A generational guide to the economic slow down

Author Tammy Erickson shares some interesting tips for making the most of the current economic environment based on your lifestage. Listen to the quick interview (11mins) she did on the Harvard Business Review podcast (episode 123).

At the conclusion of the interview the interviewer references a blog post by Erickson where she makes the point that “Nerve-Wracking Times Require Instinct Override”. Read the blog post here. Our instincts can be very powerful tools, but sometimes we need to blend them with other tools in our tool box if we want to make wise, appropriate decisions for us.

Stimulate a Financial Planner

As the first of the Government’s fiscal stimulus hand outs are distributed, the Prime Minister Kevin Rudd is urging Australians to be patriotic and stimulate the economy by spending it. Retailers would love you to spend it in their shops before Christmas, but economists agree that it doesn’t really matter what you spend it on, as long as you do not hoard it.

Here’s a novel alternative: stimulate a financial planner.

If you’re doing it tough in the area of managing your bills then spend some of your hand out being coached on managing cash flow.

If it’s a mountain of debt that’s casting a shadow then pay for advice on the most effective way to get out of owe and into dough. A little bit of money invested in learning to do it well is better than just continuing to do it poorly.

Learning new, improved behaviours is a gift that keeps on giving. You deserve it!

Thanksgiving Menu 2008

I just read this bit of wit in the December edition of Noel Whittaker’s newsletter. Whittaker didn’t quote the source, but I think the person is worthy of congratulations as it is quite clever. So if you know the origin please let me know.

Appetizers

Mélange Of Frozen Markets
Tossed Assets With Government Guarantees
Frisée Of Foreclosures And Defaults

Main dishes

Évaporation de Credit à la Cold Turkey
House Signature Dish
Seared Investors In Bottomless Pit With Caramelized Investments
Overheated Markets Without Oversight à la SEC
Braised Bankers Rump With Bailout Coulis

Desserts

Sorbet Trio Of Shock, Disbelief And Insolvency
Off Balance Sheet flambé

Featured wine

Great Depression Grand Siècle
1933 méthode creditoise

Don’t talk yourself into tragedy

At yesterday’s Annual Dinner of CEDA, Glenn Stevens, the Reserve Bank (RBA) Governor shared these wise words in his conclusion:

“…given the underlying strengths of the economy, about the biggest mistake we could make would be to talk ourselves into unnecessary economic weakness. Yes, the situation is serious. But the long-run prospects for the Australian economy have not deteriorated to the extent that might be suggested by the extent of some of the gloomy talk that is around.

…We ought to go forward with some quiet confidence in our own abilities and in the opportunities that are on offer. I wish you all well in that endeavour.” Read his full speech on the RBA website.

As I said in my recent article “How To Survive The Recession“, 20% unemployment sounds bad but that means 80% of people have jobs. Keep perspective, focus on the realities of your situation and take advantage of opportunities to strengthen your financial and lifestyle security.

Like Glenn Stevens, I wish you all well in that endeavour.

Cop a dose of Harden Up

If you allow the nightly news to permeate your conscience your Money Mindset will be having a tough time right now. It is important to take a step back to observe what is happening and look for alternate perspectives and opportunities. “Be greedy when others are fearful…” says Warren Buffet (and has done for decades.)

Michael Pascoe wrote an interesting article titled “Cop a dose of Harden Up”, which provides an alternate perspective. Read the article here. (Sydney Morning Herald; November 14, 2008)

Have you really been doing it tough? Or, by being led by your fear and letting opportunities pass you by are you ensuring that you will be doing it tough in the future?

What Warren Buffet is Doing: in his own words

“Buy Amercian. I am.” declared Warren Buffet in an opinion piece in the New York Times on October 17th, 2008.  This article is written by Warren Buffet and I highly recommend you read it here.

In his own personal account he says that he has been buying American stocks. He also says that people who currently have their wealth in cash should not feel comfortable at the moment. Read the full article to understand his reasoning, including some historical context.

Following the historical context Buffet writes:

You might think it would have been impossible for an investor to lose money during a century marked by such an extraordinary gain. But some investors did. The hapless ones bought stocks only when they felt comfort in doing so and then proceeded to sell when the headlines made them queasy.

Slow, steady and committed wins the race. Chopping and changing in line with your emotions will cost you dearly.

Over 10 years they’ve never lost

With the sharemarket hangover fairy still bashing around inside our heads it can be tempting to proclaim “never again will I drink from that font of wealth creation.” But where’s the fun in that?

