investment planning Archives

The Stock Market Deception

submitted by jwithrow.

The stock market is comprised of numerous exchanges through which buyers and sellers can trade securities. The New York Stock Exchange is the world’s largest stock exchange followed by the NASDAQ. The Tokyo Stock Exchange and the London Stock Exchange are third and fourth in terms of market capitalization.

As we mentioned, the exchanges enable buyers and sellers to trade securities with one another.

We repeat this statement to emphasize the next one:

The exchanges are not where businesses raise capital unless an initial public offering (IPO) is taking place.

We think it is important to recognize this fact.

The vast majority of trades on a stock exchange are simply speculative – there is very little productive activity taking place. Even IPOs are usually not terribly productive as the intent is often not to raise capital for business operation but rather to enrich the owners and private investors.

So if most trades are just speculation then why do we view the stock market as a gauge of economic health? Why do we assume that the underlying economy is good when stock prices go up?

We do not assume that the economy is good when corn or oil prices go up. But corn and oil contracts are also traded on futures exchanges and there are speculators who profit when their price rises.

Conversely, why do we assume that the underlying economy is bad when stock prices go down?

Nothing real is destroyed when stock prices fall. Buildings don’t collapse. Equipment doesn’t break. Goods don’t go up in smoke. Engineers don’t lose their knowledge.

Maybe there was a time when stock prices somewhat reflected the financial health of individual companies, but those days are long gone. With mark to unicorn accounting, leveraged stock buy-backs, and all other manner of financial wizardry, CEO’s can and do manipulate stock prices regularly.

Additionally, the Federal Reserve has spent the past three decades ensuring that liquidity flows directly into the stock market so that equity prices continuously rise in unison over time.

The point is that there is a huge disconnect between the stock market and the productive sector that mainstream finance pays no attention to. In fact, mainstream finance has convinced most people that speculating in the stock market is the _only_ way to invest for retirement.

There may be a place for stocks within your asset allocation model, but it is important to recognize the stock market deception for what it is and understand the game you are playing if you do delve into the market. I would highly recommend enlisting the services of independent financial analysts if you do allocate some of your capital to the financial markets.

As we have touched on in a number of other essays here at Zenconomics, financial planning should be comprehensive and diversified according to your own unique circumstances. Simply amassing paper equities denominated in fiat currency is a very fragile plan.

As Nelson Nash says: “If you know what’s going on, you’ll know what to do.”

Be wary of the stock market deception and plan accordingly.

**Want more information on how to build a sustainable financial plan? Are you ready to turbo-charge your retirement portfolio? Do you yearn to exit the rat-race? Is financial freedom calling to your spirit?

Do not take a backseat when it comes to your own finances. Learn everything you need to know to master your finances in 30 days by enrolling in Finance for Freedom today!

Investing in Gold and Silver Bullion

submitted by jwithrow.

Investing in gold and silver bullion is, believe it or not, much easier than investing in stocks, mutual funds, exchange-traded funds, or bonds.

If the concept of investing in gold and silver seems strange to you, it is only because the financial media has marginalized the precious metals in order to sell more paper equities and the mainstream media has associated the precious metals with paranoid dooms-dayers. And apparently you haven’t been reading our little blog here.

You see, gold is money. It has been for all of recorded history.

You can’t pay your taxes with gold because your government knows that no one would want government currency if you could. And then your government would be in big trouble.

We talk about the ‘why’ in more detail here and here so now let’s look at the ‘how’.

Gold and silver bullion is available in the form of coins and bars of varying weights and measures and purchases can be made either in person at a reputable coin dealer or online through an internet dealer.

The advantage of buying from a local coin dealer is that you can pay in cash anonymously and you can potentially develop a working relationship with the dealer. The downside is that you will have to pay your state sales tax on all bullion purchases made at a local dealer.

The advantage of buying online is that you don’t have to leave your home and you can avoid the state sales tax (for the time being, anyway). The downside is that you cannot purchase anonymously and there is a delay between purchase and delivery.

Gold and silver bullion can also be sold back to the same dealers – be sure to research their individual policy.

The IRS currently classifies precious metal bullion as a collectible and thus taxes the gain on sale at the collectible rate which is 28%. Keep this in mind if you choose to invest in gold and silver bullion, especially if you sacrifice anonymity and purchase online. Also, be sure to stay updated on the current tax laws regarding gold and silver bullion as they could change at any given time.

There are many strategies when it comes to investing in gold and silver but a general rule of thumb is to stay away from unique collectibles (numismatics) unless you are very knowledgeable in the field. The reason being is that numismatics carry a much higher premium than standard bullion from well-known mints but there is a much smaller market for these rare coins and thus they are much less liquid.

Our favorite strategy is to dollar-cost-average into both gold and silver periodically at the ratio of one American Gold Eagle to twenty American Silver Eagles.

MyRA-QE Taper Connection

submitted by jwithrow.

We have a question for you:

Is it a coincidence that the government has introduced the “myRA” plans just as the Federal Reserve has begun to taper its quantitative easing programs?

