Enough

“Suppose that a family has $100,000 invested in conservative bonds, yielding $3000 a year: … perhaps the time comes when the family feels they can no longer hold their heads up… unless their daughter goes to a fashionable finishing school. It will be necessary to jack up their income yield to $ 5,500. Their investment man can arrange a larger yield in a jiffy. He simply sells out the conservative bonds and substitutes with riskier securities.” – Fred Schwed 

People will always want and need more money, whether they seek a higher-paying job or a better return on their accumulated assets. 

It has taken most of us 50 years to understand how detrimental inflation is, even though we have been experiencing it our entire lives.  

To combat inflation, we have asked for higher wages and higher rates of return. When I first started working, I was making a minimum wage of $3.35 per hour. Now, the minimum wage in some states is $20 per hour, but that is still not enough to keep up with rising inflation. Because of rising inflation, for most of us, there will never be enough money. 

The Asset Problem 

Fidelity recently disclosed that it has nearly 500,000 401k participants with $1 million or more in assets in their accounts. This sounds like a good number; however, Fidelity services over 20 million accounts. Thus, only about 2.5% of all the participants have $1 million accounts. 

The problem with a large 401k, IRA, or other investment account is the chance of insufficient money. People will try to squirrel money away, but there will be constant pressure to make that money work more efficiently.  

It would be nice to have $1 million in a 401k account until one makes the effort to understand what the money is really worth.  

Look at assets as they compete against inflation. If inflation has been growing at roughly 2-3% a year for the last 50 years, then achieving a return of 4% meant there was an extra 1-2% return beyond inflation. This excess return is called real return, which is nice to see. 

However, bang! In the blink of an eye, inflation goes from 2-3% to upwards of 9%. Now, the 4% return is actually –5% in real return, so the inflation-adjusted return is no longer positive but significantly negative. 

When this happens, there is an asset problem because the saver does not have enough assets to meet their everyday needs and will spend that money faster. This will lead to a greater decline in asset value, which can result in fewer dollars to meet everyday costs and expenses. 

Of course, results depend on a stable financial market that never declines and an economy that never has a recession. If you missed the sarcasm, sorry. Both cases are virtually unobtainable unless there is manipulation.  

The Problem and Solution 

There is a point in everyone’s life when they start to think about how much money they want or need, and $1 million has always been considered desirable. But is it really? 

Currently, the average income in the US is about $80,000 per year. If a person were to quit their job, be fortunate enough to have saved up $1 million, and try to live off the assets, they would be able to do that for a little over 12 years until they would need to find more assets or income. (This excludes adjustments for inflation and includes never receiving any return on the saved money. Also, don’t forget that taxes will always be due.) 

No one knows how much is enough 

In my younger days, I would ask financial advisors how much money they thought was necessary for retirement. To my surprise, most advisors had never thought about this question. Their goal was to get the money and manage the assets, not determine how much they needed to have for a comfortable retirement.   

Through research, it was determined that an optimal withdrawal rate must be established. Most financial plans are based on a 4% withdrawal rate, but what happens when inflation is greater than 4%? The withdrawal rate will have to change to keep up with rising costs, or a higher return is needed, which will require more risk.  

Is there a “Magic Number”? 

Someone who has $1 million in their retirement account could produce a return of 4% and withdraw that amount every year, giving them $40,000/ year. People will supplement this dollar amount with Social Security (projected to be depleted in 8-10 years) and hope for the best. Sooner or later, they would get into their assets to make ends meet, and the great withdrawal would begin. As we see, if the average salary is $80,000/year, a $40,000 income withdrawal along with Social Security is going to cover about 75% of the average wage; therefore, more money will be necessary to avoid dipping into more of the savings,  

People who have $2 million would be able to generate $80,000 per year at 4%. But how do you get the money if the average income is $80,000? It is either save, save, save, pray, pray, or work, work, work.  

It all seems like a virtuous cycle that can never be enough to be able to keep up. The system rewards those with assets, but learning to compete is a way to succeed. If only 2.5% of accounts in Fidelity 401(k) plans are worth $1 million, then each person should try to focus on their own wealth accumulation. They do not get consumed by everyone else’s values but want to ensure they will have more than necessary to combat rising inflation and economic turbulence. The magic number is what works for you to take advantage of the system to make sure there will be ENOUGH FOR YOU. 

