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Isn’t it nice to hear some reassurance during a recession? Especially when the headlines have been doom-and-gloom for months. And it’s true, we’ll weather this storm, just like we’ve weathered every other recession for the past 80 years. If you’re a long-term investor, your portfolio will recover.

You don’t have to take my word for it, I wouldn’t throw that kind of statement out there without providing you with some history and data to back it up. Hopefully this article will help you get some untroubled sleep tonight.

Don’t believe the hype…
The major media outlets are doing what they do best, painting this as the worst disaster in US history. Why? Because it sells papers, draws television viewers and attracts mouse clicks. The scarier the headline and the more dire the prediction, the more successful the story. Thirty years ago, we would have condemned any news journalist that used these kinds of irresponsible scare-tactics. Today, the news is forced to compete with other forms of media, so the line between news and entertainment has become very blurry. As a result, we’ve become accustomed to outrageous (often ridiculous) predictions of disaster and worst-case scenario analysis from people that we consider to be “newscasters” and “analysts”.

We’ve all become a bit more cynical when it comes to the media, but it still takes a toll when all you see for months are predictions of disaster. We see our portfolios taking a beating, and this puts that little nagging doubt in the back of our mind… “could everything they’re saying be true? Is this the beginning of a 10 year global depression?” To compound the problem, it’s human nature to try to one-up the competition. The negativity feeds on itself, today’s headline is always going to be worse than yesterday’s until the economy and the market start to recover.

Take heart…
Mass media is an EXTREMELY poor predictor of future events. What happened yesterday and what’s happening right now is the focus, the media is reactionary so you can count on the forecasts to always lag the actual market recovery. Take a little of Warren Buffett’s advice to heart, “attempt to be fearful when others are greedy and to be greedy only when others are fearful.” If the media is crying that we’re on the brink of total collapse… buy.

Stay objective…
People are fleeing the market in droves, financial institutions are imploding left and right, we’re embroiled in two costly wars, the dollar is weakening and inflation is much higher than it’s been for a long time, right? I don’t disagree with any of those statements, they’re all facts.

How can I say things aren’t so bad if I agree that all of those things are true? Because this is a recession, and things are always tough in a recession so I see no reason why this one would be any different. This is an inevitable part of the business cycle, albeit the most painful part. Every economic boom requires a bust at the end before the cycle can start over and we can experience the next expansionary phase.

But isn’t this worse than all past recessions? Nope, it’s milder than some and worse than others but it’s far from the worst. It only feels that way because you’re losing money. Stay objective, and when you start having doubts, let history be your guide.

So how about some history… when have Americans faced greater challenges?

~ Our worst economic disaster was the crash of 1929. Back then, we were an emerging market. Ever own an emerging market stock? They define the word volatility. The crash of ‘29 and the 10 year depression that followed were dark times in America for the rich, poor, and everyone in between. In contrast, today we are the most developed economy in the world and we have sound fiscal and monetary policies, which is why our expansion periods (bull markets) are so much longer than our contractions (market corrections and recessions).

~ The 2000-2002 Tech Wreck was scarier than this recession. The scariest part of the tech wreck for me occurred right before the crash. Do you remember the euphoria in 1999 and early 2000 near the end of the greatest expansion that the US stock market had ever experienced? Pundits claimed that the tech boom created a new paradigm in business, “we would never have to experience another recession again because of the exponential growth potential of technology companies”. That sounded like complete insanity to me and the crash that followed proved that people often lose their objectivity during strongly bearish AND strongly bullish conditions.

~ 9/11 was scarier than this recession. Prior to 9/11, most Americans spent very little time worrying about our national security. Terrible things happened in other places, they didn’t happen here at home. On that fateful day, we were introduced to terrorism on an unprecedented scale and it happened on American soil. Our illusions of complete security at home were shattered in an instant and the market plummeted. At the time, we had no idea how deep or painful the economic and political fallout that followed might be. The fact that the market recovered only a few months later is a testament to America’s will and resilience.

~ Black Monday was scarier than this recession. On a random Monday in 1987, the stock market experienced its worst one day drop in history, it plummeted over 20% in a single day. I doubt many brokers, serious investors or retirees living off of their portfolio slept well (or at all) that night. There was no logical explanation for what happened, and to this day, people still argue over the cause of the crash (for the record, I blame program trading!). Nerves were frayed for months afterward and market volatility reached unprecedented new highs as investors jumped in and out of the market trying to avoid being part of the next massive selloff.

