David Evanson and Steve Cordasco
TheStreet.com, Winter, 2012
I think therezzs method in the madness of the Federal Reserve policy of so-called quantitative easing.
The massive buying of Treasury securities, now in its third incarnation, has done its work of keeping interest rates low throughout the economy. In turn, these “low, low” rates have done their job. Investment capital in search of higher returns is, albeit slowly, migrating into riskier assets.
As an aside, let me say that if the Fedzzs purpose in this is to lift the stock market and enjoy the salubrious glow of the “wealth effect” felt by individuals as the value of their holdings rise, thatzzs a radical departure from historical policy. The Fedzzs job is to lift the economy, not the market. Letzzs hope the Fed has not lost sight of this.
Retirees and near-retirees that are swept up in the policies of the Fed should indeed follow the prevailing tide and are advised, albeit reluctantly, to find assets that will deliver higher levels of income. The reason for this is very simple: the traditional near- or post-retirement portfolio simply isnzzt going to cut it anymore. This portfolio consisted of the following elements: U.S. Treasury securities, U.S. bond funds, certificate of deposits, high-yielding money market mutual funds, index growth funds and fixed annuities.
Collectively, such a portfolio is hard pressed to deliver a return over 3.5%. With inflation and taxes, todayzzs retiree or near retiree is working to hard just to stay in place. Here is how someone with an IRA or 401(k) and other retirement savings should consider positioning their investments.
Cash and near cash: FDIC bank accounts, gold
Fixed income: Foreign bonds, corporate bonds, bank loan funds, mortgage backed securities
Equities: dividend-paying stocks
Here are some, but clearly not all, funds that investors could consider to fill out the fixed-income portion of a portfolio rebalanced for quantitative easing.
Here are some, but clearly not all, dividend stocks that investors could consider to fill out the equities portion of a pre retirement, or near retirement portfolio rebalanced for quantitative easing.
This is not necessarily easy to do. Itzzs important to note that investors should know their risk tolerance. This will provide you with a guide to determine what percentage of your money should be allocated to these investments.
Since TheStreet.com readers are generally independent-thinking investors, I say this reluctantly, but with conviction: If you cannot do this on your own, find a registered investment adviser who can help you execute. Nothing wrong using a fee-only adviser to put a plan together for you then coach you along the way.
The underlying theme for retirees and near-retirees, especially for the equity portion of their portfolio, should be to invest in areas that have lots of hard assets, make necessary items, have some kind of monopolistic characteristic and pay above average current income. In short, the portfolio should mirror where retirees and near-retirees are spending their own money: energy, food, water and health care.
As a parting thought, the love affair between retired or near retired investors for Treasury securities is not completely over. Buy them all you want, but only for risk reduction, not current income.