Part 3: Should you pay off your home mortgage early?

Overview
This is the third in a series of articles on whether you should pay off your home loan early. In the first article, I covered the importance of considering the opportunity cost, tax consequences, and whether you have other debts to consider paying off first. In the second article, I provided examples of paying cash for your home in only about 10 years with no loan. In this article, I will continue the previous article buy providing an alternative of keeping your funds invested longer before taking out cash to buy your home. A future article will continue this series providing various scenarios for paying extra on your existing mortgage to accelerate payoff of your mortgage debt.

Recap of using a $100,000 mortgage in these articles
For simplicity, I use a $100,000 mortgage in all of these articles. That way you can simply multiply all numbers in the articles by the multiplier that matches your home mortgage. If you have a $200,000 mortgage, then use a multiple of 2 (your $200,000 mortgage divided by $100,000 mortgage of my articles gives a multiple of 2). If you have a $500,000 mortgage, then the multiple would be 5, etc. Just divide your mortgage by $100,000 to get the multiple to use.

Choosing to buy your home with cash
Recall in the previous article that I showed how you could pay cash for your home after only about 10 years of investing. The benefit of doing so is that you never need to have a mortgage and your reward for waiting 10 years to buy the home is a home free of debt. From that point forward, you can continue investing to create wealth for retirement or other plans you may have.

However, using you full investment funds to pay cash for a home would lose the momentum of compounding interest that kicks in strongly at about that same time. In the previous article, I showed how investing instead of making a mortgage payment for 30 years would provide a balance around $500,000 to well over $1,000,000 that would be lost if all funds were withdrawn to buy the $100,000 house. Therefore, another alternative would be to wait until your investments reached a $200,000 balance before removing $100,000 to pay cash for the home. This way the other $100,000 balance would be large enough to continue compounding into a significant sum after 30 years. In fact, waiting for your investments to grow from $100,000 to $200,000 will not take near as long as the first $100,000 did. In the last article, I showed the time it took to reach $100,000 for the different investing scenarios. Here I will repeat those tables and add another line showing how long it will take to reach $200,000 under those same investing scenarios.

When would you have $200,000 to buy the house with $100,000 cash and keep $100,000 to compound?
If $536.82 per month were invested instead of used to pay a 5% mortgage, you would have $100,000 and $200,000 by:

Balance	4%	6%	8%	10%
$100k	13 years	11 years	11 years	10 years
$200k	21 years	18 years	16 years	15 years

If $599.55 per month were invested instead of used to pay a 6% mortgage, you would have $100,000 and $200,000 by:

Balance	4%	6%	8%	10%
$100k	12 years	11 years	10 years	9 years
$200k	19 years	17 years	15 years	14 years

If $665.30 per month were invested instead of used to pay a 7% mortgage, you would have $100,000 and $200,000 by:

Balance	4%	6%	8%	10%
$100k	11 years	10 years	9 years	9 years
$200k	18 years	16 years	14 years	13 years

If $733.76 per month were invested instead of used to pay a 8% mortgage, you would have $100,000 and $200,000 by:

Balance	4%	6%	8%	10%
$100k	10 years	9 years	9 years	8 years
$200k	17 years	15 years	13 years	12 years

What would your 30 year investment balance be under these scenarios?
Here I will show three different 30 year ending balances for each monthly investment scenario. The $0 line assumes you never remove funds from the account to show what the ending balance would have been. The $100k line assumes $100,000 is removed immediately when the funds reach that amount and then the monthly investment is continued through the 30 years. The $200k line assumes $100,000 is removed only when the account balance reaches $200,000 and then the remaining $100,000 is compounded along with the addition of continued monthly investments.

Investing $536.82 per month (a 5% mortgage payment) for 30 years would provide the following ending balances:

$ Removed	4%	6%	8%	10%
$0	372,580	539,244	800,055	1,213,475
-$100k	168,743	227,454	313,878	436,837
-$200k	224,977	328,990	486,482	733,543

If $599.55 per month (a 6% mortgage payment) for 30 years would provide the following ending balances:

$ Removed	4%	6%	8%	10%
$0	416,117	602,257	893,545	1,355,276
-$100k	203,269	274,522	377,408	525,326
-$200k	259,403	376,798	556,195	833,816

If $665.30 per month (a 7% mortgage payment) for 30 years would provide the following ending balances:

$ Removed	4%	6%	8%	10%
$0	461,751	668,304	991,536	1,503,903
-$100k	241,701	325,522	447,221	624,312
-$200k	296,467	427,742	628,606	942,004

If $733.76 per month (a 8% mortgage payment) for 30 years would provide the following ending balances:

$ Removed	4%	6%	8%	10%
$0	509,266	737,073	1,093,566	1,658,656
-$100k	281,769	380,338	523,336	734,159
-$200k	336,099	482,944	705,701	1,053,182

Opportunity cost of both options
Opportunity cost is the difference between what would have been earned by investing without withdrawing funds to buy a house and either the $100k balance or $200k balance option ending balances shown above. For example, in the $599.55 monthly investment table above you see at 8% you would have had an account balance of $893,545. However, if you chose to withdraw $100,000 to buy the house immediately when $100,000 was in the account, your 30 year ending balance would only be $377,408. The difference of $516,137 ($893,545 - $377,408) is the lost opportunity, funds you lost by withdrawing the $100,000 immediately. You can think of this as the $100,000 house costing you $616,137 over 30 years since you paid $100,000 and lost another $516,137 in opportunity cost.

If you chose to wait until the account had $200,000 to withdraw $100,000 for purchase of the house, then you 30 year ending balance would be $556,195. The difference of $337,350 ($893,545 - $556,195) is a much less opportunity loss. However, the house still cost you $437,350 or your $100,000 paid and the $337,350 opportunity cost.

Both of these total costs of your house are much less than taking out a 30 year mortgage with the associated monthly payment where you end up paying several times your home price in interest. You also lose out on the monthly investment and associated compounded balance had you invested the monthly mortgage payment over 30 years instead, as seen in the examples above. If you think about it, purchasing a $100,000 home with a mortgage could cost you well over $1,000,000 and even closer to $2,000,000 with the combined opportunity loss from no investment and the loss from paid interest over 30 years to the bank. Most sophisticated accredited investors understand this fact and wait for this reason to pay cash for their home. They would much rather pur their money to work making more money than give it to a bank in interest payments.

Summary
You can see how having patience to put off purchases and being a debt-free investor can help you create large wealth over your lifetime. I plan to continue this series on paying down mortgages so stay tuned.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.

- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below (viewable on blog site only): Sphere: Related Content

Part 2: Should you pay off your home mortgage early?

Continuation from the last article
This is the second in a series of articles on whether you should pay off your home loan early. In the last article, I covered the importance of considering the opportunity cost, tax consequences, and whether you have other debts to consider paying off first. In this article, I will cover specific examples to help illustrate some of these points. However, as I said before, you should consult a financial advisor who knows your situation before making a choice on either paying off your mortgage sooner or not.

The total 30 year cost of your mortgage
Assume you recently refinanced or bought a home with a 30 year fixed payment mortgage of $100,000. I used $100,000 for simplicity since the results shown are per $100,000 loan. If you have a $200,000 mortgage, simply multiply the numbers by two. If you have a $500,000 mortgage, simply multiply by five and so forth depending on what your mortgage amount is as compared to $100,000.

The total amount of money you give the lender over 30 years will be shown below at different mortgage rates. The monthly payment against the loan for each interest rate is also provided for reference. This payment does not include property taxes, insurance, etc. that may be included in the total monthly payment for a house beyond just paying against the mortgage debt.

At 5%, the monthly mortgage payment is $536.82
At 6%, the monthly mortgage payment is $599.55
At 7%, the monthly mortgage payment is $665.30
At 8%, the monthly mortgage payment is $733.76

The total amount paid over 30 years at different interest rates for a $100,000 mortgage are:

Year	5%	6%	7%	8%
30	193,254	215,835	239,505	264,150

What would you accumulate by investing the monthly payments instead?
Consider what would happen if you did not get a mortage and took what would have been paid monthly toward accumulating wealth through investments.

If $536.82 per month were invested instead of used to pay a 5% mortgage, the total 30 year account balance would be:

Year	4%	6%	8%	10%
30	372,580	539,244	800,055	1,213,475

If $599.55 per month were invested instead of used to pay a 6% mortgage, the total 30 year account balance would be:

Year	4%	6%	8%	10%
30	416,117	602,260	893,545	1,355,276

If $665.30 per month were invested instead of used to pay a 7% mortgage, the total 30 year account balance would be:

Year	4%	6%	8%	10%
30	461,751	668,304	991,536	1,503,903

If $733.76 per month were invested instead of used to pay a 8% mortgage, the total 30 year account balance would be:

Year	4%	6%	8%	10%
30	509,266	737,073	1,093,566	1,658,656

How can you have a much larger return from investing than if paying a mortgage for 30 years?
When first looking at the numbers above, it makes no sense that a 4% yearly return on your investment can grow a much larger investment balance than a 5% mortgage would cost over 30 years. In other words, how can a lower rate of return on your investment grow much faster than a higher rate mortgage over 30 years?

Keep in mind that the starting point differs for both. For a mortgage, it starts with a balance due of $100,000. Each month, only a very small amount of you payment goes toward reducing this balance with the bulk of the payment going toward interest. However, when investing, your entire monthly payment goes toward accumulating more money the next month. You also get the huge benefit of interest compounding as well. Each month interest is paid on the full payment you put in the previous month and on the total balance of the account to date. So, as your balance grows, so does the amount of interest that is paid to you each month. This is the power of compounding growth.

I wrote a four part series that goes into detail on how compounding is a key tool, if not the most important tool, most sophisticated and accredited investors use as part of the wealth building strategy.

When would you have $100,000 to buy the house with cash instead of with a mortgage?
Consider the fact that consistently investing what would have been paid on a mortgage into investments would allow you to accumulate a balance of $100,000 very soon. You could then buy the house with cash and still be able to continue investing each month. Here is when you would accumulate $100,000 balance.

If $536.82 per month were invested instead of used to pay a 5% mortgage, you would have $100,000 by:

4%	6%	8%	10%
13 years	11 years	11 years	10 years

If $599.55 per month were invested instead of used to pay a 6% mortgage, you would have $100,000 by:

4%	6%	8%	10%
12 years	11 years	10 years	9 years

If $665.30 per month were invested instead of used to pay a 7% mortgage, you would have $100,000 by:

4%	6%	8%	10%
11 years	10 years	9 years	9 years

If $733.76 per month were invested instead of used to pay a 8% mortgage, you would have $100,000 by:

4%	6%	8%	10%
10 years	9 years	9 years	8 years

Opportunity cost of having a mortgage instead of investing the payments
Opportunity cost is the difference between what would have been earned by investing instead of paying a mortgage. To see what the opportunity cost is over the 30 year period, simply look at the table that shows the total mortgage paid at the different interest rates against what the associated monthly mortgage payment would have grown to had it been invested at a specific rate for 30 years.

For example, consider the 5% mortgage which had a monthly payment of $536.82. The total you would pay for the mortgage is $193,254. However, you could have invested that monthly payment instead for 30 years and earned from $372,580 at a 4% yearly return to $1,213,475 at a 10% yearly return. The 30 year opportunity cost the difference which ranges from $372,580 - $193,254 = $179,326 to $1,213,475 - $193,254 = $1,020,221. The range shows the significant loss of earnings that would have been realized if the money had been invested instead of spent on the mortgage. Continue this for any of the interest rates and associated monthly payment shown above over the 30 year period. The opportunity loss ranges are even more dramatic.

Consider buying a house with cash from investments
As you read earlier, your investment account could have accumulated a total of $100,000 on average in about 10 years. If you had saved first to buy the house with cash, then from that point forward you could continue with the same saving plan to again build up your investment account for other purchases or investments. This opens doors for you to continue building your wealth without debt. You will have more options on how and when you want to retire with a paid off house and a growing investment portfolio that would grow to where the yearly returns eventually pay your day-to-day expenses in a short time.

Examples above don’t really consider rent verses owning a home
The above examples don’t take into consideration that you need to pay for some type of housing during the 30 year period of investing if you don’t buy a home with a mortgage. In that case, you would be paying a comparable amount on rent so it could not be invested. However, I wanted to keep it simple and just focus on the opportunity cost of investing verses having a mortgage. Ideally you would have started an investment plan early in your career by renting a cheap place while investing significant amounts monthly into your investment account to where a home could be bought with cash in a few short years.

The above example also do not consider the added benefit of tax deductions on the mortgage interest paid yearly, the capital gains that would be paid selling your investment to pay cash for the house, and other factors for the sake of simplicity. Again, I wanted to keep the focus on the benefits of investing verses getting a loan.

