The next time your broker or 401(k) adviser tries to talk you into aggressively investing your retirement, consider the results of the latest Merrill Lynch- Gap Gemini survey of high net worth individuals:
The core of the rich portfolio is surprisingly conservative. The wealthy have, on average, 43% of their holdings in low-risk assets. That's 29% bonds and a thumping 14% in cash. So much for the idea that the more you have, the more risk you can take. (It matters, of course, that the rich are typically much older than the rest of us, and are therefore more likely to be risk-averse for that reason.)
They still only have 33% of their money in equities — a slow climb back from the 25% lows seen at the end of 2008. Ominously, while that 33% figure does not seem very high, it nonetheless equals the levels seen just before the crash. And the rich told surveys that they are planning to ramp up their equity holdings pretty substantially this year.
Real estate makes up 15% of the average allocation and gold and other alternative investments are down to 5%. The lesson learned 3 years ago is that real estate can be a risky investment (although housing is probably near a generational low price now at the moment), and for most small investors this has entailed a disproportionately large percentage of savings, even to the point that most of us are leveraged with a mortgage.
Your job is the best place to earn income-- learn a skill that is valued by society-- investments should be primarily for wealth preservation. Three lessons: 1) cash is an allocation, 2) not everyone should necessarily own a house, and 3) everyone is trying to sell you something, even your 401(k) adviser.
Charles Ferguson interviewing John Campbell, Chairman Harvard Economics Department:
CHARLES FERGUSON: Does Harvard require disclosures of financial conflict of
interest in publications?
JOHN CAMPBELL: Um, not to my knowledge.
CHARLES FERGUSON: Do you require people to report the compensation they’ve
received from outside activities?
JOHN CAMPBELL: No.
CHARLES FERGUSON: Don't you think that's a problem?
JOHN CAMPBELL: I don't see why.
CHARLES FERGUSON: Martin Feldstein being on the board of AIG; Laura Tyson going
on the board of Morgan Stanley; uh, Larry Summers making 10 million dollars a year
consulting to financial services firms; irrelevant.
JOHN CAMPBELL: Hm, ye-, well – yeah; basically irrelevant.
CHARLES FERGUSON: A medical researcher writes an article, saying: to treat this
disease, you should prescribe this drug. It turns out Doctor makes 80 percent of
personal income from manufacturer of this drug. Does not bother you.
JOHN CAMPBELL: I think, uh, it's certainly important to disclose the, um – the, um. Well, I think that's also a little different from cases that we are talking about
here. Because, um – um –
I had a discussion yesterday with a colleague about investments, pensions, Social Security and the possibility (probability) that our retierment years may be very different than what we have expected.
The usually calm and sardonic Barry Ritholz can always be counted on for his rational surmise of the financial markets and big picture economic views. Every once in a while, however, we are treated to Ritholtz Unchained, and today is one such day. Read the whole thing, but here are the snippets:
"This is financial incompetence writ on a scale far grander than anything seen for centuries.
"As a nation, our institutions have failed us: Under Alan Greenspan, the Federal Reserve slept through the most reckless and irresponsible expansion of bank lending in history for reasons of ideological purity. His opposition to the Fed’s regulatory role reached the point of malfeasance long ago. .."Back in the States, something beyond cognitive dissonance is occurring -- this is full blown case of dementia unfolding in the public sphere. When this era of excess and absurdity is treated by historians in the future, the question I expect to be asked most is not why many of these people weren't jailed for their financial felonies. Rather, I expect them to wonder why so many of these folk weren't placed in protective custody, and heavily medicated, for the only rational explanation for their statements and behaviors is that they have gone so far beyond the bend as to be completely and totally insane. ..
Should this man really be smiling?
There are several factors putting pressure on commodities: overbought technicals, short term strengthening dollar, popping of speculative micro-bubble, hedge funds needing to cover margin calls and thus selling anything with gains, weakening of the economy, and relative geopolitical stability. Deflation.The booming commodities market has become increasingly attractive to investors, with hard assets like oil and gold perhaps offering a safe hedge against inflation, as well as the double-digit gains that have fast been disappearing from the markets for stocks, bonds and real estate.
Undeterred by the kind of volatile downdrafts that sent oil plunging 4.5 percent Wednesday, to settle at $104.48 a barrel, large funds and rich individual investors have sent a torrent of cash into this arcane market over the last year, toppling records for new money flowing in.
Small investors are plunging in, too, using dozens of new retail commodity funds to participate in markets that by one measure have jumped almost 20 percent in the last six months and doubled in six years.
But this market, despite its glitter, offers risks of its own, including some dangerous weaknesses that are impairing the ability of regulators to police fraud and protect investors. Commodities are also vulnerable to the same worries affecting the rest of Wall Street, where on Wednesday the Dow Jones industrial average plunged almost 300 points, erasing more than two-thirds of Tuesday’s steep gains.
Moreover, the biggest speculators and lenders in the commodities markets are some of the same giant hedge funds, commercial banks and brokerage houses that are caught in the stormy weather of the equity, housing and credit markets.
