It’s been quite a week. Quite a month, in fact, tying up loose ends at work, enjoying the Holidays, and mentally preparing for what lies ahead. I found myself thinking a lot about the many challenges faced in my career, the grind that it became at times, but also how fortunate I have been.
I benefited in my career from almost every advantage one could have – where and even when I was born, the language spoken in our household, the nation in which I was raised, the education I was provided, the many opportunities given to me over the years to be of value to others, the good health to be able to pursue those opportunities, access to the world’s best tools and resources for my profession, the tolerance and support of family, friends, coworkers and clients, the list is almost endless.
And then, as if that weren’t enough, some of you have seen fit the last few weeks to bless me with some very kind comments, good wishes for my future, and even some accolades. It’s almost like being at my own wake, but I get to hear what everyone is saying. In fact, it’s better than that – I get to hear only the good stuff!
I know that these kind statements reflect your goodness as much as my achievements, but it has been wonderful to hear. There is no greater legacy for me than to have positively influenced the lives of others. Hopefully, I was able to do that for you.
I wish you the very best in the coming year and beyond. I’ll be thinking of you. Take care. Bye-bye.
Larry Halverson: I've Been Thinking
Larry Halverson, CFA, Managing Director of MEMBERS Capital Advisors, Inc., is a veteran of more than 35 years in the financial services industry. Links: SUBSCRIBE TO: I've Been Thinking | 
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Friday, December 28, 2007
Thursday, December 20, 2007
Expectations and remembrances
We’re down to the last two of these weekly communications. I thought I’d share a final thought about me and my retirement this week and some thoughts about you next week.
I have been asked several times in various ways if I’m looking forward to getting out from under the stress and pressure of the workplace. I hadn’t really thought about retirement in those terms. I have learned over the years to coexist quite well with the vagaries of the investment markets and our performance relative thereto. Most of the pressure to “perform” has been self-imposed, and will continue into retirement. But, as I thought about it, I realized there are two other forms of pressure I’ve felt and that are probably unavoidable aspects of almost any career. And, these I am indeed looking forward to escaping.
The first is the pressure to always know what anyone might expect you to know. Or, more accurately, to appear to know whatever anyone might expect. If you do know, but you can’t communicate it and convey confidence, it can be almost the same as not knowing. And, if you don’t know, but can make a reasonable judgment and are willing to admit your ignorance (to yourself and others), that is often almost as good as knowing. But, either way, this pressure to know is probably the primary “early career” type of work pressure most people have to endure.
Later in a career, a solid foundation of knowledge/experience/judgment has largely been acquired (or you aren’t still in that career), but then another pressure develops. It may even be partially a result of all this knowledge/experience/judgment that has been accumulated (along with an at least equal volume of less useful . . . stuff). But, I’m afraid it’s mostly caused by simple age-related mental deterioration. Either way, it’s no longer pressure to know that dominates, it’s pressure to remember.
So, yes, it will be nice to escape the work-related stress I’ve felt over the years – first the pressure to know, and then pressure to merely remember. Although, I assume there already was a period mid-career when I felt neither. Or, maybe both? I don’t know. Or, at least I can’t remember.
And, at my age, you shouldn’t expect me to.
I have been asked several times in various ways if I’m looking forward to getting out from under the stress and pressure of the workplace. I hadn’t really thought about retirement in those terms. I have learned over the years to coexist quite well with the vagaries of the investment markets and our performance relative thereto. Most of the pressure to “perform” has been self-imposed, and will continue into retirement. But, as I thought about it, I realized there are two other forms of pressure I’ve felt and that are probably unavoidable aspects of almost any career. And, these I am indeed looking forward to escaping.
The first is the pressure to always know what anyone might expect you to know. Or, more accurately, to appear to know whatever anyone might expect. If you do know, but you can’t communicate it and convey confidence, it can be almost the same as not knowing. And, if you don’t know, but can make a reasonable judgment and are willing to admit your ignorance (to yourself and others), that is often almost as good as knowing. But, either way, this pressure to know is probably the primary “early career” type of work pressure most people have to endure.
Later in a career, a solid foundation of knowledge/experience/judgment has largely been acquired (or you aren’t still in that career), but then another pressure develops. It may even be partially a result of all this knowledge/experience/judgment that has been accumulated (along with an at least equal volume of less useful . . . stuff). But, I’m afraid it’s mostly caused by simple age-related mental deterioration. Either way, it’s no longer pressure to know that dominates, it’s pressure to remember.
So, yes, it will be nice to escape the work-related stress I’ve felt over the years – first the pressure to know, and then pressure to merely remember. Although, I assume there already was a period mid-career when I felt neither. Or, maybe both? I don’t know. Or, at least I can’t remember.
And, at my age, you shouldn’t expect me to.
Friday, December 14, 2007
How old are you . . . really?
One of the many imponderables involved in planning one’s retirement finances is the time horizon – financial advisor-speak for the length of time remaining before you die. You need to at least make a guess at this to properly plan your retirement finances. Not an easy topic, but as is so often the case anymore, our government is there to help (with the planning part, not the dying . . . yet.)
Go to www.ssa.gov/OACT/STATS/table4c6.html to see a table showing your life expectancy at any age. It says the average newborn male today will live to 74. The average 65 year old male has another 16 years left. Both of these time horizons strike me as way too short. And, outliving your money is one of the greatest risks faced by retirees.
So, you really need a better estimate, one that reflects your particular lifestyle, habits, etc. That’s just what you will find at www.livingto100.com. This site provides lots of advice for extending your life expectancy (a good thing in most non-financial respects), but the primary feature is an extensive questionnaire you can fill out (free, online), after which it will tell you your life expectancy. Cool!
One thing it will ask you, of course is your current age. For those of you who, after years of lying about it, aren’t really sure anymore just what your age actually is, I am providing herewith a simple yet remarkably accurate age calculator. Try it, and let me know how it worked for you.
1. How many times a week do you think about your age or aging (any number 1 through 9)?
2. I don’t believe you. Double it.
3. I still don’t believe you. Add 5.
4. Thinking ahead . . ., multiply it by 50.
5. If you have already had your birthday this year, add 1757. If not, add 1756.
6. Subtract the year you were born.
That leaves a three-digit number. The first digit is how many times weekly you claimed you think about your age. Silly you, huh!?
The remaining two numbers are your age.
Really.
Go to www.ssa.gov/OACT/STATS/table4c6.html to see a table showing your life expectancy at any age. It says the average newborn male today will live to 74. The average 65 year old male has another 16 years left. Both of these time horizons strike me as way too short. And, outliving your money is one of the greatest risks faced by retirees.
So, you really need a better estimate, one that reflects your particular lifestyle, habits, etc. That’s just what you will find at www.livingto100.com. This site provides lots of advice for extending your life expectancy (a good thing in most non-financial respects), but the primary feature is an extensive questionnaire you can fill out (free, online), after which it will tell you your life expectancy. Cool!
One thing it will ask you, of course is your current age. For those of you who, after years of lying about it, aren’t really sure anymore just what your age actually is, I am providing herewith a simple yet remarkably accurate age calculator. Try it, and let me know how it worked for you.
1. How many times a week do you think about your age or aging (any number 1 through 9)?
2. I don’t believe you. Double it.
3. I still don’t believe you. Add 5.
4. Thinking ahead . . ., multiply it by 50.
5. If you have already had your birthday this year, add 1757. If not, add 1756.
6. Subtract the year you were born.
That leaves a three-digit number. The first digit is how many times weekly you claimed you think about your age. Silly you, huh!?
The remaining two numbers are your age.
Really.
Friday, December 7, 2007
Let’s get serious
Wow. Here we are in my last month of writing this blog, and I realize that there are several helpful retirement-related references I’ve run across that I haven’t told you about yet. So, I’ll make this issue all business – a list of what I think are some of the most helpful references for the two most common retirement questions.
1. How do I go about getting financially prepared for retirement; where do I start? Whether you want to do-it-yourself or work with a financial advisor, you will be more comfortable with the process, and are likely to be more successful, if you understand how to approach it and what it’s all about. You can piecemeal this learning process by spending a lifetime reading articles (like mine) and listening to those who are living the process (like me), or you can dedicate several evenings over a few weeks learning about the process front to back, fully, and correctly. If you want to consider the latter, UC-Irvine offers an excellent overview course online. And, it’s free. Go to http://ocw.uci.edu/courses/AR0102092/. It will go fast (some evenings, you won’t want to quit), and you will always be glad you did it.
2. How can I figure out how and when to take my (our) Social Security and other retirement benefits? Here, you may want to check a few different sources. Start at ssa.govto estimate your benefit under various assumptions using any of three calculators – Quick, Online, and Detailed (click “Calculate your benefits”). Also check out the other calculators like “Retirement Age” and “Breakeven” to compare benefits starting at different ages. There is a wealth of information here (that’s part of the challenge, of course), so plan to visit it a few times taking little bites of information each visit. Also look at analyzenow.com; it may be easier to navigate and has a couple of great calculators. After at least scanning these two, check out a paper at pensionresearchcouncil.org, “Working Papers,” “2007,” “Rethinking Social Security Claiming in a 401(k) World.”
Ideally, of course, you would do this well before your retirement so you have time to formulate and execute your ideal game plan. But, if that option is no longer available, don’t give up. Spend every other evening for one full month doing this kind of self-education, and you’ll have a good, basic understanding of the issues and options, and a much better shot at living a financially secure retirement.
I wish you well!
1. How do I go about getting financially prepared for retirement; where do I start? Whether you want to do-it-yourself or work with a financial advisor, you will be more comfortable with the process, and are likely to be more successful, if you understand how to approach it and what it’s all about. You can piecemeal this learning process by spending a lifetime reading articles (like mine) and listening to those who are living the process (like me), or you can dedicate several evenings over a few weeks learning about the process front to back, fully, and correctly. If you want to consider the latter, UC-Irvine offers an excellent overview course online. And, it’s free. Go to http://ocw.uci.edu/courses/AR0102092/. It will go fast (some evenings, you won’t want to quit), and you will always be glad you did it.
2. How can I figure out how and when to take my (our) Social Security and other retirement benefits? Here, you may want to check a few different sources. Start at ssa.gov
Ideally, of course, you would do this well before your retirement so you have time to formulate and execute your ideal game plan. But, if that option is no longer available, don’t give up. Spend every other evening for one full month doing this kind of self-education, and you’ll have a good, basic understanding of the issues and options, and a much better shot at living a financially secure retirement.
I wish you well!
Friday, November 30, 2007
With freedom come responsibilities
On my way to work earlier this week, it dawned on me that my highly structured life –directed initially by parents, then teachers, then work – will soon be coming to an end. After 62 years of externally imposed structure, I’ll finally experience true freedom. No one will care where I am or what I’m doing.
That’s right. No one will care. And this, to many, may be the most challenging difference between being employed and being retired.
A job not only provides a paycheck and something to do, it also surrounds us with people who care what we do –coworkers, customers, vendors, etc. And, that gives us structure, and purpose, and relevance outside of our own skin.
My spouse, kids, and pets, of course, all have significant vested interests in my activities, and me in theirs, but the degree of life structure this imposes on me is quite minimal. This may change somewhat post-retirement (by spousal decree, you know), but for the most part, I’ll be on my own.
This, I believe, is why so many retirees feel adrift. They never before had to make their life happen; they just had to go to work and there it was. Once retired, they find themselves out of the mainstream and with a life devoid of structure. And, unless they do something about it, they soon begin to fade away, much like how objects lose their clarity, vibrancy, and significance as they fade into the distance.
I see this – literally – in my parents, now in their third year in an assisted living facility, and even more in some of the homeless people – the ultimate retirees – who spend their days in the park. The ones new to the “home” or the streets look fresh and are very aware of their surroundings. But, they soon begin to fade. Even their skin takes on a distinctive pallor while their clothes fade to an almost uniform grey-brown, and they no longer seek human interaction. Whether in the care facility or on the streets, they have become irrelevant to the mainstream of life and are slowly fading into the distance.
But, this can be avoided. We just have to assume the responsibility to make our new life happen. It’s up to us to create the structure of our lives – with family activities, volunteer work, hobbies, a part-time job, or whatever. And, we need to do it with purpose. We must at least think about our new “job description,” including objectives. What do we want to accomplish? When? What are the steps involved? And, how will we know when we’ve succeeded?
Without this approach to our new lives, we’re not what I would call retired, we’re just unemployed. And adrift. And soon fading into irrelevance.
That’s certainly not what I want to do with my upcoming freedom.
That’s right. No one will care. And this, to many, may be the most challenging difference between being employed and being retired.
A job not only provides a paycheck and something to do, it also surrounds us with people who care what we do –coworkers, customers, vendors, etc. And, that gives us structure, and purpose, and relevance outside of our own skin.
My spouse, kids, and pets, of course, all have significant vested interests in my activities, and me in theirs, but the degree of life structure this imposes on me is quite minimal. This may change somewhat post-retirement (by spousal decree, you know), but for the most part, I’ll be on my own.
This, I believe, is why so many retirees feel adrift. They never before had to make their life happen; they just had to go to work and there it was. Once retired, they find themselves out of the mainstream and with a life devoid of structure. And, unless they do something about it, they soon begin to fade away, much like how objects lose their clarity, vibrancy, and significance as they fade into the distance.
I see this – literally – in my parents, now in their third year in an assisted living facility, and even more in some of the homeless people – the ultimate retirees – who spend their days in the park. The ones new to the “home” or the streets look fresh and are very aware of their surroundings. But, they soon begin to fade. Even their skin takes on a distinctive pallor while their clothes fade to an almost uniform grey-brown, and they no longer seek human interaction. Whether in the care facility or on the streets, they have become irrelevant to the mainstream of life and are slowly fading into the distance.
But, this can be avoided. We just have to assume the responsibility to make our new life happen. It’s up to us to create the structure of our lives – with family activities, volunteer work, hobbies, a part-time job, or whatever. And, we need to do it with purpose. We must at least think about our new “job description,” including objectives. What do we want to accomplish? When? What are the steps involved? And, how will we know when we’ve succeeded?
Without this approach to our new lives, we’re not what I would call retired, we’re just unemployed. And adrift. And soon fading into irrelevance.
That’s certainly not what I want to do with my upcoming freedom.
Monday, November 26, 2007
Some thoughts before the holiday weekend.
(If you’ve had your fill of bad news about the prevailing economic problems, just read the headings. You’ll get the point.)
More problems on the front-end of the subprime mess – The bulk of rate resets on the most irresponsibly originated mortgage loans are yet to come, and most “option/arm” loans, which give the borrower the option to set his own payment amounts (that’s right!) for the first few years, are yet to start requiring normal payments. And, home prices continue to fall, with more and more now worth less than the amount of the mortgage. So, the flow of mortgage-related problems going into the credit markets has not yet peaked.
More problems on the back-end of the subprime mess – Write-downs of subprime-related debt continue as holders realize that they have more exposure than they thought, and the exposures they have are riskier than they thought. A bond guarantee company (it promises to pay the interest on a bond if the issuer defaults) is the latest casualty, which, of course, turns the supposedly sound bonds it insures (many of which are municipal bonds) into illiquid junk. At the same time, the rating agencies can’t lower bond ratings fast enough to shield them from endless lawsuits, further exacerbating the problems. Soon, the fidelity bond and “errors and omissions” insurers will be announcing ballooning claims.
More problems emanating from the subprime mess – Retail sales, finally, are showing what may be some weakness in consumer spending. Credit card debt is still building, but only slowly, and I expect to soon be reading about spreading defaults in this huge arena, which somewhat like home mortgages, will be felt throughout the nation’s financial system. I would put he chances of avoiding a recession now at no better than 50/50.
In spite of this backdrop, I hope you can enjoy your Turkey Day. And, I have a couple of other thoughts for you as you then begin your Holiday shopping.
a. Instead of all the usual toys, games or whatever you usually buy for the kids or grandkids, put some of your gifting in the form of future financial freedom. Open a mutual fund account for them and put, say, $1,000 in a globally diversified fund or mix of funds. When they are considering retirement 50 years from now, assuming the fund delivers 8% average annual returns, they will have nearly $47,000. Wait 60 years and it will be $101,000. Factoring in the Fed’s inflation target of 1% to 2% to put these future sums in today’s purchasing power will cut them approximately in half to $23,000 after 50 years and $44,000 after 60 years – still very handsome sums. And, that’s with one gift of $1,000 now. Invest another $1,000 in each of the next 19 years, and the ending amounts grow to approximately $257,000 and $482,000 . . . in today’s (inflation-adjusted) dollars.
b. Is it reasonable to expect 8% returns, or about 6 ½% after inflation, over the next few decades from a diversified portfolio? With a world view, I believe these kinds of returns can readily be attained. Here in the U. S., however, it may well be harder to achieve this in the next 50 years than it was in the last 50 years. You’ll have to do less of your buying when things look rosy and more when markets are reacting to pervasive concerns and the expectation of more bad news to come. Like . . . now?
More problems on the front-end of the subprime mess – The bulk of rate resets on the most irresponsibly originated mortgage loans are yet to come, and most “option/arm” loans, which give the borrower the option to set his own payment amounts (that’s right!) for the first few years, are yet to start requiring normal payments. And, home prices continue to fall, with more and more now worth less than the amount of the mortgage. So, the flow of mortgage-related problems going into the credit markets has not yet peaked.
