You’ve no doubt heard about the harrowing ride investors took yesterday as the Dow took a 1,010 point nosedive and then recovered to close just 347 points down for the day. While there was no root cause of the dive, the riots in Greece following the Greek government’s approval of its portion of the European Union and International Monetary Fund bailout set the stage. While investors were already nervous, a “trading glitch” then sent investors running for the hills while high-frequency hedge funds, which use computers to trade at super high speed, appeared to pull back from the market as prices collapsed. These hedge funds have grown to account for a significant amount of trading volume, and their absence likely created a void into which prices fell. Some stocks fell briefly by 100% before recovering – prompting many to cry foul and blame the sell-off on a computer glitch.

While yesterday was no doubt a nerve wracking experience for traders on the floor, I felt even worse for the investors who had placed limit orders and implemented option strategies that were triggered by the sudden decline. And their misfortune is a lesson to us all in the dangers of placing automatic trading orders.

What are automatic trading orders?

Let’s face it – most of us are not day traders (although I wouldn’t mind the setup). We don’t spend all day watching the market with the phone in our hand ready to call our broker and yell, “Buy! Buy! Buy!” or “Sell! Sell! Sell!” Instead, technology has allowed us to set up “rules” that our broker (or rather his computer) can follow so that we get the best deal. The most common of these rules is the “limit order.”

A limit order is an order to buy or sell a security at a specific price. A buy limit order can only be executed at the limit price or lower, and a sell limit order can only be executed at the limit price or higher. For example, if you want to buy the stock of a “hot” IPO that was initially offered at $9, but don’t want to end up paying more than $20 for the stock, you can place a limit order to buy the stock at any price up to $20. Your limit order may never be executed because the market price may quickly surpass your limit before your order can be filled, but by using a limit order you also protect yourself from buying the stock at too high a price.

During today’s rollercoaster ride, the sell limit orders of thousands of investors were triggered as stocks plummeted – just as they were supposed to. If an investor had placed a limit order with his broker to sell his P&G shares if the price fell to $50, then that sell order would have been triggered as the stock tumbled to its low of $39.97. The investor lost money on the sale, but at least he didn’t loose it all.

The problem was, the decline in prices was mostly artificial and not due to a true market-side sell-off. That means that within minutes, the stock bounced back up. The investor in P&G not only lost money on the initial sale triggered from his limit order, but her lost even more money as the stock rebounded back to close at $60.76. To make matters even worse, if the investor had held the stock for a long time and had a gain, he would be hit with a tax bill on the profits.

The limit orders, put there by investors to protect themselves from losing too much money too fast, ended up hurting them.

What do we learn? Do we abandon all electronic trading? Do we leave stock trading to the day traders? The short answer is no.The long answer involves you sitting down in front of your portfolio and assessing whether your limit orders are a) appropriate b) too concentrated or c) even needed. If you’re in the market for the long haul, chances are a limit order won’t be much help because the market always comes back eventually. Selling off your stock next week due to a limit order will seem pretty silly when it climbs back up in 3 years.

Yesterday’s events simply emphasize the underlying investing principles that I, as well as many other finance professionals believe in: moderation, diversity, long-term, and common sense.

There’s a concept in finance called “cost-benefit analysis” which involves calculating whether an item’s cost outweighs its benefit. For example, I spent 8 hours yesterday cleaning the apartment I just vacated. If I had bothered to perform a cost-benefit analysis, I would have asked myself whether or not the cost (8 hours of my time on my day off) was worth the benefit (a savings of about $150 of my deposit). Is my time worth $18.75 an hour? Or were those 8 hours worth more than spending time with friends or family? The answer, sadly, is probably not. But it brings up an interesting thought: how much time should we spend concerned with our personal finances.

If you wanted to, you could spend almost 24 hours a day worrying about your finances. You could build budgets, track stock movements, read personal finance books, and watch CNBC form the moment you woke up until the moment you slept. The truth is, there’s a lot of advice out there concerning money (including this blog) and there’s no way you can possibly learn everything there is to know. On the other hand, you can’t ignore money – it’s a part of our everyday life. So the question is, how much should you worry about money?

