There must be a pony in here somewhere!
I’m sure you remember President Reagan’s favorite joke: Worried that their son was too optimistic, the parents of a little boy took him to a psychiatrist. Trying to dampen the boy’s spirits, the psychiatrist showed him into a room piled high with nothing but horse manure. Yet instead of displaying distaste, the little boy clambered to the top of the pile, dropped to all fours, and began digging.
“What do you think you’re doing?” the psychiatrist asked.
“With all this manure,” the little boy replied, beaming, “there must be a pony in here somewhere.”
There’s been an awful lot of bad news lately about current conditions and what is likely to happen in the future. We all know that there are record debts everywhere: local governments, state, federal, business, insurers, mortgages, credit cards and foreign as well. Add bankruptcies, foreclosures, hemorrhaging oil in the Gulf, floods, unemployment, higher tax rates, and many other things. So where is the pony?
Good news is always relative (as is bad news). There is a way of making a bad situation into a relatively good one. The next few years are likely to bring down security values to lower values. That makes those years’ good times to invest for the long-term investor who makes regular monthly deposits. Regular monthly deposits provide the well known benefits of dollar-cost-averaging. It's an opportunity to buy low and sell much later at significantly higher values.
Stocks are ultimately a good hedge against inflation because sales volume and profits increase with inflation after the initial inflation hit--which the market doesn't like. But bad news often brings good times to buy.
The opposite is true of bonds. Inflation takes the wind out of interest payments. It may be better to be a borrower such as a person who invests in real estate. I'm going to get back into REITs slowly for that reason. The next couple of years are going to have a lot of foreclosures, so those who are ready for the direct ownership of real estate could do well. Also, the Congress has always treated real estate well in terms of tax benefits--and likely will continue to do so.
Tax rates will have to go up--and there will be some casualties in municipalities. But the government has provided us a hedge against high tax rates. That's a Roth. Although there are situations where a Roth may not be a good investment, I encourage people to go to Roths when it's apparent that their tax rates will be higher in the future.
Tax rates will increase both at the State and Federal levels. I believe it's inevitable that we'll have high sales taxes and possibly a VAT. You can’t do much to avoid sales taxes other than to buy less, but you can do so things in addition to a Roth to help with income taxes. Very low turnover stock funds, tax-managed funds and shorter-term municipal bonds might well be a good bet. So could be I Bonds because they defer taxes and keep up with inflation. TIPS in a qualified investment could also be attractive in this environment.
Taxes will make it harder for people to save so they'll have to pay more attention to being frugal. Those that will ultimately do well are the people that feel they don't have to have the latest technology and largest homes. They are those who will train their children to learn to live without the latest media invention and a car of their own.
Savings as a percent of disposable income has gone up, but is far from the amount needed for retirement--especially so because of the decline in pensions in the private sector and the aging of our population. There is an interesting word that comes into play here: zeitgeist. That's the general intellectual, moral and cultural climate of an era. I would add the word financial to the definition. The population's financial zeitgeist has to change. Those who really think about their long-term future are more likely to do so.
Bud Hebeler, 6/15/10