Retirement plan distubtions are all about TAX MANAGEMENT! When you take money from your retirement plans, make sure you do it when it's at your best tax advantage.

Finacial advisors are never taught how Warren Buffet created Billions of dollars in wealth with a very simple forumla to follow. He's arguably the best investor, ever, yet advisors have no idea how he got there, let alone teach it to their clients.

Let's stipulate that most credit card uses are TROUBLE! If you are buying something with a credit card, thinking it's going to be easier to pay for it later - you are kidding yourself! It's harder! However, there are ways to use credit cards wisely. Let's talk about it!

Early on in my career, I ran into this family that had one of the worst debt disasters I'd ever seen! 30 years later it still is a top ten worst financial situations I've seen.  What can we learn from their mistakes?

Active investing and passive investing each have its strong suit. What is best for you and how do you adjust your investing philosophy to maximize your wealth? Hello everyone and happy fourth of July to you, you know aren't you glad we are living in a country that is free or we can have opportunities, really the sky is the limit, I know there is a lot of negative talk about America and certainly there is a lot of politician who like to you know maybe sound like we are the worst people in the world but what a great country to live in to be able to really be or do anything that you want to do in life. I mean it is really exciting and I am so grateful for this country. [00:01:04] You know when I listen to some of those patriotic songs, some of them really get to me, one of them that gets to me is America the beautiful world, it talks about the soldiers and it says something to the fact that they love liberty more than life, I mean who are these guys, I mean the life of our soldier who love liberty more than life and willing to give their life for our freedom. I mean those guys are just amazing to me and I am really grateful for them and I hope today, independent day, hope you just take a second and look at all the wonderful things that we have in our country and then take advantage of it. [00:01:58] So anyway have a great fourth of July and enjoy the fireworks. You know today I want to talk about the difference between active and passive investing, what I don't think a lot of even financial advisor understand is really what that means. When you look at active portfolio manager, basically what they are trying to do, active being the keyword here, they are trying to actively beat the market or a specific index which is called the SNP 500. [00:02:34] Active portfolio management is all about moving money, trading, getting in and out of things, riding the wave up, getting out before it heads back down and trying to actively manage that money so that it outperforms the index or a benchmarks or the market as a whole. [00:02:53] Passive portfolio management, what it tries to do is mimic the investment or the index, so try to just do as well as the index. And although those might be accurate description of active and passive portfolio management, it is just not what we like to do when it comes to active or passive management. The reason is this, I think both those things are really different to achieve, now certainly if you want to just be a passive investor, go by the index, get it as cheap as you possibly can, don't pay fees, don't pay advisors, don't pay a broker, just get a least expensive ETF or portfolio of the index and just leave it, then you are probably going to do pretty close to the index. [00:03:57] But don't ever expect that you would do better than the index and for some that might be okay. Active portfolio management is much tougher to be able to think that you are going to jump in and jump out of things and actively manage that money and then eventually outperforms the index after the fees and the cost and commission that goes along with active portfolio management, that is a little bit more difficult to do. [00:04:23] what I like is what I call being actively passive, active in the sense that you know what is going on, active in the sense that you know what you have invested in, active in the sense that you know why you invested in it and active in the sense that you are following along and making sure that the investment that you put your money into is still doing what you thought it would do. [00:04:53] let me give you an example, let just presume I want to own a particular stock, we are just for fun we will call it Apple, so what I first want to do is really understand Apple and I want to make sure I am capable of understanding that. You know Charlie Monger who is Warren Buffet partner, he talks about this pretty succinctly, the first and foremost thing that you should do is make sure you have the capacity to understand investment. [00:05:26] so let's just assume I understand Apple, I use Apple and I am very comfortable with Apple. Now, we won't talk about price at this juncture because there is a difference between price and value, price is what you pay and value is what is worth and some of those sometimes those things there could be quite a spread in those prices. So we won't talk about that but let's say I am into Apple at a price that I am comfortable with, there is value there, now I want to stay active in the sense that I kind of want to read news about Apple, I want to know what is going on, I certainly want to read the annual shareholder report, I probably want to watch anything that the CEO is talking about. [00:06:15] I definitely want to see what is going on in the new product launches and how those are accepted, so I want to stay active in the sense that I know what is going on with Apple but I want to be passive in the sense that I don't want to trade it in and out, up and down with charts looking at moving averages, I want to eventually hold that as long as I possibly can for life maybe, certainly for the next ten years. [00:06:47] You know Warren Buffet said he won't own a stock for ten minutes that he wasn't willing to own for 10 years. So in that regard we want to be extremely passive, we'd like to just get in and hold that thing forever and as long as the company is still doing what we thought it was supposed to do, as long as the company is still good management, the different things that will go a long way to helping that company grow. Then we want to stay involved but we want to be actively passive. [00:07:22] so that is a big difference between what happened when you have access to a capital, when it is time to invest, you certainly going to want to invest when price and value and at least that parity or hopefully prices below value, that is even better. And then again we just want to stay active in terms of understanding and knowing what is going on in the world. [00:07:49] so those are big differences, when you walk into a traditional financial planning firm and they throw out to you a bunch of mutual funds, they are hoping that you will stay passive and not really know what is going on but yet the mutual fund managers are very active, so that is what I call passively active, you are passive, you are doing nothing to learn, you are doing nothing to understand, you don't have any idea what these mutual funds are buying and why they are buying them. [00:08:21] yet the mutual fund over here is very active, I mean the turnover ratio in mutual fund sometimes getting to the 100, you know when they are turning over that portfolio, you know 100% of a time in a given year and maybe even much higher. So they are very active and that is maybe not so good for you, maybe not so good for the fund but that is how most mutual funds are built. There are some that do more of a buy and hold strategy but for the most part, they are very active in and out of stuff and when they hear just even the slightest bit of news that might be negative, they are out of that thing and because they can't afford to have a bad quarter. [00:09:04] Every time you get your mutual fund statement don't you expect it to go up and if it is not at least going up a little bit or staying flat, you are wondering what is going on and it could be easy for you to be swayed to pull your money. Yeah, you are very passive and I am not saying you, I am saying most traditional financial planning company’s clients are very passive, they don't know what they have, they don't know why they have five or six or eight different funds, they just know that you know it is just diversify and that their financial advisors is taking care of them. [00:09:37] so they are very passive, they are not reading about the stocks that they own and they are not keeping up on the company news and new launches and products and as a result that is a dangerous place to be in, first and foremost you are going to be the type that panics quickly when market starts to crash because you don't know what you have and why you have it, you just know that your advisor picked a lousy fund. [00:10:03] and meanwhile that manager over there in the fund is moving and try to sell out and keep your profit as best he can. As a result, mutual funds typically way underperform the index over time, there might be a year or two where they beat the index but after you add in fees, commissions, all the trading course and then eventually taxes, you are lucky for mutual fund can even come close to just passively investing in the index. [00:10:33] so that is kind of a good snapshot of the difference between active and passive investors. Now you got to ask yourself what type of investor are you, what type of investor do you want to be? You know you don't have to be full time, all addict, everyday 24/7 to be a good investor, all you have to do is you have to have capital and that is where cash value often times comes in then you just have to be able to understand what you are investing in, why are you investing in it and whether or not price is at least equal to value at the time you get involved. [00:11:14] now this is real estate, this is gold, this is oil and gas, this is stock, this is the corner business that you might be interested in, this is any kind of investment. Here we do a lot of real estate right now and it is actively passive, we are certainly active and making sure that we are going to the right location, that the subdivision looks like it is going to be you know marketable, that it is in a good area. They say location, location, location. [00:11:47] so all that is very active then we, because we are very active, because we are the builder as well, our building companies then take a vertical but investors who are with us, they are very active in the beginning and then they are a little bit more passive while everything is going vertical. In the meantime, they might be reading everything from what is going on with mortgages and interest rate to the community that has been built in. [00:12:16] I mean they might want to be much more active and just understanding what is going on. So again whether it is real estate, individual stock, businesses, whatever your interest is, you want to be actively passive, you want to be very active in understanding what is all about and then very passive in trading it, getting it out and trying to get the next thing on board. And this has been proven, you don't have to go out and try to say, well is Dan right on this, all you had to do is look at guys like Warren Buffet and Charlie Monger and Charlie Icon, [00:12:51] I mean these guys all have very similar philosophy. [00:12:56] Warren Buffet just killing them all in this actively passive perspective. So alright there you go, that is it for this week, again go out and have a great holiday and thank a soldier if you see one, be grateful you live in this country and then take sometimes and just really understand and be involved in your investment and the things that you are interested in, that is it means, that is first and foremost, only invest in things that you are interested in and then understand it and you are going to be just fine and you are going do so much better than those who sit down were traditional financial advisors and buy an array of mutual funds and then crush your finger and hope your market goes up. [00:13:45] you will never know what is going on you will always be in the panic mode if things are correct. So any question that you have always reach out [email protected] and I will be happy to answer them just as quick as I can and in the meantime make sure you subscribe to the videos, to the podcast, don't miss an episode and we will try to do this together. Alright till next week, take care.

