October 10, 2013
"No man's life, liberty, or property are safe while the legislature is in session.” Samuel Clemens
How ironic is it that “Dumb and Dumber II” started filming last week? Dysfunctional Washington has become even more so in their mismanagement of the current government shutdown.
It is likely that the government shutdown will be short-lived – perhaps shorter than the last 21 day shutdown in 1995. Political pressure grows daily on all involved to find some solution – even temporary – to the problem.
If, as expected, the shutdown is relatively brief, it will have equally temporary effects on financial markets and the economy. In the past such events have moved investors out of risk assets and into safe haven investments. We see this pattern reversing itself once the shutdown has ended. If that be the case, the most recent declines in equities are a welcome buying opportunity.
On the lower probability that this mess lasts longer, the negative ramifications for risk assets become more real and a quick reversal less likely. If the problems extend much longer than a month, however, this last quarter of the year would weaken economically and investors would continue their flight from risk asset.
We view this as possible, but assign a low probability. In their absence, the probabilities favor risk assets and using any near-term reverses as a buying opportunity.
“After a storm comes a calm.” Matthew Henry
Investors are right to be concerned, but so far – despite large increases in one month Treasury yields, the VIX volatility index, and the cost of credit default swaps – show no signs of panic. The market seems to be telling us that three things are going on.
- First, many foresee a resolution before the situation deteriorates too far.
- Second, there are many like us who believe that even if the debt ceiling is not increased, the US will not default on its debt.
- And third, the cut in spending caused by an inability to borrow would only cause very temporary problems for the economy. Congress has already voted to provide back pay to furloughed workers, so layoffs will have little impact on spending or economic growth.
As irresponsibly as U.S. leaders have behaved in managing the U.S. economy in recent years, there’s still little chance that they will allow the nation to default on its debts. We consider an actual default unthinkable and the epitome of irresponsibility, because current receipts make the US completely capable of paying the interest its debts.
For the most optimistic investors this political wrangling might be viewed as very good news. Politicians are finally dealing with what everyone knows is a long-term fiscal problem and they are dealing with it now before the US goes the way of Detroit.
Interestingly, there is strong link between Congressional activity and stock market returns. Stock returns are lower and volatility is higher when Congress is in session. This “Congressional Effect” can be quite large—more than 90% of the capital gains over the life of the DJIA have come on days when Congress is out of session.
Note: As of 9:00 am stock markets are up sharply on news that House Republican leaders plan to propose a six-week extension of the U.S. debt limit to allow for negotiations on a broader budget agreement.
If you've been lamenting the state of America, take heart…
We’re still really good at some things. For example, we have more entrepreneurs any other country in the world. According to The Economist, roughly one of every 13 Americans is an entrepreneur. That’s almost 7.5 percent of our population! By comparison less than 4 percent of the British are entrepreneurs, and less than 3 percent of the citizens of France, Sweden, and Germany are so inclined.
Forbes.com postulates entrepreneurship in America can be attributed, in part, to the fact that our country is a magnet for venture capital. Americans value the entrepreneurial spirit, and love the underdog. We don’t see failure as failure when risk-taking is involved. We see it more as daring.
As Teddy Roosevelt once said: “It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.”
Should you retire?
If you’re like most, you answer with a resounding “Yes!” You’ve worked hard and saved, and the allure of retirement is hard to resist. However, the lifestyle you retire to is very dependent on how and when you retire. Here are a couple of things to consider:
- Don’t retire at once, do so slowly. Cut back on your days at work, and abdicate some of the responsibilities that you dislike. You may find that you enjoy work more, while working less! And the continued income does not hurt either…
- Cut taxes: If you continue to work, you may be able to defer taking 401k or IRA distributions, deferring taxes.
- Increase your Benefits: From age 62 to 70 Social Security benefits increase an average of 7% a year. That’s a better “annuity” rate than you’ll find anywhere else.
- Stay on your employer’s health insurance plan as long as possible. You’re not eligible for Medicare until age 65, and even then health care costs are very expensive.
- Debt and Savings: Nobody should go into retirement with debt, when income will certainly decrease. Paying off debt or saving those extra income dollars before retirement is important.
