I think a consistent theme in our country today is that our elected officials have lost sight of a simple idea- They need to make decisions that are in the best interest of our country, rather than themselves.  It is no secret that we are faced with ballooning budgets and we are falling behind on our bills, yet many politicians fail to tackle these problems because hard decisions are unpopular.   

Well, Fox Business news has reported on a couple of school districts in California that have found a way to raise the bar when it comes to this type of cowardice.  One struggling district convinced tax payers they could borrow $105 million to pay down old debt and revamp aging schools- with a promise not to increase property taxes for 40 years.  The problem and the dirty little secret about the loan is that in the end this loan would end up costing the bond issuer roughly $1 billion.  They issued a capital appreciation bond that counts on future property tax increases to pay it off.  Payments on the debt wouldn’t even begin for another 20 years and would mature in 40.  In 1994 the state of Michigan banned school districts from these types of loans because they were deemed too toxic to tax payers.  One analyst summed it up the best, “It’s a loan not even a subprime lender would make.”  Worse yet, the bonds can’t even be paid off early or refinanced.

While the districts may have believed they were making in an investment to improve schools, they were already way over budget.  Instead of facing the tough cuts and unpopular raised taxes, they created an illusion that they could handle things and not burden the tax payers.  In two decades they would begin to make payments of $50 million a year. The problem right now is that they only receive about $11 million a year from homeowners to pay off its bonds.  They didn’t just kick the can down the road, they kicked in into the next generation.

Later this month, on August 29th to be precise, five commissioners at the securities and exchange commission will take a public vote that could dramatically change the way the average American invests their money.  Chairman Mary Shapiro has proposed a number of reforms to tighten the SEC’s control over money market mutual funds.  

Almost everyone owns or uses a money market fund.  They’re considered ultra-safe investments.  Put $10,000 in, collect interest – although right now they’re not paying much – and write checks or against or withdraw your $10,000 anytime, no penalty.  Most investors think their principal is guaranteed.  

The fact is money markets are not guaranteed.  The reason they are so safe is that they mostly invest in very short term, very safe investments like treasury bills, commercial paper and the like.  But because the competition is fierce for the $2.6 trillion invested in these funds, many have introduced foreign debt and lower rated companies to attract investors with a higher yield.  And as we all know, with higher interest comes higher risk.

Ms. Shapiro wants investors to know the risks.  Her proposals include forcing money markets to price assets on a floating basis.  Although they try to maintain a steady $1 share price, the reality is when markets get crazy the actual underlying assets can be worth slightly less than a dollar.  She also wants to limit the amount investors can withdraw  - not allowing a full redemption within 30 days – or possibly requiring a withdrawal fee to slow any run on the bank type scenarios.

Why are they messing with a good thing?  The main reason is that in 2008 the Reserve Primary Fund, a $62 billion money market that held Lehman short term debt, dropped below a $1 per share.  The stampede out of money markets forced government intervention and guarantees until the crisis passed.

I’m opposed to these proposals.  Government meddling almost always leads to undesirable consequences.  Clearly this will mean fewer choices and lower interest for consumers.  The cost of complying will be passed on and many funds will just choose to shut down.  It’s encouraging that Ms. Shapiro has mentioned the possibility of delaying the vote.  That’s because there’s not a clear majority supporting her proposals.  There are other ways of making these vital investments safer and more transparent. Her defeat will be a victory for us all.

Mike Silverstein, one of the Planners at The Horizon Group, has two daughters, one is 13 and one is 10.  A few weeks ago he was trying to explain to his little one what he does for a living and said he would help her if she’s interested in learning about the stock market.  

He told her, “When you own a stock, you own a piece of a company.”  Her eyes lit up and he asked her, “Are there any companies you would like to own?”  

He tried to give her some advice, “What companies do you and your friends use all the time?  What companies do you think are going to be real popular?”

Her brown eyes sparkled and you could see the wheels turning inside her head.  After about 10 seconds she said, “Disney.”  

Ah, Disney.  Destination theme parks around the world.   Popular Disney TV and radio channels for the kids, and ESPN and ABC for adults.  Movies from Pixar and Marvel Comics that produce big results at the box office.  

On August 8, Disney reported record earnings for the quarter.  Some analysts were concerned about one of their biggest movie flops of all-time – John Carter.  Never heard of it?  Apparently you’re not alone because nobody saw it.  The movie lost over $200 million.  How does a company overcome a bomb like that…with The Avengers, which ended up being one of the highest grossing movies of all-time behind only Titanic and Avatar.

Investing in good companies doesn’t always have to be so complicated.  Money management firms spend millions of dollars on software and have huge staffs to analyze the data.  They’ll promote how sophisticated they are with fancy charts on high gloss paper.  And in the end, many of them won’t even beat their benchmark.  They’re too snooty to realize what I know…Sometimes, you just have to look at the world through the eyes of a 10 year old!

Not that anyone needs more confusion when it comes to investing money today, but I want to make you aware of a monkey wrench that can be thrown into your investment strategy.  My job is to make sure you make investment decisions with your eyes wide open.  Whether it’s CNBC, the Wall Street Journal Personal, or heck, even I’ve talked about it the last couple of months, few investments out there are as appealing right now as U.S. blue chip stocks.  In an environment where everyone is starved for yield, it seems well worth the risk to invest in a company like Johnson & Johnson, take the 3.5% yield and maybe get some upside appreciation along the way.  There’s at least 100 stocks, great companies, that I would feel comfortable investing in, looking for nothing more than the dividend and hopefully some long term growth over time.

Sounds like a great plan, right?  Well it is a good plan, except for one wrinkle you should be well aware of.  What could possibly mess up this strategy?  What messes up everything?  The U.S. government.  

In 2003, the second of George W. Bush’s tax cuts went into effect and capped dividend taxation at 15%, essentially cutting the dividend tax rate in half.  This is one of the major reasons why Mitt Romney’s tax rate last year was about 14%; most of his income is derived from dividends.  

So what does this have to do with you investing in blue chip stocks?  Well, as we approach the end of the year and the fiscal cliff looms larger, one of the tax policies that could get a major revision is dividend taxation.  Many investors have been dumping money into blue chip stocks and mutual funds, not only for the juicy dividends, but also because they only give 15% back in taxes.

What happens if it goes back to the old rate of 28% or higher which many in DC would love to see?  Would it devastate blue chip stocks?  I doubt it, but they certainly would be less attractive.  These are the same type of companies affected by the Eurozone crisis- do we really want to give investors a reason to sell?  

Listen, nobody has a crystal ball.  I’m a big believer that your best strategy is a well-diversified portfolio, not just dividend paying stocks.   If you have overweighted your portfolio in blue chip stocks, keep a close eye on the upcoming tax policy debate.