Break the Change 

Clearing The Brush

Driving through the mountains, I encountered miles and miles of burned trees. This fire had occurred a couple of years ago and was very destructive. The devastation of the fire included houses destroyed, businesses engulfed in flames, and the entire mountainside burned to a crisp. Standing in the place of once tall, full-grown trees are tall, black, dying trees waiting to eventually fall to the ground. It all looked like a barren moonscape, but there was hope.  

Even though the trees have been burned, green grass and small mountain shrubs have started to regrow at their feet. Eventually, it will look beautiful, and the remnants of the fire will be a distant memory.  

After the fire, people pointed fingers to determine how it started and how to prevent it. Of course, everyone had the right answer, but Mother Nature had taken action and cleared out all of the brush and dead or dying trees to make way for new, healthy growth in the future. Nature has a way of “fixing” things and rebuilding.  

Humans want to control Nature.  

Meanwhile, there has yet to be a ‘cleansing fire’ (recession) to clean out the markets in the world of high finance. Yes, there was a modest decline in 2022, and the bond market has been suffering one of its worst declines in decades, but the powers that be have prevented a sizeable recession from happening. The financial markets have shown resilience, with over $ 6 trillion being pumped into the system, making it hard to have a market decline.  

After a decade of low interest rates for cash and money market accounts, making 5+ % with minimal risk is appealing. Because of that, trillions of dollars are sitting in these accounts. Even though the returns do not keep up with inflation, getting some returns without price fluctuation can be excellent.   

Humans have been trying to control Nature. When they do this with forests, eventually, the forests will respond with a big fire to clean everything out. The same will happen with the financial markets.  

Most are not prepared for the impending cleanout because of 2 things. First, they do not spend enough time educating themselves on financial and economic developments. It could be due to the demands of everyday life, which, we know, can lead to just wanting to kick our feet up and do nothing. Second, the guidance people are receiving is based on a revenue model. Therefore, the people/organizations getting the revenue will always try to maintain the revenue. The result is staying invested and happy when the market goes up but getting every catchphrase from the marketing geniuses about staying invested when there is a market decline.  

What happens if there is a significant cleanout fire (recession)?  

Like any fire in the forest, no one knows exactly when it will happen. Further, people won’t know how quickly it can spread when it does happen. Leading up to the GFC of 2008-2009, small problems would break out from time to time, and the “firefighters” (The Federal Reserve and the Treasury) would work quickly to tame the threat. It would work, but the embers would still be smoldering and then reignited again when more problems emerged, similar to smoldering embers in the forest that reignite when the wind blows.   

Only time will tell when the fire will burn. When it does happen, it will burn extremely hot and impact millions of people. Being overprepared for something like that can be good. Warren Buffett has often said, ‘You make a bulk of your money in a bear market; you don’t realize it at the time.’ How is that? Because you could ‘weather through the storm’ and were prudent and cautious during the tumultuous times, this presents an opportunity for significant financial gains.   

After we have experienced the dramatic results, we will be able to see the grasses turn green again, the brushes begin to grow again, and the trees produce foliage again. It will take some time, but what happens in Nature can also occur in the financial markets. By preparing for the worst, you can be ready to capitalize on the best when everyone else is having problems, empowering you to navigate market downturns effectively.  

Break the change 

Be Careful What You Wish For

The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks. – Jerome Powell 

The financial markets, investors, and Americans benefitted from historically low interest rates in the past decade. However, starting in 2022, the Federal Reserve began raising interest rates. Even though this was expected, it still caused consternation. Rising rates are never fun for anyone. 

While rates were being raised, a chorus of investors demanded they be lowered. Lower rates are easy to understand because they allow for potentially lower interest costs borrowers incur on their debt.  

Rising rates are not bad for the economy because they generally indicate that the economy is doing well and that most everyone is making money. Economic classes will teach that rising rates are a way to keep the economy from growing too fast and keep rising prices from going up too quickly. 

No matter which direction the Federal Reserve goes with interest rates, whether up or down, their actions resemble a pebble thrown in the water. When the pebble hits the water, it causes a ripple effect that will move throughout the body of water. Doing this type of pebble-throw action is what the Federal Reserve hopes to happen when they make their interest rate policy adjustments. The effects will cause financial institutions to adjust their interest rates and encourage more or less fiscal control. 

