Scrooge's Former Boss Fezziwig Is a Nester (2007-12-24)

Scrooge's Former Boss Fezziwig Is a Nester (2007-12-24)

by David John Marotta

One of my favorite Christmas movies is the version of Dickens's "A Christmas Carol" starring George C. Scott as Ebenezer Scrooge. I must confess that I understand Scrooge's character.

Scrooge -- a denizen of early Victorian London -- is a solitary and miserly businessman. He spends his days tracking in giant ledgers all the money he doesn't spend. He spends his nights alone in a huge drafty house he's too cheap to heat adequately. He isn't in debt, lives well within his means and makes shrewd investments. In fact, Scrooge is such a consistent and understandable character, sometimes it almost seems tragic that he has a change of heart at the end of the story.

Of all the colorful characters in "A Christmas Carol," I like Fezziwig the best. In Scrooge's youth, Fezziwig and his wife opened their doors wide to friends and family, spending three or four pounds to provide a fiddler, some foolishness and an unforgettable feast.

Financial advisor Bert Whitehead would describe Fezziwig as a "nester." In his description of financial personalities in his book "Why Smart People Do Stupid Things with Money," Whitehead describes nesters as family-oriented people whose homes are their greatest investment. And to Fezziwig, his employees are like family.

Fezziwig has achieved that wonderful balance between work and play, responsibility and frivolity. On Christmas Eve he and his staff work until seven the evening of the party, but once the guests arrive, the fun begins in earnest.

Like Scrooge, nesters like Fezziwig lean more toward saving than spending. Scrooge likely learned his propensity to save while working under Fezziwig. Because of this shared frugality, Fezziwig's willingness to spend a few pounds on holiday cheer moves Ebenezer's stony heart.

The greatest joys of the holiday season cannot be bought in a store and do not increase our credit card debt. Many parents spend more than they can afford out of a sense of guilt. But the satisfaction of putting a big-ticket item under the tree, unfortunately, is both short lived and shortsighted. There is a better way to celebrate that builds long-lasting family ties.

Holiday joy comes from taking time to celebrate values that don’t show up in your net worth statement, and Fezziwig certainly sets a great example. He hires a fiddler for the occasion. He opens his home to the six young admirers of his three lovely daughters. He invites all the young men and women who work for him. He extends his largesse to the cook, the milkman and even an apprenticed boy whose master doesn't feed him well enough.

They dance. And the Fezziwigs know how to dance: "advance and retire, both hands to your partner, bow and curtsey, corkscrew, thread-the-needle, and back again to your place . . . Fezziwig cut -- cut so deftly, that he appeared to wink with his legs, and came upon his feet again without a stagger" and "Mrs. Fezziwig was worthy to be his partner in every sense of the term."

And they feast. "There was cake, and there was negus [drink made from wine, hot water, lemon juice, sugar and nutmeg], and there was a great piece of Cold Roast, and there was a great piece of Cold Boiled, and there were mince-pies, and plenty of beer."

Scrooge's heart and soul are in the scene as he remembers and enjoys and joins his younger self in praising everything about the evening.

"A small matter," mocks the Ghost of Christmas Past, "to make these silly folks so full of gratitude. He has spent but a few pounds of your mortal money: three or four perhaps. Is that so much that he deserves this praise?"

Scrooge, defending the spirit of Fezziwig's Christmas party, replies, "Fezziwig had the power to render us happy or unhappy; to make our service light or burdensome; a pleasure or a toil. Say that his power lay in words and looks; in things so slight and insignificant that it is impossible to add and count them up: what then? The happiness he gave was quite as great as if it cost a fortune."

There is great financial wisdom to be learned from these two characters. Scrooge's riches did not make him happy. Fezziwig's celebration did not impoverish him.

Start by talking to your family about their fondest holiday memories. Make a list of all you have done right in past years so you can establish some annual family traditions. Add a few new ideas each year. The best holiday traditions don't cost a lot of money and aren't wrapped and put under the Christmas tree.

Some traditions are as simple as playing radio stations with Christmas music, reading favorite Christmas stories, or watching a Christmas movie. Your list won't be complete without a description of everyone's favorite holiday food. One tradition might involve holiday church services that reflect your family's spiritual values. Another might be as simple as a family game night. One family plants an evergreen sapling on their property every Arbor Day to have a supply of their own Christmas trees every December. Another family uses the children's school photos to make new ornaments for the tree.

