Category: MoneyCrashers

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Can a Zebra Change Its Stripes?

Zebra pregnant front view looking cutoutOften, there is some grain of truth in old sayings and myths. That is why they persist over time and generations. As I considered my own situation, I realized that one of the first questions I needed to answer was whether I could truly change old habits and patterns of thinking, if wanting to have a different life and future is really sufficient to make the effort successful. Perhaps the desire alone is not enough and there are factors that preclude some people from ever being satisfied with their achievements or happy.
 
Skeptics have always questioned whether people, particularly adults, can change, leading to such idioms as

“A Zebra can’t change his stripes.”
“Old habits die hard.”
“You can’t teach an old dogs new tricks.”
“The Apple doesn’t fall far from the tree.”
“The sins of the Father are present in the son.”
 

When we look around us, we see the world and our environment constantly changing. Humans are the result of millions of years of evolution, generation after generation of subtle differences. Everything changes all of the time, sometimes too slow to recognize but occurring never-the-less. We are biologically predisposed to change, to adapt to our environments just as we influence our surroundings to accommodate our needs more efficiently. This propensity is apparent in the way our brains work, the influence of memory on our outlook, even the impact of emotions on our behavior.
 
This conflict between constant change and the paradoxical tendency of people to resist change led me to research how the human brain works, the influence of genetics upon our decisions, and why some people are able to make massive changes in their lives and others try, but fail.

Is Success Predestined? Failure Inevitable?

Each of us is both a victim and a beneficiary of our ancestors and our environment. Based upon our genetic tendencies, reinforced by the environments in which we mature and live, each of us develops stereotypes and habits to respond to events and conditions. Our personality reflects our characteristic pattern of thinking, feeling, and behaving as seen by others. To understand better who we are as well as develop techniques to change, it is important to understand how our brains works, what if any limitations we might inherit from our parents, and how memory affects our decisions as well as the connection between our personality and our mind. As British psychiatrist Dr. Susan Greenfield says, “personality” is how others see you while “Mind” or “Self” is what it feels like to be you. In other words, your “mind” is the emotions you feel at a particular time and location. Even though outside events trigger negative emotions, how we respond to them – their impact and duration – is within our control.
 
Failure is a matter of perspective and can either be a motivator or an obstacle to overcome. Failure is not a predictor of the future, nor a indication of a person’s value. Michael Jordan, perhaps the greatest basketball player of all time, said, “I have missed more than 9,000 shots in my career. I have lost almost 300 games. On 26 occasions I have been entrusted to take the game winning shot, and I have missed. I have failed over and over and over again in my life. And that is why I succeed.”
 
Similarly, there is no absolute definition of success or the elements that make one person happy versus another. Most of us are guilty of letting others influence whether we feel successful or not, generally by how much money we make or the assets we have. But tangible measures can be false indicators. How many houses can a person live in at a time? Is there really a difference between a $500 suit and a $5000 suit? With highway speed limits at 70 mph, does it make a difference whether you drive a Chevrolet or a Maserati? Of course, it does. Not, however, because of the tangible difference in benefits, but because “more, bigger, faster, more expensive” brings more status from those around us.
 

[one_third]steve jobs 2 [/one_third][one_third]Who is happier – a Steve Jobs who made millions by designing products that makes life more entertaining, exciting, and easier for millions or Mother Theresa who lived a simple life while focusing the world’s attention on the poor, the homeless, the persecuted? I suspect that both were happy and both probably considered their lives a success, but neither would have changed places with the other expecting to find more happiness as a result.[/one_third] [one_third_last]Mother Theresa[/one_third_last]

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4 Types of Stock Market Investment Strategies – Investing, Speculation, Trading & Bogeling

stock-exchange-market-918x516
 
Trading is a relatively recent phenomenon made possible by the technology of communication networks and the development of the paper stock ticker. Details of stock transactions – stock symbols, the number of shares, and prices – were collected and transmitted on paper strips to machines located in brokerage offices across the country. Specialized employees using their memory, paper and pencil notes, and analytical skills would “read” the tapes and place orders to buy or sell stocks on behalf of their employer firms.
 
