Investing 2010: Curb your enthusiasm
- January 3, 2010
- 17 comments
- Posted in Investing, Latest Posts, The Economy
I didn’t like what I heard from one of my favorite economists when I ran into him at a party on New Year’s Day. It was hard to converse while holding plates and chewing ribs, but I caught the gist and called him later to learn more. We talked about jobs, investing and how the economy might change in the years immediately ahead.
Lakshman Achuthan is a managing director of the Economic Cycle Research Institute in New York City, where he studies—and forecasts—changes in the business cycle. He sees a resiliant economic recovery, with the job numbers turning positive within the next few months. But he doubts that the upturn will last long enough to put America back to work. Only some of the 7 million lost jobs will be recovered before the next recession strikes. The Teens could well be a decade of more frequent recessions with shorter recoveries in between. That implies chronically high unemployment for years to come.
Ever since World War II, each upturn has been a bit slower than the one before, with the post-2002 upturn the weakest on record. Lakshman’s forecast assumes that that pattern continues. As for the length of the current recovery, everything depends on when the Fed starts raising interest rates. Too soon, and the economy sinks immediately. Too late, and inflation takes hold, which would force even higher rates and a sharper downturn. Even if the Fed gets its decision just right, and the economy keeps coasting along, it won’t gain enough strength to reduce unemployment significantly.
What’s the takeaway, if Lakshman is right? Go conservative with money, in case the next recession comes sooner than expected. If you missed the 65 percent stock market rally of 2009, it’s too late to repent. Keep some money in stocks but shift your investments toward cash or high-quality bonds (U.S. and foreign government securities, and quality corporates). When business slows, bonds will hold up better than stocks. Recessions also smother inflation, which will bring the gold price down (buy gold only if you think that the dollar will turn to dust). Emerging markets in Asia, Latin America and India may do better than the mature economies of Europe and the U.S. Shift your investments in that direction.
Finally, save more money. If we’re facing a decade of jobless recoveries, we’re all going to need the cash. If Lackshman turns out to be wrong, our extra savings will give us happier retirements than we imagine now.
Tags: 2010 investing, economic forecast, jobs
I have been following Mr Achuthan’s news coverage for some time and I do believe in his methods of predicting the economic cycle. So far he has been right on and his predictions for what lies ahead on jobs and frequent recessions make sense. I guess it is the new world will live in.
Finally, I agree with you regarding shift in investments and saving more. I just think that we in this country do not save enough when compared to others in the world.
Save your money?!! This is obvious, but how do you save your money if you don’t have a job and you can’t get one?
As a society, we still don’t “see” the unemployed, especially people in mid-age who are subject to serious job discrimination. Even now, corporations are cutting their workforce while piling up cash–good for shareholders, not good for the economy. I think of Henry Ford, who said he wanted to pay his workers enough so they could afford to buy his cars. Without higher employment, and people with more money to save and spend, this upturn will be a poor one. That’s no solace to the out-of-work, but business clearly isn’t “getting it.”
Where are the best places to save?
For interest rates higher than you’ll find in the typical bank, use an Internet bank such as ING Direct or HSBC Direct. Go to BankRate.com for lists of high-yielding CDs. Or buy U.S. Savings Bonds (I series) at TreasuryDirect.com.
I was looking at TIPS, and found it a little confusing…
1 Would you mind clarifying if there is a way to invest money and not having to keep track of TIPS maturity etc
2 Is it like CDs ? ie you can withdraw only upon maturity else pay penalty.
3. The website is kind of confusing with ‘auctions’ etc … what is the typical interest rate ? (I get the part about about inflation adjusted principal value)
Thanks!
Ravi
Buy Treasury Inflation Protected Securities (TIPS) through TreasuryDirect.gov. Buy a bond for the specific maturity you want (5 or 10 years would be best). At maturity, the Treasury will automatically send the proceeds to your bank account. If you want to sell a bond early, you have to take it out of your TreasuryDirect account and sell it through a broker for what price prevails on the market. That’s not worth it. Buy only if you know you can hold it to maturity. Don’t worry about auctions. Those are for the big boys. You will earn whatever interest rate the auction sets. That rate is fixed for the term of the bond (the principal rises with inflation). The TreasuryDirect site shows you what interest rates have been set at recent auctions.
