Category Archives: investing

Pension? What Pension?

I read something interesting yesterday in the Wall Street Journal.  Turns out that states are facing a $1 trillion gap between the money they have promised pensioners and the money they have set aside to pay them.  That does not count the massive investment losses they faced in the second half of 2008, from which they have not recovered.

Did I say “interesting?”  Let’s try “criminal.”  I, for one, have not believed states would be able to pay pensions for some time now.  Some third-grade math was all it took.  The zeros were a little hard to manage until I saw this neat little analogy on the national debt clock web site.  If you were to spend a dollar a second, it would take 12 days to spend a million dollars.  Now, how much time would it take to spend a trillion?  (I’ll wait for you while you calculate this.)

Back?  OK.  The first thing you found out was that your calculator does not work with that many digits.  If you are math-compulsive, you got out a piece of paper and started to work.  If not, you waited for my answer: 32,000.

YEARS!

In other words, don’t wait for that gap to be filled.  Ain’t gonna happen.  Here’s why.  If states start to go bankrupt, something that was unthinkable until now, the money obviously will not be there.  But the Feds!  They can save us!  After all, they can always honor their obligations–by printing more money.  There, my friends, is the real problem and a good reason to be worried about your retirement even if you are not a public employee.

Historically, printing more money has been the favored solution of governments when things go bad.  They say they won’t do that, but in the end they always do.  From Ancient Athens to Zimbabwe in 2008, the result is always the same–a swift and ugly currency crash wherein money becomes worthless overnight.  Zimbabwe’s inflation rate reached 98%…PER DAY.  That means it took slightly over 24 hours for prices to double.

There is only one solution at the national level, and that is for politicians to face up to the fact that they have promised way more than they can deliver and cut expenditures.  Whew, that was a good one.  I crack myself up every time I say it.

There are some things we can do, however.  It is sometimes said that the best attitude when going into battle is to pretend that you are already dead.  Do what I do and pretend that your retirement is already dead.  Figure out how to retire without it.  One person I heard of recently bought two haircut franchises even though she is years away from retirement.  Why?  Because people will probably buy haircuts even when they can’t afford luxuries.  And inflation?  Well, if we experience true hyperinflation, all bets are off, but she still stands a better chance than most because her prices will rise accordingly.  If none of this comes to pass, so much the better.  She will have her company retirement and her franchise income.

Learn to make money in a side business or invest in things that stand at least some chance of surviving the coming earthquake.  If you think the politicians will save you, I have a business deal I’d like to discuss with you…

_________

Terry is constantly amazed at how little people learn from history.  He is also amazed at what he saw in New Orleans in 1976, but that’s another story.

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Diversify Your Knowledge, Not Just Your Stocks

Unemployment is its highest in 25 years.  Some say the picture is much worse and is being masked by changes in the way unemployment is measured.  No matter where each of us is on the political spectrum, or whom we blame, we have to agree that times are tough and getting tougher.

Financial advisors almost universally recommend a “diversified” portfolio of paper investments: stocks, bonds, and mutual funds.  Before I go on, let me remind the reader that I am neither a certified financial advisor nor do I play one on TV.  I encourage people to learn more so they can make up their own minds.  This traditional advice may have had some merits at one time.  A few people probably made it just fine with such a plan.  Times are different now, and there are a number of reason to expand your thinking.

First, paper assets such as stocks can bonk.  “Bonk” is a technical term for what happened last fall.  Stocks fell as much as 40%  People who thought they were diversified got clobbered as their entire portfolios dwindled to a fraction of their former worth.

Second, the “value” of the stock market and other similar investments is partly an illusion.  When we put our money into such instruments, we are usually planning to use the money later.  If that money only buys a fraction of what it did before, the fact that the market is “up” is true, but useless.

Third, and this may be the clinker, the market depends on levels of buying and selling.  Since people who are retiring usually get their spending money out of the market by selling their stocks, the value of those stocks can be depressed when the number of sellers increases.  We are about to face a massive amount of selling for that very reason.  Baby Boomers will soon be retiring in droves.

This leaves us with a problem.  How can each of us build a more stable kind of wealth–the kind that at least buffers the vagaries of the stock market?

Knowledge.

library

Learn all you can now about building supplementary income.  You will find that true diversification involves non-paper assets like real estate and precious metals.  You will learn why having a side business can help you build real, lasting value.  And, you will see that with some discipline and desire, you can survive the coming storm.

— Terry writes this blog because he loves you.  Well, maybe “love” is too strong a word, but he’s pretty sure he likes you.  At least he likes you well enough to encourage you to learn more about your finances.  Terry has not been on Oprah yet, but if he were, he would tell you to visit entrescape.com to learn out how to start your own business.

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Why Your Goals Don’t Work

Yesterday, I assigned my students a voluntary overnight project. We had discussed goal setting in class and I wanted to impress upon them the importance of writing down and prioritizing their goals. As I generally find in my classes, only a small number did the whole exercise.

