Read this article by Harold Gold of Marketwatch and see what's wrong with it: "Opinion: Baby boomers have no idea what they're doing with retirement planning."
I'll help. The subtitle (referring to baby boomers) says "...over 80% of them have all of their money in equities." Eye popping, right? Especially for me because I deal with baby boomers all the time; and I can tell you that, if Fidelity found that, then their study was wrong. Period.
But, of course, headlines and sub-headlines are many times misleading. Later in the article, it says that Fidelity found that approximately one in ten 401(k) participants have 100% in stocks.
What is interesting to me is that it wasn't until the 6th commenter that this was pointed out. When I first read the article and looked at the comments, I wondered if the commenters had actually read the article! I also wonder if the author proofed his own article, misread the statistics, or what?
One final point: boomers have more than their 401(k) in retirement assets. They have IRAs which they rolled over and taxable accounts. Fidelity's study probably accomplished its objective of getting people to throw up their hands and say "OMG, do we need to sell, we have too much in stocks!"
The bottom line is that studies coming out of the financial services industry always need to be read with an eye to an underlying motive.
Wednesday, September 30, 2015
Friday, September 4, 2015
Get a Quick Fix on Markets
Here is a quick overview on how I get a quick fix on the markets. You can, of course, spend all day following the gyrations of markets, tune into the never-ending flow of prognosticators expounding on the past and offering predictions of where we are headed, and even spend every waking hour reading provocative pieces intended to get your attention.
This isn't about this. It is about spending 15 minutes in the morning getting a feel for where the market is and why it has performed as it has. I believe this is the best way to understand markets. But don't get too comfortable. As Nassim Taleb has pointed out, humans are very adept at creating narratives explaining why markets have performed as they have BUT ARE POOR PREDICTORS OF WHERE WE ARE HEADED! The housing crisis leading to the debacle of 2008 is a good example. In hindsight, it is easy to explain what happened. But how many people got rich predicting it?
Markets are affected by different things at different times. This is one of the reasons it is difficult to outperform markets and why indexing is the best approach for many people. Thus, the economic data points I follow today will be different from what I am following a year from now. One of the tricks is to hone in on what is affecting the market at any particular time.
Here is what I do each morning. I first go to www.marketwatch.com and look at the following:
Note here that I have clicked on the "RATES" column. From this column, I record the rate on the "U.S. 10yr," which is a benchmark for the U.S. bond market, and the rate for the "German 10y." I then calculate the difference, known as the spread. Here that spread is 2.14 - .69 = 1.45. So, by investing in the U.S. 10-year Treasury note versus the 10-year German Bund, the global investor achieves a gain in yield of 1.45%.
Eyeball the other yields in the table, and you quickly see the superiority of the U.S. yield. This simple exercise tells you a lot about why the pronosticators over the past few years have been dead wrong about interest rates. Instead of going up, they have dropped and stayed low!
On my pad where I record data each morning, I can quickly flip back and see that this spread was 1.66 (or, as bond market people say - 166 basis points) back on 7/26/2015. Thus, the spread is narrowing. Worth keeping an eye on.
Next, I click on the FX (foreign exchange ) column to get:
From this column, I record the value of the Euro 1.11 and the value of "WSJ $ IDX" at 88.75. Currencies are a key to understanding global economics. When a currency cheapens versus other currencies,it lowers the prices of the goods it sells on world markets. It is like two gas stations next to each other. As you would expect, they typically have pretty much identical prices. If one comes out and significantly lowers its price, the other will suffer a dramatic loss in sales.
Recently, China shocked the investment world by devaluing its currency. Not surprisingly, investment market held its breath, concerned about a currency war breaking out.
In looking at the Euro, it is also worth noting that expectations play an important role in determining whether to buy the 10-year Treasury or the German Bund. Investors need to assess the spread and the likely future course of the currencies. At the margin, the spread and the expected currency movements should make investors view the two bonds the same.
Again, flipping back, I find that on 9/26/2015 the Euro was at 1.08 and the WSJ$IDX at 88.59. Global investors in the 10-year Treasury did well. They got an attractive spread and an appreciation in the U.S. dollar. I ncidently, the dollar would be expected to appreciate in a scenario where the Fed is getting closer to raising short-term interest rates.
