By Richard Eisenberg, Next Avenue Editor
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In challenging times like these, the topic of investing wisely can seem somewhat unimportant. But while your physical and mental health are clearly paramount, you’ll also want to take good care of your finances.
That’s why two personal finance experts and I just released the new investing episode of our Friends Talk Money podcast, Managing Money in a New Covid-19 Economy (available wherever you get podcasts).
Our view: Figuring out how and where to invest is even harder than usual.
“Just know you are not alone if you think things are a bit confusing. They really are,” said co-host Terry Savage, a nationally syndicated personal finance columnist and author of The Savage Truth. Savage added: “I think we’re in more uncertain times than any I’ve seen since back in the early seventies.’”
“Dig in and learn more about how solid U.S. companies that pay out dividends can do wonders to boost your income.”
Co-host Pam Krueger, an investor advocate, co-host of PBS’ Moneytrack and founder of the financial adviser referral service, Wealthramp.com, said when she asked advisers what’s been working for their clients, “even those who seem to be in the best possible position feel vulnerable.”
With that discomfiting setup, here are a few highlights from the podcast; you can hear the entire episode below.
Stocks
After the longest bull market in history, stocks took a nosedive in early 2020 due to coronavirus fears; what some called a “warp speed bear market.” Lately, though, they’ve jerked back up. “All of us had a collective ‘Phew!’” said Krueger.
(Read all of Next Avenue’s Covid-19 coverage geared toward keeping older generations informed, safe and prepared.)
The Standard & Poor’s 500 (stocks of the 500 largest U.S. companies) has risen about 36% since its March low, though it’s down about 6% this year.
But, Krueger said, “At some time, you have to be concerned there will be another shoe that drops.” In a recent Allianz Life survey of 1,005 Americans, 54% said they’re worried the stock market hasn’t bottomed out yet.
That’s why Krueger now prefers conservative stocks that pay reliable dividends.
“Dig in and learn more about how solid U.S. companies that pay out dividends can do wonders to boost your income,” Krueger advised. “It’s not unrealistic to pull a 2 to 3 ½% return by investing in high-quality dividend paying stocks.”
And, Savage added, “Going back to 1926, there has never been a twenty-year period where people lost money in a diversified portfolio of stocks with dividends reinvested, even with all the market crashes, and even adjusted for inflation.”
One caveat: the recession will likely force some U.S. companies to reduce or even eliminate their dividends.
One advantage of dividend-paying stocks: their dividends essentially provide inflation protection. and inflation is something Savage is especially worried about right now, as are some hedge-fund managers.
Bonds, Bond Funds and Bank CDs
Bonds and bond mutual funds can help protect you against investment losses in the stock market.
As Charles Rotblut, vice president of the American Association of Indvidual Investors, said on a recent webinar I attended on investing mistakes to avoid for the next six- to 12 months: “Bonds play an important role as a cushion against stocks as well as providing a stream of income.”
But Savage’s inflation fears make her leery of long-term bonds, where you’d be locking in today’s low rates for 10 years or so, as well as five-year, fixed-rate bank CDs.
“I’ve been warning about bonds at Terrysavage.com for six months,” she said. “You can lose money when interest rates go up and bond prices fall if we have inflation.”
But short-term or intermediate-term bonds and bond funds — with lower yields than long-term bonds — reduce the risk of losses and inflation. Lately, short-term, taxable bond funds have been yielding around 0.6%; high-quality, taxable intermediate-term bond funds have been about 2.0% and high-quality, taxable long-term bond funds have been yielding about 3.0%.
“I say: ‘Stay at the shallow end of the pool, the shortest end, with bond funds,” said Krueger. “You don’t want to get too far out on the risk continuum.”
Since yields on municipal bond funds are tax-free, they’re lower than on comparable-term taxable funds. But the recession will likely put pressure on cities and states, making their municipal bonds riskier.
Interest rates on online bank CDs are typically higher than CDs from brick-and-mortar banks. But Depositaccounts.com says some big online banks lately have cut their CD rates to all-time lows — sometimes even lower than what they pay on savings accounts. For instance, Ally Bank’s 5-year High Yield CD, whose interest rate was 2.15% in early 2020, now pays just 1.35%.
Target Date Funds
Many employees have invested their 401(k) retirement plans in what are known as target date funds or lifecycle funds. With these funds, you choose the date you expect to retire and the fund manager invests accordingly, reducing the percentage of the portfolio in stocks and increasing the percentage in safer bonds as you age.
I wondered what Savage and Krueger thought of target date funds these days. Personally, I’m a fan of this investment strategy, though I think it’s important, before investing, to see exactly how much the fund manager tilts the portfolio towards stocks or bonds as its investors near that target age. Some managers have higher weightings in stocks at that point than you might expect.
Savage relayed the target date fund caution of Ron Surz, a noted pension consultant. “He has warned about target date funds for a long, long time,” Savage noted. “He has said for boomers investing in target date funds, a bear market at the beginning of their retirement could be dangerous. You may still have a great exposure to stocks.”
Krueger was keener on target date funds, but felt they had a limitation. “They’re completely based on your time horizon. So, they’re not taking into consideration real life. It’s a little too simplistic for me,” Krueger noted. “That said, most of them haven’t done too poorly since the market recovered to the extent it has.”
Financial Advisers
One thing all three co-hosts agreed on: the usefulness of having a sharp financial adviser to help you manage your investments. (As Next Avenue’s Kerry Hannon recently wrote in “Where to Get Good, Free Financial Advice Now,” some financial planners are now offering their services pro bono to people who’ve been upended by the pandemic.)
Krueger said she surveyed 100 advisers and asked how many of their clients will still be able to retire when they planned, despite the pandemic.
“And this really surprised me. Across the board, three out of four of their clients will retire as planned,” Krueger said. “And those who do need to adjust their retirement plans are only postponing their retirement date by one to two years. Maybe that’s a testament to having solid financial planning all those years leading up to 2020.”
A good adviser, Krueger, Savage and I agreed, can help ensure your investments are appropriately diversified. “Diversification wins all battles,” said Krueger. “Always has; always will.”
Added Savage: “The stock market will, at some time, come back. But the question is: ‘How do you personally get through it?’ That’s the challenge. And with a good bit of financial planning help, you will make it through.”