- “Value is destroyed, not created, by any business that loses money over its lifetime ” ~ Warren Buffet
- So was the money lost? No. It's just in someone else's pockets.
- “The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them” ~ Warren Buffet.
- “After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball, said Buffet, “they know that overstaying the festivities… will eventually bring on pumpkins and mice.”
Invest For Retirement – How Fragile Is Your Nest Egg?
2008 wasn't so long ago, and that year's devastating effects it had on people's retirement portfolios are mostly ever lasting. Some have fared better than others, while many are still reeling and recovering from financial disaster.
During this time, many lost their good paying jobs, were forced to face the reality of lower pay for the same work and heavier competition for that work. However, the economy is coming back and people are starting to find a bit of extra cash in their pockets.
The scenario in the above video, a retired couple had their retirement assets cut in half from the meltdown of 2008. In comparison, these folks did better than many. Which means their investment portfolio was at least partially insulated from economic turmoil. We've heard many of the horror stories, but what this got me thinking about was how very fragile the best retirement plans can be. Maybe they call it “Nest Egg” for a reason.
When economic disasters of this magnitude occur, it normally changes the psychological behavior of the consumer or investor as it were. Survivors are less apt to take risk. And it takes a generation or so for this mentality to change. Suze Orman suggest to this couple, basically dividends. Either through single stocks, or ETFs (exchange traded funds). We'll get to this more later.
How do you recover from economic disaster? How do you survive it? There are a handful of people, barring the 1%, that actually timed the markets right. They were sitting on cash when the markets imploded, and took advantage of low priced opportunities. Especially in real estate. Here's the thing, most economic sectors are cyclical. Meaning there are ups and downs. New blood, old blood. Weak hands and strong hands. When the markets go down, or tank, its just a form of consolidation. Not to put a simple label on what happened to many people's investment portfolios, but being able to categorize and identify investment events make it easier to prepare for them.
What happens during a major consolidation, normally, is everything goes down. Bad companies go out of business, and good ones that don't have the proper capital infusion get bought up by the bigger guys. The strong survive and rise back to the top, and control even more of the market share.
“Value is destroyed, not created, by any business that loses money over its lifetime ” ~ Warren Buffet
So was the money lost? No. It's just in someone else's pockets.
So how does economic collapse happen? I'm not physicist, but I believe the same laws of physics apply to both large and small objects. Even micro-events are caused by the same things that cause major events. In the case of the economy, to put it in a nutshell, we over extended on credit and over invested in volatile sectors creating a bubble. Greed or fear of loss is the dominant mentality. We have witnessed it before during events leading up to the DotBomb era.
Here is what Warren Buffet said after dot.com implosion “I told you so.” And he did tell us so, several times previous to the catastrophic event.
Buffet called what was happening during that time “over exuberance” and it's the same things that happened leading up to the 2008 crash. Only it was stemmed by the real estate bubble.
Looking back, when my waiter hands me his card and says “I'm also a real estate developer” and my hair stylist (barber?) is giving me stock tips. I'm thinking its time to take a step back and look at what's going on.
“The fact is that a bubble market has allowed the creation of bubble companies, entities designed more with an eye to making money off investors rather than for them” ~ Warren Buffet.
There were many warning signs previous to the 2008 collapse. For example, a friend who owned a mortgage company, primarily focused on “B Paper” people, told me he was making money hand over fist. I was intrigued. So I learned more. “B Paper” people, are what is called subprime loan candidates.
- In finance, subprime lending means making loans to people who may have difficulty maintaining the repayment schedule, sometimes reflecting setbacks such as unemployment, divorce, medical emergencies, etc. …
He was getting people loans, who basically, shouldn't have a loan in the first place. The types of loans that were being offered made it even worse. Some programs were interest only for a set period of time and variable. Normally meant for savvy real estate investors. But these people were buying primary residences well above their budgets. Maybe they were thinking they would flip the property at some point before the terms of the loan kicked in. But what did he care, or others like him for that matter? They were making great money doing this. To top it off, companies leant people money based on something called “No Doc” loans. Meaning they basically didn't have to prove how much of a loan they could really afford.
To make matters worse, these subprime loans were packaged up and securitized. Meaning they were put into investment vehicles and placed on the market for people to invest in. So the original underwriters really had no risk. They were passing the risk of too investors in the stock market. Think about that for a moment.
