Daily Gains Letter

For Retirement Fund Growth, Think Like a Contrarian

By for Daily Gains Letter | Mar 13, 2013

130313_DL_whitefootWhen it comes to thinking about retirement planning, the “out-of-sight, out-of-mind” mantra seems to be a favorite amongst individual investors. How else can you explain the miniscule 14% of baby boomers who are “very confident” they will have enough money to live comfortably when they retire and the 23% who say they are “not at all” confident? (Source: “The 2012 Retirement Confidence Survey; Job Insecurity, Debt Weight on Retirement Confidence, Savings,” Employee Benefit Research Institute web site, March 2012, last accessed March 12, 2013.)

Granted, the Great Recession that began in 2008 has made retirement planning that much more difficult. Unemployment is high, gross domestic product (GDP) growth is abysmal, wages are flat, and household debt is stubbornly high at $12.8 trillion, while public debt sits at $17.0 trillion. Those who are already retired and those who are nearing retirement have a reasonable explanation for not being able to find enough disposable income to pad their retirement funds. (Source: “Household Sector: Liabilities: Household Credit Market Debt Outstanding,” Federal Reserve Bank of St. Louis web site, March 7, 2013.)

What I do find odd, however, is the reason as to why so many are plunking their hard-earned dollars into underperforming assets with terrible returns, like banks at 0.5% and bonds at a paltry 3.1%. Even jumbo five-year certificates of deposit (CDs) offer a pathetic return of about 1.5%. (Source: “National High Yield Rates for CDs,” Bankrate, Inc. web site, last accessed March 11, 2013.)

Banks, bonds, and CDs are not the retirement fund-fueling workhorses that investors need right now. To build a strong retirement fund, an investor needs to make their investments work that much harder.

That factor isn’t sinking in though. In 2012, $583 billion was withdrawn from U.S.-based equity mutual funds and $779 billion was funneled into bond funds—despite solid double-digit returns from the U.S. stock market.

dl_031313-image002Chart copyright Lombardi Publishing Corporation 2013;
Data source: The Globe and Mail, last accessed March 12, 2013.

Going against the herd isn’t the sort of investing advice you want to live by day in and day out. But in this economic environment, being a contrarian investor may be a wise decision.

In the indomitable words of Joseph P. Kennedy, Sr., “I knew it was time to sell when my shoeshine boy gave me a stock tip.”

With billions at a time flowing out of stocks and into bonds when interest rates are near zero, it’s time to re-evaluate your retirement fund strategy; it’s time to turn your gaze toward high-quality blue-chip stocks and exchange-traded funds (ETFs) that provide much greater yields.

There are a large number of quality stocks that have been providing consistent, high dividend yields and are a great alternative to bonds. AT&T Inc. (NYSE/T) provides an annual dividend yield of 4.9%; trading near $36.50, AT&T’s share price is up 10.3% year-to-date. Universal Insurance Holdings, Inc. (NYSE/UVE) provides an annual dividend of seven percent; trading near $4.60 per share, the company’s share price is up 4.5% year-to-date.

ETFs are also a great idea for broad-based investing for those who are not comfortable with their individual stock-picking prowess. iShares Dow Jones Intl Select Div Idx (NYSEArca/IDV) tracks the Dow Jones EPAC Select Dividend Index and provides a dividend of 4.7%. Direxion Daily Mid Cap Bull 3X Shares (NYSEArca/MIDU) measures the performance of the S&P MidCap 400 index and pays out a dividend of 16.8%. The index is 3X levered, meaning that if the S&P MidCap 400 moves upward by one percent, this ETF increases by three percent. If the S&P MidCap 400 goes down one percent, the Direxion Daily Mid Cap Bull 3X Shares goes down three percent.

Gone are the days of secure, reliable fixed income—of parking money in bonds with your eyes focused on retirement. Instead, investors need to consider getting back into equities and looking for stocks that outperform bonds.

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