If you are 10 years on either side of retirement, you need to be aware of how investing has changed
. Here are some ways to fight back.
There is an old line about a ballplayer getting blurred vision. “Doc,” he says, “when the pitch comes at me, I see three different balls.” The doctor’s advice: “focus on the one in the middle.” Recent stock market gyrations, plunging interest rates, and front-page talk of a global recession are enough to cause investors to lose focus.However, if you aim to retire within the next 10 years, or you did retire in the last 10 years, you can’t afford to lose focus
. Especially not now. Because the stock and bond markets do not work like they did 10 years ago, much less 3 years ago. Let me explain, and then offer some direction in these strange and unfamiliar times.
Stock market: alien takeover?
A couple of years ago, J.P. Morgan estimated that only 10% of U.S. stock market trading volume was from investors choosing stocks based on the attributes of the company itself. Where was the other 90% coming from? Primarily from sources that were motivated either by the chance of making a quick buck (day-trading, etc.) or simply mimicking the holdings of an index.If this sounds like someone made it up, think again. As I have lamented before in this column, the obsession with S&P 500 index investing is a double-edged sword. The group-think on the way up is fun. However, there comes a point when someone yells “fire” in that theater, and the door is too small for everyone to get out safely.
Stop messing with my retirement portfolio!
As for the trading crowd, we know that type of investor has been around forever. Such traders provide liquidity that can be very helpful to keeping the stock market operating smoothly. However, there has been a tendency for hedge funds and others to create “crowded trades.” That is, you see massive amounts of money piling into some market area. And then, within days or weeks, it floods out, and moves somewhere else.This is part of what creates rubber-necking for the rest of us. And for some investors nearing or in retirement, it can be stressful to experience. After all, regardless of your personal retirement investing objectives, seeing your balance hop up and down by 5% or more in a few days can be unnerving.
Bond investing: you call THAT a retirement income?!
This feels like a good time for a quick picture. Here is where interest rates have been for 2-year, 5-year and 10-year U.S. Treasury securities over the past couple of decades. If the U.S. is heading toward a recession (and with other parts of the world already in one, that is likely), the knee-jerk reaction will be to buy bonds. After all, stocks will be treated poorly by investors if economic growth is declining and corporate earnings are down.
However, it may not be that easy this time. You see, the last three recessions provided an opportunity to own bonds at rates that are well in excess of what is available today. In round numbers, the 1990 recession saw bond yields in the 8% range. The early 2000s had rates in the 5% area. And the Financial Crisis started with rates in the high 3% vicinity.As for today? The right side of the chart, highlighted in blue, tells you the story. Rates across the board are in the sub-2% range. That crimps the ability of the Federal Reserve to use rate cuts as a policy to jump-start the economy.More importantly for you, it severely limits your current income on bonds. It also makes bonds a very risky long-term investment, as compared to past recessions. After all, when bond yields eventually do rise, their prices fall. So that 1-2% income rate can be negated by principal losses for a while. Thus, bonds are not the easy way out of the theater. This also means that cash-like yields (CDs, etc.) will also be pretty weak.
But the stock market will save me…oh wait, maybe not
The other picture that paints the retiree’s dilemma is right above. It shows that the return of the S&P 500 for the past 10 years is about 11% a year. That’s fantastic when you compare it to most of recorded history. However, it also ranks as one of the highest on record, and is in the area last seen as the Dot-Com Bubble burst.
How to “flip the script” in your favor
I remember an episode of Seinfeld where George Costanza succeeded by doing the opposite of everything he had been doing in the past. If you are an investor who is enjoying a recent retirement, or if you feel you are nearly there financially, these words are for you: be ready, willing and able to “flip the script.” What that means is you must acknowledge that the investment techniques and strategies that got you this far are not likely to be the same ones that take you forward from here.
3 prime examples of flipping the script
There are several ways to make this happen, and none of them require you to sell everything you own and start over. Also, this is not some wild idea about “getting out of the market.” There is plenty of value to be gained in any market environment. Furthermore, if you think that one “timing” move to get out is tough, try pulling of 2 of them (one to get out, and another to get back in)! So from me at least, you will not hear that kind of talk.Instead, here are a few summary points on how to flip the script. Hopefully these help you continue the journey toward enjoying retirement, or getting to it, without the markets becoming a central point of daily stress. Recognize that there are ways to profit directly from falling stock and bond markets. Seek to understand how they work. Whether it is through the use of something called “inverse ETFs,” learning some basic techniques involving options, or other similar strategies, there is a lot out there for any investor to use. This is an area that I feel the financial advisory industry has not given nearly enough attention to. Brokerage firms are notorious for treating these important investment tools as being risky. At the same time, they had no problem allowing brokers to recommend mutual funds that invested entirely in tech stocks as the Nasdaq was starting a more than 75% meltdown in the year 2000! Consider including a more tactical approach to navigating volatile markets. You may have built your retirement nest egg by just letting the stock and bond markets do the work for you. But now, you need to recognize that the risk of a prolonged period of wealth destruction is possible. Again, refer back to the 2 charts above. By tactical, I do NOT mean you should start day-trading your account. But I do mean that you should recognize that gains may be more fleeting. So, capturing them when you have them is something you should be prepared to do. For the past 10 years, this turned out to be less than essential. But not now. Prioritize preservation of capital…which is not the same thing as stashing your wealth under your mattress. At my firm, we call it “Aggressive Capital Preservation.” It means that you approach turbulent times with eyes wide-open. It means that you have armed yourself with a wider toolbox to deploy. And it means you put aside any temptation to get complacent, over-confident, or even arrogant. Understand that from the ashes of market history come great opportunities. That is, as long as you stay sufficiently solvent when your friends and neighbors are allowing their retirement assets to get cut by 1/3 or 1/2.
The 3 R’s: Recession, Retirement, Regret
Investors must account for recessions along the way. That was the first “R” in the title of this article. The second “R” was retirement, and that is your focus. Challenging or confusing markets do not change that. Because the third “R” is regret, and that is not an option for you. And you hopefully see from this article and my other recent ones for Forbes.com, there is no reason you should end up with regrets if you are this close to retirement, or already there. You are not at the mercy of the markets, unless you choose to be.
It is one thing that the stock market may be tiring after a long, productive run. However, when you combine that with historically low interest rates for savers, it makes this an era in which flipping the script is a necessity. This ain’t 2000, and it ain’t 2008. Not only because of that combination of high stock prices and low interest rates, but more significantly, you are not in the early stages of saving for retirement. You are there, or nearly there. THAT is what makes all the difference, and THAT is what compels us to focus on how to think outside the proverbial box now. As they say on Wall Street. There are bulls and bears and pigs. Bulls and bears can make money. As for pigs? They get slaughtered.
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Related: Recession Signals? Here’s One