Stay the Course

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While volatility can be troubling for investors, financial experts caution against making any rash decisions when markets fall. Volatility can lead to opportunities to buy more of your favorite stocks and set yourself up for future gains.

Expect and accept volatility

You, as an investor, should accept market volatility — which is relatively common — as a normal part of the process of investing and the best way to outrun inflation, said certified financial planner Brad Lineberger, president of Carlsbad, California-based Seaside Wealth Management. “Embrace the volatility, because it’s why investors are getting paid to own stocks,” he said.

This means you should stay calm even through extreme movements. While stocks always move up and down, long-term market returns are still based on the same things: dividend yields, earnings growth and change in valuation, according to Zach Abrams, a CFP and manager of wealth management at Shaker Heights, Ohio-based Capital Advisors.

investors should worry about Jerome H. Powell, chair of the Federal Reserve. The Fed raised interest rates by a quarter percentage point in March for the first time since 2018 and projected six more increases this year.

“The market reaction in the past four to six weeks can almost all be attributed to the Fed and how interest rates have moved,” Mr. McMillan added. “There’s been very little response to events in Ukraine.”

Investors haven’t fully appreciated what rising interest rates mean for the stocks in the financial sector, especially banks and insurance companies, which have suffered from a prolonged stretch of near-zero interest rates, said Andy Kapyrin, the co-chief investment officer of RegentAtlantic. “The market hasn’t yet priced in the benefits financial stocks are going to see from higher interest rates,” he said. “Banks in particular can make a much higher interest-rate margin as short-term rates rise.”

Stocks that could suffer from higher rates include shares of small, emerging software and e-commerce companies and other capital-intensive tech firms that have depended on borrowing heavily at low rates until they can turn profitable, Mr. Kapyrin said.

Individual investors should maintain a long-term horizon even in retirement, which can last 30 years or more, said Simeon Hyman, a global investment strategist at ProShares. That means ignoring stock plays based on temporary upheavals.

“Historically, downturns in the equities market from major geopolitical events are fairly short-lived,” Mr. Hyman said. “If you look at what happened after 9/11, the global pandemic or the invasion of Kuwait, the downturns were measured in weeks or a couple of months.”

References:

  1. https://www.cnbc.com/2022/05/05/stocks-are-tumbling-heres-what-to-keep-in-mind-.html
  2. http://www.capstonefinancialga.com.advisor.news/staying-the-course-may-be-the-key-to-wartime-investing/

Price and Value Matter

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“Price is what you pay; Value is what you get.” Warren Buffett

The best investors tend to invest differently then the typical Wall Street and retail investors. The best investors don’t follow the crowd, or allow the emotions of fear or greed influence their savings, investing and building wealth decisions. Since, most people are in debt and are not building long term wealth.

They, the best investors, follow an analytical process to assess the value of an asset. They understand the difference between an asset’s value versus an asset’s market price. They understand that it matters how much you pay for an asset. And, they will not pay a price for an asset that far exceeds that asset’s value.

Emotional investing causes losses over the long term

  1. Buying assets at market peaks or all time high stock valuations
  2. Selling assets during times of high volatility and market corrections.

Avoid making the following investments:

  • If you don’t understand how a company or investment makes or loses money.
  • When the price of the stock (or investment) is greater than value of the company (or investment). It matters how much you pay for an asset.
  • If the asset class is at euphoric high.
  • When making investing decisions based on emotions or fear of missing out (FOMO), and you’re not being patient, disciplined and objective.

“The goal isn’t more money. The goal is to live life on your own terms.” Will Rogers

  • Freedom from work and trading time for money.
  • Freedom to live life intentionally and purposefully on your terms. You want the ability to take time off when you want and as long as you want.

Annually, financial planners and brokerage firms still make money off your money even when you lose money. Most financial planners, 95% of them, fail to outperform an index fund over a ten and twenty year period. No one can or has successfully predict the future, that’s why barely 5% of financial planners have out perform an market index fund over a ten to twenty year period.

