Are you a Baby Boomer heading into retirement? Chances are 2008 hit you like an anvil. Your pension portfolio and the price of your house plummeted. Together, those investments are probably the majority of your wealth.
But according to new research by the Social Security Administration, by 2010 Baby Boomers born between 1948 and 1953 had lost only an average of about 2.8% of their real wealth from 2006 to 2010. “How could this be so low?” you might be asking. In 2006 64.3% of the average Boomer’s wealth was tied up in pensions and housing and real estate. Between 2006 and 2008 housing prices fell 25.2% and the S&P 500 fell by 36.3%. Nest eggs were demolished.
What happened next is the fun part, and takes an understanding of history to fathom. Back in the first years of this millennium the Federal Reserve was tasked with cleaning up the burst of the dot-com bubble. To achieve that goal it kept interest rates extremely low through 2005 in order to spur the housing market. And spur it did. Housing took off and every jilted dot-com-startup investor in the country began flipping lofts and duplexes in the next quick-money craze.
Fast forward to 2008 and the charade fell like a house of cards. By the end of 2008 it looked like stocks were done for good. Two massive beatings in 10 years are surely enough to scare the living daylights out of investors. Right?
Apparently not. It turns out the Federal Reserve’s plan for recovering from the bursting of the housing bubble it manufactured was the same old medicine. Super low interest rates—even lower in fact. And this time, with a kick—quantitative easing.
The Fed has been desperately trying to reengineer its housing bubble, but to no avail. From 2008 to 2010 housing prices dropped another 6%. What is the aspiring central banker to do if he can’t force up housing prices? The answer—force up stock prices.
By 2010, under the influence of heavy handed monetary policy, the S&P was up 39.2% over 2008. The Fed had saved Baby Boomers’ retirement nest eggs by inflating the value of their retirement pensions.
But do you buy into the idea that the Fed can keep its latest monetary-soufflé from collapsing in on itself? We don’t. You must invest for protection.