Editorial deadlines being what they are, this opinion piece was written before Dec. 31, as a solution to the overhyped fiscal cliff remained elusive. Nevertheless, having learned from the Y2K scare, I predict that the sun will have risen on Jan. 1 and most of us will go about doing what we do regardless of what the politicians do or not do.
Taxes and fees at all governmental levels are going up given the state of things. For most people the pain will be incremental, spread over 26 paychecks, as an example, for those paid twice a month. Many of the tax bills on investment income will not come due until tax time in 2014. Granted, uncertainty is never conducive to business or personal investment, a drag on the economy.
But the American economy is huge and on the mend. There are positives that can help to mitigate the negatives engendered by dithering politicians. While there are soft spots, in general home prices are on the rebound. Real estate activity is expected to accelerate and rents are rising, a positive for yield-starved investors who braved the slump to snap up post-crash real estate investment bargains.
Low interest rates are expected to persist for some time, a boon to those making monthly debt payments. Those who refinanced and captured the lowest fixed mortgage rates in decades will benefit ongoing. Your goal should be to be mortgage free not later than full retirement age under Social Security as part of a comprehensive retirement plan. Paying one extra monthly mortgage payment per year will shorten the life of your loan considerably.
Should you pay off a mortgage completely? That is a question for your advisor, but if you have a low interest rate loan, the answer generally is “no.” Given alternative uses of capital, you may be able to deploy money in investments that yield more than the net cost of the mortgage interest. If our suspicions about rising inflation are on target, use of cheap OPM (“other people’s money”) will seem prudent.
Gasoline prices have eased. Unemployment rates are falling. Consumers in general are in better shape than a year ago.
The chase for yield is not just an American phenomenon. The Wall Street Journal reported on Dec. 6 that “German investors are rethinking their traditionally conservative investment strategies as they brace for a long stretch of low interest rates and the prospect of inflation.”
Germans are moving away from low-yielding government debt and into real estate, stocks, and emerging markets. We see a similar trend on the part of savvy individual and institutional investors in this country. Note, too, international capital is flowing into U.S. assets. For all of our troubles, we still are one of the largest and most stable countries on the planet.
Central bankers are expected to continue massive money printing and easing throughout 2013, in an effort to boost growth and inflation. Even the expectation of inflation is a danger to fixed income investors. The shift to alternative asset classes is likely to quicken.
After the 2008 debt debacle, investors fled risky assets, especially stocks. Those in or close to retirement turned defensive.
To the extent that they stayed in stocks, an emphasis was placed on value stocks, especially those with respectable dividends. Less favored were growth stocks, more expensive shares of faster-growing companies, a potentially more volatile asset class.
Generally value stocks outperform growth stocks over time, rewarding patience. But from 2009 into 2011 growth outperformed value by a significant margin. Investors are urged not to abandon an asset class on the basis of short-term numbers. Diversification remains de rigueur. Asset classes frequently rotate leadership and value may yet shine, especially given any fallout from the fiscal cliff or a resurgence of euro debt worries.
If anxiety still has you down, go to Google and type in “warm weather vacation destinations.” The best approach may be to escape for a time, and, as they say in New York, “forgedaboudit.”
Lewis Walker is President of Walker Capital Management LLC and Walker Capital Advisory Services, Inc., a Registered Investment Advisor. Securities and certain advisory services offered through The Strategic Financial Alliance, Inc. (SFA). Lewis Walker and Mike Hostetler are registered representatives of SFA which otherwise is unaffiliated with the Walker Capital Companies. email@example.com