~ Stagflation in the 70’s was scarier than this recession. Stagflation was baffling for investors and economists when it first occurred in the 1970’s. How could we be experiencing stifling inflation while we were also experiencing a prolonged recession? Theorists worried that recession coupled with inflation could only lead to one logical conclusion, a complete economic meltdown. At the time, there was no historical data to refute that conclusion. Of course, that didn’t happen, but it sure created scary market and economic conditions for several years.

Those examples may have provided a little comfort but, personally, hearing how things could be worse never really makes me feel better. I’d rather hear why things aren’t as bad as they seem, so here are a few historical investing facts that help me sleep like a baby…

~ Every 10 year period since the end of the depression has produced gains. This is even true RIGHT NOW. That’s right, even though we have the current recession and the tech wreck of 2000-2002 lumped into the mix, diversified long-term investors (such as those holding S&P 500 Index Funds) from 1998-2008 have a gain.

~ In the last recession, we faced an INVESTING bubble which created a valuation crisis. Since I’m an investor rather than a real-estate speculator, I’ll take a housing bubble over an investing bubble any day. When the tech boom ended in 2000, every major index was sitting at a record high and stock valuations were through the roof. We were facing a valuation abyss, most stocks in the technology-laden NASDAQ were trading FAR above normal or realistic P/E ratios. We had a long way to fall back then, but we are in a very different position today. Did you know that the S&P had barely made it back to the levels of the late 90’s before this recession started? We don’t have that monkey on our back this time around, stocks are already starting to look pretty cheap from a valuation perspective, even to the bearish pessimists.

~ Today we are facing a HOUSING bubble, but comparisons are starting to overshadow losses. The major banks are experiencing massive losses as a result of questionable speculation and sloppy sub prime lending. What we have working in our favor is that comparisons are starting to look pretty good. The largest bank (no longer the largest) suffered a $10 Billion loss in Q4 ‘07 and a $5 Billion loss in Q1 ‘08. Analysts predicted that they would lose $3.1 Billion for Q2 but they beat expectations by only losing $2.5 Billion. In the last six days, the stock has gone up 43%. Wait! After announcing a $2.5 Billion loss the stock is UP? Comparisons are powerful and the media will almost always focus on recent performance, they rarely look further back than a year.

~ First Movers are starting to pour money back into the market. The financial sector has been beaten down the worst during this recession, and many companies are simply suffering from guilt by association. However, those that weren’t involved in the worst of the risky speculation or sloppy sub-prime lending are now being rewarded. For example, JP Morgan has had decent volume for a couple of months and their stock price is almost back to break-even for the year. First movers are snapping up the best bargains.

Bottom line, this recession will inevitably end just like those that came before it.
I’m not an oracle or an expert, and I have no idea when this recession will end, but I still feel comfortable telling you that “everything’s going to be okay”. The market can’t always go up, it needs cooling off periods. The cooling off periods that are particularly steep, prolonged and painful are called recessions. We’re experiencing one right now, but it’s not the first or the worst and it won’t be the last.

Stay objective, stick to your long-term investing strategy, and ignore the headlines and short-term market volatility. Buy and hold… and hold… and hold… and in the future, when you’re reading euphoric predictions of never-ending bull markets or dire predictions of decade-long global depressions, trust history, if you’re a long-term investor, your portfolio will recover.

Thank you for reading! Please share your thoughts in the comment section below.
~ Odd Lot

There are more methods for paying off debt than I could list in a single article, but my personal favorite and the one I recommend the most is the “Debt Snowball”. The best way to manage debt is to avoid it entirely, but if you’re like almost 80% of Americans, you’re already in it pretty deep and trying to figure a way out. Recessions and inflation really magnify this problem, there are more searches for “debt management”, “debt elimination” and “get out of debt” than I’ve seen since the 2002 recession.   

Get that snowball rolling down the hill! I know that sounds silly now, but just keep reading. I’ve seen people that have struggled with their debt for years turn their lives around pretty quickly with this method. Before we dive into the details let me tell you what makes this approach different and more powerful than other methods you may have tried in the past. 

The Debt Snowball provides rewards along the way, and these rewards encourage you to continue paying off your debt. The other major benefit of this approach is that it instills good money management and saving habits without you even realizing it. By the time your debt is gone, you’ll be a disciplined wealth-building machine.

