Before addressing investment strategies for those ap-
proaching or now in retirement, let’s first recap the market
for August and the beginning of September. This pastmonth was the worst August performance for the Dow in9 years dropping 4.3% on the heels of the 7.1% gain in July.No sooner was August over than in the first three days of September the Dow took another U-turn rising 4.3%
(how’s that for a roller coaster!).
As I’ve mentioned on prior occasions, this can’t be a reflec-
tion of changes in the true underlying value of the market.
Rather, it’s more likely the result of fear and greed driven
by alternating good and bad economic news along with re-action to overbought and oversold conditions that tend toarise when the market makes sharp moves in one directionor the other.Indeed, there was bad news in August (for example, weak employment and lowered estimates for GDP growth) fol-lowed by good news in the first three days of September (amanufacturing index showing surprising growth and privatesector employment exceeding expectations).Rather than being whipsawed by contradictory news (forfun, see this clip on YouTubehttp://www.youtube.com/watch?v=ktKNEGSqLB4
), the chart patterns shown in last
month’s Stock Market Commentary were signaling a cau-tionary investment stance, a “yellow flag.” As it turns out,
this suggestion turned out to have been a useful guide forthe month as the market did indeed turn down in Augustbut reversed (so far) in September.Looking ahead, the charts on the following pages are, if any-thing, a bit more pessimistic than last month, despite thegain of the last few days of the month. This more pessimis-tic outlook is a result of the poor results in the entiremonth of August offset by only a few days of reversal inSeptember. To me, the negative technical outlook ties intomy downbeat view of the economy. Since I see the funda-mental problem one of high unemployment in the U.S. andlittle hope for a turnaround in the near future, I believe the
market senses this, as well. I wouldn’t suggest an outright
red flag at this point, but caution and remaining nimble isdefinitely advised. See the comments at the top of thecharts on the following pages for more information.
Investment Strategies for Retire-ment: The Search for Yield
Most of the investors nearing or in re-tirement that I come into contact with,regardless of the extent of their financialassets, dedicate all or a large portion of their investmentsto a conservative strategy intended to deliver the highestpossible return while taking the least amount of risk possi-ble, ideally preserving principal. For many, shell-shocked bythe current recession and with vivid memories of the techbubble only 10 years ago, this has meant extremely lowinterest returns achieved through CDs and bank savingsaccounts.In the limited space that follows, here is a brief and neces-sarily incomplete summary of alternative conservative in-vestment strategies.Individual bonds: Bonds have the advantage of producing aknown stream of income and maturity value but are sub- ject to potential default. Yields typically increase with dura-tion and/or lower credit quality. For investment grade cor-porate bonds, current yields range from about 2% to 4.5%.Municipal bond yields (federally and potentially state taxfree) range from about 0.25% to about 3%. Purchases andsales of individual bonds can be tricky due to thin marketsand other factors.Bond funds: For most individual investors, bond funds arepreferable to individual bonds due to professional manage-ment and diversification. Bond funds also make it mucheasier to invest in foreign bonds on both a dollar-hedgedand unhedged basis. Certain bond funds may also employ
Stock Market Commentary
September 4, 2010
Lane Asset Management
For the first three days of September, the Dow ad-vanced over 433 points orabout 4.3%. If you were fullyinvested, you probably feelpretty good and, if you werenot, you probably wish youwere.Well, it might be a little earlyto make such judgments. If you measure your startingpoint from the beginning of August, or even from thebeginning of the year, theDow has gone absolutelynowhere. This level of vola-tility with little to show for itcan discourage investors.
In this Commentary, I’ll sug-
gest investment strategiesthat I believe will produce areasonable rate of returnwithout taking on excessiverisk.As always, I welcome yourcomments and suggestions.
Ed Laneleverage that enables them to achieve higher yields, but thisadds a layer of risk. Since there is no specific maturity datefor bond funds, interest rate risk is a larger factor than forindividual bonds held to maturity. Bond funds have doneespecially well in recent years as prevailing interest rateshave declined, thus producing capital gains. It is widely heldthat interest rates will rise in coming years, though esti-mates of timing and the extent of the increase vary. Whenthis happens, yields on bond funds (and other interest sensi-tive investments) may be adversely affected.Bank loan funds: Some funds invest in floating rate corpo-rate bank loans. The advantage of these funds is that theytend to do well in a rising interest rate environment, unlikeconventional bonds.Preferred stocks and preferred stock funds: Preferredstocks can be thought of as perpetual bonds and may carry abit more risk than a conventional bond from the same is-suer. The additional risk is compensated for by a higheryield. Current yields on decent quality preferred stocksmay be in the range of 3% to 7%.Equity options: Requiring more work, but with a potentialfor greater returns, are certain equity option strategies.
One such strategy, referred to as “covered calls,” is gener-
ties, especially in today’s more volatile and questionable eq-
uity investing environment (see the chart on page 8). Inves-tors should discuss these and other income-based strategieswith their investment advisor to determine what is appro-priate in their specific situation.