As in those markets, an evaporation of credit could force some large investors — especially hedge funds speculating with lots of borrowed money — to sell off their holdings, creating price swings that could affect a host of marketplace prices and wipe out small investors in just a few moments of trading.
My take is that the long term case for energy, grain and even gold may be valid, but the dollar should strengthen from its oversold position in the short and intermediate term. Positions that would capitalize on this would be Ultrashort Emerging Markets (EEV) or Ultrashort Oil (DUG).
Technology, especially semiconductors have been forming a nice bottom over the last few weeks, which is usually a sign of accumulation. Early, aggressive buyers could look at Sybase (SY) or Taiwan Semiconductor (TSM) or Applied Materials (AMAT). A more careful approach would be to wait for greater conviction, but tech may lead us out of the bear market. Taiwan ETF (EWT) has a lot of TSM and should be a solid player in the intermediate term.
One play may be to go long EWT and short emerging markets (EEV), and keep dollars on hand for now.
Disclaimer: I'm a simple working stiff who knows less than nothing about finance and economics. My interest in the market is solely for entertainment purposes. In no way should my ranting serve as investment advice in any way. (Unfortunately, the same disclaimer is true for every financial "adviser" I've ever sought out.)
I respect people who have the confidence of their convictions. In life, medicine, politics, and especially finance, certain things are correct and certain things are incorrect. A particular opinion will be borne out eventually, and in money management a bad decision can be ruinous.
Brian Wesbury, a financial planner writing in the WSJ, has just wandered out onto a limb. He says, “Now that the Fed has cut interest rates by 175 basis points, the odds of a huge surge in growth later in 2008 have grown… Keep the faith and stay invested. It's a wonderful buying opportunity.”
On the other hand, George Soros, the noted investor, currency speculator, philanthropist and billionaire says, “The current crisis is not only the bust that follows the housing boom. It’s basically the end of a 60-year period of continuing credit expansion… the end of an era.”
Let’s keep a watch …. One of these gents will be correct, and the other will be wrong. We’ll check back in 4, 6 and 12 months to keep tabs. It’s February 2nd, do you know where your 401 (k) is?
Dow Jones Industrial Average 12,743
Nasdaq 2413
S&P 500 1395
Occasionally a light bulb flashes on and for a split second I see the miles of landscape in all its tortuous detail. Everyone gets this from time to time, it's called insight or inspiration or intuition. Gold hit a 27 year high this week before pulling back today to about $730 per ounce. Oil likewise has been on a tear, now at $80 per barrel, due to geopolitical tension and increasing demand from developing economies. Also, agricultural grains and livestock have seen higher demand worldwide as more people move into the middle class. So while the prices of many essential items have been increasing, the official US inflation rate is reported as low, mainly because the government chooses to exclude food and energy from their statistics.
Here's the deal, and feel free to correct me if I'm wrong.. The Consumer Price Index, as a measure of inflation, is a balance between various commodities, assets and products that the government sets in order to measure the stresses and strains on the economy. At any given time, some assets are deflating while others are inflating in value, and monetary policy is supposedly set to keep these in line.
The problem is that the assets most of us working folks are not increasing in value, while the costs of those commodities on which we rely are increasing in cost. We get paid in US dollars, and the US dollar has decreased in value against every major currency and is now at an all time low in the dollar index. Our houses have likewise decreased in value, or at least have not increased in value commensurate with inflation. US stocks, while they may have increased in dollar terms, the gains have been mitigated by the continued decrease in the dollar index, so in real terms the gains versus commodities and foreign currencies have been negligible or negative.
This devaluation of our homes and our paychecks has occurred at the same time our real world cost of living has increased. The government tells us that the CPI is 2.3%. Bullshit. Gas has increased 45% in two years and food has increased at least 20% depending on what your family eats. Food and energy are a proportionally larger part of the living costs for a middle class family. When the government uses a decrease in home prices to offset the increase in gas and food, then the numbers are skewed and they are not reflecting the true cost of living for the average American. Barry Ritholtz at The Big Picture has been a stalwart voice expounding on the inflation numbers coming out of the federal government.
Recently we have seen a ripple go through the credit markets due to a large increase in the numbers of subprime mortgages that have been made. With interest rates at historic lows, the housing market has been booming, but apparently that growth was not enough for the mortgage lenders who took liberties to loan money to people who had no assets or job, and what ho!, they can't pay their mortgages. Imagine that.
The federal reserve chairman, Ben Bernanke, has acted to bail out the economy by adding liquidity, i.e. lowering short term interest rates that the fed charges banks. The immediate effect of this move is to assuage the fear that homeowners will default on their mortgages by keeping interest rates low enough for many marginal mortgage holders to hang on for a while longer. The other immediate effect is to remove the moral hazard that would normally have been felt by lenders who made such ill-advised loans. It's a bail out. The ultimate effect for the rest of us, however, is a further devaluation of the dollar, i.e. our paychecks are worth less.
