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apteacher

Conventional Wisdom

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I too have an aggressive portfolio, at nearly 100% equities. However, I don't need the income as I am in the accumulation phase plus I will have a decent state pension with COLA. My dilema is whether another piece of "conventional wisdom", which is Tune Out The Noise when it comes to investing should be ignored.

 

With the recent Stimulus Bill that Washington is going to pass and the enormous, unprecedented deficit that this country will be in I am seriously concerned on the future potential for the stock market to go higher. My reasoning is as follows and I DO NOT want to make this a political discussion but an analysis on the cause and effect of how this bill may affect stock market investors such as us.

 

The stimulus bill that is going to be passed along with future unfunded programs will have to be paid by increasing taxes on individuals, small business and corporations. When the wealthy have to pay more taxes along with small business and corps, I fear that these entities that will be burdened with the higher tax bills will be less profitable and if the stock market rises based on earnings and profits, how will we have a sustainable recovery in the stock market when these companies will have to hand more of their profits over to Uncle Sam.

 

Washington has been run by many incompetents in the past and I realize this isn't the first nor will it be the last time, but the HUGE deficit that we will undertake in the near future is as historical as the election was. So I ask in all sincerity, how can or will we be able to profit from from the stock market in the future when the profits the markets need to climb higher will be diminished by the higher taxes companies will have to pay to help bring down the defict, which I do not believe we will ever be able to repay.

 

So what Hope do investors have going forward? I' wondering if this time "things are different" and if I should tune out the market noise??

 

 

When everything is bad, of course, there is an almost universal feeling that THIS TIME IS Different. Absolutely tune out market noise, get rid of your financial advisers go with index funds AND BONDS and learn to do this yourself, but unfortunately most are doing this AFTER the meltdown.

 

BTW, I was chastised by you for merely posting what Buffett said about the Obama adminstration plan to deal with the financial meltdown. Of course, Mr. Buffett would disagree with you about the tax plan as you presented it in your post. Its the standard POV that has left us in this mess in the first place. But I do not want to get into a political debate either. Anyway, if you forgot, here it is.

 

Have a good day,

Steve

 

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When everything is bad, of course, there is an almost universal feeling that THIS TIME IS Different. Absolutely tune out market noise, get rid of your financial advisers go with index funds AND BONDS and learn to do this yourself, but unfortunately most are doing this AFTER the meltdown.

 

Great reminder, Steve. When everything was sky-high in the late 90s, it was supposed to be "different." Stocks would continue to rise. The 2000-2002 crash took care of that.

 

So now we have another crash. Is it "different" this time around? Will stocks always be in the dumps? Well, I'm hoping that things will not be different, i.e. that the market will at some point move back up, as it always has. My wife and I continue to max out our 403b accounts, albeit with a somewhat less aggressive asset allocation.

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Hey guys,

 

I too have been a big proponent of Target Date Funds. I'm in 2035 fund and have been hammered. I'm years from retiring and try to tell myself (warning: conventional wisdom coming): that this is a buying opportunity. I have been dutifully contributing each month. I am thinking I may be in a bit too aggressive of a mix (90/10) but I am loath to sell from this fund now. One thought is to put new money into a 2025 fund (lower stock mix). This way I'm not selling my 2035 fund at the bottom (wishful thinking that we are at the bottom?). I still believe that since I am in the accumulation phase, I want to be buying at these prices. It is getting harder and harder to hold to this mantra but I am going to do my best to do so. Suze Orman said that unless you are prepared to keep buying an investment that you should sell.

 

 

Overall, I think the target funds make it too easy to ignore the basics of investing. Too many smart people seem to fall into selecting a date rather than an equities/income ratio. And too many non-investors choose something they don't understand because they are told everything will be done for them and they are doing a good thing just by investing.

 

Barney

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Barney,

I agree. Most people are unfortunately not like us.

 

I think there is room in the investment world for a Target Date fund, but because the vast majority of people have little idea of whats going on, they should be no less than 40% bonds at any target date, UNLESS requested for a higher equity exposure in writing by the investor.

