At what point should investors switch from aggressively investing for profit to preservation of capital? When do you switch from offense to defense? Is it possible to do both at the same time?

Shortly after the 2008 bank bailout, I was asked to write a financial newsletter for baby boomers. The firm had a great track record investing in metals and oil stocks, proudly boasting many “10-baggers.” They focused on high risk, extraordinary return investments and attracted like-minded investors. If one struck gold or oil the spectacular returns would dwarf the other losses. Many subscribers made a lot of money following their recommendations.

Each year they sponsored a conference, with a cadre of big-name speakers. The theme of my first conference was how to invest safely in the new low interest environment, with the threat of inflation looming on the horizon. How do investors safely protect their wealth?

At 70 years old, I was both the old guy and new guy; an unknown name on the drawing card. I was allocated minimal time behind the microphone.

I took the microphone and looked at the audience. The vast majority of participants looked like me, grey hair and all. Most had accumulated a nice nest egg. They were concerned about protecting their wealth and buying power?

Intuitively, I changed my opening remarks, saying something like:

“Defensive investing is not that big a deal. There are times when you take profits, consolidate, reduce the portion of your nest egg allocated to high-risk investments and seek conservative investments to grow and protect your wealth and buying power.

I see a lot of grey hair. Most of you have started this process, either consciously or intuitively.

Expect historic low interest rates for the foreseeable future. Much like a football quarterback protecting a lead, we must look at the landscape, then run the plays that will give us the best opportunities for success and do everything to avoid catastrophic losses. Keep moving forward.

Our publication focuses on educating subscribers how to do that safely in the current investment climate.”

After my talk, several long-time subscribers approached me. Many paid thousands of dollars for “lifetime membership” and were part of the inner circle. Their comments were consistent. They were getting closer to retirement, had accumulated a good bit of wealth and needed to protect it; they needed to revise their investment game plan. They told my boss, “This guy understands my problem.”

The goal hasn’t changed, but the investment landscape certainly has.

Since then, finding safe investments has become even more challenging. Prior to the bank bailout, the Benjamin Graham formula (“The Intelligent Investor”) was very successful. In a nutshell, Graham broke the portfolio into three sections. 1/3 was invested in solid, dividend yielding stocks, 1/3 in safe bonds and CDs and the remaining 1/3 moved back and forth between the two depending on current market P/E ratios. He averaged double digit returns for decades.

How have things changed?

You could count on 6%+ interest from safe fixed income investments. Interest in your brokerage cash account was around 4%. Those options no longer exist.

If you want 4-6% interest rates, the risk of default is much too high for a conservative investor.

Concurrently, the stock market is being propped up with the Fed’s fake money, and regularly setting new highs. Macrotrend shows us the S&P 500 price/earnings ratio is soaring:

Two thirds of the Benjamin Graham alternatives are now guaranteed money losers, and the sole remaining option is risky. The current pandemic is not helping an already terrible business climate. P/E ratios are high and the stock market is setting records. It looks and feels like a house of cards. Many pundits have expressed concern about an impending collapse.

In 2014, Anthony Mirhaydari asks, “What Happens When the Fed Stops Propping Up Stocks?” He explains the fed is buying up long term government bonds and mortgage securities. Corporations are binge borrowing, including huge amounts to buy back their stock. He adds:

“With stock prices at all-time highs and the S&P 500 crossing the 2,000 level for the first time ever, these debt-fueled stock buybacks are growing increasingly expensive.

…. According to Morgan Stanley, a large chunk of corporate debt will mature in the 2017-2018 timeframe. Should we get a recession between now and then and/or should interest rates rise significantly, corporate profits will get hit hard as free cash flow dries up and existing debt must be reissued at higher rates.”

We still don’t know the answer to Mr. Mirhaydari’s question. The S&P closed 2020 at $3,756.07, almost double what it was when he wrote his article and 10-year treasury yields have dropped from 2.46% to 1.09%.

Like the Energizer bunny, the Fed just keeps on going. In October 2020, Pam and Russ Martens reported, “The New York Fed, Pumping Out More than $9 Trillion in Bailouts Since September (2019)”.

The Fed keeps pumping out money, interest rates continue to decline, and the market soars. Meanwhile small businesses are failing and the economy is shaky. Despite all the hoopla, investors should be doggone concerned.

Are there any prudent choices left?

Historically, holding some cash in reserve made sense. It still does; however, don’t expect inflation-beating returns. Grit your teeth, and invest where it is totally safe.

My wife Jo and I keep a certain amount of “liquid” cash in our portfolio. We keep a minimal amount in our brokerage account as it pays almost zero interest. We roll three-month CDs which gives us safety and liquidity.

Many ask about portfolio allocations. My answer is “that depends”. I’m 80 years old, dealing with cancer. A healthy 65-year-old would have a different perspective. How much income do you need to pay the bills? Diversify reasonably for your situation.

What about stocks?

Don’t be fooled by the smoke and mirrors. The Washington Post reports:

“The S&P 500-stock index…is finishing the year up more than 16 percent. …. The Dow and S&P 500 finished at record levels despite the public health and economic crises.

Wall Street’s resurgence has been fueled by the largest federal government stimulus ever (and) historic support from the Federal Reserve…. (Emphasis mine)

On the eve of the new year, nearly 20 million people remained on unemployment, a jobs crisis worse than during the Great Recession.

…. Goldman Sachs predicts growth of 5.9 percent in 2021 – the best annual increase since 1984.

…. The rebound reflects Wall Street’s optimism about 2021, but it also underscores the disconnect between the stock market’s wild success and struggling American households.

Adding a dose of reality:

“The market’s gains have been driven largely by a handful of superstar stocks; a scenario eerily reminiscent of the dot-com era. Three of the biggest tech giants – Apple (AAPL), Amazon (AMZN) and Microsoft (MSFT) – accounted for more than half of the S&P 500′s return this year, said Howard Silverblatt, senior index analyst at S&P Dow Jones Indices.

Macrotrends shows us the Fed bailouts continue to pump up the market. The pandemic caused a quick downturn. Like Mighty Mouse, the Fed jumps in with more fake money to save the day – temporarily.

We all know how the dot.com era ended. Like a football offensive coordinator, we strategize based on the defense we see in front of us.

While the new administration is planning another huge bailout package, they also vowed to raise taxes, shut down the fossil fuel industry and add new crippling regulations. Are you confident the market will continue to rise into the stratosphere?

476 stocks in the S&P index had negative returns last year.

Game planning has never been more important

We can’t be passive and blindly follow a broker’s advice; jumping into several fee-based mutual funds. Research their top holdings and buy them individually.

Look for companies that will remain profitable, healthy and hold their own in tough times. Focus on the ability to pay solid dividend income, with potential for growth. Seek out good returns with minimal risk; while NOT losing sleep worrying about our stocks dropping and not coming back.

As I recently wrote, I use stop losses for common stocks, but not preferred stocks. Monitor them regularly and track their progress throughout the year.

In 2021, I’d be very satisfied with inflation beating returns and no loss of capital. Consistent gains, running a conservative playbook is what I see in front of us.