I recently asked how much someone saved if they bought a shirt for $50 that was originally priced at $100. Sounds like a simple question, but you need to dig a little deeper to determine the answer.
The scenario involved Sam and Sadie shopping at Nordstrom. Sam saw a shirt he really liked. At $100, the thrifty Sam had no intention of buying it. Luckily Sadie noticed that the shirt was on sale for $50. This was a price Sam was willing to pay.
Only 19% of the respondents said that Sam saved 50% in the deal. Nearly half (47%) said that Sam saved nothing, while a third (34%) said "it depends."
Many investment opportunities come with a compelling story and an enticing promised return. These investments can be quite complex. While there is no substitute for due diligence, listen to find out how you can apply a quick test to assess the risk of a venture.
Not every enticing investment story is a bargain. In the song "Bargain," The Who sing "I'd pay any price just to get you." Check out this great live version with an aging band that still rocks. A fantastic song, but not good investment advice.
Popeye the Sailor Man has a sidekick named Wimpy, with a prodigious appetite, who famously says "I'll gladly pay you Tuesday for a hamburger today." Wimpy provides a classic example of consuming now and paying later. The Federal Reserve, by continuing to keep interest rates low, is promoting such behavior.
Think of low interest rates as making money cheap. With cheap money, there is an incentive to borrow and consume now and repay the debt in the future.
In fact, that is what the Federal Reserve has sought to accomplish. In response to the recession that began in 2008, the Fed moved to dramatically reduce interest rates in an effort to spur spending and revive the economy.
If the stock market didn't go down on occasion, sometimes dramatically, then you would not experience the positive long-term results that have historically occurred. How is this possible?
Stock returns in the long run have been quite compelling because of many factors, such as a growing profits. But another factor is something known as the "risk premium."
Think of it this way. A 10 year U.S. Treasury bond is paying around 2% a year. This is not much of a return, especially after inflation and taxes. The trade-off is knowing that you will likely receive the stated interest payments and get your money back at maturity. You just don't get paid much for certainty.
Running with the bulls in the Spanish city of Pamplona can lead to serious injury, even death. How risky is it? According to the website FiveThirtyEight, there was a 0.3% chance of being injured in 2014. In a highly unscientific survey I sent out recently, about half of the respondents chose this figure. A little over one-third of the respondents said they would participate in the event if the probability was this low.
But do people who run with the bulls correctly calculate the risk? After all, FiveThirtyEight called the festival "one of the most jarring examples of how imperfect a process natural selection is ... Literally the only point of going is to survive extreme risk (and to slap a bull on the butt, apparently)."