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As of today, the Dow Jones Industrial Average has erased all of its gains this year. We’re not quite in “market correction” territory, though. The S&P 500 is still up year-to-date, but it isn’t presenting as fantastic a return as was evident earlier in the year. We could be getting to the point where the market finds itself in the midst of a market correction.

I wouldn’t pretend to be able to predict the daily, weekly, monthly, or annual swings of the stock market, but there’s no reason to rule a correction out as a possibility. Investing professionals typically define a market correction as the point at which an index that measures broad market performance is down 20 percent from a high. The Dow would have to be below 14,000 for there to be a market correction (and that would be down 20 percent from high of 17,279.74). The Dow could theoretically get there.

And if something is a possibility, it’s good to plan for it in advance. Here on the east coast of the United States, residents are prone to hurricanes. The good thing about hurricanes, and where they differ from stock market corrections, is that there are warning signs. If you pay attention to the weather segment in the news, you should know when a hurricane is going to arrive.

Before the destructive weather arrives, you have time to go to the store and buy water and food, nail boards to your windows, or evacuate. There’s little excuse for waiting until the last minute in most cases.

There are claims that there are warning signs of a market correction well in advance of a stock market crash (if the correction happens to come with one). But these claims generally come in two different situations. The first consists of those claims by people who are always predicting a correction is nigh — a broken clock is correct twice a day. The second consists of “experts” who point out the signals after the fact but were suspiciously silent while the signals were supposedly present.

Because markets generally operate in cycles, corrections are bound to occur. We just don’t always know when. So it’s good to know what to do ahead of time so you’re not searching for information in a moment of panic. If you just begin your planning during a moment of market panic, you’re going to find information from other people who are also affected by the panic.

And panic has never done any good for anybody, at least not with financial decision making. Panic supposedly developed as a biological response to physical threats and real danger. Panic causes adrenaline to pump through our bodies, increasing physical strength and agility in times of danger — like when you suddenly need to outrun a lion. Good luck with that. We haven’t adapted biologically to emergencies of a more cerebral nature, and that’s when panic fails us.

Before you think about taking any action with your finances during a correction, it’s good to know that corrections are not bad. The only reason the stock market is, in general, such a good place for investing for the long term is because of the corrections.

If the stock market offers an average of 8 percent returns over the course of any thirty-year period, it’s thanks to the occasional opportunities to invest during market corrections. If you want to get the market returns promised by financial planners, you have to be invested and continue to invest during times when newscasters and talking heads on television are concerned about the future of the economy.

Knowing what to do during a market correction starts long before any market correction. If, during the good times and bull markets, you create your plan to consistently invest a portion of your income, there’s no need to change course just because the stock market dips. In theory this makes sense, but in practice, there can be some complications.

Here is the one thing you need to do during a market correction.

Continue your investment plan.

One might say this isn’t an action to take, but a state of being to continue. Your ability to earn good returns in the long term relies on your willingness to continue your plan when the market is showing no sign of recovery. And this isn’t as easy as just tuning out the noise and leaving your automatic investment plan untouched.

Just think back to the recession of 2008. Those who invested through the recession came out on top, even with the Dow down for 2014 so far. But many people lost their jobs during the recession. Many couldn’t find work for a long time, and some are still out of work. Many graduates college between 2008 and today and haven’t had the opportunities others have had to continue — or even — start investing during a period of time in which investing in the overall stock market was crucial for receiving the best long term gains.

(Don’t worry if that’s you, and if you’re still young. There will be more opportunities in the coming decades.)

Some workers, perhaps because they were unable to maintain their jobs during the recession, retired early during this time frame. They retired early not necessarily because they were financially independent, but because the job market was unfavorable to men an women of a certain age looking for work. Some just gave up on the job hunt and learned to make do with a smaller nest egg than the one they were hoping for.

Even though just continuing your investing plan doesn’t sound like an action you take it’s absolutely necessary for coming out of a market correction with an advantage. It’s not even an advantage — it’s the baseline.

