Tag Archives: financial advice

Investors Avoiding Both Stocks And Bonds

080519_USEconomy1My Thoughts: Many of us are concerned about our investments. We don’t want our money under the mattress; we don’t want it all in money markets; we know bonds are going to get hammered when the Fed decides to start raising interest rates; and we know that over the past three months, the stock market has gyrated wildly, with a mostly downward trend.

Unfortunately, this background article won’t help you very much. But it’s not too long.

By Conrad de Aenlle on Nov 5, 2015

What do fund flows tell us about investor behavior before, during and after the third-quarter dive in stocks and the direction of markets from here? Even though raw numbers on money moving in and out of funds should be reassuringly concrete, they leave a lot to interpretation.

The trepidation displayed by the stock market may have begun in mid-August and reached a crescendo soon after, but Louise Yamada, a highly regarded technical analyst who heads Louise Yamada Technical Research Advisors, contends that distress had been building throughout the third quarter. In the September edition of her monthly newsletter, Technical Perspectives, she pointed to data from the Investment Company Institute, a fund industry group, showing that owners of stock and bond mutual funds alike made net withdrawals in July and the first three weeks of August.

“Their observation is that usually stock withdrawals move into bond funds,” Yamada wrote, “but withdrawals from both [are] a sign of nervous investors. This pattern has not been seen since the fall of 2008, a statistic worth noting.”

But a lot has changed in the business since then. Mutual funds are no longer the only game in town, or at least the one that the great majority of investors play. Exchange-traded funds get a far bigger piece of the action today than just a few years ago, and Todd Rosenbluth, director of fund research at S&P Capital IQ, noted in a recent report that as money was leaving mutual funds of all sorts in and around the August swoon, it was being soaked up by ETFs.

During the two weeks through Sept. 2, a period that included the worst of the stock market’s decline and a big rebound, about $1.1 billion more was yanked from diversified domestic stock mutual funds than was put in, Rosenbluth said, citing Lipper data.

ETF flows tracked market action more closely. During the first of those two weeks, a net $5 billion came out of diversified stock ETFs, and the following week a net $7.8 billion was added to them. As for bond funds, mutual funds saw net outflows of about $2.5 billion during the two weeks, while ETFs had twice as much in inflows.

There probably wasn’t much overlap between the buyers and sellers of mutual funds and of ETFs during the market upheaval. In a conversation about his report, Rosenbluth said that mom-and-pop investors were probably doing the bulk of mutual fund dealing, while institutions were the main force behind the ETF flows.

The net effect, in his view, is an acceleration of the longstanding trend away from mutual funds and toward ETFs, as the market decline emphasized an edge — namely lower costs and correspondingly higher returns — that ETFs have over mutual funds, just when investors were looking for any edge they could get.

“I think we have seen an ongoing shift to passive products that the correction has amplified,” he said. “People don’t want to pay up to lose money.”

That may explain the preference for ETFs, but a look at fund flows through August and September suggests that the trend that Yamada inferred from mutual-fund flows and found worrisome — the shunning of both stocks and bonds before the plunge — may be lingering. Perhaps more ominous, the tendency exists even when ETFs are added into the mix.

Flows into domestic stock ETFs in September, about $7 billion, were just enough to negate the outflows from stock mutual funds, according to Morningstar, although outflows from stock mutual funds in August were double the flows into ETFs. As for bond portfolios, it was no contest. Over the two months, three times as much money departed mutual funds as entered ETFs.

Morningstar found six months over the last decade when investors had net withdrawals from stock mutual funds and ETFs combined and from bond funds, too, with August being the sixth. Two of the other five, August 2013 and June 2006, coincided with minor blips in long bull markets.

The other three — June 2015, August 2011 and October 2008, the latter period being the one Yamada alluded to — occurred just before or in the middle of corrections or bear markets. Anyone who saw fund investors’ none-of-the-above attitude as a contrarian “buy” signal for stocks turned out to have jumped in too early.

Buyers who jumped into stocks at the start of October enjoyed an excellent month that could be the start of a long rally. But if the history of those three months repeats, it could turn out to be the calm between two storms.

9 Charts Showing Big Global Slowdown Is On Its Way

money mazeMy Comments: There are two messages here. The first is a global recession is most likely about to happen. The second is the published report has 49 pages with dozens of charts. If looking at charts makes you happy, you will be thrilled.

