Jason Parker interviews Michael Ball of Weatherstone Capital Management about investing in retirement.
Below is the full transcript:
Announcer: Welcome back, America, to Sound Retirement Radio, where we bring you concepts, ideas, and strategies, designed to help you achieve clarity, confidence and freedom as you prepare for and transition through retirement. Now here is your host, Jason Parker.
Jason: Seattle, Tacoma, Olympia, Gig harbor, all the good people right here in Kitsap County, and for those of you listening over iTunes, listening as a podcast, listening online. However you happen to be catching Sound Retirement Radio, thank you so much for tuning in to this little program. We are coming up on five years now that it has been since I started Sound Retirement Radio. One of my favorite things about doing this program is the opportunity that I have to hear from our listeners out there from around the country. People will call in with questions, concerns and looking for advice on what they should do as they prepare for retirement.
That being said, I just want to throw this out there. One of the most important questions that people need to be figuring out and thinking about as they are preparing for retirement is the best claiming strategy for social security, when to start your benefits. I’ve leaned that if you don’t do this right, it could end up costing you in some instances as much as $100,000 of lifetime benefits between married couples for social security. Just by knowing how the rules work and knowing how to optimize those lifetime benefits. We set up a website specifically for this. We are going to be doing webinars and you can log in to one of our next webinars. You can visit socialsecurity-planner.com, if you are interested in learning more about how to maximize social security benefits.
Okay folks, we are going to get this week started. As always, I like to bring you something kind of fun and funny to get the weekend started out right, and I’ve got a little joke here for you. Why do cows wear bells? Because their horns don’t work. Of course. Goodness, I love these jokes. It cracks me up. As I’m seated here telling these jokes, I’m thinking about how much my kids are going to like it when I share that one with them over the dinner table tonight. I hope you enjoy them as much as I do. When I told my good friend and associate, Dean, my joke for today, he rolled his eyes and he said, “Jason. I bet people just can’t wait to hear that one.”
Folks, we got an important show that we are going to be doing. Today we are going to be talking about the stock market, and how you may want to consider investing your money once you are in this critical zone of thinking about retirement, or transitioning into retirement. I’ve got a wonderful guest that we are going to bring on the program today. I’m going to go ahead and give you a quick bio who he his and his story, then we’ll bring him right on. Michael Ball is the Lead Portfolio Manager at Weatherstone. He is a certified financial planner. He’s a lead portfolio manager, and he has over 18 years of experience working with people to manage their investment portfolios and help them achieve their financial goals.
After graduating from Utah State University with a BA in Corporate Finance and a minor in Accounting, he continued his education by becoming a certified financial planner. Michael is a nationally recognized money manager that is tracked by “Money Manager Review.” He has been quoted in publications such as the “Investment News.” He’s the author of “Built To Last,” a comprehensive historical study of sustainable withdrawal rates from investment accounts that was published in Financial Planing Magazine in 1998. In addition to working with individual investors and small businesses, Michael provides money management services to financial advisers across the country. Michael Ball, welcome back to another round of Sound Retirement Radio.
Michael: Thank you very much Jason.
Jason: It’s good to have you back Michael, especially right now, we are kicking off a new year, we just came off a super strong year at the stock market. We saw some incredible returns. The world sure seems like is changing in a hurry, and a lot of our listeners want to hear what your take is on this. The very first question I have for you, in your opinion, is this a good time to be getting into the stock market?
Michael: I don’t know if this would be a time to be any big hurry to necessarily get into the stock market. The market goes through its cycle, some longer, some shorter in terms of … Kind of swinging from fair to [greed 00:04:31], and with the fact that Washington didn’t derail things for the economy here in the U.S. Last year was a pretty good positive. We saw Europe coming out of a recession. That just started to give investors more reason to get a little bit more positive on the economic outlooks, and so starts as a strong year because of that, but it may be gone up an awful lot. That optimism has built up, but we still got some underlying problems in the economy that would make me think that this isn’t necessarily a move straight up. Just a couple of things that we look at in terms of a modern historical context.