Don’t forget, you will lose a large portion of your tax deferred retirement nest egg to federal and state taxes when you start withdrawing or commence taking required minimum distribution (RMD) from the accounts.

Cash flow is your monthly earned and passive incomes minus your monthly cost of living expenses.

References:

Everything Money

  1. https://www.magicformulainvesting.com

Qualified Dividends vs. Ordinary Dividends

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The distinction between Qualified and non-Qualified dividends has to do with how you’re taxed on those dividends.

  • Qualified dividends are taxed at 15% for most taxpayers. (It’s zero for single taxpayers with incomes under $40,000 and 20% for single taxpayers with incomes over $441,451.)
  • Ordinary dividends (or “nonqualified dividends”) are taxed at your normal marginal tax rate.

The concept of qualified dividends began with the 2003 tax cuts. Previously, all dividends were taxed at the taxpayer’s normal marginal rate.

The lower qualified rate was designed to fix one of the great unintended consequences of the U.S. tax code. By taxing dividends at a higher rate, the IRS was incentivizing companies not to pay them. Instead, it incentivized them to do stock buybacks (which were untaxed) or simply hoard the cash.

By creating the lower qualified dividend tax rate that was equal to the long-term capital gains tax rate, the tax code instead incentivized companies to reward their long-term shareholders with higher dividends. It also incentivized investors to hold their stocks for longer to collect them.

Qualified Dividends

To be qualified, a dividend must be paid by a U.S. company or a foreign company that trades in the U.S. or has a tax treaty with the U.S. That part is simple enough to understand.

Importance of dividends

From 1871 through 2003, 97% of the total after-inflation accumulation from stocks came from reinvesting dividends. Only 3% came from capital gains.”

To put this into perspective, take a look at the example used by John Bogle, where he writes: “An investment of $10,000 in the S&P 500 Index at its 1926 inception with all dividends reinvested would by the end of September 2007 have grown to approximately $33,100,000 (10.4% compounded). If dividends had not been reinvested, the value of that investment would have been just over $1,200,000 (6.1% compounded)—an amazing gap of $32 million.” The reinvestment of dividends accounted for almost all of the stocks’ long-term total return.

Dividends are an important consideration when investing in the share market as they provide a reliable source of return while you wait.

References:

  1. https://www.kiplinger.com/investing/stocks/dividend-stocks/601396/qualified-dividends-vs-ordinary-dividends

Commit to Building Wealth

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“Change your mindset and change your life.”

If you think you can improve your financial situation, you’ll do exactly that.

“Change your mindset around wealth,” said Mandi Woodruff-Santos, co-host of the “Brown Ambition” podcast. “Tell yourself it’s possible to build wealth, that you can learn anything, and that you can do it! Once you begin to internalize your ability to build wealth, it makes it easier to take the steps needed to increase your earnings, start investing and learn along the way.”

It’s important to realize that no one is going to change your life for you. you must make the decision to learn, to grow, and to improve your life. The most important thing is that you get started!

There are five areas to work on in order to create the most efficient and effective change to your mindset – Your beliefs, fears, perspective, self-talk, and support.

CHALLENGE YOUR LIMITING BELIEFS

Limiting beliefs are the stories we tell ourselves about who we really are: shy, overweight, undeserving of love or success. But, they can be replaced with empowering beliefs.

Nearly everyone has some measure of limiting beliefs that prevent them from realizing their dreams and achieving great milestones. Those who are able to challenge and overcome them go on to achieve their goals. Those who don’t continue to live in negative patterns – and often don’t even realize it.

By rebuilding a positive set of habits, we are able to reach new levels of success* in all aspects of our lives.

FACE YOUR FEARS

When we have identified and gotten honest with ourselves about our belief system, we can then go deeper by really examining our fears. When we examine our fears, we ask ourselves questions like; what is the surface level fear? Where is it coming from? Is it a real or perceived fear? What is the underlying fear? What can I do to change my experience of it? And other such questions.

