Archive for Apr, 2012
Source: Wall Street Journal 4/27/12 and http://ycharts.com/
The past several weeks has shown some slight increase of those making claims for unemployment benefits, from 375,500 from 2 weeks ago to 381,750 last week. This is a 4 week rolling average that peaked at over 600,000 in 2009. In 2010 we saw a decrease from nearly 500,000 early in the year to the low 400,000′s, in 2011 the claims were in the low to mid 400,000′s but since October of 2011 they have been below 400,000. This uptick since the end of March may illustrate slow economic growth, but probably not a double-dip recession like we saw hit the United Kingdom this month. To put this into historical perspective, the lowest we have seen this rate in 10 years is 282,000 in January of 2006, and the earlier part of the last decade we saw the average similar to what we are seeing now.
Source: Wall Street Journal 4/24/12
Reported yesterday that earlier estimates were 24 years, but now 21 years. If reserves for disability benefits were combined with retirement, reserves would be exhausted by 2033. Social Security and Medicare account for 1/3 of the federal budget. If the trust funds are not replenished, then benefits would be reduced by 25%.
Everyone should be concerned about this, even those that are already retired, since people are living much longer these days.
|Year of birth||Full retirement age (FRA)||Your Age this Year||Years to retirement FRA||Year of Retirement||Age Soc Sec Reserves Exhausted (2033) & benefits could be reduced|
|1955||66 & 2 m||57||9||2021||78|
|1956||66 & 4||56||10||2022||77|
|1957||66 & 6 m||55||11||2023||76|
|1958||66 & 8 m||54||12||2024||75|
|1959||66 & 10 m||53||13||2025||74|
A lot of people wonder if Social Security will actually go broke, and not be able to provide them with benefits. I am doubtful this will happen, given that seniors represent the largest voting block, so politicians are always very concerned about their votes. We will have to see either rapid growth in GDP or most likely increased taxes, reduced benefits, lower or no the inflation increases and older Full Retirement Ages for younger workers, to secure these benefits. Due to the recession, declined stock portfolios, many people have much lower retirement savings and will be depending upon Social Security for a major part of their retirement. This issue is going to continue to be a hot one.
Interesting article in the Wall Street Journal comparing delaying taking early retirement income benefits (age 62) to Full Retirement Age (FRA) or age 70. Several articles recently have covered this topic from the perspective of the benefits delay in the first stage increases them about 6% and then 8% for the second delay (from FRA to age 70). This article How to Beat Government Bonds – Using Social Security may be worth reading if you are near age 62.
Great Article I stumbled upon about the History of Retirement from the New York Times. Excerpts:
- IN THE BEGINNING
In the beginning, there was no retirement. There were no old people. In the Stone Age, everyone was fully employed until age 20, by which time nearly everyone was dead, usually of unnatural causes. Any early man who lived long enough to develop crow’s-feet was either worshiped or eaten as a sign of respect.
- ELDER HOSTILE
As the centuries passed, the elderly population increased. By early medieval times, their numbers had reached critical mass. It was no longer just a matter of respecting the occasional white-bearded patriarch. Old people were everywhere, giving advice, repeating themselves, complaining about rheumatism, trying to help, getting in the way and making younger people feel guilty. Plus they tended to hang on to their wealth and property. This made them very unpopular with their middle-aged sons, who were driven to earn their inheritances the old-fashioned way, by committing patricide. Even as late as the mid-18th century, there was a spate of such killings in France. In 1882, Anthony Trollope wrote a futuristic novel, ”The Fixed Period,” in which he foresaw retiring large numbers of old men to a place where they would be encouraged to enjoy a year of contemplation, followed by a peaceful chloroforming. But this was hardly an acceptable long-term strategy.
- COTTON MATHER’S BIG IDEA
Old people hanging on to their worldly goods also threatened the social and economic fabric of Colonial America. Celebrated Puritan zealot Cotton Mather is generally credited with stimulating the national appetite for witch trials. But few people realize that he was among the first to try to force the elderly to retire. ”Be so wise as to disappear of your own Accord,” he exhorted them. ”Be glad of dismission. . . . Be pleased with the Retirement which you are dismissed into.” Nobody listened.