As a young trainee on Wall Street in the early 1960s, I remember the gray-haired, bespectacled old men bent over and concentrating on the inch-wide tapes spooling directly into their hands from the ticker. As technology improved to offer direct electronic access to price quotes and immediate analysis, trading – buying and selling large share positions to capture short-term profits – became possible for individual investors.
 
While the term “investing” is used today to describe to anyone and everyone whoever buys or sells a security, economists such as John Maynard Keynes applied the term in a more restrictive manner. In his book, “The General Theory of Employment, Interest, and Money,” Keynes distinguished between investment and speculation. He considered the former to be a forecast of an enterprise’s profits, while the latter attempted to understand investor psychology and its effect on stock prices.
 
Benjamin Graham – whom some consider to be the father of security analysis – agreed, writing that the disappearance of the distinction between the two was “a cause for concern” in his 1949 book The Intelligent Investor. While Graham recognized the role of speculators, he felt that “there were many ways in which speculation could be unintelligent.”
 
While there are observable differences in the goals and methods of the different philosophies, their successful practitioners share common character traits:
 
Read more . . .

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3 Risks of Investing in the Stock Market – Volatility, Timing & Overconfidence

dice invest-918x516Risk and reward are inextricably intertwined, and therefore, risk is inherent in all financial instruments. As a consequence, wise investors seek to minimize risk as much as possible without diluting the potential rewards. Warren Buffett, a recognized stock market investor, reportedly explained his investment philosophy to a group of Wharton Business School students in 2003: “I like to go for cinches. I like to shoot fish in a barrel. But I like to do it after the water has run out.”
 
Reducing all of the variables affecting a stock investment is difficult, especially the following hidden risks.

1. Volatility

Sometimes called “market risk” or “involuntary risk,” volatility refers to fluctuations in price of a security or portfolio over a year period. All securities are subject to market risks that include events beyond an investor’s control. These events affect the overall market, not just a single company or industry.
 
They include the following:
 
Geopolitical Events. World economies are connected in a global world, so a recession in China can have dire effects on the economy of the United States. The withdrawal of Great Britain from the European Union or a repudiation of NAFTA by a new U.S. Administration could ignite a trade war among countries with devastating effects on individual economies around the globe.
Economic Events. Monetary policies, unforeseen regulations or deregulation, tax revisions, changes in interest rates, or weather affect the gross domestic product (GDP) of countries, as well as the relations between countries. Businesses and industries are also affected.
Inflation. Also called “purchasing power risk,” the future value of assets or income may be reduced due to rising costs of goods and services or deliberate government action. Effectively, each unit of currency – $1 in the U.S. – buys less as time passes.
 
Volatility does not indicate the direction of a price move (up or down), just the range of price fluctuations over the period. It is expressed as “beta” and is intended to reflect the correlation between a security’s price and the market as a whole, usually the S&P 500:
 

  • A beta of 1 (low volatility) suggests a stock’s price will move in concert with the market. For example, if the S&P 500 moves 10%, the stock will move 10%.
  • Betas less than 1 (very low volatility) means that the security price fluctuates less than the market – a beta of 0.5 suggests that a 10% move in the market will produce only a 5% move in the security price.
  • A beta greater than 1 (high volatility) means the stock is more volatile than the market as a whole. Theoretically, a security with a beta of 1.3 would be 30% more volatile than the market.

 
According to Ted Noon, senior vice president of Acadian Asset Management, implementing low-volatility strategies – for example, choosing investments with low beta – can retain full exposure to equity markets while avoiding painful downside outcomes. However, Joseph Flaherty, chief investment-risk officer of MFS Investment Management, cautions that reducing risk is “less about concentrating on low volatility and more about avoiding high volatility.”

Strategies to Manage Volatility

Strategies to reduce the impact of volatility include:
 
Read more . . .

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How to Fix the United States’ Debt Problems & Reduce Federal Deficits

federal-debt-18 trillionAccording to projections by the Congressional Budget Office (CBO), America will continue to spend more than it receives in revenues from 2016 to 2026, and perhaps beyond. The budget deficit is projected to be slightly below 3% of gross domestic product (GDP) through 2018, then rise to 4.9% by 2026.
 
