As a financial advisor to numerous types of clients, including recent retirees, I often think deeply about the issues my clients face in this market environment. Many retirees not only lost a material portion of their home equity back in 2008, but also a large chunk of their nest eggs. They also remember the tech bubble, the flash crash, and names such as
Since the financial crisis, they have unenthusiastically participated in the market, feeling very risk-averse and lacking confidence. Many of them do not read the
In short, these investors are often plagued by fear and paralyzed by indecision. They have very serious income needs, and traditional vehicles such as CDs, government bonds, and investment grade corporate bonds are not providing returns above inflation-let alone allowing them to meet household expense obligations.
Even the retirees who are willing to move to riskier investments often have trouble understanding different asset classes. Furthermore, many of these investors are shunned by the large wirehouse advisors because they aren't considered "ultra high net worth" with tens of millions of dollars to invest.
Left without the reliability of traditional income-generating products, the only seemingly available option for the hundreds of thousands of novice investors (with an average 11,000 individuals retiring on a daily basis) is to venture into riskier products with next to no guidance. Given their cautious nature, many potential investors take themselves out of the game entirely, forcing them to delay retirement.
Those who stay invested are overwhelmingly looking for income-generating investments, and demand for these strategies continues to rise. In fact, a survey conducted by
Seniors and savers do not care about beating the market because relative returns are meaningless. Pitching even the best fund performance metrics on this growing investor base will likely fall upon deaf ears, given that they don't aspire to outperform the S&P 500. Instead, this underserviced group simply wants to hear that a manager can provide a modest level of income and, most importantly, that they won't get hurt.
Finding income in these markets is certainly difficult, but not impossible. Strategies do exist that offer a modest level of income generation with a low level of risk. For example, many large-cap, low-risk stocks are proxies for bonds in the sense that they produce very attractive dividend yields supported by stable and consistent cash flow, all while having low valuations.
To find these opportunities, investors must love sectors that others hate. Old technology tends to be overlooked by investors because it lacks flashy returns, but its consistent yields have proven good, safe investments for long-term savers. Defense is another prime example. It was beaten up due to sequestration and budget issues, but defense stocks have paid strong yields and have weathered worse times (they were hated in the early 1990s and ended up becoming some of the best performing stocks).
Exchange-traded funds comprised of high-yield corporate debt are another way to achieve a healthy return while eliminating the need for any intensive credit analysis. The range of exposure provided by ETFs protects investors from the idiosyncratic risk of one or two companies defaulting. In doing so, they provide access to yield that most investors could not replicate without a portfolio of at least seven figures.
Diversification is a key risk management tool. In the age of quantitative easing, pure stock or fixed-income portfolios can easily lag. Instead, seniors and savers need a conservative income strategy that exposes them to multiple sectors. Since the current unemployment situation will keep interest rates at zero for the foreseeable future, this approach makes consistent returns of 5%-6% achievable.
This may seem modest, but given the low level of risk required in conservative income strategies, financial advisors can send a powerful message to potential investors. Still, it's critical to note that the significance is lost unless advisors can offer a level of service addressing latent market fears and keeps investors calm through market volatility. Servicing clients in this capacity requires substantial investments in infrastructure to facilitate smooth and timely communication.
With no reversal of current Federal Reserve policy in sight, as Bernanke's language indicates, one should expect the demand for conservative income generation to continue to surge. Turning back or trying to ignore the realities of our current monetary environment will only disappoint investors further.
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