Turn the TV Off and Get Back to Basics

07/05/2013 7:00 am EST

Focus: STRATEGIES

Robert Carlson

Editor, Retirement Watch

Investors don't do themselves any favors by taking their investing cues from 24/7 cable news coverage, says Bob Carlson of Retirement Watch.

Nancy Zambell: Good morning. My guest today is Bob Carlson, the editor of Bob Carlson's Retirement Watch, a newsletter that's been around for how long now, Bob?

Bob Carlson: Since about 1991.

Nancy Zambell: And you also have a blog. Do you have a name for your blog?

Bob Carlson: No, I don't. The address is bobcarlson.net—not .com, but .net. I don't give it a clever name.

Nancy Zambell: That's great, because when you read it, it doesn't have to be clever, because it gives very good information. You have been an educator of investors for many years, and I think that has been lost today, in many cases.

One of the things you recently wrote about was cable news, which is mostly negative, with some of the news reporters seeming to be in the pockets of the people that they are actually promoting. And that has been a problem in the old newsletter industry, too.

Bob Carlson: Right. There are a lot of conflicts of interest in the various financial media. My view is that most investors spend too much time paying attention to the various media—especially what is going on in cable news and a lot of the Internet sites—and they're losing track of what they ought to focus on.

There is a lot of time and space for cable news and Web sites to fill, and so they focus on a lot of what we call "noise," rather than the real things that move markets. And investors tend to get lost in all of that noise.

Many of them either focus on just one possible outcome for the economy and markets and ignore everything else, and end up not being diversified or balanced—putting a lot of their wealth at risk. Or what many people are doing right now is that they just get paralyzed. They're just inundated by all of this different information and data and arguments, and they can't sort them out. So they don't do anything.

My approach for some years now—which I recommend for most people—is to really limit your access to cable news and a lot of these other information sources.

The first thing you need to do is figure out what your view of the economy and markets are, what your philosophy is, what you believe about what moves markets, and how you ought to be investing. Then look for information that helps you out along those lines. Don't focus on daily headlines, or the latest earnings reports, or anything like that.

First, you have to sit back and get your big picture view of how things work, and then seek out information and data sources that help you apply that to what's going on. Focus on something intermediate term rather than short term.

Nancy Zambell: As you said, people become paralyzed, and then they get totally out of the market. Any of us that have been doing this for so long know that you have to stay invested in the market, and you have to be a long-term investor and not a trader. And that's unfortunately what the cable news has turned a lot of investors into—to their detriment.

Bob Carlson: Right. When I get new subscribers these days, it tends to be people who have been paralyzed the last few years. They are mostly in cash, and they know that they are losing money after inflation and taxes.

They know that they should be doing something more, but they just don't know who or what information to rely on and what to do. So I try to get people to focus on the basics, to ignore the short-term, to have a diversified, balanced portfolio, and to focus on reducing risk.

The other thing that a lot of the media do wrong is to focus on big gains and the next big thing, and that's not really the way to manage a portfolio well. The economy is going to grow over time, the market's going to appreciate over time, and so if you are invested over time, you're going to make money.

But what you want to focus on is reducing risk. Locate the assets that are at high risk at a particular time and reduce or eliminate them from your portfolio. And look for assets that appear to be low-risk, and increase them in your portfolio. If you focus on risk management rather than big gains or the daily headlines, you'll be much better off.

Nancy Zambell: What do you see as some of the low-risk investments for investors today?

Bob Carlson: Right now, it's a very difficult time, because we have these artificial foundations put under a lot of assets in the economy by the Fed. And there has been a lot of turbulence in May and June, because a lot of people are now looking forward to the Fed changing policy. And for some reason, it seems to have surprised them.

My view is that a lot of what happened in May and June went too far, that there were a lot of leveraged investors who decided this was the time to take off their investments. And as they did that, it really hurt a lot of markets—particularly the bond market.

I think the Fed is going to continue its policies for some time, and still keep something of a lid on interest rates, but they are going to trade on a range—really as they have since the Fed started quantitative easing in 2009.

Looking out on an intermediate term of six months or longer, I think there are a lot of opportunities in various bond investments, because they went down too far and lost too much money during May and June. So for people who have a six-months-or-so outlook, I think it's a good time to be adding some of these bond investments to your portfolio.

And I think stocks weathered that period pretty well, and I think the economy in the US is stronger than many people realize. It withstood the tax hikes and the federal sequester better than really we have a right to expect.

NEXT: 2 Mutual Funds to Watch

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So I think some allocation to a good stock mutual fund would be good. I prefer mutual fund managers who focus on risk management, and who have some liberal policies on how they can invest. For example, I like MainStay Marketfield Fund (MLFDX). I also like PIMCO All Asset All Authority (PAUIX), although that did not do well into May and June. But over longer periods of time, it's done well.

