Thoughts on asset allocation, debt reduction and wise spending

Originally published on 12/16/2010

Recently I watched an interview with Charlie Munger, number two in command at Berkshire Hathaway, the firm Warren Buffett is famous for. Mr. Munger had a lot to say on society, and what we should be doing with our lives even though questions from the audience often had to do with what direction he expected the market to go in the near term, and what types of investments would be best, he really didn't answer those directly except to say what he thought about the economy in general.

I found it interesting that before he spoke about the economy he first warned that economic predictions aren’t what he is known for. He spoke about the stimulus bill and what he thought needed to be done to get our economy back on track. Much like Buffett, he thinks that people of higher incomes should be paying a higher percentage of their wages in income tax. But the interesting thing to me was that he thought that federal spending on infrastructure was a good idea especially on solar power or wind power. These thoughts about federal spending on infrastructure projects were echoed by a man named Woody Brock who was interviewed by Smart Money magazine.

My reason to share the observations of these famous strategic thinkers, is that I had a conversation with a client in 2008, and he asked me what I thought of the initial stimulus package. At the time I said that I was pessimistic about what it would accomplish, but that if the money was spent on infrastructure, that is, things that were going to improve the economy because they added value to transportation or  energy, that it would be a good thing, even though I don't normally agree with deficit spending.

Fast-forward to today, and now we have bipartisan support for a new tax package. To me it's not really a new package, because it just leaves the same tax rates in effect that have been the case for nearly a decade. What it does is remove uncertainty, so that businesses and individuals have a better idea of what to expect tax-wise over the next couple of years. It rectifies unfair imposition of the alternative minimum tax (AMT) on middle-class Americans, and it puts the estate tax at a level that I think is more palatable.

It still remains to be seen whether these changes are going to be enough to have a positive impact on unemployment, and it still could be a while before we absorb the excess supply in the housing market. Until those two things get back to something close to normal, we may continue to see profits for American corporations but it's not going to be a gangbusters boom-time economy anytime soon.

So concepts like asset allocation, debt reduction and wise spending still make a lot of sense. Plan to get some money from Social Security for your retirement, but also plan to supplement that with your own savings whether it be through a retirement plan or through other investments.