From the desk of Chris Abely, Chief Investment Officer
The Challenges Facing Conservative Investors
Does this sound familiar?
You prioritize stability and safety over an investment’s return. You are most comfortable investing
in money market funds, certificates of deposits, U.S. Treasuries, high quality bonds and perhaps a
few blue-chip dividend stocks and real estate (e.g., your home).
“I can’t afford to lose my hard-earned savings to a stock market crash, and I’ve witnessed a few.”
“I’ve spent a lifetime earning my money and I want to keep it safe and not worry.”
“I can live on less, although I should be paid more for my hard- earned savings.”
Conservative investment strategies used to work for retirees. Most financial professionals and
popular money magazines agreed with “The 4% rule”. It professed that you could invest conservatively and withdraw 4% a year from your retirement account and never run out of money. Prior to the 1990s many people used a 5% rule.
How things have changed!
Two primary changes occurred over the past 40 years:
Longevity: A couple retiring today at age 65 has an average life expectancy of about 20 additional
years beyond age 65. They are healthier, more mobile and many will live into their 90s. Being
healthy and living longer is a very good thing!
Interest Rates: Since the early 1980s interest rates have been declining. In 1981, the interest
rate on three-month U.S. Treasury bills was 14.8% or $14,800 annually on a $100,000
investment. Today, that same investment would pay you 0.015% or $150 annually.
Longer term rates offer little relief from this situation with five-year Treasuries paying only
0.85% or $850 annually on your $100,000 investment.
It has been very challenging for retirees and people close to retirement to internalize how
difficult it will be to conserve your nest egg in an environment where you are living a more
active, longer life in an era of “zero % interest rates”.
The Federal Reserve Board has stated that even if inflation (i.e. prices) were to rise above 2% on
an annualized rate, they are not likely to raise interest rates prior to 2023. In other words, with
an average annualized inflation rate of 2%, over 5 years, you would need $110,408 to buy the same
items your $100,000 could buy today.
This monetary policy may force conservative investors to experience a potentially lower standard of
living due to the loss of purchasing power!
What Approaches Should a Conservative Investor Consider?
• Cutting expenses
• Spend principal.
• Rethink what it means to be conservative.
Cutting Expenses: While it may be painful to cut your spending, especially with the cost of health
care and necessities continuing to rise, it may be an option. For example, many retirees pay off
any outstanding mortgages prior to retiring and therefore have an overall lower expense profile
going into retirement.
Spend Principal: Most people shy away from this option, as they are reluctant to spend the
economic result of a lifetime of work. However, IRAs and 401(k) plans require distributions after you reach age 72.
As you age, spending your assets in a planned way has advantages, like being able to enjoy the
fruits of one’s labors while you have the energy to do so and are healthy. Spending down your
principal in a controlled way doesn’t lead one into poverty.
Rethink What it Means to be Conservative: In the 1970’s and early 1980’s a conservative investor
had fewer choices of where to invest, and with higher interest rates available, investing may have
seemed simpler. Today you have many more opportunities and can invest in places that previously may not
have been possible or practical. The ability to diversify across different asset classes and geographies is now as simple as a click of a mouse. Putting a sound strategy together, while it may feel intimidating, can be done.
Can you still get a 4% guaranteed return as one could for most of the past three decades? No.
Can you position your assets to generate a reasonable return with reasonable risk? Yes.
An issue to consider is that when you retire, your assets, like you - will be living longer. As a
result, some of your assets should be invested in longer term investments, which may experience
additional volatility, but over time should grow as the U.S. and the World economies expand.
A Final Thought:
What happens if interest rates start to rise and move into the pre-“The Great Financial Crisis”
levels? On 1/1/2007 three-month Treasury rates were 4.37% and on 1/3/2006 the rate was 3.97%
Most likely, if this occurs, it will be the result of an increase in inflation. If that were the
case, conservative investments, during the transition to higher rates will most likely suffer
losses (a rise in interest rates causes yield-based assets to fall in price) as well as lose
purchasing power. This double hit could result in a very difficult situation with the only
available options being cutting expenses and/or spending principal.
There are those who see retirement as an end of something. When, in fact, it is the beginning.
When allocating your investment assets, you should consider the entirety of your situation
including your: lifestyle, temperament, financial position and most importantly, time.
As a fiduciary, GSB Wealth Management is here to assist you in that effort. Our advisors can help
you build a comprehensive financial profile and help work through what it means to invest, live,
and take up the challenge of the “zero % interest rates” environment.
If you would like to learn more about how GSB Wealth Management can help you create, and reach,
your financial goals; we invite you to contact Ken Russell, President & CEO at 203.204.6626. You can also email Ken at firstname.lastname@example.org.
"Wisdom is not a product of schooling but of the lifetime attempt to acquire it." ~ Albert Einstein