Stocks VS Real Estate – A debate between two friends

If you follow me at all you know I am a big advocate of being a buy and hold investor of Stocks. My friend is a die hard Real Estate investor who also invest in stocks but is way more focused on Real Estate. The other day we had a nice discussion on which was the better investment, the conversation started because he is helping me find a nice multi-family property to buy, however unlike him I am somewhat debt adverse so I will be making a large down payment, of course he tells me that will lower my cash on cash return but it will help me sleep at night. Alright let’s get into the meat of the debate.

brown and gray painted house in front of road

Returns – Returns are the holy grail of investing, I mean what is the first thing that most people brag about, returns. Being an index fund investor and keeping it as simple as possible, I basically invest in four funds, total stock market, total international non-US, Total bond, and a REIT index fund. This gives me exposure to a diverse group of investments and helps keep my investing as passive as possible, I basically set my desired portfolio allocation of each fund and once a year make any necessary changes to get everything back on that desired allocation. Now over the past 9 years I have earned some pretty nice returns but of course that was on some large losses prior to that and of course I foresee some more losses on the horizon as interest rates begin to creep higher and trade wars continue to create havoc in the markets. The great thing about this type of investing is that it is completely passive and I only spend my time earning income from my job and spend almost no time managing my investments. Contrast this with my friend the real estate investor, he puts small down payments towards properties that he then must convince a bank or lender to put up the remaining funds, this is after he has gone back and forth with the seller of the property or the agent representing them. Once an agreement is made with the seller and the bank, he then enlist multiple professionals to help him do his due diligence of inspecting the property. This inspection involves not just structural issues but studying the rent rolls, individual leases, contractual obligations with anyone providing services, and much much more. During this time if anything jumps out as an issue he will once again open up negotiations with the seller to request a discount on the purchasing price or that the seller make the necessary repairs. Is it just me or are you getting tired and stressed just reading this. After finally closing on the property he then will assign a property management company to manage the property and begin making improvement s to the property to increase rental rates, which will increase the cash flow of the property and directly increase the overall value of the property. Now even though this sounds like a lot of work, he is mostly just coordinating with his team of people he uses like his agent, inspector, contractor, and property management company, so not as passive as index investing but he’s not breaking a sweat. As far as returns go, I’ll admit he blows my returns out of the water. By only having to put up a small down payment he can spread his personal capital around to multiple deals and since he is borrowing today’s dollars at a fixed interest rates but paying them back with tomorrow’s inflated dollars over a 30 year period he is making a killing. In fact he isn’t even paying the loan, his tenants are and they are simultaneously paying down the debt, increasing his equity stance, and giving him cash flow which is the difference between rental income and the debt repayments. So he is making out like a bandit and add this to the fact that he only buys properties that he can get at least 20% below market value and that he sees instant ways to add immediate value to the property.

So as far as returns go THE WINNER IS – REAL ESTATE………..

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Taxes – Once someone begins to make a good income taxes become one of the largest cost and biggest opportunity to save money from. So for me the stock investor, I shelter $18,500 a year from taxation by maxing out my 401K and get a tax credit of about $5,500 per year by investing in an IRA. Combined that is about $24,000 that I not only don’t pay taxes on but that will also grow tax free until I begin making withdrawals, this not only shelters that money from taxes but also lowers my marginal tax rate that all my other income is taxed at.  After that I put other investments into after tax accounts which I pay tax on the dividends (around 15%) and no tax on the growth or appreciation in the value of the stocks unless I sell them, this is why I only invest in growth stocks and not high dividend paying stocks in my taxable accounts. Okay now for real estate, my friend is obviously much more knowledgeable about the tax benefits of investing in real estate but here is my best shot at explaining what he does. First is depreciation, this blew me away, he get to claim a tax deduction for the property (Structure, not land) “losing value” or depreciating over time, however in reality the property is actually appreciating or growing in value. Second is just as amazing, mortgage interest deduction!!! So like I said he is borrowing in today’s dollars and paying the bank back with tomorrow’s inflated dollars but he also gets to deduct the interest he’s paying on the loan, WHAT!!! I’m pretty sure I couldn’t do that by purchasing shares on margin. Last but not least is capital appreciation, like I said his properties are not only appreciating in value over time but the tenants are actually paying down the loan, which increases his equity position in the property, equity being the difference between what he owes on the property and what it’s worth. So similar to my stocks his assets are growing in value but not being taxed on the growth, however what happens when he goes to sell them? Enter the 1031 exchange!!! My friend can actually sell his properties and roll all the profit into another investment without incurring any capital gains tax, even better he can then start the depreciation deduction all over again on new property. Another big advantage is that since he deeds all his properties to an LLC he can also write off just about every expense imaginable, mortgage insurance, property taxes, repair and maintenance expenses, home office expenses, insurance, professional services and travel expenses related to visiting properties. Now since I also own a company that is structured as an LLC I also benefit from many of those deductions but they aren’t related to my stock investing.

