A Positive Ending to a Doom-Filled Digest

A rule of thumb for investing in stocks... Many older Americans are doing the opposite... The real cause of this shift... The aftermath of a mega-bubble can last for decades... Investors are in a holding pattern with bank stocks... Bed Bath & Beyond's stock is still worthless... A positive ending to a doom-filled Digest...

Quick, subtract your age from 100...

Your answer is the percentage of your assets you should have in stocks. At least, that's according to a rule of thumb.

So since I (Dan Ferris) am 61 years old, I should be 39% invested in stocks.

If you're 35, then you should have 65% of your assets in stocks. If you're 70, that's 30% in stocks. If you're 85, it's 15%.

And it's generally assumed that the rest of your assets would be in bonds.

The basic idea behind this rule of thumb is simple. You save and invest for years so you have money when you get older and can't work (or just don't want to).

When you're younger, you can afford to wait out all the crashes and bear markets. And you can even invest more during those turbulent times so your nest egg will grow even bigger.

As you get older, your focus shifts from growing your wealth to preserving it. You shift from embracing volatility and taking risk to playing it safer and hanging on to what you've built.

So over time, you gradually allocate less money to stocks and more to bonds and cash.

Now, I'm not saying you should or shouldn't follow this rule of thumb. But the basic idea of reducing your risk profile as you age isn't the worst idea I've ever heard.

However, it seems like many older Americans are now doing the opposite...

A Wall Street Journal article on Tuesday was titled, "America's Retirees Are Investing More Like 30-Year-Olds." And as you might expect from that headline, it suggests that retirees have abandoned the rule of thumb in favor of reaching for the maximum amount of return...

Nearly half of Vanguard 401(k) investors actively managing their money and over age 55 held more than 70% of their portfolios in stocks. In 2011, 38% did so. At Fidelity Investments, nearly four in 10 investors ages 65 to 69 hold about two-thirds or more of their portfolios in stocks.

And it isn't just baby boomers. In taxable brokerage accounts at Vanguard, one-fifth of investors 85 or older have nearly all their money in stocks, up from 16% in 2012. The same is true of almost a quarter of those ages 75 to 84.

Why take more risk at an age when capital preservation should be your priority?

The Journal article cited numerous possible causes for the trend. For example, it mentioned the advent of 401(k) accounts in 1978 and the historical tendency over the past century for stocks to return more on average than bonds.

But you and I both know that those aren't the real causes...

The real cause of it all is simply that savers haven't had a place to hide cash since 2008. That's when the Federal Reserve first took interest rates to zero.

Since then, retirees have become increasingly comfortable with the idea of taking more risk to earn more return. In other words, they've learned to put more of their savings into riskier assets like stocks instead of safer assets like bonds and cash.

It's impossible to overstate how pervasively zero-percent rates have distorted the mindsets of nearly everybody everywhere who has even a passing interest in stocks and bonds.

As the WSJ pointed out, it isn't just Baby Boomers. All older American investors have been reprogrammed by years of low or zero rates to take on more risk in search of more returns.

And the thing is...

It's not just older Americans. It's everybody, no matter how young or old...

Taking on more risk in search of more return is the defining mentality of investors in a bubble.

The line between investing and speculation becomes blurrier and blurrier. And then, one day, it fades completely out of existence.

And keep in mind that people still have this mentality after a down year like 2022. That tells us how impossible it is to escape the biggest financial mega-bubble in all recorded history.

As I said in our January 20 Digest...

Investing in a mega-bubble is tough...

It's like trying to paint an accurate full-length portrait of a human by looking only at their image in a funhouse mirror.

You can try to adjust for the distortions all you want. But the image you create won't look right in the end. You'll be misrepresenting reality, not accurately reflecting it.

You just can't know how tall, short, fat, or thin your subject really is until you see them in person – or at least in a picture that's not distorted.

In the end, it's essentially impossible to paint using a funhouse mirror. And in the market's funhouse mirror, garbage assets look like good bets and safe assets look stupid...

Why would you ever put your money in a savings account yielding 0.05% when you can buy stocks that go up and could double, triple, or quadruple your money in a matter of months?

It would be reasonable to assume that folks would've stopped reaching for returns and piling on risk after the drubbing investors took in 2022. But it's still happening today.

Mega-bubbles can take decades to work out of the system...

The Japanese stock market is a perfect example...

It hit its mega-bubble peak in December 1989. And it still hasn't hit a new all-time high.

That's a nearly 34-year sideways market.

Japanese stocks have performed even better than U.S. stocks so far this year. The Nikkei 225 index is up roughly 25% in 2023. And it's now less than 20% from its December 1989 peak.

Maybe it will get there one day.