Summary
I don’t want to say that it is best to always pay cash for a home instead of getting a mortgage. I strongly advise working with a qualified financial planner early in your career to look at your long term financial goals. Then divide those goals into a workable plan of action to know what you need to do periodically over time toward reaching those long term goals. However, the information above does show that for some people, building wealth without debt can definitely have significant advantages, especially in today’s environment where credit is bringing down economies around the world. I wrote another series of articles in the past that tells how to get debt free that might also be of interest to you.

I hope these articles help you consider the bigger picture when evaluating a plan of action. Always play out the numbers over time. See what you will gain and what you will lose. Understand why the numbers are what they are. Learn how to use those differences to your advantage.

Next article in the series
The next article continues this series continues this discussion providing several scenarios for payying cash to buy your home. Other future articles in this series will explore scenarios for paying extra each month on your mortgage for faster payoff.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below (viewable on blog site only):

Sphere: Related Content

Should you pay off your home mortgage early?

Overview
This is a question that many home owners ask themselves – “Should I apply additional funds toward paying off my home mortgage early or invest this money elsewhere?” There is no universal answer. You should consult a financial advisor who knows your situation before making this choice. However, my intent is to help you consider various factors involved with this decision. This topic will be covered over more than one article in order to provide the depth needed.

Do you have other debts?
If you have other debts, then it may make better sense to apply the extra funds toward paying those debts off first. I wrote a three part series that give insights into what credit card debts really cost you and strategies to remove all of your debts. You can read the first article in the series by clicking here.

Consider the opportunity cost of paying your mortgage off sooner
The opportunity cost of money simply means the difference between the rate off return you could earn by investing in something else verses using the funds to pay down your mortgage. Since money used to pay down your mortgage reduces the principle balance of the loan, you are saving the mortgage interest that would have been paid on the extra amount applied toward paying down the loan balance. In other words, if you have a 6% annual interest rate on your mortgage, then applying an extra $100 toward your loan payment would save paying 6% against that $100 or $6 over a year. Now assume you could have invested that $100 in a fund that paid 8% annually, then you could have earned 8% of $100 or $8 over a year. Since you could have earned $8 and only saved $6 by paying down your mortgage, the opportunity loss is the difference between the two or $2 annually ($8 you could have earned - $6 you saved on mortgage interest).

Consider the mortgage interest deduction
I wrote an article in the past about not buying a house simply for the mortgage deduction (click here to read the article). Bottom line is that you only deduct a portion of the total amount paid yearly on your mortgage according to your state and federal tax bracket. In the article I show how someone in a combined state and federal tax bracket of 40% and who paid $25,000 in mortgage interest would receive a $10,000 benefit ($25,000 x 40%). However, the difference of $15,000 ($25,000 paid on interest - the $10,000 benefit) was paid to the bank with no benefit to you. The lost opportunity cost must be considered for what the $15,000 could have received had it been invested in an investment vehicle that paid a higher rate of return than the interest rate on the mortgage. This becomes an even bigger issue for people with a lower combined state and federal tax bracket.

Assume someone has a combined state and federal tax rate of 30%. The benefit then would only be 30% of $25,000 mortgage interest paid, or a $7,500 benefit ($25,000 x 30%). The remaining $17,500 paid to interest ($25,000 - $7,500) must be considered for the associated opportunity loss.

Consider the benefit of reinvesting the tax benefit received
If you have accurately projected your tax exemptions to reduce taxes paid through the year by the $10,000 or $7,500 benefit (based on your tax rate), then the money saved on paying taxes could be invested for an added benefit.

For simplicity, lets just talk about someone in the 40% combined tax bracket that receives the $10,000 benefit yearly. This person increased his or her tax exemptions to reduce the taxes paid from income throughout the year to equal $10,000. If the person receives a monthly paycheck, then the take home pay is increased by $833.33 each month ($10,000 divided by 12 months). This person can now invest $833.33 each month in some investment and receive additional benefit from the associated return.

A secret of the sophisticated accredited investors
Think about this…You paid $25,000 total in mortgage interest over the year and received $10,000 back as a result of tax deductions. In this case, you paid a total of $2,083.33 each month on interest ($25,000 divided by 12 months) of which $833.33 was returned each month to you for investing. Sophisticated investors recognize this double use of the money as part of their investment strategy. However, they don’t do this just with their mortgage, but when structuring all of their investments. Look for ways of getting multiple benefits from the same dollar.

Next article
The next article will continue this discussion. Stay tuned.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below (viewable on blog site only): Sphere: Related Content

Being laid off? Think about becoming an entrepreneur

Overview
With millions of talented people being laid off during the current financial crisis, there is opportunity to turn tragedy into triumph by becoming an entrepreneur. I would recommend first trying hard to get another comparable job so the income stream is there to support day-to-day expenses. However, if you are not able to get a job, then perhaps entrepreneurialism might be your path forward. Even if you do have income from a job, it may make sense to start a business on your own while you have the income stream. Over time, your business may grow to take over as your primary and ongoing income source providing you with many more options with your career than currently might be possible.

What do you need to consider when going into business?
There are a lot of things you need to consider. However, don’t get so wrapped up in worrying about all of the minute details that you procrastinate actually getting started. The first thing I recommend is nailing down what business to start. Do this by creating two columns on a blank piece of paper labeled strengths and weaknesses. Write down all of the strengths and strong skills that you have personally, in business, relationships, etc. Then write down all of your main weaknesses in the same categories. Really study the list. Look for ways of overcoming your weaknesses to turn them into strengths. Perhaps you need to get some education that will build your abilities in certain weak areas. Perhaps one of your strengths could be paired with the weakness to help overcome it. Personally, I like to face my weaknesses and fears head on. I like to force myself to learn and grow in those areas to turn them into future strengths. That is my own challenge so I’m always growing and not allowing weaknesses to keep me stagnant. Continually overcoming weaknesses will give you knowledge and skills needed to face and overcome barriers that will come while growing a business.

Find a mentor/possible partner
Find someone that is strong in the area(s) you are weak in that can mentor and guide your development. This may actually be a way of finding someone else who would be a good fit for you in starting the business. Many times people who are opposites have made the best business pair since one was strong in an area the other was weak. They are able to recognize the strengths and weaknesses of each other to capitalize on who would be best suited for a particular task/client/etc. while building the business.

Ego can be your friend and enemy
We all know people who have very strong ego. Many times these people make very strong managers that take action and get things done. It is fine when ego is used constructively to drive action and get results. However, when ego is used to put others down and gets in the way, then it is a huge barrier to ever getting long term success. You must recognize what level of ego you and your partner(s) have, understand if it is constructive or destructive, take corrective action as needed to reshape the ego to be a positive driving force that motivates others to feel passionate about succeeding together.

