• A Librarian’s Guide to 332.024

    January 21, 2009
    Money Grab by Steve Wampler / CC-BY-NC

    Money Grab by Steve Wampler / CC-BY-NC

    I want you to think rationally about money. That’s my goal for this article. After you read it, I want you to feel more in control.

    That sounds easy, but it’s hard to think clearly when it comes to money. Daniel Kahneman was awarded a Nobel Prize in 2002 for his work in documenting our irrationality, and Ivy League professors have written bestsellers about it, including Irrational Exuberance, Predictably Irrational, and Why Smart People Make Big Money Mistakes. It’s tempting to bury our heads in the sand. “Money,” we want to tell ourselves, and anyone who comes to the library in search of answers, “can’t buy happiness. Plus, it’s the root of all evil. Best not to think about it.”

    After all, it’s not like we went into librarianship in order to get rich. And if we were good at thinking about money and enjoyed it, we probably would have become accountants or bankers or entrepreneurs. I’m not suggesting that we’re innumerate, only that most of us prefer to think about other things.

    Still, that doesn’t let librarians off the hook. About 80% of us are in the 25% tax bracket, which means we should have enough to save and invest, and not just in our retirement plans. We may not feel like saving money is an option for us, especially in this economy, but if you’re concerned about our economic future, the viability of social security, or outliving your savings, then you have a strong incentive to educate yourself about your money. It can be comforting, but also startling, to realize how well off we really are.1

    We also owe it to our constituents: our neighbors, students, faculty members, and colleagues. There is a great deal of discussion about the economy, and there are good reasons to be concerned, but many people have a difficult time distinguishing between good reasons and bad reasons. They also have a tough time understanding the magnitude of these issues or what they, personally, can do about them. As librarians, we help people undermine fear and ignorance by providing them with the tools to educate themselves. Unfortunately, we’re not doing quite as well as one might hope.2

    I won’t be discussing economics in this article, but I will discuss personal finance. Some of the topics I’ll discuss relate to the economy as a whole, though most will be about you and the people you see at the library, because we can do better for them and we can do better for ourselves. Imagine if we went to the mall and paid cover price on all the books, movies, and music we purchased for our collections. That would be rational compared to the way many of handle financial decisions.3

    Disclaimer

    No one has certified that I know what I’m talking about when it comes to personal finance, investing, insurance, shopping, or anything else that involves spending or saving money. In other words, these are my opinions: agree with me at your own risk.

    That aside, it’s a topic that has interested me for some time, and my understanding of personal finance has enabled me to do things I wouldn’t have been able to do otherwise. It hasn’t made me a lot of money—my small investments have served me reasonably well, but I don’t expect to retire young. However, unlike most people, I almost never worry about money. I’ve also helped family members and friends alleviate their own concerns.

    A few basic questions come up a lot when I talk to people about money. I’ve started with the ones that have short, easy answers—Where should I start? What are the first things I should do? What do you recommend I read?—and then I move onto the longer ones that require a bit of explaining.

    Books

    Every library should own, and every librarian should be familiar with, the latest version of Andrew Tobias’s The Only Investment Guide You’ll Ever Need and Burton Malkiel’s A Random Walk Down Wall Street. All the rest is commentary. And there’s plenty of it, most of it overly simplistic, overly complicated, speculative, or easily refutable.4

    Tobias’s book, which was first published in 1978 and is now on its fourth edition, is especially easy for beginners. He doesn’t assume that you know anything in particular, he avoids charts and graphs, and he keeps things light and entertaining. Malkiel’s book, which was first published in 1973 and is now in its ninth edition, is a bit more academic and focuses primarily on investing (as opposed to saving, insurance, and other aspects of personal finance), but it’s also a comfortable read, especially after Tobias gives you the lay of the land. Each of these books has sold well over a million copies.

    Insurance

    A lot of people, when they think about personal finance, spend a lot of time on the best things that might happen: winning the lottery, finding the next Google, inheriting millions from a long-lost relative, finding a kernel of useful investing advice in the mainstream business media. That’s human nature. We lead active fantasy lives.

