Because! There Will Be a Tomorrow

Not too long ago, I was pitching the Charitable Remainder Trust (CRT) to a close friend whom I thought might benefit from understanding such a tax avoidance option. In simple terms, the money in your 401(k) has never felt the icy breath of the tax man. The initial deposits from your paycheck, matching money from your employer, interest, dividends, and capital gains have all been growing in a tax free greenhouse. They will remain tax free until you begin to withdraw these funds. Then you will be taxed at whatever rate is appropriate, given your income in retirement. In my particular case, I don't intend to use these funds unless it becomes absolutely necessary. Instead, I plan on allowing the CRT that will contain these funds to start after my death. Then until my wife passes away, she will draw 5% per year from these funds. After her death, my heir will draw 5% per year for the next twenty years. Then all remaining funds, and there should be plenty in the CRT managers are even halfway prudent, will go, tax free, to the charities specified by me. In summary, I hope to leave my wife with an increase to the guaranteed portion of her income in my absence, plan for the retirement of someone from the next generation, and still be a blessing in this unhappy world, long after I have left it.

My friend chuckled, observing that I must know a lot about the future. I assured him that I didn't have a clue about the future, but it was my duty to prepare for the future to the best of my abilities, given the information that I currently possess. He bought that argument and the conversation passed on to other subjects.

Tomorrow will come, if not for you, for someone whom you love.

Which brings us to the wild gyrations of a stock market that lost over 10% of its value in a just a few days, then started climbing again as if that was nothing unusual. The market will go up. The market will go down. The problem is I don't know what is going to happen or when it is going to happen. If I knew these things, I would be placing a large bet on next year's Super Bowl, on the day when I knew I would be getting the best odds.

There are signs that have proven meaningful over more than a century, like the Shiller PE Ratio.

Current Shiller PE Ratio: 33.06 +0.01 (0.03%)

4:00 pm EST, Fri Feb 16
Mean: 16.83
Median: 16.15
Min: 4.78 (Dec 1920)
Max: 44.19 (Dec 1999)

Today, that historic index is in nosebleed territory, screaming that the market is overvalued. At the end of the day, buying shares in a company is nothing more than buying shares in an imaginary future. Will Coca Cola still be selling bottled sugar water or some other nonalcoholic beverages in tomorrow's thirsty world? Will they still be paying their shareholders a respectable dividend? Do you want a piece of that action? What are you willing to pay to play in that game?

What is different today? The world's central banks from the Federal Reserve, to the European Central Bank, to the People's Bank of China have been dumping unprecedented amounts of funny money into the world economy. All that money has to go somewhere, so why not the stock market and real estate? In London, there are whole neighborhoods of highly desirable houses that are mostly empty. They have been purchased by foreign syndicates and shell companies as an investment. Not many people who actually work in London could afford to live in one of these houses, so they sit there, unused, but going up in value. Insanity! But if you are an older Englishman who has owned and lived in one of these houses for a long time, you will be enjoying a luxurious retirement in the suburbs after you sell your home. One man mentioned in this report, traded his small apartment in London for a large farm in the countryside. He was an amoral stockbroker, who didn't much like the man he had become or the life he was living. Now, he earns his daily bread writing about the machinations of dubious characters who live and work in the London financial district.

Because we don't know what the future will hold, it is very important to have a contract with yourself. My contract tells me I should hold about half my money in shares of conservative dividend paying companies and low cost stock or hybrid mutual funds. I should never invest too much in any one company (5%?), or sector (15%?). I have been burned by holding too much in energy stocks when the price of oil took a nosedive. I have also learned that I should stay away from technology stocks, as I tend to fall in love with the technology, rather than the business plan and management of the company producing the technology.

If I am true to my contract, my net worth will increase slowly when the market is headed up, but when it goes down 40%, as it did in 2008, my net worth only drops 20%, and I will have free cash to buy undervalued shares, when everyone else is selling, terrified they will lose everything. This seems to be the best plan I can come up with for a couple still in the early years of retirement with our lifestyle, guaranteed income (pension and Social Security), and investments. Am I right? Who knows? I don't know what the future will hold, I can only make prudent, educated guesses based on the best information I can find.

The rest of it, like the life and death of your humble blogger, lies in the hands of God.