Mutual Funds and Inflation With James Dale Davidson



David Scranton: Welcome back to The Income Generation, the show where we strive each week to bring you answers for that period in your life when you’re either in or approaching retirement. Each week I help you discover useful information not covered in other shows, especially those shows filled with hype, throwing information at you at a frantic pace. My guests and I enjoy not having our thoughts minimized to a soundbite and most importantly, you have the benefit of deeper discussions on all those critical financial topics that you face. I’m David Scranton, your host. I enjoy this opportunity each and every Sunday to share with you insights and expertise that I use in my own investment management practice. Insights that you can digest as mental nourishment and insights you can put to work in your own finances. Overall, my goal is to use this hour together each Sunday to share seldom heard ideas for household finances, smart concepts for you in your retirement investment plan. American Psychologist, Abraham Maslow once said: “the story of the human race is the story of men and women selling themselves short”. The Income Generation airs each week to provide you with knowledge so you don’t sell yourself short. We’re going to be talking a lot today about being all you can be and not relying too much on other entities. There is nothing more empowering than feeling self-sufficient but you should also know the limitations as Socrates said: “know thyself”. There is a fine balance between knowing yourself and knowing your limitations. When you need it, seek help but learn enough so you don’t just blindly follow advice from others. It always helps to have a good understanding before talking to a specialist in any category. I’ve personally gotten a lot from the great thinkers through the generations. In fact, my guest today is widely viewed as a current day great thinker. He has a broad following and has been called upon by world leaders for his input on many of the topics that we’ll be discussing today. We again quote Maslow: “if you plan on being anything less than you are capable of being, you will probably be unhappy all the days of your life”. I’m sure you’ll agree that this is true, that’s why I’m sure we’re all in for an hour that may serve to increase your happiness even if just a bit.

You know there was a time when Americans had no choice but to rely on themselves but America has always been a country that’s so rich in freedom and resources and information, that finding your own way was possible even when it wasn’t easy. It became part of our values and even celebrated by artists and writers such as Ralph Waldo Emerson. That self-sufficiency included building family and friends for support or perhaps having a trade or working farm that could be handed down through the generations or building a home for shelter and warmth and making sure you had food to get yourself through the winter. The government was simply not there to bail you out if you failed but instead to create a set of laws it enforced in order to help you succeed, to succeed and retain which you work for. Later as the country grew and became richer because of all the individual successes and a small level of protection was then provided to some, by churches and benevolent association such as the Elks and the Freemasons. Over time, a broader and broader more institutionalized safety net had been created. The best known, of course, is Social Security. Social Security is seen as a positive for society but Americans may have become too reliant on this retirement supplement. Another safety net were defined benefit pension plans funded by employers. These became common and grew as the labor movement grew. Today, companies that offer traditional pensions have become fewer and fewer each year. As we talk about in a few minutes these plans, although a great idea, may not be without risks to those who rely upon them. The safety net also includes employee funded 401K.’s and 43B. These are primarily employee funded sometimes with a company match but always with a tax benefit for each. They rely heavily on investment options that are essentially mutual funds. As with all other safety net options that have been created over time, mutual funds were once an answer to a difficult problem. Mutual funds are now seen by many as fraught with problems. This installment of The Income Generation will spend a lot of time discussing these problems today.

So as we’ve been encouraged over recent years to each become more and more of a do-it-yourself-er and put more of the burden on our shoulders, discount brokerage firms have also risen. Firms like E-trade, T.D. Ameritrade, and Schwab and so on. These firms cut trading costs but, as we discover later, doing so may just be at a price. Subsequently, many newsletters have popped up or expanded their customer base to help the do-it-yourself investor as well. Perhaps you read Kiplinger’s or Motley Fool or one of the others. Now I’m not going to pass judgment today but a bit later we’ll talk about how to discern investment advice from what I like to call Iinvestotainment. Then we’re going to immerse ourselves for the next sixty minutes with the idea of balancing self-reliance with help from others. We’ll look at do’s and don’ts, trouble spots and safety.

