2011 Game Plan

Happy New Years to you and your family!!! This will provide the investing game plan for 2011. I am not smart enough to predict the future, rather I prefer to give the game plan. The 2010 game plan worked well and I am following a similar strategy. First is the weekly recap from Vanguard.

Vanguard

Economic news was light this week, as 2010 came to a close. Consumer confidence was down for the month of December amid rising concerns over the future state of the job market. For the week ended December 31, the S&P 500 Index rose 0.1% to 1,257 (for a year-to-date total return of about 15%). The yield of the 10-year U.S. Treasury note fell 12 basis points to 3.29% (for a year-to-date decrease of 56 points).

Bigger Economic Picture

I use an Ecomonic Business Cycle strategy to make investing decisions. Currently, we are in the recovery phase of the cycle and are heading to the growth phase. The action of the Federal Reserve is key to this strategy. We see economic data that is both positive and data, typical of a recovery phase.

The Federal Reserve is artificially keeping longer term interest rates low to assist in growing the economy, especially the housing industry. They have announced a $600 Billion buying spree of longer term US Treasury bonds to execute this strategy and have announced buying will continue until mid-year 2011.

President Obama has signed a tax cut plan that will reduce the tax burden on most people and most businesses during 2011 and 2012. The intent is to give people and businesses more money to spend to spur the economy. The downside of this is an increase in the federal budget.

Inflation, except for commodity prices, remain flat so that the Federal Reserve will keep interest rates low. This means that the interest rates on savings accounts and CDs are going to remain low.

Commodity prices are rising indicating growth in the global economy. As the US government prints more money to cover the growing deficit the value of the US Dollar will decline. A declining US Dollar will increase the cost on imports even more. Commodity price increases are going to be higher than most people want or think.

2011 Game Plan

The current investing strategy is appropriate for this phase of the economic business cycle. Commodity prices are indicating that a growth phase should occur during the year. When this occurs, the bond position will be changed such that the longer term bonds being held will be sold.

The change to a growth phase means that interest rates will increase impacting longer term bonds and is very positive for US stocks.

Since the US Dollar is anticipated to decline in value, this makes mutual funds that invest in foreign stocks more attractive. This means that the positions in mutual funds that invest in both US stocks and foreign stocks will be maintained.