Wednesday, September 2nd, 2009
As we head into the fall and we look forward toward next year, it is important to take a look at the general econimc landscape, assess the data that we have access to, and develop our views on the performance of our investments going forward.
The following are three high-level economic data points that we can use, along with our other tools, to further assist us determining our views on equity market investments.
1.) U.S. Housing
As the root of the credit crisis, healing in the U.S. housing market is a precondition for sustainable recovery. Recent data has confirmed that the worst is behind us and the residential real estate market is stabilizing.
The inventory of unsold houses while still high is heading in the right direction towards clearing and sales of existing homes have recently turned positive on a year-over-year basis. And an index which measures year-over-year price changes of houses in 20 major U.S. cities (the S&P/Case-Shiller Home Price Index) plunged 33.6% from its June 2006 peak to the April 2009 trough, but has now climbed 1.9% over the past two months.
2.) The U.S. Consumer
The resurgence of the U.S. consumer will be key to watch as recovery unfolds since consumption is 70% of the American economy. Despite the ‘hit’ that the housing crisis has exacted on their net worth, American household balance sheets are still in relatively better shape than they’ve been in the past due to the tremendous growth net worth over the last decade.
However, the process of deleveraging (winding down debt) has begun and this will impact spending patterns in the near-term.
3.) The U.S. Manufacturing
The level of manufacturing has historically followed an inverse path to the Fed funds rate but on a 6-month lagged basis – as the fed funds rate drops, six months later, manufacturing activity picks up.
However, in fall 2008, although rates declined to historically low rates, the credit crunch intensified and that typical relationship between low interest rates and increased manufacturing activity did not materialize. More recently, credit channels have opened up and the ISM (gauge of manufacturing activity) has improved, indicating the economy is finally responding to massive stimulus after a long lag.
And further improvement just yesterday with the latest ISM level better than expected at 52.9 – the first reading above 50 since January 2008 and hit the highest level since June 2007. This is further indication that while not yet normal, the economic environment is normalizing.
These are three key areas of the market to watch when assessing the high-level economic situation and it’s relationship to the stock market trends and valuations.
Of course this isn’t the be all and end all of data you should include in your due diligence, but it certainly plays a role as you calculate your risk tolerance moving forward.
Posted in Investment News | 1 Comment »
Thursday, May 22nd, 2008
As we all know, mastering or even just managing our personal financial situations is a long and tedious road. We make decisions that affect our personal financial situation several times each day. From the clothes we wear to the car we drive, to the lunch we eat..it all affects our finances.
Whether we like to think about it or not, we cannot escape the reality that we will never be completely free from the day to day management of our finances. The increasing stack of bills piling up in the mailbox and the all-too-automatic withdrawals from the checking account are a relentless reminder of our consumption.
There are people, like me, that are intensely concerned about their finances. I am certain there are others who are more concerned and more diligent with there finances than I am; this article is not for them.
What motivates you to manage your finances?
Of course we could sit here and debate the semantics of motivation and personal finance. However, for this exercise, we will let Wikipedia define those terms for us:
Motivation:
“The reason or reasons for engaging in a particular behavior, especially human behavior as studied in psychology and neuropsychology. These reasons may include basic needs such as food or a desired object, hobbies, goal, state of being, or ideal. The motivation for a behavior may also be attributed to less-apparent reasons such as altruism or morality.”
Personal Finance:
“The application of the principles of finance to the monetary decisions of an individual or family unit. It addresses the ways in which individuals or families obtain, budget, save and spend monetary resources over time, taking into account various financial risks and future life events.
Components of personal finance might include checking and savings accounts
, credit cards and consumer loans, investments in the stock market, retirement plans, social security benefits, insurance policies, and income tax management.”
There, now that the definitions are out of the way we can get down to business!
What Motivates You?
Many people have been turned on to managing their personal finances more diligently because of a financial meltdown of sorts. It seems to be a common theme among financial writers and I think it is one that carries the most weight with the average reader.
Lets face it…we all want to make more money. It’s not a bad thing and it’s not evil. Wanting to excel is a basic human function. The need for constant improvement is what separates us from animals and the reason for our progression as a species.
My motivation comes from the fear of being poor. I grew up poor; not as poor as some…but poor.
Just to give you an idea (without too much detail):
- I did live in a trailer park
- My family did receive the charity hamper of food at Christmas for several years.
My family’s financial situation was hampered by the bankruptcy of the family business caused by my father’s health. In case you need further clarification about bankruptcy – it’s horrible. My parents are still recovering from that devastating financial blow and I vowed that it would never happen to me.
Even though I swore I wouldn’t be in debt up to my ears, I ended up with over $40,000 in student loan debt. I managed to pay that off and, within 3 years, my net worth has reach over $250,000.