If you want those advertised market returns, don’t change your plans when the world of the stock market is crumbling.

So, when the world is shouting at you that the stock market is a terrible, horrible way to invest, how do you get through it and take advantage of a correction? The answers all require starting now, before the correction.

  • Save during the good times. The character of Joseph in Joseph and the Amazing Technicolor Dreamcoat (I also hear he was in a prominent figure in another book) seemed to have the plan down and could probably offer some lessons to today’s CEOs. Use your profitable times to set aside some of your surplus money for difficult times. Create that emergency fund that will help support you in the case of a break in your income.
  • Make your investments automatic. Don’t worry about individual stocks unless you have a small percentage of your portfolio you want to “play around” with. Choose a broad, low-cost index mutual fund like VTSMX. Start with your 401(k). Your employer will set that up for you if it hasn’t been done already. If you max out your tax-advantaged investment options, Vanguard will help you set up a recurring purchase of a fund every time you receive your paycheck’s direct deposit in your checking account.
  • Rebalance your investments automatically. Your 401(k) administrator may be able to set this up for you. And it’s only necessary if you’re investing in a basket of funds rather than one index fund. But if you do invest beyond your 401(k), you might need to rebalance manually. Twice a year is all that’s necessary. Don’t even worry about rebelancing during a market correction if you already have a schedule.
  • During the correction, tune out the noise. If the stock market is making headlines in non-financial news, everyone is going to be talking about their investments. And they’re going to be offering you advice, telling you what to do. Just ignore it. Turn off the television. Avoid social media. The less you’re exposed to panic, the less of a chance you’ll feel you need to change your plan.

How do you maintain your sanity during a stock market correction? Share your tips for investing here.

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We expect much from people we see on television. And it’s worse when we perceive someone to be smart and talented, even if they’re speaking beyond their area of expertise.

We think someone who is a great community leader or someone who is a great business leader will make a great President of the United States. We see the similarities in roles and responsibilities and believe that intelligence and talent in one area leads to success in another. The same bias happens in ourselves. Why else would Donald Trump, a successful business person who doesn’t appear to have interpersonal communication skills based on his public statements and television appearances (I don’t know him personally) believe that he could be a successful politician?

And success that takes the form of money often empowers one’s belief that their ideas on any topic are worthy of attention. It’s easy to fall into this trap, because there are many people who idolize financial success and seek out these people for leadership. It’s a self-feeding cycle. The more we seek out “advice” from people who have lots of money, the more individuals feel they have something important to say, the more they put themselves out there, and the media are happy to oblige.

So when Mark Cuban, a billionaire who built and sold a major online property, diversified his wealth, owners a basketball team, participates in a popular prime-time television program, and can easily afford a four-year education at any of this country’s top universities, feels like speaking about a topic, the news media is right there to give him an even more prominent place from which to address the country than his own blog. One topic on which Cuban spoke recently is the practice of allowing taxpayers in the United States to subsidize the higher education of its citizens — student loans.

Student loans represent an important piece of a system that allows expanded access to education. Having a highly educated citizen base allows the United States to stay competitive. There are a number of initiatives in place to improve education in this country, and the media loves the soundbites that compare citizens of the United States with the progress of other countries in science, technology, engineering, and mathematics. The general impression is that the United States is failing to keep up with the progress of other countries, and that has inspired governmental action in all levels. It may not be successful, but at least it brings the issue of education to the fore, inspiring spirited discussions about how we can ensure we are providing the best education to as many of our citizens as possible.

But at the same time, an anti-education movement looks critically at the state of the university system, and identifies some problems. While access to education is a key factor in eliminating poverty and allowing breakthroughs into the middle class, those who start off in the middle class may not be getting all that they once were able to receive from a four-year college education. It certainly feels that way when so many college graduates are still out of work in this recovering economy. (Keep in mind today’s college graduates are still much better off economically than those who did not graduate college.) Another criticism points to the outliers who are able to build significant companies and effect the economy in powerful ways without completing a college education, but those are clearly not the norm.

