Budget Deficit of the US

I refer to a news by Bloomberg, Obama’s Shrinking Budget Deficits Silence Foreign Critics (April 14, 2014) where for example reads the following:

The Congressional Budget Office projected today that the 2014 deficit will be the lowest in six years 

More evidence of fiscal health came last week, when the Treasury Department reported a deficit of $36.9 billion, the smallest for that month in 14 years. Revenue increased 16 percent to $215.8 billion from $186 billion in March 2013. Spending totaled $252.7 billion, down 13.6 percent.

and

Michael Darda, chief economist at MKM Partners LLC, estimates the U.S. deficit fell to 2.9 percent of gross domestic product in the first quarter from a peak of more than 10 percent in 2009. 

The deficit will shrink to $492 billion this year from $680 billion in 2013, according to the CBO, which today projected a gap of $469 billion in 2015. After that, the deficit will start rising every year, reaching $1 trillion by 2023. 

The increase will be driven by “dramatically” rising Medicare and Social Security payments needed to care for an aging society, said Jersey of Credit Suisse.

This is interesting because any improvements in the US' economy are positive for the rest of the world. But we can doubt the real effect of these improvements. As stated, deficit is smallest in a long time, but it is still a deficit large enough to run a small country. And mister Darda states a scary direction for the future. Clearly Obama has been able to make some clear changes, but in the end those probably are not enough without more major changes in the spending and taxation. They could do something as crazy as quit their spending on military, tax tobacco, guns and alcohol more.. but we all know their congress is unable to achieve any true compromises and create changes. Therefore my hopes concerning the future of the US' economy are not any brighter.

Sunday Culture - Politics

Most of us believe that we would make better politicians than those elected. Well for all us there is a perfect game for that called Democracy 3. It is a very well done game, very deep game that shows you how all your decisions affect each other, and that is the lure of the game. It shows how demanding it actually is to make political decisions as you try to build a better society. Below is a video by a British game tester called The Cynical Brit and he shows and explains how the game functions. Enjoy!

Asset Allocation

This blog text is about how I see asset allocation in an investment portfolio. At least in my own case. This is basically how I would advise someone else to allocate their money. My idea is to make sure that enough money is kept behind for a rainy day in safe places such as a bank account, and stocks or  other investments of this type hold everything else. 

I would say that the choice is between a bank account, bonds, stocks and finally, other assets (real estate, copper etc.)

First of all bank account holds what the investor needs during the next year and can't risk losing. For example money to pay rent and living costs for a year in the case of unemployment. Next (in the typical case that bank accounts pay less interest than bonds) investor puts capital into bonds that she definitely does not want to lose. Time frame is over one year and the idea is that the investment is always held till the end (Because bond prices can fluctuate and selling might mean selling with a loss, therefore it is best to wait for the bond to pay itself back). These are bonds that seem safe, such as German government bonds or debt of highly prestigious companies, such as General Electric and Volkswagen.

All this represents money that the investor does not want to take risks with, that he/she doesn't want to lose incase they are suddenly in need of cash due to sudden medical bills/ unemployment/ lawsuits etc. Few people instantly have enough cash behind them so this cash bumper must be built through time dividing income in appropriate manner between their portfolios.

Next comes money that the investor can truly invest in the purpose of making more money. Major part of this capital will be in stocks and rest could be in other assets, such as real estate, risky government/company debt, metals or options and commodities such as coffee futures. I would say that stocks alone are enough since you can divide your investments between safe companies and risky companies by following many different stock investing strategies. I also don't mean that investor should focus on one certain market, such as their home stock market. There is no reason to do this since world is full of quality companies in different countries. It all comes down to doing good enough research to base your decisions on. 

Due to interest towards certain areas or expectations of certain commodities for example experiencing a surge in prices it is understandable to invest into other risky(-ish) assets such as commodity prices. Someone could focus on these assets instead of stocks which is perfectly understandable if that is their speciality. 

Investor invests to those assets after serious concentration that this money won't be needed. Investor has made careful research and he has strong reasons to expect his investment be profitable after some years, but due to sometimes long waiting periods or negative changes in value his waiting period might be long. They accept this and are confident in their decision.

Some investors ask "How much should I invest in bonds, and how much in stocks?". To me this questions is irrelevant. In the long-term stocks in general are always better investment choices than bonds in general. Bonds hold capital that you do not want to risk, but want to get a better interest rate than a bank would pay. Stocks or other assets hold the rest of your wealth that you can tie down for long periods (such as real estate investments). As I said there are many stock investing strategies to follow. But basically I would say that unless investor already holds considerable wealth and only wants to enjoy slow but sure growth (by for example investing in to safe companies that pay high dividends) then I would advise any investor to follow a strategy that expects the actual stock price to grow (such as value investing strategy).

At the moment I personally focus on investing in to stocks, but I do follow other areas such as coffee prices and real estate investing for example. So some day I'm sure to invest in to these areas if I find suitable opportunities. 

An example of different possibilities an investor could go for: