Posted on Thursday, 24th March 2016 by

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The current bull market is the second longest in history and as all bull markets do, they eventually end in a recession. You hear a lot today about the uncertainty in the market considering all of the stimulation that the Federal Reserve has applied through their low interest policies. When interest rates are low more individuals are forced into the stock market to earn a higher rate of return artificially increasing stock prices. As interest rates decrease stock prices increase and vice versa.

 

Financial Planning Pen and Calculator and Review of Year End Reports

Since interest rates are near zero now for banks the only way they can go is up unless we enter a negative interest rate environment like Europe today. With negative interest rates savers pay banks to keep their money!  If they charge a negative 1 percent rate on a $100,000 bank deposit you only have $99,000 in your account at the end of the year!!! Not a good thing.  If the Federal Reserve allows interest rates to go up to where they would be without intervention stocks will fall in value and newly issued bond interest will increase correspondingly. You have to understand how markets work to protect your assets.

Basically, over the past 8 years the Federal Reserve robbed Peter to pay Paul by reducing interest rates to almost zero for banks. All of the interest that we had been earning on our savings and other accounts was transferred to the government so they could borrow huge amounts of money, estimated to be as much as 40% of the government’s annual operating expenses, at very low interest rates to fund government programs.

Making uninformed investment decisions often lead to significant losses that are hard to recover from, especially when you are retired and living on a fixed income. Unfortunately retirees can’t simply print money like the Federal Reserve does to balance the books. Successful Investing requires understanding market basics, rational thinking, and attention to detail.

When I was in my late twenties I joined the National Association of Investors Corporation (NAIC).  They are the nation’s largest non-profit organization dedicated to investment education and they publish Better Investing Magazine, an unbiased, independent source of investing news, insights and support for investors of all experience levels. They encourage members to start investing early, offer courses on investing fundamentals, and support local chapters. They showed me how to buy stocks direct from major corporations through Dividend Reinvestment Direct Purchase Programs with as little as $25 a month and no brokerage commissions.

Fidelity offers a number of online investing tutorials that you may find helpful. Their Essentials of Investing interactive tutorial can help you learn about risks, priorities, and common strategies used by other retirees. They also offer a mutual fund evaluator and many other tools to help you select and manage your investments.

Basic investment knowledge also helps federal employees and annuitants grow their Thrift Savings Plan (TSP).  You stand to lose if you panic during market corrections and invest in the wrong funds at the wrong time. Fortunately, for those who don’t have the time or inclination to learn investing concepts the TSP offers Life Cycle funds, often referred to as one-decision funds, that automatically change to a more conservative mix as you approach retirement. I wrote several articles about the TSP program including TSP – Risk Verses Reward, The TSP Advantage – Should I Stay or Go, and Survivor’s Beware – the TSP Trap that you may find informative on this subject.

Stocks, Bonds, Mutual Funds and ETFs

The purchase of stocks and bonds should be made based on fundamentals not on gut feelings or general observations. Before purchasing a stock check the company’s price to earnings (PE) ratio, yield, debt, industry outlook, book value and so much more.  Once you learn what to look for and understand the principles you will be able to make sound investment decisions. With bonds it’s about credit quality, duration, and other factors.

If you aren’t familiar with these terms take a beginning investor’s course such as that offered by NAIC mentioned earlier in this article. There are rating services that provide prepared reports for thousands of companies, mutual funds, and exchange traded funds (ETFs). I use Value Line, Morning Star and my brokerage house stock rating sheets to validate stock selections. You can view the DOW 30 Value line Investment Surveys on their site at no cost.  You have to subscribe to their service to view the 5,000 or so stocks they track or visit your local libraries reference section. Most brokerage firms provide rating sheets for stocks, mutual funds and ETFs. Services like Value Line and Moody’s are often available at your local library.

A good publication for investors is Money Magazine; I’ve been a subscriber for many years and find each issue insightful, especially their annual mutual fund and ETF rating guide.  They also publish “The Money 50”  list of recommended mutual and exchange-traded funds that include building block, one-decision, and custom funds for you to consider.  They publish articles on how to select a balanced portfolio using their recommended funds or you can do the same with a one-decision fund such as Vanguard Wellington (VWELX) or Fidelity Balanced (FBALX).

Vanguard and Fidelity both offer tools to help you select a diversified portfolio of funds based on your personal situation after answering a few basic questions. Vanguard’s Fund Selection Tool is easy to use and provides a list of recommended mutual funds and the amount to invest in each.  It only takes a few minutes to complete.

Gold & Silver Discussion

I receive a number of flyers each year offering to double or even triple your investment in short order? I personally relegate these offers to the trash and don’t read them. They talk about doom and gloom and how the market is going to crash and gold or certain other investments are your only protection.  If you have considered purchasing gold and silver there are many sellers ready to take advantage of the uninformed.

A number of companies sell gold and silver at huge markups, well above the spot price for that metal. The spot price reflects the price paid for a precious metal based upon immediate delivery and are expressed as the ask or selling price or the bid or buyback price. The reason your cost is above spot price for precious metal coins, bars, and rounds is to compensate the miners, refiners, mints, and retail outlets for producing and selling the product. You will rarely buy at or below spot and newly minted coins and bars, referred to as bullion, typically sell for between 3 to 15 percent above spot depending on the coin denomination and size.

Large gold and silver dealers such as Blanchard often sell a single one-ounce gold American Eagle coin for approximately 4 to 5 percent above current spot/melt values. They will purchase them from customers at about two percent under their current selling price. If the spot price of gold is $1250 per ounce you can expect to pay from $1287 to $1312 per one ounce coin.  Some sellers offer the same coins for considerably more so shop around to get the price as close to spot as possible. Smaller denomination coins sell for a higher premium because they cost more to produce. A tenth of an ounce coin requires the U.S. Mint to strike a smaller blank ten times to produce the same one ounce of metal coins.

I’ve seen a number of 1 ounce silver bars selling for as high as $30 to $45 when the silver spot price is only $15.89 an ounce. Silver would have to increase by more than 100% for you to break even at those prices. Newer American Eagle silver coins typically sell for a larger premium of between 15 to 18% above spot in many cases. However, you can purchase silver rounds or bars for about half that. Gold and silver bullion can be purchased from sellers across the country and also direct from the U.S. Mint. If you are interested in gold and silver coins check the spot prices online before buying precious metal coins.

Many companies offer loss leaders and will sell you a limited number of gold and silver coins just over spot at a very reasonable price. When you call they attempt to sell you graded or collector coins for 3 to 4 times what you would pay for the loss leader coins. If you do decide to buy collector coins you can check prices at the CPGS site to ensure you aren’t getting ripped off.  They also provide a grading service if you have coins that you want to have graded for your collection.

If you don’t understand market fundamentals learn about them before investing. Even if you hire an advisor it’s essential to know investing principles so you can understand and approve of his or her recommendations. Financial security is the foundation of a successful life and retirement. A little time, preparation, and pre planning goes a long way to achieving this goal and there is a lot of help available to get you there.

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Disclaimer: Opinions expressed herein by the author are not an investment or benefit recommendation and are not meant to be relied upon in investment or benefit decisions. The author is not acting in an investment, tax, legal, benefit, or any other advisory capacity. This is not an investment or benefit research report. The author’s opinions expressed herein address only select aspects of various federal benefits and potential investment in securities of the TSP and companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that retirees, potential and existing investors conduct thorough investment and benefit research of their own, including detailed review of OPM guidance for benefit issues and for investments the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice. The author explicitly disclaims any liability that may arise from the use of this material.

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