We’ll be welcoming to The Income Generation studio, my guest, James Dale Davidson. Davidson is known as a Washington insider with the common man’s interests at heart. My favorite quote of James is right in the line with today’s show: “When you subsidize poverty and failure you get more of both”. Davidson’s bestselling books include: ‘Blood In The Streets’ and ‘The Great Reckoning’. He also co-wrote: ‘The Sovereign Individual’ and although that was 17 years ago, it has become more relevant to me with each passing year. In fact, he just about to publish a new book that he’s been a bit more secretive about than most authors. I believe I’ll be able to get him to speak a little bit more about it than he has recently. Marti Johnson will also be here. She’s going to share a special news and views report which takes a look at the current state of our financial safety net, how we got to where we are today and what to expect in the years to come. But first in the Market Breakdown, I’ll be talking about an expensive problem, mutual funds. A problem that has crept into the safety net in American homes. I think it will surprise most of you because mutual funds have become a staple, they become as American as apple pie. But as with many things that start out with a good purpose, over time problems create them or things just become outdated and better replacement become available. It will all make sense what we discuss this in depth, coming up next in the Market Breakdown on The Income Generation.

In today’s Market Breakdown, I want to focus entirely on mutual funds. Despite the popularity most investors don’t actually know a lot about mutual funds or how they work. You may know what’s good about them but you know little about their drawbacks or limitations. As Clint Eastwood might say: “a man’s got to know his limitations”. Mutual funds have aspects that are good, bad and ugly so you need to be aware of all three. The good, is that even if you put as little as a dollar into a mutual fund you are buying little bits and pieces in a bunch of different companies so mutual funds give you a really simple way to diversify your investments with a small amount of money. But as with most things in life, simplicity comes at a cost. An advisor friend of mine actually talks about what he calls ‘the disease of ease’ when he’s referring to mutual funds so unfortunately that’s pretty much where the good ends. Now let’s talk about the bad and the ugly. As I’ve already mentioned the popularity of mutual funds coincided with the rise of 401K.’s, primarily in the 1980’s and also the1990’s. People got addicted to them even more so in the second decade the 1990’s because we were still in the best long term bull market our country has ever seen. Back then, it seemed you couldn’t go wrong with mutual funds. Suddenly, you didn’t have to worry about your employer canceling your pension plan or Social Security running out of money. Your retirement plan was still rock solid and your money was growing because of mutual funds. You could count on that, or so it seemed. And they were so simple you can even take a do-it-yourself approach. Just go to one of the mutual fund rating services and follow its advice. If used one with a star rating system you didn’t even have to read the report. Just pick the mutual fund with a five star rating and buy it, what could be simpler than that? Of course that sense of security some people may have felt about mutual funds disappearing with the stock market crash when the technology bubble burst between 2000 and 2003. The long term bear market cycle was over and a new long term secular bear market cycle was just beginning. Suddenly, nothing tied to the stock market seemed like such a sure thing, you might even say that 2000 spell the end of a stock market fund era. Ever since mutual fund families have endured largely because of inflows to bond funds that have offset the outflows from stock mutual funds. From 2000 until very recently with a market not doing as well and interest rates falling, an investor could simply call their mutual fund family and say: ‘hey sell my stocks and buy a bond fund’ and that worked great. The problem now is that with interest rates at a 34 year low – and let’s face it we’ve just ended a 34 year period of declining interest rate since 1981 – that rates, at this point, probably aren’t going to go any lower. In fact, I don’t believe rates are going to skyrocket anytime soon but with quantitative easing finished and the Fed now gradually increasing short term rates or, if you can believe what they’re saying, they’re going to continue to do. The tailwind that bonds have enjoyed for all these years has stalled, at the very least. And if interest rates start rising steadily, it could change course and become a headwind. That tailwind is stopped and at some point will become a headwind again. Why? Because everyone knows that there is an inverse relationship between bonds and interest rates; simply put when one goes up the other goes down. What that means for mutual fund families is that bond funds will no longer be able to take up the slack for stock funds. That’s something to think about, given that this long term bear market cycle still has at least another five years to go and most likely will include another major stock market drop. But without even considering any of that, mutual funds have other problems and limitations that can be extremely costly if you’re not aware of them. For example, one of the appeals of mutual funds for a lot of people is that they’re diversified. Diversification is a strategy that helps grant protection. But in truth, the only thing it may really be protecting is the fund manager from liability.

