When I was in grade school we had something called Scholastic Reader. One issue 30 years ago dealt with the 1978 Presidential election. The thing that stuck out to me about the issue was how they described the “hats” a President wears. I think they listed eight. Better than listing, they had eight pictures with each hat symbolizing a different role. I was a kid! The pictures were neat! What can I say – there are many ways to learn, right?
Allow me to suggest that one way to think clearly through current investing issues is by assuming you wear two hats. The two hats are your Consumer Hat and your Investor Hat. I believe we are at a point in time when your Consumer Hat is dealing with much negativity. If you wear your Consumer Hat to make Investor Hat decisions, you may make the wrong decisions, and reaching your
financial goals may prove more difficult. Let’s discuss the issues and see how the hats fit.
Consumer Hat: As a consumer, you pay more for goods and services. If the increase in inflation outstrips an increase in your pay, you have less money to spend or save for the future.
Investor Hat: Certain investments perform better in a rising inflation environment. You may not have these as part of your portfolio because we have had relatively low inflation for a long time. These investments include Real Assets, commodities, and Treasury inflation protected bonds to name a few.
Consumer Hat: A greater amount of your monthly budget is eaten up by filling your tank, heating your home, and using electricity. Businesses are hit by these costs too, and they pass on their rising costs in the form of higher prices for goods and services. Less discretionary income is available for savings and other consumption purposes. You can drive less, downsize your vehicle, and consume less electricity in the short term. In the long term you can use alternative sources of energy or conserve energy.
Investor Hat: I believe we will see a vast wave of investment into energy development of all kinds – both traditional and alternative sources. Your opportunity is to invest in areas that deal with Natural Resources and Energy Development. You may also find opportunities to invest in Oil and Gas Partnerships. (Note: I have decided not to expand on the timely subject of our Country’s energy situation in this piece. It is, of course, a subject of its own and better discussed in a different format. If you would like to discuss energy at greater length, please do not hesitate to contact me.)
Consumer Hat: You may work for a company that will have lower revenues due to sluggish sales. This may mean lower pay, no bonuses or raises, or layoffs.
Investor Hat: An investor may think of two things. First, pad the amount of money you hold in cash to cover yourself if you do lose wages or your job. Second, during a recession the companies that typically weather the storm are the large, multinational corporations that produce the goods and services households and businesses can’t do without regardless of the economic times.
Consumer Hat: The simple answer is that foreign goods and trips to foreign countries cost a lot more, and you may postpone them. It gets a little more complex when you consider how a weak dollar impacts oil prices.
Investor Hat: Certain investments perform better with a weak dollar. You may not have these in your portfolio because the dollar has been much stronger against other currencies for quite some time. First, you can hold investments that invest in foreign currencies. If you held an investment in Euros, clearly the return on that allocation has been favorable for you. Other investments include gold and precious metals, emerging markets, securities and bonds, and foreign equities.
Consumer Hat: As a consumer, or maybe the head of a household, you probably become more keenly aware of the state of things in an election year. After all, we are bombarded by news and commercials attempting to “convince us” of how things are and how they ought to be. Does an election year change your consumer habits? Probably not. It may however find you spending your time a little differently. For some, that time would be spent avoiding television, radio, and newspapers! continued Past performance is not a guarantee of future results. This paper is not an offer to sell securities. Please read the prospectus carefully before making any investment decisions.
Investor Hat: The market does not like or dislike Democrats, nor does it like or dislike Republicans — it dislikes uncertainty. Volatility that occurs in an election year is natural. Once a new administration is determined, markets historical take a more consistent path. That does not mean it is a rally! Actually, more often than not the first year of a new presidential term produces a negative return year for the US Stock market. What should an investor do? Stay invested broadly. If it is a negative year, take the opportunity to invest more for the long term. Finally, this particular change in administration will most likely produce higher taxes. Simply put, we have allowed our politicians to increase the amount of entitlements beyond any previous scope, and the government will need a lot more money (ours) to pay for them. Therefore, you should consider the value of Municipal Bonds in your portfolio for they are exempt from Federal taxes.
Hopefully these examples give you an idea of how not to throw in the towel during a period of slow economic growth, high fi scal challenges to the country, energy conflicts, and an uncertain political climate. None of the ideas I have presented are based on timing the market. You may have these investments already. But this may also allow you to broaden your investment selection in a prudent way. Call or email if you would like to discuss how your Investor hat fits.
Author: David Jeter, CFP®, Allegheny Financial Group, June 2008
Securities offered through Allegheny Investments, LTD, a registered broker/dealer. Member FINRA/SIPC.
The above comments are provided for discussion purposes only and are not meant to be an offer of any specific investment.