Why “Play-it-Safe” Investing is Dead

Maybe the best starting point today is a headline that recently ran atop a story on Investopedia.com. The headline:

Experts Warn 86% of High-Risk Retirees Are Failing a Crucial Diversification Test. What Does This Mean for Your Future?

I’ll tell you what it means: It means not earning enough income in retirement to see you through to those last puffs of O2.

Back when I was a young reporter at The Wall Street Journal, I spent a great deal of time on the phone with or in the presence of the investment industry’s superstars. Peter Lynch, who once ran Fidelity’s once-stellar Magellan Fund; Jim Rogers, who helped George Soros steer the Quantum Fund, a hedge fund, to a 4,200% gain in a decade, or nearly 22% a year; Bill Gross, America’s most famous bond jockey of the 1990s and 2000s. And plenty of others.

At that time, the story on Wall Street was fairly simple: apportion your retirement nest egg so that 60% is in stocks, 40% is in bonds… and preferably all in mutual funds. Do that, and you’re good to go.

Not so much anymore, really.

Retirees are living longer and, equally important, the annual cost of still breathing from one year to the next keeps on rising. The cost of eating at your own kitchen table (or on the sofa binging Netflix) is up 25% in the last five years. Going to your favorite eatery, those costs are up 32%. Utilities to keep Netflix running on your flatscreen are up 20%. Getting around, meaning the cost of new/used cars, insurance, repairs, yada yada yada, is is also up 25%.

Medical care… up 15%. Same with recreation.

Little wonder that “un-retirement” is a word these days. And a trend.

Between 20% and 25% of retirees in America now hold full or part-time jobs to help cover the cost of shelter and something tastier than Tender Vittles cat food. That’s according to the National Conference of State Legislators.

To wind our way back to the beginning, all of this points to the bigger, overarching problem: Americans are not well-prepared for the cost of retirement. Scads of reasons for that, including the very existence of the 401(k) plan that allowed companies to kill the pension plan and thrust the cost of retirement onto their workers’ shoulders (one of the worst pieces of legislative crappola in the last half century).

Another problem, however, speaks to that lead paragraph.

Too many Americans are invested incorrectly, particularly for the moment in history.

Owning cash right now is bad juju when the White House is actively seeking to devalue the dollar as a matter of policy. That’s inflationary (see yesterday’s column).

Moreover, Kevin Warsh, Trump’s Federal Reserve nominee, will enter with exactly one item on his “Things to do Today—and Everyday List”… lower interest rates, per Donald Trump’s mandates. That’s going to drive down interest rates on bank certificates of deposit and money-market funds, reducing opportunities for retirees to earn an income from their cash.

Government bonds, meanwhile, are no longer the safe-haven asset they used to be.

The non-US world is increasingly skittish about America’s vast and ever-growing debts.

As I was writing today’s dispatch, a headline popped up to report that the carney freaks in charge of Uncle Sam’s spending have been borrowing money so far this year at the rate of $43.5 billion every week, and that the US is on track to spend more than $1 trillion on debt repayment costs this year.

Some context: That’s more than 15% of the federal budget and the single largest line item now that isn’t Social Security or Medicare.

As foreign investors quietly step away from US debt, the interest rates that the government must pay on all those borrowings goes up. It’s a supply/demand thing. The US has an ever-growing supply of debt it must sell to function, but demand has a limit.

When that happens, Uncle Sam has to pay more to entice enough buyers. So, those interest rates on Treasury bonds go up, which mathematically means the value of the bond goes down…

Meaning that retirees who hold bonds are holding onto an asset that is falling in value. Just as bad, the income those bonds are kicking off probably isn’t adequately covering the rising cost of living.

And perhaps the worst possibility to consider is that if America does stumble into a monetary or debt crisis, as is my worry, the value of US Treasury bonds is going to crumble, leaving retirees in deep dookie.

If you’ve been keeping up with my writings, you likely know that for several years now, I’ve been moving away from traditional market exposure in my personal nest egg. I still own a few US stocks in specific industries, primarily in healthcare and consumer necessities and vices (think: Walmart and Altria, the tobacco giant), as well as high-dividend payers in energy pipelines and land leases.

But the vast, vast—vast!—bulk of my assets are anti-dollar positions.

As I’ve noted, I recently turned 60 in January and my aim for the last number of years has been to own assets that are not US cash and bonds.

Instead, I want assets that are going to protect my wealth from a weakening dollar, and those that are going to generate meaningful dividends—meaningful income—in my account.

There was a time when “play it safe” in retirement-planning terms meant owning bonds and cash. I’ll argue that those days are dead, and that today’s version of safety is getting away from Treasury bonds and cash. Oddly, those are risky assets today.