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I consider my knowledge base to be limited as I've spent some serious effort in getting a basic education in the area. Net result - the more I've learned the more I realize what I don't know, which is vast, hugely complex and generally beyond my "keen".
Having said that, a QE policy to me is analogous to an approaching train horning blaring louder as it gets closer to me. Precisely when the train arrives at the station and delivers its passenger (major inflation) is unknown --- but I can hear the approaching horn quite well. When the worm will turn isn't knowable, but I'm confident that it will turn. I just don't want to get caught when it does.
Boompa's point on the 14% "Carter" period is well taken. I also remember it clearly. The best one can do is to try and not be standing on the tracks when the train arrives.
I totally agree with your assessment of bond risk and/or long term CDs. While most of the bond funds (I'm strictly a mutual fund investor in bonds (T Rowe Price products)) have done fairly well YTD, I recently cashed out of bonds entirely. I heartily agree that its a good time to take your money and run. I view the inconsequential returns from short term CDs or T-bills as simply an insurance cost for parked cash. Contrarily, this has been an excellent time for some high risk equity investments, primarily in emerging markets. BUT - those best be short term and watched like a hawk. The bottom line in my view (and only my non-bankable opinion) is that we are in a rather unique investment period and need to plan accordingly.
How each of us tailors our plan is obviously and very seriously impacted by the mix of income sources (pension, SS, investment draws, etc.) and that income's relationship to one's BLE (Basic Living Expense) needs. However, QE is very definitely a major "heads up" to me and one which I suggest everyone ought to consider in their formulation going forward.
Maybe because we think alike but you are right on target with your assessment of investing as far as I am concerned. Right or wrong the bottom line is you are aware of the environment and so many others aren't. When and if inflation roars it's head (not sure deflation is off the table) you might not be able to keep up with it and probably won't. Now is a great time to get ahead. Even a 5-7% return is well ahead of inflation. I would suggest that all investors look at a variety of mutual funds of different sorts and see how they have performed over the last ten year. They will be surprised to see how long term consistently emerging/BRIC funds etc have been in performance.
I don't think anyone knows all the implications of QE and QE2 - in part because the asset purchases aren't disclosed. About the only thing one can say for sure is they distort asset values.
I've been investing for a long time. And I think the only thing I've ever heard that holds true almost 100% of the time is to align a substantial portion (although not 100% - you always want to hedge some) of one's portfolio in a way that your own personal "worst case" won't kill you. Some examples. Inflation. Deflation. The Wall Street Journal called it "meflation":
Excellent article. Your goal is not to get some existential satisfaction from a correct market call - but to protect yourself.
Another example - allocation to relatively risky assets when you're older - and less capable of recovering from the hits to capital those investments can cause. Again - your goal is not to get "bragging rights" at a cocktail party - but to CYA.
FWIW - my area of expertise is fixed income. I am certainly not selling all the fixed income I own (or even any yet - even trading positions like longer term zero coupon bonds). But when it comes to buying new stuff - I'm almost on the verge of taking a long fishing trip . Robyn
Robyn - all excellent points. The Journal's "meflation" piece is spot on and one I had already enjoyed. Obviously my actions only relate to and have credence for my personal situation. It would be madness for a retiree relying on primarily investment income for BLE (Basic Living Expenses) to go high risk, as you cogently noted.
My fixed income bailout is consistent with my habit of seriously trying to take my profits well in advance of observable trend changes or turns. I long ago gave up trying to think I knew what was going on except for the very broadest factors. I certainly haven't a clue whether we're looking at deflation, inflation or static squat for awhile. (If you put me on the rack I'd probably whimper that some deflation is in the offing near term, but that opinion would only be put forth under duress).
BUT - with QE on the table my non-bankable opinion does tell me that things look more than a bit dicey going forward for the powers that be. That combined with the enormous new debt levels makes me very sensitive to what inflation and surprise interest rate increases would mean, especially for bonds. Hence I've been moving to very short term (if I so choose), high risk equities (by that I mean mutual fund investments that allow me to bail in 90 days or so without a trading penalty) and cash.
I too have been investing for many moons and my learned experience leads me to avoid conventional wisdom, ignore the talking heads and absolutely not think I'm fully aware of, or really comprehend, what is going on or about to happen. I simply take discrete risks in an array of different high potential areas and cut my losses very quickly. It doesn't take too many home runs to cancel out numerous foul balls. So far its been working well for me. My recently closed out bond funds were simply a part of that strategy.
I've counseled my daughters (28 &31) to simply buy and forget it. Their situation and mine (age 60) are light years apart. As I've noted previously, retirees must craft a strategy for their specific circumstances. I wouldn't offer anyone advice on their best strategy. It is beyond my "keen".
Its a fair observation that I've moved away from investing/buy & hold and am more of a gambler for the most part. Its more fun than a casino and my "investment" funds could go to zero and it wouldn't impact my ability to cover BLE. In that regard, my approach may be more understandable. C'est la vie.
I do think TuborgP is dead on correct in highlighting the significance of a QE policy. I wouldn't predict what it means (other than with my money) but it got my attention. We live in very interesting times.
Last edited by Pilgrim21784; 10-09-2010 at 08:51 PM..
I don't think anyone knows all the implications of QE and QE2 - in part because the asset purchases aren't disclosed. About the only thing one can say for sure is they distort asset values.
