Paul Winkler: Welcome to “The Investor Coaching Show.” I am Paul Winkler. I talk money, investing, and educating as we go.
Sometimes it’s fun when I have meetings with people that I don’t normally meet with because I can share some of the things that I shared with them with all of you. Because the more you understand this stuff, the less scary that it actually is.
Debt at a Young Age
So I had a situation talking with the son of a friend of mine, a couple that I have known for a long, long time. And they said, “Will you talk to our son?” I was like, “Yeah, that’d be fun.”
So he is like 20 years old and comes in and I’m like, Wow, this is really cool. “What has you sitting in front of me?” That was my question.
“You’re 20 years old. Most kids that are 20, they’re not thinking about any of this kind of stuff. This is kind of fun to just see what it is that’s on your mind.”
And he said, “Well, I just understand, I heard that the later you wait to start something, the more of an uphill climb it is.” And I said, “Yeah, you’re right on.”
I said, “One of the things I tell people is that historically, if you look at stock markets about every seven years, give or take, that you delay saving for retirement. You actually cut your retirement in half.”
And he was like, “Oh my goodness.” And I said, “Yeah, it’s based on the rule of 72 — 72 divided by your interest rate, which tells you how long it takes to double money. Well, if you think about it, if I have seven years less, then I have gone the other direction. I’m at half.”
So yeah, okay, that makes sense. So we got to talking about saving for retirement and different types of things to be thinking about.
We got talking about debt, which was really, really good because his whole thing on debt was, “I got a car, it is not a fancy vehicle.” He said, “I know younger people with Dodge Challengers and stuff like that, and they just can’t afford it. And I know that they can’t. And they’re in debt up to their eyeballs and they don’t realize what a problem it is.”
He’s so right. So often people will buy things and they’ll get into things where they think, Well, wow, I love this car. It’s really, really cool and I look cool in it.
They’re trying to impress people, and they just don’t have the money to be impressing people.
Credit Card Debt
He was talking about how, well, he wants to save up for a house. And his friends are like, “Why would you do that? You can’t drive it.” He said, “Well, I also can’t get in an accident with it.”
I suppose you can have a tornado take it out or something like that. But the reality of it is you could be just driving down the road or even just parking and somebody dents your car or you just back into something. And all of a sudden that thing that’s so beautiful and you had such pride in and now all of a sudden it’s not pristine anymore.
He was like, “I just don’t get into that. That doesn’t drive me. It doesn’t float my boat.” And I was like, “Good for you.”
I meet with people and I talk with people about debt here and there. Not a lot, because our main business is dealing with people who are pre-retirement and in retirement, and they typically have gotten around that. But when you see what people are paying for debt now, it’s 20% plus.
I’ve seen some stuff, I’ve seen some people with credit cards that are over 30% and I’m just like, “Do you realize that you’ve paid for that item twice in two years? In 24 months, you’ve paid for the item twice.”
And they’re like, “Oh my gosh.” And I say, “You need to get really, really angry about this, that you’re being taken advantage of. I want to motivate you by telling you that somebody is taking advantage of you and they’re laughing behind your back.”
No, I don’t say that. But you think about that when somebody has a lot of debt like that, they’re being taken advantage of.
It’s usury. It’s not technically, but they can get away with it. It’s legal but you go, Man, that is really, really bad. And that’s what we’re seeing.
The average is over 20% right now for credit card debt. It’s just obscene. You’re paying for something twice in three years in that particular instance.
Well, that’s pretty bad if you make those minimum payments. It takes you a long, long time in many cases to actually get that thing paid down and gone and you’ve paid for the item many times over.
So he’s avoiding that, not getting into credit card debt. He makes sure that he’s not dealing with that and he’s not dealing with car debt at all. So he is wanting to save.
A 401(k) Match
I said, “Great, where are you working?” He’s working at a company that has a 401(k). I said, “Beautiful. Okay, they probably have a match, right?”
He said, “I think so.” And I said, “Well, there are a couple of things you want to find out as to how the match works. It is not unusual that if you put in 3% of your income, they’ll match it 100% and maybe 50% of the next two.”
He said, “Can you slow down on that?” And I said, “Yeah, absolutely.” Okay, so let’s say that you make $20,000, and this is a young kid so he probably doesn’t make a ton of money, but if you make $20,000, 3% of that is $600.