Fear is a destructive emotion; we often carry fears that we don’t need to. Overcoming your fears is a major step toward how to change your mindset for success.

SHIFT YOUR PERSPECTIVE

Learning how to change your mindset can seem overwhelming, but it doesn’t have to be. Sometimes all it takes to change your mindset forever is the smallest shift in the way you see the world. One choice that we can easily make is the meaning that we give to our experiences. Tony Robbins says, “Nothing in life has any meaning except the meaning I give it.” Do we see challenges as obstacles – or as opportunities?

When we start to make changes to our perspectives, we consider things like; how am I responding to situations? What am I doing, what am I thinking, what meaning am I giving things that I experience? When it comes to our perspectives a small shift with massive results.

CHANGE YOUR SELF-TALK

When you’re thinking about how to change your mindset, do you find yourself mired in negative thoughts? If you do, focus on your language to change your mindset. Change your self-talk starting with how you begin your day. If you plant positive language in your head at the beginning of the day, you’ll feel more energetic. You might find it effective to make a mantra for yourself, depending on how you’re feeling.

Change your mantra as often as you need to, in order to maximize your own power. In addition, remember that it’s okay to need to correct your course many times during the day.

To keep your positivity flowing, surround yourself with people whose mindsets reflect where you want to be. And remember, setbacks are normal. Bounce back from setbacks by reminding yourself why you want to change.

GET SUPPORT

Find some like-minded people whom you can share your experiences with, learn, and grow together.

These days it is pretty easy to find a group or forum online though you might need to try a few before you find a community that really resonates for you. In time many of the people in your life will see you grow and change and want to know more but for now, just find a few people who want to create change in their mindset (or have already done so) and enjoy the process!

References:

  1. https://finance.yahoo.com/news/top-expert-money-advice-better-230111509.html
  2. https://www.gobankingrates.com/money/wealth/top-expert-money-advice-for-how-to-better-build-your-wealth/
  3. https://www.linkedin.com/pulse/how-changing-your-mindset-can-change-life-the-mind-and-body-co/

Taxes are Your Largest Expense

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“Taxes are your largest single expense.” ~ Robert Kiyosaki

Total taxes are by far and away the largest expense that most households face on an annual basis. Total taxes are levied on income, payroll, Social Security, Medicare, property, real estate, sales, alcohol, gasoline, capital gains, dividends, imports, estates and gifts, as well as various other fees such as vehicle tags and driver license. It’s important for Americans to understand that income taxes, sales, Social Security and a myriad of other taxes and fees dramatically reduce your discretionary net income.

The average American household spends anywhere between 25-50 percent of their life working just to pay the diversity of taxes. That means that more than three to six months out of every year are spent working solely to pay your local, state and federal taxes and fees.

Effectively, all levels of government in the U.S. (federal, state, county, city/local) confiscate nearly half of the average household’s income every year, and yet they still cannot balance the national budget and always seem to need more money.

How much is enough when nearly half of the productive effort of the nation is taxed and used unproductively.

Your total tax rate, the one which actually matters the most to you includes more than just income. And these insidious taxes grow in size and quantity every year.

Total taxes are by far the single largest expense that you will pay every year. And, you can’t escape taxes, so the best thing you can do is learn how to better manage your taxes burden and understand how federal , state and local tax laws and regulations can work in your favor.

References:

  1. https://www.richdad.com/taxes-are-your-largest-single-expense#:~:text=Taxes%20
  2. https://www.financialsamurai.com/your-largest-ongoing-living-expense-taxes/

Dow Jones Industrial Average

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The Dow Jones is a terrible measure of the U.S. economy

Created by Charles Dow in 1896, the Dow Jones Industrial Average was intended to act as a “proxy for the broader U.S. economy.” Currently, it’s purpose is to provide a big-picture view of whether stock prices are generally moving up, down, or sideways from moment to moment, and by how much.

