So where to put your money now? 

YOU COULD WRITE A BOOK

The first thing to say is that everyone is different, and anyone who invests based on a TV interview here, a magazine article there – and then takes a different tack based on a blog entry from some guy who also offers eggplant recipes – is clearly not going about this the right way.

The right way is to have an overall plan, good money habits, and a life perspective that serves you well.

To cover all this adequately (or even inadequately, depending on your review) could take an entire book.  Having said that, let’s say some more . . . with a wide lens before we pan in.

BROAD THEMES

We’ve known for some time that residential real estate was a bubble, and have been wary of it even back when it was only modestly inflated – e.g., this column from October, 2002.  It seems obvious now, yet many got burned. 

If you watched (or read) Whitney Tilson’s segment on this past Sunday’s ‘60 Minutes,’ you know there’s a lot more pain ahead, as the Alt-A and Option ARM mortgage default wave sweeps in even as the subprime foreclosures gradually get absorbed. 

We’ve known for some time that interest rates, or certainly short-term rates, would likely stay low.  E.g., here, in March of 2007.  This week the Fed took its short-term rate down to zero (how’s that for low?) and explicitly stated its intent not just to keep short-term rates low for a long time, but long-term rates as well.

Normally, the Fed tools have limited effect on long-term rates, which are determined by supply and demand.  Ah, but if the Fed itself becomes a massive buyer, that can drive the price of bonds up – and, thus, interest rates down.* 

*Interest rates are the converse of bond prices, as light is the converse of dark:  if it’s getting lighter, it is also, and to precisely the same degree, getting less dark.  If a bond that is slated to pay $50 a year for 30 years trades hands for $1,000, it yields its owner 5% a year.  But if it later can fetch its owner no more than $800 when he goes to sell it, the new owner gets a current yield of 6.25% on his investment ($50 on $800 = 6.25%).  In this example, interest rates have gone up.  If the Fed were then to come in with massive purchases, competing with private investors to buy bonds and driving their prices up to the point that this same bond fetched $1,250, then whoever bought it – the Fed or your neighbor – would be getting $50 a year on $1,250, which is to say 4%.  That is how the Fed would drive down long-term rates.

It may or may not work as hoped.  “The market” might be so alarmed to see the Fed printing trillions of dollars to buy bonds and mortgages that it might begin to fear for the strength of the dollar . . . and to fear the inflation they might expect eventually to result from so much money-printing  . . . and thus sell their long-term bonds almost as fast as – or (oops!) even faster than – the Fed is buying them. 

We’ve known for a long time we face challenges.  There’s the challenge of better preparing our kids to compete in the global marketplace. There’s the challenge of maintaining our aging infrastructure – and our aging population.  There’s the challenge of terrorism.  The challenge of global climate change. 

And have I ever mentioned that the National Debt – under $1 trillion when President Reagan was Inaugurated – will be “around $10 trillion” when President Bush finally leaves? 

In fact, it will be even higher, as it turns out.  

Which means nothing in absolute dollars (trillions?  shmillions?  who can keep track?) but quite a lot when expressed relative to the size of our economy: around 30% of GDP when Reagan took over, closing in on 80% by the time Bush leaves, and inevitably rocketing rapidly higher (as it must and should for a while, so long as we’re borrowing to make smart investments in our future).

We’ve known for a long time of the risk of a vicious cycle.  Here, for example, “with falling housing prices leading to less consumption leading to recession leading to job loss leading to more foreclosures and yet lower home prices leading to . . . ”  (It has a hopeful ending.)

We’ve known for a long time “it’s the end of the world.”  Here is that thought reflected upon in April of 2000, as the dot-com bubble was bursting.  And here, last May, as I was touring a $7 million apartment that a friend had just purchased as a third residence. 

I can’t help thinking that if we had skewed tax breaks exclusively to the middle class these past eight years – leaving the best-off to suffer as luxuriously as they did during the Clinton/Gore years (and closing the truly obscene hedge-fund-manager tax loophole) – our economy might not have gotten quite so far out of whack.

Perhaps most of all we’ve known for a long time that I sure don’t know what’s going to happen (long-time readers may remember Google Puts, FMD and Wa-moops, among others) – although, in my defense, I’d like to point out that neither does anyone else.

And so it makes sense – as always – not to take more risk than you can afford, and to diversify your assets, should you be so fortunate as to have some, over “four prongs.”  Kindly click here to be reminded what they are. 

SPECIFICS

So yesterday Lynn asked . . .

Lynn H.:  “How About Some Financial Advice?  Every day I read your blog hoping you have the magic answers for us, but you don’t say a word about investing.  My husband and I are retirement age though he still works and we did all the so-called ‘right things’ over the years.  So we have the house paid off and we have no debt and we have savings, but we lost a lot when the market crashed as we were a bit heavy in stock.  Where do we put money now?  My broker sure doesn’t know and wherever I turn, I see no good advice.  My bonds, both corporate and muni, are down in value along with my stocks.  Treasury stuff earns zilch and we need income.  The only advice I see is for young people or for those in debt.  I know we who have money are the lucky ones, but we're scared too.  Reading about Madoff is enough to give anyone the willies, isn’t it?” 

