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Would you have been better off leaving your money in a bank in the United States or in Cyprus over the last five years?
The answer: You would have been better off in Cyprus, even after the bailout, when your money was “confiscated.” If you had 100,000 euros in a Cypriot bank account over the last five years, where the interest rate has averaged about 5 percent, you would have about 127,600 euros today. Even after the bailout, which would require you to give up 10 percent of your deposit — 12,760 euros — you would be left with 114,840 euros. The American bank? The $100,000 you deposited at Bank of America five years ago is about $105,100, at the going rate of about 1 percent interest a year. http://dealbook.nytimes.com/2013/03/18/a-bank-levy-in-cyprus... (http://dealbook.nytimes.com/2013/03/18/a-bank-levy-in-cyprus-and-why/)
Five years ago, the cross-rate wasn’t parity. If you converted $100k American to Euros, deposited it in Cypress, then repatriated it today (after paying the proposed exit tax), would you be better off? Do the math. Five years ago, your 100k American would have bought about 65k Euros (due to the weak US dollar). At a 5% interest-rate, they would have grown to about 83k Euros. Since your deposit is under 100k Euros, your exit tax is 6.75%, leaving you with about 77k Euros to convert back to US dollars. At the current cross-rate, you end up with about $99,000, or a loss of $1,000. So, leaving the cash in an American bank that paid you no interest at all would have given you a better nominal result, and that’s the key word, nominal.
Meanwhile, there’s the tiny, minor, inconvenient fact that the prices for goods and services have risen in the US. Depending on the economist you choose, which could well be yourself and your own research, inflation in the US has been averaging 5% to 6% (if not more). So, US depositors have already been paying an annual levy on their cash that far exceeds anything Cypress is trying to do.
Charlie
These numerical calculated facts are what make it hard to sort out the real story from fiction.
Thanks for your post.
These numerical calculated facts are what make it hard to sort out the real story from fiction.
Thanks for your post.
razz,
It isn't a matter that the original story (as it appeared in the NYT and elsewhere) was untrue or misleading. It's simply a matter that most who attempt to write about financial matters aren't themselves investors/traders who are actively engaged in markets. The writers are passive observers who have deadlines to meet, editors to please, and an audience they are supposed to entertain, so that advertisers will buy ad space. When events happen in the financial world, they aren't saying to themselves. "This should be yet another opportunity for me to make some money. So, let's think it through as to what's really going on."
Also, most Americans do not understand currencies and the fact that our dear Federal Reserve Bank, which isn't 'federal', nor 'a bank', has been depreciating our currency since 1914. Cypress is a tiny, pip-squeak economy whose collapse should affect no one. (California has a far bigger GDP.) However, due to counter-party risk, what happens in Cypress also happens everywhere at the same time. That's the reason to worry. US savers shouldn't feel safe. Whether Cypress is propped up or not (by Germany or Russia, the two contenders), their own savings are already being confiscated by Bernanke's Zero Interest Rate Policies (ZIRP), as they discover when they go to the grocery store or gas pump and their money buys fewer goods and services than before.
'Inflation' is a topic that Joe Dominguez did not understand, and his attempts in YMOYL to dismiss its reality do readers a disservice. But as a bond investor (and as someone who can support himself more than twice over from his investing alone), inflation is very much a reality to me. Hence, I ran the numbers, because the conclusions drawn in the original story just didn't seem right.
Charlie
So junkman, if you had $100K at B of A, what would you do with it instead? I am not financially savvy but this concerns me.
So junkman, if you had $100K at B of A, what would you do with it instead? I am not financially savvy but this concerns me.
If my investment plan required that I have $100k at BofA (or at a similar institution, because it was serving as my emergency fund), I'd leave it right where it is. Investment analysis is never just about the numbers themselves. Always, those numbers have to be put into context, so as to determine their meaning. Is that $100k merely 'petty cash' for that household? or is it the sum of their non-home net-worth?
What you're asking about is a 'straw man' case. The 2010, non-home, net-worth in this country was 10% of that fictitious amount, or a mere $10k. The average person in this country is too poor to be concerning themselves with matters that they clearly don't understand. That's why they are so impoverished. In their daily lives, they spend more than they earn, and when they do attempt to invest, they fail to pull more money out of markets (on an after-taxes, after-inflation-basis) than they bring to them, as the Dalbar 20-year studies of investor results so clearly document.
