Retirement Planning Advice and Financial Related Education by Barry Unterbrink, Chartered Retirement Planning Counselor

Monday, May 25, 2009

Recession End? What To Contemplate Next?

If the 2007-2009 time period were to somehow in the end encompass the economic collapse and surrounding recession, then what's the next actionable course of action to contemplate with your money? That, friends, is the $64,000 (no, let's up the ante and say $64 billion) question. As investor's, we have to look forward to what the future could delve out to us if we are to prove resilient and flexible to profit from the opportunities ahead (or avoid the roadblock or cliff just around the next turn). For many who don't do our homework or fail to assemble plausible outcomes based on past market behavior, there remains little doubt that costly mistakes will embed themselves in the outcomes. I've observed over the years the one-liner "this time it will be different" often precedes anything but ... that is, investor hope and greed extrapolate into the future the continuing of the current good times or bad times. The trouble with that reasoning is: by the time the good or bad times are evident, most of the damage has already been done. By then it's really in the last innings of the boom or bust cycle. There are exceptions, of course.

The current bull market rally in the stock market is a case in point. My last blog on the market's condition Does This Rally Have Legs? was penned in mid-March 10 days after the now-important and recognizable market low near Dow 6,600. The gains in the average stock prices since then has been very enticing and rewarding: Dow Industrials, up 1,685 points, or +27%, the S&P 500 Index, up 220 points, or +33%, and the Nasdaq Composite Index, up 423 points, or +33%. The current rally, which has taken off "like a scalded dog" the past 10 weeks, no doubt took many by surprise. This begs the question then, what do we do now?

If you owned stocks or stock mutual funds along the way up, your should continue to hold them based on your risk level and stage in life. The market's rally may poop put at some time, or roll over and decline substantially, so protecting your recent gains is important. If you're up 25%, I would not give back more than 7-10% of that should prices fall back again. Remember, cash and bonds should hold a place in your portfolio for what's not invested in stocks. Bonds, which had a decent 2008, have not performed well so far this year. The competing stock market, and the flood of the massive new stimulus money contributes to the rise in interest rates. The Government's ability to raise more money is at a higher cost, thus depressing bond prices. The 10 year Treasury bond's yield rose from 2.24% to 3.45% this year, while the 30-year variety moved up from 2.7% to 4.4%. That's a huge jump in rates in just 5 months!

Inflation should be watched carefully with every report. As it heats up in future months and years (which I believe it will), then your investment income will suffer. Consider: if your portfolio is growing at 8% and inflation is 4%, then you can afford just a four percent withdrawal rate to keep money protected from inflation-risk. During Jimmy Carter's reign, inflation averaged 8%, so you had to curtail your withdrawals for some time back then. Interest rates spiked up then, killing your bond portfolio value also. It would take a delicate balance and some luck then to hold onto your principal and generate a decent after-inflation income.

If you buy off on the scenario that I have outlined above, then consider using a guaranteed income annuity to fund part of your retirement income. Insurance companies guarantee your income in future years. Example, investing $100,000 today, a 51 year-old could receive $7,512/year for life when they are 56; wait until age 60 and the income jumps to $10,282/year. That's minimum income - it could be higher if the markets your account balance is tied to performs better. Ask me for a complete illustration on how this works.

Be sure to read the blog post before this one on Gold and Silver investing; it could be rewarding to you also. Be safe out there investing!

Barry Unterbrink
Chartered Retirement Planning Counselor

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