Here are the charts talked about in the podcast.    

What are the major diffences between a ROTH and Traditional IRA? Is one better than the other? What are the tax consequences when it's all said and done? Let's talk about the differences in this podcast.

Well, hi everyone it is Dan Thompson again with another wealthy and wise Wednesday, hope everything is going great for you? We are just about this expect some puppies around our house, I am really excited about that, we got a beautiful golden Doodle and she is going to deliver some pups in the next probably week or week and half. Somewhere there, so I will definitely bring them on the video and show you them when we have them. [00:00:33] You know we have seen the last few podcast and video, we have talked a lot about the economy and market and so forth and I kind of wanted to follow that up with probably one of another potential disaster that we are facing. That is not talked about very often and fortunately people kind of put the blinders on and that is the 401K. [00:00:56] Now there are several things we can talk about and I might end up having to put this on to several different videos and podcasts because there are so much. But let just see how far we get today. [00:01:10] First thing I want to talk about is this notion that everyone should have a 401K. Now we all get told the tax deferral-tax deferral- tax deferral is the greatest thing that ever happened, it is the nicest thing our government have ever provided for us but there are some caveats to that. [00:01:31] For instance I was just recently talking to this 26 years old young guy, young, married, couple of kids, working at a big corporation, a tech company and doing pretty good but he is 26 years old. Now, just based on what you might know out there and what you think out there. Just raise your hand if you think that these 26 years old might be making more money in the future. You think so? [00:02:05] Yeah, there is a good chance that he is going to be making more money in the future especially if he is aggressive and he climbs the corporate ladder or maybe he decides to open up his own business or whatever. He is going to become more valuable employee as the time goes on as well. [00:02:22] Well, my question to him is why are you doing a 401K and he really don't know, he just said he walked in and HR grabbed him and said you should be doing a 401K. No one explained to him that he was probably in the lowest tax bracket he was ever going to be in because as he progressed up the corporate ladder, made more money, his tax bracket is going to go up with him as well. [00:02:47] And as a result he maybe again in the lowest tax bracket that he will ever be in, so why are you deferring the tax, why defer a tax at 15% just so you can pay it later at 25 or 30%. That makes no sense but it is never talked about, it is just hey, you got a new job, 401K is part of the benefit you should do it and it is never looked at in the term of where is my tax bracket right now and where might it be in the future. [00:03:19] So that is one thing, the next thing and this is probably going to be the most dangerous of everything. Is that they are not doing very well for us. Okay, Fidelity who happens to be one of the biggest mutual fund management companies out there which also has you know probably millions or different 401K participants in their mutual funds. [00:03:48] So they get a pretty good statistical record and data as to what is going on out there. Well, they said that at the end of 2017, the average 401K had $97000 in it. Okay, so that was an average, so we got young and old in there. But unfortunately it wasn't much better for those who were either a few years before retirement or a few years after. [00:04:16] So people from age 60-69, they had an average 401K balance of %167,000. Now, I know most of you aren't financial geniuses, maybe some of you are. Congratulations, but it does not take a financial genius to realize that if your retirement is going to be 25 or 30 years, that $167,000 is going to be plenty for you to live off. [00:04:46] Now, of course you can say they got social security, maybe some has pensions, maybe some have a [00:04:52] benefits, who knows? But still $167,000 could be eaten up so fast in retirement. It is not even close to what we need; you will always talk in terms of a million dollars. [00:05:07] A million dollars used to be a million dollars, it just doesn't feel like a million dollars anymore and it just doesn't do what a million dollar used to do in the past and so it is just not even hardly enough to retire on. [00:05:19] So if the average out there is a $167,000, people are going to be going through their money quickly and it is going to be pretty sad. Well, fortune magazine went on to report that there are roughly thirteen million 401K managed account by Fidelity. [00:05:44] So that is the number we are talking about little bit earlier. They are literally millions, 13 million accounts managed by Fidelity and again with that average about you know $70-90000 let's just say. And only less than 1.06% had a bounce of more than million bucks. [00:06:07] Okay, .06%, so out of 13 million, that means only 1100 people had balances of more than a million bucks. And out of those very few of them made less than $150,000. In other words, if you make less than a $150,000 a year and you have a million dollars in your 401K, you have done something incredible, exceptional, got lucky, something of that effect because very few accounts have a million dollars in it if you made less than a $150,000 a year. [00:06:49] However, the other accounts that had more than a million dollars in it or at least