If you have any questions, or if I may be of assistance to you, please do not hesitate to
contact me at 303-996-3011 or firstname.lastname@example.org
September 6, 2013
“When you have to make a choice and don't make it, that is in itself a choice.” - William James
While the transition from summer to fall occurs without our consent, we have a number of interesting choices to be made in the immediate future.
Certainly the Obama administration faces a Hobson’s choice regarding US involvement in Syria. While this involvement is promised to be “limited and narrow” without “boots on the ground,” our allies and our nation are divided about any action. In response to this concern, oil and gold have rallied of late.
Stocks declined by over 4% in August, their biggest decline since 2012. The 10 year Treasury yields is nearly 3.00%, from the May lows of 1.61%, with 30 year mortgage rates topping 4.57%. Widespread are expectations that the Fed will begin “tapering” its bond $85 billion a month bond buying program, which may contribute to slowing an already slow economy. Consumer spending is slower than usual (personal income is flat), government spending is subtracting from growth instead of adding to it, and housing investments are only about half as strong as usual amid higher borrowing costs. The economy seems to be cooling, and to reach the Fed’s forecast economic forecast we will need a very strong fourth quarter.
Most see this as unlikely, and this pressures the Fed to delay tapering. However, QE cannot go on forever. Michael Galvin of Barclays says “It seems likely that the normalization of monetary policy in the US will be the most significant driver of global asset markets in the coming two to five years.” This makes the selection of the next Fed Chairman all that much more important. The front runners remain Lawrence Summer and Janet Yellen, and we expect that either will largely adhere to their predecessor’s policy.
After a welcome summer respite, expect a resumption of domestic fiscal squabbles. The country’s fiscal new year begins on October 1. We will see another debt ceiling fight as the Treasury is expected to reach its $16.7 trillion borrowing limit in mid-October. It was speculated that perhaps the spending cuts from sequestration earlier this year would spur spending cuts. This has not occurred, and thus the next battles may be even more divisive.
It will most likely be an interesting month for equities. According to Strategas, stocks have finished September higher only 44% of the time.
”Destiny is no matter of chance. It is a matter of choice. It is not a thing to be waited for; it is a thing to be achieved.” - William Jennings Bryan
European economic concerns remain, but it does seem that conditions on the Continent are improving. Germany will hold elections on the 22nd and many worry that Greece will likely soon need a third bailout. Emerging markets, once investment darlings, have been struggling amid slower growth and concerns about a larger war in the Middle East.
Despite the continued slow economy and the most recent declines, US stocks have enjoyed a nice year so far. While prognostications abound, one must realize that it is expanded price to earnings ratios that are largely responsible for the year’s gains. We will likely need stronger corporate earnings growth for stock gains to continue.
Did you know:
The average student loan balance for a 25 year old has doubled from $10,000 to $20,000 since 2003. 23% of young debtors have put off starting a business due to student loan debt, and only 37% of unpaid interns in 2012 receive paying job offers.
The average 401k balance in Q1 2013 $80,900, an increase of 75% since Q1 2009.
25% of American millionaires are under age 40, but only 3% attribute their wealth to an inheritance.
“Every man builds his world in his own image. He has the power to choose, but no power to escape the necessity of choice.” - Ayn Rand
Whether we think about it, every day we are faced with choices. Do we hit the snooze, or do we get up, dress up, and show up for our lives? Life is about making the proper choices, whether simple or difficult, in order to make our future what we desire it to be.
If you have any questions, or if I may be of assistance to you, please do not hesitate to
contact me at 303-996-3011 or email@example.com
July 8, 2013
The Great 401(k) Escape
Diversify before you retire with in-service distributions
Although Jim, now age 60, does not plan to retire any time soon, earlier this year he rolled his 401(k) plan into an IRA using a little-known maneuver know as an “in-service distribution.”
Contrary to popular belief, you may not have to keep all of your retirement savings in an employer-sponsored retirement plan until you change jobs or retire. While it’s rarely advertised, most folks over age 59 ½ are allowed to take an in-service distribution and roll over their retirement assets to an IRA. Doing so may allow you to more effectively manage your retirement savings before you retire — while you continue to work and make contributions to an employer-sponsored plan. As long as you roll your assets directly into an IRA, you can avoid tax penalties and the mandatory 20% IRS income tax withholding on your in-service distributions.