Think of it this way, most fund managers (at least stock fund managers) are evaluated based upon their performance compared to the S& P500 Index. Their goal is to match or beat it but there’s a reason they usually can’t. In fact, it’s the same reason that if you track the performance of the Dow Jones Industrial Average and the S& P500 you’ll see that they tend to follow each other for the most part. However the Dow Jones Industrial Average has only 30 stocks and the Standard & Poor 500 has 500 stocks. You see a statistician will tell you that once you get over 20 holdings in a portfolio you become, statistically speaking, as diversified as if you had 500. In a nutshell that’s why the Dow and the S&P tend to track each other and that’s why if you have 70 to 100 stocks in your portfolio you’re just tracking the market. That protects the mutual fund manager who’s holding those stocks because if your portfolio shrinks after all he can just say: ‘well you know it’s because the market overall is down not because of any bad choices on my part’.

Another potentially bad aspect of mutual funds relates to taxes. Without even realizing it you can incur what I call a Phantom Tax. Here’s an example, let’s say you buy a mutual fund today and the fund itself sells one of its stock tomorrow at a gain. You will automatically have to pay a capital gains income tax despite the fact that you were not in the fund while the gain on that stock was being made. And of course if you have a mutual fund now, you already know the manager and research team work on a fee basis. Most of the fees such as management fees, administrative fee 12B1 fees and so on, are transparent but others might take you by surprise. Do you know how much you’re paying in fees in your mutual funds? As I see it, the biggest mutual fund fee that no one talks about has to do with the fund manager’s ability to buy and sell in bulk. Now as you’re aware in most areas of commerce that usually constitutes getting a bargain because he can buy in quantity and sell in quantity but it doesn’t quite work that way when you’re talking about mutual funds. Imagine there’s a stock that the fund manager wants to sell for twenty five dollars a share but then because he’s selling so much of it those sales actually drive the price down to twenty four dollars and fifty cents. This makes the average sales price twenty four seventy five so the fund manager ends up selling at that lower average price in essence, losing one percent for his investors. But then it gets worse, because the fund manager ultimately has to reinvest that cash by buying another stock. Now let’s say that other stock happens to also be costing twenty five dollars a share. Now he’ll be driving up the average price and paying an extra one percent for it for, the same reason. Now, let’s assume the average mutual fund manager has a 100 percent turnover in a year; meaning that they sell on average, every holding and replace it once a year. So as they turn the portfolio over, in my example that represents an extra two percent hidden fee or drag that they now need to try to overcome to beat the Standard and Poor’s 500 index. And as I already pointed out, they already can’t beat it so ultimately this two percent drag ends up being another intangible cost which is even bigger than all of the tangible costs put together. In fact, the only choice the fund manager has for avoiding drag is to make the sales and purchases in small increments whether on the sell side or the upside so he or she does not affect the price while he’s buying or selling. But that’s where things get ugly because it means that he’s unable to buy and sell when he wants to or that he’s stuck holding money in cash for a period of time. And let’s face it, having uninvested money in a mutual fund is another drag because it’s not earning anything at today’s interest rates. This also happens to be when the fund manager has to deal with the whims of the average investor. Now this is potentially dangerous because the truth is, as much as it may hurt to hear it, that many people just aren’t hardwired to be good investors. That’s why the average investor is often accused of buying when the market is high after they’ve seen a big run up and they finally feel confident and then subsequent selling after the market’s been beaten up and they’re discouraged. They end up doing just the opposite of investing’s golden rule which is to, buy low and sell high. Unfortunately, that’s just human nature. Knowing this, the fund manager has to sell when the market is dropping in in order to come up with cash for redemptions. Also just like everyday people a lot of fund managers aren’t wired to be good investors either and even if they are they can often fall into the common habit of focusing on not losing rather than focusing on winning. Again, this is just human nature. For example, this is why quitting smoking is so difficult for so many people perhaps you can relate or know someone who could relate. They go around thinking all day long I can’t have a cigarette, I can’t have a cigarette, I can’t have a cigarette but that’s just like me telling you not to think about pink elephants. If you take that approach, a pink elephant is the only thing you’re going to think about. Though when a fund manager is focusing on trying to prevent losses, subconsciously they may be attracting more losses. Psychologists, in fact, refer to this as the Law of Attraction. In addition to all these issues, which are just by products of human nature in the way the financial markets work, there are certain mutual fund practices that investors need to be aware of in my opinion. You probably know that most mutual fund families have both well performing funds and poorly performing funds. Have you ever wondered why when mutual fund families touted a great track record you can’t seem to find the ones with bad track records? The reason is simple, the ones with the bad track records get folded into the ones with the good track records. They simply disappear and no longer exist. Now imagine if you could do that with your own money with the stocks that go down and just forget about it. Unfortunately, it doesn’t work that way. Then, there’s something called Front running; this is when they have a high performing fund and a low performing fund in the same family. The manager buy stocks in the high performing fund first and then in the low performing fund afterward. The purchase of the stocks in the low performing fund works to drive up the price of the shares in the high performing fund and make this one look even better so now if the bad fund is folded into the good fun well, that’s just icing on the cake.

