Last week Moody’s Investors Service downgraded a number of big banks. The rating service is responsible for evaluating the financial health of companies and governments that issue bonds. Their ratings should help investors decide if an investment is risky or not.
By downgrading the banks, they are telling investors that banks still face the potential for liquidity and solvency problems and this important sector of the economy is struggling. Their warning is probably fair enough and investors should be concerned about many of the banks that continue to struggle with problem loans.
However, Moody’s and other ratings agencies completely missed the last financial crisis. Some say they even contributed to the crisis by assigning high ratings to mortgage-backed bonds that were in fact inherently risky. Banks were also rated as very safe at that time, and most of those banks encountered problems during the global financial crisis despite being awarded the ratings agencies’ seal of approval.
Why the sudden bank downgrades should concern you
Now, after almost four years of rebuilding their balance sheets, Moody’s is downgrading a number of the world’s largest banks. Banks may very well be risky, but in the past Moody’s has shown it would be hazardous to your wealth to rely solely on their ratings. You could use investment ratings as a guide, but you still need to do your own research and fit each investment into your own financial plan.
The lesson we can learn from the fallibility of ratings agencies is that you can not rely solely on the advice of experts. You need to consider how any individual decision fits into your retirement portfolio.
Banks may be risky, but that may be a risk you are comfortable taking with a small part of your portfolio.
Similarly, many experts have advised individual investors to rely on stocks for a steady income in retirement. Stocks have delivered little if any gains over the past decade and those following that advice have been disappointed.
It doesn’t mean that stocks are bad, but this recent performance shows that you need a balanced retirement income strategy.
Your home has probably been an asset that professional advisers have overlooked in your income planning.
Reverse mortgages are an easy and affordable way to turn your home into retirement income. The loans can be completed with almost all closing costs rolled into the balance and the balance will be repaid in full when you leave your home, requiring no monthly payments in the interim.
Experts may have overlooked this option, but that doesn’t mean you have to; consider a reverse mortgage as a retirement solution.