What do you do with your money?
So you’ve worked hard and saved your entire life. You are nearing retirement. What do you do with your money?
Cash: In the Pre-2007 days you could put your money in a savings account at your bank and collect 3% or 4% interest. That sound crazy now but it’s true. Now, you don’t get anything for putting your money in the bank, it is pathetic and savers are being punished. To make matters worse if inflation is 2%, and you collect 0% interest… you are losing 2% purchasing power through the stealth tax of inflation.
Fixed Income: When I think of Fixed Income I think of safety, but are bonds safe? Well how much interest are you getting, how long are you lending money for, and which direction are interest rates going? Interest rates are at generational lows, and you have to lend money to the government for more than 10 years to get above a 2% yield. If you lend money for 30 years you can potentially beat inflation. However if rates rise in the meantime then, bonds sell off and you could lose a lot of money. They don’t call it a Treasury bubble for nothing. The Fed is committed to a zero interest rate policy and Fixed Income yields are low today partially due to the Federal Reserve buying $100 billion in assets per month.
Stocks: Stock prices are up a whole lot since the 2009 bottom. Wall Street has recovered but Main Street has not. Trailing PE ratios say that stocks aren’t particularly expensive but stocks are volatile. Growth is slowing and the “E” in PE ratio, earnings, can always go down. Margins are historically high and are expected to come down regardless. Top line growth has been weaker than bottom line growth and you can’t cut your way to prosperity forever. Stocks have rallied hard at least in part due to artificially low rates and trillions in “stimulus”. What happens when you take that away? What happens when our next recession comes?
Commodities: Hard assets and in particular Gold are acting as an alternative for many people. Gold is supposed to act as a hedge against inflation. Do you really want to buy gold after a big 10 year run up when you see cash for gold commercials on TV? How many cash for gold commercials did you see in 2001?
Right now there are tens of millions of boomers transitioning to retirement, or so they hoped. The thing that annoys me is that the Fed is rigging the game and trying to push people up the risk curve. What do I mean by that? Normally the playbook is to be in (riskier) stocks that appreciate when you are young, and transition to (conservative) Fixed Income and cash when you are in old age. Cash and Fixed Income aren’t paying anything right now so people can either stand losing money through inflation OR they can step right up to the Wall Street casino. People that normally wouldn’t want to be in stocks are forced up the risk spectrum because of the Fed. People with little to no financial literacy are guessing with their life savings. Older people that have no interest in buying stocks are buying stocks because what other options do they have? You are living on a treadmill where you are guaranteed to lose money every year through inflation.
My solution: I’ve been pounding the table for years to be in dividend growth investments. Some might say they are stocks that act like bonds. They are safe(er) than other stocks and pay rising dividends every year. They allow you to sleep well at night. The problem is that others are seeing this too and DGI stocks are becoming a crowded trade.
The true answer is cliché but there is no one size fits all answer. It depends on your age, risk tolerance, portfolio size, spending/liquidity needs etc. A fast growing and volatile tech stock might be a good investment for the 25 year old with years to live out the bumps and bruises but that same investment might be horrible for the 62 year old nearing retirement who can’t live out the bumps and bruises.
The Federal Reserve and their humongous intervention is the X factor that complicates this so much for older people. With cash paying nothing, bonds at record levels, and stocks up well over double their lows it makes this decision tough for a lot of people – and is even worse for those who lack financial literacy. It is also such a shame because I truly believe if given the chance a lot of people just want to save their money and earn modest level of return. Not get rich, but just save money without being skimmed by inflation.