So now we have people being lended money who can't service the debt. We have unserviceable debt being securitized for investment in the stock market. Then we have investment funds, retirement funds, pensions plans and fund managers pouring money into these “unserviceable” investments. Does this look like a good recipe for disaster?
I remember thinking at the time “maybe I should look into investing in foreclosures”. Surely, there would be a glut of foreclosures hitting the market in short order. However, I never imagined the far reaching global economic devastation this would cause.
We won't travel to too far down painful memory lane, the point is the signs were there on both occasions and the rational investor saw it. Many millionaires were made from these events.
“After a heady experience of that kind, normally sensible people drift into behavior akin to that of Cinderella at the ball, said Buffet, “they know that overstaying the festivities… will eventually bring on pumpkins and mice.”
And pumpkins and mice we got, both time, an infestation of them that are still here today. But the “sensible” investor left the investment ball before midnight along with their wallets intact. Don't worry, I too am guilty of overstaying my welcome at the investor ball leading to thousands in losses.
Let's go back to that cyclical part we mentioned above.
Above is a chart of the Dow from 1998 to present day. Notice the sharp dips and down trends in the chart. Each disastrous event, for the most part, led to new highs for the Dow. We are at all time highs now, even after recovering from one of the biggest financial melt downs in history. The point is, the markets will recover. They are cyclical. Just as, in time, the value of your home will go back up. The money is still there, its just in someone else's pocket. The trick is to keep it in your pocket.
Easier said than done right? Maybe, maybe not. Sure we can point to Wall Street greed, but ultimately it is you who actually control where you put your money. We “trusted” the “experts” to do the right thing, right? Fool me once, shame on you. Fool me twice… well I don't have any more money to be fooled out of. But how much time do you really spend learning about where your money is actually being invested?
If you have a managed portfolio, how often do you communicate with your investment advisor? Do you make him earn his money?
Do even know where your 401k or managed retirement portfolio is investing your money?
Do you know what percentage of your money is considered aggressive or higher risk or high growth?
Many people don't take the time to learn more about their retirement plans. If you spent just a short portion of your day reading or learning about the places your money is being placed, you might have more to say about it. Remember, its your money, and ultimately, at then of day it is you who suffer the loss or reap the benefits.
In the video at the top of the article, Suze Orman recommends dividend paying stocks or ETFs. Check out this article from Forbes on ETFs, Index Funds, and Mutual Funds http://www.forbes.com/sites/mitchelltuchman/2013/06/28/what-is-an-etf-three-simple-answers/.
You can track or identify many funds with the Yahoo fund screener here http://screener.finance.yahoo.com/funds.html.
Using the guidelines in from this article http://www.pennymotion.com/investment-articles/little-known-loophole-could-triple-investing-income/ about Energy MLPs, you can apply your own criteria to identify potential funds to learn more about and discuss with your financial advisor.
There is no doubt about it, receiving dividends can lend a huge boost to your investment portfolio, and for the most part, you can find many mutual funds that invest in these companies. But if you are looking for a single stock that pays dividends, its probably best to make sure the company has a record of paying out dividends regularly. This is normally going to be a bellwether company, like Microsoft or GE or similar.
Dividends Online, is an inexpensive premium service that can put you on a great path to dividend investing. Check them out here at Top Dividend Stocks.
You can also take a look at Bond Investing: http://money.cnn.com/magazines/moneymag/money101/lesson7/ from CNN Money and http://www.pimco.com/EN/Education/Pages/Everythingyouneedtoknowaboutbonds.aspx from Pimco.
Here is a more negative take on bond investing from WSJ http://online.wsj.com/news/articles/SB10001424052702304572204579501691093450268
Just keep in mind, one investment scenario, most likely, will not fit another person's needs. Each plan should be geared toward your own personal investment goals. A good combination of some or all of these could be used for diversification and hedging.
So what was the point of this article? Basically, to be more aware of what is happening with your money, and hopefully be able to identify pitfalls and understanding your risk. They say luck is where preparation meets opportunity, in this case, preparation is the level of your knowledge. The more you know, the easier it will be to identify these scenarios. Just dedicate some time each day or each week to identifying trusted sources of information, and learning from them. I no time you will become the master of your money. And ultimately the master of your retirement destination.
And with that I leave you with some good ol' Ludwig van – a portion of Beethoven's Symphony No 9: