The credit crisis explained visually

For those still a little bit baffled by how the credit crisis started and then snowballed I recommend you spend 11 minutes watching this video. The concepts are very simply explained including: leverage, collaterised debt obligation and sub-prime. The knowledge will help you become a better investor in the future so that you can better understand the true risk of your investments.

Much kudos to creator Jonathan Jarvis. You can also visit the official website for the videos.

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

I declare the downturn to be over

I wonder…if together we all declared “I’ve had enough! The downturn is over. From now the economy and markets are growing;” could we create a self-fulfilling prophecy?

Yes? You think we could?

Great, then join me now in making the declaration and spread the word to your friends, family and everyone you know. Blog it, tweet it and share links to those declarations in the comments below.

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Legal note: This is not a recommendation to buy long, sell short or hug your co-workers. Just spread the positive vibe man.

Don’t Stress About Losing Your Job

Are you worried about how you will cope if your job is made redundant? Is this occupying your mind for too much of the day, taking some of the joy out of life or even worse, causing you to lose sleep?

If you have the three elements shared in this video in place then you can be confident you will survive the loss of your job.

 If you have gaps in the three elements then you need to act now to be prepared. If so, visit www.Redundancy-Advice.com.au for more detailed resources to plug the gaps.

Please share these insights with all of your friends and colleagues who are stressed about the possibility of losing their job. Help them get more joy in their life right now!

Media “experts” finally held to account

Even if nothing happened in the financial markets that day there would still be a 60 page edition of The Australian Financial Review published the next day.” That was the view shared by one of my first lecturers in financial planning back in 2000. (I wish I could remember which lecturer so I could give him credit.)

Time proved that to be correct and over the past nine years I have progressively read less and less of the mass media and more specialist publications. Most of what is published in the mass media makes me quesy or irate – often both simultaneously. Too frequently I feel that mass media financial articles confuse the issue and are too superficial by not considering the real, valid depth.

I could rant on this topic for a long time, but I won’t. Have some fun instead and watch this enlightening video by Jon Stewart of The Daily Showin the USA. Stewart takes the so called experts of CNBC, the business show, to task over their forecasts and soft approach on CEOs.

The Daily Show With Jon Stewart M – Th 11p / 10c
CNBC Financial Advice
thedailyshow.com
Daily Show
Full Episodes
Economic Crisis Political Humor

Redundancy First Aid

Worried about how you will cope if you lose your job? Follow the DR ABC of Redundancy First Aid to reduce your immediate stress and be confident you will survive. The advice is also great to keep in mind just in case you are one of the first on the scene when someone close to you is made redundant.

For more resources and redundancy advice visit www.Redundancy-Advice.com.au

Donate It Forward Project

If you received a payment from the Government’s Economic Stimulus Package that you consider partly or fully to be surplus to your immediate needs then consider using it to support someone really needy. Check out Donate It Forward, which is being held in conjunction with Pay It Forward Day.

The aim is to donate $50 of your handout to a charity of your choice. (Of course you can donate more if you want and are able to.)

Not only will it give you a warm feeling you will probably also be eligible for a tax deduction on your donation. That’s an extra bonus since your Government handout was not taxable!

(Of course, many people who received the handout are in genuine immediate need. But if you feel the handout was partly surplus please consider helping others out.)

Deciding when to start investing again

At some time during the recent bear market did you sell most or all your investments to cash? Or maybe have you been holding out on your regular investment plan because you haven’t felt comfortable? Watch the video below for some insights into how to decide when to start investing again.

At some time during the recent bear market did you sell most or all your investments to cash?

Or maybe have you been holding out on your regular investment plan because you haven’t felt comfortable?

If you made that decision based on an emotional trigger such as “feeling tired of losing money” then you face the real predicament of getting back in too late and missing out on big gains which often come in the early days of an economic recovery.

Watch the video below for some insights into how to decide when to start investing again.

Ten Best Paid Politicians – Value for Money?

With all the kerfuffle by politicians over the remuneration of company executives I found it interesting to read this list of the ten best paid national leaders. Originally compiled by The Times and then re-crunched by The Australian to show their payper capita. (If the link does not work you may also read the article here.)

Interestingly by this measure Kevin Rudd (the Australian Prime Minister) is earning roughly ten times as much as Barack Obama (President of the USA).  

When it comes to how much politicians are paid I’ve often wondered if it is evidence to support the saying that “you pay peanuts you get monkeys”.

That said, many company executives who contributed to the global financial crisis were paid multi-millions and now appear to have been monkeys in human suits.

When you boil it down, mostly this is a bit of fun. I think it is fair though to remember the rule of thumb that paying a high fee is no guarantee of quality, but if you expect quality then be prepared to pay for it.

RBA rate cuts an ineffective stimulus

“Figures from the Big Four banks show that fewer than 5 per cent of mortgage borrowers have opted to reduce repayments as interest rates continue to slide.” (As reported on News.com.au here or  here)

What that means is that the massive rate cuts from the Reserve Bank of Australia over the past four months have been an ineffective stimulus on the Australian economy.

I believe this is happening because our nation’s “leaders” are fear-mongering. They are talking up the bad news too much without sufficient balancing positive leadership. Their jaw boning is counter-productive to their financial stimulus.

The big problem is that talk is free and stimulus is costing the country billions. 

The consequences could include (according to my fuzzy crystal ball):

  • Sudden reflation of the bubble as confidence returns and people start spending like the old days using their new stash of cash savings
  • Equally rapid interest rate rises 
  • A debt noose around our nation’s necks that hampers our international competitiveness and growth
  • A depression as the fear mongering becomes a self-fulfilling prophecy

To clarify I don’t mean all of the above. It could go either way in the short term.

