Suggested Resolution

Source: Capital Pixel

Resolve to start or bolster your investment program.

If you are young:  congratulations!  One of the first principles of personal finance is to start investing early to take advantage of compounding.

Decision makers understand that taking no action is in fact a decision.  You can wait until you are 65 years old and then, after blowing out the birthday candles, figure out how you are going to produce an income to live on.  You can live on the financial edge. You can believe that things always work out.  You can procrastinate.  Know, though, that there are always things in the modern economy to sop up 100% of disposable income.  The best and the the brightest among us are working 24/7 to produce goods and services you'll want to spend your income on.  It is the way our economy works.  Too many procrastinate for 45 years.

There are plenty of seniors out there who would caution against this approach.  Many "have been there done that!"  Talk to them.  A wave of baby boomers are now retiring, and a goodly percentage will struggle financially.  They have definite thoughts on what they would have done differently both in terms of how much they saved and invested but also in how they invested.

As an aside, if feasible, ask your company human resources department to arrange a seminar featuring company retirees.  Ask the retirees to talk about retirement - how it was, what they expected, and some of the surprises, what they would do differently, and what they planned for correctly.  It can be an eyeopener and very helpful for all company employees.  Feed the retirees a nice lunch.  They will enjoy talking about their experience.

Many younger workers argue that they plan to work way past the accepted 65-year-old standard retirement age.  Good luck - the data shows that people don't work as long as they expect.  They get laid off/outsourced.  Medical problems come up.  And, yes, people burn out.  Then many  turn to Social Security and maybe take a part-time minimum wage gig.  The third leg of the stool - the so-called "nest egg" - has to take up the slack, and only 4% of that can safely be spent, according to a widely-used rule-of-thumb.

Another course is to take action now.  You can resolve to understand your company benefits.  You can resolve to read at least one good book on personal finance this year.  You can resolve to start thinking about what you need to do to have choices in the future and to support yourself and your family in the event you can't work.

HAVE A GREAT 2012!

Get Me Into the Market

Source: Capital Pixel

One of the questions I have potential clients answer is why they are seeking the services of RW investment Strategies.  This, of course, points me, as an advisor, in a particular direction and tells me a lot about whether I can help them.  A frequent answer is that they need help getting into the market.

This, in fact, is one of the best reasons to seek the help of an advisor. Often, I'll find that potential clients have poorly timed the market by buying in after the market has gone up.  They then wring their hands and stress out as they watch their portfolio drop, only to sell out at the wrong time.  After selling out, they have to watch from the sidelines as  the market rises.  This, of course, is the emotional roller coaster investors ( I use the term loosely) needlessly ride.  And - it is costly!

2011 has been a case in point.  I find investors have pulled their hair out as they've witnessed and reacted to 400-point swings in the market by capitulating at the wrong time and seeing now that market indices are  positive for the year.

This is the point where they show up on my doorstep.

Some appreciate the advice I give them by acting on it in timely fashion.  Others, despite my best attempt, don't.  They will walk away and, if the market moves 15% higher, jump in.  Basically they will continue the behavior that has been harmful in the past.  This, of course, is a phenomema that is not confined just to the financial arena.

Get Into The Market

I'm a proponent of indexing.  This makes getting into the market easy.  If you have a brokerage account and we meet at 9:30 a.m., I'll have you in the market by 10:30 a.m. at the latest.  We won't try to pick stocks or sectors.  We won't discuss macroeconomic developments.  We won't even try to guess what China and Europe have up their sleeves.  What we will do is buy the whole market.  If you are with Schwab, we'll buy SCHB.  If you are with Vanguard, we'll buy VTI.  With others, we may buy IWV. These are all low-cost, broad market exchange traded funds.

The bond portion is just as straight forward.  We use low-cost exchange traded funds that are indexed to broad portions of the fixed income market.

How much will we buy?  How much in stocks and bonds?  This takes a bit of time and collaboration.  It is why we might need until 10:30 to get you invested.  We'll talk about your goals and take into account answers to other questions on the questionnaire.  We'll determine an appropriate asset allocation model that targets a given percentage in stocks and fixed income.

If the appropriate model is 70% stocks but you are very leery of the market, we might start with 60% stocks.

A number of factors come into play, but the bottom line is you'll be in the market.

12-Months Experience

Some people are wondering what the big deal is.  Over the past 12 months ended 12/23, the "Moderately Conservative Benchmark" specified by Schwab returned 3.13%.  This benchmark is comprised of 60% bonds and cash and 40% stocks.

In comparison, your money fund probably returned on the order of 0.1%.  Even if you had money in a certificate of deposit, you likely earned only slightly above 1%.  Thus, the opportunity cost of not being in the market and riding out the craziness that has taken place over the past 12 months has been meaningful.  In fact, although the benchmark return at 3.13% is below the rate of consumer inflation over the past 12 months ,it is at least close to tracking it.  Money fund performance, in contrast, has been hammered by inflation.  This is a risk many fail to appreciate.

As a point of reference, markets over the past 12 months have bordered on the insane with a government that was totally inept, a Europe that has struggled all year with the possibility of a breakdown, China slowing, and a stubbornly high rate of unemployment in the U.S.  All of these scary factors and excuses have kept investors on the sidelines and have been costly.

2012 will very likely be just as wild.  Should you be in the market?

Disclosure:  This post is for educational purposes only.  Market returns are unpredictable.  Individuals should do their own research or consult a professional before making investment decisions.

Market Predictions

This is the season of predictions and forecasts.  Pundits are getting a lot of air time and magazine space trotting out all kinds of charts and esoteric facts to support highly specific predictions on where markets are headed.

If you are like a lot of investors, you will be impressed.  In fact, crystal ball seers in the market are usually introduced by citing a time in the past when they made accurate predictions. 