Next, I click the "FUTURES" column and record "Crude Oil" and Gold.
I also mentally note the DJIA and S&P futures markets to get a sense on how the market is likely to open.
Finally, I click on the "ASIA" column and record the overnight performance of the Shanghai stock market = 3160/-.21%. On 9/26/15, this index stood at 3992.ooch! This is a good example of an economic data item I wasn't following closely a few months ago but now am.
All of this takes longer to explain than to get the data. Once you get it into a routine, you can easily record the data in 15 minutes or less; and I believe it will give you a bit of a fix on what is driving markets. Also, you can add other items to your liking.
To get a further feel for the market day, I like to also go to CNBC and read the headlines of what they see as market relevant stories:
As you can tell at a glance, the big deal today is the employment report. Markets will spend the day assessing the report and its impact on when the Fed is likely to raise rates. etc.
ENJOY YOUR HOLIDAY!
This isn't about this. It is about spending 15 minutes in the morning getting a feel for where the market is and why it has performed as it has. I believe this is the best way to understand markets. But don't get too comfortable. As Nassim Taleb has pointed out, humans are very adept at creating narratives explaining why markets have performed as they have BUT ARE POOR PREDICTORS OF WHERE WE ARE HEADED! The housing crisis leading to the debacle of 2008 is a good example. In hindsight, it is easy to explain what happened. But how many people got rich predicting it?
Markets are affected by different things at different times. This is one of the reasons it is difficult to outperform markets and why indexing is the best approach for many people. Thus, the economic data points I follow today will be different from what I am following a year from now. One of the tricks is to hone in on what is affecting the market at any particular time.
Here is what I do each morning. I first go to www.marketwatch.com and look at the following:
Eyeball the other yields in the table, and you quickly see the superiority of the U.S. yield. This simple exercise tells you a lot about why the pronosticators over the past few years have been dead wrong about interest rates. Instead of going up, they have dropped and stayed low!
On my pad where I record data each morning, I can quickly flip back and see that this spread was 1.66 (or, as bond market people say - 166 basis points) back on 7/26/2015. Thus, the spread is narrowing. Worth keeping an eye on.
Next, I click on the FX (foreign exchange ) column to get:
From this column, I record the value of the Euro 1.11 and the value of "WSJ $ IDX" at 88.75. Currencies are a key to understanding global economics. When a currency cheapens versus other currencies,it lowers the prices of the goods it sells on world markets. It is like two gas stations next to each other. As you would expect, they typically have pretty much identical prices. If one comes out and significantly lowers its price, the other will suffer a dramatic loss in sales.
Recently, China shocked the investment world by devaluing its currency. Not surprisingly, investment market held its breath, concerned about a currency war breaking out.
In looking at the Euro, it is also worth noting that expectations play an important role in determining whether to buy the 10-year Treasury or the German Bund. Investors need to assess the spread and the likely future course of the currencies. At the margin, the spread and the expected currency movements should make investors view the two bonds the same.
Again, flipping back, I find that on 9/26/2015 the Euro was at 1.08 and the WSJ$IDX at 88.59. Global investors in the 10-year Treasury did well. They got an attractive spread and an appreciation in the U.S. dollar. I ncidently, the dollar would be expected to appreciate in a scenario where the Fed is getting closer to raising short-term interest rates.
Next, I click the "FUTURES" column and record "Crude Oil" and Gold.
I also mentally note the DJIA and S&P futures markets to get a sense on how the market is likely to open.
Finally, I click on the "ASIA" column and record the overnight performance of the Shanghai stock market = 3160/-.21%. On 9/26/15, this index stood at 3992.ooch! This is a good example of an economic data item I wasn't following closely a few months ago but now am.
All of this takes longer to explain than to get the data. Once you get it into a routine, you can easily record the data in 15 minutes or less; and I believe it will give you a bit of a fix on what is driving markets. Also, you can add other items to your liking.
To get a further feel for the market day, I like to also go to CNBC and read the headlines of what they see as market relevant stories:
ENJOY YOUR HOLIDAY!
