How to Protect Your Portfolio Entering QE Year Five

By John Whitefoot

For the last five years, the U.S. has relied on quantitative easing, one of the most unconventional monetary policies, to kick-start its economy. By printing off trillions of dollars and increasing the money supply on the back of artificially low interest rates, the government is hoping financial institutions will increase lending and liquidity.

Will it work? Not if history is any indication.

On December 29, 1989, during the heyday of the Japanese asset price bubble, the Nikkei Index hit an intraday high of 38,957.44, capping off a decade in which the index soared more than 500%. Despite those dizzying heights, no one could see what the next 25-plus years would bring.

Over the ensuing decade, the Nikkei continued to slide. To shore up the economy, the Bank of Japan held interest rates near zero and had, for many years, claimed quantitative easing was an ineffective measure.

In March 2001, the Bank of Japan unveiled its first round of quantitative easing. It didn’t take, and since then, Japan has initiated 11 rounds of quantitative easing, dumping trillions of dollars into the markets. Instead of stimulating the economy, it has been saddled with a negative real gross domestic product (GDP) growth rate and record-low interest rates.

By late October 2008, the Nikkei hit an intraday low of 7,141—an 80% loss from its 1989 highs. While it rebounded in 2013 and is currently sitting near 14,170, it’s still down more than 63% since the halcyon days of the late 1980s.

After a quarter century, quantitative easing and record-low interest rates are a regular part of Japan’s economic diet. Thanks to uncertainty in the U.S., long-term near-record-low interest rates may become a mainstay here as well.

Back in September, the Federal Reserve said it had no intention of tapering its $85.0-billion-per-month quantitative easing policy—at least not until employment levels dropped to 6.5% and inflation exceed 2.5%.

Those targets are a long ways away. Thanks to the U.S. government shutdown and a guaranteed standoff (and eventual reconciliation) in Congress over the debt ceiling, chances are really good that interest rates here will remain near historic lows for a long time. With all this disconnection, one of the few things that still unites the majority of Americans is our fiscal dependence on quantitative easing.

In early 1981, the Fed rate was over 19%, and in 2007, just before the markets crashed, it was over five percent; today, the Federal Reserve has brought it down to 0.25%. Had the so-called U.S economic rebound gone according to plan, the Fed expected the fund rate to be one percent higher by late 2015 and an additional one percent higher at the end of 2016.

That won’t happen.

Incredibly, we’re already in the fifth year of artificially low interest rates, and there’s no immediate relief in sight. That’s terrible news for risk-averse investors who are looking to generate reliable income on fixed investments like bonds.

In fact, because of low interest rates, Americans looking to beef up their retirement portfolios are going to have to readjust them and take on more risk. Instead of investing in any one company, it might be a better idea to diversify risk and look at exchange-traded funds that take advantage of long-term trends.

Over the next 16 years, 10,000 baby boomers will be retiring each and every day; that represents an enormous long-term trend. For that reason, health care real estate investment trusts (REITs) that own hospitals, nursing facilities, and retirement homes like Health Care REIT, Inc. HCN, HCP, Inc. (NYSE/HCP), and Medical Properties Trust Inc. MPW will be in demand over the long term. In addition to providing shareholders with value, they also provide a steady dividend stream.

This article How to Protect Your Portfolio Entering QE Year Five was originally published at Daily Gains Letter