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My Housekeeper Has a Nicer Car Than Me

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My housekeeper has a nicer car than me.

Now, granted, 75% of America probably has a nicer car than me. I’m driving a car that, while only four years’ old, looks like it’s going on 20 because my kids have utterly destroyed it. The entire backseat looks like a Jackson Pollack painting of assorted stains and magic marker doodling.

On the flip side, the car is paid for so I refuse to pay a single nickel to get it fixed up until my kids are older. I don’t even like paying to have it cleaned because I know that it will be filthy again by the end of the day.

So I wouldn’t necessarily find it odd that my housekeeper has a nicer car than me… except for the fact that she drives a black Mercedes Benz (the only color a Mercedes Benz should ever be!).

Now, I’ll never fault a person for having good taste in cars. I rather like Mercedes… and I might buy one for myself once my kids are at an age where bodily excretions are no longer likely to soil the upholstery.

But I’ve done the back-of-the-envelope math, and I also know that the monthly payment on that car consumes a huge chunk of her income. It’s phenomenally bad for her personal finances to own a Benz… but it’s great for the dealership that sold it.

And that brings me to one of the more interesting concepts in economics:

The paradox of thrift.

In a nutshell, it’s good for an individual family to be frugal. You have more savings to tide you over when times get tough, and you build wealth for the future. But if everyone gets frugal at the same time, the economy grinds to a halt and there’s less wealth for everyone.

(For the wonks out there, this is an extension of the fallacy of composition, the error of assuming that what is good for the individual must also be good for the group.)

I save a little over a third of my after-tax income. That’s fantastic for me and my family. We’re a lot less likely to get booted out of our house or be denied credit if or when we need it, and I’m able to sleep a lot better at night.

But if everyone did what I did, our economy would probably be back to the Stone Age. Every cable company would be out of business (I cut the cord years ago). And there wouldn’t be a lot of people shopping at the Mercedes dealership either.

The problem is, there are a lot more people like me these days, either by choice or necessity, which is a big reason why the economy has been stalled out in a slow-growth funk for the past decade.

Roughly 10,000 baby boomers enter retirement age with every passing day, and most of them aren’t even remotely close to prepared for it.

According to the Federal Reserve’s latest Survey of Consumer Finances, the median American household, with the head of the household aged 65-74, has a net worth of only $232,000, which would include home equity. (Interestingly, the same survey reported that only 53% of American households save any money at all; the rest apparently live paycheck to paycheck.)

$232,000 isn’t going to get you very far in retirement, as Rodney discussed in the October issue of Boom & Bust (he also offered some solutions to boost your personal savings, and I added an income gem to the model portfolio).

Assuming the standard 4% annual withdrawal, you’d be looking at an annual income of $9,280. The boomers know this, which goes a long way to explaining why their spending isn’t what it used to be.

But their children, the millennials, aren’t exactly big spenders, either. Entering their careers with mountains of student debt, they’re marrying and buying cars and homes much later in life than the generations that came before them.

Again, all of these people are doing the right things on an individual level. It makes sense to pay down debts and to save for retirement. But collectively, this tightfistedness throws a massive wet blanket over the economy… which is why we’ve had years of aggressive monetary policy by the Fed, and political movements to raise the minimum wage and to forgive student loan debt.

Now, I’m not here to bash anyone’s pet political issue. But let’s just say I wouldn’t expect any policy move to have much of an impact on consumer growth. Raising the minimum wage by a couple of bucks or forgiving some portion of student debt isn’t going to compensate for the retirement of 10,000 people per day.

So we need to set realistic expectations.

The economy has grown at about 1.8% per year since 2009. That’s probably about what we should expect for the next several years as well, and that’s assuming we have no major crises (on which point, I wouldn’t hold my breath if I were you ).

So back to that whole “paradox of thrift” thing… I recommend you stay frugal and focus on debt reduction over the next few years.

It’s bad for the rest of us… but it’s a lot better for you.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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You Don’t Want To Beg Your Kids For Money

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I walked to work today. Granted, the weather was nice and it was only about a mile and a half, so it wasn’t any major accomplishment. But for someone whose physical exercise over the past decade has mostly consisted of lifting the TV remote, it was a significant improvement from my routine.

So, you might be wondering what inspired me to forgo the comfort of my car and put on my walking shoes.

It was my wife.

She’s been nagging me for months about taking better care of myself… and getting progressively meaner about it. The final blow that got me off my lazy butt was her comment that she was going to have a great time spending my life insurance money with her new cabana boy husband once I dropped dead and left her a widow.

Ouch.

Well, today I’m going to take a page out my wife’s playbook. I’m going to ruthlessly nag you, though thankfully not about exercise.

Listen to me: You need to max out your 401(k) plan.

Did you get that? You NEED to max out your 401(k) plan!

Social Security may not be around in another 20 years, or if it is, it will likely be available only to low-income seniors. And if you’re like most Americans, you probably don’t have access to a traditional pension plan. Frankly, even if you do, there’s no guarantee that yours will pay what was promised if your company falls on hard times.