The answer, similar to most of my advice, is somewhere in the middle. And part of it has to do with your own self assessment of how important money is to you. In order to help you figure this out, try ranking the following items from 1 to 10 – 1 being the most important to you and 10 being the least:

• Immediate family
• Extended family
• Friends
• Money
• Shopping
• Sports (watching or playing)
• Working
• TV/Movies
• Video Games

After some internal reflection, look at where money ends up in relation to other items on your list. If money is one of your top 3 choices, then I would assume that you are already faithfully checking your stock portfolio, 401(k) performance, and reading up on the latest and greatest personal finance topics. For those of you not as “obsessed” with your finances I would recommend setting aside at least one day each year to focus on your personal finances.

While your personal finance situation will most likely determine the kind of life you will lead (either now or in the future) don’t you think that dedicating at least 8-10 hours a year is worth it? This day of personal finance mastery is not meant for you to pay bills, but to go above and beyond your normal day-to-day financial activities. Take a day off work… use a holiday such as Labor Day (hint hint)… whatever you do make sure you have time to dedicate to this activity.

Suggestions for things to do include:

• Calling credit card companies to negotiate better rates.
• Updating your list of important financial information in case of emergency or death. Try something like this Financial Life Details (pdf) worksheet from Merrill Lynch.
• Update your will and/or trust documents. This may not seem “financial” in nature, but your will or trust has strong links to your financial portfolio.
• Organize your important financial documents, statements, or information for easy access on a day-to-day basis.
• Review your tax withholding amounts and re-examine whether or not you should change them.
• Consider setting up automatic withdrawals for savings, upcoming vacations, car repair, etc. using one of the popular online banks. (Personally I love the ING “sub-accounts” I can create to sock away money)
• Re-examine your insurance premiums and evaluate whether you are over or under-insured. It may be time to shop around for a new policy as well.
• If you haven’t done so lately, evaluate the returns in your investment portfolio and consider re-adjusting your mix in response to major life events or your current age.
• If appropriate, set up a 529 college savings plan (be sure to let relatives know they can contribute to it in lieu of presents).

The list could go on and on, but the important point is to set aside time to actually think about your current financial situation and evaluate how well you are accomplishing your goals. If you’re falling short, begin to research what you can do to improve. Do you need to ask for a raise? Cut back on spending? Move to a more affordable location? These are all questions you can ask yourself once you’ve taken the time to reflect on your personal finance situation – but are difficult to answer during your monthly bill-paying binge.

Karen Blumenthal wrote an interesting article in the Wall Street Journal August 25, 2009 entitled “How I Got Burned by Beanie Babies“.  She relates her experience in the Beanie Baby hype to recent bubbles we’ve experienced.  The article is not ground-breaking, but it deals with a lesson that never seems to sink in.  The article can be summarized with this quote: “In a speculative environment, just about the only ones who profit are short-term traders.”  It’s a tough lesson that is too often learned the hard way.  There were a lot of people who thought that Beanie Babies would hold their value, enough to cover college for their kids.  Turns out that’s only true today if the kids get a full-ride scholarship.

Blumenthal relates her experience with Beanie Babies to several bubbles and a little about how the hype builds.  A lot of things are like that.  One thing that comes to mind for me are sports cards.  I remember collecting baseball and hockey cards thinking that someday my collection would be worth a lot of money.  Unfortunately, cards don’t hold their value very well, speaking generally.  Rookie cards tend to be the prized possession, but those aren’t even a guarantee.  In 1991/2 I purchased an Ed Belfour* rookie card for $8.00.  Apparently If I’d waited almost 20 years, I could get the card for $1.25** at Check Out My Cards.  I can now pay for .5 nano-seconds of my kids college education.  Even if I could sell the card for $8.00 today, I’d still technically be losing money because inflation.***   That’s not the only card that hasn’t turned out to be the gold mine I expected (I’ll touch on some of my other sports card investment fantasies in a future post).  Granted, there are cards that hold their value and are worth the money, but they are rare and generally are at least 40 years old (They tend to have names like Mantle on them).

It all goes back to the quote above that short-term investors are the only ones to make the money.  There’s no way to predict when a bubble will burst.  Even when an expert nails it, it’s still just a guess, educated and informed as it may be and s/he may be wrong the next time around.  I’m not saying you need to avoid the bubble entirely, just know that you need to get in and get out quick.  My problem was I bought the hockey card at it’s peak.  I don’t think the price went up much past $8.00.  That’s why you need to know what you’re in for, because you may be left holding the bag (you’re lucky if that’s all you’re holding).  That being said there may be instances that holding on may be worth it for the extreme long hual, but you still want to get in low.  Once the real hype has already begun, it’s probably too late.  You need to be able to hold on longer than the crash.  Beanie Babies may be valuable again someday, along with my hockey card, but that may not be for another 100 years.  Then there’s always inflation.