If you have a match and you put $600 of your income away, then you are going to have them match it 100% and they’re going to give you another $600.
So you’ve got a 100% return on your money right away. So, man, it’s free money, take it.
And a lot of times what they’ll do is they’ll give you 50% of the next two. So if you take 2% of $20,000, that’s $400. If you have $400 that you put away, you put away $600, and you’ve got a 100% match on that.
If you decide to put another $400 away or $1000 of your $20,000 of income, then they’re going to match that second part, the $400, 50%. So they’re going to give you another $200. So what you got out of the company is, remember, 100% of the first 3%, and this is what’s called the safe harbor plan.
These are a very typical type of plan out there in 401(k)s. So you get 100% of the first 3%, so that’s $600, 50% of the next two, which the next 2% was $400, you get 50% of that or half of it, $200, and you got $800 of free money. So you put away $1000, and you get $800 for free.
He was like, “I get it, that’s really good.” And I said, “Yes, absolutely.”
Pre-Tax or Post-Tax?
Now the thing that you think about is, Do I put this away pre-tax or post-tax? That’s the second decision.
Pre-tax in this particular instance doesn’t make a ton of sense because his income level is super low. So you would normally not do that.
Can there be instances? There might be. So that’s why I don’t want to go and say it’s always this way.
When people say, “You always do this.” I go, “Run, don’t walk.” But let’s say that you have this situation where your income tax rate is super, super low and you’re going, “I’ll do a pre-tax.”
Well, I’m not avoiding much tax right now. If my income bracket is really low, if I take it as income, that $1000 I take as income, then I may pay $100 in taxes. That’s possible, so that would be if I’m in a 10% tax bracket.
Let’s say if your income is low enough, your rate might be zero because of the standard deduction. Itemized deduction is probably not going to be happening for that person. But you can have a standard deduction, which is an amount of income that you can earn where you pay no taxes.
Then you might pay a little tax at 10%, a little tax at 12%, a little tax at 22%, and 24% on up to 37%. Well, in this particular case, he’s very low-income. The question is, what is the likely scenario in the future that you’re taking this money back out?
If the bracket is higher, then you better pay taxes. You’d be better off paying taxes now and then avoiding that higher bracket in the future.
I’ve seen financial advisors get this screwed up and say, “Oh, you ought to do everything Roth. Always do a Roth because of the amount of taxes that you would pay now versus in the future.” The math is bad.
Let’s say that you’re looking at this and going, “Well, my bracket’s really, really low. I’m likely to be in a higher one in the future when I pull this money back out.” That’s when a Roth makes a lot of sense.
So we look at a Roth IRA and go, “Okay, so let’s do that. Let’s pay the taxes now, then I don’t have to pay taxes on the money ever again.”
As the law stands now, not only do you avoid the taxes on the withdrawals, but it also doesn’t create a social security taxation at this point. Now that may change in the future. You just never know about that particular thing.
Then you don’t have required minimum distributions in the future. For some people, that would be nice, not to be made to pull out money in the future. Because I have people all the time come in here and they go, “Is there any way I can avoid the taxes on the RMDs, on my pre-tax stuff?”
I’m like, “Well, not really. You might be able to make contributions to a qualified plan, to a retirement plan if you’re still working some after age 73.” But yeah, you might not be able to do that.
So the point here is he’s a young kid in a low tax bracket. With the likelihood of a higher bracket in the future, the Roth makes a lot of sense for this particular young man.
I’m like, bravo that he’s even thinking about this. And then don’t forego those matches; it’s free money. Typically, I will tell people all day long, “If they’re going to give you free money, take it.”
Target Date Funds
Now, the next thing is how to invest it. Well, typically they’ll put you in a target date type of fund. You’re going to retire probably in the year 2060, 2070, whatever. You have this fund set up for somebody retiring in 2060.
The asset allocation or the asset mix is how they divide it between different market segments. Because you can hear people say, “Well, the market did this today.”
And I’m always thinking, What market did that? Did large US stocks go up that much? Did small US stocks go up to that? Did large value?
There are different market segments. What did international, emerging market value stocks do? It is a different market segment.
So it’s an oversimplification anytime you hear somebody say the market did this. Just go, “Which one?” And then they’ll sit there and go, “Well, the Dow or the S&P or the Nasdaq.”
Okay, large, large, large. Okay, no, what did Japanese small companies do today? Whatever. You really throw them a curve when you do that.