More problems on the back-end of the subprime mess – Write-downs of subprime-related debt continue as holders realize that they have more exposure than they thought, and the exposures they have are riskier than they thought. A bond guarantee company (it promises to pay the interest on a bond if the issuer defaults) is the latest casualty, which, of course, turns the supposedly sound bonds it insures (many of which are municipal bonds) into illiquid junk. At the same time, the rating agencies can’t lower bond ratings fast enough to shield them from endless lawsuits, further exacerbating the problems. Soon, the fidelity bond and “errors and omissions” insurers will be announcing ballooning claims.
More problems emanating from the subprime mess – Retail sales, finally, are showing what may be some weakness in consumer spending. Credit card debt is still building, but only slowly, and I expect to soon be reading about spreading defaults in this huge arena, which somewhat like home mortgages, will be felt throughout the nation’s financial system. I would put he chances of avoiding a recession now at no better than 50/50.
In spite of this backdrop, I hope you can enjoy your Turkey Day. And, I have a couple of other thoughts for you as you then begin your Holiday shopping.
a. Instead of all the usual toys, games or whatever you usually buy for the kids or grandkids, put some of your gifting in the form of future financial freedom. Open a mutual fund account for them and put, say, $1,000 in a globally diversified fund or mix of funds. When they are considering retirement 50 years from now, assuming the fund delivers 8% average annual returns, they will have nearly $47,000. Wait 60 years and it will be $101,000. Factoring in the Fed’s inflation target of 1% to 2% to put these future sums in today’s purchasing power will cut them approximately in half to $23,000 after 50 years and $44,000 after 60 years – still very handsome sums. And, that’s with one gift of $1,000 now. Invest another $1,000 in each of the next 19 years, and the ending amounts grow to approximately $257,000 and $482,000 . . . in today’s (inflation-adjusted) dollars.
b. Is it reasonable to expect 8% returns, or about 6 ½% after inflation, over the next few decades from a diversified portfolio? With a world view, I believe these kinds of returns can readily be attained. Here in the U. S., however, it may well be harder to achieve this in the next 50 years than it was in the last 50 years. You’ll have to do less of your buying when things look rosy and more when markets are reacting to pervasive concerns and the expectation of more bad news to come. Like . . . now?
Friday, November 16, 2007
Ah, yes, I remember it well (Part 3)
This was quite a week of business and investment news, wasn’t it? Bad news. Depressing news. Scary news.
Did following this news make you any money? Did it save you any money? Did it tell you anything about the future? And, can you even remember very much of it, other than that it was bad, depressing and scary?
The fact is, if you acted on news this week by buying or selling an investment, you won’t know whether it was a good move until (a) you reverse the trade, or (b) you cash out to spend the money. If you’re like most of us, “a” will never happen, and you’ll forget what you did, much less why you did it, by the time “b” rolls around. Ah, no, you won’t remember it well.
So, although you (and I, I admit) will continue to follow the daily business news, we must recognize that it is very unlikely to help our long-term investment results. And, besides, our fund managers and financial advisors are already doing this, which they are able to do without getting emotionally involved and with a more seasoned perspective.
My ultimate solution, which allows me to follow the daily news yet not commit financial self mutilation by acting on it, is this. I read the paper each day, but I also glance at yesterday’s, or one from last week. This reminds me that business and investment news may be attention-getting, but it’s not worth getting worked up about. And, it’s certainly not a sound basis for altering a well-designed, long-term investment program.
Did following this news make you any money? Did it save you any money? Did it tell you anything about the future? And, can you even remember very much of it, other than that it was bad, depressing and scary?
The fact is, if you acted on news this week by buying or selling an investment, you won’t know whether it was a good move until (a) you reverse the trade, or (b) you cash out to spend the money. If you’re like most of us, “a” will never happen, and you’ll forget what you did, much less why you did it, by the time “b” rolls around. Ah, no, you won’t remember it well.
So, although you (and I, I admit) will continue to follow the daily business news, we must recognize that it is very unlikely to help our long-term investment results. And, besides, our fund managers and financial advisors are already doing this, which they are able to do without getting emotionally involved and with a more seasoned perspective.
My ultimate solution, which allows me to follow the daily news yet not commit financial self mutilation by acting on it, is this. I read the paper each day, but I also glance at yesterday’s, or one from last week. This reminds me that business and investment news may be attention-getting, but it’s not worth getting worked up about. And, it’s certainly not a sound basis for altering a well-designed, long-term investment program.
Friday, November 9, 2007
Ah, yes, I remember it well (Part 2)
How did you do with your news blackout? Not all that well, I would guess. Consuming new, readily available information is a strong human impulse.
But, if you did succeed with it, you feel better, don’t you? Told you so!
Still, in the back of your mind, you are probably just not comfortable with this self-imposed exile from information. You might even be wondering if it is just a case of “ignorance is bliss.” And, most people would find it very difficult to seek ignorance just for a little peace of mind.
So, what else can you do? Here’s my little secret. Read the papers all you want, but do it the next day.
It’s been said that yesterday’s newspaper is only good for the bottom of the bird cage or wrapping garbage. But, it’s also a great source of perspective. It helps you see that nearly all “news” is of very little substance. In fact it is of almost no consequence in your life. It doesn’t matter. Voilá! Peace!!
Don’t believe me? Go get that stack of papers from the corner. Page through them. Eh!?
It’s just not that easy, though, is it? As financially responsible citizens of the world, we really should know on a reasonably timely basis what’s happening in the world of economics and finance. We can all be more discriminating in how we gather and react to the information, but we probably do need to pay fairly close attention to life outside of our own life.
Well, I’ve got another solution for you. Next week. And, in the meantime, go ahead and read your papers as they arrive if you just can’t help yourself. But, also keep piling them in the corner.
But, if you did succeed with it, you feel better, don’t you? Told you so!
Still, in the back of your mind, you are probably just not comfortable with this self-imposed exile from information. You might even be wondering if it is just a case of “ignorance is bliss.” And, most people would find it very difficult to seek ignorance just for a little peace of mind.
So, what else can you do? Here’s my little secret. Read the papers all you want, but do it the next day.
It’s been said that yesterday’s newspaper is only good for the bottom of the bird cage or wrapping garbage. But, it’s also a great source of perspective. It helps you see that nearly all “news” is of very little substance. In fact it is of almost no consequence in your life. It doesn’t matter. Voilá! Peace!!
Don’t believe me? Go get that stack of papers from the corner. Page through them. Eh!?
It’s just not that easy, though, is it? As financially responsible citizens of the world, we really should know on a reasonably timely basis what’s happening in the world of economics and finance. We can all be more discriminating in how we gather and react to the information, but we probably do need to pay fairly close attention to life outside of our own life.
Well, I’ve got another solution for you. Next week. And, in the meantime, go ahead and read your papers as they arrive if you just can’t help yourself. But, also keep piling them in the corner.
Friday, November 2, 2007
Ah, yes, I remember it well (Part 1).
The Dow dropped 360 points yesterday. Are you concerned about the stock market? Worried about the economy? Afraid of energy cost inflation? Of course you are. You read the papers and listen to the news. You’re not brain dead!
Would you like to be able to set those fears aside, or at least reduce them substantially? Of course you would. You know that worrying doesn’t help. You’re not a masochist!
Well, here’s all you have to do.
Stop reading the papers and listening to the news.
Really. You would be amazed how a self-imposed news blackout can bring peace and tranquility to even the most tormented investor.
Realistically, of course, a total news blackout is almost impossible. You can run, but you can’t hide from the barrage of rantings and ravings from the “news” peddlers. But, all is not lost. I have found another way to retain and actually enhance one’s perspective, even when all those around you are losing theirs.
But, I’m going to make you wait a week. And, in the meantime, I have an assignment for you.
Try NOT reading your usual daily newspaper, at least not the business section or articles on the economy, for the next seven days. Just stack the papers in a corner. In fact, even if you do succumb to those self-destructive impulses and read some of the papers, still stack them in a corner. If your news comes via the Internet, print the one or two articles each day whose headlines most forcefully demand your attention, and stack them in a corner. And, of course, do all you can to avoid the TV and radio newscasts.
It’s just a week. You can do it. And, I assure you, you will be surprised at the results.
Would you like to be able to set those fears aside, or at least reduce them substantially? Of course you would. You know that worrying doesn’t help. You’re not a masochist!
Well, here’s all you have to do.
Stop reading the papers and listening to the news.
Really. You would be amazed how a self-imposed news blackout can bring peace and tranquility to even the most tormented investor.
Realistically, of course, a total news blackout is almost impossible. You can run, but you can’t hide from the barrage of rantings and ravings from the “news” peddlers. But, all is not lost. I have found another way to retain and actually enhance one’s perspective, even when all those around you are losing theirs.
But, I’m going to make you wait a week. And, in the meantime, I have an assignment for you.
Try NOT reading your usual daily newspaper, at least not the business section or articles on the economy, for the next seven days. Just stack the papers in a corner. In fact, even if you do succumb to those self-destructive impulses and read some of the papers, still stack them in a corner. If your news comes via the Internet, print the one or two articles each day whose headlines most forcefully demand your attention, and stack them in a corner. And, of course, do all you can to avoid the TV and radio newscasts.
It’s just a week. You can do it. And, I assure you, you will be surprised at the results.
Friday, October 26, 2007
Back on the subprime/housing/credit front . . .
I’m still anticipating it to be worse than generally expected (even now). And, I continue to watch for the event that will drive us to the bottom.
As I described awhile back, I believe the final episode will be triggered when one of the involved parties decides to “make a run for it.” Hedge funds, securities dealers and financial institutions own huge amounts of bonds backed by weak mortgages. No one knows what these bonds are worth on the market because no one is willing to make an offer to buy them. So, the investors carry them on their books at what they claim are justifiable prices. For Merrill Lynch, justifiable prices required a $5 billion write-down earlier this month, but that grew to $8.4 billion this week (per yesterday’s Wall Street Journal).
Today’s estimated prices may, indeed, be reasonable approximations of the true economic value of the bonds if held to maturity. But, not if they aren’t held to maturity. If they were to be sold today, it would have to be at prices much lower than these book values.
And, that’s the risk. If one holder believes that this valuation charade is doomed and the market will soon be flooded with bonds in a sellers’ panic, that holder may decide to get out first -- take the best offer available today, then stand back and watch the rest of the market implode as more and more bonds are written down or actually sold at ever decreasing prices.
All the players, as well as their regulators and bankers, recognize the precariousness of this situation, and are doing all they can to prevent the dreaded sell-off. Mortgage lenders, for instance, are recasting loans to make them less likely to go into default. They’re giving up future income to avoid recognizing a current loss.
The nation’s largest banks are putting together a giant Structured Investment Vehicle (SIV) to buy some of the billions of dollars of bank- and broker-sponsored SIVs that are effectively insolvent due to losses in their holdings of bonds backed by weak mortgages. These premier banks will be putting over-valued, weak assets into a pool that they will carry on their books at full value. That helps?
The Federal Reserve is likely to make another cut in the Fed funds and discount rates – to send a signal that the Fed is there to help (no matter how irresponsible the financial services sector has been . . . again . . . and in spite of the fact that the price of money is not the problem).
Might these efforts succeed? Sure. But, I doubt it. Someone will make a run for it. Some investment pools, in fact, are required by their founding documents to liquidate if their value drops by a certain amount. Others must direct all mortgage payments received to only the senior-level investors once a specified value is breached, leaving the subordinated investors with a non-paying “asset” they might as well dump and get what they can while they can.
So, yes, I still think someone will bolt. Then we can get on with the real clean-up of this very messy situation.
As I described awhile back, I believe the final episode will be triggered when one of the involved parties decides to “make a run for it.” Hedge funds, securities dealers and financial institutions own huge amounts of bonds backed by weak mortgages. No one knows what these bonds are worth on the market because no one is willing to make an offer to buy them. So, the investors carry them on their books at what they claim are justifiable prices. For Merrill Lynch, justifiable prices required a $5 billion write-down earlier this month, but that grew to $8.4 billion this week (per yesterday’s Wall Street Journal).
Today’s estimated prices may, indeed, be reasonable approximations of the true economic value of the bonds if held to maturity. But, not if they aren’t held to maturity. If they were to be sold today, it would have to be at prices much lower than these book values.
And, that’s the risk. If one holder believes that this valuation charade is doomed and the market will soon be flooded with bonds in a sellers’ panic, that holder may decide to get out first -- take the best offer available today, then stand back and watch the rest of the market implode as more and more bonds are written down or actually sold at ever decreasing prices.
All the players, as well as their regulators and bankers, recognize the precariousness of this situation, and are doing all they can to prevent the dreaded sell-off. Mortgage lenders, for instance, are recasting loans to make them less likely to go into default. They’re giving up future income to avoid recognizing a current loss.
The nation’s largest banks are putting together a giant Structured Investment Vehicle (SIV) to buy some of the billions of dollars of bank- and broker-sponsored SIVs that are effectively insolvent due to losses in their holdings of bonds backed by weak mortgages. These premier banks will be putting over-valued, weak assets into a pool that they will carry on their books at full value. That helps?
The Federal Reserve is likely to make another cut in the Fed funds and discount rates – to send a signal that the Fed is there to help (no matter how irresponsible the financial services sector has been . . . again . . . and in spite of the fact that the price of money is not the problem).
Might these efforts succeed? Sure. But, I doubt it. Someone will make a run for it. Some investment pools, in fact, are required by their founding documents to liquidate if their value drops by a certain amount. Others must direct all mortgage payments received to only the senior-level investors once a specified value is breached, leaving the subordinated investors with a non-paying “asset” they might as well dump and get what they can while they can.
So, yes, I still think someone will bolt. Then we can get on with the real clean-up of this very messy situation.
Friday, October 19, 2007
Dreaming about retirement
I had the strangest dream last night. I had announced my retirement, and suddenly found myself standing on a stage in front of all my coworkers trying to explain what I was going to do next and how I felt about leaving my “home away from home” of the last 20 years. I fumbled through a few disjointed comments, got an overly generous round of applause, then shuffled back to my seat.
When I awoke, the prospect of retirement was more real than ever before. Then I realized that this dream was true. It had happened the day before.
Yes, I have made the tough decision – I will be leaving MEMBERS Capital Advisors at the end of this year. This in no way reflects negatively on MCA. In fact, the company is in the best shape it has ever been with more investment management talent and capabilities than ever before. And, the prospects look absolutely stellar from here. But, I have stayed “one more year” a couple of times, now. It is time for me to do some other things and live life more on my schedule awhile, before those options are lost.
I am planning to pursue a small investment-related project with some former associates on a very part-time basis, but mostly I’ll be free to do whatever I choose (or, as Michael Armour cautioned last week, whatever is chosen for me, which I will aggressively seek to minimize!). The rest of my list of potential to-dos is huge – way too long. And, I don’t want to spread myself thinly over a multitude of tasks-with-no-end as most of us do throughout our working years.
So, my plan for the first few weeks of retirement is to settle in to our cottage up North with Colleen, chop a little wood and move a little (?) snow, and focus on sorting through that ominous list of options . . . that we are so very fortunate to have.
When I awoke, the prospect of retirement was more real than ever before. Then I realized that this dream was true. It had happened the day before.
Yes, I have made the tough decision – I will be leaving MEMBERS Capital Advisors at the end of this year. This in no way reflects negatively on MCA. In fact, the company is in the best shape it has ever been with more investment management talent and capabilities than ever before. And, the prospects look absolutely stellar from here. But, I have stayed “one more year” a couple of times, now. It is time for me to do some other things and live life more on my schedule awhile, before those options are lost.
I am planning to pursue a small investment-related project with some former associates on a very part-time basis, but mostly I’ll be free to do whatever I choose (or, as Michael Armour cautioned last week, whatever is chosen for me, which I will aggressively seek to minimize!). The rest of my list of potential to-dos is huge – way too long. And, I don’t want to spread myself thinly over a multitude of tasks-with-no-end as most of us do throughout our working years.
So, my plan for the first few weeks of retirement is to settle in to our cottage up North with Colleen, chop a little wood and move a little (?) snow, and focus on sorting through that ominous list of options . . . that we are so very fortunate to have.
Friday, October 12, 2007
Thanks for the advice!
I appreciate the ideas submitted by Mike Farner and Michael Armour (which you can see by clicking on “Comments” at the bottom of the prior entry) in response to my request of a few weeks ago. Each will receive a nice gift courtesy of MEMBERS Capital Advisors. (Guys, call or email me with your shirt sizes.) Their key points (paraphrased):
Mike – Don’t carry a lot of debt or frivolous spending habits into retirement, and don’t underestimate how long your money has to last (so you don’t outlive it).
Michael – Know what you’re going to do before you hang it up so that you are in control of your life, or others will make the decisions for you.
Some others shared their ideas, but were unwilling to go public with them. One of the most intriguing suggestions was to check out international living. Besides improving your climate, it can also improve your financial status with a much lower cost of living, including much lower (if any) taxes. Don’t move to Florida and avoid state income tax, move to Panama (among many other exotic locales) and avoid all taxes!
This idea has always struck me as unpatriotic – earning your fortune (?) here in the great U. S. of A., then running off to retire somewhere else, taking your nest egg with you. But, in a way, it is also a patently American thing to do. If emigrating will result in a significant improvement in your quality of life, get in the boat!
I personally am not anywhere near actually making this kind of move – we’re well set up with our condo here and cottage up North. But, I can’t help but poke around a little, out of simple curiosity and just in case the political/economic system here gets (how shall I say it?) . . . too Un-American?
Anyone similarly curious might start by taking a look at this website:
http://www.internationalliving.com/
CBS-1007-7D6D
Mike – Don’t carry a lot of debt or frivolous spending habits into retirement, and don’t underestimate how long your money has to last (so you don’t outlive it).
