Category Archives: Investing Money

Is It Too Late To Get Back In?

080519_USEconomy1My Comments: This is a writer I’ve learned to enjoy over the past several months. I’ve used his articles before and I do so here again. He makes such good sense.

posted by Jeffrey Dow Jones July 17,2014 in Cognitive Concord

I get all sorts of questions from all sorts of different investors. As strange as it seems, this is one of the most common right now. Is it too late? Clearly the last bear market had a permanent effect on investor psychology. Nobody was asking this question in 2006 or 2007.

The question doesn’t always take this exact form. Frequently I hear, “Isn’t the market too expensive here?”, or, “The market can’t possibly keep going up, can it?” or its straightforward non-question variant, “I hate the market because it’s too expensive.”

Those are all different ways of talking about the same basic concept. The market has run a long way and investors have a new type of uncertainty about how much longer it can keep running.

Did I miss it?

Is it too late?

The simple answer is that, no, it’s not too late to get in. The market can keep running, and running, and running… and running.

Have you ever looked at a 100 year Dow chart? The trajectory is pretty clear. If you have a sufficiently long horizon and truly don’t care about picking tops or bottoms then now is as good a time to buy as any.

CONTINUE-READING

10-Year Investing Forecast: Takeaways for Advisors & Clients

investmentsMy Comments: When you look back ten years from now and wonder if this article came anywhere close to reality, you must remember that people are much happier with you if you estimate low returns and reality turns out to be high, rather than the other way around.

The charts are hard to understand, at least they are for me. The short takeaway for us is that what happened in 2008-09 was not within the 5% chance of happening. A meltdown like we had only happens once every 40 – 60 years. Another takeaway is the expected annual return for stocks from the people referenced. The high number is less than 6% annually. If they are right, then it behooves you to find advisors who give you at least a chance to make money in the inevitable down markets. Because the upmarkets are going to be relatively pathetic.

by Allan S. Roth / AUG 4, 2014

We all want to know how stocks and bonds will perform next year and beyond. Unfortunately, forecasts typically give very tight ranges of returns — and often merely predict the past. That may partly explain why investors continue the pattern of buying high and selling low.

The Vanguard Capital Markets Model, which forecasts both returns and risks over the next 10 years, takes a more useful approach. Your clients might prefer to have more precise forecasts, but uncertainty is a reality.

This forecast may help you both design a better portfolio and explain its rationale to your clients. I spoke with Roger Aliaga-Diaz, a principal and senior economist in Vanguard’s Investment Strategy Group, about the model and its implications for investors.

The Vanguard Capital Markets Model’s estimated returns are based on 10,000 simulations. This Monte Carlo analysis runs not only variations of returns but also ranges of risk (standard deviation) and correlations among asset classes.

The “Range of Returns” and “Asset Class Correlations” tables below shows the forecast returns and ranges and the historical correlations.
2014-08-13 Portfolio_roth_8_14
Portfolio_roth_8_14_2

EQUITY EXPECTATIONS

The first takeaway: Across the board, equities are expected to far outpace inflation, which is estimated at 2% annually. As the midpoint in the range of expectations, U.S. stocks are estimated to return 7.7% annually, while international stocks will yield 8.5%.

International stocks were seen as likely to outperform U.S. stocks for a few reasons, says Aliaga-Diaz: International valuations are more attractive and investors are compensated for taking on more risk. The annual standard deviation for international stocks was 20.9%, he points out, compared with 17.6% for U.S. stocks.

Within the bracket of outcomes that Vanguard believes have a 90% probability of occurring, U.S. stocks are shown as returning between a loss of 2% annually and a gain of a whopping 17.7%.

International stocks, by contrast, are seen as returning anywhere from a loss of 3.3% to a 21.1% annualized gain. To put this in perspective: In 10 years, a $1 million investment in U.S. stocks could be worth anywhere from $820,000 to $5.1 million. And the same investment in international stocks could be worth anywhere from $710,000 to $6.8 million.

Not only is that range of returns incredibly large — and only somewhat helpful from a planning perspective — but Vanguard says there is a 10% probability that the actual return will land outside of these ranges. And the downside risk is even worse after you factor in inflation.

