Category: Wall Street
March 29, 2010 ·
The stock market is continuing its rally from market lows early in 2009. To many free market economists, the stock market is seen as a harbinger of sentiment concerning the future of economic growth. This has created jubilation on the part of many journalists and investment advisors, based on the belief that current stock market returns are predicting a robust economic recovery. However, deeper analysis of this rally shows that it is heavy on ‘hopes and dreams’ while unfortunately light on fundamentals.
Analysis of the relationship between the S&P 500 market price and the earnings per share or dividends per share shows a much different picture. Over the last 15 years, the ratio of prices to dividends reached astronomical levels. This indicated a shift of market sentiment away from the fundamentals that drove earnings and dividends toward speculation on future appreciation as the primary driver of value in the stock market. This phenomenon is also evident in the cycles of expansion and contraction in the P/E ratio for the S&P 500 index.
The recent market turmoil has escalated P/E ratios to unseen levels that will require dramatic increases in earnings for the current price levels to be supported by fundamentals. The ratio of prices to dividends are also still very high relative to the historical average, communicating that market sentiment is still firmly in the camp of valuing the market based on the anticipation of future value appreciation instead of the fundamentals that drive earnings and the dividends that are paid out of earnings.
All of these trends point toward a further perpetuation of value bubbles, market crashes, nominal recoveries that create more bubbles. Furthermore, these market cycles are likely to increase in severity over shorter and shorter time horizons. The reason for this is a near complete disconnect between market values and economic fundamentals. As this fracture continues to widen, it will result in market values fluctuation wildly.
Another major factor in these anticipated fluctuations is the government exercising its monetary authority to finance deficits by expanding the money supply. (also known as ‘monetizing the debt’) It is likely that future nominal value contractions will be ‘eased’ by infusions of new money by the government. This will result in nominal value fluctuations that look moderate, but real value going down precipitously because of the dollar’s progressive weakening, due to expansionary monetary policy.
http://www.CreatingWealthPodcast.com & http://www.JasonHartman.com
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October 22, 2009 ·
The Creating Wealth Show #105:
Propelling investment success using econometrics and
competitive analytics
In the one hundred and fifth episode of Jason’s extremely popular Creating Wealth show, he interviews David Savlowitz, the head of Competitive Analytics (CA), a niche full-service market intelligence firm. In this show, David explains the way that his firm uses a multiplicity of data to generate more robust information for their clients than can be obtained by the simplistic scorecards that are employed by most of the financial media. The methods that CA employs analyze supply and demand by using statistics, econometrics, predictive modeling, comprehensive research, and applied mathematics.
In this show, Jason talks with David about the ways that Competitive Analytics uses comprehensive data analysis to drive prediction models for their clients. One of the methods that they frequently employ is an economic composite score that is based on a multiplicity of weighted indicators. When applying this methodology to the general economy, David’s model is predicting the bottom of the economic cycle in Q4, 2009 with a return to equilibrium by Q4, 2011. Furthermore, David’s models are forecasting a U-shaped recovery that will have an extended trough. This stands in sharp contrast to previous V-shaped recoveries that experienced an immediate “bounce back” from the market lows. The reason for this extended trough is because a significant adjustment needs to be made in order to equalize the debt-financed over-consumption that fueled the recent asset bubbles.
The unique part of David’s methodology is the fact that his team uses a very wide variety of input variables in an attempt to capture future items that may become big swing factors. He rightly understands the implicit danger that can be present within quantitative economics for people that do not fully understand the analysis. This danger stems from the fact that econometric analysis uses trends in the past to predict the future, and thus cannot anticipate the impact of events that have never happened before. The importance of this insight comes from the fact that rare events like September 11th, 2001, the Russian Financial Crisis, and the collapse of credit default swaps were never incorporated into any prediction models because they had never happened before.
Each of these events had an unfathomable impact on the marketplace that left people who were blindly following technical trends of the past absorbing unbelievable losses (or pushing those losses onto the taxpayer in the form of a government bailout). As a point of reference; the hedge fund “Long Term Capital Management” was the brainchild of Robert Merton and Myron Scholes. It made heavy use of econometrics to undertake highly leveraged arbitrage trades in the bond market, but nearly collapsed the financial markets after the Russian Financial Crisis in September of 1998. This became the first iteration of a “too big to fail” argument, and is being used as the precedent for the government bailouts of financial institutions that are currently being pushed on the marketplace.
