Does this mean that investors should ignore current economic conditions? Not at all, but it does not mean taking drastic measures like moving in and out of equities as a reaction to market highs and lows, a recipe for buying high and selling low.
We must face facts that tell us our government cannot
sustain the current fiscal course that it is on. Our deficit is approaching $17 trillion of
which $6 trillion has been added in the last four years. Entitlement programs (Medicare, Medicaid and
Social Security) need revision and placed on a sustainable basis for the future. The Affordable Care Act is now estimated to
cost three times as much as when it was enacted by Congress. Our economy is barely growing and unemployment
remains close to 8 percent. The Federal
Reserve is keeping interest rates at artificial lows and is buying $85 billion
of U.S. debt per month, effectively printing money. This has in part led to the new highs in the
stock market. As a long-time student of
economics I know that this cannot continue.
Look at what has been happening to some of the European countries, like
Greece, Spain, Italy and now Cypress.
These countries with huge social welfare programs have long been
spending more than they could afford and are now paying a steep price.
Where do we go from here?
We must continue to save and invest to reach our financial goals and
hope that our government changes fiscal course before it is too late. As a long-term investor and a student of
economics I can share with you what I have learned from history which I use as
a guide in helping me make decisions regarding money management and
investing.
I stress defensive
portfolios not only for tough economic times, but for all the time since we
cannot predict with accuracy when tough times will occur. Defensive portfolios are low cost, diversified
portfolios designed to protect against market declines, recessions, high
inflation and bad news. They tend to be
risk adjusted but not risk free.
Diversification and low cost are key components of defensive
portfolios. You will find low cost index
funds and Exchange Traded Funds (ETFs) in a defensive portfolio. A defensive portfolio will not produce the
high returns we see in a booming stock market, but will help mitigate the sharp
losses often experienced in a declining market.
You can begin making your portfolio more defensive by
looking at your investment expenses as a percentage of your portfolio. Average investment expense should be in the
range of one-half to one and a quarter percent. Investment expenses include mutual fund and ETF expenses and fees
charged by an advisor if applicable. Frequent
trading of securities can result in excessive commissions. As a long-term investor you should not be
engaging in frequent trading. Remember,
the lower your investment expenses the greater your investment return.
Finally, invest regularly if you can to benefit from dollar
cost averaging. By investing a fixed sum
monthly or quarterly in your employer’s 401(k), IRA or other retirement plan you
will be accumulating more shares when prices are lower. Disciplined regular investing will have a
greater impact on your long-term wealth accumulation than investment returns.
