Didn't go to cash in August? Good. Now is the time: Advisor

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Who says there are no second chances? For seniors and boomers who resisted the urge to go to cash during the summer market swoon, good for you! You made the right decision by not panicking, but it isn't too late to sell. In fact, if an older client came to me today and wanted to sell stocks to raise cash, I would find it harder to argue against that strategy.

The desire to replace your active career income with passive income in retirement is not only compelling, it's the No. 1 reason why people invest in the first place.

With the Federal Reserve pegging short-term interest rates at near zero and with historically low interest rates paid out by investment-grade fixed-income securities, seniors and boomers have piled into dividend-paying stocks. Aside from many of these dividend-paying stocks now trading more like high P/E growth stocks than value stocks, this has caused a higher degree of volatility in stocks and a higher degree of angst among these generational cohorts.

This past summer — Aug. 24, to be exact — the Dow Jones Industrial Average had a 1,000-plus-point flash crash, in addition to the major averages having a quick 10 percent-plus correction in a matter of days. It was a difficult time for investor psychology and, more importantly, a lot of investors who were thinking about cashing out after a mighty run over the last six-plus years of the bull market. Some investors regretted their procrastination.

But if you were one of the seniors or boomers who were worried about seeing your investment portfolio decline but were afraid to pull the trigger, now may be the second chance you wish you could have had. The major averages have not only recovered from the recent correction, they are slightly ahead of where they closed in 2014, which in itself was an up year for the averages, too.

Last Friday's non-farm payroll figure far exceeded expectations in terms of both new jobs and wages, which the Fed pays a great deal of attention to, and that really puts the pressure on the Fed to enact its first rate hike since the Great Recession in December, something Fed Chairwoman Janet Yellen said earlier this week was a "live possibility" even before the great jobs number came out.

Even if the Fed does not move in December, if wage growth keeps up this pace for a few more months, we'll have to consider the possibility that the Fed may have to raise rates at a quicker pace than previously thought. It gives the Fed more cover to get more hawkish and for big institutional holders of stocks to sell more aggressively. Remember, stocks are considered forward-looking, so in the backward world we've been living in — where "bad news was good news" for equity investors — now good news could become bad news due to the Fed's attempting to cool the economy ahead of it heating up too much.

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I will add an important, more personal point, speaking directly to investors trying to make sense of the economic data: One's risk tolerance is tough to measure. Risk tolerance has to do with many variables, but as one ages, risk tolerance decreases because you are closer to relying on your investments for financial support. Of course, the opposite goes for my fellow Gen X peers and those younger than me. If you are many years away from needing to rely on your investments for financial support and you are investing regularly, a nice bruising bear market now will actually help you more in the long run since you would be investing in a cheaper market.

But for seniors and boomers, the problem in the current environment is that you have to decide between earning basically zero return from cash and investing in stocks for dividend income. But now that you've seen that stocks could rapidly retreat in price by a factor substantially above and beyond the cash flow from dividends, it starts to sink in that stocks are not meant to be bond replacements.

Each asset class has its own set of risks — stocks, regardless of whether or not they pay a dividend — are inherently volatile and are suitable for only the portion of assets you set aside for the long term for potential upside capital appreciation. I think you knew that already, but somehow, rising stocks validates your decisions to buy them even though it was more the luck of a bull market than your sudden discovery that you've somehow figured out the holy grail of investing. That's what bull and bear markets do — they trick us into believing our own faulty thought process.

I'm not saying liquidate every stock!

With the sharp reversal from the summer swoon to a resurgent — and getting long-in-the-tooth — bull market, now could be the time to reevaluate the upside of earning nothing on cash versus being overconfident in the stocks that have done so well for you in a low-rate environment. I have never seen a bull market end that didn't hurt badly the most vulnerable investors. That's the way all bull markets end. There is an old poker expression, "If you don't know who the sucker is at the table, then it's you." Those of you who are way deeper into stocks than you ever thought your own risk tolerance has allowed, you, my friend, are the sucker.

"I have never seen a bull market end that didn't hurt badly the most vulnerable investors. That's the way all bull markets end." -Mitch Goldberg, president of investing firm ClientFirst Strategy

This is not a call to liquidate all of your stocks! I am mildly bullish on stocks. But I am cognizant of how seniors and boomers are in yield-seeking mode and, as a group, seem more willing than I have ever seen in my career to bulk up on stocks and ever-more increasingly complex investment products that purport to enhance yield.

I'll leave it at this. You don't fight the Fed. That worked out exceedingly well while interest rates remained low and stocks went up. But with Fed officials, including Yellen, talking about raising short-term interest, over-indulging in stocks means you are soon to be fighting the Fed.

Is that what you want to do at your age? My advice for many of you is to consider taking a little off the table, even if it means you have to accept that this is the time to be happy about earning nothing on your cash.

Whether you are a do-it-yourself investor or you use the services of a trusted advisor, don't squander the second chance the market is handing you.

Income producers I worry about

High-yielding investments need to be first examined as to why their yield is high in a low-interest-rate environment. The desperation to earn more yield to avoid eating into principal has made some shaky investments too enticing for some investors to pass up.

In this low-interest-rate environment, you have to really question why an investment pays a big yield. There are two main reasons I see for outsize yield.

The first is when a company runs into trouble and the price of the stock goes down, hence, making the dividend as a percentage of the stock price higher. Sure, stocks go up and down, but if the yield starts to become outsized compared to its sector, it could be more indicative that it is a value trap, not an opportunity to collect more yield.

Second, I look to see if the product is using leverage to amp up the yield. In a rising rate environment, which you should be prepared for, leverage works against you by potentially causing a more rapid decrease in the price of the investment product.

High income–producing products often include high commissions, huge management fees and lack of liquidity. I think investors who buy are unaware of the risks they are taking. I'll bet that investors who put money into these read no further than the glossy brochures.

By Mitch Goldberg, president of investing firm ClientFirst Strategy

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