Looking Forward, Looking Back

It’s that time of year, the time when we choose to look forward into the future and reflect on what happened during the pervious year. So let me share some items from a variety of different sources and give you my reflections, for whatever they might be worth.

At least the readers of Calculated Risk, one of the best financial blogs on the web, are not too optimistic.

57% are looking forward to a double dip recession.

30% expect Gross Domestic Product to grow, but at less than 2%.

40% of their readers expect unemployment to remain between 10% and 11%.

30% of their readers expect unemployment to go over 11%.

Those are pretty gloomy numbers. I can imagine GDP increasing by more than 2%. After all, 2009 was a pretty dismal year for factory utilization, the transportation indices, and unemployment. 2% of crummy is not an unapproachably large number. The unemployment rate concerns me deeply. I just don’t see any new source of wealth producing jobs to replace our abandoned factories and the construction jobs lost in the real estate crash. A Federal stimulus package could give us a momentary bump, but what do we do when the bridges have been repaired and the pot holes have been filled, and who will pay for these projects once they have been completed? Like most of the readers of Calculated Risk, I don’t think I am ready to come out of my bunker mentality just yet. Of course in the strange world of unintended second order effects, I am part of the problem. The economy needs confident, happy consumers buying new American made cars and second homes on the beach or in the mountains, not suspicious old penny pinchers like me.

So what do the writers of financial self help articles tell us to do?

Check out the performance of your portfolio.

Everyone seems fascinated with comparing your returns to the S&P 500. I like to watch two numbers. Is my total net worth, including my house, increasing or decreasing? If it is decreasing, why? If the drop is a one time purchase of something like a car that was planned for and paid for in advance that is OK. Also, if you are retired and your total net worth is dropping at something less that 4%. That too is OK. I also like to watch my dividends grow. If my dividends are growing my stocks are happy. If they are falling, that is not a good thing. For example, I have quite a bit of money sitting around as cash in money market funds that pay trifling, insignificant interest rates. Can I do something better with some of that money and still remain liquid enough to replace the upstairs bathroom or buy a position in some new market opportunity that presents an offer I can’t refuse?

Anything risky in your portfolio?

How much risk can you stand? If you are 20 you can stand a lot of risk. If you are 70 years old, not so much. If you have less than six month take home pay in a rainy day fund, you can not afford to loose any money. If you are worth $300 million dollars, you can gamble $1,000,000 on some pretty questionable schemes and not loose a lot of sleep.

Look at what you are doing with your investments.

Are you a disciplined investor? Almost everyone agrees that investing is best done in a systematic disciplined manner. There is not one best scheme. What you are doing should reflect your personality, age, and overall financial condition. As Doctor Phil might say, “Is it working for you?” I have found a good analogy to explain this concept to women. A 16 year old girl going to a party is going dress differently than a grandmother going to a wedding, but they can both be appropriately dressed for who they are and what they are doing. Two women of the same age can wear very different clothes to the same event and still be making a tasteful fashion statement that reflects who they are. Whatever plan you are working, stick with it. If, for example, you like to use technical analysis to time the market, be certain to set hard stop loss limits on the day you buy the stock and follow your rule for selling even if your stock is increasing in value.

Rebalance

After getting burned when oil prices last crashed in 2008, I am finally learning to preemptively rebalance my portfolio from time to time. Lately, I have been moving money into my two Thrift Savings Plan bond funds to keep my total percentage of stocks within acceptable limits. In my case, I have decided between 50% and 55% in stocks is just about right for me. Right now I think the market is a little overvalued so probably that number should be a little closer to 50%. What I have not learned is how to sell a portion of a position. Last year I added to a number of my positions as the market contracted. This is the very thing a moderately conservative value investor (such as myself) should be doing in a falling market. But I have never been able to bring myself to sell a portion of a position as it rises. If I believe something is getting too hot, I sell all of it. I need to get past this weakness in my behavior. I don’t have enough money in foreign stocks, especially shares in emerging markets. I am some what frightened of investing in countries with a dubious rule of law, crony capitalism that rewards el presidente’s brother in law with the contract to build the new electronics factory, and occasional revolutions followed by the confiscation of private property. I believe the American Century is over. We are past high noon and our sun has begun to sink in the West. China, India, Brazil, Australia, the Asian Tigers, and maybe even somewhere like the Czech Republic look to be the locations of future economic growth, if the world can get through the current crisis. I need to at least take some baby steps in this area.

Set your savings goals for the new year.

How much money do you need to set aside in the next year? What are you planning in the way of large expenses? I hope every reader of this blog who has a 401K is contributing at least enough to grab all the available employer matching funds. Save a dollar and get a second dollar is really an offer you can’t refuse. I hope you all have or are working towards the six month take home pay rainy day fund. I hope you are not carrying a credit card balance. If you are, pay it off. Every dollar that lowers your balance is, in a way, giving you an 11% or more after tax return. How many investments can match paying off a credit card? Not many. My refrigerator is making strange clunking noises. I am told that the starter kit is going bad. I could replace it for $250 but the refrigerator is over 15 years old, something else could go wrong at any time. I know I will need to replace this appliance and that it will cost about $1,000. I know I want to take my wife on a nice vacation to celebrate our 35th anniversary. Her definition of nice will not be cheap, but having an opportunity to enjoy life is one of the reasons to save money.

And don’t forget. Let’s be careful out there.