Don't try to invest like the pros

The way some finance wizards manage their money offers valuable lessons - in what not to do.

(Money Magazine) -- Investing has a few simple rules that everyone knows are true yet most people find amazingly hard to live by. Diversify; don't chase hot returns; don't think you can outsmart the market. If you did nothing more and nothing less, your success would be all but ensured.
Turns out regular folks like you and me aren't the only ones who struggle to live by these precepts. A new survey shows that finance professors - the experts who analyze markets and teach future mutual fund managers how to build portfolios - have the same willpower problems as the rest of us. We can learn something about how to address our own shortcomings if we study theirs.
Colby Wright, a young scholar at Central Michigan University, surveyed more than 600 finance professors at major U.S. universities to find out how they invest their own money. It turns out that most keep things simple and smart: They do little or no stock picking, and they avoid investing in options, futures contracts or other more esoteric securities.
About two-thirds of the professors, in fact, have the bulk of their assets in index funds, the low-cost baskets that essentially own the entire market. These academics more or less practice the basic lesson of modern portfolio theory: Diversification is the key to holding down your risk and maximizing your returns. That leaves a third who have gone astray, however.
So much for theory
In their classrooms, these professors lecture on complex theories of how markets balance risk and return. In their portfolios, the profs who trade ignore that mumbo jumbo. How do they decide when a stock is a buy? By doing a discounted cash flow analysis? Or consulting the capital asset pricing model? Nope. Like any CNBC junkie, they zero in on how much the price has risen lately. To heck with theory - that sucker's going up!
Worse still, among the 44 percent of professors who believe that the market is efficient - meaning that whatever is knowable is already priced into stocks - nearly a quarter nevertheless agree with the statement "When I invest my own money, my goal is to beat the market." In other words, having spent their careers studying the stock market, these experts have concluded that it can't be beaten by anyone - except them.
"Professors' perceptions of market efficiency have little, if any, influence on how they invest," says Wright. "What really drives their investing behavior is their confidence in their own abilities."
In this, the professors are just like the rest of us. Although everybody knows how hard it is to beat the market, nobody stops trying. Let me rephrase that: Everybody knows how hard it is for everybody else to beat the market. So you and I are always honest about each other's chances of success but never about our own.
The real lessons
There are two important bits of learning embedded in Wright's survey data.
First, whenever anyone tells you that research "proves" a novel method of investing is a market beater, bear in mind that the professor behind the paper is most likely an indexer who has never road-tested his theory in the real world of trading costs, taxes and other expenses.
Second, remember that even many of the people who know best can't resist chasing hot stocks, so you have to control your behavior in advance. Put 90 percent of your money in low-cost index funds and lock yourself in by adding a fixed amount every month through an electronic transfer from your bank.
Speculate - if you must - with just the remaining 10 percent, and use a checklist of buying criteria to make sure you never buy a stock purely because it has been going up. You can buy a stock only from someone who doesn't want it anymore. You don't have to be a finance professor - in fact, maybe you shouldn't be one - to realize that the seller may know something you don't. The less you fool with your portfolio, the less often you'll play the fool.

Bush unveils $3.1 trillion budget

The proposed budget would be the largest one-year expenditure in history; seeks increase in military spending and protection of tax cuts.

WASHINGTON (AP) -- President Bush unveiled a $3.1 trillion budget on Monday that supports sizable increases in military spending to fight the war on terrorism and protects his signature tax cuts.
The spending proposal, which shows the government spending $3 trillion in a 12-month period for the first time in history, squeezes most of government outside of national security, and also seeks $196 billion in savings over the next five years in the government's giant health care programs - Medicare for the elderly and Medicaid for the poor.
Even with those savings, Bush projects that the deficits, which had been declining, will soar to near-record levels, hitting $410 billion this year and $407 billion in 2009. The all-time high deficit in dollar terms was $413 billion in 2004.
Bush's final full budget is for the 2009 fiscal year, which begins on Oct. 1. It proposes spending $3.1 trillion, up 6% from projected spending of $2.9 trillion in the current budget year.
Part of the deficit increase this year and next reflects the cost of a $145 billion stimulus package of tax refunds for individuals and tax cuts for business investment that Bush is urging Congress to pass quickly to try to combat a threatened recession.
Bush projects that the deficit will decline rapidly starting in 2010 and will achieve a $48 billion balance in 2012.
But Democrats said that forecast was based on flawed math that only included $70 billion for the wars in Iraq and Afghanistan in 2009 and no money after that and also failed to include any provisions after this year for keeping the alternative minimum tax, originally aimed at the wealthy, from ensnaring millions of middle-class taxpayers. The Congressional Budget Office estimates that fixing the AMT in 2012 would cost $118 billion, more than double the surplus Bush is projecting for that year.
Even some Republicans faulted Bush's budget sleight of hand.
"They've obviously played an inordinate number of games to try to make it look better," Sen. Judd Gregg, the top Republican on the Budget Committee, said in an interview with The Associated Press.
"Let's face it. This budget is done with the understanding that nobody's going to be taking a long, hard look at it," said Gregg, R-N.H.
Bush's spending blueprint sets the stage for what will probably be epic battles in the president's last year in office, as both parties seek to gain advantages with voters heading into the November elections.
The 6% overall increase in spending for 2009 reflects a continued surge in spending on the government's huge benefit programs for the elderly - Social Security and Medicare, even with the projected five-year savings of $196 billion over five years. Those savings are achieved by freezing payments to hospitals and other health care providers. A much-smaller effort by Bush in this area last year went nowhere in Congress.
While Bush projects that total security funding in the areas of the budget controlled by annual appropriations will go up by 8.2%, he projects only a 0.3% increase in discretionary spending for the rest of government.
To achieve such a small boost, Bush would hold hundreds of programs well beyond what is needed to keep up with inflation. He also seeks to eliminate or sharply slash 151 programs he considers unnecessary.
Bush targeted many of the same programs last year but Congress rejected the effort.