Let’s think this thing through for a minute.

We know:

China is now a net-seller of U.S. Treasuries so the Federal Reserve has had to step in and purchase U.S. Treasury Bonds in increasing quantities to support government spending.
The average American saves for retirement in a qualified retirement plan focusing primarily on mutual funds, exchange traded funds, and stocks with bonds comprising a small portion of the allocation.
The proposed myRA plans are designed to focus on U.S. Treasury Bonds.
The Federal Reserve’s quantitative easing programs have pumped massive amounts of liquidity into the system which has resulted in a broad increase of stock prices across the board.
Tapering QE will withdraw liquidity from the system which will almost certainly result in a broad decrease of stock prices across the board and quite possibly a severe stock market crash.
A falling stock market would likely cause many Americans to seek investment options that they deem “safer”.
The government is already hard-selling their myRA plans stating that there is “no risk to lose what you put in”.

Hmm.

Maybe our benevolent bureaucrats really do think that myRA plans will help the common man.

But we hold dearly to a personal mantra:

Maximize Capital,
Minimize Crap,
Never Trust the Government.

With that mantra echoing in our mind, we can’t help but be a little suspicious – something funny seems to be afoot.

What do you think?

Qualified Retirement Plans

submitted by jwithrow.

Qualified retirement plans have their roots in the Employee Retirement Income Security Act (ERISA) that was enacted in 1972.

The most common qualified retirement plans are the 401(k) and the IRA (individual retirement account). These plans allow individuals to contribute funds to their account on a pre-tax basis to be invested predominantly in stocks, bonds, mutual funds, and exchange traded funds. Taxes on investment gains are allowed to be deferred until distributions from the account are taken. Individuals may begin to take distributions without an early withdrawal penalty once they reach age 59.5. Any distributions prior to age 59.5 will be subject to a 10% early distribution penalty. Individuals are required to take a minimum distribution annually once they reach age 70.5. Distributions will be taxed at the individual’s ‘ordinary’ tax rate.

Mainstream financial thinking suggests that qualified retirement plans are the absolute best way to save for retirement because these plans enable you to invest funds on a pre-tax basis during your peak earning years and the investment gains can grow tax-deferred until retirement when your income is lower.

This way of thinking makes a number of assumptions.

The first assumption is that the investments held within the qualified retirement plan will consistently grow in value and they will not experience any significant losses to principal at any time which would serve to stunt the plan’s growth.

The second assumption is that the individual is not capable of effectively using capital during his/her peak earning years to develop diversified income streams that would provide significant income during retirement years. Maybe this would better be stated as the assumption that there is actually a “peak earning period” in an individual’s life.

The third assumption is that the rules governing qualified retirement plans will never change. Mainstream personal finance assumes that the early-distribution penalty will always be 10% and the qualified distribution age will always be 59.5. Mainstream personal finance assumes that ‘ordinary’ tax rates will always be what they are currently. (We say that there is nothing ordinary about the income tax at all!)

What’s overlooked here is the fact that qualified retirement plans are a government-created solution to government-created problems: Onerous taxation and a constantly devalued dollar that make it very difficult for the average American to save for retirement.

Pay very close attention to the language that must be used to discuss qualified retirement plans. In talking about these plans one must use words like allow, may, require, and penalty. In other words, these plans consist of permissions and requirements. People are given permission by the government to contribute funds on a pre-tax basis. And they are given permission to defer taxes on their investments. But they are required to leave all funds in the account until they reach a certain age or they will be penalized.

Any time permission is required to do something it follows that the permission could also be withdrawn at some point in the future. Otherwise one would not need permission to do whatever it is.

If you recognize that qualified retirement plans are a government-created solution to a government-created problem then a very important question must be asked: What happens if the government decides that there are bigger problems than Americans saving too little?

For example, what if government’s biggest problem became the need to finance out of control spending?

Cyprus and Poland have provided two possible answers to that question and the trend suggests that the rules governing qualified retirement plans could very suddenly become less favorable for the individuals using them at some unknown point in the future. The “myRA” proposal seems to be the first step in this direction.

So we can’t help but be skeptical of qualified retirement accounts. It just doesn’t add up. IRS approved tax shelters as a government solution to taxation and inflation? It seems to us that cutting spending, cutting taxes, cutting inflation, and returning to sound money would be a much better solution.

So we will continue to stay away from qualified retirement plans in favor of the IBC strategy for maximizing capital. This strategy, if implemented correctly, does not expose our principal to loss, it offers us access to our capital at any time for any reason, and it offers favorable tax treatment as well. All without requiring us to adhere to silly IRS rules about what we can and cannot do with our money depending on how old we are.

It just makes more sense.

The Case for Gold and Silver Bullion

submitted by jwithrow.

While gold and silver prices have declined in 2013, the fundamental case for owning gold and silver bullion is still growing.

The mainstream media has been quick to pronounce the death of the precious metals as an asset class with their evidence being the recent price depreciation of both gold and silver. Theirs is a very short term and self-serving view; the long term fundamentals have not changed.