So as far as TAXES go, the winner is…………. REAL ESTATE. However we both agree that owning a business is by far the single best thing anyone can do to get ahead in America.

advertising blue blur business

Income – This is something that will become even more important as we age and get closer to retirement, that is when we will both be dependent on our investments to provide income to replace our working salaries. My plan centers around 3 thoughts, first to reduce my monthly expenses as much as possible by eliminating all debt and secondly to accumulate 30 times my annual expenses and then be able to withdraw around 3.5% annually to live off of. Lastly to acquire enough shares in my after tax accounts of VNQ a REIT that pays a hefty dividend and VYM an index fund that tracks quality high paying dividend stocks, by doing this I should be able to have a nice supplemental income from the dividend payments without having to sell any shares. My friends plan blows mine away, he plans to acquire enough properties to provide a very nice income from the cash flow or profit of the rents without ever having to sell the properties. In fact he is already living rent free by staying in a vacant unit of a complex he owns. He utilizes the 1031 exchange to basically trade up his residential properties to commercial multi-family properties that he says offer better cash flow and are easier to build equity in since they are valued based off of income and operating expenses versus just comparable homes like residential, so any small improvements that he makes that allow him to increase rents or heck just the annual 2-3% rent increase he levies make the properties more valuable while simultaneously putting more profit in his pocket every month. His plan is to eventually consolidate his holdings and pay off the debts which will make all rental payments almost pure profit except for what he pays his management company and what he sets aside for repairs, so imagine 100+ people paying you hundreds of dollars every month, sounds pretty nice to me.

So as for INCOME, the winner is……………… REAL ESTATE

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So as for our debate I feel like he won, in fact I am now becoming a multi-family real estate investor, my plan is to acquire one duplex or four plex and allow it to slowly pay the mortgage off so that when we get ready to retire we can down size from our current home and use it as a rental, plus have four other people sending us checks every month. With a paid off house and a frugal style that will basically function as a pension I never got to have.

Thanks for reading and I hope you enjoyed it, remember this is just my thoughts on investing and not meant to be advice, everyone should consult a professional before making any investing decisions.

CHEF ON FIRE

 

 

Separating the FI from the RE in FI/RE.

The “FIRE” (Financial Independence – Retire Early) lifestyle has been receiving a whole lot of outside press lately, while this is obviously a good thing as it has the power to greatly improve the lives of those that choose to adopt it’s lifestyle and philosophies, it also has drawn the wrath of many that choose to focus on the Early Retirement aspect alone and point out how it may or may not be actually feasible as a long term plan. To be able to properly separate the two ideas we first need to define them.

silhouette photography of group of people jumping during golden time

Many people in the FIRE community may have first been introduced to personal finance by Dave Ramsey and his Financial Peace program, Dave preaches that debt creates bondage in the form of financial obligations from the lender to the borrower. Financial Independence is a very similar concept in that once someone reaches FI they have the peace of mind to know that they are in a financial situation to make choices that are not afforded to people who are living paycheck to paycheck. Financial Independence in a nutshell is the point where an individual has accumulated enough income producing assets to live off of without having to work any longer, this freedom allows them to choose to either continue what they are doing or pursue either another career or even stop working all together. For most in the FI community the game plan seems to be the accumulation off a large enough investment portfolio to withdraw 4% of the principle to cover living expenses, while allowing the interest earned over and above the 4% withdrawal to continue to accumulate, thus creating a perpetual money machine. There are of course many other routes such as rental income form real estate and passive income from ownership in private businesses. There are different stages of Financial Independence, from having enough saved to be able to take time off from work or to accept a lower paying position that offers a better quality of life, to having enough money saved to never have to work again. Financial Independence allows an individual to have many options not available to most people and one of those options is Early Retirement.

