August 2007
Note to self: Go on vacation for two weeks.  Get some perspective on this market, because nothing makes sense anymore. 

I have been in this business now since 1984.  Since then, I’ve continued to study and research the markets more every year.  I even did a “heavy duty” post-graduate program at Wharton, which basically consisted of statistics and Modern Portfolio Theory. 

But right now, the global markets are still puzzling to a veteran like me.  Either I’m missing something or all that training doesn’t apply to what’s happening in the global markets right now. 

An Enigma of a Market 
Let’s take a closer look at this puzzling market.  First of all, the valuations are extreme.  Interest rates are rising, instead of falling.  And signs of inflation are everywhere, no matter what the government PR guys are saying. 

I can see signs of inflation in my own hometown, here in Florida.  My wife and I counted eight restaurants that have gone out of business in the last six months.  A friend of mine used to make US$1 million a year in the mortgage business.  That same friend recently was forced to sell his house, and he will probably have to file for bankruptcy.

I have another friend who was one of eight construction managers with 12 projects under his belt. Now he’s the only manager left, and he has only a single project.  

And in the midst of all of this, the global markets keep climbing.  The purveyors of investment pornography on T.V. keep saying how great the markets are.  They’re claiming that this market will be different this time. “This isn’t a bubble, and there’s no way it can burst.”  I get a really sick feeling in my stomach when I hear them say that, mostly because I know better.  

So what does this have to do with your retirement plan?  In a word: EVERYTHING!!

Over the last few years, I’ve met too many individuals who lost 50%, 60% even 70% of their retirement plans when the last bubble burst.

These individuals all had the best intentions, but many of them listened to their domestic brokers when it came to picking investments.  That was their first mistake. 

The Controllers on Wall Street 
Wall Street always lobbies for your investment assets, and your retirement plan is one of their primary targets.

They want you to pour your life savings into substandard equities and investment products.  Why would Wall Street do this?  Quite simply, they want to control your money and make the most they can on it.

Think about it, if you buy a piece of property in Panama with your IRA, how much does your stockbroker make on that deal?  Not one penny. 

So he may tell you it’s a bad investment, or you should invest your assets in “safer” investments.  He may even tell you it’s illegal to invest your retirement plan in offshore real estate.  I have heard them all.

What the Average S&P 500 Return Really Looks Like 
Last week, I heard one of the bigwigs for Merrill Lynch say “The expected 12 month return on the S&P 500 is 7%.” 

My first thought was: “Really – 7%? That’s it?” Not to mention, if you break down that 7%, your “expected 12 month return” isn’t anywhere near that! 

Let’s break down that average return right now.  Say between dividends and capital gains, your total return really is 7%. 

But you still have to factor in how much you pay to maintain your brokerage account.  Say you use 1.30% to manage your account.  That’s a 1% annual asset management fee and .30% for all transaction costs. (It’s probably higher but I’m trying to be generous.) 

Now let’s factor in inflation.  Say it’s 3%. (Again, it’s probably higher, but we’re using the government’s numbers here.)  Then you need to factor in the decline of the U.S. dollar over the last few years. 
Can you see where this is going?  Once you strip away fees, inflation and the decreased purchasing power of the dollar, you’re left with miserable returns.  Possibly even NEGATIVE returns!  Plus, you have to consider the incredibly high levels of the market, which translates to additional risk.

You probably won’t make a dime in real returns even if the market does go up 7%.  And personally I think the market is going down, not up.  So this means, once again, you won’t make anything to build your retirement plan.  In fact, you might be facing straight losses and ZERO gains. 

Refuse to Play by Wall Street’s Rules 
Here is blunt and harsh truth: Wall Street has its own rules.  And in their game they get to control all of your money.  They don’t want you to invest freely anywhere in the world.  They only want you investing with them.  That way they can make fees on an ongoing basis. 

Wall Street has set up your retirement plan so you can only pick from a basket of predefined mutual funds they offer.  Never mind that 80% of all mutual funds and managers under perform the market.  That means even if the market does go up 7% odds are you won’t make that.

But you do have some options.  I’m happy to report that the U.S. government just changed rules for retirement plans.  You can now invest even more freely with your retirement plan and you can make dramatically higher contributions. 

Note to you: Read my article in the July edition of members-only Sovereign Individual to find out how you can use these new retirement regulations to your advantage (and let your broker fend for himself).

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