Money Can’t Disappear but Value Can

Where does the money go when your stock loses value? Or where does the money go when your house loses value?

And the answer is no money is lost—only value except in one instance.

But before I share that one instance with you, you must understand that stock prices, like real estate prices, are estimates of value.

If you want either, and you buy it, then you have agreed to its worth (value) at the time of the transaction and you have converted your cash into equity.

If you buy a single share of stock for $10 and the price goes down to $5, you have not lost $5 of cash money unless you sell at that point.

But did the person from whom you purchased that stock for $10, does he have your $5? What if he bought the share of stock that he sold you for $10 for $15?

What if you choose not to sell when the price is down and hold onto it and the price goes up to $15 and you sell at that point? Have you lost any money and had you actually lost any when the price was at $5?

Value is not cash. That is how many of us overestimate our net worth. For example, let’s say we buy a new car for cash. We pay $30,000 for the car plus another $2,000 for the other related costs such as license and taxes.

How does that reflect on your net worth assuming you paid cash? Do you simply exchange the cash amount for the same amount as the net worth of your new car? No way! That car is worth, MAYBE, $25,000. In other words, you have lost $7,000 and your net worth after the transaction is down by that amount.

$7,000 is a lot of money to pay for that new car smell, wouldn’t you agree?

But a share of stock is accounted for differently on your balance sheet (net worth statement).

If you buy it for $50, there is a direct exchange of cash for equity on your net worth statement. And whether the value of the share goes up or down, it can reside there for the same $50. It is only when you sell it and bank the money will a profit or loss actually be realized.

The reason that many people lost real money during the housing crash of 2008 is that they decided to sell (or were forced to sell or foreclosed on) when the value of the market was down. If they had been able to hold on for just five years the value of the property would have recovered and they would have avoided the loss of actual cash money (vs value).

Losses in value are apparitions only real if you make them so: Only when you have to deplete the store of value by selling the asset will you actually incur an actual loss.

Don’t Bank on Stocks

Wall Street does not exist to make you rich, it exists to make Wall Street rich.

Jeremy Siegel is the author of the book, Stocks for the Long Run. In that book he claims that the best strategy for most investors is to simply buy and hold stocks for the long term. The foundation of this plan is to never sell stocks until you reach retirement age and you need the money from the sale of assets to support your lifestyle.

In that book, he also claims that you can expect to average annual returns of six-percent by following his strategy.

But since publishing that book in 1994, the author has recognized the fly in his ointment—namely that as Boomers begin to retire in large numbers, there might well not be enough buyers as they begin to flood the market with their equities. Do you recognize the market dilemma personified in that last statement?

What happens when supply exceeds demand?

And the author, himself, has expressed the following:

…in the developed world share prices could fall by as much as 40-50% over the coming decades because of boomer selling [and]…unless they retire later, baby-boomers could see their standard of living in retirement halved, relative to their final year of work.

But where is the real issue in all the information just presented? Sure, the looming prospect of a flooded stock market and prices slashed by one-half are reasons for concern but the real is issue are those six-percent returns he touts in support of his claims.

Are the problem is best clarified by The Rule of Seventy-Two:

The Rule of 72 is simply an easy way to determine the length of time it will take for an investment to double at a given rate of return. To arrive at the answer, you simply divide the number 72 by the given return expressed as a whole number.

How long will it take, then, for your money to double, when your return is the six-percent that has Mr. Siegel so excited?

72/6 = 12

Meanwhile, the rent dividend provided someone who lives in their own house, whether mortgaged or owned outright, is more like 12%!

If the author is promoting his strategy based on returns, why would he ever propose stock equity over home equity?

And the answer is...well, I don’t know...he shouldn’t and, if you had a choice, which would you choose, a six-percent return or a twelve-percent return?

Stock market promoters, re: hucksters, mostly, crack me up. But don’t laugh; if you play their game, it’s your money that keeps them in yachts, penthouses, and private jets!

And, you probably are—playing their game I mean. And whether you hold individual stocks or not, if you have a 401(k), the odds are you are invested in the stock market.

And the real problem with stocks is that, unless you hold a vast quantity of stocks that pay dividends, you cannot extract their value without selling out. Do you see the problem with that as it relates to what Mr. Siegel stated?

You could well be in the position of needing to liquidate your stocks at exactly the worst time in history to do so!

On the other hand, you do not need to sell your home in order to realize the rent dividend it pays you.

Put the Odds in Your Favor to Avoid Poverty

A lot of the buzz online and the subject of countless financial books address the issue of building wealth. And wealth is good but the first step and your first financial concern should be how to avoid being poor.

What steps can you take that are likely to keep you from living in poverty?

Well, actually, according to the Brookings Institute, a D.C. think-tank, there are three:

Get a high school diploma, work full time, and delay having a child until you are married.

Your chances of living in poverty in the USA are about 12%. Follow the three steps just detailed and your risk of being poor is reduced by over 80%!

In 1987 the magazine The Economist published an article that also listed three steps to avoid poverty:

Get a high school diploma, never leave a job except for another job, and get married and stay married.

Those three seemingly innocuous (common sense?) steps are the foundation that will keep an individual out of poverty AND also increase the odds in your favor of joining the middle-class by almost 20%. The three steps are the foundation of financial achievement.

However, statistical trends in our society are moving away from all three and it is the reason why poverty rates are climbing on average but, more alarmingly, in specific sectors of our population.

Almost 30% of kids live in single-parent households; this figure is 30% higher than it was in 1970. And poverty rates in those households are five times higher than two-parent households.

Among women under 30, more than 50% of births are to unwed mothers.

There are two other trends that are striking—college grads are tending to marry other college grads and to stay married. In other words, those at that end of the income spectrum are getting the word while those at the other end are not.

Money is No Object Redux

I wrote and posted a post recently in which I stated that money is no object—I herein retract that.

The fact is that my personal finances are a business and the object of my life/business is profit. So, even though I have long been financially independent, and that being so gives me some options as far as earning additional income is concerned, I do endeavor to achieve as high an ROI as possible on my business investments.

I make this retraction because your words, my words, carry weight and they are a form of self-talk. And our subconscious hears every word we say to ourselves and—and this is important—it tends to act on those words:

That is the reason you need to be very conscious of what you are telling your subconscious.

Feeding your subconscious a steady stream of thoughts that discount money and…who knows?

I am not comfortable with thoughts that discount the value of money. I do not want to think that way; every dollar that enters our lives is a blessing and when you treat it otherwise you act as a bad steward.

It is my belief that bad stewards are less likely to be receive more blessings because your actions are interpreted as meaning that you do not desire those additional blessing. Interpreted by who…or what? I have no clue. But I do believe that our self-talk creates actions that create consequences. That is about as well as I can explain it.

I base my beliefs in this regard wholly on empirical evidence. Ask and you shall receive. And I believe that getting what you want begins with knowing what you want and then asking for it. I mean…how can it be otherwise?

And there is another bit of biblical wisdom that has shaped my thinking in this regard that can be found at Luke 16:11:

…if you have not been trustworthy in handling worldly wealth, who will trust you with true riches?

Exactly. So, to whomever is listening…I didn’t mean it!

We now return you to our regularly scheduled programming.