Another common practice is called, window dressing. This is based on the fact that there is something to be said for keeping investors happy by having what we call, good looking stocks. So the fund manager tries to make the fund look good when he publishes a list of holdings at the end of each quarter. If a stock gets beaten up and gets a bad publicity in a quarter, the fund manager may not want to sell it while it’s down. But he does not want to call attention to it either so he window dresses his quarterly disclosure. That means, he sells the bad looking stock at the end of the quarter and replaces it with a good looking stock. But then on the first or second day of the new quarter he sells the good looking stock and revised the bad luck looking stock hoping it will rebound. The idea, is that he wants to present a portfolio at least that looks good, even if it only tracks the market or performs below the market Psychologically, it looks good to you as a client and you may be more inclined to be optimistic instead of disappointed and you may also be more inclined to keep your money with the fund and the fund manager or perhaps put even more money into the fund. Now, none of these practices are technically illegal and none of these drawbacks or limitations or the result of trickery or deception but they are definitely things that you should be aware of when weighing the popularity support for your mutual funds against other factors. You need to take into account not just the good. But the good the bad and the ugly.

Welcome back to The Income Generation. As promised we’re here today with great American thinker, James Dale Davidson. He is the author of ‘The Sovereign Individual’, Editor of ‘Strategic Investment Newsletter’, contributor to ‘The Financial Intelligence Report’ and also a founding director of Newsmax. James welcome to the show

James Dale Davidson: Glad to be with you.

David Scranton: Good. I’d like to hear from you for a moment about why you initially wrote the book and why the book seems even more relevant today than perhaps it was 17 years ago?

James Dale Davidson: Well, I think maybe today more of the things that we envisioned have come to pass and it’s easier for people to see that we knew what we were talking about or that we were thinking along the right lines. I wrote this book with Lord Rees Mogg, who is now deceased unfortunately. But we were trying to shed some forward vision on the way the world was destined to change and I thought that basically that the move toward micro processing was going to lead to micro production and the miniaturization of things rather than the mass production which was the characteristic of the twentieth century taken to its epitome  in China when everybody had a one size fit all clothing, not only policies but…

David Scranton: Wow

James Dale Davidson: you all had to wear mouth clothes and they had to be the same size and they were all manufactured in one size. They were like socks sometimes where they had one size fits all.