How did I do it?
I Started To Learn About Money
I learned from the mistakes of my parents and began to research (formally and informally) the ways that the wealthy made money. I also learned about the importance of education and building the power to earn money.
Your ability to generate an income is the most important asset that you have. This is why Life Insurance and Long-Term Disability insurance are critical components of your financial plan in your younger years.
I also studied how mortgages work and the ways that financial leverage can accelerate your wealth exponentially. The concept of leverage is instrumental in learning how to carefully and methodically speed up the wealth accumulation process.
The ability to earn an income is the greatest asset that you have.
Think about that.
This is exactly why I am a huge fan of dividend paying stocks and income producing real estate. These assets generate cash flow. Increasing cash flow is the basic building block for generating wealth.
Cash Flow is the ticket to play the game.
Personal finance is a game. A very serious game, but a game nonetheless. As long as you have enough cash flow coming in to pay the bills, you can continue playing the game. Evaluate the cash flow that you generate and be sure to begin with a solid budget that does not exceed the cash flow.
Plug The Holes, Then Turn on the Hose!
I also started to learn about budgeting. Many of the people that I have talked to about growing wealth continue to harp on the fact that a budget is a budget, no matter the size. What they mean is that before you go looking to earn more money, you need to learn to master what you have.
This lack of control and poor foundation of the concept of financial planning is the reason why many lottery winners go broke within just a few years. Regardless of the amount of money you earn, if you have no idea how to manage it, you will end up in the same position.
It is essential to learn basic finance and budgeting skills. Don’t fall into the “I need to earn more money trap” before you learn to manage what you have.
- Work first to decrease your expenses; then look for additional sources of income.
Remember, it’s not how much you earn, it’s how much you keep!
Make keeping more of your money automatic. Learn how to save more money every month by reading this previous article of mine:
http://dividendmoney.com/automatic-savings-is-essential
Golden Rule of Finance
This leads us back to the golden rule of finance which is:
Spend Less than you Earn!
*Note: Another dividend investor has also pointed out that in addition to spending less than we earn, we must simultaneously find ways to both increase our income and decrease our expenses.
I’d love to hear your motivation for mastering your personal financial situation! Feel free to contact me with your story or drop a note in the comments.
Posted in Investment News | 6 Comments »
Thursday, March 20th, 2008
Don’t Talk About Moving When Your Wife Is Pregnant
I’ve recently had a discussion with my 9-month pregnant wife about the idea of moving. Now, I should have known better than to approach that subject when my wife is in her “nesting” mode – needless to say she was not happy.
The reason that I brought up the subject is that we can literally choose to live wherever we like. There is nothing holding us back from moving anywhere that the respective laws allow. I began thinking about this subject as I have watched home values in my city double over the last two years.
My Thoughts
We have made a couple of really savvy real estate deals that have made us more money over the past two years than our respective salaries. This, along with minimizing our expenses has put us in a comfortable position with no consumer debt and an increasing net worth.
Because our only debt is our mortgage, I have been toying with the idea of selling our house and moving to a less expensive location whereby we can purchase a similar home and be completely debt free.
In my mind this makes a lot of sense, here’s why:
- We would not be enslaved at jobs that we may not enjoy because we need to make a mortgage payment.
- We could plow a lot of money into other investments at the age of 29, with a long time horizon to watch it compound.
- We could spend money on travel and experiences that produce life-long memories, which is more valuable to me than “stuff”.
- We could choose to take extended “vacations” from our jobs to spend with our new child and extended family.
Rationale
- We both have Master’s degrees and are highly employable in any location. Even in a remote location, we could easily make ends meet by telecommuting or freelancing.
- Our city is freakin’ cold in the winter – what is the advantage to that?
- We would be further from extended family, but with the added freedom of not having a mortgage, visiting would be less taxing on the pocketbook.
(To be honest, we see our extended family only slightly more than when we previously lived much further away)
- Real Estate values are bound to cool at least slightly as evidenced by the “trendy” markets in the United States and Canada. I’m not calling a top to the housing market in my city, but I’m not greedy either – freedom is very tempting.
Making a move to a slightly smaller city less than three hours rive from our current location, with good job prospects for the both of us could set us completely debt free under 30 years of age. Most importantly, it would do so while living the same lifestyle that we are accustomed to. This is something that I find very tempting. (The winter would be just as cold though)
Of course it was seriously bad timing on my part to bring this up due to the pending birth of our first child. However, it has been eating at me ever since we did our annual budget in January and I realized the possibility.
Complete freedom from debt is a huge goal of mine; but is this the right way to achieve it?
I’d love to hear your stories or thoughts on this matter. Feel free to share in the comments!
Posted in Debt | 2 Comments »
