One of my greatest concerns about investing for retirement is that the term “investing” has become synonymous with buying stocks with 100 percent of one’s portfolio. No matter what one’s age, goals, or risk tolerance is, having one’s investment portfolio entirely exposed to the stock market is too high a risk with too low a potential reward. I hope that if the experience of 2008 has taught us anything, it is that investing requires allocating a portfolio to fixed income, equities, and cash in proportion with the account holder’s age, goals, and risk tolerance. Investing also requires constant monitoring and re-evaluation.
Seek Out Advice
For those who do not have the time or inclination to handle retirement planning, I strongly suggest seeking out an investment advisor. An investment advisor is not a stock broker, and any investment advisor that only invests in the stock market is not truly an advisor. In addition, stock brokers earn a commission on trades made, investment advisors generally charge an annual fee constituting a small percentage of the portfolio total. Please note, I am not disparaging stock brokers – for those investors who would like to have an account solely devoted to equity investing, there are many good brokers in the industry. However, a stock broker is not the best manager for one’s overall retirement planning.
My concern is that there are individuals holding themselves out to be investment advisors whose counsel is little different from that of a stock broker. When looking for help with your retirement planning, make sure that your advisor discusses your goals and risk tolerance and builds a portfolio to reflect those. Also, trust the advisor who speaks in plain terms, clearly explains what he or she plans to do with your portfolio, responds to your calls in a timely manner, and avoids using Wall Street speak like “they/we/I like XYZ stock” – “over an x-year period, the stock market always outperforms other investments” – “you must be in the market at all times or you will miss the rally.”
Earnings Season Begins This Week: Tread Carefully
The S&P 500 has rallied from its low in November 2008 by approximately 20 percent. Earnings reports for the fourth quarter of 2008, and given what we know about the economy, those reports are expected to be terrible. The question for the market in 2009 is will earnings improve, and if so, by how much. So, there will be two facets of the earnings reports that will move the market:
- Earnings that are significantly better or significantly worse than expectations will have an immediate impact on a stock’s price;
- The outlook provided by the company for future earnings may take precedence over the current report.
Trading volume for the first full week of trading has been light, as it has been since the end of November. This partially explains the drop in volatility, which has been welcome. However, expect some volatility to return with the earnings reports. Over the next few months, earnings-season volatility will cause headaches as individual stock prices gyrate while investors digest the earnings reports and outlooks.
Over the longer-term, what happens in Washington will determine the economic outlook for 2010. The results of any stimulus package will not been seen for about 12 months. The stock market, however, is generally forward-looking, and so, the economic outlook for 2010 will likely drive the market in the second half of 2009. Although the U.S. and other world governments seem to be doing whatever it takes to avoid an economic calamity, these stimulus programs are largely experimental. Actions have consequences, and we cannot imagine what the consequences of the various stimulus packages may be. The best we can do is watch the economic numbers carefully and draw the best inferences possible from those numbers.
What does this all mean? Well, no one can honestly say. That is the most serious risk in investing the market today—there is still little earnings visibility and the economic picture is unclear. Without being able to determine future earnings capability within a reasonable range, there is no way to put a reasonable value on the stock market. And so, we could see a year where the market is down 20 percent at one point, up 20 percent at another, and yet ultimately end up right where it began.
What Can We Do?
The slogan for 2008 was “preserve capital.” Hopefully you have done that. The mantra for 2009 is “slow and steady.”
In 2008, the best move was to get out of the stock market and stay out. No sector was immune from the downturn, and the best stocks simply held their value for the year. In 2009, we need to put the cash raised in 2008 to work, but safety is still paramount. A good portion of one’s portfolio should be allocated to fixed income: municipal and corporate bonds. Treasuries have been overbought in the worldwide rush to safety, and so it hard to recommend an asset that offers almost no, and for shorter term bonds exactly no, return. However, Treasury Inflation-Protected Securities may offer good returns in the future if inflation returns.