Here’s how it works. First, create a list of all of your debts. A table similar to the following is all you’ll need…

Notice that these are sorted in ascending order by the amount owed with the smallest balance first and the biggest balance last. Why? Because that’s the order you’ll be paying off your debt, that’s how the snowball works. Paying off the small debts first gets the snowball rolling down the hill. We’re not going to worry about the rate or the minimum payment, we’re just going to focus on balances. I also added a row where we could list how much extra you can afford to pay each month in the “Pay extra if you can row”, $100 in this example.

To get your snowball rolling, you want to pay the minimum payment on every debt except the smallest. That’s right, it might sound like blasphemy based on all of the debt elimination methods you’ve tried in the past but I’ll say it again, just pay the minimum on every balance except the smallest. On your smallest debt, Macy’s in our example, you will pay the minimum plus whatever extra you can afford.

You must also STOP BORROWING for this to work. Until you’ve made substantial progress, no more loans and no more financing. Pay cash or use your debit card if the inconvenience of cash annoys you, but don’t borrow or charge ANYTHING.

Back to our example. The first month we are going to pay the minimum payment of $40 for Macy’s plus the extra $100 that we can afford. We will pay the minimum payment on everything else.

Fast forward two months…

Two months later and we’ve already eliminated the Macy’s card, a great start. So now that Macy’s is paid, what do we do with that $40 minimum payment? We packed it back on to our snowball so that it can get bigger as it rolls down the hill. My metaphors are usually pretty weak, what I’m literally saying is that we took the $100 extra and the $40 minimum Macy’s payment and started applying it to the Bank of America card which is why you already see a much smaller balance.

Let’s fast forward two months again…

Now the Bank of America Card is paid! How could it be paid off so fast? We paid the minimum $27 payment plus we applied all of our extra money. Extra money? We are still paying $1,134 in payments each month, that total “Payments per Month” amount is never going to change. When a debt gets paid off, we simply add its payment to the next smallest balance and we keep doing this until everything is paid off.

Paying off these smaller debts is like taking baby steps, it’s a great reward and it doesn’t take very long plus it reinforces the behavior. Can’t you see yourself being pumped after you closed out that Macy’s card and then even more excited when you paid off Bank of America only two months later? Wouldn’t that give you motivation to continue? For many people, the answer is yes, they can see real and fast progress.

Let’s fast forward six months this time…

 Another debt paid off, Nieman Marcus is gone! We are now applying $446 per month to the American Express bill so it is disappearing quickly (the $100 extra + $40 Macy’s payment + $27 Bank of America payment + $180 Nieman Marcus Payment + $99 minimum American Express Payment).

Usually after this many months, paying the $1,134 no longer seems like a burden, it starts to feel like a reward and a victory. You can really see yourself chipping away at that mountain of debt because you are starting to make BIG payments on your smallest balance.

Let’s jump ahead another 6 months…

Great progress, we paid out the Chase AND the American Express.  At this point, only the biggest ugliest debts are left, all the small stuff is gone. Since we continue to pay $1,134 per month even though a lot of our debt is gone, our snowball is starting to turn into an avalanche. This will allow us to take out those big balances quickly, we can apply $592 per month to our Rooms-to-Go account.

We’re going to jump ahead another six months, and this time, pay particular attention to how much debt is disappearing…

See how fast you can pay off even large loans when you use this method? You’re still paying $1,134 per month, but with all of your small debts gone, $692 per month was going to Rooms-to-Go. After Rooms-to-Go was paid for you were able to start paying $999 toward your car payment per month and still pay the minimum payment on the student loan!

This time we’re going to fast forward an entire year, mostly because I’m tired of doing the calculations…

 All of your debts are gone except for a $7,046 student loan balance and it took less than three years. You’ve erased $34,120 of debt. Seven months from now, even that student loan will be paid off since you’re still paying $1,134 per month.  

In addition to getting out of debt, you will have gained something very valuable along the way, the habit of saving. You may be thinking “The habit of saving?! All I’ve only been doing is paying off debt, I haven’t saved a dime!” 

That’s the beauty of the Snowball Approach, you continued to pay $1,134 per month even though debts were disappearing. You could have taken that extra money and spent it, but instead, you chose to live beneath your means and apply the extra money to debt. When all of your debt is gone, what will you do with that $1,134 per month? That’s right, save it! It will be easy, it won’t even feel like saving because you’re already in the habit and you won’t miss the money because you haven’t had access to it in three years.

I’m a firm believer in long-term goals so let’s skip ahead