Investing for the Real Payoff
Monday, October 30, 2006
Usually in this space, I talk about scary subjects like how terrible you're going to feel if you don't plan adequately and implement the plans adequately for your retirement.
Lately, an analogy has occurred to me that sums up just what I mean. We old guys (I'm 61) are fond of saying, "If only we knew then what we know now, we could have...." You can fill in the blanks: dated the cheerleader, bought stock at IBM at its low, bought Google at 60.
A Fine Mess
But the truth is that we already do know something vital we can use to good effect in our later life: We know that if we don't have money when we're older and are unable to work, we're well and truly in a pickle.
We also know that the government isn't going to be able to bail us out. We know that working conditions are getting ever more difficult as a result of Far Eastern competition and the competition of low-wage immigrants.
All of this, every bit of it, tells us we need to do just two simple things: save like a banshee and invest wisely.
Investing Wisdom
Now, I've been over the savings part a few times, so I don't need to do that again right now. But I do want to talk about the good things about investing -- the things that should make us all feel better.
The first one is that the stock market has been on a tear lately, breaking records on the Dow day after day. This is because large capitalization stocks like GM, DuPont, and IBM have been making up for lost ground.
They lagged for years when the small caps, techs, and foreign stocks did well. What does this tell you? That it's good to have a little bit of everything in your portfolio, and especially that it's good to immediately buy what's lagging right now.
My colleague, the investment guru Phil DeMuth, likes to say that the essential kernel of wisdom in investing is that you must buy what's low and not buy what's high. Right now, foreign large cap, such as what's captured in the ETF initialed EFA, has been lagging.
It might be a good time to load up. Emerging markets have also lagged this year after a mighty run of three years. I think their future (they're in ETFs such as EEM) is going to be choppy indeed for the next year or so, but barring nuclear war, I love them for the long run.
Likewise, small cap like the Russell 2000 value makes sense to me now. Again, the theory is to buy what's lagging. The good news is that it's available and you can and should buy now. I would always have the largest chunk in the really large caps like the S&P 500 Spyders, but 10 percent each in EFA, EEM, and some low-cost, no-load small cap value also makes sense.
A Receding Recession
Now, here comes another bit of good news. There's a lot of gossip out there saying that because of the severe housing correction, we may be in for a recession. After all, housing is an immense part of the economy, and it is unquestionably in a slowdown.
But the data on this point is interesting. If I may just put on my economist's hat for a moment, let me make some notes on my imaginary blackboard.
Next, there's no clear evidence in economic history of a housing correction causing a recession. Yes, they sometimes happen at the same time. But recessions are usually caused by bubbles in money growth, inventories across the board (not just in one sector), and mistakes in government policy.
So far, we're seeing a major correction only in one sector: housing. If the government continues its masterly guidance in monetary policy, there's little reason to fear a general recession. A slowdown from recent torrid growth is virtually assured, but we want that because it will slow down the likelihood of an inflation that would hurt us, and whose cure would raise interest rates and really slam on the brakes across the whole country.
In other words, the likelihood of recession, while not nil, is small.
Bad News, Good News
There's still more good news: If the recession comes or even seems to be coming, it will lower interest rates and the stock market, and provide a buying opportunity for stocks and for real estate.
The savvy investor wants to buy low. If a recession gives him or her that chance, they should go for it. The data is overwhelmingly powerful that when you buy at the low point on the economic cycle, you make more than if you buy when things are rosiest.
So, to me, it looks as if no recession is coming. Certainly the stock market would bear that out as well. But if the market tanks, that's not the time to panic -- that's the time to buy. Buy when the boys and girls on CNBC are at their most gloomy, not when they're cheerful. Buy on the sounds of muffled drums and mourning about the market, and hold on even when you get scared.
The good news -- again with the good news -- is that if you do that, you'll wind up practicing your backswing and your mah-jongg instead of exercising your fear when you get to retirement age.
The Real Payoff
To change the subject, I travel constantly. All the time, day and night. And I usually sit next to men and women who are also traveling frequently.
Would you like to know what we talk about when we take our snoots out of the Wall Street Journal? We talk about our families and how much we miss them. We talk about how tired we are, but also how happy we are just to be supporting our loved ones.
If Pat Robertson and James Dobson or the other backers of family values could hear how strong the love of family is among business travelers, I think they'd be very moved indeed. Those men and women with bulging briefcases and laptops loaded with PowerPoint presentations are mostly thinking about how much they just want to be sitting quietly at home with their wives and hubbies and kids and dogs and cats.