David Scranton: Remind of me of my days in Catholic high school I kind of felt that way. We were all dressed to look the same.

James Dale Davidson: Yes. But it didn’t survive the test of time because really people would prefer to have clothes that fit them. There’s a company now called the ‘Left Shoe Company’ that manufactures shoes specifically to your feet the way that the old fashioned boot makers in London used to have a last with your name on it and they really did all the shoes to fit your foot. And this is the coming way in the world we’ve changed. We now have 3D printing that can manufacture all kinds of things specifically to order.

David Scranton: Let me ask you, how much of that do you think is due to the baby boomers?  You know, the baby boomers want things that are custom for them what’s your thought?

James Dale Davidson: I think the baby boomers, of which I am an incarnate example, were the last generation who could grow up being spoiled by the myth that ‘America is the richest country in the world’ which we used to hear. I used to hear this all the time when I was a kid.

David Scranton: Saying it’s a myth now or was a myth long ago?

James Dale Davidson: It was true then it’s not now. My parents used to bludgeon me to eat my broccoli but telling me that there were starving children in Europe and then the starving children moved to Africa. We’ve all heard about them, right?

David Scranton: I think you and I almost grew up in the same household.

James Dale Davidson: Yes. So I had to eat my broccoli and I did take seriously this idea that we were the richest country in the world and it seemed like there was a lot of fat in the land that took a little of the edge off of life that my father’s generation who grew up in the Depression did not feel this easy attitude towards things and it now seems like his view was right when we see the world collapsing and inflation as it is.

David Scranton: Changing gears I know you’ve told me in the past your concerns about China and so on but I’d like to focus on the United States because I know you also have concerns about the markets, the stock market here in the United States. I’d like you take the last three minutes or so we have to talk about, you know our viewers are always hearing me talk about the concerns about the U.S. market, but I’d like to hear them, to hear directly from you, why you’re so concerned about the current levels?

James Dale Davidson: Well I think it goes back to something very basic. Which is, that if you go back 4-5 years and look at the revenues of companies that are top line revenues and their actual profits which we would count as a profit is money that you make that’s left over after you’ve met your cost that you could walk out the door with without being arrested why..

David Scranton: Sure, sure.

James Dale Davidson: So  they have not grown at all. While the stock market, if you look at the price of the shares, has gone staggeringly higher and I think that you can’t continue to financially engineer higher stock prices made on fictitious money or what Marx and one of his lucid moments called ‘fictitious capital’.

David Scranton: Last ten seconds. How low do you see the possibility of the Dow getting when all this stuff comes to roost?

James Dales Davidson: I think you could easily go down 50 percent from here.

David Scranton: I will agree completely. That’s great James thank you so much for being on the show, I really appreciate you being here.

James Dale Davidson:  My pleasure.

David Scranton: Thank you. And don’t go anywhere. Again, thank you very much again to James Dale Davidson for adding a lot of knowledge and wisdom. Don’t go anywhere, we’ll be right back after the break.

