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
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.
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.
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
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
I moved my non-IRA/401-K (i.e. “non-qualified”) money to Treasurydirect.gov, which you can find online and set up and account, and link it to your bank account for money flows. The menu items there will show you how to buy the bonds. The other IRA/401-K funds I set up with Fidelity online (because they must be in custodial accounts by law as opposed to yourself or Treasury Direct, probably as a kickback to the financial services industry when the law was made), and it is even easier there to buy bonds, and they are great on the phone in stepping through you opening an account and buying individual TIPs on their website (don’t let them talk you into a bond fund). I do not have any interest in promoting Fidelity per se, but they were the only ones I could find that let me buy individual TIPs, their fees are imperceptible, the process has been reliable and I have been impressed with their competent customer support.
What are your thoughts on money market funds – how do they compare to treasury securities for risk vs. reward in the current climate? Thanks!
Thanks. What is the very first step in setting up the TIPS ladder? I mean. one has money in the bank. And it has to be moved to… where? Treasury account? How to set up one?
Good article. If one gets 1.2M or 1.5M cash from the sale of a house, how does one go about directing it to 6 or 7 different banks? Ask the buyer to give multiple checks of 200-250K each?
My family has lived on laddered TIPs that mature every January for over 11 years, and I plan to do so from here on out. Our portfolio has made around 2.5% + annual inflation, and they have been predictable and reliable, and holding individual bonds to maturity means there are no interest rate fluctuation issues; it also lets me plan out an inflation-adjusted annual income for 30 years or more. We own our non-qualified funds in Treasury Direct, and qualified funds in Fidelity, where you can buy individual TIPs in your IRA or 401-K. I also own a big stockpile of simple I-Bonds as well (many paying 3-3.5% above inflation), which also have some advantages over TIPS as well, and they dovetail nicely to manage taxes.
“Her doctor tells her “Trump anxiety” is running rampant”.
Seriously? Do people go to their doctors to complain about things like this? No wonder health insurance costs so much — even before Obamacare.
What would be the appropriate medical treatment? Maybe a swift kick up the ass, followed by a brief review of the budget deficit, the growing national debt, unfunded pensions, and the hollowing out of the US economy. There are a lot of things to worry about. President Trump is far down the list.
As I understand it EVERYONE pays for the Credit Card option, and by using your CC you get that money back and cash buyers get stuck paying extra
The only Trump anxiety that is warranted is that the Deep State with either impeach him, or deep six him.
Its almost funny, but I have been wondering if using Credit Cards might be better. You get the 2%+ back now and if you pay it off at the end of every month there is no interest rate applied. So it kind of turns every dollar you spend into a savings account, with a better rate than a savings account. I know there has to be a catch to it, but what it is isn’t obvious. There is no safe investment, no way to avoid the drop in the markets, or have a investment beat inflation. Once the market down turns the inflated values do not come down, at least recently. So you have to wonder what is the end game, retired are getting poor because the income is generally fixed.
Excellent post Mish. I was just thinking about moving in this direction myself. I’d add in get rid of all debt, and enjoy living frugally.
Kinuachdrach, that’s an outstanding post. The one note that I would make is that there are things we can do that are good, such as exercise and intermittent fasting that increase lifespan, but also increase healthspan. There is nothing wrong with living longer so long as we stay healthy to enjoy it.
Many of us wonder about the great inflation/deflation debate. Mish makes excellent arguments that we should be expecting deflation — others make similarly excellent arguments that inflation is unavoidable. And the hedgers argue that we should expect a bout of deflation followed by runaway inflation.
Maybe the point about retirement is to remember Ben Stein’s quote — retirement is “Never Never Land” — it never happened before in human history, and it will never happen again.
In addition to the prudent financial advice Mish offers, it would be good to continue working in some capacity for as long as possible. And then to accept that we are all mortal, and make a commitment not to try to extend our lives by excessive medical interventions.
Probably better to ladder in while rates are falling
If you earn 2.5% on your assets, start with $1 m, collect $25,000 from social security a year, and spend $100,000 a year, and social security and expenses both go up at 2% a year, you will run out of money in year 15. Since I expect to live to at least 95, those assumptions will never work for me. Thankfully, I also expect to be in excellent health most of those years, and my lifestyle choices are more frugal than that. With combined expenses starting at $60k a year instead of $100k, the same assumptions make it last 32 years instead.
Mish – You’re in cash and gold? What happened to “Bond – Long bond”?
One of the principles of investing is to preserve principal.
Your friend can construct a ladder out of them also, if he wishes. Almost all on-line discount brokerages will allow you to buy them. I use E*Trade.
Zero Coupon US Treasuries are ideal for IRA accounts.
Great article. I suggest also adding some ultra safe munis (not Chicago or Illinois 😊). Decent yields and tax advantages.
The very definition of irony: http://nymag.com/selectall/2018/04/an-apology-for-the-internet-from-the-people-who-built-it.html
Great information Mish… thank you!
$1 million in a representative ladder will get you a little over $100k in 5 years. Assume that in the future you will pay out $50k per year for health care, and that you need $50k to live on beyond that per year. So the ladder gives you one year of life.
Injection of media (mass & social) into every aspect of people’s lives is a major issue. One minute people are led to believe they are in control and the next bombarded with information an issues that control their emotions but over which they have no control. Recipe for anxiety. Cut out the media, focus local, focus people close by, get back to basic relationship building/nurturing and turn off the crap. Alternative – be driven insane.
Trump anxiety? Turn off the media, focus local. Market anxiety, Mish’s post addresses well.