Coasting in Retirement Ep 23: Investing in a High Rate Interest Rate World
Segment 1 (Show Open):
Good afternoon, everyone! Welcome in. Welcome to Coasting in Retirement! That’s. Right. Thanks for joining us today, we’re excited to have you! Josh Null here, joined by the one and only Michelle Lee Melto…Michelle, how are you? (should we talk about our ailments?) We have had a busy last couple of weeks, we got moved into our new Fairhope office in Portico, that is just east of the post office for you locals, we’ve been doing all kinds of cool things with our clients, it’s been great. And it’s also great to be back in studio, once again in Coastal College’s recording studio, beautiful downtown Fairhope, working up yet another great show!
Listeners: Michelle and I are here today to discuss financial topics relevant to those of you in or near retirement living your best life along our part of the gulf coast. Here’s what we’ve got in store for you today: First segment – deep dive on our topic of the day. 2nd segment - at about 20 minutes past the hour - fan favorite, “Michelle with the News of the Week”. 3rd segment, roughly 40 minutes past the hour, ”Josh’s Crystal Ball and…(Michelle:) Big Mouth”. That’s right, big mouth. So buckle up, we’ve got a lot to get to!
Quick background on me for those new to the show. Again, my name is Josh Null, I am a fee-based financial advisor, I hold my FINRA Series 65 securities license, and I am the owner of Gulf Coast Financial Advisors, an independent investment management and financial planning firm with offices in Fairhope and Orange Beach, Alabama. You can find more information on me and Gulf Coast Financial Advisors by visiting our website gulfcoastfa.com, or feel free to give us a call at 251-327-2124. If you missed that, don’t worry, we will repeat our contact info several times throughout the show!
So, Michelle, you ready to have a little fun? We’re going to use a fun exercise to demonstrate the different choices that investors are faced with as we wind down 2023, particularly those in or near retirement, particularly those confused about what to do in a high interest rate investing environment! The point will be to demonstrate strategies for investing in a high interest rate environment, but we’re also going to discuss the pros and cons of various investment choices. Michelle, for this exercise, I want you to put yourself in the shoes of the folks listening and become the avatar for our listeners – please pretend that you are close to retirement, or maybe you’re already in retirement!
Let’s set the stage - let’s say you’ve done a good job of setting yourself up for income in retirement – you’ve got a pension, you had a long history of employment income so your social security benefit will be healthy when you turn it on, and you’ve kept your expenses low. Let’s also say that you have additional money that has been put away, maybe you socked it away in a 401k or 4013b or already rolled it into an IRA, maybe you kept it in a brokerage account, maybe you just have a pile of money at the bank, or maybe you’ve got a mix of where you keep the money, several different accounts for example. For sake of this example, and time, let’s simplify and call this pile of money $1,000,000, and let’s put it all in one location.
Now, to make it seem a little more real, I am going to lay 10 - $100 dollar bills out in front of you, Michelle, to represent this $1M, meaning each $100 = $100,000. Sorry, I didn’t have a spare million in cash to bring, or this would have been even more fun.
So again, audience, Michelle is your avatar in the example, and again, just like you…hopefully…she’s done a good job with her pensions and her social security and keeping her expenses low, and well add the caveat that if she wants to, she has the ability to work part time in retirement…but even with this good stuff going on, Michelle is still not quite sure what to do with her $1M, primarily because she’s worried about making the wrong decision and not having this pile of money when she needs it, or worse, losing a big chunk of it.
Let’s start with….what if she does nothing? What if Michelle stuffs this $1M into her mattress and lives like a hermit because she doesn’t want anyone to find out her secret and rob her? What’s the downside or upside for this approach?
(Josh – take one of Michelle’s $100 ($100,000) and replace it with a $50 ($50,000), b/c 2023 inflation will end around 5% for the year, meaning that Michelle’s $1M only has the buying power of $950k now.) Ask Michelle how she feels about that?
OK, let’s go the totally opposite. Let’s say you put all of your $1M into the stock market this year. (Josh, add a bunch of ones to represent what happened this week. But then take $150 ($150,000) to represent Oct. Back and forth, and so on to prove the point.). Michelle – what I just did is physically represent stock market volatility – how did that make you feel?
