So why not buy and hold? Ask a Japanese retiree.
Japan’s surprise announcement on going negative on interest rates and follow-up warnings that they could keep pushing them lower had me feeling sorry for Japan’s retirees. Not only are they not earning anything on their life’s savings, the government is in effect issuing a monetary tax on their savings.
What does the government want them to do? Go blow their remaining retirement funds on stuff they don’t need to help the economy or are they trying to push them into investing in the stock market. We all know the stock market always goes up and always bounces back from those short bear markets. Right?
I don’t think the Japanese have the same optimistic perspective we Americans have for some reason. I don’t bring this up for the purpose of instilling fear about our current bear market (okay maybe a little) but instead to highlight the situation facing one of the world’s developed nations and their people (and 23% of TSP I fund).
Where do you invest in Japan – a stock market with another deflating bull market that was fueled by quantitative easing sending the tapped-out government debt to 230% of GDP or in bonds where interest rates are being pushed to zero and below? Somehow I don’t think negative rates are going to go over well or help the economy.
If I was approaching retirement in Japan I would save more and spend less knowing I will not be earning any interest in retirement and thus have a lower retirement income. This of course will slow economic growth and bring inflation down, but that is not factored in to any of the central banks models that only see us as consumers and not savers.
I would also become very motivated to invest overseas and send some of my funds to the US where we still have positive returns, a strong world reserve currency and less government debt. This would drive long term interest rates down in the US even while the Fed is pretending to raise short term rates – this is happening now.
While the stock market in Japan is back to where it was 30 years ago, 24 years ago, 19 years ago, 16 years ago and 9 years ago US inflation has reduced purchasing power of the dollar to only 46% of its 1986 value. I do not know what Japan’s inflation rate has been but wanted to make the point Japan’s stock market may not get back to the same level of purchasing power in 1986 let alone the top of their bubble.
But that is Japan right…
The Fed Wants to Test How Banks Would Handle Negative Rates 2 February 2016 Bloomberg
The article says not to worry… “Fed officials have made clear that they are a long way from contemplating a reduction in rates below zero”. Not contemplating but testing? Could someone from the Fed please define “contemplating”. And I thought we were normalizing rates because the US economic “forecast” is so strong. We know better.
Informed decisions matter
The economic indicators I track (the ones that actually lead the economy) have not looked strong for some time. The economy does not support the current high valuations in the US stock market (even after recent losses). We also know you can not time the market based on valuation measures since the markets can stay overvalued for very long periods of time during secular bull markets.
I get why “Buy and Hold” works in a secular bull market. But we are not in a secular bull market. Whether one invests in Japan, Europe or the US; buy and hope will not be a good strategy for your retirement funds for the foreseeable future. I understand most market timers do not have good long term track records because I researched them in-depth when I was looking for what works. And unfortunately, diversification is not going to fall into the “what works” column going forward. Ask Japan.
I hope our “perspectives” help and our member reports more so. Invest smart.
TSP & Vanguard Smart Investor promotes two objectives – to help members with our simple-to-execute strategy that has academic and historical support showing it works in both bull and bear markets and identifying bear markets early so we can avoid significant losses. Combining these two simple concepts will give our members a low risk way to gain a good return in a low return world. What’s your strategy?