Also, never be so proud that you don’t listen to and use the advice and help of others. Always known your weaknesses and recognize when someone can help, then accept that help. Life is too short to let pride get in the way of success.

You need a team to create long term success
Going completely on your own is a very hard way to start a business. Start meeting people as you take training classes, work with clients, go to church or other gatherings, etc. Get to know who has strengths that could be tapped to help you in business. Find a way of bartering for their help – perhaps you will provide a product or service to them in exchange for them doing the same for you.

The Small Business Administration and SCORE are invaluable resources
Don’t forget that the Small Business Administration (SBA) is an invaluable source of education and counseling to help you succeed. They also have a separate arm called SCORE, which is comprised of retired executives who now volunteer their time to consult with business owners and many other resources to help entrepreneurs succeed. In fact, the SCORE website www.score.org has set up a feature for you to select consultants for free geographically and by industry at http://www.score.org/ask_score.html. They also have online classes on various subjects. Anyway, SCORE is an amazing free resource that can help tremendously with starting, running, and growing a business.

Consider the finances required
Once you have a business, create a business plan that includes timelines of accomplishments and any project income and expenses at each milestone on the timeline. Always know where your finances stand. Know when you need to make cuts to get by enough to continue moving forward. Also recognize when the business is not going to succeed to cut your losses early and try another business. Again, don’t let pride keep you from moving on. However, always learn from everything you do to incorporate your knowledge into the next venture.

Don’t take things personally
Don’t take rejection personally. Don’t take failure personally. Recognize that these things always happen and are a requirement for success. Until you have failed or experienced rejection, you don’t really learn how to overcome them and move forward. Personally, I look forward to failure and rejection since those are my most challenging times that require me to be very resourceful in finding solutions to overcome. I feel the most personal growth and satisfaction after overcoming my hardest challenges. Welcome them as opportunities to grow and become an overcomer.

Share your success
Treat your employees well. Provide unexpected small bonuses such as a gift certificate to a nice restaurant or store when someone does something nice. Write a hand written note that says you are proud of their accomplishment on a task. Get a simple plaque made that they can put on their desk. Bring them into your office to tell them how much you appreciate their work on that task.

Consider doing similar things for people outside of your company who help you and your business. Give your supplier, banker, customer, etc. a nice surprise. Let them know they are appreciated and valued.

Doing these things will go a long way toward building fierce loyalty. People will remember you and your company will be their first choice when needed.

Understand you are in the business of people, not products or services
Remember, you are in the people business, not a business of selling products or services. Products or services won’t likely be bought until you have first built the relationship with a decision maker/customer. Think about yourself – would you rather buy something from a friend or complete stranger? Take that even further – would you be willing to pay more buying from a trusted friend or paying less from a complete stranger? In that case, you can see there is a financial value placed on the level of trust and friendship you can build with the customer, and with your employees.

Be a lifelong student of business
Take every opportunity to continue learning. As mentioned before, take classes and read books about areas you are weak in. Continue building on your strengths through ongoing education. Talk with successful people who can mentor you. Always be moving forward with your personal development and knowledge of every aspect of business.

Summary
As you know, there are many books, articles, etc. on starting a business. I could not possibly include everything that is needed to start a business in this article. My hope here was to at least get those who are currently being threatened by the negative job market to consider going into business for themselves. Doing so could be a way of creating job security in the long run. Sure there are up and down periods in business, but those events can be anticipated and planned for through proper investments that ensure continued survival of the business. If you do take the entrepreneurial plunge, I wish you the very best and say it will be hard, but very rewarding in the end. Expect many challenges, but make those opportunities to develop character and strengths as an overcomer.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below (viewable on blog site only):
Sphere: Related Content

Why do you need to earn a higher rate than the percentage of investment loss?

Overview
One thing that confuses many investors is the fact that any percentage loss must be recovered by earning a higher rate of return than the percentage of loss (will illustrate this with examples later in this article). Accredited investors are aware of this difference and understand the relationship between percentage loss and percentage required to gain back the loss. This article will provide the math behind the relationship in a easy to read format. I’ll first look at the mathematical equation used to calculate the percentage loss of an investment. Then I’ll look at the mathematical equation to calculate the percentage gain required to make up a loss. By the end, you will be able to understand what percentage of a gain is required to make up for any loss in your investment. This knowledge is required to accurately manage your investments while implementing your long term investment plan.

We now consider the equation for calculating the percentage of loss.

Equation to calculate the percentage of loss:
Percentage loss = (Initial value – current value)/initial value

This is derived by thinking about this in the following way…
If you lose money, the loss is based on the initial value of the investment. You consider what the value was initially and what it is currently. The difference between the two is the amount of loss. That is where the equation shows (Initial value – current value). Then to get the percentage of loss, you need to divide this amount of loss by the initial value of the investment. The idea is the find out how big this loss is when compared to the initial value of the investment. That is where you see this difference between the initial and current value being divided by the initial value in the equation. The result of this division tells you what percent of the initial investment was lost. Now consider an example to help understand the equation better.

An example of a 25% loss:
For this example, lets assume Joe had a retirement account with $100,000. Now, some time later, the account is worth $75,000. I will walk through the percentage of loss equation to calculate the percentage of loss.

Percentage loss = ($100,000 - $75,000)/$100,000
Percentage loss = $25,000/$100,000
Percentage loss = 25%

So we calculate that a drop from $100,000 to $75,000 is a 25% loss.

You can’t get back your investment by earning the same percent that was lost
You may be tempted to think a 25% gain is needed to get back to $100,000. However, the problem is Joe now only has $75,000 to start with. The amount of gain required is against $75,000, not against $100,000. The 25% loss was against the initial $100,000 account value and any percentage gain must now be against the remaining $75,000. Before calculating the percentage gain required to get back to the initial $100,000, consider the associate equation…

Equation to calculate the percentage of gain required to make up a loss:
Percentage gain required = (Initial value – current value)/current value

Did you notice the very slight difference in the equation? The only change was dividing the loss by the current value of the investment instead of dividing by the initial value. This is required since you are starting with the current value that remains after experiencing the loss. You need to know what percent of additional funds are required against the current value to get back to the initial value. Now use the equation against the above example to find out what gain is required to make up for the 25% loss.

Calculating the percentage gain required to make up for the 25% loss:
Using the above equation for calculating the percentage gain required,

Percentage gain required = ($100,000 - $75,000)/$75,000
Percentage gain required = $25,000/$75,000
Percentage gain required = 33.3%

So, we need to earn 33.3% against the remaining $75,000 in order to get back to the initial $100,000. Now consider additional examples.

