I drove to the box factory earlier this week to chat with my former co-workers. While I was there, I asked my cousin Nick (the bookkeeper) for info on the company retirement plan. I still have $80,000 that I need to roll over once I set up my new 401(k) for the blog. Only, it seems I don’t have $80,000 in retirement savings anymore. It’s more like $60,000. 2008 has not been kind to American investors, and this week has only added salt to the wound.
A few readers have written to ask about the recent financial turmoil. I’ve been slow to reply, though, because discussing economics is outside my comfort zone. Also, my fundamental thoughts on the situation haven’t changed since the last time the market had a meltdown. My personal advice for times like this remains:
- Don’t panic.
- Tune out the media.
- Remember your goals.
- Focus on the fundamentals.
- Know your risk tolerance.
- Educate yourself.
My top recommendation is to go the public library and borrow a copy of William Bernstein’s The Four Pillars of Investing. I’ve found that the more I read about financial history and the way markets work, the less frightened I am by daily events.
Many people see the current downturn not as something to fear, but as an opportunity. Trent at The Simple Dollar just maxed out his 2008 IRA on Monday afternoon. He writes: “I’m essentially getting the same index fund I would have bought back in January at a 25% discount.”
Here are some past posts at Get Rich Slowly about this subject:
- Why it pays to ignore financial news — “Financial news can be dangerous to the health of your investment portfolio.”
- Warren Buffet on market fluctuations: Investors gain when the market falls — “Be fearful when others are greedy, and greedy when others are fearful.”
- What the stock market decline means for you — “The best bet for the average investor is to just sit back, relax, and remember that investing in the stock market is a long-term proposition.”
- What if the stock market makes you nervous? — “If your risk tolerance is low, then the stock market may not be right for you.”
- The upside of risk: Why market volatility is a good thing — “The longer you hold on to stocks, the more volatility declines.”
I had considered writing a post about this week’s events, but then I saw that Ramit at I Will Teach You to Be Rich has done the work already! He’s created a three-minute video with tips for today’s economy:
If you want more information, I urge you to read his blog post on the subject, which elaborates on his presentation. His basics points are:
- Your deposits are generally safe, but your money is not insured against losses in the stock market.
- Don’t worry about things you can’t control, like macroeconomics and fiscal policy. Worry about things you can control, like your job and your savings.
- Save. Diversify your investments. Focus on making smart choices with your own finances. (And those smart choices haven’t changed in the past week or month or year, by the way.)
For a great summary of the recent turmoil in the financial markets, read this post at the Freakonomics blog. Here’s a quote:
The concern for the man on Main Street is not the bankruptcy of Lehman, per se. Rather, it is the collective inability of major financial institutions to find funding. As their own funding dries up, the remaining financial firms will be much more cautious in extending credit to normal firms and individuals. So even for people whose own circumstances have not much changed, the cost of the credit is going to rise. For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years.
Free Money Finance recently asked his readers, “Can you handle a troubled economy?” What about you? Does the economy make you nervous? Why or why not? Are you making any changes to your plans? Are your finances able to weather this financial storm?
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I thought I’d mention that even though you aren’t insured against stock market losses, at least here in the UK you are normally insured against your broker (etc) going bankrupt.
I too think that one of the biggest impacts on regular folks is likely to be the lack of credit. Now is a good time to be paying back rather than borrowing more, although really, it’s always a good time to be paying back.
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I think the single most important (only?) thing an individual can do is have a very safe emergency fund.
The longer you could go without a paycheck without getting into debt, the better off you are. If that amount of time is a full year, then it really would take one heck of a financial catastrophe, personally or word-wide, to create an immediate problem for you.
What *does* make me nervous is that both Suze Orman and Jim Cramer have directly stated that, had the fed not bailed out AIG, we would be looking at The Great Depression all over again. I suspect and like to think this is a lot of hyperbole. But honestly, I don’t know enough about AIG to really understand why its so fundamental to the economy.
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I believe right now, the most important rule for me is “Tune Out The Media”.
I remind myself that these channels run 24 hours a day, 7 days a week, and that’s a lot of airtime that they have to fill. By needlessly chattering and repeating the same mantras again and again, I believe they contribute to the negativity; it’s almost a self-fulfilling prophecy.