Which brings us back to gold and its 27 year high. I'm not some wingnut goldbug who has stashes of Krugerrands in my mattress. Most of my retirement funds are in diversified stock mutual funds and I do very little trading of these retirement funds other than an occasional re-balance.* Lately, however, I've been a little leery. The rise in gold and other commodities has me spooked. How long can we devalue the US dollar and not feel some pinch in the overall US economy? When will foreign investors lose confidence in holding US dollars? The current rise in gold, silver, platinum and copper prices is evidence that the US dollar may be losing its cache as the haven of safety in a tempestuous world. As geopolitical tension rises, US treasuries and dollars should become more sought after, and that's not happening.
Historically, the last time such dollar devaluation had occurred was the early 1970's. Nixon took the US dollar off the gold standard, we had huge war debt from an unwinnable and unpopular war and inflation tore up the value of the greenback. Sound familiar? As we rattle sabres against Iran, where do you think the price of oil and gold will go, or is it all baked in already? If you think the price of gold will stop short of an all time high now after rising this far, please let me know your rationale. If you think that some technological breakthrough will make the fossil fuel internal combustion engine obsolete before the Chinese hit he highways, please let me know.
Sure, economic slowdowns will occur and financial cataclysms will happen from time to time, but the macroeconomic tendencies all point to a continued increase in the use of commodities and the continued decrease in the value of the US dollar versus gold and other hard assets.
These are not merely rhetorical observations. If you had $100,000 to invest, where would you put it? Would you buy US real estate? Ha! Would you buy US dollar denominated stocks like Starbucks and General Electric? Perhaps the latter. Or would you play into the global growth story and invest in areas that are a lock to grow over the next 10 or 20 years? The two dominant themes, as I see it (and have seen it for a while now), are 1) Asia, and 2) commodities. And get rid of your dollars.
No?
* My retirement funds are sacrosanct and are invested in staid Fidelity funds of various stripe. However, I do have a stash in a discount brokerage account that is traded actively, and fortuitously has been a source of fun, adventure, intellectual challenge and significant wealth generation lo these many years. I make a point not to comment on individual trades, but perhaps I'll alter this policy in the future.
Someone, a co-worker, recently asked me if I could sit down with him to talk about personal finance. While I am flattered that anyone would ask my advice, I admonished him to heed that the recommendations of a physician about anything financial may be detrimental to one's economic well-being. While I may enjoy playing with the stock market and studying patterns and valuations, my interest in stock trading is merely that of a hobbyist using extraneous cash. My retirement plan, on the other hand, was developed years ago and set in motion with very little tweaking since. Having gone through the caveat of my innate ineptitude of all things financial, I agreed to meet with this colleague. Now, as I think about the topic, I'm not sure what type of advice would be appropriate. I give my medical opinions every single day to nearly perfect strangers who seek me out on the referral of friends, family and other health care providers, so why does the prospect of a small conversation about IRA's and life insurance give me pause? If I can meet a person and within 30 minutes review intimate details of their life and health, examine every orifice of their anatomy and then schedule them for a major surgery, then why would I hesitate to give a friend and colleague a bit of wisdom about their retirement that isn't even scheduled for another 25 years?
I have a recurring nightmare that entails a close friend or family member, say a sister, who asks my advice about a cash lump sum to invest. I caution them to be careful, but give statistics about the long term results attained in stock investing. I forward a copy of John Bogle's Mutual Funds or Burton Malkiel's Random Walk Down Wall Street, which is ignored. My nutshell recommendation is to dollar-cost average into a diversified stock and bond fund over 12 to 18 months. This nightmare takes place in the fall of 1999 when the market had enjoyed several years of a high trajectory return. My advice is only partially followed, the advisee hears the wonderful news about the stock market, but none of the cautionary language about the high valuation, and drops the entire amount into a tech fund in December 1999.
We know what happens next.
Fast forward to this week. Again, the market has been enjoying a near unprecedented bull run with all major indices at record highs, and more up-days this past 6 weeks than anytime since the 1920's, an ominous comparison in and of itself. Price-earnings ratios might be more realistic compared to 1999, but most market historians and technicians are expecting some type of pull-back or correction one of these days. The fundamentals of the macroeconomic environment show a slowing US economy with an accelerating stock market. What gives? What advice do I give now? Is this 1999 all over again? Or worse, 1929? Where are these would-be investors when the valuations and technicals portend less irrational exuberance?
Scott Adams, the creator of the Dilbert cartoon and franchise, has written a book Way of the Weasel in which he covers many topics, but none as succinctly as personal finance. The wisdom is in the simplicity. Do these 9 things, and your personal finance concerns will be history:
Make a will
Pay off your credit cards
Get term life insurance if you have a family to support
Fund your 401k to the maximum
Fund your IRA to the maximum
Buy a house if you want to live in a house and can afford it
Put six months worth of expenses in a money-market account
Take whatever money is left over and invest 70% in a stock index fund and 30% in a bond fund through any discount broker and never touch it until retirement
If any of this confuses you, or you have something special going on (retirement, college planning, tax issues), hire a fee-based financial planner, not one who charges a percentage of your portfolio
Simple if not easy. Ignore financial pundits, market mavens and get-rich quick schemes. Sometimes the best advice comes from the strangest sources, but that doesn't detract from it's value.
Getting rich is just as savory if attained slowly, and with a few Dilbert jokes to brighten the journey. This is where the conversation begins.