4 candidates, your paycheck

How the leading Democratic and Republican presidential candidates' tax proposals could affect your take-home pay.

NEW YORK (CNNMoney.com) -- Regardless of how much money you make, you have skin in this game.
The four leading presidential candidates say they're concerned about the taxes that Americans pay out of their paychecks. And they all vow to do something about it if elected.
Now with the economy at the forefront of the presidential campaign, the leading candidates' tax proposals will come under increasing scrutiny in the coming weeks.
Here's a look at some of the ways that Hillary Clinton, Barack Obama, John McCain and Mitt Romney would realign tax policies and how those changes could affect your take-home pay.
Keeping the tax cuts in place
One of the central questions is what to do about a series of tax cuts passed in 2001 and 2003 set to expire in three years.
The four candidates seem to agree on one thing: They want to preserve the cuts for low- and middle-income earners. Those tax cuts include lower rates, reduced taxes paid by married couples and a higher standard deduction.
But the Democratic and Republican candidates part company when it comes to upper-income earners.
Both McCain and Romney have said they would preserve the tax cuts for high-income earners - typically defined as households that make $250,000 or more. Clinton and Obama want to repeal them for taxpayers in that group.
Clinton also would reduce the value of some personal exemptions and itemized deductions for big earners.
Part of the rationale given for restoring higher taxes on upper-income households is that they benefited the most from the 2001 and 2003 tax cuts, and that continuation of the tax cuts for those at the top of the heap may force the government to raise taxes on everyone else or cut spending.
Those who oppose taxing the rich more note that the top 1% - taxpayers making more than $250,000 - already account for 40% of all federal income tax revenue. Taxing them more, proponents of extending the tax cuts say, may lower tax receipts because high-income filers will seek more ways to shelter their money from taxes.
New tax breaks
The candidates also have somewhat different ideas about what kind of new income tax breaks to offer.
On the Republican side, Romney has said he wants to permanently lower the rate on the lowest tax bracket to 7.5% from 10%. Currently that tax bracket applies to roughly the first $8,000 for single filers and the first $16,000 for married couples filing jointly.
And he has proposed permanently exempting workers over 65 from having to pay payroll taxes, which are used to fund Social Security.
McCain hasn't yet offered up any individual income tax breaks beyond proposing to make the 2001 and 2003 breaks permanent.
On the Democratic side, Obama would offer a tax break to seniors by eliminating their income taxes if they make less than $50,000.
Obama also would create a credit worth up to $500 per working person ($1,000 per family) to offset Social Security tax on the first $8,100 of earnings. The credit would start to phase out for people with incomes between $150,000 and $200,000.
Both he and Clinton have said they want to expand the earned income tax credit for low-income workers. And they want to offer an expanded saver's tax credit although in somewhat different ways.
Clinton would offer a savers' credit equal to 100% on the first $1,000 saved by married couples making less than $60,000, and a 50% matching credit for couples making between $60,000 and $100,000.
Obama would match 50 percent of the first $1,000 of savings for families that earn under $75,000.
New retirement tax bites
The candidates' tax proposals aren't all sugar. There are notable differences, for instance, in how they would might treat payroll taxes in a bid to shore up Social Security over the long haul.
Obama would consider increasing the amount of wages subject to the payroll tax. Currently, the first $102,000 of wage income is subject to the 12.4% tax, half of which is paid by workers and half by their employers.
Obama has indicated he might favor lifting that cap but only after imposing a "donut." A donut would protect from the payroll tax a certain portion of wages above the current cap - for instance, wages between $102,000 and $202,000. But any earnings above that ceiling would be taxed.
It's not clear yet whether a payroll tax increase would be in the offing under Clinton or McCain, because both candidates have been spare on details.
Clinton has said she doesn't want to eliminate the cap on the income subject to the Social Security tax. But that doesn't necessarily rule out an increase in that cap or a higher tax rate.
McCain, meanwhile, has said he would prefer Social Security funding to be shored up by reducing growth in benefits rather than by raising the payroll tax.
Romney doesn't want to raise payroll taxes, but instead favors the idea of letting workers have individual investment accounts and fund them with money from the surplus paid into the system.
Clinton and Obama oppose the notion of diverting payroll taxes - whether from the system's surplus or direct from your paycheck - to fund accounts.
Don't rearrange your budget yet
Of course, campaign promises are often easier to make than they are to keep. A lot can come between a newly elected president and his or her ideas about taxes.
Political reality, for one. Just look at President Bush and Congress. Their inability to come to agreement has stymied decisions.
Then there's deficit reality. The budget that Bush submitted Monday projects a deficit of more than $400 billion. That could tie the hands of the next president to make tax changes.
Or consider the Alternative Minimum Tax (AMT). Everyone in Washington says they want to do something about the outmoded tax scheme, which was originally aimed at the rich but is increasingly hitting the middle class. But no one has an appealing way to pay for fixing it. The price tag for reform or repeal ranges between $500 billion and $1 trillion over 10 years.
"No one has really staked out a credible claim at fiscal responsibility," said Len Burman, director of the Tax Policy Center. "They'd just devote deficits to different purposes."