1. Reduce Your defense stocks and all government contractors
Since defense is targeted for billions of dollars of spending cuts, investors should dig into their 10K annual reports of companies to see how dependent they are on government work. Defense contractors are likely to lose business as these cuts work their way through the system, but so will other government contractors, and state contractors too, as already recession-pinched states will lose some federal funding. Charles Rotblut of the American Association of Individual Investors counsels,
“Stock investors who have companies that depend on government financing should monitor their holdings carefully. Infrastructure is at particular risk, because it’s going to be a lot harder for states to work on bridges, roads and highways.”
2. Relax a little about your bonds
With Congress making good on U.S. obligations, that diminishes the possibility of a ratings downgrade pushing Treasury rates up. And the bill’s budget cuts, which mainly don’t go into effect until 2013 at the earliest, could crimp economic growth, delaying the rise of interest rates. Don Martin of Mayflower Capital in Los Altos, California says, “Bonds are not as scary as before. The economy has hit stall speed and is beginning to slip back into a recession, so with the reduction of government stimulus caused by austerity this means that stocks will go down and bonds will go up.” Investors still may want to move their bond holdings to a less-concentrated, shorter-term or more cautious approach, but there’s less need to panic about them.
3. Pay off your student loans
The debt bill will eliminate the rebate that education borrowers get when they make a year’s worth of loan payments on time. But they still may be able to get an interest-rate discount if they arrange to make their payments automatically through a bank account debit.
Many graduate students will have to pay more for loans, as this deal eliminates the federal subsidies that paid interest costs on some of their loans while they were in school. Grad students may find it worthwhile to pay the interest themselves while they are in school, if they can, to avoid those costs compounding until after they graduate.
4. Defer your Social Security benefits
Every year that you defer starting your Social Security (SS) retirement benefits, they rise by almost 8%. The new law’s Super Committee of 12 may nip SS recipients’ cost-of-living adjustments (COLA). Starting your SS benefits early means you relinquish that 8% a year increase and, should the COLA be nipped, start giving up buying power sooner. Mark Berg, of Timothy Financial Counsel, a fee-only financial planning firm, advises: “That would be a significant problem for clients who rely on Social Security. We would encourage a wait approach on Social Security if the client can afford it.”
5. Pay off your debts and Save, Save, Save
Bedda D’Angelo, president of Fiduciary Solutions, a Durham, North Carolina, financial-planning firm, says: “If we have learned anything from this crisis, it’s not to depend on the government for anything. Entitlements change with the wind. Since pensions are being phased out too, the only sane thing to do is max out your tax-deferred retirement savings accounts.”
Advisers have been telling their clients to get defensive for some time: Investors who pay down their debts, move more of their bond money to shorter-term instruments and their stock money to defensive dividend-earning stocks will be better prepared for whatever the government throws at them next.
Money manager Daniel Romero, of Romery & Levin Wealth Management in Santa Ana, California, has had his clients building reserves, paying down debts and diversifying broadly into commodities, Japanese stocks, and natural resources stocks: “This is the fourth or fifth Armageddon situation that’s come across our desk in recent years. Just put yourself in a situation where it won’t affect you so much.”
[Source: Linda Stearn’s article for Reuters, August 2, 2011]
H/t beloved fellow Anon.