For the past 126 years, the Dow Jones Industrial Average (DJIA) has served as a barometer of the stock market’s health. The index is composed of 30 highly profitable, multinational companies.

In many respects, the Dow Jones is home to mature and generally slower-growing businesses. Although, “mature” businesses can make patient investors wealthier and long-term investors financially independent.

All components of the DJIA are household names like Johnson & Johnson (JNJ), Coca-Cola (KO), Disney (DIS), and Microsoft (MSFT).

Dow Is Weighted

The DJIA is price-weighted. Rather than using a simple arithmetic average and dividing by the number of stocks in the average, the Dow Divisor is used.

This divisor smooths out the effects of stock splits and dividends. The DJIA, therefore, is affected only by changes in the stock prices, so companies with a higher share price or a more extreme price movement have a greater effect on the Dow. 

Many financial pundits argue that the DJIA has lost its relevance as a barometer of U.S. stocks. the Dow is deeply flawed. Professor Jeremy J. Siegel at the Wharton School summed it up. Today, no one would build a stock market index that contains only 30 companies, with some sectors of industry completely excluded (like utilities). Worse, the index is weighted by share price instead of market capitalization, which means one company, Boeing, has a wildly outsized sway on the entire stock market.

Yet, DJIA continues to serve as a market and economic indicator. As long as it contains the stocks of companies that reflect the major industrial areas of the U.S. economy during any given period, this 30-stock index will likely remain the standard of financial indicators.

References:

  1. https://www.msn.com/en-us/money/savingandinvesting/the-dow-jones-industrial-averages-5-fastest-growing-stocks/ar-AA103dnv
  2. https://www.investopedia.com/articles/stocks/08/dow-history.asp
  3. https://www.investopedia.com/ask/answers/difference-between-dow-jones-industrial-average-and-sp-500/

Fears of a Recession

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The U.S. economy shrank for a second consecutive quarter, which is a common definition of recession. Additionally, the U.S. economy is enduring a rocky transition from an exceptionally strong post-pandemic recovery to a steep Federal Reserve caused slowdown.

The Commerce Department reported that Gross Domestic Product (GDP) contracted at a 0.9% annual rate in the second quarter of calendar year 2022. With the 1.6% annual rate decline in the first quarter, this means the U.S. economy has declined for two consecutive quarters, a commonly used, but not official definition, of recession. GDP is a broad measure of the goods and services produced across the economy.

Inventories, specifically the pace of restocking, accounted for much of the economic output decline experienced in the second quarter. As an example, Walmart announced that it was cutting prices in its Sam’s Club stores to reduce merchandise levels.

However, the official arbiter of U.S. recessions, the National Bureau of Economic Research (NBER), has not announced that a downturn has begun because an array of other indicators, such as employment and corporate earnings, do not look as dire. NBER defines a recession as a significant decline in economic activity, spread across the economy for more than a few months. It usually doesn’t make a recession determination until long after the fact.

In fact, within the broader economy, the job market remains strong and if employment stays strong, consumer’s will to spend should remain intact.

Consumer spending continues to grow, but at a slower pace. The housing market has cooled down under rising interest rates and high inflation has taken the steam out of business and consumer spending v

Corporate earnings haven’t been as bad as investors had feared, suggesting that soaring inflation and signs of declining economic growth aren’t weighing too heavily on the economy.

The Federal Reserve raised interest rates from near zero to a range between 2.25% and 2.5%, so far this year, and Chairman Powell hinted that the pace of rate increases would eventually flow.

The economy is slowing down as the Federal Reserve acts to bring down inflation. The challenges facing the economy are high inflation, weakening consumer sentiment and supply chain volatility. Consumer spending accounts for about two-thirds of risk U.S. economic output.

References:

  1. https://www.wsj.com/articles/if-this-is-a-recession-we-might-not-know-for-months-11659173402?mod=mhp

Thought of the Day

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There are no limitations to the mind conditioned for success and achievement.

“Try as hard as you wish and you cannot be happy unless you BELIEVE IN YOURSELF!