Will Martin Nov. 14, 2015

The Organization for Economic Cooperation and Development released its twice yearly Economic Outlook on Monday, and it makes for pretty gloomy reading. Angel Gurria, the OECD’s secretary general spoke in Paris on Monday morning, and he reflected the OECD’s generally pessimistic tone.
“The slowdown in global trade and the continuing weakness in investment are deeply concerning. Robust trade and investment and stronger global growth should go hand in hand,” said Gurria.

Alongside the Economic Outlook, the OECD releases a huge amount of information, including a boat load of charts and graphs, some of which show just why the organization thinks that the current economic situation is so worrying.

Source article: http://www.businessinsider.com/economic-outlook-2015-key-charts-from-the-oecd-2015-11?op=1

Very Strong Jobs Numbers Underpinned By Wages

Bruegel-village-sceneMy Comments: Politicians of all stripes consider employment numbers relevant, and well they should. Right now we have the lowest unemployment numbers in this country that we’ve seen for a long time. And it’s all because of that idiot in the White House.

This came from a group called Bespoke Investment Group, a name I am not familiar with. Also, there are several charts that I’ve chosen not to replicate here. But if you want to see them, here’s the URL where I found this article: http://seekingalpha.com/article/3662136-very-strong-jobs-numbers-underpinned-by-wages?ifp=0

Nov. 8, 2015

Friday’s Employment Situation Report delivered an extremely strong Nonfarm Payrolls print (+271,000 vs +185,000 expected and 142,000 previous, revised down to +135,000). While that headline number is extremely strong, the “guts” of the report were even stronger. Unemployment fell to 5.0%, the U6 measure of broader unemployment came in at 9.8% versus 9.9% expected and 10.0% previous, and the labor force participation rate held steady.

But the real story, in our view, was wages, which were boosted in part by a recovery from an extremely weak reading in September. Even still, the gains were nothing short of breathtaking. Below we show MoM annualized wage changes, along with the level for each industry.

As shown, there were broad-based wage gains across the economy in October, with Construction leading the way, up 18.2% MoM annualized. Other “low pre-requisite” industries also had steady gains, with Leisure and Hospitality printing a steady +4.82% MoM annualized level. The strength wasn’t universal (notable weakness in Manufacturing, Retail Trade, and Other Services) but overall this was a solid wage print. Looking at Construction, below we show the MoM annualized Construction Production and Nonsupervisory wage series, MoM annualized. This was the second-best print for that series in over 20 years, eclipsing one of the worst prints in years last month.

To get an idea of the broader trend in average hourly earnings, we show the YoY change in AHE for the last 10 years. Total private wages are +2.48%, while production and nonsupervisory earnings are +2.22%. The former is the best print of the recovery and a notable move above the range that had prevailed since the recovery began. Production and Nonsupervisory wages are still underperforming, but the spread between the two YoY series moved from 0.32% in July to 0.26% this month, notable progress.

WHEN You Retire Makes a Difference

rolling-diceMy Comments: If you accept that life is finite, then luck and a roll of the dice has a lot to do with how your life will play out financially.

Saving and investing for retirement over many years is a prudent strategy. Time is mostly on your side and the compounding of returns can help to potentially increase your nest egg.

The Return on Investment (ROI) on stocks, bonds and cash vary from year-to-year, sometimes greatly. You’ll see long and short periods where the ROI is mostly positive or mostly negative. But over time returns tend to average out, regardless of the order in which they appear. By saving regularly and staying invested through up and down markets during your working years, you shouldn’t be overly concerned about the return you’re getting right now.

The problem is that once you stop saving and start taking income from your retirement nest egg, the return your portfolio generates is now very important and can be the subject of great concern. If you take yearly 5% withdrawals from a portfolio that is appreciating each year at a rate higher than 5%, the withdrawal will have little effect on the remaining balance. Conversely, if you take 5% withdrawals from a portfolio that is depreciating in value the results might be devastating.

The experts call this “Sequence of Returns Risk” and it means that the order in which poor and good market returns occur after the accumulation stage ends and the distribution stage from your portfolio begins will have a significant impact on how long your retirement assets will last.

Here is a hypothetical example using historical returns that illustrates how sequence of returns risk could impact two identical retirement portfolios (See the table and chart below).

Mr. Smith retired in 1969 with $100,000 and Ms. Jones retired in 1979 with the same amount. Both invested in a mix of stocks and bonds, taking 5% per year initially, then increasing the percentage withdrawn each year to keep up with inflation. The ten year difference in their dates of retirement had a significant impact.