Michael – Know what you’re going to do before you hang it up so that you are in control of your life, or others will make the decisions for you.
Some others shared their ideas, but were unwilling to go public with them. One of the most intriguing suggestions was to check out international living. Besides improving your climate, it can also improve your financial status with a much lower cost of living, including much lower (if any) taxes. Don’t move to Florida and avoid state income tax, move to Panama (among many other exotic locales) and avoid all taxes!
This idea has always struck me as unpatriotic – earning your fortune (?) here in the great U. S. of A., then running off to retire somewhere else, taking your nest egg with you. But, in a way, it is also a patently American thing to do. If emigrating will result in a significant improvement in your quality of life, get in the boat!
I personally am not anywhere near actually making this kind of move – we’re well set up with our condo here and cottage up North. But, I can’t help but poke around a little, out of simple curiosity and just in case the political/economic system here gets (how shall I say it?) . . . too Un-American?
Anyone similarly curious might start by taking a look at this website:
http://www.internationalliving.com/
CBS-1007-7D6D
Friday, September 14, 2007
A little help here?
Did you see this? Researchers have determined that two-year-old chimpanzees and two-year-old humans are essentially intellectual equals. So, why are we humans building computers and traveling in space while chimps are foraging for food and swinging from trees?
Because chimps are wiser? Maybe. But, the researchers attributed it to one area where the children were slightly more capable than the chimps. The children were better at patterning the behavior of others.
Give them each a lidded clear plastic jar with cookies inside and they’ll handle it similarly. They’ll hold it, turn it, bite it, and bang it on the floor, to no avail, of course. Then, if someone sits down with them, unscrews the top, takes a cookie, eats it, then puts the lid back on, their reactions are quite different. The child (once it stops whining, “MY cookie!”) is soon trying to unscrew the lid, and usually eventually succeeds. The chimp still holds it, turns it, bites it, and bangs it on the floor.
So, we humans have a greater capability than our closest relatives (we’re talking species here) to learn from others.
But, we don’t use this capability nearly as much as we could. Examples?
In its broadest sense, we don’t learn what we should from history. If we did, we wouldn’t keep repeating it (even after we’ve studied it).
On an individual level, it’s worse. We often don’t even pay attention. When we do, we don’t really listen. And, when we do listen, we are usually quick to discount the information coming to us.
One example I’ve experienced – raising those supposedly readily taught children. The single greatest disappointment in my stint as a parent has been (and still is) my inability to shelter my kids from most of the typical mistakes, pains and anguish of growing up. Part of this was the teacher, I’m sure. But, most of it, I really think, is because they, like all of us, weren’t very good at taking guidance.
A close second in the disappointment category is my own learning. I wish I had listened more to my parents, my bosses and coworkers, my spouse, my kids, and my many other well-meaning would-be teachers. As I gradually became aware of this deficiency over the years, I have tried to be better at seeing, hearing, feeling and understanding the many forms of learning coming my way. I still avoid or miss or ignore a lot, I’m sure, but I’m trying.
In that vein, I’ll be entering retirement one of these days. This may well be as difficult in some ways as growing up, maybe worse as it evolves into growing old. So, I have a request, especially of all of you who are already retired.
What are some of the common mistakes we soon-to-be-retired should try to avoid? What are some lessons you’ve learned – things you wish you had been told earlier? Or, things you did know, and are glad you did?
We’ll send a little gift to everyone who responds, and a medium gift to the best of the bunch. Just click “Comment” below. If you don’t want your name posted with your comment, or you don’t want even your comment posted, just say so. I’ll be out the next couple of weeks, but will look them over when I return and will let you know what I learned.
Because chimps are wiser? Maybe. But, the researchers attributed it to one area where the children were slightly more capable than the chimps. The children were better at patterning the behavior of others.
Give them each a lidded clear plastic jar with cookies inside and they’ll handle it similarly. They’ll hold it, turn it, bite it, and bang it on the floor, to no avail, of course. Then, if someone sits down with them, unscrews the top, takes a cookie, eats it, then puts the lid back on, their reactions are quite different. The child (once it stops whining, “MY cookie!”) is soon trying to unscrew the lid, and usually eventually succeeds. The chimp still holds it, turns it, bites it, and bangs it on the floor.
So, we humans have a greater capability than our closest relatives (we’re talking species here) to learn from others.
But, we don’t use this capability nearly as much as we could. Examples?
In its broadest sense, we don’t learn what we should from history. If we did, we wouldn’t keep repeating it (even after we’ve studied it).
On an individual level, it’s worse. We often don’t even pay attention. When we do, we don’t really listen. And, when we do listen, we are usually quick to discount the information coming to us.
One example I’ve experienced – raising those supposedly readily taught children. The single greatest disappointment in my stint as a parent has been (and still is) my inability to shelter my kids from most of the typical mistakes, pains and anguish of growing up. Part of this was the teacher, I’m sure. But, most of it, I really think, is because they, like all of us, weren’t very good at taking guidance.
A close second in the disappointment category is my own learning. I wish I had listened more to my parents, my bosses and coworkers, my spouse, my kids, and my many other well-meaning would-be teachers. As I gradually became aware of this deficiency over the years, I have tried to be better at seeing, hearing, feeling and understanding the many forms of learning coming my way. I still avoid or miss or ignore a lot, I’m sure, but I’m trying.
In that vein, I’ll be entering retirement one of these days. This may well be as difficult in some ways as growing up, maybe worse as it evolves into growing old. So, I have a request, especially of all of you who are already retired.
What are some of the common mistakes we soon-to-be-retired should try to avoid? What are some lessons you’ve learned – things you wish you had been told earlier? Or, things you did know, and are glad you did?
We’ll send a little gift to everyone who responds, and a medium gift to the best of the bunch. Just click “Comment” below. If you don’t want your name posted with your comment, or you don’t want even your comment posted, just say so. I’ll be out the next couple of weeks, but will look them over when I return and will let you know what I learned.
Friday, September 7, 2007
Here’s a retirement issue for you – income taxes.
First, a caveat. None of the following should be considered tax advice. If you need such advice, consult a tax expert.
If you do, you may find that many of these “experts” are expecting the next administration and congress to push through increases in personal income tax rates. The reasons – to shrink the ballooning deficit and spread the income tax load more fairly.
They may well succeed in raising the tax rates. But, I’m afraid they won’t get what they want.
First, I’m not at all sure higher taxes would reduce the deficit. This year’s deficit is now estimated to be $158 billion – a big number, but only 1.2% of GDP, and $217 billion LESS than the annual deficit before the most recent round of tax CUTS. (All numbers courtesy of the U. S. Treasury.)
Why? I assume it is similar to the effect of raising taxes on cigarettes or gasoline. It reduces their attractiveness. Taxing income more makes it less attractive, too, whether that income is from labor or investments. So, people and companies have less incentive to seek maximum pre-tax income. One way they evidence this is by deferring making changes in their investments because deferring gains taxes is more important at higher rates. Another is by aggressively seeking ways to shelter income from the higher taxes, like domiciling in lower tax locations. And, even if everything else stays the same, higher taxes mean lower after-tax income, which itself is a drag on a nation’s economy.
This impact of high or increased taxes is hard to refute. Ireland and some Eastern European countries are recent vivid examples of the positive effects lowered taxes can have on an economy as well as on the government’s total tax receipts. So, maybe we don’t want to raise the overall tax load on our economy. But, why not make it more equitable – raise the rates on the highest incomes and lower them on the other end?
This is probably doable. But, we need to be careful. We don’t want to disincentivize our most productive citizens, which make up a large part of the highest paid, or incentivize our biggest tax payers (productive or not) to relocate. Besides, we’re already getting a much higher proportion of our income tax receipts from the higher income groups than in years past. But, not by raising tax rates.
We’ve raised income tax receipts from the wealthy through other changes in the tax code, like allowing fewer deductions, or through the lack of changes, like not indexing the Alternative Minimum Tax to inflation. Our top tax rate was 70% in 1980, and the Treasury was getting 19% of its individual income tax receipts from the highest paid 1% of taxpayers. It was getting fully 49% of its receipts from the top 10% of income earners. The other 90% of its citizens paid in only about half of the total income tax receipts.
By 2004, we had cut our top tax rate in half – to 35%. But, even with these lower rates, we collected 36% (up from 19%) of tax receipts from the highest earning 1% of the population, and 68% (up from 49%) from the top 10%. I’m not sure we can push this much farther without killing or scaring off these geese that are laying all those golden eggs for the rest of us.
So, I’m not expecting lower income tax rates on my “middle income” in retirement. Nor am I hoping for higher rates on those with higher incomes. I’d say let’s not tamper with success, and focus instead on spending those tax receipts in ways that provide the most benefits, especially for our currently least productive citizens.
If you do, you may find that many of these “experts” are expecting the next administration and congress to push through increases in personal income tax rates. The reasons – to shrink the ballooning deficit and spread the income tax load more fairly.
They may well succeed in raising the tax rates. But, I’m afraid they won’t get what they want.
First, I’m not at all sure higher taxes would reduce the deficit. This year’s deficit is now estimated to be $158 billion – a big number, but only 1.2% of GDP, and $217 billion LESS than the annual deficit before the most recent round of tax CUTS. (All numbers courtesy of the U. S. Treasury.)
Why? I assume it is similar to the effect of raising taxes on cigarettes or gasoline. It reduces their attractiveness. Taxing income more makes it less attractive, too, whether that income is from labor or investments. So, people and companies have less incentive to seek maximum pre-tax income. One way they evidence this is by deferring making changes in their investments because deferring gains taxes is more important at higher rates. Another is by aggressively seeking ways to shelter income from the higher taxes, like domiciling in lower tax locations. And, even if everything else stays the same, higher taxes mean lower after-tax income, which itself is a drag on a nation’s economy.
This impact of high or increased taxes is hard to refute. Ireland and some Eastern European countries are recent vivid examples of the positive effects lowered taxes can have on an economy as well as on the government’s total tax receipts. So, maybe we don’t want to raise the overall tax load on our economy. But, why not make it more equitable – raise the rates on the highest incomes and lower them on the other end?
This is probably doable. But, we need to be careful. We don’t want to disincentivize our most productive citizens, which make up a large part of the highest paid, or incentivize our biggest tax payers (productive or not) to relocate. Besides, we’re already getting a much higher proportion of our income tax receipts from the higher income groups than in years past. But, not by raising tax rates.
We’ve raised income tax receipts from the wealthy through other changes in the tax code, like allowing fewer deductions, or through the lack of changes, like not indexing the Alternative Minimum Tax to inflation. Our top tax rate was 70% in 1980, and the Treasury was getting 19% of its individual income tax receipts from the highest paid 1% of taxpayers. It was getting fully 49% of its receipts from the top 10% of income earners. The other 90% of its citizens paid in only about half of the total income tax receipts.
By 2004, we had cut our top tax rate in half – to 35%. But, even with these lower rates, we collected 36% (up from 19%) of tax receipts from the highest earning 1% of the population, and 68% (up from 49%) from the top 10%. I’m not sure we can push this much farther without killing or scaring off these geese that are laying all those golden eggs for the rest of us.
So, I’m not expecting lower income tax rates on my “middle income” in retirement. Nor am I hoping for higher rates on those with higher incomes. I’d say let’s not tamper with success, and focus instead on spending those tax receipts in ways that provide the most benefits, especially for our currently least productive citizens.
Friday, August 31, 2007
Retirement question!?
Occasionally, someone asks me a technical question about retirement. Can you imagine that!? As if I would know such things!!
This blog is intended merely to convey some of the investment and retirement-related thoughts that occur to me as I approach my own retirement. It was not supposed to be an all-encompassing factual resource for pre- and post-retirees.
But, I have to admit – I have been combing the Internet for just such resources, too. Without much success. The net is full of calculators and check lists and investment advice, but provides relatively little about the overall “project” of preparing for, entering, and living in retirement. But, I recently found a good alternative source of this kind of information.
If you’re willing to leave the net for awhile and employ a very retro-resource – a book – there are some that provide very helpful, broader views of the subject. A recently published, excellent example is The Wall Street Journal – Complete Retirement Guidebook (How to plan it, live it and enjoy it) by Gene Ruffenach and Kelly Green (Three Rivers Press).
This 300-page (small size, large print, lots of graphics), $15.00 paperback does a very good job of helping you define what you really want in retirement. It then provides practical guidance for what you need to do – before and after retirement – to get it.
So, read the book. But, check back here occasionally as you write your own retirement story whenever you need someone to commiserate with.
This blog is intended merely to convey some of the investment and retirement-related thoughts that occur to me as I approach my own retirement. It was not supposed to be an all-encompassing factual resource for pre- and post-retirees.
But, I have to admit – I have been combing the Internet for just such resources, too. Without much success. The net is full of calculators and check lists and investment advice, but provides relatively little about the overall “project” of preparing for, entering, and living in retirement. But, I recently found a good alternative source of this kind of information.
If you’re willing to leave the net for awhile and employ a very retro-resource – a book – there are some that provide very helpful, broader views of the subject. A recently published, excellent example is The Wall Street Journal – Complete Retirement Guidebook (How to plan it, live it and enjoy it) by Gene Ruffenach and Kelly Green (Three Rivers Press).
This 300-page (small size, large print, lots of graphics), $15.00 paperback does a very good job of helping you define what you really want in retirement. It then provides practical guidance for what you need to do – before and after retirement – to get it.
So, read the book. But, check back here occasionally as you write your own retirement story whenever you need someone to commiserate with.
Friday, August 24, 2007
(Continued from last week.)
As we walked, recounting our day’s adventure, I began to wonder. When we were in the ditch and our pursuers were standing just across the fence considering their next move, did anyone (besides me) seriously consider making a solo run for it – bolting from the ditch and heading across the hay field? Doing so would divulge the location of the others, but even if they also ran at that point, they would be a few steps behind and were almost certain to get caught. And, that would occupy the pursuers, further assuring the success of my dash for freedom.
So, I asked. To a person, they all admitted to considering running. Most confessed that they almost did run. But, none did. They realized, even at that young age, that to do so would have cost them their “membership” in the group, and would have caused great pain and hardship for the others (and maybe even for themselves ultimately when the others turned him in). If we just stayed together and didn’t flinch, we would retain each other’s respect, and we would all have some chance, at least, of coming out unscathed.
And, that, as you know, was exactly what happened. The sheriff’s decision not to “lay down the law” extended our good fortune. We knew how lucky we had been, and we certainly learned a thing or two about life, and about ourselves.
We made it home safely, by the back roads and alleys. Once there, we suffered the expected parental wrath (muted somewhat by their recognition that “boys will be boys”) for nearly ruining our shoes “playing Army in the ditches.” We all promised never to do it again. And, we never did.
Why relate this story here? Because it has some striking similarities to what is going on in the investment markets. Some investors’ hunger for maximum returns (greed) got them into trouble. They had invested in high yielding subprime mortgage-backed investment pools, and with the housing market rolling over, the mortgages began to default – more and faster than they expected. The value of the investment pools declined. How much? No way to know. Until all the underlying mortgages are extinguished by normal retirement, refinancing, or sale of repossessed property, the amount of the decline can only be estimated. And, with this great uncertainty, no one has been willing to buy these mortgage pools at any price.
Initially, the financial pain could very possibly have been modest, and limited to these direct investors (and the strapped homeowners, of course). But, they had borrowed extensively to buy more and more such weak paper. They were up to their chins in leverage, and now mostly under water. So, as the problems grew, the concerns spread beyond the direct investors to their lenders and others, and they all wanted out.
But, they couldn’t all get out at once. And, they knew they shouldn’t even try. If nobody ran and they all waited patiently for the scenario to play out, the damage could be minimized. The investment fraternity could save itself a lot of money and avoid a lot of anguish if all its members could just stick together.
Nice thought. But, unlike our covey of pre-teen boys, the markets don’t work that way. In fact, they won’t work that way. For markets to function – to correctly (most of the time) price whatever is being traded – everyone in the markets must be trusted . . . to do whatever is in their own best interests. So, instead of sticking together, investors generally prefer sticking each other. It’s every man for himself (neutral gender intended). If running for the woods appears to be the best option, they’ll run for the woods.
And, then there are “the authorities.” Typically, well after the excesses have developed and the bubble is already leaking, they arrive to do what they should have done before the problems developed. By then, the “fix” exacerbates the problems, hastening and deepening the damage. Rating agencies, regulators, and the congress all seem to be particularly adept at this. Where is the wisdom of the county sheriff when you need it?
I do have to acknowledge that some of the players this time – besides the world’s central banks – have made valiant and partially successful attempts to limit the damage. The fraternity of big Canadian banks were the first to act by voluntarily extending due dates of loans to strapped borrowers. Some mortgage lenders are beginning to do the same. The prime motivation is not eleemosynary, however. They are willing to restructure the debt only because it improves the chances of getting their money back. If the problems are as extensive as they appear, though, this won’t prevent the inevitable; it will merely allow it to play out in slow motion.
So, when the Bear Stearns hedge funds were initially being kept afloat by another injection of capital and their lender’s good will (not immediately calling their loans and liquidating the fund), more and worse news was almost a certainty. Such attempts to make faltering investments look secure rarely work for long. Eventually, there is always someone unwilling to play along. They see the ruse and choose to save their own skin. In this instance, the authorities are doing their part, too, tightening lending standards just as thousands of struggling homeowners and hedge fund borrowers need to refinance their loans.
