Building Wealth - Cutting Costs

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.

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.

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.