Well, that's my question. How would you balance cash, bonds and equities? How would you spread them across the world?
Recession - like we've had a few times in recent years?
Or Depression - like the Dirty Thirties (the last time that there wasn't inflation).
When you lend your money to some one or corporation (e.g. bank) often they make more on it than you do.
Suppose, listening to a bank's touted guarantee that, apart from the rent on your money that they agreed to pay, they'd give you back every dollar that you loaned to them, you'd put $20,000. into a bank-issued guaranteed investment certificate 20 years ago, and renewed it over the years since, but needed it now, so withdrew it. The bank had, as agreed, paid you the rent on your money.
There's another guarantee that they never mention - they won't pay you one dollar more, either.
However - you have a problem: there are two rats that eat your cheese. The income tax people want to talk to you every year about your current income - and they want part of it.
Plus - if your asset is sitting in a situation where you have a guarantee that every dollar will be returned (but no more), the inflation rat nibbles off a corner of every dollar of that asset, each year that it sits there.
So - you'd better put part of your current interest earnings with the principal, each year, in order to maintain your purchasing power.
That $20,000.00 twenty years ago would have bought a nice car. Not now.
After the income tax people take their slice ... and inflation chews up part of your (guaranteed) asset ... you can keep what's left. Which in recent years, wasn't much - if anything.
And - do you know what? The rats eat first!!
On the other hand, which ordinary person/investor gains from inflation?
Suppose that 20 years ago I borrowed that $20,000.00 from the bank where you'd "invested"/loaned it out.
I agreed to pay the bank their required rate of interest, only, monthly.
Which I did for the last twenty years - paying them at a higher rate than they paid you, of course. But the bank did O.K. - they rented that dollar that you rented to them, out to other people, about 8 times.
When I used the money to buy investments that I expect to be productive, the income tax people let me deduct the interest from my income.
The solid stocks that I buy pay well over half of the interest that I'm paying to the bank. In Canada, when I buy Canadian stocks, the tax rate on the dividends that they pay is low, leaving a higher percentage of my earnings in my hand than if I earn interest, which is taxed at top rate.
When I go into the bank today to repay my loan - how much do they ask me to pay?
That's right - exactly $20,000.00.
Which is precisely the amount that I borrowed.
Each dollar of which will buy much less now than it would 20 years ago - in fact, with inflation running at around 3%, somewhat over half of what it would have bought then.
Who gained from inflation?
In the meantime, not only did the average stock that I bought increase substantially in value, despite some fluctuations in between, but it likely increased the dividend rate that it pays, as well. Some U.S. stocks have increased their dividend rate annually for the last 40 years.
When I sell that stock, I calculate the increased value ...
... and I pay tax at regular rate, on half of that gain.
But - an additional benefit - I did not have to answer to the income tax people for that increase in value until I cashed the stock. Or died.
It's nice to avoid paying income tax, but next best is to defer it.
But - the only earnings that your guaranteed asset ever produces, relative to this year, is now. And taxed - now.
Though I'm an old fart approaching 80, I still have over 80% of my assets in equities.
They go up ... they go down ... they go sideways ... but a number of them do O.K in the end.
As Sir John Templeton, manager for over 50 years of the outstanding Templeton Growth Fund, said, very few money managers are right over 60% of the time - but if you can do that well, you can make money.
The trouble with using mutual fund managers is, few of them out-produce the market averages, over the long term - and they want about 20% of the growth that the average investor's money produces - if they produce well. But - they get a percentage of the total investment, even if there is no growth.
As members of an investment evaluation group that I've attended for years say, "Losses are the tuition in the game at the University of Hard Knocks, of learning how money works".
Learn how to manage your money effectively, yourself.
As Canada is only something under 2% of the world market, our advisors have been telling us for years that we should diversify not only in terms of various industries, but outside of Canada, as well.
With the huge government and individual debt in the U.S., plus the annual government deficit, and balance of payments problems, that'd be good advice for U.S. folks, as well.
Had you bought Canadian money three or four years ago, and exchanged it back now, you'd have made more than 25%, apart from anything that it might have earned in the meantime.
Have a lovely week.
Could you please boil that down to a few lines?
Perhaps I should have asked what one should NOT hold, i.e., get rid of before recession.
Is it true that "Cash is King" in recessions/depressions?
As a general rule in recessions secure bonds rise in value and stocks fall in value.