- BISMARCK INVENTS RETIREMENT
In 1883, Chancellor Otto Von Bismarck of Germany had a problem. Marxists were threatening to take control of Europe. To help his countrymen resist their blandishments, Bismarck announced that he would pay a pension to any nonworking German over age 65. Bismarck was no dummy. Hardly anyone lived to be 65 at the time, given that penicillin would not be available for another half century. Bismarck not only co-opted the Marxists, but set the arbitrary world standard for the exact year at which old age begins and established the precedent that government should pay people for growing old.
- PASTURE-IZING THE ELDERLY
It was the world-renowned physician William Osler who laid the scientific foundations that, when combined with a compelling economic rationale, would eventually make retirement acceptable. In his 1905 valedictory address at the Johns Hopkins Hospital, where he had been physician-in-chief, Osler said it was a matter of fact that the years between 25 and 40 in a worker’s career are the ”15 golden years of plenty.” FACTORY REJECTS
Retirement came in very handy in the United States, where large numbers of aging factory workers were wandering around the Industrial Revolution, dropping things into the works, slowing down assembly lines, taking too many personal days and usurping the places of younger, more productive men with families to support. It was one thing when an occasional superannuated farmer leaned on his hoe in an agrarian culture — a few bales of hay more or less didn’t matter. But it was quite another when lots of old people caused great unemployment among younger workers by refusing to retire. The Great Depression made the situation even worse. It was a Darwinian sacrificial moment. Retirement was a necessary adaptation and everybody knew it, but the old guys were not going quietly. The toughest among them refused to quit, even when plant managers turned up the conveyor belts to Chaplinesque speeds.
- THE BIG PAYOFF
By 1935, it became evident that the only way to get old people to stop working for pay was to pay them enough to stop working. A Californian, Francis Townsend, initiated a popular movement by proposing mandatory retirement at age 60. In exchange, the Government would pay pensions of up to $200 a month, an amount equivalent at the time to a full salary for a middle-income worker. Horrified at the prospect of Townsend’s radical generosity, President Franklin D. Roosevelt proposed the Social Security Act of 1935, which made workers pay for their own old-age insurance.
- THE GREAT MIGRATION
The opposite of work turned out to be play. The rich discovered leisure first, but by 1910 Florida became accessible to the middle class. Retirement communities, where older people did not have to see younger people working, began to appear in the 1920′s and 30′s. The number of golf courses in the United States tripled between 1921 and 1930.
- SENIORS ARE BORN
The publication in 1955 of Senior Citizen magazine was the first widespread use of the euphemism that, while intending to reconfer respect, instead made a senior citizen sound like an over-decorated captain in ”The Pirates of Penzance.”
My additions to this article
- RETIREMENT 1950’s – 2000
Seniors are able to retire on Social Security and defined benefit pension plans from working for the same company for decades or working in a government job.
- RETIREMENT 2000 -
Fewer people today have defined benefit pension plans, either because companies have done away with them, or people don’t work for any one employer for a long time. Social Security is becoming one of the major sources of retirement income. With the growth of defined contribution retirement plans like 401(k)s and IRAs, more retirees are living on their savings.
- RETIREMENT 2008 -
The Great Recession has put people in precarious financial conditions; many people have insufficient retirement investments, causing them to delay retiring, or planning for an earned income component to their retirement, through self employment, part- or full-time employment.
The Ohio Department of Jobs and Family Services (ODJFS) is notifying current and past recipients of unemployment compensation, the regular requirement to apply for 2 jobs per week is staying the same, except that recipients of unemployment compensation must keep a written record of actions taken including employer’s name and address, method of applying for work, type of work sought, dates of contact and the outcome of each contact. When they file each week for their weekly check, there will be new fields on the weekly claim form requiring entry of weekly job contact information. The Agency is informing unemployment compensation recipients that they are now conducting more frequent audits, and the written records you are required to keep may have to be submitted.
Merriam-Webster named Austerity as the word of the year in 2010, but these days it isn’t a word we use often. Dictionary.com defines it as 1. austere quality; severity of manner, life, etc.; sternness. 2. Usually, austerities. ascetic practices: austerities of monastery life. 3. strict economy. I like the definition of Financial Austerity from Wikipedia: is a policy of deficit-cutting, lower spending, and a reduction in the amount of benefits and public services provided.
