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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

August 7, 2012 at 10:15 AM

Trapped in a 401(k) and the stock market?

With the Dow back above 13,000, a reader asks, “what options investors really have instead of the market for their 401k portfolios?” He continues, “With so many companies eliminating defined benefit retirement and pushing employees into investment-based plans, that money every payday has to go into something that has the potential to create some growth. That creates a continuing demand for stocks and bonds, despite the risk, and it would seem that the demand keeps the Dow up.”

It’s an interesting theory. But Dow 13,000 won’t survive the next big bump in Europe or an inability in the Other Washington to avoid the fiscal cliff. As to other options, let me give a few caveats. I’m not a certified financial planner. I also believe there are only two personal finance stories: 1) Don’t be greedy, and 2) Don’t be stupid.

That said, we are long past the long bull market of the 1990s. In his latest outlook, PIMCO’s Bill Gross bluntly states “The cult of equity is dying.” From 1912 on, stocks produced a solid 6.6 percent real return. But for a variety of reasons, investors may face much lower returns in the future.

Bonds are always an alternative. However, Gross continues:

The primary magic potion that policymakers have always applied in such a predicament is to inflate their way out of the corner. The easiest way to produce 7-8 percent yields for bonds over the next 30 years is to inflate them as quickly as possible to 7-8 percent! Woe to the holder of long-term bonds in the process! Similarly for stocks because they fare poorly as well in inflationary periods. Yet if profits can be reflated to 5-10 percent annual growth rates, if the U.S. economy can grow nominally at 6-7 percent as it did in the 70s and 80s, then America’s and indeed the global economy’s liabilities can be “reflated” away. The problem with all of that of course is that inflation doesn’t create real wealth and it doesn’t fairly distribute its pain and benefits to labor/government/or corporate interests. Unfair though it may be, an investor should continue to expect an attempted inflationary solution in almost all developed economies over the next few years and even decades.

On top of changing economic circumstances, Wall Street is increasingly a grifter’s casino stacked against the average person. In the New York Times, Ron Lieber looked at what disgruntled investors might do. The strategy might not be for everybody.

So there’s no easy answer, especially for younger people who will likely be paid less, advance more slowly, face big debt — and for boomers without much savings or who were ruined in the crash (the screwdoodoo’d cohort is multi-generational). Select stocks of solid companies you believe in and stick with them. Don’t think you can time the market. Don’t put all your eggs in one basket — diversification is key, including index funds and bonds. If something sounds too good to be true, it is not true. None of these are brilliant insights. Some may make out wonderfully if the Dow keeps rising. Many won’t. The returns simply won’t be strong barring a revolutionary breakthrough in both business and policy. Not just a new breakthrough such as the Internet, but a return to less scandal and “fixing” policy to benefit a few well-connected winners.

Finally, most people wear multiple hats: Investor, employee and citizen. Often these are at odds. So you might make a stock profit from a merger or offshoring that costs you your job and devastates your town. Those who make most of their income from investments are at odds with those who depend on wages. People on fixed incomes are hurt by a Federal Reserve keeping interest rates low. Raise them and the economy would collapse. Many more are stuck in 401(k)s with limited options and diminishing contributions from employers. Pensions, once the foundation of the middle class, are now a source of anger and resentment by the majority that doesn’t have them. Those that do are facing shortfalls.

Interesting times.

And Don’t Miss: Stop rigging the system against small business || Elizabeth Warren/Politico

Today’s Econ Haiku:

Home prices are up

But the old wisdom applies

Location times three

Comments | More in Investing, Stock market

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