Making the Most of Your Money NOW

It’s a tricky moment for bond-fund investors. The economy is improving. Interest rates and inflation are going to rise, which means that the price of shares in bond mutual funds will fall.

If you’re making new fixed-income investments, these facts suggest that cash is a better place for money right now.  Choose a money market fund instead of adding to your bond funds. Switch that money into bond funds when the recovery has been going on for a while, interest rates are higher and people are getting more worried about inflation–maybe in a year or so.

For me, this is uncharacteristic advice. It’s a gamble on interest-rate timing, which I usually oppose. I’ve weakened because so much money is pouring into bonds and interest rate increases seem so plausible. It seems wise to hold off. If I’m wrong, we’ll know soon enough and you’ll never see a post like this from me again.

I feel differently about stocks. They can move ahead during a recovery, even if interest rates and inflation rise (see my post here).  They might zig-zag but you can’t be sure. So stick to your stock program and reinvest dividends. But for the fixed-income side of your portfolio, consider cash.

Stocks leaped off the bottom, after the market panic passed, and the economy did too.  The first two quarters of recovery were unexpectedly strong. Now, however, various leading indicators point to slower growth later in the year and early next year. Not a return to recession but not a boom, either.

That suggests disappointment for stock-fund investors. Stocks won’t make much headway if the economy merely plods ahead. They could drift down or simply go nowhere for a while. Still, it’s futile to try to time the market. Assuming that you won’t touch this money for 10 or 15 years, continue your stock-fund investment program.

Here’s an interesting historical point to help keep you going. Stocks went nowhere from 1966 to 1983.  The market rose and fell and rose and fell but never went much higher than 1,000 on the Dow or 100 on Standard & Poor’s 500-stock index.  For those 17 zig-zagging years, index investors earned zero in stock price alone. If they reinvested their dividends, however, they earned a compounded average of 7 percent a year (measured by the S&P). During that same period, long-term bond investors earned 4.3 percent.

So long-term investing works, especially if you’re reinvesting dividends. Keep those IRAs and 401(k)s stuffed.

Maybe I mourned too soon.

I donned black crepe when Senator Chris Dodd (D) proposed killing Obama’s Consumer Financial Protection Agency—replacing it with  a “bureau” that looked like a useless glob. Supposedly, Dodd was trying to compromise with the Party of No.  But for them, even a glob proved an ooze too far. He got zero Republican support. Senator Richard Shelby (R) made two counterproposals, both of them just as bad. The financial industry’s owned-and-operated Senators appeared to have won again.

So I was surprised to find Ed Mierzwinsky feeling chipper. Ed is the consumer program director for the U.S. Public Interest Research Group, and a feisty supporter of financial reform. His take is that the Republican rejection actually helps the cause. “This fight is Wall Street against Main Street,” he told me. “The public is furious with Wall Street.”

If the R’s are really out of the picture, a stronger bill might come to the floor and win popular support…. more

A quick note to taxpayers who send their returns to Austin. Some of you have asked me whether the recent tragedy–a deranged taxpayer crashing his plane into an IRS building– might have burned up their paperwork. The answer is no. The IRS doesn’t process tax returns or issue refunds from that particular building, so nothing has to be refiled. The tax-dodging pilot, Joe Stack, had apparently tried and failed to exploit a loophole for churches. He owed back taxes and was enraged by the IRS’s legitimate attempts to collect. For the anti-tax hate groups that call him a hero, I have nothing but contempt. Stack murdered Vernon Hunter, a longtime IRS employee and father of six who did two tours in Vietnam. He, and all the injured, are in our thoughts.

America’s banking institutions got rich exploiting ordinary people. The mortgage banks that funded abusive loans. The investment banks that made billions of dollars leveraging these loans for fees. The commercial banks that drowned you in credit-card fees and abusive subprime cards. They ran the economy over the cliff, taking your jobs and savings with them. Now they’re getting their pet Congressmen and Senators to opposed any serious bank reforms. They want to be free to exploit you all over again.

The government ran up huge deficits to save the banks and prevent the country from dropping into another Great Recession. At some point, we’ll need higher taxes to help bring the deficit back down. Who should pay? The banks, first and foremost. Obama has proposed a tax on the too-big-to-fail institutions (otherwise known as “wards of the state”). Some legislators have proposed a tax on Wall Street’s financial transactions, which would catch the daisy-chain buying and selling that make fortunes for hedge funds and investment bankers but do little for Main Street businesspeople.

Here’s economist and Nobel Prize winner Joseph Stiglitz, on why the banks should pay. It’s from his lucid new book, “Freefall:”… more