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We haven’t changed our financial strategy with the financial mess going around. We have an emergency fund and we’re paying down debts. Our goal has been to reduce our monthly expenses and increase savings. We’re going to continue to stay the course.
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Hopefully more people will start to pay attention to things like investing, budgeting, and the economy with all this mess. Unfortunately, this is the only kind of thing that gets people to finally pay attention to this kind of stuff.
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We’re seeing a natural part of the financial market cycle. It’s not pretty but it’s quite essential, much like natural selection.
Investors make the most money by decisions made at times like this.
“Before the beginning of brilliance, there must be great chaos. Before a brilliant person begins something great, they must look foolish in the crowd.” ~ The I Ching
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What makes me nervous about the present chain of events is its unprecedented nature and that no one really understands it.
Past recessions I’ve experienced were all of a kind. This is not. This is something different. That it came about through the ill-advised policies of ideologues whose minds are not changed and who still control considerable political power is also scary. We’re losing a great deal more than a few bucks here.
It’s not good.
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@jb…
“What *does* make me nervous is that both Suze Orman and Jim Cramer have directly stated that, had the fed not bailed out AIG, we would be looking at The Great Depression all over again. I suspect and like to think this is a lot of hyperbole.”
Not so.
http://www.npr.org/templates/story/story.php?storyId=94748529
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I find this period in time very interesting. I’m 35 and really haven’t lived through anything like this. All I’ve known my adult life are boom times with the exception of the tech crash – which really didn’t last that long. I have been watching CNBC and reading everything I can simply because its fascinating.
I, too, think the biggest effect of this downturn will be credit and the availability of it. No more houses with no down payment. No more rampant home equity loans and daily credit card offers. Is this a bad thing?
I also think this crash is just like all the others – everything is on a bubble and the market, housing industry and credit industry are just correcting themselves.
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I fear that my future has just been sold out for my present. I’m one of those generation Xers who feels sort of screwed by the Boomer generation who apparently haven’t had the fiscal responsibility to enlarge government the way they desire without incurring immense debt.
I haven’t enjoyed watching my portfolio shrink, but I did enjoy knowing that my current investments were going in cheaper and cheaper. Periods of outperformance follow periods of underperformance.
Personally, I sort of looked at this whole debacle as evening the score. I’m in the market buying for cheap those retirement plans of the not-so-responsible generation before. And then the fed comes in and props them up. Can I not expect that debt to eventually fall to me? Screwed again.
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I’m with William Maize on this. I’m not concerned about the economy. It’s in a correcting cycle and will cycle around again. What does concern me are the poor decisions being made by businesses and individuals who watch too much CNN (or any media) and are in panic mode.
My husband was recently laid off by a panicking leadership who cited “the coming economic crisis” as the reason for the layoff. Not present factors, not even the bottom line, but fear.
Companies (and individuals) who make decisions based on fear and not based on reality are hurting themselves and others and driving the cycle down.
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“What about you?”
I’m gettin greedy Warren Buffet style.
“Does the economy make you nervous?”
Nope.
“Why or why not?”
-Emergency Fund
-Reasonable job security. I’m not middle management, and my company and group have open headcount at my level.
-Reasonable job security significant other
-Willingness to work at a terrible job for a while.
“Are you making any changes to your plans?”
Nah. I’ll keep pushing money into the EF and watching for market drops during which to invest.
“Are your finances able to weather this financial storm?”
Depends on how long it lasts, doesn’t it?
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Im 19 years old and i can’t believe whats going on. Im from a poor family. I found out over the years of working(since age 13)that saving is the only way. I have a 401K i have stocks and i save every little penny i have. people need to stop worrying so much about what is happening day to day. You need to be PREPARED for any thing. And with Credit cards, If you don’t have the money DON”T SPEND IT. We as americans should take a look at the great depression and learn from it.
On another note this site is very informative and i hope im not coming off as a snoby little brat.
-They say wisdom comes with age, i think wisdom comes from understanding your surroundings and working things out.
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The only thing I’ve really done is move my money around a little bit (diversified even more). I’m certainly not thrilled about the situation at all.
The main thing to do is remember your deposits are insured up to $100k in any one bank (even more for some types of accounts). For convenience’s sake, I’ve put another small amount to cover my immediate needs into another bank because it the event of a bank failure it could take a few days for depositors to get their money from the FDIC.