One thing that we track is looking at how long the stock market has gone without a decline of 20% or more. Going back into the ‘1920s, we are now at about the fifth longest time that we have gone without a 20% decline. We looked out and said, “What’s our probability of going out a century, another nine, or ten months from this point.” You’ve only had two of those stock market advances that we are able to continue after that much longer. Those advances were the first one. Late ‘1940s, it started shortly after World War II. Second one, mid ‘1990s, both of which were in a much stronger economic environment than what we have now …
Jason: Wow. That’s incredible. That’s a really interesting statistic, to look back [in a 00:06:25] historical context there.
Michael: I think it’s useful. This was something that we had looked at as we were getting into 2007. Likewise, that was one of those that became the top five. When you’d see an advance that’s gone that long, one of the things that starts to worry us when we see that, is that when investors start to see this continual gain, the complacency starts to build up. That everything keeps moving along and things are good, [after then 00:07:00] probably they start to build up [under 00:07:02] the surface are pretty easily ignored, and then when they do come to the surface, the decline can be steeper than average and sometimes pretty violent.
We certainly saw that being the case as we got into 2008, because we had some of the first warning signs or cracks in the foundation from the financial crisis in late 2006, early 2007, when we started to see some of the subprime lenders taking out bankruptcy. Then, some of the hedge funds and investment banks [trading 00:07:35] into problems. They [nearly 00:07:37] really started to still [bull 00:07:38] after that. Longevity alone doesn’t necessarily kill off a bull market, but it does become a warning sign that we do need to very careful about being complacent.
Jason: That’s what I was going to say. We’ve got longevity as one key component here. I was just reading recently that the December jobs number looked kind of dismal compared to what economists had been looking for. We’ve got some fundamental economic issues that haven’t been fully addressed. The Federal Reserve seems to think that the economy is improving somewhat, because they’ve decided to taper their bond purchases by about $10 billion per month. What are your thoughts on that action by the Fed Michael? This willingness to start maybe slowing some of the easing that we’ve been fortunate to receive for the last several years.
Michael: Sure. Jason, I think that this is one of the key things that we need to see happen. It’s really more from a standpoint of, we’ve been injecting this extra stimulus into the economy. That has been able to benefit the stock market and other financial assets, but if it does benefit the broader economy, it leaves us still in a very [vulnerable 00:08:59] position, because the Federal Reserve, number one pretty much exhausted their [inaudible 00:09:07]for if we go into a recession, which is we will cut interest rates to stimulate the economy.
When you get down to virtually zero, there is not much room there. Then we go into things like the quantitative easing and more experimental monetary policy to try to get further stimulation to the economy. We are very vulnerable from then standpoint that if we go back into a new recession, we really don’t have many options to stimulate the economy in a very effective way. For the long-run benefit of the economy, the Federal Reserve really does want to be able to start to eliminate the quantitative easing, and then secondarily bring interest rates up in a steady manner to [more 00:10:04] and normal levels, so that they once again restore the types of tools that they are going to have available.
Jason: That’s interesting. Kind of monetary policy and some of these other economic factors. I just wanted to ask your personal opinion and kind of what your experience has been with the real estate market in your community, because out here I’m noticing that it sure seems like we are seeing house prices that are right back in line with where they were in 2008. I know from looking at the Census Bureau numbers here in the county that I live in, that there is just really not that many people that can truly afford to go out and buy a $758,000 house. What do you see happening with real estate, and how do you think that’s going to affect the economy as interest rates do start to rise?
Michael: Sure. Speaking on a more local level for Denver, Colorado, we are seeing in this area real estate prices getting that closer to what we saw before the peak. Inventories have certainly dropped down, and houses move much quicker than what they had. In this city, things are okay. For our friends that have places up in the mountains might go up there, [their 00:11:25] [bear 00:11:26] markets still tends to be pretty slow, but as it relates to the economy and to investors, this is an important area from this impact … From this standpoint of when you look at the economic directed across as we are trying to come out of the [recent 00:11:48] recession, it was quite significant.