a million. These people made $350,000 or more per year. So really the only people who had a million or more in their 401K were people who made over $350,000 in a year. [00:07:14] So it is a very small percentage of people who really had a million dollars in their 401Ks at retirement and again a million dollar still isn't probably going to get you the income to sustain this kind of lifestyle that you want. [00:07:29] Wow, this seems really depressing, doesn't it? Well, the point is that the 401K is kind of letting us down. The really unfortunate part is that there are so many people who believed that as long as they are maxing out their 401K, that is all they need to do. That they are going to have plenty of money because that is how the government set it up, that if you max out your 401K and it gives this whopping rate of return and it is managing mutual funds then you are going to be just fine and handy. [00:07:59] well folks, I hope you are listening loud and clear because it is just not the case and if hopefully you are 25 years from retirement and you can put a breaks on and you can figure out a better way as quick as possible because if you are pushing into that 60 years range, 60-65 years, you may be faced with a host new problems that you didn't know were coming. [00:08:21] Now, there is not many things you can do about what is going on in the 401K, there is not many things you can do period because of the fact that lot of people are kind of maximizing their savings anyway, that the amount they are putting in 401K might be all that they can do. [00:08:39] I am just here to tell you; it is not all you should do because it is not going get you where you want to be ultimately. So these are just a couple things going on in the 401K, now we add to that a [00:08:56] study. Now what is a [00:08:58] study [00:09:00] analysis mutual funds, real returns and what they do is that they compare that to an index. Now what is an index? Index is like the S and P 500 or the [00:09:11] industrial average or the Russel 5000, these indexes are made up of so many different stock companies and as a whole they calculate what they have grown to dividends reinvested and so forth and we get this index average rate of return. [00:09:28] once again has proven that not only our mutual funds support to the index but that those people who buy mutual funds tend to not be a very good investor as well and here is what happens in over 30 years. Now think about what is going on in the last 30 years. [00:09:50] we have had a couple dips, about for instance like the last 10 years, these has been some pretty good years. Obviously they came off of substantial recession and a fairly hefty market drop of 50% but since then we have actually had some pretty good years. [00:10:09] well in that period of time the indexes have been just under 10% but the average investor out there investing in the mutual fund has done less than 7, okay? And let me just tell you when most advisors sit down with you, they are always projecting and you hear this on a radio from this radio guy as well. [00:10:33] they are always projecting that you are going to get 10-12%. Well, I am here to tell you and [00:10:39] is here to tell you that over this last thirty years, that is not happening. So you are not going to get your 10 or 12% that you are planning on. [00:10:49] so don't take out your future value calculators and calculate how much you are going to have based on 10- 12% because it is just not happening. By the way, that does not include fees, that does not include taxes, that does not include if your 401K also has administrative or fiduciary fees. [00:11:12] On top of that, it is not uncommon to see a 401K have anywhere between 2 and 4% in fees every year. So think about that, you do 7 fees or 3, you are going to net somewhere around 4 and you still get to pay the taxes on it. [00:11:29] Long story short folks. You can hear in my voice, you can see where we are going, 401K has not been what it was chalked up to be, it is letting us down, we have got to find better ways, we got to take more control, we have got to find investments and opportunity that are going to outpace what a 401K has been able to do. [00:11:54] And it tells you, come to that realization there is a good chance you are going to find yourself come retirement time with a 160, 180, maybe a couple hundred thousand dollars and wondering how is this going to stretch for my life expectancy over the next 20, 25, 30-year retirement these days. [00:12:14] Lot of people are living into their '90s and money that runs out too soon can just make for a miserable retirement and I am not trying to disparage anybody but really I don't think most people want to be Walmart [00:12:29] but that is where they end up if they haven’t prepared financially and put themselves in the driver seat. [00:12:40] you know that is how we really like to talk about this, is making sure that you understand investments that you invest in opportunities that you control your ship and unfortunately just dropping the money to a 401K isn't quite the answer. [00:12:55] so there are better ways and of course we talk about these better ways on our podcast, on our videos, in my book, make sure you subscribe to all these so you can stay informed and make sure that you don't fall into this category. [00:13:12] Okay, that is it for this week, good to talk to you. Please reach out with any question and again if you don't have our books and our podcast and our videos, get on it so that you can always be an informed and very wise investor, so that is it for this week, look forward to talking to you next wealthy and wise Wednesday until then take care.

