Friday, October 10, 2008

What if...

I was referred by minus car to a great post today, and it was along the lines of something I was going to write about. I have the time and interest, I'm going to write. First, you should go read the original post that I read today, here.

So the stock market is tanking. That's fine, I'm 'in it for the long haul'. I know that the market has 'normal fluctuations' and I know that historically, 'the market has always been a good investment over time'.

I'm not a dooms-day sort of person, but I want to think a little. Almost everyone seems to think that this is a dip in the market. We can call it a recession and it may develop into a depression; that's fine. The final assumption that almost everyone makes is that in the end (whenever that is), the market will return to 'normal' and our stocks will increase in value and go back to how it once was. But what if it doesn't? I think we should think on that point a moment.

We have some money in retirement accounts. We have lost $10,000 so far this year. That's OK, I'm quite content without it. Honestly, I don't feel the impact of this financial issue. If it weren't for the news I get from NPR and the internet and the fact that I checked my stocks recently, I would have no idea that Americans are in financial turmoil. How is it that I'm an American, and this is a really big deal, but I haven't noticed?

Next question. We have some extra money lying around. Should we invest it? I know that the stocks are currently 'on sale'. The big index funds are currently available for ~30% off previous prices. What a bargain, I should buy. I should take the $10,000 out of my savings account and put it into a big mutual fund, it's bound to go up if I give it enough time. Just think of the money I could make.

From my understanding of the stock market, now is the time to invest and history shows that I'll be glad I did in the future. But, what if the stock market doesn't increase in value? What if things continue to decline? What if financial institutions as we know them cease to exist? Surely the financial system that we have now has evolved from an ancient financial system that at some point came to an end. Who is to say that this evolution isn't about to speed up?

This is the point that I wanted to make and also the point from the blog I referred you to at the beginning; I don't think anything is a sure thing. While I think that things will likely return to 'normal' at some point, I have this little thought at the back of my head saying that it is quite possible that HUGE changes are in store. What would I need if the financial institution as we know it dissolves into nothing? I would need just a few things. Top on that list would be a home and some land where my family could live. Next on that list would be more knowledge than I currently have on how to grow enough food for my family for a year. I'd probably also need some equipment to do that much farming.

Maybe instead of investing in the stock market I should invest in a house on a couple of acres of fertile land with sufficient rainfall. Boy would my family think I was a freak if I sold everything I have in order to buy a farm in preparation for a financial disaster. (Don't worry family, I won't be buying a farm anytime soon).

What is the sign that it's time to buy the farm? How bad does the financial system have to be? I feel like I'm trying to predict the future, and I'm not good at it.

Don't take the wrong message from this post. I don't think that everything is going to fail, and if it does, I think it will put up a long grueling fight before it's ultimate collapse. The point that I want to make is that we shouldn't assume that everything is going to return to 'normal' (does anyone else think it's odd that we refer to prosperity as normal). If peak oil is real and banks are in as bad of shape as some people say they are and there are other major issues in the economy, things could get ugly. I certainly don't hope for that, nor would I predict that, but I think it's a bad idea to neglect to recognize it as a possibility.

Then if you really want to get the meaning of this post, go back to the site I have referred to several times and read about things of value and things that have no value. It's thought provoking.

I hate it when I post on the economy, I'm far from an economist. Next time I'll try to post more about the conference I attended. I'll give you a little glimpse into what it was about. It was about obesity and everything they said could be generalized to be either about eating less or exercising more to prevent obesity.


A Girl Called Dallan said...

What a great post. I think I'm thinkin' the way you're thinkin'.

Earl said...

Thanks for posting about the economy!

Here's how I explain things to myself.

There are two ways to make money in stocks: capital gains and dividends.

Capital gains are what everyone gets excited about, you buy a stock at a low price and sell it at a higher price. What determines these prices? The prices are determined by what the people who make up the market think they should be. In general, there is no basis for stock prices, it's all made up. I don't see any difference between stock prices and baseball card prices. If the whole market woke up tomorrow and decided that stocks were worth 1% of what they were worth today, everyone would "lose" 99% of their investments.

On the other hand, dividends are real. They are a portion of the company's profit that the company pays to the stockholders. As long as the company has profits from its operations, it can pay dividends. As long as there are companies in our country making a profit, there will be dividends.

So why does everyone pay attention on to stock prices? Taxes. Dividends are taxed at the same rate as income, but capital gains are taxed at a lower rate. So most investors want capital gains over dividends. To please their investors, most companies will use profits to buy back their stock to increase the price instead of paying a dividend. So companies and investors are so involved in stock prices because of the way taxes are structured.

Emily A. W. said...

Today I went to a wedding where a wonderful woman was wed to a man in her neighborhood. She has terminal cancer, and I think many speculated about the purpose of his marrying her since she is bound to pass away soon. That got me thinking about the worthlessness of material goods. Who cares if he decides to marry her and inherits her house when she passes on? What matters is that during her final days on this earth she has companionship and she is happy. He treats her well, so why should others worry themselves about the purpose of their marriage? It won't matter what she owns once she passes to the other side.

I also took a bike ride to the store today to get some baby formula. While I was peddaling and HATING the ride because my body seemed overly tired and annoyed with the effort of peddaling, I thought about how easy it is to drive a car to the store even though I live within a mile of it.

As I got into the parking lot, and saw the numerous people getting out of their cars looking fat, unhappy, and over-indulged, I was thankful that I had worked to get my goods rather than lazily drove myself there. I felt good about the effort it took for me to get food for my son, while at the same time saving money, gas, and doing something good for my health. That feeling stayed with me until I tried to buy some crackers and realized I had NO money to do so. Being poor to the point where you can't buy crackers feels depressing.

And...regarding the recent economic turmoil. I agree with you. I haven't really noticed the change. Unlike you, I don't have any money to lose in the stock market, but one thing that I love about simple living is that you don't need much in life to feel satisfied. I like that blog you linked...yes money is just a means nothing. I am so glad I was taught that by my grandparents and parents. There is so much more to life.

One thing has been made clear to me...I don't think the stock market will go back up either. I think we are finally seeing the collapse of the debt bubble, and I think our prophet warned us about it before it happened so we could avoid the wordly turmoil that occurs when we base our prosperity on fake wealth and goods accumulated on debt.

The Woulfes said...

the thing is, as long as our governments keep propping up the current banking structure, it probably will remain the same.

Eventually it will crash, but it won't be this downturn.

There was avery interesting quote that got passed over in most stories from the "Downturn" that stated "The US and Europe have been consuming 7% more then they produce for the past decade," meaning that we have been using imaginary money to finance our excess.

People spent and spent, then when they ran out of money, they borrowed (money which didn't exist) and spent some more.

I wish more people were as enlightened as Eleutheros