Determine Your Eligibility
The terms of your employer-sponsored retirement plan determine whether you can take in-service distributions. Specifics of eligibility vary widely by plan, so review your retirement plan documents to find out if you’re eligible. If you have questions about your eligibility, contact your plan administrator.
There may be advantages to moving a portion of your retirement assets into an IRA now – while you are still working - rather than later.
Benefits can include:
- Control and ownership - With an IRA, you are the account owner and have more control over your assets, free from the restrictions an employer sponsored plan can impose.
- Investment diversification - many employer-sponsored plans offer limited investment options, have high fees, and cannot easily be professionally managed.
- Beneficiary options - An IRA may allow you to designate beneficiaries in advantageous ways, such as naming multiple or contingent beneficiaries, restricting beneficiary payouts or naming a trust as beneficiary.
- Exceptions to penalties – IRAs may offer exceptions to the 10% premature distribution penalties in the case of the purchase of a first home up to $10,000, post-secondary educational expenses and medical insurance premiums if unemployed.
- Income tax withholding - Qualified plans require mandatory 20% IRS withholding on distributions, but with an IRA you have the choice to opt out of withholding on distributions.
Weigh Disadvantages Before Rolling Over Funds
Before you decide if in-service distributions make sense for you, consider potential drawbacks:
- Age limitations – You may not take withdrawals without penalty from an IRA until after age 59 ½, where you may do so at age 55 in a qualified plan.
- NUA treatment – Rolling over employer stock into an IRA may eliminate your ability to take advantage of NUA (Net Unrealized Appreciation) tax treatment.
- After-Tax Funds - Within a qualified plan you may segregate pre-tax and after-tax contribution dollars. If after-tax funds are rolled into a rollover IRA they will become part of the IRA’s non-deductible basis.
- Creditor protection - IRAs have federal bankruptcy protection, but qualified plans have broad federal creditor protection
- New contributions - In-service distributions may affect your ability to make future contributions to your employer sponsored plan.
- Fees & expenses – Fees & expenses in a qualified plan may be lower than in an IRA.
If you want to discuss this option, please do not hesitate to contact me at 303-996-3011 or firstname.lastname@example.org. We will determine if your retirement plans offers this option, and to consult with your tax advisor.
June 13, 2013
“There is nothing permanent except change.”
Change is in the air. The warm summer breezes are upon us, and kids are out of school. Next week is my 20th wedding anniversary, and next year my wife and I will have two sons in high school – a freshman and a senior. The time has passed quickly! But while I certainly mark new chapters and the passage of time, change itself must be embraced. Refer to the above quote. Change remains the constant.
As regular as the seasons, change is also inevitable in the investment markets. High grade bonds, normally serene investments, have been volatile of late - and this has impacted stocks as well. If there was a widely-known index for fixed income (such as the S&P 500 index for stocks), the May carnage in the fixed income markets would be a big story and the general public would be talking about a bear market in bonds. Bonds are just less covered by the media and thus less understood by the investing public. Nevertheless, May was one of the worst months in decades for bonds.
It started in May with rumors that the Federal Reserve would begin “tapering” its quantitative easing purchases of $85 billion dollar of bonds per month. Concerns about the end of QE drove bond prices down sharply, and the benchmark 10 year Treasury yield as high as 2.29% (up from a low of 1.63%). Bond funds saw record outflows. As rates increased, bonds in general lost 2% to 8% depending on duration. Managers that invested aggressively saw declines of as high as 13%. These losses more than offset anticipated income yields for the year or years.
The yield curve has continued to steepen, and home buyers / home owners are rushing to lock in mortgage rates before they rise further. Quantitative easing will taper, and the impact of this remains to be seen, but I am not immediately worried. Assuming that we continue the slow growth, modest economic recovery trend, I believe that Fed policy change will come gradually. Hopefully an orderly increase in interest rates will not truly threaten stocks until rates are significantly higher. The unraveling of the Fed’s “financial knot” will provide interesting pageantry for the rest of the year.
JP Morgan CEO Jamie Dimon recently said “We should all hope for a normalization of interest rates - that’s a good thing, but as we go back to normal it’s going to be scary, and it’s going to be kind of volatile.”