That has turned from real estate being a negative on the economy to at this point being a modest positive. One of those things that caused the Federal Reserve to initially postpone their tapering decision when they talked about it back in May of 2013, was that shortly after we saw interest rates [backing 00:12:17] up on longer term government bonds which the Federal Reserve have a good ability to control those rates. That was impacting the mortgage rates that people were paying. As a by product, it was starting to quickly cool down the housing market. The Federal Reserve kind of backtracked some, and didn’t initiate the tapering until later on, and did that possibly because they were concerned that it might derail the real estate recovery that they seeing on a more nationwide basis.
They talked about being concerned about tightening with interest rates and a lot of things, but really the only interests rates that were tightening or causing problems was with [digital 00:13:03] home buyers. They are very sensitive to that, and I think it’s an interesting step in this process of going back to a more normal interest rate level, because the Federal Reserve will be closely watching the impact that an increase in long-term interest rate has on the economy. As we have been seeing here over the past about nine or ten months, to see how well the economy can handle that before they start moving up short term interest rates. It’s going to be essentially almost a three-step process heading back and eliminating the quantitative easing seen, and normalizing longer term interest rates relative to inflation, and then moving up short-term interest rates.
Jason: Michael, we need to take a quick break and we’ll be right back. All right folks. Welcome back to another round of Sound Retirement Radio. I’m your host Jason Parker. As always, I sure appreciate your being on the program. As I say, at our firm, we want to bring experts onto this program who we believe can add clarity, confidence, and freedom to your financial life as you are preparing for your retirement and transitioning through retirement. I have Michael Ball on the program. Michael is the Lead Portfolio Manager, certified financial planner with Weatherstone out of Denver, Colorado.
Michael, we are talking about some of the things that we should be looking at in the economy. I just think it’s kind of a no-brainer. If interest rates go up significantly, and there is debt to income ratios that the banks have to follow in terms of how much home somebody can buy and be able to afford the payment. As interest rates rise, people are going to be able to afford less home. It seems to me if you are one of these people sitting on one of these people great big … A house that you believe is worth a lot of money, that selling that house in a lower interest rate environment would seem to me more an easier thing to do than waiting for interest rates to go up, and then try to sell your house. Won’t you agree with that?
Michael: Obviously as interest rates go up, the affordability on houses is going to get pushed down. For people who have large homes that could become a particular challenge as you go down the road, there is some interesting historical studies that go back and look at housing from the ’70s through the ’80s about affordability, and what people could buy. Essentially as interest rates came down and people could afford to buy more houses, then that helped to really jump-start price appreciation in housing. If we go into a longer term period of rising interest rates, you are just going to have a big headwind for trying to keep up with historical appreciation rates in [homes 00:16:13], because if mortgage rates are going from 4% to 4.5, to 6, to 7. People just won’t be able to afford as much house anymore and it will certainly a damper on appreciation for housing.
Jason: It sure seems like people’s incomes just haven’t been keeping pace with the rising cost. That’s the bottom line there. I want to switch gears so I can get us back into the stock market. What are some of the biggest risks that people need to be considering as we head into 2014?
Michael: Couple of things. If we step back and we look at markets globally, we talked, one about how long the stock market has gone up in the Unites States without a significant direction. That’s one thing that would make me be a little bit more cautious. Secondly, most investors tend to favor stocks in the U.S. Everybody is more comfortable with them, and frankly you tend to have less fluctuation when you invest internationally. However, valuation is important. If you look at long-term earnings and you take an adjust [pose 00:17:32] based on inflation and other things across countries, you can take approximately 40 different countries and look at kind of who is cheap and who is expensive.
The Unites States is the second most expensive stock market in the world … Not on that basis right now. We were only beaten out by Sri Lanka. I didn’t even know if they have that much of a stock market there, but in terms of what that means, if we go back a year ago and we look at the ten most expensive stock markets at the end of 2012, those five of the top ten returned roughly a -18% last year. The top ten returned essentially a -5%. Only two of those ten most expensive markets were higher. One was up [almost 00:18:33] like 3 or 4%, the Unites States was up over 30.
