Challenges in a Strange Time

            Recently it was announced that the countries of Greece, Portugal, and Spain were involved in a debt crises. The European Union, as of this writing, was giving Greece 30 days to reduce their debt to more manageable levels before aid would be offered.  Whole countries going bankrupt?  These certainly are strange times.

            I’ve listened to several people declare that the world is coming to an end.  Certainly, if you listen to the news media, it appears that it is.  And based upon several economic and policy trends, our world does not look like it is heading in the right direction:

1)                  The budget deficit is soaring.  This is leading to potentially higher interest rates.  According to Jeffrey Kleintop, Chief Market Strategist at LPL Financial, (LPL Weekly Market Commentary, Feb. 15, 2010) at the start of the last decade, total U.S. government debt equaled $5.6 trillion.  Five years ago, it totaled $7.7 trillion. The federal debt is now $12.3 trillion and if no changes are made, it will total $17.43 trillion in 2015!  (My suggestion is that it could be even higher than that.)  The government has been financing this huge debt with the massive issuance of U.S. Treasuries.   So far, individual investors and foreign central banks have been willing to purchase them at low yields.  However, the interest yields on treasuries have not had great competition from corporate and municipal bonds.  With what I expect will be increasing demand for credit from businesses, consumers, and municipalities going forward,  an increasing supply of corporate and municipal bonds will likely force up interest rates in the future.  If the U.S. Treasury is forced to pay more interest on its debt (offering higher rates to sell its Treasuries), it’s likely to magnify the acceleration of the deficit.

2)                  President Obama, according to some recent polls, has been viewed by investors as anti-business. I believe the uncertainty of what he and congress are going to do next has caused the stock market to increase in volatility.  Obama announced in January that he wants to start collecting fees from the large banks.  We have heard nothing of it since.  Did he mean it or was he just having a mood swing?  This type of uncertainty not only affects the stock market, but business investment as well.  Are you, as a business owner, going to hire more people, expand your marketing program, extend your lease, or buy a more expensive and expansive health care package for your employees when you don’t know what the mood of Washington will be tomorrow?  I know that I, as a business owner, am not doing any of these things right now.

3)                  Home foreclosures and defaults are still a major concern.  Homes are considered to be in default if the homeowner has missed one or more payments.  And even though the numbers reported, at the time of this writing, showed an improvement in December, the situation is anything but sure going forward.

            Other headwinds to economic progress would include China’s new requirement that their banks hold more cash (slowing down their economy and therefore, their imports from other countries), commercial real estate losses that are hurting the banking system (a few weeks ago, a congressional oversight panel reported that $1.4 trillion in commercial real estate loans would require refinancing in the next 4 years with more than half of those loan values exceeding the value of the property), weak bank lending, and a 10% unemployment rate.

            So, what does all of this mean that you should do with your investment portfolio?  Should you sell all of your investments and keep the cash in a low-paying CD or money-market account?

            My suggestion is to not take this overly-conservative approach.  Taking strange measures at this time will likely prove to be wrong.  I believe your best hope for a reasonably enjoyable retirement is to diversify among multiple asset classes and investment types.  It has been shown that most people who invest much of their money into bonds as they enter retirement will run out of money well within their lifetimes.  They often die destitute and dependent upon their children.  And this applies whether you are just starting out or are entering retirement.

            Despite the economic odds that are against us, we need to have faith that positive events will happen in our world going forward.  With technology, innovation, and hard work on our side, history tells us that things ultimately will improve.

            These are definitely strange times.  They do not require strange measures.

Opinions expressed are those of the author and are not intended to provide specific advice or recommendations for any individual.  To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.

Past performance is no guarantee of a future result. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio.  Diversification does not ensure against market risk.

Jim Rigtrup is the owner of and a Wealth Manager with Keystone Wealth Management Group, LLC.  Sandy, UT.  He can be reached at (801) 572-1077 or at jim.rigtrup@lpl.com

Securities and Advisory Services offered through LPL Financial. Member FINRA/SIPC.