Big Day, Small Future

The US stock market just climbed the highest in a single day ever. At over 10% gains across the board, investors rallied and drove equity prices up for nearly non-stop gains in trading. This sounds like a huge positive when considered out of context, but there's a deep reality that can easily be overlooked.

Returns in the stock market are still approximately down 20% for the year. Consider this:

At the high point, the Dow Jones was around 14,000.
During last week's low, it sunk to around 8,500.
Now, it is sitting at 9,400.

TEN years ago...the Dow Jones floated around 10,000. This means that your hard-earned contributions in a passive style investment returned you nothing in the last decade. It actually lost you money; and it's a bit more than your account is stating.

What most people don't realize is that a 20% loss is NOT equal to a 20% gain. If you start with $100 and lose 20% of it, you are left with $80. If you keep that $80 invested and earn 20%, you now have a total of $96. Taking a loss on your initial investment lengthens the time you need to recoup. Every time you take a step back, you've got to take two steps forward to get anywhere. It's a fact of life that hurts more the closer you get to retirement.

An ounce of prevention is worth a pound of cure.

Your first move towards money should be defensive. What are the safest investments? How can I protect myself from losses? The pandered philosophy is to diversify and invest broadly in stocks, bonds, commodities, and even real estate. Nearly ALL professionals will tell you that the best protection which also ensures gains is to spread your wealth around. DO NOT buy into this thinking blindly!!! I swear...it's some of the most toxic advice ever.

The diversity idea works if your worth is in the millions of dollars. I'm saying that if you were to sell everything with your name on it, was left with only straight cash, and needed to decide how to apply your money...diversifying and balancing yourself across the board is certainly the best option. The problem is that it's NOT a realistic option. Wealth is accumulated over a period of one's entire life. And the rate at which we earn money changes throughout our careers.

You start bagging groceries for $6 an hour. You later become a cashier and earn $12 an hour. After getting an education, a corporation pays you a great $60,000 salary (e.g. about $29 per hour). The option to diversify your money doesn't even become viable until most of us are in our thirties.

Wealth is a process that is built through stages. What may be great advice for one person, can be horrible advice for you. The same rules don't apply to everyone. If you double your investment of $1 million, you'd be really happy. But if Warren Buffett doubles an investment of $1 million, that's not even a single percent of his net wealth. Your thousand is Buffett's million. This is why you MUST understand what phase you are in economically. Being in debt a million dollars will get your thumbs broken something awful, but for others it's next to nothing. (Sorry for the redundancy, but it's the most important concept that is often overlooked).

Everything is relative. Your financial well-being greatly depends on your specific situation. I have NEVER heard a drop of good advice from a person that didn't inquire about my personal situation. In fact, it is unethical for someone to give you financial advice without understanding your tolerance for risk. And your risk tolerance is a consideration of BOTH your emotional attitude toward losing/gaining money AND your ending financial stability if you were to lose money. The worst unethical practice is allowing a person to take on more risk than their finances can handle. (does sub-prime mortgage ring a bell?)

We are in some very interesting financial times. I honestly believe that we will have a long recession. At the very best, it looks like the economy will see insignificant growth for some time. Anything else would likely signal unhealthy inflation, or another dangerous bubble. With unemployment a little over 6% (and speculated to rise to 10%), unemployment for new college graduates over 7%, and big losses in retirement funds, it'll take a while before we see sustainable growth. Afterall, whenever you take a step back, it takes two steps forward to make any progress.