The Old Rules Still Apply

After the mortgage meltdown and subsequent recession, it was sometimes claimed that the economics profession had been turned on its head and the textbooks would all have to be rewritten. EVERYTHING has changed! NOTHING IS THE SAME, they cried! Even the rules of investing were supposed to have changed. 

My goodness, such extremes merely from failing to predict the future. When did economics become fortune telling? I have been teaching and studying economics for over 30 years. Somehow I missed that memo. 

The fact is that the old rules still very much apply. We still live in a world of scarcity and thus face tradeoffs and opportunity costs, productivity and innovation still drive our standard of living, and buying, holding, diversifying, and rebalancing is still the most prudent way to invest. Despite all the hype and rhetoric, not all that much is different. 

In the videos linked below, Burton Malkiel, Princeton University economist and author of the investments classic A Random Walk Down Wall Street, explains why the “rules” are still the same. 

Burton Malkiel Explains Why The Old Rules Are Not Dead

Malkiel Questions and Answers 

MM

Why is it so difficult to beat the market?

 

Financial markets and agriculture are the two of the most cited examples of markets that approach what economists call Perfect Competition. The characteristics of a perfectly competitive market are: 

• A large number of buyers and sellers
• No buyer or seller has the power to impact the price
• The market dictates the price thus everybody is a price taker
• Output is homogeneous thus nobody can tell the difference between the output of one producer and another producer
• Information is symmetric thus both buyers and sellers have a complete knowledge of the information that is available. 

With agriculture these characteristics are fairly obvious. There are a very large number of farmers, Farmer Smith’s corn is pretty much identical to Farmer Jones’, and buyers and sellers of corn know all that is important to know about the market for corn. With financial markets we have these same characteristics – more or less. There are lots of buyers and sellers so everybody is a price taker (however, there are some exceptions because large institutional investors such as mutual funds and pension plans can impact the price), buyers and sellers have access to the same information about a particular stock (such as financial statements, macroeconomic data, and industry statistics), and the product investors are after (the return on investment) is pretty much homogeneous (a risk adjusted 10% return in stock X is the same as a risk adjusted 10% in stock Y).

 

A big hot-button issue in finance is whether or not it is possible to create a portfolio of stocks that returns more than the investor would have received had he simply purchased every stock in the market. By buying all of the stocks, there is no need to study financial statements, forecast cash flows, and analyze macroeconomic data. You just buy them. If you do spend hours doing all that analysis and you don’t do any better than the market averages, you pretty much wasted your time (unless analyzing stocks is something you do for fun) 

 

Typically, we use the Standard and Poors 500 index as a proxy for "all of the stocks”. So, if the S&P 500 returns 12% and your portfolio returned 14%, congratulations! You beat the market. Virtually all portfolio managers can beat the market now and then but almost nobody beats the market over the long haul. Why not?

 

Just as wheat farmers receive what the wheat market has to offer, on average, portfolio managers receive what the stock market has to offer. This is because over the long term, financial markets process information fairly accurately (in finance lingo, the market is efficient). So, even though the markets can have severe short-term fluctuations, ultimately stock prices will gravitate to their true intrinsic value which leaves little opportunity to find mispriced stocks to be exploited for economic gain (during these short-term fluctuations it is not uncommon to beat the market – but whether this is skill or luck is tough to determine)

 

Years ago, Wall Street Journal reporter John Dorfman started a weekly column in which he pitted portfolio managers against a portfolio chosen by throwing darts at the financial pages. Over the ensuing months, the pros were about even with the forces of chance -- with the darts holding a slight edge. Amazing! All that work and research and all you can get for it is a return that is no better than throwing darts!