Another portion of one’s portfolio can be allocated to the stock market. However, this should come in the form of trading in and out of specific stocks with a goal of taking profits and keeping losses small. Thus, one should always have a cash position in this portion of the portfolio to take advantage of opportunities or to dollar-cost average one’s position in the event a stock’s price drops soon after the initial purchase (but does not fall through the stop price). In other words, when it comes to stock market investing this year, be nimble and be safe.
There are plenty of posts on this blog that detail the themes raised in this post. I have compiled a list of those posts and their respective topics below:
Currency: The State of the U.S. Dollar
Corporate Earnings: Corporate Default Rate Pushing Up Cost of Financing for Healthy Companies
Credit Crisis: Credit Crisis- A Brief History and Time Line
Deleveraging: The Wolf is at The Door
Economy: Consumer Spending Will Not Bounce Back
Inflation/Deflation: Disinflation/Inflation/Deflation and Fiscal Stimulus: A Look at 2009
Inflation/Deflation: Economic Roundup (Week of 11-17-08 to 11-21-08): The New Vocabulary Word is Stag-Deflation
Investing: New Mindset Needed for Stock Market Investing
Investing: Fixed-Income Investing: CDs, Money Markets, Treasuries, Municipal and Corporate Bonds
Market Phenomena: Dynamics of a Market Bubble
Stock Market Investing: Managed Funds Do Not Outperform Index Funds
Gregg D. Killoren
victoria1014
Market Pricing of Default Risk for Financial Companies; An Opportunity in Goldman Sachs?
According to Bespoke Investment Group LLC, Morgan Stanley and Goldman Sachs, both investment banks recently turned bank holding companies, are the most at risk of defaulting on debt within the next five years.
[SOURCE: Financial Company Default Risk; Think B.I.G. blog; Bespoke Investment Group, January 9, 2009]
While it is generally unwise to fight market perception, occasionally investing opportunities arise when the market remains skeptical following a near-calamity such as the credit crisis. Goldman Sachs’ corporate bonds may present such an opportunity. Among investment banks, Goldman had long been the strongest and most respected. The credit crisis nearly undid the company, forcing it to become a bank holding company in order to gain access to federal government borrowing. On the heels of that conversion in September 2008, Warren Buffett, via Berkshire Hathaway, invested $5 billion in Goldman by purchasing preferred shares with a 10 percent dividend yield and receiving warrants to purchase $5 billion in common stock at $115 per share ($10 below the per share price at the time; GS share price closed at $83.72 on 01-09-2009) . The preferred shares are callable within 5 years. The deal allowed Goldman to maintain its operations until the credit markets returned to some type of normalcy. When Goldman can borrow at a more favorable rate, it will do so and pay off the Berkshire Hathaway preferred shares.
Given that credit spreads are coming down and Goldman does not have great exposure to what are sure to be the next two financial problem areas, credit card debt and commercial real estate mortgage defaults, an investment in Goldman Sach’s corporate bonds may make some sense. There are two caveats though: (1) Consider bonds that have a maturity of less than 5 years to limit time exposure to the company in the event the economy does not turn around; and (2) make sure that the bond prices have not jumped already in anticipation of an improved Goldman balance sheet, thus reducing the yield on the bond. In addition, please note that this is not an argument for purchasing common stock in Goldman. I still believe that financials stocks are too unpredictable for such an investment.
Below is one example of a Goldman Sach’s corporate issue an investor may want to consider. This bond was recently trading at approximately $102 (or a $2 premium to face value), which would lower the yield to approximately 6 percent. Still, that is an excellent yield, and one would only be exposed to Goldman for two years. Also, I expect the price of this bond to increase as confidence in Goldman returns, so there is the prospect of selling the bond for a profit, rather than holding it to maturity:
GOLDMAN SACHS GROUP INC 6.87500% 01/15/2011NT
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Posted in Fixed-Income, Investing, Market Commentary
Tagged Finance, Fixed-Income Investing, Investing, Market Commentary, Personal Finance