Bubbles and the Hangover in Your Retirement Plan

The Federal Reserve (the Fed) announced it would spend $40 billion a month on bond purchases in an effort to stimulate the economy and drive down the unemployment rate in the third calendar quarter of 2012 (QE3).  While Federal Reserve Chairman, Ben Bernanke, said that this is not at all politically driven, one must admit the timing of the QE 3 plan looks a lot like a 4th quarter “Hail Mary Pass” by the current administration.  But unlike the first two stimulus plans, this time the Fed will focus solely on buying mortgage-backed securities.
 
Can anyone say B-U-B-B-L-E?  Much like the hangover you get from those fizzy bubbles in your champagne glass, most of us continue to experience a lingering headache from the last bubble created by the Fed who, in its infinite wisdom, continued to lower interest rates in an already overheated housing market. And there may be a migraine on its way to your retirement plan after the QE 3 plan is implemented.
 
Much like those first few glasses of champagne, we initially experience a short term “high”—perhaps even giddiness! It’s not that things are better, but they sure do feel better:  perception is reality?  The experienced imbiber/investor, firmly grounded in reality, knows that third glass of champagne (stimulus) is going to create one heck of a headache:  not immediately, but eventually.
 
So, what kind of a hangover might this third stimulus create and what does it mean for your retirement plan?  Your head will be pounding when you realize that your “high” must come down, when your retirement accounts begin to realize the effects of lowering interest rates (which are already artificially low). Those hangover symptoms include inflation, a likely drop in the stock market, and the lowering of the value of your retirement accounts.  The eventual bounce back from the bubble will create a subsequent rise in interest rates that will hurt bond prices.  Hangovers feel like they will go on forever.
 
So what should you do?  In my estimation, it would be nice if we could prevent the hangover in the first place, but that’s not likely to happen.  Are there any safe havens or hangover cures for the effect of too many bubbles?  A lot of commercials out there say that annuities are guaranteed, 100% safe, but there is risk:  insurance companies (backing annuities) could be downgraded and risk insolvency.  That scenario is akin to what happened with the banks in 2008:  too big to fail?  Maybe not.
 
Many investors who feel safe with annuities need to realize the downside as well:  you are locking up your money for a substantial period of time, so you could lose buying power for two reasons:  you can’t get to your money if/when you need it, and you will be locked into rates that are below inflation:  a double whammy.
 
My recommendation to investors is to schedule an appointment in my offices at Beacon Asset Management where we will conduct a full assessment of your investment and retirement accounts.  We will make certain that you are well diversified, and that your accounts are as up-to-date and as resilient as possible to survive more bubbles and the certain hangover.

Michael LaVoy, ChFC, CFP®
President - Beacon Asset Management Inc.