The Top 10 Economic Lessons for America with Explanations

The Top 10 Economic Lessons for America with Explanations

1. No other financial vehicle has created more long term wealth for Americans than the stock market. Take any 75 years of stock market performance you want and the average annual growth will work out to 10-11%. Here is a chart of stock market performance starting in 1900 - http://stockcharts.com/freecharts/historical/djia1900.html Also, check any 30-40 year period you want to see how the stock market grows if you buy and hold - Stock Market Performance Calculator - http://www.moneychimp.com/features/market_cagr.htm

2. A single stock market investment of $2,000 for a newborn child, based on historical stock market performance, has a high probability of being worth over $1,000,000 by the time the child turns 63. Can't afford $2,000? - $1,000 could grow to over $500,000; $500 could grow to $250,000. Still substantial. If you are fortunate enough to have the funds, a single $5,000 investment at birth could grow to over 2.5 million dollars by age 63, while one $10,000 investment could grow to over $5,000,000. Why not do this for your newborn child or grandchild? Note - Even if the future growth rate of these investments is less than 10-11%, the results will likely be quite good too. For example, $2,000 at 8% growth still will be worth over $250,000.

3. A person who invests $2,000 a year in the stock market every year starting at age 23 until age 65 will make a lot more money than a person who waits until age 44 to start. How much more? Based on long term stock market performance, the 23 year old at age 65 could potentially collect $128,000 a year for the next 42 years while the 44 year old would likely collect only $16,000 a year for only 21 years. If you invested $5,000 a year, the 23 year old would collect $320,000 a year for 42 years, while the 44 year old would likely collect $40,000 a year for 21 years. Give yourself the power of compounding growth by using time (youth) to make your fortune without ever having to 'earn' big money in your job in order to get rich.

4. Invest in Roth IRAs (and Roth 401Ks if available), not Traditional IRAs (nor Traditional 401Ks if the Roth option is available). Traditional IRAs are a government designed sucker's bet. Since over decades, your IRAs are likely to be worth many times more that your initial investment each year, the taxes on your withdrawals will be much larger than paying the little bit of tax the year you put money into a Roth IRA. Additional advantages of a Roth IRA include not being forced to withdraw funds each year starting at age 70 plus your heirs won't have to pay taxes on withdrawals from their inherited Roth IRAs. For example per point 3 above, would you rather be taxed on $2,000 income today by investing $2,000 in a Roth IRA or $128,000 worth of income or more 42 years later by investing in a Traditional IRA?

5. Never buy individual stocks – buy mutual funds, ETFs, and Index funds instead. Hold them for decades – don't buy and sell them as the stock market inevitably churns. Individual stocks can go to zero, but the other vehicles spread the risks over many companies and they are not likely to all go out of business. Most people simply do not have the time to study stocks that they bought on a daily basis to determine when to buy and sell. They are already at a disadvantage to the mutual funds which make up 80% of the marketplace that constantly buy and sell these stocks and ultimately they, not you determine if a stock is going up or down. Also most people are too emotional to make smart decisions or correctly time the market on buys and sells. Most people tend to buy when the stock market is doing well and sell when it is doing poorly. That results in emotionally buying at high prices and selling at low prices – a recipe for losing money and/or reducing long term growth results. When stock markets tank, 3 out of 4 stocks go down with it. That's just a historical fact and it sets up the emotional panic that influences people to make bad choices on buys and sell. 4 excellent ETF stock indices to consider purchasing - SPY (S&P 500), SLY (S&P 600 small caps), MDY (S&P 400 midcaps) and QQQ (Nasdaq Top 100).

6. Mutual funds, and ETFs are categorized several ways - by industry or 'general' – multiple industries, by growth or value funds, by small, medium, and large caps or a mix of all of them, by region of the world, by emerging markets, etc.. Over time as you purchase them, you want to move toward a mix of all of those categories. Keep in mind that it is easier for small and medium sized companies and emerging markets to grow more quickly than large sized companies and mature markets. For example, when companies like Walmart and McDonalds had only 100 stores decades ago, there were more opportunities for them to double and re-double repeatedly across the nation and world then now that they have saturated the nation and/or the world with thousands of stores. Therefore, the case is the same for mutual funds specializing in small and mid-size companies – and since they have research departments plus are spreading the risk among many companies, their downside risk is smaller than with an individual company.

