“Instead of learning the lessons of Lehman and the crisis from which we are still recovering, they are choosing to ignore them,” he said. And later, “Hear my words: We will not go back to the days of reckless behavior and unchecked excess at the heart of the crisis, where too many were motivated only by the appetite for quick kills and bloated bonuses.”

My question is: Will consumers and investors be guilty of the same? Individuals, unlike Wall Street, are looking saner than over the past few years.

We’ve learned, over the last year, to spend less and save more. According to a recent study by HSBC, over the past six months, 55 percent of survey participants have cut back on leisure activities, 46 percent have cut back on travel and 40 percent have cut back on electronics spending. We’ve learned that a night in with Netflix can be just as good as a night at the movie theatre. And thanks to public figures (namely Michelle Obama) we’ve learned that Talbot’s and J.Crew can be just as chic as couture. Going hand in hand with frugality is saving. Over the course of the past year, we’ve learned that saving for a rainy day is more important than ever. Today, the U.S. savings rate has climbed from 1.2 percent at the beginning of 2008 to an average of 5 percent during the second quarter of this year.

We’ve learned — once again — that you can’t time the markets. Individuals who pulled out after the fall were unfortunately many of the same that missed the recent 50 percent run. (Missing just the best 20 days over the past 20 years would cut the return of an investor who had plowed $10,000 into an S&P 500 index fund from $93,000 to $39,000.) That’s why I still believe that the best strategy is to buy it at all levels, stay in it for the long-term, and rebalance twice a year. By doing so you’ll be sure you aren’t overweighted in any particular asset allocation simply by the moves of the market.

And we’ve learned that panicking about our finances doesn’t help. Yes, when the markets get shaky, I like most Americans, worry. But I know that the secret is controlling the things I can control — the amount of life insurance I carry, the fact that I drive a sensible car, the ability to cut one dinner out during the week or one vacation over the course over the year — rather than fretting about those things that I cannot manage.

After the Depression these lessons stayed with individuals for a good 40 years. Here’s hoping they have that much sticking power this time around.

I have money that I want to invest in gold. I want to keep the value of the money and am very afraid of the economic climate. Are gold coins, or gold stocks a good idea?

Many financial planners suggest that a portion of any well-diversified portfolio be compromised of gold or other commodities such as oil. “I wouldn’t allocate more than 5%, maybe 7% or 8% max,” suggests Cathy Pareto, President and Founder of Cathy Pareto and Associates.

When you purchase gold, you have several options. You can purchase it as an exchange traded fund, as mining stocks, as futures, or as bullion.

If you’ve never invested in gold before, Paul Mladjenovic, author of “Precious Metals Investing for Dummies,” suggests starting with bullion (high-quality gold or silver in bar or coin form) such as the American Eagle coins, which are issued by the United States Mint. He warns to steer clear of medallions or commemorative coins. “These are more expensive and have a dealer markup,” says Mladjenovic

Today, more and more investors are looking to gold instead of stocks to provide some financial stability. But before you start plotting where to stash the shiny stuff, you’ll need to consider both the positives and the negatives of investing in gold.

One of the upsides is that as long as you own gold, you own a tangible asset that is desired by others. “If I have a gold coin in my hand, it’s been recognized as having great value for thousands of years, and thousands more to come,” says Mladjenovic. While the value of gold will never be zero, it’s value will fluctuate due to changes in the market. On the downside, if you invest in gold, you won’t be paid any dividends or interest. Additionally, the IRS doesn’t consider gold an investment, which makes it subject to the 15% maximum federal capital gains tax.

Unfortunately, when it comes to investing in this commodity; there really is no one “golden rule” to follow. They key is remembering that gold, like any other investment has its risks. “As with anything, any investment, you ought to be diversified. Everything else has risk, and we can’t forget that, gold has it too,” cautions Pareto.

Rebalance or not to Rebalance?

