I would like to ask you to consider a question that is very serious to your financial well being, both now and in the years to come: Who is in control of your money? It sounds like a simple enough question, right?
But that simple question is actually multifaceted, because it doesn’t specify whether I am asking about the money in your pocket now, the money in your bank account, the money you are going to use to pay your house note or car note a year from now, or the money you are counting on in 5 years or even 15 years.
Consider first the money in your pocket or your purse. That’s easy enough, you are pretty much in control of that stash. If you are married then most likely your wife is in control of it. To some degree the same is true about the money in your checking and savings account. (Although banks pay you a paltry rate to safeguard your money while at the same time charging you triple or quadruple the amount when lending you money in the form of a house note or a car note.)
Do yourself a favor and be a good steward of this stash of cash. How you treat this money has ramifications on other areas of your finances, possibly even your credit score. Realistically though, the money in your pocket or purse is just a fraction of your net worth. Therefore let’s consider other monies.
YOUR 401(k)
Consider next the money in your investments. By now most American workers have heard of a 401(k) plan. Countless financial magazines, books, web sites, radio hosts, television hosts and experts agree that the 401(k) is the best investment vehicle for the average investor to reach his retirement goals.
But is the 401(k) the powerful tool we are led to believe that it is, or is this just brilliant marketing by Wall Street? Who is in control of your 401(k)? I ask this not as a rhetorical question but so that you can take a serious look at who really is and is not in control of your money. I am going to disseminate the false notion that the 401(k) or even the stock market in general, is a good place for you to invest your money.
Does The Market Control Your 401(k)?
Houston PBS recently aired a documentary about how investors with big time money would easily manipulate a stock’s price by buying huge blocks of a particular stock, which drove the stock’s price up thus generating interest in that stock, leading the average investor to buy in on this “hot” stock.
Meanwhile, as the average small investor buys in at an inflated price, the big time money investor sells at a profit and pockets a handsome gain. From here on out it doesn’t matter to him whether the stock price drops as he has sold his position. Of course the stock price will drop because of the selling off of the huge block of stocks and because the previous rise in price was not based on company performance or fundamentals, it was an artificial increase.
This documentary was not about hedge fund managers of the 1990’s and 2000’s, nor was it about the Dennis Levine’s or Ivan Boesky’s of the 1980’s. It was about practices back in the 1920’s, predating the most famous stock market crash in history. In other words, these practices have been used for decades. The stock market of the 1920’s was stacked against the average investor just as it is today.
In addition to manipulations caused by institutions with huge amounts of money to invest, consider what the stock market does every time there is uncertainty of any kind. Take a look at historical returns after events like 9/11 or the Oklahoma City bombing.
Also, think about how much the market reacts to every press conference held by the Federal Reserve chief. Even the former fed chief, Alan Greenspan can send the market into a frenzy and he is not even the fed chief anymore. Of course some people have gotten rich in the stock market. In fact, employees of Microsoft, AOL, Yahoo!, and Starbucks became millionaires because of the stock market.
However they became stock market millionaires not by playing the stock market as investors, but because of the capital raised by their company’s stock. The stock market was designed as a way for companies to raise capital. That’s all. It was not designed to fund the retirement of a nation’s workers. That’s not to say you can’t become rich by playing the stock market; you can. But the odds are not in favor of the small investor.
Do Corporations Control Your 401(k)?
Have you ever heard the phrase “good help is hard to find”? Well it’s true. From the floor sweeper to the top dog, good help truly is hard to find. Take for example Dennis Kozlowski, the former CEO of Tyco International. For the sake of brevity I won’t go into detail about what a dirt bag this guy is, but if you don’t know about him then type his name into Google and read about how he stole millions of company dollars for his own personal use- or more accurately, for his own personal waste.
Maybe some of you out there may have heard of Enron and how this one time darling of Wall Street was cooking the books for years until the company imploded. Of course you have heard of Enron. Every investor worth his salt owned Enron. Did you? And as long as you are doing Google searches on dirt bags go ahead and read up on Bernard Ebbers, and Scott Sullivan, and Joseph Nacchio, and John Rigas, and the debacle at Healthsouth, and read about the collapse of Bear Stearns, and the list goes on and on.
Is it possible that fraud is still occurring today or have all the dishonest executives already been caught? These men were executives at corporations that had millions of shares of stock owned by ordinary investors everywhere.