How bad will it get this time? How long will it last? The initial explosion of market volatility indicated that the ultimate outcome was very uncertain. The recent relative (and, I would say eerie) calm indicates a growing belief that market participants and regulators have been and will continue doing the right thing.
We’ll withhold our judgment. Just as boys will be boys, we expect that markets will be markets. Someone will bolt, or sneeze, or surrender. We’ll just have to await the next chapter to know who and how much pain and suffering their actions will trigger.
So, I asked. To a person, they all admitted to considering running. Most confessed that they almost did run. But, none did. They realized, even at that young age, that to do so would have cost them their “membership” in the group, and would have caused great pain and hardship for the others (and maybe even for themselves ultimately when the others turned him in). If we just stayed together and didn’t flinch, we would retain each other’s respect, and we would all have some chance, at least, of coming out unscathed.
And, that, as you know, was exactly what happened. The sheriff’s decision not to “lay down the law” extended our good fortune. We knew how lucky we had been, and we certainly learned a thing or two about life, and about ourselves.
We made it home safely, by the back roads and alleys. Once there, we suffered the expected parental wrath (muted somewhat by their recognition that “boys will be boys”) for nearly ruining our shoes “playing Army in the ditches.” We all promised never to do it again. And, we never did.
Why relate this story here? Because it has some striking similarities to what is going on in the investment markets. Some investors’ hunger for maximum returns (greed) got them into trouble. They had invested in high yielding subprime mortgage-backed investment pools, and with the housing market rolling over, the mortgages began to default – more and faster than they expected. The value of the investment pools declined. How much? No way to know. Until all the underlying mortgages are extinguished by normal retirement, refinancing, or sale of repossessed property, the amount of the decline can only be estimated. And, with this great uncertainty, no one has been willing to buy these mortgage pools at any price.
Initially, the financial pain could very possibly have been modest, and limited to these direct investors (and the strapped homeowners, of course). But, they had borrowed extensively to buy more and more such weak paper. They were up to their chins in leverage, and now mostly under water. So, as the problems grew, the concerns spread beyond the direct investors to their lenders and others, and they all wanted out.
But, they couldn’t all get out at once. And, they knew they shouldn’t even try. If nobody ran and they all waited patiently for the scenario to play out, the damage could be minimized. The investment fraternity could save itself a lot of money and avoid a lot of anguish if all its members could just stick together.
Nice thought. But, unlike our covey of pre-teen boys, the markets don’t work that way. In fact, they won’t work that way. For markets to function – to correctly (most of the time) price whatever is being traded – everyone in the markets must be trusted . . . to do whatever is in their own best interests. So, instead of sticking together, investors generally prefer sticking each other. It’s every man for himself (neutral gender intended). If running for the woods appears to be the best option, they’ll run for the woods.
And, then there are “the authorities.” Typically, well after the excesses have developed and the bubble is already leaking, they arrive to do what they should have done before the problems developed. By then, the “fix” exacerbates the problems, hastening and deepening the damage. Rating agencies, regulators, and the congress all seem to be particularly adept at this. Where is the wisdom of the county sheriff when you need it?
I do have to acknowledge that some of the players this time – besides the world’s central banks – have made valiant and partially successful attempts to limit the damage. The fraternity of big Canadian banks were the first to act by voluntarily extending due dates of loans to strapped borrowers. Some mortgage lenders are beginning to do the same. The prime motivation is not eleemosynary, however. They are willing to restructure the debt only because it improves the chances of getting their money back. If the problems are as extensive as they appear, though, this won’t prevent the inevitable; it will merely allow it to play out in slow motion.
So, when the Bear Stearns hedge funds were initially being kept afloat by another injection of capital and their lender’s good will (not immediately calling their loans and liquidating the fund), more and worse news was almost a certainty. Such attempts to make faltering investments look secure rarely work for long. Eventually, there is always someone unwilling to play along. They see the ruse and choose to save their own skin. In this instance, the authorities are doing their part, too, tightening lending standards just as thousands of struggling homeowners and hedge fund borrowers need to refinance their loans.
How bad will it get this time? How long will it last? The initial explosion of market volatility indicated that the ultimate outcome was very uncertain. The recent relative (and, I would say eerie) calm indicates a growing belief that market participants and regulators have been and will continue doing the right thing.
We’ll withhold our judgment. Just as boys will be boys, we expect that markets will be markets. Someone will bolt, or sneeze, or surrender. We’ll just have to await the next chapter to know who and how much pain and suffering their actions will trigger.
Friday, August 17, 2007
How about a story to take your mind off the market carnage?
I love sweet corn. Always did. When I was young (in small town Iowa) , my grade school buddies and I would often raid the neighbors’ fields as the kernels were just beginning to turn from tasteless white to so-sweet yellow. We’d shuck it right there in the field and eat it raw right off the cob, five or six ears apiece. If anyone came by, we would just move farther into the field and sit silently in the dense forest of eight foot tall stalks until the threat had passed.
Once, however, this scenario didn’t play out as scripted. Someone must have spotted us because only minutes after we had slipped into the field, we heard a truck approach and stop. Then the voices of the farmer and his wife. Then of their four sons as they all gathered at the edge of the field devising their own plan. They were going to space themselves every 10 or 12 rows and comb the field from one end to the other. All we could do was head for the other end as quickly and silently as possible.
As I ran, crouched over with my hands clasped and arms pointed straight ahead to deflect the leaves, my mind was reeling. I strained to remember what was at that far end (a fence, or a road, or another field – maybe soybeans?), and trying to devise an appropriate strategy for each.
Once at the end, we quickly huddled silently together and listened. We could hear the faint but growing sounds of their much taller and wider bodies brushing the leaves on both sides as they moved up the rows. We had managed to extend our lead on them to a few hundred feet, And, that was good. We needed time. Because the field ended at a wire mesh fence, which separated the field from a muddy, cattail-choked ditch half full of water next to a gravel road. On the other side of the road was a half-mile deep hay field that had just been harvested. Beyond that, the woods.
What should we do? We each knew we had done wrong, and that surrendering and confessing was the noble thing to do. But, no one dared mention this option for fear of being labeled the wimp, the scaredy cat, the sell-out. And, of course, for the additional fear of what the farmer’s sons, and then our parents, would deem an appropriate penalty for our misdeeds.
So, what could we do? The woods were too far to run – we were certain to be spotted crossing the hay field and they could easily run us down there. Heading to either side of the sweet corn field would probably only delay our capture. So, our only real option was to climb the fence, slip into the ditch, submerge ourselves among the weeds and rushes with only our heads above water, and wait it out, hoping that our pursuers were unwilling to endure the discomfort of slogging into the muddy water in pursuit of a few juvenile corn poachers.
And, that’s just what we did. Almost immediately after getting into position, we heard one of the sons call to the others. “I’m at the fence. No one here.”
From several yards to the side, “No one here, either.”
Seconds later from the other side, “Nothing here. We must have missed them.”
After a long pause – long enough to rekindle our hopes of escape, we heard what we had all been dreading, “They might have gone into the creek.” And, it was said by the one closest to where we were huddled, submerged to our chins among the weeds.
With this, our already high and rising anxiety and fear turned to full panic. Our bodies literally shuddered and our minds raced imagining the humiliation, fear, parental scorn, loss of privileges, pain, and more pain that awaited us. We sat there, breathless and shivering in fear, for what seemed an eternity.
Then, from several yards away, we heard the farmer say, “No, they probably crossed the hayfield and are deep in the woods by now. We’ll get ‘em next time.”
The others voiced their concurrence as they walked toward each other, then they moved back into the field together, calmly discussing the condition of the corn and when it should be ready to pick.
We waited as their voices faded away, but we didn’t move until we heard the sound of the truck doors shutting, the engine starting, and the truck driving away. Only then did we begin to extricate ourselves from the scratching weeds and stinking muck we had so willingly scrambled into a short time before.
Eventually, we all had crawled up to the side of the road, and were scraping mud off of and out of our shoes when we heard a car approaching. We could tell it wasn’t the farmer’s truck, but who was it? As it drew nearer, we saw that it had a light bar on top. It was the county sheriff.
Again, we quickly evaluated our options. The woods were still too far to reach unseen. In fact, the sheriff had probably seen us already, so slipping back into the ditch wouldn’t help, either. The corn field? No, we’d pressed our luck far enough with that option. So, we just sat where we were and continued to clean ourselves off the best we could.
When the sheriff’s car reached us, he leaned out the window, slowly looked each of us up and down, but said nothing. We looked back, also in silence, trying desperately not to convey our feelings of guilt, fear, and dread. Finally, he sat back, sighed, then said, “I suggest you boys do your eatin’ at home from now on, okay?”
We all nodded. One said, “yes, sir.” He turned away and slowly drove on. And, we began the long walk home. (To be continued.)
Once, however, this scenario didn’t play out as scripted. Someone must have spotted us because only minutes after we had slipped into the field, we heard a truck approach and stop. Then the voices of the farmer and his wife. Then of their four sons as they all gathered at the edge of the field devising their own plan. They were going to space themselves every 10 or 12 rows and comb the field from one end to the other. All we could do was head for the other end as quickly and silently as possible.
As I ran, crouched over with my hands clasped and arms pointed straight ahead to deflect the leaves, my mind was reeling. I strained to remember what was at that far end (a fence, or a road, or another field – maybe soybeans?), and trying to devise an appropriate strategy for each.
Once at the end, we quickly huddled silently together and listened. We could hear the faint but growing sounds of their much taller and wider bodies brushing the leaves on both sides as they moved up the rows. We had managed to extend our lead on them to a few hundred feet, And, that was good. We needed time. Because the field ended at a wire mesh fence, which separated the field from a muddy, cattail-choked ditch half full of water next to a gravel road. On the other side of the road was a half-mile deep hay field that had just been harvested. Beyond that, the woods.
What should we do? We each knew we had done wrong, and that surrendering and confessing was the noble thing to do. But, no one dared mention this option for fear of being labeled the wimp, the scaredy cat, the sell-out. And, of course, for the additional fear of what the farmer’s sons, and then our parents, would deem an appropriate penalty for our misdeeds.
So, what could we do? The woods were too far to run – we were certain to be spotted crossing the hay field and they could easily run us down there. Heading to either side of the sweet corn field would probably only delay our capture. So, our only real option was to climb the fence, slip into the ditch, submerge ourselves among the weeds and rushes with only our heads above water, and wait it out, hoping that our pursuers were unwilling to endure the discomfort of slogging into the muddy water in pursuit of a few juvenile corn poachers.
And, that’s just what we did. Almost immediately after getting into position, we heard one of the sons call to the others. “I’m at the fence. No one here.”
From several yards to the side, “No one here, either.”
Seconds later from the other side, “Nothing here. We must have missed them.”
After a long pause – long enough to rekindle our hopes of escape, we heard what we had all been dreading, “They might have gone into the creek.” And, it was said by the one closest to where we were huddled, submerged to our chins among the weeds.
With this, our already high and rising anxiety and fear turned to full panic. Our bodies literally shuddered and our minds raced imagining the humiliation, fear, parental scorn, loss of privileges, pain, and more pain that awaited us. We sat there, breathless and shivering in fear, for what seemed an eternity.
Then, from several yards away, we heard the farmer say, “No, they probably crossed the hayfield and are deep in the woods by now. We’ll get ‘em next time.”
The others voiced their concurrence as they walked toward each other, then they moved back into the field together, calmly discussing the condition of the corn and when it should be ready to pick.
We waited as their voices faded away, but we didn’t move until we heard the sound of the truck doors shutting, the engine starting, and the truck driving away. Only then did we begin to extricate ourselves from the scratching weeds and stinking muck we had so willingly scrambled into a short time before.
Eventually, we all had crawled up to the side of the road, and were scraping mud off of and out of our shoes when we heard a car approaching. We could tell it wasn’t the farmer’s truck, but who was it? As it drew nearer, we saw that it had a light bar on top. It was the county sheriff.
Again, we quickly evaluated our options. The woods were still too far to reach unseen. In fact, the sheriff had probably seen us already, so slipping back into the ditch wouldn’t help, either. The corn field? No, we’d pressed our luck far enough with that option. So, we just sat where we were and continued to clean ourselves off the best we could.
When the sheriff’s car reached us, he leaned out the window, slowly looked each of us up and down, but said nothing. We looked back, also in silence, trying desperately not to convey our feelings of guilt, fear, and dread. Finally, he sat back, sighed, then said, “I suggest you boys do your eatin’ at home from now on, okay?”
We all nodded. One said, “yes, sir.” He turned away and slowly drove on. And, we began the long walk home. (To be continued.)
Friday, August 10, 2007
Time to take cover?
I got an interesting question earlier this week. It began with a list of some of the many challenges facing our economy and markets, from the subprime mortgage mess and our energy dependence to funding the military budget and social security. We had just said to be prepared for more market turbulence, but to stay the course with their long-term mutual fund investment program.
The question: “With all this risk ahead of us, wouldn’t it be prudent to do something about it? Shouldn’t I be taking some money off the table?”
Answer to the first question – Yes
Answer to the second question – No
In times of turbulence (in fact all the time), WE the investment managers are investing to reflect our expectations of the future. And, we share the many concerns listed. So, WE are “doing something about it” in our selection of the individual investments in the funds (for several months we have had more exposure to energy, less to housing, more in high quality, etc.) That’s what active managers (as opposed to indexers) do.
But, we rarely take our investors’ money out of the markets they have chosen to be in long-term and temporarily put them into “safe” investments, expecting to get back in later. Such market timing just doesn’t work long-term. People find it nearly impossible to invest when the future looks most grim and raise cash when things look most rosy. Instead, we would tend to sell when we’re scared (like now), and buy when we’re feeling cocky (like last month when our investments were all going up).
The point is this. When we say, “stay the course,” we don’t mean there is nothing that needs to be done. We’re saying, “Don’t YOU do anything WITH THE ALLOCATION OF YOUR INVESTMENTS.” Don’t expect to – don’t even try to – avoid weak markets with your long-term investments. But, do expect your investment managers to invest prudently and with a good understanding of and appreciation for the risks facing investors.
Other questions?
The question: “With all this risk ahead of us, wouldn’t it be prudent to do something about it? Shouldn’t I be taking some money off the table?”
Answer to the first question – Yes
Answer to the second question – No
In times of turbulence (in fact all the time), WE the investment managers are investing to reflect our expectations of the future. And, we share the many concerns listed. So, WE are “doing something about it” in our selection of the individual investments in the funds (for several months we have had more exposure to energy, less to housing, more in high quality, etc.) That’s what active managers (as opposed to indexers) do.
But, we rarely take our investors’ money out of the markets they have chosen to be in long-term and temporarily put them into “safe” investments, expecting to get back in later. Such market timing just doesn’t work long-term. People find it nearly impossible to invest when the future looks most grim and raise cash when things look most rosy. Instead, we would tend to sell when we’re scared (like now), and buy when we’re feeling cocky (like last month when our investments were all going up).
The point is this. When we say, “stay the course,” we don’t mean there is nothing that needs to be done. We’re saying, “Don’t YOU do anything WITH THE ALLOCATION OF YOUR INVESTMENTS.” Don’t expect to – don’t even try to – avoid weak markets with your long-term investments. But, do expect your investment managers to invest prudently and with a good understanding of and appreciation for the risks facing investors.
Other questions?
Tuesday, August 7, 2007
What, you couldn’t live without me!?
I go on vacation for two weeks, investors panic, and the market plummets. I get back (today) and stocks surge.
I have no more two-week vacations planned. Is this, then, the beginning of the market’s recovery and we’re back on our way to new highs?
Doubtful. Regardless of my vacation plans, the process of unwinding our nation’s excesses will take longer. But, it shouldn’t go a whole lot deeper – to the point of a serious recession and a 2000-like stock market swoon.
Why not? Because the U. S. is no longer the dominant engine of the world economy. It is still the most powerful (for now), but it no longer leads the economic parade. It is now supplemented by many other smaller and faster economic engines, nearly all of which are currently cruising along with relatively little baggage in the form of excess debt like we have in our housing and investment arenas. So, as our economic engine loses power and falls back, it can “draft” (as in NASCAR) the economies of the rest of the world. This should keep us from falling into recession as the excesses unwind.
But, we can’t be sure. Investors’ still have a lot to worry about, especially if the unwinding proves to be messier-than-expected. So, investors may not feel comfortable for some time yet. Even if I never take another day of vacation.
I have no more two-week vacations planned. Is this, then, the beginning of the market’s recovery and we’re back on our way to new highs?
Doubtful. Regardless of my vacation plans, the process of unwinding our nation’s excesses will take longer. But, it shouldn’t go a whole lot deeper – to the point of a serious recession and a 2000-like stock market swoon.
Why not? Because the U. S. is no longer the dominant engine of the world economy. It is still the most powerful (for now), but it no longer leads the economic parade. It is now supplemented by many other smaller and faster economic engines, nearly all of which are currently cruising along with relatively little baggage in the form of excess debt like we have in our housing and investment arenas. So, as our economic engine loses power and falls back, it can “draft” (as in NASCAR) the economies of the rest of the world. This should keep us from falling into recession as the excesses unwind.
But, we can’t be sure. Investors’ still have a lot to worry about, especially if the unwinding proves to be messier-than-expected. So, investors may not feel comfortable for some time yet. Even if I never take another day of vacation.
Friday, July 20, 2007
Previously on “As the Housing Bubble Deflates,” . . .
Yes, the subprime soap opera plays on. To recap, from my March 28 entry:
“I believe (housing in general and the subprime problems in particular) will have a broader and more negative impact on the economy than is currently reflected in the stock and bond markets.”
