Randy's Rants

Where is John Galt!
By Randy Gage
Dec 9, 2008, 10:56

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Last time we asked what to do about investments that may have gone
south in this economy. I've been conflicted on this, but coming to
some strong opinions.

First again let me state that I am not an accountant, financial
planner or lawyer, and advise you to find good people in these
areas to counsel you. And it's important to find ones that don't
buy into conventional herd thinking. You need critical thinkers
surrounding you.

Now in terms of bad investments, we've all made them. That's the
nature of the beast. The key is recognizing when you've done so
and moving on. My experience is bad investments never get better.
They just get worse and worse. And more people lose substantial
wealth because they insist on pouring more money down black holes
and hanging on to dogs for years or even decades, figuring
something is going to turn.

For the most part my advice is usually the same: Get out now!

Like the people that have bought the semi-numismatic coins and have
been waiting 20 years for them to bounce back. You could have sold
them in 1978 and turned that money over three or four times in
great investments. Or simply put it in a solid low yield one that
was building your net worth upward consistently.

As we discussed a few issues ago, if you diversify your investments
so that 50% are no risk, 25% moderate risk/reward and 25% high
risk/reward, you'll never lose it all, and over time your wealth
will ultimately grow.

Precious metals will always be precious. Buy them and sock them
away. Real estate (if you are buying it properly) will always be a
safe harbor. The key here is cash flow. Don't buy real estate
where you would be forced to sell in a downturn, because there will
always be downturns.

My South Beach condo probably lost $200,000 in value when the
bubble burst. Yet it's already making its way back and I'm
actually investing another $100,000 remodeling two of the
bathrooms. I'm certain I could sell it next year for a $300,000
or $400,000 profit, because I bought it right and high-end property
will always have buyers.

For most things however, if it's a bad deal, it's a bad deal. Lose
it, take your loss for a tax write off and put the money to work in
something that will yield you better.

Now the one area I was feeling ambivalent on was the 401k
retirement plans. A lot of people have seen theirs virtually
halved over the last several years. As a result I felt that they
may be better off just to wait things out, and hope that the
government socialistic bailout plans help the economy bounce back.
Not so sure any more.

The extent of the meltdown and the kind of bailouts this will
require are numbing to the mind. Take the little three Detroit
automakers. They went to Washington asking for a $25 billion
package. As you know, they got chastised for going in three
private jets, and assailed because they had no credible plan for
what they'd do with the money.

Now they're back a couple weeks later and the figure has risen to
$32 billion. Yet industry analysts suggest that they really can't
be saved with less than $125 billion. Which they probably know,
and are just coming in at 32 for the opening bid. Once the tax
payers are on the hook, they can keep coming back to the trough,
over and over, counting on human nature's fear-based thinking: "We
already poured in $32 billion. If we don't do more, we'll lose
that."

You've already seen this with AIG, Fannie Mae and Freddie Mac and
you'll see it again and again for the next few years. The slippery
slope will ultimately be a cliff. There are $500 Trillion worth of
worthless derivatives out there already. Throw in the other cash
grabs from the carmakers, airlines and "Atlas Shrugged" is coming
soon, to a country near you.

As a result, it's pretty unlikely that your 401 plan will ever
rebound to where it was. You would be wise to have a serious talk
with your financial planner and explore some other options. It may
make sense to kill it, take your tax break for this year, and get
something new set up such as annuities in Swiss Francs.

In some future issues we'll look at some things you can do to
create new cash flow. I particularly like the idea of starting new
businesses right now. So we'll explore some of the better ideas in
that area.

In the meantime, if you haven't read my five-book series on
prosperity, this would be a good time. (Or a good time to re-read
them.) And if you're looking for the perfect holiday gift for
those you care about, these would be wonderful for them. You can
find them at:
http://prosperityuniverse.com/prosperityseries.html

Have a great day!

-RG

P.S. I hope you've been following my blog at RandyGage.com
recently. The posting on "Turning Lack into Prosperity" may be the
most important thing you read this year.

© MMXI Randy Gage. All Rights Reserved.

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