Josh – always sound out what you are physically doing b/c audience obviously can’t see.
So what did we just illustrate? With the mattress example, we showed the effects of inflation on your raw cash. With the stock market example, we showed the effects of market volatility.
Let’s dive into another couple of examples:
VA’s – give Michelle $70 ($70,000) but then take back $30 ($30,000) for fees. That’s right, many VA’s have fees in the 3% range, depending on riders and how much you pay for your sub-account.
Money Market Fund – give Michelle $50, let her know she can access the money anytime she wants, but that this time next year, that $50 ($50,000) might only be $30 ($30,000), or less. This would be similar to directly investing in treasuries or bank CDs
Bonds - corporate bonds, U.S. bonds, foreign bonds, taxable bonds, municipal bonds, short-term and longer-term bonds – I am going to add $50 ($50,000) in dividend payments to you. But wait! On some of your longer term bonds, I am going to take $200 ($200,000) away! Wait, what!! Remember one of our previous episodes about the affect of higher interest rates on bond prices? That’s right, even though your bond performed with the interest it produced, it’s price, or current value, has fallen b/c investors can now buy bonds at par with a higher interest rate that what you have on your existing bonds. How does that make you feel?
MYGAs – give Michelle $60 ($60,000) but tell her she can’t touch the money for 5 years, at least not without penalty. Give the pros and cons of this approach.
Income annuities (briefly discuss difference between SPIAs and Deferred) – take all of Michelle’s money then start handing her back $50 ($50,000) every year on a SPIA, depending on age and life expectancy, maybe $70 ($70,000) on deferred income annuities.
FIAs – walk thru 0% floor and upside potential, the market index you track does 12% but you only get to participant in 10% of that gain, called cap rate. Well you may ask, why doesn’t everyone do this? Walk thru the longer surrender fees and how you are trading long term control for long term capital preservation and potential income production.
Talk about which parts of the stock market to look at, dividend producing stocks, value plays on companies with low debt and cash on hand, etc: The best-performing sectors when rates are rising are utilities (8.4% annually), energy (7.9%), consumer goods (7.8%), and foods (6.5%).
Meanwhile, the worst-performing sectors during rising rate environments are autos (-1.3% annually), durables (0.1% annually), retail (2.8% annually) and apparel (2.8% annually).
So listeners, as you have seen, Michelle has probably had very similar reactions to what you would have, if you were seeing $100,000 or more leave your account, or even if you saw $50,000 added without much risk, etc.
If you’re uncomfortable with the ups and downs you’ve been seeing in your portfolio, or maybe you’re confused about the different fixed income or annuity options, or maybe you’re even losing sleep over the investments in your portfolio, the first step is making an appointment with us and bring your account statements with you. Michelle, I can’t tell you how often someone will come into our office with an investment statement that is supposed to be on the conversative side, but once we do our analysis, is anything but. Not that investors should avoid all risk, but your portfolio needs to match your risk tolerance and time horizon.
The second step, and something we can help with at GCFA, is educating yourself on what options are out there if you are in or near retirement, and especially if you are someone deeply concerned about a recession and the impact that will have on your portfolio. As we just demonstrated, there is a positive flip side for retirees to this high interest rate environment we find ourselves in, in that the offerings on fixed-income, fixed-interest- and interest-bearing securities are as attractive as they have been in YEARS.
Listeners – as the Gulf Coast’s honesty broker, I’m going to shoot you straight even though it does me no good – you can buy most if not all fixed income and fixed interest investments we discussed directly yourself without using a broker or advisor intermediary. Treasuries, bank CDs, Municipal bonds, corporate bonds, etc. A broker will charge you a one-time mark-up or commission on most of these and an advisor like me typically charges an ongoing fee for managing your investments. Now, if you don’t want to do-it-yourself, or have tried and don’t like it, then give us a shout and we can discuss all the options out there – not just what I listed but also the attractive options on MYGAs, money market funds, bond funds, etc, etc. 251-327-2124. You know what makes even more sense when making these types of decisions, Michelle? Having a financial plan to reference so you know how all the parts fit together. Call us! We can help!
How do you start the process of working with us? Easy. First, set up a no pressure, free, no obligation conversation with us by calling 251-327-2124, or if you prefer email, you can visit our website gulfcoastfa.com and click on the blue calendar link in the upper right hand corner.
