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Flight to Safety in Retirement

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In wealth management and retirement investing, as in life, risk and opportunity go hand-in-hand. Stock market losses can seriously reduce one’s retirement savings.” That, and then some. Suffice to say, as with the other risks, it’s impossible to predict what will happen to stocks.

When you hear the word risk, the danger that usually springs to mind is market risk. That’s the scenario in which you’ve amassed a healthy portfolio of stocks and bonds only to see it plummet in value because of a market crash or other disruption to the global financial system.

In finance, a market crash is considered a systemic risk, or risk beyond investors’ control. Although they cannot be prevented, they do provide warning signs. Concerns now lie in the fact that once again, markets are at all-time high with exuberance among investors and many ignoring the possibility of a crash.

Think of market risk as a parallel to the water level in a bathtub (i.e. the higher the water level the higher the risk). If you’re playing with your toy boat (i.e. your stocks) in that bathtub, and the valuation and risks are too high and the market corrects, then the water level will go down and will take your toy boat with it.

The opposite is also true if valuation and risks are too low. Then as the water rises, your boat will rise too. And when the market is volatile, as it is currently, we all get a little seasick.  When I hear about high yielding investments I always do a double take. Something high yield generally means something high risk…The risk vs. potential rewards suggests that stocks and diversified stock funds are no longer the best investment options.

It has been 7 years since the financial crisis of 2008 gripped the world, although it still makes the news on a regular basis. However, the US stock market has been up for six consecutive calendar years — from 2009 to 2014. If it closes up in 2015 for the seventh year in a row, it’ll be the first time this happens ever.

After 6 years of solid gains, this is now the 2nd oldest bull market in history. However, Bull markets don’t last forever  The last time stocks closed up six years in a row was over 100 years ago — back in 1893 to 1903. And then the next year saw an 18% downwards price correction.

Forecasting the weather has many similarities to investing in the stock market. How many times has the weather changed and the forecast wasn’t even close?  The key factor is that you want your investing to be better than the weatherman. You want to develop proven strategies that are going to give you best return for your own personal goals and desires.

We assume that the S&P 500 will finish the year slightly down as the strengthening of the US dollar and the new tightening cycle offset the strong US GDP growth already priced-in at the start of the year. Most economic recoveries falter in a monetary climate of rising rates, tightening credit and/or a falling dollar.

Beyond interest rates, the bull is being pushed and pulled, sometimes simultaneously, by a variety of other developments. Many of the dynamics driving stocks today can be characterized as double-edged swords, so investors must take care to be on the right side.

Whether we finish the year still in a bull market is up for debate.  Bull markets don’t always age gracefully. This one may be entering its golden years beset by uncertainties and buffeted by crosscurrents. Toward the end of 2014, a long period of calm gave way to increasing volatility, and you can expect more of the same in 2015 as the sedative of an ultra-easy monetary policy finally starts to wear off.

The Federal Reserve Board’s bond-buying program has ended, and the central bank will likely raise short-term interest rates in the second half of 2015. The surprise might be that the hikes turn out to be benign for both the stock market and the bond market, if, as we expect.  Moreover, even with the Fed pushing short-term rates higher, any increase in long-term rates will be subdued by expectations for low inflation and high demand for the safety of U.S. assets.

Historically, when the stock market tanks investors flock to bonds, which sends bond prices higher. Many investors see bonds and bond funds as their best safe investment options.  The problem here is that bonds and bond fund prices are near record highs as interest rates remain historically and ridiculously low. The problem: when rates climb significantly bonds and bond funds fall in price and investors LOSE money.

The U.S. will profit from flight to safety” as investors flee other markets for America’s.  We’ve seen this movie before, we know how it ends, and it’s not pretty,” But I say that it has longer to run, and we have already paid the price of admission. So we might as well stay to the end. You just keep your eyes on the exit door.”

No matter what you invest in, your goal should be to find safe, sound, secure solutions for your money.  Remember the story of the road. There was a fork in the road and a decision had to be made by the traveler. The first traveler picked the road most traveled and did not fare well. The next traveler met one who knew the road and picked the one least travelled and that made all the difference.

One of the most important choices facing a retiree is how to replace the monthly income that once came in with a steady paycheck. Retirees still need to pay their electric bills and phone bills; they still need cash to purchase food and entertainment.

But with no paycheck, and insufficient income from a pension or Social Security (if any such income at all), retirees often need to supplement their regular income. Ordinarily, one would invest any nest egg, from a 401(k) or other savings, in an investment product that provides an income stream.

Indexed annuities are basically an option of investment that is offered by insurance companies. They actually provide you with the benefit of investing in the stock market without the associated risks of losing your money.

So, in an indexed annuity, your principal is never lost and even in a worst case you may take some interest back home. Most insurance companies offer a minimum guaranteed rate of return on index annuities which makes it worthwhile when the market conditions are poor.   And they will not lose money in a down market.

The indexed annuities are therefore seen as a conservative and prudent investment.  They became quite popular during the previous bullish run in the market and insurance companies saw them as an excellent means of combining the security of a guaranteed return with the boom of the stock market.

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Friday, January 23rd, 2015 Wealth Management

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