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Stocks Get Bernanke Bounce

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In his twice-a-year economic report before Congress Wednesday, Federal Reserve chairman Ben Bernanke’s comments helped stocks rally during the morning session, with the Dow Jones Industrial Average surging 164 points—for a Bernanke bounce. He told the House Financial Services Committee that “We have to keep all options on the table” in fighting inflation or deflation. Well, that clears things right up, doesn’t it?

Bernanke went on to say that “If we get to the point where the recovery is faltering” and inflation drops to zero, then he would consider additional stimulus options. Great, more bond buying to stimulate the economy. Just what consumers need, especially those of us who eat for a living and don’t want a second helping of QE II stimulating higher food prices.

Mr. Bernanke’s too-hot or too-cold fairy tale of a Fed policy makes the already difficult task of retirement investing that much more difficult by adding another layer of uncertainty—as if trying to figure out how long you’re going to stick around isn’t hard enough as it is. You shouldn’t be studying Bernanke’s next move in your retirement. You should be studying a time-tested strategy.

One back-of-a-napkin strategy is to put a percentage of your portfolio equal to your age into bonds. Imagine if you were 60 in 2001 and you put that percentage in bonds. The Vanguard Wellesley fund invests about 60%–65% in bonds returning an average annual compound return of 6.53% from May 14, 2001, through March 31, 2011. An investment of $1,063,829 compounded at 6.53% for 10 years is $2,000,000. And note, 4.66% came from income and only 1.87% from capital appreciation.

In the last nine and a half fiscal years, Wellesley (September 30, 2000, through March 31, 2011) had only one down year, or a .900 batting average. Not bad considering that the early 2000s saw the aftermath of the tech bust, followed by the real-estate crash, the great recession, and the current weakness in a far-from-robust recovery.

Mr. Bernanke did comment on what the Fed’s next move will be, saying, “The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might re-emerge, implying a need for additional policy support.” Then again, they might not.

 

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E.J. Smith

Editor-in-Chief
E.J. Smith is Founder of YourSurvivalGuy.com, Managing Director at Richard C. Young & Co., Ltd., a Managing Editor of Richardcyoung.com, and Editor-in-Chief of Youngresearch.com. E.J. graduated from Babson College in Wellesley, Massachusetts, with a B.S. in finance and investments. In 1995, E.J. began his investment career at Fidelity Investments in Boston before joining Richard C. Young & Co., Ltd. in 1998. E.J. has trained at Sig Sauer Academy in Epping, NH. His first drum set was a 5-piece Slingerland with Zilldjians. He grew-up worshiping Neil Peart of the band Rush, and loves the song Tom Sawyer—the name of his family’s boat, a Grady-White Canyon 306. He grew up in Mattapoisett, MA, an idyllic small town on the water near Cape Cod. He spends time in Newport, RI and Bartlett, NH—both as far away from Wall Street as one could mentally get. The Newport office is on a quiet, tree lined street not far from the harbor and the log cabin in Bartlett, NH, the “Live Free or Die” state, sits on the edge of the White Mountain National Forest. He enjoys spending time in Key West and Paris. Please get in touch with E.J. at ejsmith@youngresearch.com.

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