How Do We Redistribute Wealth in America?
Posted by politicalpartypooper on April 13, 2010
The top ten percent of people in America have 71.5% of the wealth. The bottom 50% of people have 2.5% of the wealth. For a long time, I’ve been talking about a plutocracy that is forming in America. Wait until you see this pie chart.
Notice that this chart was made in 2007, before the single greatest wealth redistribution event in the history of man; the bank/ Wall Street bailout and the 60% Bear Market of 2008. This chart would look even more starkly pro-plutocratic than it does right now, because the people located between the 50th and 90th percentile no longer have 9.3% of all stocks, bonds, and mutual funds in America. Any guesses as to which percentile that money went to?
This post isn’t another whine about plutocracy, but rather a call to action for everyone below the 90th percentile to change this. How do we do that? One of the first ways you can do it is to keep your job; to do anything you have to do to stay employed. The second is like it; do more than you’re paid for and make yourself as irreplaceable as possible. The third also has to do with your job; work as though you are worth more.
None of the first three things guarantee that you will change anything in your financial life; but they are guarantees that you will be giving yourself the best opportunities to do so. Capitalism is all about seizing opportunity.
What else can we do? Take advantage of your employer’s retirement program. I realize that many of you are already doing this, but you may not be doing it in the right way. Are you losing half of your 401k every time we have a bear market? The answer for most of you will be yes, if the statistics on that are at all close. Don’t be ashamed if it’s yes for you, too. The fact is, the vast majority of 401k’s and employer retirement plans lose more than 50% every time there has been a bear market in the last twenty years, which begs the question, “What in the world are you investing in?” followed by, “Who in the world is advising you?”
First step to investing: No Mutual Funds! Don’t buy them! Don’t do it! Not unless you like not knowing who is managing your money, what they are investing in, and how much they are making off of losing your money for you. If you have no other choices (like individual stocks and bonds), then make sure that no more than 50% of your entire portfolio is in stock mutual funds at any one time, regardless of age. This one simple step will leave you far ahead of everyone else around you.
If you are allowed, buy individual stocks and bonds; it will require you to pay more attention to your portfolio and your advisor. Do it. You won’t be sorry. There’s nothing wrong with a Treasury paying 5%. Your Grandparents retired by investing in almost nothing but bonds. In fact, Mutual Funds only became popular around the first part of the 90’s. Before that, most people invested in cash, bonds, or stocks. I can’t stress to you strongly enough how important this is. If you want a bigger piece of that pie, you cannot allow your money to be invested into a black hole, which is what mutual funds are. I call them a black hole because you cannot possibly, at any one moment in time, know where all of your money is. That means your money is out of your control. The first rule of wealth is that you must control your money. If someone else does, it’s not really your money, is it?
If your portfolio starts at $50,000, and it gains 20% for four straight years, and then loses 50%, how much do you have left? Answer? $51,840. That’s five years of investing for a gain of 3.6%. However, a portfolio that actually had a straight-line return of only 3.6% every year for five years would have a value of $59,671, a nearly $8,000 difference! So what did all those years of 20% returns actually gain for you? $8,000 less than the fellow you laughed at who was only earning 3.6% every year. Get it? That’s how the vast majority of investors from the last Bear Market in 2001 to the one in 2008 failed to earn even one percent on their investments over that time.
I have friends who refuse to let a friend advise them who complain to me that since 1985, the only thing in their retirement portfolio is their original investment. That’s twenty-five years of investing! For nothing! Just putting that money in a money market would have left them far, far better off than they are now! Do you need any more evidence that investing heavily in stock mutual funds is the wrong way to do it? Stop it!
The key to coming out ahead is managing your profits and losses. With stocks, you can buy low and sell high. I know, I know…everyone knows that! But few do it, and mutual funds are a part of the reason why. Timing the market is another reason why, and the funny thing is, timing the market the opposite way is just as easy! If you buy a stock, and have done sound research on it, then you can feel safe in naming your “sell” price, so long as that sell price is realistic. Once you sell it, convert it to cash and wait for the market to tank. It will, It always does. You might miss up to fifty percent of the market gain doing it this way, but I guarantee that you will miss eighty percent of the market’s loss in a bear market. Wait until the market drops, and then buy low. Be realistic, and be content with a good profit. If a stock has gained fifty percent in one year, even if you think it might gain another fifty, I’d sell it. And then I’d wait for it to tank, because sooner or later, they all do. Patience is the name of the game. There is absolutely no room in the stock market for most day traders. They simply do not have the patience to make their million the old fashioned way; by earning it. And you earn it through planning it and being patient about it.
There are two certainties in the stock market. What goes up will always come down, and what comes down will always go up. If you sell near the top…not at the top because we’re not good enough to guess where that is, you’ll do fine. Be content to lose a little bit of market gain, rather than all of it by being greedy and hanging on too long to your stock. As an example, if you bought your stock when the market was at 7500, and sold it when the market hit 10,000, getting back into a stock should occur when the market hits near 8000.
