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Change? Everybody talks about it, but how often does real change occur? September 15, 2008

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Change seems to be the buzzword for politicians these days.  But how often does real, structural change occur?  Less than most people think.  And what causes change? Usually technological advancements pushes the forces of change. The last period of real technological advancement occurred in the 1940-1970 time period.  Previous to this was the post Civil War era which saw significant change.  Silicon chips were developed for missile technology leading to changes from computers to refrigerators.  The internet and communication technology (satellite, cell phones) again came from the pentagon to capitalists to you. Container technology (developed during the Vietnam War to get military equipment to Asia) made it possible to efficiently move parts and consumer items around the globe.

Along with this technological change came new companies with new ideas, applying enormous pressure to the old guard.  Hence, that period of time from 1945-1975 of stable capitalism, stability in employment, stable investor returns was turned on its head.  The king and queen (large manufacturing firms and organized labor) were beheaded.  The new king and queen were consumers and investors.  They demanded cheap products and high returns resulting in enormous pressure on companies and labor.  The result was unstable employment, and bankruptcy (failure) for many companies.  Ask yourself what has happened to IBM, General Motors, Merrill Lynch,  Eastman Kodak, US Steel, AT&T, Penny’s, K-Mart, many banks,  etc.  Organized labor is only a small percentage of what it was with little if any power.

Not only was this process happening in the US, but in Japan and Europe the same process was occurring.  The change was deep seated, world-wide, and permanent.

Nothing any politician says about change, nothing public policy can do, nothing any political party can do, will change what has happened.  Of course, some future technological change will, but that it at some undetermined point in the future.

The truth is, it is the golden age to be an investor and a consumer.  The entry cost to enter the business world has dropped to almost $0.  Knowledge is critical, experience helps, and those that act as if these changes haven’t occurred will mostly fail.

Call me at 727.804.9271 or e-mail me at dave@shaferwealthacademy.com.  I await your contact.  You need a guide if you are still behaving like it is 1975.  

Become an INVESTOR,with an INVESTOR MENTALITY! June 11, 2008

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One of the large problems for folks who have listened to the financial experts is that negative returns can really do damage to one’s retirement planning, especially if it occurs around the time one retires.  Let’s look at what would have happened if a person retired in the year 2000 at the age of 65.  For the sake of argument let’s pretend this person did very well and had $500,000 in his retirement accounts (6 times what the average person had).  This person followed the current wisdom of taking our 5% from the initial account value as income, thinking this would last him throughout retirement.  Let’s pretend this person had his money in a S&P 500 Index Fund with a total expense of .3%.  So this is a best case scenario.

Year                    Income                     Account Value (End of Year)

2000                  $25,000                            $430,350 

2001                   $25,000                           $355,897  

2002                   $25,000                           $256,000

2003                   $25,000                           $297,601

2004                   $25,000                           $301,496

2005                   $25,000                           $289,215

2006                   $25,000                           $305,168

2007                   $25,000                           $294,737

In eight years our 73 year old has an retirement account value which has decreased 41%!  Accounting for official inflation rates the $25,000 now has the buying power of $19,594. With a life expectancy of 17 years for a man and 20 years for a woman, this person is in serious threat of running out of money.  Note, this person has already seen 20% of his/her buying power disappear from the ravages of inflation.  Five out of eight years were positive for the index.  Negative returns hurt!

Now, what do you think the person who was retired would do after a year or two of negative returns?  Might they buckle and decide to get out of the market?  It is a fact that negative return years yield outflows from mutual funds.  This year is no exception.  People who have been taught to think of investing as a risk free endeavor are not emotionally prepared for market downturns, especially when they are close to or are in retirement mode.  It is a psychological fact that we fear pain more than we appreciate pleasure.  So in very real terms we are all risk adverse.  That is why the financial experts have to downplay market risk in order to sell their wares.  So ironically, after they have convinced you to buy those mutual funds, they then need to change the game for you and attempt to have you forget about the pain of market downturns.

Now, to accomplish this the financial expert industry has turned to another dubious fix; amatuer psychoanalysis!  Yes, they are having their clients take tests designed to examine their childhood memories about money in order to get people to stop reacting to market downturns.  You think it will work?

My experience tells me it will take a little more than amatuer psychoanalysis to reorient folks thinking to stop this detrimental behavior.  The buzzword in the industry is “trusted advisor status.”  But, if you are selling the same old snake oil, you are making a mockery of the word “trust.”  Folks, take the time to turn yourself into an investor with an investor mentality then you won’t need to trust anyone else with your money.  Investors know that risk is always there.  Investors have a plan that takes into account market downturns or other bad situations that can occur.  Because it is part of their plan, they don’t feel the need to react to every negative feeling.  Stay the course is more than a mantra with investors, it is the direct result of having a plan that they designed to fit their needs and account for their proclivities.  They own their plan intellectually and most importantly emotionally.