I came across this sad piece while looking through CNN Money recently:

“My wife and I have been saving our money for many years in hopes of buying a retirement home and living off our investments. No matter how much we saved, it seemed that housing prices continued to escalate beyond any reasonable bounds. We feel like fools for saving our money, which only gets eaten by inflation.”

Inflation is not the only problem. In the article above, another woman mentions she has to declare bankruptcy for a lack of health care. Another couple is about to lose their home for lack of health care. A health care disaster is the main cause of severe financial difficulties in America today. Entitlements are teetering and the impending demand from retiring Baby Boomers may push these programs over the edge into insolvency (although I’m sure we’ll tax our way out of it). The government bails out investment banks, rescuing the bonuses of top management (which would have been reclaimed in bankruptcy) but refuses to do the same for homeowners swamped by overwhelming mortgages. The Federal Reserve (and other central banks) continue to pump paper money into the system, creating a long slow death for the US dollar. Ridiculous measurements are used to gauge inflation while we all know that the price of living soars past any reasonable measure of inflation when you consider the cost of gas, heat, milk and even basic foodstuffs. A war in Iraq - whether you support it or not - will suck trillions of dollars out of the budget for a generation to come (don’t believe anyone who says they are withdrawing the troops - the troops will still be there in 2012; we can’t even withdraw our troops from Germany yet). People are whispering the “D” word.

My fear is that too many people (including me) buy into the aphorisms: the market always goes up over time. Index funds are a great way to invest. Real estate always goes up. The US can’t just collapse - we aren’t the Soviet Union, or the Weimar Republic. Banks are safe. The US dollar is the best currency in the world.

Let me tell you what IS true: Your greatest asset is, now and always, yourself. Don’t be cheap, be frugal. Buy high quality goods that last a long time, because they will always have value. Do not ever believe that someone will be there to help you when times get bad: not the government, not your employer, not your neighbors or even your family or friends (because they may have troubles of their own). Expect times to be good, but prepare for times to be bad. Stay healthy; the single greatest risk to your wealth in America is to GET SICK.

That may seem overly pessimistic, but it is true. Don’t assume that dropping 15% into a 401K, having $1000 in an emergency fund and having a “steady job” are enough to protect you and your family. True protection comes from staying healthy, diversifying your income streams and investing nonstop in your greatest asset - yourself. You have to keep investing and saving and buying houses and paying down your debt, but never forget that even the most brutally frugal lifestyle is absolutely no guarantee of financial safety - or even stability.

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Steve S. is the author of Brip Blap, a blog about personal finance, health, career management, productivity and self-improvement. He lives and works as a contract governance and audit consultant in the New York City area, and has lived in Germany and Russia. He is an active lender at Prosper.

Sometimes being too savvy about investing can paralyze your decision making. Back in December I had a feeling that the market was going in a bad direction, and I sold a fairly significant portion of the index funds in my IRA (about 25% of my overall holding). Yay! Right? I missed the horrible downturn, and while the remainder of my investment portfolio has taken a beating like Clint Eastwood in A Fistful of Dollars, I left this portion in a money market fund, chugging along at 3%.

The problem now is that I’m hesitant to start investing again. I shouldn’t be - even if we aren’t at the bottom, the chances are very good that if I go right back into the same types of investments I’ll be just fine. I’ve slightly altered my mix (going lighter on corporate bond index funds and beefing up my domestic positions) with recent contributions, but that cash is just sitting there mocking me. The monthly interest rolls in and I wonder whether I can time the bottom of the market.

When the market is this bad, my risk averse nature really kicks in. I am more anxious to avoid a loss than I am to take a chance on a gain. This thought pattern haunts a lot of people, and it does not serve me well. I have been somewhat successful at avoiding huge market downturns, but I’m usually late catching them on the upswing again.

So how do you avoid getting paralyzed by concerns about the weak economy and the struggling market? Here are a few ideas:

1. Don’t look year-to-date returns on mutual funds or stocks or any sort of investment. I understand why mutual funds try to rope investors in with their 5-year, 3-year, 3-month, year-to-date and so on returns - anybody likes looking at “15% returns” when they are investing. But it takes about two seconds for anyone to understand why this approach doesn’t work: for example, the Patriots won 16 games in the regular season, and their first two playoff games. Does it mean they were automatically guaranteed a 19th win? No. Past performance does not ever guarantee future results.