Morgan Thompson: It’s hard to believe, but for most of this country’s history people didn’t give a thought to saving for retirement. In fact, the concept of retirement didn’t even exist. That really only started to change in the late 1880’s.  The forces behind that change Is what I’ll talk about in today’s segment. I’ll also look at how retirement planning is still changing and evolving today. If you remember your high school history, you know America’s economy was based on agriculture until the late nineteenth century. For the most part, the farms that drove the economy were family based and men worked for as long as their health allowed. As they aged, they gradually handle the reins literally and figuratively to their growing sons. As late as 1880, half of Americans still worked on farms and nearly 80 percent of all men worked past the age of sixty five even though the average life expectancy was actually considerably lower than that. But as the century ended, factories began to take over. The country was shifting quickly from an agricultural economy to a manufacturing economy and from the family based model to the company model. Suddenly older workers had no one they could gradually hand the reins to. So as their jobs became more physically demanding as they got older, the idea of leaving the workforce at a certain age began to take hold. It was seen as practical not just from the workers’ perspective but from the employers as well. As workers age increased, his production often declined. Soon the idea of providing financial security for aging workers caught on. It was the American Express Company that established the country’s first private pension plan with the goal of creating a stable career oriented workforce. By 1899, there were 13 private pension plans in the US and more being created every day. Worker morale and retention were primary motivators, of course.

But one of the reasons companies didn’t mind providing pensions initially, is that life expectancies were far shorter at the time. In 1900, life expectancy for men and women was approximately 49 years at birth. People who reached age 60, could expect to live only an additional 12 years on average. Yet there was still no minimum or mandatory retirement age and most people continued to work as long as they were able. That, combined with the growing prosperity of the manufacturing based economy, meant that pensions were a financial hardship for many growing companies. By 1919, over 300 private pension plans existed covering about 15 percent of the nation’s wage and salary workers. As for the other 85 percent, they were still largely on their own until 1935 when Social Security was enacted. Importantly, it established 65 as the normal retirement age. At the time, life expectancy was still only about 60 years from birth. That means, Social Security was also enacted with the belief that most workers wouldn’t live for very long after retirement and therefore, it wouldn’t be a great burden on taxpayers. What’s more, according to the Social Security Administration when the program started there were approximately 40 working people paying into the system for every one retiree obviously that’s a healthy ratio. Meanwhile pension programs kept growing. By 1950, 9.8 million Americans or 25 percent of all private sector workers were covered by a pension. Over the next 20 years that number would increase to 26.3 million or 45 percent of all workers. Throughout all those years, however, life expectancies also continue to increase. This presented a growing financial challenge to the very concept of businesses and the government providing financial security for retired workers.

By the early 1970’s, Congress had identified a growing pension crisis in the country. By 1974, they enacted ERISA, the Employee Retirement Income Security Act, in an effort to address the crisis. One of the results of ERISA was a gradual rise in the popularity of defined contribution plans as an alternative to traditional defined benefit pension plans. Increasingly, businesses began to offer employer matched investment plans like 401K.’s in lieu of traditional pensions which had become less financially viable as retirees live longer. It was one thing to commit to paying a worker’s retirement income for five to ten years on average. It was quite another to make that commitment for ten to twenty years. Defined contribution plans, such as 401K’s, which were introduced in 1978, shifted some of the burden back to the workers themselves. By now however, increasing life expectancies and the option of taking early retirement were also putting a strain on the Social Security system with retiree’s living longer and the birth rate declining after the baby boomer era that healthy worker to retire E. Ratio of forty to one shifted dramatically.

As of today, there are only 2.8 working people paying into the system for every 1 retiree. Within 20 years or so, that ratio is projected to be only two to one. Changes were made to the Social Security system in 2000 to try to address some of these concerns. But even today, many retirees continue to worry about Social Security being depleted and about their benefits being there for them when they retire. By 2006, life expectancies had risen to age 74 for men and age 79 for women. Also by then, 43 percent of all private sector workers were covered by defined contribution plans like 401K.’s rather than traditional pensions. That number has only increased since and so have longevity rates. Today, according to the Centers for Disease Control, for the average 65 year old there’s a 50 percent chance that you’ll live at least into your late 80’s. For the average couple age 65, there’s a 50 percent chance that at least one spouse will live to age 92. The bottom line, is that American workers today need to plan for retirement income that will last them up to 30 years. And although Social Security is reportedly solvent through 2033 and being admitted to prevent reductions to benefits beyond that, for most people it won’t be enough. Social Security by itself, won’t provide sufficient income to meet their retirement goals or even needs. That leaves it up to them to parlay their 401Ks or other plans into vehicles and strategies that will provide the majority of their retirement income. Achieving that goal with a sense of security and with so many complex options can seem daunting and that’s especially true for this generation of retirees. With all of the uncertainty in today’s economy and financial markets it’s also the reason that we urge them to start by identifying their retirement goals and by really embracing their identity as The Income Generation.

