Building Wealth - Cutting Costs

If you use Word Press for blogging you know that it comes with a stock visual editor that is basiclly a limited WYSIWYG (what you see is what you get) editor and you can switch over to a HTML code view.  One thing that annoyed me was the lack of some very basic editing buttons in the visual editor.  Things like underlining and redo and undo for instance along with a formating options for things like headings and paragraphs as well.

I mean come on!  These are very basic word processing functions.  Then I learned they were there you just needed to know how to access them.

The command to do so is, hold down alt and shift and then hit the “v” key.  This adds the features mentioned above along with some others like a code cleaner and the ability to insert special characters (like Π or €, etc).  Now do not ask me why these functions are hidden.  That makes no sense but now you know how to access them.  Give it a try I think most bloggers will enjoy the added editing power with out having to switch to code view and doing it manually.

Today the Down Jones Closed down a significant 370 points (almost 3%).  The question is why?  The answer, The Institute for Supply Management’s January report on the service sector, which accounts for about two-thirds of the economy, said the service side of the U.S. economy dropped sharply . The index dropped to 44.6 last month from a revised reading of 54.4 in December.  This the lowest number since 2001.

So what the heck is the real meaning of this?  The simple way of putting this is the U.S. economy is in a definite decline on the “service” side of the economy.   This is bad because so much of our economy (66%) is service based.

So what’s next?  It’s possible the services side of the economy could rebound some in February, like the manufacturing side did in January after its’ own slide in December.   The benefit of the Federal Reserve’s two big interest rate cuts in the latter part of January could also help spur the service sector back into growth mode later this year.

The key to understand here is this is another shot across the bow of the coming war that is a imminent recession that sooner of late will happen.  My advice yet again is to make sure you are not fully exposed in stocks right now.  We had a few good years but a slide is coming have a heart to heart with your advisers and put some of your investments into something safer for the next few years.

With all the talk of a coming recession I am sitting down with my financial adviser this week and I am moving more of my money out of U.S. stocks and for that matter U.S. dollars. I am buying more gold, more silver and more foreign government bonds. Please understand that I tend to hold gold and silver more in “funds” then in hard metals. Though I do think there is a place to actually hold some bullion as well.

As I have been researching silver I came across an investors web site that specializes in metals called Monex Precious Metals, and they have a great page about silver. I encourage you to watch their video about silver as you will learn some pretty interesting silver facts.

One suggestion is that the video does not stream well. I advise you to click play, let it run a second, then click pause and let it pre load while you do something else. Come back to it in a few minutes and then watch it. Someone should get with Monex’s marketing department about using YouTube for their videos. I am 100% sure that bad steaming is costing them viewers.

Right now all we seem to hear about in any economic news is the subprime meltdown and how it is responsible for everything. Now the sub prime meltdown is bad but it is also misunderstood in both cause and effect. Let’s look briefly at both sides

The Cause - Everyone wants to blame the lenders for this. To me they get say 20-40% of the blame at most, sure they were stupid and sure it is biting them in the ass right now, as it should but they are not the real ones to blame. Our nation is so fixated on passing the buck and not actually blaming the person who is guilty our grandparents may not recognize our nation if they were with us today.

So who should get the blame for taking rapidly accelerating ARMs, hybrid mortgage loans and borrowing to the absolute limits of their budgets? Doesn’t really take a genius to figure it out does it? The people that took out mortgages that were too high or had bad terms are to blame. That is your fellow Americans and or you yourself if you took out these loans. It is so ever loving easy to blame corporate America but in the end if you borrow money and can’t or don’t repay it the blame is on you, not the company that loaned you the money.

The Effect - The news about the subprime market makes me think of El Niño. Remember El Niño the weather pattern back in the 90s that we blamed for everything. To me that is the sub prime meltdown today. A stock goes down, blame the sub prime lenders. A company lays off workers blame the sub prime market. To many illegal aliens are crushing our educational and health care systems, blame it on the subprime market. Our nation has over spent and is in a 58 trillion dollar hole just for social security alone, blame it on….OK you get the point.

The reality is the subprime bust is bad, very bad but it is also being used as an excuse for other problems in the market. Even the lenders are probably more effected by toxic unsecured (credit card) debt then bad sub prime loans. Yet make no mistake lending institutions are going to loose an estimated 300-400 billion or more before the whole thing comes to an end. Some banks will get bought by other banks, some will flat out shut down and all and all this is going to be another reason for the coming recession or more accurately depression.

Yet when it hits don’t let the talking heads on the idiot box tell you it all because of the greedy sub prime lenders First they are taking a bath you would not believe right now and getting what they deserve, lost money and some going under. Next the real reason for our recession is the US Government is spending far more money then we have and has been for 35 years, the bills are coming due.

So what can you do about all this?

First I advise you to read my post from yesterday about the overall weakness in the economy and watch the video with Comptroller General David Walker to get some specific understanding of what our real problems are and to learn some ways you can protect your assets.