Stocks declined too, but thankfully not as much as bonds. US stocks had a year’s worth of gains in the first 4 months of the year, so some retreat was not surprising. Even though the S&P 500 index declined 3.40% since the record high on May 21st, stocks were still up for the month. Yield stocks, however, declined in the face of higher interest rates.
“The sun is new each day.”
Despite interest rate worries, there was good news. The Fed reported last week that finally US households have recouped the losses from the “Great Recession” that began in 2007. US housing prices have increased roughly 10% in the past year, with larger increases in the formerly depressed markets such as San Francisco and Phoenix. May job growth was stronger than expected. Stocks are up ~13% YTD, and over the past year have surged ~30%.
There is an interesting dichotomy between the return of the S&P 500 and Emerging Markets equities. Where the S&P is up over 13% this year, The MSCI Emerging markets index has declined by ~4.00%, partially due to currency valuations. While some larger emerging market economies are struggling, many feel there is still value in frontier holdings (though not without risk).
With dichotomies in mind, recent research reflects that “boring” stocks may be more fun than “exciting” ones – if you think making money is fun! Why? Because “boring” stocks – those with the lowest historical volatility – have on average outperformed “exciting” higher volatility stocks. Apple, for example, appreciated nearly 33% in 2012. It’s exclusion from the DJIA was the single largest reason for the differing 2012 returns for the S&P 500 (up ~16%) and the DJIA (up ~10%). But as much fun as 2012 might have been for Apple investors, not so 2013. Over the past 12 months Apple stock has declined 21%, where the DJIA and the MSCI USA Minimum Volatility index have gained ~20%. It is human nature to seek excitement in our lives as well as our investing habits. But remember that boring – whether in low-volatility stocks or by holding a well-diversified portfolio – has produced better long-term returns.
“No man ever steps in the same river twice, for it's not the same river and he's not the same man.”
Use the F word
Did that get your attention? I hope so! The F word you should use is Finances. According to multiple studies, most people in the US, regardless of their career success, lead unexamined & uncoordinated financial lives. Statistics show that over 70% of people in the US are stressed about the state of their finances, and that financial issues are at the core of the majority of divorces.
What can you do about this? Simple! As the Nike ad urges: “Just Do It.” Step one is to discuss your finances with your friend, family, or spouse. If you’re one of the above 70%, then consult with an expert for financial profiling and counseling. If you don’t know where you are financially today, and you have not decided where you want to be in the future, how can you think that you’re going to succeed in getting there? Seek objective expert advice. Make a plan. It’s an excellent investment in yourself and your financial peace of mind.
8 Habits of Highly Effective Retirees:
1. Live with a sense of urgency.
2. Take calculated risks in pursuit of meaningful goals.
3. Be healthy.
4. Retire to something, not from something.
5. Retire based on your bank account, not you birthday.
6. Choose yes over no, active over passive, adventure over inertia.
7. Do important work.
8. Maintain & foster meaningful relationships.
The quotes in this newsletter are attributed to the pre-Socratic Greek philosopher Heraclitus. A major influence on the Stoics, Heraclitus is famous for his insistence on ever-present change in the universe.
If you have any questions, or if I may be of assistance to you, please do not hesitate to contact me at 303-996-3011 or email@example.com.
Information contained in this distribution is derived from sources that are believed to be reliable. The Advisor does not assume responsibility for the accuracy of this information. This information is provided for informational purposes only and is not to be considered investment advice.
April 12, 2013
"Expect the best. Prepare for the worst. Capitalize on what comes."
Our year started in melodramatic fashion with worries about January's Fiscal Cliff, then March sequestration, followed by financial crisis in Cypress. Despite this, U.S. stocks moved sharply higher in the first quarter, with both the DJIA (logging its best quarter in 15 years) and the S&P 500 (up 23% since June) hitting new all-time highs. Despite worrisome developments in the Eurozone, developed international stocks gained roughly 4%. Not all risky assets performed equally well, however. Emerging-markets stocks were down 4%. The U.S. stock market has been a huge outperformer, and has continued to increase into April. No April Fool joke here! Even with these heady returns, the equity market remains widely disliked, still under-owned by individuals, but not unreasonably priced (S&P 500 P/E is now 15x vs. 20x in 2007) and investors are left with a dearth of other options. Dubious bears may note that stocks have started each of the past 3 years in strong fashion, only to falter during the spring and summer months.
