A New Marshall Plan

How long will it take the Europeans to figure it out? Watching the day to day events coming out of Europe is like the drip of water torture. No wonder the financial markets are facing such day-to-day volatility. It is clear what the Eurozone members need to do and do fast: craft a master bailout plan to 1) backstop the government debt of the PIIGS (Portugal, Ireland, Italy, Greece, Spain) and 2) shore up the capital of the healthiest banks and let the weakest banks go. How could this happen ?

Obviously financial resources of all G-20 countries would be required: $3, $4, $5 trillion?? The current Euro bailout facility of about $1.6 trillion is not adequate. The capital is available amongst the G-20 central banks. The new facility would be a larger reserve that would backstop the debt of the PIIGS as a long-term workout plan is implemented. A comprehensive workout plan, including austerity measures, could serve almost as a second Marshall Plan (the first was implemented to re-build a decimated Europe after World War II). A comprehensive plan like this would go a long way to restore confidence in the capital markets. 

Our belief is the Eurozone members will eventually work out a plan that has some of the elements described above, but timing and structure remain highly uncertain. We believe the Europeans understand the gravity of the situation, but of course, political pressures can affect decision-making, timing, and ultimate outcomes. In the meantime, from a financial planning perspective, we continue to advocate investing in a highly diversified portfolio that provides exposure to global growth opportunities and delivers above average income. Both the diversification aspect and higher income component of the portfolio will help to reduce its volatility while providing opportunity for return in a “trading range” environment. While slower growth may be with us for a while longer, appropriate asset allocation and diversification with a tilt towards higher income will help investors weather this slower growth period and be positioned for improved market conditions, which we expect eventually.

Let’s Get Radical

We’ve noted a number of articles lately about the prospects for rising retirement ages for the baby boomer generation. It’s all over the media these days. Some articles now estimate many boomers may be working well into their 70s. To anyone who has given it much thought recently, this should come as no surprise. The facts are pretty sobering:

§  The Federal Reserve recently reported that the median household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed to maintain its standard of living in retirement.

§  The Fed reported that the median 401(k) plan held only $149,000, according to the Center for Retirement Research, an amount that would be virtually impossible to retire on.

§  AARP recently reported that one in four older workers exhausted all their savings during the recession with a growing number of older Americans facing bankruptcy.

§  Recent studies have estimated Social Security will run out of money by 2033.

This situation has several implications from a financial planning perspective:

1.        It is obvious that extending the retirement age will have to be an option for many Americans and that the notion of an easy life of leisure after age 65 is probably now a pipe dream for many if not a majority of baby boomers (one problem with this: it is unlikely the economy can create enough jobs to support all the boomers who will need one). 

2.        “Radical” notion: traditional asset allocation models may be a thing of the past.  The traditional strategy of transitioning a portfolio to bonds in retirement will not provide the returns necessary to enable retirees to meet their spending goals. People will need more growth investments in retirement, which means holding more equities in retirement than has traditionally been the case. This implies retirees are going to have to stomach greater portfolio volatility which many may find distressing.

3.       Global balance with emphasis on large, quality companies. The not so radical notion from an investment perspective is to increase portfolio emphasis on large, quality, globally diverse companies that can capture growth of faster-growing economies and translate that into higher earnings, dividends, and cash flow for investors.

4.      Increase cash flow from your investments. Cash flow has become a new mantra in the investing world and for good reason: it pays the bills. Creating greater cash flows in portfolios can accomplish several things at once: a) increase spendable income; b) reduce portfolio volatility; c) create a rising income stream through dividend increases.

5.       Another “radical” notion: save more, spend less. Granted, this is easier said than done, but this discipline will have to be embraced given the prospect of lower stock returns and Social Security cutbacks. Without a grasp of what is realistic, the American “dream” is turning into a nightmare for many. With proper planning and renewed saving and spending discipline, many people can achieve a comfortable retirement. But the boomers have always changed the rules, and this generation will probably change the rules that have defined “traditional retirement”.