Before retiring, Jack worked at IBM for over 28 years. His articles have over 120,000 views.
With a new administration, comes new policies. These policies are motivated by politics. Whether they be taxes, spending, climate change, and foreign policies, and energy, and trade, it will impact business and investments.
As a personal investor, what should we do?
That is the 64,000 dollars question.
Here is what we do know.
1. Taxes will go up.
2. Inflation will be on the rise.
3. Cost of energy will be higher.
4. Interest rate will remain near 0%.
5. Illegal immigration will escalate.
6. Government will keep spending.
Economics move in cycles. They follow a set pattern of boom and recession. Politics do play a role but recognize their is a delay between when policies are implemented and the results showing up in the data.
Companies also make plans and they are usually a year or two ahead.
Given the reality, what does a small investor do amid all these changes?
Back to Basics...
The cost of money. Money or cash is not fixed. There is a time element. A dollar today will not be worth the same a year from now. That is why time is money. When you invest in something, over time, you expect to earn a profit. That is the effect of interest rate. The Federal Reserve is charged with setting the interest rate banks charge.
For example, an interest rate of 5%, means the cost of money is 5%. If you borrow money say $100 at 5% interest rate, a year from now, you have to pay the bank $105.
What is inflation? Inflation is also related to the cost of money. When products rise in cost, it means the value of the money has decreased. This is called purchase power.
If a dollar buys a loaf of bread today, and that same loaf coat $1.05 next year, then the inflation rate is 5%.
Typically, the total interest rate is a combination of inflation and something else.
What To Do Now
My simple advice consist of three things.
1. Keep some cash on hand
2. Invest the rest in SPY
3. Diversify and invest some in Gold and Real Estate
Cash will carry you in time of stress and high volatility. My advice is to keep at least 6 months of your average expenses in cash. If your monthly expenses is $3K, you need $18K in cash.
The rest of your assets should be invested in the market. The easiest investment is in ETF. The most diversified investment is in SPY, the index of the top 500 companies.
Due to the prospect of rising inflation, you should also look to invest a portion of your assets in gold and in Real Estate. In time of high inflation, only certain assets are inflation proof.
Gold is good because it has intrinsic value. Unlike bitcoin, it has value both in electronics and as jewelry.
Real estate is good and even become a source of income. If you invest in a rental property, you can leverage your cash assets. Having a low interest mortgage can give you a leverage factor of 4-5. If you put 20% down payment on a house or apartment, your investment can increase 4 folds. For every dollar your house rises in value, you have only invested 20 cents.
The rental income is taxable but you can offset that income with depreciation and any expenses incurred.
5 Years Plot of SPY
High Dividend Stock
Another option is investing in good dividend paying stocks.
NLY, is a real estate holding company that is paying consistently a dividend of close to 10%. That is better than SPY performance over the long haul averaging a 7% return.
One Year Chart of NLY on Yahoo Finance - 5/28/2021
Investing is not hard. Depending your comfort level, you can do a lot or very little. You can let a professional handle it and pay a fee or you can do it yourself.
I prefer to do it my self. Over the years, I have learned by experience that I can do better than some professional investors.
Our government has not been a good steward of our money. We have to protect our selves against rising inflation and possible world recession.
Some Common Sense Ideas...
1. If it sounds too good to be true, it probably is. take bitcoin as an example, of a high risk investment vehicle.
2. Only invest in the company or business you know or understand.
3. Don't follow the crowd, that is how bubbles are created.
4. Don't be greedy. Bulls and bears can make money but hogs get slaughtered.
5. Fundamentals like earnings and revenue and balance sheets are important. Tesla's high rolling value is beyond belief.
6. Don't fall for a pyramid scheme. They are a dime a dozen.
7. Investing is not hard or complicated. Anyone can learn how to do it.
This content is accurate and true to the best of the author’s knowledge and is not meant to substitute for formal and individualized advice from a qualified professional.
© 2021 Jack Lee