Closing out the recent Morningstar investment conference was Harvard's Robert I. Goldman Professor of Economics David Laibson. He tackled the unpleasant but important topic of cognitive decline among the elderly and the impact it has on their financial and investing decisions.

Combining information from this summary of Laibson's address as well as this follow-up interview following the address, here are some of the highlights that stood out:

Laibson highlighted two kinds of intelligence. Crystallized intelligence is the ability to accumulate wisdom, experiences, skills, and knowledge. This type of intelligence rises until age 60 when dementia is more likely to set in. Fluid intelligence is the ability to solve new problems. This type of on-the-fly intelligence peaks at 20 and then declines rapidly.According to memory and analytics tasks performed by all age groups, 80-year-olds perform at the bottom 16th percentile. Moreover, age is a greater hindrance to economic rationality than is being low-income or of low-education. As a result, the retired are among the most impaired in terms of economic reasoning. The prevalence of dementia (or cognitive impairment) plays a huge role. Laibson noted a startling but compelling statistic — the likelihood of developing dementia doubles with every five years of age after age 60. FULL POST

My wife and I decided this would be the year we would transition from using a combination of credit cards and debit cards to primarily using cash. While we'll still use a rewards-based credit card for gasoline purchases (we're not going to spend more on gas just because we're using credit, so we might as well get rewards for that spending), we're otherwise moving to a cash approach.

We haven't finalized the plan just yet. Probably, we'll combine our cash spending with some kind of online accounts for certain budget categories, such as using ING "sub-accounts" or some version of PNC Virtual Wallet. (Having been avid debit card users for 11 years, I already gave Mvelopes a try, but didn't find it intuitive or helpful.)

So, I posed the following question over on our Facebook Page: Best advice for someone transitioning to the cash/envelope budgeting system? FULL POST

A week ago, I wrote about the fact that the market tends to experience 5% pullbacks quite often, noting that the most recent one is the sixth such pullback during the current two-year current bull market. One of the main points of that post was that regardless of the recent events in Japan and the Middle East/North Africa, the market was "overdue" for such a pullback, simply based on how far it had gone up since the last one.

That may seem odd to some, but the basic idea behind it is straightforward. Stock market activity is driven by three main components:

• Valuation (are stocks over/under-priced?);
• Monetary conditions (interest rates and changes to the money supply); and
• Psychology/Sentiment (are investors excessively bullish or bearish?).

Clearly, each of these pieces influences the others. And there are many ways to measure these various pieces, with various measures sometimes conflicting. So even knowing these are the three main drivers of the market doesn't simplify the task of predicting what the market will do next very much.

Getting back to the 5% pullback idea though, these pullbacks are important due to their impact on market sentiment. As the market goes higher and higher without any type of pullback or correction, there's a tendency for investors to become excessively optimistic. This shows up in all sorts of sentiment measures, such as bullish/bearish surveys and so forth. FULL POST

The economic events of the past two years, and the government's response to them, have many wondering how long it will be before inflation returns — and how strong it will be.

The Obama administration's new budget, released this week, projects a 2011 budget deficit of $1.6 trillion dollars and a doubling of the national debt—from $9 trillion to $18 trillion—over the next decade. In other words, over just the next 10 years, the U.S. will face budget deficits roughly equal to all the deficits combined from 1945 to 2009.

How will these huge deficits be funded? Partially by tax increases, but also by the Federal Reserve creating additional money. One economist quoted in the Wall Street Journal put it this way: "Effectively, the Fed is monetizing the Treasury's debt, a strategy that appears in the encyclopedia under the heading 'how to trigger inflation."

While it may be difficult to grasp concept of trillions of dollars in debt, it's quite easy to understand escalating prices at the grocery store.

Grocery prices grew by more than one-and-a-half times the overall rate of inflation in 2010, according to the U.S. Bureau of Labor Statistics (BLS). Although there are multiple reasons for the increases, excessive money creation likely plays a key role. FULL POST

We normally don't spend much (if any) time discussing various forecasts for the new year. That's because we think very little of most attempts at forecasting — it mostly amounts to guessing, and that we can do without.

That said, I do still read some forecasts every year. I do this not because I'm particularly interested in what the authors predict will happen, but rather I'm interested in the reasons why various predictions are made.

In other words, I have very little confidence in the predictions people make, but I do think there are occasionally pearls hidden within the reasoning used to arrive at those predictions.

