The Correction or What Happened?

Not a good weekend to look at our 401Ks or IRAs. The Stock Market went down about 10% in a week. Depending how it was invested so did our savings.

Company earnings have not dropped. Other country stock markets have not fallen much. The Economy is still doing well. Jobs and Wages are growing. What is causing the sudden change?

It is leverage, options and derivatives. These are higher risk borrowing and insurance without reserves. For instance if you knew absolutely a stock would go up 300% next week you would buy it now as an investor. If you don’t have enough money, you could borrow to buy more shares. That is leverage. The downside if share prices fell, you would still have to pay off what you borrowed and quickly. You sell whatever has value to cover your debts. You could lose 100%.

Most people don’t know they are buying derivatives. Most of us have been buying index Exchange Traded Funds (ETFs) or Exchange Traded Notes (ETNs). But now there are more leveraged ETFs & ETNs then there are stocks. Few non-professional investors understand what they own and the risks involved.

Warren Buffet has called derivatives “weapons of financial destruction.” Financial professionals have created “derivatives of derivatives” to further increase profits. However these are all powered by debt. At some point debt has to be paid.

A large number of investors have been improving profits by investing in low Volatility. Shorting VIX was the way this has been done. For the last few years it has been an ideal bet. Or was until a week ago. Some investors have lost 80% in a week. Some funds will liquidate and close.

Debt is the reason stocks fell so fast and may fall more. The average of corrections is 16%, but no correction is average. The correction may be done, or markets lose over 10% more into a recession (20% loss). Stock markets may start climbing again next week or next year. Anyone who tells you they know what will happen next is lying. Which is why am diversified and still investing for my retirement.

It’s Okay to be Wrong

Didn’t get the Memo? You are not alone. Most of us grew up trying to give the right answer in school. Was embarrassing to be wrong. Had to sit down when you couldn’t spell the word in the spelling bee. (Still be one of the first out today)

Did not have the right result in math? Teacher would figure out where you got off track, and help you. It is called Learning.

No one gets the words or notes right the first time they sing a song. Singers spend hours practicing and honing a song. Artists create drafts before they paint or sculpture. Writers edit more than they write.

What about investing. Most people may have an idea, but no one knows when. Remember the experts said if Donald Trump were to beat Hilary, the stock market would drop due to uncertainty? Results: Dow Jones is up $3,600 to over $22,000 (+19%) in half year. No one really knows. The pundits gave no chance to President Trump. Most pundits are still working.

Most mistakes are not life or death. If you are responsible for other people’s lives, you do have a higher standard for getting it right. Train to be successful.

Stop criticizing other people’s mistakes. Remember you own. We are human. So are you. It is okay to try and fail. No need to be embarrassed about it. Failure is a necessary step to success.

Remember weathered, sore muscled, traveled, opinionated, businessman-engineer and former C student. I Could Be Wrong. 

“At Harvard, the A students tend to become professors and the C students become wealthy donors." - Larry Summers

Beginning Investing

7 hard earned lessons to use

There are all sorts of people who want to give you investment advice, aka sell you something. Why? So they can earn a commission or profit from you investing with them.

Experienced in life and a former business owner/appraiser. Have nothing to sell you and not giving hot stock tips. Frankly happy to be a full time employee now, but would like to start a second business.

Do Not consider myself a great investor, definitely am Not a day trader and my predictions are average. Have learned from hard knocks.

These are good advice and rules I have learned over the years:

1) Spend Much Less than You Make

Wealthy people often lived for free or on 10% of earnings to save enough to start a business. They did this for years to get started. The wealthiest people I know often drive old cars and wear clothes too long. They only owe on their business assets, and their home may even be paid off.

2) Have a Rainy Day Fund

You don’t know when you or family will be ill, have a major repair to your home or car, be laid off, fired or the business shuts down. Have paid 6 months of bills from savings to get through. Have enough for 1 year’s worth of bills outside my retirement accounts.

3) Start Investing Small

Put money in the company 401K, especially if offered matching funds. I started at 8% on my current job and increased the percentage with every raise. If had more income would save more.

Second don’t buy one investment with all your money. Only invest some on each idea. Often start with a third and see if it is working.

4) Learn Value before You Buy

My best investment has been my house. Being a real estate professional identified good neighborhoods first, then found houses to look at. Originally wanted a 2 - 4 family house to live in, but prices were much higher than the cash flow justified.  Was cheaper to buy a single family house.

Bought at the bottom of the real estate market when few would consider buying, and bought a working short sale 10% under market value. Yes it took 6 months to close. But bought for 2/3 of original owner’s price.

