Monday, March 23, 2015

So You Wanna Prevent A Stock Market Crash?

Just a quick thought. This week as I was pondering the philosophy of the stock market and how modern man interacts with it, it came to my attention that many.....too many humans act like the stock market is operating beyond their scope of influence. Most humans wrongly assume that the stock market is controlled by some outword entity....some wall street big wigs.
But what I have noticed is that THE most powerful influence on the stock market is actually YOU and I....ordinary small time investors who either decide to stick with it or jump ship and sell when the going gets tough. The "crashes" that so many investors fear and loathe are created by US.....not some mysterious entity.
Stock market crashes occur when the majority of folks give in to fear and try to all sell their shares at the same time, thus driving the stock prices down to next to nothing.

So, in a quick summary, what can you and I do to prevent another stock market crash? Don't panic!!!
Stay in the market for the long haul. Don't be reactionary and pull your money out when you see some doom and gloom on the news channels. Stewart your money with intelligence and  prayer and accurate and up to date information.....just don't be hasty to abandon ship during rolling waves. Prices will always go up and down.

And yes, finally, yes oil prices will come back up in North won't be overnight...but it will come to pass. Just wait and see.

Peacefully productive,

Is your DEBT Compounding FASTER than your INVESTMENTS?

I'm sure most of you already know what "compounding" interest means right?

Basically, just in case you need a bit of a reminder, it's the way in which, if a chunk of money that earns a certain percentage of interest is left alone for several years to will gain great value over a lengthy period of time. Every year the interest is not only earned on the original principal amount but also on the interest paid out for the previous year(s). So let's say you invest $500 at 5% interest and leave it alone for 5 years, you won't just have $25 in interest earned at the end of the five year term. You will have much more than than because each year you will have earned "interest on your interest".

So the miracle of compounding is pretty awesome in the world of investing, especially if you have the fiscal discipline to leave your investment money alone before trying to withdraw any of it to spend.
Those who love the stock market and utilize dividend re-investment plans also use a similar concept of compounding in order to build up the value of their portfolios by simply "not touching" the dividends that their equities produce and allowing the plan to use the cash dividends to purchase even more stocks.

The scary part of compounding is that it can also seriously apply to instruments of DEBT. Therefore, if you have a debt owing of $500 dollars and you are paying 12% in interest yearly to the creditor....and you allow that debt to remain unpaid for five years, then after the FIVE years of compounding you won't just owe the company the original $500 plus a simple 12% interest payment....but you'll ALSO owe the creditor
"interest on the interest". That's why and how consumer debt gets way out of control so quickly. Many folks forget that DEBT also compounds when it is not quickly paid off in full. A small debt of only a couple thousand dollars can quickly balloon into hundreds of thousands of dollars in debt obligations if the debt is never paid off in full.

Remember that interest rates REALLY MATTER. One credit card might charge you 12% yearly in interest. Another credit card might charge you 28% in yearly interest. That is a HUGE difference and it will make a HUGE difference in the amount of money you are paying in interest to your creditor.

Today I just wanted to mention that when you are trying to get a healthy perspective on your financial situation you may want to dumb it down to this simple question..."
"Is my debt increasing FASTER than my investments?"
Is my debt costing me a higher interest rate than my the rate at which my investments are growing? It is a simple but very powerful tool to use to get us all to think about our finances in new and empowering ways.

For example, a simple equity portfolio might earn an average of 5% compounded annually. But what is your consumer debt costing you to carry it? 28% on a credit card is not uncommon for many department store credit cards. Therefore, if your investments are only GROWING at 5% and the consumer debt that you are carrying is ballooning in size at 28%.....something is not good. Ideally, we all want our investments to grow FASTER than our consumer debt. Then we will all stay ahead of the game and have something to retire on in the long run.

Think about it.

Peaceful productivity,

DISCLAIMER: Note the above blog post is not intended as professional financial advice and the owner/publisher of this blog does not accept any liability for the ideas discussed in this post. Professional financial advice should be obtained from a licensed professional.