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Brace Yourselves for the Great Income Rush

Wednesday, 01 August 2012 07:43 AM

Has the Great Income Rush begun at last?

A new survey by Oppenheimer, the money manager, found that financial advisers are being pushed into a variety of non-traditional investments in their search for yield. Once content to sit in U.S. Treasury debt, a strong majority now tell their clients to buy dividend stocks (84 percent) and to look to foreign-bond issuers for yield (76 percent).

Meanwhile, bond king Bill Gross, founder of money manager Pimco, told investors this week that the “cult of equity” was on its last legs. In effect, baby boomers should turn away from stock appreciation and instead seek safety and yield, he argued.

"Common sense would argue that appropriately priced stocks should return more than bonds. Their dividends are variable, their cash flows less certain and therefore an equity risk premium should exist which compensates stockholders for their junior position in the capital structure,” Gross argues.

"Yet despite the past 30-year history of stock and bond returns that belie the really long term, it is not the future win/place perfecta order of finish that I quarrel with, but its 6.6 percent 'constant' real return assumption and the huge historical advantage that stocks presumably command.”

The open question, then, is where do all those trillions of retiree dollars go, if not into stocks?

Obviously, the United States taxpayer will be socked for quite a tab built up over years. And retirees will have to sell assets to finance their own retirements.

Yet, presumably, a fair chunk of that wealth will stay in the market in some form. It raises interesting questions: Whose market (United States or foreign?), which assets (bonds, stocks, or alternatives?), what time horizon (how fast will they liquidate?), and where do their kids and grandkids invest, if not right back into stocks?

The roller coaster in stock prices over the last few years has been something of an acid test for the baby boomer investors. If they had simply held on during the panic and the ensuing recession, most would have been made whole. The Dow Jones Industrial Average is once again back above 13,000, if barely.

Tellingly, though, the SPDR S&P 500 ETF (SPY) is down more than 5 percent over five years, while the Vanguard Dividend Appreciation ETF (VIG) has put on more than 5 percent. (The funds currently pay comparable yields.)

Retirees seem likely to change horses midstream no matter what, given the Federal Reserve’s insistence on keeping rates near zero. Oppenheimer found that 59 percent of advisers believe their clients are less interested in risk than before, moving toward fixed income investments as a result.

More than half say their clients are seeking protection, and nearly 20 percent reporting having trouble find the income their clients demand. Presumably, every time the major indexes touch a relative plateau, that’s just another trigger to sell off risk and buy safety and income, in whatever form it seems to take.

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Wednesday, 01 August 2012 07:43 AM
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