We couldn’t help but recoil while reading James B. Stewart’s “Common Sense” column in the June 15th edition of The Wall Street Journal.
Don’t get us wrong, we have the utmost respect for Mr. Stewart. He has authored some fascinating and insightful treatises on the goings on in corporate America and the Wall Street community, including “Den of Thieves,” “Blind Eye” and, most recently, “Disney War.”
We are, however, a bit skeptical regarding his expertise in the area of personal finance.
In his column, Mr. Stewart discusses the “puzzling development” that long-term interest rates are almost one full percentage point lower despite the fact that the Federal Reserve has raised the Fed Funds rate eight times (2.00%) since last June.
Stewart readily admits he was wrong in predicting that long-term yields would rise, though he excuses himself by saying “everyone else” was wrong, too.
But we’re not as willing to excuse Mr. Stewart or the other seers with whom he associates, particularly since newcomers to income investing who followed this advice and decided to wait for higher rates before committing funds to the bond market have found the “cost of waiting” to be incredibly prohibitive.
Ignoring income risk
These gurus’ obsession with potential market risks and faith in their ability to predict the future has caused them to completely ignore income risk, which will be of paramount importance to a burgeoning “baby boomer” population rapidly approaching retirement.
To their credit, most veteran bond buyers take a long-term view and are rarely influenced by Wall Street prognosticators who espouse the merit of long-term investing while continually recommending “turn-on-a-dime” asset shifts.
So what is Mr. Stewart recommending today? You guessed it: Two-year bank certificates of deposit.
Two years is ideal, he claims, because by that time, long-term rates will have risen and he will be able to “shift” the proceeds into higher-yielding alternatives.
Of course, what he fails to address is what happens if, once again, he is wrong.
Does that sound like common sense to you?