 

It is important to state that this does not mean that financial analysts and portfolio managers are dumb. To the contrary, some of the brightest people around go into this field. It just means that the financial markets are extremely competitive. Much like athletics, you may have a super star dominate for a while but eventually the competition catches up and ends the hot streak. In the financial markets there are thousands of professional investors (and thousands more amateur investors) who have the same information, which means nobody has a clear advantage and it is unlikely that any one investor or portfolio manager will beat the others consistently over the long haul. The only information investors don’t have is news events and since the news is unpredictable, so are the markets. Although there are many in the investment field who insist that they can beat the market, the evidence is that they can’t, UNLESS… 

 

I can’t end this without telling you that there is a way to beat the market EVERY TIME! Unfortunately, if caught you go to jail. It is called insider trading. If you are in possession of information that you know to be non-public AND know that the information would have an impact on the stock price if it were public, you are in violation of the law if you trade on that information. In this case, information has become ASYMMETRIC, that is one party to the transaction knows more than the other. Asymmetric information changes everything and we are no longer operating within the realm of competition.

 

The reason insider trading is such a serious issue is that if it becomes generally believed that the only way to make money in stocks is to know somebody on the inside (company executives, investment bankers, etc) people will keep their money out to the markets and this will make capital investment more expensive as there will be less savings available for financing. The result would be slower economic growth and smaller gains in the standard of living. Unfortunately, it is difficult to prove what somebody knew and when they knew it. As a result, there are relatively few insider-trading cases prosecuted. 

 

In the following video, Princeton University economist Burton Malkiel (author of A Random Walk Down Wall Street) debates a reporter. Be sure to watch (nine minutes)  

 

Passive Versus Actively Managed Mutual Funds 

MM

 

 

Why is the Economy Stuck in Second Gear? 

Unemployment hit a high of 10% in October 2009 and came down to 9.5% in mid-2010. Since then it has fallen to 8.1% and then back up to 8.2%, down to 7.8% and back up to 7.9%. Months later it sits at 7.6% with job creation too mild to expect any meaningful improvement. With a natural unemployment rate (the rate at which we consider the economy to be fully employed) in the area of 5%, current unemployment is dramatically higher (52% higher) than we would like it to be -- and it is only as low as it is because so many people have dropped out of the labor force. If labor force participation had remained constant, current unemployment would be over 11%. 

 

The question often asked: We had enormous amounts of stimulus spending, why haven’t we seen more, well, stimulus? Here are the most likely reasons:    

·       Much of what has been spent was stimulus in name only. Former Chief of Staff Rahm Emanuel said it best: “Never waste a crisis.” In other words, hard times present an opportunity to achieve a political agenda that would not be possible otherwise. As a result, we have seen a lot of spending on earmarks and social programs and hasty projects like this one and this one. Calling this stimulus does not make it so. It is very difficult to spend wisely so quickly. It takes many months (years, actually) to plan and execute good projects (public or private). After much hype and celebration, even President Obama later had to concede that there is no such thing as a “shovel ready project”.   

 

·    New hiring tends to come later on in any expansion.  Businesses typically wait until they are confident that the expansion is well underway before hiring back workers. Labor is the most expensive input in any production process and businesses will get as much as they can out of their current employees before they are willing to incur the expense of expanding their workforce.   

 

·     Uncertainties about new taxes and mandates on business seem to be putting a drag on economic growth and employment. It is tough enough for businesses to add new employees in the early going of an expansion but in this expansion, businesses have more to worry about than usual. Because of the massive and unprecedented amounts of government spending, government has also been doing massive and unprecedented amounts of borrowing and the public debt has exploded. This is causing firms (and citizens in general) to worry about how high taxes will have to go to service all this new debt. Expectations of higher future taxes can curb hiring by businesses as well as spending by consumers. A recent survey by the U.S. Chamber of Commerce of small businesses (the primary engine of economic growth) confirms this. 78% of responders report that taxation, regulation and legislation from Washington make it harder for their business to hire more employees. 74% say the recent health care law makes it harder to hire more employees.    

 

The result is less hiring than we usually see coming out of a recession. 