Work with all the strength at your command and you cannot accumulate more than barely enough to live on unless you BELIEVE IN YOURSELF!

The one and only person in all this world through whose efforts you can be supremely happy under all circumstances, and, through whose labor you can accumulate all the material wealth that you can use legitimately, is YOURSELF!” —Napoleon Hill

When you believe in your ability to succeed…you completely transform your life.

Federal Reserve raised its benchmark overnight interest rate

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The Federal Reserve is driving the economy into a recession as it tries to fight inflation.

The Federal Reserve raised its benchmark overnight interest rate by three-quarters of a percentage point in an effort to cool the most intense breakout of inflation since the 1980s. And, there are further increases’ in borrowing costs still ahead despite evidence of a slowing economy in an effort.

Inflation has been raging in the U.S. while economic growth measured by GDP is slowing. The U.S. Commerce Department recently reported a second straight quarter of negative economic growth.

Generally, a central bank tightens money by raising interest rates when the economy is healthy or over heated in order to head off inflation. By making money more expensive to borrow, the Fed’s rate moves work relatively quickly to temper demand. As buying a house or a car or expanding a business becomes pricier, people pull back from doing those things. With fewer consumers and companies competing for the available supply of goods and services, price gains are able to moderate.

Larry Summers, the former Treasury Secretary, argued that the Federal Reserve needed to take “strong action” to control inflation and that allowing inflation to gallop out of control would be the “bigger mistake” than causing a recession. Summers blames inflation on the spending boom of 2020/2021 that spurred excess demand.

Summers believes to tame inflation the Fed must crush demand. But, slowing the economy down could trigger a recession, leaving workers unemployed and families with lower incomes.

Fed officials themselves acknowledge that their tools are blunt, that they cannot fix broken supply chains and that it will be difficult to slow the economy enough without causing an economic downturn.

References:

  1. https://www.nytimes.com/2022/07/27/business/economy/interest-rate-inflation-impact.html
  2. https://www.reuters.com/markets/us/fed-unveil-another-big-rate-hike-signs-economic-slowdown-grow-2022-07-27/

Words Create Life Direction

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“Train your mind to see the good in every situation.” —Unknown

Words set the direction and destination for your life. You can’t speak defeat and expect victory! That’s why you need to pay attention to what you’re saying.

It is not possible to walk in prosperity and talk poverty. It is not possible to walk in health and talk sickness. It is not possible to be love and forgiveness ruled and at the same time talk bitterness and anger.

Change the words you speak will change the direction of your life.  Words are the rudders that steer your life.

Ship captains know the importance of a strong rudder. Without it, they can never reach their destination. Your tongue is like a rudder on a ship. Whatever controls your tongue, controls your direction and destiny.

Your tongue and your words are the rudder of your life. Joel Osteen

What we say with our words and think in our minds will eventually become what we believe and what fruits our lives will bear. You will eat the fruit of your words. Thus, everything you say should be good and encouraging. Since “your tongue and your words are the rudder of your life.”

“I know for sure that what we dwell on is what we become.” — Oprah Winfrey

This is why it is important that you start saying and focusing on positive things about yourself. You set the direction with your words. Over the long-term, you’re going to become what you’re continuing saying.

Thankfulness is the language of faith! And with faith, you have to speak it before you see it.

“My friends, love is better than anger. Hope is better than fear. Optimism is better than despair. So let us be loving, hopeful and optimistic. And we’ll change the world.” —Jack Layton

Your words set the direction and destination in your life. You will never rise above them, your words. You will become in your tomorrows what you believe and speak in your todays.

You can change the course of your life by changing the words you speak. Start taking notice of the direction your words are steering your life. Words have directions an destinations. Change your words, change your destination.

References:

  1. https://www.yourlifeyourvoice.org/pages/tip-101-positive-things-to-say-to-myself.aspx
  2. https://www.jonasclark.com/changing-the-words-you-speak-change-the-direction-of-your-life/