When complete, your list should include a hundred ways to enjoy the holidays without going into debt. Like Fezziwig, the happiness these traditions bring you will be quite as great as if it cost a fortune.

Take Fezziwig's advice to heart: "When happiness shows up, always give it a comfortable seat." Merry Christmas to you and your family! And as Tiny Tim would say, "God Bless Us, Every One!"



from http://www.emarotta.com/article.php?ID=262

Scrooge's Nephew Fred Is a Traveler (2007-12-17)

Scrooge's Nephew Fred Is a Traveler (2007-12-17)

by David John Marotta

Every December I reread "A Christmas Carol" by Charles Dickens. Ebenezer Scrooge's nephew Fred is the character young people most easily relate to. He is young himself, carefree, in love and enjoying life with his friends. He has a "traveler" personality.

In his description of financial personalities in his book "Why Smart People Do Stupid Things with Money," Bert Whitehead describes a "traveler" as someone who would rather spend money on experience than things.

Whitehead maps financial personality on two different scales. The first measures people's tendency toward greed or fear. Fred, like all travelers, is neither particularly greedy nor fearful, whereas his uncle Ebenezer appears greedy in the extreme. The second scale measures an individual's tendency to save or spend. That Scrooge is a saver we have no doubt; Fred, like all travelers, tends to spend freely.

Travelers yearn to see new places and learn new things, and they love celebrations like Christmas. Sometimes they even pride themselves on their antimaterialism.

Uncle Scrooge asks, "What right have you to be merry? What reason have you to be merry? You're poor enough." To which his nephew Fred replies, "What right have you to be dismal? What reason have you to be morose? You're rich enough."

Fred's wife comments that Scrooge is very rich. "What of that, my dear?" Fred replies. "His wealth is of no use to him. He doesn't do any good with it. He doesn't make himself comfortable with it."

Fred got married simply because he fell in love. To Scrooge, his nephew's decision is even more ridiculous than a merry Christmas. The young are such romantic idiots!

Travelers like Fred may not have realized the value of saving and investing to reach their objectives, but they have such delightful goals: to marry for love, to celebrate happiness to its fullest and to live in peace with everyone.

Fred wants nothing from Scrooge and he asks nothing of him other than friendship. So every year at Christmastime he invites his uncle to come to his house and join in the celebration.

In Victorian England, being invited to someone's house was not as simple as merely attending. You were expected to repay the favor in some way. As a result, rich relations were invited more places than they really cared to go.

So Scrooge isn't just being overly cynical when he's suspicious about Fred's invitation. Scrooge even swears at his nephew, but Fred keeps his Christmas spirit to the last and wishes his uncle a merry Christmas. Fred is thoroughly good-natured, laughs freely and sometimes doesn't even care what they are laughing about. He passes the bottle with good humor.

The idea of a rich old uncle leaving a poor nephew a bundle of money is a cliché for a reason. Fred may have the purest of motives for inviting Uncle Scrooge, but the thought of an inheritance from the old man is never far from his thoughts.

Fred's beautiful bride confesses, "I'm sure he is very rich, at least you always tell me so." To which Fred replies, "But he hasn't the satisfaction of thinking that he is ever going to benefit us with it." Fred hopes that his encounter with Scrooge has at least rattled the old man enough so he leaves 50 pounds to his poor clerk Bob Cratchit.

Even if Fred's motives are altruistic, his thoughts often return to Scrooge's money and the potential inheritance that might come his way. And so even if Scrooge is as cold as the winter toward Fred, his cynicism is at least partially justified.

This suspicion between travelers and nontravelers over motives and money is a common one. Young people are more likely to be travelers until they settle down and become what Whitehead calls nesters. The older generation knows that money can get tight later on in life, and the sooner you start saving the better.

For young people, meeting basic needs may seem simple: income often easily covers expenses, and the surplus can be used for savings, investment or added consumption. Many young people mistakenly assume they are doing so well financially that they can simply spend their extra money and consume more. They do not realize that the urgent needs of family life typically follow these years of plenty. Bob Cratchit knows all too well that expenses multiply once children enter a family.

