Posts Tagged ‘investing’

America’s Debt Hits The Ceiling. How’s Yours Doing?

August 4th, 2011

How is your debt on a scale of 1 to 10?

The Bank of Montreal has issued five tips on how individuals can avoid hitting their own personal debt ceilings. Like Washington, many of us live beyond our means, with a quarter of us living paycheck to paycheck – a 10% increase over last year. The average household carries $75,600 in debt and 44 million souls rely on food stamps.

Don’t overspend and curb credit card debt.

These are obviously related. Overspending increases debt. It’s taken Uncle Sam decades of profligate spending to reach this crisis, but the average citizen can get deep into credit card trouble far more quickly.

Credit card limits

Individuals who hit their credit card limits should take it as a sign that their spending is out of control and start cutting back. Or they can raise revenues by getting a raise, finding a better paying job, moonlighting or running a business on the side. Maintaining or increasing spending without boosting your income means trouble. Too often, indebted consumers ask their financial institution to raise the limit on their credit card. The request is often granted because that’s how the banks make their money.

Financial destruction

But even if your card issuer refuses to raise your limit, debtors hellbent on financial destruction may apply for second and third cards, bypassing the safety mechanism of hitting the limit on the first card. Problems snowball if you pay only the suggested monthly minimum payment. The power of compound interest goes into reverse and you get in over your head, drowning quickly if unexpected job loss curtails your ability to meet even the seemingly low monthly minimums.

Mortgage free

Another tip is to become mortgage-free faster. This tip comes after curbing credit card debt, since mortgage interest is much lower than that charged by most credit cards. Credit card debt is considered bad debt because it involves spending on consumption. Mortgage debt is good debt because it helps you build equity while putting a roof over your head, and is tax-deductible.

Monthly payments

If the mortgage is large and monthly payments small, you pay more in interest than the house cost, meaning your effective home price is double or triple the asking price. The best mortgage is no mortgage at all and the way to eliminate one is to have high regular payments that reduce significant amounts of principal from day one. Take advantage of annual prepayment privileges and you’ll be amazed how fast your personal debt ceiling fades into irrelevancy. Once credit card and mortgage debt are eliminated, along with student loans and car loans, focus on becoming the beneficiary of compound interest instead of its victim.

Invest to save

BMO’s fourth tip is invest to save, ideally through tax-free savings accounts.

Plan B

The last tip is to have a Plan B. Unfortunately, too often the B stands for bankruptcy. This is invariably a disaster for consumers and as the world almost discovered the past week, a disaster for everyone if the government of the world’s largest economy goes bankrupt.

Tags: Credit card debt, Debt, Debt ceiling, investing, Mortgages
Posted in Business, Economy, Finance, Money, Personal / Internet | No Comments »

Here’s a Winning Market Strategy for You

July 6th, 2011

This strategy is ultra boring, but it delivers solid results
There are two catches: it won’t beat a buy-and-hold in the event the stock market were to go more or less straight up, and the strategy is about as exciting as watching grass grow.

Dollar-cost averaging
The strategy is dollar-cost averaging: Periodically investing a set sum in the market. Because this set amount ends up purchasing more at lower prices and less at higher prices, the strategy is a close variant of “buying low and selling high” which, by definition, is guaranteed to make money.

Performance to date
How has dollar-cost averaging performed in the U.S. stock market? Consider a portfolio that invested $1,000 at the end of each month in the Wilshire 5000’s total-return index, starting at the top of the bull market in the fall of 2007. As of the end of this past June, this portfolio would be worth $56,143, representing a 24.8% profit on the $46,000 invested. The portfolio’s internal rate of return is different, since the $46,000 wasn’t invested all at once.

Lump Sum
In contrast, if you had invested that $46,000 in a lump sum at the beginning of this 46-month period, your portfolio today would be worth $43,594, or $12,549 less than if you had dollar-cost averaged.

No timing
Furthermore, that the dollar-cost averaging portfolio earned this additional amount without making any market timing guesses. Its profit was automatic, given the discipline of investing a set sum in the market each and every month.

401(k)
This is one of the reasons why the average 401(k) account is worth more today than at the bull market peak. Investors almost always pursue dollar-cost averaging approaches in such accounts, since they rarely have any other choice. Dollar cost averaging has worked over longer periods as well. A dollar-cost averaging portfolio would be well ahead of a buy-and-hold over the period beginning in early 2000, for example.

Not in the 1990s
The approach lagged during the decade of the 1990s, when the stock market underwent few serious corrections, much less a bear market. For the 10 years through December 1999, for example, your $1,000 per month investment would have turned $120,000 into $358,447, representing a 199% profit on original investment, equivalent to 11.6% annualized. Buying and holding, in contrast, produced an 18.5% annualized return over that decade.

Deciding
In deciding whether to pursue a dollar-cost averaging strategy yourself, therefore, you need to gauge your willingness, should the future be a replay of the 1990s, to make “just” 11.6% annualized when the market itself is rising at an 18.5% annualized rate. What you get in turn for that willingness: The assurance that, if and when the market endures a serious downturn, you will perform far better than a buy-and-hold.

The psychology
While many might have such willingness, the bigger problem with dollar-cost averaging may very well be a psychological one. This strategy is boring. The question to ask yourself: Are you willing to forego the excitement of correctly calling the market’s zigs and zags in order to be more or less assured of a decent, market-beating return over an entire market cycle.

Tags: investing, Investing strategy, Shares, Stockmarket, Trading
Posted in Business, Economy, Employment, Finance, Money, Personal / Internet | No Comments »

Invest Like a Beginner and Make Good Money

June 14th, 2011