The United States was certainly kind of the [outline 00:18:38] of the group. When we look at the ten cheapest markets, they were up on average a little over 20%. Five cheapest were also right and about that 20% range. Gravity kind of catches up with expensive stock markets. If you are looking to buy things that have good value, you really do need to look outside the U.S. Even though that tends to be somewhat uncomfortable because there is a little bit more fluctuation there, in terms of where you are able to forget probably long-term returns, not necessarily short-term returns, I think people should look outside of the U.S. That’s one of the important thing I would take a look at.
Jason: One of the things that I want to bring up, because Sound Retirement Radio is all about serving people who are getting ready to retire and people who are already retired. These are people in many instances, they don’t have a lot of time on their side to continue to replenish their portfolio, because once they are done working, they don’t have time on their side. In many instances today what I find is that people are going to need to depend on those retirement savings to supplement their income.
If you are just getting ready to retire, may be you are already retired, and you are looking at the fact that the stock market in the United States is looking pretty expensive. It has been a long time since a market correction. They are trying to preserve what they have. What are the solutions, thinking about I hear you saying you have some exposure to more of the emerging markets where there is going to be more opportunity, but a lot of volatility there too. You’ve got a bond market now where ten-year treasuries are paying less than 3% per year. You have less than 3% to get into a ten-year treasury. What should those retirees, that demographic specifically be doing in order to position themselves correctly as head into this?
Michael: Okay. There is a number of different strategies obviously, Jason. I know these were the people you work with about different options that they have. We will come down to some different circumstances that each person encounters. In general, a few things to look at is, when you are looking at your allocation between stocks and bonds, it probably is a good time if you are pretty heavily invested in stocks to increase your allocation to bonds with the few points. That’s where you are going to be taking your income from over the next few years, because you don’t want to have to pull money out of stocks on a down year if you can avoid it all.
Jason: Let me stop you right there just for a quick second. It’s just to challenge out a little bit, because the other risk that we have is this rising interest rate environment. If we go on and we stick a bunch of money in bonds right now and interest rates start to go up, it seems like that’s a potential for some significant portfolio losses if you had to sell these bonds early.
Michael: Quite correct. I would mention that you need to be careful about the types of bonds you pick, because if you are going to be taking money from your bonds in the next few years, obviously you don’t want to take it from long-term treasuries. You need to realize, if I’m going to be spending one to two years, you need to have things that are going to be more short-term in nature. If you don’t mind, let’s a little bit as we talk about bonds, because I think this is something that surprised a lot of investors last year in terms of … Last year for the broad market was the worst year for bonds that we’ve seen in 19 years. Let’s go back to 1994. Most investors have seen bonds be a consistent positive performer, but when you look at the spectrum of bonds, if you were in long-term treasury bonds you actually end up losing more than you were down about 12 to 14% in many cases. Intermediate term treasuries that were down about 6% more than aggregate bonds and that’s just kind of a mixture of corporate bonds and government bonds down about two. It takes on where you are adding corporate bonds some of them, that were more economically like your high yield corporate bonds. They were in many cases up 4% to 6%, so funds were up one to three. Depending upon what category you were in in bonds last year, was a more than 15% performance difference. In a rising interest rate environment, it does get very important to look at where your bonds are going to be. For example, corporate bonds were able top do better last year because even though interest rates were moving up because people were concerned with the government buying less bonds that you were going to see treasury bonds move back to more normal yield levels relative to inflation. The fact that the economy was still pretty strong, weren’t that uncomfortable owning corporate bonds because the interest rates were still pretty attractive relative to treasuries. The economy was still maintaining some momentum and so had to worry about large scale corporate bankruptcies and things of that nature. It just becomes that more peaky environment as far as where you need to be with your bonds, and so I don’t disagree with your assumption that you need to watch the bond because if you are not careful then you can be in as bad of a position with bonds as you are at stocks.