Example of a 50% loss and calculating the percentage gain required:
Here Joe’s $100,000 initial account value drops to $50,000. Calculate the percentage loss first…

Percentage loss = ($100,000 - $50,000)/$100,000
Percentage loss = $50,000/$100,000
Percentage loss = 50%

Since the current value of the account is $50,000, what percentage gain is required to get back to the initial $100,000 value?

Percentage gain required = ($100,000 - $50,000)/$50,000
Percentage gain required = $50,000/$50,000
Percentage gain required = 100%

Joe now needs to earn 100% against his remaining $50,000 value to get back to the initial $100,000 value of the account.

Example of a 75% loss and calculating the percentage gain required:
Here Joe’s $100,000 initial account value drops to $25,000. Calculate the percentage loss first…

Percentage loss = ($100,000 - $25,000)/$100,000
Percentage loss = $75,000/$100,000
Percentage loss = 75%

Since the current value of the account is $25,000, what percentage gain is required to get back to the initial $100,000 value?

Percentage gain required = ($100,000 - $25,000)/$25,000
Percentage gain required = $75,000/$25,000
Percentage gain required = 300%

Joe now needs to earn 300% against his remaining $25,000 value to get back to the initial $100,000 value of the account.

Recap of above examples:
If Joe has a 25% loss, he needs to invest in something that will provide a 33% gain against his remaining funds to get back the loss.

If Joe has a 50% loss, he will need a 100% gain against the remaining funds.

If Joe has a 75% loss, he will need a very high 300% gain.

Summary
As you can see, there is a very large difference between the percentage loss of an investment and the required percentage gain to get back to that initial value. The higher the loss, the dramatically higher the required gain will be to make up for the loss. As the amount of loss increases, the required gain to make up for the loss increases much more since the remaining funds get smaller to use for making back the much larger loss. Again, seasoned investors, such as active accredited investors, understand this relationship between percent loss and percent gain required to make up the loss. Understanding the relationship will allow you to consider which investment strategy to consider as you move forward toward your long term financial goal.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer:
This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below (viewable on blog site only): Sphere: Related Content

Don’t let fear drive your investment decisions

Overview
Most investors know investment prices move up and down over time. However, many investors panic when things get tough and make investment decisions that are opposite of what should be done. With the current worldwide dramatic fall in prices of so many investments (stocks, real estate, etc.), emotions can be even more dramatic resulting in many people selling (and buying) at the wrong time.

Seasoned investors count on fear driven selling
In a previous post, I wrote how professional investors count on panic selling by unseasoned investors to determine good buy points (click here to read the article). Usually during very heavy sell volume days when prices drop dramatically for a stock, that is the point that the price starts to turn around as most sellers finish selling their shares. At this point the professional investors know they can get a rock bottom price when buying into the investment. However, in this market, there is no assurance the low price won’t get lower in the near future if these buyers also begin to sell through even lower prices.

Remember a loss is not real until you sell the investment
It is scary holding one or more investments where the price has dropped 40%, 50%, or more just in the past few months. If you have continued to hold your dropping investment through this downturn - whether it be stocks, real estate, or other investment – remember you have a paper loss until the investment is actually sold. As an example, if you have a rental property that was previously worth $250,000 and is currently worth only $150,000, it can be very tempting to sell the property for fear of even lower value in the future. If you don’t sell, then the perceived loss of $100,000 ($250,000 past value - $150,000 current value) is not realized. Only if you actually sell the property will there be a $100,000 loss in value.

Commenting on a recent article on CNN
This past week money.cnn.com ran a story on a young couple who have done a good job saving and investing money. The story can be found at: http://money.cnn.com/2009/02/18/retirement/makeover_savers.moneymag/index.htm. Financial advisors provided thoughts on whether the couple should make changes in their saving/investing strategy based on losses experienced with the recent downturn in stock and real estate values. One of the recommendations was to sell the rental property this couple has that has a $400 per month negative cash flow over rent. The sales recommendation is not necessarily based on fear, but was suggested to free up the $400 per month for use in other after tax investment accounts.

That recommendation really bothered me since this couple is in their late 30s and don’t plan retirement for 20 more years. In my mind, they have many years to wait for the real estate value to recoup the $100,000 drop, while collecting rent all the while to pay down the associated mortgage. After 20 years, the mortgage will be largely paid off and the monthly income from raising rent over those years should have erased the $400 negative. Since the property was bought in 2006, they would only have seven years left on the mortgage. Even if they do retire in 20 years as planned, holding onto the property seven more years to pay off the mortgage would provide a nice rental income to use for whatever purpose they needed during the rest of their lives. Hopefully, the value has grown over all of those years as well to increase the value of their estate as an added benefit for the heirs.

Assume they sold the property out of fear
For purposes of discussion, let’s assume this couple was getting very nervous about the perceived $100,000 drop in property value and sold out of fear of losing even more. In that case, they would miss out on the scenario I provided above where eventually the property could be debt free with a large cash flow going into the couple’s future retirement needs. If the couple had a mortgage on the property higher than the current $150,000 value, then the couple would owe taxes to the IRS on the difference between what the couple owes on the property and what the mortgage lender was able to get paid back from the sale. The IRS treats this difference as income to the owner. This all assumes new tax laws are not implemented as part of the stimulus package. Check with your tax advisor if you are in a similar situation before taking any action.

In this case, fear would prevent the couple from enjoying the benefits of owning the rental property as I outlined earlier. The couple could potentially owe a large tax to the IRS on the portion of the mortgage loan that was not paid off from the property sale. They would add shame and a sense of failure to their self image, likely keeping them from considering other potentially good investments in real estate for fear of losing large amounts of money again. The loss of self image and lack of confidence in their ability to chose investments could lead them toward investing only in safe assets like CDs or even savings accounts. Those investments will lose money over time as inflation eats away what money they do have saved. All of this because the couple sold, rather than rationally thought through that there isn’t really any loss unless the property is sold. Even though you should mainly focus on buying rental properties that have a positive cash flow from the beginning, in this case, the loss is only $400 per month against their combined income of $250,000 per year. That, to me, makes no sense to sell with the added costs that could result from selling the property vice the monthly loss of $400.

