Our money needs to generate a higher return to maintain our purchasing power. This presents a unique problem.
A savings account is a Picasso work of art.
You sit back, relax, put your money in each month, and get paid interest. Those were the glory days. I remember getting 5% interest on my savings account and feeling like Spiderman.
The idea of a savings account turned into a nightmare last year. The G20 list of countries created trillions of dollars and metaphorically dropped $100 bills from helicopters.
Creating more money from nothing doesn’t make us richer. It simply distorts the price of everything. The result is you think you’re getting richer when you’re actually getting poorer. We have a transparency problem that even a Harvard graduate with a degree in finance/economics will struggle to decrypt.
You might be sitting smug right now and thinking, “I don’t need no stinking financial assets.” Here’s why you do.
First understand this
Inflation (prices going up) is becoming more and more out of control. Larry Summers, the former Treasury Secretary who served Clinton and Obama says indflation is 8% right now. Official inflation numbers appear to be more around the 5% mark.
Or if you measure prices in real stuff like real estate, then you may even calculate inflation to be 24% like billionaire tech CEO Michael Saylor does. Either way, even the lower end of inflation at 5% changes the game.
Inflation in the US is 24% if you want to live in a house — Michael Saylor
Every finance book written in the last ten years has preached the “buy the Vanguard Index Fund that tracks the S&P 500 and you’ll be rich” dream. I used to believe in that dream too. But at an annual growth rate of 7% before tax and fees is not enough anymore (depends on how many years of S&P 500 data used — the last 2 years have distorted returns a lot).
Buying an index fund causes you to break even. Read that again.
Markets are risky
Now what? Savings accounts won’t help you stay ahead of rising prices. The easy S&P 500 index fund game is up for now. Cash is trash. Buying debt (bonds) pays you peanuts. Buying real estate requires huge amounts of savings and an ability to fall in love with debt until ‘death do you part.’
Well, now you’ve been forced to become an investor. If you refuse, then the money you earn will lose value. Simple as that.
Now you might think this subtle change is no big deal. The problem is conventional options like index funds and savings accounts required zero financial education. You could buy and hold and never read a Warren Buffet book ever. Not anymore.
Becoming an investor secretly means you have to take on risk to get greater than a 5% return on your money.
Financial assets require a financial education
Stocks are how many everyday people are increasing the return on their money to keep up with rising prices. To know what stocks to buy you need these skills:
- Be able to read a balance sheet
- Understand the basics of economics
- Be able to do basic due diligence on a company — who’s on the leadership team, what’s their business strategy, what do they sell, what are their competitors doing, etc
- Know if a company is overvalued or undervalued
As you can see, this is far more complex. Many of us aren’t designed to become bankers when we get home from work, just to stay above water.
Even if you can learn, the bots run by hedge funds and the stock trading apps (who front run what their customers are buying) will still make getting returns difficult.
Social media scrolling is a holy act compared to investing
The temptation of using social media apps is widely known. We get sucked in. We get addicted. Our attention gets sold to businesses who mass-produce ads to take advantage of our wants and desires.
Being an investor requires dealing with a higher level of temptation. If you choose to learn about investing, then you will be offered free stocks for signing up via reputable companies. Try resisting the urge to get $200 of free Tesla stock as you’re learning about finance.
Jump on Youtube. Learn about stocks there. It’s a minefield full of gurus who are secretly receiving all sorts of commissions from financial services companies to present information in a certain way. Then there are the stock promoters on Twitter. They tell you what stocks are red hot. They use salacious terms to ignite your FOMO baby!
The desire to protect your money is high. The desire to double your money by investing in the latest craze is almost criminal. Work at a job you hate for the rest of your life or buy XYZ stock? Humans are just not made to resist these sorts of temptations.
Some of these investments are known as pump and dumps. The sole purpose is to hype a stock or investment up. As the price skyrockets the people in the know cash in a huge profit and the average investor is left holding worthless numbers on a computer screen.
Crypto has plenty of them. There’s Safemoon that trends on Twitter almost daily. Then there’s the mother-son Ponzi that recently got busted by the SEC. Thankfully, there are good samaritans who are debunking scams on social media to prevent new investors from losing the shirts off their backs.
Now we’re all investors (welcome!), this is what we have to deal with.
Bitcoin made everything tokenized
I am a Bitcoin fanboy as you may know. Bitcoin did one bad thing though: it paved the way for everything to become tokenized. Now you can buy a token that represents a US dollar. Or a token that represents one Tesla share but isn’t actually a Tesla share. Or a token that represents an item in the physical world. This creates immense innovation. It also creates a lack of transparency.
