Tuesday, January 8, 2013

Protecting Your Savings

Harry Hopper enjoyed his home and like many people, his home was his financial security. The year was 2006, and for five years, Harry had watched the huge run up in home sales prices, a run up that seemingly had no end.

And all around Harry, working people like himself for the first time in their lives were making big money as real estate mortgages had very low interest rates and everyone seemed to be able to qualify for them. They used those mortgages to refinance their homes, and in many cases, to buy not just one more home, but two, three and even four homes. 

They would then "flip" those homes, meaning they quickly resold them to other buyers looking to also flip them, each buyer pocketing a profit on the fast rising prices. Meanwhile those mortgages were packaged and sold to investors all over the world, many of them buying a tiny piece of those mortgages with the money in their retirement accounts or their life savings.

What could possibly go wrong? Everyone was making money and nearly all the "experts," politicians and pundits were predicting even higher sales prices and bigger money to be made. But Harry refused to participate. "Home prices can't keep rising like this," he said. "For at those prices who can afford to buy and live in these homes? And what happens if prices drop sharply?" 

But no-one listened to Harry for they knew he was a fool. Meanwhile, Harry did just the opposite of what others were doing. He paid down his mortgage and in his tiny two person jewelry store, he kept his inventory low so that if financial catastrophe hit, he wouldn't be in way over his head.

But the financial run up in real estate prices continued. Then suddenly it stopped. And as panic set in prices quickly fell into a free-fall and with it, in 2008 the economies of the entire industrialized world began to collapse, for they had been based largely upon the financing of the real estate price run up and all the consumer spending that accompanied it.

In desperation, governments bailed out the giant banks that wrote these terrible mortgages, bailed out government institutions that initially bought them from the banks and bailed out brokers such as the Wall Street firms that sold them to investors.

But they let the overextended homeowners lose their homes to foreclosure. New construction largely stopped and vast numbers of people were thrown out of work, which is where things stand in 2013.

But Harry is in solid financial position because he had not followed the crowd and gotten caught up in their greed. "This wild real estate speculation made no sense, other than about greed at every level," he said. "That many millions of people were caught up in it or that 'experts,' politicians and pundits were encouraging it didn't make it any more sensible.

"My advice to people who want to protect their savings is to avoid rampant speculation and instead find ways to invest in themselves. If you own a home, live in it, don't use it as an ATM machine to get more cash.

"If you have a business as I do," he continued, "And it is a well run business, invest some of your profits back into that business and grow it. And don't get caught up in mass psychology, for that psychology confuses its emotions for logic and it is often wrong.

Finally, believe in yourself. No-one understands your needs or your capabilities as well as you do, nor is anyone else as determined as you are to do the right things for your family's well-being."


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