If the CBO projections are accurate, the federal debt will grow another $9.4 trillion by the end of the 10-year period, with potentially dire consequences for the country. According to the authors of the report, “The likelihood of a fiscal crisis in the United States would increase. There would be a greater risk that investors would be unwilling to finance the government’s borrowing needs unless they were compensated with very high interest rates; if that happened, interest rates on the federal debt would rise suddenly and sharply.”
 
Higher interest rates—averaging 2.3% in 2014 and 2015, as reported by TreasuryDirect—on an increasing amount of debt are likely to cause a “crowding out” effect, according to the Federal Reserve Bank of St. Louis. As the Federal Government borrows more money to pay its bills, there is less capital available for the private sector.
 
Many believe that the CBO’s concern is understated. In his testimony before the United States Senate Budget Committee February 25, 2015, economist Dr. Laurence J. Kotlikoff of Boston University bluntly stated, “Our country is broke. It’s not broke in 75 years or 50 years or 25 years or 10 years. It’s broke today. Indeed, it may well be in worse fiscal shape than any developed country, including Greece.” Kotlikoff claims that Congress has “cooked the books” for years, and that the difference between the present value of all projected future government expenditures less the present value of all projected future receipts was actually $210 trillion in 2014, more than 16 times the actual reported debt.
 
Whether or not economists agree on the appropriate level of the federal debt, there is agreement that the only way to reduce annual deficits and pay down the debt is for the government to Collect more than it spends – an unlikely (if not impossible) result in today’s political atmosphere. Only six times between 1960 and 2015 has the Federal Government spent less than it collected, according to the Office of Management and Budget. Most recently, in 2015, the Federal Government collected $3.25 trillion in taxes, almost 60% from income taxes, while spending $3.69 trillion. As a result, the budget deficit of $439 billion—the lowest deficit since 2008—was added to the federal debt.
 

The Myth of Economic Growth as a Solution

Politicians regularly suggest that the deficit problem can be resolved as the economy improves because revenues through taxes naturally increase as incomes rise through stronger growth. Such thinking encourages postponing actions that are politically unpopular, such as raising taxes or cutting popular programs.
 
Hoping that economic growth can solve America’s problems is likely futile for the following reasons:
 
GDP Growth Is Projected to Be Lower Than in the Past. According to the CBO’s Budget and Economic Data, annual growth averaged 3.2% to 3.3% from 1974 to 2001, 2.7% from 2002 to 2007, and 1.4% from 2008 to 2015. While the economy is recovering, the CBO projects average annual growth from 2016 to 2025 at 2.0%, well below the average prior to 2008.
 
Widening Income Disparity Threatens Economic Growth. The trickle-down theory was discredited by a 2015 International Monetary Fund report, which indicated that when the rich get richer, no others benefit and growth slows. The data from more than 150 nations suggests that when the richest 20% of a society increases their income by 1%, the annual rate of GDP growth shrinks by nearly 0.1% within five years.
 
Costs for the Major Entitlement Programs Will Rise Sharply. The aging population, rising healthcare costs per person, and increased costs of the Affordable Care Act are likely to boost federal spending for Social Security, Medicare, and Medicaid if current laws remain unchanged. As Kotlikoff testified, the estimated 76 million members of the Baby Boomer generation are already entering a period where each recipient will Collect “$40,000 in Social Security, Medicare, and Medicaid benefits each year.” As a consequence, the largest group of people to put money into the system – the Boomers – will begin taking it out. Left unchanged, Social Security will begin using its surplus funds to pay benefits in 2017 and deplete reserves by 2034.
 
Interest Costs on Federal Debt Will Triple in the Next 10 Years. According to CBO projections, net interest costs for the federal debt are projected to more than triple from $223 billion in 2015 to $772 billion in 2025.
Projections Do Not Include the Costs of New Wars for Defense Against Terrorism. The Watson Institute of Brown University estimates the costs to date of the wars in Afghanistan, Pakistan, and Iraq at $4.4 trillion, all of which were funded by borrowing. Some analysts estimate the costs of the three wars even higher. The cost of future defense is unknown, but likely to be as high as – if not higher than – past wars.
 
Read more . . .