 

Steve

 

 

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Thank you, Steve.

 

I, too, can't stand hearing the phrase "This time, it's different."

 

Of course, this time won't be exactly the same (I haven't seen any people left holding the tulip), but broadly speaking, we have seen this type of market move before.

 

Unfortunately, it seems to me that many people want to change their investment strategy without first considering the data to make an informed decision.

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The incredible deficits proposed by the president (up to 12% of GDP) will eventualy result in increased inflation that has not been seen since the 10%+ annual inflation in the Carter administration (77-81) which is a great reason to invest in equities for the long term instead of bonds because equity prices will adjust for inflation. I would not be concerned with higher taxes on corporations because corporatons pass their taxes onto their customers and more importantly, under the IRC corporations can use net operating losses (NOL) incurred in the current tax year to reduce taxes paid in the prior 2 years or carry the losses forward to reduce taxes that would be due in over the next 20 years which means that corporations incurring NOL in 2008-09 will reduce their US taxes in 2010 and later years to 0 which will increase their earnings/profitability. Also global US corporations can allocate taxable income to foreign countries with lower tax rates to reduce their US tax liability.

 

The worst thing investors can do is buy US Treasury notes and bonds that are paying 0.25% for short term and less than 3.0% for 10 year treasuries because inflation will destroy the yield. Its better to buy municipal bonds with 2% or higher interest rates which are exempt from federal and state income taxes.

 

 

Not to mention the $7 trillion Bush deficit that added to the foundation of this recession.

At least this president will listen to willing participants in finding a solution. He will give the credit to the team that helps. The country has to pull together. I agree with you on taxes being passed on. Maybe we should eliminate personal income taxes and just tax energy, businesses with over $3.0 million annual income, financial services, and all bonuses.

 

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The incredible deficits proposed by the president (up to 12% of GDP) will eventualy result in increased inflation that has not been seen since the 10%+ annual inflation in the Carter administration (77-81) which is a great reason to invest in equities for the long term instead of bonds because equity prices will adjust for inflation. I would not be concerned with higher taxes on corporations because corporatons pass their taxes onto their customers and more importantly, under the IRC corporations can use net operating losses (NOL) incurred in the current tax year to reduce taxes paid in the prior 2 years or carry the losses forward to reduce taxes that would be due in over the next 20 years which means that corporations incurring NOL in 2008-09 will reduce their US taxes in 2010 and later years to 0 which will increase their earnings/profitability. Also global US corporations can allocate taxable income to foreign countries with lower tax rates to reduce their US tax liability.

 

The worst thing investors can do is buy US Treasury notes and bonds that are paying 0.25% for short term and less than 3.0% for 10 year treasuries because inflation will destroy the yield. Its better to buy municipal bonds with 2% or higher interest rates which are exempt from federal and state income taxes.

 

 

Not to mention the $7 trillion Bush deficit that added to the foundation of this recession.

At least this president will listen to willing participants in finding a solution. He will give the credit to the team that helps. The country has to pull together. I agree with you on taxes being passed on. Maybe we should eliminate personal income taxes and just tax energy, businesses with over $3.0 million annual income, financial services, and all bonuses.

 

 

Personal income tax accounts for 43% of all federal taxes collected, FICA accounts for 37% and the corporate tax accounts for only 13% of tax revenues. Since bonuses are thing of the past because the companies that paid them are no longer in business how do you propose to make up the lost revenue? If you taxed the top 1% all taxpayers it would reduce federal income tax collections to 17% of income (40% of 43%). How will your solution reduce the deficit.

 

China holds 700B in US debt and Japan hold 600B. How much more debt will they buy?

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Cut in spending? Voters would never allow it. Sure you can cut if "Its not in my back yard."

 

http://www.warresisters.org/pages/piechart.htm

 

Steve,

 

I think that you are correct. However, sometimes the voters are wrong. Sometimes folks in government have to lead. This is one of those times.