 

While the “stimulus” has helped relieve some of the pain of the recession, it hasn’t done much for permanently improving the economy. This kind of spending during the Great Depression had the same results (though this last recession was light years from being as bad as the Great Depression) While there was modest improvement during the 1930s, it wasn't until World War II that the Depression came to an end. 

 

The bottom line is that despite mountains of rhetoric, ideology, and deficit spending, not all that much economic stimulus has actually taken place (which is why a THIRD stimulus package -- the jobs plan -- has been proposed). Meanwhile, the enormous debt that has been racked up will all have to be repaid – much of it by those who have not yet been born!  This is often referred to as The War on Kids, and indeed it is. How noble of us to live beyond our means and let our posterity pick up the tab. 

 

For unemployment rates, see:

http://data.bls.gov/PDQ/servlet/SurveyOutputServlet?series_id=LNS14000000

For labor force participation rates, see:

http://data.bls.gov/timeseries/LNS11300000/ 

For monthly job creation, see   

http://data.bls.gov/timeseries/CES0000000001?output_view=net_1mth

MM

 

 

Why is the average return for stocks higher than for bonds? Why are loan rates for large corporations lower than for college students? How can you tell if a business “opportunity” is just too good to be true? Millions of dollars and many nest eggs are lost every year because this simple but powerful concept is either not understood or ignored. I tell my students if you remember anything 20 years from now, remember this. It may keep you from losing everything.  

 

Risk and Return  

The most important concept for an investor to understand is the relationship between risk and return. Many fortunes and life savings have been lost by those who didn't understand this very powerful, yet, basic principle. 

 

If you were offered $10 to walk across a 100 foot wooden plank laid out across the floor, would you do it? Of course! It would be easy money. Now, let’s put the plank between two buildings, 30 floors up. Would $10 be enough? How about $10,000 or $10 million? You may decide to take lessons from a circus performer and get lots of practice and then try it for $10 million, but nobody would do it for $10 because the risk has increased significantly while the payoff remains the same. 

 

“Normal” people are risk averse. This doesn’t mean that we won’t take risks; we just won’t take risks for free. We need to be compensated for taking risk. 

 

Tweaking the previous example, suppose I offered you $10 million to walk across a wooden plank. Thinking that you have been greatly blessed with this wonderful opportunity to make a fortune with very little effort you immediately agree to do it. I then take you up 30 floors and your face turns white! You state your case that you did not know that there was going to be so much risk involved. BUT YOU SHOULD HAVE KNOWN!!! You should have known that there had to be some crucial information missing. Your first question should have been: “What’s the catch?” Whenever there are unusually high returns involved, you should know that there are very likely to be higher risks or possibly a scam. Far too many investors jump at the chance to make high returns without understanding that there are greater risks involved.   

Here are the average annual returns for various financial instruments from 1926 to 2009.  

	Average	Standard
Type of Security	Return	Deviation
Small Company Stocks	17.7%	37.1%
Large Company Stocks	11.7%	20.5%
Long-Term Corporate Bonds	6.5%	7.0%
Treasury Bonds (long-term)	5.9%	11.9%
Treasury Notes (intermediate-term)	5.6%	8.1%
Treasury Bills (short-term)	3.8%	3.1%
Inflation	3.1%	4.2%

 

Why is the average return from small companies higher than large companies?  

·       If we observe that one asset produces higher returns (on average) than another, we know that it is riskier. Why are small company stocks riskier than large company stocks? Because small companies are young, unproven firms that are still in the growth phase. Investors require a premium to compensate for the additional risk.  

·       Large companies have been around a long time (at least long enough to become large). They are more proven and there is less uncertainty. Investors don't require as large a ‘risk premium’ to invest in these companies.  

Why is the average return on stocks higher than bonds?  

·        Stockholders are the owners of a firm and they bear the risks and reap the rewards of ownership. The upside is that if the firm does really well, the owners enjoy the spoils. The downside is if the firm fails, the stockholders are last in line to receive anything from the liquidated assets. 