These consequences of fear selling apply to other investments as well
Personally, I sell stocks when I first see technical indicators showing a down term coming. However, if you have already ridden down the price drop without selling and are scared of losing more, sit back and take a breath. Look at the reasons you bought the stock – hopefully rising market share, increased net cash flow, etc. If those same indicators are still valid, then think twice about selling into a significant loss if the stock should have a good chance of making up the loss over the next 5 or 10 years. You need to consider each stock on its own merits. Of course, there are many stocks where the fundamentals have changed dramatically for the worse where they no longer have any prospects of increasing income or market share, etc. In that case, you may need to sell now to prevent even further loss. All I ask is that you don’t sell out of fear. Look at all the information you can get on the company. Look at how much debt they have on the books and how likely they are to pay off those debts to remain profitable. Look at the industry the company is in. Is the industry one that is being hit and continues to be hit seriously? Make your decision based on facts, not on emotions of the moment.

Summary
Don’t play into the hands of seasoned investors who count on the inexperienced investor selling at the worst possible time, handing these seasoned investors potentially great bargains. Many of these seasoned investors make this part of their investment strategy to wait for the panic sale periods in the market before making purchases. Imagine if you were patient enough to wait for these periods of uncertainly to build a portfolio of investments at very good prices. Now imagine how much money you would have when the markets then recover and grow beyond where they were before the market fell. You would have bargain priced investments with strong growth over time. It is like looking for fire sales at the store before making your purchases. It builds your self esteem and reinforces your confidence as an investor. Learn to control your emotions and invest based on facts to increase your long term prospects for success as an investor.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Find similar articles by clicking the Sphere.com icon below:
Sphere: Related Content

The cost of borrowing from your tax deferred account

Overview
If you have a sizeable balance in your tax deferred 401, 403, IRA, Keogh, or other tax free account, it can be tempting to borrow against the account for hardship, medical, education, or the purchase of a home. There are times when a loan makes good financial sense. However, most of the time it is best to leave your funds in the account to take advantage of the tax free compounding (click here to read a previous series that covers compounding in detail). This article will go over the “cost” involved with borrowing against one of these accounts.

Revisiting the effect of compounding
If you read the previous series on compounding interest, you understand the enormous benefit compounding brings to multiplying your final account balance after many years. Most advisors recommend you invest in a combination of stocks and bonds to spread the risk and still participate in the higher historical return stocks provide.

Costs of borrowing funds
When you borrow from your account, the borrowed funds are usually paid back at the lowest rate – usually the bond rate (approximately 4%). In that case, you lose out on the significant long term gains that would have been achieved from a higher compounding rate closer to the historical stock gains of 8%. However, another “penalty” that many people are not aware of is that funds used to pay back the loan are after tax money. You can’t deduct the money used to pay off the loan. Therefore, you are using money that has already been taxed to pay back the loan. The money you paid in taxes could have also benefited from compounding interest over time. So, you lose two ways – the higher compounding the funds could have received if left in the account and the compounding of the taxed dollars spent to pay back the loan. There is also the potential for a third penalty if the borrower decides to lower the ongoing regular investment into the account in order to afford the new loan payments. In this case, there is additional loss of compounding growth against the reduced contributions over time. Lets look at an example to help illustrate the issues involved with borrowing.

Simplified example of borrowing from a tax deferred account
Assumptions: 1) Joe has $75,000 in his account earning a long term average annual return of 6% and is contributing $1,000 monthly; 2) He borrows $25,000 (for whatever reason) from his tax deferred account; 3) The current bond rate is 4% and that the loan will be paid back over 15 years at this 4% rate with a monthly payment of $184.92; 4) Joe pays a combined State and Federal tax of 30%.

Had Joe had continued his investment plan of $1,000 monthly and not taken out a loan, he would have a ending balance of $474,876 in 15 years. By removing $25,000 as a loan, the remaining $50,000 balance with the $1,000 monthly contributions would grow to $413,523 after 15 years or $61,353 less ($474,876 - $413,523). However, the $25,000 would add back a 4% compounding return into the account over the 15 years of $8,286 as the loan is paid back. This lessens the difference to $53,027 ($61,353 - $8,286).

Adding real life complexity to the example
That was a very simplified example since the 4% loan payments would actually be added back into the same investment split that the new contributions are distributed across - bonds, stocks, etc. So, if the account is earning a 6% average return from the current investment split, then each payment would compound at this 6% rate through the remaining years. This would lessen the $53,027 difference. Another complexity is the 4% loan is paid back with after tax dollars. Since the combined tax rate is 30%, then it takes $1.30 of before tax funds for every $1.00 paid toward the loan. Since the monthly payment on the 4% $25,000 loan is $184.92, then approximately $55 is paid each month in taxes (185 dollars x 30 cents taxes on each dollar equates to $55 in taxes). If there was no loan, then this $55 could have been invested monthly into the tax deferred account at the average 6% rate to earn $15,995 after 15 years. This is an added loss on top of the $53,027 difference calculated earlier.

Summary
You need to see a qualified financial advisor to look at your particular situation. Information provided above are hypothetical and not meant to be financial advice for any specific situation. However, as you can see, there are many variables that could affect the calculations. But, in all cases you end up with less in your tax deferred account over the long term by borrowing funds that by not borrowing. Again, there are situations where loans may make sense, but you need to be aware of the long term consequences of missing out on compounding over time for the funds borrowed from the tax deferred account. A financial advisor is usually going to be much cheaper than the amount of money you may lose over time by borrowing.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -

Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted: Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.

Sphere: Related Content

Part 3: Understanding Inflation – The dollar to gold price relationship

Overview
This is a series of articles intended to help you understand how inflation can erode your long term investments and how you should counter those effects in your investment strategy. The first article provided a definition of inflation and showed the effect it has on reducing the value of a dollar over time. Last week’s article discussed the importance of investing in assets that grow faster over time than the rate of inflation. This article will discuss the relationship between the value of the dollar and prices of high demand commodities such as gold during times of inflation.

Valuing the dollar
Normally the dollar is worth more or worth less based on the demand for U.S. goods, services, and assets/products. If foreign investors buy lots U.S. items such as real estate, treasury bonds, stocks, or other, then they must first convert their currency into dollars in order to pay for the purchase. When there are many foreign investors converting to dollars, then the demand for dollars is high and the value of the dollar rises. When demand is down, then the dollar is worth less.

A crude analogy to illustrated to change in value of the dollar
Assume there is a small town of 5,000 people in the middle to high income bracket that all live in apartments due to lack of available land for building homes. Then assume one home is finally built in the town and it is in very high demand. Would it be unreasonable for the asking price on the home to be at least 2 or 3 times as much as for a similar home in a large town that has plenty of housing? Could the price even go as high as 10 times as much or more? Well this is a crude example of how the value of the dollar also goes up when there are fewer dollars available to meet a rising demand by foreign investors wanting to purchase our treasuries, stocks, real estate, etc. Similarly, when there are many more dollars available than demand, then the value of the dollar declines – it is easy to find dollars to convert from their currency. In those times, foreign investors are not seeking to buy as many our things so there is less demand for dollars to convert with.

