The Aftershock Investor: A Crash Course in Staying Afloat in a Sinking Economy (35 page)

In nearly every industry in all three sectors of the economy, there will be some opportunities to benefit from falling asset values. Just as high-priced office furniture from bankrupt dot-com companies ended up at auction sales for pennies on the dollar after the relatively small Internet bubble popped, there will be countless auctions of every description after our multibubble economy pops. Opportunities to make large profits by buying, selling, and servicing distressed businesses and other assets will actually become one of the good sectors in the postbubble economy.

As always, timing will be key. One of the biggest mistakes many people will make is buying distressed businesses or other assets too soon. In this very unusual economic downturn, involving the fall of multiple bubbles, we will face very high interest and inflation rates that will take a lot longer to come down than anyone might imagine. It will be easy to mistakenly think the worst has passed and the time is right to start buying up distressed businesses and assets, when actually the price of these bargain properties will likely fall
even lower
. For maximum profits, think years, not months. Many people in the real estate market are making this mistake right now. They think that because an asset has lost 25 to 50 percent of its peak value, it is a bargain. That is true only if it is not going to fall further.

That said, there can be some shorter-term opportunities to “flip” a distressed asset even before the Aftershock hits and assets fall even further, if you can find a willing buyer.

Once the Aftershock hits, the servicing of distressed assets and businesses will be an instant and long-term winner. People and companies who buy, restructure, manage, and resell distressed businesses and other assets will have the opportunity to make huge incomes and profits, including:

• Accountants and financial analysts involved with forensic accounting and distressed properties accounting.
  
• Consultants, bankers, managers, and others involved in the acquisition, restructuring, and management of distressed businesses and other assets.
  
• Bankruptcy attorneys.
  
• Liquidation companies and auction houses.
  

For high school students or recent graduates, planning to go to college still makes sense. Even though the economy will be falling during that time and you will likely emerge from college in a difficult work environment with fewer jobs and business opportunities than before, it is still a good idea to get a college education if you can. The longer you wait, the less likely you are to go back to school, and a college degree will still mean something, even in the Aftershock. While a college degree is no guarantee of landing employment, it will definitely increase the odds of getting a job after you graduate and will also improve your chances of getting a higher-paying job. Obviously, you will do better picking a field in the more favorable job sectors mentioned earlier. If you already have a secure, full-time job, going back to college may not be worth it, unless you get your degree in a year or two.

Conventional wisdom’s approach to saving for college (like CW advice on most investing) made sense during the rising bubble economy. However, in the falling bubble economy, traditional savings plans and college investment instruments, such as 529 plans, are not going to fare well as inflation rises and interest rates climb. Instead, put your college savings into a well-diversified Aftershock portfolio, as described throughout this book and especially in Chapter 11.

In terms of student loans, we suggest you get these while you still can if you need them to go to college. Right now, student loans cannot be discharged in bankruptcy, and student loan lenders, both private and government, go after student loan payments fairly aggressively. So do not borrow more than you can reasonably handle in monthly payments after you graduate.

However, just as the government has become more relaxed about the repayment of mortgages, we will probably see the government be much more relaxed about the repayment of student loans when the multibubble Aftershock hits—mostly because it will be very difficult to collect and politically more popular. Also, after our falling bubbles finally fully pop, there will likely be less money available for student loans.

Retirement means different things to different people—tarpon fishing in Aruba, 18 holes every day before lunch, finally having the time to learn Spanish—but in financial terms there’s only one real definition: no more upside income potential. As long as you’re working, you have the power to increase your income, by getting a promotion or a raise, or changing companies or even careers. But on the day you leave the workforce, you’re limited to whatever you’ve managed to save by that point, and a stream of essentially fixed income. (For the record, the numbers on retirement savings are pretty dismal. Among people ages 50 to 59, the median retirement savings is just $29,000. How long could you get by on that amount?)

That’s why it’s so crucial to plan for retirement, whether it’s 5 years away or 35 years. For those who are nearing retirement or already retired, the information in previous chapters may seem daunting. But don’t panic. You can still do plenty to protect yourself—and even come out more comfortable than you would have before—by adopting an Aftershock approach to your retirement.

We need to stress again that
set-it-and-forget-it investing
does not work for retirement anymore. For years, people have been told to just put their money in stocks and bonds and don’t worry about it. We’ve already seen some retirement accounts get hammered in 2008–2009 due to this strategy, but the future is going to be much, much worse for people who refuse to change with the changing investment environment. Unfortunately, the vast majority of retirement plans are still focused on stocks, bonds, and real estate. And just like with whole life insurance and annuities, as those major markets decline, so will those retirement plans.

Given that risk,
you have to actively manage your investments over time
. This is true if you’re in your 30s or 40s, and even if you’ve put your retirement money into gold and other Aftershock investments. After all, those investments won’t necessarily remain your best option 20 or 30 years down the road. Even if you’re in your 60s, you want your investments to hold up into your 80s and 90s if necessary, don’t you? And maybe even leave something to your loved ones, too? We say this often because it’s so important: successful investing is a lot more complex than it used to be, a rising bubble economy. Now,
active management is key
.