·       Bondholders are creditors of the firm and enjoy the benefits of stable interest payments. Also, bondholders and other creditors are first in line to the liquidated assets if the firm fails. The downside is if the firm does extremely well, bondholders get only interest payments for which they contracted. They do not enjoy the benefits of the success of the firm.  

·       The bottom line: Bonds are generally less risky than stocks and thus require a lower return to attract investors.  

Why do Corporate Bonds return more than US Treasury Bonds?  

·       Corporate Bonds are backed by the corporation that issues them. Treasury Bonds are backed by the full faith and credit (and taxing power) of the U.S. government. Thus, Treasury bonds have lower default risk. 

·       Because corporate bonds have more default risk, they must pay a higher rate of interest to attract investors away from Treasury Bonds. Remember, people don't take risks for free, they must be compensated. If corporations attempted to borrow at the same rate as the federal government, they wouldn't be able to borrow any money. Nobody would buy their bonds because they could get the same interest rate from the Treasury for less risk. Similarly, if college students tried to borrow at the same rate as corporations, there would be no student loans. Who would lend to students at the same rate they could get from large corporations? Students are much more likely to default; therefore a risk premium is required to get money flowing into student loans (This is why student loans are subsidized by the government. This makes the rates more affordable).  

Why do long-term bonds return more than short-term bonds?  

·       Bond investors need to be compensated when lending for longer periods of time because there are greater risks when locking up money for, say, ten years rather than for three months. The longer the term to maturity, the greater the likelihood that a bondholder may need the money before the bond matures. If interest rates have increased since the bond was purchased, it will be worth less and the price will fall. This is called interest rate risk. Long-term bonds have greater exposure to interest rate risk because there is a greater probability that the bond will be sold before maturity. Investors require a greater return to be compensated for this risk.  

·       Classic cases of not understanding the risk/return relationship come during times when interest rates are very low. Retirees and others living on fixed incomes are sometimes convinced to increase their return by buying longer term Treasury Bonds. The broker's pitch is that they can just sell the bond when they need the money.  

·         Many of those who have pursued this strategy have been shocked to find that when it came time to sell the bond they had actually lost money. How could they lose money on a government guaranteed bond? Because interest rates had increased causing the bond price to fall. If they had purchased a bond with a maturity that matched their investment horizon (or more precisely, a bond with a duration that matched the investment horizon), they would have received a lower rate, but would not have lost anything. The first question these retirees should have asked was why do Treasury Bonds pay more than their CDs? The answer is because Treasury Bonds are (you guessed it) riskier. 

·       A stock broker (usually called financial advisors these days) proposed the above strategy to my dad. “What if interest rates rise?” he asked. “They won’t” replied the broker. “Are you willing to guarantee that in writing?” asked my dad. The broker wasn’t, my dad didn’t, and interest rates did!   

A greater return should signal greater risk and virtually nothing in the field of economics is as solid as the mountains of data confirming this relationship. Yet, this is the first thing those selling dubious investments will try to undermine. There truly ain't no such thing as a free lunch. On the other hand, it is important to maximize your return. How fast your money grows can make a big difference in how much you have when you retire.  

Here are the future values of investing $5,500 (the maximum IRA contribution for 2013) per year for 40 years:  

@ 12% per year you would have $4,219,003

@   9% per year you would have $1,858,353

@   6% per year you would have $851,191

@   3% per year you would have $ 414,707

@   0% (stuffing it under your mattress) $220,000

 

But, doesn't maximizing returns mean maximizing risk?  

·        Financial Economists and Analysts use the volatility of the returns to quantify risk. One of the greatest innovations in finance over the past 50 years has been in the area of risk management. Management of investment portfolios dramatically changed since the 1960's when risk management techniques were created. In 1990, the three innovators (Merton Miller, William Sharpe, and Harry Markowitz) were awarded the Nobel Prize in Economic Science. What are these risk management techniques? Very simple: Diversify. In other words, put your eggs in several baskets.  