Additionally, saving when you are young gives you more time in the markets and more time for your investments to grow. For example, saving $5,000 a year for seven years and then stopping is worth more than starting in the eighth year and saving for the rest of your life. After seven years of saving, your investments should be earning more than you were contributing each year.

Or looked at another way, for every seven years you delay saving and investing, you cut your retirement lifestyle in half. So in the story, Scrooge is focused on the long term while Fred is living in the moment. But achieving a balance between these two impulses is possible.

Fred is interested in experiences and supposedly doesn't care about money. But if he truly was indifferent about the money, he could save and invest half his income while enjoying life just as much. After all, if money doesn't bring happiness, Fred shouldn't need to spend all he earns. He can become both rich in wealth and rich in experiences.

If Fred saved and invested he could have given to the poor himself, started a business and hired his own clerk or provided for Tiny Tim's medical expenses out of his own largess. For someone who consumes everything he produces, he is overly critical of the spending of those who through frugal living produce more than they consume.

At the Christmas party, Fred and his wife are described as a musical twosome. After dinner they sing a Glee and a Catch. Fred's wife plays the harp admirably, which helps soften Scrooge's heart toward the couple. Travelers often appreciate music, which doesn't have any monetary value.

After a musical interlude, the partygoers play "Forfeits" because "it is good to be children sometimes." Each person in the room gives up some personal belonging for the game. One player is chosen to be the judge and another holds items one at a time over the judge's head so he (or she) can't see them. For each item the judge orders the owner to do some stunt to get their property back.

The commands are usually silly requests intended to get everyone at the party laughing, such as "dance a jig," "tell how to make a pie without talking," "yawn until you make someone else yawn" or "try to stand on your head." The judge must be careful what he demands because at some point in the game his own item will be held over his head!

Next they play the games "Blindman's Buff," "How, When and Where" and then "Yes and No." None of these pleasures cost a cent, which is a lesson Scrooge has forgotten.

Victorian priorities dictated that men attend to business. Hard work was the way to achieve respectability and advance in society, feeding the culture of materialism in the rising middle class. Industriousness and productivity were extolled virtues.

To the extent that travelers are simply avoiding burdensome and stressful responsibilities, they are not yet wise or mature. But if they keep a sense of wonder about life and a spirit of adventure that does not deplete their resources, travelers like Fred can find a satisfying balance in life. Because without some self-restraint, Scrooge's warning could come true: "What's Christmas time to you but a time for paying bills without money; a time for finding yourself a year older, but not an hour richer?"

Many holiday delights need not even show up as a line item in your budget. Watch a Christmas video or read a Christmas story as a family. Play Christmas music or go caroling. Make your own Christmas cards or bake and decorate cookies. Do some errands for an elderly neighbor.

May Fred's wise words from "A Christmas Carol" inspire us to enjoy the nonmaterial joys of this season:

"There are many things from which I might have derived good, by which I have not profited, I dare say, Christmas among the rest. But I am sure I have always thought of Christmas time, when it has come round -- apart from the veneration due to its sacred name and origin, if anything belonging to it can be apart from that -- as a good time: a kind, forgiving, charitable, pleasant time: the only time I know of, in the long calendar of the year, when men and women seem by one consent to open their shut-up hearts freely, and to think of people below them as if they really were fellow-passengers to the grave, and not another race of creatures bound on other journeys. And therefore, uncle, though it has never put a scrap of gold or silver in my pocket, I believe that it has done me good, and will do me good; and I say, God bless it!"



from http://www.emarotta.com/article.php?ID=261

How Shrewd Investors Save on Taxes (2007-12-10)

How Shrewd Investors Save on Taxes

by David John Marotta

When you're building wealth, saving a penny on your taxes is just as important as earning a penny in the markets. You can use both investment losses and investment gains to good tax advantage.

For example, in November some U.S. stocks experienced a significant drop. Disciplined investors use these declines to save on their taxes and rebalance their portfolios.

But most people are loss averse. Selling an investment for a loss feels like failure. So they hold on and wait for it to come back up before they sell. It doesn't matter if another investment might appreciate faster and recover the loss more quickly. Their reluctance to sell is even more pronounced when the investment was purchased recently. In taxable accounts, however, investors must overcome this loss aversion and learn to realize capital losses whenever possible.

