As we all know, financially the world is a mess. Greece is bankrupt and there are several other candidates with the same potential. The States of Illinois, New Jersey, New York, Connecticut, and California are in the same boat.

RE: State of New Jersey: “The firm (Moody’s) on Dec. 17 cut the debt rating to Ba1, one level below investment grade, from Baa3, and said it may lower it further, citing concerns over how the town will close a $12 million budget gap and make up for a $50 million, or 1.7 percent, decrease in its tax base over the past two years.”

“The scenario happening in New Jersey may be a harbinger” as communities struggle with declining revenue, said Chris Hoene, director of the Center for Research and Innovation at the Washington-based cities league. “The phenomenon of cities in fiscal distress is certainly something that will be on the rise for the next few years.”

Many of these ongoing fiscal scenarios are not being fully “felt” by the markets because of the massive global efforts with “stimulus” – READ -Borrowed money (and or printed money).

The net result, as we are starting to see, is higher interest rates globally. Last week, 2 year Greek bonds hit a high yield of 24 % !! Don’t think that Canada is affected? Our 5 year fixed mortgage has increased from 3.9% to 6.25% in the span of two months.

Higher debt levels; rising interest rates; a withdrawal of stimulus; Ongoing high US unemployment; Rising tax rates (in the US effective January 1, 2011); It all points to significant headwinds for an overvalued stock market ! At the very least, its a time to have great caution.

Contrast that with the Aggressive Advisor, who wants you to throw caution at the wind, and be fully invested in equities .

A new client of mine was given this advice in 2007 and 2008 , and was convinced to borrow $400,000 over two years to maximize growth. Currently, this investor has a portfolio of
$ 296,665. The bottom line: his Aggressive Advisor has cost him $103,334 in capital PLUS interest payments of $24,585 over the same period.
SUMMARY: Being aggressive over the last 3 years has put a significant dent in this investor’s retirement plan.. AND that’s after a 70% rebound off last year’s stock market lows. I am restructuring this portfolio immediately, to reflect a very uncertain market.

Being cautious over the last few years has really paid off.

Sincerely,

Mike McGann