Then, the June 29 issue related how a couple of hedge funds were close to being shut down due to losses on bonds backed by subprime loans, but were then bailed out by their sponsor – with more borrowed money. I concluded that “. . . more and more mortgage-backed bonds will see declines in value, and more and more investors in those bonds will be looking to get out. Crisis avoided? I’d say more like challenges deferred.”
Well, the challenges weren’t deferred for long. The hedge fund sponsor announced this week that, due to continuing losses on bonds and related derivatives, the funds are now basically worthless. Even top-rated bond issues owned by conservative investors are becoming suspect. But, no one knows exactly where we are with this because, as the hedge fund sponsor stated, “. . . there isn’t much of a market for the bonds.”
It is this one aspect of the problem – the illiquidity of the assets – that was behind my initial concerns, and that convinces me that there are more problems to come.
Liquidity is important for all investors, but especially for retirees who will generally be selling assets in the months and years ahead. They must recognize that most assets’ “values” are assumed to be the prices at which similar assets most recently sold. That’s how appraisers set home values, car dealers determine used car values, and investors value stocks and bonds.
But, even in the most liquid markets, the “last trade” took place between the then most eager buyer and most agreeable seller. Lined up behind each of them are increasingly less eager buyers, and increasingly less willing sellers. So, if anything happens to make the buyers even less interested and the sellers a bit more eager to unload their holdings, prices can plummet in very short order. And, the less “depth” there is in a market – the shorter the lines of buyers and sellers – the more severe the price change.
Assets like subprime loan-backed bonds have an additional valuation problem. There often are no recent “last trades.” As a result, there are no arm’s length transactions to give guidance for the next trade, much less for the trades that might follow.
So, when a hedge fund values its portfolio, the prices used are often little more than educated guesses. And, with the lack of transparency and the pressure to perform in this business, these guesses can be little more than wishful thinking. Until the next trade.
So, stay tuned. This soap opera has many more episodes to come.
“I believe (housing in general and the subprime problems in particular) will have a broader and more negative impact on the economy than is currently reflected in the stock and bond markets.”
Then, the June 29 issue related how a couple of hedge funds were close to being shut down due to losses on bonds backed by subprime loans, but were then bailed out by their sponsor – with more borrowed money. I concluded that “. . . more and more mortgage-backed bonds will see declines in value, and more and more investors in those bonds will be looking to get out. Crisis avoided? I’d say more like challenges deferred.”
Well, the challenges weren’t deferred for long. The hedge fund sponsor announced this week that, due to continuing losses on bonds and related derivatives, the funds are now basically worthless. Even top-rated bond issues owned by conservative investors are becoming suspect. But, no one knows exactly where we are with this because, as the hedge fund sponsor stated, “. . . there isn’t much of a market for the bonds.”
It is this one aspect of the problem – the illiquidity of the assets – that was behind my initial concerns, and that convinces me that there are more problems to come.
Liquidity is important for all investors, but especially for retirees who will generally be selling assets in the months and years ahead. They must recognize that most assets’ “values” are assumed to be the prices at which similar assets most recently sold. That’s how appraisers set home values, car dealers determine used car values, and investors value stocks and bonds.
But, even in the most liquid markets, the “last trade” took place between the then most eager buyer and most agreeable seller. Lined up behind each of them are increasingly less eager buyers, and increasingly less willing sellers. So, if anything happens to make the buyers even less interested and the sellers a bit more eager to unload their holdings, prices can plummet in very short order. And, the less “depth” there is in a market – the shorter the lines of buyers and sellers – the more severe the price change.
Assets like subprime loan-backed bonds have an additional valuation problem. There often are no recent “last trades.” As a result, there are no arm’s length transactions to give guidance for the next trade, much less for the trades that might follow.
So, when a hedge fund values its portfolio, the prices used are often little more than educated guesses. And, with the lack of transparency and the pressure to perform in this business, these guesses can be little more than wishful thinking. Until the next trade.
So, stay tuned. This soap opera has many more episodes to come.
Friday, July 13, 2007
Investor’s worst enemy
Studies have long shown that most of us aren’t very good at investing. (See, for instance, Dalbar, Inc.’s 2007 Quantitative Analysis of Investor Behavior which analyzed the 20 year period 1987 through 2006). Driven by our emotions more than our logic, we typically buy high and sell low, which makes our ultimate returns less than they would have been if we had just steadily bought and held (then held and gradually sold) a diversified list of funds.
People in or near retirement seem to be particularly prone to such misbehavior. We’re our own worst enemy. We tend to diddle with our investments when we should be leaving well enough alone.
The usual advice for how to counter this is to practice abstinence. Establish an investment plan, then leave it alone (besides an occasional rebalancing). Don’t even look at the monthly statements; just file them away. But, since we are living, breathing organisms, we find this extremely difficult to do.
Fortunately, there is another way to shield our accumulated mutual fund wealth from our all too human urges. We can protect it with an impenetrable wall – in the form of a hired professional to manage our overall portfolio.
One very effective way to achieve this is with a separately managed, mutual fund “wrap account” from a financial advisor. But, there may be an easier way. The most recent Dalbar study found that the more widely available “allocation funds” are also providing this protection.
(For those not familiar with allocation funds: Allocation funds contain a diversified portfolio of other funds – the “underlying funds.” The types of underlying funds used differ from one allocation fund to another to reflect a range of the most important investor attributes – risk tolerance for “lifestyle” funds, or investment time horizon for “target maturity” or “lifecycle” funds. So, all the investor has to do is estimate their risk tolerance (conservative to aggressive) or time horizon (when the investment will begin being liquidated), and select a matching fund. The fund manager builds and maintains the portfolio of underlying funds over time.)
The latest Dalbar study found that investors typically hang onto allocation funds significantly longer than stock or bond funds. It also determined that stock fund investors, due to their bad habits, averaged only 4.3% annual returns, and bond fund investors 1.7%, for this very challenging 20 year period. So, if the average investor was 60% in stock funds and 40% in bond funds for this period, the overall return would have been 3.3%. Dalbar calculates the average allocation fund investors’ return for these 20 years at 3.7%, and these funds also typically have about a 60/40 stock-to-bond allocation. Disciplined buy-and-hold investors in these fund types, of course, did even better on average.
So, the best approach for most investors is to ignore their natural urges and let their well-designed portfolios of diverse mutual funds do their thing. For those of us with less confidence in our ability to control ourselves, though, it may be best to invest via an allocation fund where the structure itself protects our investments from our untoward advances, well-meaning as they may be.
People in or near retirement seem to be particularly prone to such misbehavior. We’re our own worst enemy. We tend to diddle with our investments when we should be leaving well enough alone.
The usual advice for how to counter this is to practice abstinence. Establish an investment plan, then leave it alone (besides an occasional rebalancing). Don’t even look at the monthly statements; just file them away. But, since we are living, breathing organisms, we find this extremely difficult to do.
Fortunately, there is another way to shield our accumulated mutual fund wealth from our all too human urges. We can protect it with an impenetrable wall – in the form of a hired professional to manage our overall portfolio.
One very effective way to achieve this is with a separately managed, mutual fund “wrap account” from a financial advisor. But, there may be an easier way. The most recent Dalbar study found that the more widely available “allocation funds” are also providing this protection.
(For those not familiar with allocation funds: Allocation funds contain a diversified portfolio of other funds – the “underlying funds.” The types of underlying funds used differ from one allocation fund to another to reflect a range of the most important investor attributes – risk tolerance for “lifestyle” funds, or investment time horizon for “target maturity” or “lifecycle” funds. So, all the investor has to do is estimate their risk tolerance (conservative to aggressive) or time horizon (when the investment will begin being liquidated), and select a matching fund. The fund manager builds and maintains the portfolio of underlying funds over time.)
The latest Dalbar study found that investors typically hang onto allocation funds significantly longer than stock or bond funds. It also determined that stock fund investors, due to their bad habits, averaged only 4.3% annual returns, and bond fund investors 1.7%, for this very challenging 20 year period. So, if the average investor was 60% in stock funds and 40% in bond funds for this period, the overall return would have been 3.3%. Dalbar calculates the average allocation fund investors’ return for these 20 years at 3.7%, and these funds also typically have about a 60/40 stock-to-bond allocation. Disciplined buy-and-hold investors in these fund types, of course, did even better on average.
So, the best approach for most investors is to ignore their natural urges and let their well-designed portfolios of diverse mutual funds do their thing. For those of us with less confidence in our ability to control ourselves, though, it may be best to invest via an allocation fund where the structure itself protects our investments from our untoward advances, well-meaning as they may be.
Monday, July 9, 2007
Too Much Stuff
A piece of advice for those preparing for retirement: Get rid of stuff. Now. And, don’t buy any new stuff “that you’ll want in retirement.”
I know of what I speak. I just sent yet another yearly rent check for our three 10x20 storage units, but I can’t remember half of what’s in them. And, half of what’s in our closets should be in them, too. Or, in the landfill.
I somewhat expected this challenge. After all, we’re of the era of “save everything.” You spent good money on it. It served you well. Someday you might need it again. It’s still perfectly good, or it can be easily fixed; just needs a couple of parts.
And, not only do we save stuff, we save it in the box it came in. Tied with a string. Protects it, you know. And, makes it easier to find (and to stack).
Our kids don’t save anything. They even throw away those plastic boxes that CD’s come in. And, after they load the CD onto their laptop, they throw it away! Of course, they never even consider trying to fix anything; if it breaks, they toss it. We’ve become a disposable society, plain and simple. So, get on the train, pre-retiree. Dispose of all that stuff you haven’t touched in years (except to move it around).
And, then there’s the issue of buying things “that you’ll want in retirement.” No, you won’t. Here, too, I know of what I speak.
The casual clothes you’ve been accumulating at end-of-season sales – not only will they be hideously dated, they are likely to be made of material that isn’t produced anymore because there is something better. And, they won’t fit.
The cordless power tools you just laid in – they’ll be available with more power, and be lighter and cheaper. The Nikon you bought a few years back with all those lenses – well, people don’t use film anymore. Try to unload it on eBay. The big screen TV, the stereo, the cordless phone – think flat-screen monitor, surround sound and iPhone, all wireless, of course. Besides, wait a couple of years and they’ll be even better, cheaper and simpler to operate.
The culprit here is technological change. It’s not going to stop. In fact, it’s accelerating. We all know that. But, we haven’t all adjusted to it. We need to shift gears from being accumulators to being user/recyclers.
One hint: You might get a little comfort if you think about the concept of recycling. It’s just like keeping/saving. But, it’s kept/saved somewhere else. Next time you need it (if ever), you’ll have to pay for it again, but it will be cheaper and even better than it was. And probably disposable. That’s progress! Isn’t it?
I know of what I speak. I just sent yet another yearly rent check for our three 10x20 storage units, but I can’t remember half of what’s in them. And, half of what’s in our closets should be in them, too. Or, in the landfill.
I somewhat expected this challenge. After all, we’re of the era of “save everything.” You spent good money on it. It served you well. Someday you might need it again. It’s still perfectly good, or it can be easily fixed; just needs a couple of parts.
And, not only do we save stuff, we save it in the box it came in. Tied with a string. Protects it, you know. And, makes it easier to find (and to stack).
Our kids don’t save anything. They even throw away those plastic boxes that CD’s come in. And, after they load the CD onto their laptop, they throw it away! Of course, they never even consider trying to fix anything; if it breaks, they toss it. We’ve become a disposable society, plain and simple. So, get on the train, pre-retiree. Dispose of all that stuff you haven’t touched in years (except to move it around).
And, then there’s the issue of buying things “that you’ll want in retirement.” No, you won’t. Here, too, I know of what I speak.
The casual clothes you’ve been accumulating at end-of-season sales – not only will they be hideously dated, they are likely to be made of material that isn’t produced anymore because there is something better. And, they won’t fit.
The cordless power tools you just laid in – they’ll be available with more power, and be lighter and cheaper. The Nikon you bought a few years back with all those lenses – well, people don’t use film anymore. Try to unload it on eBay. The big screen TV, the stereo, the cordless phone – think flat-screen monitor, surround sound and iPhone, all wireless, of course. Besides, wait a couple of years and they’ll be even better, cheaper and simpler to operate.
The culprit here is technological change. It’s not going to stop. In fact, it’s accelerating. We all know that. But, we haven’t all adjusted to it. We need to shift gears from being accumulators to being user/recyclers.
One hint: You might get a little comfort if you think about the concept of recycling. It’s just like keeping/saving. But, it’s kept/saved somewhere else. Next time you need it (if ever), you’ll have to pay for it again, but it will be cheaper and even better than it was. And probably disposable. That’s progress! Isn’t it?
Friday, June 29, 2007
A crisis avoided?
Subprime home loan problems were back in the news recently. A couple of leveraged hedge funds that were heavily invested in subprime mortgage-backed bonds nearly folded when losses on those bonds erased most of the thin margin of equity in the funds. But, the funds ultimately were kept afloat . . . with more loans.
The original lenders to these funds strongly considered liquidating the funds – selling off the subprime mortgage-backed bonds and other assets, using the proceeds to pay off their loans, and then paying any remaining proceeds out to the funds’ investors. But, I suspect they soon realized that this might not raise enough to pay off the loans, much less return anything to investors. Putting a long list of low-quality bonds on the market would hammer the already suffering subprime mortgage-backed bond market as well as bring down the prices of other bonds, possibly starting a downward spiral throughout the investment markets.
So, they just lent the funds more money to keep them in business. For awhile at least.
This illustrates the type of concerns behind my statement of March 28, when Wall Street was saying we had seen the worst of the subprime crisis: “I believe it will have a broader and more negative impact on the economy than is currently reflected in the stock and bond markets.”
I still believe this. The growing impact may be confined to the areas of the financial markets tied most directly to housing. But, as more and more home mortgage loans reset to higher interest rates over the next twelve months, and the mandated higher lending standards prevent many marginal borrowers from refinancing, more and more mortgage-backed bonds will see declines in value, and more and more investors in those bonds will be looking to get out.
Crisis avoided? I’d say more like challenges deferred.
The original lenders to these funds strongly considered liquidating the funds – selling off the subprime mortgage-backed bonds and other assets, using the proceeds to pay off their loans, and then paying any remaining proceeds out to the funds’ investors. But, I suspect they soon realized that this might not raise enough to pay off the loans, much less return anything to investors. Putting a long list of low-quality bonds on the market would hammer the already suffering subprime mortgage-backed bond market as well as bring down the prices of other bonds, possibly starting a downward spiral throughout the investment markets.
So, they just lent the funds more money to keep them in business. For awhile at least.
This illustrates the type of concerns behind my statement of March 28, when Wall Street was saying we had seen the worst of the subprime crisis: “I believe it will have a broader and more negative impact on the economy than is currently reflected in the stock and bond markets.”
I still believe this. The growing impact may be confined to the areas of the financial markets tied most directly to housing. But, as more and more home mortgage loans reset to higher interest rates over the next twelve months, and the mandated higher lending standards prevent many marginal borrowers from refinancing, more and more mortgage-backed bonds will see declines in value, and more and more investors in those bonds will be looking to get out.
Crisis avoided? I’d say more like challenges deferred.
Friday, June 22, 2007
And, they’re off! Already.
We’re going to really be sick of the Presidential horse race well before it’s over. But, so far, I have to admit, it’s been somewhat amusing.
The Dems saw Clinton take the lead right out of the gate. But, then Obama moved up fast and, depending on the viewing angle, may have nosed ahead. But, Clinton then surged back into the lead, in spite of boos and catcalls from some in the far left end of the grandstand who were even louder than her usual right-side detractors.
Republicans have suffered even more bumping and grinding with Thompson and Guiliani now neck and neck up front while Romney and McCain are fighting it out side by side a few lengths back.
And, posturing to enter the race midway through is Bloomberg, who spent most of his life a distinctly blue shade, transformed himself to red a few years ago, and just this week shed all identifying colors.
(Go to http://www.rasmussenreports.com/public_content/politics for regular updates on the progress of each of the contenders.)
These recurring contests of strength, style and stamina have always caused concern if not consternation among those who follow the sport, especially those of us who see great significance in the outcome. After experiencing what the last two winners did, however, I’m not sure it’s worth the anguish. They did what Bloomberg has done, but covertly. They changed colors, or at least shades, as they served out their terms as champions.
I’m noticing one thing that’s different this time, though. Me. I’ll be retired for a good part of their term. My priorities are changing and I’ll be less able to change my lifestyle in response to new taxing and spending priorities. The wave of baby boomers on my heels will be having similar thoughts.
I wonder how this will change the political landscape. Will this largest of generations (so far) that benefited so much from the strong private sector they will soon be leaving now begin to look more to the public sector for its care and feeding, and vote accordingly? Or, will the typical age-related transition to more conservative views lead them to prefer even less government in their lives than they have had? Either way, most of us will root for whoever we see as most likely to provide the optimum social and financial environment nationwide, and geopolitical environment worldwide, that doesn’t leave us – the soon to be retired – any worse off.
But, who will do that? No way to know for sure. And, each of us wants something a little different. That’s what makes it a horse race.
The Dems saw Clinton take the lead right out of the gate. But, then Obama moved up fast and, depending on the viewing angle, may have nosed ahead. But, Clinton then surged back into the lead, in spite of boos and catcalls from some in the far left end of the grandstand who were even louder than her usual right-side detractors.
Republicans have suffered even more bumping and grinding with Thompson and Guiliani now neck and neck up front while Romney and McCain are fighting it out side by side a few lengths back.