2. Diversify. With a good mix of index funds, you should be automatically diversified. Right? Wrong. If you have 100% of your investments in Vanguard mutual funds, you’re banking a lot on Vanguard, aren’t you? I am. It makes me nervous, and I plan to do something about it as I go back into the market - I’m going to try to find something besides the personal-finance-blogworld-beloved Vanguard to invest in. And as far as that goes, there’s a lot to be said for diversifying outside the stock market, too - real estate investing, P2P lending, investing in small businesses and even investing in yourself by continuing your education. Instead of investing only in the stock market, branch out. Now is as good a time as any to start a portfolio that isn’t restricted to equities. Diversifying your investments helps spread the risk and loosens that paralysis.

3. Be realistic about macroeconomic issues. I liquidated 25% of my holdings in December, and in retrospect, that seems about right. In terms of catastrophic market meltdowns, I think we are about at 1 star out of 4. I think the worst is behind us, because the root causes of a recession have already infected the economy like a virus. But much like a virus with a 14 day incubation period, once the symptoms start showing you are actually closer to the end of the sickness than the beginning. And people, let’s face it - although the market is down and homes are being foreclosed, the vast majority of Americans still have jobs, still buy stuff and still pay taxes. People will still need to borrow money, maybe more than ever. P2P lending should grow faster than ever while the banks are credit-shy after suffering quarter after quarter of writedowns. But the important thing to remember is that the engine of capitalism is not stopping, it’s just sputtering for a second. The next president needs to take it in for some routine maintenance and some tune-ups after the last eight years, but I think we’re a long way from needing to trade it in.

4. Don’t stay invested heavily in the US. I’ve seen this mentioned elsewhere, but keeping more than 50%-60% of your savings invested in the US is not wise. The US doesn’t represent 50% of the world’s capitalization, so it should represent that much of your portfolio if you want to be diversified. In the same way that smart people got in at the beginning of the dot-com and real-estate booms, there are a lot of markets around the world that are growing far faster than the US market. Failing to invest heavily in overseas markets is dangerous for anyone planning to retire 10+ years in the future.

5. Stick to a formula but don’t be inflexible. I have stuck to a 30/30/30/10 formula for a long time (US, international, bond and “other”). I’m changing it, but I’m going to stick to my new formula for a while. Now I’m going to switch to 40/30/20/10, because I want to cash in on the US market when it’s at a low point, and I am not comfortable about the prospects for the bond market. I feel the need to get more aggressive although I’m doing it within the confines of an index fund strategy. Bonds were not providing the normal “hedging” protection they’ve provided in the past, since the Fed keeps cutting rates every time they draw a breath these days.

So don’t let the gloom and doom stop you from investing. Shake it off and get back in there, champ.

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Steve S. is the author of Brip Blap, a blog about personal finance, health, career management, productivity and self-improvement. He lives and works as a contract governance and audit consultant in the New York City area, and has lived in Germany and Russia. He is an active lender at Prosper.

The other day I had a business lunch. Not a deal-making lunch or a productive work session over disregarded entrees…no, my department took another department’s administrative assistant out for lunch since she had helped us with a few projects. The result of this lunch taught me a lot about creating demand for a product, and why you shouldn’t always assume that massive demand means that an item is worth getting (I’m looking at you, iPhone…)

Many people are often of the opinion that you should always look for the busiest restaurant in an area on the theory that people go there because it’s good. A less crowded restaurant must not be as good. If you follow this line of thinking, you may pat yourself on the back for identifying a great restaurant where people are waiting in lines to get in, but you may just be playing right into their hands. The Cheesecake Factory is a brilliant example of this. They do not advertise. They count on word of mouth to bring in new customers. One of the ways they encourage people to come in is by intentionally making the restaurant too small for expected crowds. If you drive by a Cheesecake Factory, it always looks crowded. Once you go in, the menu is crowded, too, making your head spin with the endless possibilities. Chocolate vanilla cheesecake and vanilla chocolate cheesecake? This place is out of control! People feel they need to go there. The evangelism of a Cheesecake Factory fan can be overwhelming.