Hi everyone, welcome to another wealthy and wise Wednesday hope you are doing great this week, we just got a couple of more days until the weekend and hope you might be having some good times, summertime out there, nice and sunny, ready to go. I got a little bit of exciting news to share with you today, we are going to start something that I think is going to be really unique and very helpful, I call it the three-minute money mastery. [00:00:48] And what we are going to do, we are going to make very short videos three minutes or less, they are going to be both in podcast form and in video. We are going to take all sort of subjects, we are going to talk about them and a very quick and concise manner. The reason is this, you know it is great if you are driving around or you have got sometime and you can listen to a 15 or 20 minutes’ podcast or watch a 15 or 20 minutes’ video and I certainly encourage you guys to do that. But there are times where you might just like a little bit of information, just a small education on a particular subject and that is where this three minutes to money mastery is going to all be about, just quick, precise, concise, to the point and we are just going to hit these things. I hope we are going to have a ton of them. [00:01:45] So I would love your feedback on what kind of ideas and topics you would like to hit on that subject, it can be anything, anything that has to do with money, with debt or investing or banking or whatever might be interesting to you. So I am really excited about that and watch for that, I think probably about the time this podcast comes out, we might have our first one and what I am going to do is I am going to start each one of them or head each one of them with three minutes and that way you can kind of know that that is a short video, so we will call it three minutes to and then we will have out topic. Three minutes to understanding 401k, three minutes to understanding what a rough IRA is or whatever the subject might be. [00:02:40] So watch for those, make sure you are always subscribing to both the podcast and the video to have the one works best for you so that you won't miss those and I think that they are going to be really good, really informative. [00:02:56] So what about this week, this week podcast, I want to talk about a few different things, one is kind of an add on to the economy that we talked about a couple of weeks ago. You know this economy is ripping and roaring, I think there is a lot of reasons for it and I think there are somethings that we got to be at least understanding what is going on but it has been kind of exciting to say the least and we have seen a lot of money chasing after this types of investment, I will use real estate as an example, there is so much money out there looking for real estate and driving prices up. Obviously it is what usually happens, part of it and at least the best part of it is we are not back into the old days of 2006 and 2007 where everything was subprime and that is what was driving the market. [00:04:01] Subprime if you remember, this is people who really couldn't qualify for a mortgage so what they did is they just jacked up the interest rate, put them in a subprime which you can get in to a house oftentimes with no money down and even after you closed you could pull money out of a home equity line, I mean it was just crazy what was happening. But the worst part again is that most, not most but in a subprime situation, these people were not qualified to make those [00:04:35] payment. [00:04:37] Another part of it was how the interest was structured. Some had [00:04:43] interest rate so that every year it went up, some moved up with interest rate indicators like the Libo or prime and it prime or libo plus one or two, so if interest rate started to go up then so would your mortgage payment. So all these factors were part of what drove the crash of the real estate market in a week in '09 because people cannot afford these mortgages and so now all of a sudden where things get a little tight, foreclosures, bankruptcies, all those kind of things came in. [00:05:23] Well at least not going down that part again, someone have pretty much have to qualify for a home mortgage and that is good because we want people in there that eventually can end up paying off their mortgage and living there and can afford their mortgage but part of what is that there are some many people looking for home in many part of the country that home suppliers down and as a result you can't build a home as fast enough and so contractors are out there looking for subs to help build more houses faster. The subs are so busy that they can almost name their price anymore and so they are charging more, plumbers gone up, labors gone up, so house and prices continue to escalate in many part of the country too. [00:06:25] And again that is not necessarily all that bad but at some point you got to think that this thing can't just keep going on forever and depending on your community, what is happening, are they getting influx of people, is it just people trading houses, you want to really analyze what is going on to you know determine if getting into real estate right now is a great place. [00:06:53] I think we have got, you know I don't see any real looming indicators that say that you know it is a bad thing right now, other than like I say it is just a lot of money chasing after fewer pieces of property and that can typically help