Family austerity: change in fiscal policy of a family to substantially reduce spending in response to: 1. deficit spending (spending more than one earns), 2. excessive debt, 3. unfortunate circumstances (e.g., job loss, investment reduction), 4. negative economic factors (increase costs of food and gasoline), in an effort to ultimately avoid bankruptcy, lower financial stress, re-pay all non-mortgage debt, build wealth and give. The non-financial consequences of austerity are enjoying less wants, but enjoying maturity, more quality time with good friends and family and spiritual growth.
Unscientific numerical and graphical result I imagine would look something like the following, the percentages could be adjusted according to severity of deficit and mathematical proximity of bankruptcy:
75% Reduction in expenses
- Entertainment such as eating out, movies and spectator events
- Vacations and travel
- Extra children’s activities
- Regular new clothing
75% Increase in investments
- Debt reduction
- Possible mortgage or car loan reduction through downsize or refinance
100% time increase for activities
- Budgeting and expense tracking
- Spousal financial meetings
- No/low-cost family activities
- Introspection and spiritual pursuits
- Taking financial courses and reading financial books
- Receiving counsel
100% increase in personal growth
- Maturity & personal growth
- More joy, happiness and contentment
- Closer family relationships
- Financial skills passed on to children
If you charted this on graph it might look something like:
March unemployment rate dropped to 8.2% from 8.3%, a three-year low. Economists were not excited, since the economy added fewer than 200,000 jobs, indicating that the drop in rate may be attributed to those out of work for a long time and are not actively seeking employment.
My article entitled The Asset Allocation Style of Investing, highlighted this method of investing made popular from the study by Garry P. Brinson, Brian D. Singer, and Gilbert L. Beebower that found that over 91% of long-term portfolio performance is derived from the decisions made regarding asset allocation, and not market timing or security selection.
In that article I compared 5 fictitious model portfolios to help demonstrate different risk levels: very conservative ‘Volvo portfolio’, conservative ‘Lexus portfolio’, moderate ‘Acura portfolio’, aggressive ‘BMW portfolio’, and lastly the very aggressive ‘Porsche’ model portfolios – each investing in a different mixture of cash, bonds and stock, as well as different allocations of large, mid and small cap stock and foreign stocks.
The chart below provides historical rates of return for each asset allocation model from the article, based upon the respective indices. Investors should take into consideration expenses and timing and have a healthy historical perspective.
The Expense Factor
The table below compares the GROSS rates of return that you would have earned in any of these portfolios if you invested in index funds that held investments identical to the index. Gross rates of return are before any expenses, such as:
* Mutual fund management fees and expenses
* Transaction costs
* Financial planner’s management fee
In order to have earned these rates of return, you would have had to invest at the same precise time of the time period represented. Fluctuations in the market can make a drastic difference in your actual rate of return, so if you invested a lump sum of money on a day that the market was down or up, or you invested each month (perhaps using dollar-cost-averaging), you may and will experience quite a bit different results than illustrated here.
Historical Perspective of Indexing
Index fund investing (passive) has been popular because people hear in the media frequently that a majority of actively managed mutual funds do not consistently beat their respective index.
Actively managed mutual funds usually have higher expenses, thus making it more challenging for them to out perform their passive brethren. However, investors may want to consider looking for mutual funds that beat the indexes (net of expenses), they might even find some that have a lower risk (volatility) than their index.
The preference to invest in index funds is a fairly recent phenomenon. Now you can even invest in ETFs or exchange traded funds, a hybrid of index investing that has emerged in the last several years. The charts below illustrate returns all the way back to 30 years, however index funds and ETF’s didn’t exist for each of the indexes used to make these calculations back that far.
Past Performance an Indication of Future Performance?
Anyone who as ever glanced at any financial product advertising or literature will see “Past results are not an indication of future performance” pasted all over the place. This sentence is required by the security industry’s regulating authorities and it is very true. However in order to make intelligent decisions, historical information is very useful for comparison purposes, in addition to a lot of other financial information including your own personal financial plan.
The indexes used to compile the historical rates of return are below. Keep in mind there are dozens of different indices. These ones many feel most closely represent the benchmark for each category. There is some differing of opinion in the investment community as to the best indices that should be used for benchmarking.