The bottom line, of course, is that equity investing is risky — any forecast asserting otherwise would be claiming to have precise (and, needless to say, impossible) foreknowledge of economies, geopolitical events and investor sentiment. Nonetheless, equities offer the best expectation for high future returns.

Clients should also understand the impact of expenses and emotions on these returns. Aliaga-Diaz notes that the projections are geometric asset class returns and don’t include costs, and that even the lowest-cost index funds have some fees. And clients need to stay the course. Even with the least-costly index funds, investors’ returns underperform fund returns — an indication that investors time the market poorly.

FIXED-INCOME INVESTMENTS
Bonds, of course, have lower expected returns with less risk. Vanguard predicts the aggregate bond index of investment-grade bonds will return 2.5% annually — just half a percentage point more than inflation.

The range is much tighter than for stocks, with the 90% confidence interval showing returns ranging between 1.2% and 3.9% annually. Translated again, this suggests that a $1 million investment would be worth anywhere between $1.13 million and $1.47 million after a decade.

Note that these returns are far below those of the last decade, when declining rates were good for bonds. The narrow range of returns for bonds illustrates the role of high-quality bonds; they are more a store of money than a growth vehicle. Hedged international bonds offer similar expected returns and volatility.

Both of these bond classes have little credit risk; increasing credit risk increases correlation with stocks. For example, according to Morningstar, the average bond mutual fund — which is more likely to include bonds of lower credit quality — lost 8% in 2008 while Vanguard’s Total Bond ETF (BND), which follows the Barclays Capital Aggregate Bond Index, gained about 5.1%.

One more note on the inflation forecast: While 2% doesn’t sound unusual, extrapolating the downside shows about a 15% probability of sustained deflation over the next decade. Should that occur, the resulting scenario would be bad for stocks and great for longer-term U.S. government bonds.

CONSTRUCTING A PORTFOLIO
What matters most for clients, of course, are real (after inflation) returns. But to model the impact of inflation, we can’t just deduct two percentage points — because inflation impacts the returns of the asset classes.

The Vanguard model — run for a combination of U.S. and domestic equities, with various maturities of Treasuries and corporate fixed-income securities — looks at various weightings, from conservative to aggressive. The “Portfolio Implications: Real Returns” chart above shows the results.

Because high-quality bonds and equities have low correlation to each other, you’ll note the combined portfolios have less downside than the simple average of stocks and bonds.

The good news is that even a conservative portfolio of only 20% equities is forecast to outpace inflation by 1.7 percentage points annually. And it can still deliver a handsome return if results are high in the range of possible outcomes.

The takeaway here is that clients who have met their goals and have little need to take risk — even those who say they have a high risk tolerance — should consider a high concentration of high-quality bonds. (Think back to March 2009 and ask yourself if clients’ appetite for risk was in fact constant.)

A moderate portfolio of 60% equities is projected to outpace inflation by 4.2 percentage points annually. An aggressive portfolio of 80% stocks does deliver an expected return of 5.4% annually, while the downside is only an extra annualized 0.7 percentage point loss relative to the moderate portfolio.

While this might argue for taking on more risk, few aggressive investors want to stay the course when markets melt down. By my calculations, that portfolio declined by about 31% in 2008; that’s more than two standard deviations away from the mean and should happen only once every 40 years.

HOW MUCH RISK?

Just looking at the numbers, one could conclude that the 80% equity portfolio isn’t that much riskier than the 20% equity portfolio. In real terms, the outcome at the bottom fifth percentile for the 80% equity portfolio loses about 31% of spending power, while the fifth-percentile result for the 20% equity portfolio loses about 22%.

But don’t forget that a fifth-percentile outcome doesn’t measure the so-called black swan event that many said happened in 2008.

What this means for your clients is certainly open for interpretation. This is perhaps the most comprehensive economic model I have reviewed, but even so, it is important to remember that this is only one model.

Vanguard predicts a most likely case of a 5.7% real annual returns for stocks, but other experts are more cautious. In his new book, Rational Expectations, William J. Bernstein predicts a 2% real return for large-cap stocks and 3% for small-cap stocks over the next decade. Rob Arnott, chairman of Research Affiliates, forecasts a 3% real return over the next decade.