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I try to tune out the media as much as I can. The best way is to just read one paper and not watch CNBC at all. That helps to keep a good perspective on things.
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JD- If you qualify for a Roth IRA you may want to consider rolling over your 401k to a Roth right now. You obviously know the benefits of the Roth.
The benefit of rolling over NOW when the economy is bad (and you’ve lost money) is that you have to pay taxes on the roll-over (since you didn’t pay taxes originally on that money). If you waited until the 401k value went back up, you’d be paying MORE taxes. So by doing it now you save taxes.
I’ve done this with one old work 401k this year. (though I wish I had waited until now…)
If you want me to explain further just shoot me an email.
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We should all be crystal clear on what FDIC and SIPC does and does not do.
FDIC: Up to 100K cash in a bank insured in case of bank insolvency.
SIPC: 500K worth of securities (100K of cash) held in a brokerage account insured against brokerage FRAUD. You are protected in no way of market loss of your investments (including money market funds). If your brokerage firm goes belly up and somewhere along the line they lost or stole some of your securities, that’s when SIPC kicks in.
The good news: Unlike banks, brokerage firms are not allowed to comingle your assets with theirs, so in the case of an insolvent brokerage firm, your investments should not be affected in any way.
This is a VERY big issue right now and should be made crystal clear to investors.
Cheers
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I have a question, it is something I’ve never been clear on (not that I have anywhere near enough to worry about this, it is just always something that I’ve wondered)…
The FDIC: Up to 100K cash in a bank – is that per person, or per account? If I were to have 200K in 2 different accounts, would they both be covered or should I be using multiple banks (again – assuming I had that type of money – in a bank)
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JD I agree with Elizabeth you could not have a better time to roll over your 401k in to a Roth. And since I belive you mentioned vanguard handled the account at the box factory you could switch into the same asset classes with a vanguard Roth IRA they most likly would do all the work for you.
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The real concerns, I think, are how much are my taxes going to go up and where is the money for the bail outs coming from. Did they just print more money and devalue the dollar even more?
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@Funny About Money:
“Past recessions I’ve experienced were all of a kind.”
I do not intend to condescend but no recession, or any market cycle for that matter, is the same or “all of a kind” as you say.
Each market cycle is marked by similar occurrences, such as a greed-induced bubble followed by a “bursting” of that bubble, but none have ever been the same.
“History does not repeat itself, but it does rhyme.” Mark Twain
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Does the economy make you nervous?
Our economy should make everyone nervous.
Why or why not?
The Federal Reserve prints money as it sees fit (with or without the approval of Congress). They devalue our dollar with the removal of competition in currency (removing the gold standard) and the continuous intervention in our “free market” (printing new paper money to artificially lower the interest rates). The fact is, if our government was not intervening in the market (including the bail outs of Fannie, Freddie, AIG), we would be much better off economically. All the Fed’s are doing is patching up the bubble they have created for our nation (and other nations who decided it was wise to invest in our failing dollar and economy).
Every bail out from now until our dollar is worth nothing is prolonging the inevitable and setting us up for an even harder crash. Instead of trying to save the current failing system, we should be working to replace it with a working one. No one wants to go through the hard financial times required to fix this system, so we will all see a hard crash as everything unwinds.
Going back to a gold standard, getting rid of the Federal Reserve, and keeping the government’s hands out of the “free market” is just a start to fixing the problem.
If anyone is more interested in what I believe to be sound economics, check out http://www.mises.org — “The Ludwig von Mises Institute is the research and educational center of classical liberalism, libertarian political theory, and the Austrian School of economics.”
Are you making any changes to your plans?
So far, I have not decided to change my current plan of paying down student loans and contributing the 15% that my company will match to my 401k.
I have, however, changed my plans of how to act as a result of our nation’s situation. No longer can I be the apathetic nobody who blends into the background. If I don’t change, nobody will. I am becoming more vocal by starting conversations to get others thinking and interested in the current events that surround us all. It’s not about me being right or wrong; it’s about all of us being awake to the world around us.
/EndRant
Are your finances able to weather this financial storm?
Hopefully. I’ve just started building my wealth.
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@Elizabeth – good point on converting to Roth now.
Re: For an individual or business that falls behind on payments or needs an increase in short-term credit because of the slowing economy, credit will be much harder to obtain than in recent years.