I’ve heard that TIPS are bad in times of deflation. So if I buy a TIPS when the time is right (i.e., there’s no deflation), and plan to keep it for 5 to 10 years…what if deflation rears its ugly head during that period (5 or 10-year period)…should I take the money out of the TIPS during times of deflation and then when inflation is back, put the money back into the TIPS? Just wondering what the best strategy is? What if we experience deflation at least 3 times before the 5 or 10 years is up? So would we have to take the money out 3 times? Know what I mean?
Yup, I know what you mean, and this is why you shouldn’t try to time the occurences of inflation, any more than you should try to time stock market prices. Hold TIPS as a hedge against inflation, hold fixed-rate Treasuries as a hedge against deflation. Hold both, because no one knows what is going to happen. In a deflation, by the way, TIPS would never fall below face value, so they do give you a modest deflation hedge.
In his chapter on distribution of investments, John Bogle says that defined pension benefits should be figured as similar to bonds. How would one value these?
It’s a present value calculation, not easy. If the pension is certain, however, you can afford to risk more money in equities.
Is there any financial institution I can trust?
TD Ameritrade requires you to deposit a check before stock can be purchased, something they didn’t require a few years ago. I think it is a wise policy change and delivered my check in person. However, they told me they had to wait a few hours while a the check cleared to make my trade. However, they “forgot” to make the trade. Mistakes happen but because the St. Paul, MN manager offered no apology and was extremely arrogant, I transferred my account to Scottrade.
I then sent a check to Vanguard for a SEP/IRA account which was clearly designated on their form in two places. However, they put the money into a SEP account. Kizzie Brown, Vanguard Resolution Dept. made no apology explaining the error with “deposits go into a black box and no one looks at them” whatever the hell that means. I asked for my deposit back. If there had been even a smiggen of apology, empathy for the tax mess this could have caused or any logical explanation, I would have still invested the amount, maybe more. Ironically, I heard the same term “black box” two days later on a tv documentary about Enron. Apparently “black box” is the financial industry’s term for “black hole”.
Where can I safely invest my money, not from a risk standpoint, but from an ethical and doing good business standpoint? CD rates are horrible because the banks have been given our taxes instead of depending on depositors. I would consider bonds, but who can I trust? Are I-bonds safe given how the U.S. is being bankrupted with our ongoing involvement in Bush’s oil war and Obama’s endless handouts for everyone and anyone? I have never been one to stuff my pillow or coffee can but the little I might lose to inflation is nothing to what I will lose investing with any financial institution these days. Besides, it appears that those of us who have worked and saved are going to be penalized when we retire because our social security will have been given away, not to just the seniors it was designed to help, but everyone who never worked or saved a dime.
Series I US Savings Bonds are safe, as are other Treasuries. You can buy online through TreasuryDirect.gov, so won’t run into rude employees. But the rates are low there, too. If you need a retirement account and have eliminated Vanguard, I hope you’ll look for a SEP/IRA somewhere else–it’s an important investment to make. Customer service at financial institutions is sometimes wonderful and sometimes awful. I believe Vanguard to be ethical, but that doesn’t protect you from a crummy reponse.
Why oh why can’t businesses learn that that their reputations can be made or broken by “lowly” workers on the phone!!!Customer reps and service people are their face to the world. Reps need more training and deserve the kind of corporate TLC that will keep them alive to customers’ feelings.
Appreciate you. Re your article, AARP, April, 2010, #7 Be smart about SS. Drawing from 401 or IRA for 8 years depletes it for later or an inheritance. Yes the check is 76% higher, but the person has missed 96 checks, which takes many years to recover. Also about the spouse, the worker waiting till 70 to draw does not increase the Primary Insurance Amount, on which spousal benefits are figured, unless the worker works 62-70. The spousal benefit is increased is the spouse delays drawing. For most people, with normal lifespans, I believe your advice is not advantageous.
The National Academy of Social Insurance commissioned the study, from which I drew. The link is here http://bit.ly/71JEq8
I don’t understand why you would advise people to invest in bonds at this time. Our currency is being ruined and they offer almost nothing in yield or inflation protection.
Their purpose is deflation protection. They also provide a safety net when the stock market falls. Bonds have outperformed stocks for the past 30-plus years, to everyone’s surprise. With interest rates this low, I think stocks will outperform bonds over the next 30 years, but not in every year. Bonds are the right diversification.