Generally, there are two types of investments in retirement plans: those you can control and those you can’t. We’re going to focus on what you can control.

A few decades ago, most retirement plans offered by an employer were defined benefit plans, also known as pensions. These are still around in some isolated cases, but they’re increasingly rare. Under defined benefit plans, the company took care of everything—you just had to show up at work every morning, get your gold watch on your retirement day, and the pension checks would show up until your dying day, along with your spouse’s (or you could opt for a lump sum payment). It was the company’s responsibility to invest the pension plan and make sure it had enough money to cover the payments for their retirees. If the plan fell short, the company would have to dip into assets and earnings to cover the difference. Because this was a very bad thing, pension plan investments are usually very conservative—typically in bonds and more conservative stocks.

In the past 30 or 40 years, Congress has created a number of new retirement structures, and many employers have shifted responsibility for managing retirement plans to their employees. These generally work the same way, but they have different names—401(k) accounts are for private companies, 403(b)s are for nonprofits, and 457 accounts are generally for government workers and contractors. Regardless of the name, these accounts let employees choose their own investments, and their contributions grow tax free over time. In the decades since these accounts were created, they’ve been incredibly popular because they allow employees to take advantage of a booming stock market. Another advantage of these accounts is that many employers match their employees’ contributions up to the legal limit of 5 percent of an employee’s salary. This is a major incentive to contribute the maximum amount allowed—even if your company only matches 25 percent of your contributions, that effectively gives you an immediate 25 percent return.

A variation on the traditional 401(k) plan is the Roth 401(k), introduced in 2001. Contributions to a Roth 401(k) are not tax deferred—your contributions come out of your salary after taxes. But the advantage is that you don’t have to pay any taxes when you make withdrawals. And as with a traditional 401(k), your investments can grow in a tax-free environment. This can be a big advantage over traditional 401(k) plans, especially for younger investors.

The biggest drawback of a 401(k), especially from an Aftershock perspective, is the limited number of investment options. Because your employer administers these programs, your employer also decides the mutual funds and stocks in which you can invest. And in some cases, you may get stuck with only a handful of options. Even those with more expansive options tend to include only traditional investment strategies.

There’s a lot to like about individual retirement accounts, especially from an Aftershock perspective. Contributions are still tax deductible and grow tax-deferred—as with a 401(k)—but rather than being run by your employer, IRAs are self-managed, giving you far more control over your retirement savings. You can open an IRA at just about any brokerage firm—full-service or discount—and you can invest them in just about any asset category out there: stocks, bonds, real estate, and even gold bullion. You can probably guess that this is our favorite retirement vehicle, as long as it’s employed wisely.

There are a couple of other categories of retirement plans for workers in specific categories. For example, civil service employees have their own plan, called the Federal Employees Retirement System (FERS), which combines both a defined benefit plan and a defined contribution Thrift Savings Plan (TSP), as well as mandatory participation in Social Security. (Some long-tenured federal employees may still qualify for an older plan.) The investment options for TSP are extremely limited—just five funds: two for bonds and three for various stock indices.

Similarly, small businesses and self-employed people have their own types of plans: Keogh, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, and Simplified Employee Pension (SEP) IRAs. These have various advantages and drawbacks, which are too complex to explain here. If you’re in either of these categories, please understand the rules before opening any of these accounts, and remember—active management is a must.

The conventional wisdom says that stocks, bonds, and real estate are all recovering or will recover soon. So most people are not worried about their retirement accounts. As long as people simply hold on to their diversified stock and bond mutual funds, this thinking goes, the markets will be fine and pensioners and 401(k) investors will be able to retire comfortably for years to come.

For pension funds, this conventional wisdom goes several steps further. Even amid concerns about under-funded corporate pensions, people tend to rest easy about them. After all, corporate pensions are overseen by managers with many years of experience, and they primarily invest in bonds, which are thought to be a more stable asset class, right? Ratings agencies like Standard & Poor’s (S&P), Moody’s, and Fitch provide objective analysis on corporate bonds, and many pension funds are restricted to bonds with the highest ratings.

Even if those bond holdings go bad, the company is still on the hook to cover the payments of their retirees. And if all else fails and the company goes bankrupt, there’s a last line of defense: the U.S. government. Most pensions in this country are insured by the Pension Benefit Guaranty Corporation, or PBGC, which collects premiums in return for covering pensions in the event that they fail. (If the PBGC fails somehow, it’s pretty much understood that the government will do what it has to do to guarantee pensioners get what was promised them, even if it has to resort to more borrowing and printing money to do so.)

This is a pretty exhaustive list of protections for pension plans. And the important thing to keep in mind is that
every single line of defense must fail
before pensions collapse. That has never happened before in history, so it’s understandable that many people think it never will.