One type of business that does well in recessions is bankruptcy liquidation.
Recessions are largely about distinguishing between those who are ready willing and able to pay their obligations and those who are not.
In financial depression cash and secure sources of steady income are kings.
Governments facing a financial depression have been known to panic and start printing lots of money, which then causes hyperinflation.
To entice you to let them use your money, banks tell how they'll repay every dollar that you lend them, plus rent on the money.
But they won't pay one dollar more when you redeem, either. Plus the value of each of those dollars eroded every year that they held them.
The only earnings that asset will ever produce, relative to this year, is this year. And are tax liable this year, plus, in Canada, that rent ("interest") is taxed at top rate.
Since the value of each of those invested dollars shrank every year, you need to put part of the interest with the principal in order to preserve purchasing power.
Added to your risk is the issue that, at the end of the term that you selected to let the bank use your money, you have no idea what rate of interest they may offer at renewal time, should you choose to leave the money with them for an extended period.
I made some money on long-term bonds a few years ago (which was tax-free at the time, by the way), because interest rates were dropping at the time, and current investors were willing to pay me a premium for those bonds that would pay them higher than currently offered rates.
But interest rates are not very high these days - and may well go higher, for there's a shipload of U.S. Gov't. debt out there, much of it owned by the Gov't. of China, and when holders of that debt ask for repayment, the U.S. Gov't may have to offer higher rates to entice future bond-buyers to take them - which will mean that bond prices may deteriorate.
I like stocks, for various reasons, some of them peculiar to the Canadian market.
Many people try to buy low and sell high - but few succeed. Further, every time that one sells, the income tax people want to talk to her/him about the gain (I think U.S. rules may vary) - and they want part of it.
I've bought stocks over the years and, mostly, held them. Some increased in value, some didn't - but as Sir John Templeton said, if you're right 60% of the time, you can make money.
Right now a company whose stock I bought over 30 years ago has been sold (to private foreign buyers) so my shares are to be redeemed. They've paid me dividends over the years, and at increasing rates as the value of the shares increased. Now that I need to turn them in for payout, I'm working on a plan by which I give them to a charity, receive a receipt for the full amount, which is tax-deductible, and pay no tax on the accrued capital gain.
Most personal financial advisors recommend using tax-deferred investments, but I feel that I've developed a system that works in similar fashion, but without the penalties associated with the tax deferral.
Stock that I bought for just over $4.00 39 years ago has had value fluctuate up, down and sideways over those 39 years - but the current value is about $96.00.
I haven't paid purchase and sale commissions by buying and selling over the years.
Plus, I haven't had to talk to the income tax people about the increased value - and won't, until I either sell them, or die - neither of which I plan to do during the next week or two. That gives me a good deal of the benefit enjoyed by the folks who used tax-deferred investment systems - but they pay tax on every dollar withdrawn, and I get half of my capital gain free of tax.
That stock paid about 6 cents or a dime annual dividend when I first bought it - now it pays $2.80 annually: you've never seen anything like a comparable increase in rates offered on GICs.
And, if I borrowed to invest and paid just the interest owing monthly as I went along - if I repay the loan now, I give the lender precisely the same amount of dollars that I borrowed in the first place.
The value of each of those dollars deteriorated every year that I used it.
So the guy who put his money into the bank lost due to inflation - and the borrower gained.
Learning how money works is an interesting hobby - that pays well. Good wishes for increased wisdom as you go about that useful project.
Hope this helps (even if only marginally shorter than the earlier message - sorry). If you have more specific questions, ask: there are a lot of people knowledgeable about money, here.
Generally, the least risky investments are short term US Treasury Bills. The holder is paid a fixed rate of interest for a short period of time. The US Govt is perceived to be the least risky of all debt issuers. However, as with any investment, the less risk,the less the return. If you currently have a diversified portfolio and can weather the fluctuations, I'd recommend a balance of strong and stable stocks, mixed with credit worthy bonds. The older one gets, USUALLY the recommendation is to increase one's weighting of bonds and decrease stocks.
Do you have a specific reason for questioning recession impacts?
Thank you all. I'm asking because I don't like the current runup of the US market, based on...no strength I can see.
Seems some who had played "flip" with real estate after the dot-com bust have returned to the market, but where is the real underlying economic strength?