As an example of the forecast type I find helpful, I pass along this 2011 analysis by Edward Harrison (hat tip to The Big Picture blog). You won't find predictions regarding where the stock market will go this year and such in it, but then I've just told you those are the least useful parts anyway. FULL POST

Here in Georgia where I live, we got six inches of snow Monday morning. Very unusual for this part of the country. But the weather forecasters were dead-on in their predictions, so we were prepared and are now cozy here with plenty of provisions and, if need be, a back-up source of heat.

The folks who forecast weather for a living are usually pretty accurate (probably because they're dealing with events only a few hours or days away). Regrettably, the same can't be said for those who forecast the economy and the stock market, as the Wall Street Journal's Jason Zweig points out.

Every January, hordes of highly paid experts attempt to predict what the economy and the markets will do in the coming year. Later in the year, nearly all of the forecasts turn out to be wrong....Why do people with years of experience, massive expertise and mountains of data at their disposal so often get the future wrong? FULL POST

Building a savings reserve is one of the best things you can do for your long-term financial health. And the beginning of a new year is a great time to get started — or to start saving more than you have been.

The easiest way to save steadily is to have some of your income set aside automatically before you have the opportunity to spend it!

Here are two paths to automated savings, plus ideas about how much to save, as discussed in chapter 5 of The Sound Mind Investing Handbook (5th ed.):

Sign up to have part of your paycheck (you decide how much) automatically deposited into a savings account at a credit union or local bank. It's easy, convenient, and offers useful discipline. Plus, your savings are insured and available for withdrawal without penalty whenever you wish.For a slightly higher rate of return, set up an automatic monthly transfer from your checking account to a money-market account at an online bank.

How much should you save? If you're still in your 20s, set a target of saving 5%–10% of your income. Initially, this will go toward building your contingency fund. Once that's in place, your savings can be used for a down payment on a house and other large purchases. FULL POST

I thought some readers might find it helpful to understand why the Fed doesn't appear to be as concerned as many commentators about the risk of future inflation.

Note that I'm not writing this explanation because I necessarily think the Fed is right and its critics are wrong. This is simply to help you understand both sides of the argument a little better.

With the disclaimer that I'm not an economist (nor do I play one on TV), here's a quick, general explanation of why the Fed is doing what it's doing.

The Quantity Theory of Money helps visualize this. Simply put, this theory says:

M * V = P * Q

M = Money in circulation
V = Velocity of money (how fast is the money being turned over, how much lending is going on)
P = Price level
Q = Growth of the economy

What critics have focused on (really for the past two years) is how the Fed has dramatically boosted M (the money supply). The fear is that all this extra money eventually drives up P (prices). In other words, that eventually the extra money translates into significant inflation. FULL POST

SMI has never endorsed the idea that when people arrive at certain age they should give up all productive endeavors and go spend every day on the golf course or at the lake. We think a person's later years can be spent in all kinds of productive enterprises, especially those that relate to strengthening family ties and advancing the Kingdom of God. And if your health is good, you might even want to keep working.

But even if you plan to keep earning an income well past normal "retirement age," it's wise (and good stewardship) to build up savings now so you will have adequate financial support later.

Regrettably, many people are failing to save enough when they are young or middle-aged, according to retirement-funding studies.

In the decades ahead, that lack of savings, when combined with possible cuts in Social Security benefits, is likely to mean that Americans will be forced to work longer, competing for a limited number of employment opportunities that may not pay as well as current employment.

To help you think through the realities of retirement planning, we've prepared a complimentary new report, IRAs, 401(k)s, and Social Security: A Retirement Planning Primer. The report explains the "three-legged stool" of retirement income: Social Security, private employer-sponsored retirement plans, and personal retirement savings. We believe it will help you craft a plan to ensure future financial stability. FULL POST

Have you ever played that game where one person has to close her eyes, fold her arms over her chest, and fall backward into the arms of friends or co-workers? It's called the "Trust Fall." If you're the person falling backward, you have to trust that the folks behind you are going to catch you so you don't hit the ground.

I thought of that game when reading this passage from Jesus' Sermon on the Mount (Matthew 6):

Do not store up for yourselves treasures on earth, where moth and rust destroy, and where thieves break in and steal. But store up for yourselves treasures in heaven, where moth and rust do not destroy, and where thieves do not break in and steal. For where your treasure is, there your heart will be also....

So do not worry, saying, "What shall we eat?" or "What shall we drink?" or "What shall we wear?" For the pagans run after all these things, and your heavenly Father knows that you need them. But seek first his kingdom and his righteousness, and all these things will be given to you as well.

I suspect the reason we tend to worry is that we're just not sure God is going to be there to catch us. We know God is big and strong, but somehow we're just not convinced that He knows our particular address. We think if something happens to us, God may be otherwise occupied with important cosmic events and not notice us. FULL POST