Investors planning to keep their money in the stock market for the long term have come to expect returns in the region of 10 percent, the historical average for the 20th century. But since 2000, returns have been significantly lower. From the start of 2000 through the end of this past May, annual returns for the S&P 500 Index were 1.1 percent. Since then, things have only gotten worse.
The popular press, for the most part, tells us not to worry and says we'll see 10 percent average returns once again. On My Own Two Feet, a personal finance book for women, bases its savings suggestions for today's 20- and 30-somethings on the assumption of 10 percent returns. Vanguard's chairman, John Brennan, assured his customers earlier this year that he believes the markets will return to historical averages, but not necessarily anytime soon. In its October issue, Martha Stewart's Body + Soul magazine took an even more optimistic perspective, advising a reader that the historical average is closer to 11 percent. (Perhaps they didn't adjust for inflation?)
This morning, the Wall Street crisis really hit home for me. Citigroup purchased my bank, Wachovia. I had noticed Wachovia's shares falling over the last week, largely because of its hefty mortgage debt, and the thought that it could fail crossed my mind. But because I have nowhere close to the $100,000 limit that the FDIC insures, I was mainly concerned about logistics: Would my credit and debit cards still work? What about my credit card rewards points?
So far, since the purchase was announced, my account is functioning as normal, and Wachovia assures its customers that we should "continue banking as usual, and feel confident that their deposits are secure."
Americans are apparently divided on whether or not to support the financial bailout. Poll findings have been inconsistent, with USA Today reporting that almost 80 percent want the bailout and the CBS Evening News saying only 16 percent of Americans think it's a good idea and more than 1 in 3 thinks it's a bad idea. Judging from yesterday's comments, most Alpha Consumer readers come down firmly against it.
I asked Rep. Ron Paul, the Texas Republican who was one of the first people to speak out against the bailout because it conflicts with his small-government beliefs, what the plan would mean for consumers who are struggling with foreclosures, credit card debt, and other financial stresses. (Some versions of the proposal include provisions to aid such borrowers.) He told me:
President Bush had a tough job to do in his speech last night. He had to convince the nation—including people who are on the verge of foreclosure, struggling to pay student loan debts, and falling behind on their credit cards—that it was financial giants, and not them, who deserve the $700 billion bailout.
The proposal has been met with fierce opposition this week as consumers ask themselves why they should squeeze their own budgets even further to help hand over $2,300 per taxpayer to companies run by people who earn more than that per hour.
In preparation for the first presidential debate this Friday, I want to know what you would ask the candidates. Do you want to know what they would do to help your drooping retirement account? Or how they plan to deal with rising gas and food prices? Or maybe whether you can get a government bailout for your own bad debts?
To start things off, I asked Catherine Collinson, president of the Transamerica Center for Retirement Studies, what she would like to ask. Here's her question: "With more Americans struggling to make ends meet, often at the expense of retirement, what would you do, if elected, to help Americans better prepare for a financially secure future?"
For this week's Alpha Consumer Podcast, I spoke with Justin McHenry, research director at IndexCreditCards.com and Zen Personal Finance blogger. He explained how consumers—especially those with strong credit scores—can benefit from the financial crisis by taking advantage of lower interest rates. He also reveals why small banks tend to come with lower fees and fewer penalties, something to consider when choosing a financial institution. And he gives his own tips on paying off credit card debt, which involve focusing on getting rid of the smallest debt first. You can also hear the Alpha Consumer Tip of the Week on dealing with stock market losses. Listen now, download at iTunes, or subscribe via RSS Feed.
Over the weekend, I spoke with WTOP about the 10 places we selected as America's Best Healthy Places to Retire. Because the radio station is based in Washington, D.C., we focused on Reston, Va.—a town filled with European-style plazas and walking paths. Listen now, download at iTunes, or subscribe via RSS Feed.
My dear 85-year-old mother has trouble opening the ridiculously difficult plastic packaging that consumers have to pry apart and slice open every day. Arthritis has twisted my mother's hands, so things that are tricky for the rest of us are nearly impossible—and always time consuming—for her. She has particular trouble with the Oral-B toothbrush. Have you heard of this problem, and what can people like my mother do about it?
You don't need arthritis to realize that the stiff packaging used on many products today is hard on our hands, let alone the environment.
The Transamerica Center for Retirement Studies has some scary news for single women: Many aren't saving enough to fund the kind of retirement they might want.
On average, the center estimates that a single woman needs to have saved $500,000 by the time she reaches retirement. But according to its annual survey, most are on track to store up far less than that. One-third of single female respondents had saved less than $25,000 and only 1 in 10 had saved more than $100,000. Only 6 percent had calculated how much they will need to fund themselves once they stop working.
Consumers looking for a safe place to store their money and also earn interest have long turned to money-market funds, which invest in short-term bonds and are usually considered virtually risk free. But this week's news of Lehman Brothers' bankruptcy and the federal government's bailout of American International Group called the safety of such funds into question. At least one, the Reserve Primary Fund, lost value, partly because it held Lehman bonds.
But that doesn't mean consumers with savings in money-market funds should cash out and store their money in an FDIC-insured bank account, which usually pays much lower interest rates. It does mean, however, that it's a good time to check out the details of how your money-market fund is managed and what kind of securities it holds.
For an upcoming video project, I'm looking for someone in the Washington, D.C., area who has a financial question or problem related to saving money, retirement, or paying off debt. If you fit this description and are willing to talk about it, please E-mail me at alphaconsumer@usnews.com.
