Chances are very good that we will go over the “fiscal cliff,” and even if we don’t the long recession we find ourselves in will continue. The current environment of higher taxes, more regulation (especially environmental regulation like a carbon tax), and an unpredictable environment created by unprecedented government action in the housing market, energy sector and food sectors will continue to make investors very cautious. The effects of the new taxes imposed by the health care law and new regulations that will make hiring and keeping employees far more expensive will also have an unpredictable effect on hiring. Fewer people working means less production of goods and wealth, fewer paychecks and less spending, which could affect a wide range of consumer companies.
This type of environment discourages investment. Many investors may feel like selling everything and burying their wealth in a mason jar in the backyard or buying a brick of gold and a shotgun to protect it. Such markets also provide opportunities, however, for those who are able to take advantage.
The fact is, it is very difficult to predict what the markets will do over short periods of time. We saw a big selloff Friday when it became clear that taxes will go up next year, but we could very well see a rally next week if people figure that it may not be so bad or begin to expect for the tax increases to be reversed shortly after the new year starts. The best strategy remains buying stock in good companies and holding them long-term. There will be periods of great growth, periods of declines, and a lot of periods where the price of the stock stagnates. The trouble is that it is difficult to predict when these big rallies will occur, and if you miss one or two your 20% return could be reduced to a 5% return.
Now, if you have some cash built up, or if you regularly put money away for investing and have enough to invest every few months or a couple of times per year, I wouldn’t be diving into the market right now. I would wait for opportunities where there is a good decline in the markets that take all stocks, good and bad, down with them. I would find a set of stocks to watch and snatch up some shares each time the price declined by 5-10% or so. I know that I would not be buying at a bottom, but I also would know that I was not buying at a top. I would not wait too long, however, since inflation will quickly reduce the value of cash sitting on the sidelines. Three to six months will probably not make a lot of difference, but three to six years would.
I would also avoid buying bonds or stocks that primarily are purchased for their yield right now. The reason is that low interest rates have caused the price of these investments to spike recently as investors look for ways to get a higher current yield with money markets paying nothing. If inflation spikes that Federal reserve will be forced to raise interest rates. This will make the price of these investments decline rapidly. The fact is, unless you are investing short-term, there is a lot more opportunity in appreciation than there is in current yield. The fact that taxes on dividends may also return to 25-40% rates soon also doesn’t make then attractive.
In the next post I’ll talk about strategies to keep your taxes low.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.