American Investment Services, Inc.

Disciplined, Diversified, & Cost Effective

Dec. 2010 – U.S. Fiscal Policy and Your Wealth

Voters have sent a clear message of concern regarding U.S. fiscal policy, and as our parent organization AIER recently made clear, spending discipline is vital to the nation’s future prosperity. But it is important to understand the nature of the relationship between deficits, debt, economic growth, and your portfolio’s value.

This month (see Deficits, Debt, and Markets) we explain why it is unwise to bet on the short-term direction of capital or currency markets based on news regarding fiscal policy or prospects for economic growth. Investors, in aggregate, reveal expectations regarding macroeconomic developments, not the other way around. Empirically, economic output has been a poor indicator of future equity returns. Indeed, the S&P 500 stock index is a leading indicator of business cycle trends. Similarly, though all fiat currencies ultimately fail as a store of value, deficits are not a reliable indicator of future currency rates.

Avoid the temptation to adjust your holdings in light of dire fiscal forecasts. You are far better served by holding assets that have been historically resilient to price inflation and by maintaining a disciplined portfolio allocation plan.

The New Tax Law: What’s in Store for Investors?

As of this writing, the President has signed into law a bill that reinstates the federal estate tax and extends the cuts in federal income taxes that were enacted in 2001 and 2003. Congress included a cut in payroll taxes; while this will put a few more dollars in the pockets of wage earners, it only adds to the looming Social Security revenue shortfalls that we describe herein (see The Deficit Commission and Social Security Reform).

For more detail regarding how these tax provisions will affect you, visit the Subscriber Only section of our website. We will review these changes more closely in next month’s issue of Investment Guide.

Also in This Issue:

Deficits, Debts, and Markets
The Deficit Commission and Social Security Reform
A Thrifty Government Plan
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield
Asset Class Investment Vehicles