The stock market normally appreciates over 10% each year. Any investment you hold for a few years will probably have a satisfying capital gain. The only investments you are likely to be able to sell for a loss and deduct on your taxes are recent purchases. Be quick to sell your capital losses in taxable accounts and reinvest the money at a lower cost basis going forward.

The difference between what you paid for an investment and its current worth is called a "capital gain" or a "capital loss." As long as you continue to hold the investment, the gain or loss is "unrealized." Selling the investment means "realizing" the gain or loss, which you must report on your taxes.

Realized capital gains are commonly taxed at a reduced 15%. Realized losses can offset realized gains, but you are also allowed to deduct up to $3,000 of capital losses against other types of income. If you have net losses in excess of $3,000 in one year, you can carry your losses forward to future years.

Now is a good time to review your portfolio for investments you can sell for a loss. Use software to track your investments. Even a simple spreadsheet can compute the current value minus the cost basis of each investment. Consider any significant losses for tax-loss selling.

Ask yourself, "If I did not own that security now, would I buy it at current prices?" If the answer is no, sell. If the answer is yes, sell it anyway. Then wait 31 days and buy it back. That way you "realize" the loss for tax purposes and still hold the security. And you have reduced your tax liability by sharing that loss with Uncle Sam.

Another technique is to double up. First, purchase the same number of shares you currently hold in that security. Wait 31 days. Then sell the original shares for a tax loss. Waiting a month between the sale and the buyback avoids a "wash sale," which would prevent you from taking the tax loss.

Most investments (stocks, bonds, mutual funds) are subject to the same tax rules, but owning individual stocks provides additional tax-loss selling opportunities.

Compare two millionaire investors. The first buys $1 million of a mutual fund that invests in 200 different stocks. No stock represents more than $10,000 of the investment, and the amount invested in each stock is $5,000. Although the mutual fund might have a tame 10% return for the year, one of the underlying stocks in the fund might have doubled and two others lost 50% of their value during the year. But this investor only owns shares in the mutual fund, and he cannot take advantage of any tax-loss selling.

The second millionaire buys all 200 as individual stocks. Her overall portfolio also has a tame 10% annual return, but she has additional choices that help boost her earnings even higher. She can sell the two stocks that have a 50% negative return and take the loss on her taxes. By selling the stocks with losses, she realizes their loss for tax purposes. By not selling her stocks with gains, she avoids realizing those gains and therefore is not required to pay any capital gains taxes.

Selling investments with losses can reduce your taxes, but you can also save on investments that have gone up by using appreciated assets for your charitable gifting.

Many Americans donate to charities in December. No matter what worthy organizations you support, you can contribute up to 15% more if you give appreciated investments instead of cash.

For example, if you sell $1,000 worth of appreciated stock, you most often pay capital gains tax of 15%. If most of the stock's value is appreciation, the tax burden approaches $150, leaving only $850 for charitable giving.

But if you give the stock directly to the charitable organization, you can take the full $1,000 tax deduction, and the organization will not have to pay any taxes when it sells the stock. You could save up to $150 on capital gains taxes, and the gift itself reduces your taxes at your marginal rate. In total, your $1,000 gift could cost you $500 or less if you use appreciated stock!

Here's how to do it:

1. Ask your financial advisor to choose which stocks are best for charitable giving (probably those that have appreciated the most and you do not want to continue holding in your portfolio).

2. Determine the amount of each charitable contribution. To compute how many shares of stock to give to each charity, divide the current price of the stock into the amount you wish to donate. The number of shares will not work out exactly, so you may need to round up or down.

3. Call the designated charities and ask for their "stock liquidation brokerage account." Nearly every organization has one expressly for this purpose. You may like to give anonymously and without fanfare, but you only have to request this account number once.

4. Instruct your brokerage firm to transfer the correct number of shares from your account into the charity's stock liquidation account. You can fax this request directly and then send the original by mail.

5. Save these letters and account numbers for next year's charitable giving.

6. Report the gifts to your tax accountant. Stock gifting is deductible at the fair market value, that is, the amount the stock was worth at the close of the day it was transferred. The stock may change value after you have transferred the stock but before the charitable organization sells it. These changes do not affect your tax deduction, but it may mean the charity reports a different amount than you must declare on your tax return.