This is not to say that quantitative analysis and econometrics are implicitly dangerous. It is simply to say that it is a tool . . . a very powerful tool that needs to be understood before it is used. When applied by knowledgeable professionals, it can generate valuable insights. When given over to pseudo-intellectual or short-sighted agents, it can become a tool of mass financial destruction as the algorithms become an item of blind faith that drives insane investment decisions. As with all tools, the result depends largely on how it is used. Thankfully, David keeps the scope and limits of his analytics in perspective. A strong dose of this perspective is highly advised for anybody that seeks to incorporate econometric analysis into investment decisions.
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October 5, 2009 ·
We don’t mean to scare you – well, actually we do. The words above were spoken by President Obama at a recent press conference. Ouch. Does that mean the U.S. economy is a car with a bone-dry gasoline tank still rolling slightly from 233 years of inertia?
Maybe?
A better analogy might be the economy is a car with a bone-dry gasoline tank still rolling slightly from 233 years of inertia heading off a cliff! What can we, as law-abiding citizens, expect when our government continues to bankrupt itself and devalue our currency? Seriously. The federal government is a Ponzi scheme that makes Bernie Madoff look like a piker.
Here’s a glimpse into the future after the dollar collapses:
1. An explosion in prices as Americans scramble to buy basic necessities.
2. Sparse grocery shelves and long gas lines.
3. Failed businesses and a breakdown in commerce as long-term transactions vanish due to worthless currency.
4. Rampant crime and unemployment.
5. Disappearing government services.
Sound like fun? What can you do to protect your wealth? The simple answer is to own income- producing property. It’s the only investment liable to have any value when the fiat currency collapses.
The time to act is now. There may still be time before the greenback dies as the major player on the global currency market. But there may be less time than you think. Wall Street is already coming apart at the seams from greed and incompetence. Make it a point to explore history’s best bet when it comes to investing. Platinum Properties Investor Network offers free educational services for any investor interested in weathering the coming storm. Check us out at www.JasonHartman.com.
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September 28, 2009 ·
A recent article published by Matt Tiabbi in Rolling Stone magazine articulated the role that Goldman Sachs is believed to have played in market manipulations since the Great Depression. The thesis of this article is that Goldman Sachs places itself in the middle of speculative bubbles by selling financial instruments that it knows are of low quality, and then re-purchasing them at depressed prices after the market bubble collapses. In the midst of the populist political rhetoric and conspiracy theories peppered throughout the article, there are some important points that can be taken away by those who are astute enough to see them.
The most important point is that investment banks and financial institutions have an incentive to drive up asset bubbles, and then pick up the pieces after a collapse and repeat the process. The reason why such nefarious activities perpetually persist is because financial companies tend to have very strong lobbying influence with both political parties. As an aside, it is important to divorce ourselves from the foolish notion that “Wall Street” is for or against Republicans or Democrats. Wall Street is in favor of whoever is in power, and politicians are typically in favor of whoever gives them the most money.
Regardless of the inherent morality (or lack thereof) in the actions of financial institutions, it is important to understand that simply complaining about their despised actions will do absolutely nothing to remedy the situation. The only way that corrupt brokerage houses will be held to task is when a market movement away from their financial products dries up their river of capital. The reason for this is because political restrictions will always be laced with loopholes, and even extreme financial malfeasance will be bailed out by the reigning political powers under the notion that said institutions are “too big to fail.”
Thus, it becomes clear that the only way to side step the ”Bubble Machine” of Wall Street is to develop a portfolio of direct investments that you personally control. The reason for this strategy is because direct control allows you to determine when assets are bought, sold, refinanced, etc. For example, if you own a portfolio of rental properties, you can personally make the call when to raise rents, refinance the properties, buy new investments, and sell to trade up to larger deals.
Whenever your investment assets are outsourced to Wall Street, fund managers get placed in control of all these decisions. Thus, it should not come as much of a surprise when these same fund managers funnel your resources into a speculative bubble in the hopes of capturing large bonuses on the returns generated while the bubble is inflating, and then take those returns to the bank after the bubble pops and your investment assets experience a sharp reduction in value. Direct investment allows an individual to select investment areas that are less susceptible to the effect of speculative bubbles through prudent analysis and due diligence.
Over the coming decades, it is likely that many more bubbles will expand and pop as the government attempts to use monetary expansion and market manipulation to mask the fact that it is unable to meet its entitlement promises that have been used by politicians to secure elected office. Unfortunately, many people will be taken along for the ride, and have their wealth systematically destroyed by the bubble machine. As prudent investors, each of us needs to be aware of this market reality and actively step around the manipulations of government and Wall Street so that the bubble machine passes us by while unleashing its path of destruction on the financial world.
