Traditional Investment Strategy

Email Print

I often use the phrase "traditional investment strategy" and get asked to explain exactly what I mean by that. For lack of a better response, it’s the investment strategy that I learned growing up, and it contrasts sharply with many strategies employed today like "momentum buying" and "buying on the dips."

Notice that many of the recent faddish strategies born during the great bull and bubble market of the 1990s emphasis buying. In contrast, traditional investment strategy emphasizes saving, safety, and sound sleeping. The fads hold out the promise of striking it rich — making it big — while traditional investment strategy is simply geared toward making your life better. That is why it is sometimes called the traditional investment philosophy, because there is some thought to it and it is geared to promoting your values and beliefs.

The first few steps in this strategy have nothing to do with buying corporate stocks. First and most important is to get out of debt. Going into debt is an easy fix for all your little short-run problems, but it is deleterious to your family’s future and the key ingredient in economic catastrophes like bankruptcy. Statistics indicate that Americans are fast approaching $10 trillion dollars in overall debt. If you divide that by every man, woman, and child (including those in nursing homes, mental health facilities, and prisons) you come up with an average indebtedness of more than $33,000 per person. For a family of four, that is more than $130,000 in debt.

Board of Governors of the Federal Reserve System

Getting out of debt is easy. All you have to do is nothing. Just stop spending. Consume less. You can cut back on all your necessary expenses by purchasing less quantity or less quality in everything from housing, cars, food, clothing, etc. Good habits like reading books from the local library, listening to classical music, gardening, and exercise can cost virtually nothing. Statistics indicate that Americans spend too much on food and cars for their physical and financial health. It seems that the less you have the more you eat and spend on cars. The old stereotype of a poor person was thin and gaunt looking, wearing wore out shoes. Today the stereotype is quadruple XL and an SUV.

Stop the financial gimmicks and get those credit cards paid off as soon as possible. Credit card debt is the anathema of the traditional investment philosophy. Using credit cards is fine, especially if it helps you to keep track of your expenditures, but you must pay off the entire balance each month and never pay interest except under unusual conditions. These unusual conditions should be your conditions — things that you plan, like moving expenses — not things that "just happen" to you.

Mortgage debt is a possible exception to the traditional rules because it is tax-deductible and housing is so expensive. However, don’t use the tax benefit to buy a house bigger than your needs or one that is too expensive. The traditional strategy dictates that you buy the worst house available in the best neighborhood you can afford. You can fix up the house on your own time and accrue "sweat equity." The "best" neighborhood does not mean the most expensive, but rather the one best suited in terms of commuting to work, quality of schools, and crime.

(For those who rent and cannot afford a down payment, we are getting ahead of ourselves. For those who buy during housing bubbles, you may already be over your heads.)

When you get out of debt, your income is greater than your expenditures and taxes and you begin saving money — lots of your money. You will need one month’s wages in your checking account, two months wages in your saving account, and then begin putting money into short-term certificates of deposit (CDs). Long term you should maintain about three months’ income in CDs, but initially you will have to build up six months worth so you will have more than enough for a big down payment on your house (this helps keep the payments manageable; going with government gimmicks might get you in trouble).

After the house has been purchased and savings have been stabilized, it is the time for a little security. While very unpopular today, some traditionalists consider it more important than buying your house. Gold and silver coins are a great hedge against inflation and economic catastrophe. Everyone should have a cache of both. I prefer a mix of junk silver coins and bullion and collectible gold coins, but any combination is better than going without. Accumulate the coins over time, especially when gold prices are low. Keep the valuable gold coins in a bank safety deposit box along with the original copies of all your important legal papers.

These precious metal coins will keep up with inflation, or even beat it, over long periods of time and insulate you against the ravages of global, national, or personal economic collapse. As Burt Blumert reminds us, there are risks to owning gold but "NOBODY ever went to the Poor House buying gold." For example, the coins could lose value if the world were to embark into an era of sound money, limited government, and international peace, but who cares? That would be the greatest investment loss we could ever incur!

With home, savings, insurance, and your gold holdings established, now it’s time to start investing. Any type of investment will do here. You may have a business you wish to expand or to start a new side-business of your own. You may want to buy and manage your own land or real estate. I’ve found that buying income-producing rental property during times of distressed real estate prices is a good investment, but it’s a pain in the neck. All of these types of investment have the negative in that they can take up a lot of time and might cut back on your reading at and other forms of personal betterment and enjoyment.

The simplest investment is the tax-avoiding retirement account at work. It’s automatic, gives less of your income to Uncle Sam, and if you pick well-managed, low-cost mutual funds it could build up into a substantial sum over long periods of time. I like funds that are low cost and well diversified. I also like funds that aren’t shy of buying oil shares and gold mining stocks, are willing to invest overseas, and aren’t afraid to buy income-earning securities or go into cash when the risks are high. The big advantage here is that you do not have to become a financial wizard or monitor your investment on a daily basis. You just have to keep track of the big picture. Your monthly deposits are invested along the lines of dollar-cost-averaging. This approach seems to take the least of your time and presents the lowest level of risk. Asset allocation can help manage this risk.

Nevertheless it is still a risk. Everything is a risk, but the nice thing about the traditional investment strategy is that it is an overall personal financial strategy that puts you into a position of safety before undertaking significant risk. With a stable financial position in cash, savings, and gold (and no debt), you are less likely to be whipsawed by the psychological factors that cause many investors to buy high and sell low.

This takes me to my disclaimer. I don’t follow the traditional investment strategy, at least not perfectly. I’m overweight, bought WorldCom stock in 2000, and spend two times the amount that Jeff Tucker pays for his haircut.* But I do have my safety deposit box and pay off my credit card each month.

* If you saved $20 per month on haircuts (or anything else) and invested it in a tax-free account for 50 years (earning about 7% after inflation) you would accumulate over $100,000 in savings.

Mark Thornton [send him mail] is an economist who lives in Auburn, Alabama. He is author of The Economics of Prohibition, is a senior fellow with the Ludwig von Mises Institute, and is the Book Review Editor for the Quarterly Journal of Austrian Economics. He is co-author of Tariffs, Blockades, and Inflation: The Economics of the Civil War.

Mark Thornton Archives

Email Print