 

On the other hand, to imagine Congress leading on this is a pipe dream. Members of Congress could not give a rat's a** about the well being of the country. They are most interested in their own reelection.

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Cut in spending? Voters would never allow it. Sure you can cut if "Its not in my back yard."

 

http://www.warresisters.org/pages/piechart.htm

 

Steve,

 

I think that you are correct. However, sometimes the voters are wrong. Sometimes folks in government have to lead. This is one of those times.

 

On the other hand, to imagine Congress leading on this is a pipe dream. Members of Congress could not give a rat's a** about the well being of the country. They are most interested in their own reelection.

 

 

As usual steve is clueless on what the issue is.

 

The Question is whether Chinese, Japanes and middle eastern investors will bankroll our social programs for the environment, health care and education plus the stimulus legislation in this year and next years to the tune of $5+T in new debt and at what price. Interest rates on 10 year T bonds will increase to 2 or 3X the current 3% rate which will double the amount of interest that will be paid on the national debt. This year's defict will be 12% of the GDP which is about 4x the amount considered reasonable.

 

The only other alternatives are to drastically increase income taxes of all taxpayers, not just the top 5% or just printing more $ which will result in double digit inflation. Electing either of these choices will result in regime change in Washingtion.

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Steve is NOT clueless.

 

I suspect that he is using different models and different assumptions than your own, and perhaps you would like to argue why your models and assumptions are better than the ones he chooses, but I see no reason to say that he is clueless.

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Steve is NOT clueless.

 

I suspect that he is using different models and different assumptions than your own, and perhaps you would like to argue why your models and assumptions are better than the ones he chooses, but I see no reason to say that he is clueless.

 

Steve has helped many people on this forum. He has been a stalwart for 403b reform.

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Steve is NOT clueless.

 

I suspect that he is using different models and different assumptions than your own, and perhaps you would like to argue why your models and assumptions are better than the ones he chooses, but I see no reason to say that he is clueless.

 

 

I don't want to get between Steve and Intruder - but will point out that Intruder is not "using a model", simply listing the only available options.

 

When we run a deficit we must borrow, only three entities can buy that debt: Americans, Non-Americans or the Federal Reserve. I think it is doubtful the first two have the capacity or the desire to absorb the trillions in deficit spending that is coming (using the administration's numbers) and thus that leaves the lender of last resort - the Federal Reserve. They print money. Actually they don't, they create money out of thin air with a keystroke and that money is used to buy Treasury bills. This is usually (though not always) inflationary. The same as a company issuing more shares - they dilute the other owners.

 

High deficit spending that is not financed by Americans or non-American must be monetized by the Federal Reserve - if you've got another way to do it I'm all ears.

 

ScottyD

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Steve is NOT clueless.

 

I suspect that he is using different models and different assumptions than your own, and perhaps you would like to argue why your models and assumptions are better than the ones he chooses, but I see no reason to say that he is clueless.

 

 

I don't want to get between Steve and Intruder - but will point out that Intruder is not "using a model", simply listing the only available options.

 

When we run a deficit we must borrow, only three entities can buy that debt: Americans, Non-Americans or the Federal Reserve. I think it is doubtful the first two have the capacity or the desire to absorb the trillions in deficit spending that is coming (using the administration's numbers) and thus that leaves the lender of last resort - the Federal Reserve. They print money. Actually they don't, they create money out of thin air with a keystroke and that money is used to buy Treasury bills. This is usually (though not always) inflationary. The same as a company issuing more shares - they dilute the other owners.

 

High deficit spending that is not financed by Americans or non-American must be monetized by the Federal Reserve - if you've got another way to do it I'm all ears.

 

ScottyD

 

 

Hi Scotty, AP and Chrysoplyae,

I have Intruder on ignore. Dan can deal with Intruder if he wishes.

I was only pointing out that some booms were caused by big government projects and some busts were usually caused when the projects ended. To say that government does not effect the overall economy because its only private sector that can, is IMO short sighted.

Have a good day,

Steve

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