David Scranton: Now mutual funds give many a false sense of confidence during the 1980’s and 1990’s: the best bull market in U.S. history. The reason being is that they did an adequate job even for those with limited knowledge. Since then, however, many more investment tools and source of information have become available. But in some ways these also create an illusion that we know enough to be 100 percent self-reliant in our finances. Now some of these are worthwhile and some I think were created to line the pockets of companies and publishers. Just as mutual funds brought investing into stocks and other asset classes to the broader public, discount brokers created industry that barely existed before. An industry where almost anyone with 500 dollars or more could open up an account and start trading. These firms make money on commissions from trades so their goal is that you trade often. Now we’ve all seen the online discount brokers run commercials of people sitting in front of their computer. These folks are usually happy and pumping their fists in the air because presumably their trades did very, very well. They make trading look fun, sexy and easy and they give the impression that if you’re not trading your missing out. If you’re part of The Income Generation you might remember the cigarette ads of the 1970’s that imply you’d be cooler if you smoked. Well the problem is that discount brokers try to attract you with a similar trick. But a trick that can be just as dangerous and bring what I call, cancer to your portfolio.

In the past decade, many of these online brokers have added more of what they’re calling resources. These include chart and graphic packages along with alerts. They seem to suggest how can anyone go wrong with such a colorful array of price charts complete with stochastics candlesticks Achi numbers and Makepeace. Well when you’re trading against firms with much greater resources and experience the chance of you becoming that happy guy sitting poolside with his laptop saying ‘booyah!’ is very, very slim. I mentioned books in newsletters earlier now I’ve got a great deal of understanding from the books I’ve read and many newsletters are excellent. In fact, they serve a different purpose because they are current and if the author knows his or her stuff they can cause you to look at things that you may just have missed. But be careful, some newsletters are in the business of selling investments others are in the business of selling newsletters. The ones in the business of selling investments are easy to recognize, they’re pushing products and clearly they’re biased. Those that are just in the newsletter business can also be spotted. There more often selling fizzle and secret ideas. Why? Because sizzle sells. They often try to scare you one month and make big promises the next. Read them for entertainment if you like but give them as much credence as the radical papers you see on the checkout line at the grocery store that claim that Elvis is still alive and living on Mars. It’s entertainment but please don’t invest solely based upon them. Know who is publishing what you read. I own a registered investment advisory firm. My fiduciary responsibility is to you, my client, and it is required in everything that I write and every word you’re hearing on my program. I’ve personally read my guest, James Dale Davidson, ‘Strategic Investment Newsletter and I find that it’s forward looking global focus keeps me sharp on international issues. So now the question becomes, where is that balance? Between doing a completely yourself versus enlisting some help from others. Also how much knowledge do you need just to determine what’s real and not real from different sources? In my mind newsletters were initially a medium that dug a little deeper than magazines or newspapers. They initially provided the right questions to ask. Since they know everyone circumstances are different their aim was to provide you with a better understanding for when you spoke to an investment professional. Or regardless of whether you’re dealing with financial advisors, reading newsletters or looking at charts at a discount brokerage firm, how you find the line between what’s enough versus what’s not? And how do you do that if you’re working with a financial advisor? Also how much extra do you need to go it completely alone without leaning on anyone else? Let’s start with doing it completely yourself.

