Here’s why they are related
The financial advice industry is known for having strong opinions. Politics is like that too. Especially these days. To be clear, this is NOT a political commentary. I direct you to a zillion other locations on the internet for that.
Likewise, it seems to me that people within 10 years either side of retirement (hoping to retire within 10 years or retired within the last 10 years) are bombarded with confident (dare I say arrogant?) opinions from my industry. Whether it is the future direction of the stock market, the economy, political winds, etc., it is a lot to take in. And now, the impeachment of a U.S. President is top of the news. What should we make of that?
Left, right and blue?
If you are right-leaning politically, you think impeachment is a hoax, or at least over-hyped. If you are left-leaning, you think it’s about time, and that it needs to happen. And, naturally, there are plenty of folks in the middle. I don’t care about any of that here and now. What I care about is what you should as well. Specifically, to size up the potential impact on your retirement lifestyle of whatever happens.
This is not just an attitude I possess about impeachment, or politics in general. And, I am not a bull or a bear on markets. I am a realist and a historian of sorts. More than anything, I am determined to strike a balance. That balance is between the potential pursuit of growth and income (a.k.a. the good stuff) and the realistic risk of major loss in value (the bad stuff). The latter is what can ruin all the work you have done for decades to set yourself up to retire as you wish. So, with impeachment as the news topic de jour, here is my take on striking that balance. It is more deductive reasoning than shouting at whoever disagrees with me. I hope you find that refreshing.
Impeachment and market history
I will skip over the impeachment of Andrew Johnson. If you don’t remember, he was the one who reluctantly replaced Abraham Lincoln after the tragic assassination of our 16th President. Markets are just a bit different today, so we’ll ignore what happened then.
The impeachment of Richard Nixon is known today as a case of a crime and a cover-up. The latter is what did the damage. Back then, we had a functioning U.S. Congress. So once the information became available about what had actually happened, the process was followed, and Nixon resigned before he could be convicted. Gerald Ford became U.S. President, and the country slowly recovered from the psychological impact.
In 1974, the 10-year U.S. Treasury Bond yield was in the 7-8% range. As I write this, it is at 1.52%. So, bonds as a long-term retirement portfolio anchor are just not there.
The markets were roiled from that, and the threatening economic conditions that preceded it. The result was one of the worst stock bear markets in recorded history, from 1973-1974. Interest rates were much higher then, as was inflation. Still, I would say that one of the key long-term retirement cushions of that era does not exist today.
Then, there was the impeachment of Bill Clinton. That occurred in October 1998. The S&P 500 was around 1,000. Short-term, the stock market went much higher. This was the late stages of the Dot-Com era. The peak of around 1,500 occurred about 17 months later. However, as of the summer of 2010, nearly 12 years after Clinton’s impeachment, the S&P 500 was again around that same 1,000 level.
Naturally, a lot happened in between. But, my point is that if you are setting up for long-term use of all the wealth you accumulated over decades, you can’t just do it in a “pot-shot” manner. It’s not impeachment, though that is one of many factors that can impact market psychology and confidence.
And that, after all, is what takes modest market moves in both directions, and turns them into major ones. So, we can’t ignore impeachment, but we do have to account for it.
A shortlist of “must care abouts” for retirees
Here is where your focus should be right now:
Income investing: think differently
- High-quality bond interest rates are low, and the bond market is filled with companies whose credit quality is suspicious. BBB-rated bonds now occupy about half the assets of corporate bond funds. That is twice the rate of a decade ago. That’s scary if you own those. Once the default phase of the cycle begins, the bond portfolio you counted on could be your worst enemy.
- You need to consider income-producing methods that are more balanced from a reward/risk standpoint. To me, this means being more tactical, not falling in love with the income-producing securities you own, and identifying a combination of quality, stability, and yield that can get that job done. It is harder than before, since investors have been trained (unfortunately) to think that higher current yield is better. It’s not, it’s just higher. Look deeper, know what you own!
Growth investing: it’s a cyclical thing
I cringe whenever I see a buy and hold portfolio for a retiree or someone nearing retirement. I love the concept of buy and hold. But the current times make it many times riskier for those in the waning years of the primary career.
There is currently a unique combination at work to threaten retirees. We have an extended bull market on the back of cheap-money policies that have not been addressed, much less resolved. And the mountain of debt at the government, corporate and consumer levels that exists today is potentially toxic to the wealth of those in the retirement/pre-retirement phase.
Business is cyclical, so are markets. The old recency effect is your enemy. That is, don’t let recent strong returns in the stock market blind you to the reality that it’s easy to give it back. I think that many investors would benefit from learning more about hedging strategies, and about tactical approaches to equity investing. There are plenty out there, but they tend to get drowned out by the “set it and forget it” machine that is today’s financial advisory business.
Turning the impeachment era into action
What I have done in this article is to help you identify the opportunities and threats to your accumulated wealth. Nothing here is a forecast. Instead, it is a call to action. Get more sensitized and less complacent. Or, if none of this balancing act mantra I speak of is new to you, congratulations! You are in a good position to weather whatever investment climate results from impeachment and anything else that comes along.