man and woman holding hand walking beside body of water during sunset

Early Retirement or the “RE” in FI/RE is as mentioned earlier when someone has accumulated enough assets to live off of the earnings and no longer depend on outside income derived from another person or entity. Everyone has a different path to Financial Independence and therefore will arrive at the crossroad of continuing work or Retiring Early at different times and stages in their lives.  Retiring Early is an option only afforded to someone that has already achieved Financial Independence. Many detractors of the Early Retirement movement point to the fact that there is not much data to back test to see whether the 4% rule will actually work over a 40-50 year retirement period, however they fail to see that the main point is that the individual has achieved financial independence at an early age, something that the majority of people may not ever actually achieve in their entire life, this is great evidence that Financially Independent people are extremely good at handling their personal finances and that if a problem does arise in the future they will most likely be able to resolve it with the same hard work, focus, and discipline that got them to financial independence at such an early age. Another thing to keep in mind is that the 4% withdrawal rate was not just picked out of thin air but actually derived from a study known as the trinity study that sought to find the highest withdrawal rate that would allow for complete certainty of never running out of income and in fact the majority of the time the scenarios in the study had someone using the 4% rule end up with much more money than they started with 30 years later, even after making yearly withdrawals of 4%. This is because the stock market on average returns much more than 4% and thus allows the principle to continue to grow over time.

man and woman holding hands walking on seashore during sunrise

Fortunately their are many young and extremely intelligent bloggers in the FIRE community that are there to help and not just offer generic advice but give highly specific and specialized advice to people of all walks of life, so regardless if you are a physician, a mechanic, a pharmacist, a chef, a military officer, or even a single parent, there is a blog out there just for you that offers specific advice that can not only save you money but time and frustration from trying to comb through what seems like never ending advertisements from investment firms wanting to charge you to invest your money.

As you can probably tell from the name Chef on FIRE, I mostly speak to the restaurant and service industry segment about how to maximize their incomes and investments. I have a personal love for those that choose to serve others and feel that they deserve to be able to retire in confidence and hopefully enjoy having someone serve them for a change. While this is the audience that I focus on, I am constantly learning from reading post from other bloggers and think that they offer a great insight into the lives that other professions offer. It is great to know that regardless of the type of career one chooses, they have to ability to become Financially Independent if they are willing to work hard, save money, and learn to invest it wisely.

Screw F.I.R.E – Don’t retire early, create a legacy.

People today have become so self centered and inwardly focused on themselves that their only concern is to create just enough Financial success to enjoy a modest life and  free them from the obligations of earning income from trading time for money. Now don’t get me wrong I have nothing against people choosing not to work or to stop earning income, I do think that to save just enough to afford a modest lifestyle for you and your family is slightly selfish, I mean for one thing if anything was to happen to either you, your spouse, or a child, that minimum income to support that modest lifestyle will create almost certain financial ruin, don’t believe me, spend time in a hospital or retirement home speaking to patients or residents and you’ll learn just how uncertain life is and how easily unplanned medical issues can derail a life.

adult doctors gloves health

If we look back in time men were not just providers but they were builders, warriors, conquerors, and empire builders. They didn’t plant just enough crop to barely make it through the winter, they planted as much as they could and if they had excess above their family’s needs they either sold it or gave it to a neighbor. What happened to our desire to grow wealth, create a family name, and create a fortune? Instead of saving the minimum amount to meet our minimum needs for contentment, why not use the excess money we have above our family’s needs to continue to further our family’s wealth and standing in society?

The playbook to wealth is very simple.

Find a source of income that exceeds your monthly expenses

Focus on creating more income while keeping expenses as low as possible

Invest excess finances in assets that increase in value and create more income.

Rinse and repeat.