    The reality is that it’s more rational to prepare for the worst things that can happen—an expensive illness, a disability that prevents you from working, your own death (if people you love depend on your income)—because they’re a lot more likely than the best things. If you’re alive, insure your health; if someone else depends on your income, buy (term) life insurance. If you own a car or a house, insure it. Disability insurance is usually a good idea; long-term care insurance and an umbrella policy may make sense as well. If your job provides these benefits, so much the better, but make sure that you understand what you’re getting and that you have enough coverage to meet your needs.

    I’m not suggesting that you should buy more than you need—the goal is to buy just enough to cover your expenses—but you (and your employer) absolutely should buy insurance from a company with a strong financial rating and a good record for honoring its commitments. The point of insurance is for the insurer to give you money when you make a claim: if it goes belly up, or shirks its responsibility, you might as well have not even bothered.

    As far as honoring commitments, Consumer Reports regularly surveys its members about their insurers, and J.D. Power conducts annual evaluations. Unfortunately, guessing which insurers will be around long-term has gotten dicier lately, especially because the agencies who rate insurance companies’ stability have had their own credibility called into question, which is all the more reason to make sure your insurers are rated highly by A.M. Best, Fitch, Moody’s (free registration required), Standard & Poor’s, and TheStreet.com Ratings (formerly Weiss). Yes, there’s a chance that all five could be wrong, but it seems less likely than one or two of them overestimating an insurer’s long-term viability.

    Planning

    For many people, money and stress are like “jacknifed” and “tractor trailer”: they don’t think of one without thinking of the other. In my experience, there are a few things you can do to take a bit of the stress out of dealing with money. The first is education. My hope is that reading this article, and reading the articles I’ve linked to and books I’ve recommended, will make you feel more sure of yourself.

    It’s also important to have the discipline to spend less than you make. Much less, if possible. One way to help control spending is by making a list of the things you want to buy. Do you want a house, a car, fashionable clothing, vacations, cable television, presents for your friends, veterinary care for your pet, meals at nice restaurants? Probably, and likely many other goodies as well. Prioritize your list. Figure out how much each thing will cost you. Figure out how often and how long it makes sense to delay gratification. Always remember that items on the list are more important than anything that isn’t on the list.

    If at all possible, it make sense to establish an emergency fund with at least three to six months of living expenses, perhaps more if you have children. Put your rainy-day fund somewhere safe where your money will be working for you, such as a savings or money market account, and, as the name implies, don’t touch it except in an emergency.

    Along with educating yourself, spending less than you make, and maintaining a rainy day fund, the other important way to minimize financial stress is to avoid bad debt. Credit card debt, auto loans, consumer loans… these are not good debt: the interest rates tend to be high and you can’t deduct the interest like you can with a mortgage or a student loan. Though even for tax advantaged loans like mortgages and education, make sure that you shop around for the lowest rates, learn about refinancing mortgages and consolidating student loans, and that you pay off even these debts as quickly as makes sense.

    Wills, etc.

    In Sweet and Low, Rich Cohen does a great job of documenting how his family, the founders of the Sweet’N Low company, allowed money to drive a wedge between parents, children, siblings, and cousins. It happens all the time: to my mother (twice), to my father, to my best friend. As with the Cohens, the money wasn’t really the issue, and anyway it wasn’t enough to justify a lawsuit. But that doesn’t diminish the pain of having your sibling manipulate you, of having your stepmother subvert your father’s wishes, of having your stepfather mishandle the modest estate your mother spent a lifetime carefully stewarding. In many ways, the fact that not all that much money is involved only magnifies the pain.

    There are ways to avoid these situations. Not perfect solutions—in each of the above instances, there was a will involved—but having a will and other directives in place lessens the likelihood of your instructions being disregarded. Nolo has a useful website, with a very good section on wills and estate planning that includes a clear explanation of Nolo’s inexpensive, clearly written guides, and also includes a directory of wills, trusts, and estate lawyers. You may also want to familiarize yourself with the Internet Legal Research Group‘s Legal Forms Archive and with FindLaw, both of which offer forms online for free. Ultimately, your goal is to have a will, a durable power of attorney, a healthcare proxy, and a letter of instruction.

