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NewAlchemist (44.06)

What do you do with your money?

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May 09, 2013 – Comments (10)

So you’ve worked hard and saved your entire life.  You are nearing retirement.  What do you do with your money?

Cash:  In the Pre-2007 days you could put your money in a savings account at your bank and collect 3% or 4% interest.  That sound crazy now but it’s true.  Now, you don’t get anything for putting your money in the bank, it is pathetic and savers are being punished.  To make matters worse if inflation is 2%, and you collect 0% interest… you are losing 2% purchasing power through the stealth tax of inflation.

Fixed Income:  When I think of Fixed Income I think of safety, but are bonds safe?  Well how much interest are you getting, how long are you lending money for, and which direction are interest rates going?  Interest rates are at generational lows, and you have to lend money to the government for more than 10 years to get above a 2% yield.  If you lend money for 30 years you can potentially beat inflation.  However if rates rise in the meantime then, bonds sell off and you could lose a lot of money.   They don’t call it a Treasury bubble for nothing.  The Fed is committed to a zero interest rate policy and Fixed Income yields are low today partially due to the Federal Reserve buying $100 billion in assets per month.

Stocks:  Stock prices are up a whole lot since the 2009 bottom.  Wall Street has recovered but Main Street has not.  Trailing PE ratios say that stocks aren’t particularly expensive but stocks are volatile.  Growth is slowing and the “E” in PE ratio, earnings, can always go down.  Margins are historically high and are expected to come down regardless.  Top line growth has been weaker than bottom line growth and you can’t cut your way to prosperity forever.  Stocks have rallied hard at least in part due to artificially low rates and trillions in “stimulus”.  What happens when you take that away?  What happens when our next recession comes?

Commodities:  Hard assets and in particular Gold are acting as an alternative for many people.  Gold is supposed to act as a hedge against inflation.  Do you really want to buy gold after a big 10 year run up when you see cash for gold commercials on TV?  How many cash for gold commercials did you see in 2001?

Right now there are tens of millions of boomers transitioning to retirement, or so they hoped.  The thing that annoys me is that the Fed is rigging the game and trying to push people up the risk curve.  What do I mean by that?  Normally the playbook is to be in (riskier) stocks that appreciate when you are young, and transition to (conservative) Fixed Income and cash when you are in old age.  Cash and Fixed Income aren’t paying anything right now so people can either stand losing money through inflation OR they can step right up to the Wall Street casino.  People that normally wouldn’t want to be in stocks are forced up the risk spectrum because of the Fed.  People with little to no financial literacy are guessing with their life savings.  Older people that have no interest in buying stocks are buying stocks because what other options do they have?  You are living on a treadmill where you are guaranteed to lose money every year through inflation.

My solution: I’ve been pounding the table for years to be in dividend growth investments.  Some might say they are stocks that act like bonds.  They are safe(er) than other stocks and pay rising dividends every year.  They allow you to sleep well at night.  The problem is that others are seeing this too and DGI stocks are becoming a crowded trade. 

The true answer is cliché but there is no one size fits all answer.  It depends on your age, risk tolerance, portfolio size, spending/liquidity needs etc.   A fast growing and volatile tech stock might be a good investment for the 25 year old with years to live out the bumps and bruises but that same investment might be horrible for the 62 year old nearing retirement who can’t live out the bumps and bruises.

The Federal Reserve and their humongous intervention is the X factor that complicates this so much for older people.  With cash paying nothing, bonds at record levels, and stocks up well over double their lows it makes this decision tough for a lot of people – and is even worse for those who lack financial literacy.  It is also such a shame because I truly believe if given the chance a lot of people just want to save their money and earn modest level of return.  Not get rich, but just save money without being skimmed by inflation.

10 Comments – Post Your Own

#1) On May 09, 2013 at 5:02 PM, awallejr (82.99) wrote:

 it is pathetic and savers are being punished. 

I see this comment too often.  Savers are not being punished.  CASH savers are.  And people can always buy TIPS if they are fearful about high future inflation, but until we start to see any meaningful wage growth for the average worker (not the obscene growth for the top brass) I suspect inflation will remain tame for years to come.

To me the kickers are energy/immigration.  We over produced in nat gas and saw dramatic drops in its and coal's price (deflation).  Now we are producing oil like mad.  I am kind of surprised oil is still at $96, but imagine if it drops to the $80s or even $70.  Again, then deflation.

