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Is all spending bad?

Is all spending bad?

When talking to the GOP elite inside the beltway, President Reagan holds almost god-like status.  He was the architect of the great economic boom in the 80s and 90s.  He alone dismantled the iron curtain.  He was the great communicator and was somehow able to reach across the aisle and broach ideological barriers and simply get things done.

Reagan was not the captain of fiscal responsibility that many of his worshippers think that he was.  On page 57 of his book, "The Great Deformation,", Stockman wrote, “The Reaganite legend begins with the false proposition that the Reagan Administration stopped the march of “Big Government” and brought a new fiscal restraint to Washington.”  Reagan’s federal outlays average 21.7% of GDP, compared to 21.1% of GDP during the big spending Carter years.

Looking this, one might scratch their head and think; maybe Reagan wasn’t that great after all and agrees with Stockman.  This made me think further and ask the questions: Is all spending bad?  Is all debt bad?  Let’s consider these questions.

Under Reagan, lower taxes, reducing the growth of government spending, a stable currency and less regulation created 9.6 million jobs and increased the economy by 18.5 percent.

Obama’s policies of more taxes, more spending, more regulation and loose monetary policies have led to 5.7 million fewer jobs than Reagan created and an economy with growth nearly 50 percent smaller than it could have been.

According to usgovernmentspending.com, in 1985, the beginning of Reagan’s second term Reagan spent $356 billion of the $734 billion budget on entitlements and mandatory payments (social security, welfare, Medicare, Medicaid, food stamps).  That is 48% of federal receipts (revenue).  Compare this to President Obama, where 82% of federal receipts (revenue) go towards mandatory payments and entitlements was recently looking over some notes from a dinner meeting I had way back on May 30, 2013 with Stockman’s predecessor, James Miller who was OMB director under Reagan from 1985-1988.  Mr. Miller, unlike Stockman, had nothing but the highest praise for Reagan and his policies, as the growth of the economy for a couple decades are resultant from his policies.  How could two very intelligent people, who held the same position for the same President, have such different viewpoints?  We may never know.  But when I look at the numbers, when I look at the resulting economies that are products of spending policies, it brings up some talking points.  These are education moments that we can have with our clients, with our kids, and practice in our own lives.  The points are:  NOT ALL SPENDING IS BAD and NOT ALL DEBT IS BAD.  If debt is acquired in order to build revenue-generating assets, then over time this will be beneficial.  (I.e. potentially adding debt to finance the purchase of a rental property).

Reagan did not do everything correctly, and as Stockman points out, he did spend a lot of money and didn’t really practice much fiscal restraint.  But, what he did do was an attempt to spend money the right way.  It appears the policies of President Trump are very similar to what Reagan did.  Not everything is perfect, but nobody is.  The good thing is that we are finally moving in the right direction with our economy.  I think it all boils down to the old adage, “give someone a fish and feed them for a day.  Teach someone how to fish and feed them for a lifetime.”

The $2 million cup of coffee

The $2 million cup of coffee

On May 28th, 2014 there was an article on Bustle.com reporting how Starbucks baristas had served the most expensive drink ever.  It’s called the Sexagintuple Vanilla Bean Mocha Frappucchino, and it’s pretty much death in a glass. A 128-ounce glass with 60 shots of espresso and costs a whopping $54.75!  So this got me thinking, not only is this DEATH IN A GLASS, it is also DEATH TO YOUR RETIREMENT PORTFOLIO!

         In 1996 Thomas J. Stanley and William D. Danko wrote a book called, “The Millionaire Next Door.”  They described the surprising secrets of America’s wealthy.  What are just a few of the characteristics they talked about?

Millionaires don’t look like millionaires, dress like millionaires, eat like millionaires, act like millionaires, and they don’t even have millionaire names! 

  • They live well below their means. They wear inexpensive suits and drive American-made cars. Only a minority of them drive the current-model-year automobile. Only a minority ever lease their motor vehicles.
  • Most of them have never felt at a disadvantage because they did not receive any inheritance. About 80 percent of them are first-generation affluent.
  • About two-thirds of American millionaires are working, the rest are retired. Those who are working are self-employed. Interestingly, self-employed people make up less than 20 percent of the workers in America but account for two-thirds of the millionaires.

In a nutshell, they are not flashy.  They live below their means, they work hard, are very entrepreneurial, and they save and invest what they don’t spend.

So, let’s get back to the coffee.  I know a person who would go to the coffee shop every day and get a frappaccino.  Let’s not be ridiculous with the $54.75 frappaccino.  Just a basic frap is $4.25.  If my friend would  invest that $4.25 instead of drinking it the results would be AMAZING!  From age 20 to 65 (when most people want to retire), investing $4.25 Monday through Friday instead of drinking it, and having that grow at 15% annually, my friend could accumulate a lot of money.  Let’s do the math.

$4.25 cup of coffee for 22 days a month = $93.50 per month on coffee

WHAT IF SHE CUT THAT OUT AND INVESTED IT.  As we learned in previous lessons, there is a time and place for everything.  A buy and hold forever strategy is a foolish allocation.  Day trading is also foolish.  But, IF YOU ARE A STUDENT OF HISTORY and a STUDENT OF THE MARKETS you can identify the major trends and take advantage of them so those trends don't take advantage of you.

In working trough this example, let's assume a 12% annual growth rate on your investments.  Why 12%?  Isn’t that kind of high?  Well, let’s look at the trends:

1980-2000 the DJIA grew 1404%, that’s a compounded average of 14.5% a year for 20 years!

From 1970 to 2000 U.S. average real estate prices grew 593%, or an average of 10.7% per year.

For the decade of the 1980s you could have averaged 9.46% per year with bonds.

But, nothing lasts forever, when you are a student of history and a student of the markets, there are signals you can look for that can indicate that a trend is about to change.  This happened in the early 2000s.  From 2002-2014 Gold has grown from $278 per ounce to $1230.  That’s a 342% increase in 14 years.  Or 13.1% per year average.  Silver is similar, growing from $4.57 per ounce in 2000 to $20 per ounce in 2014.  That’s an average annual return of 13.1%.

So, by understanding the trends, allocating into the right place at the right time, 12% per year all of the sudden doesn’t seem outrageous, but actually quite a reasonable expectation over time with a properly diversified portfolio that maximizes your return and minimizes your risk.

So, back to my friend.  Instead of her coffee, if she invested that $4.25 per day into a growing trend from age 20 to age 65 how much do you think she would have saved up?  Just from cutting out coffee and saving $4.25 per day?  $10,000, $50,000, $100,000

NOT EVEN CLOSE!  At age 65, not adjusting for inflation she would have $2,026,073.94.  YIKES!  Not only will the cup of joe with 60 shots of espresso probably kill you, but going out for coffee every day should have just made you sick!  $2 MILLION DOLLARS is what those cups of coffee cost.

In economic terms this is called the opportunity cost, or the best forgone alternative if you would have done something else with your money.

Now, replace my friend with you.  Imagine how much you could have if you cut your cable TV package from the highest to the lowest package.  Instead of eating out once per week you went out once per month.  Instead of going to a movie you rented one.  Examine your life.  Just think of all the things you could cut out.  I’m not suggesting you cut out everything.  STILL HAVE FUN AND ENJOY LIFE!  But, if you invested what you cut out into the right places at the right time, all of the sudden your retirement could look AMAZING instead of something to fear and lose sleep over.

In closing, here are 3 strategies for a prosperous retirement while still enjoying life now!

Discuss this blog with your family over dinner.  The future could be AMAZING if you follow these steps.