If consumers have been carrying the US for the last several years, that bill is overdue. We have stagnating income; layoffs; mortgage defaults. Too many people will be upside down in their mortgages, having overextended to buy using low rates and/or having cashed out of their homes' now falling values.
The hopeless war. The deficit. The expense of rebuilding the military and caring for a phenomenal number of severely damaged veterans. The escalating health and pension costs of retiring Baby Boomers. That enough cause for concern?
I understand the LONG-TERM value of stocks, but I'm looking at about 20 years on the actuarial table. We got lucky last dip by having pulled from our portfolio to build one house and buy a Maui condo. Saved about a third of what we would have lost -- still lost plenty.
So...what IS propelling the stock market? Why won't there be a big correction in 2007? (And longer, since the Fed is supposedly now independent of election year pressures.)
In my option, the stock market is being propelled by decent corporate earnings and a perception that the Federal Reserve won't be tightening interest rates any time soon.
I'm 51, have a financial advisor but I also work in the investment field. I'm staying as heavily invested in stocks as I was 1 yr ago. Given our stage in life, we have faith that this is the right move for now. However, if something happens and my attitude changes, we'll just pull back and go into shorter term bonds for awhile.
We have reduced exposure to US stocks and added to bond funds -- also added more world stocks and bonds to the mix. Debating where to park some cash and for what lengths of time.
Gold and other metals.
I'm with kec01 on this one. If you're well diversified to begin with, I do not personally think it is a good idea to try to take defensive measures against the inevitable dips in the market. The reason is that you don't know in advance when the downturn will start, or--even more important--when it will end.
If you move to cash because you think a recession is coming, you might be right--but even so, it might arrive a year after you expected. In which case you've lost that whole year of gains. Similarly, if you wait until you're sure the recession is over before getting back into the market, you will have lost the gains between the low point and when you reentered.
I have heard the claim that that is just what happened in the 2000-2002 downturn: As the S&P lost nearly half its value in slightly more than two years, there was a huge outflow from stocks to bonds. How many of those investors do you think were clever (i.e. prescient) enough to sell at the peak and buy at the trough?
So my own opinion is that the way to avoid loss is to take a long view and realize that what goes down must come up. I'm not a financial advisor, so I'm posting a link to someone who is.
Here is a link that might be useful: Paul Merriman: Losing Money is No Fun
I agree that for YOUNG people, it's wise to invest in the market regularly -- just drop it in and hope that OVER TIME the market will do what it has done historically OVER TIME: average 8% gains.
But...if you see an inflated market, wouldn't you take your gains off the table? (I think the current market is inflated and the economy is growing weaker.)
And...if you are a Senior, you may not live to see the recovery OVER TIME. We lost a third of our portfolio in the dot-com crash. 2006 is the first year we've seen any remarkable comeback.
I have to dispute the statement that what goes down ALWAYS comes up.
Chisue, Part of your decision should revolve on what you are expecting to get out of your investments. If you can't afford to lose any principal at all, you need the most risk free investment out there. I don't agree that gold is always the most risk free so, in this case, I'd only invest in US Treasury securities. Stagger your maturities so you can at least get some yield from 2,3,5,10 yr holdings. But you say you should have about 20 yrs to look at. In that case, I'd still say a mix of stocks and bonds would be good. The general rule of thumb is that the older one gets, the more heavily they should be weighted with fixed income (unless their last name is Getty or Vanderbilt or the like). You could go with bank cds or high grade shorter term corporate bonds or preferred stocks (because they have an element of fixed income) along with some high grade stocks that pay good dividends. If you really wanted to get creative, hedge your stock holdings with options. But, then, options aren't for the faint of heart either. In my opinion, the right mix for anyone depends on what their goals are. That's a piece that's missing in this string.
Oh, and by the way, there is some truth in "cash is king" but you must remember that cash doesn't earn much. To me, staying in cash involves a large opportunity loss.
Oh, we do have a mix of mutual funds for stocks and bonds and some munis, and some real estate. I feel pessimistic about the outlook for the US economy in the coming year.
So...we took our two-year profits from the most heavily stock-weighted funds. We still have the funds -- just less in them. Some of the profits went into funds that are more heavily bond-weighted, and are more global. I don't know how much longer the capital gains tax will be as low as 15%; that was another factor in our decision.
I doubt we will ever be gold-bugs! I'm just looking at 6-month or 12-month CDs that yield 5.5% or Treasuries and wondering if there is anything better.
