I can see the future. No, I’m not some sort of clairvoyant or something. I mean that I have the ability to look at current events and predict how they will shape the future. This has been a very useful gift in investing because it has allowed me to figure out how to invest (and what to invest in).
I’ve found that a lot of people don’t seem to have this gift, because most financially “normal” people, which is most people. tend to make bad financial choices. They buy stocks that are clearly overpriced then sell those same stocks when they have fallen to the point of being a bargain. They take out huge student loans then wonder why it is a struggle to pay them back. They spend money like it is water when they are young and then wonder why they cannot afford basic necessities when they are old.
Actually they probably could see the future if they really looked, but they choose not to. There is a sense of greed and the desire for immediate satisfaction that drives us all. There is also a fear that clouds our judgement and causes us not to think about the long-term consequences of our actions.
Today I’d like to summon up my power of prediction and offer some insights about the future:
1. If you are buying your first house and trying to get one comparable to what your parents have, you will struggle to pay the payments and build up large amounts of debt over time. Instead, buy a smaller, starter home once you have built up a 20% down payment minimum. Get a fifteen year fixed loan and pay it off in ten. Once you have paid off the first home, save up for a couple of more years then find your dream home, using the equity in your starter home to make a huge down payment.
2. If you take out home equity loans, you will not have any money when you are ready to retire. If you find the need to take out equity in your home, it means you are trying to live beyond your means. Even if you do nothing else, if you have paid off your home by the time you are ready to retire you’ll be able to sell and move into a smaller place and pay for living expenses with the left-over equity.
3. If you are 20 and put all of your retirement savings in money market funds, you will have 100 times less at retirement than you should have. Money in money market funds and CDs rots with time because of inflation. If you don’t need to touch the money for a long period of time (more than 5 years), you must invest it just to preserve its value.
4. Social Security as we know it will not exist in 15 years. Social Security is a pay-as-you-go program, meaning that money collected today is used to pay benefits for people who are currently retired. Anything left over is acquired for the general fund and spent. With the large number of retirees drawing on the system over then next several years, it will quickly become unsustainable and collapse. This has been accelerated by the recent payroll tax holiday, which reduced the amount current workers are contributing. There may be some program for the elderly poor, and there may be some benefit that kicks in at a really old age, but it will be inconsequential in most people’s lives. Don’t plan on receiving anything from the program. Take that 2% you are saving by not paying the full payroll tax now and put it into an IRA. If you are young enough, you’ll be able to easily replace the payment you were supposed to receive. Put away 15% to have a comfortable retirement.
5. Several states will go bankrupt between 2013 and 2018 and be bailed out by the Federal Government. Bond holders are likely to receive little if anything when this happens. Be wary.
6. There will be a shift from adult toys like motorcycles and gadgets to adult care as the Boomers enter retirement. This means that stocks like Harley Davidson and Apple will see earnings decrease and stocks that provide healthcare and senior communities will thrive. Look for a lot of hip and knee replacements over the next 20 years.
7. Traditional health insurance will be replaced with Health Savings Accounts with high limit, major medical plans attached. This will be a difficult transition at first, but eventually the cost of healthcare will drop dramatically, largely due to the reduction in the cost doctors need to pay to maintain a staff to file insurance claims and the reduction in the amount of unneeded procedures performed. Expect a very rocky start as health insurers collapse under the Obamacare mandates and a brief, failed experiment with socialized medicine is attempted.
8. There will be large amounts of inflation over the next few years. The Federal Reserve is injecting huge amounts of money into the economy by keeping rates this low, but there is little reason for businesses to expand with continued weak demand. Expect this money to cause prices for energy and food to continue to increase, eventually resulting in increases in wages and an inflationary spiral. This is not the 1930’s, it’s the 1970’s we’re living through.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
Picture Credits: Colin Brough , downloaded from stock.xchng