As we have seen, the Cantillon effect has been ever present in the financial and economic system for quite some time. As the Federal Reserve has implemented its monetary policy, it has benefitted those that are closely aligned with those that are close to the Fed, such as the “too big to fail banks”, hedge funds, private equity, and other financial managers (along with their executives who have received massive compensation packages). The problem is the ripple effect has not benefitted much of the population. This part of the population has seen prices for everyday goods and services rise, in some cases over 50%, while the value of the dollar they earn has not allowed them to buy as many goods as they previously could.  

The people who control the money have been begging the Federal Reserve to lower interest rates. They are making this request because they are starting to see financial data that indicates the economy may not be as robust as advertised. Recently, the number of jobs supposedly created over the last year was adjusted downward by over 800,000 jobs. Also, the unemployment rate has risen from a reported 3.4% to over 4.3%. Add to that number the reports of companies planning to lay off employees, and the economic picture becomes gloomy.  

When Jerome Powell recently spoke at a Federal Reserve meeting in Wyoming, he stated that it may be time for the Fed to pivot and consider lowering rates. If the economy is so good, why would the Fed be thinking about lowering rates, especially so close to a major election? The answer is simple: the economy is not as good as advertised. 

Whenever the Fed lowers interest rates, it is a precursor to the economy going into a recession. Yes, it will drive down the cost of a mortgage, but home prices are still historically higher, so who is going to be able to afford these homes? We shall see. 

Be careful what you wish for. The people at the top of the Cantillon pyramid are excited to see interest rates lowered, but the people at the bottom will still be paying higher prices for essentials while barely making a wage that can compete with higher prices.  

The investment market may have a slightly enthusiastic bounce higher, but when the eventual recession hits, it will be felt much sooner than it is confirmed. 

I remember someone told me a long time ago when I was encountering one of my first recessions that a recession is when your neighbor loses their job, and a depression is when you lose your job.  

Tread carefully, and don’t celebrate the headlines. Your ability to control your finances is the most important element to successful outcomes. 

Break the change. 

Illusion vs. Reality

Anyone who believes in magic is a foolHarry Houdini.  

Something is mesmerizing about a magic act, how a well-trained magician can use their abilities to captivate the crowd and take them to what seems like a different world. These magicians can make things fly, disappear, or reappear in the blink of an eye. The entertainment value they provide is fun at the moment it is seen and can last for a few days.   

A good magician keeps the audience from knowing exactly how the illusions are created and frequently keeps them engaged by moving from one illusion to the next. By the end of the show, the audience is entertained but questions how the various tricks were performed.  

When we go see a magician, we know what to expect from them because we want to be separated from reality for a while and taken to a place where illusions seem real.   

Every so often, we encounter illusions in real life. One is happening right now. We have seen the illusion of inflation turn into the reality of struggle. As prices have gone up, it has become more challenging to make the income necessary to purchase even basic goods and services needed to survive.  

People are starting to make difficult decisions about where to spend their hard-earned dollars. Reports have shown that people who make over $250 thousand have less than $1000 for emergency expenses. This type of income used to be considered the top 5% of all income earners, but now it is not.   

The illusionists keep telling us that prices have increased by 22% for groceries, 23% for dining out food, 25% for fuel, and 27% for auto insurance costs. The reality will tell you that these numbers are significantly higher. So, who will you trust? What your wallet, or what the assumed experts are saying? Most people believe these price increases are much higher and do not take themselves as fools.   

Meanwhile, as prices for what we buy go up, the cost to produce these goods has gone up as well. Henry Ford was not only recognized for his design of the assembly line but also for his willingness to pay his employees a wage that would allow them to buy the cars they made. Now, wages are not able to keep up with the goods produced.  

The challenge is that companies are obligated to their employees and shareholders. Suppose the cost to produce goods erodes the company’s earnings potential. In that case, the company will reduce employee headcount and may even reduce their operations or move the operations. We are starting to see this right now as more and more companies are laying off employees, moving their business from one state to another (it seems like companies based in California have been leaving consistently) due to tax burdens or working conditions, or they are even moving to other countries as Ford recently announced they will be moving more manufacturing to Mexico because labor costs are cheaper.   