BTW, I am remiss in not thanking you all earlier. I do appreciate your time and your thoughts.
If you plant to be in bonds for a while, why not just buy your own, rather than using a bond fund?
Though they can buy for lower commissions than you'll pay, so may justify at least part of their management fee.
Sounds like you're on the right track--you've reduced your stock exposure, but not eliminated it. You're nervous about the US economy. I agree that the US isn't going to be the be-all and end-all of the global economy forever. So, I'd suggest diversifying overseas. You don't say how much you have overseas already. If it's only 5% or so, I'd increase that.
There are also ETFs (exchange traded funds) that concentrate in different overseas assets. Such as, foreign real estate. You can look up different funds at the link below, as well as at yahoo finance or google.
The important thing with global funds is to understand what they're investing in. For example, I read recently about 2 china ETFs--one invests in chinese companies; the other invests in US companies doing business in china. Big difference.
I have a couple of REITs too, although I don't know that I'd be buying into the sector now that the bubble is bursting. You might wait until later next year. Yields will probably be higher.
The main thing is to diversify into non-correlated assets. So, when one thing goes down--the S&P 500, say--something else goes up.
News headlines to the contrary, I don't think there's any such thing as 'recession-proof' investments.
Here is a link that might be useful: etf-connect
Now you are probably all thinking about poor Sue, who got out before an all-time stock market high. At least the prediction of one "guru" didn't happen: 13,000 on the market.
Oh well, we're resting easier. Still haven't decided where to move the cash. It's earning 4.something in a MM act.
I have not bought stocks for a while, so have some cash build-up ... and am not treating that as wisely s I could, for it's mainly in savings accts., but should be in M M funds (no load) - both of which earn highly-taxed interest.
But didn't sell any stocks, voluntarily - got sold out of a couple early last year, when one, a steel co., bought by a foreign buyer, one changed so drastically that a different style of stock (unit trust) issued.
I've been running about 80% in stocks, some foreign (only one tiny one U.S.-based) and equity-based mutual funds, most of them global.
I plan to liquidate some of the poorer (equity mutual fund) performers among them, maybe this year.
I studied the course that stockbrokers take, about 25 years ago, worked for a mutual fund broker for a year (didn't sell enough to suit them) and took the 6 courses leading to Chartered Financial Planner - unfortunately, only passed five, and system revamped, would have to start over ... at age nearing 70 at the time - I didn't think so.
A major component of what I consider similar-to-bond situation in my account is a mortgage-based mutual fund, bought as deductible investment in home-purchase plan, $1,000./yr. '74 - '83, $9,000. total, that has grown to over $64,000.
As I've held a number of stocks/mutual funds for a number of years, if I sell them to batten the hatches for expected recession ... when to sell ... and when to buy again?? Not easy choices.
And a substantial portion of the proceeds of sale - goes to the tax people. Yes, I'll have to pay tax on that portion of the gain eventually (or, more likely, my executor will) ... but why bother doing it now?
Though I have larger than usual cash component now, I'm often almost fully invested.
As a personal financial advisor, I recommended having 3 - 6 mos. value of income readily available in case of emergency ... but I often haven't had it.
But I have a number of mutual fund and stock certificates lodged with my bank as collateral for a fully-secured LOC, which usually sits there unused - but which I can draw on if needed in an emergency.
In the meantime, the underlying equities produce their usual rate of current payout, and ongoing capital gain, sometimes more than others.
Plus a credit card for immediate use, to pay account in full prior to due date from LOC loan.
Trouble is - used for living exenses, interest is non-deductible.
So I need another LOC, to use when I choose to borrow to invest, as interest on that type of loan is deductible.
As I've written elsewhere, I feel that I can borrow to invest in quality, dividend-paying stocks at almost nil net cost: interest cost deductible, dividends taxed at low rate pay part of interest cost, I gain about 2% due to inflation.
At age 80, holding about 80% in wide variety of stock-based investments, I sleep easily, every night.
My ex- used to say that I could sleep, any time and any place.
Good wishes for making wise choices about your investments - and life in general.
a senior shouldn't be in the stock market--too volatile. Anyone who anticipates needing their investments within the next 5 years should be in a stable investment portfolio, w/ not much focus on high gains.
I don't know about focus on high payout, but I do know you should focus on secure value.