But you want to look at, typically, what other funds you have access to in the 401(k). Because the 401(k) providers sort of know this. If they really knew it and they really believed it, they’d diversify more than they do.
Typically, they do not have a lot of choices. Very rarely do I have as many choices as I want. Even with brokerage accounts, sometimes they give you a brokerage account with a 401(k). Even with that, I don’t typically have all the choices I want.
But if I’m looking at the target date fund, I’m looking at mainly the money in one area of the market.
This is where it’s tricky because target date funds in recent past performance, most of them were not terrible. And the reason for that is because the one area that they overly concentrate in has done fairly well in recent history.
But if you look at what price those companies are selling for and how they are overly concentrated in just a few companies, Microsoft, Apple, NVIDIA, namely those three companies, because there’s so much concentration in just a few companies when — I’m not thinking if but when — that market turns it can get really ugly. It got really ugly in 2000 through 2002 where tech stocks dropped 80%. It got really ugly in 2007, 2008, and 2009, when large growth companies just got hammered.
And the thing is that you may be sitting there all fat, dumb, and happy right now with a target date fund thinking everything’s just fine, not recognizing that when things change for that market segment because they’re selling for a super, super high price compared to historic norms, I don’t know when it’s going to happen. I’m just telling you that markets do not go up forever. Trees don’t grow to heaven. When that turns you could be in big trouble.
Look at Other Market Segments
So I said, “Here’s what we got to do. Let’s look at other market segments that you have access to because the 401(k) provider, they know that they have a huge liability on their hands if they don’t give you access to a lot of different things.”
So they’re going to give you access to different market segments, smaller companies and value companies and so on so forth. Let’s look into that and bring those things. And that’s typically what I want to do: I want to see everything that you have access to and then we pick and choose.
Now, the beauty of it is once you choose that asset mix, the changes are few and far between. You don’t make changes all the time.
It’s not like we have to be watching the market every day to make those changes because by definition, changing the portfolio based on a prediction about what’s going to happen in the future is market timing.
If I go and put my money in a couple of different areas of the market and I go, “Man, it looks like this market’s overvalued. Let’s move more money over there,” that is market timing. And that’s typically what you see in the investing world, but it’s not good for the investor to be engaging in that because you’re trying to predict the future.
And by definition, it’s not something that is predictable. We don’t know what’s going to happen. The biggest thing that moved the market in the past 25 years was 9/11 and nobody knew.
And people say that they knew about the banking crisis. No, it was a huge bet by a couple of people that there might be a problem with a banking system in ’08. And then those people are put on pedestals because they predicted, and because predicting the future and being right about it is such a rare thing. That’s why we remember these people.
But don’t try to invest based on predictions about the future because it’s a fool’s game. Because we see, if we look at the data on even pension plans, their ability to time the markets and do tactical asset allocation and increase returns, it’s pretty much non-existent.
The evidence that they’re able to do it is pretty much non-existent. We just don’t see it. And if you look around, you might be able to find somebody who had some luck, but we don’t want to invest based on luck.
Preparing for Retirement
Okay, now something that he said as we walked through that was, “What else do we do?” He had another goal besides retirement.
And I’m going to talk a little bit about something else that he talked about as a goal and just give a few things that I think are important to understand in other goals, because you don’t just have one goal when it comes to money. You might have short-term goals, you might have intermediate goals and long-term goals.
So right after this, I’m going to get back and talk a little bit more about some of the other types of goals that you might have and preparing for those things.
I’m Paul Winkler. This is “The Investor Coaching Show.” Paulwinkler.com is the website, where there’s video, there’s audio, and the ability to actually set up phone calls with anybody.
Because we have a team of all degreed advisors. I am really big on lots and lots of education and having academic education behind it as well. Not just the education from the colleges on financial planning, because too often the information is just a little bit shy of what I think is needed, quite frankly.
I’m just super proud of all the people that I have that work with me here at Paul Winkler Inc. We have offices all over the place, so check it out, paulwinkler.com.
Okay, so the young guy came in, he’s a son of some clients of mine, some long-term friends of mine, and they said, “Can you just talk to our son?” I was like, “Absolutely, love it.”
So he came in, and I’ve known him since he was knee-high to a grasshopper. So he came in, 20 years old, starting out, got a job, working his way through getting to college and just doing a phenomenal job, thinking about saving for the future because he said, “Hey, look, I understand that if I don’t do it now, if I wait too long, then the positive is I can live high right now and make it look like I’m doing well. But the negative is that long run life gets tough.”