Yes this is simple but it should be. In modern times this would include getting a job, gaining education or experience to make your time more valuable, when you begin earning more don’t allow your lifestyle or spending to increase but instead invest the difference in index funds, rental property, and start a side business that you can earn income from and hopefully grow as well. See our ancestors did this as well, they first had to make sure they could meet their basic needs of food and shelter, after that they would sell their excess goods or services, they would then invest those proceeds into buying more land and livestock which had a compounding effect for them, many would eventually invest in selling goods made from the land or animals such as wood, wool, hay, etc… The only difference is that those generations knew how hard life was and that nothing is promised so they didn’t barely meet their basic needs and stop, they continued to acquire land and livestock for not only them but for their kids and their grandchildren. They would teach their children to run the farm and insist on them having a better life than they had had.

man field rice colombia

Now the question is why don’t we do that? Why should we be so selfish to save just enough to cover our immediate needs and stop working towards furthering our families standing? If our incomes are the largest contributor to our net worth or our family’s security, why cease to use it? Personally I feel obligated to earn as much as I can in my life and to acquire as much as possible to leave to the next generations to come. I could easily stop working and downgrade my standard of living so that I wouldn’t have to work anymore but I’m not that selfish. I want to ensure that I not only meet my needs but that if something happens to me and I require long term medical care, that not only will I be able to receive excellent care but it will not leave my spouse broke, I want to not only meet my needs but create a long runway for my kids to take off from and to be able to help them get a financial head start in life. I want to be able to help care for the aging parents of my wife and I, I want to be able to bless multiple generations of my family, I want my grandchildren to have the option to attend private school, to take music lessons, to take vacations, and to enjoy a life that is full of options. This is called self sacrifice and it is the greatest form of love that one can express. Just as Jesus paid the ultimate sacrifice by giving his life so we could be saved, I choose to give my life, my time, my effort, and my attention to not just making my life as easy and enjoyable as possible but to sacrifice so that generations of my family can be Financially secure. Health is a gift and choosing to exit the workforce at the prime of your earning potential is pure selfishness, not only are you shortchanging yourself but also mankind as you are no longer contributing to the greater good of society. Just as past generations taught their kids to plow a field or milk a cow, I teach my children to budget, to invest, and how to make themselves more valuable to society, however not only do I teach them these essential skills I also give them a head start, this is my duty as a father. When you take a wife and have kids, you are no longer just responsible for yourself but you are responsible for their safety and well being and in today’s time it is less about defending them from physical starvation or the elements as it is about ensuring their financial futures.

battle black blur board game

So in closing, MEN……. Be MEN, be not only providers and protectors, be defenders of freedom, be conquerors, build an empire that your grandchildren can be proud of, don’t fall into the trap of becoming satisfied with barely getting by but strive for the best life possible. Do you want your legacy to be “Well grandpa saved some money and retired at 30, then just kinda hung out?” Yes it’s nice being around young kids but as they get older they probably won’t want to be around you so much and when you are dead and gone, I’m sure they would rather have large inheritances than memories of you laying around on the couch……………

Thanks for reading,

CHEF ON FIRE

Dividends

If you own stocks you are probably somewhat familiar with dividends, but what exactly are they? In simple terms a dividend is a portion of the excess revenue a company has available after paying all operating cost that they choose to distribute to  owners/shareholders. That sounds great but is it? Personally I love dividends and see them as a sign of both maturity and stability, this is because usually a new company will reserve most of if not all earnings to re-invest in the company for growth, this isn’t bad because that growth allows them to increase earnings which will hopefully result in an increase in the value per share of the company. In contrast a large and established company may not have much room for further growth except through acquisitions, since they don’t need to employee excess revenue they choose to pay it out in the form of dividends which is attractive to many investors, especially older investors looking for income and stability. The dividend investor may also benefit from share appreciation but nowhere near the same rate as the younger faster growing company, in fact the per share price will actually fall after the dividend payout due to the fact that the company just moved hundreds of thousands of dollars off of their books, of course that money went straight to you the shareholder so it’s not really a loss but a way to earn passive income. Currently income from dividend payouts is taxed at different rates depending on your gross income, see the chart below.

Qualified Dividend Tax Rate Single Filing Status Married Filing Jointly Head of Household Married Filing Separately
0% $0-$38,600 $0-$77,200 $0-$51,700 $0-$38,600
15% $38,601-$425,800 $77,201-$479,000 $51,701-$452,400 $38,601-$239,500
20% $425,801 or more $479,001 or more $452,401 or more $239,501 or more

close up photography of people holding coca cola bottles

Some of my favorite dividend paying stocks are listed below with their current dividend yield.

