Prospering in today's economy

[jcjm]

I've been discussing finances with people on this board by PM and thought I would open it up to anyone who is intrerested.

My most recent conversations have been about how to make back the money people have lost on their investments, houses, and possible reduction in income from layoffs.

The first question I propose is: can you do it under the old rules or have things changed so much that you need to do things differently. In other words, are we in a long term bear cycle and will dollar cost averaging into the things you have just be flushing your money down the toilet?

The second question is: if things have changed that much, what do you do?


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Personally, I don't know, but half the economists say we can have a double dip. So, I am investing less money and putting it into things with greater reward. Leaving cash on the table to buy more if things dip and sell if things go up.

To do this I like index ETF's rather than mutual funds. You pay a fee but you can get in and out faster and not ride the waves up and down. Some peole call this market timing, but I don't. The reason is because of the way I do it. I take profits when things are up, buy more when things are down, and leave cash in the account rather than being fully invested. So it is more like re-balancing than market timing.

I've set up several paper trade portfolios to see where things are and the best performing over the past month has been a combination of 60% bonds and 40% ETF's consisting of a 2x Russell 2000 index ETF.

The worst has been a defaltion portfolio constisting of US Treasuries, inverse Euros ETF, Inverse Real Estate ETF, inverse 3x Dow ETF and inverse 3x Russell 2000 ETF.

As far as Real Estate, I'm staying where I am. Not sure if prices have bottomed out or not. So I feel it is a gamble to buy now. The strategy is different for up and down markets. In a down market you sell you place at a loss to buy a bigger place at a bigger loss (which is your gain). In a up market you sell your place at a gain to pocket money and buy a smaller place or just pocket the money and rent for a while.

Not knowing where things stand in Real Estate, I feel it is too risky to make that large of an investment being levereged(mortgage payments), where you could end up owing more than the house is worth.

[jcjm]

THE ELECTION AND STOCKS

The stock market has been down for the past 2 weeks, so where will it go after the election?

Many gurus and talking heads say it will continue down for a while if Obama gets re-elected and it will have a slight bump if Romney gets elected, but it will end up the same place in a few months, no matter who wins. Where it goes from there is anyones guess.

So I guess if you think Obama is going to win, you should be a bear and sell and buy back later. If you think Romney is going to win you should be a bull and buy and hold for a month or two.

If you aren't psychic, I guess you could just balance your portfolio and wait it out. Supposedly in a few months the market will be the same no matter who wins.

But why is there so much attention to the market, anyway? I guess it is because people have their retirement tied up in IRA's and 401Ks. How the market does, determines how soon they can retire, but does it have to?

Maybe, with the market being about where it was 10 years ago, stocks and mutual funds aren't the best place to be. Maybe return of your investment is more important than return on your investment. Maybe a roth IRA isn't better than a traditional IRA anymore. Maybe it is better to put the money in something safe and get a deduction instead of putting it in the market and hoping the market goes up and you don't have to pay taxes on the profit.

Maybe, if you already have a large per cent of your retirement income in the market, its time to put this years retirement money in something safe, in a traditional IRA, take the deduction, get more money back on your income tax refund, and mark that as money to take out first when you retire. Especially if you are getting close to 59 1/2.

Wait a minute, isn't that what they were pitching when IRA's first started? Put money in a CD, let it compound slowly over time, while getting a tax break and more money back on you tax refund. Then when you do retire, pay the tax at a lower rate or no rate if you're income is low enough.

Just some OLD SCHOOL thinking which might have come back into vogue.

[mango]

But why is there so much attention to the market, anyway? I guess it is because people have their retirement tied up in IRA's and 401Ks. How the market does, determines how soon they can retire, but does it have to?

Maybe, with the market being about where it was 10 years ago, stocks and mutual funds aren't the best place to be. Maybe return of your investment is more important than return on your investment. Maybe a roth IRA isn't better than a traditional IRA anymore. Maybe it is better to put the money in something safe and get a deduction instead of putting it in the market and hoping the market goes up and you don't have to pay taxes on the profit.

Maybe, if you already have a large per cent of your retirement income in the market, its time to put this years retirement money in something safe, in a traditional IRA, take the deduction, get more money back on your income tax refund, and mark that as money to take out first when you retire. Especially if you are getting close to 59 1/2.

Wait a minute, isn't that what they were pitching when IRS'a first started? Put money in a CD, let it compound slowly over time, which getting a tax break and more money back on you tax refund. Then when you do retire, pay the tax at a lower rate or no rate if you're income is low enough.

Just some OLD SCHOOL thinking which might have come back into vogue.

Love these thoughts, jcjm. Thank you for writing them down!
I completely agree.

[jcjm]

So I guess if you think Obama is going to win, you should be a bear and sell and buy back later. If you think Romney is going to win you should be a bull and buy and hold for a month or two.

Market was down 278 points in first 3 hours of trading after election.

I just wish I had been psychic.

[SquarePeg]

I currently have one child as a dependent plus a mortgage. I believe that my federal taxes are as low as they're ever going to be percentage-wise. If I manage to live on half my current income when I retire and have double the taxes, I'll end up paying the same. But is that a likely scenario? I think I was wise to convert my IRA to a Roth IRA when it was first introduced. (I was able to spread the tax penalty over a four year period.) Except I have a sneaky suspicion that the IRS eventually will impose a nation-wide VAT to cash in on folks like me.

[jcjm]

From what I have learned:

Nobody knows what the government is going to do, but a lot of times things are grandfathered in and you just can't continue to contribute.

