By Thomas K. Brueckner, Strategic Asset Conservation
As we enter 2014, last year’s aging bull market faces a myriad of problems. It’s overvalued, unnaturally subsidized by a Keynesian Fed, and the artificial quality of its earnings is being driven less by booming sales than by labor force reductions, outsourcing, automation and efficient technology, the hiring of part-time workers, and wage stagnation. Companies have bought back their own stock with money raised by issuing their own bonds, leaving them rife with cash—as well as debt. The debt bubble we are in requires the Yellen Fed to keep the QE apparatus humming because if rates were allowed to rise to the historical mean, governments, corporations, banks and individuals would be subject to tremendous stress, littering the landscape with bankruptcies, business failures and foreclosures. The Fed is simply trying to buy time, hoping the world economy improves soon enough to prevent the inevitable. It’s a colossal gamble on a massive scale with unthinkable consequences if it fails.
Individual investors face some statistical challenges too, after The Year No One Expected in 2013. Conditions last seen in early 2000 and late 2007—irrational exuberance, record levels of margin debt, and fund managers with record equity exposure—all bode poorly for those trying to convince themselves that the coming “correction” will be shallow and short-lived. Recent history bears different testimony but, as an old mentor once told me, “The only thing we learn from market history, is that investors repeatedly refuse to learn from market history,” so don’t expect the scar tissue to deter the foolhardy.
Logic, experience, and common sense should dictate that if “buy low, sell high” is the watch phrase of investing, now would be an opportune time to take some profits, and perhaps move to the sidelines. The older you are, the less tolerance you have for risk. As we often ask new prospects with both sufficient assets for a sustainable retirement and age-inappropriate risk exposure, “If you’ve already won the game, why are you still out on the field?” While most have never thought of it that way, some have a different reply, parroting the advisors who benefit from ongoing management (risk exposure) of those funds: “But we can’t afford not to be at risk, since only equities historically outpace inflation over time.” (Never mind the fact that inflation is currently at 1.2 percent and has averaged less than 2.3 percent for a decade.) Translation: No pain, no gain. Really?
Guess again. A savings platform first developed by insurance companies in the mid nineties credits market-linked interest (like a CD) during years when the indices (S&P 500, DJIA, etc.) advance—while retaining such gains amid a sell-off or meltdown the following year. Fixed Index Annuities, or FIAs as they are now called, protected their owner’s account balances magnificently during both the -51 percent “tech wreck” sell-off in 2000-2002, and again during the -57 percent decline that followed the subprime mortgage and financial crisis on Wall Street. They have grown so much in popularity that even some of the brokerage firms that once maligned them have recently partnered with the companies that developed them, for the benefit of their more risk-averse clients, lest their advisors lose such clients to other firms.
Employing the simplicity of time-tested hedging via the use of options, FIA firms guarantee: a) their clients’ original principals, b) any bonus monies credited (in exchange for a longer enrollment), and c) each year’s market-linked interest gains against losses. Like an ever-rising tide leaving a new high-water mark, an FIA owner will only see their account value grow or hold—and only decline when they take a withdrawal. Although they’ll never again hit a market home run, they’ll hit a lot of singles, doubles and triples while never losing the retirement game.
Regulators, CFPs and actuaries have long maintained that the older an investor gets, the less risk they should be taking. Getting market-linked interest of 3 percent to 9 percent—we’ve even seen credits of over 20 percent during banner years—knowing you’ll never lose those gains to another massive sell-off—makes for many a contented retiree sleeping very well at night. Whatever Janet Yellen or Europe’s central banking elite have up their economic sleeve in 2014, we all know that the reality of a stagnant world economy will eventually overtake the euphoric fantasy that was 2013.
The only question is whether you’ll have protected yourself this time.
Thomas K. Brueckner, CLTC, is president/CEO of Strategic Asset Conservation in Scottsdale, a conservative wealth management firm with clients in 18 states and six countries. He is a 2011 Advisor of the Year national finalist, a radio talk show host, and a mentor to other advisors nationally. He may be reached for comment at go2knight.com.