Ultimately, I expect all kinds of financial and economic distortions that we can't see today will come to light over the next decade. That's the hallmark of a massive mega-bubble.

In this mega-bubble, we don't know what will break next...

But we know that technology-focused banks were the worst things to break so far.

First Republic Bank, Silicon Valley Bank, and Signature Bank all failed earlier this year. They were the second-, third-, and fourth-largest bank failures in U.S. history, respectively.

Some folks seem to think the banking crisis is now over. But the stock market looks like it's waiting for the other shoe to drop...

The Invesco KBW Bank Fund (KBWB) and the SPDR S&P Regional Banking Fund (KRE) have both drifted sideways since March, when they crashed after the bank panic. Take a look...

If the market really is a forward-looking mechanism, it seems to be flashing uncertainty about what's ahead for the U.S. banking sector. It's neither in decline nor in a recovery.

This is the sort of holding pattern that happens when investors crave more news – good or bad – to give them direction. Without that, they're just wandering aimlessly back and forth.

Given the huge role that higher interest rates and lower U.S. Treasury bond prices played in the bank failures, it still doesn't seem likely to me that we've seen the last of the victims.

I bet a lot more banks are suffering from the same problem. And since rates aren't likely done rising, I bet at least one or two stressed-out banks are just waiting for the death blow.

We'll see.

Fortunately, investment success doesn't depend on one's ability to make predictions like that...

It's enough to remember that nobody will escape the biggest financial mega-bubble in all recorded history.

All-time-low interest rates punished prudent people who saved money. And for years, it rewarded those folks who threw caution to the wind and bought extremely risky stocks and other assets.

Now, we're only just beginning to find out the mega-bubble's consequences.

No matter your age, you've been in the same boat as every other investor in the world...

Until 2022, you were consistently penalized for playing it safe and consistently rewarded for speculating on the riskiest stuff in the market. It paid to gamble with things like call options, "meme stocks," cash-burning tech stocks, cryptocurrencies, and non-fungible tokens.

Investing is hard. And chasing fads is a half-hearted attempt to make it easy.

But it eventually blows up on you.

Unfortunately, most folks don't understand that yet. The unpleasant market performance of 2022 and the fastest rate-hiking cycle since 1980 haven't been enough to discourage folks from behaving that way.

Take Bed Bath & Beyond, for example...

You may recall that I dubbed the now-bankrupt home-goods retailer's shareholders as "the world's dumbest investors" in the February 13 Digest.

I also detailed how Bed Bath & Beyond's management made a deal to take money from the world's dumbest investors and give it to a hedge fund called Hudson Bay Capital. They did that instead of just declaring bankruptcy at that time.

Bed Bath & Beyond finally declared bankruptcy in April. It secured $240 million in financing to keep it going long enough to close all its stores and shut down the company.

Notably, its stock is now worth zero. And the world's dumbest investors are left holding the bag.

That's what happens when a company declares bankruptcy.

In a normal bankruptcy process, bondholders and other creditors get paid based on their seniority. Secured creditors are paid first. Unsecured creditors get paid next, depending on where they are in the capital structure. Then, preferred shareholders (if there are any) get paid if there's anything left.

The deeper you go in the capital structure, the less likely a security's holders will be made whole. Common stockholders are at the bottom. And they routinely get zero.

In Bed Bath & Beyond's case, even some of the bonds might be worthless. The company's bonds currently trade for about $0.02 on the dollar.

Heck, it's clear the ignorant gamblers buying the stock really don't know anything. If they did and were likely to be right about it not being totally worthless, the better bet would be to buy the bonds at $0.02 and make 50 times profit when they're made whole in the end.

But that's the thing...

They won't be made whole, which is why they're trading for $0.02 today. And since the bonds won't be made whole, common stockholders will get zero – like they always do.

Bed Bath & Beyond declared Chapter 11 bankruptcy with $5.2 billion in debt and $4.4 billion in assets. There's no way the stock is worth anything today.

Folks who continue to cling to their shares are like flat-earthers who laugh at astronauts and pilots who say they know Earth is round because they've flown around it many times.

But in reality, the truth is right in front of their faces. As one market strategist succinctly told the Financial Times...

The bond market is telling you the stock is worthless.

Bed Bath & Beyond doesn't even own its name anymore. Overstock.com bought it for $21.5 million. The Overstock.com name will go away. And it will now go by Bed Bath & Beyond.

Wow, what a powerful brand the world's dumbest investors embraced. It sold for less than 0.5% of the value of the company's total assets at the time of bankruptcy.

This is all Finance 101.

It's the sort of basic financial knowledge you should have if you're going to buy and sell individual stocks for your own account. But Bed Bath & Beyond's shareholders obviously don't possess this knowledge...