My opinion is that the future is even more uncertain than the ranges shown in the Vanguard model — especially on the downside. And as I see it, the world is a less predictable place than ever before.

Allan S. Roth, a Financial Planning contributing writer, is founder of the planning firm Wealth Logic in Colorado Springs, Colo. He also writes for CBS MoneyWatch.com and has taught investing at three universities. Follow him on Twitter at @dull_investing.

Wealth Managers Enlist Savvy Spy Software to Map Portfolios

profit-loss-riskMy Comments: I’ve been playing this financial game now for almost 40 years. And like so much in today’s world, it’s very different today than it was then. Technology forces us to embrace new thoughts and ways to deal with so much in life.

When it comes to managing your money, my role as an investment advisor and financial planner causes me to try and stay at least near the front of the line, otherwise I’ll get left behind.

Much better returns on investment (ROI) can be had today, hypothetically, than we could have hoped for 30 years ago. Do you remember when interest rates less than 10% were thought to be ridiculous? Now we are living with interest rates near zero and have been for some time. So how is it possible to predict that a 10% ROI is reasonable today?

The following article talks about people of wealth that no one around here fully understands. And so for the rest of us, it’s kind of meaningless. Except when they talk about technology and how far its come so that mere mortals like us can benefit. Having access to these technologies can make a huge difference in your life.

Posted by Steven Maimes, Contributor – on August 5th, 2014
NYT article by Quentin Hardy

Some of the engineers who used to help the Central Intelligence Agency solve problems have moved on to another challenge: determining the value of every conceivable investment in the world.

Five years ago, they started a company called Addepar, with the aim of providing clear and reliable information about the increasingly complex assets inside pensions, investment funds and family fortunes. In much the way spies diagram a communications network, Addepar filters and weighs the relationships among billions of dollars of holdings to figure out whether a portfolio is about to crash.

Professional wealth managers are going to be seeing a lot more of big data. Last spring, Addepar raised a substantial sum to take this mainstream, and although it is not the only one bringing big data to a portfolio statement, its cast of characters sets it apart.

“One of the most foundational questions in finance is ‘What do I own, and what is all of this worth?’ ” said Eric Poirier, the chief executive of Addepar. “ ‘What is my risk?’ turns out to be an almost intractable problem.”

Although the list of wealth managers who use Addepar is confidential, Mr. Poirier says it has already grown from people like Joe Lonsdale, its tech-billionaire founder, and Iconiq Capital, which manages some of the Facebook co-founder Mark Zuckerberg’s money, to include family offices, banks and investment managers at pension funds.

“In this state, some people are just getting wealthier,” said Joseph J. Piazza, chairman and chief executive of Robertson Stephens L.L.C., a San Francisco investment adviser that manages about $500 million using software from Addepar. Ten years ago, he said, “it might be a young entrepreneur with $50 million. Now it could be 10 times that, and they are thoughtful, bigger risk-takers.”

Investing used to be a relatively simple world of stocks, bonds and cash, with perhaps some real estate. But deregulation, globalization and computers have meant more choices. For a wealthy person, this could mean derivatives, private equity, venture capital, overseas markets and a host of other choices, like collectibles and Bitcoin.

And for all the computers on Wall Street’s trading floors, a lot of money management is surprisingly old-fashioned. Venture capitalists may invest in cutting-edge technology, but they sometimes still send out quarterly reports on paper. Financial custodians, which hold securities for people, often have custom-built computer systems. That makes it hard to compare a trade at one with a trade at another.

“The market is much more complicated than it used to be,” said David G. Tittsworth, president and chief executive of the Investment Adviser Association, a trade group of 550 registered firms. “The rich have bigger appetites for futures, commodities, alternative investments. There’s a lot of demand for helping them keep track of what their holdings actually are.”

Mr. Poirier, 32, a New Hampshire native who started a coding business at 14 before heading to Columbia University, worked on analyzing fixed-income products at Lehman Brothers from 2003 to 2006, before that Wall Street firm collapsed from mismanagement of its own risk. “Trying to figure out a yield, I’d work with a dozen different computer systems, with different interactions that people didn’t understand well,” he said.

