Dan,
Making the decision to pay off debt or purchase investments is a common decision that companies make all the time. Honestly, it depends on your risk tolerance. The market’s at a relative low. Historically at times like this, it’s been a good time to invest. But, I thought it was a good time to get in 3 months ago, and I was wrong. In my opinion, any time you can get a great company with predictable future cash flows with the present value of future incomes at less than 20%… It’s hard to resist. Right now’s a fire-sale.
Two points:
1. Remember to factor in taxes, you probably need 10% before taxes to beat debt payoffs.
2. Don’t invest if a lot of your capital is getting eaten up by trading expenses.
There’s a lot of potential for a rebound. People sell everything when they are fearful. I see a lot of opportunities surrounded by varying levels of risk. There are highly profitable companies selling at less than book value. If I was you I’d do 50:50. Pay off debt but at the same time, buy undervalued securities. That said, if the Dow Jones and S&P continue to fall, I’d accelerate purchases.
If you look around, global governments are fighting this credit crunch head on. I think they’ll fix it.
If your short on time, look for mid-large companies with a low PEG ratio and high motley fool caps ratings.
Besides, I’m calling market bottom. The negative consensus is too high and the central governments around the world are pushing positive messages through the pipeline.
That’s one I read for updates frequently.
Glen
From: Dan
Sent: Monday, October 06, 2008 1:52 PM
To: gbrad
Subject: Starting Strategy ?
Glen,
This might be too basic a question for you, but I’d appreciate any feedback if you have time to provide it. My question concerns a starting investment strategy in the current market, given preexisting debt obligations.
Currently, I owe about 10k in credit card debt that I incurred after my wife took a year off work after the birth of our daughter. During the same time, we burnt through our small savings and currently are trying to figure out the best blend of investments/debt payoff. The good news is the debt is cheap at 5.9% APR & with my wife just starting working again, we have about $1000/month surplus that we can allocate to debt paydown and/or investments.
So, my question: Is it better to strictly target debt paydown, or to take a blended approach to take advantage of opportunities to buy into cheap stock. My phyche tells me to pay down the debt in a year, then start agressively putting money into stocks – ostensibly, it would “feel” better. Yet logic tells me that if I can beat 6% on my returns, then allocating at least some of the cash to securities is the way to go, given I’m providing myself a “head start” over the former strategy on generating profits.
So, given the instability of the market right now, how do I determine the best approach to this delima?
Aside:
I’m certain this is obvious, but just for the sake of disclosure,I am indeed a beginning investor, but am looking to make investing a major part of the rest of my life. Currently my only holding is a small stake in CTSH (I am an employee and participate in the ESPP). I also have Schwab online checking which will pay me 3% to sit on my cash in that account – less than I project the CPI to increase over the coming year, but better than nothing, I suppose.
Dan