Have you ever asked yourself why you invest in your 401k while you carry and incur large amounts of expensive debt? That is an easy answer — right?
We do it because we are planning for our retirement. We also delay the payment of income taxes as a benefit of contributing to our 401k, and who can beat that?
The stock market has to be a great place for our 401k money, doesn’t it? On March 2, 2009 the Dow Jones bottomed around 6,626. Today, just two and a half years later, it is nearly doubled and trading around 12,700. But what has really happened in that time frame to cause it to double?
The economy is still struggling. Unemployment is more than 9 percent. The country has piled on trillions upon trillions of debt to prop up the economy. Our federal government picked up more than $20 trillion in bailout outlays and guarantees, obligations it could never come good on if called to do so as it has its own $14 trillion-plus debt it can’t pay from its day-to-day operations. And the Fed has taken its balance sheet to unimaginable proportions creating money and loans from thin air.
So what’s the deal? The deal is that we are all playing a game which we have been told to play by our financial leaders and thinkers for decades now. I happen to be one of those ‘finance’ guys.
Let’s consider that in nature a little bit of something is often good, but too much has consequences. Moderation is often the prevailing barometer for success. We find this rule applies in most areas of life if we think about it.
With regard to the stock market and its near doubling amidst trying economic times I would offer this: With the age of the 401k came an ever-increasing ‘demand’ for stocks. Remember a dump truck load of 401k money shows up at Wall Street every two weeks whether the market is good or bad. The managers and investors at Wall Street will never say “hey don’t send that here anymore.” Of course they will always find great places for your money. Or so you hope.
We are in good hands right? Let’s take Jim Cramer from CNBC. He has become a circus entertainment type of icon in the past decade. What he says is gospel right? What about two years ago when controversy surrounded him and Comedy Central TV show host Jon Stewart had him on the ropes with regard to his public admission of having manipulated the market while at Goldman Sachs for the benefit of his accounts? We just let him off of the hook and let him continue to tell us where to put the money.
I would answer my opening question in this column with the following thoughts:
• The biweekly demand created by our 401k system will force stock prices to rise even when the underlying analysis of stocks tells us otherwise. Just look at historical price to earnings ratios today versus 20 years ago. Consider weak overall fundamentals in many of the stocks we pour money into. And of course your financial “expert” community will tell you it is the right thing to do, as they all make their living from this process. Employment in the financial sector and the percentage of GDP derived from this sector now dwarf anything in history.
• Meanwhile personal debt levels at the household level keep piling up. You send money to your 401k while your credit cards eat you alive from the inside out at 18 percent interest. The U.S. household is carrying more debt than ever before.
• Might it be true that we are adding to our debt burdens while we invest money in a market that is inflated by “unnatural” demand? In nature, too much of something has consequences. I think this is true everywhere. I believe it will prove true with the markets. As we invest our earnings in these paper assets, we build real debts which have to be paid.
To close on this consideration for today I leave you with this thought: The debt we have compiled for ourselves has placed us in bondage to its payments. Reduce that debt, free yourself to take time to think, consider your options and live a much happier and fundamentally sound life.
Joshua Hayward has worked as a financial strategist for 19 years and can be heard Monday mornings at 7 on the George Hale & Ric Tyler Show, 103.9 FM Bangor, 101.3 FM, Augusta. He can be reached at firstname.lastname@example.org.
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