I like funds like that where the manager has a lot of flexibility and has a long record focusing on risk management and handling things well.

Nancy Zambell: That makes sense now. Are you an investor in bonds, or bond funds, or both?

Bob Carlson: I would recommend mutual funds primarily, with some closed-end funds, as well. I don't recommend individual bonds in my newsletter.

Nancy Zambell: Individual investors who do buy bonds—for many years—have depended on the ratings agency to try to help them figure out whether it was a good investment or not, whether it was credit-worthy. The rating agencies have fallen onto hard times because of the problems that they caused themselves. And you talked about that recently in your blog.

Bob Carlson: Right. One thing I object to is the phrase "rating agencies." These are not agencies as that term implies.

I don't know why that became the term that's used. These are just private sector for-profit firms that were given special status by the Securities and Exchange Commission, so that mutual funds and other investors could rely on their ratings. But they don't do a good job. They have a conflicted business model where they receive money from the people they are actually rating.

I'm on the board of trustees of my local government pension fund, and we regularly interview and evaluate money managers. One thing I've learned over the years is that the top bond-fund managers are the ones who—in their explanation of how they invest—one of the first things they say is, "We ignore the ratings. We do our own research and our own evaluation."

We've learned you can't rely on these rating firms, and so we don't even consider their ratings or what they say. And, unfortunately, that's the approach an individual investor who is looking at individual bonds has to take as well.

These firms are conflicted: they don't have the best talent in the industry, as they can make a lot more money elsewhere if they're good. So I recommend you really not pay attention to the ratings. You really just need to hunker down and do the financial statements and do your own research.

Nancy Zambell: Unfortunately, a lot of investors are at a loss as to how to even begin that. Bob, what do you think about annuities for individual investors?

Bob Carlson: Annuities are a very difficult subject, because there are so many of them and they're so complicated. I do recommend certain types of annuities in certain situations.

For example, if someone is retired, they should have some portion of their income guaranteed for life. You get some of that from Social Security, but for most people, it makes a lot of sense to put some portion of your nest egg into an immediate annuity.

These are not the annuities that get advertised or promoted a lot; they don't have the highest commissions; but they're the best for most conservative, retired investors. It gives you that locked-in floor of income for life.

These are just the traditional, plain vanilla annuities where you pay a lump sum to the insurance company, and it promises to send you a check every month for the rest of your life that is going to be the same amount—and it's going to be guaranteed no matter how long you live. That's a very good supplement for part of your nest egg.

There are a lot of other annuities out there that have a lot of bells and whistles, a lot of guarantees. These tend to have very high fees. If you actually analyze them carefully, you'll see you can probably do just as well with some combination of the immediate annuity and your own investments.

But most people who look at annuities go about buying them completely the wrong way. What you should do is decide what might fit your portfolio, what kind of conditions and terms you want on that annuity, and then go out and search the market, talk to different insurance agents and brokers, look at different Web sites, and see what the different terms are for similar annuities.

The way most people buy annuities is they'll have contact with some kind of financial services professional who will basically be selling one particular annuity, or maybe a small portfolio of annuities, and will just say, "I've got this annuity that I think is good for you."

So instead of comparing different annuities from different companies and seeing what fits best with his portfolio, the person ends up looking at just this one particular annuity and deciding if it's good or bad—just based on looking at it in isolation. That's really not a good way to buy an annuity. You first need to determine what your needs are, and then second, survey the marketplace for what's out there.

Also, a lot of annuities have been promising too much. What became very popular after the financial crisis were variable annuities with guaranteed income benefits or guaranteed life benefits. They would basically say that you buy the annuity for a lump sum, and after five or ten years, it will begin to pay you, or you can begin to take distributions of about 5% of the annuity value.

It was guaranteed you could take 5% each year for the rest of your life, and even if you exhausted the contract value, the insurance company would still continue to pay that amount. So it was similar in some ways to the traditional immediate annuity, but it had the potential for your account value to grow, and perhaps increase the benefit you receive for life.

It turns out these insurers promised too much. With the low interest rates and poor market performance we've had, they can't meet these guarantees, so they are retroactively changing a lot of terms. They are limiting the investments that people can make. Some of them have simply said, "We're not going to let you make additional investments, because we can't afford it."

And this is happening to people who planned their retirement assuming they could make contributions to these annuities over a period of years, and they'd have a certain level of safe income built up. Now that's being taken away from them.

So, it's the old rule, "If it sounds too good to be true, it probably is," and that's been the experience of a lot of people who bought these very attractive-sounding annuities over the last few years. That's one of the reasons why I recommend that most people just stick with your basic immediate annuity and make it part of your retirement nest egg.

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