Getting Safe Returns on Your Investments
Here’s the question that investors in their 60s are (metaphorically) screaming at the heavens: “Why can’t I just get a safe 7% return on my investments that will allow me to retire without worrying about burning up my capital?!!” (I think two exclamation points are probably enough to show the urgency of the question. But if your nest egg is smaller and you need a higher rate of return to get the required level of income, I think three or four exclamation points might be a better reflection of the questioner’s consternation.)
It’s complicated, but anyone would agree that the problem at the core of the question is that extremely safe fixed income investments—like government bonds—are at or near historically low rates of return. (I’m not even going to give bank savings accounts—1% interest or less—the time of day.)
If you want to be absolutely sure that your capital won’t go away, you’re going to have to accept returns of less than 1% on any Treasury up to three years’ maturity and a maximum of just over 2.5% for 30-year notes. And if liquidity has any place in your calculations, you’re probably not that interested in a three-decade commitment.
But if you want no risk (or as close to no risk as the market will offer you), you’re locked into return levels that will barely let you beat inflation.
The next level on the risk/return scale is probably municipal bonds. They carry more risk (remember Detroit!), but as a group, the potential for default is pretty small. And their income is tax-free, which is always nice. Municipal rates are a bit higher than Treasuries, with the highest rated (AAA) returning 1.85% for 10-year bonds and 2.8% for 30-year bonds.
And if you’re willing to buy A-rated bonds (still quality, but not the best of the best), you can get 2.65% on 10-years and 3.7% on 30-years.
I could gradually work my way up through corporate bonds (various ratings) and high-yield bonds (ditto), which offer progressively higher rates, but feature progressively lower ratings from the companies that rate the safety of such offerings.
But eventually, if you’re looking for higher returns and you aren’t interested in buying and selling real estate or shipping your money off to a hedge fund (for which you have to be an accredited investor and have a joint net worth of $1 million or more, not counting your residence), you’re pretty much going to have to look at the stock market.
And that’s why all those golf tournaments (which you may or may not be watching) are teeming with sponsors who want to help you with your retirement planning, and they’re pretty much all stock brokers. Because advertisers know that once you have the luxury car and trophy watch you want, you will need to spend some time figuring out what kinds of stocks you’re going to buy … and who you want to have advising you.
Whoever you pick will undoubtedly tell you that much of your money should be in blue chips—safe, dividend-paying stocks that will hold their value and provide income for you to live on. Good advice.
But you are also going to need a component in your portfolio that will provide growth, which means buying stocks that have the potential to increase in price. Without exposure to investments that can increase your capital, you’re just floating in the water. And depending on your risk tolerance and how much time you’re willing to put into the project, you’re going to need either a set of oars, a sail or a motor to get your boat moving.
Is the risk higher with growth stocks? Of course. If you don’t remember anything else from this little screed, you should remember that risk and reward are so intertwined that you can’t peel them apart with a crowbar. Seeing to it that risk and reward stay balanced is the prime function of free markets.
So, what do I suggest?
I’d advise you to take a trial subscription to Cabot Market Letter, soon to be renamed Cabot Growth Investor, Cabot’s advisory that’s been giving good advice to growth investors for 44 years. Cabot Growth Investor will show you what growth stocks to buy, how to adjust your portfolio for every type of market environment, how to build a watch list and when to sell. It’s perfect for everyone from a complete beginner to a seasoned veteran, with lessons on chart reading, valuations, rising and falling sectors and industries and how to get market timing right.
This Week's Video
In this week’s Stock Market Video, I look at the U.S. markets that are hanging around their highs, but can’t quite break out. It’s still a time to lean bullish and have some money at work in growth stocks, but not a time to go all in. Cleaning up your portfolio to kick out losers and laggards and generate some cash for future buys is also a good idea. I name a number of stocks that are well set up for buying, either right now or on breakouts. I also show a few great charts from Chinese stocks that are definitely in breakout mode. Click below to watch the video.
Tim’s Comment: As a formula for a full life, I embrace this sentiment, and hope to keep saying “yes” for many more decades. As to its applicability to investing, it’s a reminder that fear of the future is a recipe for the mediocre performance that comes from “safe” investments, while the greatest growth opportunities are found precisely in the stocks of companies whose best days lie ahead—in the uncertain future.
Paul’s Comment: I’ve always thought that skepticism was useful, a kind of armor that protects its practitioners from being taken in by con jobs and prevents being swept up by the follies that afflict crowds. But cynicism is more like living in a box that’s completely welded shut. Yes, nothing can get in; but nothing can get out either. It’s better to take risks than to shut down into complete isolation. And that applies to all of life, not just the stock market.
In case you didn’t get a chance to read all the issues of Cabot Wealth Advisory this week and want to catch up on any investing and stock tips you might have missed, there are links below to each issue.
Tim Lutts, the brains behind Cabot Stock of the Month, writes about a Victorian house in Colorado that illustrates the dangers of boom/bust cycles. He also looks at yieldcos, revenue-generating spinoffs that offer great income opportunities. Stocks discussed: Terraform Power (TERP) and SolarCity (SCTY).
Jacob Mintz, Chief Analyst of Cabot Options Trader, writes in this issue about how following options action can give insight into the Street’s expectations for Facebook’s (FB) upcoming quarterly earnings report.
Cabot Market Letter’s Chief Analyst, Mike Cintolo, writes about a chart pattern—“volume support zone”—that can provide a buying opportunity for stocks after a big rally. Stock discussed: First Solar (FSLR).
Chief Analyst, Cabot China & Emerging Markets Report
And Editor of Cabot Wealth Advisory