And, posturing to enter the race midway through is Bloomberg, who spent most of his life a distinctly blue shade, transformed himself to red a few years ago, and just this week shed all identifying colors.
(Go to http://www.rasmussenreports.com/public_content/politics for regular updates on the progress of each of the contenders.)
These recurring contests of strength, style and stamina have always caused concern if not consternation among those who follow the sport, especially those of us who see great significance in the outcome. After experiencing what the last two winners did, however, I’m not sure it’s worth the anguish. They did what Bloomberg has done, but covertly. They changed colors, or at least shades, as they served out their terms as champions.
I’m noticing one thing that’s different this time, though. Me. I’ll be retired for a good part of their term. My priorities are changing and I’ll be less able to change my lifestyle in response to new taxing and spending priorities. The wave of baby boomers on my heels will be having similar thoughts.
I wonder how this will change the political landscape. Will this largest of generations (so far) that benefited so much from the strong private sector they will soon be leaving now begin to look more to the public sector for its care and feeding, and vote accordingly? Or, will the typical age-related transition to more conservative views lead them to prefer even less government in their lives than they have had? Either way, most of us will root for whoever we see as most likely to provide the optimum social and financial environment nationwide, and geopolitical environment worldwide, that doesn’t leave us – the soon to be retired – any worse off.
But, who will do that? No way to know for sure. And, each of us wants something a little different. That’s what makes it a horse race.
Friday, June 8, 2007
Looking ahead
Awhile back, I wrote about my concerns regarding what I’ll do in retirement. I have lots of ideas, but that’s the essence of the problem. Which ones will I actually do? How will I choose? Should I focus on a few things or touch on many? No progress to report on this issue yet.
So, I’m thinking about another issue – aging. Or, maybe maturing is a better word. What’s that going to be like?
With both of my mid-80s parents in memory care assisted living, I’m not too optimistic about my later years. But, what about my 60s and 70s? Could they actually be “the best years of my life” as some have claimed?
Specifically, there are three aging/maturing-related things I found myself wondering about this past weekend.
1. Will the Sunday blahs ever stop?
Ever since grade school, Sundays have been downers. I can’t seem to shed the weight of Mondays and school/work. Even though I usually enjoyed both, I preferred days of freedom-to-choose-what-I-do. Except on Sundays. When I have more days off, will Sundays get better? And, will days off get worse?
2. Will I finally learn to recognize how complicated things are before I undertake them?
Whether it was at home or at work, with projects or relationships, I have always underestimated the complexity and the challenges involved. I usually see the desired destination in vivid detail, but the route from here to there is often nearly invisible to me . . . until I start the journey. Will more years and continued efforts to be more objective help me in this regard? And, if so, will I enter the fray more prepared, or will I simply undertake less?
3. When I look back even a few short years at some of the things I’ve said and done and not done, will I ever stop thinking how immature/naïve/short-sighted I was?
This is natural, I’m sure, and generally fully warranted through the teens, twenties, and maybe into the thirties. But, I didn’t expect it to continue full bore into the forties, the fifties, and now in the early 60s. Will I ever “get it right” the first time? Or, do I really want to? If I reach the point where my actions of the past few years look perfect, I guess I will have stopped growing, right?
So, I’m hoping to get over the first two, and I’ll try to learn to live with the third. But, I’m a little worried that some Sunday evening early in my retirement years, I’ll find myself feeling morose, realizing I’m only half way through what I thought was a simple weekend project, and thinking I would have done this much BETTER a few short years ago.
So, I’m thinking about another issue – aging. Or, maybe maturing is a better word. What’s that going to be like?
With both of my mid-80s parents in memory care assisted living, I’m not too optimistic about my later years. But, what about my 60s and 70s? Could they actually be “the best years of my life” as some have claimed?
Specifically, there are three aging/maturing-related things I found myself wondering about this past weekend.
1. Will the Sunday blahs ever stop?
Ever since grade school, Sundays have been downers. I can’t seem to shed the weight of Mondays and school/work. Even though I usually enjoyed both, I preferred days of freedom-to-choose-what-I-do. Except on Sundays. When I have more days off, will Sundays get better? And, will days off get worse?
2. Will I finally learn to recognize how complicated things are before I undertake them?
Whether it was at home or at work, with projects or relationships, I have always underestimated the complexity and the challenges involved. I usually see the desired destination in vivid detail, but the route from here to there is often nearly invisible to me . . . until I start the journey. Will more years and continued efforts to be more objective help me in this regard? And, if so, will I enter the fray more prepared, or will I simply undertake less?
3. When I look back even a few short years at some of the things I’ve said and done and not done, will I ever stop thinking how immature/naïve/short-sighted I was?
This is natural, I’m sure, and generally fully warranted through the teens, twenties, and maybe into the thirties. But, I didn’t expect it to continue full bore into the forties, the fifties, and now in the early 60s. Will I ever “get it right” the first time? Or, do I really want to? If I reach the point where my actions of the past few years look perfect, I guess I will have stopped growing, right?
So, I’m hoping to get over the first two, and I’ll try to learn to live with the third. But, I’m a little worried that some Sunday evening early in my retirement years, I’ll find myself feeling morose, realizing I’m only half way through what I thought was a simple weekend project, and thinking I would have done this much BETTER a few short years ago.
Wednesday, May 30, 2007
No where to run to; nowhere to hide?
A recent conversation:
Friend: Are you looking forward to being retired and moving out of the cold country?
Me: I’ve got lots of things I’m looking forward to doing when I have the time, but we aren’t planning to move.
Friend: What!? Why would you want to put up with Wisconsin winters when you could live almost anywhere?
Me: We actually like the winters. And, most of the usual retirement areas are ungodly hot in the summer.
Friend: And, the tornados! Wouldn’t you want to get out of the tornado belt?
Me: There are risks everywhere.
Friend: Meh.
Later that day, I did a little poking around and found an article from the August 5, 2005 issue of Forbes magazine that listed the safest and least safe cities in the U. S. in terms of extreme weather (based on data from Sperling’s Best Places).
Least safe:
1. Monroe, LA
2. Dallas, TX
3. Jackson, MS
4. Lakeland - Winter Haven, FL
5. West Palm Beach – Boca Raton, FL
6. Kansas City, MO
7. Elkhart – Goshen, IN
8. Tulsa, OK
9. Memphis, TN
10. Shreveport – Bossier City, LA
I particularly like the fact that a city named for being a haven from winter has riskier weather than any snow-belt city in the country, even though one of the risk factors measured in the study was the frequency of below-freezing temperatures.
Safest:
1. Honolulu, HI
2. Boise City, ID
3. Santa Fe, NM
4. Yakima, WA
5. Spokane, WA
6. Richland – Kennewick – Pasco, WA
7. Medford – Ashland, OR
8. Corvallis, OR
9. Salem, OR
10. Las Cruces, NM
Why all the WAs and ORs (and the ID?)? The study ignored volcanic eruptions. It also ignored tsunamis (although Hawaii hasn’t had a bad one for decades).
That leaves a couple of higher elevation cities in New Mexico.
We might take a look. Any other suggestions?
Friend: Are you looking forward to being retired and moving out of the cold country?
Me: I’ve got lots of things I’m looking forward to doing when I have the time, but we aren’t planning to move.
Friend: What!? Why would you want to put up with Wisconsin winters when you could live almost anywhere?
Me: We actually like the winters. And, most of the usual retirement areas are ungodly hot in the summer.
Friend: And, the tornados! Wouldn’t you want to get out of the tornado belt?
Me: There are risks everywhere.
Friend: Meh.
Later that day, I did a little poking around and found an article from the August 5, 2005 issue of Forbes magazine that listed the safest and least safe cities in the U. S. in terms of extreme weather (based on data from Sperling’s Best Places).
Least safe:
1. Monroe, LA
2. Dallas, TX
3. Jackson, MS
4. Lakeland - Winter Haven, FL
5. West Palm Beach – Boca Raton, FL
6. Kansas City, MO
7. Elkhart – Goshen, IN
8. Tulsa, OK
9. Memphis, TN
10. Shreveport – Bossier City, LA
I particularly like the fact that a city named for being a haven from winter has riskier weather than any snow-belt city in the country, even though one of the risk factors measured in the study was the frequency of below-freezing temperatures.
Safest:
1. Honolulu, HI
2. Boise City, ID
3. Santa Fe, NM
4. Yakima, WA
5. Spokane, WA
6. Richland – Kennewick – Pasco, WA
7. Medford – Ashland, OR
8. Corvallis, OR
9. Salem, OR
10. Las Cruces, NM
Why all the WAs and ORs (and the ID?)? The study ignored volcanic eruptions. It also ignored tsunamis (although Hawaii hasn’t had a bad one for decades).
That leaves a couple of higher elevation cities in New Mexico.
We might take a look. Any other suggestions?
Friday, May 25, 2007
Lapse . . . of judgment?
Today’s interesting statistic: In 2005, 3.5 million life insurance policies paid death benefits.
Today’s amazing statistic: In 2005 18.5 million life insurance policies lapsed.
(These numbers were recently reported by the Insurance Information Institute.)
I’m no insurance expert, but this seems like a lot of lapses. I’m sure many of these policies were owned by retirees who simply quit paying premiums when their perceived need for insurance declined with their retirement (no more earning power to protect and fewer if any financial dependents). Or, maybe it was just that money got a little tight.
There may have been good reasons for the majority of these lapses, but I’m sure some were simply bad financial decisions. Before letting a policy lapse, the policy owner really should give strong consideration to the following:
What benefits does the policy still provide (tax advantages, estate planning, etc.)?
What is the economic value of the policy today if I live to my normal life expectancy (present value of proceeds at death less present value of premiums paid between now and then)?
What alternatives do I have to maintain coverage (borrow to maintain premiums, convert to a paid-up policy, etc.)?
If I can’t or don’t want to maintain the policy, what alternatives do I have besides letting it lapse (give or sell the policy to someone who will maintain the premiums and designate them as beneficiary)?
Most policyowners should work with an insurance expert to fully evaluate these (and probably other) alternatives. This is especially true when considering selling a policy; this “life settlements” arena has seen lots of shady dealings and abuse, both from buyers and sellers, so be careful.
But, don’t just let your life insurance policy lapse without considering the alternatives. That could be the worst lapse . . . of judgment.
Today’s amazing statistic: In 2005 18.5 million life insurance policies lapsed.
(These numbers were recently reported by the Insurance Information Institute.)
I’m no insurance expert, but this seems like a lot of lapses. I’m sure many of these policies were owned by retirees who simply quit paying premiums when their perceived need for insurance declined with their retirement (no more earning power to protect and fewer if any financial dependents). Or, maybe it was just that money got a little tight.
There may have been good reasons for the majority of these lapses, but I’m sure some were simply bad financial decisions. Before letting a policy lapse, the policy owner really should give strong consideration to the following:
What benefits does the policy still provide (tax advantages, estate planning, etc.)?
What is the economic value of the policy today if I live to my normal life expectancy (present value of proceeds at death less present value of premiums paid between now and then)?
What alternatives do I have to maintain coverage (borrow to maintain premiums, convert to a paid-up policy, etc.)?
If I can’t or don’t want to maintain the policy, what alternatives do I have besides letting it lapse (give or sell the policy to someone who will maintain the premiums and designate them as beneficiary)?
Most policyowners should work with an insurance expert to fully evaluate these (and probably other) alternatives. This is especially true when considering selling a policy; this “life settlements” arena has seen lots of shady dealings and abuse, both from buyers and sellers, so be careful.
But, don’t just let your life insurance policy lapse without considering the alternatives. That could be the worst lapse . . . of judgment.
Friday, May 18, 2007
Developing Financial Discipline
Most of us near-retirees and many actual retirees were raised by people who lived through the Great Depression of the 1930s. Most of them were quite thrifty, maybe even miserly. This trait was almost universally attributed to their life experience – to their environment.
Most children of these Depression era parents are thought to be not very thrifty, maybe even spendthrifts. This is usually attributed to their opposite experience – their formative years’ environment of ready employment and rapidly advancing standards of living.
I’m sure these differences in external influences made a difference in how these two generations thought of and used money. But, I also think there is another factor. And, I base this opinion on my own personal experience
One of our two sons has an almost manic compulsion to spend. The other is still in college, but already has a pretty nice liquidity cushion in his savings account as well as a few mutual fund investments. Yet, they grew up in the same environment.
At least part of this financial characteristic has to be innate in each individual.
I recently ran across some confirmation of this. George Lowenstein of Carnegie Mellon University monitored actual brain functions as people made purchases and found that everyone experiences pleasure from buying, and also subsequent displeasure with having to pay for the purchase (buyers’ remorse?). But, some experience this displeasure/remorse far less than others. For them, it’s all gain and no pain.
The significance of this in the retirement realm? Don’t expect your spending patterns to be easily changed in retirement. Without a lot of work, however you behaved pre-retirement is likely to continue post-retirement. You’re wired that way.
Contrary to the usual perception of our generation noted above, the study also found that under-spenders are more prevalent in the U. S. today than over-spenders, but are just less visible. I guess spenders love to spread the joy of their purchases while the more penurious among us are quietly watching their wealth accumulate. I wonder who’s happier (at least until the money runs out).
Most children of these Depression era parents are thought to be not very thrifty, maybe even spendthrifts. This is usually attributed to their opposite experience – their formative years’ environment of ready employment and rapidly advancing standards of living.
I’m sure these differences in external influences made a difference in how these two generations thought of and used money. But, I also think there is another factor. And, I base this opinion on my own personal experience
One of our two sons has an almost manic compulsion to spend. The other is still in college, but already has a pretty nice liquidity cushion in his savings account as well as a few mutual fund investments. Yet, they grew up in the same environment.
At least part of this financial characteristic has to be innate in each individual.
I recently ran across some confirmation of this. George Lowenstein of Carnegie Mellon University monitored actual brain functions as people made purchases and found that everyone experiences pleasure from buying, and also subsequent displeasure with having to pay for the purchase (buyers’ remorse?). But, some experience this displeasure/remorse far less than others. For them, it’s all gain and no pain.
The significance of this in the retirement realm? Don’t expect your spending patterns to be easily changed in retirement. Without a lot of work, however you behaved pre-retirement is likely to continue post-retirement. You’re wired that way.
Contrary to the usual perception of our generation noted above, the study also found that under-spenders are more prevalent in the U. S. today than over-spenders, but are just less visible. I guess spenders love to spread the joy of their purchases while the more penurious among us are quietly watching their wealth accumulate. I wonder who’s happier (at least until the money runs out).
Thursday, April 26, 2007
Dow hits record high! Yawn.
Dow 13000 is certainly a milestone. But, really, it’s no more noteworthy than your last birthday (nothing personal), which by definition is your personal best in the age department, but does not warrant notation in the annals of mankind.
In fact, just like your age, reaching higher and higher levels is the natural progression of stock markets. It is what should be expected to happen, especially when the index represents some of the currently strongest companies operating in a steadily growing economy that is supported by (or supporting) an ever-growing and geographically expanding population base.
What’s remarkable to me is not that the stock market’s long-term growth has been so persistent, but that its short-term growth is always so erratic.
This was nicely illustrated not two weeks ago as the market reached for another “record.” It clocked eight straight days of up markets. The all time record is only 14 days (May 28 through June 14, 1897). There have been only eight instances of eleven or more consecutive up days. And, the percent of months that saw positive index price moves is a mere 59% – indexes have declined in four of every ten months on average, or about five months every year. The percent of days that saw positive price moves is (prepare to gasp) only 50% rounded to the nearest whole number! Almost exactly half of stock market trading days have been losers. No wonder the market so rarely puts two weeks or more of up days in a row.
This kind of short-term randomness is not what any normal person would expect of a market that averages advances of about 10% annually and has never had a negative return for any 20-year period. But, this is exactly why investors in retirement need to be careful not to depend on their stocks rising steadily along with their living costs. Historically, stocks have matched or exceeded the rise in living costs on average over time, but if you want steady, you’re not going to get that from stocks.
You might relate this short-term variability to how old you feel, which can vary markedly day-to-day or even hour-to-hour. The long-term growth persistence relates to how old you really are, which steadily grinds higher no matter how you feel. Until some unknown point in the future, of course. And, then it doesn’t matter any more. Yawn.
In fact, just like your age, reaching higher and higher levels is the natural progression of stock markets. It is what should be expected to happen, especially when the index represents some of the currently strongest companies operating in a steadily growing economy that is supported by (or supporting) an ever-growing and geographically expanding population base.
What’s remarkable to me is not that the stock market’s long-term growth has been so persistent, but that its short-term growth is always so erratic.
This was nicely illustrated not two weeks ago as the market reached for another “record.” It clocked eight straight days of up markets. The all time record is only 14 days (May 28 through June 14, 1897). There have been only eight instances of eleven or more consecutive up days. And, the percent of months that saw positive index price moves is a mere 59% – indexes have declined in four of every ten months on average, or about five months every year. The percent of days that saw positive price moves is (prepare to gasp) only 50% rounded to the nearest whole number! Almost exactly half of stock market trading days have been losers. No wonder the market so rarely puts two weeks or more of up days in a row.
This kind of short-term randomness is not what any normal person would expect of a market that averages advances of about 10% annually and has never had a negative return for any 20-year period. But, this is exactly why investors in retirement need to be careful not to depend on their stocks rising steadily along with their living costs. Historically, stocks have matched or exceeded the rise in living costs on average over time, but if you want steady, you’re not going to get that from stocks.