Coca-Cola – 3.37% – Dividend has grown each year for 55 years

Pepsi – 3.36% – Dividend has grown each year for 45 years

AT&T – 6.08% – Dividend has grown each year for 33 years

person holding pepsi can

Now we can’t talk about dividends without mentioning the Dividend Aristocrats, to meet the criteria to be called a Dividend Aristocrat, a company must be a member of the S&P 500 index and have a minimum of one dividend increase annually for at least the last 25 consecutive years. The first list of Dividend Aristocrats was published in 1989, with 26 companies on the list, this list is often times considered a list of some of the strongest and most dominant companies in the world since to have been able to earn excess profits from operations even through all the bear markets and recessions, the companies must have a great operating system and strong competitive advantages.

For the die hard index fund investor there are dividend funds that track high paying dividend stocks, two of my favorite are listed below with their dividend yields.

VYM – 3.26% – Expense ratio of 0.08%

VIG – 2.03 – Expense ratio of 0.08%

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Of Course a discussion of dividends wouldn’t be complete without mentioning REITs, better known as Real Estate Investment Trust. In simple terms a REIT is a fund that owns and operates income producing land and or real estate, this usually consist of a mix of commercial properties such as retail spaces, office buildings, storage facilities, and apartments. The REIT investor/shareholder benefits from the steady stream of rental payment made by the tenants and the best part is that by law a REIT must pay out at least 90% of it’s taxable income to shareholders. Below is a list of my favorite REITs along with their current dividend yields.

VNQ – 4.29% – Expense ration 0.12%

Personally I own both VNQ and VYM in my ROTH IRA as well as the three single stock companies listed earlier with about 3 other high yield dividend stocks, however I am not nor do I plan to increase my holdings in the single stock, only in the index and REIT funds. I like owning them in my ROTH because the dividend income is earned tax free and is a not only a long term holding for me but an inheritance vehicle for my children that I hope will benefit from a steady source of tax free income for someday. I must say that I also own both VOO and VTI as well as VEU, in both my ROTH and my Traditional IRA for long term capital appreciation but I have always loved dividend stocks since my first purchase of Coca Cola stock many years ago and I still remember seeing the first dividend payment in my account:)

I hope you enjoyed this article and appreciate you taking the time to read it.

CHEF ON FIRE

 

 

 

 

Understanding America’s National Debt.

Currently America and it’s citizens owe roughly 21.48 trillion dollars, some of this debt is actually owed to itself. How is that you may ask? Well some of our federal agencies actually operate in the black and take in more than they spend, unfortunately since other agencies operate at a loss our government will take the surplus from one agency and use it to cover the short fall of another, this is basically just intra-agency accounting and moving funds around on the books. The other debt is owed to public and private entities. Other foreign governments loan America money and in return get Treasury bonds, the same goes for individual investors/citizens. Currently individual investors as well as large financial institutions such as banks, mutual funds, insurance companies, as well as large public companies hold the majority of the debt. How did the national debt originate?

person signing contract paper

The United States actually began incurring debt before it became a nation, leaders of the colonies borrowed money from France and the Netherlands to fund the Revolutionary War and their independence from Great Britain. The Continental Congress, which would come to be known as the  U.S. Congress, did not have the power to tax citizens so the debt continued to grow. By 1790, it was over $75 million, which represented a 30 percent debt-to-GDP ratio. When Andrew Jackson took office in 1828, the national debt was a massive $58 million,  Jackson called the debt a “national curse.” By selling off federally owned land in the West, Jackson managed to pay off all the national debt, however within a year  an economic recession led the government to start borrowing again and our country has never been debt free since, but how did we get over 21 trillion dollars in debt?

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One way to measure debt is to compare it to (GDP) Gross Domestic Product, GDP is the total revenue created within a country, historically America has hovered around the 50% debt to GDP. Only Presidents Andrew Jackson, Martin Van Buren, John Tyler, and Franklin Pierce left office with the debt at 1% or less of GDP.  In percentage terms, Roosevelt increased the national debt more than any other president. He added $236 billion, increasing the debt by over 1,000%, this was largely due to his instituting large government aid programs during tough economic times. Here is a quick list of the recent presidents during my lifetime and the debt that was added during their presidential terms.

