How should this affect your approach? If you hold the majority of your nest egg in cash or low-yield investments, you are losing ground to inflation. On the other hand, going all in the market if you are uncertain that the economy is improving could be equally disastrous.
A word of caution: do not let fear of getting it wrong immobilize you! It can be a very costly mistake. Keep learning and researching until you find investments you are comfortable with.
Let’s look at the best- and worst-case scenarios with long-term bonds. If you follow the advice of a bond salesman, you’ll buy long-term corporate bonds. Ten-year, AAA-rated bonds currently yield around 3.41%. Assuming the bond trader is correct and inflation is not an issue, the best you could earn is 3.41%. Is that enough to get excited about when you factor in taxes and the risk of inflation?
In a recent article, I shared an example of a hypothetical investor who bought a $100,000, five-year, 6% CD on January 1, 1977. If he’d been in the 25% tax bracket, his account balance after interest would have been $124,600 at the end of five years. That’s a 25.9% reduction in buying power because of high inflation during that five-year period.
In that light, 3.41% does not look quite so appealing. Yes, inflation was particularly high during the Carter era, so apply a bit of common sense to the example. Nevertheless, what has caused inflation in the past? In general terms, governments spending money they don’t have and printing money to make up the difference. Argentina is a timely example of this folly.
These concerns are why our research team and I paired up to produce Bond Basics. We think there are better risk and reward opportunities than long-term bonds available in today’s market.
Investing in stocks is a different story. We cannot keep up with inflation and provide enough income to supplement retirement needs with bonds alone (unless you have a huge portfolio and are willing to buy higher-risk bonds). That’s why our team picks stocks with surgical precision. We run them through our Five-Point Balancing Test, recommend strict position limits, diversify across many sectors, and use appropriate stop losses.
Our premium publication is named Miller’s Money Forever for good reason. We want to help you grow your nest egg in the safest possible manner under any market conditions. Neither the happy days nor the doomsday crowd can predict the future, so we prepare for all possibilities.
You’ve likely heard the refrain, “Inflation or deflation? Yes.” It’s a favorite of our friend John Mauldin. With that, baby boomers and retirees are forced to become kitchen-table economists and to sift through statistics that may or may not be accurate.
I haven’t been shy about my opinion: I don’t think the economy is improving, so retirees need to risk more than they would like in the market. That’s why our Bulletproof Income strategy prepares for all market possibilities as safely as possible.
Whom should you believe? Well, is the person speaking trying to sell you something? Stockbrokers trying to garner your business tend to be optimistic about the economy. If someone is trying to sell gold or foreign currency investments, they are likely to cite a history of rising inflation and explain how their product can protect you. It doesn’t mean either is wrong. And yes, the same point applies to the humble authors of investment newsletters.
At Miller’s Money we share the reasoning behind every recommendation we make. We want our subscribers to know as much as we do about every pick—pros and cons. If you agree with our reasoning, act on our advice. If not, or if you have additional questions, ask us or sit tight for another pick. Never invest in something you don’t understand or are uncomfortable with no matter who recommends it.
The bottom line is you have to read, learn, do your own research, and make your own judgments. Listen to all sides of any argument, and then do what you think is best.
What could be more important to baby boomers and retirees than protecting their money? Take the time necessary to teach yourself. In time you will become more comfortable trusting your own judgment. If you were savvy enough to make money, you are savvy enough to learn how to invest and protect it. Give yourself credit where it’s due.