We have all been there. We vow to cut back on spending and save a certain amount of money, only to buy a few big ticket items that we vainly try to rationalize. The purchase might even have made sense at the time, but when we review our finances, our savings goals are far out of sight! Here are two simple questions to ask yourself – before you make a big ticket purchase.
1: Do I Need It?
It seems obvious: don’t buy things you don’t need! Of course, this is also the hardest question to ask and to answer honestly. A new car? If your current one is doing fine, and you just wanted that new car smell and extra features, then no. A new TV? Already have one, I just wanted the latest high-resolution screen.
If you answer ‘No’ to the first question, then the process is already over. Move on and try to forget about it. But you might be asking, “So I can never buy anything I don’t need because it isn’t financially the most prudent thing to do? Haven’t you ever heard of something called enjoying life?”
People all over the internet have been re-posting and talking about a recent analysis done by The Telegraph that found Lego® sets have been a better investment over the past 10 years than savings accounts, stock and even gold! So should savers start hoarding the Danish construction toys to preserve their wealth, instead of gold coins? We will explore this question as well as a more interesting point the article indirectly makes about fiat money and wealth preservation.
Plastic Bricks vs. Gold Bricks
To be clear, the article notes that when talking about Lego sets over the past 15 years increasing an average of 12% per year, they are talking about sets in pristine condition, almost exclusively those bought as collector’s items and kept unopened in the original box.
The numbers come from their analysis of data from Lego price-tracking website brickpicker.com, which in turn gets its data from ebay sales of Lego sets. I have not crunched any numbers myself on this, but I have no reason to disbelieve their analysis. Further, 12% per year is a very impressive number, so are Legos going to become the new retirement savings vehicle?
Getting bored over the holiday break, or need to kill time waiting for the New Year to arrive? Board games provide a great diversion but if you are like me, you find some of the classic board games to be a bit dull. Fortunately, I have found a couple of games that are not only loads of fun to play, but also offer some great economic lessons.
When considering board games and economic you might think of Monopoly, since it deals in money, trading, mortgages and rent. But Monopoly is one of the worst games there is, both in terms of game design and the economic concepts taught.
Why Everyone Hates Monopoly
First, Monopoly is hated by many people who are regular game players. A popular board game ranking site, boardgamegeek.com, ranks Monopoly at 11,689 on its list, a few places behind games like Old Maid. Why? The game follows a tired sequence that gamers like to call the ‘roll your dice, move your mice’ mechanic, so most players are bored while it is not their turn. It also is a game where once one person gets the upper hand, everyone else must play out the game in despair with little hope of winning.
More importantly, Monopoly teaches bad economic concepts. Unlike real life, there are rarely any situations where people are forced to pay someone for a service they do not want or need. Yes, some real estate or hotels may be more expensive than we would like, but there are always alternatives, even more so now with the rise of services like Airbnb. Also, contrary to popular belief, while monopolies are a theoretical economic possibility, there have never been any monopolies in history that have actually succeeded.
The Federal Reserve concluded its meeting this past Wednesday, choosing to increase their interest rate target by a quarter of a percentage point. The move was expected by the market because the Fed had been signaling it was planning on raising rates before the end of the year. Many market participants are cheering the move, saying it shows the Fed has confidence in the economic recovery and that things will be returning to normal. However, this is quite unlikely for a number of reasons that will be discussed below.
First the facts. The Federal Reserve increased the federal funds range from 0% to 0.25% (where it had been since December of 2008), to a higher range of 0.25% to 0.50%: essentially a quarter point increase. Yellen noted that the rate increase was due to the Fed’s confidence in the U.S. economy. The Fed’s projections put interest rates at a median 1.375% by the end of 2016, implying gradual rate hikes through next year.
I previously wrote that I did not expect the Fed to raise rates this year. So yes, I was off in this prediction since the Fed did sneak in a small increase right before year end! My logic was that the Fed currently had more to lose than to gain with a rate increase, given the risk of increasing rates into a recession or pricking the stock and bond bubbles. Conversely, the Fed didn’t face much pressure to increase rates, given that inflation is currently low, and if inflation did increase, it could be blamed on other factors.
I still think that is the case, which is why the Fed’s first increase is a very small one. What may have prompted the increase could be two factors. First, since the Fed has talked about (and repeatedly delayed) increases, they may have felt it necessary to finally have one, lest they lose all credibility. It was getting to the point that the market expected it so much, that if they backed out, it could have signaled that the Fed was not at all confident in the U.S. recovery, which might have sent panic through the economy.
First there was Black Friday, then Cyber Monday, and now there is Small Business Saturday, a day intended to promote shopping at small local businesses for the holiday season as a way to support their livelihood, enhance the local community and even help the environment. While certainly well-intentioned, the movement is misguided and can actually end up hurting more than it helps.
Ironically, the term Small Business Saturday was conceived and promoted by the financial services giant American Express, which also holds a trademark on the term. Nevertheless, the idea – to encourage consumers to shop at small local brick-and-mortar retail shops – has been around for awhile.
The claimed benefits are numerous, but they mostly center around the supposed idea of ‘keeping the money in the local community,’ which in turn supports those businesses, creates local jobs and even has a multiplier effect as the money spent locally circulates around the community more than money that is sent off to say, Amazon.com.
Like many economic fallacies, there is always a grain of truth that makes it potent and appealing to the logic of its believers. It is somewhat true that if you buy a television set online, that money is sent to the online retailer, who is probably not based in your local community. Whereas if you buy the same set from Bob’s Great TVs down the street, Bob has the money in hand which he may very well spend at the local car repair shop that you own. A much better situation, right?
It has been a disappointing year for gold investors in 2015 so far with gold gradually declining since the beginning of the year. Investors may be getting sick of the yellow stuff after the 2014 performance of gold going nowhere, and then the drop in 2013. However, it is during such times that it is important to review the reasons for owning gold and keep its performance in perspective. In this article, we will review the performance of gold, look ahead at the financial landscape, and review whether holding gold still makes sense.
Gold Continues to Outshine, Despite Short-Term Performance
Gold is currently down around 10% year-to-date, bringing its one-year performance down to about the same at -11%. The current price of $1,070 hasn’t been seen since November of 2009. The five-year performance of gold is now down around 21%. This comes after 2014, where gold was essentially flat for the year, and 2013 where gold was down around 28% after correcting from its big run-up to $1,900 an ounce.
Periods of poor performance are certainly painful, and years of poor performance can seem excruciating in the short-term. However, gold as an asset must always be viewed in longer time frames and should always be compared to the other options. From 2001 through 2012, gold had positive gains, with eight of those years showing double-digit gains.
The ten-year performance of gold is up 116% and the fifteen-year performance is a positive 303%, compared to the S&P 500 which is up only 65% and 55% respectively! Gold is clearly holding its own, considering it should be an underperformer because it doesn’t represent a business or return a cash flow.