So, yeah, I make good money. In fact, currently, I'm making fabulous money, about $1,000 per market day. Sometimes it's $1,500. Sometimes, it's just $500 per market day. I'm the beneficiary --as are many-- of an asset-price bubble that won't last. Ben's Zero Interest Rate Policy will blow up the US economy. It's already beggaring the rest of the world as he exports our inflation to them. His stupidity will come back to us and exact its revenge. It's just a matter of time. Meanwhile, the music is playing. So, the party is on, and it's going strong for them that know how to party (err- 'invest'). But you'd be wise to save most of those investing gains, because they are a buffer that soon will be needed.
OK. Let me assume you were genuinely and sincerely asking for investment advice and what you might do with a pile of cash that is now just sitting in a bank earning almost no interest. My advice is simple. Do what your investment plan tells you to do. No plan? That's where you need to begin, and each person's circumstances, means, needs, skills and goals will be different. There can be no "one-size fits all" plans, despite the attempts of the parasites known as financial planners to create such. Investing is a business. It's an owner-operator business that 90% will fail at, just as 90% of all start-ups fail with their first ten years. And the majority of those failures can be explained by two reasons: lack of a creditable business plan and insufficient capitalization. Can a small, $10k account grow significant wealth? For sure. It won't be easy, but it can be done. Ed Seykota grew $5,000 into $15,000,000 over a 12-year period. But he had what most lack, namely, consistency, discipline, courage, imagination, and a sense of fun. http://www.youtube.com/watch?v=LiE1VgWdcQM
If against fair warning and the formidable odds of ever achieving success you do wish to persist, then begin where you should begin, with some reading. http://www.amazon.com/Intelligent-Investor-Book-Practical-Counsel/dp/0060155477/ref=sr_1_2?s=books&ie=UTF8&qid=1363797714&sr=1-2&keywords=ben+graham+intelligent+investor His book won't tell you 'what to do'. But it will suggest a productive way to think about 'how it might be done'. In other words, his intro to value investing will give an overview and framework within which a beginning investor can formulate and begin to test his or her situation-specific investment/trading plans. That, and about 8,000-10,000 hours of study and practice is all it takes to get to the point of being able to perform, in a proficient and workman-like manner, the common and ordinary tasks required of investor. No beginner wants to make that kind of commitment. No successful investor hasn't. The matter is just that simple. If you want to get paid as an investor, then show up for work every day of your life, for the rest of your life, ready to put money to work. That's the downside of being an investor. Investing takes constant, persistent effort. The upside is that the boss is nice, and the hours are flexible.
Charlie
sweetana3
3-20-13, 12:45pm
Charlie, fabulous advice. I have been preaching a life book with info and goals for over 30 years now. No plan and you are just existing day by day subject to other people's needs and desires. We started very much like Your Money or Your Life and documented where we had been, where we were with budgeting info, and the most important, where we wanted to go. We reduced it to a permanent written record and review it each year at a minimum. We make changes and discuss any spending over $500. Note that we have met all our goals. Investing can be emotional but if you have goals and understand risk and allocation, it works.
Bears repeating:
"My advice is simple. Do what your investment plan tells you to do. No plan? That's where you need to begin, and each person's circumstances, means, needs, skills and goals will be different. There can be no "one-size fits all" plans, despite the attempts of the parasites known as financial planners to create such."
Charlie, fabulous advice. I have been preaching a life book with info and goals for over 30 years now. No plan and you are just existing day by day subject to other people's needs and desires. We started very much like Your Money or Your Life and documented where we had been, where we were with budgeting info, and the most important, where we wanted to go. We reduced it to a permanent written record and review it each year at a minimum. We make changes and discuss any spending over $500. Note that we have met all our goals. Investing can be emotional but if you have goals and understand risk and allocation, it works.
Bears repeating:
"My advice is simple. Do what your investment plan tells you to do. No plan? That's where you need to begin, and each person's circumstances, means, needs, skills and goals will be different. There can be no "one-size fits all" plans, despite the attempts of the parasites known as financial planners to create such."
sweetanna3,
Thank you for understanding what I was saying, that this investing stuff can be done, and done well, by anyone who truly makes it their goal. But in America, where everyone is encouraged to think that they will be given a prize just for showing up at the starting line, the discrepancy between expectations and reality can be brutal. Why does "Wall Street" encourage the uninformed to invest? Why do the mutual funds encourage the uninformed to invest? Why have employers switched to defined-contribution pension plans?
The reality is this. Investing is a negative-sum game in which you and a counter-party are making bets with each other. One of you will be wrong, and the middlemen will get their cut no matter what. Unless/until you figure out how to take money out of their pockets, (i.e., unless/until you craft a game for yourself that has a positive-expectancy, on average and over the long haul), they will take money out of yours. It matters not whether they pick your pockets through taxes, inflation, or just by making better bets than you do. None of your losses spend any better at the grocery store or gas pump.
