Pocket Change: Answering Your Finance Questions

PAUL SOLMAN: First question from Bill of Saint Louis, Mo. -- I'm guessing there's more than one Bill in Saint Louis but -- "Could you please..." Oh my God, this is written for you, sir, "Could you please give me more info on TIPS?" What does he mean, TIPS? Hot tips at the race track?

ZVI BODIE: Oh boy, do I have hot tips for him! TIPS stands for Treasury Inflation Protected Securities. And I love TIPS!

PAUL SOLMAN: Yes, in fact Paul Samuelson, the first Nobel laureate in economics from the United States, one of the great eminent economist of the 20th and now 21st century, well into his 90s, once said that everything he ever knew about TIPS he learned from you. And that you never stopped haranguing him to buy them!

ZVI BODIE: This is true, this is true. I tend to be a bit of a one note singer. Anyhow. The first place to go if you want to learn about TIPS is a little-known Web site of the U.S. Treasury: treasurydirect.gov. It's actually a great Web site, if you get there. You have to find your way there. It is not, for example, mentioned anywhere on the SEC Web site.

PAUL SOLMAN: Right. This is an issue that... This is something that has bothered Zvi and me for years, which is the extent to which the government is in the pocket of the investment industry and is afraid to offend them, and therefore does not ever really tell you very much about the safest investment alternative you have, and by the way the one with the least commission.

The cheapest way in which to invest your money safely, which is to say going to treasurydirect.gov and, there, giving them your bank routing number, actually being able to buy Treasury bonds from the U.S. government that are protected against inflation, in that when you get your money back at the end. They have adjusted it for all the inflation that happened between the time you bought it and when you redeem it.

ZVI BODIE: Correct. And not only that, but TIPS have periodic payments. You get a so-called coupon payment or cash payment of the interest on the principal. That too is inflation-adjusted every six months and these are fully inflation-protected bonds.

PAUL SOLMAN: With the full faith and credit of the United States government. We've... I've been pushing them for years ever since I started the Business Desk. You've been pushing them ever since they've been actually put out and they are still something that any reasonable investor ought to be thinking about with respect to protecting her, or in this case Bill, his financial future.

ZVI BODIE: We should tell people that if they participate in an IRA, you know Individual Retirement Account, a 401K, any type of voluntary retirement account, they should ask their employer, the benefits office, or the mutual fund company that is managing if they have an inflation-protected account or fund.

PAUL SOLMAN: And there are by the way mutual funds, Fidelity has one called I think Fidelity Inflation Protected Securities FIPSX, Vanguard has VIPSX. So you can even...

ZVI BODIE: The one that I belong to the College Retirement Equities Fund has one.

PAUL SOLMAN: And that's the one you put me into 10, more than 10 years ago.

PAUL SOLMAN: Amanda from Lincoln, Neb., writes, "I got my mortgage in August 2005. I did not have enough to put 20 percent down, so I have been paying $200 in private mortgage insurance since then. Since private mortgage insurance did not save lenders from mortgages going bad, has there been any discussion about reform to this practice?"

ZVI BODIE: Not to my knowledge, there hasn't. In fact I would imagine that there will be even stricter rules of that sort in the future because the whole point is if a borrower cannot put down a large down payment to protect the lender, the lender needs some other form of protection. And so if anything, we're going to see an increase in this type of practice.

PAUL SOLMAN: But what happened was there were these very big companies that provided mortgage insurance and then those companies suddenly were tottering because...

ZVI BODIE: Oh yes, that is true. In fact, what I could see happening is federal mortgage insurance taking the place of that private mortgage insurance. But from the point of view of the mortgage borrower, the need to buy mortgage insurance if they don't have a large enough down payment -- that's going to increase in the future.

PAUL SOLMAN: Got it.

PAUL SOLMAN: David from Reedsville, Ga. "I'm an economics teacher. Could you explain how the recession may affect college- and non-college-bound high-school seniors as they enter the workforce now or after college?"

ZVI BODIE: Oh sure. It's going to reduce their opportunities and they face a tougher environment. So, they're going to have to make sure that they have nicer resumes, they're going to have to differentiate themselves from other potential employees. It's going to be a buyer's market as far as new employees are concerned.

PAUL SOLMAN: And, of course, one of the things that they're doing is trying to hide out in graduate school programs, right?

ZVI BODIE: You bet! There's been a surge in applications to graduate programs.

PAUL SOLMAN: BU School of Management?

ZVI BODIE: Among others.

PAUL SOLMAN: Yeah. It's unbelievable the numbers. I teach some at Yale and there the graduate program's doubling the number of applicants because people just don't want to be in the job market.

ZVI BODIE: Sure. Well here's one way that we economists look at it. All of a sudden investing in human capital has become a much more attractive investment as compared to investing in other forms of capital.

PAUL SOLMAN: I don't get it.

ZVI BODIE: When you go on for a graduate degree, when you stay in school, you are investing in your own human capital. Now there are lots of things you could invest in, right? Like stocks, bonds, and so relative to those other investments, investing in your own human capital looks a hell of a lot better.

PAUL SOLMAN: And I would add with regard to non-college bound high-school seniors that they are in really tough shape, and lots of them by the way are going back to community college where there is also a surge in applications, because if you haven't got a skill that you can sell -- that skill, by the way, very often being the people you know, the skill at working your connections -- but if you haven't got that, in this environment where you're competing with all the other people who are out of work, you're at least as bad off as you were year after year for decades now and in a smaller, you know a tighter job market you're in worse shape than you were.

ZVI BODIE: Yeah, I agree with you there, Paul, completely. It's going to be a tougher, let's call it... It's going to be a buyer's market for employers and therefore anyone coming into the market, especially college graduates who don't have a...especially high-school graduates going into the labor force without some sort of higher degree - they'd better make a good impression.

PAUL SOLMAN: You know and I just... Parenthetically, we were in St. Louis recently talking to a group of kids who had dropped out of high school, were back in a sort of remedial school. And they were talking about the fact that what this really turns on is not your skills so much, but how you present yourself, and who you know.

ZVI BODIE: That is so important.

PAUL SOLMAN: And they don't know anybody because they only know each other and they can't get fast-food jobs without networking and who do they have to network with? So that's one of the... That's the main reason to stay in school, because you meet a different class of people in college than you met in high school!

Zvi this is the end of our installment of Pocket Change here. Thanks very much we'll be back in the not too distant future.

ZVI BODIE: Thanks, Paul. This was a lot of fun.