drive up the prices as well when something goes for sale and it can't even stay on a multiple listing service for more than a few days then you know you have got a pretty robust market. [00:07:30] Okay, so we have got that, then we have got the stock market as well, it is just pushing all-time highs all the time. However, one thing that you can help justify that a little bit is at least companies out there are having at least meeting or shielding a little bit the earnings that they projected. And look with any stock, with any business actually it all comes down to this one thing, if I am going to invest the dollar, what kind of return can I expect off that dollar from the company's profit, cash flow or what you like to look at is free cash flow then you can calculate their percentages whether the risk is there or not and if you can justify the price that you are paying for the cash flow that you might be getting, well that is why this thing continues to go up because companies are presenting some decent cash flow and free cash flows and so people are willing to pay a little bit more per share for the stock. [00:08:39] Well again that gets to a point where there is a lot of money chasing after that cash flow and driving up prices and pretty soon you think wow is it worth paying that cash for the amount of cash flow I am going to get. And that is where we start to stumble and fall and then the company misses their earnings by a penny or a fraction of a pennies sometimes and everybody panics. The big sell off comes and then one after another you say well oh mhen I got to hurry up and get out before this guy and this guy and then I will say we have a pretty decent sell off and maybe for no other reason and just a company or two missed some of their earnings projections. [00:09:28] The other thing that can be an empathic to that is interest rate, mhen the feds would love to raise interest rate right now, it kind of slow things down a little bit but that is exactly what happens if you start raising interest rate, it slows thing down. You know it is really just another risk, a suspense, if fixed interest rate are high enough that you are comfortable with that return, there is no need to take the risk in the market. So as interest rate come up and the profits of companies maybe come down or stay stagnant, more people move to fix the investment. [00:10:08] The other side of the coin is that we have got a whole baby boomer generation who at some point, probably going to start taking some money out of risk and put it into the more fixed investment because they can't afford to have an 8 or 10 years waiting period for a market to correct and that could just be an empathics to starting a market correction as well. So again we are moving pretty good, market doing good, real estate doing well, I mean there is a lot of good out there, we have been given some extra money through a tax break from congress to reduce our taxes, we have got businesses bringing back money into the United States to help build other businesses and then there is repatriating of money brings in a pretty good chunk of dough to build new business or build current business or start new ones or to buy businesses and I mean there is a lot of money out there just floating around and looking for a place to land. [00:11:23] And if you look at what is happening in Canada in real estate, so in real estate you look at what is called cap rate, basically [00:11:32] way to return for an easier way to say it. In Canada they are willing to accept very low cap rate, 1 or 2% cap rate, just basically means if I bought a million dollar or let's just say a one hundred thousand dollars’ piece of property, I might only get one or two percent a year of that in the cap rate or in cash flow. That is horrible by the way, just for prospective, we typically like to have an 8 plus cap rate, 10 is almost like you know starting point. I mean depending on what is going on, you might accept a little lower cap rate based on some equity participation on the other side. [00:12:18] So that is what is happening in Canada with the real estate, investors are going in and saying hey, I got to put my money somewhere, I will be happy with a one or two percent cap rate and hope the equity play on the other side will help boost the overall return. So anyway just kind of thought would follow up with our conversation on the economy last week I believe it was or maybe two weeks ago because I didn't want to paint this picture of gloom and doom, I just want to paint a picture of being aware of what is going on, why it might be going on and then being prepared if and where that time comes in the near future or year from now, who knows where you want to start pulling back and maybe raining in some of your risky investment. [00:13:06] So that is it for this week, just another talks about the economy but I want to remind you, just watch for those three minutes’ money mastery podcast and videos, I think they are going to really take off and I think it is going to be really exciting, you know share them with your friends, share them with your family and we will try to just talk about all kind of different subject in a very quick and concise manner. In the meantime, if you have any questions or thoughts, comment, you want to you know discus something, send those to [email protected] answer them just quickly as we can, other than that, I hope you have a great week, talk to you next week, take care.