He then took a job with Palantir Technologies, a company founded to enable military and intelligence agencies to make sense of disparate and incomplete data. He went on to build out Palantir’s commercial business, managing risk for things like JPMorgan Chase’s portfolio of subprime mortgages.

There were plenty of parallels between the two worlds, but instead of agencies, spies and eavesdropping satellites, finance has markets, investment advisers and portfolios. Both worlds are full of custom software, making each analysis of a data set unique. It is hard to get a single picture of anything like the truth.

Even a simple question like “How many shares of Apple do I own?” can be complicated, if some shares are held outright, some are inside a venture fund where the wealthy person is an investor and some are locked up in a company that Apple acquired.

Finance “was the same curve I encountered in the intelligence community,” Mr. Poirier said. “How do you make sense of diverse information from diverse sources, when the answer depends on who is asking the question?”

The parallel was also evident to Mr. Lonsdale, a Palantir co-founder. From an earlier stint at PayPal, he had millions in cash and on paper is a billionaire from his Palantir holdings. He also knew lots of other young people in tech who could not make sense of what was happening to their money. “Wealth management is designed for the 1950s, not this century,” he said.

Mr. Lonsdale left Palantir in 2009, starting Addepar with Jason Mirra, another Palantir employee, in 2009. “It didn’t make sense for Palantir to hire 20 or 30 people to work in an area like this,” Mr. Lonsdale said. Mr. Mirra is Addepar’s chief technical officer. Mr. Poirier joined in early 2013 and became chief executive later that year.

Besides Mr. Lonsdale, early investors in Addepar included Peter Thiel, a founder of both PayPal and Palantir. More money came from Palantir’s connections to hedge fund investors. Addepar’s $50 million funding round last May was led by David O. Sacks — another PayPal veteran, who sold a company called Yammer to Microsoft for $1.2 billion in 2012 — and Valor Equity Partners, a Chicago firm that has also invested in PayPal, SpaceX and Tesla Motors, among other companies.

Despite the pedigree, Mr. Lonsdale says Addepar, which has 109 employees, is not meant just as a tool for rich tech executives or family money. They are, he said, “just the early adopters.”
Karen White, Addepar’s president and chief operating officer, says a typical customer has investments at five to 15 banks, stockbrokers or other investment custodians.

Addepar charges based on how much data it is reviewing. Ms. White said Addepar’s service typically started at $50,000, but can go well over $1 million, depending on the money and investment variables involved.

And in much the way Palantir seeks to find common espionage themes, like social connections and bomb-making techniques, among its data sources, Mr. Lonsdale has sought to reduce financial information to a dozen discrete parts, like price changes and what percentage of something a person holds.

As a computer system learns the behavior of a certain asset, it begins to build a database of probable relationships, like what a bond market crisis might mean for European equities. “A lot of computer science, machine learning, can be applied to that,” Mr. Lonsdale said. “There are lessons from Palantir about how to do this.”

A number of other firms are also trying to map what everything in a diverse portfolio is worth. One of the largest, Advent Software, in 2011 paid $73 million for Black Diamond, a company that, like Addepar, uses cloud technology to increase its computing power and more easily draw from several databases at once.

“We’ve been chipping at the problem for 30 years,” said Peter Hess, Advent’s president and chief executive. “There is a lot more complexity now, and the modernization of expectations about how things should work is led by the new tech money. But because of Apple and Google, even my parents have expectations about how easy tech ought to be.”

3 Market Warning Signs Predict 20% Stock Tumble

My Comments: No need for any commentary from me. Just draw your own conclusions, and hope that if the author is right, you’ve talked with me about how to make money when everyone around you is losing theirs.

On the other hand, essentially this same argument was made last April and yet the crash has not happened. Yet.  Another example of the boogyman creating uncertainty. All you can do is be prepared, which I hope you are.

MarketWatch commentary by Mark Hulbert / August 3, 2014

Over the past 45 years, the stock market has lost more than 20% each time three warning signs flashed simultaneously.

After a selloff this past week dragged the Dow Jones Industrial Average into negative territory for the year, it’s worth noting that all three are flashing today.

The signals are excessive levels of bullish enthusiasm; significant overvaluation, based on measures like price/earnings ratios; and extreme divergences in the performances of different market sectors.

