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Tactical Strategies Gain, as Buy and Hold Fades

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There appears to be a significant disconnect between those of us who have advocated a tactical approach to investing money for years from those who learned their trade during the 18 years that ran from 1982 thru 2000.

The study referenced below in the article, as it appeared in the print edition, headlined “45% of advisers surveyed … say they are applying tactical strategies.” Wow! That means that 55% are NOT using tactical strategies, which suggests to me that risk management and the avoidance of dramatic plunges when the market goes to hell is not important to them.

global investingHere at Florida Wealth Advisors, LLC we’ve been using tactical approaches to investing money for our clients for almost ten years now. And until it’s clear we are in another 18 – 20 year run like what happened in 1982 – 2000, we’ll continue to take a tactical approach.

For a better understanding of how this works, click on the image to the left that accompanies this post.

By Jeff Benjamin | InvestmentNews.com

There is nothing quite like a seismic market shift to throw financial advisers off their game.

This has been the case since the 2008-09 financial crisis, according to the latest research from Cerulli Associates Inc., which shows that advisers have been migrating away from buy and hold toward more-active strategies.

Nearly half of Cerulli’s database of more than 10,000 advisers said that they are employing some form of tactical portfolio management.

When the same survey was conducted in 2009, tactical strategies didn’t even register among respondents, according to Cerulli associate director Tyler Cloherty.

“After the financial crisis, there seemed to be a general sense that long-term strategic-allocation strategies didn’t work,” he said. “So in order to position themselves to clients, advisers started indicating that they were navigating away from risky assets and capitalizing on shorter-term opportunities.”

ALL SHAPES AND SIZES
Strategic investing comes in all shapes and sizes, but Cerulli found that 37% of advisers surveyed said that they are using a strategic allocation with a tactical overlay, and another 8% said that they are strictly tactical. In all, 45% of the respondents apply tactical strategies.

This is about where advisers have been in terms of tactical strategies ever since the initial spike, Mr. Cloherty said.

Theodore Feight, owner of Creative Financial Design, exemplifies the transition away from strategic portfolio management.

“I’m absolutely more tactical, and my clients are enjoying it,” he said.

Mr. Feight became a believer during the financial crisis, when he witnessed virtually every asset class fall in stride.

“Adjusting to tactical strategies made me go back and look at some of the stuff I was taught in the past,” he said.

These days, Mr. Feight is comfortable about setting stop orders to limit losses, and seeks out other areas of opportunity.

In the fixed-income arena, for example, he has gone from static allocations to low-yielding indexes to a more aggressive blend of high-yield-bond exchange-traded funds.

The result is a 300-basis-point increase in yield to about 5% for his fixed-income investments, Mr. Feight said.
On the equity side, he also has moved away from broad indexes to take more specific advantage of some of the higher-yielding dividend stocks, such as Altria Group Inc. (MO), Eli Lilly and Co. (LLY) and Reynolds America Inc. (RAI).

“I started doing this in 2009, and I’ve been an outlier until recently,” Mr. Feight said. “I have had a lot of people tell me I’m nuts and that I should just stick with buy and hold.”

Paul Schatz, president of Heritage Capital LLC and member of the National Association of Active Investment Managers, said that he isn’t surprised that more advisers have turned tactical since 2009.

‘ABSOLUTELY CRAZY’
“It is absolutely crazy to not have at least a portion of a portfolio actively managed at all times,” he said.

“Everybody knows that markets drop faster than they rise.”

Mr. Schatz said that he recently has begun hearing institutional managers talk about shifting back toward buy and hold now that the markets have had a strong run.

“People historically have turned to tactical after the horse already left the barn, and now that the stock market is up 125% from the bottom, people are starting to talk about buy and hold again,” he said. “To me, anytime people start talking about buy and hold being the way to go, it’s a good sign that the market is at a peak.”

Mr. Cloherty is less interested in whether advisers are moving in and out of tactical strategies at the wrong time than he is about how qualified most advisers are to execute tactical strategies.

“If you have advisers attempting to be tactical, you will have a mixed bag of performance, because a lot of it is based on their own internal decision making where there might not be a strict framework,” he said. “An asset manager or professional research team might be better suited to apply tactical strategies.”

