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Is Now the Time to Think Defensively?

Posted October 31, 2012 in Advice Column, Johnston

Ever heard of a football team’s defense winning the game? Most people think about winning teams as having a good offense because that is who is notorious for putting points on the board.

But what if your team has a terrible offense that cannot do this? That’s the way investors sometimes feel when their investments can’t seem to make the gains that would put them ahead.  I spoke to a couple recently who have as much money saved in a stock market mutual fund account today as what they had in the year 2000. They had not made any withdrawals; just let it run its course. Unfortunately for them, they have watched their account fluctuate with market performance for almost 12 years now. Their expectation in 2000 was that they would have almost double the amount for use in retirement.

Even if you did have a good offense, when it comes to investing, it’s not always obvious as to when you need to be defensive with your investing habits. You see, people in general have become complacent with the returns that stock markets are supposed to bring over time. Is now one of those times we need to think about putting our defense on the field? Everybody seems to have a different answer, but let’s examine some notable observations that could impact this decision.
    •    It’s an election year. In a few short weeks we will know who our president will be for the next four years. Unfortunately, for that time period, not much can be done for an immediate impact, regardless of who wins the presidency.
    •    Fiscal Cliff. Includes the expiration of the Bush tax cuts, expiration of the payroll tax cut, new healthcare reform taxes and spending cuts.
 •    European Debt Crisis. Is the world really clear of this as a threat?
 •    Domestic Financial Crisis. Imagine this household annual budget: Family income $21,700, family expenses $38,200, new debt on credit card $16,500, existing credit card balance $160,000.

How long could your family live like this before filing for bankruptcy?  Now add eight zeros to these numbers, and this is roughly where the U.S. budget stands right now.

But wait, what about “QE3?”  This is a Fed economic stimulus plan that involves the Fed buying back $40 billion per month in government bonds and mortgage-backed securities.  It came with the statement that rates will remain low, likely through 2015.

These are just a few things that might make it evident for many people, especially pre-retirees, to begin looking at taking a defensive position with some of their financial assets. Furthermore, the domestic U.S. stock markets have had a great run for the past few years and seem to be getting close to historical high points.  Sometimes, the ultimate offense is having a great defense.

Information provided by Nathan Reeder, Midwest Retirement Services, 6500 University Ave., Suite 202 Windsor Heights, (515) 991-1302.

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