Sue is feeling pretty good now about taking some profits off the table and investing a wee bit more (percentage-wise) in global funds. Mr. Greenjeans (my name for him) spooked the market but good. After all my belly-aching about the fallout from artificially low mortages, that is now suddenly "cause for concern" too.
Now poor old Sue discovers her "other" hip may need replacing and her trusted orthopod stopped taking Medicare assignment in January! May not have to worry where to put any "excess" dollars after all.
It's Always Something!!!
Hi again chisue,
One important aspect of my situation that I did not mention is that I live comfortably (if frugally) on less than my income from pensions, so do not expect to have any need to cash in some investments in the near future.
Recently I was more than able to pay cash for a replacement car when my former one was written off following a traffic incident (back end hit by gravel truck). Haven't had settlement yet from Ins. co. - they're ready to pay, I'm wondering about buying it back and fixing it (will cost much more than its current value - but it takes a great deal of precious energy, with additions to pollution and global warming to build a new one).
I am sorry that your limbs are not working as well as they did previously.
Also - I live in Canada, and if I need medical services, most of them are at nil or minimal direct cost.
An important consideration as one approaches age 80.
The senior who shouldn't be in the stock market ...
... is the one who expects to quite likely die within the next five to ten years.
With a potential life expectancy above that ...
... it could be wise to own some quality stocks, aiming for some growth in value.
When you put your $10,000. in the bank, they guarantee to pay back every dollar, plus the rent on the money.
Which is precisely what they do.
They don't pay One Dollar more, either.
And the value of each of those dollars shrank, every year that they held it.
You got burned by inflation.
And if I borrowed those $10,000., to invest in equities, or whatever, with an agreement to pay interest-only throughout the length of the loan, I'd pay that agreed rent on the money (your money) ...
... and after a time ... I'd repay precisely $10,000.
I gained from inflation.
Further - if the stocks that I bought gained in value, I wouldn't need to pay any tax on the gain till I sold them (and then, in Canada, pay at 1/2 regular rate).
I posted a thread over on "Retirement" a while ago relating to what percentage of one's assets that a 70 year old (the age that I was at the time) might be wise to invest in the stock market.
When a kid's a kid ... we tell him/herto stay away from the stove.
Later, if s/hedoesn't learn about stoves ... s/he'll be eating a lot of raw food for the rest of her/his life (or be wholly dependent on a spouse who was shrewd enough to learn how). Or on a restaurant - expensive.
Have a lovely weekend, everyone.
Several years ago I spoke to a financial advisor on a radio phone-in program about investment plans I was using as a senior, which he agreed made a lot of sense.
It's at "Investment Concepts as a Senior", over on "Retirement " forum, page 1 - things don't move very fast, over there.
I'm trying for a link - we'll see if it works.
Here is a link that might be useful: Investment Concepts as a Senior
The light has dawned on me. My stocks have appreciated, and I pay taxes on the dividends. I sell the stocks, I pay taxes on the gains. This year I've paid more in Federal (US) taxes than many Americans earn gross in a year.
On the other hand, my Munis are all at least AA and all are insured. I get income every month (I have a bunch of them). I don't pay taxes on them, except those subject to AMT. (They kicked in this year, too )
The stocks fluctuate every day.. munis fluctuate very little over years... Hang on the net watching the stocks and fret about the hourly changes in stock prices?? or just go check my estimated income once in a while on the munis? NO brainer. I asked CPA about dumping stocks and going all muni, his reply: "What have I been telling you for years?? I guess it just never sank in.
I'm going to have another big hit next April, but I think that having the problem is better than not having the problem, and I can deal with it.
US Treasurys? JOKE! I inherited some bonds... Auntie owned some with Daddy. Auntie died, paid taxes on them. Daddy died, paid taxes on them. Mommy inherited them, paid taxes on them. Coming due this year... guess what.. I get to pay taxes on all the interest I get. I will never buy another savings bond unless it's for a minor child that can use it for education.
I have real estate. I rode out the crazy prices that I could have sold for just because I didn't want to pay the crazy gains. (i.e., $5,000 inherited lot for $115,000 "offers to sell") Not worth it. Will sell when prices are more stable and can sell for a reasonable price.
As my muni bond broker says: You can sleep at night, they're tax free, and insured. That's where I'm heading.
"What should a senior hold in a recession?"?
His/her spouses hand, maybe??