By: Jeremy Biberdorf
December 1, 2014
Retirement planning is a crucial task. The reality is that most people work for most of their lives in order to save money and be able to survive their golden years without working. However, with current market and geopolitical conditions, your retirement may be at risk. Today, we’ll talk a bit about what’s going on around the world and how it could affect the stock market. Then, we’ll talk about how you can protect yourself should your retirement investments be at risk.
The Stock Market Looks Great…Right?
2008 and 2009 brought incredibly hard times for several people. However, the recovering from that financial crisis has been great for investors! Throughout the past several years, we’ve been experiencing a bull market that seems like it’s going to last forever. The Dow Jones and the S&P 500 have smashed through their record highs quite a few times this year, while the NASDAQ has seen some pretty impressive gains as well. So, the big question is, “Can this really last?”
Looking at the stock market throughout history, we learn that long term bull markets, as great as they seem, lead to big time market corrections. That’s because when the market increases in value at a pace faster than the corporate profits of underlying assets, investors are essentially overpaying for stocks. When the investors become wise to the mistake, it prompts a big time sell off that brings values of stocks down substantially.
One of the metrics that I use to see how close we may or may not be to a market correction is called the Schiller PE Ratio. This ratio is a simple formula that compares the price of stocks to the corporate earnings of the underlying assets. In healthy market conditions, the PE ratio hovers around 16 points. However, today the Schiller PE ratio sits at 26.5 points. This tells us that right now, investors are grossly overpaying for stocks!
So, to put this all together, while the stock market looks great, it’s also throwing up a red flag the size of a football field. As mentioned above, when stock prices rise faster than corporate prices, things may look good on the cover, but by reading the book, we find out the cover lies!
How You Can Protect Your Retirement Investments
If a market correction does happen, and it looks like it will, tons of people will lose quite a bit of money that they’ve built up in their retirement accounts. However, looking at my favorite indicator, history, we can see a way to protect ourselves. The vast majority of times we’ve seen market corrections in history, the value of gold increases. That’s because when investors see losses due to a correction, they look for safe haven investments. Gold is about as safe as it gets. As a result, demand for gold increases, ultimately increasing its value.
Knowing this, pprotecting your retirement investments becomes a bit easier. By converting a portion of or your entire 401k to gold, you can hedge against losses you would have sustained due to the looming market correction.
What are your guys’ thoughts on the Permanent Portfolio in this regard?
I can’t imagine losing what I have invested in retirement. So I will do whatever I have to do to keep it safe, even if that means sitting outside my bank with a bat….I have never thought about looking into buying gold as an investment…you have peaked my interest.