The key to not falling victim is to avoid the emotional rush.  It’s not unlike the emotions that gamblers feel in the casino when they think they might just hit the big one.  Honestly, I find it hard to feel completely sorry for people who lost in the housing bubble or a Madoff scheme.  So many went in thinking they would make a killing and they should have known the risks (Those who returned money after making a killing with Madoff honestly deserve the Medal of Freedom).  On top of that, they should have been aware that things were too good to be true.  It’s that rush or emotional signal saying “you’re gonna make a killing” that hijacks the sensible center.  BUYER BEWARE is the single greatest advice for anything.  But I digress.  I’ll close with another Blumenthal quote “If your investing horizon is too short to take the chance, you should avoid taking the risk.”

*At the time Belfour was a standout rookie goaltender for the Chicago Blackhawks.  Many thought he would be the Wayne Gretzky of goal-tending.

**That’s 50% of the regular price even.  The worst is I ended up with the very same card a week or two later in a pack.

***Today I’d have to sell the card for $12.65 to make a profit.

My wife is an amatuer photographer.  About 2 and a half years ago we splurged and bought her a nice Canon camera, which ran in the $1000 range.  It’s not top of the line, but certainly not cheap.  She absolutley loves the camera and we have a massive number of pictures of me and the kids, and one or two of her.  Though she’s enjoyed the camera, she’s been dying to get new lens that’s both sharp and has a good zoom on it.  The perfct lens for her is the Canon EF 24-70mm f/2.8L, which runs at about $1200.  She’s wanted the lens for over a year and we’ve been waiting patiently to save the money so that it doesn’t kill the bank account.

We’re close to actually purchasing the lens from Amazon, which has the best price at the moment.  At least that’s what I thought.  I did some searching with Google and found the lens for $850.  I’m always in the mood for a bargain and a chance to save some money.  And, $350 is not a bad discount to take.  Though I’m up for a good deal, something seemed a little odd.  The price at Amazon is actually quite discounted already.  The lens can easily go for up to $1800.  How was this company (Sonic Cameras) able to price this so much lower than even Amazon?  With today’s technological tools there’s little excuse for being a lazy consumer.  Before we even took the time to consider purchasing from this company, I decided to do some research.

What set me off first was the price.  It was just a little too low for me to trust it.  While I like a good deal, I’m suspicious when it’s too good.  The second thing that troubeled me was the company.  It wasn’t anything more than the fact that I’d never heard of them.  I’m very cautious about just purchasing something from a company I’ve never heard of.  At least with Amazon I have a history and they’ve developed pattern of trust.  The third thing that stuck out to me was that when I put the lens in the Gooogle search, it didn’t show up in the shopping results.  It merely came up as a sponsored link at the top of the search.  These may not necessarily be deal breakers, but they certainly caught my eye and caused me to do more research into the company.

My results were not good.  In fact I could not find a good review.  I even found a whole webpage called Sonic Camera’s Sucks.  I also read a number of reviews on sights like Rip-off Report and Yelp.  The big problem with Sonic camera’s turned out to be their tendency to pull the old bait and switch.  Many of the reviewers told stories about ordering an item and them being sold something different that was supposed to be better.  In some cases the product (usually a lens) turned out to be completely incompatable with their camera.  Others reported they experienced the upsell, where they were asked endlessly to add other items to the order.  Unlike most companies online, Sonic Cameras calls to confirm your order and get your information, though the primary reason appears to be getting more stuff onto your order.

The real point here is to be aware of where you shop online.  This is especially important with big purchases.  You should have sense of the price range of the product you’re looking for.  If it’s outside of that range, then there has to be a reason.  So either find out why, or go somewhere else.  Finding customer reviews of businesses is essential for businesses that you’ve never done business with and who don’t have an established reputation.  Reviews are helpful too, so that you know how to handle things if there is a problem.  Many reviewers offer very detailed reports of how they handled things and how well problems are resolved.  There’s no excuse for not doing your research and it’s better to learn from somebody else’s mistake.

It looks like we’ll be shelling out the the whole $1200 for the lens, but at least it’s from a retailer that we can trust.

Tim Harford, the Undercover Economist, is putting his two cents in for us young folks to not only buy some stock, but even go into debt for it.  I’m not sure I’d got the debt route (maybe it’s a deep psychological issue from my childhood), but buying stock would be at the top of my list of where to use extra cash.  But enough about me; here’s Tim’s article from Slate.