Second I recommend you visit MorCap Fund Advisors, LLC and read their excellent article on the subprime meltdown to better understand it and its’ impact our our economy.

I am not a gloom and doom type but I do believe in being prepared and I also don’t believe in just letting your money sit and wait in mutual funds and stocks when a clear bad time is on the way.   If I were you and I had my money in conventional US Stocks I would get out and do it now.

How bad is it really? I invite you to listen to this interview on the Glenn Beck show with Comptroller General David Walker. This should scare the hell out of you. You will learn how bad the pending social security nightmare really is.   Honestly we are “bankrupt” as a nation.

If you add this to the mortgage problems and our other weaknesses we are in real trouble.

So where would I put my money or more accurately where is my money going?

• First I am putting a good chunk into 2 year Australian Bonds at a guaranteed rate of 7.5% plus any gains as the dollar further weakens.
• Second Gold is a good hedge that has done very well, I will buy more and my only regret is that I did not buy more in the past.
• Third hold cash and possibly in the form or foreign currency such as in a United Kingdom or Canadian bank perhaps even buy bonds in some other forigne markets. Right not as I mentioned above Australia, New Zealand, Canada and the UK are all in great shape financially.

I don’t want to sound un American here at all but the simple fact is we are in over our heads for more then 58 trillion dollars and we have zero.   Again listen to the interview with David Walker, this man has no political axe to grind and he is the chief accountant for the United States government.   His message is simple, we are out of money.

So my advice is protect your hard earned dollars by converting them into something other then dollars.  Perhaps not all of them but pick a percentage and diversify before this bad problem gets a lot worse.

I have already written a bit about my affinity in my post, What I Blow Money On, but today as a follow up to my article on investing in gold it seems like a good time to talk a bit more about precious metals before we move on. In addition I am going to provide you some of my own rules on buying silver coins.

First let me lay out my case for why silver is a good investment. Simply put all metal commodities are doing very well right now and will continue to do so. Heck even copper is getting rather expensive. Back in the 80s I remember copper going for about 70 cents a pound. Today it is hovering in the range of 2.80-3.00!

Many people see silver as a “poor man’s gold” and I think that is rather short sighted. First I don’t care if silver is ounce for ounce far cheaper then gold if you have 1000 dollars worth of gold or 1000 dollars worth of silver you are holding the same value. Now silver and gold are true brothers in my opinion and the price of one is indeed tied to the price of the other. While they are not completely pinned to one another and the Hunt Brothers debacle will skew numbers from the 80s and early 90s there is a strong correlation (precentage wise) to movements between the two. To get an idea of the correlation look at the two graphs below which cover 1997-2007…

As you can see again while not lock step with each other the two metals perform very closely to each other on the open market.

So why not just buy gold? Understand I am not saying to not buy gold it is just that I truly “invest in gold” I buy through my broker and I buy both actual gold, gold funds and stock in gold companies. I have nothing against doing the same with silver but I prefer to actually buy, hold, touch and own my silver mostly in the form of coins.

Why? Two answers….

First, because I love silver coins, they are history, they are beautiful and they are something material to me that I can look at and appreciate. In this way Silver Coins offer me something that 95% of my other investments can’t. Sure I can look at my stock certificates but there isn’t much fun in that. Most of my other investments are just numbers on paper then don’t have the feel, look and glitter of my coins.

Second, because investing in many different things and in many different methods creates diversity. The beauty of silver coins (at least of the type I purchase) have most of their value in the silver basis price. I can “cash in” anytime I want and do so with no paper work or government red tape. I can literally walk into a shop, sell my coins and walk out. Holding silver coins is like holding cash money with out the cancer of inflation upon it.

So what rules to I have for investing in silver? Here they are but understand these are no ones rules but my own. A few you really should follow but others are more about your risk tolerance and your personal view about numismatic values.

1. I do not belong to nor do I buy my silver in any kind of “club” or any highly advertised coin supplier. In particular Littleton Coins is among the worse places of all to buy coins. Their prices are generally 40-90% higher then local coin shops in my area. I buy from local merchants or only via mail order if the price is as good or better then local pricing.

2. Directly related to the above, I am not on any type of auto shipping or monthly arranged purchases. I buy what I want as I find it and as I want it. My silver investments are truely incremental investments outside of my conventional portfolio.

3. I never buy “junk silver coins” which are large unknown lots of mostly 1960s and older dimes and quarters. Most are worn so badly you can scarcely read the dates.

4. While I don’t buy junk coins I also don’t buy highly numismatic valued coins. In other words I never buy a coin where the bulk of the coins value is based on how “collectible” or “rare” it is. Such values are highly subjective and only represent a “real value” if you can find a buyer. Try buying a 200 dollar silver dollar this week and see what the same shop will pay you for it (with out a big jump in price) the following week. This is the one rule that I understand when others break, this is my personal preference but I have my reasons.