We have been part of a grand illusion to make everything appear suitable, but that illusion is beginning to fade, and reality is setting in. Recognizing this is important to be prepared for what will happen in the future. Magically, all the financial data produced has been of the Goldilocks variety, where it is not too bad and not too good.   

Don’t be enthralled by the illusion. Sooner or later, reality will set in, and that will be when real challenges will begin. Change will be necessary, even if it is not desired. Go forward and break the change. 

The Reality of Retail Sales

Last week, the retail sales report showed an increase of 1% for the month of July. Yippee, the consumer, is spending money again. Is that the case? 
While the recent retail sales report did show a 1% increase for July, it’s crucial to note that these figures have been revised downward in eight of the last twelve months. This downward trend is a significant indicator that warrants closer examination. 

While many may find such economic indicators as retail sales data to be of little interest, it’s important to remember that these figures can provide valuable insights. Understanding what’s happening ‘under the surface’ can be a key to making informed financial decisions. 
Some businesses rarely have a sale because their products have incredible pricing power. Their products are in such high demand that consumers are willing to pay a premium price. One company that has been successful at doing this for a long time is Apple. Everyone knows that if they buy an Apple product, they will pay a sizeable premium over competitors. Because of this capability, Apple has been able to have this premium price capability because of the design of its products and the quality and ease of use of its products. However, I noticed last week that even the mighty Apple is having a sale on many of their products. 
Economics 101 will teach you that when demand begins to fall, prices must fall to try to increase it.
It is common for a company to lower prices on older products to reduce inventory and make room for new products, but this differs from what Apple is doing. Besides Apple, several other companies have reduced prices to entice consumers to buy their products. However, chances are slim this tactic will work because inflation is still running rampant, causing prices to continue to accelerate and purchasing power to decline. The result is causing retail sales to look like they are rising when, actually, consumers are getting less for their dollar. 
With retail sales showing a slight uptick but being revised downward for most months, there may be a more significant sign that financial uncertainty is coming faster than anticipated.  
The state of retail sales should tell you that the earnings companies rely on to survive may not be as robust as people expect in the coming months. Eventually, Wall Street will recognize that earnings are not growing as much as previously, and the bull market everyone is celebrating may turn into a bear market before people realize it. 
Break the change! 

Returns, Returns, Returns

This past week has been one of those fun weeks for the financial markets. The week opened with massive downside selling. Before most investors knew what hit them, the various indexes had declined between 3% and 6%. All the financial pundits were coming out to try to calm everyone’s nerves and encourage people to have a long-term perspective, which is what they always do.  

Why do they try to keep everyone’s emotions in check? The goal is not whether investors lose or make money; it is whether the financial firms lose or make money. They are beholden to making returns on the money they have under management. So, if the market starts to decline, their clients risk losing money, but the financial firms will make money because they are still charging fees.   

It is never fun to see the market go down, and when it does, it can be very unnerving. However, historically, there will be a market decline of around 10% about every two years. After the GFC (Great Financial Crisis), the number of 10% declines has gone from once every two years to more like once every four years. Suffice it to say investors have benefitted from an ever-increasing market.  

Even though the market declined at the beginning of the week, it has been able to recoup all of those losses. Most investors did not get emotional and did not sell when the market was declining. This is mainly because the declines are not really impacting them yet.   

An investor with $100,000 in an account who has seen it appreciate up to $110,000 is happy to see that type of gain of $10,000 or 10%. Now, if they were to lose 6% on the $110,000, they would still be satisfied because their return is still higher than what they initially started investing with.  

While investors will look at the returns they receive over a day, a week, a month, a year, or ten years, they should focus more on two specific types of returns they can receive: RETURN ON CAPITAL or RETURN OF CAPITAL.   

Return ON Capital is when an investor sees their money appreciate and grow over time. When appreciation occurs, investors are happy and willing to continue to see their assets appreciate. Further, with appreciation, the hope is the money will be there for some future needs, and then the thinking will be that the market will not decline but continue to reward with higher and higher returns, which is foolish to think the market will always go up. 

Yet, significant sustainable market declines bring about different attitudes from investors. Declines lead to not focusing on capital appreciation but on getting as much money back as possible. In simplest terms, when people focus on the return of Capital, they want their money back.  