They have gone off in unison six times since 1970, according to Hayes Martin, president of Market Extremes, an investment consulting firm in New York whose research focus is major market turning points.

Bear in the air

The S&P 500’s average subsequent decline on those earlier occasions was 38%, with the smallest drop at 22%. A bear market is considered a selloff of at least 20%, with bull markets defined as rallies of at least 20%.

In fact, no bear market has occurred without these three signs flashing at the same time. Once they do, the average length of time to the beginning of a decline is about one month, according to Martin.

The first two of these three market indicators — an overabundance of bulls and overvaluation of stocks — have been present for several months. Back in December, for example, the percentage of advisers who described themselves as bullish rose above 60%, a level Investors Intelligence, an investment service, considers “danger territory.” Its latest reading, as of Wednesday, was 56%.

Also beginning late last year, the price/earnings ratio for the Russell 2000 index of smaller-cap stocks, after excluding negative earnings, rose to its highest level since the benchmark was created in 1984 — higher even than at the October 2007 bull-market high or the March 2000 top of the Internet bubble.

Three strikes and you’re out

The third of Martin’s trio of bearish omens emerged just recently, which is why in late July he advised clients to sell stocks and hold cash. That’s when the fraction of stocks participating in the bull market, which already had been slipping, declined markedly.

One measure of this waning participation is the percentage of stocks trading above an average of their prices over the previous four weeks. Among stocks listed on the New York Stock Exchange, this proportion fell from 82% at the beginning of July to just 50% on the day the S&P 500 hit its all-time high.

It was one of “the sharpest breakdowns in market breadth that I’ve ever seen in so short a period of time,” Martin says.

Another sign of diverging market sectors: When the S&P 500 hit its closing high on July 24, it was ahead 1.4% for the month, in contrast to a 3.1% decline for the Russell 2000.

Expect up to a 20% S&P 500 decline

How big of a decline is likely? Martin’s best guess is a loss of between 13% and 20% for the S&P 500, less than the 38% average decline following past occasions when his triad of unfavorable indicators was present. The reason? He expects the Federal Reserve to quickly “step in to provide extreme liquidity to blunt the decline.”

To be sure, Martin focuses on a small sample, which makes it difficult to draw robust statistical conclusions. But David Aronson, a former finance professor at Baruch College in New York who now runs a website that makes complex statistical tests available to investors, says that this limitation is unavoidable when focusing on past market tops, since “by definition it will involve a small sample.”

He says that he has closely analyzed Martin’s research and takes his forecast of a market drop “very seriously.”

Martin says that expanding his sample isn’t possible because most of his current indicators didn’t exist before the 1970s and “the comparative math gets very unreliable.” But he says he does use several statistical techniques for dealing with small samples that increase his confidence in the conclusions that his research draws.

Russell 2000 could take 30% hit

He says stocks with smaller market capitalizations will be the hardest hit in the decline he is anticipating, in part because they currently are so overvalued. He forecasts that the Russell 2000 will fall by as much as 30%.

Also among the hardest-hit stocks during a decline will be those with the highest “betas” — that is, those with the most pronounced historical tendencies to rise or fall by more than the overall market. Martin singles out semiconductors in particular — and technology stocks generally — as high-beta sectors.

He predicts that blue-chip stocks, particularly those that pay a large dividend, will lose the least in any decline. One exchange-traded fund that invests in such stocks is iShares Select Dividend, which charges annual expenses of 0.40%, or $40 per $10,000 invested.

The average dividend yield of the stocks the fund owns is 3%; that yield is calculated by dividing a company’s annual dividend by its stock price. Though the fund’s yield is higher than the S&P 500’s 2% yield, it nevertheless pursues a defensive strategy. It invests in the highest-dividend-paying blue-chip stocks only after excluding firms whose five-year dividend growth rate is negative, those whose dividends as a percentage of earnings per share exceed 60% and those whose average daily trading volume is less than 200,000 shares.

The consumer-staples sector has also held up relatively well during past declines. The Consumer Staples Select Sector SPDR ETF currently has a dividend yield of 2.5% and an annual expense ratio of 0.16%.