I’ve been getting a number of emails lately from readers concerned about their personal bank accounts in the wake of this month’s financial crisis. The truth is a number of fairly large banks have failed and the trend is likely to continue over the coming weeks. People have already begun to speculate, for example, how much longer Wachovia has before it has to shut its doors.

But a bank failure is a scary thing – especially if it’s your bank. However, here are a few things that should give you comfort.

• The vast majority of US banks are going to be fine. According to the FDIC website (Failed Bank List) only about 44 banks have failed since October 2000. That’s approximately 0.61% of the nations 7,200 banks. Those are pretty good odds.
• When banks do fail, most are insured. The FDIC insures deposits in several “ownership categories,” which means you may actually be insured beyond the $100,000 limit you hear about. For example, single accounts in your name are covered up to $100,000 per bank. Joint accounts are a separate category and also get their own $100,000 of coverage per person per bank. This means that a joint account held by you and your spouse is insured up to $200,000. Retirement accounts (IRS, SEP, etc.) are covered up to $250,000. Check out the FDIC’s tool to help you determine if your account is fully insured.
• Even if your bank fails, your account isn’t going to disappear. For example, in the case of Washington Mutual, the bank was sold to JPMorgan Chase. JPMorgan has already informed Washington Mutual customers to continue banking as usual. Within a few weeks customers will get new debit or credit cards, checks, etc. In the meantime however, your account number stays the same, your checks will still be honored and you will hardly know your bank failed at all.
• Although mutual funds are not covered by FDIC insurance does not mean you would lose the money you have in mutual funds that you bought through the bank if that bank failed. Mutual fund assets are not part of the bank’s assets – they’re held in separate accounts – so they don’t even come into play when calculating the bank’s assets and liabilities.
• Money-market accounts are considered bank deposits and are therefore insured by the FDIC. However, money-market funds are not considered deposits and are therefore not insured. Money-market funds fall in the mutual fund category and would be treated as such.

So although the recent news of bank collapses has occupied our thoughts lately, the chances of your own bank failing is actually very small. If it happens though, hopefully you’ll now be a little more prepared for what’s to come and can avoid panicking.

Ever wonder how long you need to work in order to fill your gas tank? Check out the “hours for gallons” calculator and find out!

I found this little gem the other day on DownloadSquad.com. There are 2 things I love about this site:

First, RepairPal offers a time-saving method of obtaining all the relevant information conscientious consumers need. It provides impartial, fair price estimates, the most comprehensive auto shop directory, and expert insights and advice from certified mechanics. The site has a unique, patent-pending system relies on multiple sources of difficult-to-acquire proprietary data that has never before been available to consumers.

And second, RepairPal also provides a centralized online location where your records can be maintained for the entire ownership cycle of your vehicle. Emails will remind you of an upcoming oil change or scheduled service (coming soon).

And best of all… its free! If you own a car you should bookmark this site!

If you google “reasons behind high gas prices” you’ll get about a thousand different answers. High state or federal taxes, supply, demand, OPEC, President Bush, oil companies, Wall Street speculation… the list goes on.

And to be quite honest, I’m not sure who to believe. The republicans are using the issue to push for more drilling. The democrats are using the issue to push for energy policy reform and investments in “clean tech.” But the truth is buried so far beneath politics, lies, and misdirection that it’s impossible for you and I to find the truth.

It’s not a blip, said Marilyn Brown, professor of energy policy at Georgia Tech, citing data showing surging transit ridership, dropping sales of sport-utility vehicles and sharply increased demand for gas-efficient vehicles. I think the difference between now and 1979, when prices were comparable when you adjust for inflation, is there’s a sense of sustained pain. There’s a sense that the era of cheap energy is a thing of the past.

However, as the prices have continued to climb it seems to have had an effect. USA Today is reporting that Americans drove 22 billion fewer miles from November through April than during the same period in 2006-07, the biggest such drop since the Iranian revolution led to gasoline supply shortages in 1979-80. The decline in total miles traveled, though only 1%, means that many drivers are cutting back far more because the number of drivers and vehicles grows by 1% to 2% a year.

But I suppose my question is: if we’re driving less and more people are buying fuel-efficient cars doesn’t that mean that demand for gas is lower? And if demand for gas is lower, should the market respond by decreasing prices? The fact that the market hasn’t kicked in makes me suspicious that other forces are at work here. And something tells me they’re working to make a buck from you and me.