investment planning

There is a legend about a successful financial advisor in Warren Buffett's stomping grounds of Omaha, Nebraska. It is reported that this advisor has learned the art of communicating the basics of wealth building with the local farmers. The advisor, who we will call Fred Smith, greets clients in his office with a window behind his desk that overlooks fields of blowing wheat and corn.

Brent and Darlene really enjoy their 'toys' and their lifestyle. In the last few years, they bought themselves a big screen TV, a stereo system, two expensive new vehicles, a ski boat and took a tropical vacation, mostly on credit. They also used their credit cards to pay for numerous restaurant meals, theatre tickets, hockey games and other expensive outside entertainment. It wasn't long before they were carrying a balance from month to month. The credit charges and payments quickly became a burden.

In his early July testimony before Congress, US Federal Reserve Chairman Jay Powell. Mr. Powell stated that the Fed funds rate will be reduced, given lower than expected U.S. inflation. This follows on the heels of President Trump’s demands for lower interest rates to help support the economy and more specifically the US stock market. As anticipated, in late July the US Federal Reserve lowered interest rates for the first time in over ten years but at the same time signaled that there was no certainty that further rate cuts would occur during 2019 or beyond.

Over the next several years, governments in advanced countries will likely continue to struggle with mounting debt burdens and the associated rising costs of servicing that debt. It is also noteworthy to remember that total government debt continues to increase every year because of deficit spending.

So how does the Law of Large Numbers apply here? Simply put, at some point the whole debt situation could defy the ability of a government to control a national economy and the response to ever increasing debt burden costs. Here is a definition from Investopedia:

A major Canadian financial institution ran an investment promotion earlier this year that promised attractive returns for GIC-type investors, who needed higher returns to generate income. While dealing with an advisor from this particular institution on another matter, the conversation turned to the details of their offer.

Randy worked for a small business. When the owner died suddenly, the business accounts were frozen and it took several weeks before they could be accessed to meet payroll. Randy had trouble meeting his financial obligations and had to find a new job.

Jane worked at a small company for many years. When the owner decided to retire, she offered to sell the business to Jane. As she didn't have the funds available, the business was sold to someone else. The new owner let Jane go shortly after taking over.