Mr. Smith experienced negative returns in four of the first ten years, as well as elevated inflation rates. Although his rate of return was higher, the combination of lower returns and high inflation caused the inflation adjusted exhaustion of his portfolio after just 15 years.

Ms. Jones on the other hand experienced negative returns in only two of the first ten years in retirement. Although she also experienced periods of higher inflation, timely positive market performance helped to grow her assets in the early years, and a strong bull market helped the assets continue to grow as she took income from the portfolio.

The main difference between these retirements was that Mr. Smith had the misfortune to retire at the wrong time. Notice the average rate of return or ROR for Mr. Smith was greater than that for Ms. Jones.
Sequence of Returns2The data is based on two 31-year periods ending on December 31, 1998 and 2008, respectively. Each portfolio assumes a first-year 5% withdrawal that was subsequently adjusted for actual inflation. Each portfolio also assumes a 60% stock/40%bond allocation, rebalanced annually. Stocks are represented by the S&P 500. The Standard & Poor?s 500 Index (S&P 500) is an unmanaged group of large company stocks. It is not possible to invest directly in an index. Bonds are represented by the annualized yields of long-term Treasuries (10+ years maturity). Inflation is represented by changes to the historical CPI. Past performance does not guarantee future results. This illustration does not account for any taxes or fees, and is not indicatives of any GIFL portfolio.

It is important to note that in these hypothetical examples, although one investor was more successful than the other, neither had a guaranteed income from their portfolio, and instead had to rely on the overall return of the market. Unlike with Social Security or a traditional pension, personal retirement savings in a 401(k) plan or an IRA account don’t automatically have a guaranteed income feature.

It is possible to continue to invest in the market and establish a guaranteed income stream using a variable annuity. The guarantee is backed by the claims-paying ability of the issuer, and does not apply to the investment performance or safety of the underlying portfolios. This approach allows you to establish and maintain the level of income necessary for required living expenses and allows you the opportunity to continue to grow your asset base when the market performs well.

When considering an annuity for use in an IRA or other tax-qualified retirement plan (i.e., 401(k), 403(b), 457), it is important to note that there is no additional tax deferral benefit, since these plans are already afforded tax-deferred status. Thus, an annuity should only be purchased in an IRA or qualified plan if some of the other features of the annuity are of value, such as access to specific portfolio choices, the ability to have guaranteed payments for life and other guaranteed benefits, and you are willing to incur any additional costs associated with the annuity to receive such benefits.

However, and this is a big however, only an insurance company can guarantee a lifetime income, and they are the only source of annuities. Understand first how you want to deal with risk, and then act accordingly.

Your Retirement Plan Could Be Seriously Flawed

rolling-diceMy Comments: I’ve been talking about retirement with clients for the past 30 years. From day one I’ve stressed that I have no idea what I’m having for supper tonight, much less how much money they will need 30 years from now.

We can make projections and predictions until the cows come home but it’s just a guessing game to help a client feel better about their future. The best scenario is when you know the critical questions to ask yourself, follow the priority you have assigned to the answers you get, and hope for the best.

Tim Van Pelt – September 30, 2015

My industry, the business of providing financial advice, should be ashamed of itself. We’re supposed to be professionals versed in the knowledge of investments, financial markets, retirement planning, and the mathematical fundamentals behind that subject matter.

We are regulated up the you-know-what. Yet, we are still allowed to provide you guidance and information that we know (or should know) with virtual certainty will be completely wrong, and we don’t tell you that.

Have you ever had one of those retirement projections done for you where a fancy software program spits out a 10-, 20-, or 30-page report full of neat-looking graphs and tables of your investments and ultimately comes to the conclusion that you will be “A-OK” in retirement?

I am going to show you today why those reports are likely more useful as fire starters than as guides for your retirement.

The problem lies in several factors:
1. modeling with averages rather than accounting for sequence of returns and actual volatility,
2. the use of average market returns that are too high,
3. advisors typing inputs into the software without understanding the mathematical principles and limitations behind the models, and
4. advisors not adequately communicating to you the “fine print” — i.e., the inherit limitations and flaws of the models.

Instead, you are presented with a fancy and professional-looking report that gets treated like gospel because of its appearance. (As a wise uncle used to tell me, “Appearance often matters more than reality in business.”)

