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.
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