As we have seen incredible volatility rip through the markets this past week, many (my own parents included) keep asking me when the economic storm will end.
My answer is the economy will recover when the global powers realize that not everything can come out of a recession unscathed.
Every business cycle has seen its share of winners and losers. With financial institutions being back-stopped at every troubled turn, it is impossible to put a timeline on when the skies will clear once and for all. Any way you look at it, the endless global bailouts have disrupted the natural cycles of the economy. Were at least some of the bailouts necessary? Perhaps, given the pervasiveness of relaxed lending standards, leveraged products, derivatives, and other dangerous financial instruments that banks created to bolster their own bottom line.
For investors who have been smart with their money and avoided the casino mindset advocated by the mainstream financial media (portfolio challenges, contests, and all things meant to get you to catch the "trading fever"), you will be given some great investing opportunities ahead. Poorly-positioned fund managers will need to sell quality positions to build up needed capital for redemptions. And of course, retail investors who are frantic to sell out of even the best long-term investment ideas will also help provide good entry points.
What Should We do Now to Prepare?
All too many investors continually put off necessary changes in how we manage out money. I advocate automating money transfers from your paycheck into a brokerage account each week so you are always positioned to get money to work for you in income-producing dividend stocks. If you have been reading and sitting on the sidelines waiting for a bottom, I've got some news for you. No one has the faintest clue of an exact bottom, despite many that take to the business television screen every day to proclaim they have the answer. The best strategy is to scale into positions slowly and get into the habit of buying quality dividend-paying stocks from our Best Dividend Stocks List .
In order to maximize your wealth-building ability, you'll also need to separate yourself from friends or family that have a "plastic fetish" and can not control their spending urges. Whether it's the need for all the latest fashions or the hottest new gadgets, we all know plenty of people who seem to be addicted to shopping. There is nothing wrong with treating yourself, but all too many are in the habit of making it a weekly (or even daily) event. Shopping addicts often become complacent with making the "minimum due" payments on credit card bills, so the payments appear manageable. The problem is, minimum payments are often barely enough to cover the interest on your debt, which continues to grow each month. Credit card companies just love this process, and many become a slave to their plastic cards in no time.
When it comes to investing, doing nothing is just as risky as doing something. This fact holds especially true in the current environment. Banks just simply aren't offering any sort of worthwhile interest rates for savings accounts, money markets, CDs, etc.
Your wealth will only deteriorate if you don't acquire income-producing assets. Taxes and inflation (despite what the government says, prices ARE higher for many everyday items) will chew up accounts of those who let their money rot. And as I've said before, The Federal Reserve is clearly not on the side of the saver these days. The Fed has pledged to keep rates at all-time lows for the foreseeable future. There's nothing wrong with raising cash, but sitting on that money for long periods of time will never provide you with good best investment returns. Investing part of your cash holdings in your own business can make sense if you see opportunities to grow, as well as starting your own business (as long as the prospects for making money are realistic - not every good idea can turn into an actual money-making enterprise).
Thank you for sharing part of your weekend with me, and please be sure to pass this post on to anyone you think we can get inspired and educated about money, building wealth, and using common sense to do so.
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