Back in 2006, I wrote at WatchBlog, of a coming market and economic downturn and warned 401K investors that 2006 was the time to start unloading stocks from their 401K's. If you followed that advice, transferring funds from stocks to bonds and fixed funds, your 401K is still intact, and you made money in the interim. I am pleased to now write it is time for 401K investors to start transferring fund balances back into stocks. I don't have a crystal ball. I base this recommendation on Fortune Magazine's chart, Warren Buffet's wisdom, and my own education and experience in economics. Details follow.
Before discussing the 401K investment strategy, I encourage readers to click on the link to my 2006 article above, and review the very long term economic picture and ensure that what is written below for the interim term of the Obama administration is not confused with the longer term economic picture hinging upon the dramatic climb in national debt and its convergence with entitlement spending obligations as they currently stand.
Smart 401K investors re-balance their funds between stocks, bonds, and fixed funds, according to long term economic conditions for each of those categories. Just as my 2006 article warned of a coming housing and real estate downturn that would affect the entire economy, via my reference to Jon Markman's astute article, there are now clear signs that economy is poised to improve.
Corporations have, and are downsizing to accommodate the dearth in consumer demand, consumer demand is being pent up, the stock markets have tested their lows, and now hover near those lows, and the housing crisis data are finally showing improvement with sales up, mortgage rates and prices down, and capital for mortgage lending beginning to flow more readily again. And, of immense importance, are the many stimulus actions taken by the Federal Reserve, Congress and the White House, which are now beginning to actually work become visible in effect in the economy and supporting a halt to the decline in the housing and real estate market. And more economic stimulus, which will have an effect in the Fall and Winter late this year, is making its way through Congress at this very moment.
Let me be clear, the very long term economic picture is still very dark, and will remain so until reforms and responsible and sustainable changes are made to the Social Security and Medicare/Medicaid systems, and measures to end deficit spending by Congress and the White House have taken place. In the interim however, over the next 4 to 5 years, our economy and stocks are poised to make a strong comeback and that is a retirement investment opportunity for 401K investors.
Smart 401K investors no better than to try to pick market bottoms and tops. Instead, when stock price growth is likely for a period of time, the smart investor moves their money into stocks in increments, taking advantage of significant dips in stock prices to add more money into stocks. Given that indications point to 2010 becoming the year in which much of the stimulus effects will be realized, and therefore the year in which pent up consumer demand gets fully unleashed, the time frame for incremental increases in stock funds begins now and should top out at around 80% in stocks and 20% in bonds by the end of this year.
While this is not a guaranteed strategy, it is the most logical and rational based on the economic information available today. If the Earth is struck by a meteorite the size of Texas at Christmas 2009, disregard all that is written here from that point forward. In addition, if the Obama administration fails to successfully address entitlement reform and ending deficit spending during his first term, regard such circumstances as a meteorite striking our economic future, and act accordingly.
An economic turning point.
There is an economic bounce back coming. If the Obama administration and Congress use that bounce back as an opportunity to put in place near draconian measures to halt deficit spending, increase tax revenues, and lay down a plan that can be sustained to prevent the growth of our national debt to many times our annual GDP as baby boomers retire, then our very long term economic future can hold out hope for the next generations of American workers and tax payers.
On the other hand, if such measures are not taken or successful, national debt trends based on current future obligations and entitlements have our national debt growing to $57 trillion dollars. Our economy and nation will fail long before we reach such a level of debt. America must do an about face on that imploding economic future. Default on American debt to its creditors, even a devaluation of America's credit worthiness, will cause civil conflict, mass poverty and dislocation of homeless and jobless citizens, and fertilize the seeds of revolution in young minds facing such a horrific future for themselves and their loved ones.
Talking the talk will not avert such a cataclysmic future. Sustainable, persistent application of difficult measures will be required to walk that walk. And therein lies the enormous challenge for America. It is not an economic problem. It is a political one. The instant one party in government proposes the kinds of difficult measures needed to save our economic future from being crushed under national debt, the opposition party will attempt to take advantage and propose other ineffective measures that will sound more appealing to the public and entice them to vote for the party offering the rosier path. If the public choose the party offering the no pain path to an economic future, America will seal its fate to economic cataclysm.
There are no painless paths to avert long term economic insolvency. President Obama is absolutely correct when he says we will all have sacrifices to make. CEO's and executives will have to sacrifice 10's of millions in annual compensation to make funds available for hiring and staffing their corporation's growth. Unions will have to sacrifice unrealistic wage and benefit gains that will cause their employers to fail to compete and shut their doors. Consumers will have to sacrifice debt purchasing in favor of U.S. bonds and treasury investments to help their government buy down its foreign debt and reduce foreign borrowing.
Oversight and enforcement of ethical behavior will have to replace litigation as the less costly way for American business' to operate. Which means would be attorneys may have to settle on less lucrative careers as law, and regulation enforcement agents. Tax payers will have to pay more taxes. And they will do so, if Congress and the President provide evidence that those tax dollars are being spent on saving the nation's future and not wasted on 'get while the getting is good' pork and special interest lobbyist projects.
Federal Reserve Chairman Ben Bernanke summarized the future quite well, when shortly after his appointment he said in words to this effect, 'The time to reform Social Security entitlement spending is 10 years ago'. He meant by those words, that all the easy paths to our economic future have already passed us by. And from this point forward, each year of delay in getting responsible fiscal management in place, dramatically increases the hardship required to reach that goal. We are at a turning point. America's economic future can be saved for prosperity of future generations. But not without significant changes, reforms, and sacrifices by this generation. The time to act as an American patriot to insure this great nation's future and leadership role in the world, is at hand. The time to reject easy political solutions is NOW!