This won a Nobel Prize?  

·        Yes it did! More precisely, the prize was awarded for the creation of the Capital Asset Pricing Model (CAPM) which includes a quantifiable measurement of risk called Beta -- and the mathematical proofs that demonstrated that by combining stocks that were not perfectly positively correlated into a portfolio, Beta (which measures systematic risk) would be reduced. Studies have demonstrated that the risk reduction benefits of diversification are maximized somewhere between 15 and 40 stocks (depending on how talented the investor is in putting together a portfolio).  

·       The risk reduction capabilities of adding another stock to your portfolio can be illustrated by comparing it to the benefits of adding another station to your TV programming. If you can receive just one television station, adding one more brings a great benefit. If you currently receive 40 stations, adding one more won't bring much benefit because there is likely to be some overlap in the programming. And if you currently receive 100 stations, there will be almost no benefit from adding one more station as you will likely be adding programming very similar to what you already have.  

·        Unfortunately, many people (especially those in retirement or close to retirement) have lost a lot of money because they believed that they were eliminating ALL risk by diversifying their stock portfolio. We can only eliminate unsystematic (or specific) risk. This is risk that is specific to the company itself. Unsystematic Risk can be eliminated by buying stocks in many companies, many industries, and many geographic locations. However, even if you own stock in every company in the world, you cannot diversify away systematic (or market) risk. Systematic Risk is the risk that affects everyone, everywhere (e.g. inflation, recession, natural disasters, world war). It is therefore important to include different types of assets in your portfolio. You need both equities (stocks) and fixed income (bonds).  It may also be prudent to include some real estate as well. A Real Estate Investment Trust is one way to include real estate in your investment portfolio.  

What is the appropriate allocation of equities and fixed income in my portfolio?  

·       When you are young, it is not imprudent to put all of your retirement savings into stocks, but as you grow older; your asset allocation should start including bonds and other fixed income assets. The closer you get to retirement, the more your portfolio should be comprised of fixed income assets. Too many people have had far too much of their portfolios in stocks when they retired. They were attracted by the higher return potential of stocks and thought being well diversified would protect them. THEY HAVE ONLY ELIMINATED UNSYSTEMATIC (SPECIFIC) RISK. THEY HAVE NOT ELIMINATED SYSTEMATIC (MARKET) RISK.   

How do I know which stocks and bonds to buy?  

·       Another great innovation, from the past forty years or so, allows small investors (as little as $1000) to own a portion of a well-diversified portfolio of stocks and bonds. These are called Mutual Funds. Mutual Funds are investment companies that specialize in buying the stocks and bonds of other companies. So, you buy shares in the fund, and the fund buys shares in the companies the mutual fund managers believe are going to perform well. A Real Estate Investment Trust (REIT) is essentially a mutual fund that invests in real estate. 

·        Mutual Funds have become so popular that there are now more funds than there are stocks trading on the New York Stock Exchange. But watch out for management fees, commissions, hidden back-end commissions, 12b-1 fees, etc. Mutual funds can be deceptively expensive. Be certain to understand ALL the fees before investing.  

Diversify future tax liability   

·        It used to be conventional wisdom to put your retirement savings in an IRA or 401(k) using pre-tax dollars. This means that you have not yet paid taxes on that money and the assets grow tax deferred. You then pay taxes when you withdraw the money for retirement. The downside is that it will all be taxed as ordinary income (a higher tax rate for most people) even if most of the growth is through capital gains (taxed at a lower rate). 

·       These days it is not so clear that this is the best way to go so the ROTH IRA and ROTH 401(k) have been created. These are funded with after-tax dollars and they will never be taxed when you withdraw your money or when your heirs withdraw the money. If taxes are higher when you retire than they are now, a ROTH account is probably the best way to go. Unfortunately, we do not have a crystal ball but with government spending seemly out of control, taxes will most likely have to increase. 