Fallout for States Rejecting Medicaid Expansion

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healthcare reformMy Thoughts on This: As you know, I fully support the passage a few years ago of the Affordable Care Act.

I’m also a realist in that I expect it to change shape over the years. Here’s an article that suggests what might happen in those states where the governor is married to the “anyone but Obama” party line.

By Ricardo Alonso-Zaldivar | April 22, 2013

WASHINGTON — Rejecting the Medicaid expansion in the federal health care law could have unexpected consequences for states where Republican lawmakers remain steadfastly opposed to what they scorn as “Obamacare.”

It could mean exposing businesses to Internal Revenue Service penalties and leaving low-income citizens unable to afford coverage even as legal immigrants get financial aid for their premiums. For the poorest people, it could virtually guarantee that they will remain uninsured and dependent on the emergency room at local hospitals that already face federal cutbacks.

Concern about such consequences helped forge a deal in Arkansas last week. The Republican-controlled Legislature endorsed a plan by Democratic Gov. Mike Beebe to accept additional Medicaid money under the federal law, but to use the new dollars to buy private insurance for eligible residents.

One of the main arguments for the private option was that it would help businesses avoid tax penalties.

The Obama administration hasn’t signed off on the Arkansas deal, and it’s unclear how many other states will use it as a model. But it reflects a pragmatic streak in American politics that’s still the exception in the polarized health care debate.

“The biggest lesson out of Arkansas is not so much the exact structure of what they are doing,” said Alan Weil, executive director of the nonpartisan National Academy for State Health Policy. “Part of it is just a message of creativity, that they can look at it and say, ‘How can we do this in a way that works for us?’”

About half the nearly 30 million uninsured people expected to gain coverage under President Barack Obama’s health care overhaul would do so through Medicaid. Its expansion would cover low-income people making up to 138 percent of the federal poverty level, about $15,860 for an individual.

Middle-class people who don’t have coverage at their jobs will be able to purchase private insurance in new state markets, helped by new federal tax credits. The big push to sign up the uninsured starts this fall, and coverage takes effect Jan. 1.

As originally written, the Affordable Care Act required states to accept the Medicaid expansion as a condition of staying in the program. Last summer’s Supreme Court decision gave each state the right to decide. While that pleased many governors, it also created complications by opening the door to unintended consequences.

So far, 20 mostly blue states, plus the District of Columbia, have accepted the expansion.

Thirteen GOP-led states have declined. They say Medicaid already is too costly, and they don’t trust Washington to keep its promise of generous funding for the expansion, which mainly helps low-income adults with no children at home.

The remaining states are still weighing options. Concerns about the unintended consequences could make the most difference in those states.

A look at some potential side effects:

The Employer Glitch
States that don’t expand Medicaid leave more businesses exposed to tax penalties, according to a recent study by Brian Haile, Jackson Hewitt’s senior vice president for tax policy. He estimates the fines could top $1 billion a year in states refusing.

Under the law, employers with 50 or more workers that don’t offer coverage face penalties if just one of their workers gets subsidized private insurance through the new state markets. But employers generally do not face fines under the law for workers who enroll in Medicaid.

In states that don’t expand Medicaid, some low-income workers who would otherwise have been eligible have a fallback option. They can instead get subsidized private insurance in the law’s new markets. But that would trigger a penalty for their employer.

“It highlights how complicated the Affordable Care Act is,” said Haile. “We wanted to make sure the business community understood.”

The Immigrant Quirk
Arizona Gov. Jan Brewer, a Republican, called attention this year to this politically awkward problem when she proposed that her state accept the Medicaid expansion.

Under the health law, U.S. citizens below the poverty line — $11,490 for an individual, $23,550 for a family of four — can only get coverage through the Medicaid expansion. But lawfully present immigrants who are also below the poverty level are eligible for subsidized private insurance.

Congress wrote the legislation that way to avoid the controversy associated with trying to change previous laws that require legal immigrants to wait five years before they can qualify for Medicaid. Instead of dragging immigration politics into the health care debate, lawmakers devised a detour.

Before the Supreme Court ruling, it was a legislative patch.

Now it could turn into an issue in states with lots of immigrants, such as Texas and Florida. It could create the perception that citizens are being disadvantaged versus immigrants.