Most people will lean toward one objective or the other. Some want to see their assets grow and thus want the return on capital type of investment approach. They will be willing to absorb some declines and hope upward returns will continue. 

There is nothing wrong with being greedy or cautious, which are what these attitudes represent, but when the market has moved away from its traditional normalcy, then something else may be afoot. When this happens, as it is now, all bets are off. Do what you please.  

There will always be volatility in the market; this is a given. We have been living in a different simulation of bad news being good news and good news being good news. This week’s market action has proven that even with bad news, efforts will be made to continue the market’s ever-steady rise upward. Because of these shenanigans, the return of Capital may be necessary.  

Break the Change. 

Word From the Street #8 

Economic observations from Main Street – Local restaurant apocalypse 

Breaking the Change aims to help subscribers become better educated on financial topics with the hope they will be more confident with personal financial decisions.   

To achieve financial success, one must remain as unemotional as possible, not becoming too euphoric or negative.   

Early in the investment management business, I learned to use observation for potential investments and when economic headwinds may be building. It is essential to look at a company’s financials and monitor its ability to find and retain new customers. What happens in one part of a city, state, or country may differ entirely from another, but various observations help illustrate broad financial conditions.  

Restaurants are usually busy the first part of the week. It is not uncommon for a restaurant to be closed on a Monday or Tuesday because of light customer flow and the need to prepare for the busier part of the week. However, I visited a popular Mexican Food restaurant on a Wednesday night. To say I was shocked would be an understatement.  

My visit was during prime dining hours of 6-7 p.m. When I walked in, there were two customers there. That was it! Two people were sitting at different places at the bar. I looked around to double-check, and there was nobody else.  

After taking the customer count, I noticed plenty of employees there. They had a server, a bartender, at least one cook, someone working in the back of the restaurant, and another sweeping the floor. I felt terrible for the employees because they would not get much business that night.  

That one night may have been an anomaly because it was usually busy when I visited before. Seeing so few customers concerned me for the business but made me question the economy. People may have had other things to do. Or all the customers were using DoorDash (although it didn’t look that way). Could it also be that people are getting tapped out and can’t afford meals at restaurants as frequently?   

Interestingly, this visit coincided with McDonald’s reporting slowing visitor traffic in their stores and focusing on increasing customer traffic with the “$5 Meal Deal.”  

Using observation skills to see how the economy works around you can help make informed financial decisions. If a restaurant is not very busy during the middle of the week, what is that showing you? Could the food quality have changed, or could the experience have altered?   

Further, one of the largest fast-food chains reports slower customer visits and a small local restaurant has fewer customers. This observation shows that the economy may not be good, and risks could rise. 

An economic slowdown could be a problem —small or large businesses’ ability to generate revenue impacts the economy.  

Remember, one restaurant, even if it is small, can have a significant impact on the economy. For example, one restaurant has other businesses tied into its supply chain to operate regularly. This chain will include food suppliers, beverage suppliers, cleaning companies, and property owners, to name a few. Also, the employees need to get the income necessary to survive. If not, they will leave to find better pay, so a decline by one business can also have ripple effects for other companies.  

Your hard-earned dollars require some observation occasionally to seek out gains and help prepare for or protect against a potential decline.   

In short, losing 50% is more difficult to recover from both financially and emotionally than making 50%.   

Break the Change by observing what is happening around you. These observations can help you become better educated.  

$35 Trillion

You are welcome! The US is now $35 trillion in debt. As the post references, this means that every person living in the US is strapped with roughly $105,000 in federal debt. Then add on State and even local debt, and most people are looking at an even bigger number. So, for a family of 4, the debt would be north of $420,000. If you have children, then they are going to be saddled with this debt for not even participating. This is crazy!  

The debt is growing at about $1 trillion every 90 days, and there doesn’t seem to be an end to it. The annual interest expense on this debt is estimated to be over $1.3 Trillion.  

We will be told, “It is okay to just keep living our lives,” and there is the problem. Most of us will shrug this information off because “What else can you do?”  

Debt leads to massive destruction when not used correctly, and it is highly evident that the US is not using debt correctly. The people in charge are continuing to take on more debt to deal with current financial expenses and appear not to think about the future impact. The results will be catastrophic.  