So, you’re on your own. If you want anything better than life in a trailer park with ramen noodles for dinner, then you had best get to saving. And the best way to do that is via automatic investment into your 401(k) plan.

I know, I know. Saving is hard, and you have bills to pay today. All of that might be true. But if you don’t start taking your 401(k) plan seriously, you’re not going to have enough money to retire, and you’re going to end up having to move in with your kids in your old age.

That’s a sobering thought. Not quite as sobering as thinking about your newly widowed wife blowing through your life savings with her new cabana boy husband, but sobering nonetheless. I don’t know about you, but I would be humiliated by having to look to my kids for financial support in retirement.

So, let’s talk through this…

You can defer $18,000 of your salary per year into your company 401(k) plan, and that’s not including any company matching. If you’re 50 or older, you can contribute an additional $6,000. That gives you $24,000 in total per year. And again, that doesn’t include any employer matching. Depending on your salary and your employer’s generosity, matching can chip in several thousand more.

Most American workers take home 26 paychecks over the course of the year. So maxing out at $18,000 per year would put you at $643 per paycheck. That might sound like a lot of money, but it’s actually less than you think due to the tax benefits. If you’re in the 28% bracket, it actually equates to about $462 in take-home pay. That’s still not chump change, of course. But with a little discipline, you can squeeze it into your budget.

And if you can’t… well, it’s time to make some changes.

If you rent, consider getting a cheaper apartment or even taking on a roommate. If you own your house, consider firing your lawn crew and your housekeepers. Yes, your home and garden might not look quite as nice if you’re mowing your own grass and sweeping your own floors. But isn’t it better to tolerate a little dust and retire well than to have an immaculate house and be forced to eat cat food in your golden years because your savings ran out?

I’m not saying you have to live like a pauper until you retire. But you should make maxing out your 401(k) plan a very high priority. The longer you wait to take your savings seriously, the more likely you’ll end up going to your own children with hat in hand.

 

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Trust Your System

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In August of 1971, Ray Dalio – now one of the most respected hedge fund billionaires on Wall Street – was a lowly clerk working on the Street. By coincidence, Dalio was starting his career during one of history’s critical turning points. President Nixon had just taken the dollar off of the gold standard.

Dalio’s gut told him the market would crash the next day. Instead, it rallied. Hard! The Dow finished the day almost 4% higher.

It’s not much of a stretch to compare then to now… Back then – as now – you had central banks meddling in the markets. And back then – as now – you had unexpected results.

Dalio learned a lesson from his experience. He realized that the market has a knack for doing what you least expect it to do… and he reached the conclusion that, rather than trying to guess what happens next, the better course was to simply build a portfolio that would perform well in any environment… no matter what happened. So he launched his All Weather portfolio, and the rest is history.

I’m not necessarily recommending you run out and invest with Dalio. Even if you wanted to, you wouldn’t meet the minimums. You’d need $5 billion in investable assets to get in the door.

But I do recommend that you take a few plays out of his playbook…

First, ask yourself the same question he did: what kinds of strategies can I implement that will work in anymarket, bull or bear?

With stock prices at all-time highs – and with the Fed’s next move anyone’s guess – you need to be confident that your strategy will handle the unexpected.

And as you look for answers, be systematic.

Set your trading rules in advance and follow them – verbatim. If you’ve done proper back-testing, then you should have faith in your system to do its job once a storm hits. If you don’t have faith in your system, then you have no business investing with it.

I incorporate both systematic and fully discretionary trading in my accounts. I think there is an important place for both. But I also never mix the two; they are distinct strategies run separately. If you’re investing using a system, then you need to stick to your system. Sure, you can and should refine it over time. But you don’t ignore its trading rules because it’s convenient or you’re scared. Systems only work when you actually follow them.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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See You in Palm Beach

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Whenever two Texans meet for the first time on neutral territory – and by neutral, I mean anywhere outside the Lone Star State – somehow, some way, the meeting inevitably becomes a contest to see whose Texan roots run deeper.

It’s the closest thing to a manhood-measuring contest I can imagine without a ruler.

At last year’s annual Irrational Economic Summit, I was once again measured… and fell far shorter than ever before against my new friend. It was a guest from the Houston area whose roots dug all the way back to before Texan statehood, the Republic of Texas and even Mexican rule.

She could trace her family’s Texan roots to a land grant by the King of Spain. Her ancestors had literally lived under all six of Texas’ flags.

I know when I’ve been beaten, so I tipped my hat (proverbially, of course) and looked to console myself with a cold Shiner Bock… which was irritatingly tough to find in Vancouver.

But, it goes to show that you never know who you’re going to meet at IES. Attendees from around the world come to hear Harry and the rest of the gang speak. And, as often as not, the conversations you strike up in hallways, or at the bar, are equally insightful.

You will learn a lot from watching Harry on stage. But if you really want to know what he thinks about something, buy him a drink afterwards. You’ll have a conversation that you won’t soon forget.