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September 10, 2009 ·
This http://JasonHartman.com video as you to “take stock” of the stock market during this economy. It explains how the stock market works, what it was intended to be, and how it has changed into a gambling casino. http://CreatingWealthPodcast.com.
Conventional wisdom has long held that the way to become wealthy over the long term is by compounded investment in the stock market. The reason for this was quite clear when one looked at the chart of historical returns. By making very modest investments at regular intervals over a long period of time, small investors could create very large amounts of wealth. This line of thinking is what has prompted most employers to source their 401k retirement plans with mutual funds that invest in the stock market.
Unfortunately, the movement of stock market investment into the ‘main stream’ of America has caused it to become less of an investment vehicle and more of a gambling casino. The primary purpose of the stock market is to provide companies with a means to raise capital for business investment by selling a partial ownership stake (also known as a ‘share’ of ownership). Typically, investors were rewarded for their investment by the payment of dividends from the company profits. Thus, stock market investing was originally based on the notion of finding a company that was likely to make sufficient profits to pay healthy dividends.
This sentiment changed as the secondary market for trading stocks became more popular. A ‘primary’ issue of stock happens when a company issues more ownership shares.
A ‘secondary’ stock transaction happens when one investor exchanges an existing ownership share with another investor. This is where the stock market turns into a casino. When the focus of investment shifts away from the ability of the company to viably pay dividends on a consistent basis toward the probability that the secondary market will pay more for the company stock at a future date, stock investment becomes much more akin to gambling. When returns are primarily based on price appreciation, continued growth in market value requires a perpetual stream of new buyers. This phenomenon is true for both stocks and real estate, and explains the recent booms/busts very thoroughly.
The only factor that can push up the entire stock market is if there is an aggregate increase in investment capital (similar to how increases in the money supply from the Federal Reserve drive price inflation). When corporate profits grow, it is natural to assume that more capital will be attracted to the market. However, when market values rise faster than corporate profits, the only cause can be a net influx of investment capital.
In the United States, there were two ‘Sledge Hammer’ events that sparked a colossal 25-year bull market for stocks. The first was the passage of the Employee Retirement Income Security Act (ERISA) in 1974, which created standards and stability for company-sponsored stock market investment plans that dramatically increased the supply of equity capital. The second was the pairing of tax cuts in the 1980s and a significant reduction in the cost of debt capital that spurred a rapid growth in corporate profitability. These two events combined to generate a massive increase in stock market investment that pushed values sky-high.
However, these massive gains came with a bit of a shadow. This problem has been created as investors stopped directly buying stocks of individual companies and started investing in funds where a manager buys and sells the stocks. Now these brokers and managers have control over incredible amounts of other people’s capital. This control gives them the power to create or destroy tremendous amounts of value based on the decisions that they make. It also channels market activity more and more toward ‘gambling’ as managers seek to maximize value appreciation. (This set of incentives is very adverse to investor interests, as managers have incentives to take insane risks, since big gains mean tremendous bonuses and losses only mean that they get fired.) Furthermore, most managers charge very hefty fees for their services, which cut into the net investor returns. (Thus far, we have assumed that the fund managers are honest . . . when the ‘crook’ dynamic is factored in, the risks increase significantly.)
Fundamentally, there are four principal risks implicit in this kind of stock market investing:
1) Your broker may be a crook.
2) Your broker may be incompetent.
3) Even if your broker is honest and competent, he will take a big slice of your profits in the form of fees and commissions.
4) These problems are not limited to your brokers . . . all of the middlemen like stock promoters, CEOs, bankers, and all other flavors of hucksters or salesmen.
On top of all these risks, there is a bigger dynamic to consider. Currently, corporate profits are taking a very steep tumble relative to their prior levels. In addition to this, most of the working population is already invested in the stock market, so there is no large pool of capital to attract so that valuation can continue to inflate. Finally, the current market Price/Earnings ratio is well above its historical average. This means that the market is discounting-in a future increase in corporate earnings. If that increase does not come, or takes longer than expected, it will most likely result in market values decreasing.
Finally, there is a longer-term risk of very average performance. Even if the anticipated recovery happens as expected, there is no looming influx of capital to push the market up at explosive growth rates. This means that future market appreciation will look very average by historical standards. (Granted, nominal values will be pushed up by inflation, but real returns will still be very much in the ‘average’ category.)
