Where to Invest in 2012

Ralph Smith is the president and a co-founder of FedSmith.com. Sign up for the FedSmith.com free daily email newsletter to get the latest news affecting federal employees.

There are plenty of reasons to be concerned about our economic future. Headlines from Europe scream about countries defaulting with investors in Greece potentially taking a 70% loss on their investments as the Greek government tries to cut back on spending while dealing with rioting from those who want the spending to continue; a downgraded credit rating for numerous countries including many in Europe as well as the credit rating of the United States; a federal budget deficit that is getting much larger each year; and concerns about a new recession while the most languid economic “recovery” in the United States since World War II has a weak pulse with unemployment over 8%, even considering we do not count many people who have given up looking for work; and a labor participation rate that is the lowest in decades.

With more than 10,000 baby boomers turning 65 each day, many of these people are retired or will be retiring very soon. Maintaining financial stability is critical for them. So where should you put your money now in order to avoid a person financial calamity?

The Money Show was held in Orlando, Florida in February and attended by about 7000 people. No statistics are released on the average age of attendees but it is a safe bet that the baby boomers are by far the most dominate demographic group. The event brings together financial advisors, investors, financial columnists, authors about finance, and advice “from some of the best minds in the advisory business.”

The conference is not about investing, not politics, but federal policies and political decisions, particularly during an election year, have a significant impact on the economic climate and investment decisions.

Here is a summary from some of the speakers at this show and how they advise Americans to invest in 2012.

Safety vs. Growth

One major concern is balancing the safety of your assets while trying to increase your assets and to come out ahead of inflation. We all want our investments to increase in value. We don’t want to invest in something that will result in losing money we already have.

That balancing act is not as easy as it sounds. For example, investing in Treasury bonds is very safe. But an investor in Treasury bills can lose money. Stated simply, putting money into the G fund will ensure that you do not lose the dollars you invest. But that is not the entire picture. The interest rate G fund investors receive is less than the real rate of inflation. Those buying Treasury bills are losing money each year because the rate of return is less than the loss of purchasing power of your investment due to inflation.

Over time, returns in the stock market are often a better way to grow your investment but the stock market is much more volatile.

Does the American Future Look Like Greece Today?

Ed Finn is the editor and president of Barron’s. In a keynote address to conference participants, he offered his opinion on the investing climate in America and his view of what may is likely to occur in coming months.

He noted that the European Union (EU) has been a boon for Germany. Germany has a world class manufacturing capacity and expertise. The EU has given Germany a chance to sell its products throughout Europe and the world as southern European countries are less sophisticated and less able to compete in Europe and other world markets. Germany will assume an increasingly influential role in the EU and in the world.

He says the United States needs a government that is leaner, more efficient and less expensive rather than doing things the “old fashioned way” – hiring more people to accomplish work that could be done more efficiently and issuing regulations for more centralized control of economic activity.

In Finn’s view, if President Obama is re-elected, the U.S. economy will probably grow about 3% a year. If a Republican is elected with a Republican Congress, he predicts our economic growth will rise to 10% a year or more.

His prediction: In 10 years, it is possible that the United States will be in the same position that Greece is in today. The massive debt and interest on the debt will create social unrest, economic stagnation, and high unemployment. It will also mean a less prosperous future for our children.

His investment suggestions: If Barack Obama wins the election and Republicans control Congress, he suggests putting up to 40% of investments into high quality stocks; up to 30% in short term bonds and up to 10% in gold. Presumably, the remainder of an investment portfolio would go into intermediate term corporate bonds or other alternative investments for diversification in an economy that is stagnating.

“Market is Rigged”–Go for Dividends Instead of Interest

Louis Navellier is chairman of a company managing $5.2 billion in assets and author of four investment newsletters. He is forthright in his opinion of our economic situation noting that the Federal Reserve has been politicized and no longer functions as an independent entity. If the federal government raises interest rates, the rate increase will “blow up” the government because of the amount of interest we would have to pay on our massive (and growing) federal debt.

Since October 2011, 91% of long term Treasury bills have been bought by the Federal Reserve. In effect, says Navellier, the “market is rigged” to keep interest rates low. As the Federal Reserve tries to manipulate the market to force investors to invest in stocks and other riskier assets, the impact on the 30-year Treasury bond is distorted and impacts investor actions.

Interest rates on some Treasury bills have plunged. If the interest rates increase, which would happen in a free market, the amount of debt owed by the federal government would rise dramatically.

Government actions are also distorting the stock market. With interest rates being forced to low levels, many large companies are borrowing money to buy back their own stock. Dividends are taxed at a rate of 15%. Taxes on interest are much higher. For some investors, they will pay as much as 35% on interest they receive.