    Retirement Plans

    You probably have access to a 403(b), a 457, or a 401(k). The first is for employees at nonprofits, including those who work at educational institutions, the second is for government employees (many public libraries fall into this category), and the third is for people who work at for-profit corporations.

    A retirement plan is a container, like a building. That building could house a library or it could house a Wal-Mart. So if you ask someone if they’re saving for retirement, and they tell you they have a 401(k) and leave it at that, they either don’t know what they’re talking about or they’re blowing you off.

    Employers hire companies to handle their retirement plans for them. The ones you hope your employer has hired are Vanguard and TIAA-CREF5 because they’re huge and stable, they’re the lowest-cost providers in the industry, and they’re both essentially nonprofits.6 If your employer is using anyone but Vanguard or TIAA-CREF, ask them to switch if they can’t explain why their current provider is a better choice. This actually worked for me once.7 The only potential gotcha: depending on the number of people who participate in your employer’s retirement plan, you may be too small for Vanguard or TIAA-CREF. If that’s the case, encourage your employer to use Employee Fiduciary as a low-cost intermediary.8

    If these are not options, or if you’re able to reserve additional funds for retirement savings, consider a Roth or Traditional IRA. If possible, set it up so that money for retirement is automatically deducted from your paychecks. In that way, you get in the habit of paying yourself first.

    Investing

    Sometimes, instead of saying “I have an IRA” or “I have a 401(k),” people say, “I’m in mutual funds.” Once again, they’re either clueless or think you are.

    Mutual funds are like libraries. Just as libraries can house books, DVDs, CDs, and many other types of objects, depending on their charter mutual funds can invest in stocks, bonds, real estate, commodities, or other assets. Some of them only hold U.S. stocks, some of them only hold non-U.S. stocks. Some of them hold whatever their manager thinks is appropriate. Mutual funds’ holdings are owned by the people who invest in them.

    In general, it makes sense to determine what you should invest in—usually a mix of stock mutual funds, bond mutual funds, and real estate mutual funds—and put your money into those funds with the very lowest overhead (i.e Vanguard or TIAA-CREF). Any investment company will help you determine the right mix for you, and they’ll do it for free, either in person, over the phone, or online. Malkiel also does a good job of walking you through the process in his book.

    The idea behind this sort of asset allocation is that it helps you manage risk. In general, bonds carry less risk than stocks, which is why bonds typically have more consistent returns from year to year, but stocks have higher returns on average.9 For people who won’t need the money for a while and can wait out the bad stretches, it makes sense to invest mostly in mutual funds that focus on stocks. Keep in mind that the bad stretches can last for a decade or more: Japan’s stock market currently trades at 20% of the value it attained in 1990. For retirees who need the money for living expenses, or people approaching retirement, it makes sense to invest most of your money in mutual funds that focus on bonds. As you get closer to retirement, you change your target mix, gradually, from mostly stocks to mostly bonds.

    Having a target mix—for instance, 60% stocks, 25% bonds, 10% real estate, and 5% cash—also helps you buy low and sell high. Rather than trying to guess if stocks or bonds are going to do better, you automatically buy the funds in your asset mix. Every year or so, you check to see if one of your asset classes is doing especially well or especially badly. For instance, maybe stocks have been going through such a bad stretch that, even though you’ve been putting 60% of your money into it, your stock mutual fund now represents only 45% of your holdings. Having a target mix would help you have the discipline to sell enough of your bond and real estate mutual funds to get your stock fund back up to 60%. Investors, in aggregate, do not have the discipline to sell high and buy low; in fact, as an often cited study called “Quantitative Analysis of Investor Behavior” reveals, most investors do the opposite: they buy just before bubbles burst and sell just before recoveries.