Combine a tough job economy with growing student loans and you have a hot button issue that is perfect for attention from someone like Mark Cuban, who because of his success in business believes he might have some insight on public education and economic policy. His approach to higher education is to boil all the complicated variables into one concept: easy money.

As the government made it easier for all citizens to attend a college by backing student loans — loans that can’t be eliminated through bankruptcy like most other loans — it gave colleges guaranteed income. Because the money was coming in so freely, colleges could raise tuition without the increase affecting enrollment numbers. They could increase salaries for administrators (while adjunct faculty salaries remain an affront to education) without any damage to the budget.

Students take student loans so easily, but then have such a difficult time dealing with them once they need to start repayment. I went to school with student loans, and despite the initial orientation and exit interviews, my low salary in the nonprofit sector didn’t give me much of an opportunity to both pay off student loans and save for the future. I did neither, at least not well, for many years. And I had the benefit of at least being employed.

Cuban argues, perhaps correctly, that if students did not have such a financial burden upon graduation, they might be using their income to contribute to the economy (which probably means buying tickets to Maverick games or buying houses). If we could cap student loans to $10,000, the burden would be less, and with less free-flowing money, colleges would have to lower tuition to maintain enrollment.

None of this will work. It’s a very short-sighted approach. College graduates earn so much more than those without a degree, even in a difficult job economy. The best thing for the economy in the long term is to make sure as many people as possible, those who have the capacity to develop lucrative skills, get those college degrees. Reducing access to college will send this country’s competitive stance and overall level of production down, inside and outside of the United States.

Furthermore, in today’s economy, having students graduate with less debt is no guarantee they’ll still be generating income to spend boosting the economy. Low-income or no-income graduates can take advantage of deferment or income-based repayment plans. These program lower the immediate financial burden, so if there was to be any boost by limiting student loans to $10,000, we would already be seeing that today. The bigger problem is that graduates are still unemployed or underemployed (though less so than non-graduates).

Colleges are not going to lower tuition just because the government might not be backing as much in loans. If government loans were limited to $10,000, the most likely scenario is that private lenders take up the slack. And even if they didn’t, the best that could happen is that the rate of tuition increases slows down. That’s a good thing, but not nearly a strong enough reaction that would allow the same access to education, all other things being equal.

Germany took the opposite approach recently, announcing that all public colleges universities would eliminate tuition entirely for all domestic and international students. Almost 95 percent of colleges in Germany are public colleges and universities. In the 2000s, German states wrestled with the German federal government to win back control of education, and in doing so, the federal government needed something to do with the money it had been setting aside for education priorities while the German states began funding loans and grants to students.

Because of higher education’s positive effect on the economy, and because a higher-educated populace is culturally and socially important, universal access is a worthwhile goal, and that is why there is a tax system in the United States. There are certain things that are good for the country — and the world — as a whole. There’s no denying there needs to be improvement. Institutes of higher education are businesses, though, despite their charters. They need to operate on a budget. They need to generate profits to pay employees.

There should be institutional reform to make sure these businesses are running efficiently, and those reforms could open the opportunity for using available funds in ways that directly help students and increase the value of a college degree. Limiting government-backed student loans to $10,000 is the wrong approach.

Am I wrong? Is Mark Cuban right? Do you believe colleges (which are still businesses) will lower tuition if student loans were to be capped at $10,000?


I’ve written extensively about taking control of one’s own finances. My life changed for me when I realized I had more control over my personal situation than I previously believed. Every human has the power to make every decision based on a future benefit.

One can choose to use a pay raise to pay off an overdue credit card or to justify the unnecessary purchase of a new car. One can choose to go to work early every day and otherwise impress the executives to earn a raise, or to do nothing beyond the scope of a job description and stagnate in one position in a career for a decade or more. One can choose to work hard in school and excel to prepare for a fruitful career, or to enroll in easy classes, not take education seriously, and not develop the critical thinking skills necessary to be successful later in life.

It sounds easy: just think about what you want for yourself in the future, and make day-to-day choices that bring you closer to that goal.