The place where I had my business lunch had the suckers rolling in. I skipped right on in with everyone else. Seating was non-existent. I would estimate there were places for about 30 people, in total. The menu was sparse: only three things on the menu. The atmosphere was dirty and unpleasant. The prices were phenomenally high. But it was crowded! A line snaked out of the restaurant, into the main part of the hotel where it was located and almost out into the street. What was the secret? Creating demand. In a busy part of Manhattan, in an expensive area where a burger was hard to come by someone had created a busy restaurant using a fresh and never-ending supply of tourists, salesmen and irritable office workers. The owners took a below-average burger joint and made it look desirable.

A huge segment of the American economy is centered around creating demand. I cannot believe, for example, that there is a need for 150 channels on television or designer jeans. There is no need for premium alcohol or chocolates or satellite radio. You do not need an MP3 player. You may want these things, but you do not need them.

When a company becomes an expert at creating demand - creating “needs” where there once were only “wants” - leads to overconsumption. This overconsumption leads to a lot of unhappiness in our society.

• Buying too many things encourages us to go into debt
• Accumulating things we don’t need leads to clutter, or makes us want more space to live in to store our things
• Makes us, as consumers, work even more to afford things we think we “need”

If you develop a business and that business is selling something that nobody really needs, your business will fail. You have to convince people that they need what you are selling. Once your business is an expert in making people believe they need what you sell, you can sell them almost anything. Apple is a master of selling “wants.” Every fashion clothing company sells “wants”. Perfume companies do it, jewelry companies do it. This practice is not evil or deceptive - but it does encourage bad spending behavior, and it is important to fight it.

As a consumer, it is important to avoid confusing your needs and wants. When you set out to buy something that you need, take a minute to think about what you would do if you had to make do without it for a month. If you had to buy it a month later, would you still get it? If so, maybe you really do need it. If not, maybe you don’t. Maybe you just want it.

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Steve S. is the author of Brip Blap, a blog about personal finance, health, career management, productivity and self-improvement. He lives and works as a contract governance and audit consultant in the New York City area, and has lived in Germany and Russia. He is an active lender at Prosper.

I’ve always dreamed of being a movie producer. That’s not true, exactly. Always would imply that as a chubby-cheeked infant I was clutching my rattle and thinking about who to cast in the sequel to Emmet Otter’s Jug-Band Christmas, The River Bottom Nightmare Band Strikes Back. But as I’ve gotten older I realized there were a number of things about my favorite movies I’d do differently. I didn’t care much for Keanu Reeves in the Matrix - I wish the producers’ first choice, Will Smith, had taken the role. I wish Gladiator had lived. I didn’t care too much for the Ewoks - or Jar Jar Binks.

One of the things I’ve been looking for on Prosper and haven’t found yet is someone looking to finance a movie. I know people are out there hoping to do this, though. We’ve all read stories about movies funded on a shoestring - The Blair Witch cost $22,000 to make and earned $248 million, for example. The template for success exists.

When I started lending at Prosper I expected to see loan requests from people consolidating bank debts (and that’s certainly a valid reason to borrow). What I didn’t realize - and this is a fault of my creative thinking perhaps - was that borrowers would also be looking for lenders to invest in businesses or capital projects or even start-ups. I realized that creative projects and (maybe someday) even a film couldn’t be all that far behind.

Even those creative projects like these might be more exciting than routine financial transactions, lenders still need to bring the same critical eye to these requests as they would to anything else. It doesn’t mean that you should be any less critical of the business plans presented by borrowers, but it does mean that someone seeking capital for an unusually creative venture doesn’t automatically have to go hat in hand to a bank.

I’m sure you could argue that I could just invest in a publicly traded entertainment company like Viacom and I’d be investing in movies, too. That’s true - but there’s a certain level of interest that’s sparked thinking you’ll invest in a specific movie. It raises some interesting questions about research. I’m sure that someone who is selling their plasma to make a film can’t be judged solely on their statistics - but how do you find out whether the actors are the types who will appear on Inside the Actor’s Studio, or the types who will be acting in Anaconda IV: Still Slitherin’?

