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.