The Federal Reserve did taper its money printing, but guess what? The creature from Jekyll Island is still creating $75 billion new dollars every single month to purchase U.S. Treasury bonds and mortgage backed securities. Meanwhile, Congress has quietly done away with the sequester spending ‘cuts’ and will continue to spend gargantuan amounts of money in 2014 – money they do not have.

What’s so humorous about this is the fact that the sequester did not cut any real spending in the first place – it simply curtailed proposed future spending increases. We suppose the thought of curtailed spending increases kept the Congress critters up too late at night.

And it’s not just the U.S.

Japan has promised to continue to keep their central bank money printer on turbo gear. Estimates suggest that the U.S. and Japan together will create nearly $2 trillion over the next 12 month period. Meanwhile, the Eurozone experiment is still on the verge of blowing up and not one single G-20 country operates with a balanced budget.

Simply put, the economies of the developed world have run up massive amounts of debt that cannot possibly be paid back in full. The massive debt has been serviced primarily by central bank funny money up to this point, but we are quite sure that the funny money policies cannot possibly last forever. And the longer the printing presses continue to run, the less valuable our paper currencies will be.

That’s why we adamantly believe that gold and silver bullion will be a vital part of a diversified portfolio in the coming years as the economic endgame of central bank funny money policy plays out.

Now, we don’t think it would be prudent to hold 100% of one’s assets in gold and silver. We look at the precious metals more as insurance against destructive monetary policies. Oh, and we should probably clarify that we mean physical gold and silver bullion in your possession, not an ETF.

So if you expect the value of your paper currency to increase then you may not be interested in holding gold or silver bullion. But if you expect the value of your paper currency to decrease then purchasing gold and silver bullion may be very wise. Given the long term fundamentals, we would suggest that the value of our paper currency is ultimately only going to go in one direction.

And that direction is back to paper currency’s inherent value…

The Lesson From Monopoly

submitted by jwithrow.

Chances are you have played the once popular board game Monopoly. In the event that you have never played the game then I would highly recommend it to you as there is a valuable lesson to be learned. And it is a classic!

The object of the game is to buy up as much real estate as possible so you can earn rental income when another player ‘lands’ on your real estate. Once you have acquired the real estate then you can invest in houses and hotels to increase your rental income.

Common thinking suggests that the game is called Monopoly because players attempt to achieve a real estate monopoly.

I do not think this is accurate, however. I would suggest that the title is derived from the fact that the ‘bank’ holds a monopoly on the money supply.

The object of the game is not to hoard the Monopoly money but rather to convert the money into productive assets. These productive assets then generate additional money in the form of rental income which can be used to subsequently purchase more productive assets when the opportunity arises.

Interestingly, the money generated from productive assets can also be used to pay taxes when the player is unfortunate enough to ‘land’ on those spots.

Players of the game understand that the Monopoly money holds no inherent value. The Monopoly money is only the accepted means of exchange with which productive assets can be purchased.

This is the lesson that we would be wise to learn and apply.

The Monopoly money is not terribly different from our fiat currency today. Our currency holds no inherent value and the central bank (Federal Reserve) holds a monopoly on the money supply. In fact, the Monopoly money may actually be better in context than our dollar because the Monopoly money maintains its value over the course of the game whereas our dollar is constantly losing value due to inflation.

So in this regard, the key to our own personal financial success is not terribly different from the object of Monopoly. The path to true wealth in life is the same as it is in the game – use the monopoly money to purchase income-generating assets. Obviously this is more complex in real life as there are a myriad of assets of varying quality to choose from and the process of acquiring these assets is much more complicated than ‘landing’ on their spot. But the concept remains the same.

Mainstream personal finance does a poor job of emphasizing this. Personal finance gurus almost exclusively suggest that we invest all of our surplus money in stocks and bonds employing a “buy, hold, and pray” strategy. This may be due to the fact that financial advisors make their living by selling the securities they tout. And while there may be a place in our investment portfolio for paper securities, they certainly do not take the place of real productive assets and one would be wise to understand the nature of the markets and the business cycle before jumping in.

Keep this concept well in mind as you build and execute your own personal financial plan. The goal is not to end up with the most money at the end of the day; it is to use money to acquire productive assets that will then provide income streams. It is essential to also employ an asset allocation model so that you are diversified across several different asset classes.

Always remember that money is just an illusion. Its only purpose is to serve as a medium of exchange and a temporary store of value. It is wise to keep a healthy amount of cash on hand at all times for both opportunities and emergencies, but any cash above your allocation would best serve you in other asset classes.

**Want more information on how to implement the lesson from Monopoly and build a sustainable asset allocation model? Are you ready to turbo-charge your retirement portfolio? Do you yearn to exit the rat-race? Is financial freedom calling to your spirit?

Do not take a backseat when it comes to your own finances. Learn everything you need to know to master your finances in 30 days by enrolling in Finance for Freedom today!