Opinion: Congress needs to take economic literacy test

So we had to decide: replace the deck or go on our hoped-for Florida trip – the funds weren’t there to do both. We chose to have a new deck built, postponing our trip until some undefined later date. It was a case of what was necessary versus what was desired.

You have probably had to make similar decisions in your lifetime.

The question is this: Why can’t politicians exercise the same kind of reasoning when it comes to spending? The government gets a huge increase in revenues as a result of the tax cuts, but the deficit grows because Congress can’t control its profligate spending.

The argument will continue by some (we know who the usual suspects are, including Dick Durbin and Barack Obama from my state of Illinois) that the tax cuts should not be extended and the estate tax not repealed, as those benefit only the wealthy. C’mon guys. Get off the worn-out class warfare shtick.

Here’s some food for thought: What if we had a requirement that those running for the House or Senate (at the federal or state level) pass an economic literacy test?

The “members’ initiatives” (they would never call it pork-barrel legislation) that larded the transportation bill are prime examples of the kinds of acts that can roil the markets. A budget deficit does not necessarily mean economic gloom, especially in a growing economy; however, it can, particularly when aided by the fear mongering of the mainstream media, create a negative aura. And psychology is what moves markets.

So, now add the drunken-sailor spending to the difficult-to-quantify damage from the evil sisters Katrina and Rita, the disruption of energy supplies, fears of inflation, and the Fed raising interest rates, and the bond market crowd is not in a positive mood. The result is an increase in yields, giving competition to U.S. common stocks.

There’s a point at which the trough should be taken from the pigs.

But wait! It ain’t all bad in the investment world. If you hold foreign investments in your portfolio in the form of Exchange Traded Funds (ETFs) or mutual funds, you have not been stuck with the paltry (read primarily negative) returns of the domestic equity markets this year.

Here are some performance figures for non-U.S. holdings through Sept. 30:

IShares Latin America is up 29.24 percent; Pacific Rim (ex-Japan) ETF grew by 9.56 percent; the China ETF increased 11.39 percent.

And not all areas of the domestic markets performed as badly as the Dow (-2 percent), S&P 500 (+1.4 percent) or Nasdaq (-1.1 percent). Again measuring appreciation of the various asset types using ETFs, mid-cap value and mid-cap growth were up 9.41 percent and 7.71 percent, respectively.

These holdings have mitigated the declines in many portfolios, sometimes turning a losing portfolio into a profitable one, and should be incorporated into any truly diversified portfolio. It’s the asset allocation approach that we and many other professionals have been preaching for a long, long time.

We use as many as 16 different asset classes and styles in our managed accounts, in addition to individual bonds and stocks. It’s the prudent thing to do. We suggest you consider doing the same.

And now for a word about the TV gurus.

If you are a serious investor, not a short-term trader or speculator, then Jim Cramer’s Mad Money program on CNBC is about as worthwhile as watching Jerry Springer. Don’t get caught up in the frenzied manner created by his giant ego.

Figures that I have seen, but which, because I have better uses for my time, haven’t confirmed, indicate that his success rate is approximately what you would get flipping a coin. And that’s before taxes are considered. It’s not what you make, but how much you get to keep and how well you sleep at night that are the ultimate measures of investment success.

There is one TV personality who generally dispenses much better advice. That is Suze Orman. Unfortunately, with that cutesy smile and that condescending attitude, she is too smarmy for me to watch regularly, but if you can tolerate her mannerisms, you may pick up some beneficial information.

Oh yes, in the interest of full disclosure: Neither Jim Cramer nor Suze Orman has ever asked me for advice.

Clark Davis is a 35-year investment veteran and CEO of Saint Louis Investment Advisors, a specialized money-management company.