Over the next year:
- Obamacare taxes go into effect
- Bush tax cuts expire, so taxes will be going up
- Mandatory spending cuts at the federal level, for deficit reduction purposes
All of these factors will create a drag on economic growth, and are critical for investors to be aware of.
So why are we talking about the next three years, when so much is changing this year?
The answer is realistic, if not optimistic. We believe that our national habit of deficit spending will have to be dealt with in 2013 and beyond. If we don’t see sufficient austerity from the federal level, we think that interest rates will go up.
Because of this, we think that the next three years will be the most challenging many investors will ever experience. During the next few years, we think that risks will be deflationary, meaning asset values will decrease (think 2008).
It’s important to note that debt-related troubles are coming from more than just Washington D.C.. Deficit spending gets a lot of attention at the federal level, but many people don’t notice or know how much trouble local counties, cities and states are in as well. There are many places in the U.S. which are simply running out of money, which means austerity that is on its way.
Austerity doesn’t just mean lower income, it also means higher taxes. We are seeing the effects of high unemployment and austerity in Europe, and those problems (and with them, civil unrest) might be coming to the U.S. in the next couple of years.
You need to be aware and prepared for these challenges. It’s going to be very tough for any politicians to make good decisions on our behalf, and it’s critical that investors understand the risks in the market and what might soon be coming.
So, how do we achieve financial goals over the next three years? Our three-step plan is:
- Capital preservation should be your highest priority
- Monitoring and analyzing your portfolio positions in light of these risks
- Know your exit strategy
Despite rising markets, risk is extraordinarily high, and investors need to avoid getting lulled into complacency by a seemingly safe market.
(If you read this blog and enjoyed it, listen to Doug’s podcast this week for even more details on these topics, and please share this information with others who might benefit from our perspective.)