The Fairness Argument
Under the law, U.S. citizens below the poverty line can only get taxpayer-subsidized coverage by going into Medicaid. But other low-income people making just enough to put them over the poverty line can get subsidized private insurance through the new state markets.

An individual making $11,700 a year would be able to get a policy. But someone making $300 less would be out of luck, dependent on charity care at the emergency room.

“Americans have very strong feelings about fairness,” said Weil. “The notion of ‘Gee, that’s just not fair’ is definitely a factor in the discussion.”

7 Must-Have (Free) Mobile Apps to do Your Job Better

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My Comments: Mindful that I have clients who do not have computers at home, and whose cell phones were purchased 7 years ago, I confess to trying to be as up do date as possible with technology. I find it fascinating and fun to use.

Having said that, I don’t do much with Twitter or with Facebook. Too much clutter and useless chatter for my taste. Here is an article with several free mobile apps that just might make a difference in your life. I already use two of them.

Posted by: Ryan Holmes | March 12, 2013

In the six short years since Steve Jobs unveiled Apple’s iPhone to the world—with his famous 4,000 Starbucks lattes prank—smartphones have become for many people, an absolute necessity in their lives.

The smartphone may also well be the most important productivity tool in—and out of—the office. This year an estimated 200 million workers will tap into mobile business apps to collaborate and conference, access and edit docs, check email, chat and more on the go.

But there’s one dirty little secret: Most mobile business apps kill more time than they save. I preview hundreds of apps on the job at HootSuite, a social media management tool used by Fortune 100 companies, mom-and-pop businesses and five million users around the globe. And I see countless apps that make big promises and don’t deliver. They’re non-intuitive, with clunky interfaces. They have tiny user bases and no customer support. They make simple tasks – like making a to-do list – ridiculously complex.

But the best of the bunch really do make working on the go easier. These seven free mobile business apps – a mix of tried-and-true classics and road-tested upstarts – merit a spot in the phone of any office warrior this year.

Brewster: Instant Rolodex – Between Facebook, Twitter and LinkedIn – not to mention your email client – you likely have hundreds, if not thousands, of colleagues and customers you interact with. Brewster is a handy mobile app that pulls in contact info and other details from all of those platforms and creates eye-catching, in-depth profiles for each and every person. Using a “relationship algorithm,” the app automatically sorts contacts into “favorites,” “trending” and other lists, and even sends out gentle reminders when you’re falling out of touch with someone. Another benefit: Brewster is fully searchable – not just by name, but keyword, location and even photo.

Here on Biz: Meet your LinkedIn contacts in real life – Virtual connections are great, but nothing beats a face-to-face meeting. With Here on Biz, you can instantly see which of your LinkedIn contacts (as well as other LinkedIn users) are physically nearby, segmented into visitors and locals. Request a connection and you can chat directly via the app, ideally setting up the kind of in-person encounter that gets results. Here on Biz proves especially useful at conferences when trying to make sense of a sea of new faces and maximize meeting time. The app is free to use, though it is somewhat limited by the fact that only LinkedIn users actually running the Here on Biz app show up in searches.

HootSuite: All your social media, anywhere - Yes, HootSuite is my company. But it’s not just fatherly pride when I say HootSuite Mobile is an amazing app for handling social media on the go. Just like the web version, the app allows for publishing to all of your social networks – Twitter, Facebook, LinkedIn, etc – from one interface. You can schedule messages for optimum times, attach files and photos and shrink links, all with a few taps. Advanced users can even set up streams for monitoring customer feedback on social networks, track clients and keywords across different platforms and more. But don’t just take my word for it. Says Mashable: “[HootSuite is] the premier dashboard for companies looking to get analysis of their social media efforts.”

Dropbox: Your hard drive, anywhere – Here’s an oldie but goodie. According to urban legend, Dropbox was hatched back in 2007 when MIT grad and founder Drew Houston got fed up with always forgetting his memory sticks around campus. His solution: a seamless, cloud-based system to sync files across all of your devices. Just drag files or folders into the Dropbox folder, and they’ll sync across phones, PCs, laptops, tablets, etc., automatically. Edit from anywhere and changes are saved and synced (You can even access older and deleted versions of files). Dropbox gives you 2GB for free (or up to 18GB if you refer friends) and has paid plans for users with bigger needs. You can also designate certain files as favorites, making them available offline – especially handy for frequent flyers and off-the-grid travelers.