* Cash – Money Market (3-month CD
* Intermediate Long Bond – Lehman Bros Aggregate Bond
* Large Cap Value — S&P 500
* Mid Cap — Russell Mid-Cap Index
* Small Cap – Russell 2000
* International Equity – MSCI EAFE Equity Index.
|Historical Rates of Return as of 2/29/2012|
|Model Type||Very Conservative||Conservative||Moderate||Aggressive||Very Aggressive|
If you do your own investing – active or passive or hire someone to invest for you, it is prudent to make sure that you are doing as good as the benchmark. The benchmark is a minimum expectation of rate-of-return that you should be achieving. It is a way to hold yourself or your investment advisor accountable. It is important that you know why your investments are either not doing as well or much better than the benchmark. Either could be cause of concern: it could be merely a timing issue or it could be because your advisor made a mistake or is not doing their job. It is important that you are in the know and asking the right questions, and getting the right answers.
Asset allocation investors do not just invest in funds similar to the S&P 500 or the DOW (the most common benchmarks), therefore they should compare their results to aggregated benchmarks that include indices that closely match their allocations.
There are four ways to invest money, and the most boring way works best for most people: Asset Allocation.
The other three ways to invest: strategic asset allocation, market timing or picking stocks are more sexy. Next time investing comes up at a cocktail party you will be sure to hear someone touting their get rich quick hot stock. When interest rates soar, or stocks drop you may even hear someone brag about how they got in or out at just the right time, or used some type of ‘option’ strategy and made a bundle. You will see people interested in these types of conversations, because many people’s investment portfolios have not performed well.
Most people are not good at picking stocks, even with the internet and greater access to information than ever, there are too many stocks and too little information about each one – and it gets outdated quickly. People are emotional. Even if they pick good ones, they often sell them at the wrong time, because their fears overtake their ability to objectively make decisions.
Market timing always becomes popular when the stock market drops, and people see their account values dropping as they are now. No one has consistently shown the ability to predict markets or securities. To win you have to have 60% accuracy just to cover the losses caused by mistakes of the other 40% – because of transaction fees and taxes. You have to be correct in all four decisions: what/when to buy and when/what to sell.
In the last decade of poor stocked market returns, some investment advisers have questioned the validity of asset allocation, and have come out with hybrids of it, or some kind of strategic approach using various computer driven modeling tracking numerous factors. Some of these approaches look promising, and they should be looked at, but they don’t yet have long term track records.
You are sure to put a damper on a party conversation by mentioning ‘asset allocation.’
What is asset allocation? It is the method of investing based on the study by Gary P. Brinson, Brian D. Singer, and Gilbert L. Beebower in 1991. They found that over 91% of long-term portfolio performance is derived from the decisions made regarding asset allocation, and not market timing or security selection. This traditional buy and hold method is boring – but it works.
When you asset allocate you invest a portion of your money into each of the major asset classes: Cash, Bonds, and Stocks. When it comes to your stock portion you split or allocate it into Large Cap, Mid Cap, Small Cap and Foreign Stock.
If you are conservative you allocate a greater percentage into cash and bonds and large cap stock. If you are aggressive your allocation has less cash and bond and more mid, small and foreign stock. Aggressive allocations will probably have a better rate of return over time than going conservative, but will be the most volatile, meaning your values will fluctuate up and down more. You can pick a model like the ones below or take a quiz utilizing software to help identify your tolerance for handling risk.
I have designed 5 fictitious model portfolios to help demonstrate different risk levels. I call the most conservative the ‘Volvo portfolio’. The ‘Volvo portfolio’ fits you because you want something solid (good rate of return) and protection from market risk. The ‘Lexus portfolio’ is for those you are conservative but want more speed (little better rate of return), but you still like a smooth ride. The ‘Acura portfolio’ fits those who want a little more sport (higher rate of return), and are willing to encounter a little more risk. Riskier investors may choose the ‘BMW portfolio’, to get great performance (higher rate of return), and because they can tolerate tricky roads (a lot of market fluctuation). Lastly, the ‘Porsche is for those who want maximum performance, and whose nerves can tolerate the riskiest of roads. This fictitious demonstration was done with premium cars, because investing with asset allocation over the very long term will hopefully position you to be able to eventually afford one. In conclusion, neither of these asset allocation models would be considered at the upper end of the high risk continuum. As you progress from conservative to aggressive asset allocation models, you increase your probability for volatility and rate of return, but not by wide margins over the long term.