Parts of the population will not feel the impact of this ever-increasing debt problem, but the vast majority will. Debt has to be paid, or there will be consequences, as debt has gotten people into financial problems. Currently, we may not feel the impact of this type of national debt, but soon, there will be an impact.   

This type of debt growth is leading to higher inflation and crimping people’s ability to save their hard-earned dollars. More of what they earn is having to go to meet rising expenses. Meanwhile, with rising costs for goods, we see rising tax receipts, but no end in sight for when this will stabilize.   

The work people do to save some dollars will be in vain if this level of debt continues to increase. When people reach a certain point where their debt is unsustainable, they will seek help to find solutions to reduce it and get themselves into a more comfortable financial position. They will have to sacrifice to get their financial house in order.  

However, because of this financial calamity or incompetence, the problem will be thrust upon everyone, leading to financial ruin for a large percentage of the population. The sooner people wake up to this reality, the more they can protect themselves.  

What should they do? Prepare individually for difficult financial times ahead. If this debt continues to increase, we will continue to see higher and higher inflation. Dollars earned will be used to meet government tax needs and then to buy essentials for food and shelter. This is not how it should be. Our hard-earned dollars should support ourselves first and then the government.  

Break the change they are trying to implement on you. Control your financial destiny even though they don’t want you to. 

Not Wanted

Not Wanted 

Recently, after a conversation I had with an advisor I had previously worked with, I was reminded of where the vast majority of the public sits in the eyes of the financial industry.  

There have been reports the average American makes over $75,000 per year. Taking out taxes, housing, and food costs leaves little for other financial needs. Yet, people will scrimp and save as much as they can to have some nest egg in the future.  

When they have accumulated enough money to explore opportunities to grow it at potentially a higher rate of return than a bank savings account may provide, they will try to find a financial advisor to guide them. The problem is that the advisor is trying to find people with a significant amount of money.  

When I sold financial products to financial advisors, I always wanted to ensure I was working with those with significant assets. They could shift a sizeable amount of assets into one of the products I was selling. Also, they demonstrated how to find new clients with assets. Having the chance of getting a sizeable asset flow was more important to me than getting small pieces of business from time to time. In a sense, I was always swinging for the fences.  

The advisor I was talking to reminded me that they must continue to swing for the fences, too. This person worked for a well-known company and focused all their attention on people and families with millions of dollars worth of assets. They were not interested in helping someone who had scrimped and saved their entire working life to have an average-sized nest egg.   

What is average?  

Fidelity regularly produces a report updating the average balance of the over 23 million 401k accounts under management. This report has shown that the average balance is slightly more than $125,000. The typical financial advisor will not find this type of asset worth the effort to pursue, so the average person is left having to do their own planning and hope they are able to make ends meet now and into the future.  

When I talked to this advisor, it reminded me that the “little guy” is not essential and will be left dangling in the wind. Coincidentally, this is the same thing I would do when selling to advisors. Working with an advisor with few assets who did not project a vision of where they would be in 1-2 years was not the best use of my time and resources.  

It is unfortunate that the financial industry has left the small investor in the dust and let them fend for themselves. This is especially true when cracks are starting to materialize with what many consider to be their “safety net” for retirement: Social Security.   

There is no way to put the genie back in the bottle, and unless one comes into a significant amount of money through work or inheritance, the financial industry will leave them behind.   

People thought there was a firm that was a good resource for the small investor, but it had tentacles attached to it from large, well-established Wall Street firms. I’m talking about Robinhood, which became a brand during the Gamestop period. It was discovered that the little guy did not have control, as they thought, and they had their ability to trade their accounts frozen while Wall Street found a way to damage them.  

Though it may be tempting to want to work with a known brand to help with your financial assets, realize they are in it strictly for the money. Their game is to have as much money under management as possible. Then, they can charge their fees and generate sizeable revenue with limited effort.   

Regretfully, my conversation with the advisor reminded me that small investors are not significant to them. They were waiting for huge windfalls of wealthy people to adjust their assets, and they wanted to be in a position to receive and hopefully manage those assets. Meanwhile, the little guy is left to their own devices to try and make their hard-earned dollars do something for them.   

It is a harsh world out there, and learning how to address the financial imbalance between the “has and the have-nots” will be the first step to changing the system.  

Break the change. 