Ultimately, the stock market is in the midst of a ‘return to reality’ from the large rates of return in prior years. The fundamentals are pointing toward difficulty in maintaining prior growth rates out into the future, including the risk of more near-term price compression if the forecasted economic recovery does not materialize as expected. Granted, there is a probability that the stock market will recover better than expected and produce favorable returns. However, prudent investors should seek to diversify their investment activities into other emerging areas of opportunity to limit exposure to the stock market.
Situations such as prudent real estate investing with a small to negligible downside and significant to infinite upside are what economists call a ‘free option’ . . .principally because the investment volatility runs mostly in the ‘up’ direction because of the downside risk mitigation. Needless to say, these are the investments that we would like to create.
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September 8, 2009 ·
In this article by Mark MacVay for http://JasonHartman.com, you will see exactly how inflation acts like a termite on your investments, and how to use the power of inflation to create wealth instead. http://CreatingWealthPodcast.com
Do your investments have termites? It may sound like an odd question. But if you’re like many Americans with the typical savings accounts and mutual fund/stock portfolios, then you are subjecting yourself to the ravages of a specific type of termite which is slowly, and clandestinely devouring away at your financial portfolio, taking away the prospects of a secure retirement with it.
What type of termite could do such a dastardly thing, you ask? This termite is called inflation and it is both the scourge of financial security and the product of our current monetary system.
Allow me to explain. Most of us have been brought up to believe that saving and investing are good and getting into debt is bad. While I certainly agree with this general sentiment, it contains one important fallacy – it presumes that the money supply in our economy is static. The reality could not be further from the truth; the money supply is increasing at an ever-faster pace. You see, every dollar added into the economy cheapens those already in existence, and the Federal Reserve in conjunction with the government are increasing the supply of dollars and credit at an alarming rate. This means that your savings and portfolio accounts are being reduced in value as the dollars they convert into buy progressively less and less. Sadly, this termite assault on your wealth is ongoing and relentless.
But, you ask, I heard on the radio that inflation was under control, that the CPI (Consumer Price Index) was relatively low… what gives? Suffice it to say that the CPI is sufficiently manipulated by the government to give the public a much more benign view of inflation than actually exists. To see just how ravaging this inflation termite is, simply look around you – oil, commodities, health care, education, housing, food and now even postage have been going up substantially in the last few years. These increases far eclipse the relatively modest gains in the stock market over the same time period.
Now, at this point, I presume you’re scratching your head and asking… well, how do I eliminate this termite? How can I secure my financial house from this destructive insect? The truth is that there is no Orkin man, no Terminix for this type of pest – that would require a major overhaul of our monetary system. Alas, we are stuck with this troublesome termite for the foreseeable future.
However – and this is where it gets interesting – while you can’t eliminate this pestilence, you can use it to your own advantage to maintain and grow your wealth rather than have your wealth eaten away. How, you say? By properly turning the tables on our financial system and becoming a debtor.
Heretical, no? If you recoiled in disgust, I understand as it runs counter to the way many of us have been brought up. But allow me to elaborate. By debt, of course, I don’t mean going out and indulging yourself on fancy meals, cars and vacations. There is no long-term benefit of purchasing those items using debt. In contrast, by selectively purchasing tangible assets which throw off cash flow, and by buying these assets with the bank’s dollars in the form of a mortgage/loan, you achieve the financial equivalent of a double play. Long term, your asset most likely increases in price as more and more dollars flood the economy, and, just as importantly, you are paying for that asset year after year in progressively worthless dollars thanks to the inflation termite eating away at the dollars you’re now repaying to the bank. Not only is this a shining example of leverage, it can also be thought of as a form of financial martial arts – you are harnessing the energy of your opponent (inflation) and using it against him.
Of course, one of the best asset classes with which to follow this path is investment real estate, a proven path to wealth for many and a good hedge against inflation. In the interim, your tenant helps pay your debt obligations while you allow the aforementioned economic forces to work their magic. Of course, you have to do your due diligence and choose your properties and loans carefully. Nevertheless, this is a powerful technique to build long-term financial wealth.
How ironic that the best defense against the termite of inflation is an investment property with a big mortgage!