    You can automate your rebalancing by investing in Vanguard’s Target Retirement Funds or TIAA-CREF’s Lifecycle Funds. You pick the year you expect to retire and the company does the allocation and rebalancing for you.

    Indexing

    Let’s say you had to run a library all by yourself and had almost no money with which to do it. You could install self-checkout machines, have all reference questions handled remotely, and set up standing orders for shelf-ready books, such as anything that made the best-seller list or was included in the appropriate Core Collection.

    That was the idea behind the first index fund, the Vanguard 500, which started in 1976. Rather than researching which stocks to buy, Vanguard founder John Bogle set up his mutual fund to buy everything in the Standard & Poor’s 500 Index, a collection of 500 large companies whose aggregated stock prices are intended to mirror the U.S. stock market as a whole. By eliminating research and other overhead charges, Bogle found that he could generate returns that did better than most other mutual funds, often much better.

    Today, there are low-cost index funds that track most segments of the market. For many people, that’s the easiest way to get consistent returns in the asset classes it makes sense for them to hold.

    Hiring an Advisor

    If you aren’t investing directly in an index fund, you’re either picking your own stocks and bonds (which is almost always a bad idea, even for professionals) or you’re using an advisor to pick your investments for you. Some people aren’t going to be satisfied with Tobias or Malkiel, or they don’t have the attention span to read about personal finance, or they feel so overwhelmed by money that it shorts out their ability to think rationally. For these folks, hiring an advisor probably makes sense (though if they haven’t read a book like Tobias’s or Malkiel’s, it’s going to be awfully difficult for them to know if their advisors are doing a good job).

    As I mentioned, Vanguard and TIAA-CREF (and pretty much every other investment company) will give you free advice if you use their services. You can also get very good advice at an online forum called Bogleheads.org (formerly known as Vanguard Diehards).

    If you want to pay someone to manage your investments, and you have a pretty fair nest egg (minimum amounts vary), the low-cost advisors that seem to get a consensus of support at Bogleheads.org are Portfolio Solutions, Evanson Asset Management, and Cardiff Park Advisors, roughly in that order. For those with a bit less money, Bogleheads posters seem to like a new advisor called AssetBuilder, which was co-founded by investment writer Scott Burns. For those with a bit more money, the posters also like Buckingham Asset Management.

    If you don’t have enough money to meet these advisors’ minimums, or if you want to work with someone in person, you have two reasonable options. One would be to hire a local, fee-only advisor. Rather than getting paid a percentage of your assets, or taking a commission each time you make a trade, fee-only advisors negotiate their fee up front. To find a fee-only advisor, go to the website for the National Association of Personal Financial Advisors and select “Find an Advisor.” The alternative would be to work with a more traditional broker who can help guide you into mutual funds that make sense for you. These brokers get a percentage of the money you invest each time you buy a mutual fund (or a high commission on your stock trades). As a rule, this isn’t a good deal for many investors because these brokers only get paid when you trade, so they tend to find excuses to move your money around. An exception to this rule is Edward Jones, whose brokers have a good record of encouraging investors to buy solid mutual funds and hold them long term.

    There’s one other avenue for hiring an advisor that may make sense. The alternative to indexing—investing in a mutual fund that mechanically buys the stocks or bond or other assets that make up its index—you can invest in a mutual fund in which managers use their judgment to decide what to buy. There are thousands of managed mutual funds to choose from—even Vanguard offers them, and most TIAA-CREF funds are managed as well. The key, as always, is to keep costs down and to limit risk as much as possible. For that reason, if you aren’t going to go with an index fund, choose a fund that has had the same manager (or management team) for a decade or more, ideally a manager who owns the company and whose record is considered legendary. Martin Whitman, who founded and manages the Third Avenue Value Fund, fits that description, as do the partners of Tweedy, Browne, who manage three mutual funds. If you’re thinking about investing with Third Avenue, read Whitman’s books and his last several shareholder letters; if you’re thinking about Tweedy, Browne, read the material in the Research and Reports area of their website.10 If you’re unconvinced, confused, or bored to tears, stick to index funds.

