- Personal Finance
A Simple Approach to Personal Investing
This past year has been a financial boon for investors. No matter what you invested in, stocks, bonds, commodities, real estate..., you probably made a healty return. There is no guarantee going forward. The big question is how should individuals behave in the current environment? Some experts are warning of a major correction in the stock market. The problem is no one knows when it will occur. Here are some common sense ideas.
- Dec. 2017
Our economy is a cycle of ups and downs. Every so many years, there is a boom and a recession. The timing of the events are not known ahead of time. The cycle can vary from a few years to a decade. Timing the market is not a good way to invest. It is like gambling, sometimes you win and sometimes you loose. What is a better way?
A simple technique is called “dollar cost averaging.“ This method takes the guessing out of investing. The idea is simple. You take a fix amount of money from your paycheck and invest it in some stock or mutual fund. As the market goes up and down, you are buying into it and your costs is averaged over a long period of time. The benefits are you are guaranteed to not paying a high price. Also, you are forced to save on a regular basis.
The concept is, over a period of time, your assets will grow steadily and by the time you are retired, you would have a very nice nestegg. By then, you can move your assets to some safer investments like CD or Savings account where you will be safe from major corrections.
Our Current Environment
The problem we have today and it has been for a while, is that the interest rate has been kept artificially low by the Federal Reserve. This net effect is to devalue the currency. This policy by our government is deliberate. It is a way for the government to manipulate the cost of money for both businesses and for individuals. The idea is if the cost of money is low, it will help with investments into creating new businesses. This will benefit borrowers and hurt investors and savers. The government is also a big part of this equation. Since our government have been running on deficits for a long time, it is a borrower. It benefits from the low interest rate at the expense of people on fixed income and who are savers.
This low interst policy has produced a sluggush economic recovery which has distorted the typical economic cycle. It makes some sense if you think about it. When you have a rapid recovery, you will have a large boom which will be followed by a deep recession. On the contrary, if you managed the growth, you also prevent the deep trough. The problem is, this artificial low rate is contrary to the natural cycle.
The other key component our government employ is tax policies. By instituting various tax policies, it controls where and how we individuals and businesses spend our dollars.
Right now at the end of 2017, we are faced with a major tax reform that has passed both houses of Congress. In addition, the Federal Reserve has announced a steady increase of interest rates. The stock market have been reaching new highs on a daily basis in anticipation of these changes. The idea and hope is that these new tax laws will stimuate our economic growth and will lead to better GDP and more jobs and higher revenues. There is no guarantee.
Assuming things go as planned, we as investors have a few choices. What should we do now with our savings? and investments?
As a retiree, with assets, our goal is to preserve our capital and to grow it to offset inflation and even a bit more to help increase our living standards.
What do we do assuming we have a house, some cash and some IRA funds and income from pension and social security? Some may have mortgages or loans...
Lets identify the various asset classes.
- Real estate
- IRA account
- social security
- medical insurance
- mortgage and loans
The focus should be on the long term asset class, the IRA. This was designed to help with your retirement. The government wanted to incentivize people to save for their retirement and not rely on social security as their only source of income.
This investment was created with pre taxed dollars. It was and is growing over the years hopefully and making gains year after year. It now will be taxes as you withdraw. In fact, you are forced to withdraw a percentage from it whether you need the money or not. This way, the government will get their share of this delayed income to the treasury.
In the meantime, how should we invest this pot of money sitting there. That is the big question?
The Simple Way to Invest
The answer is very simple. Index Funds or ETF.
The key to investing decisions is tied directly to interest rate. If the interest rate is low your choice should be equities. If the interest rate is 4-5%, you can move some investments to fixed assets CDs.
Your primary goal is to preserve your assets. Your secondary goal is to grow your assets or at least stay even with rising inflation. My personal goal is to obtain a 7% return on my investments year over year. That is assuming I have $100 in the bank on Jan. 1. I want to shoot for $107 by Dec. 31. If inflation rate is at 3%, I have gained 4%.
The one ETF I prefer is called SPY. It is the index average of the Standard and Poor top 500 companies. This ETF can be traded like any stock. You can buy and sell at any moment.
Something to Consider...
In 2017, what are some political realities?
We are in the first year of a new Trump administration. There are major shifts in public policies with regard to business regulations, environmental policies and tax policies.
Public sentiments and consumer confidence is on the rise.
Interest rates are slowly heading back up to traditional levels.
The GDP is above 3% for the first time in 8 years.
I call all of the above the Trump Effect. America is growing and working again.
SPY from 2007-2012
SPY from 2012-2017
The Key Investment Strategy
From the above two plots of the SPY, you can see that the index rises and falls in sync with the stock market. What is key is that over long term, it is rising. During the 2008 recession, it dropped about 40% but in about two years, the losses were recovered.
The strategy is to keep about two years worth of your required expenses in your cash account. The rest should be invested in SPY. Use dollar cost average to buy in.
What to Avoid...
Don’t follow the crowd. The current Bitcoin craze is a major bubble in the making. Don’t fall for it. The same can be said for TSLA stock. It is way over valued. Diversity is good when it comes to investing. Don’t put all your money in one basket.
Personal investing does not have to be conplicated. A simple way is sometimes the best way.
The 2017 Tax Reform Bill
A short summary on the tax reform bill. This bill will reduce the number of tax brackets, reduce corporate tax rate from 35% to 21% in line with most other nations. It will simplify tax filing for most people by doubling the standard deductions. It will place limits on the tax deductions for local taxes and morgages. This is an attempt by the federal government to equalize the tax systems of the states where currently, some states like NY, NJ, CA have very high state income taxes which is deductible from federal income. The hope is over time, the people of these states will vote for tax reductions more in line with the rest of the 50 States that either have significantly lower taxes or even no state income taxes.
The net effect is that the majority of the middle class will see a tax reduction come 2018. There will be some who will see an increase in their tax liability. These are mostly higher income people who live in one of those States with high local taxes.
Time will tell if the effects of these changes will benefit or hurt our overall economy. The tax reduction is expected to add to our deficits by the CBO estimates but the hope is that with increase growth in GDP and more jobs being created, our overall revenue will increase to offset the losses in revenue to the IRS.
The following two charts show how you might be affected by the new tax reform bill. The difference is if you live in a high or low tax states.
*** The Latest one Week Performance of SPY from 1/2-1/9, 2018 ***
SPY has risen 3.2% in just this first week of trading. It went from 266 to 274.5 per share.
Some Related Info
© 2017 Jack Lee