·        A good strategy may be to put half your retirement savings into a conventional account and the other half into a ROTH account. If you are in a low tax bracket -- like many who are just starting out in their careers -- it would be best to put all of your retirement savings in a ROTH account because the tax deduction you would be giving up is very small.  

This is all such a hassle, especially since Uncle Sam is going to take care of me. I really don't want to lower my current standard of living by saving.  

·       This kind of thinking is putting our country in a very difficult position. Social Security was never meant to be a retirement plan. It was designed to be a supplement. If things continue on as they are today, social security will not remain solvent.  

·       Why? Because there is no such thing as a social security pension fund. Retirees who receive social security today get it from those who are currently working and paying into the system. What the government receives from social security tax almost immediately goes back out to the social security recipients.  

·       This system will become a crisis as more and more baby boomers retire. Since the birth rate has fallen, there will be relatively few workers to support the large number of baby boomers on social security.   

·        Bottom line: Social Security won't remain solvent if our politicians are not bold enough to enact some reforms (which probably means it won’t happen). Solution: It will be best not to consider Social Security in your retirement planning. Look upon Social Security as extra frosting on the cake. If you get some, GREAT! Take your grandkids out for pizza. But, DON'T plan on using it for your full means of support.  

A common error is to consider home equity to be retirement savings.  

·       The problem here is that there are only two ways to access that equity: 1) borrow and 2) sell (reverse mortgages are typically used only as a last resort, not as part of a financial plan). Only if you plan on selling and moving into a cheaper home can the difference between home equity and the purchase price of the new home be considered savings. Otherwise, the home you live in would be considered a personal use asset, not an investment. Do not delude yourself into thinking that you are saving for retirement when you make your house payment. Remember: You have to live SOMEWHERE!  

How do I get started?  

·       There has never been such a wealth of information and technology available to manage your own portfolio. Online newsletters, websites, and brokers seem to be everywhere. If you are unfamiliar with investments and feel uncomfortable doing it on your own, get help. 

·         There are zillions of financial advisors out there with a wide range of experience and expertise (anyone can call him/herself a financial advisor or planner) At a minimum, look for someone with a college degree in a financial related field (e.g. finance, economics, accounting). A graduate degree in one of these fields is even better.  

·       A professional designation such as the Certified Financial Planner (CFP) or the Chartered Financial Analyst (CFA) demonstrates that the advisor has had the motivation to fine-tune his/her knowledge and skills. However, be aware that it is possible to become a CFP without any prior financial/economic background. For example, an English major who later becomes a CFP will only have covered the very basics. By design, the CFP is a very broad and general program and will not make you an expert in anything. A CFA, on the other hand, while an expert in financial analysis and investing, would have learned virtually nothing about taxes, insurance and estate planning. Just be aware that academic studies are important and that the professional designation by itself can leave some important areas uncovered. Also understand that no one person can be an expert in all areas of financial planning. 

·       You will avoid possible conflicts of interest if you seek out a "fee-only" advisor rather than an advisor who works on commissions. (How would you like to go to a physician who charged you nothing but took a commission on every prescription written?) Certainly there are many good commission based financial advisors who resist these conflicts, it is just that they have a few extra hurdles to jump through in order to do so. You need to be very careful here, there are many “advisors” who badly abuse their clients with high commission/high fee investments. A good resource is www.napfa.org. 

·       Ask how long the advisor has been practicing and ask for references from some of his/her clients. See http://www.pbs.org/newshour/businessdesk/2013/02/how-to-find-a-financial-adviso.html for some great advice on finding a financial advisor.  

Don't have all of your money with one advisor or broker.  

·        I am amazed at how many people have lost ALL of their money because they gave a trusted advisor EVERYTHING they had to invest (or they had all their money in their employer’s stock – never have more than 5% of your portfolio in any one stock) and the advisor turned out to be running a scam (e.g. Bernie Madoff) or was not all that competent or ethical (e.g. a friend’s "advisor" who put her in 70% stocks and 30% bonds at her retirement. This is malpractice and/or incompetence in the extreme. He also put half of her money in a very expensive deferred annuity that included life insurance even though she had no dependents! At her stage in life, her asset allocation should have been much more conservative and there was no need for life insurance. This financial "advisor" was clearly looking out for himself, not his client.  