Hi everyone and welcome to another wealthy and wise Wednesday, hope everything is going good in your world and welcome, I am glad you can join us today. You know every once in a while I get the thinking about the economy, actually not every once in a while, almost every day and I am sure you do too because some of the things that are going on in the economy directly affects you and certainly affects what is going on in your future and especially if you are getting to the point where retirement is on arising. So I thought that it would be a good idea to talk about economic cycles and hopefully not put you in a sleep but to give you some a really good basis as to what you know what we look for and what we are looking at and watching closely because economic cycles are bound to happen in your lifetime and typically a cycle probably goes you know about every ten years. In fact, I remember reading Warren Buffet saying that you can pretty much expect the economic cycle about ten years. [00:01:20] So what is a cycle, what is an economic cycle? Well it consists of basically four things, you have expansion, you have contraction, you have troughs and you have peaks and you know those as they make up the graph, expansion and contraction and troughs and expansion to peaks and those kind of things continually cycle as you go along and in between there, there might be some recessions and luckily since 1929 anyway and 1930, we haven't seen a depression but those things are certainly possible in the economic cycle as well. You know it is really interesting about dealing with gloomers. I certainly try to look at things objectively and I try not have a too much of a rose color glasses when looking at the economy and cycle as so forth but there are some that are just gloom and doom, I mean they just always predicting the absolute worst. [00:02:36] Way back in the 70s there was a guy, he might still be out there maybe I shouldn't mention his name, HR was his initials and this guy was predicting. This is the 70s, keep in mind, this guy was predicting the longest and the most devastating depression that was ever going to hit the United States and for a while my mom at the time, every once in a while she did some typing and some secretary works for him and so she would come home and talk about the upcoming newsletter that was going on and because I am just a teenager but already I am interested in the financial world and more curious what this guy was saying and the whole premise was we had interest going to through the roof, way double digits pushing 20%, with inflation right alongside going up double digit and he was pushing into that 20% range as well. And he had all these kind of collapsing because of low unemployment and I can't remember everything about his number because obviously that was a long time ago but the point is he was just a doom and gloomer and everything he wrote about was the big crash and it sold. [00:04:20] I think he did really well, I remember going to his house, he happened to life near my hometown in California and I remember going to his home, huge home, he wasn't living like a recession or a depression was coming along, he lives pretty well. But his newsletter sold like crazy, so he had a huge falling. Well what happened in the 80s, you can give some credit to Ronald Reagan, I don't know whoever you want to give the credit but things just turned around in the 80s were a boom. So my point is this, even though we want to keep an eye on the economy and we want to see some of this indicator, we don't necessarily want to buy into gloom and doom, I kind of like Warren Buffet philosophy on our country, that is it is pretty pro country and pretty positive that even if recession and things like that hit us that we are going to come back ahead and I feel the same way. I am very pro America and the technology and the innovation and all that we have going for us. [00:05:31] But as we look through the economy cycle, we have got the expansion which I think it is important to understand what is happening in there, basically we have had GDP growing every quarter. Now what is GDP? It is gross domestic products, that is taking everything sold in the country and adding all together. That is adding our gross domestic product and as long as that is moving forward, that is an expansion phase. As we start to slow then we start a little bit of contraction but we are not in the recession until we have had two negative quarters. So basically 6 months where we have had two quarters that have gone backward in GDP then we are technically in recession, now recession average is somewhere between 6 and 18 months historically and during that period, we see a slow in the economy, we see unemployment maybe down, we see interest rate. Sometimes the reason for this is because interest rate is reason, so we might see interest rate start to fall. We are in a real awkward situation right now because if we did go into recession, it will be really difficult to drop interest rate much lower than they are so that could be unique if that ever happened. [00:06:57] Some of the more solid indicators of recession start with asset prices declining, things like stocks and real estate as they start to soften and start to go backward, that is a good