My house is worth 60% more 4 years later.

5) Diversify Investments

Have good savings in cash at bank. Much more in 401K, and equity in my home. Have paid off 30% of the mortgage in 4 years. Goal is to pay off mortgage before retirement.

Am not adverse to holding cash. Especially when stocks, bonds and real estate seem over priced. Can be patient until a new opportunity shows up.

Cash is a safe refuge when the market is going down for an extended period. There will always be recessions in normal economies.

Am willing to sell and sit out the drop until the market starts rising again. Just don’t stay out forever. Look for the opportunity to get back in.

6) Do Not Pile in Late to a Trend

There have been good ideas I have missed. However did not compound the problem by buying at a high prices hoping some fool comes along to pay more. Would wait for a pullback and buy at a better price. Or would just wait for the next opportunity.

The secret to successful investing is buying at the right price. Not necessarily when everyone else thinks it is a good idea.

Beware the phases “This time it is different” (it is not) and “_____ always goes up” (no, they drop too). One investment made by my advisor is a non-dividend stock that is actually losing money. The commodity is way under trend and the company is doing a good job improving productivity. The market is too busy overpaying for dividend stocks to see the value. My advisor wants to be positioned for the future recovery and is looking for the opposite of the late trend.

7) Educate Yourself

Best investment is good books and classes. Pay to take classes out of my pocket to further my career and knowledge. Does not have to be for a degree either.

Find people or groups who invest in what you are interested in. You can learn a lot from like minded people.

These tips are not all you need to know. In fact am still learning, and hope you can teach me something too. However they will make the rough seas of investing smoother if you are humble enough to apply them.

How the Wealthiest Got Wealthy

The US Trust conducted a survey of 700 wealthy people of all ages. How do you think they got wealthy?

Inheritance? Only 1 out of 10 inherited their wealth. 3 out of 4 wealthy people came from middle class or poor families.

Own a Business? A common way, however a good number were executives. Over half of wealthy people earned their wealth in business. Earners often believe they work harder, were disciplined, and willing to sacrifice. They typically believe building a business builds wealth. Serial business builders were common.

The third way to wealth is Investing for more than 3 out of 10. Interesting most success came from smaller gains, consistent investing, and Buy & Hold produced the biggest gains. Half of investors invested in real estate, timber and farmland. Almost all wealthy people hold 10-25% in cash for opportunities.

Values the wealthy cite for their success?

1.     Hard Work

2.     Personal Ambition

3.     Family Values

What does this mean for you?

·      Does not matter how broke you start. Start.

·      More than one way to succeed. Pick based on your strengths and learn more.

·      Be patient, and keep your eyes open for opportunities.

Why should you build wealth? Because the wealthy Give Back to charities, invest in Economic Growth, and make an Impact in society. Good goals for anyone.

http://www.ustrust.com/ust/pages/insights-on-wealth-and-worth-2016.aspx

What Brexit Means?

Unexpected social change. Britain voted to Leave the European Union. The stock markets dropped and gold went up as investors react with fear to the surprise. I am among the many who never thought this vote would happen.

The British people will go through changes. But Brussels is shocked because they thought no one wanted to upset years without war. Doesn’t everyone want our leadership and rules? No one wants overreaching rules telling us how little we can do.

The leaders of the EU do not realize their advice and interference is holding economies back. Iceland and Ireland both ignored EU edicts to follow austerity rules and raise taxes. They reorganized and their economies have recovered fairly quickly. How well are Greece and Spain doing? France’s economy is struggling, and Italy & Portugal economies are a real mess following EU advice. Germany cannot pay for all EU’s issues.

What may happen next? Britain is going to have tough negotiations. The EU leadership will want to prevent other countries from leaving. Some members may want to be more reasonable because their countries may want to leave. Netherlands is likely to have a referendum next.

Most countries will find a way to trade with Britain. Why would you not want to trade with the 5^th largest economy? Already heard proposals Britain be invited to join NAFTA.

Will there be a recession? Of course, recessions are a normal part of the economic cycle. Will it be as bad as 2008 crisis? No.

Change is a constant in life. Accept it, adjust to change, and keep enjoying life. Children still grow up and we grow a little wiser. Keep your faith. Life goes on.

Savings and Emergency Funds

Your future is hard to imagine. Mine did not unfold the way I thought. Imagined growing up in my hometown and working for one company during my career. After college my hometown was in a local recession and few jobs to be had. Wound up working my first job 300 miles away.  Currently working across the country in my 7^th state.

Man plans, God laughs.