I keep saying buy MLPs, since you still have to "move" and store all this stuff.  And when LNG exporting gets full underway you will now have world wide demand for our product.  I am kind of on the fence here since it will increase jobs yet could cause higher prices thereby potentially impacting the consumer negatively.

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#2) On May 09, 2013 at 9:02 PM, HarryCarysGhost (99.75) wrote:

This is a tricky question and timely for me as my Father just asked me that very same question.

He's about to turn 70 @1/2 eligible to remove his IRA money tax free

Even though I like his portfolio of dividend paying stocks, I can see why he would be skittish about having his life savings all in the market.

I honestly wish he could buy land and live off the rentals, but that's not an option.

So I'm not quite sure what to tell him at this point.

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#3) On May 09, 2013 at 9:31 PM, NewAlchemist (44.06) wrote:

@awallejr

We are on the same page on a lot of things.  I agree that all savers aren't being punished, but cash savers are.  What percentage of the public do you think knows what a TIP is?  I'd love to see somebody with a video camera ask 500 random Americans.  What percentage of the public has ever bought a stock?

I agree oil is too high, I'm short it.

I agree the Nat gas boom should be huge.

I agree immigration is a big issue.

I agree the MLPs are juicy right now.  I just picked up OKS in my Caps game last week and already own it in real life.  OKS is the mid stream Nat Gas MLP servicing the Bakken Shale.

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#4) On May 10, 2013 at 12:24 AM, ikkyu2 (99.36) wrote:

When bond yields go up - and they will go up - dividend-stock investors are going to learn the difference between stocks and bonds: stocks can go way, way down.

There is nowhere 'safe' in today's fiat-currency world.  There is no certain store of value.  "Retirement" is soon going to be understood as a luxury that our parents enjoyed; it is not for us.

Better get used to it. 

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#5) On May 10, 2013 at 12:28 AM, awallejr (82.99) wrote:

So I'm not quite sure what to tell him at this point.

Harry he has little options.  He has to stick witth equities atm, that is where the yield is.

And NEW, OKS is not a bad choice, although I am a PVR fan.   BWP has potential too for the lng interest.

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#6) On May 10, 2013 at 12:34 AM, awallejr (82.99) wrote:

ikkyu2 actually if you are predicting bonds to basically decrease in value (should yields go up) then equities would benefit.  Personally I think both will benefit mainly because of demographics and Bernanke.  Boomers will concentrate on bonds and the rest will see the value of equities.

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#7) On May 10, 2013 at 3:22 AM, jiltin (25.09) wrote:

It all depends on individual come, age, savings, health and comfort to take risk etc. I have been hanging around few months with fool.com

As you all pointed out, cash savers are being punished. This includes checking, savings and CDs.  I have limited amount in cash for around 3 months of emergency funds. I am trying to improve it to 6 months.

For high growth and easy liquidity, I came here is to invest in growth stocks and achieve a meaningful savings for the future.

I find stocks, Mutual funds, muni bonds and ETFs are better for me. Among my investments, I have 40% in muni bonds with 5% yield (at least to beat inflation without any tax implication on yield) and 60% in growth stocks.

I still find that my main issue is on fed and state tax on this income with volatile  market. If I pull out within a year, I lose 40% fed and appx 10% state.  If I am able to hold more than one year, I can at least pay 30% (20% fed and 10% state).

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#8) On May 10, 2013 at 1:59 PM, NewAlchemist (44.06) wrote:

@ikkyu2  & @ Harry.

That's kind of what I am getting at here.  What are older people supposed to do when there is no store of value?  They either lose purchasing power through inflation or they take their entire life savings to the Wall Street Casino.  

Some speculators will strike it rich, a lot of them will lose a lot of money, but they know that.  What about Ma and Pa who just want to earn a modest return?

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#9) On May 10, 2013 at 7:55 PM, jiltin (25.09) wrote:

Older people, after retirement, need not take any big risk or stocks play. There may be some exceptions. Normally, they need to spend time leisurely after retirement focusing on the health and well being.

Save as much as before retirement. I wanted to be like that, should not worry too much for money as the days, month or years are numbered after retirement.

Low risk returns are best suotable after retirement - just to keep pace with inflation or just to beat inflation.

Here is the link from Suze Orman. I do not know how many likes it...but gives general guidance. 

http://www.costcoconnection.com/connection/201305#pg20

 

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#10) On May 11, 2013 at 2:13 AM, awallejr (82.99) wrote:

Please, never invoke Suze Orman.

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