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Ronald Reagan – $1.8 trillion – 49% of GDP

George H Bush – $1.58 trillion – 62% of GDP

Bill Clinton – $1.396 trillion – 54%  (only recent president to not run country at a budget deficit, left office with a $36 billion surplus)

George W Bush – $5.849 trillion – 77%. of GDP

Barack Obama – $8.335 trillion – 105% of GDP (Added more debt than any president ever)

man person suit united states of america

Donald Trump – Since he is still President we can’t actually say what the debt will be from his presidency. We do know that Trump promised to eliminate the debt in 8 years and actually dropped the national debt by over a $100 billion but since then it has increased. Trump has made some massive tax cuts which has stimulated the economy, this should lower the debt to GDP as a percentage but historically lowering taxes raises federal debt due to less funds coming in to operate the government on.

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So what is the answer to eliminating the National Debt? Well first we need to be able to operate the government without going into debt, the annual cost of running the government is around $4.147 trillion , of which we run close to $700 billion in the red, otherwise known as a budget deficit, meaning we spend $700 billion more per year than we take in and that number keeps rising each year. So what do we spend all that money on, check out my blog post “What does it cost to be the Boss” to get an idea of what America spends your tax dollars on. I say your tax dollars, because the only way the Government has to bring in money to operate is through taxing us it’s citizens. Now taxes aren’t a bad thing as long as we get something out of them, think military and police protection, sewers, highways, public schools, etc…. but the truth is that if you want to get out of debt you have to spend less than you bring in. Just like us as individuals have to make tough decisions everyday about how we spend our money, the officials we elect to represent us need to make some tough decisions on how they spend our money. Tough decisions include what you are willing to live without and what you are willing to sacrifice in the present to be better off in the future. Imagine if America got on the Financial Independence bandwagon and learned to postpone instant gratification…….. 

Thanks for reading, if you liked the article let me know.

Thanks,

ChefonFIRE

 

 

Stocks, Stocks, Stocks

In this article we will explore a brief history of the stock market, from it’s origins to it’s current place as America’s number one wealth creator. The East India Company is recognized as the world’s first publicly traded company. The East Indies were a major hub of riches and trade opportunities, merchants sailed there to trade and purchase exotic items that they could return home to sell. Unfortunately, few of these voyages ever made it home. What would usually happen is a merchant would have a great idea to travel to a far off land and purchase exotic items, however since he didn’t have enough money to do it alone, he would seek financing from wealthy individuals who sought to earn a return on their investment. If the ship sank or was taken by pirates the captain might lose his life and the financier would lose his total investment. The wealthy soon saw that it was better to spread their investments out over multiple ships to prevent losing everything, this however was extremely expensive and prevented everyone except the ultra wealthy from entering this business. As a result, a unique corporation was formed in 1600 called “Governor and Company of Merchants of London trading with the East Indies”. This was the famous East India Company and it was the first company to use a limited liability formula. Investors realized that putting all their “eggs into one basket” was not a smart way to approach investment in East Indies trading. This company sold shares in each of it’s ships to many people looking to spread out their risk and earn a profit. The formula proved to be very successful. Within a decade, similar charters had been granted to other businesses throughout England, France, Belgium, and the Netherlands. In 1602, the Dutch East India Company officially became the world’s first publicly traded company when it released shares of the company on the Amsterdam Stock Exchange. Stocks and bonds were issued to investors and each investor was entitled to a fixed percentage of the East India Company’s profits. Unfortunately an Indian uprising ended this company. London actually founded a stock exchange in 1801 but publicly traded companies weren’t legal until 1825 and by 1817 America founded what is still to this day the center of the world’s financial market.

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The NYSE or the New York Stock Exchange founded in 1817 is today the biggest stock exchange in the world, however Contrary to what some people think, the NYSE wasn’t the first stock exchange in the United States. The Philadelphia Stock Exchange was actually the first in America but the NYSE soon became the most powerful stock exchange in the country due to the lack of any type of domestic competition and its positioning at the center of U.S. trade and economics in New York. The NYSE is presently located at 11 Wall Street in 1865.