Megan at Jezebel tells her refinancing story, which involves being treated poorly by loan officers. She writes:
This guy was from the hard sales side of the aisle. He kept telling me how he, and he alone, was looking out for my financial interests. Why would I want my mortgage rate to go up in 2008? Didn't I know rates were rising? How was I going to be able to keep my home if my ARM adjusted upwards by 3 points or more? Didn't I understand that he did this for a living and he was just trying to help me? I share this story because it wasn't the first time I've had a dude try to muscle me into a bad financial arrangement.
I've also experienced such condescension, most notably when my husband and I were buying a car and the sales rep addressed all of his comments to my husband, as if I were just a passive observer. (Another pet peeve—after we bought the car, all of the mail related to payments and car maintenance comes addressed to Mr. and Mrs. My Husband's Name, when that is not even my name. From the car company's perspective, I don't even exist.)
What do you think—is this sexism or oversensitivity?
Has all of the latest financial news made you nervous? My own 401(k) has plummeted more than 15 percent since January, which doesn't feel good. But the only thing to do—unless you're among the Lehman employees who have suddenly found themselves without jobs—is to ignore all the drama about the markets plunging and bankruptcies being filed. While our portfolios may have gone down, those of us who buy into the market regularly (through 401[k] purchases, for example) are also purchasing stocks on the cheap right now, and the financial advisers I've spoken with say they still expect returns over the long run to be around 8 percent.
Here's how other bloggers are handling the news:
• The Budgeting Babe: "While the front-page stories haven't yet really affected me directly (as in, my day-to-day life hasn't changed), it seems a lot of other people are affected. Several of my young, capable friends are out of jobs. I know a lot of young couples hoping to "trade up" who can't sell their condos. Gas is still crazy expensive (really high today due to Ike), and credit is harder to come by. For those nearing retirement, 401(k)'s are a nightmare right now. Is America in for a major lifestyle change?"
After reading about Annie Leibovitz's $715,000 debt from unpaid taxes, outstanding rental equipment fees, an uncompleted book deal, and renovation payments, I wondered: How in the world do rich people (Leibovitz earns at least $2 million a year through her Vanity Fair contract) go into debt? (For the record, Leibovitz says her debt issues have now been resolved.)
When I posed that question to several financial planners for an upcoming story, one of them made a point that stuck with me. The average consumer makes the same kind of financial missteps, says Tim Maurer, director of financial planning for Financial Consulate, a Baltimore advisory firm, but the only difference is that no one is watching. Whether it's leaving bills unpaid, like Leibovitz, failing to save, like Britney Spears, or facing foreclosure, like Dustin Diamond (aka Saved by the Bell's Screech), celebrities are just as vulnerable to bad money decisions as we are (or maybe even more vulnerable, because they have more money to lose).
Still, it's hard not to feel some amount of frustration with a celebrity's mismanagement of wealth—perhaps only because I'd like to believe that given the opportunity to manage millions, I would do it so much better.
Trend-spotter Faith Popcorn says all the financial pressure consumers are facing during this down economy is driving many of us to wilder behavior. One in five adult Americans report drinking more, 17 percent say they are smoking more, and 19 percent report increased sexual activity.
Popcorn, chief executive of her eponymous consultancy, says, "In the face of adversity, many people, especially young adults, propose to 'cut loose,' have some fun and worry about the consequences, financial or otherwise, later."
For those following that trend, an economic recovery might be something of a letdown.
A new study from ING, working with Essence magazine, explores black women's attitudes toward money. The participants said they worried about finances more than their health, appearance, job, or relationships. Here are some highlights:
47 percent of black women surveyed said it is difficult to have the lifestyle they want because of financial obligations to immediate family.
More than one third have loaned more than $1,000 to friends or family in the last year.
71 percent said it was "very important" to donate money to their place of worship.
41 percent feel guilty about how much they spend on expensive brands.
2 in 5 reported total savings of less than $10,000.
In this week's Alpha Consumer Podcast, I talk to Melissa Tosetti, founder of the online magazine Budget Savvy, about setting financial priorities. She recommends scaling back on what's not important to you so you can spend money on what is. For her, that means less money on cars and more on travel. Some of her favorite websites are:
On her blog SmallNotebook.org, Rachel offers advice and, as she puts it, "encouragement" for living a simpler life. Her site is both personal, with stories from her own family life, and practical, with daily tips. I asked Rachel to answer a few questions about how and why she got started.
How and when did you decide to start SmallNotebook.org, and what is your background?
Small Notebook began as my personal blog about six months ago. I wanted a place to keep photos and notes to remember the day, like how I draw and write in my paper notebooks. I didn't expect anyone to be interested, and I'm pretty sure my mom was the only subscribed reader for the first several weeks.
Are you wondering how Barack Obama's and John McCain's tax plans will affect you? Katie Couric's CBS Evening News team explains, with three helpful real-world examples:
For an upcoming story, I interviewed journalist Michaele Weissman, author of God in a Cup: The Obsessive Quest for the Perfect Coffee, about the business of coffee. It's the first in an occasional series on what I'm calling the Business of Pleasure. So far, the wine, oyster, and sushi industries are also on that list. If you have any other suggestions for sectors that provide us with enjoyment, please send them my way by E-mailing alphaconsumer@usnews.com.
One question Weissman answered for me addressed the hipster-coffee connection. She explained why so many coffee shops are run by young people who have embraced alternative lifestyles:
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