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Preface If it is brassy to title a book The Only Investment Guide You’ll Ever Need, it’s downright brazen to revise it. Yet not to do so every few years would be worse, partly because so many of the particulars change, and partly because so many people, against all reason, continue to buy it. In the 38 years since this book first appeared, the world has spun into high gear. Back then, there were no home-equity loans, no 401(k) retirement plans or Roth IRAs . . . no variable annuities to avoid or index funds to applaud or adjustable rate mortgages to consider . . . no ETFs, no 529 education funds, no frequent-flier miles (oh, no!), no Internet (can you imagine? no Internet!)—not even an eBay, Craigslist, or Amazon. (How did anyone ever buy anything?) The largest mutual fund family offered a choice of 15 different funds. Today: hundreds. Stock prices were quoted in fractions and New York Stock Exchange volume averaged 25 million shares a day. Today: 3 billion shares would be a slow day. The top federal income tax bracket was 70%. The basics of personal finance haven’t changed—they never do. There are still just a relatively few commonsense things you need to know about your money. But the welter of investment choices and the thicket of jargon and pitches have grown a great deal more dense. Perhaps this book can be your machete.The Big Picture Not long after this book first appeared in 1978, the U.S. financial tide ebbed: stock and bond prices hit rock bottom (the result of sky-high inflation and interest rates) and so did our National Debt (relative to the size of the economy as a whole). Investing over the next three decades—as difficult as it surely seemed at times—was actually deceptively easy, as the tide just kept coming in. Now we’re in (roughly, vaguely) the opposite situation—very low inflation, very low interest rates, and an uncomfortably high National Debt—making the years ahead a particular challenge. Understanding that challenge—seeing the big picture—will help you put events and decisions in context. Take a minute to consider the National Debt and interest rates; then another minute to consider “the good stuff.”National Debt In 1980, the National Debt—which had peaked at 121% of Gross Domestic Product in 1946 as a consequence of the need to borrow “whatever it took” to win World War II—had been worked back down to 30%. It’s not that we repaid any of it, just that the economy gradually grew to dwarf it. Whether for a family or a business or—in this case—a nation, having a low debt ratio is healthy. It gives you wiggle room if you ever run into trouble, like a recession, and need to borrow. Indeed, that had long been the big idea: that in bad times governments should lean into the wind and run deficits . . . borrowing to boost demand and ease the pain while excess business inventories were gradually worked down . . . and then, in good times, not borrow much, or even run a surplus, to build borrowing capacity back up. Yet in the mostly good years since 1980, our National Debt has ballooned. From 30%, when the Reagan-Bush team took over, it topped 100% in the fiscal year George W. Bush passed it on to his successor. (Only between Bush Senior and Junior was the annual deficit tamed, as Clinton handed off what Fortune called “surpluses as far as the eye could see.”) Although the deficit has once again been tamed as of this writing—meaning that the National Debt is once again growing more slowly than the economy as a whole—the wiggle room is largely gone. I wrote in this space five years ago, with the unemployment rate hovering just under 10% and home foreclosure rates peaking, “We will get through this and emerge more prosperous than ever. But the decade ahead will be more about hunkering down and retooling than about jet skis and champagne.” And, indeed, the unemployment rate has fallen to 5.0%, as I write this in early 2016; foreclosures are running at their lowest rate since 2007; and the stock market is nearly triple its March 2009 low. So we did “get through it.” Even so, the nation’s infrastructure has been allowed to decay badly; the National Debt may require 35 years to shrink back to 30% of GDP, as it gradually did in the 35 years following World War II; and many of the “new” jobs don’t pay nearly as well as the ones they’ve replaced. So it’s still too soon for the champagne.Interest Rates In 1981, Uncle Sam said: Lend me $1,000 for two years and I’ll pay you $336 in interest. In early 2016, Uncle Sam was saying, Lend me that same $1,000 and I’ll pay you $20. And people were rushing to take it. So it is a very different world. In 1981, investors willing to take a risk on stocks or long-term bonds knew that—if inflation didn’t spin entirely out of control—interest rates would eventually fall, making the prices of both stocks and bonds rise. In 2016, investors have to understand that—whatever may come first—interest rates eventually will rise, making bond prices fall (see Chapter 5) and stocks relatively less attractive as well. (The more interest you can get from safe bonds, the less reason to take a risk with stocks.) None of this is to say stocks can’t go up if interest rates do. They absolutely can if rates don’t go too high and sit atop healthy economic growth. But as a general rule, falling rates boost profits and stock prices. And for nearly 35 years, long-term interest rates generally were falling: wind beneath the market’s sails. At this point, if rates were to start falling again in any major way, it would only be because economic conditions are terrible—and that’s not likely to drive enthusiasm for stocks. So either way, up or down, we face a bit of a headwind.The Good Stuff For all our problems, there is the astonishing onrush of technology. People look at the last 50 years of technological progress and they are dazzled. And they think to themselves, “The next 50 years may be equally dazzling! Won’t that be something!” But no, says futurist Ray Kurzweil, they are wrong. Technological progress over the next 50 years will not be “equally dazzling”—it will be 32 times as dazzling, 32times as fast, 32 times as great. The implications are both thrilling and scary. Cyberterrorism? Don’t get me started. There’s no guarantee that, whether as a nation or a species, we’ll keep from hurtling off the rails. That is, indeed, the central challenge of the century. But if we can manage to keep from blowing it, the implications are amazing. Imagine, for example, a world of “nearly free” clean renewable energy, much as we now have nearly free communications. (When I was a kid, a hushed, urgent “I’m on long distance!” meant get the hell away from the phone. And that was for a call to Chicago. Today, the same call—even if it’s to China, and even if it’s a video call—is nearly free.) Nearly free energy would make everything dramatically less expensive—including materials, like energy-intensive aluminum—allowing most people to enjoy a terrific boost in their standard of living. And that’s just energy. The rate of advance in medical technology is another thing, already dazzling, that’s likely to speed up—with astonishing implications. It’s getting from here to there that is the challenge. At best, it will be a bumpy ride. But making sensible economic and financial choices, and getting into sensible habits, will at the very least tilt the odds in your favor to enjoy as much of the upside as possible while avoiding the pitfalls. OK. Let’s get started.
