Part I of a three part discussion
Evaporation? The last two plus years have been surreal to Grandma. She has seen a lot and lived to tell about it financially, but this time is different. The first gas lines in 1974 and Grandpa’s instructions not to cash his paycheck really got her attention.
She was fresh out of college, teaching school then, without a care in the world. Grandma loved every minute of playing “grown-up”. Promise number one to her adult self was: “In order to survive financially, you must pay attention to the world around you.” And so it was she was soon married to newspapers, TV news, financial publications, and numerous investment letters. Grandma has been paying close attention ever since.
Blissfully teaching school immediately came to a screeching halt. Into the “rat race” she leaped in order to gain three times her former salary. Meanwhile, the stock market heaved a big downward sigh as first President Nixon put into place a ‘voluntary’ wage and price freeze.
Heady inflation followed, and President Carter came on the radio one afternoon and begged the country to stop using credit cards. One bank in Grandma’s area was charging 24% interest to buy a home. As usual, the ever vigilant Grandma had the radio on. Her office staff and she were speechless as they listened to Carter’s plea.
Things began turning around under President Reagan. Again the radio was on the afternoon in August of 1981 when the stock market took off like a rocket. The announcers were giddy with joy as they relayed the news. Grandma was vacationing that day, and always remembers how the lunch patrons in the golf course club house broke into loud applause. We were ready for that day.
The day we weren’t ready for was that Monday afternoon in October of 1987. Grandma was literally ‘sick to her stomach’ as she watched her portfolio and the college trust funds for her girls lose almost half their value in a matter of hours. Life went on though, and we all survived.
We will physically survive this time too, but this a cycle that is distinctly different than the ones mentioned above including the crash of the NASDAQ in 2000.
Evaporation of your wealth doesn’t really happen, it just feels that way. In reality, wealth just leaves you in a transfer to its new owner. If your home (wealth) has been through foreclosure, your home (wealth) has been transferred to the lender or to a buyer at the auction. When people lose money as stocks drop in price, somebody else made money by selling short. Transferred again.
Grandma really thinks this time will be different, not that wealth transfer hasn’t already occurred. To be sure, the transfer has begun and will continue.
The key is learning to recognize what’s happening so you can protect your wealth.
Next….. Part II: How we got where we are today, the short-term view.