Recent events across the globe make it hard to think we may not be witnessing the start of a new political climate (a “newer” new normal, maybe?). With events we generally attribute to happening ‘somewhere else,’ it was amazing to see pictures of recent scenes from the Wisconsin Statehouse, and the reaction of legislators from both sides.
Let’s look at the possible ramifications, and how events relate to your portfolio and financial plan:
State battles with unions. At the time of this writing it appears many states will have showdowns with unions as new government officials try to lower costs; the possible flipside to lowering costs (assuming there are not other places states will find cuts) is of course a higher possibility of raising taxes. Other proposals that are sure to influence portfolio decisions have involved refinancing current state debt at lower rates.
National Budget. President Obama’s budget will be fodder for other blogs and articles. Two points relatively agreed on by critics as well as the administration are that proposed current cuts are relatively small (or, a first step as proponents as have referred to them) after a time we have increased spending dramatically, and the budget pushes increased spending in areas such as education.
Egypt, Libya and international events. We have witnessed how political instability can drive certain commodity prices higher, which is a concern always related to countries that are major producers of a given commodity.
Looking at what’s making news today, it appears there are several factors that might make inflation and increases in taxes likely, and investing in bonds, annuities, or savings accounts not such as great idea. Rising prices, increased spending, higher taxes, and the lowering of interest payments on bonds do not bode well for individuals who are: living on a pension or stable income, savers, or owners of bonds, annuities or other relatively ‘safe’ income-producing products. Likewise, increased government spending in areas such as education tends to inflate prices in those areas for consumers.
But even with what appears likely, my crystal ball is still a little foggy. As such, I tend to imagine what the likely outcomes could be, and try to plan accordingly. Over the next year, two scenarios I can imagine from the above are:
We see inflation in energy and commodities and know that we should have moved out of income-oriented assets, and into equities.
Other factors in the economy over the coming year overshadow the above; the problems fizzle out, are kicked down the road, or end up not as large as they seem today, and we will forget them entirely.
Now, I don’t promote gambling (which is the reason for my conclusion below), but I liken the feeling in the first bullet above to knowing the day after how a favored sports team won against an underdog opponent. Of course, you didn’tknow the higher ranked team would win at the time, but the day after the game you often wonder why you aren’t more of a gambler!
And, that’s the problem with looking back on events after they’ve occurred and ‘knowing’ what you should have done. We forget the times we would have lost, and remember the times we should have been all in.
There is talk today about a ‘lost generation of investors’ as a result of the recent market correction. Many investors moved to ‘safe’ investments, swearing off the markets entirely. Many who did questioned why they didn’t move out sooner when they knew what the outcome would be beforehand.
But the reality is that they didn’t know. I think we will eventually get some of those investors back on track, but it may be after they’ve been doubly penalized (first by selling their stocks at a low, then by having their ‘safe’ investments fall far short of stock returns). It’s sad to continue to read stories about investors who have not seen a recovery as the stock market has recovered over the past few years.
So, how should you play current events in your portfolio? Instead of constantly playing a guessing game about where specific securities prices or interest rates may go, I recommend you create a plan focused on items you can control – how much are you saving, are you adequately diversified, are you taking an appropriate amount of risk, do you have a written plan for meeting your goals?
By focusing on the above, I can’t guarantee you won’t feel regret over only partially participating in a market homerun, but I can say you will avoid devastating loss; and you will be appropriately prepared for whatever the results of the coming year end up being.