This life is what you make it. No matter what, you’re going to mess up sometimes — it’s a universal truth. But the good part is you get to decide how you’re going to mess it up.
— Marilyn Monroe

I spent much of my childhood in Los Angeles. I’m convinced that people in Los Angeles are more image obsessed than any other city in the world. This leads to a number of odd phenomena.
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While the aspirational in the rest of the country are often house poor, for example, many in Los Angeles are what I’ll call “car poor” — guys making $30,000 per year driving a Porsche while living in a microscopic concrete box with one window and no furniture. [Click to continue…]

When I was young I thought that money was the most important thing in life; now that I am old I know that it is.
— Oscar Wilde

The first Baby Boomer turned 65 in 2011. This generation has a number of qualities that make this an event that is likely to change the market landscape dramatically.

A few items to note:

• Boomers are on pace to live much longer than their predecessors.
• They have presided over the relentless decline of defined-benefit pensions in favor of defined-contribution plans like 401(k)’s.
• They thus have much more of their assets in the stock market than previous generations.
• They also are the first generation to enter retirement with so much debt, and many are on shaky ground, financially.

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Price is what you pay. Value is what you get.
— Warren Buffett

You can stand on the shoulders of giants, or a big enough pile of dwarves. Works either way.
— Anonymous

Devotees of index investing also tend to be strong proponents of the Efficient Market Hypothesis. There are a number of variants of the theory, but the basic idea behind it is this: the market effectively prices in all information that is realistically knowable to a non-insider. Thus the market price is always the “right” price, and it is “impossible” to consistently beat the market. Anyone who does so, adherents claim, is just lucky.

As you might imagine, I have some serious doubts about this theory, to put it mildly. But let’s set that aside for the time being, and assume that, at least until 1992 or so, it was more or less accurate.

The key thing to understand about the Efficient Market Hypothesis is that its entire foundation rests on the notion of a broad array of actors discovering all information that is knowable and relevant to the intrinsic value of an asset, then acting in aggregate on that information to provide a highly accurate real-time price. (Remember the Parable of the Ox?) [Click to continue…]

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Nobody goes there anymore. It’s too crowded.
— Yogi Berra

I first heard of index funds in the 90s, although they had been around since 1975. Their popularity grew relatively slowly at first, but has skyrocketed in the last 20 years or so.

A number of factors have contributed to this growth, but one of the biggest has been the steady trend away from defined-benefit pensions to defined-contribution retirement plans like 401(k)’s. These plans typically offer limited choices, most often comprising a defined set of mutual funds to choose from. As word got out that few managed funds could consistently outperform the indexes (a point I certainly do not dispute), it’s no surprise that more and more Americans have elected to invest their retirement savings in them.

Millions upon millions of people now steadily pour money into index funds every month. While it’s great that so many people have figured out that it’s a good idea to avoid the high fees and spotty performance of actively managed mutual funds, this also presents a problem. [Click to continue…]

Just a brief note to mention that my post Do What you Love, but Don’t Expect to Get Paid For It was included in this week’s edition of the Carnival of Personal Finance. It’s my very first carnival appearance, so naturally I’m excited. Thanks to the editor for including my article.