“Working to help parents raise money-smart kids.”
Hello, friends!
No preamble this week. Let’s get right into our “3 Ideas to Share and Save.”
— 1 —
Beware the danger of early wins: When I interviewed money-expert (and dad) Brad Klontz, he explained that a primary concern when he introduced his son to investing young (age 7) was the possibility that his son would have some early success.
Klontz is a financial psychologist (yes, that’s a thing!), so it’s not surprising that his concern was well placed, even rooted in neuroeconomic (also a thing!) research. Big wins, particularly early big wins, have an oversized effect on how we think we’ll do with subsequent efforts.
For example, literary legend Mark Twain’s brain seems never to have recovered from his first “hit.”
Twain and a friend struck a vein of silver ore during a rush in the 1860s. And while that investment ultimately went belly up, the memory stuck with him indefinitely.
“Twain must have been driven to relive the visceral excitement he had felt in 1862 when he hit that giant vein of silver in Virginia City. That memory kept his anticipation circuitry in overdrive whenever he thought about money. The result was a lifelong, compulsive craving for the big score that sent Twain on wild swings from wealth to debt to bankruptcy and back again.”
– Jason Zweig, Your Money and Your Brain
So, while Twain holds a place in the pantheon of literary gods, he was a mere mortal when it came to making smart money choices.
— 2 —
Getting college credit: As I was prepping for my podcast conversation with Ann Garcia, “The College Financial Lady” (I’ll share that conversation right here in a few weeks), I discovered a practical tax credit that might be useful for those of you with kids in college.
The IRS’ website explains it succinctly: “The American opportunity tax credit (AOTC) is a credit for qualified education expenses paid for an eligible student for the first four years of higher education. You can get a maximum annual credit of $2,500 per eligible student. If the credit brings the amount of tax you owe to zero, you can have 40 percent of any remaining amount of the credit (up to $1,000) refunded to you.”
As Ann’s book, How to Pay for College, makes clear, AOTC has an income phaseout. If you qualify, though, you can get tax credits for qualified college expenses like tuition, fees, books and supplies. Room and board doesn’t count.
This is the IRS, so there are numerous details you’ll need to review in deciding if the AOTC makes sense for your family – far too many to detail in this newsletter. Still, I wanted to give you a heads-up to explore this potential college savings option. Check out the IRS’ website above or pick up a copy of Ann’s book if you want to know more.
— 3 —
Pundits Don’t Know Sh*t (Volume 2): Last week, I introduced the first installment of “Pundits Don’t Know Sh*t.” This week, I bring you more reasons to engage your skeptical senses when a pundit is predicting.
At a conference I attended last month, an economist was making a Federal Funds Rate prediction for the next year. Fair enough, that’s what economists do and attendees seemed to want to know what he thought. (The Federal Funds Rate is the rate at which financial institutions lend money to each other. It also influences the interest rates we pay for mortgages and credit cards.)
To his credit, he revisited his claims from the past year, (he’d spoken at the same conference) telling us he predicted the Federal Funds Rate would be 3.5% this year. He said this was “pretty close.” The rate at conference time was 5.25%.
I’m sorry, but what is he smoking?
The rate when he gave his 2022 talk was 1.75%. So, yes, he predicted the rate would go up, and he was right. He even predicted that it would double. But he only predicted 50% of the actual increase. Pretty close? Only in the world of pundits could that possibly be true. 🙄
Here are two short tales from Jason Zweig’s Your Money and Your Brain that underscore this same point.
“On Friday the 13th in August 1982, the Wall Street Journal and the New York Times quoted one analyst and trader after another, all spewing gloom and doom: “A selling climax will be required to end the bear market,” “investors are on the horns of a dilemma,” the market is gripped by “outright capitulation and panic selling.” That very day, the greatest bull market in a generation began—and most “experts” remained stubbornly bearish until the rebound was long underway.”
“According to money manager David Dreman, over the past thirty years the analysts’ estimate of what companies would earn in the next quarter has been wrong by an average of 41%. Imagine that the TV weatherman said it would be 60 degrees yesterday, and it turned out to be 35 degrees instead—also a 41% error (on the Fahrenheit scale). Now imagine that’s about as accurate as he ever gets. Would you keep listening to his forecasts?”
The answer is no. You would stop listening to his forecasts.
So, yep. Pundits Don’t Know Sh*t.
If you enjoyed this newsletter, can I ask you a favor? Please forward it to someone you know who might also enjoy it.
Thank you! And don’t forget to enjoy the journey!
John, Chief Mammal
P.S. Please consult with a financial or investment professional before engaging in any decisions that might affect your own financial well-being.
Like what you just read? You can sign up for the newsletter here.