Worried About Everything

My friend is better off than most. He has a small retirement nest egg but he is fearful of a 2007-2009 kind of drawdown. That's a reasonable fear to say the least.

He's 60-40 or so in stocks and bonds, mostly funds, with a bit of gold. All of his savings are in an IRA. His number one concern is loss of principle.

Anyone heading into retirement with no concerns is 1) somehow oblivious to the risks or 2) has so much money it does not matter what happens.

Potential Problems

  • The dollar could collapse.
  • Defaults can wipe out junk bonds.
  • Funds carry selloff and liquidation risks.
  • Gold is gold but it can fall in price.
  • Inflation can kill long-term bonds
  • Deflation may kill equities.
  • Stocks and bonds may fall for years, even if there is no recession, simply because of valuation and sentiment changes.

Losing Sleep

Someone worried about nearly everything cannot possibly be getting much sleep with all these recent stock market gyrations.

To reduce risk as much as possible, one needs to largely get out of the market, especially mutual funds.

Treasury Ladder

A TreasuryDirect bond ladder is one of the safest places to be.

Contrary to popular hype, the US is not going to default on treasuries.

TreasuryDirect does not support IRA accounts. However, banks do offer CDs for IRA accounts.

Someone with a $1,000,000 portfolio can easily construct a TreasuryDirect or CD Ladder to preserve principle.

There are not as many banks offering IRA CDs but there are enough of them. From BankRate.Com, I came up with these rates.

CD Rates

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Those who expect inflation will mock such rates. So will those who expect a dollar collapse.

Those who think deflation, and those who think an equity or junk bond collapse is coming would appreciate those rates.

Yields are the highest in about a decade, and they can be locked in.

Moderate CD Ladder

Bankrate came up with this "Moderate CD Ladder" for an $800,000 investment.

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The problem with that ladder is the top rates tend to be clustered at the same small set of banks, especially for IRAs.

Safety Rule

Do not put more than $250,000 at any one bank.

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In the above ladder, every year you roll over the expiring 12-month CD at the bank then offering the highest 5-year rate.

If that puts you over the $250,000 limit, then find another bank.

80-20

My initial assumption was a $1,000,000 portfolio. As long as fear of gold is not extreme, then $800,000 in a bond ladder with another $100,000 in gold and another $100,000 in gold miners seems reasonable.

The more adverse one is to risk, the more one should put on gold and less on miners.

One who is more fearful of gold can go 90-10. At a 90-10 ratio, even if gold were to fall in half over five years, the portfolio would still have a gain.

Other Options

Rather than a treasury or CD ladder, one can opt for extremely high quality individual bonds held to term. Such bonds would include Apple, Google, and Microsoft. Those companies are not going bankrupt.

The important point is to build a bond ladder of hand-picked individual bonds as opposed to bond funds.

GMO

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GMO Projects real (inflation-adjusted) negative returns in US stocks and bonds, every year, for the next seven years.

GMO offers this disclaimer.

*The chart represents local, real return forecasts for several asset classes and not for any GMO fund or strategy. These forecasts are forward‐looking statements based upon the reasonable beliefs of GMO and are not a guarantee of future performance. Forward‐looking statements speak only as of the date they are made, and GMO assumes no duty to and does not undertake to update forward-looking statements. Forward‐looking statements are subject to numerous assumptions, risks, and uncertainties, which change over time. Actual results may differ materially from those anticipated in forward‐looking statements. U.S. inflation is assumed to mean revert to long‐term inflation of 2.2% over 15 years.

Measuring the Bubble

If one assumes 2.2% inflation per year, then the nominal decline is on the order of -3.4% per year for seven years.

Compared to Hussman, GMO is outright optimistic. In Measuring the Bubble, Hussman forecast stocks will decline by two-thirds over twelve years.

I expect the S&P 500 to lose approximately two-thirds of its value over the completion of this cycle. My impression is that future generations will look back on this moment and say "... and this is where they completely lost their minds." As I’ve regularly noted in recent months, our immediate outlook is essentially flat neutral for practical purposes, though we’re partial to a layer of tail-risk hedges.

I side with Hussman, but even GMO's optimistic forecast would crucify pension funds.

If either GMO or Hussman is remotely on target, those in a treasury, CD, or extremely high-quality corporate bond ladder of individual issues will be the ones smiling.

Trump Anxiety vs Investment Anxiety

Another sleepless friend has "Trump Anxiety". She is worried about everything Trump says and does.

Her doctor tells her "Trump Anxiety" is running rampant.

I cannot help with "Trump Anxiety" but an extremely conservative portfolio structured as above will minimize investment anxiety.

Personal Positions

What are we doing? I am mostly in gold, miners, and cash. My wife is mostly in a portfolio of extremely conservative individually selected bonds.

Mike "Mish" Shedlock

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