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September 7, 2009 ·
In today’s video from http://JasonHartman.com, we will look at the different types of investor personalities. Some people are better suited for riskier investments, while others need slow and sure investments. http://CreatingWealthPodcast.com
When engaged in the business of living our lives, it is critically important to ‘know yourself’ in all things that you do. In the context of personal relationships, we must learn about ourselves to develop healthy relationships with others. Harmony requires that we be up-front and honest. In an ideal situation, the strengths of one person in a relationship will compensate for the weaknesses of the other.
In the world of investing, knowledge of yourself is no less important. The most important thing that investors can know about themselves is the degree of risk and volatility that they are willing to accept. Similarly, they must be honest about their willingness to take action and close a deal. This principle is doubly important since most investment ‘systems’ focus exclusively on the academic side of deal analysis. It is certainly important to find good deals, and analyze them quickly, but all of this can be for naught if the investor lacks the willingness to take action at the critical moment. Things can also fall apart if the investor does not follow through sufficiently to see the deals through closure and into implementation.
The truth is that there are two types of investor. One type is suited for assembling ‘deals’ that can generate tremendous returns. The other is either uncomfortable with the risk and uncertainty implicit in assembling deals or is unwilling to take action at the critical moment. This type of investor is typically better suited to steady compounding of investment returns over a long period of time to create wealth. It is important to note that both investors can be very successful. The path of the deal maker tends to achieve wealth more quickly than the ‘slow and steady’ investor, but either of them can realize tremendous amounts of success with the proper balance of analysis, discipline, and the willingness to act.
In the end, it is much more important that you know yourself than that you know how to execute a particular system or strategy. Systems come and go . . . strategies constantly change with the business environment. But knowledge of yourself is a priceless asset that will serve faithfully throughout the tenure of your life.
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September 1, 2009 ·
In today’s video from http://www.JasonHartman.com, review the Financial Market Update and Monetary Update for the United States. Learn the best types of properties investment during financial Armageddon. http://CreatingWealthPodcast.com
The recent stock market rally has inspired a rising tide of hope and optimism within the investor community. Evidence of this is seen in the gentle step-up in market values from the floor of their recent decline.
This optimism seems to be discounted into the Price to Earnings ratio of the S&P 500 Index as well, since the current price of $921.23 represents a P/E ratio of 31.2 times the next four quarters of forecasted earnings per share for the index. Since the historical valuation for this index is significantly below the current level, it stands to reason that the investor community collectively believes that the government initiatives will create a market recovery in the near term.
At the Financial Freedom Report, we are not yet convinced that the fundamentals of the market justify such an optimistic valuation.
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August 28, 2009 ·
In this video from http://www.JasonHartman.com, test your fiscal IQ and learn what it means to be Fiscally Fit. Learn more at http://www.CreatingWealthPodcast.com
1) When is debt good?
a. When I feel like spending money
b. When I am buying something that I can see and touch
c. When I am buying something like a house or car
d. When I am buying an asset that produces income
2) When is debt bad?
a. When it causes you to be highly leveraged on an investment
b. When it is used to finance consumption
c. When you use your credit card
d. Debt is always bad
3) What causes inflation?
a. Evil businesses raising prices on the little guy
b. The federal reserve increasing the supply of available money
c. OPEC constricting output to push up prices
d. A tri-lateral conspiracy between George Bush, the Illuminati, and the Vanderbilt Family
4) What is the result of inflation?
a. It destroys the value of savings, equity, and debt
b. It creates jobs by increasing the amount of money in people’s pockets
c. It makes me more wealthy by increasing the value of my house
d. It makes me more wealthy by increasing the value of my 401k
5) What happens when the government increases spending?
a. It means that I get free money in my mailbox
b. It means that those rich people will finally have to pay their fair share
c. It means that the government must extract more resources from the private economy through taxes, borrowing, and inflation
d. It means that the country starts to run better, because the government always does things more efficiently than the private market
1) When is debt good?
The way that debt can work to your benefit is if it is used to finance an income-producing asset that pays your interest costs. The most typical example of this is rental real estate. As the owner, you take out a fixed-rate loan on the house, the tenant pays you rent, and you pay the applicable tax, insurance, and mortgage expenses.
Over time, inflation will increase the value of the house and the rents paid by your tenant. However, the amount you owe on the house will stay flat because of the fixed-rate debt. This will result in your profits increasing.
2) When is debt bad?
Generally speaking, debt will work against you when it is used to purchase anything that doesn’t produce income. The reason for this is because the interest for debt that is used to make these purchases must be paid out of your income. Furthermore, as the amount of debt goes up, it consumes more and more of your income. By concentrating debt in assets that produce income, you can escape this ‘debt spiral’ trap that keep many people confined in financial prison.
