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It’s interesting to observe how most Americans view the economy, view the future and view their own wealth.  In most cases, it’s not based on the real wealth that they have or don’t have, but in fact, is often based on market sentiment and other feelings of the public as a whole.

Let’s look at two periods to discuss further…

Housing Boom – 2000-2006

During the years where real estate prices skyrocketed, everyone felt wealthy.  The problem of course was that there was a bubble in real estate, and bubbles always end up going bust.  If you got out, you may have been spared the destruction, but most were not spared.

During this phase of skyrockted asset prices in homes and stocks, Americans felt more wealthy than they had in years.  Unfortunately, these gains were for most people only on paper.  We learned a tough lesson that paper gains are not real gains until they are “cashed in”.  Taking it further, paper wealth doesn’t equal real wealth, but it does boost our “feelings” of wealth.

For most Americans during this time, they would have saw dwindling savings accounts as more and more money was put towards their residence, and why not, it was a guaranteed gold mine.  If they would have taken their eye off paper wealth, they would have realized that they were actually becoming less wealthy since the cost of living was rising and the money they were putting away was shrinking.

When paper profits collapsed, most were left with nothing despite years of feeling wealthy.

The Rally of 2009

The huge rally in stocks has had a different result but still is making people feel more wealthy and feel better about the economy.  Furthermore, government stimuli has had similar effects.  Sadly, the real economy continues to deteriorate no matter what the public continues to feel.  We may feel like the economy is rebounding because of what the talking heads continue to say, but more and more people are losing their homes and more and more people are losing their jobs.

No Alternatives

There is no alternative to cold, hard saving money.  The paper gains and feelings of prosperity that come with asset bubbles and fast rallies usually do not hold.  You cannot put your trust in these feelings, instead you need to trust your growing savings account.  Don’t be afraid to hold onto more cash than most people think you should.

Real wealth is built by hard work and sacrifices.  Real wealth is built by saving money.  Real wealth is built on cash flowing assets not speculative investments.  Dividend paying defensive stocks aren’t as sexy as the technology stocks but their constant cash flows are better than speculative moves up and down.