indicator. We might also see unemployment when unemployment starts to rise, that means companies, manufacturers and jobs are not expanding and that might show a recession to a certain extent. And also in inverted yield curve. Now what does that means? You know if you look at a yield curve on a graph, you are going to see long-term interest rate and you are going to see short-term interest rate and the inverted yield curve is when the long-term interest rates are lower than the short-term interest rate. In other word, you can go put money in the saving account and get a better rate return than a ten-year treasury bond for instance and that means we have got an inverted yield curve and most likely somewhat of a recession that we are in. As I have mention the depression, we have only had one of them, hopefully you will never and I will never see one in our lifetime but that is a 10% decline in GDP, so 10% is huge by the way. You think about GDP on an annual basis, they love it to grow somewhere between 2 or 4% but a decline of GDP drop in 10% well that is huge, that is like you know five years of growth wiped out in a single moment so to speak. [00:08:32] Back in the 1930, we saw unemployment touch on 25% unemployment. I mean that is huge, you look around your neighborhood and one out of 4 people aren't even working, you can imagine what happens to home and foreclosure and oh it can get ugly. So hopefully we don't see one of those depressions but we certainly are going to see contractions, we might even see recession, in all those period of time, we have about since probably 1945, there has been about 10 expansion and contraction period or we just call them economic cycle. And again a 10, 12 years’ period of time is pretty normal for an economic cycle and if we look since 09, we have been pretty much on expansion, so we need to start looking at some things and to make sure that we are eyes wide open in what is going on here and when I think about that, I go back to some of these ratios and graphs and chart that we have to look at. [00:09:45] One of them being the [00:09:46] PE and they know we have looked at this before because it is a great indicator and right now it says 32.44 and it has only been higher one other time in history, that was just before the crash of 2000 which we saw the [00:10:06] at that point drop 50%. So we are definitely into high territory and so we want to watch that for sure, that is a great indicator. Another really good indicator is GDP to market capitalization, this is if we can define this really easy. There is an index out there called the [00:10:27] 5000, it is basically 5000 and if you use that as a kind of a barometer of the entire market, we can just call it market capitalization of this 5000 stocks and we will define that with the GDP that grows domestic product, we come up with a ratio and that ratio right now is a 142.1. Now what is good, you can sit by this chart but this chart shows GDP or this ratio in that 70-80% area where 141 or 142 and again the highest it has ever been 2000 just before that massive sell-off and recession that we hit right after the turn of the century. [00:11:24] So those are two indicators that we need to look at, you know that indicator that GDP to market is to send that 151 right now as you can see if you are looking at the chart, so 151 is pretty high. Again not being doom and gloom, not trying to say oh watch out, here comes recession. But if you have any kind of worry, if you have got money in the market, maybe you have got this 401k that has just packed to the hill with equity and you are a few years away from retirement, it is probably time to talk to somebody and really see if there is something that, some moves that you could be making especially if you are going to start using that for income. So as we look at the economic cycle, we see the expansion, we see the contraction, we see the trough and we ultimately see the peak which is kind of where we might be right now, it is those time where we just want to be smart and look at things. There is time to be aggressive and that is going to be down in the trough when things are looking not so pretty but we can buy things on sale and we can pick up asset that have soften and fallen back in value quite a bit. [00:12:45] So that is the whole economic cycle kind of in a nutshell and I think it is wise especially at this point in time to really look where the cycle is, where you are, where your investments are, how they are doing and then eventually you might even run what is called the stress test to see what would happen if the market took a 30, 40, 50% hit, what would that do, how would that look in your portfolio? And then again like we talked about in our last podcast and video was then we start preparing for opportunities, we look for those times where we can get involved when markets are soaring and we are getting in some good prices. So okay that is it, the economic cycle in 15 minutes or less, please let me know if you have any questions, send them to [email protected], I will answer them just as quickly as I can. Thanks for listening, always remember to subscribe to both the podcast and the videos, never miss a bit and we will try to keep you inform, alright till next week, take care.