    Socially Responsible Investing

    I’ve been a vegetarian for twenty years, so it’s hard for me to get excited when McDonald’s is helping to prop up the indexes. I have a good friend who’s a big Linux advocate; he’d love to see Microsoft go out of business. Both McDonald’s and Microsoft are members of the Dow, the S&P 500, and most other major indexes. What to do?

    A popular sub-industry known as socially responsible investing attempts to fill this breach. You can read up on social investing at SocialFunds.com and the Social Investment Forum. You might also want to check out the largest players in the field, Calvert Investments and Domini Social Investments. For those people whose employers offer TIAA-CREF 401(k), 403(b), or 457 plans, there’s the CREF Social Choice Account, which invests in a mix of stocks and bonds; for those who invest in TIAA-CREF directly through mutual funds (or through a Keogh or SEP-IRA), there’s Social Choice Equity, which invests only in stocks. Vanguard offers a Social Index Fund that invests in a modified version of the FTSE4Good Index Series.

    One of the main problems with social investing is revealed by Mark Pilgrim’s joke about Unicode:

    I was walking across a bridge one day, and I saw a man standing on the edge, about to jump off. So I ran over and said, “Stop! Don’t do it!”

    “I can’t help it,” he cried. “I’ve lost my will to live.”

    “What do you do for a living?” I asked.

    He said, “I create web services specifications.”

    “Me too!” I said. “Do you use REST web services or SOAP web services?”

    He said, “REST web services.”

    “Me too!” I said. “Do you use text-based XML or binary XML?”

    He said, “Text-based XML.”

    “Me too!” I said. “Do you use XML 1.0 or XML 1.1?”

    He said, “XML 1.0.”

    “Me too!” I said. “Do you use UTF-8 or UTF-16?”

    He said, “UTF-8.”

    “Me too!” I said. “Do you use Unicode Normalization Form C or Unicode Normalization Form KC?”

    He said, “Unicode Normalization Form KC.”

    “Die, heretic scum!” I shouted, and I pushed him over the edge.

    It’s tough, perhaps impossible, to find a set of screens that block out the companies you want blocked out (I’ve never seen a screen that blocks out Microsoft, which my friend considers heresy) and also lets in enough companies to offer a diverse set of investments (and if you don’t have a diverse set of investments you’re taking on an awful lot of risk). In addition, it’s expensive to pay people to review pretty much everything about any company that might not pass social muster. As an investor, you pay those expenses. It might be worth it to you—I happen to be a big fan of the CREF Social Choice Account—but there’s a chance the fees you pay are hurting you long-term.

    Finally, there’s no overwhelming evidence that social investing changes the world in ways that social investors want it changed—but then, I haven’t seen as much evidence as I’d like to see about libraries and librarians making the world a better place. Some of us still think it’s worth doing, but that doesn’t mean people should feel bad about investing in regular indexes (or going to the bookstore or using Netflix).

    One final thought on investing, specifically social investing: giving back is a great way to invest in our common future. I’ve worked most of my adult life in nonprofits, mostly as a fundraiser. I won’t make suggestions about which organizations are deserving of contributions, but I urge you to make donating to worthy organizations one of your priorities. I also suggest answering the following questions: Does it make sense to give a little bit of money to a lot of different organizations or larger amounts to fewer organizations? Does it make sense to give them money in cash, on a credit card, or through a stock transfer? Could you do more good by setting up a personal foundation or donor-advised fund (it’s easier and requires less money than you might imagine)?

    Ultimately, the key is to feel confident in all of your choices regarding money, to understand them and, ideally, to educate those around you. This is what we, as librarians, have to offer.

    Thanks to Jeff Bonfield, W. Keith McCoy, Mike Overholt, and Bill White for reading an early draft of this article, and to my ItLwtLP colleague, Kim Leeder, for helping me with its final version.

