By Jerry Lynch, CFP, CLU, ChFC
August 18, 2011
There has been quite a plunge in the market in the past week, followed by somewhat of a rebound. I want to give you my thoughts on what is currently occurring in our economy, what the implications are, and what you need to be doing.
There is a lot of “data” floating around out there, but not a lot of information. I am seeing a lot of conflicting data from very credible sources. For example, Warren Buffett is saying that the U.S. should be AAAA rated, while Bill Gross from PIMCO is agreeing with the issues that Standard and Poor’s has released. Let’s break this down so that everyone understands the prevalent issues right now and the consequential realities of the situation.
I agree with the S&P analysis, even if it affects the current market. The U.S. currently has too much debt. And our $14.3 trillion debt does not include Medicare and pension payments. Bill Gross has stated these liabilities at 66 trillion dollars! This is an outrageous number and we have to get more control over our spending – no question about it.
Are you kidding me? Are we in third grade? Congress is in recess until Sept 5th. How many of us have worked on vacations, weekends or holidays because we had to get something essential done at work. Congress should get back to Washington and take care of its business: getting a deal that makes financial sense. The current deal is filled with holes and does not provide the reductions that we need to make as a country. I say, get back to work and finish the job right.
There are not many options to U.S. currency. We may be a dog, but we are the best-looking dog out there. The U.S. is still liquid, and in spite of the downgrade, dollars are flooding into U.S. Treasuries. Our corporations have a tremendous amount of cash and are looking for opportunities to invest in corporations and people. They just need the right incentives.
Our tax system is insane and certainly inequitable. Our corporate tax structure is one of the highest in the world. There are U.S. corporations that have billions of dollars oversees and are trapped over there because they take it back without paying a huge tax burden. Let’s give them an incentive to bring it back.
For instance, instead of charging them 35 percent, we charge them 5 percent. This would give us more revenues and dollars for U.S. jobs in the U.S. economy.
How about instead of paying corporate taxes, corporations get a 50 percent credit on their tax bill for hiring new people? This will lead to a higher employment rate, income taxes and, perceivably, better morale.
Here comes yet another outlandish area of concern. Forty-seven percent of the population paid no taxes in 2007 and the top 300 families with incomes in excess of $300 million paid an average tax rate of 17 percent. This seems just a bit unfair and the tax issue needs to be analyzed for what it’s worth.
Medicare needs to be reformed. It should not be paying out for 20 years as it is now. Medicare was set up in 1965 to start at age 65 because the average life expectancy was 64. Life expectancy is now it is in the mid-80s. This program should be used to help disabled people and those in the last 10 years of their lives, so basically age 75 and on. I realize that this is a sacred cow, but that is how it has to be.
Medicaid & Unemployment
This should be available to people who need it short-term – or in other words, right now. It should not be a permanent fix. People need to work for their money and if they cannot find a job, they should only get a benefit if they work in some capacity. But that can include any service that provides value to society like cleaning parks, child care, teaching kids, helping the elderly – whatever it takes to help our country.
Foreign Aid is in excess of $1 trillion dollars. Let’s reduce that and focus on what we need here now. Global concern is fine but not when we are currently facing enough problems at home. As my mom says, “Charity begins at home.”
I respect all of the many individuals who are willing to put their lives on the line for the U.S. I support their efforts. Unfortunately, this is often used as a video game by the leadership and is not considered real as many of the decision-makers have no skin in the game (i.e., their own children). The budget is estimated to be $1.4 trillion. We need to do battle when it is necessary and in the interest of our country and people. That is one tenth of the current national debt. Do we really have to spend that much?
All of us, including myself, have an entitlement attitude. However, we have had these benefits on borrowed money that we can no longer afford. We need to get real.
I do feel that the U.S. markets have overreacted with the recent news of the S&P downgrade, but the reality is that we must address these issues. We had a very nice run-up in the market and we were due for a correction. Here are my thoughts on what we should be doing, after careful thought and analysis:
- Cash is King! Ensure that you have liquid assets that you can access in the event of an emergency, as it is critical in any good financial plan.
- Asset Allocation. This is still the most important thing in an investment strategy. You need to understand how much pain is associated with any stock portfolio. The more stock, the more potential pain. Select a portfolio that in bad times is still within your pain threshold so you can stay invested and ride it out.
- Stay Invested. Those that stayed invested throughout 2008 and 2009 made up their losses. For those that sold at market lows, they are still below where they started. This has happened consistently throughout many market cycles. The key is stability and a long-term strategy.
- Buy Low, Sell High. Now is a great time to invest! If you felt comfortable 3 weeks ago, you should feel better now as stocks are on sale. Most people are looking to sell when stocks drop and that destroys a long term plan. Systematic investing is the best way to deal with market volatility.
- Buy Quality. Now is not the time to double down. Focus on good companies that haven’t taken a hit and contain solid earnings.
A mentor of mine has a great line: “It’s tough to watch a movie that you’re in.” That is very true. Most people make investment decisions based on two emotional decisions: fear and greed. I have never made a good emotional decision in my life. For every decision I made based on emotion instead of logic, I was recovering for years afterward. Take some time and evaluate your strategy and investments by asking yourself the following:
- Is your stock allocation appropriate for your risk tolerance? Would you buy the stocks/funds today if you were buying now?
- Have your financial timeframes changed?
- Do you still have the same investment goals?
After assessing these key financial areas, you can determine if you are on track, as now is the time for financial concern not financial panic, whereas concern can be constructive, while panic can wreak havoc on your financial sensibility. Make a good decision here!
Finance & Investment Archives