15707 Rockfield Boulevard,
I was told a story about a man walking on one of the rails on a railroad track and reflecting upon the many challenges in his life. Things looked grim and his concerns weighed heavily upon him. What he forgot to notice was that there was a second rail directly across from him going in the same direction at the same time.
There are two rails always present in our lives. One represents the challenges, heartaches, etc. The other represents the blessings and opportunities. However, like the man in the story, most of us focus on the rail we're standing on (usually the one reflecting our challenges) and forget about the other side. How does this relate to our finances?
The First Track
For the past year and half, we have gone through various economic and financial crises. The stock market was beaten down, housing plummeted, our personal financial situations worsened to list a few. While we have begun seeing signs of a recovery with key economic indicators improving, credit slowly easing and the stock market rising, there are still issues that will impact the economy. Housing will continue to face problems stemming from homeowners unable to pay or refinance their mortgages as rates reset. The unprecedented level of government spending in an attempt to get the economy moving, to provide stricter regulatory oversight and to increase services will have long-term effects on the economy and taxpayers. (Don't worry, there is good news below!). Businesses' ability to innovate and grow will be slowed by increased taxes, more regulatory oversight and higher obstacles to hurdle to access capital. Income, sales and usage taxes on individuals will increase. Inflation will rise and the cost of the products we buy will increase. Hang in there...the good news is around the corner!
To pay off the U.S. debt, if foreign investors, especially China, who the U.S. has heavily relied upon to fund our debt, decrease or stop purchasing U.S. government securities, then the debt will most likely be covered through higher taxes and/or monetizing it ("printing more money"). We understand the impact of higher taxes. Monetization of our debt will flood the market with U.S. dollars, which will devalue the dollar further and increase inflation.
We have little control over these potential developments, BUT...you still can influence your investments and protect against future losses.
The Second Track (FINALLY!)
First, equities and the stock market will recover - since the beginning of the rally on March 9th through June 18th, the Dow has risen about 30% and the S&P 500 35%. It has always recovered in the past and will this time too. It's important to be well-diversified within your equity position to provide the best opportunity for recovery and protection. Beyond equities, it's important to consider other asset groups.
To address issues of inflation and a devaluation of the U.S. dollar, hard ("tangible") assets, such as gold, timber, commodities, energy, etc. are great hedges during times of inflation and the devaluation of the dollar. These asset groups historically have performed well and helped to protect the value of portfolios during inflation and dollar devaluation. Additionally, treasury-inflation-protection securities (TIPS) are fixed income instruments that rise and decline with the rate of inflation. This is one way to provide income and protect your principal and purchasing power during rising inflation.
What can you do?