Black Friday Financial Tips

Today is Black Friday, the biggest shopping day of the year, so called because this is the day that many retailers turn the corner into annual profit, able to finally record their figures in black ink on their ledgers. It’s the kick off of the holiday spending season.

If you listen to many news reports, it seems to be your patriotic duty to rack up as many credit card charges as you can today, since 70% of the US economy is fueled by consumer spending. Besides, you can rationalize that many of the bills won’t come due until after Christmas.

It’s useful to reflect on the original black weekdays, during the stock market crash of October 1929 which led to the Great Depression. In many ways, the irrational exuberance that led to the crash was reminiscent of our time. A couple of years ago, there seemed to be no end in sight to the constant increases in real estate values. In 1929,  it was the stock market, zooming ever upward, increasing five fold in a six year run. Much of the price run up was fueled by borrowing. By August 1929, stock brokers were routinely lending small investors up to two thirds of the value of the stocks they were peddling to buy “on margin.”  The investments were considered to be sure things.

Paper millionaires abounded. More money was extended on stock purchase loans than the entire amount of US currency in circulation. Joseph Kennedy, first Chairman of the Securities and Exchange Commission, and father of the President, said he realized it was time to move his fortune out of the market when the elevator operator in his building boasted about how wealthy he now was.

Speculation drove the market to its peak on September 3, 1929. For the next month it fell sharply losing 17% of its value but regaining half of its losses.

The crash began on Black Thursday, October 24, 1929. A record 12.9 million shares traded that day. The only reason the bottom didn’t fall out was that several leading bankers from Morgan, Chase and National City Bank bought large blocks of industrial shares to prop up the market. Although the Dow’s loss was minimal on the 24th, the stock purchases couldn’t hold back the tide. Black Thursday was followed in short order by massive panic selling on Black Monday then Black Tuesday when a new record was set of more than 16 million shares traded.  In two short months, the Dow Jones Industrial average had collapsed by 47%. Still the market continued its downward trend. It finally hit bottom on July 8, 1932. The Dow didn’t regain its pre-crash peak until November 23, 1954.

What can we learn from the dark days of the 1929 crash? What goes up does come down. We should only spend what we can afford, always mindful of the potential downside. Financial experts give us these simple,  shopworn but practical money handling pointers:

  • Budget. Anticipate what your expenses and income are and live within your means.
  • Never rack up more credit card charges than you can pay off in full on your next bill.
  • Save from every check, paying yourself first. If you’re on a steady income, set aside a fixed percentage of your gross. If you’re income varies, it’s even more important to have a cushion for emergencies.
  • Strive to keep enough funds to cover 3 months of expenses in an immediately accessible savings account, with another 3 months easily reachable elsewhere like money market funds or certificates of deposit.
  • Then and only then, start to put your money into investments that will provide a greater return, such as mutual funds, stocks, and of course real estate. Remember that greater returns do translate into greater risk.
  • Put as much as you are allowed into tax deferred investments like 401K’s and IRA’s, especially if your employer offers any matching funds. Retirement will be here a lot sooner than you think. To prove it, look back at the day you got your first job. It wasn’t that long ago, was it? Chances are good you have fewer years than that before you retire.
  • Don’t be hesitant about relying on the advice of a legitimate investment counselor. We all try to monitor our own health, but wouldn’t think of removing a diseased tooth or appendix ourselves.
  • Finally, keep track of your net worth. It’s a great way to keep score.

By following these simple tips, you’ll see your fortunes steadily grow.  Now go out and enjoy Black Friday. Bargains abound but, don’t overspend.

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