Trello: Beyond to-do lists – Back In the early 1950s, engineers at Toyota pioneered a deceptively simple scheduling system called Kanban, based on index cards passed from one part on the plant to another. Trello takes this concept into the mobile era. Tasks (or Lists, in Trello lingo) are represented as columns on a virtual corkboard. Add as many cards as you want to a List, then customize each card with comments, checklists and attachments. You can loop in other team members and assign them cards and even drag cards from one List to another as a project moves toward completion. Uniquely flexible and collaborative, Trello is as handy for personal to-do lists as it is for coordinating complex projects among big teams – from managing sales leads to producing films.

Evernote: Junk drawer for your digital life – Another indispensable classic, cloud-based notetaking app Evernote is quite possibly the world’s most incredible junk drawer. You can throw all the random stuff of life in it – photos, voice memos, attachments, clips from the Internet, typed and even handwritten notes – and it makes everything searchable, synced and accessible across all of your devices. The uses are really limitless. Record a sound bite at a conference on your phone and listen to it later on your work PC. Jot down some inspiration on your tablet on the bus, then finish the thought later on your home computer. Take a photo of a business card or handwritten Post-it note, then – courtesy of Evernote’s OCR handwriting recognition – search its contents at a later time. The free mobile app lets you upload up to 60 megabytes a month. Upgrade to Premium ($5/month, $45/year) and you get a gigabyte of uploads, collaborative notebooks (which colleagues can log into and edit) and access to your notes even when offline.

UberConference: Conference calls on the go – Organizing conference calls is a logistical feat under the best of conditions – emailing colleagues to set a time, sending out access codes, waiting for everyone to call in. Trying to do all that on the go can be nearly impossible. That’s where UberConference comes in, the brainchild of Google Voice guru Craig Walker. You select attendees from your phone’s contact list and UberConference automatically calls, emails or texts them to join, no PIN required. Once the call is underway, the app’s nifty display shows photos and social profiles of all callers and even indicates who’s speaking at any given time. Though it lacks the ability to schedule calls in advance, UberConference definitely succeeds in making the conference call experience a bit less painful.

Looking for more time-savers? An unabridged list of 2013’s must-have business apps (both mobile and desktop) is available on HootSuite’s app directory.

3 Actions for Worried Investors

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‘Is the stock market a bubble ready to burst? No,’ say BlackRock’s investment strategists in a spring update

question-markMy Comments: All of us are looking for an edge, an insight, a clue to help us make what we hope are smart decisions about our money. These comments from someone clearly ahead of the curve that I live on may be helpful to you. The fact that Blackrock manages over $3.7T (that “T” means trillion!) suggests they know what they are talking about.

Here at Florida Wealth Advisors, we can help you interpret and implement these ideas.

By Joyce Hanson, AdvisorOne | April 15, 2013

The stock market has powered ahead of the nation’s faltering economy so far in 2013 at the same time that the Federal Reserve keeps supporting U.S. Treasuries by keeping interest rates low.

These seemingly contrary events have left investors so uncertain about what will happen next that BlackRock, the world’s largest asset manager, with $3.79 trillion under management as of Dec. 31, stepped forward Friday to offer three actions for worried investors to take.

Russ Koesterich, BlackRock chief investment strategist and iShares chief global strategist“The powerful advance of U.S. stock markets has investors asking: Do the markets have more room to run, or is a correction imminent? First, we think there is almost no chance that the pace seen in the first quarter will continue. But does that mean we’re in the middle of a bubble that will burst? The answer is no,” write Russ Koesterich (left), BlackRock chief investment strategist and iShares chief global strategist, Jeffrey Rosenberg, chief investment strategist for fixed income, and Peter Hayes, head of the municipal bonds group.

As for interest rates, Koesterich, Rosenberg and Hayes predict that rates will drift higher, but slowly and erratically.

“A number of forces are keeping a lid on interest rates, including the low net supply of fixed-income securities (due largely to Fed buying) and a strong demand among investors for yielding assets. The Federal Reserve will not reduce its pace of accommodation any time soon given still-elevated unemployment. However, stronger economic growth could lead the central bank to pull back on the pace of accommodation later this year, they write in “What’s Next in 2013? 3 Investment Actions for 2013.”

