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Wednesday, February 15, 2012

Cheap-money Fed pushes savers to risky investments

Federal Reserve chief Ben Bernanke's promise to keep money at near-record cheap interest rates at least until 2014 is good news for homebuyers  and borrowers -- and not so good for retirement savers, who have watched the stock market go sideways since the end of the 1990s, and are showing signs of despair that bonds or stocks will recover in time to refloat their 401(k)s.

What can desparate investors do? Try "an 18-month snooze," suggests James Barnes, senior fixed income portfolio manager at National Penn Bank's investment affiliate, which manages $1 billion in bonds, plus $1.5 billion in stocks and more volatile investments.

"In this environment, there's two ways to increase your yield: go out the yield curve" and buy longer-term debt at slightly highe rreturns, "or increase the risk you're willing to assume," Barnes told me.

Instead, investors are taking on more risk. Michael Forman, co-head of Philadelphia's Franklin Square investment funds, says his closed-end funds based on junk-rated corporate and energy debt are growing rapidly as investors hope they'll continue to post yields approaching 10%, thanks to today's unusually wide spread between government and corporate interest rates.

Barnes says that kind of investment may work for "people of lower age and longer time horizon," but isn't appropriate for older folks nearing retirement who are desperate to grow their next eggs.

 "People are feeling driven to change their investment foundation" -- and it's a bad idea, Barnes said: "You shouldn't take on more risk unless your investment objective has changed. We are in an interest rate environment that's low. But we're here for a reason." Rates will rise in time; today's rich junk loan yields could blow away as quickly as the late-90s dot.com bubble, Barnes concluded. 
Posted by Joseph N. DiStefano @ 12:38 PM  Permalink | 3 comments
Comments   
  • 0 like this / 0 don't   •   Posted 4:04 PM, 02/15/2012
    ben bernake is not be be trusted.
    — OhOkay
  • 0 like this / 0 don't   •   Posted 4:11 PM, 02/15/2012
    The "Fed" or aka Central Bank caused the Great Depression and Great Recession and finances the War Protiteers of the American Military Industrial Complex. Americans are lemmings...shells of what the Founding Fathers knew about central banking and why they fought the Revolutionary War agaist not the King of England, but the Bank of England.
    — Citizenc92
  • 0 like this / 0 don't   •   Posted 5:00 PM, 02/15/2012
    This is one way to reduce corporate obligations. Free money borrowed at zero interest rate, but savings for retirements, pensions and annuities paying next to nothing. Financial planners borrow from the Fed and invest in treasuries, and sell this weak crap as retirement plans. The thinking investor worrying about the future looks for higher returns only to swim in shark infested waters of doom to fail, capital hungry start ups that can't get bank loans, can't sustain political support from DC, and can never get enough from the junk bond dealers to make payback more than a suckers bet. And the banks collect fees coming and going.
    — Fernando08


3 comments
About Joseph N. DiStefano
Joseph N. DiStefano writes this blog to feed his PhillyDeals column in the Philadelphia Inquirer. Joe has been a member of Bloomberg LP’s New York Finance Team, wrote the book “Comcasted,” taught writing at St. Joseph’s University, and studied economics and history at Penn. Reach Joe at 215-854-5194 and JoeD@phillynews.com
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