Up, Up and Away

Everyone is experiencing an increase in the cost of goods and services. Food, gas, insurance, houses, and stock market prices are up.   

When the BLS (Bureau of Labor Statistics) reports the monthly job numbers, they break out full-time and part-time jobs created. The results show that more people are working part-time jobs to meet ends.  

Although there can be despair when everything rises in price, there is euphoria when stock prices go up. People lose all sense of reality and believe stocks will increase for the foreseeable future. Inevitably, there will be a point when they begin to fall, which nobody wants to see.  

Financial education is so poor in America that most people need help understanding how returns work. Yes, we are all happy to see the prices of assets appreciate because it means that, hopefully, we will have similar purchasing power with the increase, resulting in the ability to buy the same basket of goods now and in the future.   

Investment advisors bring up compounding to illustrate how an asset could appreciate over time. Yet, they frequently will not discuss compounding related to rising prices. Inflation compounds just like an investment may compound. The difference is that when investments decline, the effects can be damaging, but with inflation, it never declines. Rising prices may plateau, but if a company were to raise prices, chances are they would not lower prices because inflation is flat or down. Every company has revenue expectations built into the price they charge, and reducing prices will impact their earnings capability. 

For example, the average price of a new car is over $40,000, but 20 years ago, it was below $30,000. Would a car manufacturer or a dealer cut their new price back to the old price if inflation were to come down? Heck no! The manufacturer now has higher costs to produce the car, and if they cut prices, they lose revenue and potentially go out of business. It’s a vicious cycle.  

Declines can be dramatic and impactful, significantly, when the gains increase.   

Think about going for a hike on a mountain. Initially, you start on a smooth, steadily rising trail. After a while, the trail begins to become steeper. As you start to near the top of the peak, the trail gets even steeper, and the risk for small mistakes becomes greater. You could slip off the trail and slide down the mountain’s edge. You know the goal is attainable, but you want to make sure not to make a mistake. Soon, you reach the summit, celebrate for a few minutes, take a selfie, and head back down.   

Going down is always easier than going up. The effort to get to the top was physically and mentally taxing. On the other hand, momentum powered by gravity and weight draws you down. You expend less energy, and the time it takes to reach the bottom is much less than it takes to get to the top.  

Currently, the markets are experiencing a never-ending rise. Again, this applies to the stock market and all financial markets, including real estate.  

The cheerleaders will continue to espouse their well-rehearsed words that this time is different: stay the course or invest for the long term. What they won’t do, though, is talk about the large numbers. The Dow Jones Industrial Average is close to its all-time high of over 40,000, and the other indexes, S&P 500 and Nasdaq are hitting all-time highs daily. While this is good to see, do you know who loves it? Wall Street because they can generate great earnings from the fees they are receiving. If you have $ 1 million invested with an advisor charging 1%, they are making $10,000. If it goes up to $1.1 million, they would be making $11,000. So, it benefits them to talk the long game, preach patience, and keep you invested. Until it doesn’t.  

Like slipping off the trail or descending a mountain you just climbed, any market decline can have effects.   

Digging a little deeper, if the Dow were to decline by 50%, the results would be shocking because the numbers are more significant than the last time there was such a move. The Dow would be going from near 40,000 to near 20,000. THAT IS HUGE! Further, not only can it happen, but it has happened. Spend the time to look at 2000-2003 or 2008-2009. During both periods, the decline was more than 50%. Notice the time it took for the decrease was shorter.  

Financial advisors were solely trying to survive during the declines of the previous periods I mentioned. Most wanted to avoid coming into the office. They were content to try to avoid addressing the declines their clients were experiencing because not only did the clients lose, but the advisors were losing, too.  

Most financial advisors are not market prognosticators but asset gatherers and allocators. It would be incumbent on you to be cautious as you continue to scale the financial peak you are climbing and prepare for slips that will happen. Also, don’t get so greedy you end up back where you started because climbing that hill may be more challenging than it has been.  

Determining market direction is a fool’s game, but the possibility of a significant decline continues daily. In the meantime, the people who advise investors are caught in a precarious situation because they have to keep their clients invested in producing a return that will keep clients happy so they can continue to charge their fees and make money.   

So, for now, it is up, up, and away until it is down, down, down in the dumps. 

Break the Change.