“Zach, he’s picking up nickels in front of a steamroller. And eventually, he’s going to get crushed!”
Those were the wise words of my boss Bill, referring to one of the rookie hedge fund managers who just left our office.
David was a young aspiring investor with all the right credentials.
He graduated from an Ivy League school, was well connected in the Atlanta social scene, had some deep-pocketed investors backing him, and an investment strategy that seemed to print money week after week.
He dropped in for a meeting with Bill and me to see if we would be interested in putting some money in his fund.
And after looking at his low-volatility strategy and a year’s worth of stable returns, I was convinced. It seemed like a great place for us to invest some of our clients’ assets.
Heck, I wanted to put some of my own money into his fund!
But after Bill politely declined and showed David the door, we got down to brass tacks. And what I learned from Bill that day made a huge difference in my success as a professional investor.
Today, I want to share that lesson Bill taught me with you!
And please understand that this lesson is especially timely for your retirement right now.
Because inadvertently, many investors are taking a similar approach to David’s strategy — and are about to get crushed by the market’s bulldozer.
So make sure you’re not picking up nickels in front of this bulldozer like them!
Maximum Risk, Minimum Returns
The strategy that David used to start his hedge fund was known as a “low volatility” approach to markets.
Using a special indicator he developed, David would identify small areas of the market that were priced incorrectly.
He would then take a large amount of his capital to place a trade, lock in a small gain, and close out the position within a few days.
While each trade took a large amount of capital (and only yielded a small amount of profit), David knew that if he made these trades over and over throughout the year, he’d lock in an attractive annualized return.
And as long as these mispricings were only temporary, the returns would come in like clockwork week after week. This let his investors sleep well at night because his fund never really lost much when the market moved back and forth.
What David didn’t seem to understand (and what Bill explained to me after he left) is that these temporary mispricings in the market don’t always resolve themselves right away.
In fact, sometimes they get much worse before they move back to equilibrium.
Since David was investing huge amounts of money to capture small gains, he was at risk of getting clobbered by the market when these small opportunities didn’t turn out the way he expected.
Sure enough, within two years David’s fund had an overwhelming loss and was shut down. Neither Bill nor I were happy to see David’s company fail like that.
But I was certainly thankful that Bill passed on the opportunity for our clients. And I was grateful that I didn’t have any of my family’s money invested in David’s fund.
I bring up this story from my hedge fund career because retirees today are in the same position as David — picking up small returns in the market without realizing that a steamroller is bearing down on them!
How “Safe” Investments Will Steamroll Your Account
Last week, I wrote to you about the ticking time bomb that so many investors hold in their retirement accounts.
It’s ironic that treasury bonds, which are supposed to be some of the safest investments you could own, are likely to destroy tens of thousands of lives in the years ahead.
I’m worried about this situation, which is why I’m pleading with you to make sure your retirement savings are out of harm’s way.
You see, in today’s market, treasury bonds act just like the strategy David used in his brand-new hedge fund.
These bonds give you small returns and you have to invest huge amounts of money to manufacture any meaningful amount of profit.
(As I write this alert, 10-Year Treasuries give investors just a 1.04% yield and the 30-year Treasury bond pays just 1.79%)
Investors in these bonds believe they’re safe because the U.S. can always print money to pay their debts.
So even in a worst-case scenario, investors will get their money back when the 10 or 30 years is up.
But what happens in the meantime?
If inflation picks up (which I absolutely believe it will), your expenses will rise sharply. But you’ll only receive the 1.04% or 1.79% yield on your bonds.
What’s worse, the actual price of bonds will drop in an inflationary environment. And that means you can’t sell these bonds in an emergency without taking a huge loss on your investment!
So even though you’ll eventually receive the nominal dollar amount that the bonds are supposed to be worth in 10 or 30 years, those dollars won’t go far enough to cover your retirement needs.
See what I mean about a financial “steamroller?”
Harnessing Inflation and Growing Your Income
In the past, buying and holding treasury bonds has been a smart thing to do.
But in today’s environment, those bonds offer you practically nothing as far as returns and a tremendous amount of risk to your wealth.
Instead of leaving a large portion of your money in treasury bonds, I urge you to consider buying shares of blue-chip dividend stocks that will benefit from inflation.
For instance, you can invest in companies that own tangible assets that will grow in value if inflation picks up in America.
For instance, consider Vulcan Materials Co. (VMC), a materials firm that has mines and quarries across the country. If inflation causes the price of “stuff” to rise, VMC will naturally benefit.
After all, the company can sell the asphalt, concrete, and other materials it produces at higher prices. And naturally, that means VMC can pay investors higher dividends to help offset their risk of inflation.
Similarly, metal and mining companies like Rio Tinto Group (RIO) have tremendous value thanks to the resources held in their mines around the world.
By investing in shares of RIO, you’ll earn a higher yield than you receive with treasury bonds. And you’ll also set yourself up for bigger gains as the stock price trades higher during inflationary periods.
This year, retirees are facing major shifts in many areas of life…
The balance of power in Washington is shifting… The global economy is reopening after the coronavirus crisis… Interest rates are low and likely to start moving higher… Markets are at extremes with speculative manias in certain areas indicating high risk…
With all of these changes underfoot, I’m extremely excited about the prospects for growing your retirement wealth.
But to do this, you’re going to need to be wise with how you allocate your investments.
We need to take the opportunities that the market is giving us and step away from the major risks that are just below the surface.
Please consider getting out of long-term bonds and selling bond funds that invest in long-term Treasuries.
Instead, start building a portfolio of reliable dividend stocks that can flourish even during inflationary periods.
If you do, you’ll put yourself miles ahead of other retirees and you’ll be able to enjoy your retirement without worry.
After all, when you have your financial picture in good shape, you can have more time and energy to focus on the things that matter to you!