A couple of months back, the legendary John Bogle of Vanguard was on my radio show and I asked him about rebalancing your portfolios to keep a mix of stocks, bonds, and cash (or other asset classes) in check.  “I think rebalancing makes a substantial amount of sense,” he says. With his own accounts, though, he noted, “I don’t rebalance… I leave it alone.  I have not touched my asset allocation since March of 2000.”

Hmmm, I started to wonder.  Which was better for an individual – doing as Bogle said? Or doing as he did?  After all, the advice I’ve been giving for years is that if you take 100 and subtract your age, you’ll have a rough estimate of the amount of your portfolio you should have in stocks.  The rest should be in bonds or other safer havens.  Then, each year, as you age, you take down the stock component by a percentage point.   But I hadn’t tested the theory – at least not recently.

The folks at T. Rowe Price were willing to use their computers to help me out.

Let’s take a 40-year old who had $100,000 invested in an asset allocation of 60 percent stocks and 40 percent bonds in 2000.  Each year in January, they adjust that allocation by one point, so that in 2001 they are invested 59% in stocks and 41 percent in bonds, in 2002 they have 58% in stocks and 42 percent in bonds, and so on. They also rebalanced their portfolio on the same day.  By continuing this strategy, they would have seen a 13.3% return on their investments by December 2008 – increasing the value of their portfolio to $113,261.

If, on the other hand, that 40-year-old just let it ride without adjusting their asset allocation at all in those eight years, they’ve seen a 12.9% return on their investments – for a total balance of $112,992.

If they only rebalanced, so that their asset allocation would remain 60% stocks and 40% bonds, they’d see a return of only 9.3%, and a total portfolio balance of $109,303.

 Bottom line: It’s pretty close.   If we had run the example to rebalance in March rather than January would the numbers had been different?  If we’d started in 1999 and ended in 2009, what then?  I’m glad my advice looks to have been sound (and also glad – as I’ve been a fan for years – that Bogle’s own system is working).  But clearly there’s more work to be done here.

* Last week, ADP said that employers cut 491,000 jobs in April, versus the 708,000 that were lost in March. In fact, job losses were at their lowest since November of 2008.

* Fed Chairman Ben Bernanke forecasted a turn-around for later this year, saying that conditions in the financial markets have improved and the banking system is gradually being repaired.

* President Obama said on Friday that “the gears of our economic engine do seem to be slowly turning once again.”

* The Dow Jones Industrials gained nearly 165 points and finished up 4.4 percent for last week – the eighth gain for the index in nine weeks.

Is this good news? Eh. What I really think it is is less-than-bad news. But the fact that it’s being played so positively could cause problems for you and me. If individuals follow these encouraging headlines they can become too optimistic and sabotage their financial future. When we feel too good, too powerful, too in control of the future, it tends to backfire. There are studies from Duke University that found that when people see the glass as too full, they behave in ways that aren’t good for their future. They overspend. They accumulate debt. They fail to save. On the other hand, mild optimists – people who are happy, but not complacent – save more and are likely to have emergency funds.
What’s an understandably confused consumer to do?

* Pay down debt. Recovery or no recovery, you should absolutely continue to pay down your debt. Outstanding consumer credit fell by a seasonally adjusted $11.1 billion in March to $2.55 trillion, according to the Federal Reserve. It was the sixth decline in the last eight months, after years of our debt averaging a steady growth of close to 7% a year. Revolving debt – mostly credit cards – fell $5.4 billion, or 6.8%. Sure, part of this is due to the fact that banks have become less willing to lend, but another chunk can be attributed to the fact that consumers are less willing to spend, and they’re instead putting that money into getting balances down. If you managed to pay off $2,000 in debt over the last several months, but now you turn around and charge those cards back up again, it will cost you some $350 in interest alone over one year if you make only the minimum payment each month on an 18.9% card.