In other words, those who invest in bonds will pay more in taxes and also receive very low interest payments. Companies are generally increasing dividend payments and higher grade stocks are becoming more valuable and likely to be a better investment in 2012. The artificially low rates undermine the value of the dollar as other countries will be paying higher interest rates. Americans will be sending more money out of the country to receive the higher interest rates. This will fuel inflation and means that what we pay for necessities such as food and gas will be going up more in the future.

As we have noted before, the way the federal government calculates inflation in our economy is not realistic for the actual expenses of many people. There is likely to be significant inflation in some goods and services this year even if the official inflation rate remains low.

Diversify, Diversify, Diversify

Richard Band has been providing conservative investment advice for a number of years. His advice to investors: shift your allocation of assets toward fixed income investments by taking profits on stocks when there is a market rally. He prefers conservative stock funds and also favors putting some investment assets into defensive assets such as gold or gold mining stocks.

Obviously, Thrift Savings Plan investors are more limited in their TSP options but his advice to diversify is worth heeding. He sees several factors that indicate the current stock market rally is nearing an end and that we will not have an exceptionally strong bull market for some time, including the fact that 10,000 baby boomers are turning 65 every day now. People who are retired or about to retire tend to sell more stocks and put their money into more conservative assets.

In short, there is plenty of pessimism about the American economy. Generally, advisors are conservative and urge diversification into relatively safe investments, including large company stocks. No doubt, the confidence of these financial advisors, economists and investors will remain low until high government spending and increasing deficits are reduced.

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Ralph Smith

We published an article on the TSP fund today at: http://www.fedsmith.com/article/3368/tsps-c-fund-provides-highest-returns.html which may help answer your question (It is entitled TSP’s C Fund Provides Highest Returns in March)

The F fund was the only loser for the month of March. With the Federal Reserve printing money, many analysts think that inflation will create problems for bond funds (and the F fund is a bond fund).

The best approach is to diversify your investments. You can do that through the lifecycle funds by selecting the fund that is close to your projected retirement date. You can also invest in each of the underlying TSP funds which should provide some protection since bonds and stocks do not always move in the same direction. The amount to put into each fund will depend on your timeline, your ability to take the stress of more risk with the possibility of higher returns, etc.

We don’t provide specific financial investment advice but there are a number of good advisers that have the expertise and will take the time to help you choose a plan that best meets your needs.

David Dejewski

Ralph – Love the history and the facts you quoted. I completely agree with your points on inflation, interest rates, debt, credit, Greece, etc. I also believe strongly enough in real estate an an option to have started a company that invests in this asset class.

Warren Buffet recently said:

“If I had a way of buying a couple hundred thousand single family homes… and find a way to manage them, I would load up on them.”

Find his interview with CNBC here. He’s talking about single family homes as investment opportunities here.

I’m even more attracted to the multi-family markets. I’ve got good deal flow on multi-family apartment buildings. Those properties offer a lot more control, economies of scale, and tax advantages well above and beyond traditional investments. Best of all, with a fully self-directed IRA, anyone can buy into these through their retirement accounts.

Jerome P. Dion

Ten percent growth if a Republican is elected? Red flags and sirens should be sounding on that whopper. Perhaps the DOW will go to 50,000 if we go all-in on Republicans. The fact is neither Democrat or Republican control will make much of an impact on the growth rate of the economy. Deficits will need to come down, and government will need to be more efficient and effective to support growth that benefits all citizens. Beyond that, radical turns right or left won’t help much.

David Dejewski

Jerome – good catch. For whatever reason – likely due to a subconscious political filter – I don’t place much stock in claims that a President from one party or another is going to have much effect on the economy. I believe we’re too far down the road for that. What’s at work is bigger than a Presidency. The other items Ralph talks about: debt, interest rates, credit, inflation, Greece, etc are real factors. I just don’t believe the correlation to a Presidency is as strong as the political pundits would have us believe. The rhetoric is meant to influence the vote.

I’m also not in total agreement with the “diversify!” mantra. It depends on the individual. Regular employees who like a hands-off “set it and forget it” approach to investing probably benefit from this strategy. Mitigation of risk by spreading investments around. The typically small returns reflect it.
Investors who dive deep and look for stronger returns should, in my non-financial advisory opinion, get to know a few investments really well. They should know what stimulates the markets, how money behaves in the markets of choice, normal market cycles, and have a solid exit strategy.

Jerome P. Dion

Two must reads for anyone thinking they can beat index funds long term: Nasim Taleb’s “Fooled by Randomness” and Daniel Kahneman’s “Thinking Fast and Slow.” Economic man making perfect allocations of resources is a myth. Read these books so you can perhaps recognize the potential traps your human nature can lead you into – including putting too much faith into self-proclaimed pundits and experts.