‘New normal’ just a fad that could hurt retirees’ plans
Retirees are in danger of seeing their investment portfolios meaningfully and detrimentally impacted by an unwinding of the latest fad. That fad can be named “expensive defensives” and there are valid reasons for the development of this fad. Indeed many are calling it the “new normal”. But it is just a fad and one that, like all fads, will end.
Thanks to historic low interest rates – rates that aren’t justified by economic conditions and will therefore end – investors have employed a strategy of pursuing higher incomes from everything from farmland to investment properties and stocks. The greatest beneficiaries of this trend in the stock market have been large-cap, high-yielding companies and infrastructure stocks.
The problem, however, is that high prices for both categories are not justified by their fundamentals.
We have a warning for those who believe interest rates are going to remain lower for longer; Mark Twain once said whenever you find yourself on the side of the majority it’s time to pause and reflect. We are worried about the consensus view that the “new normal” is lower interest rates for a long period of time. But these low interest rates are anything but normal.
Investors should be very cautious. We are increasing the amount of cash we hold in our fund, and we think that’s a sensible thing to do in the short term, and maybe the medium term, for many investors who otherwise think their retirement savings are safe.
In this video we show why payout ratios and the misuse of valuation theory has produced something that could permanently harm the plans of retirees.
William
:
Roger,
I’m curious to hear your thoughts on how you would structure an investment portfolio if you were retired. Thanks to your blog (and many others), I am aware of the risks of chasing yield. However, for those who are no longer earning a regular income (e.g. salary), generating a sustainable and growing stream of income remains the primary objective – with a potential secondary objective of maintaining the capital base in line with inflation.
Roger Montgomery
:
Hi William,
It’s a challenge when rates are as low as they are. Epochal low interest rates have been synthesised by central banks in order to bring about asset inflation (i.e.: force people to move cash out of their savings accounts and into shares and property, lifting the prices of those assets). You have to question how sustainable an asset boom is when it isn’t created by natural market forces. The image of the duck gently gliding across the water but paddling furiously underneath comes to mind when thinking about stock market activity at these elevated levels. Look behind the curtain and all is not well. Returning to your question, one cannot create high returns from thin air. We need lower asset prices. They will eventually transpire – they always have. If you can survive with a lower return and a reasonable proportion of your portfolio in the safety of cash you may eventually appreciate that +2% was preferable to -20%.
Joe
:
Hi Roger,
Thanks for the article. What do you think are possible catalysts that would lead to interest rate control being ‘wrestled’ from the central banks by market forces?
Roger Montgomery
:
Joe that can happen at any time and without notice. All that needs to happen is a loss of faith.