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Dennis Miller is the author of “Retirement Reboot”, a book chronicling his own journey to save his retirement in a low yield, turbulent investing environment. He works with some of the country’s top investment managers, authors and analysts to tackle the financial challenges faced by today’s... More
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  • Investing When You Think We're In A Bubble 0 comments
    Jul 25, 2013 3:28 PM

    Some folks may think we have returned to a pre-crash environment all over again, where the market moved on multi-year highs. Year to date, the major indexes are up roughly 15% depending on when you're reading this article; and that's on top of 7% returns from the year before and 5.5% the year before that. To the uninitiated, this almost looks like acceleration. To the more pessimistic, it looks like a trap: we're in for a nasty correction that will pull down the entire market. You can't turn on the television or read through a financial news website without being overwhelmed by stories telling us the market will crash in the next "X" number of weeks or months.

    I'm not even going to try to predict what I think will happen because we're long term investors, not traders. But every one of us should be concerned about this and take appropriate actions to profit from the upside and protect ourselves from the downside. After all, many folks have to make up for lost time while others need to make their money last far longer than they dreamed.

    During my peak earning years, I imagined what retirement would be like based on the generation ahead of me. When those folks stopped working full time, they slowed down a bit, spent weekends watching their grandchildren's activities, and had plenty of time for a little fun of their own. They had few financial worries; perhaps their biggest concern was their health, and even that wasn't an issue until they got really old.

    How do you know when you are really old? I don't know; you would have to ask someone much older than I am.

    For the generation ahead of me, "retiring comfortably" meant you had accumulated enough wealth and/or had a pension large enough to not worry about money. Retirement meant your money was working for you. These folks had no debt and enough money coming in to pay the bills. For the first six years of my retirement, life was exactly like that for me too, and it was fun.

    Of course, not everyone in my parents' generation had it quite this good. Folks who were a little less fortunate might still retire, but their retirement was more about basic survival. They had enough money for food, clothing, and shelter, but not enough to take a cruise or foot the entire cost of taking the children and grandchildren to Disneyland.

    These folks lived within their means, much like my grandparents did on the farm. Grandma and Grandpa grew their own food and had a huge cellar with enough canned food to feed an army. Instead of looking after their finances - of which they had little - they looked after their garden and managed what little money that had wisely. While their golden years were simple, they were happy and managed to survive independently.

    The Wisdom of Retired Old Men Eating Out

    During a recent breakfast with my ROMEO (Retired Old Men Eating Out) buddies in Illinois, a friend shared his concerns about the shaky stock market. Is it experiencing a real boom, or is it just a house of cards? Apparently he was not alone in his concerns, because Chuck Butler mentioned the same issue in a recent Daily Pfennig:

    "I talked to a stock analyst the other day, and the first thing she mentioned to me was that she didn't understand why investors didn't see that the stock market rally was nothing more than an asset bubble created by stimulus. I told her to get ready to deal with this for a long time. The Fed is in a rut and so is the economy, unable to get out unless the stimulus is applied. This should keep the economy going with a pulse, and interest rates low, so housing continues to improve and stocks reach price levels that are not supported by earnings."

    I could have easily answered that question for her. Sure, investors know it's an asset bubble, and when it bursts, it will be terrible. Retirees just hope to be out of the market when that happens. In the meantime, we need income to survive, and there's nowhere else to find it.

    A decade ago we could have invested the vast majority of our life savings in safe, fixed-income investments. Today, fixed-income investments that pay anything near what we need no longer exist. For our money to really work for us, we have to live off the income and never touch the principal. The consensus among my ROMEO buddies was: What other choice do we have today but to invest in dividend-paying stocks? (Here's a plan using some of my favorites for monthly income.)

    Retired folks now have two choices:

    1. Invest in the stock market with full knowledge that it is risky and propped up by the Federal Reserve.
    2. Invest in fixed-income investments that do not even beat inflation, which means we eat away at our principal and worry about outliving our money.

    Investing a large portion of our portfolio in the market is just the lesser of two evils. And of course, it still comes with plenty of caveats about investing wisely and diversifying across sectors and risk levels. On top of that, you still have to find yields that keep up with inflation and provide income.

    If we can't meet this huge challenge, our dreams will suffer, and we may even find ourselves in survival mode. The last thing we want is to be dependent on the government or our children for our next meal.

