2008 was a tough year economically, the type that I hope to never see again in my lifetime. Although I thought 2008 was going to be a down year, I didn't expect it to be as bad as it was. Hopefully, 2009 will be a better year. Here's what I expect and how I will adjust our financial plans.
- Stock market. I expect the stock market to rebound significantly as it did in 2003, after the 2002 market decline. Psychologically, I believe the mass selling and redemptions are mostly over. People are avoiding being invested in the stock market. There is a lot a cash on the sidelines but fixed income investments, e.g. Treasuries, have very low yields. Also, an indicator in the Modified Unemotional Investor Growth System is positive for a short term rally.
Our plan is continue to keep our invested funds in the stock market, with some reallocations based on manager performance. We did raise 10% cash during the end of 2008 and will be reinvesting that amount by trickling it up to 25% at a time in early 2009. For example, I just put money into our 529 college plans that will be invested in index mutual funds.
- New bubble. With interest rates at all time lows, I believe another bubble will form. It's matter of when, not if. Some experts believe it will be Treasuries. I think the area may be in the medical/health care stocks, based on the Modified Unemotional Investor Growth System I use.
I have observed it's very easy to keep adding money in a bubble market, and be fully invested when the bubble bursts. This time, as the market rises, we will consciously sell equities to generate cash, and be more rigorous about staying within allocation guidelines for stock and cash. In addition, we will only invest in short term (less than 5 years) CDs and bonds.
- Inflation. Unfortunately, the bailouts and stimulus packages will have undesirable economic impacts in the future. With increased government deficit spending, I have to believe that higher inflation will return in 2 to 3 years.
Our plan is to keep our house (which benefits from inflation), buy CDs and bonds with less than 5 year maturities, and consider buying TIPS (Treasury Inflation Protected Securities) bonds.
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This is not financial, investing or economic advice. Please consult a professional advisor.
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