Finance 8. Control your debt Paying down your debt is probably the oldest and most effective strategy for dealing with “interesting” times. During times of financial turmoil, it’s often one of the simplest steps that you can take to improve your personal finances and, just as important, to the way you feel about your personal finances. Keep in mind that your goal shouldn’t necessarily be to pay off your debt completely − debt can be a very useful financial tool depending on your circumstances. And it’s true that current interest rates don’t look to be going up any time soon, making monthly interest payments on most mortgages and loans relatively manageable for most borrowers. Still, you need to be able to control your debt, rather than the other way around. If you have a small mortgage, or perhaps you’ve taken out a line of credit to invest in an income property or a diversified portfolio of stocks, then you’re probably fine holding on to that debt. But if you find yourself constantly worried about how much of your monthly income goes to interest payments, or you’re losing sleep over the size of your mortgage, or you’re worried about what a rise in interest rates would do to your ability to pay off your loans, then we’d suggest that your priority should be debt reduction − preferably before times become really interesting. Start with your credit card balances − with a typical card charging you somewhere around 19% interest annually, this is a quick and obvious place to make a big impact on your finances. Then take a look at your line of credit and other loans. Your mortgage can come last − rates are generally lowest on loans that are secured by property. A good target is to keep your overall debt to a level at which you could pay it off substantially within two or three years. The best time to start toward that goal is right now. 9. Build your buy list Youmay have heard the old saw about how the Chinese character for “crisis” is built out of the characters for “danger” and “opportunity.” Hate to say it, but it’s not actually true. However, it does offer an excellent lesson regarding how savvy investors should think about “interesting” times. While nobody looks forward to market volatility, savvy investors know that one of the best ways to deal with it is to invest in beaten-down businesses and asset classes that have been subject to investor overreactions. To do that, you’ll want to start compiling a list of potential businesses and assets in which you’d really like to invest − if only the price were right. Create a “buy list” of these names and, if the downturn becomes pronounced, youmight find yourself with an opportunity to buy some at a bargain price. Perhaps you already have a general idea of some excellent investments which you’d like to get into. If not, here are four quick questions that you can use to evaluate potential opportunities: Is there something specific going on? – Is there a specific problem or challenge that’s affecting this company? If so, you’ll need to research it thoroughly before stepping in. On the other hand, if the company has simply been caught up in a general market malaise, that could spell opportunity. Is the business stable? – Is this the kind of business that’s likely to be around in the next three to five years? Or is it a young startup that’s still experiencing growing pains? Generally speaking, an established company is usually better able to survive a market downturn, which could make it a good defensive play. On the other hand, a young, growing company is more likely to be affected by general selling overreactions − whichmeans more opportunity for investors who can ride out the storm. How’s themanagement?−Does the company have a strongmanagement teamwith a proven track record of leading a business through tough times? Ideally, you’ll be looking for a management team that has lived through one or two business cycles before, so they’ll know how to do it again. Is the balance sheet healthy? − Does the company have the financial wherewithal to survive challenging times? Or are they dependent upon commodity prices, debt financing or some other means of raising cash if they want to keep the lights on? Of course, this is just a starting point for amuch more detailed look at a given investment. But it should help give you some ideas for further study. CSANews | WINTER 2019 | 35
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