Note: investment and insurance salesmen LOVE to sell annuities because they receive very high commissions. Some “advisors” make annuities the center piece of their retirement plans, arguing that their client’s retirement needs to be “contractual” like the pension plans of yesteryear. You should not even consider an annuity until after you have maxed out all contributions to your IRA and 401(k). Even then, the benefits received from these extremely expensive investments are tenuous. Frankly, I would never own an annuity. A Florida Financial Planner summed it up well when he jokingly stated: “Annuities are wonderful. They have enabled me to move my retirement date up from 30 years to three months while my clients have moved theirs from three months to 30 years”.  

While it is a good idea to diversify investment advisors, brokers, and bankers, this is not practical when you are first starting out (how many ways can you split up a $100 of savings?) As you accumulate some assets during your lifetime, it is best to allocate them among two or three investment managers/advisors/brokers. Many of Bernie Madoff clients could have used this advice but they were enticed by the extraordinary returns Bernie was promising them (don't be undone by your own greed). I recall hearing the story of one man who gave Bernie his entire life savings of four million dollars. He thought he was set for a very comfortable retirement. He lost every cent. A red flag is if your advisor asks you to write your investment checks out to him or his firm rather than an independent, third-party, name brand broker that has Securities Investor Protection Corporation insurance (e.g. Charles Schwab, TD Ameritrade, Vanguard) where you have your own account that your advisor can oversee but withdrawn funds can only be sent to you.     

Run away from advisors/brokers who claim special spiritual guidance in making investment decisions.  

·         Many good folks have lost it all when deeply spiritual investment advisor Brother Jones turned out to be Mr. Jones the scam artist. Truly moral and spiritual people don’t trade on their religion. Their faith means too much to them. Run the other way if approached by advisors or brokers who use their religion to try to gain your confidence (Be VERY careful here, affinity fraud is rampant)   

Bottom Line: Diversify  

·       Diversify EVERYTHING. Diversify within an asset class, diversity among asset classes, Diversity future tax liability and diversify financial advisors, brokers, and bankers.   

Required Reading:  

http://www.nytimes.com/2013/05/19/business/for-stock-picking-advice-dont-ask-an-economist.html?_r=1&

Highly Recommended Reading:  

The Wealthy Barber by David Chilton. This little paperback is wonderful introduction to the world of personal finance. I have used it in my classes and have received several thank you letters from students telling me that their whole lives have changed. Many have said that, next to the Bible, it was the most important book they have ever read. They all say that they are passing it on to friends and family. I highly recommend it. It is written in a fun and entertaining way and is easy to understand. The concepts taught are powerful. The most recent edition is a bit old but the concepts taught will never be outdated.   

The Millionaire Next Door by Thomas Stanley and William Danko. This book is a very powerful eye-opener. A must read! 

A Random Walk Down Wall Street by Burton Malkiel. This classic tells the ins and outs of financial markets and investing as well as some financial history (most entertaining is the tulip bulb crash that took place in Holland in the 1500's). This is a great book. Not as easy as the Wealthy Barber, but still very accessible to the lay reader.  

False Profits by Robert Fitzpatrick and Joyce Reynolds. A revealing look at pyramid schemes and multi-level marketing. A must read before you invest your time, money, and energy.   

Financial Serial Killers by Tom Jamie and Bruce Kelly. A horrifying look into the world of various cons perpetrated upon the innocent and unsuspecting. BE CAREFUL OUT THERE!!! 

Personal Finance: Turning Money into Wealth by Arthur Keown. An expensive textbook but very good and interesting to read. I use this text in my Personal Finance classes.    

Good Luck,  

MM