If the broad market’s loss is in the 13%-to-20% range that Martin anticipates, and you have a large amount of unrealized capital gains in your taxable portfolio, you could lose in taxes what you gain by selling to sidestep the decline. But the larger losses he anticipates for smaller-cap stocks could be big enough to justify selling and paying the taxes on your gains.

THOUGHT FOR THE WEEK – July 30, 2014

house and pigMy Comments: I’m involved in a philosophical conflict these days between those on one side who believe there is a universal truth that says investment skill trumps traditional permanent life insurance every time.

On the other side is someone who believes permanent life insurance trumps traditional investment methodologies. They argue vehemently that permanent life insurance will result in a better outcome for everyone. Both sides of this argument have a built in bias that is difficult for the average consumer to recognize and compensate for.

I’m loath to attribute “universal truth” status to either position. Life insurance and credible investment strategies have roles to play in almost everyone’s life. It’s only when you fully understand a client’s thought process, value system, and where they are in life are you able to help them determine whether life insurance is appropriate, what kind to buy if it is, and how much coverage is enough.

Here is a thought from a trusted colleague with a valid perspective on this question.

By Gene A. Pastula, CFP

When compared to other investment options for liquid assets for medical emergencies, the creation of a large asset from small deposits (life insurance) is a most desirable alternative.

Those who say that life insurance is a bad investment are not relating to real life.

Since everyone dies, we know exactly what the end result of a life insurance program is going to be. Because we don’t know when any individual will die, we don’t know how efficient the program will be.

* Walt purchased a $1,000,000 life insurance policy at the age of 47 and died from a brain tumor at age 53. Does anyone disagree that, no matter what Walt paid for it, he made a good “investment” buying that policy… an IRR of about 92% per year?

* Sharon purchased the same kind of policy at the age of 63 and died at the age of 93. After 30 years of paying premiums… an IRR of about 4.5% per year. Should have put her money in a mutual fund. Who knew?

When you sell life insurance for a living, you must concentrate on the “need”. That is what all the critics of insurance focus on. How expensive is it, and do you really “neeeed” it? You will sell only to those clients to whom you can effectively point out that the individuals untimely death will leave a significant deficiency in the financial condition of those he/she leaves behind. Then you must be convincing, and good at motivating them to take action to “purchase” the policy so the money will be there “in case” they die.

On the other hand, if you are a financial planner or investment advisor you can clearly see the value in your clients’ portfolio and to their family of having a portion of their assets “invested” in a life insurance policy. And the way you can tell if it is a good value is to know when the insured will die. Only then can you calculate the rate of return. In most cases the tax free rate of return is about 4.5% if one dies at age 93 and much greater (8.5%/yr.) if you are lucky enough to die at 85 and EVEN GREATER (24%/yr.) if you are EVEN LUCKIER and die at 75… well, hopefully you get my point.

Now consider the risks of Critical, and Chronic Illness that (in many cases) occur before death. Just think of the rate of return on your money if you are lucky enough to have a heart attack or kidney failure or need a lung transplant after only 10 or 15 years of owning and paying for that policy. That is assuming your advisor was wise enough to make sure the insurance you were “investing in” contained an acceleration rider to access a portion of the death benefit while you are still alive and needed some big bucks to cover the cost of that lung transplant.

An additional comment from TK: Among my resources at Florida Wealth Advisors, LLC, are people like Gene Pastula, and his company, Westland Financial Services. They believe in the value of committing a portion of their clients’ portfolio to an insurance policy that creates large assets just at the time it is needed, no matter when that may be. And yet… if it is never needed, the heirs will think of them as a hero for doing such a good job of protecting the portfolio. Life does not move in a straight line; it has ups and downs. Who knows what is going to happen next. Whatever it is, a major health issue could cause great damage to their portfolio just when it was about to make great gains in the upcoming bull market.

The Hangover

My Comments: The blogosphere and financial press is increasingly filled with questions and presumed answers about the amount of time since the last market correction. The focus of each writers attention is to suggest doom is imminent or doom is not imminent. Personally, I have no idea when the next crash will happen, just that sooner or later it will.