Alright folks, coming up next! Every week Michelle and I scour the interwebs for helpful financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. Join us after the break to hear Michelle and I discuss this week’s relevant headlines in our “Michelle with the News of the Week” segment. Stay tuned!
Segment 2 - Michelle with the News of the Week:
Josh: “Welcome back to Coasting in Retirement, your host Josh Null here! As we discussed before the break, every week Michelle and I scour the interwebs for helpful financial articles related to our topic of the day, especially articles that pertain to those in or near retirement. Our job is to help you all understand how these headlines impact you, especially when it comes to your money! We also include the articles links on our show transcript, which you can find on our website gulfcoastfa.com under the podcast tab. So, without further adieu, here’s “Michelle with the news of the week!”:
1. Alright Josh, for the first time in show history, you and I found an article so useful, we are referencing it twice! It’s from Investor’s Business Daily, and it’s titled “Strategies for Investing in a Rising Interest Rate Environment”. We pointed out last time that this article discussed bond portfolio diversification, plus listed the industries that tend to do well in a high interest rate environment, as well as the ones that tend to do poorly – like auto sales and retail. Towards the end of the article, they had a phrase I’m not familiar with, called the “Illiquidity Premium”. This section also talks about having “uncorrelated” assets in your investment portfolio. What are they referring to?
Josh: it’s talking about private credit market, which is definitely an individual case discussion, but illiquidity can refer to anything that locks up your money, without a ton of control by you, in exchange for either some guarantees, or in this articles example, the possibility of robust returns. One example that listeners may recognize is from the movie the Big Short, where right before the housing market crash, Christian Bale’s characters clients were demanding their money back, but he refused, mostly on the grounds that he had locked a lot of their capital up into short positions on Collateralized Debt Obligations or (CDOs). Closed ended funds, non-traded REITS, even insurance products like MYGA’s, have some version of illiquidity. The reason the article mentions both in the same section is that there can be bleed over from illiquid assets to what’s called Uncorrelated assets, that is, investments that should move independent of the stock market, possibly even move against, such as gold and silver, fine art, or even REITs, the thought being when the stock market is volatile or falling, investment dollars will flood into things that produce gains independent of stocks and bonds. Crypto was supposed to be uncorrelated but that’s been proven mostly false.
https://www.investors.com/etfs-and-funds/personal-finance/strategies-for-investing-in-a-rising-interest-rate-environment/
2. Michelle: Next up is an article from a website that I believe is industry facing in your world, Josh, Advisor Hub. They have a recent article titled “Market in a Minute: The Impact of Rising Interest Rates”. Even though this website is geared towards guys like you I picked it because it gave some behind the scenes data on how some investments have been hit the last few years with high interest rates. As anyone holding bonds or bond funds learned this year, rising rates have driven down bond prices and ate away at portfolio values, especially anyone holding long-term Treasuries, but this article listed one fact that I think will even surprise you, Josh. Did you know that the ETF that tracks the value of the 20-year Treasury bond has lost 50% of its value since 2020? Did you also know that the more broadly diversified Bloomberg Aggregate bond index has fallen over 20% in that same time period? That sounds like a lot for bond funds.
Josh: Yeah, losses like that are usually more associated with equities funds. I just gave a presentation at Lake Osprey (shoutout) and we had a graph of bond prices over the last 40 years – it was amazing how much worse 2022 was than any other year, plus if memory serves me right Michelle, you and I did some research and bonds had their worse year in 2022 since Napolean! So, more importantly for those in or near retirement with a damaged fixed income / bond portfolio, what can you do about it? Well, one option is to just ride it out, as we demonstrated in the opening segment, as long as your bond has integrity, even though the price it commands on the open market is down, it should still be producing the agreed upon interest rate. Now, for those of you with a severely damaged bond portfolio, there are programs we can look at to walk you through each and every position and give you options, particularly around using tax-loss harvesting to clean up your bond mess and help you feel much better when you look at your statements. Just give us a call at 251-327-2124 to discuss.
