Daily Gains Letter

A Retirement Portfolio, for Now and Then

By for Daily Gains Letter |

DL_Mitchell_3You know, there’s a reason why the Federal Reserve is doing everything it can to pump billions into the U.S. economy by increasing the money supply and keeping interest rates artificially low. It’s because the party’s over; there is no more real economic growth. Too much debt and too much spending have crippled the ability of fiscal policy to positively affect the economy. It’s happened to budgets at the individual, municipal, and national levels for many countries, including the U.S.

In a way, all that’s left to tweak is monetary policy, and all the Federal Reserve knows how to do is print money. In my mind, real economic growth comes from innovation and hard work, not inflation. It’s a perilous time when you consider the consequences of all this sovereign debt and the potential for inflation in commodities. All of it results in the inability to create real economic growth, and that’s what you have to plan for with your retirement savings.

It used to be that once you got to retirement, your savings and your portfolio (if you had one) would be set up in a very conservative fashion, with income and preservation of capital being top goals. Frankly, because we are now in the age of austerity and economic growth is minimal, even new investors should be taking this route with their retirement savings—a highly conservative investment strategy with room for just a little bit of speculation.

The reason for this is because the prospect for real economic growth (that is economic growth above the rate of inflation) is minimal, probably for the rest of this decade and beyond. There is the prospect for severe price inflation with all the money that’s being printed, and this is on top of regular inflationary factors, like weather and supply, affecting commodities. The consequences for individuals are less disposable income and less money for retirement.

So, it’s my view that a highly conservative investment stance is warranted, even for young people now saving for retirement. Of course, you can adjust your portfolio strategy to reflect changes or themes in the economy, but with the expectation of slow economic growth for the foreseeable future, income is becoming a more important part of total investment returns.

If you are saving for retirement, there’s no need for high-flyers in your portfolio. You might, however, consider some higher risk allocation to gold, silver, or possibly some agricultural commodities. With the prospect of genuine economic growth being pretty minimal, cash flow and income becomes king. You can get this from dividend paying blue chips, among other securities.

So, I argue that those who are saving for retirement should consider a portfolio strategy very much similar to the kind of strategy you would likely have when you’re actually in retirement. This isn’t a bearish long-term view on the stock market or the global economy, only a realistic view reflecting slower economic growth and the substantial investment risk now inherent in capital markets.

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