Friday, April 21, 2017

The Stock Market Only Goes Up

Here’s a chart of the S&P 500 total return for the past 8 years:

The only conclusion my lizard brain can draw is that the stock market only goes up. In Daniel Kahneman’s terms from his great book Thinking Fast and Slow (my review here), my brain’s “System 2” knows that the stock market may crash in the future, but my automatic “System 1” is sure the stock market will keep going up forever.

As my human capital dwindles, I get closer to the age where I should be shifting some of my portfolio into safer investments than stocks. I’ve done this by building up a cash reserve, but perhaps it’s not as big as it should be at this point. It’s very hard to shake the feeling that I’m losing out by not having this cash in stocks right now. My System 2 has determined that I should have some fixed-income investments just in case stocks begin a large drop. But my System 1 resisted hitting the sell button.

Younger investors have bigger concerns. Those who have been investing for 8 years or less can’t be certain they have the stomach for the risk level of their portfolios. A huge risk for investors is that they will lose their nerve in a market downturn and sell out near the worst possible time. It’s hard to know what you can handle unless you have lived through a crash of the type that we had in 2008-2009 and back when the dot-com bubble burst.

We can be sure that a market crash will come eventually, but I have no idea when it will arrive. It’s possible that today’s stock level is the lowest it will ever be in the future. It’s also possible that stocks will get cut in half from today’s level. Most likely, we’ll get something in between.

Don’t let your lizard brain blind you to the very real possibility that stock prices will drop significantly from today’s levels. Try to invest your money with a mindset somewhere between fear and euphoria.

Friday, April 14, 2017

Short Takes: Mortgage Rates and Credit Scores, Bond Confusion, and more

I was on vacation for most of the past two weeks and managed only one post about debt:

Managing Debt

Here are some short takes and some weekend reading:

Canadian Mortgage Trends explains recent changes to how your credit score affects your mortgage interest rate. It certainly makes sense to charge more when the risk of default is higher, but I’m not sure that credit scores are a very good measure or default risk. But maybe they’re the best we’ve got.

Canadian Couch Potato tries to clear up a common point of confusion about bonds: the fact that higher interest rates mean lower bond prices.

Where Does All My Money Go interviews Sandra Foster, an expert on personal finance and estate planning.

Big Cajun Man takes on the common misconception that a Tax-Free Savings Account can only hold cash like a regular savings account.

Boomer and Echo calls for an overhaul of the finance industry.

My Own Advisor considers the possibility of trying harder for financial independence and an earlier retirement.

Monday, April 3, 2017

Managing Debt

Debt is a big part of modern life. The high cost of university leads to student debt, and sky-high real estate has many Canadians in large mortgages. And that’s just the kinds of debt that most easily justified. Then we have the growing lines of credit and credit card balances that come from failing to save up for the cars, clothes, electronics, restaurant meals, and home upgrades we want.

Finance Blog Zone asked bloggers for their takes on how to manage debt. I read through them all and found 7 of them that caught my eye either because I found the ideas interesting or because I disagreed. Here’s my take on their takes.

Brave New Life

Brave New Life says “College debt and a home mortgage are the only two acceptable debts. Ever.” And for emphasis: “No debt for cars.” There may be narrow circumstances when other forms of debt make sense, but this is an excellent starting position. Too often when I try to tell people that borrowing for a car is a bad idea, their reaction is “that’s great, but is it better to get a car loan or a lease?”

Andrew Hallam

Instead of the usual boring debt advice, Andrew Hallam does a great job of stirring emotions. “Declare war against [debt],” “Crush the debt with the smallest outstanding balance” to “frighten your other debts,” and “Then go after your next smallest debt and ruthlessly obliterate it.” He even suggests taping the carcasses to a cupboard for inspiration. Reading this almost made me wish I had a debt to kill.

Fitz Villafuerte

Fitz says “Focus on how to make more money, rather than wasting time in worrying about how to pay your debt.” Unfortunately, for people with debt-building personalities, earning more money just leads to ever-higher spending and more debt. For those with very low incomes, earning more money can be the right answer. But too many people blame their overspending on their supposedly inadequate incomes. There’s nothing wrong with trying to earn more money, but examining spending is necessary.

Celebrating Financial Freedom

Dr. Jason Cabler attacks the mindset of seeing debt as inevitable: “too many people believe that debt is just a normal part of life, but it doesn’t have to be.” Getting too comfortable with debt is a bad idea. It’s better to see debt-freeness as the normal life state.

Bert Martinez

“Money is an emotion. Debt is an emotion too. How you feel is more important than what you know.” I don’t know what this means or how it can help someone. It’s true that there are a lot of emotions tied up in money and debt, but that doesn’t help me understand Bert’s advice.

J. Money

J. Money says debt problems can be the result of habits. “The best thing that got my money straight was taking a 40 day ‘no spend’ challenge.” This changed his habits and “I didn’t realize how often I’d go shopping when I was bored!” This is some practical advice for people to try instead of just telling them to stop overspending.

Leslie O’Connor

“Don’t look at debt as ‘the enemy’ or ‘a disease’. It is just one small factor in your overall, long-term financial growth.” This works for people who handle their finances well. But for those with debt problems, telling them it’s not a big deal is terrible advice. Andrew Hallam’s advice to declare war is a much better idea.

To close, I’ll stick with something I wrote once before: Debt is a crushing burden that weighs down people’s lives and dreams.