The "wealth effect" in reverse Is this real?

[PandaBear]

The problem I have with Robert Kiyosaki's philosophy of investment is that the word "risk" does not exist in his world.

Let's see, if anyone can borrow on an asset to make "positive" cash flow all the time, there will not be anyone going bankrupt because of unforeseen incidents.

Rental properties financing has some of the highest risk / reward ratio out there. Apartment complex are not priced the same as home because the majority of them are not owner occupied and mortgage interest cannot be used to deduct their personal income outside of the rental income. The main reason why we have high housing price is because people rather pay property tax and mortgage for a nicer house than federal and state income tax. Commercial property can't do that for you, and even if you do live in one of the unit, you are only going to get a fraction of the deduction.

What about buying single family home for rental? You will be paying a premium vs a large apartment complex to begin with, dollar for dollar, because you are competing with people that buy it to deduct their personal income tax. When you look at the whole picture, the return on investment, before factoring in all the foot work like things plumbing problems, repairs, VACANCY, tenants not paying rents, etc, you're looking at a rate way lower than buying investment grade bonds.

All it takes is a sudden change in investment climate (recession, regulation change, school district redraw, earth quake, flood, hurricane, fire, etc) to make a big change in your investments' value and let you end up having nothing.

The only true way of making rental properties value is buy low and sell high while parking your CASH in the real estates with little to no borrowing.

 

[CivicFan]

Kiyosaki probably makes more money on his books than his real estate investments.

 

[Win]

Originally Posted By: GROUCHO MARX
... I realize a positive cash flow of about 3k per year which is much higher than any return I could get in a bank if I sell it in this market.

...


Ain't that the truth. I park cash in tax free money markets and they aren't even paying 1%. I'm paying them to hold my money

Whoever said this economy is like the eighties has a different memory than I do. If this were the 80's, we'd be getting 20 + % on cash.

OTOH, the commercial real estate throws off 10% or better every year regular as clockwork, good times or bad. I couldn't tell you whether the stock market is up today or down or what the price of gold is. I just don't care.

With the singular exception of people who bought Wal Mart stock when it was just a small and unknown Arkansas retailer, I don't know anyone who has ever gotten wealthy buying paper, unless the paper had warranty deed written across the top.

Everybody I know invests in dirt. My barber has 19 rent houses. The guy that repairs my copier has 14 and is still in growth mode. Once something is paid for, they throw off cash pretty fast. Think they worry about social security going bust or the administration seizing 401(k)'s? I don't.

Don't forget that there is a reason it's called "real" property.

 

[tonycarguy]

Originally Posted By: fdcg27

Still, a new economic alignment will slowly emerge, we will at some point see a more robust recovery, and we will then have another twenty five years of prosperity, with only minor recessions that most of us will know only as economic statistics.
Remember that from the mid-'eighties, we enjoyed a period of economic expansion, with only one light recession, lasting until 2008.


There've been 2 recessions since the mid 80s and 2007. 1991 was a moderate recession and took a while to recover from. I remember unemployment here in Calif being over 9% in 1994 three years after the start of the recession, so it wasn't a light recession at all. The 2001 recession was light.

In any case, we can't assume that the 25-year cycle will repeat itself. Too many things differ in the economy and in the world today compared to the 1980's.

 

[tonycarguy]

Originally Posted By: Win

With the singular exception of people who bought Wal Mart stock when it was just a small and unknown Arkansas retailer, I don't know anyone who has ever gotten wealthy buying paper, unless the paper had warranty deed written across the top.

Everybody I know invests in dirt. My barber has 19 rent houses. The guy that repairs my copier has 14 and is still in growth mode. Once something is paid for, they throw off cash pretty fast. Think they worry about social security going bust or the administration seizing 401(k)'s? I don't.

Don't forget that there is a reason it's called "real" property.


Most people don't have the discipline to invest in equities. The liquidity of stocks is its downfall, as it allows people to panic and sell when they shouldn't, or greedily buy before they've done their due diligence.

The stock market gets a bad rap due to many people treating it as a casino. Once again this is because of its highly liquid nature

 

[javacontour]

Exactly!

If I take a look at my current portfolio the value of what I have matches what it was at it's height in 2008. That's comparing the value of the stocks and bonds I own today to their highs in 2008. The thing is, I owned less stock in 2008.

Instead of selling, I kept buying. So I've made back what the doom and gloomers say I've lost, AND I've bought more at discount prices.

I have a long term outlook. Not going to be able to retire for another 20-22 years, at the current rate of contributions, and when the kids are off the payroll, I can increase those contributions.

So I'm in it for the long term.

Since my divorce and having to give up a percentage of my 401(k) I've tripled the value of my portfolio in the past 5-6 years. About 1/2 of that was contributions and the other 1/2 was simply gains in the market.

Dollar cost averaging and compounded returns are my best financial friends. Well that and just being a tightwad and willing to sink a good sized chunk of my salary into the 401(k) to begin with! The daily gains or losses are typically larger than my bi-weekly contributions and company match figures.

If folks would just invest it and then leave it alone (provided they've chosen good investment vehicles) then after a couple of decades, the growth out paces the periodic additions. That's why starting early is key.

I started as a young 2LT in the Army, made some mistakes and learned so I wouldn't make them again.

This doesn't help those who are older, closer to retirement, but those in their late teens/early 20's can start now, even start small, and after 30 years they are likely to have a large nest egg, at 50 something.

But too many would rather pay a $300-$500 car note than invest that kind of money for a future payoff.

