Fundamentals of Investing in Uncertain Times

The famous “blood in the streets” quote always comes up when the market is shaky. Just wait until things are really bad and then buy is the implication. However, sometimes it is not darkest before the dawn but darkest before a healthy stock becomes a penny stock and then goes into bankruptcy. There is a sense that many investment advisors promote that if you money is not working for you, you are losing out. However, cash is still cash and cash gives an investor the flexibility to invest where he wants and when he wants without waiting for a good price at which to sell a previous investment. In investing and the fiscal cliff drama, cash may be a good idea. Treasury bills were great a year or so ago and resulted in profitable investing. However, as uncertainty drives interest rates up the value of currently held treasuries and bonds falls. Likewise the value of high paying dividend stocks falls as interest rates rise. A concern voice by the White House is that playing with the debt ceiling may result in another US debt downgrade and higher rates. At that point money bearing interest in the bank trumps treasuries, bonds, and dividend stocks. What about inflation and the loss of purchasing of money in a bank account? With investing and the continuing fiscal cliff drama a slow loss of purchasing power due to a low level of inflation beats the heck out of substantial stock and bond losses due to higher interest rates and an economy plunged back into recession.

More Resources

Hopes of Fixing the Fiscal Mess

The mighty US dollar suffered a downgrade last year due to the comedy on Capitol Hill over raising the debt ceiling. The US Federal Reserve has been buying US Treasuries which has had the effect of driving down interest rates and forcing bond buyers into the corporate market. Interest rates on treasuries will likely go up and prices of treasuries will likely go down if the adults take over on Capitol Hill and work for the good of the nation and not their particular political constituencies. The long term results of coming to grips with the Federal Deficit with mixture of tax increases and even handed budget cuts, could spell a long term economic rally the USA and the world as well. Long term investors are well advised to watch to see if the current negotiations come to fruition of if the nation will continue to wallow in fiscal stimulus generated low interest rates, devaluation of the US dollar, and ever more staggering debt for future generations to deal with.

Practical Approaches

Success in long term investing comes from accurately picking the winners and avoiding the losers. If the US gets its fiscal house in order investing in gold will become less attractive. To the extent that the fiscal slide occurs precious metals may get a boost. During the upcoming period of uncertainty options contracts may hold the key for conservative investors. Puts can act as insurance on stocks that you believe to be at risk for a fall. Calls will hold your place in line, at the current price, for stocks that you believe might rise. A practical approach during times of market uncertainty is to search for undervalued stocks and profit as their share prices rise.

More Resources

A favorite tax free investment is in municipal bonds. Municipal bonds are used by state or local government to build bridges, roads, or other public projects. Because the federal government does not tax these, they are a tax free investment and protected from the expected tax increases needed to cover the budget deficit.

You can buy individual bonds, typically in $1,000 increments or you can invest in bond funds. If you choose municipal bonds in your state of residence the bonds are usually a tax free investment at the state level too. Thus investing in individual bonds may provide more tax free investment advantage than a bond fund. The advantage of a bond fund is that you can invest any amount of money, not in increments of $1,000 or more.

A lot of stimulus money is going into infrastructure in the USA. The federal government can issue treasury notes to raise money, or print money. Municipalities need to issue bonds.

The rap against bonds has always been the relatively low yield. This complaint is made when the market is going up. This complaint goes away when the market collapses. Typically those in high income brackets have looked for tax free investments such as tax free bonds as the secure end of a basket of investments. Obviously those in higher income brackets benefit more from a tax free investment. As the specter of everyone paying higher taxes approaches more folks should be looking for tax free investments.

As the health insurance (or lack of it) issue becomes more pressing there will eventually be some sort of government health insurance guarantee or nationalization of health care. There will be more government offices, employees, and expense, not to mention health care delivered that is not being delivered today when so many people lack health insurance and the cash to cover medical expenses.

Besides the health insurance issue the huge amount of money that has been needed to stimulate the economy and avoid a depression will need to be paid back and when the economy is more stable we will likely see the argument being made that the patriotic thing to do is pay more taxes to help bring down the dangerous budget deficit. As usual the issue will likely be addressed obliquely because the American electorate does not like to hear Pogo’s famous proclamation that “We have met the enemy and he is us.” Whether the USA comes to grips with its economic slide or needs to be fooled into compliance they will be paying higher taxes. Those with the foresight will be looking now for tax free investments.