I believe that investors will have fewer choices than ever when it comes to retirement planning over the next 5-10 years. I have endorsed a sound strategy of dividend growth investing as most of my readers know. The most recent update of our "Team Alpha" portfolio can be reviewed right here.
While our portfolio is up by nearly 24% in the last 10 months, I have been questioned, and rightly so, by some readers who think that this is just a small time sampling. I agree, it is a small time sampling, but it is real and accurate none the less.
Our portfolio now consists of; Exxon Mobil (XOM), Johnson & Johnson (JNJ), AT&T (T), General Electric (GE), Annaly Capital (NLY), Southern Company (SO), Procter & Gamble (PG), Intel (INTC), Realty Income (O), Coca-Cola (KO), Bank of America (BAC), American Capital Agency (AGNC), Wal-Mart (WMT), Cisco (CSCO), 3M Company (MMM) and Bristol-Myers Squibb (BMY).
While this has been a solid run, I am concerned that many folks who are not investing in dividend producing, solid, large or mega cap blue chip stocks, (as well as a few growth stocks in the mix) will face serious issues in the years ahead. I believe that if old rules are followed, like a mix of 60% stocks and 40% bonds, retirees might not have enough money to last them for their lifetime. Here is an interesting article I suggest you review.
"For years, many financial advisors gave clients standard advice: Buy a diversified portfolio of stocks and bonds and hold it through up and down markets. Portfolios should include foreign and domestic stocks as well as corporate and government bonds, advisors said.
If one investment sank, others were bound to stay afloat and enable investors to avoid big losses. But when markets crashed in 2008, the old advice about diversification failed to provide much protection."
The returns on Treasuries and other fixed income investments have been at record low levels for several years now. The zero interest rate policy of keeping short term rates low, and the Fed intervention of buying longer term bonds to keep longer term yields down, has crippled the most prudent savers among us. If those of us are risk averse to holding equities, the value of our savings have, and will, continue to dwindle. Future dollars will simply not keep up with real inflation.
Even with the government "released" data, showing a relatively low inflation rate, fixed income investors could face dire straights even in the relatively nearer term.
The argument of the "fiscal cliff" fast approaching is irrelevant right now because quite frankly, retirees and those close to retirement will have very few choices whether there are tax changes or not. Not even the usual safe haven of Treasuries.
This article is another one I suggest you review.
"The historically low interest rates the Federal Reserve has been backing as a means of stimulating the economy may be having an unintended side effect: a potential bond bubble that could hurt seniors and others who rely on income from their savings to help pay the bills.
Savers, frustrated by risk-free investments such as bank certificates of deposit paying less than 1 percent, have been taking on more risk with corporate and municipal bonds to make up for lost income.
And while bonds have been relatively stable investments for the past three decades, bond prices have risen so much as interest rates have gone down that there is some concern the bubble could burst."
The Major Factors We Face
I have put together some major factors that the U.S. is facing. Rather than a short time horizon, I have compiled all of the issues to compare over a 5-50 year period.
This first chart (from 1962-2012) clearly shows the correlation between the unemployment rate and the inflation rate. The inflation rate has most recently diverged from the unemployment rate, which shows that even in periods of low inflation (like right now), unemployment remains a major problem.
Add to this scenario an ultra low Treasury Note interest rate, and even those who are employed are not earning enough on their savings. Ironically the GDP has continued to increase through the decades. The shaded vertical lines are recession periods.
By keeping interest rates for mortgages at their lowest levels ever, the Government has hoped to stimulate home sales and mortgage lending. As you can see, mortgage originations have declined right along with interest rates. To me, this means that people simply do not have the money to buy homes, and the banks are not lending money for new mortgages.
I believe that when you look at the interest rate on fixed incomes like Treasuries in the first chart, and see the continual decline in mortgages, savers are either not saving enough to buy homes, or are not earning enough on their savings for it to compound quickly.
This is a 5 year chart which shows how the U.S. personal savings rate has remained almost flat at around 4.2%. The total of all U.S. savings has declined by around $400 billion since mid 2009. People simply cannot save as much because incomes have declined and unemployment remains far too high.
If consumer spending stays level (as you can see) and income growth remains below the savings rate, how will folks continue to save even at a 4% rate? In my opinion, we will experience savings shortages, perhaps major, in 2013 and beyond. How does this shape up for those who wish to retire, or are close to retiring? Either drastic cutbacks in personal spending must be taken, or major increases in personal income achieved. I do not see either of those scenarios occurring yet.
In perhaps the most revealing chart, I have taken one metric of dividends and total returns, and compared them to inflation indexed Treasury yields and savings rates. This is a chart from 2009-2012. Total returns with dividends has risen dramatically. Long term yields, indexed for inflation, and personal savings rates have plummeted.
So What Does All Of This Actually Mean?
A counter argument can be made that none of these has anything to do with each other, and since the overall market has gone up then "things" must be better. Since the unemployment rate has dropped to under 9% and inflation is so low, look how much better we are doing. With interest rates being so low, look at how easy it could be to borrow for homes and have much lower payments.
Consumer spending has held up, right? How bad can things be? Well, I think that every single one of these metrics are completely inter-related, and will impact our future retirement plans for years to come. Let me outline:
- Savings are down so individuals might not have enough to retire comfortably.
- Interest rates are so low that what we earn on our savings will not keep us ahead of inflation.
- Even though mortgage rates are at historic lows, banks are NOT lending money for mortgages, which probably means that housing has not yet recovered to where folks are actually buying homes. This metric is terrible for sustained economic growth.
- Unemployment remains high and incomes remain low, which impacts savings. This will mean that when folks do find a job, they will probably earn less, save less, and have less for retirement.
- The ONE metric that is showing consistent strength, is dividends and total returns. To me, this is where we need to be invested, if we hope to have a more secure and comfortable retirement.
In the end, we can only do just so much no matter what happens on the political scene, the tax scene, and the economic environment scene. Nothing is ever going to be an easy path, and these days it looks like it is tougher than ever.
The basic rules stay the same however;
- Save as much as you can for as long as you can.
- Spend less than you have and stay focused.
- Invest in quality dividend paying large cap blue chip stocks to create an income stream when you retire.
- Prior to retiring, re invest all dividends back into the very stocks that pay them.
- Max out your contributions on every tax deferred program available to you.
- If you have a job, keep it. If you want to leave, find another job first.
- If you become unemployed, network yourself to chase down every potential avenue for new employment and never give up. Even if it means driving a taxi during the day, and flipping burgers at night. At the same time, cut expenses wherever you can, for as long as you can.
For whatever it's worth, I have a profound belief in our country and the free enterprise system. I KNOW we will turn things around at some point. Being aware and prudent with our finances is more critical now than it has ever been in MY lifetime. Knowledge is power, it really is. The more we learn and know, the better off we will be-- for ourselves, our families and our nation.