QE3: Hindering the Savings and Retirement Process
The Federal Reserve recently announced another quantitative easing program, referred to as QE3. The program will purchase agency mortgage-backed securities each month for an unspecified length of time. Furthermore, the central bank decided to extend out its zero interest rate policy to at least mid-2015. While the moves are touted as a way to support asset prices and boost confidence, it is another blow to already beaten down savers and those trying to prepare for retirement with conservative investments.
Investor Insight: QE3 Removes Price Ceiling for Gold and Silver
The ultra low interest rate policy environment is making it difficult for risk-averse people to earn a decent return on their money, and a new study shows that Americans need every bit of help they can get. Ameriprise Financial (NYSE:AMP) recently conducted a retirement preparedness survey, which sampled 10,000 residents in the nation’s 30 largest metropolitan areas between the ages of 40 and 75. The study found that less than 70 percent of Americans are making preparations for retirement, the lowest level in three years. Washington D.C. ranked as the least prepared city, while Hartford-New Haven was the most prepared.
Suzanna de Baca, vice president of wealth strategies at Ameriprise, said, “While the majority of Americans we surveyed express positive feelings about retirement, we’re still seeing a significant lack of confidence, in fact, nearly half admit they’re concerned about outliving their savings,” according to the WSJ.
Don’t Miss: Are These the Best Stocks for QE3?
The Federal Reserve has embarked on numerous stimulus programs over recent years, and the central bank will not stop anytime soon. As a result, dividend paying equities have gained popularity as their yields are outperforming other investment vehicles such as savings accounts or certificates of deposits. After declining for five consecutive years, shares of the iShares iBoxx $ Investment Grade Corp Bond ETF (NYSE:LQD) started to climb higher in 2009, following the unfolding of the financial crisis. The fund is attractive because even after rising more than 20 percent in the past four years, it still has a dividend yield of almost 4 percent. Furthermore, its holdings contain corporate bonds from well recognized names such as Wal-Mart (NYSE:WMT) and General Electric (NYSE:GE).
However, savers and retirees seeking yield in the form of equities are taking on additional risk and the total impact from the Federal Reserve’s monetary easing policies are yet to be fully seen. Jeffrey Gundlach, CEO of DoubleLine Capital, recently told CNBC, “We’re not going to have a lost decade in equities, but I wouldn’t buy them today.” He later added that investors looking to invest in equities should only buy the safest dividend players, such as Campbell Soup (NYSE:CPB) and Kraft Foods (NYSE:KFT). He also believes banks like Citigroup (NYSE:C) and Bank of America (NYSE:BAC) should be avoided. On when the Fed may actually leave the bond market, Gundlach said, “I think it will be more likely that the Federal Reserve buys all the Treasury bonds that exist than starts selling them. I have no concept of what an exit strategy would look.”
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