Roths seem to make sense as long as you are growing your money. If $1000 grows to $2000 then it makes sense.

Traditional Ira's make sense when you want to get more money back on you income tax refund AND you think you will withdraw the money at a lower tax rate.

For those reasons Traditional Ira's and 401ks are usually the first things cashed in. You know what the tax law is now but not in 10 years. Because any changes to Roths would probable have a grandfathering you probably would still be able to take that money in 10 years tax free or at least at a lower rate than a Traditional Ira or 401k.

[Scenario Thinker]

I do both Roth and regular, so hopefully it will even out.

[jcjm]

Seems like all bets are off at this time until there is some certainty on the fiscal cliff.

People know the market will drop if nothing happens and go up when it does.

Problem is, its betting not investing. Betting on what the government will do.

[GoCubbies]

Limited investing in stock market. Not interested in speculation, market timing. Aim is to invest to support good management teams. More interested in dividends than appreciation. Rebalance as needed. These are times of deleveraging of debt from massive overspending and overpromising. Too bad there's no Paul Volker and Reagan right now. Volker to keep the money supply in check despite a tough recession (washed out high inflation and high interest rates), and Reagan to instill confidence.

Look to states for what's working. They have to take the bull by the horns, and some are. By law, have to balance their budgets (can't print money). Wisconsin turned 3+Billion bienniel debt into surplus in one year. Among other things, schools have averted untenable situations as a result.

My 2 cents

[jcjm]

About 10 years ago I saw a woman financial advisor on a PBS special who's name I can't remember, but I think it was something like Sieve. She talked about treating your money as if it were in a chest of drawers. Top drawer for what you use most, bottom drawer for things not used very much.

I remembered her principle more than her name. Using that idea here is what a typical chest would be

top drawer-cash in a checking account
2nd drawer-CDs
3rd drawer-US treasuries
4th drawer-stock mutual funds
5th drawer-real estate in the form of a home

Unfortunately, in todays economy that wouldn't make money. In fact it would be at a net loss with the 1st 3 earning almost nothing and stocks and real estate at a 20% loss.

Also, at my age, I'm ready to get out of real estate and go to a smaller chest. Now it looks something like this

top drawer-cash in a checking account, no need for a money market, they don't pay anything
2nd drawer-CDs, still here, but at a 3 month muturity interval because rates will rise some time and it keeps you from spending the money
3rd drawer-leveraged index funds and some mutual funds

I find that by being a little riskier on the 3rd drawer you can have more in the 1st and 2nd drawer, with about the same return.

The key to me is balance. Take profits from the 3rd drawer when they are up and reinvest those profits when there is a dip.

I'm not for market timing per se, but am for taking profits to avoid being trapped in a bubble.

In an ideal world I would like to have interest on CDs in double digits (like the 80s) and take those profits and put them in a leverage index (2x or 3x dow, russell 2000, etc) . To me, that would be a high growth portfolio with little risk, but that ain't going to happen soon.

[jcjm]

Not too much going on here lately. Seems like people are afraid to do anything because of the problems in Washington.

Historically the time between Halloween and April 1st have been the growth parts of the year, with things dipping sometime after April 1st.

People may be missing out on the bull market, but are just too scared to do anything. What usually hapens is they junp in after it is way up, just in time for it to fall.

[jcjm]

Things have been holding about the same over the last month in stocks. The index keeps tugging at the high then pulling back.

So it can go one of two ways. Break the highs or pull back.

My bet is on breaking the highs then pulling back. Several reasons. If you look at a chart of the DOW over 10 years you will see a pattern where the DOW has hit the same level 2 other times then pulled back. Another reason is analysts interpret this as meaning we are in an over all bear market, with short periods of a bullish nature.

For that reason I am cutting back on stocks at least to the point that I will have some cash available to buy back shares at a lower price. It may not be this week or month, but not too far in the future. With the govt problems coming to a head this week, we may see a jump in the market if things get settled, but we also might see a drop if things linger on. That's betting, not investing and for that reason, I am cutting back and buying a little insurance in the form of invese index ETF's.

[Scenario Thinker]

I just put a bunch into a 500 index fund. It's a bet for sure, but I need to do it before April 15th for tax reasons. It just happened to be a good time, and realizing what's happening soon, I figured I'll either gain a little, or I'll lose if the bottom drops out. Fortunately, it's not my life savings, just a chunk to see how it goes. I've heard pros and cons on what the sequester is going to do.

[SquarePeg]

I understood that investors cashed out in December to take advantage of the lower 2012 capital gains taxes.

In any case and regardless, I continue to divert a portion of my salary into various funds in my 401(k) with a 30% employer match. That's no typo -- thirty percent match. I wish I could say that I'm maxing out the contribution, but I cannot manage it, and still stay debt-free (ignoring the mortgage). The plan is to borrow against the 401(k) in the event that the teenager goes to college and needs help paying for it.

For me 2013 seems to be the year everything will break and need repairs -- so far it's the car and the washing machine. And what good is a warranty that only covers parts when labor is both expensive and inept? Maybe the way to prosper today is to buy products that are the easiest and least expensive to maintain and repair. iFixit.com might become my next virtual hangout.

[Scenario Thinker]

All mine are in retirement, no capital gains.

I continue to divert a portion of my salary into various funds in my 401(k) with a 30% employer match. That's no typo -- thirty percent match.

Do you mean a dollar for dollar match up to 30% of your pay, or 30% match on the dollars you put in?