It’s time to continuously remind ourselves to take a strategic view and keep a long term perspective that matches the period we will be alive and investing. Finally some articles to that affect are appearing among the mass media doom and gloom.

You may think you have heard it before but keeping reading the good news – you need at least two pieces of bright news to outweigh the psychological impact of each piece of gloomy news.

Following is an excerpt of a long article by James Dunn in The Australian today. Rational analysis that enables you to learn from history.

Andex Charts has calculated the returns made by investments in the main accumulation index (share price growth plus dividends) of the Australian share market, made at every month-end since January 1, 1950, and held for 10 years. In the period to August 31, 2008, there have been 585 10-year investment periods — and not one had made a loss.

The lowest 10-year return was 2.9 per cent a year (for the 10 years ended September 30, 1974), while the best return was 28.7 per cent a year (for the 10 years ended September 30, 1987. The median 10-year return comes in at 13.3 per cent a year.

The most recent completed 10-year return — for the decade to August 31, 2008 — is 12 per cent a year. This is despite a 13.1 per cent fall in the last 12 months of that period. Reid says the index would need to have fallen by 66 per cent in September to produce a negative 10-year return.

The lesson in these numbers is that if you are certain that you can give a share market investment (that is, in the accumulation index) time, you can be confident that it will make money for you.

A financial planner would get into trouble for describing the share market as capital guaranteed but, statistically, the accumulation index is, if you hold it for 10 years.

Wealth creation is a long term project. Investing in growth assets like shares must always be considered with at least a 10 year horizon before you need to spend the money. Any time frame less than that is gambling with odds that are turning against you.

How to survive the recession

On the ABC’s 7:30 Report on Wednesday night, Economist Associate Professor Steven Keen gave the following prediction for Australia this year:

“Best case scenario is a recession more severe than 1990 and lasting one and a half times as long.

Worst case is something up to the level of the Great Depression which was 20 per cent unemployment and lasting up to a decade.”
(Read the full interview here)

Earlier that morning my esteemed colleague Bill Milburn had enlightened me as to the technical difference between a recession and a depression:

A recession is when your mates lose their jobs.
A depression is when you lose your job.

Following are some tips to help you place yourself in a stronger position should we enter a recession.

Repay Debt Faster

If a recession hits you are probably going to need to pull in your belts just to continue to meet the minimum debt repayments.Get a head start and build a substantial buffer by boosting your repayments now.

It is when you fall behind in repayments that the banks will start to repossess your car, boat and house. If you are ahead in your repayments that will give you a buffer if your income stops temporarily.

Refinance

If you recently locked in a fixed interest rate on your loans and that now seems high in the current environment consider refinancing to a lower rate and a more flexible package. Check the break fees before doing so and include them in your cost/benefit analysis.You will have more options if you refinance now while you appear to have a more secure income and before your property value has plummeted. Don’t wait until both you and the lenders get even more nervous.

If you do achieve a lower interest rate keep your repayments at the same (or even higher) dollar level to help you build a substantial buffer.

Secure Your Income

Twenty per cent unemployment sounds really bad. But remember that means eighty per cent are employed. So make sure you are one of the people who keep their job.Ask yourself what you can do to ensure you continue to be of massive value to your employer. How do you ensure that you only lose your job if your employer goes broke? What can you do to help your employer not go broke?

  • Can you be more personally productive by improving personal systems and eliminating personal waste?
  • Can you increase your expertise by completing additional, relevant and valuable professional development?
  • Can you help your employer win new (unexpected) business and retain existing business?
  • If your industry looks to be hit hard (e.g. retail) can you up-skill now and be prepared to change to a more robust industry?

Ensure you are very employable to both your current and other employers, so that if you do lose your job you don’t lose your income.

Investors or pussys?

“Investors wiped another 5 per cent off the Australian share market…”

So was the opening sentence of the front page article of The West Australian newspaper yesterday (9th October 2008).

It should have read:

“Anxious, emotionally fragile, short sighted sellers wiped…”

Movement in the share market index is based on actual trades completed. For every seller there is a buyer.

Buyers are always out for a bargain – it’s human nature. So would-be-buyers submit a bid below what they think the item is worth just hoping for an anxious seller to come along.

The “investors” at the moment are the buyers with long term vision and emotional control. They are not the ones wiping 5 per cent off the share market.

Do not push the panic buttonRevered investor, Warren Buffet, is often quoted as saying “the markets are a very efficient mechanism for transferring wealth from the impatient to the patient.”

Wealth creation is a long term game. Whatever you do, do not push the panic button!