5. What I do buy are Silver American eagles as they are priced right about bullion prices. I also buy high quality but common Franklin, Kennedy and Walking Liberty Half dollars which are still quite affordable and made of 90% pure silver. My other big favorites are the more common Morgan and Peace dollars. These coins to me represent a nice mix and all are very affordable and most importantly highly tied in value to the silver basis.

So what is my advice? Well I think it makes a lot of sense to buy some silver over the years and just have it as a hedge against inflation not to mention an investment that remain liquid in both the best and worst of times. The beauty is you can buy say a 10-20 dollar coin just once or twice a month if you don’t have a lot of extra money to invest. Even that over the years can build a nice collection and a lot of real value. I personally buy between 20-150 dollars a month of silver and have been doing so since 1995. As you can see by the graphs in this article that has been a very good move.

Many financial advisers are not very keen on investing in gold because they claim it has a fairly poor record compared to let’s say the S&P Average or the Dow Jones. Indeed a case can be made for this but there is another lesser know case for gold that make you really want to look at putting at least some money in gold. The reality is that the Dow and just about any metric or fund or stock has at some point a 10 year period where it lost money or at least lost to inflation and against gold.

Gold has never gone down over any 10 year period in history except for the early 80s when gold along with silver and other metals were artificially manipulated by the Hunt Brothers and other groups. Smart investors did not buy during that period though, if they were really smart they sold off gold and bought in back in the mid 80s.  Those investors did very well.

Now look I am certainly not advising you to put all of your money in gold or to take it all out of solid investments.  I am also against any real heavy numismatic investments in gold coins.  Yet to put 10-20% of a portfolio into gold or gold stocks or funds makes a lot of sense as a solid investment hedge.   Gold has gone up quite a bit in the past five years so many investors are a bit skiddish about buying it at a precieved high.  However there are a lot of factors in play right now that will most likely have a positive impact on Gold prices for a long time to come.

• The US Dollar continues to decline and the government seems to want it that way.   To understand this factor you need to grasp that gold could stay level in the global market and still go up in dollars, simply because the dollar declines.
• The economies of China and India and other nations are putting more demand on gold as a consumer level commodity.  As the middle class of these nations grow more demand for gold jewelry results in more demand for gold in the global market.
• Right now the demand for Gold is about 10% higher then the supply that is being produced.

All of these factors make gold an attractive alternative to conventional investments.  Of course you should consult with your financial advisors before you buy, I am just saying have a look at gold as one way to protect yourself against what looks like a coming recession and an ever falling dollar.

OK I have to give credit for this idea to my Brother-In-Law (we will call him Mark).  I took a different approach to saving for college for my son.  In our case simply set up a 529 plan for our son, made contributions as part of our financial plan and he is now in college and can do four years (including housing) as a state college with no debt and almost on out of pocket expense.  While this seems wonderful a bit of it is already biting us in the rear.  Our boy just doesn’t seem to realize how lucky that makes him.  I am glad we did it but what I am about to lay out for you is a much better solution at least to a degree.

What Mark has been doing since both children were born is both simple, cost free and may I say genius.

Every kid has birthdays, Christmases, Easters and many other times that relatives, friends etc send them cards and gifts and very often money.  Mark has required that 50% of his two children’s financial gifts (no matter how small or large) go into savings accounts to be used for college.   He choose very safe investments and did not elect to use a 529 due to its restrictions.

What does this mean to his kids?  Upon Graduation both will have over 20,000 dollars in funding toward schooling or life in general if they choose not to go to conventional college.   I should point out that this is not a family the gets huge amounts of money for each event, we are talking 20 bucks here, 5 bucks there, may be 50-100 for a Christmas that goes into these funds.  Mark requires his kids to save this money no matter the source.  If they come over to my house and I give them a ten a piece for spending money, Dad puts 5 bucks a piece away, just like clockwork.  The fact that 18-20 years is a very long time for money to grow, takes care of the rest.

Some of the family thinks this is “taking away the fun of just being a kid”, most of our family is BROKE by the way!  Taking advice from the broke is a good way to not only be broke but build generations of kids and grandkids that are broke too.  Mark wisely has ignored this and I think when his kiddos go to college or start a business or do what ever with their money as adults they will put more value on the funds.

Now we did teach our son to save, we helped him invest in stocks, set up accounts and always made him put some money away.  Yet if I had it to do over I would have also had some allocation go to his college fund directly from his hands.  Not just to increase the funds available but to give him a true sense of ownership, responsibility and gratitude for the fact that this money is available.

What I know is this my niece and nehpiew will have real options when they finish high school.  Options my brother-in-law would be hard pressed to provide on their household income.  All this from the simple wisdom of “pay yourself first”.  Consider it the next time your little ones get a card from Grandpa Joe or Aunt Betty.  A few less do-dads today for a real kick start to life tomorrow.