I still have hope that at some point in the future, as a Prosper lender, I’ll be able to turn smugly to the person sitting next to me at the Multiplex and say “I’m an uncredited producer of this film - I financed this guy when nobody believed in him - nobody!” The person sitting next to me will probably move to a different row, because that’s what New Yorkers do when crazy people talk to them in movie theaters, but I’ll know the truth, and I can gloat while I enjoy a Mr. Pibb and some Goobers.

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Steve S. is the author of Brip Blap, a blog about personal finance, health, career management, productivity and self-improvement. He lives and works as a contract governance and audit consultant in the New York City area, and has lived in Germany and Russia. He is an active lender at Prosper.

Meet Bob and Fred. Bob and Fred both have $40,000. Both want to buy a new car, and use anything left over for investing. Bob spends a month researching new cars - he picks out the exact features and colors and styling he wants. He has that budget of $40,000, but he’s determined to get a great deal. He calls dealers all over his town and pits one against another. He haggles, he researches. Finally he finds the perfect deal. He knocks it out of the park - he buys a perfect car for a lot less than list price - $22,000 for a $25,000 car. Since he’s already spent so much time hunting for cars he just tells his broker to drop it in a “good mutual fund” for him.

Fred, on the other hand, goes out one afternoon and buys a normal, non-luxury sedan without spending any significant time researching, other than to make sure the car meets some minimum standards. He doesn’t haggle much. He knows what basic features he needs, but he doesn’t feel like spending day after day driving all over his city trying to knock another $100 off the price. Why? Fred has other things to do. Fred’s spending his free time studying investment possibilities. He spends $24,000 on a $25,000 list price car. He invests the other $16,000 in carefully researched investments that he identified while Bob was haggling over wheel covers.

Who “made” money? Bob certainly feels he has a nice little chunk of change, “saving” $3000. Fred, on the other hand, didn’t save much on his car, but spent time planning his investments. He identified some great places for his money instead of just dropping his hard-earned savings into a mutual fund his broker’s company is promoting this month. (Editors Note: I wonder if either Fred or Bod saved money with a Prosper auto loan?)

One of the biggest concerns you may have about Prosper (I had it myself) is “how can I possibly spend enough time researching loans and making sensible investments?” Would you ask that question about investing in a stock or mutual fund? Probably not - there is an assumption that stocks and mutual funds are “safe.” You may not feel a need to research GE’s debt or financial statements before investing in their stocks. I am sure many Enron investors were unconcerned by the fact that they didn’t understand what Enron actually did. But any investment requires serious study and examination.

If you don’t feel you have enough time in your life to study investments - be it real estate investments, making a P2P loan or a stock market purchase - let me ask you a simple question: have you seen an episode of a sitcom this month? There’s 30 minutes. If it’s a rerun, there’s 60 minutes of your life that could have been spent making yourself richer. I know people will say that they need to relax. I turn on an episode of The Simpsons from time to time myself. But if you do that, make sure that it’s not time taken away from studying and research in your financial future.

Another reason people find they don’t have enough time to research their investments is a lack of focus. If you try to become an expert in the entire Fortune 500 and real estate investing and the best mutual funds and 15 different alternative investments, you won’t ever have enough time to master them all. You’ll be a dabbler. You can’t focus on just one area, of course; diversification is one of the cornerstones of the personal finance temple. But pick specific industries or types of investments on which you can focus your attention. I work in the financial services industry, and I have always enjoyed following industry news, so it makes it easy for me to follow the news about that market. I don’t do much real estate investing, but I do follow my local market and the markets in cities where I have some knowledge simply because I visit frequently. I used to spend time trying to research 100 different means of gaining alternative income but then I realized it was better to focus on a few I’m interested in - like P2P lending and creating content (writing, developing websites). I found no reason to keep studying the best ways to sell on eBay because I have no passion for doing it.

So the next time you think you don’t have time to study your investments, make time. Whether it’s the market, real estate, peer-to-peer lending or even your own education, good investing requires time - and if you get as much enjoyment out of investing as you do from watching a favorite rerun of Seinfeld, you’ll always have time.

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Steve S. is the author of Brip Blap, a blog about personal finance, health, career management, productivity and self-improvement. He lives and works as a contract governance and audit consultant in the New York City area, and has lived in Germany and Russia. He is an active lender at Prosper.