jump to navigation

How you just lost money in a stock market that's up 40% August 5, 2009

Posted by Jeff Nabers in : Money, Personal Productivity, Self Directed IRA Solo 401k , add a comment

stocksup

Headlines abound, the stock market is up 40% from its March lows!!! Let’s all celebrate. Those who spoke badly of Obama, Bernanke, and Geithner have their foots in their mouths, right?

Not even close. These types of misleading headlines are the very weaponry of a financial system that tricks you, lures you, spikes your drink, robs you blind while you’re partying, and then nurses you back to sobriety in the morning by giving you another spiked drink.

Imagine you have $100 in the stock market. You experience a 40% loss. You now have $60. And, abracadabra, the economic rescuers have juiced the market back up 40%. You now have $84. Wait a tick, how exactly do I get back to $100? Well to recover from a 40% loss, you would need a 67% gain. You see, 40% of $60 is much less than 40% of $100, so the initial 40% loss was much larger than the 40% gain that followed. For those whose livelihood involves serious math, this is very obvious. For the rest of us, it should be an “ah ha” moment that exposes the red arrow, green arrow game.

Watching and listening to the financial news networks report about the stock market is like watching a sports game. And it entertains just like a sports game. In the midst of entertaining, it lulls us into watching the red and green arrows. Oh, it’s down today a few points. Hey look, it came back up. It feels very much like watching a basketball team surrender and regain the lead in a basketball game. If they are down by 40 points, and then they score 41 uncontested points, they have the lead and they win the game!

But it doesn’t work the same in percentage points. But just wait, over the long term the losses will be recovered and there will be profit, say the “experts” whose payroll checks are signed by Wall Street. If you buy that line of baloney, you will be further tricked. Because over the long term those losses will be recovered and there will be profits… but only as measured in dollars. If you factor in how over the long term those dollars buy less stuff, you will not find a substantial long-term profit.

Today the Dow closed at $9,320. But the dollar has lost over 96% of its purchasing power since 1913. Take 96% out of today’s Dow price and you get $372. In 1913, the Dow was at about $62. So the Dow Jones Industrial Average grew from $62 to $372 (in constant 1913 dollars) over a period of 96 years. That’s an annualized rate of return of 1.88%.

This bears repeating…

The Dow Jones has returned 1.88% per year for the past 96 years

Can you still get excited about a stock market that’s up 40% since its March lows when it is still a stock market that hasn’t even been able to produce an actual 2.00% return over the long run?

Or even more important questions: Is it worth the risk of losing a big chunk of the money you worked for just to “get some action” in a market that produces less than a 2.00% return over the long run? When you are down, can you wait decades without touching your money just to get back to your break-even point?

—-

Jeff Nabers is author of 5 STEPS TO FREEDOM: How to Cut Your Dependence on Institutions and Escape Financial Slavery

How to vote against the bailout October 3, 2008

Posted by Jeff Nabers in : Money, Personal Enjoyment, Self Directed IRA Solo 401k , add a comment

Our government is not one for the people anymore, and we must oppose the bailing out of failing, irresponsible, fraudulent corporations.

Reasons to vote against the bailout

  1. The corporate officers who made the decision to pursue short term profits at the cost of later bankruptcy often received tens of millions of dollars in bonuses and dismissed adequate warnings from advisers about the future consequences of their decisions.
  2. Bailing these companies out is a reward for behaving dishonestly, unethically, and fraudulently.
  3. If running a company into the ground is rewarded with free money, then this puts sound-minded companies in a position of competitive disadvantage.
  4. This would create new rules of business: If you are a small company, you must follow sound-minded practices to thrive; if you are a very large company, destroy your company and it will be rebuilt at the cost of American taxpayers.
  5. Bailouts are requiring the Fed to create an extraordinary amount of new money which throws fuel on the fire of the already double digit inflation. Runaway inflation steals wealth from citizens to give it to the banking system and the government.

How do I vote against the bailouts?

