Let’s take a moment to savor the good news of the past year. The Federal Reserve took multiple proactive steps to further bolster the economy and 2010 saw a year of slow but continued growth. Additionally, we received two gifts from congress in the form of continued lower income tax rates through 2012 and a 2% decrease in Social Security tax withholdings for employees. This may reduce your SS taxes by as much as $2,136!1
The news has also been good for stocks. Despite early losses, the S&P turned around and closed the year – up 12.8%. The Dow Jones followed closely with an 11% return for the calendar year2.
It’s important to note that the stock market often runs ahead of economic fundamentals and all are watching carefully to see if this growth is sustainable. Such economic stimulus brings a strong likelihood of increases in interest rates, which in turn impacts consumer and business borrowing costs and can hurt bond values, particularly longer term bonds.
Beware Overconfidence
After 2 good years in the stock markets, it’s tempting to blank out those painful memories of 2008. Once again, many seek that elusive pot of gold at the end of the rainbow.
Remember that in attempting to predict the future, the key is not simply making one correct prediction, it’s also correctly predicting all of the interacting (and unintended) consequences. Would you ever have imagined that Citigroup would ever trade for less than $1 per share? That GM would file bankruptcy? That graduating law students would be unable to get jobs or CFO’s would be unemployable?
No – it’s not our intent to spoil the good news – just to temper it with a dose of common sense. Investing is exciting and can have great rewards! But financial success depends more on consistently managing the basics. Don’t overspend, pay off debts and add more to your investment accounts. If you qualify for the Social Security savings – don’t waste it! Take opportunities that are handed to you and use them for the things that are most important.
1 If your employment income equals the Social Security maximum wage base of $106,800, the 2% savings equals $2,136.
2Source: Standard & Poor’s. The S&P 500, Dow Jones Industrials, and Nasdaq Composite are unmanaged indexes. It is not possible to invest directly in an index. Past performance is no guarantee of future results. Dividends are not included.