"The 10 Plagues" of Retirement Investing

Last Tuesday marked the end of the Passover holiday, in which Jews around the world celebrate the exodus from Egypt in biblical times (see the classic movie “The Ten Commandments” for a visual version of the story).  One highlight of the “Seder” dinner conducted on the first two nights of the holiday is for all gathered to recount a part of the story known as “The 10 Plagues.”  Biblical references aside, it got me thinking about 10 plagues that today’s retired and retiring investors must grapple with.  Here they are, sans the Matzoh Ball soup. 

1. Emails encouraging us to “Buy this penny stock now for tremendous profits!”  As with many white-collar criminals, some of the best minds are wasted on activities that run counter to the greater good.  That they tend to prey on retirees makes it even worse.  I just wish this would change. 

2. Unscrupulous Wall Streeters – the papers and internet are full of stories, so no explanation needed here.   One of the actual “10 Plagues” is Vermin…so there you go. 

3. The long-term economic cost of war.  Note that this is NOT a sociopolitical statement.  Remember what the key issue was in the 2000 U.S. Presidential debates (G.W. Bush vs. Gore)?  How to spend the U.S. Government’s surplus! There’s something you never hear about anymore.  Two wars, a financial crisis and massive Federal Reserve support of the economy has produced a financial debt which will be a major yoke on the back of the next generation of consumers.  What is the cause and effect to this?  Government bond rates will need to go up.  That is, America’s cost of borrowing will unlikely stay this low, which leads us to Plague #4. 

4. The “bond game” has changed.  For investors in high-quality bonds, the fact that rates have generally fallen since the early 1980s, and are perhaps on the verge of a secular move higher should be a major source of concern.  Despite a ton of media coverage over the past year, we don’t see that many investors or financial advisors are paying much attention to a huge and (to us) predictable problem. For many, a change in the way bonds behave will be a shock and will force urgent action at some point.  It is best if we do not get to that point.  At Sungarden, we think we have been way out in front of this issue through the creation and management of an alternative approach to trio of retiree needs: income, preservation and growth. 

5. Hedge funds that don’t hedge.  As our readers know, we think hedge funds can be valuable tools, but they are overused.  The business is now massive, and there just are not that many geniuses.  Furthermore, many hedge funds are set up simply to do what non-hedge funds can do…but with a much higher price tag to the buyer.  That’s something we just don’t care for. 

6. Short-term performance mentality.  Once upon a time, most investments were held for years based on the client’s admiration for the investment process and long-term approach of the people managing the money.  We understand the urge to watch progress closely, and don’t discourage it.  What we do oppose is drawing major conclusions from very limited return data. 

7. U.S. Inflation measures – The CPI (Consumer Price Index) and “Core CPI” – that same CPI “ex-food and energy” are both quoted monthly, yet the media tends to focus on the Core. Since the latter measure does not factor in the cost to heat your home, drive your car, and eat a meal, we don’t know many consumers who care about the Core CPI.  Still it seems that many influential people try to get us to focus on it. 

8. Retirement planning strategies that sacrifice liquidity to feel better today – much of the retirement planning industry appears to be a tradeoff between perceived security/predictability and access to your assets when you want it.  In 28 years in the investment management industry, I have not seen that this is a necessary tradeoff for investors.  When it comes to access to your money, put me in that “Bird in Hand” category. 

9. Focusing on income yield above all else – it is not difficult to find the highest-yielding securities to fill your portfolio.  Anyone with a computer can screen for them, identify them and buy them.  What is far more important, and difficult, is distinguishing between high-yields that will also produce a strong total return (i.e. the yield combined with the gain/loss in price).  Too many times I see retirees jump at the highest yield without too much regard for the downside potential of doing so.  I also see many financial advisors filling portfolios with these, knowing that an unsuspecting public will say “yes” based solely on the outsized (and likely unsustainable) income yield offered. 

10. Slaying of the American consumer.  Predatory lenders, selfish corporate leaders, greedy Wall Street traders – their actions have a lot to do with the current status of the American Dream, which has taken a hit and will likely take more before the healing can truly start. 

A belated Happy Passover and Easter to our clients and friends!

(c) Sungarden Investment Research

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