Electionomics is upon us: The fierce desire of all incumbents to produce a strong enough economy to win reelection.
The fly in their ointment is the new inflation that blew up during the first half of this year, raising interest rates a bit and giving voters a bad case of jitters.
Typically, the economy is cosseted safely through an election year, after which all bets are off. But the analysts are divided on whether inflation and interest rates will continue up, or whether they'll stay about where they are now.
An economist can afford to be wrong. He or she will even be promoted and given a raise. But that's the only way money is ever made on a wrong-way forecast. All the rest of us have to guess right -- or at least arrange our investments so that a wrong guess won't cause too much damage. Some ideas:
STOCKS: Toward the end of an economic cycle, stocks and interest rates rise in tandem for awhile. But eventually, interest rates get high enough to attract money out of stocks and into income investments, and the stock market falls.
It is not possible to predict when that dreadful moment will arrive. Maybe the market will rise further. Maybe the Reagan rise is already history. We will not know, except in retrospect.
But an aging market is far more dangerous than a youthful one. So it's time (in fact, past time!) to take some of your money out of stocks, to reduce the risk of loss.
A diversified investor will not take every penny of his or her money out of stocks (or stock-owning mutual funds). Since no one knows exactly when the music will stop, you'd want to keep at least some money in play. But move a portion into money-market funds, to protect your profits, and await developments.
Exactly how much of your investment portfolio to keep in stocks is a judgment call. But here are two firm rules for dealing with aging bulls: (1) Don't start buying stocks or put any more money in the market than you have already. (2) Withdraw from the market any money that you can't afford to risk.
BONDS: As interest rates rise, the value of your bonds and bond mutual funds will fall. Their share prices dropped sharply this spring, causing panic among conservative investors who didn't understand that they could lose principal in bond mutual funds. On the other hand, as fund managers invest in higher-yielding bonds, your income from these funds could rise.
What to do?
-- Don't buy more of these funds until it's apparent that the current rising-rate cycle is over.
-- Continue to hold some or all of your present bond-fund investments, if you need the income and don't care about losing some principal. When interest rates fall again, as they will, the value of your shares will go back up. But sell some of your holdings, if losing principal will drive you up the wall.
-- Investors who understand fluctuating markets will always want to keep part of their portfolio in bond funds, for diversification and for income. You'll do even better, over time, if you reinvest the income for compound growth.
-- Pure savers, who are happy only with zero risk of losing money, should sell all of their bond funds and put their holdings in the bank.
REAL ESTATE: A forecast of higher inflation ought to be good for real estate. But this time around, it may not be the bonanza it was in the past.
More properties have adjustable-rate mortgages. If inflation rises, so will the cost of carrying those real-estate investments, depriving you of the profits you might have expected. In a double-digit inflation, the value of your holdings might even go down, says John Reed, editor of the Real Estate Investor's Monthly.
Furthermore, the country is still plagued with high vacancy rates, a legacy of the building boom of the late 1970s and early 1980s. Prices for these properties have probably stopped dropping and may move up a bit, but not enough to knock your socks off.
GOLD: Expect higher prices if politicians pump up the economy next year. That would carry inflation higher than expected and push up gold investments, to