Notes & Commentary

As you probably know by now, Standard and Poor (S&P) lowered the credit rating of the United States by one notch from the highest rating, AAA, to the next highest, AA+. The purpose of this issue of Why We Plan is to give you some perspective, both short and long-term, on what caused this downgrade, what it likely means, and how should you really react to the news.

Even for those who have tried to take a media holiday, it is nearly impossible to get away from the histrionics and demagoguery surrounding the current debt ceiling debate. Let us interrupt this story you are hearing with some facts.

The Good, The Not So Good, and The Ugly

As we enter 2011, it is instructive to look back over the last couple years to see if we can glean any lessons from the "Great Recession" as it has been coined.

If you're like most people these days, your feelings about our country, your investments, and the stock market in particular run somewhere between complacency and resignation to downright fear. It's understandable. The news cycle today, in a rare show of diversity, spouts out two stories over and over (as opposed to the usual one story at a time model).

At the beginning of every new year, decade or century, the so-called experts feel compelled to share their "insights" with rest of us (some would argue that they do it mostly for the purpose of keeping their names in the public eye).

As a result of legislation dating back to 2005 (the Tax Increase Prevention and Reconciliation Act of 2005), the rules governing Roth IRAs are changing as of January 1st, 2010. These changes, which will open Roth IRAs to higher income individuals for the first time, are among the biggest and most important changes on the IRA landscape in years.

Today's story of looming disaster from Media Groupthink Central is that the administration's policies will surely devalue our currency and the dollar is going to lose its status as the world's reserve currency as a result. This is, of course, reported as uniformly bad news.

Between sales taxes, income taxes, property taxes, etc., we are all subject to some sort of taxation. Given the spending and programs/reforms that have been or may be implemented by the government since last fall, it is likely that each of us will face an increasing tax burden over time. Nonetheless, do you know that there is a tax that many investors pay that is completely voluntary? Moreover, do you realize that most of these investors do not even realize that they are paying it? That tax is the Emotion Tax.

This just in the end of the world as you know it is NOT imminent! Of course, you never know that from the media today. Granted, the media have always been catastrophists, but the recent dialing up of the volume of their predictions of the end of the world/end of the U.S./end of capitalism and democracy has reached new levels.

It probably seems as if there is no end to the bad news you hear on TV or read in the papers, so I wanted to send this update for a few reasons. First, I want to revisit the approach we are taking as that will help to set the tone for the rest of my note. While this is something we have discussed (on more than one occasion for some of you), I realize that the basics may be forgotten as soon as you leave the office or hang up the phone.