The current world-wide demand for dollars
With the world-wide financial crisis hitting most foreign countries harder than the U.S., investors in those countries want to buy U.S. issued securities such as treasuries that are backed by the full faith of the U.S. government. Since we have the largest economy in the world, foreign investors feel U.S. securities are the safest available, at least they perceive them more safe than investing in their own country. That is why the dollar has soared in value recently with so many foreign investors seeking these perceived safer investments that must be purchased with U.S. dollars.

Relating gold to the dollar to inflation
Currently, there is also a demand for gold since most investors around the world view it almost as a standard currency that is valued by everyone. That gives it a large base of investors that keep the price high, especially in times of high uncertainty such as the world is currently experiencing.

In terms of the dollar, you need to realize part of the price of gold rising can be attributed to times when the value of the dollar decreases. In those normal times, it is not so much that gold has risen in price, but that it takes more dollars to buy the same amount of gold. As an example, assume you can buy gold for $1,000 per oz. Later, the value of the dollar decreases by 10% to only be worth 90 cent when compared to what it was worth when purchasing $1,000 oz worth of gold. In this case, you would need to have $1,111 to buy the same oz of gold under the current lower valued dollar. This is derived by taking the $1,000 originally paid divided by 90cents for each lower value dollar meaning you will pay $1,111 using these lower value dollars for the same ounce of gold. So, it isn’t that gold has risen, but instead, gold has stayed the same and the value of each dollar to buy that gold has gone down. This is a time of inflation when the value of the dollar goes down, which is why prices paid for many things seem like they are going up

Relating gold to the dollar to deflation
This also works in the opposite. If over time the value of the dollar had instead increased by 10%, then each new dollar would be worth $1.10 of the older dollars. In that case, we take the original dollar paid $1,000 oz of gold and divide by the new $1.10 value dollar to only pay $909 per ounce of the same gold. In this case it looks like deflation since the price has decreased over time. This would also be true of many other items when the dollar increases in value as we are currently seeing.

Amplifying my point about the price of gold during inflation and deflation
An interesting observation I’ve made recently is in times of very high uncertainty, as we have around the world today, there is the added demand for gold that is also causing the price to increase on top of whatever the value of the dollar does. If the value of the dollar increases, as it has recently due to the high demand for our treasuries, gold has still increased due to high demand by investors around the world. So you can’t always only count on the straight mathematical price model I used above to calculate the price of gold during inflation and deflation.

Summary
Notice that many commodities follow a similar pattern during inflation and deflation where their prices move in the opposite direction of the value of the dollar, under normal market conditions. As the dollar rises, it takes less dollars to buy the same commodity like oil (affecting the price you pay per gallon for gas at the pump), silver, gold, etc. As dollars fall, it takes more dollars to buy the same items. Just a general rule to think about when investing – keep a close eye on the value of the dollar and world demand trends for the dollar (rising demand or decreasing demand).

Accredited sophisticated investors are very mindful of such trends before making investment decisions. Don’t let them take advantage of your fear when you sell or buy at the wrong time when they are doing the opposite. Continue educating yourself about the investments being considered and all factors that affect those investments.

I hope this article helps you to not just look at the price of gold or other commodities by itself. Consider the valuation of the dollar, world demand trends for both the dollar and the commodity being considered, etc. Look for patterns and relationships. Understand those well before moving forward. Be an educated investor and you will be way ahead of the ordinary investor who wants to “get in before it is too late” or “get out since it is going to crash”. Those are opportunistic times for the educated investor to do the opposite of the crowd.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -

Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13

- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/

Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Part 2: Understanding Inflation – choosing the right investments during inflation

Overview
This is a series of articles intended to help you understand how inflation can erode your long term investments and how you should counter those effects in your investment strategy. In last week’s article, I provided a definition of inflation and showed the effect it has on reducing the value of a dollar over time. This week I want to show the importance of investing in assets that grow faster over time than the rate of inflation. Sophisticated investors know they must increase the value of their portfolio at a higher rate than inflation in order to grow their wealth. Any growth rate lower than inflation (such as the interest rate paid on most savings accounts) would still erode the value of the investment portfolio over time. Lets look closer at this balance of growth against inflation.

Overcoming the effect of inflation
As stated above, there are two opposite forces that affect what your long term investment portfolio will end up accumulating: inflation and rate of growth. Any long term investment strategy must consider the effect of both and incorporate a plan for accumulating assets that will increase in value faster than the rate of inflation. To do this, many investors seek assets that have limited quantity such as rare high grade coins, rare art, gold, desirable real estate. Over time, the scarcity of the asset will make them harder to buy so the price usually goes up. In addition, accredited investors have access to other investments that have high risk of loss, but demand high rates of return such as participation in a private placement, special hedge/leveraged funds, providing seed capital for a new or young business/product/service, etc. These investments each carry different levels of risk and expected returns. All of these factors need to be incorporated into a long term investment strategy/plan.

You must have an investment strategy/plan
An investment strategy must have set investing rules and boundaries you will maintain no matter what. Consistently applying a strategy over time will take out emotional decisions that usually go against what needs to be done during times of uncertainty. Your strategy should incorporate your end goal, how long you plan to invest, and what you are going to invest in to get there. You can make improvements in your plan, but only change one thing at a time - don’t make another change until enough time has past to confirm if the change worked or should be reversed. Continuing this refinement process will go a long way toward getting you to your end goal and help refine your investing skills.

Research historical returns on your prospective investment
Keep in mind a general estimate of inflation is about 3% to 4% per year. You want to make sure your entire portfolio gets at least 4% over time just to keep up the same real overall value. Ideally, your return should consistently be higher than the historical rate of inflation to increase your buying power by the time you retire. Maximizing contributions into tax free accounts is one of the best ways to increase compounding of your long term investments by deferring taxes on the gains.

We are currently in a very scary down market. Seems like everything has dropped considerably including “blue chip” stocks, real estate, minerals such as oil and gas, etc. However, if this down turn is like so many others in the past, then these assets will again come into favor with increasing prices along historical averages. Research the historical average of assets you want to learn about investing in. Within those assets, learn what makes some more desirable than others (for example, different locations of real estate have dramatically different historical returns). Chose those assets that provide the historical returns you need to reach your goal as part of your strategy. Diversify enough to decrease the risk of loss to your portfolio, but not too much as to dilute any gains made by each asset. Periodically shift funds from one asset to another to rebalance your portfolio.

