Saturday, November 03, 2012

Retirees should be careful about junk bonds, private equity


Retirees may want to make note of the editorial Nov. 2 in the New York Times, “The junk is back in junk bonds”, link here.

The editorial refers to a recent paper by Nathaniel Popper, explaining the effect of artificially low interest rates, which might have been perceived as propping up the valuations of bond portfolios. 

Companies have resorted to junk bonds with optional interest payments, where companies can “default” on interest if they can’t pay.  They have also reverted more to private equity, and issued riskier paper to get out of trouble,  This practice seems to be legal again with regulators.

The whole practice reminds me of the film “End of the Road: How Money Became Worthless”, reviewed on the movies blog Nov. 1, explaining how “fiat currency” is not the same thing as “money”.  Accumulated wealth, which people who no longer work depend on to live well, is at risk.  That’s especially true of retirees who aren’t skilled in making money by selling to others.  One of the nastiest comments I ever heard, sometime after the 2001 recession, had been, “any retiree with a brain can make $200000 a year anyway”.  

Sure, by peddling things.  Like real estate, cash flow management, or various Ponzi schemes.  I’ve looked at them all.

That brings up the question of how much good financial planners do.  Indeed, they do know specific products, like annuities. But they can’t really predict how the economy will do or what will hold value any better than “you” (or “I”) can.

Here’s a video, “What is Private Equity”, by “Privcap”.

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