Jason: I guess that’s a concern that we have. We see this happening where people are moving a lot of their money into bonds because they are worried about they volatility of the stock market and they have no idea what the duration is on those bonds. A lot of times, Michael, what we find is people don’t own individual bonds, What they own are bond mutual funds and bond etfs, which in my opinion exposes people to an even greater interest rate risk because you don’t have an instrument that you can hold to maturity unless you have some of these special shares that they have come up with now that are designed to have a maturity date, but I’m looking here, unfortunately it looks like we need to take another quick commercial break but we will be right back to ask you some more questions.
Michael: All right. Thanks.
Jason: Alrighty folks. Welcome back to another round of Sound Retirement Radio. I’m your host, Jason Parker. As always, I appreciate you tuning in to this program. If you missed the first part of the program, remember I’ve set up the website, Social Security-planner. com. We’re going to be hosting webinars on how to maximize your Social Security benefits. If you are in a position right now where you’re thinking about starting Social Security, this is especially important for married couples. You want to understand how to get the very most back out of the Social Security Administration. Visit the website, and join us for one of our next webinars. We’ll teach you some of the strategies, concepts, and ideas that have helped a lot of the people that we’ve met with over the years.
I’ve got Michael Ball on the program with us. Michael is the Lead Portfolio Manager and a certified financial planner with Weatherstone Capital Management at Denver, Colorado. He has over 18 years of experience. He was sharing with us some really interesting historical studies regarding this bull market that we’ve been, and how long it’s lasted, and the sustainability of that going forward, some economic things that we should be looking out at in the new year, the question of how much do you have in bonds versus how much do you have in stocks, and what do you do to manage some of that volatility in a potential rising interest rate environment.
Michael Ball, the next question I have for you is regarding some of the declines that we saw in 2000 through 2002, and then again in 2008, especially 2008. I remember meeting with people that year that lost 30, 40, or 50% of their money. Again, focusing on the folks that are retired, the people that just don’t want to be in a position where they can experience that kind of volatility, as you look out into the future … I know your crystal ball probably doesn’t work much better than everybody else’s, but should we be thinking that there is another 30, 40, 50% decline on the horizon? What do you think about that?
Michael: I’m sure that from a couple of perspectives there, when you look at the fact that we’ve had one of the stronger stock market advances since 2008 that we’ve seen coming out of a bear market on the back of one of the weakest economic expansions is really quite an anomaly. Pimco, the largest bond manager in the world made some interesting comments on [note 00:28:04] … They’ll talk about some of the long-term outlooks, but they really said, “Hey look, we see some real risk from the standpoint of, the very low interest rates have distorted the values of most financial assets out there. They’re higher right now than what we would see based upon the underlying economic fundamentals.”
People are paying up for a lot of these assets based upon the fact that they believe that the low interest rates will stimulate the economy, and that will bring the economic fundamentals up to where the market prices are at. The risk is that if the economy stumbles, then the prices of assets will drop down to where [the 00:28:45] fundamentals would value them. That is a risk. Second one that I thought was interesting was [that 00:28:53] almost a year ago, Jack Bogle from Vanguard was being interviewed by CNBC. On there, they asked him about long-term … Are stocks still a positive place to be? He said, “Yes, it is, but investors still need to be prepared two 50% declines over the next ten years.
When you’ve got one of the biggest proponents of buy and hold investing saying stocks are good, but in his opinion, there’s two of those big declines still likely to be out there, I think that is a prudent thing to do, is to be prepared and look at that possibility and say, “How do we manage through that, if something like that were to occur again?
Jason: What are some of your thoughts? How do we manage through something like that?
Michael: [Where 00:29:53] you help people as they are getting close to and into retirement, some of the things that come up … Obviously the way people manage their investments as they move into that stage of their life tends to be different than when they are in their 30s and 40s and they still have a long time, [recovery 00:30:13] time, because back at that point, they could just light it out.
Jason: I couldn’t agree more with that. A lot of times, Michael, when people are retired, they retire from their job, but they don’t change their portfolio. They’re still investing like they’re 40 years old.
Michael: That can be a significant danger, especially if you start taking [intermass 00:30:32] of that portfolio, just because if you have a decline and you essentially accelerate it by pulling it out when markets are dropping. You can put a portfolio into a downward spiral that you can never recover from. You absolutely need to have a different strategy when [you’re certain 00:30:57] of the liquidation phase or the withdrawal phase, so to speak, on your investment portfolio.
