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The refinancing sensitivity increases with a decreasing credit quality. This means that weak B- and C-rated companies are the most refinancing sensitive. There is a close relationship between the ratings cycle and the Fed fund cycle. Atight Fed policy goes hand in hand with a lower amount outstanding of CCC paper. If the Fed switches to an easing mode the proportion of CCC-rated bonds will increase in the credit market. AFed tightening policy goes along with credit rating upgrades whereas an easing policy cycle is usually associated with credit rating downgrades. This is because the effects of the Fed policy will have an impact on the credit markets with a time lag of several months.

Asteepening of the treasury curve – driven by declining short-term rates will provide the credit market with liquidity, which in turn helps to lower default rates. In this scenario, companies will have easier access to liquidity (e.g. bank loans, debt and equity markets).

Failure to panic in a crash is more troublesome. Tech stock investorswho did not get out in April 2000 know these feelings well. Holding on through a crash will lead to depression and a sense of inferiority. Longer bear markets lead to confusion, free-floating fear, resentments, and regrets. Those who failed to panic in 1966, 1970, and 1974 suffered until the 1980s bull market became fully established in 1985. Investors who hold on during long bear markets feel helpless, unable to stay in the market and sit with the pain of loss, yet unable to get out for fear of missing a great rise in prices. These emotions may last many years.

Step 2 explains in detail how you can gain self-knowledge from an emotions inventory. An emotions inventory is similar to a physical inventory of goods in a shop or investments in a portfolio. It is done for the same purpose as well. Goods that are defective must be discovered and discarded; investments that have no future must be liquidated. Emotions that prevent investment compatibility must be recognized and isolated to make room in the psyche for those that are functional. Thereafter you will be investing in your comfort zone.

This simple process has worked for me, an ordinary investor, and it will work for most of you. I do not claim any high level of emotional maturity or spiritual development. No one who knows me would describe me as a saint or a guru. I am not a trained therapist. I do not have an MBA. I am not a Certified Financial Planner, and I am not a Chartered Financial Analyst.

After 21 years of living off my investments and taking regular investment emotional inventories, I do know which investments work best with my personality and which investments irritate me or keep me awake at night. By staying in my comfort zone, investing is fun for me. It will be fun for you too, though you may not see that yet.

Another important measure and motivating factor as you do battle with debt is whether or not you could get pre-qualified or pre-approved for a loan if you really wanted one. What if your car needs a major repair and you’d rather just buy a new one instead of repairing the old? What if you found the house of your dreams?

Aside from credit cards, which companies seem to hand out like candy on Halloween, many loans are approved based on a couple of key ratios that consider your monthly debt service. Now granted, you still have to have a good credit score, but many lenders would not approve someone with the best credit score if they fell outside these ratios:

A front-end ratio is a comparison of your loan payment for the purchase you’re making against your total household pre-tax monthly income. For example, a $500 payment compared against a $2,000 per month income would give you a front-end ratio of 25% ($500 divided by $2,000). For most car and home loans, the front-end ratio needs to be in the ballpark of 30%, though this changes based on the lender and the size of the loan.

A back-end ratio is a comparison of the payment on the loan you’re applying for plus all your other types of monthly debt service, compared against your income. (This is the one that gets most people denied for a loan.) For example, the back-end ratio on a new monthly car payment of $500 and an existing monthly mortgage payment of $1,000, when compared against $2,000 in monthly income, would be 75% ($1,500 divided by $2,000). For most auto and home loans, the maximum back-end ratio is 50%, though 35–40% is common.

So what is your back-end ratio? Let’s figure them out:

Total monthly debt payments (short + long term) $________
Total monthly income before taxes $________
Back-end ratio (monthly debt payments divided by your income) $________

As big and bad as these numbers may be, it’s probably not the balance that is causing you the biggest problems. Rather, it’s probably your monthly payments or debt service. Virtually everything in your financial world, from bills to paychecks, operates on a monthly basis. Injecting $200, $500, or $1,000 of debt service can make surviving month to month utterly exhausting.

Just as you did with your total balances, add up all your required payments before you try and pay any extra, breaking them down into those categories again. Short-term monthly payments (car, credit card minimum payments, medical, etc.) and long-term payments (mortgage, student loans, child support/ alimony).

Record those numbers here:

Total short-term debt monthly payments $__________
Total long-term debt monthly payments $__________

I ask you to consider the short-term debts, because they tend to be the easiest to eliminate, while simultaneously having a large impact on your budget. Even though your mortgage or student loan balance may be 10 to 100 times your credit card balance, the lower interest rates and longer repayment schedule make it relatively painless. Paying down $10,000 on a $250,000 mortgage is not going to change your monthly cash flow that much. Paying off $10,000 out of your $25,000 credit card balance, which is charging you 30% interest per year, will make a huge difference.

Compared to the risks of scientific discovery, financial risks seem mundane. A banker would be concerned about a risk of total loss that is worth 10 basis points, or 0.1 percent. The R&D director of a pharmaceutical company knows that the chances of commercial success for a new molecule are from 10,000 to 1 to 100,000 to 1. The probabilities of success implied by these risks of total loss are 99.9 percent versus as little as 0.0001 percent. Because the chances of loss are much lower in relative terms, there is a mismatch in vocabulary and in processes among those managing the risk. But the absolute values at risk for the bankers may be very large (for example, billions of dollars of U.S. investments in the Far East), whereas those for the R&D director are relatively small—perhaps writing off a $100,000 project. In brief, R&D managers address risks that are often a thousandfold greater than those addressed by the bankers; the latter in turn deal with investments that are often a thousandfold larger than R&D investments.

The financial community has identified and dealt with a host of transactional risks and has appropriated the term risk management to encompass its methods. This term is unfortunate because it masks the ability to turn risk to economic advantage.