Don’t create a budget — and 12 other financial tips to live by

I’m in a crabby mood. Why not spread the joy around? Welcome to today’s deliberately inflammatory column. Here are 13 of my firmly held financial beliefs: 

1. You have no clue where stocks and interest rates are headed—and neither does anybody else. Instead of forecasting returns, investors should devote their efforts to cutting investment costs, trimming taxes and managing their portfolio’s risk level.

 DYI Comments:  The author Jonathan Clements is correct over the short term it is impossible to determine the direction of interest rates or stock prices.  What we do know is the level above or below the average interest rate or dividend yield (or Shiller PE10) to determine the risk level.  Anyone who has been reading this blog even for a short period of time knows that the market for interest rates or stock yields is in the sub atomic low range. This makes for a overvalued market for stocks and bonds.  Can stocks go higher from here?  Absolutely they can; but higher and higher we go, driving down the dividend yield, future returns will fade.  Bonds yields as exampled the 10 year Treasury are very low at 2.40% with future returns approximating 90% of the beginning yield (90% x 2.40% = 2.16%).  Caution is the key word for stocks and bonds at these nose bleed levels for when the turn comes it will be ugly.

  2. Buying actively managed mutual funds is an act of faith in the face of daunting odds. S&P Dow Jones Indices, part of McGraw Hill Financial, analyzed the performance of U.S. stock funds in 13 categories. Depending on the category, just 14% to 39% of funds managed to beat their benchmark index over the five years through year-end 2013.

DYI:  As a general rule DYI sticks to index funds whenever possible. Our favorite is Vanguard.

 5. You are highly unlikely to make money from your home’s price appreciation once you figure in inflation, homeowners insurance, maintenance and property taxes. What if you have a mortgage? The loan may leverage any home-price gains—but the interest costs will likely offset the benefits. 

6. Paying down a mortgage is a great low-risk investment. It may not give you the highest possible return. But the interest saved is probably greater than the yield you could earn by buying bonds—and the result can be substantial financial freedom. Everybody should strive to be mortgage-free by retirement.

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Why It's Still Only A Cyclical Bull Market Within The Long-Term Secular Bear.

In 1999 Warren Buffett famously warned that “The next 17 years will be quite unlike the last 17 years. It might not look much better than the dismal 1965-1982 period.”

He was referring to the market’s history of cycling between long-term ‘secular’ bull and ‘secular’ bear markets, as it has done for at least 113 years.

Then there is investor sentiment. Retail investors have fallen back in love with the stock market to a significant degree. According to the Investment Company Institute, as is typical in the cycles, public investors, devastated by the 2007-2009 bear market, pulled money out of the market through the first three years of the new bull market that began in 2009. But they have been pouring money back into equity funds at an increasing pace since mid-2012, reaching a near record $92 billion in the first half of this year, (even as data shows institutional investors have been cutting back their exposure).

The last time retail investors became as enthusiastic and confident was in 2007, when they moved $85 billion into equity mutual funds in the first seven months of the year. So by that measure anyway, greed has replaced fear to an even greater extent than near the serious market top in October, 2007.

DYI Comment:  The chart below says it all; the secular bear market that began in 2000 is still with us.

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DYI