Because you don’t want to work forever. That’s the reality of things.
People think, I can work, I can do things forever. And when you’re young and bulletproof, you think you can work forever and you’ll want to work forever.
But I’m telling you, the laws of thermodynamics actually kick in and you just don’t feel like doing what you used to do and your brain literally changes.
We know that the research shows that your brain starts to change after the age of about 45, and the things that got you to the dance aren’t the things that are going to carry you through the rest of your life. So you’ll change, your views on work will change. Your desire to continue and your goals will change.
So I always tell people, “Prepare. Every seven years you wait, cut retirement in half.”
Renting vs. Owning
So we got into talking about retirement and talking about 401(k)s. Then he got into intermediate goals. He’s 20. What else is he going to be thinking about?
Well, not living in an apartment forever, right? He eventually wants to buy a house. So in that particular case, I want to know the time horizon.
When do you think you might do this? Now for some younger people, you’re going to be thinking about it sooner than later because you don’t want to throw money away.
And I’m like, “Not so fast.” When you’re looking at an apartment, number one, somebody else is always doing the repairs.
You don’t have to be paying interest on a loan. That’s a big cost. You look at the amount of money you borrow, let’s say it’s 7% and you borrowed, let’s say $300,000. Well, that’s $21,000 per year in just interest.
Well, think about how much you could pay in rent on that, and you’re renting money. You’re renting money versus renting the house. You look at and it’s kind of a parallel if you think about it.
I’m renting the house and then I’m renting money when I borrow money to buy the house. Now, number one is upkeep, as I said.
Then you’ve got the rental on the money with having a mortgage. Then you have also the difference between renter’s insurance and homeowner’s insurance.
The cost is lower for renter’s insurance because you’re not covering the building itself. You are not insuring that.
Then the other thing that you have to think about is property taxes. You don’t have property taxes if you’re a renter.
There are a lot of responsibility differences. So it’s not necessarily terrible to stay in an apartment for a while.
Younger people, think about that. Many times, if you’re going to get married, let’s say, you buy a house. Then you get married and your spouse goes, “Ew, I hate this house. We got to sell it.”
Well, now you have the cost for the commissions on the buying of the house that you bought and the sale of the house. So that’s a cost that you have to take into account. So there are a lot of things to take into account when you buy too early, and then also, where are you going to be located?
Is your job going to be wherever you live right now? Maybe, maybe not. That’s another thing to think about.
You may be on the other side of town. You may be on the other side of the country, whatever. So thinking about buying a house too early may be a bit premature.
Well, he was thinking maybe in 10 years. I’m like, “That’s cool.” That’s not a bad thought at all. Maybe when he is 30, he’ll have his first house, he might be married by then and then he’ll be in concert with his wife to decide where to live and what house and what it needs to look like.
Investment Time Horizons
So then you have a situation where you’re asking, what do you put the money in? Now, there are different time horizons based on an investment portfolio design.
Now, if I’m looking at, “I need all my money back in just a couple of years because I’m buying really soon.” Well, in that particular case, that is where we have things like savings accounts and typically not CDs, unless I know exactly when I’m going to need the money back.
If I have a two-year CD, I know I’m going to spend it all in two years. That might be an okay alternative. But typically if I’m a little bit indeterminate like an emergency fund, I might need to have savings accounts.
By the way, he had a savings account too, which is pretty cool. He had money in savings just for emergencies, which I thought was phenomenal that he had thought that far ahead.
Now, the other thing that you think about is what is the intermediate goal here? Well, buying a house. Well, in how long?
The more time I have between now and when the goal will take place, I can start to lean toward an investment allocation or a mix with more stocks in it.
Because markets go through cycles, and if we look at historically when markets turn down, how long does it take for them to recover from the downturn?
Historically, the average is it’s in dates. There was a New York Times article one time that said, “Hey, you can typically count the number, the amount of time between when a market goes down, when it recovers back to where it was before, not in years, but in dates.” And I thought it was a great article. I’ve quoted it many times, but it’s 111 days is what they came up with in that particular article.
Well, sometimes it’s a little bit longer than that. You might see a couple of years.
