Please ensure Javascript is enabled for purposes of website accessibility

Don't Let Bernanke Pick Your Pocket!

By Alex Dumortier, CFA – Updated Apr 6, 2017 at 8:32PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Your choices for saving intelligently.

This month, the rate of inflation exceeded the yield on the 10-year Treasury bond for the first time since 2008. That's a negative real yield! Your assets will lose purchasing power with that return. Bill Gross, who manages the world's biggest bond fund, told Bloomberg Television last week: "Savers are being disadvantaged. ... We call [what policymakers are trying to do] pocket picking." Don't let central bankers pick your pocket. Here are a few asset allocation guidelines to avoid just that.

Saving is healthy -- necessary, even. Indeed, during the housing bubble, there was spending on a massive scale, with people borrowing against the value of their home to fund their spending habits. Now that the party is over, U.S. consumers are left licking their wounds ... or balance sheets, as it were.

Avoid cash and government bonds
However, by setting interest rates at zero, the Federal Reserve isn't making it easy for people to save -- that's the idea. With negative real Treasury yields , saving intelligently for the long term means avoiding cash instruments (T-bills, money market funds, etc.) and Treasury bonds (I'm not referring to an emergency fund here). With regard to government bonds, the longer the maturity, the more interest rate risk you take. Steer clear of the iShares 20+ Year Treasury Bond ETF (NYSE: TLT), for example.

If you have money in a corporate bond fund that is run by a competent manager who you are comfortable with, that's an acceptable choice.

Favor real assets -- at the right price
There is only one reason to have your long-term savings in cash right now: because you're waiting for asset valuations to become more attractive. Otherwise, you should be investing those funds -- very selectively -- in real assets (assets that can be expected to provide a return above the rate of inflation, such as stocks or real estate.) In a stock market that looks overheated to me, high-quality large caps are one of the few segments that offer decent value. Two good alternatives to take advantage of that are the Vanguard Dividend Appreciation ETF (NYSE: VIG) and the Vanguard High Dividend Yield ETF (NYSE: VYM).

High quality, still
Finally, if you have the time and the inclination, you can invest in individual stocks. For the reason I gave in the previous paragraph, I would suggest concentrating on micro caps or special situations (if you have enough expertise) or high-quality large caps (which is easier). It's hard for me to believe that franchises like Cisco Systems (Nasdaq: CSCO), Intel (Nasdaq: INTC), General Dynamics (NYSE: GD), or Eli Lilly (NYSE: LLY) -- all of which offer a forward earnings yield of more than 10% -- won't produce at least 5%-6% in annualized return above the rate of inflation over the next five to seven years.

 The stock market looks overheated -- "Watch This Before the Market Crashes."

Fool contributor Alex Dumortier holds no position in any company mentioned. Click here to see his holdings and a short bio. You can follow him on Twitter. The Motley Fool owns shares of General Dynamics and Intel, has created a bull call spread position on Cisco Systems, and has bought calls on Intel. Motley Fool newsletter services have recommended buying shares of Cisco Systems and Intel, as well as creating a diagonal call position in Intel. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Eli Lilly and Company Stock Quote
Eli Lilly and Company
LLY
$311.46 (0.19%) $0.59
Intel Corporation Stock Quote
Intel Corporation
INTC
$27.52 (-1.96%) $0.55
Cisco Systems, Inc. Stock Quote
Cisco Systems, Inc.
CSCO
$40.66 (-1.19%) $0.49
General Dynamics Corporation Stock Quote
General Dynamics Corporation
GD
$221.90 (-2.71%) $-6.19
Vanguard Specialized Funds - Vanguard Dividend Appreciation ETF Stock Quote
Vanguard Specialized Funds - Vanguard Dividend Appreciation ETF
VIG
$139.05 (-1.29%) $-1.82
iShares Trust - iShares 20+ Year Treasury Bond ETF Stock Quote
iShares Trust - iShares 20+ Year Treasury Bond ETF
TLT
$105.70 (0.41%) $0.43
Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF Stock Quote
Vanguard Whitehall Funds - Vanguard High Dividend Yield ETF
VYM
$97.76 (-1.90%) $-1.89

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
329%
 
S&P 500 Returns
106%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 09/24/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.