Doctors cannot cure a patient in severe pain by pumping him full of painkillers; they need to accurately diagnose the root cause of the pain before treatment. Without an accurate diagnosis, it is nearly impossible to fix a problem, medical or otherwise.
And the stakes are high: a misdiagnosis can trigger treatment that may compound a problem instead of making it better. That’s exactly what happened with the bank bailout five years back: the “cure” set in motion new challenges for seniors and savers.
Forget all the technical mumbo-jumbo. Here are the need-to-know facts: for generations seniors and savers could invest the bulk of their retirement nest egg in safe, interest-bearing CDs, government bonds, and utility bonds. That, coupled with Social Security, allowed for a comfortable retirement. Those 6-7% yields are gone, as we all know.
Was the 2008 financial crisis properly diagnosed and treated?
That depends on whom you ask. Most Americans, however, don’t think so. According to Pew Research, “Five out of eight Americans surveyed (63%) earlier this month believe the US financial system is no more secure in 2013 than it was before the economic crisis of 2008.”
In September, Sheraz Mian broke down the 2Q earnings reports of the S&P 500 companies in Zacks Earning Trends:
“Yes, the total earnings tally reached a new quarterly record in Q2 and the rest of the aggregate metrics like growth rates and beat ratios look respectable enough. But all of that was solely due to one sector only: Finance. … Finance results have been very strong, with total earnings for the companies that have reported results up an impressive +30% on +8.5% higher revenues. Excluding Finance, total earnings for the remainder of S&P 500 companies that have reported would be down -2.9% from the year-earlier period.”
Too-big-to-fail banks are certainly succeeding. The report continued:
“Earnings growth was particularly strong at the large national and regional banks, with total earnings at the Major Banks industry, which includes 15 banks like J.P. Morgan and Bank of America.”
Pew Research also reported that 33% of people it surveyed thought things were more secure in 2013 than they were in 2008. Those people must work in the financial sector.
The problem continues to grow. And it’s a problem that affects us all. While the Federal Reserve holds down interest rates and floods the banking system with money, the retirement dreams of several generations are being destroyed.
As interest rates tumbled, investors ran to bonds, utilities, dividend-paying stocks, and master limited partnerships (MLPs), which offer better yields. As one subscriber mentioned to our team, “at least they have a better chance of keeping up with inflation.”
Sure enough, the stock market came back to new, all-time highs. So now both the banks and Wall Street are happy. But where does that leave us?
In the middle of 2013, Mr. Bernanke uttered the word “taper,” sending the stock market into a tizzy and gold prices soaring. This was a preview of things to come. Many of the investments I mentioned above took a dive, as they have become interest-rate sensitive. Take utility stocks, for example. In September, I highlighted how these stocks took an immediate 11.2% tumble. Since then, although the Fed has tried to calm the markets, there is still real cause for concern.
I’m worried, but I refuse to throw down my cards. Doug Casey recently reminded us of one of his basic principles: “My preferred investment style is to look for opportunities where no one else is looking.” If we invest along with the crowd, we can expect to get caught in the rushing tide, regardless of its direction.
While the Federal Reserve has been trying to keep things under control, don’t be lulled to sleep. Interest rates may have turned the corner, and it is time to review your portfolio with that in mind.
Here are five questions to ask about your current investments.
- Is this investment likely to get caught in the outgoing tide if the Fed gets serious about tapering?
- How has this company performed in other down markets?
- Can the company’s fundamental business thrive in both good and bad economic times?
- Is the dividend safe?
- Should the market turn down rapidly, what should you expect from this company?
At Money Forever, we put trailing stop losses on our portfolio picks for a darn good reason: We cannot afford large losses with our retirement money.
Invest where no one else is looking. All too often these are called “out of favor” investments. That implies there is something wrong with them, and people avoid them accordingly. Seventy-three years on the planet, however, tells me something different. There are many attractive people at every high school prom, but very few are crowned king or queen. The same principle applies to investments.
The real challenge is finding those attractive opportunities that have been overlooked by the majority of investors. Where should we look? Can we do the research ourselves? If we want to take on that challenge, do we even have the time and skill set?
Or could we turn to our stockbrokers? It’s not likely. Years ago, my broker and I wrote to her company’s research department in New York, asking for advice in a particular market sector. The “research department” sent a summary similar to what I now get from my online broker. Our request was probably handled in less than two minutes. Their analysis: buy their recommendation because 8 of 10 companies rate it as a “strong buy.”
No kidding! That was where everyone else was looking. It was the last investment I wanted to make.