Despite all the reasons why they'll never see a dime, they did enough buying to shove the stock price up from $0.20 to $0.33 in just four trading sessions from June 22 to June 27.

When a bankrupt company's stock spikes like that, it should tell you a couple things about the markets today...

First, folks can still get excited enough about stocks with zero value to have an outsized effect on their valuations. These know-nothing investors command hundreds of millions – if not billions – in investor capital. Their power is waning, but it's still there (for now).

Second, even when the company goes bankrupt – proving that the meme-stock buyers were wrong – they still persist and buy shares in the belief that they have power.

You may recall that the meme-stock phenomenon started as retail investors "sticking it" to hedge funds who sold short the shares of declining businesses. But that's no longer a factor since I doubt any institution is placing short bets against Bed Bath & Beyond at this point.

So it's not about short-squeezing hedge funds anymore. Now, buying garbage like Bed Bath & Beyond is just a learned behavior...

Buy stock. Hope beyond all hope. Lose money. Rinse and repeat.

Of course, as a Stansberry Research reader, you've hopefully learned to spot (and avoid) garbage like Bed Bath & Beyond...

But I still need to point these things out in the Digest from time to time.

It shows you that the 2022 market drawdown hasn't changed folks' desire to speculate and take more risk. Beyond all reason, this behavior is still a force to be reckoned with today.

In other words... we're still in the biggest financial mega-bubble in all recorded history.

Even worse, older investors are taking more risk with their retirements. And something worse than this year's bank failures (or at least more of the same) is likely coming.

That's disturbing news.

Even without any further post-bubble turmoil, it's simply not prudent to ramp up risk just because you feel everyone is doing it. You don't need to keep up with the Joneses that way.

Keep in mind...

The market doesn't care about you. It doesn't care that you're craving more return to build a bigger nest egg. If you get too greedy, it will swallow your retirement whole.

I hate sounding so gloomy and ominous, so I'll end on a positive note...

With interest rates much higher than they were a year or so ago, it's now possible to do what investors couldn't do since 2008...

You can now get a solid return without taking a lot of risk.

It's possible to earn 5% on U.S. Treasury securities with maturities as long as two years. That hasn't been true since 2007, according to data compiled by Bloomberg.

In other words, the Federal Reserve has planted the seeds of a return to a more sane, reasonable investing environment. And the Treasury market is responding accordingly.

I'm still worried that we won't flush out all the excesses and bad investments without a lot of pain. We're still living through the biggest financial mega-bubble in all recorded history.

But at least we can begin building a portfolio on a much more rational foundation.

New 52-week highs (as of 7/6/23): Iron Mountain (IRM) and Rollins (ROL).

In today's mailbag, a subscriber shares feedback on yesterday's Digest, where we talked about the launch of Twitter rival Threads. Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Corey, [Mark Zuckerberg] is setting Thread[s] up to scalp information to program [artificial intelligence ('AI')]. Just think, once AI is going full throttle, you won't have a job." – Subscriber Loren I.

Corey McLaughlin comment: Thanks for the note, Loren. You packed a lot of thought-provoking ideas into just two sentences...

First, I agree with you that Threads is probably collecting mountains of data on all of its now 50 million and counting new users as we speak.

But we're not publishing entire Digests on it (or any social media platform that does the same thing). So it's unlikely that a Zuckerberg bot will start writing like us anytime soon.

The idea of AI putting me out of a job in the longer run, though, is an important one. And it's something I've thought about...

I believe AI technology will almost certainly change how industries operate – and how many jobs exist in them. But I don't believe AI or any other technology will ever fully replace quality, original, creative work like writing.

Sure, some skills and jobs will become fossilized because of AI. And as is often the case, new technology could be dangerous or used in nefarious ways...

We're thinking of the AI-controlled drone that reportedly decided to "kill" its human operator in a simulation staged by the U.S. Air Force. (Although, it's worth noting that the Air Force later denied the test ever happened.)

Stories like that may actually be an argument against AI systems. They seem to show that AI isn't quite ready for widespread use as much as people think – or that these systems will always need human oversight even when AI is "full throttle."

Regardless, in my view, the best way to approach AI is to embrace it rather than think of it as an enemy.

By that, I mean people and businesses – whether in health care, manufacturing, publishing, or anything else – need to find ways to use AI as a tool to be more efficient or productive.

That should put them in the best position to keep their jobs or businesses. They'll likely be better off than those folks who try to fight against AI or any new technology.

With that said, I'm not naïve, either. And maybe you're right...

Maybe I'll be toast in a few years. In my place, you'll get the Digest delivered through a Daily Financial Newsletter Writer bot that doesn't exist yet. And I'll do something else.

But for now, we'll keep on keepin' on.

Good investing,

Dan Ferris
Eagle Point, Oregon
July 7, 2023