https://www.advisorhub.com/resources/markets-in-a-minute-the-impact-of-rising-interest-rates/
3. Michelle: Alright Josh, let’s pivot to the Financial Post and their recent article “Which investment strategies work best when interest rates are high?”. At first I thought this article might too closely resemble our first article in this segment about strategies for investing when rates are high, but this article took a totally different approach. First, it gave some history of inflation and interest rates, starting in the 1970s when you and I were babies, then it pivoted to 2 concepts for investors. The first one is called “merger arbitrage” and it sounded like gambling at best and witchcraft at worst. I was much more familiar with the other strategy this article listed of buying small cap companies, but I seem to recall our recent discussion on how the market gains of 2023 have been mostly carried by the largest of the large cap companies, so how does the advice in this article square with what we are actually seeing in the small cap investment space?
Josh: Yeah I was caught off guard a little bit too by their suggestions. Merger arbitrage (sometimes called risk arbitrage) involves purchasing shares of a company targeted in a merger or acquisition. There is usually a price gap between the price offered by the suitor and the current price due to the risk of the deal not closing. A merger arbitrage strategy involves collecting the difference, or spread, between the offer/closing price and the current market price. Higher interest rates are directly connected to merger-arbitrage spreads because investors demand a higher rate, one above the risk-free rate (Treasury bill rate), to hold the shares. In this way, merger-arbitrage funds are an inflation hedge and the returns are uncorrelated to the general direction of equity and bond markets. As spreads widen, potential returns increase. I’m not saying it’s a bad strategy but this definitely requires a level of sophistication and experience on both the part of the investor and the advisor or broker.
Now with small cap funds, the argument is that smaller companies do not use as much leverage as larger ones, so they are less likely to be holding costly debt that becomes more expensive to manage as interest rates rise. They also tend to have higher growth rates and, while they can have larger drawdowns during a correction, they also tend to outperform in the aftermath. As we’ve discussed before on this show, most of the 2023 market rallies have been with the largest of the large cap companies, so what has happened is the valuation gap between large-cap and small-cap companies is at a historical peak, which also bodes well for future returns for small caps. Do note that the term “small caps” is a bit of a misnomer because to qualify for membership in the small-cap club, a company in the U.S. would need a market valuation of at least US$250 million, up to US$2 billion, so these are not minnows.
https://financialpost.com/investing/investment-strategies-work-best-interest-rates-high
4. Michelle: Last article Josh, this one form U.S. News and World Report, titled “What to Invest in When Interest Rates Peak”. I included this article because it provides a counterbalance to our first three headlines in this segment, all of which were written with the assumption that high interest rates were here to stay for a while. In contrast, this article argues that many economists believe the Federal Reserve is approaching its “terminal” interest rate and will begin cutting rates soon. I feel like this article might be suffering from premature…speculation when it points to investments such as real estate and growth stocks, when both those sectors are showing signs of decline. Do you agree?
https://money.usnews.com/investing/articles/what-to-invest-in-when-interest-rates-peak
Josh: Michelle, great job as always with the headlines, these are all important pieces of information that impacts those in or near retirement! Listeners – if you have questions around the topics in our headlines of the week, or questions related to your investment strategy or financial plan, you can set an appointment by calling us at 251-327-2124 or by clicking calendy link on our website, gulfcoastfa.com. It’s in the upper right-hand corner. It’s a free, no pressure, no obligation meeting.
Alright folks, coming up next : Josh’s Crystal Ball and Big Mouth. What have been some of my predictions? Have I been right? Was I ever wrong? How wrong? What do I think is going to affect investors in the near future? We talk about all of these things and poke a little fun at my big mouth. Stay tuned!
Segment 3 – Josh’s Crystal Ball and Big Mouth:
Welcome back! Your host Josh Null here, along side co-host Michelle Lee. So, I am opinionated, I have strong opinions at times, I would say a radio show host that isn’t probably wouldn’t be very interesting to listen to. And I am paid in my profession to offer professional guidance and opinions to my clients, otherwise what use am I? Sometimes I feel so strongly about something that I talk about it publicly, on the various podcasts and radio shows I’ve had, sometimes I’ll even make predictions, and while I usually proved right, there are times I swing and I miss. Want to hear me beat my chest or maybe…eat a little crow? Then let’s get at with Josh’s Crystal Ball and Big Mouth. Alright Michelle, what’s first?