7. Never increase your mortgage payments to pay off your mortgage early. You are giving the bank an interest free loan at great risk to yourself. Instead, put the money into a savings account or CD. It has a couple of advantages. Even at low interest rates, it will grow in time to an amount large enough to pay off your entire mortgage sooner than if you paid it off through higher monthly payments. More importantly, if a financial crisis occurs (loss of job, medical crisis), you will be better prepared to hold onto your house to either weather the crisis or sell your home before bankruptcy occurs, preserving your hard earned equity in the house. By paying off your mortgage through extra monthly payments, you have less money in your personal savings accounts, possibly little or nothing left, to weather the crisis and may lose the house and all your savings that went into it. However, don't put all of your savings into this mortgage payoff endeavor. Leave a significant amount of savings to invest in higher risk but higher long term return (stock market) investments even if it means taking longer to pay off your mortgage.

8. Avoid investments in illiquid companies that pay monthly dividends for two to eight years, before self liquidating. Also avoid investments in commodities and especially avoid General and Limited Partnerships in oil and gas exploration despite the nice tax breaks. Rule 5 applies here. These are indivudual companies, not pooled assets, and they can and sometimes do go bankrupt. They are bought through certified Financial Planners (not stock brokers) who are associated with a larger company enforcing financial guidelines with their Financial Planners. Madison Avenue Securities and also VFG Securities are common companies that work with their associated Financial Planners. Normally, these investments maintain limited flexibility to either liquidate early or late so that they liquidate in hopefully the best market conditions. For oil and gas General Partnerships (normally for one year to get the tax break, and then changed to a Limited Partnership), though they carry lots of insurance, if sued, all your assets and wealth can be utilized to satisfy the final settlement – not a risk worth taking.

9. Raising taxes on Corporations is really a tax on you. Corporations get their money from their customers – ultimately you. They cannot print money like the government. So when you raise taxes on corporations, they must get the money to pay for the taxes somehow while still making the investment returns expected by their stockholders and board of directors. Their first choice in dealing with the additional taxes is to raise their prices – you pay for that. However, market resistance to the new higher prices has the natural impact of lowering demand for their products and services, thus reducing their revenues. Unacceptable result for any corporation. They have two choices – lower prices to get more demand or hold prices and find other ways to reduce costs so as to increase profits. Either way, they have to come up with other options to pay the extra tax. The options are not good ones – layoffs, salary cuts, reduce or eliminate raises, slow down or eliminate business expansion, or go out of business. All those options are essentially a hidden tax on you because you are ultimately paying the price for this tax in reduced income to you either directly or indirectly (as the people laid off, etc. spend less making your employer poorer which eventually affects your income). Note, if they cannot maintain their previous profits even after taking these actions, then their tax liability goes down and despite the higher tax rates, the government loses, not gains tax revenues because there is less profit to tax. More so, when employees are laid off or salaries cut or grown more slowly – since government taxes their income too but can't tax zero income or must accept smaller income available to tax.

10. Raising Minimum wages only hurts the people you are trying to help. Getting a job and job experience is the key to eventually entering the middle class for those without job experience and/or skills. They have double to quadruple the unemployment rate of skilled and/or higher educated workers. 75 years of 30 minimum wage history shows that whenever minimum wage rises, the unemployment rate for unskilled workers rises. History also shows that most of these workers are under 24 and most live in middle class households with multiple family earners. Also, people earning more than the minimum wage are also hurt by “compression” as their wages are now worth less than before in terms of purchasing power. That is because whatever the bottom minimum wage is, products and services have not been increased. So income dollars, though nominally higher for minimum wage workers can't buy any more goods and services than before because there aren't more to buy. A minimum wage worker now more highly paid due to government raising the minimum wage does not produce any extra goods and services. More money chasing the same amount of goods could become inflationary and those earning the least amount of money will always be able to buy the least amount of (the same amount of goods and services produced in America). The often quoted “liberal” argument that minimum wage workers will spend all or most of their raises thus lifting the economy leaves out the fact that businesses will have less profit to invest in expansion and/or give more raises or hire more people offsetting the money spent by minimum wage workers. It also forgets that the always sky high unemployment rate for low skilled workers gets worse every time the minimum wage is raised.