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The NYSE was founded 17 May 1792 when 24 stockbrokers signed the Buttonwood Agreement on Wall Street in New York City. Famously, they met beneath a Buttonwood tree and formed a centralized exchange for the rapidly growing securities market in the United States. The agreement eliminated the need for auctioneers who were used frequently for wheat, tobacco and other commodities and set a commission rate. The organisation made the Tontine Coffee House its headquarters and focused on government bonds. Twenty-five years later, on  March 1817, the organisation officially became the New York Stock & Exchange Board, later simplified to the New York Stock Exchange. Throughout the early 1800s, the NYSE expanded beyond government bonds and bank stocks. Advances in telegraphic communication allowed buying and selling through the telegraph. Membership increased and became more exclusive. By the start of the Civil War, securities, commodities and gold, discovered in California, greatly increased participation in the exchange. When the stock market crashed on October 23 1929, causing an 89% drop in share prices, the federal government decided it was time to step in and regulate the stock market. The NYSE subsequently registered with the United States Securities and Exchange Commission. The Securities Act of 1933 required public corporations to register their stock sales and distribution and make regular financial disclosures. The Securities Exchange Act of 1934 created the SEC to regulate exchanges, brokers, and over-the-counter markets, as well as to monitor the required financial disclosures. In 1971, NASDAQ National Association of Securities Dealers, founded its own exchange, NASDAQ, which specialized in electronic trading and eventually became a U.S.-based rival to the NYSE. Today there are a little less than 4,000 publicly traded companies for investors to purchase share in. The stock market to this day still functions much the same way as the original East India company designed it’s business plan. The stock market allows companies to quickly raise money for investments and expansion, while at the same time allows the individual investor to participate in the profit of multiple companies to spread their risk across multiple ventures.

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What exactly is a stock? A stock is a small piece of a publicly traded company, so when you purchase a stock you own a small piece of the company and are entitled to a piece of the profit they earn. In the old days investors would try to buy stocks of individual companies and diversify by spreading their purchases across several different sectors of the economy such as, energy, consumer goods, manufacturing, commodities, etc… then came along the mutual fund, which was a single fund, managed by a professional who charged a fee for his management services, these mutual funds provided instant diversification through spreading out their investing across different sectors as well as different investment vehicles. With all investments the best way to track their returns are not just of actual returns but their returns compared to the average of the market, which is basically a function of the national or international economy. If your investment did worse than the average of the market or of the average return of a particular segment then it was considered a dud, if it did better it was considered a good fund and the manager would be able to attract more investors and most likely justify a larger fee, the problem is that few managers beat the average market return and the ones that do usually cancel out the higher returns with the higher fees . Enter the Index Fund……. If you are even slightly involved in the F.I.R.E community, you are probably very familiar with what an Index Fund is, if you are new to the F.I.R.E community, an Index Fund is a fund that tracks a particular index or sector of the market. Two of the more popular within our community are the total stock market index, which tracks all the publicly traded companies and a fortune 500 index fund, which tracks the 500 largest companies based on revenue and market share. The investor gets two great things, instant diversification and a guarantee to get the average return of the market. This is why index funds have become so popular, they offer a great way to invest without requiring a fund manager or constant portfolio maintenance. The great thing about index funds is that they allow the market to do what it is supposed to do. self-cleanse itself by allowing the stronger companies to take market share from the weaker companies, if you owned individual shares, you run the risk of losing everything if the company goes out of business, however in an index fund the losing company is simply replaced by another company. This is great because the economy doesn’t stop demanding goods and services just because a company goes out of business and the employees of the shuttered company will simply find jobs at companies that can afford to pay them. People are what run the economy, they create the demand for good and services and also earn wages to produce them. All over the country people meet in rooms together to devise ways to increase revenues, raise profits, and expand the business, all of this is to provide returns to you the share holder. With an index fund you own a small piece of every company in that index, so essentially you have thousands of very smart men and women working hard to increase your net worth.

Thanks for taking the time to read this and I you liked it.