Most people are willing to work "40 for the man". Why aren't they willing to work even just "4 for themselves"? But most aren't. They want a simple, 10-minute fix and to be able to get back to their favorite TV program. Well, my advice is simple. Give that TV to Goodwill and cancel your cable subscription. Immediately, you've now got both time and money to begin learning how to invest. For the first five years, if you do nothing but scratch (i.e., break even on the game), you're doing good, and gradually, a hundred here, a thousand there, the profits begin to add up until, one day, you realize that this investing stuff is simple and boring. Scan-vet-execute. Scan-vet-execute. Scan-vet-execute, and the profits keep rolling in.
Charlie
Excellent observations, Charlie. Spot on.
Excellent observations, Charlie. Spot on.
bae,
Now, let me do something totally despicable and take the other side of the debate. Rather than blame the financially inept for their own poverty, let's look at the forces that conspire to put them in that position of helplessness. To drive on America's public roads, proof of ability is required (through testing), and proof of financial responsibility is required (through insurance). But to access America's public markets, no more is required than proof of age and a checkbook. Worse, there is a persistent, consistent campaign directed at the financially uninformed to make them feel bad for not hopping on the financial carousel. "Why aren't you investing? Don't you want to be a winner?" The dirty, little secret never mentioned is that no one needs to invest. Investing is a choice, just a much as choosing to play golf or tennis, or to choosing to fish for bass rather than trout, is a choice. Wall Street needs investors, not the other way around. And it isn't 'investors' that Wall Street needs, but their money, or else the music would stop, and the game would end.
Why does no one have trouble buying bell peppers or broccoli for themselves at the grocery store? Why does nearly everyone have trouble buying stocks or bonds for themselves? There ain't a lick of material difference between the two. Success in both depends on answering these two questions: "How much am I being asked to pay? What am I being offered in return?" If you don't like the price, walk away. It's just that simple. Good investing is just good shopping. But investors let themselves be swept along by the glitz, the excitement, the crowd, and they end up losing money, yet again.
Most people's financial education begins at home around the dinner table. From their parents, they learn the attitudes that will serve them well (or foolishly) for rest of their lives. This is why "the rich get richer", as Robert Kiyosaki hammers on in his books (which are NOT about real-estate investing, but about identifying one's goals and then taking creditable action to obtain them). But if one did not have financially savvy parents, then one needs to borrow some, and books are an easy place to find them. Like a kindly, savvy uncle. Ben Graham's book, The Intelligent Investor, is really where most people need to begin their financial education. The book, YMOYL, is a tool by which they can get themselves out debt and trouble. But to make real progress toward acquiring 'Enough', they need Ben's book for the framework it provides. And what they should take from Ben's book is the interplay between Mind-Money-Market that investing is. Ben doesn't use those terms. But the trilogy underscores the role that investor psychology plays in achieving investing success (that, and risk-management). The third part of the trilogy, 'method' is what beginners want to focus on. But that is the least important, and most easily mastered, of the three. Ben understood that. He understood human foibles, which is why his book is a much-reprinted, ever-timely classic.
Charlie
Our investments were even simpler than yours. We used first individual stocks in the 70s and 80s, then individual managers of funds, then index funds. But we ensured that we were fully diversified over a wide range of investments and continued to invest thru boom and bust markets. We do have a significant allocation of 40-50% in cash or equivalents due to our age and risk tolerance now.
But it all started with a plan and goals. I remember the first dollar in our "Motor Home Account" because we were going to save for one. It became our taxable savings account. My husband says he knows when I really want something because he an get me to write a check for it. And I hardly ever write a check.
We took some classes, hubby got his degree in finance, we listened to many people and got some advice from a fee for service advisor who also taught some investment classes. But for the basics before investing, YMOYL is still the reference I hand out to anyone interested.
ps: No classes are needed to become parents either but that is a whole other story.
Most people's financial education begins at home around the dinner table.
DH and I were discussing this very thing at dinner last night. Money and finance topics were rarely discussed in either of our families. Ditto at school. I did pick up on the frugality bit from their Depression era lives though which has helped a lot.
DH and I were discussing this very thing at dinner last night. Money and finance topics were rarely discussed in either of our families. Ditto at school. I did pick up on the frugality bit from their Depression era lives though which has helped a lot.
pinky,
But that 'not talking' was the lesson they were teaching, and your families weren't unusual. Nonetheless, attitudes toward money were implied by our parents to all of us as we were going up. Most of those attitudes are crippling ones, rather than enabling ones.
