Juggling Dynamite

A recently published study from the American Bankruptcy Institute shows that filing rates for Americans over 45 are increasing larger than any other category of bankruptcy petitioners.  With the fastest growing segment of filers coming in the over 55 category.  “Facing reduced income in retirement and escalating health care costs, the researchers said they expect increasing bankruptcy filing rates for older Americans will persist into the forseeable future.”

A troublesome element of this news is that the research was only cited up until 2002 in this paper!  Since 2002, debt levels have literally skyrocketed for all age groups.  The data on the over 45 petitioners can only have grown much worse over the past 5 years.

In the good old days, people worked to pay off their homes by the time they were 45 to 50.  In retirement they had no debt and some savings as well as employer pension plans they could rely on for guaranteed income.  In recent years people have been trying to spend their way to prosperity rather than pay off thier debts.  It turns out that having a line of credit is not nearly the same as having savings in the bank to draw on. The housing boom is now ended and the revolving line of equity withdrawal is tapped out.  The sad part will be the overhang from the spending spree. Pain of the aftermath will be with our economies for some time to come.  And with social benefits and health care systems already stretched beyond capacity, one must wonder how can these casulaties be rescued?  The reality is that there will be no way to fix this for many people.  The “golden years” are likely to be everything but.

“At a time like this, who can lose money?”…

Quoted from a 60-year old cleaning woman in the southwestern city of Chongqing, China. Lauded in the media as a market wizard after doubling her 20,000 yuan (US$2,600) investment in two months (Chongqing Morning Post).

My comment:  Famous last words….Flashback to daytraders in 1999 who were quitting their jobs to trade stocks full time.  Classic bubble signs abound.

It has always been the promise and hype of the investment sales world that people get rich by buying equity investments.  A new study by The Harrison Group finds that of the 930 million Americans who have more than $5 million of net worth, only 10% of their money came through passive investments like the stock market and only a further 10% of their money was inherited.  Most people who have acquired this level of wealth did so by having a dream and taking the risks of pursuing it.  They created something themselves and were actively involved in its management.  80% either started their own businesses or worked for small companies that saw explosive growth.  Almost all of them made their fortunes in big lump sums after many years of effort.

Many wealthy people used the stock market as their exit strategy selling their company or their shares to the public market or to another larger firm as their big liquidity event. This is how most receive their lump sum wealth.  But once obtained, protecting the capital from big. bold risks is key.  Those with less money see the stock market as their hope for riches, business owners see the stock market as an attractive exit strategy.  Ideal timing for the entrepeneur is to sell their business to the market when profits have been strong and valuations are toppy.  Conversely this tends to be percisely the time of greatest risk for the passive buyer.  From strong hands to weak.  Buyers of passive investments must be aware of this fact, and they must have their own unique discipline about how to use the markets to their benefit.