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Private Briefingwith WILLIAM PATALON III, Executive Editor
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Frankly, thanks to the U.S. Federal Reserve, it's surprising we have not seen a savers revolt in the United States.
We can debate how effective the Fed's Zero Interest Rate Policy (ZIRP) has been, but one thing is unquestionable: Those who rely on income from investments that are cautious and conservative have been brutally punished.
Traditional safe income havens like Federally Insured Certificates of Deposit and Treasury bills offer a minuscule return. It is not possible to retire and live off the interest earned on your savings unless you have several millions stashed away. Even then the return from conservative savings options will not provide a very luxurious retirement.
And according to Fed Chairman Ben Bernanke this condition will exist until at least 2015.
That's why in a ZIRP environment, savers must become investors.
To earn a decent return you have had to consider investments like stocks, bonds and real estate that require a deeper knowledge and risk tolerance than savings-oriented accounts. People with little or no investment experience or knowledge have turned to the stock market to earn the return necessary to fund their lifestyle and living expenses.
That idea might be frightening to life-long savers, but it doesn't have to be. Here's a strategy for finding high-yield investments in the Fed's ZIRP world.
The first thing you have to do is sift through the bad advice from Wall Street.
Right now all of the advertising from Wall Street firms and the talking heads in the financial media is about buying solid, blue chip dividend-paying stocks to provide your income needs.
This is indeed wonderful advice, provided you were giving it back in 2009 when large blue chips were safe and cheap.
Yield-seeking investors have pushed up shares of traditional dividend stocks like the drug companies, electric utilities, and large oil companies. Dividend-paying blue chips are a great story and an easy thing to sell but are probably not the right strategy for most income seeking investors right now.
Look at a chart of stocks like Merck & Co. Inc. (NYSE: MRK), Consolidated Edison Inc. (NYSE: ED) or Chevron Corp. (NYSE: CVX). The time to buy was when everyone hated stocks three years ago, not after the shares have doubled in price.
Another thing to remember is words of wisdom from the Dean of Wall Street, Benjamin Graham. He told us that the most important concept in investing is to always maintain a margin of safety. You want to own securities where the chance of a permanent lasting loss of capital is as small as possible.
You can achieve this by trying to only buy those securities which trade at a discount to their asset, or book value. You want to buy shares when they're undervalued, which increases the potential appreciation.
If the stock is indeed a viable enterprise, it likely won't trade for less than the net worth of the underlying assets forever. Eventually the ship is righted and the patient investor rewarded.
You also want a company that's viable and able to stay in business for an extended period of time. You want to buy into healthy, long-term yield.
I do not want to create the impression that this is really easy to accomplish. It takes more patience and discipline than most investors are able to bring to bear. You have to go against the crowd and make the markets work for you and not against you. You could be buying stocks no one has heard of at a time when most investors are selling. When everyone is excited about stocks you will be quietly selling those of your holdings that have appreciated to full value.
Valuation rather than market fluctuations will be your guiding principle. If the value of an investment has not changed but the price declines you will learn to view this as an exciting inventory creation event and not a panic situation.
It is not easy - but it does work.
Combining value and dividend investing makes sense. If you are willing to invest the time and effort, you will find the income needed while ZIRP is firmly in place.
And here's one of the best opportunities to consider.
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