27 July 2018
Question: According to MSN:Money, what things should you do to boost your net worth?
Facebook sheds $120bn in value as ‘bombshells’ spark record sell-off – Pg. 1
– The share price plunge of more than 19% marked the biggest one-day value destruction of a listed company in US history, almost equal to the entire value of McDonald’s and Nike, and larger than the likes of General Electric, Goldman Sachs, BlackRock and the entire Argentine stock market
– …came less than two weeks after investors inflicted similar punishment on Netflix….
The next crisis is brewing in pension funds, not banks – Pg. 9
– Risk has been gently and painlessly excised from the US banking system over the past 10 years. On any sensible measure, US banks are far safer now
– It grows ever clearer that risk has been moved, primarily to the pension system. This means that the long-term dangers in the financial system have become more insidious: easier to ignore but ultimately even more dangerous
– Pension funds have been the principal losers from quantitative easing, the main tool used to bail out the banks. QE bond purchases pushed down bond yields. This created pain for pension funds, which buy bonds to offer their members a guaranteed income. The lower the yield on bonds, the more expensive it becomes for them to fund any given guarantee. This problem has created a true crisis among US public sector pensions. Many are looking for ways out of the guarantees made to their members, only to find that courts – rightly – defend the members
– In the US, pension deficits – the gap between assets and the notional cots of funding the guarantees – widened sharply after the financial crisis
– …comp[anise in the S&P 1500 index currently face a pension deficit of $229bn, or 11% of their assets
– With bonds barely offering an income, many funds have resorted in taking greater risks. That has meant buying into funds and strategies that go under the umbrella term of “alternative assets”, may of which rely on leverage for their returns
– Unlike a banking crisis, a pensions crisis has no one month of critical danger. Its ill effects settle in over time, and there is opportunity to fix them
Answer: (1) Start with cutting out unnecessary expenses (Prof Note: Stop with the Starbucks!); (2) Take Risks (Prof Note: Calculated and quantifiable risks); (3) Know what you want in life (Prof Note: This is absolutely critical. I still ponder this thought. Great people is a consistent answer.); (4) Believe that you can be rich (Prof Note: I cannot stand this word “rich”! What does it mean?! What one really wants is Passive Income exceeding active expenses!); (5) Now to build net worth (Prof Note: this is SOOOO WRONG!!! Net worth is nothing! A high net worth can be created by an asset requiring significant feeding! What is really desired is Low-risk passive income); (6) Diversify your assets (Prof Note: This single employer system is dangerous….diversify one’s income); (7) Have specific financial goals (Prof Note: Know the passive income required to live the life that you desire!); (8) Do something you love (Prof Note: Absolutely! I love development as I love creating. Also, see the value is creating something from nothing. Creating jobs, raising standards of living, etc.); (9) Learn how to invest smartly; (10) Build your net worth over time (Prof Note: I am going to flip OUT! NOOOO…build your passive income streams over time.); (11) Increase your contributions each year; (12) Raise your bottom line; (13) Consistently invest your income; (14) Invest in yourself (Prof Note: While this is absolutely true, be cognizant of the return. If you go to No-name business school, is the return really going to be there for the money spent? Of course the return could be personal satisfaction, which is priceless. However, enter with eyes wide open!)