You might relate this short-term variability to how old you feel, which can vary markedly day-to-day or even hour-to-hour. The long-term growth persistence relates to how old you really are, which steadily grinds higher no matter how you feel. Until some unknown point in the future, of course. And, then it doesn’t matter any more. Yawn.
Friday, April 20, 2007
How’s that again?
So far, it seems that the number of questions answered in this retirement-focused blog is exceeded only by the number of questions the answers raised:
New Question #1
You say you plan to sell (more than your normal, periodic, small liquidations) when everything looks rosy, and not sell (any more than your normal, periodic, small liquidations) when you’re feeling depressed about the market. How are you feeling today?
New Answer #1
Fine, thanks. Not particularly positive or negative. If I had to choose, I’d say things may be closer to too rosy than to too depressed, but not close enough to alter anyone’s strategic retirement funding program.
New Question #2
You said you will do some things to help assure that your level of cash reserves is sufficient. What things?
New Answer #2
I’ll try to limit the possible costly surprises. Here’s how.
a. If those who depend on me would be hurt financially by my death, I’ll maintain enough life insurance to cover the loss of income (wages, pension, whatever) that would occur with my death.
b. If those who depend on me would be hurt financially by my disability, I’ll maintain enough disability insurance to cover the loss of income (wages, pension, whatever) that would occur with my disability.
c. To protect against high and increasing health care costs, I’ll carry some health and long-term care insurance.
d. To offset any large casualty losses, I’ll insure my home and cars, but with large deductibles to keep the premiums down.
e. To help me weather any mid-retirement financial set-backs, I’ll try to keep my fixed costs of living to a minimum.
f. To keep myself and my spouse financially flexible, I’ll constantly work to appreciate the multitude of non-financial gifts we are so fortunate to have so that we won’t be so troubled by things financial.
Other suggestions? (There may be prizes involved!)
New Question #1
You say you plan to sell (more than your normal, periodic, small liquidations) when everything looks rosy, and not sell (any more than your normal, periodic, small liquidations) when you’re feeling depressed about the market. How are you feeling today?
New Answer #1
Fine, thanks. Not particularly positive or negative. If I had to choose, I’d say things may be closer to too rosy than to too depressed, but not close enough to alter anyone’s strategic retirement funding program.
New Question #2
You said you will do some things to help assure that your level of cash reserves is sufficient. What things?
New Answer #2
I’ll try to limit the possible costly surprises. Here’s how.
a. If those who depend on me would be hurt financially by my death, I’ll maintain enough life insurance to cover the loss of income (wages, pension, whatever) that would occur with my death.
b. If those who depend on me would be hurt financially by my disability, I’ll maintain enough disability insurance to cover the loss of income (wages, pension, whatever) that would occur with my disability.
c. To protect against high and increasing health care costs, I’ll carry some health and long-term care insurance.
d. To offset any large casualty losses, I’ll insure my home and cars, but with large deductibles to keep the premiums down.
e. To help me weather any mid-retirement financial set-backs, I’ll try to keep my fixed costs of living to a minimum.
f. To keep myself and my spouse financially flexible, I’ll constantly work to appreciate the multitude of non-financial gifts we are so fortunate to have so that we won’t be so troubled by things financial.
Other suggestions? (There may be prizes involved!)
Friday, April 13, 2007
Wouldn’t it be nice . . .?
Forty years ago, we were singing along with the Beach Boys, “Wouldn’t it be nice if we were older?” As the difficulty of these very basic retirement questions indicates, “being older” brings some challenges, too. But, every retiree – current or soon-to-be – needs to answer these questions. Here are my answers:
How much do I need in liquid reserves in retirement? I feel I need at least six months of subsistence spending readily available in share draft accounts, savings accounts, and very short-term, fixed income investments. I’d also like to have another six months or more in semi-liquid assets – intermediate-term, high quality bond funds, term CDs, etc. The rest of my retirement nest egg can be in a diversified portfolio of long-term investments. (I’ll also do some things to help assure that this level of reserves is enough. We can talk about that later.)
How do I know when stock or bond prices are “depressed” (and I should wait for a recovery before selling)? For me, this question has a two-part answer. First, I hope to never have to make this decision. Ideally, I will be able to gradually liquidate our long-term investments in hundreds of small increments through a life-long systematic withdrawal/liquidation program. This will steadily “drip” dollars into my liquid reserves, from which we will pay our living costs. This gradual liquidation program will make timing virtually a non-issue. It will capture essentially the asset allocation’s balance-weighted average return over the life of the portfolio.
But, no mater how hard I try, I suspect that occasionally the drips won’t keep up and I will have to come up with what constitutes a veritable bucket of cash – for another year of college for one or more of my progeny, a once-in-a-lifetime trip with my soul mate, whatever. Hopefully, I’ll be able to fund these out of my second-tier reserves, and then take some time replenishing them with a period of doubling up the systematic drips. But, when that isn’t enough, here’s what I plan to do.
1. I will consider selling some of whichever asset class has done the best over the last few years relative to its long-term average return. Currently, that might include funds focused on mid-cap value stocks or the lowest quality junk bonds.
2. If I am feeling particularly depressed about the investment markets – if the economic environment is tenuous and most market prognosticators are bearish – I will do everything I can to not sell anything, particularly not anything that has declined to valuation levels that are well below their historical average. Instead, I will consider borrowing from my friendly credit union. Or, maybe just deferring the expenditure, thereby deferring the need to liquidate long-term investments.
So, as this indicates, the factor I will use to indicate when the investment markets are depressed . . . is my own current state of “economic depression.” If I and most of my fellow investors are afraid of the markets, chances are the markets are beaten down by the selling of more skittish investors. Likewise, if everything looks rosy, the more speculative investors have probably been throwing money into the market, making it a good time to raise some extra cash.
Tough to do? Definitely! The first alternative – gradually liquidating investments over a number of years – is unquestionably the easier and safer approach for any normally emotional human being. But, if you find yourself in need of extra cash and are able to act exactly contrary to your current state of mind, you are likely to do better than if you just go with the feeling of the moment.
That might have worked in the 60s and 70s. We were young and stupid then. But, this is now. We’re just (emotionally) stupid . . . and running out of time.
How much do I need in liquid reserves in retirement? I feel I need at least six months of subsistence spending readily available in share draft accounts, savings accounts, and very short-term, fixed income investments. I’d also like to have another six months or more in semi-liquid assets – intermediate-term, high quality bond funds, term CDs, etc. The rest of my retirement nest egg can be in a diversified portfolio of long-term investments. (I’ll also do some things to help assure that this level of reserves is enough. We can talk about that later.)
How do I know when stock or bond prices are “depressed” (and I should wait for a recovery before selling)? For me, this question has a two-part answer. First, I hope to never have to make this decision. Ideally, I will be able to gradually liquidate our long-term investments in hundreds of small increments through a life-long systematic withdrawal/liquidation program. This will steadily “drip” dollars into my liquid reserves, from which we will pay our living costs. This gradual liquidation program will make timing virtually a non-issue. It will capture essentially the asset allocation’s balance-weighted average return over the life of the portfolio.
But, no mater how hard I try, I suspect that occasionally the drips won’t keep up and I will have to come up with what constitutes a veritable bucket of cash – for another year of college for one or more of my progeny, a once-in-a-lifetime trip with my soul mate, whatever. Hopefully, I’ll be able to fund these out of my second-tier reserves, and then take some time replenishing them with a period of doubling up the systematic drips. But, when that isn’t enough, here’s what I plan to do.
1. I will consider selling some of whichever asset class has done the best over the last few years relative to its long-term average return. Currently, that might include funds focused on mid-cap value stocks or the lowest quality junk bonds.
2. If I am feeling particularly depressed about the investment markets – if the economic environment is tenuous and most market prognosticators are bearish – I will do everything I can to not sell anything, particularly not anything that has declined to valuation levels that are well below their historical average. Instead, I will consider borrowing from my friendly credit union. Or, maybe just deferring the expenditure, thereby deferring the need to liquidate long-term investments.
So, as this indicates, the factor I will use to indicate when the investment markets are depressed . . . is my own current state of “economic depression.” If I and most of my fellow investors are afraid of the markets, chances are the markets are beaten down by the selling of more skittish investors. Likewise, if everything looks rosy, the more speculative investors have probably been throwing money into the market, making it a good time to raise some extra cash.
Tough to do? Definitely! The first alternative – gradually liquidating investments over a number of years – is unquestionably the easier and safer approach for any normally emotional human being. But, if you find yourself in need of extra cash and are able to act exactly contrary to your current state of mind, you are likely to do better than if you just go with the feeling of the moment.
That might have worked in the 60s and 70s. We were young and stupid then. But, this is now. We’re just (emotionally) stupid . . . and running out of time.
Tuesday, April 10, 2007
And, we have a winner!
If you haven’t done so yet, click on “comments” below. You’ll see the four responses that (1) the authors allowed me to post, (2) had enough substance to warrant posting, and (3) were appropriate for this family-friendly site.
Instead of doing the drawing for two winners, we have decided to take the public schools approach and award a prize to each of the four. Michael Armour wins for the shortest right answer, Tim Hamele for the most conservative right answer, Richard Corbin for the most real right answer, and jddeadendfarm for the most entertaining right answer.
So, we need each of you winners to email (or “comment” again) your shirt size to us and we’ll send one of the very attractive and high quality (really!) MEMBERS Capital Advisors polo shirts to each of you. If you have a color preference, cross your fingers and you might get lucky.
Thanks to each of you four for participating, and to all the others for . . . all the fun ideas that you shared!
I’ll give you my thoughts on these questions later in the week.
Instead of doing the drawing for two winners, we have decided to take the public schools approach and award a prize to each of the four. Michael Armour wins for the shortest right answer, Tim Hamele for the most conservative right answer, Richard Corbin for the most real right answer, and jddeadendfarm for the most entertaining right answer.
So, we need each of you winners to email (or “comment” again) your shirt size to us and we’ll send one of the very attractive and high quality (really!) MEMBERS Capital Advisors polo shirts to each of you. If you have a color preference, cross your fingers and you might get lucky.
Thanks to each of you four for participating, and to all the others for . . . all the fun ideas that you shared!
I’ll give you my thoughts on these questions later in the week.
Thursday, April 5, 2007
Hey! Free Stuff!!
No ideas? Come on, folks. There’s a free MEMBERS Capital Advisors shirt/blouse for each of two lucky contributors. Send in your answer to one or both questions. We’ll put all your names (or email addresses) in a hat and draw one for each question:
How much do you need in liquid reserves in retirement?
How do you know when stock or bond prices are “depressed” (and you should wait for a recovery before selling)?
So, send me your thoughts on this. If you don’t want them posted or attributed to you, just say so.
Enjoy this special weekend!
How much do you need in liquid reserves in retirement?
How do you know when stock or bond prices are “depressed” (and you should wait for a recovery before selling)?
So, send me your thoughts on this. If you don’t want them posted or attributed to you, just say so.
Enjoy this special weekend!
Friday, March 30, 2007
Protecting Your Nest Egg
We’ve been talking about why investment risk matters most right at retirement. First, that’s typically when you have the most invested and, therefore, the most to lose. And, that’s when your ability to recover from a financial setback becomes increasingly limited due to the shortening length of time before you need the money, and your gradual consumption of your financial assets, leaving less and less to provide future growth and income.
How do you manage this risk? Diversification is the usual answer, and this definitely is important for the longer-term portion of your investment portfolio. But, at times like we saw earlier this month, nearly all asset classes can plummet in price at the same time in response to a market shock.
So, the only sure way to avoid suffering losses at the wrong time is . . . by not taking price risk with the money you will need to live on as you await the market recovery.
Are those “duhs” I’m hearing?
We all wish there were an easier answer, but the only sure way to eliminate this risk is with the classic rainy day fund – a cushion of liquid reserves invested in price-stable investments. These include share savings accounts, time deposits, money market mutual funds, and short-term bonds. (They could also include stocks and long-term bonds protected by some kind of options or futures hedge, but this effectively turns them into short-term, lower return assets and is a complex undertaking not suitable for most investors.)
The goal is to have cash reserves sufficient to never have to sell long-term investments when they are at depressed prices. This, of course, raises two more questions: How much do you need in liquid reserves? And, how do you know when prices are “depressed?” Tough questions. Any suggestions?
How do you manage this risk? Diversification is the usual answer, and this definitely is important for the longer-term portion of your investment portfolio. But, at times like we saw earlier this month, nearly all asset classes can plummet in price at the same time in response to a market shock.
So, the only sure way to avoid suffering losses at the wrong time is . . . by not taking price risk with the money you will need to live on as you await the market recovery.
Are those “duhs” I’m hearing?
We all wish there were an easier answer, but the only sure way to eliminate this risk is with the classic rainy day fund – a cushion of liquid reserves invested in price-stable investments. These include share savings accounts, time deposits, money market mutual funds, and short-term bonds. (They could also include stocks and long-term bonds protected by some kind of options or futures hedge, but this effectively turns them into short-term, lower return assets and is a complex undertaking not suitable for most investors.)
The goal is to have cash reserves sufficient to never have to sell long-term investments when they are at depressed prices. This, of course, raises two more questions: How much do you need in liquid reserves? And, how do you know when prices are “depressed?” Tough questions. Any suggestions?
Wednesday, March 28, 2007
Subprime Outlook
One more comment on the subprime mortgage issue. I believe it will have a broader and more negative impact on the economy than is currently reflected in the stock and bond markets. Federal Reserve efforts to soothe the wounded with lower interest rates won’t help because, thanks to tighter real estate lending policies (from the lenders and their regulators) and the growing risk of further defaults, the problem will be the availability of credit, not the price of credit -- it will be cheap to borrow, but only strong borrowers will qualify.
Will this be bad for investors? For those who have to sell assets at depressed prices, yes. But, this kind of risk can be minimized. I’ll share some thoughts on that later in the week.
Will this be bad for investors? For those who have to sell assets at depressed prices, yes. But, this kind of risk can be minimized. I’ll share some thoughts on that later in the week.
Friday, March 23, 2007
With Age Comes Wisdumb?
Interesting article in The Wall Street Journal yesterday. Under the title, “Why Middle Age May Be Healthy for Your Wallet,” it describes the findings of a study to determine the age at which people make the fewest financial mistakes. It defines mistakes as things like not getting the lowest available interest rate on a loan or getting stuck with readily avoidable credit card fees.
The optimum age, it turns out, is just over 53. People younger or older make more mistakes than do 53-year-olds, and the mistakes increase as you move away from 53 in either direction.
The researchers attribute this to the crossover between declining mental abilities (which begins at about age 20) and accumulating experience (which begins as soon as we start paying attention – sometimes well after 20). They also acknowledge, though, that some of this may be attributable simply to the different eras in which each generation grew up.
Both explanations sound reasonable. But, I think there is also another one. As we move through middle age, our focus on maximizing our wealth peaks. Prior to that, we’re distracted by thoughts of building relationships, a family, a home, a self-image, a career, and all the other aspects of life and legacy. After that, most of us start to mellow out, realizing that it’s often more important to deal with the best people than to get the best deal. And, we’re more willing to sacrifice the attainment of “optimum” for simplicity.
Some may view this as getting soft, or even soft in the head. And, our brains may, indeed, be shriveling in size and assuming the texture and conductivity of Swiss cheese. At the same time, the pace at which we are experiencing new things (thereby enhancing our judgment) may be slowing as we settle more and more into our preferred routines (aka ruts). But, we are also usually becoming less internally focused. And less demanding of ourselves and of those around us.
You might even say that, as we become less financially rigorous, we become better people. Or, maybe it’s the other way around.
Either way, for most of us it’s probably a good trade.
The optimum age, it turns out, is just over 53. People younger or older make more mistakes than do 53-year-olds, and the mistakes increase as you move away from 53 in either direction.
The researchers attribute this to the crossover between declining mental abilities (which begins at about age 20) and accumulating experience (which begins as soon as we start paying attention – sometimes well after 20). They also acknowledge, though, that some of this may be attributable simply to the different eras in which each generation grew up.
Both explanations sound reasonable. But, I think there is also another one. As we move through middle age, our focus on maximizing our wealth peaks. Prior to that, we’re distracted by thoughts of building relationships, a family, a home, a self-image, a career, and all the other aspects of life and legacy. After that, most of us start to mellow out, realizing that it’s often more important to deal with the best people than to get the best deal. And, we’re more willing to sacrifice the attainment of “optimum” for simplicity.
Some may view this as getting soft, or even soft in the head. And, our brains may, indeed, be shriveling in size and assuming the texture and conductivity of Swiss cheese. At the same time, the pace at which we are experiencing new things (thereby enhancing our judgment) may be slowing as we settle more and more into our preferred routines (aka ruts). But, we are also usually becoming less internally focused. And less demanding of ourselves and of those around us.
You might even say that, as we become less financially rigorous, we become better people. Or, maybe it’s the other way around.
Either way, for most of us it’s probably a good trade.
Friday, March 16, 2007
Timing of Retirement Investing Losses
Continuing with the saga of the timing of retirement investing losses . . .
The first question posed earlier related to the timing of losses to any one lump sum investment over its lifetime. There, timing didn’t make any difference. But, timing does matter to a pool of such individual investments that grows over time with new investment dollars, and then shrinks as the money is withdrawn and spent. There, you want to have your losses early. You don’t want them right when you retire. Timing of losses does affect the value of your nest egg in this scenario.