Things that you can do … I think looking at and segmenting out what money is kind of short intermediate versus longer term, and say, “I can still keep some money in the market,” but it’s not realistic to put money you’re going to be spending in one to three years at above average risk.
Jason: Yeah, that’s a great point that you just made, something that I’m a big fun of. This idea of diversifying your time horizon, and then using the appropriate tools based on how much time you have, creating different segments, different piles of money that have different jobs to do. It’s more complicated to set that up that way, but it sure provides people with a lot of peace of mind when you start going through very volatile markets. I think that’s great.
Michael: Yeah, I agree, in terms of experience and watching people’s reactions to market fluctuations. For some people, they shift into that retirement mode, and then they look at their portfolio like, “I can’t take any risk,” and then they almost go too far the other way and don’t take on any risk. Then they don’t get the growth that they need to sustain their lifestyle. As you’re looking at what you can do, some people need to adjust the strategy.
Some people, they look at the portfolio, and they say, “[inaudible 00:32:28], I can’t take that risk, and so I’m just going to walk away and I’ll not invest in stocks,” which eliminates historically good [inaudible 00:32:48] [fast at class 00:32:49] over time. The other thing that you can do, and [then where 00:34:54] we tend to specialize in is you change how you manage the risk, because for example when we look at debt markets, we look at them from the standpoint that not all market risk is worth taking.
Like we talked about earlier about some of the market profiles for how long markets had gone up, valuation, and other things, we look at some of those factor to say based upon what the [bad clown 00:33:20] environment and other things are, how much risk should you take on? We’ll adjust the level of risk that we take on over time simply requires more work and effort to do that than just putting it in there and letting the market do its thing. It’s a more active approach to managing the risk on a shorter term time frame rather than saying, “Look, I know market’s going to have ups and downs, so I just need to give it ten years to work itself out. That can work for people as well.
Jason: On that note, one the [hair binds 00:33:53] that seems to come up every year after a really strong bull market is they say, “Dump your active money manager and just go buy an index fund and you would have done better.” Why may that not be the best advice for somebody that’s retired, Michael? Obviously, indexing has its merits and there’s a lot of academic studies that point to it over a long period of time. For somebody that’s retired that doesn’t have that time on their side, why would they want to employ more of an active approach to portfolio management?
Michael: In terms of helping to manage the goal, if investor’s goal is simply to match the return of the stock market, then an index can be an appropriate way to go about that. We frankly will often use index funds in constructing our portfolios, because we want to track certain markets, but in terms of the active type of portfolio management which we do and which some others do, we’re looking at getting good risk adjusted rate to return.
We want to get and we want to squeeze out good return while taking on a prudent amount of risk. There are sometimes when going into the market and taking on a stock market risk has been well rewarded, and there’s other times when it has not been rewarded at all. You’ve suffered big losses for being willing to take on market risk. If we can look back historically and see over various market cycles, over different years, decades, et cetera, things that [is it 00:35:35] important in terms of helping to identify periods of higher or lower risk and where there’s risk in our opportunities.
We use that to build a portfolio, then we find that to be useful, because if the goal is to get a higher rate of return than I can get in [selling 00:35:58] a bank, but I can’t live with the volatility of the stock market, then certainly that’s an area that you can do better by utilizing active management typically.
Jason: That is such an incredibly important point that I just want to highlight for our listeners out there, because I meet with a lot of people that are planning for retirement, and every time I meet with them, I ask them, “What’s the purpose of this money? What do you want it to accomplish for you? Why do have it in the first place?” I have to tell you, in all of the years that I have been doing this, Michael, I have never once had somebody come into my office and say, “Jason, I am trying to beat the S&P 500. That’s the reason that I have this money. I’m trying to keep pace with an index.” They never say that.
What most people tell me is they say, “Jason, I want to earn a fair rate of return on my money. I don’t want to be in a position where I get wiped out if there is another huge market correction. I’d like to earn a couple of points above inflation and just keep the money working for me.” That’s what people say, so when I hear these guys out there saying, “Your money manager didn’t beat the index,” my argument always is, “Look, if you hired a money manager and told him that your expectation was to beat the index, that’s one thing, but if you hired somebody and you said, ‘My goal is 5, 6, or 7%,’ and if that guy is getting you 5, 6, or 7%, then stop worrying about what the index is doing, because if your financial life is going to be good at 5, 6, or 7% …” It gets back to this fear and greed comment that you brought up a little bit ago.
People get so wrapped up in more, and more, and more, give me more in the good times, and then when the bad times set, all of a sudden, they’re not quite the risk takers they thought they were. I just think that’s a really important point that you made there, Michael, is that people need to understand what their goal is, what it is that they are trying to accomplish, and structure their portfolio in a way that helps them achieve that goal. Michael, with that, I know I kind of got off soapbox, but that really gets me going. We’re going to take another quick break, and we’ll be right back.
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Jason: Alrighty folks. Welcome back to another round of Sound Retirement Radio. I’m your host, Jason Parker. I sure appreciate you tuning in. I’ve got Michael Ball on the program today with us talking about some of the things you should be thinking about as you’re preparing for a retirement transition and into retirement, looking out into the economy and the stock market, and just trying to help you paint a picture for some of the things you should be thinking about as you’re constructing your portfolio in such a way that’s going to be sustainable for you for a very long period of time.
Michael, one of the concerns, of course, is inflation. I wanted to bring this topic up, because we have seen so much quantitative [ease in 00:39:37] … So much money printing where there’s more of it today than there was yesterday. What should we be, as we look out into the economy from an inflation standpoint, what should we be planning for with inflation?
Michael: That’s a tough question to really get a good feel for it, quite frankly. When you look at the amount of monies being printed, that certainly in an [evite self 00:40:05] can be a cause for concern where frankly if that money has gone into banks [inaudible 00:40:13] but hasn’t gone into the economy very quickly, it really hasn’t been inflationary so far. I know some people believe that because the money has been printed, therefore, it’s automatically inflationary. It’s not always inflationary.
We’ve seen other times and other places, say in Japan for instance, where they’ve done some similar things, and we didn’t have much of a pickup. We need to watch to start to see how much inflation we do get as the economy gets stronger. Frankly, if it does start to get much above the 2 to 3% range that we’ve normally seen, start getting up say around 4%, then I would start to get pretty concerned that you could go back into something that did look [potentially 00:41:03] more like the 1970s where you saw a more extended rise in interest rates, because of inflation picking up. Right now, the jury is still out a little bit.
I think that just prudently speaking, when we look at over roughly 100 years worth of history for bonds, you see there’s long term cycles where our interest rates tend to either be trending up or trending down. We had from [premises 00:41:34] of early to mid 1950s up until about 1980, a time period where our interest rates over time generally rose. Since 1980 up until about a year ago, they’ve generally fallen, and there’s not a whole lot of room left for interest rates to go lower.
There are certainly some arguments that are being made out there that it’s in the government’s best interest to tolerate higher levels of inflation to help pay off some of the debts and things that have been accumulated. It’s probably more likely that you’re going to see higher interest rates five and ten years from now than what you have today. To adjust to that type of a bond environment, utilizing things that can adjust for inflation such as adjustable rate bond funds or things that could be tied to prime rates or even the inflation rate could be quite important in that type of an environment.
Once again, let’s just go back to this past year. One thing that people have bought in anticipation of problems with inflation [has been this 00:42:48] what they call “Treasury Inflation-Protected Securities.” They actually became one of the worst performing bond asset classes, had the worst [evolution state 00:42:58] come out in the mid 1990s and lost about 8% on average. That was because interest rates went up without accompanying inflation, and so people who had bought that with that expectation said, “Whoa, this is not working.” They expect that they moved out of there.
You need to have inflation moving higher for that type of an asset class to work if it’s something that is tied to say primary, then you need to have short-term interest rates moving up, or you just need to invest more in shorter term bonds instead of longer term bonds, where you’ll have greater risk.
Jason: I know a lot of our listeners that are out there are going to want more information on the work that you’re doing and be able to plug in to some of these ideas that you’re sharing. What are going to be some of the best ways for people to get in touch with, or learn more about your company and the work that you do, Michael?
Michael: Obviously you know about it. Still they can contact you and you can provide them with some information. If they wanted some information, they can also visit our website. We put a monthly commentary and things that cover some of these types of topics, and they can sign op for that there as well.
Jason: Okay. We’ll put up a link to your website at Sound retirement Radio in the show notes, but what is the website for those listeners out there?
Michael: Sure. It is weatherstonecm.com.
Jason: Weatherstonecm.com. All right, we’ll put that in the show notes for our listeners that are interested. When we talk about inflation, I’ve read some reports that say historically real assets and commodities have been a good place to have money allocated towards in inflationary times. We obviously … This is a pretty bad year for Gold. What are your thoughts about Gold? Is this a good place to be putting money right now?
Michael: I would not be that buyer of gold at this point. Gold actually did run to its year since 1981 this past year. Gold completely good premium because of what all the paper printing and because of the financials crisis. As we’ve seen that start to reside in the background, we’ve seen gold prices suffer as a result. I think intelligence start to build up either inflationary pressures or go back to a more significant crisis that financial stability … You are going to see the premium for Gold tend to decline.
If you are in inflationary environment then suddenly things like gold and hard assets, fuel, oil, natural resources, timber and things like that in real estate in some instances can work all right as a diversifier, but if you don’t have it happening yet, unless you have an expectation that that’s really going to start flare up pretty quickly the next year or two, there is not a real compelling reason to be heavily invested in those areas.
Jason: Okay. I’m going to throw you a little bit of a curve ball here. One oft things we’ve seeing and hearing a lot about, in this ultra low interest environment, people are looking for yield. We’ve been seeing a lot of people exploring this public non-traded reeds. You have any comments or thoughts on those vehicles?
Michael: In some of the work that was done by the Yale University in which has been one of the most successful university in over the past probably 30 or years or even longer. They look at asset classes such as that and they tended to find that you had what they tended to call illiquidity premium. By so going into some of those asset classes and being willing to officially lock the money which most of them are in a non-traded and not being able to get your money help for several years, that they could provide a pre-attractive return relative to other assets. There is a pretty big range of that they can invest in and different ways they go about it. Something pretty good to others, not so good … I think it’s an area of interest. There is really some opportunities there, but I think you need to chose which ones you would use careful and it’s not you can just jump in to anyone and come out and be fine.
Jason: My personal experience, when I look in all of the different investments and places people can put money, I’ve heard more stories about people really getting burned and some of those things from that investment class in particular than any other investment. That has just been my personal experience seeing some people really get hurt there. I would caution our listeners. I know it’s very attractive. You hear that you can get 6, 7, or 8% yield and you are getting half or 1% in your bank cd, but just really make sure you do your due diligence and understand your risks there if you are considering those financial vehicles. One last question before we close up the show, do you think we are heading towards another recession in the United States?
Michael: At this point, no. We know it’s probably not in the near term that this and things tend to slow down the economic growth, some here or china has been slow and when you look at things in a more global basis, we actually saw a bit of a global contraction that had started back in 2011 and lasted until April of last year. If you look out on a global basis, things that have out of that point have slowly been taking up some momentum, obviously not really strong but at that tends to be going in the right direction. While it will be nice to see us get back to 4, or 5% economic doesn’t look like we are going to get there, but if we can keep going and keep some additional momentum, that will be good, but in the near term, the recession is below average which is good, because I would like to see the Federal Reserve be able to get back to a more and normal stance as far as having their full complement of tools to help us if and when can go another recession.
Jason: All right. Folks, we’ve had Michael Ball on the program with us. He’s the lead portfolio manager, certified financial planner with Weatherstone capital management. Michael, thank you for taking time out of your busy schedule to be a guest on the program again.
Michael: Jason, you are most welcome.
Jason: All right. Have a good one.
Michael: All right. Thank you.
Jason: Bye bye.
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