You do not know how well your industry or your company will do over the next 50 years. Layoffs, horrible bosses, and business closings are real possibilities.

No one can predict their health, accidents, children, nor which natural disasters you will face. So what can you do?

Save

Saving is a cornerstone of wealth. If you don’t have money to invest, you can’t earn more except by working more hours or jobs.

Savings give you options if something happens. You can choose investments, education, nicer vacations, good homes, and better schools for your children. If conditions are going down or crime is rising where you live, you can choose to move to a safer place. You can donate to charities doing good work. Savings are a form of freedom.

Started my current job after being out of work for most of one and a half years. My savings were not very much after being self-employed for six years. Had about $15,000 in savings, an old $3,000 car and no debt.

Five years later have $60,000 in the bank, $85,000 grand in my 401k, and own a house with $100,000 in equity. How did we do it? We did not win the lottery.

Pay Yourself First

Save at least the matching 401k funds your company offers from the start. Do not give up free money and with the tax deduction this will only take a small amount from your take home pay. To get to the maximum am now putting in the 401k I increased my contribution with every raise. You don’t miss the extra money if you don’t see.

Set up a separate credit union savings account for my emergency fund. That $3,000 car could break any time and will not run forever. Put more than a car payment every paycheck in this fund to create an emergency fund. The good news is have over one year's expenses and will pay cash for my next car.

Live Within Your Means

Know how much my monthly expenses are and pay them. Pay my credit card bill in full every month.

The rent was not late nor is the mortgage. Actually refinanced a 30-year mortgage to a 15-year mortgage at a lower rate and pay extra principle every month.

We keep monthly expenses low, don’t eat out every weekend and pick affordable restaurants we like. Don’t have all the movie channels, nor the fastest Internet. (Okay added the sports channels because can afford them)

We plan our big purchases and don’t impulse spend. My wife is a tremendous negotiator and will walk away if the price is not right. My last cell phone physically wore out being 7-8 years old. The smart phone has the lowest monthly payments and was paid for by overtime.

Choose Where You Spend

Got prequalified for a mortgage and was surprised how much could borrow. Did I look for a house in that range? No, my wife and I do not need a big house for two. Looked at neighborhoods that fit my commuting, good schools and safe/low crime rates. Aimed for the median price range 40% below what could borrow. (No one says you have to be in debt your whole life) Looked at almost 100 houses before buying a short sale, waiting 6 months to close. Have the smallest house in a very nice neighborhood, cleaned up the dirtiest house and painted. Now just paying off the mortgage.

Yes still driving the $3,000 car. My wife has a good car and mine goes to work to sit outside all day. How nice of a car do I need for 8 miles? It is mechanically sound, maintained and the interior is falling apart. Including repairs have spent ~$1,200 per year.

Realism

Have a good paying career, but am in a boom and bust industry. Median price houses sell faster than the expensive houses. Not having debt lets me go where the work is.

My investments are diversified, low cost and fairly conservative. When someone promises high returns they are likely taking high risks or lying. (See Bernie Madoff)

Have good health, auto, homeowners, and long term care insurance. In addition funding a small annuity to afford retirement with Social Security. Will not have to touch the savings for many years.

Summary

Being responsible you may not be the wild friend with the fancy home, latest gadgets and crazy expenses. You will not be the homeless person either by learning how to save and invest. Being able to help others is a blessing you won’t forget either. Life is good.

Business Owners Need Fans

The average business owner is not flush with cash. If they still have their best customers, the orders are smaller, and he has to offer lower prices. Half their small customers have gone out of business and the business owner had to at their debt. The average business is hurting for income and profits.

If the owner has any cash, he is waiting for the next crazy idea to come from DC. Taxes will go up next year 4%. Cap and Trade (Tax) will export more manufacturing jobs overseas. Who knows how much health care will cost in a few years.

Look at states that have better economies. Texas, Oklahoma and North Dakota have lower unemployment and generated two thirds of all new jobs created over the last three years. Why? Business friendly regulations, stable taxes, governments within budget, limits on litigation awards, and respect for taxpayers.

Canada is doing well in this global recession. Why? Business friendly regulations, lower taxes, limited government spending, limits on litigation, and lots of legal immigrants. Same thing that built the USA. Canada also avoided the real estate bubble by not allowing very low down payments nor subprime lending. Smart regulations unlike Fannie and Freddie offerings.

If DC wants to improve the economy, the government has to be fans of business owners. Not vilify them. What business needs is stability. Cut government spending and borrowing, don’t add more regulations, and limit tax increases. Then businesses will start investing, expanding and hiring. Until then we are starting down the path of the Japanese lost decades.