The yields on core investment-grade bonds were basically flat for the quarter. The 10-year Treasury yield fluctuated from 1.80% to 2.00% and back. Note that the last time the 10 year yield exceeded 2.00% was April of 2012 and that a decade ago 10 year Treasuries yielded over 4.00%. International bonds declined in the quarter, due largely to currency weakness against the U.S. dollar.
So what's next?
With U.S. stocks hitting new highs, many people are wondering if they should be reducing exposure to lock in gains, or increasing exposure due to an improving economy.
These are both good questions and they can also provide an opportunity for discussion about investment return objective and risk tolerance. But our short answer to both questions right now is, no. As we look at potential risk / returns scenarios for risk assets such as stocks, we must balance short term (12 months or less) risk against our longer-term (five-year) potential returns across asset classes.
Without a clear picture of the future, our response is that to some extent we are hedging our bets - also known as diversifying-and that is the prudent thing to do in an environment this uncertain. We are constructing portfolios that we believe should perform reasonably well across a range of potential outcomes, any one of which we believe has reasonable odds of actually playing out. We don't think making a big bet on an outcome that can't be determined with confidence is in the best interests of our clients.
- We cannot fool ourselves. While we continue to look for opportunities to generate additional value, we need to be intellectually honest with our clients and ourselves when we don't have a sound basis for such conviction.
- The second critical element in the long-term success of our investment process is one that is also challenging for most of us: patience. Directing our efforts toward both intellectual honesty and patience has been key to longer-term success.
- In the meantime, Fed statements and actions continue to be an important support and driver of short-term stock market performance. In the near term, we don't see any catalyst for Fed policy to become restrictive. Fed support to the markets is likely to remain in place. But uncertainty increases as the time horizon extends.
To wrap up, let's revisit a few investment principles that we believe are timeless, and are particularly important to keep in mind in the current environment.
- Keep returns expectations realistic. Our analysis suggests it is likely that returns for stocks over the next five years will be below their 10%-11% average return of the past 30 years. And this definitely will be the case for core bonds, given their very low current yield and compared to the incredible 8% annualized return they have generated since interest rates peaked in the early 1980s. In any case, it is more difficult to reach one's financial goals in a low-return environment.
- Focus on the longer-term fundamentals, not on highly variable short-term ups and downs of the markets. Markets and economies move in cycles. As best we aspire to take advantage-through our tactical asset allocation process - of investor herding behavior and short-term overreactions to cyclical events or news headlines - positive or negative.
- Investing should be viewed as a long-distance marathon where it doesn't pay to over-emphasize any single short-term segment of the race. Expect the inevitable periods where your portfolios are lagging a benchmark index and maintain your discipline during those times. A sound investment process requires discipline to the long term plan. Jumping into the latest fad in the markets is a sure fire path to whipsaw, disappointment, whipsaw, and subpar long-term investment results.
- Cultivate self-awareness regarding your risk tolerance and psychology as an investor. This is an important element for achieving one's long-term financial/investment goals. Are you in the right type of portfolio in terms of risk/return objectives for your temperament and your financial situation? Evaluate both your psychological ability to absorb downside risk and handle market volatility, as well as your financial ability to do so.
"Your attitude, not your aptitude, will determine your altitude."
Is Domestic Pessimism Excessive?
The following is a compressed version of an article by Edward McBride in The Economist. I found it to be very insightful:
The misgivings are easy to understand. Growth is sluggish, unemployment is high and investors are wary. America's public debt is approaching $17 trillion, more than 100% of GDP, and it has been growing fast. Much of this stems from the transitory effects of the recession, but it will get worse rather than better. On the current trajectory, the soaring costs of Medicare and Medicaid, the government's health-care schemes for the old and the poor respectively, along with Social Security, the state pension scheme, will consume all federal revenues within a generation, leaving nothing for anything else.
America's politicians have been feckless in the face of this impending disaster. All the bickering over budgets of the past two years has done little to diminish this soon-to-be-crushing burden. Words like "shutdown" and "default" have become part of Washington's everyday language.
However, despite glaring problems, the outlook is less bleak than the pessimists maintain.