Putting it together
In a previous article on compounding interest, I showed how a $1,000 investment in a tax free compounding interest account after 40 years can provide an additional 122% return at 4% interest rate ($2,224 account total minus the $1,000 invested, then divide that difference of $1,224 by $1,000 to get 122%), 394% at 8% ($4,940 balance - $1,000, then divide by $1,000), and 5,759% at 16% ($576,923 balance - $1,000, then divide by $1,000).

In last week’s article, I showed how inflation does the opposite by reducing the buying power of $1,000 over 40 years to only $201 for a consistent 4% rate of inflation. This is a 80% reduction ($1,000 - $201, then divide by $1,000) in buying power. In other words, $201 is only 20% of the value the initial $1,000 after 40 years. In reverse, to maintain a $1,000 buying power after 40 years you would have needed to initially invest $5,000 the first year ($5,000 x 20% after 40 years leaves $1,000). Starting with five times the initial $1,000 investment defeats the purpose of keeping that initial $1,000 investment at the same buying power after 40 years. Therefore, we need to invest the $1,000 at a compounding rate that negates the devaluing rate from inflation. Since we need the initial $1,000 invested to act like $5,0000, we must invest at an annual rate that generates 400% return after 40 years ($5,000 - $1,000 invested means we need to generate the equivalent of $4,000 additional dollars in the beginning over the 40 years or 400%). From the previous paragraph, we need an annual tax free compounding interest rate of 8%. Interestingly enough, this is the historical growth rate you hear that the stock market has grown. That is why many financial advisors recommend investing in a stock index (S&P 5000) to keep up with inflation. Of course, these days that seems like bad advice with the significant drop stocks have taken in only a few months. But, if you believe history will repeat itself again, then you should still include stocks in your investment strategy to assure gains keep up with inflation. As mentioned earlier, there are many other investments that historically have met or beat the historical rate of inflation such as choice real estate, private placements,

Summary
A small increase in inflation (from 2 to 4% or 4 to 8%) can cause significant impact on your future ability to buy anything with the same dollar. Your investment strategy/plan must include investing in assets that increase with inflation can give you the edge needed to help maintain your lifestyle and why sophisticated accredited investors work hard to identify and acquire such assets in their portfolio as part of their long term investment strategy.

Next article in this series
Next week's article covers the relationship between the price of gold and value of the dollar during times of inflation and deflation.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -

Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://ino.directtrack.com/42/3400/195/

- - - - - - - - - -
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors. This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

Part 1: Understanding Inflation and how it affects you

Overview
You hear a lot about inflation (rising prices) and deflation (decreasing prices) these days. Most people feel we are currently in a period of deflation, but worry that the huge stimulus plan and associated funds from the government will force the country into a period of very high inflation. What does this mean to you and how will it affect your investment strategy?

What is inflation?
In general, when prices of most things in the economy continue to rise over time, that is considered inflation (read what Wikipedia says about inflation). What this means over time is that the value of a single dollar will buy less now than it did at some time in the past. Small to moderate Inflation is usually good for an economy since companies usually pay higher wages (give employees raises periodically) which means more money to spend. Other people who are self employed can make more money every year by raising prices. As long as income continues to rise as inflation rises, then the economy is able to expand and people are still able to buy the things they need and want.

However, when inflation rises too fast, then wages/income may not be able to keep up. In that situation, people are not able to keep up with buying the same things they used to. The standard of living goes down and the economy gets out of balance. Something has to give. Usually the government steps in and raises interest rates to take money out of the economy in an attempt to bring high inflation down to the small to moderate level desired.

What does inflation mean to you?
Simply, it means that you can’t buy as much today as you could years ago with the same dollar. In my own case, I can remember as a kid paying 10c for a candy bar and paying 45c for a movie ticket. When candy went to 25c, I thought that was crazy and had a hard time paying that much in my mind. Now candy bars are well over $1 and movie tickets are around $10! I went from being able to go to the movie and get five candy bars (not that I EVER would have done such a terrible thing as a little sweet tooth boy…ha) to today spending nearly $20 total for those things. You also know stories of how your parents paid some ridiculously low price of say $10,000 for their house and you are paying hundreds of thousands of dollars for a similar home. Gold used to be less than $50 an ounce in the early 70s and now is nearly $1,000 per ounce. I could go on and on, but you get the point.

Look at what inflation does over time to the dollar
Lets look at how inflation devalues the dollar over time. In the table below, you can look at different rates of inflation and what a $1,000 today will be worth at each 5 year period going into the future.

Year	2%	4%	8%	16%
00	1,000	1,000	1,000	1,000
05	905	818	669	447
10	819	670	448	200
15	741	548	300	89
20	670	449	201	40
25	606	367	134	18
30	549	301	90	8
35	496	246	60	4
40	449	201	40	2

Understanding the numbers
In the previous four part series I just completed on understanding compounding interest, I purposely chose interest rates of 2, 4, 8, and 16 percent since each is double the rate of the previous number, yet the resulting compounding effect is much more than double those of the lower rate. In this series of articles on inflation, the same is true in the opposite as inflation compounds its effect by devaluing the dollar over time much more than twice the effect of the lower inflation rate. You can see that $1,000 today will be worth only $449 at 2% inflation, $201 at 4%, $40 at 8%, and only $2 at 16%. Just for fun, at 32% $1,000 today will only be worth $0.002, not even a penny. It would take $5,000 today to be worth 1 cent in 40 years!!!! Hopefully we will never have 40 years of high inflation.

Think about countries you do hear about that have had very high rates of inflation. In that situation, you MUST have some equivalent means of increasing your income at the same or higher rate than inflation or there would be no hope of maintaining your standard of living. Also, that assumes everyone and all things increase at the same rate of inflation to keep the economy in balance. That is extremely, if not impossible to do over a long period of time.

Summary
You can see that a small increase in inflation (from 2 to 4% or 4 to 8%) can cause significant impact on your future ability to buy anything with the same dollar. In next week's article, I will show the same thing in a different way by looking at how investing in an asset that increases with inflation can give you the edge needed to help maintain your lifestyle and why sophisticated accredited investors work hard to identify and acquire such assets in their portfolio as part of their long term investment strategy.

Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -

Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8

INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://ino.directtrack.com/42/3400/195/

- - - - - - - - - -
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.

Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.

This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/.

Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content