    There are a variety of approaches for getting the job done. One of my wealthier ROMEO buddies has an independent, professional money manager with whom he's worked for years. While he is pleased with the results, he still oversees the process and is constantly on top of it.

    Another member has fired five financial advisors over the years. His primary complaint was that they didn't listen and invested in ways too risky for his personal comfort, no matter how hard he tried to explain his concerns.

    He shared an example from late 2008 when the financial crisis got into full swing. While our CDs got called in, he had several good-quality, high interest-rate bonds that were non-callable. One prospective money manager wanted to sell them off immediately. Many of those bonds, however, have now matured after paying a nice yield up to maturity, and the others have appreciated handsomely. He would be kicking himself now if he had listened to that money manager.

    Nevertheless, now that interest rates are so low, he is afraid the gains from his immature bonds will quickly disappear if they begin to rise. Does he sell his high-yielding bonds now at a profit, or ride them out to maturity? In the meantime, now he must invest his recently redeemed cash in a shaky stock market along with the rest of us.

    Regardless of the size of our portfolios, we are all experiencing some market anxiety and need to actively monitor our money. The consequences of ignoring our nest eggs are too great to bury our heads in the sand.

    In 2007, our ROMEO breakfast talks were all about sports. But today, even though baseball is in full swing, fans are still on a high from the Blackhawks winning the Stanley Cup, and the NFL will soon start pre-season games, the only sentence I've heard about sports is: "At least when we want some relief from trying to figure this stuff out, we'll be able to watch the Bears." We all have bigger fish to fry.

    Not Our Fathers' Game

    The investment lessons we learned from our fathers were nice, but most just don't apply today. Folks point to technology as a marker of how quickly things change. The same holds true for retirement.

    "Set it and forget it" investments don't exist anymore, and we sure can't abdicate responsibility for our life savings to a financial advisor. But managing our own money means educating ourselves on topics we may have ignored before. What is a balanced portfolio, and how can it help mitigate risk? How can we earn income while keeping our nest egg relatively safe?

    For those of us who don't want to go it completely alone, we also need to know how to work with a broker or financial advisor. Having to fire your advisor is difficult and often costly, particularly if he lost some of your money. Learning to manage your advisor or broker should be on the top of your list, if you're going to work with one. It's not only a matter of trust, it's simply the prudent thing to do if you want your money to last.

    Entertainment vs. Education

    Many older baby boomers and retirees like to read the financial section of the newspaper and watch market pundits on television. That's fine as long as we see it for what it is - pure entertainment. We have all heard horror stories about folks who mistook a blurb on a hot stock for true, in-depth research. Some of those so-called money shows should come with a disclaimer on the bottom of the screen: "Don't try this at home." Following the risky advice they spew can be downright dangerous.

    The good news is there are trustworthy sources of real financial information that can help us manage our life savings, but they are not found in a 30-second sound bite, nor a column limited to 300 words. Every retiree needs his own information arsenal: newsletters, periodicals, websites, and trusted advisors. Combined with our life experiences, this arsenal can keep our nest egg safe and our golden years, well… golden.

    Retirees who understand they have a job to do - looking after their life savings - and approach it with diligence and a commitment to learn generally fare pretty well. Those who don't, however, risk spending much of their lives on the dole. That doesn't sound like much of a choice to me.

    ----

    One of the reasons we started Money Forever was to provide retirees and those planning their retirement with solid advice free of any conflicts of interest sometimes found with many financial advisors. When my retirement finances were put at risk by the financial crash, I put every bit of my time into working with the leading investment minds in the country - experts who had no other agenda than to help me.

    With the help of these experts, we developed an entirely new strategy, one that actually has me better off today than I was before the crash: and one that's being used by thousands of Money Forever readers right now. Part of our strategy is to create a monthly income stream from conservative investments. We've recently put together a short presentation explaining how the plan works - how you can receive income every month, and even when you should expect that income. Click here for more.

    Even if you decide not to give Money Forever a try, I urge you to find reputable investment newsletters with editors you feel you can trust. Most have full refund periods and you'll generally know within the first couple of issues whether the editor, his strategy, and his newsletter are right for you. Bottom line is, don't go it alone.

    Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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