…what I’m telling my friends who ask is 1) Now is not the time to use a credit card for an emergency fund. SAVE.
2) Stocks are on sale – but most people should only buy if you plan to hold them for 10-20 years.
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@Steev:
FDIC insures $100,000 total at each BANK per person. If you have more than $100,000, you should have it in separate banks. However, if you are married, you and your spouse may each have an account with $100,000 and you may also have a joint account for $100,000. In that case, you would technically be able to have $200,000 insured at one bank.
I am most worried about the tax bill that will come due to us in the future for all the buyouts today. It is terribly sad to me that there are starving children in this country and people who die because they can’t afford health care and to save the economy, we are shelling out BILLIONS of dollars to companies who knew the risks of what they were doing and chose to behave badly.
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Keep our heads down, stay the course.
Save, invest, spend carefully, take on only affordable debt on non-depreciating assets, etc.
I’m a compulsive listener to Marketplace on public radio, and I end up shaking my head at what’s been going on and how it’s turning out. I knew to some extent that a lot of people and businesses were taking unreasonable risks, but I figured they knew something I didn’t. So glad I didn’t follow them, though!
So, no, we’re not freaking out. We’re paying attention, though!
Hadn’t thought about rolling over the 401(k)s, though — have to run that idea by my husband (the MBA). He’s skeptical that the gov’t won’t decide to somehow tax Roths by the time we need them.
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@ steev asked:
Up to 100K cash in a bank – is that per person, or per account? If I were to have 200K in 2 different accounts, would they both be covered or should I be using multiple banks (again – assuming I had that type of money – in a bank)
Yes, if you have over 100k you should be using multiple banks. You are only insured for $100k per person no matter how many accounts you have at a particular bank. Some people open accounts in their childrens’ names to get around this.
I’d just put anything over 100k in a totally different bank for the reason I mentioned above: It could take a while for the FDIC to get your money back to you- esp if its fund is depleted by a bunch of banks going under at once. If this happens the FDIC will borrow money from the treasury. The treasury gets its money by issuing treasury bonds, which are backed by the US government.
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“Don’t panic.
Tune out the media.
Remember your goals.
Focus on the fundamentals.
Know your risk tolerance.
Educate yourself. ”
——–
great post.. last time i checked i was down 18% in my 401k for this year
i was telling someone else the other day we don’t really have any choice but to ride it out
dow is up almost 400 points today.. i’m sure there will be a lot of these roller coaster up and downs in the future
like i said.. just ride it out!
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I’m also getting greedy Warren Buffet style. I’m looking for buying opportunities on ETFs everywhere. I’ve got a bottom-of-the-local market plan to pick up a rental property in the next 6-8 months that I’m saving for.
Every time the DOW loses 400 points, I think “what part of the market is on sale?”
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I think the market’s way overvalued and I kind of hate to keep shoveling money into it, but I don’t really know what else to do.
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“Worry about things you can control, like your job and your savings”
have you never been laid off or downsized or rif’d. worst unemployment numbers for years. you don’t control your job.
saving is also touch and go. there’s now talk of a bailout for banks in the hundreds of billions. while the fdic fund is getting low. just because your money is in a bank doesn’t mean you can get your money from them. ever. no control there, either.
take douglas adam’s advice: don’t panic.
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Thorton, I don’t think you’re a brat. I think you’re smart.
To answer the blogs question, I am nervous about the economy. Though I have no debt and I have savings, I feel that I won’t be able to retire like my parents. I feel like I will have to work till I die. I am 44 and have yet to buy a house. I keep thinking I should have bought a house a couple of years ago and have the government bail me out now. Sorry to sound depressing. I wish money grew on trees.
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I am interested in your 401(k) setup for your blog. I don’t know if you have posted about this before. I am self-employed and always figured a 401(k) would be too complicated/expensive to setup and maintain for my business with 1-2 employees. I figured IRA ( maybe SEP?) was the best/only option. Is GRS setup as a corporation? Does business structure matter? Can I get a 401(k) setup for my small business that has only 1 and no more than 2-3 employees?
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Thanks for the post. I really feel that your 6 pieces of personal advice are strong and relevant ones. Even though I believe tuning out the media is a good piece of advice, I still have trouble NOT picking up a WSJ every day to see what else has happened. However, I simply remember not to panic and think things through. Good post!