3) What causes inflation?
As tempting as conspiracy theories can be, the money supply is the principal factor that drives inflation for the overall economy. Supply and demand can create price spikes and drops in specific products like oil or corn, but the only way to make everything more expensive at the same time is to increase the amount of money in circulation while the amounts of goods and services stays flat or decreases. This phenomenon is known as ‘more money chasing less goods.’
4) What is the result of inflation?
Inflation erodes the purchasing power of all things that are denominated in dollars. When the prices of everything you buy go up, but your savings account only grows at 0.2% per year, it results in a negative ‘real’ rate of return since the savings will now buy less than it did before. In practical terms, this means that dollar-denominated assets, like home equity, savings, and CDs, along with liabilities like debt, will all have their value destroyed by inflation. Because of this, the optimal strategy is to have your assets denominated in physical things and your liabilities denominated in dollar-based debt.
5) What happens when the government increases spending?
The government does not have the capacity to produce anything. The only way that it can spend anything is to first take it from somebody else. Sometimes this is done directly through taxes, and other times it is done indirectly through borrowing or inflation. The way that borrowing takes money is by displacing private debt with government borrowing, effectively reducing the amount of capital available. The way that inflation takes money is by eroding the purchasing power of people’s salary, savings, and home equity to finance government spending.
Because of this phenomenon, it logically follows that any time the government decides to do something that the private sector could do more effectively, it drags down the overall economy by displacing private economic activity. (Granted, the government frequently enacts arbitrary laws & regulations that artificially hamper the efficiency of private industry, thereby creating a perception that the private market is broken, when the problems are all a direct result of government fiat.) The adverse incentives implicit in this balance is that politicians derive their power from the amount of money that government spends. Because of this, politicians have an incentive to make government bigger, regardless of how much it erodes the economy, because it will result in them becoming more powerful and important.
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August 21, 2009 ·
Many people are stuck in stock market based investments because of their 401k. Jason Hartman shares how investors can break out of 401k Jail and build long term wealth with properties investments. http://www.JasonHartman.com & http://www.CreatingWealthPodcast.com
There are many investors who have heeded the advice of Jason Hartman, and are looking to diversify their investment positions out of the stock market. However, many of these people have a large percentage of their investment assets tied up in a company 401k that has limited investment choices. What can a person do who is being held captive to a limited menu of investment options in the current environment?
In this situation, the optimal strategy is to capture market returns, while minimizing the costs associated with acquiring those returns. Fund managers have a tendency to charge hefty fees for their services, and frequently under-perform their comparable market indexes. The reason for this is not difficult to reason out.
When the gains and losses of all the market players are added together, they average out to the market rate of return. This simple arithmetic dictates that if one manager over-performs the market, that he must be offset by another that under-performs the market. Furthermore, fund managers must overcome the hefty fees that they charge in order to beat the market return. The net result is a zero-sum game created by everybody chasing the same market returns that turns into a negative-sum game when costs are factored in. So how does a 401k investor get out of this fund manager prison of high costs and disappointing returns?
The answer to this dilemma is achieved through the use of index funds in a stock portfolio. By capturing the average market returns at a minimal cost, index funds allow investors to ignore the ‘noise’ of daily stock market volatility and focus on the fundamentals. For investors who are looking for further diversification without losing the advantages of indexing, they can choose market indexes for small or medium sized companies that tend to be more volatile and produce higher returns. Similarly, index fund investors can choose international indexes that produce favorable returns and reduce portfolio volatility.
In addition to this, there is another option available to ‘jailbreak’ some of your money out of the 401k, and that option is to take a loan against your retirement plan. This strategy is typically advised against, because most people use the loan from their 401k to purchase items like cars or boats that decline in value. However, if you are astute and aggressive, there may be an opportunity to use your 401k as a vehicle to acquire capital for investment in other assets like rental real estate.
It is no secret that prudent investors should seek to limit their exposure to the stock market. However, for investors that are in ‘401k Jail’ with their employers, there is a viable way to structure your stock market investments in such a way that the major pitfalls of traditional stock investing are mitigated. And for those who are more adventurous, most 401k plans allow the owners to take a loan against the plan balance for outside investment. By thinking creatively, prudent investors can mitigate the impact of ‘401k Jail’ and use this tool to help build long-term wealth.
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