More Market Mayhem On Its’ Way

My Comments: History does typically repeat itself. Whether its human frailty or the laws of physics, the past is usually a glimpse into the future. Cries of ‘this time it’s different’ usually prove to be false. It’s not what happens that has a critical effect on your financial future, it’s how you manage the inevitable. I’ve been at this for almost 40 years now, and while I’m far from perfect, there are ways to mitigate the risk.

26 Sep 2015 Richard Dyson

Earthquakes and volcanoes rarely strike once only to vanish. A number of smaller episodes precede and follow the main event.

The same appears true of market routs, where a series of dramatic falls cluster within a period of several weeks, or more often months, sometimes signalling an entire change in the market’s direction.

Black vertical lines in the chart, above, show the number of days per month in which the FTSE 100 index has fallen by more than 3% – from opening to close – in the past 20 years.

While falls of that magnitude often capture front-page headlines, they are relatively uncommon.

If all such falls over the past two decades were spread out evenly, they would occur on average every 78 trading days, or once a quarter, according to broker AJ Bell which processed the data for Telegraph Money.

But they rarely occur in isolation.

On only 12 occasions since 1995 has there been just a single day within a calendar month where the market fell by more than 3%. Instead the bad days clump around wider market events, usually global in origin.

The first cluster of lines marks the crises in the late 1990s beginning in Thailand and spreading across Asia and from there to Western markets.

The two biggest concentrations of falls – including single months where there were six and seven days in which the FTSE fell by more than 3% – came in the desperate years of 2003 and 2009.

The first marked the final end of the protracted sell-off of the technology bubble. The 2009 cluster marked the trough at the end of the financial crisis.

By contrast the correction suffered since last month’s “Black Monday” (August 24) has been comparatively minor.

If the past patterns of the data are to be repeated, further days of sharp sell-offs are to be expected in coming weeks.

Russ Mould, investment director at AJ Bell, said: “If anything, the story here is the comparative absence of turmoil in the past 18 months up to August.”

He points out that downward market movements are more abrupt. This means days of 3% falls far outnumber those where the market gained 3% or more. “Markets tend to rise serenely and lose ground quickly, which again is what can make bear markets such a shock.”

Preparing for opportunities

With further falls likely, investors are eyeing sectors where the greatest value is likely to emerge – and building cash reserve in preparation.

Based on a number of measures of value including price to earnings ratio, yield, and “Cape” – the cyclically adjusted p/e – Telegraph Money identifies European and emerging markets as “prepare to buy” areas, with commercial property, bonds and gold as sectors to trim back as a way of raising cash ahead of future falls.

5 Reasons the Fed Shouldn’t Raise Rates

080519_USEconomy1My Comments: You’ve already read my comments about the significance of interest rates. They are going to start going up; when is the big unknown.

By Akin Oyedele, September 9, 2015

Larry Summers is convinced the Federal Reserve will make a huge mistake if it raises interest rates next week.

Two weeks ago, Summers wrote in the Financial Times that a rate hike risked “tipping some part of the financial system into crisis.”

And in a blog post on Wednesday, the economist, who withdrew as a candidate for chair of the Federal Reserve Board, a job now held by Janet Yellen, followed up on this thinking, giving five reasons his argument against a rate hike was even stronger than it used to be.

Summers’ main points are:

  • The stock market chaos two weeks ago tightened financial conditions and created the equivalent of 25 basis points of a hike (this is the amount by which most think the Fed will raise rates if it does this month).
  • Employment growth has slowed down, and commodity prices have fallen. The Atlanta Fed’s gross-domestic-product tracking model, which nailed first- and second-quarter growth, is forecasting only 1.5% growth in Q3.
  • The Fed has argued that low inflation is transitory. But inflation will most likely stay low, and the Fed’s preferred measure — personal consumption expenditures — is expected to be below the 2% target, according to market-based expectations.
  • It would be pointless, as some have suggested, for the Fed to raise its benchmark rate by 25 basis points and then say there will not be more hikes for some time. “If as some suggest a 25-BP increase won’t affect the economy much at all, what is the case for an increase?”
  • If the Fed does nothing, the “risks” are a rise in inflation and less volatility in markets. But there could be a “catastrophic error” if it tightens policy now. And according to Summers, the consensus views on the economy are understating its real risks.

At next week’s meeting, the Federal Open Market Committee will decide whether to raise its benchmark rate for the first time in nine years. But markets think it’s a remote possibility and are pricing in a 30% chance that the Fed will hike.

Summers joins the World Bank, the International Monetary Fund, and others in calling on the Fed to not raise rates just yet.