Dear John:
Many boomers who lost much of their 401(k) and 403(b) gains and principal a few years ago invested hardeartily in stocks to offset losses with retirement in sight. In view of the many articles that you have written prognosticating this [about a] Dow drop and low bond-interest rates, where would you suggest that a boomer place his/her nest egg? H.P.
–
I can’t tell you what to do with your money, but here’s the way I see things.
Stock prices have risen sharply over the past few years. But the gains were mostly because the Federal Reserve was adding trillions of dollars in extra liquidity to the financial system. That extra money was used by the Fed to purchase government bonds and mortgage-backed securities. This is what was referred to as quantitative easing.
Now there’s talk that the Fed might retreat on QE. That (and a lot of other things) causes the stock and bond markets to act very skittish.
It would be normal for them to pull back, and 20 percent would not be an obscene correction. But with the economy still doing poorly, a change in the Fed’s attitude toward QE could create an even bigger downturn.
Still, investors already in the stock market need to consider the tax consequences of selling. If you have gains, you will be taxed on what you’ve made in the market. Will the market’s decline be worse than the tax rate you will have to pay? Will the market bounce back if it gets clobbered post-QE, or will it continue to decline for a long time?
All you have to do is guess right and you’ll be OK. Pick this week’s Powerball numbers, and you’ll also be sitting pretty.
The bigger problem is the bond market’s reaction to a “tapering” of QE. As you probably know, bond prices and interest rates automatically move in the opposite directions.
So if the end of QE causes rates to rise, bond prices will decline automatically — and maybe dramatically. The more rates rise, the more bond prices decline.
Did I hear you say you don’t own any bonds? Well, you’d better check the investments being made by the diversified funds you have your retirement money in. I guarantee some of the funds’ money is invested in bonds.
Send your questions to Dear John, The NY Post, 1211 Ave. of the Americas, NY, NY 10036, or john.crudele@nypost.com