If we look at equities back through history, you look at the Depression and you had a 10-year period in the Depression, so that could be a much longer period of time, but that would be exceedingly rare. There were a lot of things that happened during the Depression where the Fed, the interest rate policy, the tax policy, and everything that could have been wrong was done wrong during that period of time.
That’s what we’re looking at going, “Okay, how long?” And in this particular young man’s case, what I did was I said, “Well, I’m looking at a possibility of somewhere in the neighborhood of about 75% stocks, 25% bonds,” because we’re indeterminate. We don’t know exactly where we’re going to have all this money back, but that’s a pretty good asset mix for this particular goal.
Roth IRAs and Non-Qualified Accounts
Then we’re looking at it going, “Okay, so how do we do this?” Well, there are a couple of ways you can do it. Sometimes, and this gets a little bit complex, but sometimes you use a Roth IRA because Roth IRAs are first in, first out.
In other words, if I put $10,000 in over time, and let’s say the account grows to, let me just use $30,000. Let’s say it grows to $30,000, just so you get the concept. I can get the first $10,000 out tax-free, penalty-free.
Now, if it grows, let’s say that it grows to $30,000, that next $20,000, I can get some of it out, $10,000 for a first-time home purchase. The other 10 I could have a penalty in taxes on.
So if you think about it, there are three tiers here. So you might look at that and go, “Well, and if I don’t need all that money, then the money’s there to grow for retirement and I can use it for that particular purpose.”
You can do that. That’s another thing. It may be you also balance that out by using a non-qualified account.
Now, a non-qualified account is just a taxable account. No special bells and whistles or tax benefits from it, but you just own the mutual funds.
And when we own the mutual funds, I might be diversified in 20, 30,000 companies all around the world. Stocks, large companies, small companies, value companies, growth companies, different market segments. And this is beyond really to get all of this down, I just want you to know this stuff exists more than anything.
Non-qualified accounts. I don’t have a limit on how much I can put in. You do have a limit with Roth IRAs, $7,000 this year. If you’re over 50 — he wasn’t — it’s 8,000.
But if you look at that, I say, “Well, what if I want to put more than $7,000 away?” Well, that’s where a non-qualified account comes in, because you’re not limited in how much you can put in.
You can take it out anytime you want, no penalties. You could have some taxes on it, but it’s something that I could use for whatever I want.
Short-Term, Intermediate, and Long-Term Goals
So a non-qualified account can often be a great little intermediate type of a goal fund because I can have access, but I’m just saying, Roth can make sense. This would be something I do with an advisor, making sure they know what the heck they’re doing so they understand the ramifications of accessing the money early.
But this is something that he was thinking about. How do I do this? Now for him, we’re looking at, we hit the long-term goals.
The 401(k), loved that. He could put money inside of that and have the match on the 401(k). We already talked about that. His intermediate goal was going to be the house purchase and how to mix that.
The mix between stock and bonds is driven by time horizon.
I won’t go through all of that. There are some website answers about this on my website, paulwinkler.com, where I talk about time horizon a little bit more in detail. You can actually go to the paulwinkler.com and do a search for “time horizon” and learn more about that. But that is something right there for him.
Another thing for the short-term stuff is cash — don’t want to get fancy. Just savings accounts.
Something like high-yield savings accounts could be okay or something where it’s just I can get access to it at any point in time. Now, I’m going to take a break, but after this, when he was on his way out, we got into a conversation about advice he had gotten from his 401(k) plan provider.
And I’m going to walk you through that because you need to know this stuff exists. Everybody needs to know this stuff is out there and the things that are being taught, but I’ll cover that right after this.
PART 2
Paul Winkler: All right. I am back here on “The Investor Coaching Show.” I’m Paul Winkler.
Diversification
I had a son of one of my good friends come in, and I was just walking through some of the things we talked about — short, intermediate, and long-term goals, utilizing the 401(k) at work, etc. Thinking in terms of the intermediate goal being a house purchase, we talked a little bit about that, and then also short-term money, just emergency type money, thinking about that.
Now, one of the things that happens quite often when we work at a company is we have people that come in, and they’re providers of the 401(k). I have personally sat in on meetings at the client’s request for 401(k) meetings, and one of them said, “Hey, Paul,” I’ll never forget it, “Can you come by my company’s meeting and sit in? They’re going to have a 401(k) thing, and just make sure that what you’re hearing is right.”
And I was like, well, this will be fun. This was years ago. I went, and I was just, oh my goodness. The person was talking about diversification, and the concept of diversification was just wrong.
