What the (not-so) Safety Bubble and What it Spells for Retirees

I’ve written at length about why the “safe” investing instruments might not be so safe. There is another nuances to the investing environment right now.

When I tell people that I’m a financial advisor or financial planner (I am both, depending on how the stars align I’ll say one or the other when people ask me what I do for a living), inevitably people ask me where they should invest. Often my responses is where not to invest and paint the investing environment. CDs pay next to nothing. US Treasury bonds pay a smidgen over nothing and would require you to invest out 10 years before you can hope to get a rate as “high” as 1.5%. Stocks are always a barrel of monkeys, but if you’re investing in stocks you have to embrace – as in accept, unconditionally love – the fact that if you are starting out a 30 year retirement, historically recessions will happen every 5 years and bear markets (a decline of 20% or more in the stock market) happen every 3 years. What you must embrace is that over a 30 year retirement the averages imply that you’ll see the stock market go down 20% or more 10 times … and you’ll see six recessions (and understand that the media will report all of these instances and the impending end of the world, hail it as the signal ending America’s reign as the only superpower, etc.).

But here’s the problem. Let’s say that you are an early stage Baby Boomer born in 1946. You started your career somewhere around the Summer of Love in 1967. That love didn’t quite stretch into Wall Street as this marked roughly the beginning of a 13 year performance drought in stocks. To be sure, I don’t blame this on the Summer of Love; I blame Yoko Ono. If you were a good behaving investor you would have hung in there through the 70s and kept dollar cost averaging through this time (in the same way that good investors must be doing now).  In 1982 you were 36 when the stock market reached its lowest valuation and you continued to buy into a rapidly rising stock market during your peak earning years. You felt rather vindicated through the late nineties as the market peaked. You were 54 when you watched Dick Clark on the 2000 New Year with flashlight in hand, but you were looking at the lamp in the corner to see if it would turn off and wondering if your stock pile of wood chips and canned goods was adequate.

At this point, many Boomers were thinking of an early retirement. At the time, the no-brainer retirement plan would be to ladder out 10 year Treasury bonds. Quite simply, let’s say you had a $1,000,000 in savings … chop it up into 10 pieces and buy bonds where each piece is a bond that comes due one year away from each other. You could have looked at the previous 10 years would see that the rate was usually in the 6-10% area meaning that you could expect $60,000-100,000 per year in income. Add your Social Security check in there and kick back sipping your margarita.

I’ve personally come across investors who are still trying to make this strategy work. 10 years ago if they bought a 10-year Treasury bond, the rate would have been nearly 6%. Today they would be rolling it over at 1.5%. This means that They’re getting more than a 75% pay cut going from $60,000 down to $15,000 (I’m looking at the whole $1,000,000 portfolio, not the individual bonds). At some point, investors have to realize that this strategy is dead and no defibrillator in the world will revive it.

A pleasure of my job, if not the pleasure of my job (I have been accused of being a masochist to do this for a living) is that twinkle that comes across someone’s face when I show them a better way. For the past decade they’ve felt this increasing sense of desperation feeling like everything they are doing is not working. Sometimes they’ve been doing it on their own, but the majority have been working with an advisor that they’ve lost faith in. Quite simply put, if you feel that what you are doing isn’t working, go with your gut and do something different or at least get a second opinion on it.

When I was a teenager, personal computers were starting to become commonplace. At the time, I could fix just about anything that went wrong with them. At some point, the technology made it nearly impossible for me to be able to stay on top of it and I came to recognize that it was wiser to get help from someone who was staying on top of it. If you are a Baby Boomer reading this, the cars of the 1960s and 70s were easier to fix. There was room inside the car to work. There weren’t computers in there, it was all mechanical. Then, at some point the cars starting stuffing machinery in there and computerizing it and the do-it-yourself train left the station. I believe the same thing has happened with investing. Things have changed in many ways and I think it’s becoming more and more difficult to do it on your own and I would argue that making simple mistakes can actually make it more expensive than getting help from a financial advisor.

If you are hearing clicking sounds in your portfolio and feel that it needs someone to take a look at it, call me.

 

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing. All performance referenced is historical and is no guarantee of future results.Investing in securities, including stocks and bonds, is subject to market fluctuation and possible loss of principle. No strategy can assure success or protect against loss. Government bonds and Treasury bills are guaranteed by the US government as to the timely payment of principle and interest and, if held to maturity, offer a fixed rate of return and principle value.

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