I've been investing for a long time. And I think the only thing I've ever heard that holds true almost 100% of the time is to align a substantial portion (although not 100% - you always want to hedge some) of one's portfolio in a way that your own personal "worst case" won't kill you. Some examples. Inflation. Deflation. The Wall Street Journal called it "meflation":
Excellent article. Your goal is not to get some existential satisfaction from a correct market call - but to protect yourself.
Another example - allocation to relatively risky assets when you're older - and less capable of recovering from the hits to capital those investments can cause. Again - your goal is not to get "bragging rights" at a cocktail party - but to CYA.
FWIW - my area of expertise is fixed income. I am certainly not selling all the fixed income I own (or even any yet - even trading positions like longer term zero coupon bonds). But when it comes to buying new stuff - I'm almost on the verge of taking a long fishing trip . Robyn
So what are you buying? These are interesting times to make it through. I am having a good year right now and at some point 0% additional return might look good.
I can't see that taking long term federally insured CD's is even remotely suicidal. Pulling the CD before maturity simply forfeits the interest, not the principal. When the interest you are forfeiting is a lousy 2%, and you are trading up to a CD with 6% or 8% interest, you'll make back what you lost in interest very very quickly.
I can't see that taking long term federally insured CD's is even remotely suicidal. Pulling the CD before maturity simply forfeits the interest, not the principal. When the interest you are forfeiting is a lousy 2%, and you are trading up to a CD with 6% or 8% interest, you'll make back what you lost in interest very very quickly.
But what is your effective ROI the entire time you were holding the CD? Doesn't it then become zero? So what was the purpose of the CD?
I think that what some naysayers don't understand that in addition to nay saying articles we get annual statements from our pension fund showing the number of years in reserve they have in hand and invested. The issue is with future retiree's a number of years aren't. Most folks in this forum don't all into that category so we don't have that worry. It is a lot like asking someone who is 70 to get worked up about SS. Yes there are local districts and states that have greater problems. However most of us are smart enough to know if we do or don't live there and if we don't back to our nap. Other posters respond to us with generic articles and know nothing about our specifics. So nay say on and those of us who know our specifics will continue our naps.
You know I just plain disagree with the criticism expressed here of low interest rates.
Low interest rates have lead to some real deals in the housing market for those who can afford it. We bought our second home about one year ago, because I found that opportunity to be a better use for our money than keeping it in the bank.
I'm just a minor example though. Low interest rates encourage people to borrow and establish a business. More businesses lead to more employment. Low interest rates allow young couples to afford a home. Low interest rates allow America to finance the huge debt it has. I'm sorry we have it. But, without deficit spending (and the debt we've incurred) this recession might see 20% unemployment instead of 10% unemployment. I can borrow money for my business when I need it at a 3% rate (secured loan)
High interest rates simply result in people making money off of money rather than making money off their labor, or off the production of good and services. Labor and production increase real wealth. I've never really believed that simply making money off money increases real wealth at all. Its simply wealth that appears on paper.
I see another positive to low interest rates as well. I think they may subtly discourage younger people--like myself--from seeking early retirement. It may keep us in the labor force for more years and creating less of a drain on private and public retirement systems. If we can't count on our saved money increasing at more than 3% a year than our alternative is to keep working.
Finally, low interest rates encourage investment in the stock market rather than in safe areas like bonds. This is positive because when we take risks investing they sometimes pay off with new inventions and new technologies. It makes for a better world when we do this instead of simply owning bonds in a municipal power company.
So, I'm the minority here. But, I'm glad the FED is pursuing a policy that keeps interest rates low.
You know I just plain disagree with the criticism expressed here of low interest rates.
Low interest rates have lead to some real deals in the housing market for those who can afford it. We bought our second home about one year ago, because I found that opportunity to be a better use for our money than keeping it in the bank.
I'm just a minor example though. Low interest rates encourage people to borrow and establish a business. More businesses lead to more employment. Low interest rates allow young couples to afford a home. Low interest rates allow America to finance the huge debt it has. I'm sorry we have it. But, without deficit spending (and the debt we've incurred) this recession might see 20% unemployment instead of 10% unemployment. I can borrow money for my business when I need it at a 3% rate (secured loan)
High interest rates simply result in people making money off of money rather than making money off their labor, or off the production of good and services. Labor and production increase real wealth. I've never really believed that simply making money off money increases real wealth at all. Its simply wealth that appears on paper.
I see another positive to low interest rates as well. I think they may subtly discourage younger people--like myself--from seeking early retirement. It may keep us in the labor force for more years and creating less of a drain on private and public retirement systems. If we can't count on our saved money increasing at more than 3% a year than our alternative is to keep working.
Finally, low interest rates encourage investment in the stock market rather than in safe areas like bonds. This is positive because when we take risks investing they sometimes pay off with new inventions and new technologies. It makes for a better world when we do this instead of simply owning bonds in a municipal power company.
So, I'm the minority here. But, I'm glad the FED is pursuing a policy that keeps interest rates low.
One of the reasons you may have a different perspective is that you are much younger than most of the posters here. Most posters here are already in or at the point of retirement. That paper wealth when liquidated becomes real wealth. When you are young and working and invest aren't you exchanging that real wealth for paper wealth in the form of your investment? Don't you want to preserve that investment? As it increases from ROI aren't you the same as the rest of us?
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. Robyn