Unfortunately, it’s more complicated than that. The ability to make good decisions is itself complicated, but the entire philosophy rests on the idea that all people are starting from the same position and have the same opportunities.

Decision-making is complicated because humans are not logical. Some people may strive to make good decisions by keeping emotions as far away from the decision-making process as possible, but the truth is that’s impossible. Every decision we make, as human beings, is an emotional decision. Decisions are also not always binary options. In reality, dealing with a raise is not a choice between one very good option (paying off an overdue credit card) and one very bad option (justifying the unnecessary purchase of a new car).

Further complicating the decision-making process is that lives are full of issues with different levels of priority. When you are faced with urgent matters — everything that needs to be handled immediately — you aren’t able to focus on more important matters, or decisions whose effects may not be felt for years. You can’t save for retirement if your cash flow only covers the bare necessities of your shelter and sustenance. (And “getting a better job” or “downsizing your living space,” even if possible otherwise, still requires an upfront investment of time and money you do not have.)

But hard work is supposed to be the solution that overcomes all obstacles. Malcolm Gladwell synthesized a few research studies when he wrote about the “10,000 hour rule.” Following the 10,000 hour rule, anyone can become an expert with through deliberate practice with the intent of improving, as long as he or she puts the time in. More research disagrees with this premise.

A recent article in Slate addresses the research that disproves Malcolm Gladwell’s 10,000 hour rule.

Deliberate practice left more of the variation in skill unexplained than it explained. For example, deliberate practice explained 26 percent of the variation for games such as chess, 21 percent for music, and 18 percent for sports. So, deliberate practice did not explain all, nearly all, or even most of the performance variation in these fields. In concrete terms, what this evidence means is that racking up a lot of deliberate practice is no guarantee that you’ll become an expert. Other factors matter.

It turns out that genetics plays a role, too, on an individual basis. That may be true for some skills, like musical or athletic ability. It may be just an anecdote, but I can see how the genetic proclivity for musical talent has been transferred from generation to generation in my own family, going back at least four generations on my mother’s side.

While musical ability and aptitude for expertise may develop in part due to genetics, it remains to be proved whether the same factor is as strong for success in business. It’s clear that some business allow executive roles to stay within the family from one generation to the next, but that’s not genetics, just family favoritism.

Outside of genetics and deliberate practice, starting a skill early in age is another important factor in success.

In their study, Gobet and Campitelli found that chess players who started playing early reached higher levels of skill as adults than players who started later, even after taking into account the fact that the early starters had accumulated more deliberate practice than the later starters. There may be a critical window during childhood for acquiring certain complex skills, just as there seems to be for language.

Success with complex cognitive tasks like playing chess or learning may not be associated directly with success in running a business, achieving financial independence, or making the social connections necessary for becoming an executive at a corporation, but the idea that a child who focuses on skill during certain stages of development is better prepared to excel with that skill throughout life.

While some of the reasons involve chemical changes in the brain, being involved with activities during childhood could also help someone develop a passion for those activities. And that passion could keep a developing adult interested in excelling by become a desire to excel.

As the article in Slate points out, not all of us are starting from the same position. There is no “blank slate.” The idea that anyone could become Wolfgang Mozart or Pablo Picasso or Steve Jobs if she just puts in the required 10,000 hours of practice is wrong.

With this knowledge, should we change our approach to life? If you tend to listen to self-improvement gurus, the answer is probably yes. It’s too late to do anything about our genetics; we can’t choose the genes we inherit. We can’t go back in time and start developing skills as children. But we can make choices based on realities that science has proven.

1. Don’t expect to be a professional athlete, the next President of the United States, or the next generation’s Bill Gates or Warren Buffett.

If you haven’t shown an amazing aptitude in sports by age fourteen, getting to the major leagues in any sport probably isn’t going to happen. There are some exceptions. Golf comes to mind as one sport where someone can learn to excel later in life.