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I would like to respond to post #13 Thorton. I am 72 years old and I wish, when I was 19, I would have been as level headed as you are. I think you come across as a smart young person an think you will do just fine in life. Hope you enjoy the trip.
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Am I worried? A little. Do I think that it will last forever? No, I do not. The market will turn around and we will all be looking back at this as a bad memory.
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@escapee #26
Sorry but the way you have stated your issue with FDIC coverage is very misleading. A single person has several legitimate ways to TITLE their accounts in ONE bank that will make their deposits in excess of $100,000 covered by the FDIC. Most banks should have the FDIC brochure that will explain the details – and it does not mean you have to “open accounts in their children’s names to get around it.” Also the FDIC site (http://www2.fdic.gov/edie/)
helps you figure it out for yourself with the calculator.
As for my DH and me – we’re extremely blessed to be totally debt free, so no, we’re not panicking and making a run on the bank. I may not even look at our investment stmt when it comes this month – we still have 10 yrs at least before starting to pull any income from those anyway. Everything will be okay if people would just stop being so reactionary! Calm down. Relax and stay the course.
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I’m not panicking.
I’m in my 30′s so I pretty much ignore my 401k and IRA. Other than shoveling money in, that is – it’s kind of fun to think I’m buying stocks at a “discount”.
I have reasonable job security. We’ve already been approved to refinance our mortgage at a lovely low rate. I have no debt. My only concern is my bank – my checking account is at Washington Mutual. It’s too late to change banks before closing on our new loan. I’m afraid that if something happens to WaMu, I won’t have access to my cash for closing costs. I guess in this case I can only hope for the best.
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So true. The key is in SAVING, a good plan, and staying the course. Saving does not always mean denying yourself everything. It just means making your money count for something.
Elizabeth #16, I did that in 2003 and turned a $16,000 traditional IRA portfolio of mutual funds into $70,000+ in today’s market. Great advice.
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I am definately not panicing. my online business and blog is going to be making me a full time income in the next 6 months so then I will be very confident
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Greg C @ 32:
I think there are ways you can set up a 401k for a small business that are not insanely complicated. Maybe search on “solo 401k” or “401k sole proprietor.” I’m pretty sure there are ways to do it through both Fidelity and Vanguard, and as I recall from the bit of reading I’ve done, you can actually put away more than you could in a SEP. Might be worth looking into.
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Nice job on this article.
There is so much panic and worry but I don’t think enough people are scared of what it going on – they are scared because they have no idea of what is going on.
Taking time out and going to the library to grasp the reality of the current economy is spot on. Forgot what the media shoves down your throat and open a book and start learning for yourself.
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J.D.,
Research shows that investors who tune out the media are less likely to panic and have better investment returns than those who follow the media.
Your advice for times like this is right on target. Perhaps “Tune out the media” should have come first and “Don’t panic” second.
Regarding your 401(k), it makes sense to either roll it to a Rollover IRA or convert it to a Roth IRA and pay the taxes. Or, you could do both – put the funds in a Rollover IRA now and convert it to a Roth IRA over a period of years to pay the taxes gradually rather than all at once.
It’s too bad that most investors have been brainwashed into thinking that “buy-and-hold” is the only way to invest and that “market timing is a fool’s game”. Investors with that mindset have watched their 401(k) and IRA plans plummet in value. Your readers would do well to consider your sixth bullet: “Educate yourself”. There are plenty of excellent books and research papers available that describe proven market timing systems that far surpass a buy-and-hold strategy and reduce investment risk.
Our SISTM market timing model has produced excellent results for our subscribers. Year-to-date, two of our three published portfolios are up while the third is down less than 1%. And year-over-year, all three portfolios are up while exhibiting very low volatility compared to the stock market. Market timing works!
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In response to #42, Paul, your post was great but its a shame you had to kill any value of the post by plugging your crappy market timing website.
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With the massive layoffs we’ve seen just this week, the bail out talks, and the roller coaster of the stock market, I know a lot of people who are living in fear. I like to remind them that history has shown that more multi-millionaires are created in challenging financial times than when the economy is flourishing. I like the suggestions for keeping calm in these financially troubling times. Great posts and comments.
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