    You might also be interested in:

    1. In 2006, the most recent year for which data is readily available, for the 25% tax bracket the lower bound was $30,650 and the upper bound was $74,200. According to the BLS, in 2006, “The lowest 10 percent (of librarians) earned less than $30,930, and the highest 10 percent earned more than $74,670.” So we’re within a rounding error of matching both boundaries of the 25% tax bracket.

      While we may not think of ourselves that way, the 25% bracket might well be considered rich. It certainly would be in a global sense: according to data available at the World Bank’s PovCalNet, a librarian making $30,930 would have a higher annual income than 99% of the people throughout the developing world (follow the link to PovCal, select WorldBank’s Regional Aggregation, select 2005 as the reference year, and select this librarian’s average monthly earnings, $2,577.50, as the poverty line). It could also be considered rich domestically: in 2006, 68% of the the population made less.

      Note: For the sake of simplicity, and except for the World Bank statistics, all number are from U.S. and refer to “Unmarried Individuals (other than Surviving Spouse and Heads of Households)” because we’re comparing tax brackets for individuals to individual (librarians’) incomes (for that reason, capital gains are also excluded). The 68% figure refers to the number of “Unmarried Individuals” who did not earn enough to qualify for the 25% tax bracket; among all tax payers, 64% were below 25%. []

    2. For instance, Warren Buffett’s partner, Charles Munger, is one of the world’s most respected investors. His talks, lectures and public commentary have been collected in Poor Charlie’s Almanack, which features a foreword by Buffett. In his most recent letter to Berkshire Hathaway shareholders (February 2008), Buffett wrote, “Without any advertising or bookstore placement, Charlie’s book has now remarkably sold nearly 50,000 copies.” It is held by 67 WorldCat libraries, which isn’t bad, but we could be doing a lot better. (By way of comparison, the underground Islamic punk novel, The Taqwacores, was held by 64 WorldCat Libraries when last I checked.) []
    3. Just to be clear, I’m not picking on librarians. Irrationality affects everyone, even the world’s best programmers. To combat it’s employees’ irrationality, Google, when it was preparing to go public, did a sort of workplace wellness program, only instead of being about physical health its program was about personal finance. An article by Mark Dowie describing Google’s personal finance education program is a nice primer on this topic. []
    4. Which isn’t to say that no one else has anything useful or interesting to say about money. Among my favorite writers in this area are Warren Buffett, John Bogle, and William Bernstein—and those are just a few of the B’s. But most people will get most of what they need if they stick to the books I’ve recommended by Tobias and Malkiel. []
    5. See “Yale Money Whiz Shares Tips on Growing a Nest Egg.” []
    6. Vanguard is mutually owned by the people who use Vanguard to handle their investments; TIAA-CREF lost its federal tax-exemption in 1998, but is still run by not-for-profit corporations and retains its nonprofit structure. []
    7. Dan Otter, founder of the 403(b)wise and 457(b)wise websites, has additional recommendations. []
    8. If your employer is too small to participate in a Vanguard or TIAA-CREF 401(k), 403(b), or 457, they may be eligible for a SEP-IRA or SIMPLE IRA. In addition, in case you some day find yourself suggesting resources for someone who is self-employed, or if you’re thinking about starting your own business, be sure to investigate Keogh and Solo 401(k) plans as well as SEPs and SIMPLEs. Call the Vanguard or TIAA-CREF to explore these options. []
    9. Bonds are IOUs; when you buy them, you’re betting that a company will be able to pay you back. Stocks are an ownership interest in a company. If a company is doing well, and making a lot of profit, it’s more valuable to own the company than to be owed money by the company. However, when a company isn’t doing well, especially if it looks like it may go bankrupt, you’re better off being owed money by the company because, if it needs to, it can sell its assets in order to pay a portion of its IOUs. []
    10. In addition, if you go with Third Avenue or Tweedy, Browne, you might want to be begin thinking about a back-up plan: Third Avenue’s Martin Whitman is 84 years old, and the partners at Tweedy, Browne are approaching retirement age as well []
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