If one were to invest $400/month over the course of 30 years at say 10% average annual growth, they'll easily have over a million after that 30 years.

If they adjust that monthly contribution to keep pace with inflation, they could have double that amount. But too many want it now.

Too many grasshoppers and too few ants it seems.

I use simple tools, largely index funds. Most can't beat the market anyway, so why not buy the market? Some precious metals, some international funds (We can see that big growth is more likely to happen in emerging markets, right?) and of course some bond funds to lower the risk in the portfolio.

Ultimately 10 different mutual funds and some employer stock (a very small portion of the whole basket!)

 

[Vikas]

Quote:
If I take a look at my current portfolio the value of what I have matches what it was at it's height in 2008. That's comparing the value of the stocks and bonds I own today to their highs in 2008. The thing is, I owned less stock in 2008.


Am I missing something here? You have essentially lost money since 2008 because all the money that you added since 2008 has gained you NOTHING.

Did you mean that?

- Vikas

 

[CivicFan]

Originally Posted By: javacontour
But too many would rather pay a $300-$500 car note than invest that kind of money for a future payoff.

If one were to invest $400/month over the course of 30 years at say 10% average annual growth, they'll easily have over a million after that 30 years.

If they adjust that monthly contribution to keep pace with inflation, they could have double that amount. But too many want it now.


OK, what's the point of not enjoying life now and saving for the future if you are going to be old and frail with a lot of money? When we are young, we can enjoy the life. In old age, we will be worrying about whether our Depends are full or not.

 

[Trav]

Originally Posted By: JHZR2
Housing never was or is wealth. It is one thing if you are a landlord and have a secondary property. Borrowing against/betting on your own home is just plain stupid. Frankly those who screwed up should be on the streets. That's life and people are inherently self-destructive.


+1 I own apartment buildings and am thankful i chose this way to invest in housing,even when some of my tenants got unemployed they still got help from the state to pay the rent and fuel assistance.

 

[javacontour]

Originally Posted By: Vikas
Quote:
If I take a look at my current portfolio the value of what I have matches what it was at it's height in 2008. That's comparing the value of the stocks and bonds I own today to their highs in 2008. The thing is, I owned less stock in 2008.


Am I missing something here? You have essentially lost money since 2008 because all the money that you added since 2008 has gained you NOTHING.

Did you mean that?

- Vikas


Nope.

Today I own X shares. A quantity of X shares today is worth what they were worth during the high of 2008.

Back in 2008, I owned (X-Y) shares. I.E. I owned fewer shares which had a lower cash value and I purchased an additional Y shares during the past 30 months.

So I'm saying two things.

1. The market has returned all of it's losses since the highs of 2008.

2. If you were buying during that entire time, you made some serious money.

That's what I was saying.

I did not say the value of my portfolio today is the same. What I said is if you look at the shares I own today and compare the value of X shares today to that same X shares in 2008, the values would be the same.

But if you owned (X-Y) shares and bought the Y shares over that time, you made money. The (X-Y) shares did not lose value as the market recovered AND you made money on the Y shares purchases over the low period.

It's more complex than just X shares, but I figure you understand.

The cash value of my portfolio is up about 40-50% since the market high of 2008. Not the low, but the highs.

Not panicing and buying while the market was down helps grow the portfolio. that's what I'm saying. I both recouped the "losses" when the market went down in late 2008, but I also bought a bunch "on sale" since the costs of those Y shares purchased were lower than the current market value.

 

[javacontour]

Originally Posted By: CivicFan
Originally Posted By: javacontour
But too many would rather pay a $300-$500 car note than invest that kind of money for a future payoff.

If one were to invest $400/month over the course of 30 years at say 10% average annual growth, they'll easily have over a million after that 30 years.

If they adjust that monthly contribution to keep pace with inflation, they could have double that amount. But too many want it now.


OK, what's the point of not enjoying life now and saving for the future if you are going to be old and frail with a lot of money? When we are young, we can enjoy the life. In old age, we will be worrying about whether our Depends are full or not.


I don't think 50 is really old. We tend to live into our 90's in my family both men and women. So 50 is middle aged. My great grandfather and both his sisters lived into their 90's, and the oldest lived to be 103.

My grandmother is still alive at 86, and my mother, smoker and all is still kicking in her 60's. She may not live to her 90's due to her habits. But the genes are there for longevity in my family.

So I'm planning as if I'm not going to be old and frail until I'm in my 100's.

 

[Win]

Originally Posted By: tonycarguy
The liquidity of stocks is its downfall, as it allows people to panic and sell when they shouldn't, or greedily buy before they've done their due diligence.

The stock market gets a bad rap due to many people treating it as a casino. Once again this is because of its highly liquid nature


Disagree.

While I don't dispute that people play the markets in an ill advised manner, the inherent downfall of equities lies in the distinction between real and personal property.

 

[PandaBear]

Originally Posted By: CivicFan
OK, what's the point of not enjoying life now and saving for the future if you are going to be old and frail with a lot of money? When we are young, we can enjoy the life. In old age, we will be worrying about whether our Depends are full or not.


For some people saving and making money is fun (that's me).

Also for those who have seen a lot of ups and downs in their lives, like my parents, you tends to believe that life will not be stable all the way till you die.

Do you expect social security and medicare will be around when you are frail and old? Do you expect that health care will cost the same when you are old?

 

[Cutehumor]

Originally Posted By: PandaBear


Do you expect social security and medicare will be around when you are frail and old?


Yes. I like to see what happens when the government tries to take all of it away.