To go it alone one would need extensive knowledge in the areas of accounting, macroeconomics, microeconomics, corporate finance, credit analysis and so on. In fact, it would take years for one to have enough knowledge to review newsletters talk to financial advisors and browse discount brokerage sites to decide which sources they might trust versus which they don’t. But the question becomes without real world experience, is it still a good idea to be going it totally alone with your entire life saving? After all, it’s not so easy that a baby can do it. Here’s an analogy that better explains why you should have a decent amount of financial knowledge even if you’re not flying completely solo: it’s like going to a medical provider with a problem and not understanding at least the basics of what you might need and what the treatments could be. Heck, if you didn’t have that knowledge you would even know what kind of doctor to go to and you wouldn’t be able to discern between treatment choices that are presented to you by the doctor. And like going to the doctor, if you decide to use a financial adviser, you’ll need to know what questions to ask, questions like: whether they are adept and investing for income? Or any other style that benefits your goal? An example I like to use, involves my own life. Now this isn’t about investments, I know, but it has to do with my personal safety. I own a fishing lure company and we have a corporate boat. We use the boat to test products that we’re developing. Sometimes when we’re off shore it gets a little rough, a little dicey and at times downright dangerous. But I took extra steps beyond the standard US Coast Guard Safety class. I actually went to attain and have attained my 100 ton US Coast Guard master license. Although we hire an experienced captain when we venture out, I personally would not feel comfortable if I didn’t also have a good understanding of how to operate the boat and navigate safely home. Why then do I still hire a captain? Well yes, I have educated myself so I can have a high level of understanding of what’s going on when we’re on the water and what he’s doing on the bridge and this gives me increased confidence in trusting him with the helm and literally with my life. So I may have all of the credentials but let’s face it he has much, much more real life experience. He’s seen more on the water than I will ever see. Now this is important, I urge you to do the same with those things that you don’t get a second chance at. No one should outlive their money. And at an advanced age, you certainly do not want to unretire. So how do you stay abreast of all that’s available? Know the risks and comprehend them enough to make informed decisions? Well you’re tuned into The Income Generation, so that’s a great start. And as I said before, there are very good books and newsletters and even some radio shows that aren’t half bad. But I caution you to know the bias of the authors and others involved, more on this in a minute. In addition to all that, there are also not-for-profit educational programs. One not-for-profit that I’m personally involved with is, the Scranton Academy for Financial Education or S.A.F.E.  Instructors at S.A.F.E are certified in their fields and share conventional knowledge about personal finances. They provide wisdom at an easy to understand level that you may not get in many other places. These can be great ways to become more self-sufficient with investment decisions. But I’d caution anyone who wants to go it completely alone despite what you see on the commercials for a certain discount brokerage firm, it’s not so easy that a baby can do it.

I want to thank James for spending some time with us today and talking about the necessity of taking your personal finances into your own hands. I also look forward to his new book. You might also look for his newsletter ‘Strategic Investment’. In addition, I want to thank Marti Johnson for her report on mutual funds. We have more investment choices to choose from now than ever before and yet the confusion that many choices creates allows for many of you, many investors, to overlook huge pitfalls with some of them. Marty always manages to tie a lot of useful information together increasing understanding. And I’ve already heard from many Income Generation viewers, that they want to thank her for filling some of the knowledge gaps that they didn’t even know they had.

Next week we have a man who needs no introduction joining us. Yes, T. Boone Pickens will be here. I’ve been looking forward to getting him on the show to discuss oil and investment alternatives and he’ll be in town to join us. You will not want to miss this episode of The Income Generation. Now if you haven’t signed up for our complimentary special report entitled ‘The Income Generation’ which allows readers to discover many answers to their investment questions, get it today by signing up now at At the same time, you could begin receiving free alerts from Sound Income Strategies. We love getting your calls. So if you’d like, use the number on the screen and let us know what else we can do for you. Get your questions answered and discover what other resources Sound Income Strategies can make available to you. Well that’s all for our show today. I’m David Scranton and you’ve been watching The Income Generation. We’ll see all again next week.