When we talk about diversification, there are two types of diversification — diversifying within an asset class or a market segment.
I could be a totally diversified tech investor, own all of the major tech companies in the year 2000, and have lost 80% of my money. Whereas over that three-year period, you have market segments that actually went up during that period of time, but you weren’t diversified into those. You just basically lost your shirt.
So the idea of diversification can be pretty doggone narrow. There are people who say you’re diversified if you own five stocks; I’ve heard that. Diversified if I own the S&P 500.
Well, yeah, you’re diversified within those 500 companies, but you’re not diversified in that area of the market. During the 2000 to 2002 downturn, it went down 40%, and went down 40% again in the 2007, 2008, and 2009 downturns.
From 1966 through 1982, you have zero return. Zero, and you can be diversified in the S&P 500. Zip, no return whatsoever.
So diversification can be inside of an asset category and feel right, and that’s what the person at the 401(k) meeting was teaching. The other thing is diversifying across asset categories, and diversifying across different types of asset categories, not in just US stocks, large, small, large value, small value, but also international, emerging markets, and diversifying in stocks versus bonds. That’s another type of diversification.
Investment Advisor Pyramid Scheme
So it was very, very narrow what was being taught in the workshop that the person was teaching for the 401(k) provider for my old client. Now, in this particular case, this guy went to the employer and said, “Hey, I want to talk about not only just our 401(k), but I just want to get some general advice about investing.”
And they sent him to the provider for the 401(k). So the person sat down with him and started talking about investing, and then started talking about recruiting him as an investment advisor. And he was like, “No, no, no, no, no, wait a minute, this isn’t what I was looking for,” and as the meeting went on, this young guy, 20-year-old, goes, “Is this a pyramid scheme?”
And I laughed because I thought, Bravo to you, bravo to you. And the guy said, “No, no, no, no, no, no, it’s not that at all, it’s not multilevel marketing. It’s not.”
And he said, “What’s the difference?” So he was basically pointing out to me that here is a guy at the 401(k) trying to recruit him to be an investment advisor. And he said, what is that all about?
And I said, “You’d be surprised how many big name groups out there, companies, people out there, they’re well known” — I named a few because I was in a private meeting — “but actually, that’s what they’re doing.” They will recruit you because you have friends, you have family members, and what you’ll do is you’ll pull in your friends and family members, they’ll teach you how to sell investments. It’s the way it works. A lot of times this is the way it works.
So you’re recruited by this person. Then you go out and you look for friends and family members. “Hey, you got to go talk to this person. I’m becoming a financial advisor and I’m learning about this.”
Then your friends and family members meet with this person who has recruited you, and then they get commissions, payments for bringing on the clients, which are your family members and your friends. And by the time you’ve worked through five friends and family members, you’ve worked through your entire network of people that might even do something as a favor to you, buy something from you as a favor to you.
And now you’re trained. Now you go out and go forth and do this yourself. Then you fail out of the business. In the meantime, the person who recruited you got your five friends and family members as clients.
And so I explained it to him. He was like, “Oh my gosh.” And I said, “Yeah, that’s basically what we see all the time.”
The investment industry is notorious for having people who are very poorly trained, very poorly educated, out there selling, and they talk at a low level, just a little bit higher than you, and you think that they know a lot more than they know.
Be very wary about the level of education of advisors.
And your 401(k)s, quite often, it’s just salespeople that represent these 401(k)s. They get out there and recruit them, bring in the money, and then the people in the 401(k) have no clue what they’re really doing. And they don’t know that they don’t know what they’re doing because the person talks at a higher level than you do. It just frustrates me.
Investing in Gold
Oh, this is lovely. Yeah, Scott in my office up in Goodlettsville — you’re going to love this — he handed me this flyer they got in the mail. It said, “4% back in gold and silver on this credit card.”
Yeah. So using a bullion card — it’s bull something — invest as you spend, and you get your rewards and money. And it’s another thing driving people to put money into something.
“Wow, this is great. Gold. That’s what I want. Gold and silver.”
If you’ve never heard me talk about this, with gold historically, the rate of return is non-existent after inflation. And I often use the example of a good men’s suit because I heard this from this academic one time.
One hundred years ago, you could buy a good men’s suit for an ounce of gold. Today, you could buy a good men’s suit for an ounce of gold. But people think it’s this great investment.