I already know why many of my students failed to follow through on this well-established method for getting what we want out of life. It is the same reason many of us fail to follow through. We say we want to achieve great things, but in the end, we would really rather stay in our comfortable cocoon of low-level misery.

We know from well over a thousand studies that goals work–that is, they lead to high performance. If you want to lose weight, make more money, or achieve anything else quantifiable, goals are the way to do it. Yet we all know how easy it is to get distracted while working on a goal. Why is that?

In my view, there are two major reasons we find it difficult to achieve things. The first stems from what I call a “mind-split.” On the one hand we want to accomplish what we set out to do. On the other, we are afraid that we just might succeed. If we succeed, we show ourselves and the world that we really are capable. It renders null and void all the excuses we used before, and by implication, the excuses we may want to use in the future.

The second hindrance to goal achievement is having the wrong goals. High performance does not necessarily lead to happiness and personal fulfillment. I see this in “achievement junkies,” people who crave the next chunk of conspicuous wealth or yet another trophy in a sport they have grown to despise.

Learning the mechanics of goal setting takes twenty minutes. Learning to set the right goals may take twenty years. As you set out on the great journey that is entrepreneurship, remember that getting what you really want is scary and that getting what you think you want may make you miserable.

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Is This Socialism?

In order to understand the premises of socialism, we need to understand two words: “from” and “to.” Specifically, socialists believe that justice is served when societies observe the following rule: From each according to his abilities; to each according to his needs.

On the face of it, this sounds just. Who would quarrel with the idea that people should get what they need? It is the “from” part that get us into trouble. If life were a matter of us all standing around a pre-existing barrel of goods–food, clothing, shelter, and other necessities–and taking what we needed, one might justify this distribution rule.

Of course, we all know that is not how the things we human beings need come to exist. Except for air, basic necessities have to be created by someone. Socialism presumes it is right to take from the creators and give to others. Is that what our economic system has become?

You bet it has, but not in the way you may think.

The complexity of our economic system has allowed us to take from people who don’t exist yet. How can that be? It is called debt. Debt is en extremely useful tool. If someone lends you money to buy something you could not purchase with cash, say a house, many people benefit. You benefit because you are able to use something valuable before you pay for it completely. The seller benefits because he/she can sell to someone who otherwise could not purchase. The lender also makes money.

If we had no system for borrowing and lending money, it would be nearly impossible to own anything like a house or car. Here is the problem. Not only can regular people and private businesses borrow money, so can the government. The difference is that the government borrows from future generations.

One way the government does this is to borrow money literally. It essentially issues IOUs to its citizens. The government can also print money. In the first case, debt can build until the present generation cannot pay it all off. In the second, government spends money it has “printed” and hopes no one notices that the resulting inflation has robbed citizens of buying power.

Either way, the system makes chumps of us. If we live frugally, save our money, and teach our children to do the same, we wind up feeding the government’s insatiable appetite for spending at our own expense. At some point, the system has to break down. Either our children and grandchildren will have to pay absurd tax rates or the value of our currency will diminish to zero. Maybe both.

And this brings us back to socialism. If the government tried in the present to take the amount of money it needs to sustain its orgy of spending, citizens would revolt. If they hide their theft by passing it on to its future citizens, we who are right here right now may grumble, but we won’t revolt.

Is this how we want to live? If so, let’s be honest about it. Socialism advocates taking from the “able” and giving to the “needy.” If you believe that, are you willing to look future generations in the eye and tell them that we gave and gave and gave and that by the way, they owe the bill?

I didn’t think so.

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Uncovering Your Hidden Value

All business operates on a simple premise. One person creates value for another. Outside of gift-giving and other types of benevolence, the creator gets paid. He or she receives value, often in the form of money, and both partners to the trade are better off than they were before.

Many forms of value are obvious. Clothing, shelter, food, and the people who create them are valuable because we need those basic things to survive. Music, paintings, sports and other non-essentials improve our lives even though we could live without them. But they too are commonplace and obvious.

Many people who start businesses are stuck in the obvious. They try to provide more of what others are already providing quite well: dry cleaners, groceries, web design, etc. There is nothing wrong with opening this kind of business. If you can do it better, faster, or cheaper than your competitors, you may do well. But why butt heads with the rest of the market?

Each of us has value to others that may have gone unrecognized. We may know how to do something unique or make something unusual that is valuable to 0thers. But how does one discover these hidden veins of value? Start by brainstorming fifty ideas for businesses. Don’t criticize or question any idea, just write down fifty. Even if some turn out to be “obvious” keep writing. Chances are, you will find something valuable that only you can provide.

The next step is refining your idea into a business model. A business model takes your initial idea and builds around it a “delivery system” that allows you to get paid for what you do well. More on business models next post.

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