Investment Strategy and the Economy
Traditional Investment strategy is basic:
1. Don’t put all your eggs in one basket.
a. Have a diverse portfolio of CDs, Treasuries, municipal bonds, real estate, growth stocks, and income stocks.
b. Keep enough in Cash, Money Market, CDs and readily available short term bonds to cover emergencies and down markets.
2. The higher the return, the riskier the investment.
a. Professionals claim they didn’t know the mortgages, reverse mortgages, and hedge funds were risky. If it was paying 18%, they new it was risky
b. With the cost of healthcare rising, your stock broker was under pressure to provide you a mutual fund that would keep up with inflation. So we broke the basic rule of conservative investing: “don’t gamble what you can’t afford to loose.” We gambled our retirement because we were afraid to gamble on universal affordable healthcare.
3. Adjust your portfolio to be age appropriate.
a. When you are in your 30s and you have time for the market to recover from ups & downs, you can afford to have your retirement in growth stocks.
b. Once you are in your 50s, you should switch from growth stocks to a combination of growth/income stocks with a more stable return.
c. Five years before retirement, adjust your portfolio again to include less mutual funds and stocks and more CDs, Municipal Bonds, Treasuries. Hang on to rental property which is providing a steady income, and sell any speculative Real Estate.
d. If you have debt or mortgage, pay it off before you retire; especially if you don’t itemize and there is no tax advantage to the mortgage.
e. Once you retire, adjust your portfolio again to insure you will have a steady income. If you do have retirement other than Social Security, or rental property with a steady income, you can afford to still have some stocks & mutual funds. If you are dependent entirely on Social Security and your own 401k or IRA, be very conservative with your investing.
4. Buy Low Sell high.
a. When the market is down, like now, and you have followed the above advice and kept enough in cash, then you can buy into the market while it is down. NOW is the time to put $4000-$5000 in your IRA or $10,000 in your SIMPLE.
b. If you have a stock that grew & split so many times, it is now a significant part of your portfolio, reduce risk by taking 1/3 out and investing in something else. Sell when it is high; don’t wait for quarterly reports to come out and the stock go down.
Current Market Conditions:
Nothing has really changed about the above rules other than you may change the amount in cash for “emergencies” because the emergency could be a job that gets cut and doesn’t get replaced for 7 months. Some investment advisors suggest you should have 5 years expenses in cash and cash equivalents. This depends on your own feelings about risk because you could miss out on a good investment by having too much cash, but the handwritting is on the wall. Tax breaks do or don't trickle down depending on how structured, but jobless DOES trickle down considerably faster than a trickle. The foreclosures will increase as jobless increases.
Don’t panic and sell in a down market. The time to sell (which I did) was when the market hit a record high last fall. Now, if you have an emergency, you will be forced to sell in a down market, but never volunteer to sell in a down market.
If you have anything automatically reinvesting the dividends and you do NOT have enough cash reserves, discontinue that immediately and have all dividends go into the money market. If you have enough cash reserves and don’t need dividends to pay your property tax at the end of the year, now is the time to start a dividend reinvestment strategy because you will be buying stock low, and it will grow.
What’s wrong with the market now?
You and I, Joe retirement investor, were following the rules and investing for long term gains. The professionals on Wall Street were investing based on next year’s bonus.
Deregulation alone didn’t cause the problem, but failure of the Fed to adjust strategies used for 50 years in combination with deregulations set up the mortgage market for a meltdown. And they are still doing it. In order to “give homeowners a break” they lowered interest rates. And that would have worked in 1999 when adjustable mortgages were based in interest rates. But since deregulation, banks charge based on risk. Lowering rates makes money more available to banks, but the rate YOU pay will be based on your risk and the risk of your zip code. So even if you have good credit, if you live in a zip code hard hit, it will be reflected in the he interest rate you pay. The Fed is still operating on rate strategy that predates de-regulation. Greenspan said he had no idea, and I beleive him. Economic drivers are very different now.
What's good for the goose is bad for the flock!
We don't want people to take money out of the market but we want a capital gains tax cut. OK, if you cut the tax, they take it out of the market all at once causing large market swings that are not based on economics of the companies bought & sold, but rather, based on supply of money. If they have tax consequences they will sell in smaller groups of stocks spread over several tax years, based on long term outlook of a company instead of knee jerk reactions one quarterly earnings statement. Isn't that what we want them to do, take a long term approach and decrease market volatility for all investors (i.e. The flock). I want my clients to get tax breaks but not at the cost of the entire populations retirement savings. I want my companies to have available cash from investors based on their potential for earnings, not based on the supply of money.
Executive compensation:
The government didn’t really lie when they said there were provisions in the ‘bail out’ to curb excessive executive compensation. There are measures which apply to future executive compensation packages. The problem is you cannot make something illegal retroactively. So executives, who have a signed contract for golden parachutes, will still get those parachutes because they have a CONTRACT. Stock holders don’t have a “contract” they have a certificate whose value is subject to change. Lehmann Bros will likely not get their bonus because they filed for bankruptcy, and in bankruptcy, everybody including contract holders, get pennies on the dollar. But the ones that were ‘rescued’ will be obligated to pay contractual agreements.