What should you make of them?  Sometimes potential clients reel off well-known pundits' names and their forecasts.  They say so-and-so says the market is headed higher/lower or gold is going to $ _____/oz. etc.  They want to know what I think.

I patiently explain that I can get super smart, very articulate people to give well-reasoned, highly-believable arguments on both sides.  Jeremy Siegal (author of Stocks For the Long Run), for example, will argue forcefully that stocks are headed higher while Bob Shiller (author of Irrational Exuberance) will take the opposite side and say that now is not a good time to buy. 

What you don't see are all those in the gutter because their predictions turned out horribly wrong.  You won't see Miller, Paulson, Berkowitz, et al.  Sometimes this gets through; often times it doesn't.  After all, some people have their whole view of investing grounded in predicting which stocks and which sectors will do best.



If I thought forecasting was useful, I'd probably go with the most recent presenter given that they are so persuasive.  But I don't think it is useful.  In fact, it is harmful, IMHO, because many times investors use these forecasts as a  substitute for thinking; and when forecasts start to go awry, emotions come into play and the investor is set up for a stressful period that typically ends badly.


Larry Swedroe is the director of research of Buckingham Asset Management, LLC and a well-known proponent of index investing.  Here is his response when asked to make a forecast of macroeconomic events:
 
 From interview of  Larry Swedroe by "Seeking Alpha":


SA: Global Macro considerations dominated the headlines in 2011. Do you see 2012 unfolding differently? If so, how?
LS: Yes, it is always different, but my crystal ball is always cloudy. So I don’t make forecasts. Investors should learn what Warren Buffett knows: A market forecast tells you nothing about where the market is going but a lot about the person doing the forecast.
       There are good studies on the ability to forecast and the only thing that correlates with accuracy is fame, and the correlation is negative:  The more famous the forecaster, the less accurate the forecast.

Why Are Interest Rates So Low? (Part 8)

In this final, 4-minute Khan Academy video on currencies, "China Keeps Peg But Diversifies Holdings," Sal notes that China's holdings of U.S. Treasuries are decreasing as they diversify their holdings but other countries holdings of Treasuries are increasing.  In fact, globally the rest of the world has to do something with the excess of the amount we buy from them versus what they buy from us, i.e. our trade deficit.  They buy Treasury issues because they are liquid and safe and can be bought in very large amounts.

So, the end result is that China buys Treasuries to peg their currency below the market rate which results in a humongous demand for Treasuries, driving Treasury prices higher and rates lower.  This is a major factor holding U.S. rates low and expanding the U.S. trade deficit.  It holds Treasury rates lower than they would be otherwise as well as the rates on other issues. B y doing this, China is able to build their manufacturing base.  Eventually they should reach the point where they create a middle class to buy the goods they produce.

To me, the Khan Academy videos are a treasure.  For those interested in understanding how the economy works and financial markets, I suggest visiting the site on a regular basis and viewing the videos systematically.  To keep up-to-date on events, check out the new videos he is constantly producing.  Eventually your understanding of markets will become much more sophisticated.  I actually believe that many big-time money managers didn't fully appreciate the impact on rates described by Sal in the videos we have viewed this week.

Why Are Interest Rates So Low? (Part 7)

In today's Khan Academy video, "Debt Loops Rationale and Effects," Sal looks at the positives and negatives--for both China and the U.S.--of the on-going pegging of the Yuan on global markets.  He discusses the likely outcome once the process is halted and the result when it is reversed.  Very simply, it has held interest rates low and enabled the U.S. to finance its massive debt at historically low interest rates.  Understanding this whole dynamic is crucial, IMHO, for the DIY investor going forward because it will be a driving force.  In fact, it could be the driving force of the next big crisis - banks hold Treasuries!  Central banks around the world hold the dollar as a reserve currency in the form of Treasuries.

Why Are Interest Rates So Low? (Part 6)

In this Khan Academy video, "American - Chinese Debt Loop," Sal explains the effect of China pegging the Yuan, lending the U.S. funds via the buying of Treasury securities, and thereby contributing in a major way to low U.S. interest rates.  U.S. Treasury rates affect other U.S. rates as well, along with global interest rates.  Furthermore, low interest rates push global investors out on the risk spectrum - after all, individual investors, pension funds, insurance companies, et al. aren't satisfied with miniscule rates on the least risky assets being affected by this process.

Understanding the process leads naturally to the questions of how it gets unwound and what happens if and when the Chinese get tired of holding U.S. assets.  Not long ago, Fed Chairman Greenspan wondered why long-term Treasury note yields didn't rise as the Federal Reserve raised rates from the 1% level in the latter part of 2004.  His so-called "conundrum" is partially explained by the process explained here by Sal.

Enjoy the video:

Why Are Interest Rates So Low? (Part 5)

In this 16-minute video, Sal of Khan Academy takes us real close to understanding an important dynamic taking place in the global capital market that has held interest rates down and has been a bit underappreciated.  Here he shows how the Chinese Central Bank needs to constantly print Yuan and use that Yuan to buy U.S. dollars to maintain the peg between the Yuan and the U.S. dollar.  They do this to produce an ongoing trade surplus with the U.S. - i.e., to sell more goods to the U.S. than it buys from us to support its industries.

The key is what they do with the dollars bought with the Yuan they print.  As Sal points out, they need to put this massive accumulation in something that is safe and liquid, i.e. U.S. Treasuries.

Just this morning there is a report that Japan wants to increase the amount it can intervene with in currency markets to prevent the Yen from rising further.  So this whole process is not just unique to China.  Countries have an incentive to keep their currencies from appreciating versus the world's reserve currency!

Enjoy the video: