Investing as a Retiree In a Zero Interest Environment

Things are tough for retirees. Many may have lost a significant portion of their savings in the stock market crash of 2008. Even worse, most of those investors may have been too fearful to re-enter the market—numbers show that many retail investors still have not returned—and thereby missed out on the opportunity to regain their losses in recent years as the market has rallied. Further, in response to the recession, the Federal Reserve has slashed interest rates to near 0%. This may have benefitted corporations in the broader economy, but it has been a bane for retirees surviving off the interest paid on their savings. Unfortunately, as troubles in the Eurozone have emerged, it may be too late to get into stocks in a conventional manner. At the same time, barring major political upheaval, the Fed has promised near zero interest rates until at least 2013 and maybe even longer after that. So, what is a retiree to do? Given the current state of the world, a balanced portfolio may be the best option. However, when creating this portfolio, retirees may do well to consider more unconventional plays, working to hedge against multiple scenarios:

This asset class may do well in a highly inflationary environment. Some commodities—like gold and coffee—have seen a record run-up already and could, admittedly, be due for a further pullback. Others, like oil, may be moving more on instability concerns and could falter when these issues clear up. Still, commodities as a class dominated the environment of the 1970s, and if history repeats itself, having exposure to commodities could be a smart move. Investors can get exposure to these through a combination of commodity-based ETFs and companies in the commodity industry like agricultural companies and miners.

In the event of a market collapse, these stocks may be the least hard hit. Utilities, tobacco companies and consumer staples could be a safe haven when most stocks are trading lower. This is more of a standard play, and could therefore be prone to somewhat of a bubble effect, but may be an integral part of a balanced portfolio.

Despite the low interest rates, retirees may do well to have some portion of their portfolio in cash. In the 2008 market crash, the US dollar rallied sharply as deflation and debt restructuring ruled the day. In a similar scenario, holding cash may be retirees' best bet.

Perhaps the most risky play, but one retirees might want to consider. Emerging markets have been a lone bastion of growth in recent years, and may continue to be in the future. Additionally, some of them may have attractive currencies. India, for example, has recently made statements that is concerned that its rupee is weakening and may intervene to fight this weakness. This is a sharp contrast to developed nations, which have been intervening to intentionally prevent their currencies from appreciating. Savers could benefit from storing their capital abroad, although emerging markets bear some degree of inherent risk. With so much uncertainty, it is far from an ideal time to be a retiree. Yet, maintain a balanced portfolio with exposure to a number of hedges may allow retirees to maximize their investment returns.