In another thread, there's a truly inane, truly stupid discussion going on about the virtue of 'dying broke'. That sort of 'just-in-time' efficiency has great appeal to those who fail to understand 'risk'. In Taleb's terms, "efficiency is fragile, and fragile is risky". If your house doesn't burn down each each year, thus enabling you to collect the insurance, have you wasted the premiums you paid? Same-same with financial reserves. They are self-insurance. Yes, one's average lifespan can be projected. But what is the margin of error of that estimate? Do you really, really want to be running out of money before you run out of life? Most people assume the gov't will bail them out of their poverty. Fat chance of that happening when almost not a single one of the 'boomers' have funded their retirement to 3 standard deviations of their life-expectancy, or still a not insignificant chance of failure. Why do they fail to self-insure themselves? Because they deny that the risk of failing is real.
What is 'risk'? It's the likelihood of an event times its magnitude. It is simplicity itself to pull actuarial tables and to create a betting strategy for one's gender. What, for example, is the 'average' life-expectancy for a non-racially specific, US male? Not much, right? But that is only the 'break-even' odds. The odds are one in three he will live to 85. One in eight he will live to 91. One in 20 he will live to 95, etc. At what age are you --if you're a male-- willing to start betting against yourself? For females, the odds favor them living about 4 years longer at each betting step. This country is facing a pandemic of old-age poverty due to the intellectual and financial stupidity of people who plan to 'die broke'. The 'broke' part, they have right. But it's going to happen to them a long time before they die. I guarantee it, and so do the numbers, and so does our dear gov't, which is already broke and cutting back benefits and social safety nets.
In addition to our parents not typically not talking abut money around the dinner table, thus losing the opportunity to provide valuable life lessons, they also failed to teach addition and subtraction. Income - Expenses = Reserves , and Reserve are A Good Thing to have, for the freedom the create and the peace of mind they provide. Will my kids and heirs end up with a small fortune (or hopefully, a large one)? Who cares? But meanwhile, I sleep well at night for knowing that another market downturn --which is coming-- won't threaten me. "Down 10%?" Yawn. "Down 20%? Hmm, that's interesting. Maybe it's time to get short and profit from it." The average family in this country is so indebted, and is carrying so little reserves, that even another mild, very normal correction, such as the 2007-2009 correction proved to be, will put them out on the streets.
Charlie
chanterelle
3-20-13, 5:26pm
Charlie, exactly!...my family's life span runs from 68 to 98.... so I have run my numbers to age110 or so.
I cannot expect my last dollar and breath to coincide...so I invest carefully and purposefully. This was something that I had to teach myself and the learning curve was steep in the beginning.
Charlie, exactly!...my family's life span runs from 68 to 98.... so I have run my numbers to age110 or so.
I cannot expect my last dollar and breath to coincide...so I invest carefully and purposefully. This was something that I had to teach myself and the learning curve was steep in the beginning.
Congrats for being sensible about this. My "problem" is even worse. Great Uncle Jack died at 103. His sisters at 107 and 109 respectively, and these weren't infirm, demented people whom everyone was waiting to die. Until their final months --months, not years-- they were active and engaged.
As incredible as its conclusions might seem, there was a study done of the effect of 'expectancy' on 'longevity'. Those who were sure they'd die young, did do. Those who planned a long life for themselves lived --- on average-- seven years longer than their pessimistic peers.
If one's experienced rate of inflation is running at 6%, not an unreasonable guess, then one's costs of living double every 12 years. A long life quickly becomes very, very expense. That's what those who plan to 'die broke' fail to realize, just how expensive their same beer-and-bait lifestyle will become in a very short time.
Charlie
let's look at the forces that conspire to put them in that position of helplessness. To drive on America's public roads, proof of ability is required (through testing), and proof of financial responsibility is required (through insurance). But to access America's public markets, no more is required than proof of age and a checkbook. Worse, there is a persistent, consistent campaign directed at the financially uninformed to make them feel bad for not hopping on the financial carousel. "Why aren't you investing? Don't you want to be a winner?"
As sweetana points out, there's very little required to become a parent, either. Just one of the great things about living free in America, isn't it? :)
I'm not so sure most Americans feel bad about "not hopping on the financial carousel", however. The percentage of workers who choose to invest in deferred-compensation plans at new jobs is distressingly low. It's more than publicly acceptable to admit to not understanding investment, the same way few are looked down upon for not understanding quantum physics or modern art. I also believe many Americans believe they don't have the financial wherewithal to invest, either. But that gets back to the comments about rampant consumerism.