The reason is much more logical than the answer to question one. It is easily envisioned by considering the first few days of building your anticipated pool of retirement investments – when it might have consisted of a small initial investment into a mutual fund. Any loss that happened to it then could change its terminal value a lot, but it wouldn’t affect the values of subsequent lump sum investments. A loss 40 years from now, however, will whack every investment you ever made into this pool, at least all that are still in there.
Most of us gradually build up our retirement investment assets over our working years. The total reaches its largest amount virtually at retirement, and then we draw it down gradually over our years in retirement. So, the most important time to avoid significant losses is right at retirement. From then on, of course, avoiding losses remains important for the reasons cited earlier – limited if any earned income coming in, and the difficulty of reducing your standard of living at that stage of life.
Patently obvious to the most casual observer, you say? Maybe so. Question one was the tricky one, not question two. But, we all know of people devastated by a market downturn right when they were retiring, or planning to retire, but then couldn’t. And, not just former Enron employees.
So, how do you keep your investment risk down while still going after good returns? Some thought on that next time.
The first question posed earlier related to the timing of losses to any one lump sum investment over its lifetime. There, timing didn’t make any difference. But, timing does matter to a pool of such individual investments that grows over time with new investment dollars, and then shrinks as the money is withdrawn and spent. There, you want to have your losses early. You don’t want them right when you retire. Timing of losses does affect the value of your nest egg in this scenario.
The reason is much more logical than the answer to question one. It is easily envisioned by considering the first few days of building your anticipated pool of retirement investments – when it might have consisted of a small initial investment into a mutual fund. Any loss that happened to it then could change its terminal value a lot, but it wouldn’t affect the values of subsequent lump sum investments. A loss 40 years from now, however, will whack every investment you ever made into this pool, at least all that are still in there.
Most of us gradually build up our retirement investment assets over our working years. The total reaches its largest amount virtually at retirement, and then we draw it down gradually over our years in retirement. So, the most important time to avoid significant losses is right at retirement. From then on, of course, avoiding losses remains important for the reasons cited earlier – limited if any earned income coming in, and the difficulty of reducing your standard of living at that stage of life.
Patently obvious to the most casual observer, you say? Maybe so. Question one was the tricky one, not question two. But, we all know of people devastated by a market downturn right when they were retiring, or planning to retire, but then couldn’t. And, not just former Enron employees.
So, how do you keep your investment risk down while still going after good returns? Some thought on that next time.
Subprime Mortgage Meltdown
I’m compelled to interrupt the “investing in retirement” theme momentarily to outline how I see the “subprime mortgage meltdown.”
1. Government lowers interest rates to 1% to spur economy
2. World is already awash in liquidity seeking investment
3. People start to borrow (against home equity, etc.) to buy nice things
4. Lenders are increasingly eager to lend
5. People borrow more to invest in higher return investments and pocket the difference
6. Lenders further relax lending standards (but still within government regs -- mostly)
7. People borrow even more to invest in real estate (nothing down, floating rate, minimal
payments)
8. Demand for loans finally pushes interest rates up a notch
9. Fear of even higher rates means less borrowing to buy real estate and some selling
10. Less buying and more selling means real estate prices quit rising and start falling
11. Declining real estate prices take down weaker borrowers (“subprime”) and their lenders, as
well as investors in bonds backed by loans generated by those lenders
12. Government steps in to save the day by tightening lending regulations, which takes down
the remaining weak borrowers, lenders, and bond holders.
All three parties – borrowers, lenders, and government – contributed to this situation essentially in the order listed. But, I’m most disappointed in the government. Just as it did with the S&L crisis of the 1980s, it created a situation that naturally leads to “war” (this is ONLY AN ANOLOGY), stood silently behind the lines as the battle raged, then combed the battlefield after it was over to identify the dead, shoot the wounded, and send the survivors off to fight the next war.
1. Government lowers interest rates to 1% to spur economy
2. World is already awash in liquidity seeking investment
3. People start to borrow (against home equity, etc.) to buy nice things
4. Lenders are increasingly eager to lend
5. People borrow more to invest in higher return investments and pocket the difference
6. Lenders further relax lending standards (but still within government regs -- mostly)
7. People borrow even more to invest in real estate (nothing down, floating rate, minimal
payments)
8. Demand for loans finally pushes interest rates up a notch
9. Fear of even higher rates means less borrowing to buy real estate and some selling
10. Less buying and more selling means real estate prices quit rising and start falling
11. Declining real estate prices take down weaker borrowers (“subprime”) and their lenders, as
well as investors in bonds backed by loans generated by those lenders
12. Government steps in to save the day by tightening lending regulations, which takes down
the remaining weak borrowers, lenders, and bond holders.
All three parties – borrowers, lenders, and government – contributed to this situation essentially in the order listed. But, I’m most disappointed in the government. Just as it did with the S&L crisis of the 1980s, it created a situation that naturally leads to “war” (this is ONLY AN ANOLOGY), stood silently behind the lines as the battle raged, then combed the battlefield after it was over to identify the dead, shoot the wounded, and send the survivors off to fight the next war.
Tuesday, March 13, 2007
Okay, where were we?
Okay, where were we?
Wednesday’s scenario: You’re 30 years old and you invest $10,000 for your retirement at age 65. You don’t know it yet, but your returns are going to be exactly 8% in every year except one. In that one year, you will lose 30%.
Wednesday’s first question: Assuming your goal is to have the most possible assets at the time you retire, is it better for that loss year to be early in this 35-year period or late?
Friday’s answer: It doesn’t matter, even if it happens at the end of the period when the 30% loss will cost you in excess of $41,000, dropping your then nearly $137,000 nest egg to less than $96,000. In the first year, it would have cost only $3,000 (30% of $10,000), but that is $3,000 that would no longer available to grow for 34 years at 8% compounded annually, ending with a value of (guess what) about $41,000. You would end up with the same amount no matter when the loss occurs.
Wednesday’s second question: In your actual retirement investing, do you care when the inevitable losses come – before, at, or even after your retirement?
Yes, you do care. At least, you should care. As most retirement experts will tell you, you have to invest more prudently in retirement because your ability to recover from a financial set-back is increasingly limited. Your earned income has slowed significantly or stopped, so you can’t double-up your saving rate to catch back up. And, you probably have been tailoring your life style to the anticipated size of your nest egg, so a sudden drop in value just before retirement can be particularly difficult to adjust to.
But, there’s another aspect. The losses (and gains) that matter the most are those that happen when you have the most money invested.
Wait. Isn’t this what we just disproved with our answer to the first question?
Nope, this is different. Think about it. We’ll pick this up again later.
Wednesday’s scenario: You’re 30 years old and you invest $10,000 for your retirement at age 65. You don’t know it yet, but your returns are going to be exactly 8% in every year except one. In that one year, you will lose 30%.
Wednesday’s first question: Assuming your goal is to have the most possible assets at the time you retire, is it better for that loss year to be early in this 35-year period or late?
Friday’s answer: It doesn’t matter, even if it happens at the end of the period when the 30% loss will cost you in excess of $41,000, dropping your then nearly $137,000 nest egg to less than $96,000. In the first year, it would have cost only $3,000 (30% of $10,000), but that is $3,000 that would no longer available to grow for 34 years at 8% compounded annually, ending with a value of (guess what) about $41,000. You would end up with the same amount no matter when the loss occurs.
Wednesday’s second question: In your actual retirement investing, do you care when the inevitable losses come – before, at, or even after your retirement?
Yes, you do care. At least, you should care. As most retirement experts will tell you, you have to invest more prudently in retirement because your ability to recover from a financial set-back is increasingly limited. Your earned income has slowed significantly or stopped, so you can’t double-up your saving rate to catch back up. And, you probably have been tailoring your life style to the anticipated size of your nest egg, so a sudden drop in value just before retirement can be particularly difficult to adjust to.
But, there’s another aspect. The losses (and gains) that matter the most are those that happen when you have the most money invested.
Wait. Isn’t this what we just disproved with our answer to the first question?
Nope, this is different. Think about it. We’ll pick this up again later.
Friday, March 9, 2007
Something to Chew on Part 2
(Note: Our “comments” button is acting up again, so I apologize to those who tried to send in a response to Wednesday’s questions and couldn’t get through. It’s supposed to be fixed soon. All I can say is please try again sometime.)
Wednesday’s scenario: You’re 30 years old and you invest $10,000 for your retirement at age 65. You don’t know it yet, of course, but your returns are going to be exactly 8% in every year except one. In that one year, you will lose 30%.
Wednesday’s first question: Assuming your goal is to have the most possible assets at the time you retire, is it better for that loss year to be early in this 35-year period or late?
The answer: Mathematically, it doesn’t matter. To illustrate the extremes, if the loss were to occur in the first year, the calculation would be $10,000 times 0.70 (to reflect the 30% first year loss) times 1.08 (to book the second year’s return) times 1.08 (to book the third year’s return) etc., continuing 34 times. The formula would be:
($10,000)(0.70)(1.08 to the 34th power)
If, instead, the loss occurred in the last year, the formula would be:
($10,000)(1.08 to the 34th power 34)(0.70)
We all know that A x B x C is the same as A x C x B, right? So, either way, you’ll end up with the same amount – that $10,000 investment will have grown to $95,831.
This is also true, of course, with any subsequent retirement investments. If you invest $15,000 a few months later and it has some good return years and some bad loss years, the sequence of gains and losses again won’t matter – it won’t have any effect on the ending value of this investment. So, this leads us to . . .
Wednesday’s second question: In your actual retirement investing (that’s you, for real), do you care when the inevitable losses come – before, at, or even after your retirement?
Ponder that a bit (if you’re so inclined). If you have some thoughts, please try sending in a comment (if you’re not too frustrated from prior unsuccessful attempts). I’ll give you my views on this next week.
Enjoy the weekend!
Wednesday’s scenario: You’re 30 years old and you invest $10,000 for your retirement at age 65. You don’t know it yet, of course, but your returns are going to be exactly 8% in every year except one. In that one year, you will lose 30%.
Wednesday’s first question: Assuming your goal is to have the most possible assets at the time you retire, is it better for that loss year to be early in this 35-year period or late?
The answer: Mathematically, it doesn’t matter. To illustrate the extremes, if the loss were to occur in the first year, the calculation would be $10,000 times 0.70 (to reflect the 30% first year loss) times 1.08 (to book the second year’s return) times 1.08 (to book the third year’s return) etc., continuing 34 times. The formula would be:
($10,000)(0.70)(1.08 to the 34th power)
If, instead, the loss occurred in the last year, the formula would be:
($10,000)(1.08 to the 34th power 34)(0.70)
We all know that A x B x C is the same as A x C x B, right? So, either way, you’ll end up with the same amount – that $10,000 investment will have grown to $95,831.
This is also true, of course, with any subsequent retirement investments. If you invest $15,000 a few months later and it has some good return years and some bad loss years, the sequence of gains and losses again won’t matter – it won’t have any effect on the ending value of this investment. So, this leads us to . . .
Wednesday’s second question: In your actual retirement investing (that’s you, for real), do you care when the inevitable losses come – before, at, or even after your retirement?
Ponder that a bit (if you’re so inclined). If you have some thoughts, please try sending in a comment (if you’re not too frustrated from prior unsuccessful attempts). I’ll give you my views on this next week.
Enjoy the weekend!
Wednesday, March 7, 2007
Here’s something to chew on. It will take a few paragraphs, so I’ll split it between today and Friday.
This is the scenario. You’re 30 years old and you invest $10,000 for your retirement at age 65. You don’t know it yet, of course, but your returns are going to be exactly 8% in every year except one. In that one year, you will lose 30%.
First question: Assuming your goal is to have the most possible assets at the time you retire, is it better for that loss year to be early in this 35-year period or late?
Second question (begged by the first): In your actual retirement investing, do you care when the inevitable losses come – before, at, or after your retirement?
Give it some thought, share your views with me if you wish (click on “Comments” immediately below), and check back on Friday.
This is the scenario. You’re 30 years old and you invest $10,000 for your retirement at age 65. You don’t know it yet, of course, but your returns are going to be exactly 8% in every year except one. In that one year, you will lose 30%.
First question: Assuming your goal is to have the most possible assets at the time you retire, is it better for that loss year to be early in this 35-year period or late?
Second question (begged by the first): In your actual retirement investing, do you care when the inevitable losses come – before, at, or after your retirement?
Give it some thought, share your views with me if you wish (click on “Comments” immediately below), and check back on Friday.
Friday, March 2, 2007
Interesting week in the markets, huh? Tuesday’s stock market downdraft was triggered by one of those impossible-to-predict but inevitable “external shocks” – this one being a nearly 10% drop in mainland China’s stock market in response to fears of increased government attempts to slow their economy. That shouldn’t have been that big of a shock, but add the uncertainty in the U. S. housing market, utterance of the “R” word by former Fed Chairman Greenspan, and some very mixed economic reports and you have the stuff of a market correction. In fact, it produced the biggest point drop in the Dow since the day the markets reopened after 9/11/2001.
I was traveling when this latest sell-off occurred – presenting our economic and market outlook to various groups of credit union boards, managers and members in the Gulf Coast area (which, by the way, is coming back very strongly in most areas, but still bears many highly visible scars from the 2005 hurricanes). The conclusions in my presentation:
- The U. S. is overdue for setback/consolidation (or at least volatility) in our economy, bond markets, and stock markets
- An economic “hard landing” (recession) appears highly unlikely (barring a significant external shock)
- Our interest rates are attractive to foreign investors (as long as the dollar’s decline is only moderate)
- Our stock valuations are reasonable (as long as earnings hold up)
- The global liquidity glut has to go somewhere, and although more and more will go to other nations, we do capitalism best and our markets will continue to get support from foreign investors.
My recommendations ended with:
- Be prepared to see a modest U. S. and global slowdown, increased investment market volatility, but about historically average investment returns.
It appears we’re getting the first two – a modest economic slowdown and increased market volatility. We’ll have to wait awhile to see if we get the third – decent returns – over the next several quarters. And this, of course, will depend on the impact of the next unexpected event, and the next one, and . . . you get the point. But, that’s just part of investing, and of life in general, right?
Friday, February 23, 2007
And then, apart from what I’ll do, is what we’ll do – we the citizens of the great U. S. of A – under the new leadership headed for Washington in a couple of years. I just saw the latest Rasmussen Reports™, one of the better polling sources out there. If the primaries took place this week, here’s very close to what we’d get:
Republicans – Giuliani 33%, McCain 19%, Gingrich 13%
Democrats – Clinton 28%, Obama 24%, Edwards 11%
It also found that, if the actual election were held this week between Clinton and Gingrich, it would be about 50% to 43% in favor of Clinton. If between Gore and Gingrich, Gore would win 51% to 40%.
Both within the Republican Party and between the two parties, the sweep to the left appears to be proceeding unabated. Living in retirement could be quite a bit different a decade from now, as could investing for retirement. Makes these difficult undertakings even more so. But, we all love a challenge, right?
Republicans – Giuliani 33%, McCain 19%, Gingrich 13%
Democrats – Clinton 28%, Obama 24%, Edwards 11%
It also found that, if the actual election were held this week between Clinton and Gingrich, it would be about 50% to 43% in favor of Clinton. If between Gore and Gingrich, Gore would win 51% to 40%.
Both within the Republican Party and between the two parties, the sweep to the left appears to be proceeding unabated. Living in retirement could be quite a bit different a decade from now, as could investing for retirement. Makes these difficult undertakings even more so. But, we all love a challenge, right?
Friday, February 16, 2007
Here’s my dilemma as I approach my retirement and try to prepare for it financially and emotionally.
I have a very good idea of what I’m going to quit doing:
- Going to the office (coal mine) five or six days a week
- Interacting daily with coworkers and clients
- Adding value (taking care of business) for coworkers and clients
- Getting a paycheck
- Making (and executing) plans with my spouse
- Doing things with and for our sons
- Building things in the shop
- Growing things in the garden
- Making art
- Making music
- Making our neighbors into friends
- Serving on boards
- Reading just for fun
- Napping in the sun
- Organizing our records
- Culling our stuff (eBay, here I come!)
- Volunteering
- Exercising in the middle of the day
- Seeing more movies, concerts, plays, etc.
- Writing more
- Having a glass of wine with lunch
- Managing our investments
- Looking at photo albums with spouse and sons
- Becoming more adept at digital photography and computer graphics
- Traveling
- Walking/running the dog
- Holding the cats
. . . and the list goes on.
So, I’m quite sure about the main things I’ll quit doing. And, I have a long list of what I want to do. What I don’t know, however, is what I actually will do. I can’t do everything on the “want to” list, at least not at the same time, and at an enjoyable pace, and well. So, where do I start? And, what else will be occupying my time and attention?
- Will I still be able to go to bed at a reasonable hour and get up in time to have a full 16+ hour day?
- Should I be doing a little cooking? Cleaning? Shopping? Chatting?
- What about visiting the relatives (you can pick your friends . . .)?
- What if we find we need supplemental income?
- What will I do if I or a family member gets sick or injured?
- What if one dies?
- What if we don’t die before the money’s gone?
- What'll I do?
And that, my friends, is the song, or at least the phrase from the song, that I can’t get out of my head lately. Irving Berlin wrote it in 1923. Several people recorded it, including the version I recall by Linda Ronstadt in 1983.
What’ll I do when you are far away,
And I am blue, what’ll I do?
The song is about the end of a romance, of course. My relationship with my career has been good, but not that good. Still, the end of it will definitely leave me with a sense of loss. And, and lack of direction. It will require me to reinvent myself. And, I’m not sure how much leeway, or how much capability, I truly have in that regard.
So, I can’t help but wonder . . . really, what’ll I do?
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