Yes, the market might drop lower than 8,000, it might even drop to 7000, but remember, you bought at 7500, then sold at 10,000, and now bought at 8,000 again. You only need to get to 8001 to realize a profit, and who here thinks the market won’t blast right past that? The key is to ride the middle of the wave, not the crest or the valley. Riding the middle of the wave is how Warren Buffet does it, if you need one example of a very wealthy, well-known name who did it this way. And because you are dealing with individual stocks and not the entire market, tracking when to buy is that much easier.
Buying bonds will help the other portion of your portfolio with consistency. Buy nothing but Grade AAA bonds, and don’t be shy about buying U.S Government debt. The wealthiest people in the world are buying gobs of it right now. That should tell you something.
There is another part to this. In order to have money to invest, we have to stop spending money stupidly. No one needs the new iPad. I guarantee it! There isn’t a single person in this world who needs the iPad. Likewise, no one needs a new cell phone every year no matter how cool it is, and as a special message to some of my clients (you know who you are), no one needs to spend $275 / month on a cell phone bill, and $145/month on cable. No one. We haven’t even touched half of entertainment yet. No one needs to go see 30% of the movies that hit the box office every year. When I ask some of my clients what they spend at the movies, I almost go blue in the face at the answers. Sometimes it reasonable, like $50 / month. Other times it’s ridiculous, like the couples that tell me they really don’t know, but if they had to guess, they’d say around $200/month. Yikes! Even going every weekend, I don’t see how a couple can spend that much at their local theater. Isn’t that impossible? But even more concerning is that they don’t know!
Remember the number one rule of wealth? You must control your money! If you don’t know where it’s going, it’s not really your money.
Do you really need that 52″ LCD TV? Do you really need to pay $20 extra every month just to watch fifteen channels in HD? Do your kids really need to have unlimited texting? If so, what are we teaching them about restraint? My daughter gets 1000 texts a month, and even then, I think it’s too high. If she goes over, too fucking bad; She loses her phone for a month. That’s the rule. By the way, she’s never gone over. Personally, I have texted exactly twice in my life, just to prove I could do it. It’s useless garbage. If I had to communicate at that snail’s pace every day, I’d go insane. Time is money. Texting is a waste of time, and thus, a waste of money.
Rule number two for wealth: Save your money first, then spend it. Put aside your ten or fifteen percent, then pay your bills, and I guarantee you that you will feel a lot better about spending the rest of it on whatever you want. Most people spend first, then scramble to pay bills, and cry because they have no savings. If I tell them this, they sometimes get angry and say, “It’s my money! I can do what I want!”.
Allow me to refer you back to rule number one of wealth: You must control your money! If you don’t know where it’s going, it’s not really your money.
So if you can’t control how you spend your money, may I be the first to tell you that there is no hope for you? For some people, they think they have to earn more in order to save money at all, for others, they have to earn more to save more. But I have an example that will blow your mind, and end this argument of needing higher earnings in order to save for all time.
Meet Jacob and Melissa . (their real first names) Jacob and Melissa were married at the age of eighteen. They are currently both twenty-six. They have four children, and Melissa is a stay-at-home mom. Jacob works at Subway as a shift manager, which means he’s second-in-charge of the day-to-day operations. It also means he earns about $12.00/hr, which ends up computing into about $1,800 take-home-pay every month. As you can see, that’s not a lot of money for a family of six. But wait; that’s not all. Jacob and Melissa also own their own home, and their payment every month is less than $600, including taxes and insurance. Jacob puts 15% of his wages into his 401k, and somehow, Jacob and Melissa manage to save another 5% of his take home pay every month. Jacob has health insurance through his employer, and just recently bought a life insurance policy for not only he and Melissa, but a small one for each of the children as well. This is a family that is as handicapped as any in America, with four young children, a main breadwinner without a college degree, and a stay-at-home mom! And yet they are thriving!
What’s missing? They own two cars and one of them is paid- for and five years old. The other is three years old and within a year of being paid off. They don’t own Cadillacs. They don’t have a LCD TV, but Jacob has the money to buy one with cash if he wants to. They have a debit card that they use as their credit card for online purchases; otherwise, no credit cards at all. Melissa has a cell phone plan for $45/month and no land line. Jacob splurges on his satellite dish at $35/month. They both love their DSL internet for $25/month. They go to a movie about once a month and out to eat twice monthly. What in the world are they missing? Nothing. Absolutely nothing. But they are considered poor for America, as in “below poverty level”.
If Jacob and Melissa can do it, anyone can do it. All it takes is the will to get it done. I absolutely abhor the plutocracy that the US of A has become, but we can change that ourselves; most of us.
If you aren’t willing to do at the very least what Jacob and Melissa have done for themselves, then you have no right to expect your government to do it for you. Maybe there are some things that need to be done to level the playing field for small businesses vs. giant corporations, or for higher wages for employees, but for the most part, you are on your own. If you want what the Man has, then take it from the Man using his own game against him. I just gave you an example of a man who earns $12/hr doing just that!
Stay on your Federal and local government to keep the playing field level, to provide equal opportunities for all Americans, but in the end, wealth is up to you. If you want to change that pie chart to your benefit, it all starts and ends with you. If Jacob can do it at $12/hr with a family of six, what’s holding anyone else back?