ChefonFire

John Maynard Keynes vs Ronald Reagan – The battle for your money Aggregate Demand vs Supply-side Economics

In the constant battle between Democrat vs Republican it’s easy to lose sight and even interest as it seems both parties are more focused on making the other party look bad and placing blame than on actually moving America forward. However one thing we are all interested in is what they plan to do with the money they take from us each week, month, and year. I think as American’s we have become so accustomed to taxes being taken out of our paychecks that often times we fail to even look at our check stub to see exactly how much is being taken from us, even worse we certainly don’t keep track of what exactly they are doing with our money.

Article I, Section 8, Clause 1 of the United States Constitution states –  The Congress shall have Power to lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defense and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States. So basically the money they take from you should be spent to fund the military, upkeep of infrastructure, and to care for those that can’t care for themselves, this an abbreviated definition but you get the point of the founding Fathers, which was to limit government taxation to only what was necessary to continue running the government and keeping it’s citizens safe. Unfortunately in modern times we have a lot of different opinions of how much should be taken from us and what it should be used for. There are 2 main sides and each has very strong and feelings associated with their beliefs, below we will examine both in depth and let you decide which makes more sense.

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Keynesian Economics – Keynesian economics was developed by the   John Maynard Keynes during the 1930s in an attempt to understand the Great Depression, most economist were completely baffled by the great depression and could not fully explain it. Keynes thought that increased government spending and lower taxes would stimulate demand and could pull the global economy out of the depression. Keynesian economics can be summed up by saying that optimum economic performance can be achieved and economic slumps prevented by creating aggregate demand through government intervention and activist stabilization. Keynesian economics is considered a “demand-side” theory that focuses on changes in the economy over the short run. Basically Keynesian followers think that capitalism has it’s flaws and creates massive ups and downs in the economy, during these down turns Keynesian’s think that the government should step in and intervene by spending money and creating a false demand. This makes some sense because during an economic slump businesses close and people are laid off or let go, if the government infuses the economy with money through infrastructure building, it creates a need for the materials to be produced and the people to do the actual work, this in turn gives people more money to then go spend at local stores, which props up the economy even more. Then critics of this theory make 2 big points, one a free market will always correct itself and any attempt to manipulate it will result in greater problems down the road. Second since the government doesn’t actually create anything, the money it is using to prop up the economy is simply being taken from one person and given to another without actually creating a lasting need or supply and by creating a false demand that it will either have to continuously keep the infusing money or the false demand will collapse.

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Reaganomics –  Ronald Reagan’s economic policy was built around a few key concepts, reduce the growth of government spending, reduce the federal income tax and capital gains tax, reduce government regulation, and tighten the money supply in order to reduce inflation. Ronald Reagan and his economic adviser Milton Friedman, figured that if you cut taxes on companies and the very wealthy, while also reducing  regulations on business, they would invest more, the economy would expand, and everyone would benefit. Of course, this approach, would require cutting government spending and the services it offered, which would affect low income Americans the most. Reagan thought the benefits to the rich would eventually “Trickle down” from those on the top of the ladder to those on the bottom.

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So there we have it, two very different ideas and approaches to how the government uses the money we give them. Both economic theories were founded during extremely difficult financial periods for the United States, Keynesian economics during the Great Depression and Reaganomics during the Cold War. Reaganomics initially created a huge surge for the economy much like the one we see today. It lowered unemployment and created a massive uptick in entrepreneurs starting new companies. However it took the federal debt from 900 million to over 3 trillion in just 10 years. Keynesian economics usually implemented by democrats often times has the same effect of creating an initial surge in the economy but is dependent on the businesses continuing to pay high taxes, however the higher taxes usually eventually cause the high earners to shelter money, and the businesses to move money elsewhere, while also not investing to grow the company, which halts job growth, this creates less tax money for the government to spend on it’s policies. Both sides have operated in a budget deficit the majority of the time in recent years and both added to the national debt. So what’s the solution? Which one should we go with? Well how about a little bit of both, how about we lower taxes on businesses and give them tax incentives to spend money here in America. Lower government involvement and regulations but offer tax incentives for companies to invest in the communities they inhabit and their employees live. No matter what we do, we will always be obligated to care for those that can’t care for themselves, while also trying to maintain and improve our great country for the next generation.