Money Strategies For Obama 2.0

Smart Money Strategies For Obama 2.0

This story appears in the December 10, 2012 issue of Forbes.

William Baldwin, Forbes Staff

What are the odds of a tax overhaul during Obama’s second term? In 1986 President Reagan engineered a rewrite of the tax code that lowered the top rate to 28% and partly paid for that cut by choking off commercial tax shelters. Don’t count on a repeat performance, says John Buckley, a law professor at Georgetown who was working as a tax expert for Congress at the time of the Reagan tax coup.
The biggest stumbling block is that the federal deficit is so much worse today. At some point, Buckley says, the Federal Reserve and Chinese banks will have their fill of U.S. Treasury bonds. The federal government has to get its deficit down to a sustainable level–meaning a deficit no larger than the growth in nominal GDP. At the moment the deficit is roughly double that.
What about curtailing itemized deductions as payment for lower rates? That would be problematic, says Buckley. Eliminating all deductions would be, besides politically close to impossible, surprisingly modest in its yield–good for only $2.5 trillion over a decade.
The country may yet grow its way out of the fiscal crisis. But you have to allow for the rising cost of government, college and medical care. With that bleak reality in mind, consider these strategies for wealth building.
AGE 25-35
1. Buy stocks. Brush off that ominous market crash during election week. If you’re buying to hold for 40 years, the fiscal cliff, the possibility of a recession in 2013 and the antics of a lame duck Congress don’t matter. The ability of risky investments like stocks to reward long-term holders is what matters.
Inside a tax-sheltered account like a 401(k), the best option is a low-cost diversified stock fund. If your company plan has a brokerage window with low commissions, use an exchange-traded fund like the Schwab U.S. Broad Market Fund (ticker:SCHB), the Vanguard Total World Stock Fund (VT), or the Vanguard Total U.S. Stock Market Fund (VTI).
Outside a tax-sheltered account? Buying individual stocks can make sense as a way to lower your management costs and increase your opportunity to harvest capital losses.
James Grant, the acerbic publisher of Grant’s Interest Rate Observer, never has a kind word for profligate governments and the central bank money printers who sustain them. But even he found a stock on the Athens exchange that he liked. In February he told his readers to buy Metka, a constructor of power plants. It so happens that Metka has most of its payroll in Greece and gets most of its revenue from outside the country. That’s a good combination. Including dividends, the stock is up 48% since Grant recommended it.
What does Grant like now? MetLife, a life insurance company that would see an earnings uptick when the Federal Reserve stops suppressing interest rates.
http://www.forbes.com/sites/baldwin/2012/11/26/smart-money-strategies-for-obama-2-0/