Because our system of (more…)

Is this the bottom? How to recover your stock market losses September 30, 2008

Posted by Jeff Nabers in : Money, Self Directed IRA Solo 401k , add a comment

This question is on the minds of millions of Americans. I know exactly how to recover your losses: get out of the U.S. stock market and recoup your losses elsewhere.

S&P 500 loses 28% in one year

The sales pitch of securities salesman is that the stock market goes up around 8% or 9% per year over the long run – so don’t ever sell as a reaction to losing money. Let’s examine this, and assume your investment performance equaled the S&P 500 (even though the majority of mutual funds’ performance is inferior to that of the S&P 500).

Scenario A – You entered the (more…)

Does the weak dollar make foreign real estate a bad investment? August 7, 2008

Posted by Jeff Nabers in : Money, real estate, Self Directed IRA Solo 401k , add a comment

In a recent meeting with a couple of real estate investors, I was posed with the question:

Doesn’t the weak dollar eat into the profit of foreign real estate investing?

Not at all; in fact, quite the contrary. A weak dollar makes spending dollars in foreign countries disadvantageous. I ran into this a few years ago in Sweden. I went to buy a t-shirt and it cost the equivalent of $85 USD. I asked my Swedish friend if this shirt was expensive, and he replied “no”. That’s when I learned firsthand that the plummeting dollar is making international vacationing more expensive for Americans.

Spending money on foreign real estate

The same does apply to real estate purchase for personal use. If you find a beautiful property in a foreign country that you’d like to buy for personal use, it’s going to cost a lot more today than it did 5 years ago. You’re spending US dollars and you’re going to have to spend a lot more now since they are worth less thanks to inflation.

Investing money in foreign real estate

Investment into real estate is done to accomplish one or both of the following objectives:

  1. Produce [Rental] Income – I believe this should be the primary objective of any investment. Income is more predicable and controllable than appreciation.
  2. Appreciation / Capital Gains – This is the focus of most novice investors.

When investing in foreign real estate, you convert the appropriate amount of US Dollars into local currency, and you will purchase the property in local currency. Regardless of whether you receive your return on investment from #1 above, #2 above or both… you will receive it in local currency. If you buy property in Sweden, you will receive rental income in kronor (Swedish crowns) and proceeds from the sale of the property will also be in Swedish crowns.

Scenario 1. If the dollar is weak (relative to its historic value), but its value remains constant during your ownership of the Swedish property, your return-on-investment (ROI) will be unaffected by the dollar’s weakness.

Scenario 2. If the dollar is weak, and it continues to weaken during your ownership of the Swedish property, your ROI in Swedish crowns will remain unaffected, but in USD your ROI will be increased.

Scenario 3. If the dollar is weak, but it rebounds and strengthens in value during your ownership of the Swedish property, in USD your ROI will suffer. The dollar can only bounce back if the Fed completely reverses its monetary policy. In this case, interest rates will go up to 13% – 20%, and the entire US economy will essentially crash. Here there will be so many opportunities that as long as you didn’t put your entire investment portfolio into the Swedish property, riding the bear market down in short positions will more than compensate for the lessened ROI on the Swedish property.

Weakening dollar makes domestic real estate investment a bad idea

The weakened dollar has hurt real estate in the last 2 years. During this time, inflation has been at 10% – 12%, while housing values have been stagnant or even declined in some localities. This means all our homes have decreased in actual value 10%+.
If you believe interest rates will remain low and that Fed will continue its inflationary policies, investing in U.S. real estate might not carry a very good ROI. If your property is returning you 12% annually, but inflation is at 12%… you have successfully stored and protected your wealth, but you have not grown it. The continued weakening dollar will hurt domestic real estate unless real estate appreciation outpaces inflation. Using the increasing money supply as a forecaster, inflation is heading towards 16%. I don’t think real estate values (or rents) will increase by 16% per year over the next few years, so this tells me that while our inflation continues, domestic real estate investment performance [in general] will suffer.

Summary

Concepts to consider