Does it upset you Democrats that corporations donate millions of dollars of company profits to the campaigns of Republican candidates? Don’t get upset, the exact same corporations also donate millions of dollars of company profits to the campaigns of your party too. Does it upset you that your tax dollars have been used to bail out inefficient corporations that exercised bad business practices, yet the stocks of those corporations that your 401(k) owns are still nearly worthless?
Take GM for example. Does it upset you that AIG gave company executives millions of dollars in bonuses after your tax dollars paid to keep them afloat? How has AIG’s stock performed in your 401(k) in the meantime? Remember, these corporations have been widely held by millions of 401(k) plans. What’s in your 401(k) plan?
Does Your Company Control Your 401(k)?
Most company’s offer 401(k) plans to their employees, however the investment choices are often limited. For example ETF’s are a choice that may not be available to you. If your company has a plan with a giant investment house like Fidelity or T. Rowe Price then you do have several choices but for the most part you are still limited to stock and bond mutual funds. If those choices sound good to you then please scroll up to the beginning of this article and start reading again.
Additionally, with the ongoing wave of layoffs sweeping across America, Texas, and even right here in Houston, where has that left workers who’s retirement was looming 5 to 10 years away? Lower paying jobs, coupled with a drastic slashing of net worth has left millions of older American workers disillusioned with the false belief that their 401(k) would be their saving grace in their golden years.
Even before the massive number of layoffs swept across the country, even after the stock market boom of the Clinton era, most workers do not have nearly enough money in retirement funds to actually retire. And with the recent market down turn and its ongoing sideways trend, it will be difficult to increase the value of a 401(k), and difficult to fund it in an ailing job market.
If the job market continues to worsen, that will lead to an increasing number of companies discontinuing the practice of contributing matching funds to employees 401(k) plans or even hiring new employees as temporary status and thus not offering retirement plans at all. In fact, the popular financial web site MSNBC just released a report stating that a quarter of companies have already eliminated or plan to eliminate matching contributions (see http://www.msnbc.msn.com/id/31488492/ns/business-personal_finance/).
Do The Institutional Investors Control Your 401(k)?
It is true that the 401(k) industry and “traditional investing” does make a lot of money for a lot of people. Just watch any football gave televised in America and you’ll see that most of the advertising dollars are coming from beer companies, car companies and investment houses.
Where do all those advertising dollars come from? You, of course. Your fees. If the market goes down, you pay fees. If the market goes up, you pay fees. You pay fees to interrupt your team’s game on TV. Your fees also pay for glossy magazine ads in Money magazine and Forbes. Your fees also pay for limos and expensive suits, and cruises, and first class airline tickets, and i-phones.
Have you ever lost money in the stock market only to hear that “now is a great time to buy in”? Does it make sense to catch falling knives? What if your broker told you to continue betting on a losing horse? Exactly what money are you supposed to use to buy in when you just lost 40% of your net worth in the market? Remember that brokers salaries are dependent not on market performance but on making trades and bringing in more customers so they can charge those customers fees.
Along with the reputable institutional investment houses (and there absolutely are reputable companies out there) do not forget about guys like Bernie Madoff and R. Allen Stanford, who have been accused of ripping off millions of dollars from investors; investors who gave complete control of their money over to these strangers because there was a time when they too were considered reputable.
Please don’t think that I’m lumping all investment companies in with the likes of Madoff and Stanford. I invested for years with T. Rowe Price and never had a single complaint, and I always received excellent customer service. I would say the same about Scottrade, who I also used for years. I never made any real money playing the stock market, but the companies I used seemed like good companies to me.
THERE IS AN ALTERNATIVE
All this may sound pretty gloomy to you, and it should. Hopefully by now you realize that the truth is you have very little control over your money if it is tied up in a 401(k) plan. I haven’t even mentioned the fact that in a 401(k) plan you are not allowed to have access to YOUR money until you are 59 ½ years old. So really, you have NO control over your money without paying a hefty penalty.
I am in my 30’s so I don’t like the thought of not being able to use MY money for over 20 years. As a real estate investment group, obviously Lifestyles Unlimited® feels that real estate is a better alternative. It is an alternative that gives you much more control over your investment dollars and allows you to mitigate the things that you are not able to control.