There’s no cost of capital. Nobody’s paying you to use your money.
When we look at dividends on stocks, we look at interest on accounts, we look at interest on bonds, we look at the payment of rent on real estate, there is a cost to use your stuff. And that’s the difference between gold and silver and anything like that. Anything that you don’t have a cost of capital, by definition, is not an investment.
But what happens is people hear, “Hey, this is a great thing to be doing with your money right now. These are times of uncertainty. Gold has always been there and blah, blah, blah.”
Well, some of the greatest uncertainty we had in this country was in the ’80s, in the early ’80s and late ’70s, and gold actually took a pretty big dive even though inflation was very, very high. So it’s not necessarily the case.
Increasing the Gold Supply
I was actually having a conversation with somebody, one of my clients this week, and they were talking about certain countries mining underground in the ocean. And I’ve talked about this before.
If you have the ability to increase the supply of something — I’ve said this before, but since 1971, you’ve had half of the gold ever mined has been mined since 1971.
Well, what if you own something that the supply of it keeps increasing because they’re able to find more of it? What does that tend to do to price?
What happens when a car manufacturer decides to make too many of a certain model and they can’t sell it all? Well, they have to drop the price to get rid of them.
Well, that’s the same with anything. It’s a basic supply and demand. That’s Economics 101.
And that’s one of the things that you have to be watching out for here is them telling you, “Hey, we’re going to give you this back in gold and blah, blah, blah.” And you have to wonder, If I got the gold in my account as kind of not a cashback, but a gold back on my credit card, what would it cost me to sell it, and where would it be stored and who’s making money on storage of it?
My mind goes all over the place when I see this kind of stuff. It’s probably in the fine print someplace.
Let’s say they earn rewards on their things and they earn four points per dollar in purchases. Oh gosh, the fine print is too long.
I don’t know. I’m not going to go through all this on the radio. You’re probably sleeping. But there’s probably some really interesting stuff in that fine print.
But I’m just telling you as a general, well, not even as a general rule. Now, I’ve heard people say, you ought to have part of your portfolio in gold. I just have none. Zero.
I just don’t. That’s not something I would even consider doing.
Financial Firms Playing With Your Emotions
I was talking about something when comes to diversification, and I talk about this all the time. One of the things I did was this week I was having a meeting with all the different people in different offices around. And one of the things that I really just kept hearkening back to was when we look at investment portfolios and I see a level of diversification that isn’t quite what I think it ought to be. Let me just get you to follow why that’s so important.
For example, right now, if we’re looking at large US stocks, as I speak right now, large US companies are selling for a multiple of the value of their assets. So when we talk about gold, for example, I do have exposure when I own mining companies, for example.
It’s not that you don’t have any exposure, but I want to own a company that is actually producing something and they have earnings and I’m actually getting a cost of capital. But recognize that some of these companies can be selling for high multiples. It’s not unlike the S&P 500.
And when I say a multiple, I mean how many times they’re selling for every dollar of earnings. And it actually can get an over-exuberance in people and buying companies just because they’ve done well recently.
The same thing happens with gold or silver or Bitcoin or anything. When something has had a good run, people create this pattern in their minds that the run is going to continue.
Recognize that the financial firms will play on this emotion with you. Your emotion is greed, number one. That’s the emotion being played on, but they’re also playing on the instinct of going toward pleasure.
And when you see this kind of stuff, when you see ads like this saying, “Hey, you’re not going to get your cash back, but you’re going to get gold instead.” Or if I see people pushing certain mutual funds with good past performance or short-term track records, five, 10 years — yes, that’s short-term.
When you see those track records, recognize they are playing you and they’re playing you based on this psychological game of messing around with your desire to have more, which is natural. They’re playing on the greed though.
Recognize it. When you’re played for your greed, you can fall by it as well. And they’re getting you to go toward pleasure.
When reality says that trees don’t grow to heaven, don’t fall for it. Gold, the last time it went up to a high level, dropped like a rock. Pun intended. Well, like a metal, really quickly and it can happen again.
Advisory services offered through Paul Winkler, Inc an SEC registered investment advisor. The opinions voiced and information provided in this material are for general informational purposes only and not intended to provide specific advice or recommendations for any individual. To determine what investments are appropriate for you, please consult with a financial advisor. PWI does not provide tax or legal advice. Please consult your tax or legal advisor regarding your particular situation.
