Retirees are in danger of seeing their investment portfolios meaningfully and detrimentally impacted by an unwinding of the latest fad. That fad can be named “expensive defensives” and there are valid reasons for the development of this fad. Indeed many are calling it the “new normal”. But it is just a fad and one that, like all fads, will end.
Thanks to historic low interest rates – rates that aren’t justified by economic conditions and will therefore end – investors have employed a strategy of pursuing higher incomes from everything from farmland to investment properties and stocks. The greatest beneficiaries of this trend in the stock market have been large-cap, high-yielding companies and infrastructure stocks.
The problem, however, is that high prices for both categories are not justified by their fundamentals.
We have a warning for those who believe interest rates are going to remain lower for longer; Mark Twain once said whenever you find yourself on the side of the majority it’s time to pause and reflect. We are worried about the consensus view that the “new normal” is lower interest rates for a long period of time. But these low interest rates are anything but normal.
Investors should be very cautious. We are increasing the amount of cash we hold in our fund, and we think that’s a sensible thing to do in the short term, and maybe the medium term, for many investors who otherwise think their retirement savings are safe.
In this video we show why payout ratios and the misuse of valuation theory has produced something that could permanently harm the plans of retirees.
(Running time: 4m 47s)