1. Alright Josh on our last episode, we discussed the chances of the Fed increasing the Fed Funds rate again in 2023. You predicted that Fed Chairman Jerome Powell’s obsession with a 2% inflation rate, combined with an upcoming Consumer Price Index Report, would probably lead to one more rate increase this. The most recent CPI report coming in at 3.2%, with the core part of that index coming in lower than expected, and according to Barron’s, many economists are expecting the Fed to keep rates steady for the rest of the year. Based on the reaction of the stock market, many investors agree with this sentiment. So what does your crystal ball have to say now?
2. Next up is an opinion your big mouth spouted way back in July of this year, and unfortunately for you Josh, you’ve already had your teeth kicked in on this one, so I’ll try to play nice this time. On our July episode we discussed current interest rates on fixed interest investments such as money market funds, bank CDs and multi-year guaranteed annuities, know as MYGAs for short. We asked, or better stated, YOU asked, “is this as good as it gets in regard to fixed interest investments?” and the answer was almost immediately wrong, with interest rates rising across the board the following week. So I would like you update on on two things: what is going on with interest rates being offered to investors on investments like these? And why does this matter to people in or near retirement?
Josh: MYGA rates are now north of 6% with A rated carriers, MM are 5.24, near 5 ½ on $1M or more,
3. Alright, last one Josh, looks like one of your absolute favorite “investments” is back in the news. It looks like the price of Bitcoin is surging on hope that the SEC is going to approve an Exchange Traded Fund, of EFT, that allows people to invest in Bitcoin. It also appears that asset management giant BlackRock is moving forward with their own ETF that would invest in cryptocurrency’s 2nd most popular coin, Ethereum. Of course I say “favorite investment” in jest because we’ve been quite open about our misgivings with crypto, you think it borders on a Ponzi scheme and I think it’s all just witchcraft, but, nonetheless, many are claiming that this most recent crypto winter is about to thaw. Whatcha your big mouth got to say about that?
Josh: Ignore the recent Michael Lewis book called “Going Infinite” which focuses on Sam Bankman-Freid, and instead, if you’re interested in investing in crypto, read a book called “Number Go Up” by Zeke Faux. Again, there is no real use case, no problem where crypto appears to be the better answer, no sovereign nation that is going to allow it’s citizens to print private money, and most importantly, crypto has been proven at this point to greatly assist the black market in all kinds of nefarious activity. It’s also a zero sum game – explain.
https://www.reuters.com/business/finance/blackrock-woos-investors-ethereum-trust-further-crypto-push-2023-11-16/
https://www.nytimes.com/2023/11/16/technology/cryptocurrency-bitcoin-etf.html
Well listeners, I hoped you enjoyed a peak behind the curtain on how I form my opinions and predictions, and more importantly, that I’m willing to admit when I am wrong. Which isn’t very often, but still. Now, to our listeners that have more questions the various investments and topics we discussed in this segment, we invite you to reach out to us. Call us anytime at 251-327-2124 to make an appointment or find us at on our website at gulfcoastfa.com.
Folks, that’s it for us this week here at Coasting in Retirement! I want to give a huge thank you to my lovely co-host, Michelle Lee Melton, a thank you to our awesome radio station 106.5, many thanks to the provider of our show music, local band Sloth Racer, and as always my sincere appreciation for all of your out there that have been listening and joining us on this journey. We would love to be a part of your journey as well. Until we talk again next Sunday, have a wonderful and productive week. This has been Coasting in Retirement with Josh Null!
Disclosure:
Advisory products and services offered by Investment Adviser Representatives through Prime Capital Investment Advisors, LLC (“PCIA”), a federally registered investment adviser. PCIA: 6201 College Blvd., Suite#150, Overland Park, KS 66211. PCIA doing business as Prime Capital Wealth Management ("PCWM") and Qualified Plan Advisors (“QPA”). Certain services may be provided by PCIA affiliates. In this format, Josh Null provides general information, not individually targeted personalized advice, and is not liable for the usage of the information provided. Exposure to ideas and financial vehicles should not be considered investment advice or a recommendation to buy or sell any of these financial vehicles. This information should also not be considered tax or legal advice. Past performance is not a guarantee of future results. Investments will fluctuate and when redeemed may be worth more or less than when originally invested.