One thing I am clear on is that fear breeds fear and what we need is true leadership, not a cash shower.

If you’re feeling scared ask yourself if the facts of your personal situation have really changed? Or is it just your perspective?

Maybe you are unnecessarily too scared. Maybe you don’t really have much to be afraid of and instead could be showing personal leadership to those around you.

How long markets have taken to recover

The Reserve Bank of Australia’s Statement on Monetary Policy (released 6th February 2009) included the following graph of the largest falls in Australian equities (aka shares). As the RBA note in their report “Historical experience indicates that, following large falls, it can take between three and six years for the share market to recoup losses”.

aust_equities-falls-rba.jpg

Read the full report on the RBA website here. The above graph is graph 65 on page 47 of the report.

First Home Buyers: Don’t Rush In

Many in the media are saying that the latest interest rate cut makes property more affordable for first home buyers. I disagree.

Let us remember this is the lowest interest rate in over 30 years. Rates are artificially low to stimulate the economy short term. This is not normal or even an average.

So it is fair to assume that over the 25 to 30 year loan term that interest rates will go up again. If you can’t afford the repayments when interest rates go back up (as they will) then buying a house now is a recipe for future financial stress.

The current interest rate only makes a home more affordable if you can fix your rate at current levels for 30 years.

If you still buy even though you can only just afford the repayments now then you are betting that your income will increase quicker than interest rates. Start praying that it does.

The only thing that makes the house more affordable is free cash in the form of the First Home Owners Grant.

House prices will perhaps stop decreasing so rapidly. Lower interest rates reduce the pressure on would be sellers so they will be less inclined to drop the price of their house. It is suddenly more affordable for them to hold on.

Of course you could be really creative and just buy a less expensive house that you could afford.

TIP: calculate your affordability based on the repayments if interest rates are 3% higher than they are at the time of purchase. Then make repayments at that level right from the start.

Ensure your employer paid your super last month

In a presentation last Thursday night, Australian Taxation Office (ATO) second commissioner Jennie Granger said that of the 2,200 employers selected and visited since July 2008, around 1,045 had not met their superannuation guarantee obligations. (Reported here.)

With many small businesses struggling with cash flow at the moment it can be very tempting for them to not pay their compulsory superannuation contributions on time, if at all. There have been plenty of segments on current affairs shows of employees suddenly discovering they have not been paid superannuation for years. Then the business goes into liquidation and they never receive what they are owed.

This should not happen to you – unless you are ignoring your superannuation.

The compulsory 9% contribution must be paid at least quarterly. The deadline is the 28th day after the end of the last quarter. The last contribution was due on 28th January. So go online or call your superannuation fund and check your last contribution was paid. (Salary sacrifice amounts must be contributed in the same month they are sacrificed.)

If you are missing a contribution then confront your employer. Be as understanding as you like but just make sure you are informed about why it is late and precisely when it will be paid.

This could be one of your best indicators of the health of your employer and the likelihood of you losing your job.

My lessons from the crisis of 2008

“Those who cannot remember the past are condemned to repeat it.”
George Santayana, Spanish philosopher

I have just finished reading my gift from Father Christmas, “The Ascent of Money: A Financial History of the World”. This is the newly released book by renowned British historian Niall Ferguson.

2008 was not a first. In the past three or four centuries global economic crises have happened before. They will probably happen again – and maybe even again in your lifetime. Certainly there will be many more bubbles created and busted in your lifetime.

What have you learnt about managing money from what you experienced and observed in the past year?

What will you remember and do differently? What will you share with and encourage your children and grandchildren to do?

My Lesson: Margin of Safety

One of my clear lessons from the financial events of the past year is the importance of a margin of safety.

Retire with more than adequate funds

From seeing all of the news reports about recent retirees needing to go back to work I strengthened my resolve to not cut it that close. Yes that means saving earlier and possibly harder -but more importantly it means creating wealth smarter.

Contain debt repayment obligations

When one borrows to the maximum capacity of both theirs and their partners existing income there is no margin of safety if that combined income decreases, as it often does through life. When you are at maximum capacity you can’t afford extra repayments, so if you miss one you are in default and on the lender’s radar.

Have a backup tank

When things go awry you need access to liquid assets that can be accessed within days at the most. This can be actual cash in a bank or access to redraw on your mortgage.

Shares and managed funds are often considered to be liquid assets. But, as we saw this year redemptions/sales can be frozen and the emergency may have you selling precisely at the wrong time.

Spending less than you earn is another excellent way to have a backup tank. If your income drops temporarily you are ok as you are accustomed to living on less.

Leverage conservatively

Using other people’s money can accelerate your gains, but this year we saw the truth of how it also accelerates loses. In a boom it can be tempting to maximise your leverage because “you don’t want to miss out”.

However, you must always respect the power of the beast and not underestimate the probability or magnitude of loss. History shows it is this underestimation coupled with leverage that can cause the previously unimaginable catastrophe.

Leveraging conservatively will mean different things depending on your overall circumstances. Work out your margin of safety.

Your Lessons

What have you learnt about managing money from what you experienced and observed in the past year?

Please help us all learn from our collective past by sharing your lessons as a comment below.

Top 10 Financial Collapses of 2008

Time Magazine has published its list of the Top 10 Financial Collapses for 2008. The list is interesting, but I most liked the commentary about what contributed to each collapse. Hindsight is a wonderful thing, and it makes it easy to criticise what now appears as stupidity. So I applaud courageous people like Alan Greenspan who at least publicly acknowledged that he got it wrong.

The other great thing about hindsight is that it presents a wonderful opportunity to learn.  The key is to implement the lessons so we avoid getting caught out again.

What have you learnt from what you have observed and experienced in 2008? Please share it with me in the comments below.