That being said, here are comments from one of the bright lights at one of the best well lit family of funds available to us. Draw your own conclusions, but if you agree with me that something ominous will happen before long, then talk to me about ways to limit your losses when it does happen.

by Scott Minerd July 24, 2014

The Fed’s not taking the punch bowl from the party, but investors should be wary of the hangover.

On a fall night in 1955, Federal Reserve Chairman William McChesney Martin stood before a group of New York investment bankers at the Waldorf Astoria Hotel and delivered what is now considered his famous “punch bowl” speech. It earned this label because Martin closed his eloquent talk by paraphrasing a writer who described the role of the Fed as being “in the position of the chaperone who has ordered the punch bowl removed just when the party was really warming up.”

Janet Yellen’s recent congressional testimony suggested that she does not subscribe to her predecessor’s temperance. While citing that valuations in certain sectors, such as high-yield or technology stocks, appeared “substantially stretched”, Yellen’s overall sentiment was clear: the Fed does not view the party as really warming up to the point that the punch bowl need be removed.

The excessive risk taking among investors lulled into complacency by an overly loose Fed is a powerful cocktail indeed; one that could produce a hangover in the form of volatility. Having said that, the Fed’s party can still go on for a long time. As I’ve said before, bull markets don’t die of old age, but because of an exogenous event or a policy mistake.

In his famous speech, Martin preceded his punchbowl comment by saying, on behalf of the Fed, “…precautionary action to prevent inflationary excesses is bound to have some onerous effects…” The flipside – a lack of precautionary action by the Fed – will have its own set of consequences in time. It is very difficult to say when exactly these will happen, but near-term indicators suggest the hangover won’t hit while you’re relaxing at the beach this summer.

Chart of the Week
Equity Markets: The Bigger they Come the Harder they Fall
The S&P500 has now gone nearly 800 days since a correction of more than 10 percent – the “meaningful” level for many analysts. The more extended the market becomes, the larger the eventual decline may be. Over the last 50 years, the longer the time between market corrections, the steeper the drop once the correction does occur.

EX-RECESSION S&P500 CORRECTIONS (>10% DECLINE) SINCE 1962

These 3 Charts Show The Amazing Power Of Compound Interest

retirement_roadMy Comments: Math was not and remains not one of my strengths. But I understand this part. If you are younger than I am and have an opportunity to put some money to work, you need to push the envelope and make it happen.

Whether you do or not, the price you pay for stuff with your money will also increase via the same compounding mechanism, so it behooves you to make sure your savings are growing at least as fast and preferably, much faster. Remember, money is only useful if you can use it to buy the things you need and the things you want.

By Libby Kane July 12, 2014

One of the biggest financial advantages out there is something anyone can access by opening a simple retirement account: compound interest.

Retirement accounts such as 401(k)s and Roth IRAs aren’t just savings accounts — they’re actively invested, and therefore have the potential to make the most of this benefit.

As Business Insider‘s Sam Ro explains, “Compound interest occurs when the interest that accrues to an amount of money in turn accrues interest itself.”

So why is that so important?

The charts below will show you the incredible impact compound interest has on your savings and why starting to save in your 20s is one of the best things you can do.

1. Compound interest is incredibly powerful.

The chart below from JP Morgan shows how one saver (Susan) who invests for only 10 years early in her career, ends up with more wealth than another saver (Bill), who saves for 30 years later in life.

By starting early, Susan was able to better take advantage of compound interest.

Chris, the third saver profiled, is the ideal: He contributed steadily for his entire career.

chart-jp-morgan-retirement-1

2. When you start saving outweighs how much you save.

This chart by Business Insider’s Andy Kiersz also emphasizes the impact of compound interest, and the importance of starting early. Saver Emily, represented by the blue line, starts saving the exact same amount as Dave (the red line), but begins 10 years earlier. Ultimately, she contributes around 33% more than Dave over the course of her career, but ends up with almost twice as much wealth as he does.

saving-at-25-vs-saving-at-35-continued-saving-prettier-1

3. It can even make you a millionaire.
Compound interest can get you pretty far. In fact, Business Insider calculated — based on your current age and a 6% return rate — how much you need to be saving per month in order to reach $1 million by age 65. You can also see the calculations based on different rates of return.

monthly-savings-chart-new-1