Thursday, September 3, 2015
Some Market Perspective (Part 2)
Yesterday's post focused on the performance of a particular asset allocation that fits many retirees, i.e. those who are drawing down their nest egg.
To get further perspective here are the returns on the underlying market indices for various periods:
last 3 mos. y-t-d 1 year 3 years 5 years
S&P500 -8.90% -5.75% -2.49% 13.18% 14.50%
MSCI EAFE -9.98% -2.63% -9.68% 7.65% 5.93%
Russell 2000 -9.43% -5.59% -2.68% 13.09% 14.05%
Barclay's Bond .02% 0.54% 1.65% 1.56% 3.06%
3 mo. t-bill .00% .01% .02% .04% .06%
S&P GSCI -17.60% -17,80% -44.12% -19.68% -8.29%
The MSCI EAFE is an international stock index and the GSCI is the Goldman Sachs commodity index. Note that the bond index was positive in each of the periods. Note that it returned a positive 1.65% over the past year as the S&P 500 had a -2.49% return. This is what the bond portion of a portfolio is intended to do! It acts as a sort of hedge to the volatile stock portion. To be clear, understand that the low yielding cash portion doesn't typically do this well. Over the past 12 months it returned .02%.
People like to ask about the purpose of holding cash in a portfolio. After all, the other asset classes tend to outperform over the long term. For the retiree drawing down a nest egg cash (i.e. money market fund) holdings are a buffer for meeting drawdowns and not having to liquidate stock or bond holdings in a down market. Selling stocks and bonds in a down market would be a type of reverse dollar cost averaging! For the younger person, holding cash would be dry powder to put to work in a market like we are having today.
For the record I don't recommend holding commodities separately for the simple reason that commodities are a part of the overall market. For example, the S&P 500 has a goodly representation from the oil sector. So holding a commodity fund would be like double counting. If you have a strong view on commodities you can hold a commodities Fund but understand that you are making an over-weighted bet.
The bottom line here is that investing is a long term prospect. Focusing on short term results and thereby letting your emotions skyrocket in up markets and dive in down markets is typically counter productive.
To get further perspective here are the returns on the underlying market indices for various periods:
last 3 mos. y-t-d 1 year 3 years 5 years
S&P500 -8.90% -5.75% -2.49% 13.18% 14.50%
MSCI EAFE -9.98% -2.63% -9.68% 7.65% 5.93%
Russell 2000 -9.43% -5.59% -2.68% 13.09% 14.05%
Barclay's Bond .02% 0.54% 1.65% 1.56% 3.06%
3 mo. t-bill .00% .01% .02% .04% .06%
S&P GSCI -17.60% -17,80% -44.12% -19.68% -8.29%
The MSCI EAFE is an international stock index and the GSCI is the Goldman Sachs commodity index. Note that the bond index was positive in each of the periods. Note that it returned a positive 1.65% over the past year as the S&P 500 had a -2.49% return. This is what the bond portion of a portfolio is intended to do! It acts as a sort of hedge to the volatile stock portion. To be clear, understand that the low yielding cash portion doesn't typically do this well. Over the past 12 months it returned .02%.
People like to ask about the purpose of holding cash in a portfolio. After all, the other asset classes tend to outperform over the long term. For the retiree drawing down a nest egg cash (i.e. money market fund) holdings are a buffer for meeting drawdowns and not having to liquidate stock or bond holdings in a down market. Selling stocks and bonds in a down market would be a type of reverse dollar cost averaging! For the younger person, holding cash would be dry powder to put to work in a market like we are having today.
For the record I don't recommend holding commodities separately for the simple reason that commodities are a part of the overall market. For example, the S&P 500 has a goodly representation from the oil sector. So holding a commodity fund would be like double counting. If you have a strong view on commodities you can hold a commodities Fund but understand that you are making an over-weighted bet.
The bottom line here is that investing is a long term prospect. Focusing on short term results and thereby letting your emotions skyrocket in up markets and dive in down markets is typically counter productive.
Wednesday, September 2, 2015
Some Market Perspective
The market has been hit hard. A whiff of panic is in the air. China is slowing down big time and pundits are parading to the financial news networks to offer their disparate views. This is not new. Every correction feels the same. Every correction feels like the end of the world.