It’s great to encourage children by saying they can be whatever they want to be when they grow up, even parents who say this know the chances of giving birth to the next president is unlikely. But where this is much more obvious for adults is where people believe that they can overcome nature by practicing hard for many years.

2. Look for the intrinsic value in the work you do rather than validation by outward success.

I may never be a best-selling author, particularly if I never publish a book. But even if I’m not, does it mean that all the writing I’ve done over more than the past decade was a waste of time? Absolutely not. I’ve affected a lot of people’s lives for the better. And more personally, I’ve mostly enjoyed the time I’ve spent writing. That’s important as well.

It would probably be too much to say that I would have done everything the same had I not been able to turn writing into a business.

3. Use the time you have wisely.

Along those same lines, if I was in search of business success, I would want to cut losses as early as possible in order to prevent myself from going down a path that probably won’t result in that success. I wasn’t trying to form a business when I created this site, but I was working on many different projects at the time.

When it became clear that developing Consumerism Commentary would be more fruitful as a community — people were interested in what I was writing about and people were starting to follow as I progressed along my financial journey — I put other projects on hold to focus my time and energy where it was doing the most good.

If you do want to spend 10,000 hours perfecting some skill, make it something that you enjoy doing, something with which you have already proven your excellence, or something with which you may be genetically predisposed to succeed. That way, you’re at least more likely to activate all factors in success, but even if you don’t, at least you spent those 10,000 hours doing something you enjoy.


Yesterday, I pointed out that the house you live in is an essential part of your net worth calculation. But determining the value of your house, especially if it’s the house you live in and not something you track as an investment, can be tricky.

It’s easy to determine the value of your mortgage to include that in your net worth calculation. Just look at the latest statement from the lender. The statement will highlight your remaining balance, and it’s a number you can’t escape if you do in fact, as you should, look at your statement every month.

The house can be trickier to value. But if you include your mortgage in your net worth calculation, you should also include some value for your house. And it should be a value that makes sense. There are at least three ways to determine your home’s value for the purposes of your net worth calculation.

1. The value of your home is the price you paid.

When you purchased your house, you and the seller agreed upon a value. You then paid the seller that much money, whether you borrowed the money or not, and paid additional fees to complete the purchase. It’s not wrong to consider the purchase price the value of your house for your net worth calculation purposes. No one could say that your figure would be wrong if you use this approach. After all, this was the last market-confirmed value, and there won’t be another market-confirmed value until you sell the house.

This is a problem if you’ve lived in this house for a substantial amount of time. Your community may be more desirable than it was when you moved in, or it may be less desirable. Your neighbors in similar houses might have sold their homes for more money in the intervening years, and the sales price of “comparables” may effect the potential sales price of your own home. You may have made improvements to your home or you may have let it fall apart. All of these factors can change the value of your home, and you can’t be sure until you put it on the market and receive at least one offer.

The big benefit of using your house’s purchase price as the value of your house in all future net worth reports is that it ensures your net worth progress reflects mostly the financial decisions you make on a day-to-day basis. That would allow your net worth progress to present a better picture of your behavior with money, but it wouldn’t really represent your true net worth at any one time.

If however, you own your house for a sufficiently long time, there’s a great chance the value of your home will be so far off from the purchase price that your net worth with a number in old dollars is relatively meaningless. An interesting remedy would be to use your purchase price initially, and then adjust your home’s value on your balance sheet once a year based on the rate of inflation. This will allow you to continue using the house’s purchase price, but it was always be in “today’s dollars,” just like your mortgage and the rest of your balance sheet.

2. The value of your home is defined by appraisal or competitive market analysis.

In order to pay property tax, your local government depends on appraisals. Appraisals provide a way for the government to look at your land, your home, and any changes to either since the purchase of your home to determine the amount of your tax bill. Appraisals also come into play when you’re going through the process of selling your home. When you pay tax, you want the appraisal to be low, while when you’re selling, you want the appraisal to be high. And if an appraisal isn’t inline with the owner’s expectations, the owner can challenge it.

Using the latest appraisal in your net worth statement offers a more timely valuation, but it may not be a valuation you agree with. It may not be a valuation that has any relevance to the amount of money a buyer would be willing to pay, either. It is the result of someone’s opinion — a professional’s opinion — but a real estate agent familiar with your home and your neighborhood may be better professional to offer such a valuation. And if you ask a professional who doesn’t have any reason to exaggerate, you can probably get a relatively accurate estimate.

A real estate agent might be willing to do a competitive market analysis for your property if you appear to be intending to use that agent to represent you in a sale. And certainly, an agent who is willing to do this work for you will feel he or she is in a good position after doing a significant amount of work for you to choose that agent as your broker.

A competitive market analysis may be more accurate than an appraisal, but neither of these would you do every month to keep your net worth calculation “accurate,” or to follow the potential of a sale price that might change on a month-to-month basis.

3. The value of your home is provided by Zillow.

Anyone who has shopped for a house in the last few years is likely familiar with Zillow. I’ve only just begun to look at houses — and I’ve paused those efforts during my latest round of travel — and I’ve been using Zillow to plan most of the visits. Zillow’s estimate — or Zestimate — for one property I was interested in was a good $100,000 or more higher than the seller’s asking price.

So how does Zillow come up with their estimates for each property? Zillow uses public data about recent sales and uses a calculation — a proprietary formula — that takes factors about the home and its neighborhood into account. A few real estate agents I’ve talked to don’t like Zillow’s estimates. It seems to make their job more difficult, and they believe it could lead buyers or sellers to make bad decisions. I think it’s important to remember this value is just an estimate, but it is based on data, and that makes it appealing to people wishing to track their net worth (as well as to people house shopping).

A publicly-recorded sale of one house in a neighborhood can send Zestimates in one direction or another without much warning, even if that house bears little resemblance to one’s own. And that’s one of the possible reasons house values are fluctuating month to month on the net worth report submissions from Naked With Cash. Zillow offers verifiable data to support a valuation on a balance sheet, and it gives someone the comfort level of not having to guess the value of their property on a day-to-day or month-to-month basis.

The question is whether Zestimates are correlated to actual sales prices. And there have been a few analyses completed outside of Zillow to determine if there is a trend of Zestimates to be higher or lower than realized prices, but every area seems to be different.

What is your method for including a value for your house on your balance sheet? I have not owned a house in the past, and I don’t own one now, so I’ve had no reason to decide on a method for myself. I’m curious how other people think about the value of their house while they own in.


Naked With Cash: Betsey S, August 2014

by Luke Landes
Betsey - Naked With Cash

Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs). For more information, read this introduction. This year, we have four ... Continue reading this article…

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Naked With Cash: Laura and Leon, August 2014

by Luke Landes
Laura and Leon - Naked With Cash

Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs). For more information, read this introduction. This year, we have four ... Continue reading this article…

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You Need to Include Your House in Your Net Worth

by Luke Landes

Naked With Cash participants include their houses in their net worth, if they own houses. Is that really necessary?

2 comments Read the full article →

Naked With Cash: Brian, August 2014

by Luke Landes
Brian - Naked With Cash

Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs). For more information, read this introduction. This year, we have four ... Continue reading this article…

1 comment Read the full article →

Naked With Cash: Jake and Allie, August 2014

by Luke Landes
Jake and Allie - Naked With Cash

Naked With Cash is an ongoing series at Consumerism Commentary in which readers share their households’ finances with other readers. These participants benefit from the accountability that comes from tracking their finances publicly and the feedback of the four expert Certified Financial Planners (CFPs). For more information, read this introduction. This year, we have four ... Continue reading this article…

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Tipping Housekeepers: Whose Responsibility Is It to Pay Hotel Staff?

by Luke Landes
Hotel Room

The prevalence of tipping is simply a fact of society. On several occasions, a friend of mine bemoaned the perceived necessity of tipping a specified amount to restaurant servers while dining out. He would ask the rest of our friends eating together at a restaurant, “When did the expected base tip go from 15 percent ... Continue reading this article…

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