What You Can Control
When you buy an investment in real estate, you have complete control over where you chose to buy that property. You know the part of town where the property is located, the subdivision, the street, the nearby freeways, etc. You know the condition of the house before you commit to buying it because you have the chance to inspect the property or, better yet, you could hire a professional home inspector to check out the condition of the property (which I would highly recommend).
Compare this to buying stock in an American company that could have it’s headquarters offshore in order to avoid paying U.S. taxes, manufactures its goods overseas in China, assembles it’s goods in Mexico, then markets its goods here. Nothing against China or Mexico, my point is that, aside from having less political stability in those countries than here in the U.S., it is hard to know just where this company is actually located. It is not feasible to go inspect these companies in which you are going to invest your hard earned money. You cannot do a pre-purchase inspection like you could with local property.
Just as in stocks, when you buy real estate as an investment you cannot control the market forces that dictate the asking price of that investment. However, unlike stocks, with real estate you directly participate in the purchase price negotiations. And if you buy at the right price then it doesn’t matter if market fluctuations lower the price of your investment because the positive cash flow every month is bringing you a real return on your investment.
If the market takes 5 years to rebound, then all you did was collect 5 years worth of rent checks from your tenants. If your stocks devalue then what choice do you have? Hold on until they rebound (good luck GM shareholders) or sell at a loss to preserve some of your working capital.
Mutual fund managers are faced with scrutiny from shareholders, the media, and competitors in the industry which puts them under tremendous pressure to perform well versus the market. Outperforming the market brings in more customers which brings in millions of more dollars in fees.
As an individual investor in real estate, you are not under that kind of pressure to outperform any other competitors. You are free to learn from your mistakes, and no doubt you are going to make some mistakes, but the point here is that you are not controlled by the pressure of shareholders.
One kind of event that no investor can control is a catastrophe or natural disaster, but of course measures can be put into place to mitigate your losses. You are in control of how much insurance you place on your investment when you purchase a piece of real estate.
Can you buy insurance for your stock portfolio? No. The best you can do to minimize your loss in the stock market is to put a stop loss in place. That strategy is called “buy high, sell low”. You can, however, buy insurance on your real estate investments.
Obviously not even the most savvy investor could have controlled the path and magnitude of Hurricane Ike. But when I had thousands of dollars worth of damage done to my property due to the storm, can you guess what happened? I got a check from the insurance company for thousands of dollars. My loss was zero. The best part is that my renters actually are the ones who are paying for the insurance premiums every month.
Once you own a property you have complete control over who you allow to live there. You can do a background check to make sure that your renter has a good rental history, and a credit history and criminal background that is acceptable to your standards. Of course nothing is foolproof, but this is a much greater level of control than you would have if you bought stock in a company.
When you buy stock, you do not have any control over the company or the decisions that company makes with your money. Sure you get a few proxy votes concerning the board of directors, but realistically you have no control with those few miniscule votes. And remember, the board of directors could include guys like Jeff Skilling and Ken Lay of Enron fame. Do you want those guys controlling your money?
One Point to Wrap Up: Keep Control of Your Investments
Regardless of where you choose to invest your money, the recommendation I would give is to keep as much control of your money as you can. Nobody has your interests at heart like you do. You can trust your money to strangers or you can trust yourself. To review what you can and cannot control, just remember that with stock investments you cannot control market manipulations, whether they are intentional or caused by outside forces.
Buy a piece of property at a good price relative to market value and you don’t have to worry about what the market does. For example, if you buy a property at a discount of 25% relative to market conditions, then the market drops by 25% you are still doing ok. Remember again though that with real estate you are more concerned about the cash flow; the direction of the market is not the most crucial factor.
If you do own property then keep control of your liabilities with good insurance coverage. You cannot insure your stock portfolio against loss but you can insure your property. In fact, you can’t get a loan from the bank without having insurance in place. Keep control of who you allow to live in your property. Keep expenses under control. Lastly, keep on investing the smartest way you can…by keeping control of your own money.
Investing in real estate is not just a few mouse clicks away. It involves more than just funding an account then picking up a magazine or watching Mad Money on CNBC. You can and probably will make some costly mistakes if you don’t know what you’re doing, or if you have more ambition than education. If you would like to learn more about investing in real estate please feel free to call Lifestyles Unlimited®.