*Save. The savings rate has popped, and that’s good news. In the last year, the percentage of after-tax income that people don’t spend has risen above 4%. Still, a study by MetLife released in March found that half of Americans have a one-month cash cushion or less. 28% said they wouldn’t be able to survive financially for more than two weeks if they lost their job. In a good economy, I advise having at least three to six months worth of expenses, these days you need six to nine months, which means that even if we are headed for recovery, we still need to be stocking away some emergency cash.

*Invest appropriately. Just yesterday, I saw one headline that suggested we’re in a mini-bubble about to burst and another suggesting the Dow could top 10,600 by year end. Either way, your strategy should remain the same: Pull your short-term funds out of the market if they’re still there. Anything you need in the next 3 to 5 years doesn’t belong in stocks. Then where your long-term funds are concerned, dollar cost average in on a regular basis, making sure that you have the appropriate asset allocation for your age and risk tolerance.

*Don’t under insure. A new study by the Insurance Research Council found that although many Americans have taken steps to reduce their insurance costs in response to the downturn, most still consider home and auto insurance a priority. However, five percent of homeowners and 14% of renters reported canceling their insurance. Insurance is a non-negotiable, and if you scaled back your coverage during the downturn, one of your first priorities after a recovery should be re-evaluating your policies to make sure that you have the coverage you need. You should do this every year anyway.

*Stay thrifty. A recent Pew Research Study found that Americans are paring down the list of things they can’t live without. In 2006, 68% of adults considered a microwave a necessity. Earlier this year, only 47% did. In the same study, Pew found that six in ten Americans said they were shopping more in discount stores or passing up name brands in favor of less expensive products. One in five said they’ve started doing their own home repairs or mowing their own lawns. These things may seem small, but they add up fast, and once you get in the habit of spending a few hours on the lawnmower every Saturday, why break it? Instead, you can bank that savings or use it to pay down high cost debt.

I backed into an answer.

Me: Do you know what a mutual fund is?

Him: Ummmm….

Me: It’s usually a bunch of investments in stocks or bonds or both bundled together.

Him: Okay.  (He turns and walks out the door and then, realizing we are having a conversation shouts,) I’m still listening.

Me: Well the whole point of a mutual fund is that if one of your stocks or bonds is losing money, the rest of them may not be so you won’t end up losing your whole investment.   That’s called “diversification.”  Anyway, a hedge fund invests a whole bunch of investments at the same time too, but many of them are riskier than stocks and bonds.  So for the most part only wealthy people are allowed to invest in them.

Him: Do you?

Me: Do I what?

Him: Do you invest in them?

Me: No.

Him: Can you put on Z-100?

And that was it.  For now.  My mother once advised me that you should answer kids’ questions directly.  They know how much information they can comfortably take in and they’ll ask only for what they can stomach.  And when they’ve had enough, they have a way — “Can you put on z-100?” — of letting you know.

But how about adults?  Are we, in this financial crisis, taking in the information we need?  Or is there so much that many of us are simply unable to digest it?

I was thinking about this on my way home, when after dropping the kids off I switched from z-100 to Imus.  His guest, Rolling Stone’s Matt Taibbi has a 10,000 word piece in the latest issue dissecting the financial crisis.  Taibbi, who is an excellent reporter and terrific writer, spent 4 months he said just getting enough of an education on the meltdown to put pen to paper.  (Be warned.  Taibbi is angry and believes the rest of us aren’t “angry enough.”  The piece is not for the faint of heart.)  He says ordinary mortals need to understand credit default swaps and collateralized debt obligations in order to understand what happened here — and how to move forward.

You should read the piece.  Just as you should read the Paul Krugman editorial in the New York Times today slamming the Timothy Geithner public-private investment partnership as “cash for trash.” Just as you should tune into as much of the discussion as you can handle without getting a major migraine.

This mess, as I’ve said for a while, is like a closet in the midst of a cleaning.  It’s going to look worse before it looks better.  And it’s going to take time — lots of time — before it looks moderately good.   In the meantime, when your 14-year-old wants to know the answer to a little piece of the financial puzzle, you’ll have one.

Here’s the clip, in case you missed it: