Here’s all you have to know about men and women: women are crazy, men are stupid. And the main reason women are crazy is that men are stupid.”― George Carlin
This instablog post is sponsored by Tim Plaehn, expert on income investing and a friend & colleague of mine at Investors Alley as well as a contributor here on Seeking Alpha. Tim runs the Dividend Hunter newsletter which offers a solid & diverse selection of attractive high yield plays. The service now nearly 10,000 active subscribers and can be had HERE for the rock bottom price of $49 (It usually is $99) for the first year. Tim provides a solid selection of lower beta, high yield recommendations for these challenging times.
Where to look if you’ve lost your mind?”― Bernard Malamud, The Fixer
By Tim Plaehn,
It doesn’t take much time on Google before you find headlines like these:
If you are at that time in life when planning for retirement is prominent on your agenda, losing 20% of your retirement savings throws a big wrench into those plans. Much of the problem stems from the investment recommendations provided to employees concerning their 401(K) accounts.
Most 401K accounts are invested into broad market stock and bond funds, or into “lifecycle” funds that balance stocks and bonds with allocations based on your expected retirement age.
But here are some of the problems with the widely recommended advice – and how you can fix them…
First of all, most mutual funds or ETFs in 401-K plans are passively managed funds that track specific stock market indexes. Index funds have a couple of flaws, the big one being that the indexes are market cap-weighted, which means your 401-K is greatly overweighted in the current crop of very large tech companies like Amazon, Apple, Microsoft, Google, and Facebook.
The market cap weighting of stock indexes keep your exposure small to what may be the next hot sector. For example, energy is up over 40% this year, but energy stocks make up just 3% of the S&P 500. If you own an S&P 500 index fund, you received a minimal benefit from the great returns posted by energy stocks.
Second of all, index-tracking funds will own all the companies in the index. The result is that you own shares of good companies alongside shares of bad companies. The result is very average returns, which turn into poor returns when the market goes into a correction.
The usual 401K allocation includes bond investments. The traditional portfolio was set at 60% stocks and 40% bonds. The lifecycle funds change the bond allocation based on age and forecast retirement age. Bonds are supposed to provide stable interest income to balance the volatility of stock prices. Unfortunately, for the last 15 years, bond yields have been very, very low. As a result, retirement accounts became overweight in stocks or subject to significant capital losses on the bond holdings as interest rates rose.
These are the factors that have decimated 401-K account values so far this year. The stock prices of the large tech stocks have plunged, taking down the major stock indexes and tracking index funds. Interest rates are rising, causing bond prices to also tank.
I take a different, more individually managed approach to long-term investing. You can sustain and grow your retirement savings without taking on the risks outlined above, as has become so graphically apparent over the last couple of months.Stay away from low-yield-but-volatile bond funds for your fixed income allocation. Currently, I like the 7% yield, plus the relative safety of preferred shares instead. Take a look at the Virtus InfraCap U.S. Preferred Stock ETF (PFFA). This ETF pays stable monthly dividends and yields almost 9%.
For stocks, I stick to profitable companies that share those profits as dividends to investors. I don’t mean stocks with a measly 2% yield. I focus my research on finding stocks with above-average yields and strong dividend growth. One of my current favorites is mall owner Simon Property Group (SPG). SPG share yield 7%, and the dividend has grown by 21% over the last year.
America’s always been a great place to be crazy. It just used to be harder to make a living that way.”― Charles P. Pierce, Idiot America: How Stupidity Became a Virtue in the Land of the Free
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Thank You & Happy Hunting,