Why does no one have trouble buying bell peppers or broccoli for themselves at the grocery store? Why does nearly everyone have trouble buying stocks or bonds for themselves? There ain't a lick of material difference between the two. Success in both depends on answering these two questions: "How much am I being asked to pay? What am I being offered in return?" If you don't like the price, walk away. It's just that simple.
Buying produce is a matter of a few bucks. If the purchase is a total failure (the peppers are rotten inside when you use them the day after you go to market), they go back to the store for a refund. Or you choose not to bother and, worst case, you're out a few bucks. But stocks and bonds require a much greater financial commitment and 1) don't come with a money-back guarantee if they go south prematurely; and 2) don't offer anywhere near the same certainty of fitness to the buyer that a hand-selected head of cauliflower does.
From their parents, they learn the attitudes that will serve them well (or foolishly) for rest of their lives.
One of the dangers of learning from parents of uncertain financial skill is that many of them deal in old information. Many parents grew up during the time when buying a house and letting it appreciate into a significant portion of one's net worth was an almost-unquestionable notion. How many of our parents endured a Chevy Vega or AMC Hornet, gave up on American cars, and won't even consider them today despite the changes? What are these people feeding their kids for information?
Steve,
You can choose to see huge differences between making financial and non-financial purchases, or you can try to see their similarities. The former isn’t a productive path. The latter is. You can create obstacles to learning where none should exist. Or you can try to help people make the bridge between what they do already know and what they would like to learn. That’s just sound pedagogy. Never, ever dismiss the familiar because it is so familiar. I’ve seen too many good lecturers take what seemed obvious and show how wasn’t so. The familiar --which was actually sophisticated and had been learned reflexively, almost osmoticly-- was used as the starting point, and then the lecturer built on it. I could get from bell peppers to bonds quite easily, and I’ve done so in the past with an audience.
As for discounting parental attitudes toward money, that, too, can be looked at in different ways. My now-dead parents would be horrified at the direction I’ve taken my investing if they merely heard about what I was doing. “Junk bonds? Isn’t that risky?” But if they were to sit down me for a long, long afternoon as I showed them, step by step, what I actually do and how I learned from their own example how risk has to be priced and managed, they’d understand. They might never become comfortable enough with the process to use it themselves. But they’d understand the connections between what they themselves did in their own lives and what I’m doing in mine. I learned the essentials of my investing at their kitchen table. The rest was just tiny, tiny details to be worked out on the fly.
Most who attempt to invest will fail. Instruction cannot prevent that. But, so what? Those who genuinely want to learn can do so, and they can do so far more easily with good instruction than not. Go to some of the Money Shows sometime and attend as many of the lectures as you can get into through the standing-room only crowds. Some of them, maybe most of the lecturers, are hacks. But some truly are gifted. Options? Pizzas coupons. Black-Scholes? Penny flipping. If I were talking, it’d be bell peppers and bonds, because both depend on comparative shopping. “How much am I paying? What am I getting in return?” The zeros don’t matter. The process does.
Charlie
SteveinMN
3-20-13, 10:17pm
junkman, I'm very happy with the investments I've made so far, so I'll continue to learn as I go but I will forgo the more formal education.
But you have an open forum here. If you have that much to teach people, hold forth! I'm merely taking a counterpoint, as you did, pointing out that there are real differences in the example you gave. If you'd like to elaborate, go ahead. A lot of people out there can use that kind of education.
junkman, I'm very happy with the investments I've made so far, so I'll continue to learn as I go but I will forgo the more formal education.
But you have an open forum here. If you have that much to teach people, hold forth! I'm merely taking a counterpoint, as you did, pointing out that there are real differences in the example you gave. If you'd like to elaborate, go ahead. A lot of people out there can use that kind of education.
Steve,
Let me tell you a parable that is a propos. You're a surgeon at a party, and someone comes up to you. "Say, Doc. I'd like to make some quick money in medicine next week. Tell me a good book to read over the weekend."
I'd be happy to share what I know about bond investing. But I want this in exchange, the promise of 8,000 to 10,000 hours of your time, so you can catch up to where you will need to get to.
Don't have that kind of time? not willing to make that kind of commitment? Your choice. But the high-probability bet has to be that you can't pull more money out of markets on an after-taxes, after-inflation basis than you bring to them. In other words, you can't support yourself from your investing/trading alone. That's not surprising, few can. For them, investing is a hobby, not their profession. It provides some supplementary income. But they aren't market professionals.
Charlie
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