| |
| |
|
Investing Information |
|
|
|
The Cost of Green Eggs and Ham
Young readers know that March 4th is the birthday of Dr. Seuss. Many parents trip their tongues over Seuss stories like "Green Eggs and Ham". "Do you like green eggs and ham?/I do not like them, Sam-I-am./I do not like green eggs and ham". Our son wields a wild spatula when making his April Fool's Day green eggs and ham. Sometimes his culinary skills warrant a cost per item analysis the same way the U.S. Department of Labor reports the Consumer Price Index (CPI). CPI reports tell us what a "basket of goods and services" costs using a benchmark dating from 1982-1984 Importantly, the CPI becomes one of many components within inflation measurement models. The CPI "basket of goods" leaves out green eggs and ham, however, it includes breakfast cereal, milk, coffee, chicken, wine, full service meals and snacks. CPI reports account for 7 or 8 categories of goods and services in the U.S. economy. If you recall Psychology 101, each category coincides with Abraham Maslow's basic or physiological "Hierarchy of Needs". When the U.S. Bureau of Statistics announces the CPI (most countries have a similar index), Wall Street listens because price increases suggest inflation concerns. When prices inflate, wallets deflate making consumers shy about spending. As you may observe, consumer spending drives worldwide economic productivity; for example, our spending habits account for nearly two-thirds of all U.S. economic activity. Although statistical patterns for Internet spending seem scant, the effect appears the same. Mall shoppers and Internet surfers open or close their wallets based on value and price. Inflated costs suggest decreasing value for products or services. Likewise, inflation pushes credit card interest rates higher, thereby adding another burden to the consumer. Inflation decreases the value of the dollar also. Ask your grandparents what they could purchase with a dollar compared with what that same service or product costs them today. Their experience explains inflation with more colorful expression than the CPI. Investors become unnerved by inflation as evidenced by Wall Street sell-offs when CPI numbers go up. When interest rates increase, the cost to borrow increases making it more difficult for corporations to borrow for expansion, earnings decrease and stock prices stagnate. Inflation numbers since 1926 average about 3.1%. In 1980, inflation peaked at 14%. High interest rates attract investors to bank certificates of deposit. However, investors often overlook and misunderstand "real rates of return". If a bank certificate of deposit earns 5% annually and the inflation index reads 2.5%, then your "real rate of return" becomes 2.5% (5%-2.5%). When bank certificate of deposits paid 16% in 1980, the real rate of return provided a measly 2% (16% - 14%), and then U.S. investors paid tax on that 2%. If you choose bonds or certificates of deposit as investments, consider laddering your maturities (e.g. with $100,000 to invest have $10,000 come due every year for ten years). Stock or equity securities out perform bonds and certificates of deposit with returns exceeding inflation numbers. However, when inflation increases, stocks go down in value initially. Stock investing seeks long term returns which average about 11% since 1926. Since inflation averages about 3.0% during the same time period, stocks provide an 8% real and reasonable rate of return. Stocks, including stock mutual funds, confront investors with greater short term risk while offering higher real rates of return over long term time periods. This risk reward trade off allows you to purchase your green eggs and ham during any economic cycle. "I learned there are troubles of more than one kind./Some come from ahead and some from behind." - Dr. Seuss About The Author Ray Randall serves clients as a registered investment advisor with his firm, Ethos Advisory Services, Essex, Massachusetts http://www.ethosadvisory.com, and coordinates the developments at Echievements http://www.echievements.com.
MORE RESOURCES:
Investing - Google News |
|
|
|
RELATED ARTICLES
Keeping It Interesting Some lines from a movie never leave your mind; I don't remember the context always, but I do recall the dialog. "The Big Chill" is one of the few movies I own (VHS). The Real Cost of a Bad Habit What is the value of a good habit? Think of some daily habits, like brushing your teeth, or buckling a seat belt, or flushing. All of these habits have value important to some part of life. Diversify! The best way to avoid being hit hard by a stock market crash or another Enron/Worldcom fiasco is to make sure you don't put all your eggs in one basket. Diversification helps ensure steady growth of your net worth as you accumulate more assets. Franchise Investing, Franchise Opportunities and Franchising Renewals Have you considered buying a franchise instead of trying to start a business from scratch. Many franchise agreements are renewed every five or ten years, automatically. Have You Ever Seen A Map of the World Turned Upside Down? For those accustomed to viewing things a certain way, it is quite disconcerting. One almost expects the ocean to pour out. Preparing to Invest: How to get started Investments can be a source of great potential earnings. The two most common reasons that a person does not invest are either they do not have the money or they do not know how to get started. Quit and Retire Three Years Earlier! For most people, there is a direct correlation between how worried they are about retirement income, and how much they can actually do about it. This is because the more worried you are, the closer you probably are to retirement, and the less time you have to do anything - like save up. The Perfect Mutual Fund The Perfect Mutual Fund is the one you build yourself!The perfect Mutual Fund you build should have the objective of owning no more than 12 to 15 companies; owning shares in 12 companies would allow the diversity needed to sleep well at night and would provide a cash dividend every week of the year.The 12 companies (with staggered dividend payout dates) in your perfect Mutual Fund should not only provide a cash dividend every week of the year, the companies should also have a historical record of raising their dividends every year for at least the past 8 years (to eliminate risk). Angel Investors: Who They Are & When Are They Appropriate Angel investors are individuals who invest in emerging business ventures. Angels typically provide both capital and know-how to companies who are in either their start-up or expansion phases. Playing With Money - And Making More Ready to start playing with your money? Not interested in complicated businesses or boring bank C.D. Your Portfolio and "Old Ironsides" The USS Constitution first ventured into the waters in 1798. From there she became an icon of durability and success. Do You Need A Financial Planner? No matter how much money you make, it pays to keep on top of money coming in and going out. Even if you do a good job of that, there are important times in your life when talking with a professional adviser makes sense. Investing in Car Dealerships: How to Do It Right The financial characteristics of the automobile dealership are attractive:". . Raising Capital Using a Public Company Going public in this manner is ideal for companies that may not be large enough to attract an underwriter for an IPO and those that don't need to raise capital immediately. They want to go public because of the many benefits that being a public company offers such as increased valuation, using public stock as currency to acquire other companies and assets, liquidity, prestige and to reduce the need for expensive venture capital and other financing sources. Before You Start Investing There maybe several reasons why you to want to invest your money. You may want to retire early, want to build your own business in the future, or to pay for your kid's education. The Differences Betweeen the Wealthy and Everyone Else I recently received an e-mail from a young lady who had doubts about the principles of wealth found in "Rich Dad, Poor Dad". She mentioned a couple of past failed investments, and wanted to know what I thought about investing and financial freedom - whether it was just a myth, or whether it could be acquired. Franchise Opportunity Sellers Beware; franchise buyers lie on forms? It seems completely absurd that franchise buyers lie about their financial position, available cash and abilities in order to buy a franchise. After spending 8 years setting up franchises around the nation and fielding inquiries I am appalled at the lack of integrity of the average business buyer. Investing: The Art Of Making Your Money Work For You There is a lot to know about investing. It all depends on what type of investing you are interested in as well. The Basics of Tax-Free UK Financial Spread Betting Financial Spread Betting (or Trading) offers a tax free method of speculating on financial markets.Quite simply, if you think a particular index, share, commodity, currency or sector will rise, you place an UP bet. The Difference Between Investing and Trading Investing and Trading are not the same thing. The returns you seek, the length of time it takes to achieve those returns, the amount of risk one is prepared to take, and the commitment one can make to monitor the investments dictate the strategy of whether to invest or trade.
|
| home | site map |
| © 2006 |