As investors, we have to trust that the tokenized version of a stock is actually redeemable for the stock. All of the financial plumbing Bitcoin has helped create works in theory. What we don’t know as investors is what happens when everybody runs for the exits during a recession. In other words, if we all try and sell our tokenized Tesla stock at the same time, is there enough for everybody?
Past financial crises, like 2008, have shown that a lot of modern investing is a game of musical chairs. While the music is playing loudly to the sound of Linkin Park, we’re partying like it’s the dotcom bubble of the early 2000s.
But when the music stops, then what? Well, that depends on what you bought, how you bought it, whether you borrowed money to invest, and whether you did due diligence. Often many of these steps are missed. That’s what creates risks for investors that we now must all understand.
The investor party hangover
This might all sound like fun. Being a full-time Wolf of Wall Street after you finish work might sound like a dream. Maybe you love researching stocks and playing around with trading apps.
You might look at the last twelve months of investing and say: “See, it’s all gravy. A pandemic struck and markets recovered quickly and we all went back to dancing to the beat of the Linkin Park drum. And we did partaaay.”
What’s missed is that our central banks happily stepped in to keep markets going up, by creating money out of thin air and giving it to the banks that support our newfound love with investing.
Question? What happens if all the trillions of dollars stopped flooding the markets? Well, we don’t actually know. Nobody has thought that far ahead. We’ve never been in this situation as experienced investors, or as new investors who joined the conga line to stay ahead of rising inflation.
Life right now is enjoyed with zero interest rates. Obviously interest rates can’t be zero forever. So what happens? Interest rates go up.
Now interest rates going up may seem like no big deal. That’s because you’re a smart investor with nothing to worry about. Unfortunately, a lot of investors bought financial assets using debt. When interest rates go up the repayment on the debt goes up too. Investments that were affordable at zero interest rates may not be so affordable when interest rates go up. You can see how the markets for investors will shift.
I actually got fooled into investing with debt. You can too. I went to buy some Bitcoin and ended up accidentally buying with debt. Luckily I got a refund and didn’t lose any money. But even experienced investors can accidentally buy a derivative of a financial asset rather than the asset itself.
Oh, and there’s the capital gains tax you have to pay when you do decide to sell an investment, which is easily forgotten.
Investing with interest rates at zero is exhilarating. When interest rates go up, the party becomes a hangover.
How to survive as an investor in this mad world
We’ve all become investors thanks to the distortion of prices created by pumping trillions of dollars of free money into the economy over the last 18–24 months. No point crying.
All we can do as forced investors is the following:
- Don’t invest with debt. Debt increases risks. If prices fall due to a sudden shock, then you’ll witness the horror of a margin call — where your investments are automatically sold for you (at bad prices) to cover losses.
- You’re an investor now. Get a decent financial education. Don’t worry about going to Harvard for $100K to learn. Learn from reputable providers. I personally learn from Real Vision, Stansberry Research, Graham Stephan, and Andrei Jikh.
- Read “Richer, Wiser, Happier” by William Greene. He interviews the best investors in the world over a long period of time. The simple tips they offer are perfect for the average investor. Things like be patient, diversify, and don’t worry about stock market news channels.
- Understand blockchain. Blockchain is trying to fix this whole problem and release us from investor duties. It’s unclear whether it will work. But we have to try and rebuild the financial system. What we have now is a joke.
- Become obsessed with the official inflation numbers. Inflation is a map that tells us what investment returns are needed to break even.
- Check how much new money is being created out of thin air regularly. You can google in your country the M1 and M2 money supply to see the facts. Beware: the visual representation of all the free money created from nowhere since 2008 can be a little alarming at first. You’ll get used to it :)
What I’ve just explained may not have made your day. I used to love my savings account, too, until the war on savers began back in the 2008 recession, and went up a level in 2020. You’re an investor in financial markets now whether you like it or not.
Investing money is how you stay ahead of the rapid increase in prices. Financial education is key. Patience is a must. Real teachers not driven by fear-mongering are important. Diversifying across many investments helps you sleep at night.
Stay safe out there. Avoid the hype. Don’t go crazy with crypto (a reminder for me too).
This article is for informational purposes only, it should not be considered financial, tax or legal advice. Consult a financial professional before making any major financial decisions.
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