We’re hosting this year’s Irrational Economic Summit in October at the PGA National Resort in sunny Palm Beach, Florida. The Honorable David Walker – previous Comptroller General of the United States and head of the U.S. Government Accountability Office – will be our keynote speaker.

You won’t want to miss his speech. David – despite living in the corridors of power – never “drank the Kool-Aid” and became a Washington insider. He maintained his independent streak… and his knack for taking both Democrats and Republicans to task for their fiscal shenanigans.

Fellow Texan Dr. Lacy Hunt, who joined us last year in Vancouver, will also be returning this year. Lacy is one of the few economists out there who understood years ago that deflation rather than inflation would be the greatest economic challenge of the 2010s.

And he puts his money where his mouth is; Lacy runs a $4.5 billion money management practice specializing in fixed income portfolios. Given how heavily allocated I am with income investments in Peak Income, Dent 401k Advisor and Boom & Bust, I’m looking forward to what Lacy has to say.

You’ll also see some familiar faces from the Dent team taking the stage. Harry and Rodney will kick it off like always, but you’ll also get to hear from our resident forensic accountant John Del Vecchio.

John is a short seller by trade, and I’m willing to bet his speech is unlike anything you’ve ever heard. A lot of speakers will tell you how to buy stocks. John will show you his tricks on how to short ‘em.

Dent Research’s Chief Investment Strategist Adam O’Dell will also give his outlook. Adam gave his “sell everything” call at last year’s event… and I mean that literally. We exited most of our long positions in Boom & Bust based on an announcement Adam made during the summit.

And it was well-timed. Very shortly thereafter, the market went into a tailspin that didn’t let up until mid-February… nearly five months later. We’ll see what new insights Adam has cooking for us in October.

And naturally, I’ll be taking the stage as well, giving my recommendations for the investment minefield ahead. So if you’d like to chat in person, this is your chance. Also, be sure to buy Harry that drink. You won’t regret it – he’s a real force to meet in person.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Brexit: What Happens Next?

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Photo credit: frankieleon

Well, they did it. Brits have voted to leave the European Union. Now what?

I wrote last month that Brexit could take a wrecking ball to your portfolio. And judging by the carnage in the markets last night and this morning, that wasn’t an understatement. The pound sterling was down as much as 12% in overnight trading, and stock markets around the world plummeted.

So the question now is: what happens next… and how will it affect your portfolio?

I’ll start with the controversial statement that I think Britain herself will get out of this relatively unscathed. Yes, the pound is in freefall. But considering that central banks all around the world are competitively cheapening their currencies as a way of spurring exports, I don’t really see that as a bad thing.

If anything, it will probably boost tourism… and might encourage even more foreign buying of real estate.

Yes, there is a good chance that Britain has at least a mild recession. Companies that were planning to expand in the UK as their European beachhead might put those plans on hold for a while.

But as Britain’s new relationship with the EU starts to take shape, I think something close to the status quo will reassert itself. Europe has no viable financial capital other than London… which has managed to maintain its position, even though the UK never adopted the euro.

So, that’s the good news. The UK won’t be sliding off into the north Atlantic.

Now for the bad news…

While Britain will probably be fine once the dust settles, I can’t say the same about the European Union.

Europe is losing its biggest military and diplomatic power, the world’s fifth largest economy and one of its biggest free-market champions.

Said another way: Europe without Britain is a nightmare. It’s all of the headache and regulation of an overbearing central government but without the push for free trade… which was frankly the only thing that made the enterprise worth doing to begin with.

But that’s a long-term issue. What happens now?

Things are moving fast, but this is the scenario I worry about: while England and Wales voted strongly for Brexit, Scotland voted overwhelmingly to stay in Europe. So Scotland will probably have another independence referendum within the next year that will actually pass this time.

And that’s where things can really go south.

Catalonia has been agitating for independence from Spain for a while… as has the Basque Country. Will they see Scotland leave and then seize their moment?

Then what? What happens to the euro when one of its largest member states splits up?

Remember back in 2010 when the financial world went mad over whether Spain and Italy would remain in the Eurozone? Six years later, we’re right back where we started.

ECB President Mario Draghi said he’d do “whatever it takes” to save the Eurozone. But will “whatever it takes” be enough? Or is this the beginning of the end for the euro as a currency?

In the immediate short term, all of this points to one thing: uncertainty. And markets hate uncertainty.

It may take days… or weeks… for the market to handicap what the real risk is here. And that means we’re likely to see major volatility. There will be major down days… and major up days. It will be enough to give you whiplash.

Think back to 2008, when Lehman Brothers cratered. We had some of the worst single-day selloffs in history. But we also had some of the largest single-day rallies in history.

Now, I’m not necessarily expecting another 2008. I think it’s very likely that the central banks will collectively dump liquidity into the currency and bond markets to keep the bottom from completely falling out. But I do expect a lot of wild trading without much in the way of a trend. So bottom line, for the next few weeks, tread carefully.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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