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Retirement Plannning:The Three Lessons to be Learned post-Bailout October 3, 2008

Posted by retirementwithaplan in retirement.
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Retirement Plannning

The Three Lessons to be Learned post-Bailout

House vote

House vote

The House of Representatives voted to pass the historic bailout proposed earlier this week. Although this did not happen until the stock market lost over a trillion dollars of investor’s money, a knee jerk reaction that did not seem to change the outcome for most retirement accounts, the inevitable became fact. Current economic policies have failed. The prevailing financial and investment wisdom now played out on a global scale, not just Wall Street, still believes that government regulation is bad – unless you need cash. And there is always the hope, both in Washington and on Wall Street that our memories are still very short.

Post-bailout will much different.

There is little likelihood that this is the last time Congress will need to ante up with cash to infuse not only struggling companies and banks around the globe but states such as California.

The misguided thought that the government will be able to profit from this mess lay in the capable hands of as-yet-to-be-named investment guides who, will try to do for the taxpayer what they formally would do for themselves. This is a little like asking the thief to analyze the potential leaks in your home security system. Once in, whatever security you may have had is now in the trust that the reformed bandit has truly changed their ways.

While the reasons for the passing vote (263-171, reversing the 228-205 against the package on Monday) are numerous – from increased pressure from constituents to the most recent economic numbers posted this week )jobs at a five-year low, weak data on how the consumer is reacting to the current crisis and lackluster manufacturing reports – they may not have been solely the reasons why the shift came so soon after such a resounding vote just four days ago.

Where does that leave us?

Perhaps it is time to begin to look at the mistakes we have made as the road to recovery. And although we will promise to do differently, once we realize that most of this crisis (at least in the short-term) has avoided us, we will be right back to where we think we should be. With one exception, you will not be able to borrow.

Do not expect the credit markets to suddenly roll over and let you scratch their bellies again any time soon. You are now in a cash based economy. Supermarkets around the country have begun to feel this shift as consumers begin to shy away from credit card and debit card usage in favor of spending what they have in their pockets. Their worry is not that you will stop buying food, something they have razor thin margins on, but purchases will be well placed when it comes to sundries and beauty aides.

This will force you to deal with your debt in a very real and upfront way. And I am not speaking simply of the debt you have to creditors but what you may owe your parents for having underfunded their retirement in favor of funding your college, helping you with your down payment, or any other financial help they may have lent you throughout the years. This may be the advent of the multi-family dwellings that were a staple of the American landscape before WWII.

The last lesson we need to wrap ourselves around is the convenience of purchasing stocks for your retirement plan. Hands down, the majority of the people crying the financial blues in the past week had done just that. Instead of using those tax-deferred accounts the way they were meant to be used – safe, long-term investments – many instead sought the growth that was plainly evident last year.

These were the days and months leading up to the disclosure by so many firms of the toxic debt on their books. Your investment portfolio should be one that consists of the following mechanisms in place: A tax deferred account with mutual funds designed to take advantage of the growth potential in the markets (had you done this you would own many funds that are currently selling at a huge discount), outside of your retirement account, you would have your index funds (the most tax efficient form of investing which is why they should be outside of your retirement account) and if there is any money left over, a portfolio of stocks (funded only with “mad money” a term coined by Benjamin Graham, the guy who taught Warren Buffet how to do what he does so well, or with cash you do not need).

Being Financially Nimble

We can’t go back might be lesson four if I were not the optimist. If you have a five-year horizon, you will see fully 75% of what you had invested at the turn of 2008 returned to you – less the stocks. If your horizon extends beyond ten-years, you should be well on your way to recovering your full pre-2008 portfolio value – less the stocks.

That may be money gone for good. Stay in mutual funds and keep investing as much of our pre-tax income as possible. Stay out of stocks unless you have some mad money laying around that you don’t need for food or fuel. We have a wholly different economic situation unfolding before our eyes. Being financially nimble will help. Being wary will help even more.



1. Equity School - September 18, 2009

Great Article. Graham is considered the first proponent of Value Investing, and I am a great fan of Benjamin Graham myself, I follow most of his rules, I started a site on value investing. The site mainly screens out Low PE, Low PB, High Divident Yeild. Low PB+ High Div etc.. for the India markets. I really appreciate the effort you have put in your blog. Best Wishes.

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