Investing For The Breaking Of Impossible Promises

By: Daniel Amerman | Thu, Sep 23, 2010
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(The video below takes about two minutes to view, the transcript can be read in about a minute.)

I'm 50 years old, and I've known for a long time that Social Security and Medicare won't meet their promises to me. We all know it. That's why we're told to load up our retirement accounts with stocks.

Stock Return Components

The current dividend ratio of the S&P 500 is about 2%. We're hoping for 8% or better annual returns, and the difference is that we're counting on share prices increasing because corporate profits are increasing. Generally, most of the value of a stock isn't based on profits today, but this expected growth in future earnings.

Composition of US Economy

But, the problem is the private economy isn't growing, but rather it's shrinking rapidly as the government's share of the economy grows. During the last two years the private economy shrank by 1.3 trillion while the government grew by $1 trillion, as the government share of the overall economy went from 35% to 43%.

Gov't vs Private % of US Economy

We have a government that made impossible promises. Trying to keep these promises means the government that takes an ever greater share of the economy. Which arguably collapses the current value of stocks because the government takes all the growth and then some.

Resulting Stock Return Components

So the irony is that we have many millions of people investing everything they have to survive the breaking of impossible government promises, by buying investments that radically increase their risk exposure to the breaking of impossible government promises.

Does that make sense? Or should we be doing just the opposite and seeking out strategies where the worse the situation gets, the better our investment strategy performs? So we seek financial security by offsetting our risks instead of doubling them up?


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Daniel Amerman

Author: Daniel Amerman

Daniel R. Amerman, CFA

Dan Amerman

Daniel R. Amerman is a financial futurist, author, speaker, and consultant with over 20 years of financial industry experience. He is a Chartered Financial Analyst (CFA), and holds MBA and BSBA degrees in Finance from the University of Missouri. He has spent seven years developing a large, unique and intertwined body of work, that is devoted to using the foundation principles of economics and finance to try to understand the retirement of the Baby Boom from the perspective of the people who will be paying for it.

Since 1990, Mr. Amerman has provided specialized quantitative consulting services to financial institutions, with a particular emphasis on structured finance. Previously, Mr. Amerman was vice president of an institutional investment bank, with responsibilities including research, synthetic securities, and capital market originations.

Two of Mr. Amerman's previous books on finance were published by major business publishers. "COLLATERALIZED MORTGAGE OBLIGATIONS, Unlock The Secrets Of Mortgage Derivatives", was published by McGraw-Hill in 1995. Mr. Amerman is also the author of "MORTGAGE SECURITIES: The High-Yield Alternative To CDs, The Low-Risk Alternative To Stocks", which was published by Probus Publishing (now a McGraw-Hill subsidiary) in 1993. Advertised by the publisher as a professional "bestseller" for four quarters, an Asian edition was sold as well.

Mr. Amerman has spoken at numerous professional seminars and conferences nationwide, for a variety of sponsors including New York University, the Institute for International Research, and many others. After the publication of his prior books, he acted as keynote speaker at a number of banking related conferences over the next several years.

This article contains the ideas and opinions of the author. It is a conceptual exploration of general economic principles, and how people may - or may not - interact in the future. As with any discussion of the future, there cannot be any absolute certainty. What this article does not contain is specific investment, legal or any other form of professional advice. If specific advice is needed, it should be sought from an appropriate professional. Any liability, responsibility or warranty for the results of the application of principles contained in the website, pamphlets, videos, books and other products, either directly or indirectly, are expressly disclaimed by the author.

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