Rumors of the death of American innovation are exaggerated: the country is spending as much of its output on R&D as it ever has, and continues to come up with dramatic breakthroughs, such as "fracking" for oil and gas. It still towers over emerging giants like China in crucial matters such as the quality of its research universities and respect for intellectual-property rights. However, the main reason for cheer is that beyond the Beltway no one is waiting for the federal government to fix the economy. At the regional and local level America is already reforming and innovating vigorously.
Washington is not completely absent from these changes, but the overall picture is of revolution from the bottom up rather than the top down. This has its advantages: the states yet again are proving themselves laboratories for experimentation. Yet it also means that America's economic fight back is patchy and inconsistent. The United States could become far more competitive far more quickly if Congress punched its weight.
This is a hugely important condition. The political feud in Washington, and the fiscal shenanigans that come with it, constitute the biggest threat to the nation's prosperity, and the main caveat to the otherwise optimistic assessment outlined in this report. Moreover, all efforts to boost America's competitiveness are for naught if the galloping costs of Medicare and Medicaid are not reined in-something only the federal government can do.
So America's competitive recovery is not as strong as it should be, and it will remain overshadowed by its shaky public finances. But it is real. What is unfolding around the country offers a template for reform at the national level. And for all the histrionic talk of cliffs, brinks and shutdowns, the politicians in Washington have not inflicted any crippling damage yet. Those who like to lecture smugly about America's impending decline should take a closer look.
"You will get all you want in life, if you help enough other people get what they want."
Did you know?
- According to the Fed, consumer prices are currently rising at approximately 2% or less. Two areas that defy that statistic are health insurance premiums and college tuition & fee, which increased 7.30% and 7.40% from 1983 to 2012. The Bureau of Labor Statistics says that inflation over the past 30 years has averaged approximately 3% per year.
- Home prices continue to increase. The S&P / Case-Shiller 20 City Composite home price index increased by 8.1% in January, its largest increase since 2006, with hard hit areas such as Phoenix, Las Vegas, and San Francisco rising strongly (23%, 15%, and 17% respectively).
- Mortgage Rates remain extremely low. Conventional rates (up to $417,000) for individuals with excellent credit and 80% loan to value this week were 3.625% for a 30 year fixed rate loan, and 2.875% for a 15 year fixed rate loan. Look into refinancing!
- You have until April 15th to make 2012 IRA contributions. For 2012, the maximum you can contribute to all of your traditional and Roth IRAs is $5,000 (or $6,000 if you're age 50 or older). Don't forget!
- Colorado residents get a state tax credit for all contributions to the state's 529 college savings plan? This is a tax benefit worth using.
- The Long Term Care insurance industry has changed (and improved) a lot in the recent years. While everyone does not need LTC insurance, everyone does need a LTC plan. If you have interest in attending a "no sales pitch" informational event on LTC on April 30th, please let me know.
The quotes interspersed in this newsletter are from Hilary Hinton "Zig" Ziglar, American author, salesman, and motivational speaker who died last year at age 86. A World War II veteran, Zig Ziglar wrote over two dozen books and amassed a following of millions who were encouraged by his lessons for success.
3.5.2013 | Newsletter
Blunt, Ugly, and Dangerous – but Effective?
Despite weeks filled with the assignment of blame, brinksmanship and fear mongering, no agreement could be reached and broad federal spending cuts known as the sequester began on Friday, March 1st. We were warned by President Obama that “These sudden, sharp, arbitrary cuts will slow our recovery and cost us hundreds of thousands of jobs.” Yes, the sequester will produce short term pain, but in exchange will we receive the long term gain of a more reasonable rate of federal spending?
John Boehner pointed out that “There is nothing wrong with cutting spending…but the sequester is an ugly and dangerous way to do it.” One would have hoped that our legislators could negotiate a reasonable compromise to end this fiscal logjam…
There are cutbacks, especially in defense spending, but these are offset by increases in entitlement spending. At this point total spending still rises for fiscal year 2013. To keep this in perspective, cutting government spending by $110 billion per year will lower total federal spending of $3.6 trillion dollars by a miniscule 0.3%.
It is easy to spend, but difficult to reduce spending. Unfortunately for the US, the Keynesian stimulus spending of the recent past has produced only anemic growth.
