Sunday, November 17, 2013

Where do (retired) investors go from here? The experts say 'hang in there.'

"Investing is a bit like lovemaking. Ultimately, it is really an art requiring a certain talent and the presence of a mysterious force called luck. In another important respect, investing is like lovemaking, it's too much fun to give up." - Burton Malkiel, "A Random Walk Down Wall Street."

By Julia Anderson
Over dinner this week, I listened as three of my table mates announced that they had recently plunked big chunks of cold cash into the American stock market. I smiled because I've been reading for the past few weeks about small investors (like my dinner companions) who are finally coming back into stocks. In the short-term that's good news for me because I'm pretty much all-in with my retirement nest egg, which has increased in value by about 50 percent in the past three years. More money from new investors means stocks have a ways to go in this Fed-stimulated bull market that we are enjoying. But what about the longer-term, say six months, a year or two years from now?
What if you're just retiring and will need to figure out what to do with roll-over 401(k) money saved from a life-time of work? What happens over 20 or 30 years of retirement? And for that matter when should I pull-back from my all-in position with stocks after this big run-up? Lately with every stock market increase my anxiety level is also increasing.
To sort through the what-ifs, let's look at past history. We know:
- The American S&P 500 Index has produced an annual return over 80 years from 1926 to 2006 of 8 percent to 10 percent in terms of dividends and growth in prices. Those increases of course were not spread evenly over 80 years. In 1995, the S&P increased in value by 34 percent. In 2008, the index dropped a stunning 38.5 percent at the start of the nation's financial meltdown from which we are only now recovering.
But if you believe in the future of the American economy, investing in the S&P seems like a good place to be based on its long-term performance. That's if you're willing to weather the ups and downs and avoid trying to time the market by jumping in and out. This year, the S&P is poised for its best year since 1997.
- Interest rates as dictated by the Federal Reserve are historically low. There's no earnings to be had in a CD or a bank savings account. Treasuries are safe but undeserving.
- Inflation remains in check. In Europe there's growing concern about deflation; Consumers stop spending money while waiting for the price of goods and service to drop. That's a deadly formula for economic stagnation. Cost-of-living inflation in the 2 percent annual range is where economists like to see things.  (Inflation calculator, click here.)
- The S&P 500 closed this week at 1,798.18.That's up from 1,359 at the start of 2013 or a whopping 26 percent increase. As one U.S. newspaper put it, "U.S. stock market nears milestone heaven." The S&P is approaching 1,800 and the Nasdaq exchange is nearing 4,000, which was last seen in 2000 during the bubble.
The S&P by the way is "widely regarded as the best single gauge of the U.S. equities market" and includes the 500 leading companies in leading industries of the U.S. economy.
So where does this leave us? The answer may be different depending on your age.
Young people with a life-time of employment ahead of them should start saving early and often. A contribution of $5,000 a year at age 25 with an 8 percent annual return will get you $1 million at age 65. To accomplish that you've got to believe in the U.S. economy, the U.S. stock market and trust that those managing your 401(k) are not taking a big fat management fee for doing so. Who cares if markets go up and down? Over the long haul, they go up. Think, SnapChat and Twitter. If you're over 60 you've got to be smarter about your investing strategies. Here's what the experts are saying as we near the end of 2013.
- Wall Street Journal (7/16/2013) - "Investors should prepare to trim their U.S. stock allocations if the S&P 500 rises another 15 percent or more, says Ben Inker, co-head of asset allocation at money manager GMO in Boston, which oversees about $110 billion. Click here to read, "Is This a Bubble," by Joe Light.
- Janet Yellen, during confirmation hearing (11/14/2013) as new Fed chairman: "We have to watch this very carefully, but I don't see this as an asset bubble." Click here for Yellen's testimony.
- Wall Street Journal: "Even though stocks look expensive there are many reasons to think this bull could continue. The bottom line: Investors shouldn't flee the market now simply because they think a pullback is due, but they should get ready in case the market goes much higher from here," Joe Light, WSJ writer. This year through October, investors have put $111 billion into U.S. stock mutual funds and exchange-traded funds, according to research firm Morningstar. That doesn't yet make up for the $134 billion they have taken out of stocks since 2009, the Journal reported.
So where to put new money?
The experts say Europe and Emerging Markets are more attractive because of average share prices that are below the U.S. average. The experts recommend broad-market index investing in such products at iShares MSCI EAFE with an annual management fee of 0.34 percent or $34 for every $10,000 invested. or the Vanguard FTSE Developed Markets, which costs 0.1 percent. Portland, Ore. economist, Bill Conerly, recently said in a Forbes magazine forecast piece that "The IMF (International Monetary Fund)  expects global economic growth of 3.8 percent next year, inflation-adjusted."
Staying with U.S. sectors
At the dinner discussion this week, my companions also talked about sectors of the U.S. economy that still look attractive. Those include the energy service sector, consumer staples and industrials. Over-bought sectors -- utilities and retail. But as we move into 2014 plenty can happen. An implosion, for instance, of Obamacare could be a drag on the economy.
Meanwhile, the experts at don't see inflation as a problem for at least the next 12 to 18 months. That means no increase in the Fed-managed interest rates. Fidelity suggests taking a look at emerging markets, which are "selling at a 35 percent discount" to the U.S. market.
Investors, they said, looking for a long-term hedge against inflation should consider investing in physical real estate, energy companies and hard commodities. If stocks feel too risky, the alternatives might include municipal bonds or mutual funds invested in infrastructure (toll roads, ports etc.). Fidelity experts expect modest earnings growth at most publicly held U.S. corporations going into 2014. That pace of investment growth should slow in 2014, but not necessarily have a big pull-back.
After reading though all kinds of reports, I'd say the U.S. economy still is on good ground. As small investors we just need to keep our eye on the ball and mentally prepare for a pull-back of 10 percent or so mid-way through 2014, if the S&P gains another 15 percent or more in value. However, if earnings continue to improve we may not see that pull-back. I'm leaving my money where it is for now. (Gulp)!
For more:
"Economic Assumptions for your 2014 Business Plan," - by Bill Conerly, Forbes, click here.
"Good news and bad news for stocks," - click here.
"What is the U.S. economic outlook for 2014? Not Good," - click here.
"This is what the economy will look like in 2014," - CNBC, click here.
"IMF predicts higher global economic growth in 2014," Vanguard, click here.

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