Giving appreciated stock is a great way both to reduce your taxes and to give more generously to worthy charities.

from http://www.emarotta.com/article.php?ID=260

Cash Has Been the Riskiest Investment (2007-12-03)

Cash Has Been the Riskiest Investment

by David John Marotta

If you think hiding money under your mattress is a risk-free way of building wealth, think again. Cash, it turns out, has been the riskiest investment since 2002. Many investors try to avoid risk by putting their money in a bank account or investing in CDs. But like any other investment, cash is subject to its own set of risks.

Cash is dangerous because the dollar can be devalued. When our currency decreases in value, we experience inflation and the purchasing power of the dollars we hold is compromised. Having the same amount of dollars doesn't do you any good if your dollars won't buy as much as they used to.

Since the beginning of 2002, the U.S. dollar has lost much of its purchasing power. From 2002-2007, the U.S. Dollar Index has dropped over 36% from 120 to 76.5. During that same period, the dollar has dropped over 39% against the Euro going from $0.88 to a Euro to $1.45. And the dollar has dropped over 64% against gold going from $280 to an ounce of gold to $795.

Money market's real risk is the dropping value of the dollar, not exposure to subprime lending. Cash in money market has lost over 40% of its buying power since 2002. And the US Dollar has dropped 10% just this year alone.

Interestingly enough, the consumer price index (CPI) over this same period has only registered a 15% drop in the dollar's purchasing power. While 15% is still significant, many economists believe that the federal government has been under reporting CPI since they changed the rules for computing it in 1996.

Purposefully under reporting CPI allows the government to cut the impact of cost of living increases in social programs and helps curb runaway government entitlement programs. Started under the Clinton administration and continued under Bush, these changes have rendered the official CPI numbers less meaningful.

Current CPI calculations have changed inflation numbers through tricks such as "substitutionary adjustments", "component removal" and "hedonic deprecators". This creative accounting rivals anything done by Enron. These changes were made specifically during a political debate over cutting back cost of living increases to Social security and other federal benefits. The changes have saved the Government tens of billions of dollars a year at the expense of benefit recipients whose benefits buy them much less now than they did a decade ago.

Any attentive consumer knows that cumulative price inflation since 2002 has been closer to 50% than 15%. This corresponds to the CPI being understated by about 5% a year. One study suggested that the CPI index has been understated by about 7% per year. No matter the exact amount, your bank deposits and money market funds have been the riskiest investments and have lost significant buying power to inflation. The danger of the U.S. dollar continuing to decline is aggravated if you try to be "safe" and over-expose your investments to cash and money market.

Just this year the dollar has continued its decline. Since the beginning of 2007, the U.S. Dollar Index has dropped 9% from 84.2 to 76.5. The dollar has dropped over 10% against the Euro going from $1.30 to a Euro to $1.45. And the dollar has dropped over 21% against gold going from $625 to an ounce of gold to $795.

Over half of your portfolio should be protected against the risk of a falling dollar. You can protect your portfolio against a falling dollar with investments in foreign bonds, foreign stocks, and hard asset stocks. Hard asset stocks are one of the best ways to protect yourself. As an asset class, they have also provided one of the best returns since 2002.

Hard asset investments include companies that own and produce an underlying natural resource. Examples of these natural resource stocks include companies that produce oil, natural gas, precious metals (particularly gold and silver), base metals such as copper and nickel, and other resources such as diamonds, coal, lumber, and even water.

Keep in mind that investing in hard asset stocks is not the same thing as investing directly in commodities. Buying gold bullion or a gold futures contract is an investment directly in raw commodities or their volatility. Commodities, as an asset class, generally maintain their buying power in dollar terms. Stocks, as an asset class, generally appreciate over inflation after dividends are factored in. For that reason, it may be to your benefit to invest in hard assets stocks which have an underlying commodity.

One index that tracks hard assets is the Goldman Sachs Natural Resources Index. This index is comprised of 70% energy and 11% materials. As of the end of October 2007, this index is up 34.00% year-to-date. Its three-year annualized return is 30.69% and its five-year annualized return is 30.43%.

And please don't be fooled into thinking that cash in your mattress is a safe investment.

from http://www.emarotta.com/article.php?ID=259