F It is – and one more reason to feel vaguely, or not so vaguely, nervous about taking risk. 

Which leads to the old saw – “a bull market climbs a wall of worry” (and peaks when people finally decide it’s safe to get in). 

Note that at the end of his truly dire ‘60 Minutes’ analysis of the residential mortgage situation referenced above (and let’s not forget the looming problems in commercial mortgages), Whitney Tilson pronounced opportunities in the stock market more interesting than he had seen in ten years. 

“Actually we’re the most bullish we’ve been in 10 years of managing money,” he said.  “And the reason is because the stock market, for the first time I can say this, in years, has finally figured out how bad things are going to be.  And the stock market is forward looking.  And with U.S. stocks down nearly 50 percent from their highs, we’re actually finding bargains galore. We think corporate America's on sale.”

So maybe now’s the time to buy.  Certainly you would have done better to buy Citicorp at $3.05 a month ago – or even at $7.83 last night – than at $57 two years ago.  But where will it be next year?  The bank will be there; but will the current shareholders own it? 

I don’t know.

Sometimes, a market seems so wildly overpriced (or cheap – “if the world doesn’t end, and if it does, who cares?”) that a guy thinks he really does know.  Like I knew not to buy real estate and avoided the dot coms.  (But did buy some real estate in Miami in the Eighties when they were giving it away.)

But even if a market does seem wildly cheap or overvalued, and even if a guy turns out to be right, it could be years before he is vindicated – if he doesn’t go broke being right in the meantime.

In any event, I don’t see the stock market as wildly cheap or dear at these levels.  It’s certainly cheap if we things get back to normal in the next year or three (another Wall Street truism: “Don’t fight the Fed”); dear, if we are headed over a cliff (as argued by James Boyce here). 

So I have some money in stocks . . .

I still think we will have to dredge our waterways (GLDD) and I still think trees will grow (PCL) – although it’s less clear to me that the price of lumber will continue to outstrip inflation over the long-term.  I still hope airplanes may back out from their gates under their own power.  (If you don’t know the symbol for that one by now, I’m not going to compound the felony by repeating it.)  I actually bought some more CPNO at $10.24 yesterday (down from $30 this summer).  And have taken a flyer on any number of items beaten down to pennies by this market and by (I’m guessing) year-end tax selling.

 . . . But most people shouldn’t buy individual stocks (nor this particular sampling) – index funds are the place for most of the money you want to have in the stock market.

. . . And I still own RSW as a “hedge” against the possibility of further declines.  RSW – my “safe-ish way to short the market” – is designed to go up 10% when the S&P goes down 5% and vice versa.  We first looked at these in April at $85 or so; sold “a third to a half” around $180.  They closed last night at $112.*  Yesterday, I replaced some of the shares I sold; only instead of buying RSW, I used SDS, much the same thing, because it is far more heavily traded and thus more liquid.

* Net of a 13.79% distribution being paid at the end of this month to holders of record as of December 12, so in a sense RSW is around $130, if you want to compare apples and apples.

. . . And I have those 5-year TIPS I suggested last month, as both a deflation and an inflation hedge.  (Happily or unhappily depending on whether or not you bought some, they have risen in the meantime, making them marginally less appealing).  And have I-Bonds, as discussed last week.  Neither of these is the magic answer that will give Lynn the yield she is after, but both are at least safe.

I have a few more suggestions but I don’t want to make you late for work, so I’ll shorthand them:

First, Lynn, if “your broker sure doesn’t know,” as you say, then why do you have a broker?  Maybe you’d do just as well, and save money, using a deep discounter and/or a family of low-expense funds like Vanguard’s.  Not spending money is as good as earning money – tax free.  

Which is why the very best investment many people can make is simply to pay off their credit card debt, to avoid paying interest.

Then there’s this caveat:  Don’t reach for yield.  If something is paying an extraordinary dividend or interest rate, it almost certainly entails a commensurate risk.  It could work out, but especially these days, it could well not.

On a related note:  At least some municipal bonds are not as safe as they once were (which is why, though tax-free, they now yield more than taxable Treasury bonds).  I like to think that states and cities won’t go bankrupt. There are a lot of reasons to think most won’t.  But some restructuring will almost surely have to be done  . . . (I have a friend who was a New York City cop from age 20 to 40 and now will receive something like $75,000 a year, with guaranteed cost of living increases, for what could be the next 50 or 60 years.  How can the City not go broke with contracts like those?) . . . and I can’t imagine breaking labor contracts without bondholders’ also taking some kind of hit.

Tell your retirement-age husband:  Keep working.  He’ll live longer, and you’ll able to use his income to dollar-cost average at least a portion of your stock portfolio as he does.

Save more, or at least live on less.  After all, you say the mortgage is paid off; and you can both now get senior citizen discounts at the movies; fuel has come back down in price; property taxes may fall with lower appraisals – so try to bank some of those savings, or at least let them help you make do on less income from your investments.  And, hey!  Social Security is about to kick in.  You will be rolling in it!