So how bad has it been to this point? Well, it depends. It depends on how you are positioned. Back in 2008 when markets were experiencing a much worse environment retirees talked of losing their life savings. This of course got investors who understand asset allocation principles to scratch their heads and wonder how this could be. After all retirees should have a decent representation of bonds in their portfolio and bonds had a positive return of greater than 5%!
I split the investor world simplistically into accumulators and decumulators. Accumulators welcome the current markets because they are building their nest eggs and thereby welcome the opportunity to buy shares at lower prices. The decumulators are primarily retirees drawing down their nest eggs or are close to drawing down their nest eggs. For them market downturns can be traumatic, especially if they don't understand asset allocation.
So, suppose you are a retiree and are decumulating or close to decumulating. Then one asset allocation you could reasonably consider would be basically 40% stocks/60% fixed income and cash. Here is a proposed allocation by Charles Schwab:
Large Cap Stocks 25%
Small Cap Stocks 5%
International Stocks 10%
Fixed Income (Bonds) 50%
Cash 10%
A quick point on the percentages. Cash at 10% gives the retiree two and one-half years to weather a downturn assuming the usual 4% drawdown rate before even looking to dividend and interest payments.
So how has this allocation fared to date? Here are the numbers through the close of yesterday 9/1/15:
3 months -3.68%
year-to-date -1.71%
12 months -0.90%
3 years +5.77%
5 years +7.02%
The returns for 3 years and 5 years are average annualized returns. These returns on the overall asset allocation can be pretty closely matched using low cost well diversified index funds and avoiding high cost investment advisor services.
I'm not trying to sugar coat the market correction but clearly anyone who has been in over the long term should see that the situation isn't as bleak as the fear mongers make it out to be. Surely it is worth recognizing that a one million portfolio has seen a $36,800 decrease in value over a short period and that is enough to cause people to lose a little sleep. Another point is that if someone bailed in 2009 and got back in in the last couple of years they must feel snake bitten. But the evidence shows that jumping in and out generally leads to significant under performance.
So how bad has it been to this point? Well, it depends. It depends on how you are positioned. Back in 2008 when markets were experiencing a much worse environment retirees talked of losing their life savings. This of course got investors who understand asset allocation principles to scratch their heads and wonder how this could be. After all retirees should have a decent representation of bonds in their portfolio and bonds had a positive return of greater than 5%!
I split the investor world simplistically into accumulators and decumulators. Accumulators welcome the current markets because they are building their nest eggs and thereby welcome the opportunity to buy shares at lower prices. The decumulators are primarily retirees drawing down their nest eggs or are close to drawing down their nest eggs. For them market downturns can be traumatic, especially if they don't understand asset allocation.
So, suppose you are a retiree and are decumulating or close to decumulating. Then one asset allocation you could reasonably consider would be basically 40% stocks/60% fixed income and cash. Here is a proposed allocation by Charles Schwab:
Large Cap Stocks 25%
Small Cap Stocks 5%
International Stocks 10%
Fixed Income (Bonds) 50%
Cash 10%
A quick point on the percentages. Cash at 10% gives the retiree two and one-half years to weather a downturn assuming the usual 4% drawdown rate before even looking to dividend and interest payments.
So how has this allocation fared to date? Here are the numbers through the close of yesterday 9/1/15:
3 months -3.68%
year-to-date -1.71%
12 months -0.90%
3 years +5.77%
5 years +7.02%
The returns for 3 years and 5 years are average annualized returns. These returns on the overall asset allocation can be pretty closely matched using low cost well diversified index funds and avoiding high cost investment advisor services.
I'm not trying to sugar coat the market correction but clearly anyone who has been in over the long term should see that the situation isn't as bleak as the fear mongers make it out to be. Surely it is worth recognizing that a one million portfolio has seen a $36,800 decrease in value over a short period and that is enough to cause people to lose a little sleep. Another point is that if someone bailed in 2009 and got back in in the last couple of years they must feel snake bitten. But the evidence shows that jumping in and out generally leads to significant under performance.
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