I contend that deficit management and spending restraint is necessary for our country’s long-term financial solvency. This should have long ago ceased to be a political issue, and become a policy issue. The Congressional Budget Office projects that at our current trajectory that debt as a percentage of GDP will increase from the current 76% to 200% over the next decade. Unless we want to follow Greece and Spain’s example, our borrowing and spending habits must change. Regardless of party affiliation, spending restraint in Washington is a positive move for the country – but it does have a cost. It is estimated that the sequester will trim economic growth by .6% from an already lukewarm 2.00% 2013 projection.
As we seem to lurch from spending crisis to spending crisis, mark your calendars that the next one is scheduled for March 27th when yet another “CR” (continuing resolution) of government spending will need passage. Without an extension, a government shutdown will begin. And please don’t forget that the “Fiscal Cliff” suspension of the debt ceiling ends soon after in May… It was interesting to note that stocks shrugged off Friday’s news, and finished higher. Despite the dysfunction in DC, US companies are still making money in an extremely accommodative monetary environment.
A truly balanced deficit reduction program would mean the reduction of actual spending – not just of planned spending – in exchange for tax increases.
By enduring the sequester, however blunt, ugly, and dangerous, our nation may see virtuous progress towards more sustainable fiscal policy, and our government may concentrate on other important issues such as jobs production as well as entitlement & tax reform.
As I write, the Dow Jones Industrial Average is at 14,266 – having exceeded for the first time the record high of 14,165 of October 9, 2007. In the 15 months that followed that date, the DJIA lost more than half its value. As money pours into equities, I think how quickly investors have forgotten the pain of 2008!
Some investors cite higher gasoline prices, market volatility, rising bond yields and event risk as good reasons to take profits in a market that has appreciated 20% since June , 35% in the past 16 months, and 125% since March 2009. Ironically, after 5 years of being defensive, money management firms are now growing increasingly upbeat on stocks. Some say that this could be the beginning of the long-awaited change in investor psychology and the “Great Rotation” from bonds to stocks. In January over $65 billion was invested into equities and equity funds, the largest monthly net ever according to Morningstar. As evidence of the cash on the sidelines, some $39 billion flowed into bond and bond funds during the month as well.
Arguments abound as to whether the economy and markets are healthier now versus 2007. Investors, as humans prone to attempting to time the markets, and are again doing a poor job of it. Having been burned in 2008, many spurned the investment markets altogether, losing the returns of the past 5 years. Following heady returns in 2012, they now feel like they have missed the boat. Thus, late to the game they trample in, chasing returns & buying high, failing to properly diversify, without knowing their long-term investing plan or risk tolerance.
“If everyone is thinking alike, then someone isn’t thinking.” George S. Patton
Over 20 years ago the CFA Institute published a letter from a father, a financial professional, to his daughter which included the below timeless and practical thoughts on investing:
- A fool and his money are soon parted. Pay close attention to financial matters because investment capital is a perishable commodity when not properly managed.
- There is no free lunch. Risk and return are interrelated. Generally, the greater the risk, the greater the return and vice versa.
- Know thyself. Be honest in assessing your risk tolerance because it’s easy to underestimate the stress of a high-risk portfolio in falling markets.
- Don’t put all your eggs in one basket. Diversification helps determine potential rates of return and manage exposure to risk. Make sure you have a well-diversified and well-allocated portfolio.
- Take the long view. Make a plan and stick with it. Don’t let short term fluctuations or media-fueled frenzies cause you to panic. Investment decisions should result from a rational trade-off of risk and return. Unfortunately, those decisions often reflect fear and anxiety about current events.
- Remember the value of common sense. Investing is not a competitive sport. It should be an effort to achieve a pre-determined financial goal within a specific risk tolerance framework. No system works all the time and you should not expect it to.
The old saying that “there’s safety in numbers” may apply to some settings, but not necessarily to investing. Doing what everyone else in the market is doing may feel safe, but it may not help you get ahead. Famed investor Howard Marks points this out in his recent book “The Most Important Thing: Uncommon Sense for the Thoughtful Investor.”
“Unconventionality is required for superior investment results, especially in asset allocation. You cannot do the same things as others do and expect to outperform. Unconventionality should not be a goal in itself, but rather a way of thinking.” Howard Marks
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