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Who should you behave like; the middle class or the wealthy? October 14, 2008

Posted by shaferfinancial in Uncategorized.
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When it comes to our financial lives, who should we look to guide our behavior?  That is the question 10 years ago I asked myself.  Since my goals included having enough money to retire comfortably, the obvious answer was the wealthy.  Yet, many folks continue to insist that copying the behavior of the middle class is the way to go.  Yet, the middle class is in real trouble.   I have posted the current financial results from the data many times before.  Here they are again; for the 55-64 age group average retirement accounts have $83,000 in them.  Less than 35% of these folks have a defined benefit pension coming their way.  80% of this age group has a total net worth less than $300,000 of which more than one third is in the form of home equity.  Currently, 90% of retirees are dependent on government payouts for their basic living expenses.  The average person will spend 17 years in “retirement age.”  How long will that $83,000 last? 

That is where the middle class is right now.  Do you want to end up there too?  If you do mimic the middle class’s behavior.  What is that behavior?

Invest primarily in mutual funds, certificates of deposit, and savings account.  Pay off your mortgage as soon as you can.  Pay attention to fees, making sure you don’t pay any.  Be a passive investor.  Be a life time employee.  Panic when things happen you haven’t taken the time to understand or plan for.   Avoid risk.  Listen to the advice from Wall Street, Big Insurance, financial planners who are not wealthy and the banks, especially if the salesperson is sitting in a fancy office.

I posted on how the wealthy really invest here.  Quickly summarized it is real estate, niche businesses, individual stocks and cash value life insurance.  They are generally owners not employees and active investors not passive investors.  So which road are you on; the road of the middle class or the road of the wealthy?

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1. Joshua - October 15, 2008

David:

I looked into HCN. It looks the Insiders haven’t purchased the stock themselves in over 5 years. In fact, the last insider purchase was in 2003! But yet the stock keeps rising?

Isn’t it usually a bad sign when the Insiders don’t buy it? In fact, a few have even sold recently. Just curious since it’s a stock your invested in. Thanks in advance.

2. shaferfinancial - October 15, 2008

I invest like Warren Buffet suggests, for the long run. So, personally I don’t care if insiders are buying or selling because they have their own needs. Many times insiders buy because they want to appear to have confidence in their company when they are on their last leg. Other times insiders sell because the price has gone up and they are way to heavy (in their own minds) invested in one company. The reasons are as individual as their are people.

But what I do look at is the fundamentals of the business. Does the business make sense? Does owning health care facilities with long term leases make sense as the baby boomers age? Is there going to continued demand for senior housing, professional office buildings, assisted care facilities, hospitals and clinics, nursing homes, etc.?

Are they leveraged? and how high? (1 to 1 in this case). How is there cash flow? Dividend payments around 6-7% in this case. Are they diversified geographically? Yes.

Finally, is the price cheap? No, in fact it is expensive right now. I’m not sure I would buy HCN right now because its P/E ratio is above 30. I think the price has gotten a little ahead of itself. (I began accumulating when the P/E was under 20! Good for the company, since they just sold a bunch of stock at a high price. But, I think is a big question for any investor now!

So, that is my analysis. I think it is great long term, but would expect some short term price decreases. Meanwhile, I get my dividends right on schedule!

3. Joshua - October 16, 2008

Thank you for the excellent reply. I do have a lot to learn!

4. investmentblogger - October 18, 2008

Good article David! Its an unfortunate position that most elderly will find themselves in. No longer is it Freedom 55 but Freedom 75. Why, do people continue to do these things and not mimic the wealthy?


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