Retirement and Risk Profile: Making Sense of the Current Market
One of the most common pieces of knowledge when it comes to retirement investing is that your investment portfolio should become less risky as you near retirement. There’s no hard and fast rule about that, or ratio determining how much of your portfolio should be held in stocks or bonds or other assets. That’s because each individual’s risk tolerance and ability to withstand negative shocks is different.
Some investors may start out their careers wholly invested in stock markets, and may feel just fine holding large percentages of stocks throughout their careers. Others may be more nervous about losing money in stock market crashes, and seek to hold bonds instead. But regardless of your risk preferences, you’re still going to want to adjust your holdings over time as your investing time horizon narrows and retirement gets closer.
When you start investing in your 20s, retirement seems a long ways away. By the time you reach your 40s, you’re halfway there, and likely starting to reassess your investment goals and your portfolio’s performance. Once you reach your 50s, retirement is at the back of your mind in every financial transaction you make. And by your 60s, you’re looking to keep all the gains you’ve made over the past decades so that you can retire in comfort and so that your retirement savings will continue working for you into the future.
In the current market, it seems like most common investment choices aren’t safe havens for those nearing retirement. We’re entering a new world with significant uncertainty about the future. No one really knows what the investment climate will look like a year from now, let alone 5-10 years down the road, and that uncertainty is weighing on many an investor. Here’s what you need to know about the future.
One of the few things that is certain is that Social Security is in terrible financial shape. The best case scenario for Social Security has the trust fund running out of money in 2035, with retirees only netting 76% of expected benefits after that time. But with unemployment rising and payroll taxes decreasing, the financial situation of the Social Security system is deteriorating significantly this year, which will harm the system well into the future. Those expecting to rely on Social Security for a significant portion of their retirement income will find out the hard way that it may not be there for them when they need it.
Stock markets have had a rough year already, and they’re in for even more over the rest of the year. With at least a quarter of the US workforce out of work as a result of the economic lockdowns around the country, economic productivity is poised to take a nosedive. First quarter GDP decreased nearly 5% and could be revised even further downward in the future. Expectations for the second quarter are for a GDP fall of up to 40%, which would be catastrophic.
Given those discouraging figures, it’s inevitable that stock markets will fall even further from their current levels. By the time all is said and done, stock markets will likely end up falling at least 50% from their all-time highs, if not more. In fact, 80% losses like we saw during the Great Depression can’t be completely ruled out.
Bonds are the primary alternative to stocks that most investors think of. And very often investors think that when stocks aren’t doing well, bonds will do better. But bond markets today have been thrown into disarray for a number of reasons.
For one thing, there is a massive corporate debt bubble that has been growing since 2008. Total corporate debt has grown over 50% since then, with over $10 trillion in total corporate debt outstanding in the US. At the same time, the quality of debt issued has fallen over the past several decades, with the average corporate bond now being only one or two notches above junk status.
In fact, we’ve already seen numerous corporate debt rating downgrades, with some such as Kraft-Heinz, Macy’s, and Ford joining the ranks of the “fallen angels,” once-great corporations now relegated to junk. As the reality of the economic downturn sinks in, even more corporations will join them, making corporate debt an even riskier investment.
Government debt, a traditional safe haven, won’t be much better. With the US Treasury borrowing $3 trillion this quarter, markets are set for a huge flood of government debt. Whether all of that can be absorbed by markets is questionable. All we know for certain is that yields will be low, and prices about as high as is possible. And the outlook for the future is pessimistic, as the trend will be towards trillions and trillions more dollars of Treasury debt issuance. For short-term investment, Treasuries might still make sense for those looking to stash some money, but in the long term there are probably better options.
Many investors still like to hold cash. Certainly in an investment climate characterized by extreme uncertainty, holding cash for short periods of time in order to look for better investment options can be a wise decision. But over the long term cash isn’t an investment, it’s a guaranteed money loser. Because of inflation, holding cash means you’re losing several percent every year for each dollar you hold. Over the course of decades, holding too much cash could not only lose you thousands of dollars in decreased purchasing power, but also cause you to miss out on thousands of dollars of potential gains.
Gold and silver have long been the asset of choice for investors looking to protect their assets during times of financial crisis. When other assets are shedding value, gold and silver only add to theirs. During the aftermath of the 2008 financial crisis, gold and silver nearly tripled and quadrupled in value respectively. And with the US economy on the verge of a massive recession, gold and silver are once again set to make great gains.
Some prominent investors like to characterize precious metals as rocks that just sit there doing nothing. But that’s part of their appeal. They don’t evaporate into thin air like the value of stocks and bonds issued by companies that go bankrupt. Gold and silver maintain their value over the long term no matter what happens in the economy. And with a gold IRA, investing in precious metals is just as easy as investing in stocks and bonds.
Ultimately the decision of what to invest in is a personal one that is up to you to decide based upon your personal tolerance for risk. But those investment decisions shouldn’t be made blindly, they should be based on plenty of research, analysis, and assessment of both current and future economic conditions. When it comes to your retirement savings, you can’t afford to throw away decades of gains and risk your retirement by making uninformed decisions.