The BlackRock strategists recommend three smart ways for investors to achieve income and return this year:

1) Broaden your bond approach. “Investor demand has pushed interest rates to such lows that it presents new risks,” the BlackRock team says. They recommend that investors allocate to flexible core bond alternatives, increase exposure to credit sectors and implement long/short strategies.

Interest rates should gradually drift higher through the end of the year, with the 10-year Treasury yield ending around 2.25%, they predict. And if the Fed begins to slow down quantitative easing, yields on longer-maturity fixed-income assets such as the 10-year and the 30-year would move modestly higher as prices fall.

“In this environment, we advise protecting portfolios from the effects of increasing interest rates,” the team writes. “One way to do this would be to focus on shorter-maturity segments of the market. Additionally, we continue to suggest a focus on credit sectors of the market, including areas such as bank loans and high-yield bonds.”

2) Find new sources of income. Historically low yields within fixed income are driving investors to cast a wider net for income. The BlackRock team recommends solutions that balance income and risk, investments in nontraditional income sources and allocations to municipal bonds for tax-advantaged income.

The team favors munis particularly due to the prevailing higher-tax environment. “Munis have demonstrated lower volatility than many other areas of the fixed-income market and boast yields that, in many cases, rival Treasuries even before tax,” they write. “They can offer a better way to keep more of what you earn.”

3) Grow your wealth in unpredictable markets. “Equities remain attractive and should be the foundation for meaningful long-term growth,” write Koesterich, Rosenberg and Hayes. “However, mitigating volatility is critical.” The BlackRock team recommends allocating to “flexible, unconstrained” strategies, investing in high-quality dividend-paying equities and implementing alternative strategies.

Surprisingly, the BlackRock team was mixed on China’s outlook, saying that while it is on an economic rebound in both manufacturing and exports, “Chinese authorities are tightening credit availability once again, which could dampen growth prospects.”

More broadly in the emerging markets, although they got off to a poor start in 2013, “thanks to cheap valuations as well as higher growth, we still believe they can outperform developed markets for the year,” the BlackRock strategists say.

15 Best Investing Quotes of All Time

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GardeningMy Comments: There are successful investors, and there are unsuccessful investors. Some of them are the same people.

I ran across this list and realized there are nuggets here that my clients and prospective clients might find helpful. We live in an increasingly complex world so finding short, sweet comments from time to time that attempt to simplify what is otherwise a confusing matrix is valuable. Enjoy.

By Ron Pechtimaldjian, AdvisorOne | April 18, 2013

“I will tell you how to become rich. Close the doors. Be fearful when others are greedy. Be greedy when others are fearful.” – Warren Buffett

“The stock market is filled with individuals who know the price of everything, but the value of nothing.” – Phillip Fisher

“An investment in knowledge pays the best interest.” – Benjamin Franklin

“In investing, what is comfortable is rarely profitable.” – Robert Arnott

“Bottoms in the investment world don’t end with four-year lows; they end with 10- or 15-year lows.” – Jim Rogers

“How many millionaires do you know who have become wealthy by investing in savings accounts? I rest my case.” – Robert G. Allen

“Every once in a while, the market does something so stupid it takes your breath away.” – Jim Cramer

“Invest in yourself. Your career is the engine of your wealth.” – Paul Clitheroe

“Investing should be more like watching paint dry or watching grass grow. If you want excitement, take $800 and go to Las Vegas.” – Paul Samuelson

“The individual investor should act consistently as an investor and not as a speculator.” – Ben Graham

“Financial peace isn’t the acquisition of stuff. It’s learning to live on less than you make, so you can give money back and have money to invest. You can’t win until you do this.” – Dave Ramsey

“Know what you own, and know why you own it.”– Peter Lynch

“The four most dangerous words in investing are: ‘this time it’s different.’” – John Templeton

“Wide diversification is only required when investors do not understand what they are doing.” – Warren Buffett

“If you have trouble imagining a 20% loss in the stock market, you shouldn’t be in stocks.” – John Bogle

The Annuity Puzzle

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That's me, in 1941!

That’s me, in 1941!

My Comments: As a financial planner and investment advisor for the past 38 years, I recognize that we, that’s me and you, are moving into uncharted waters. While the future is always an unknown, what we are dealing with now is how whether many of us are going to have enough money to live with some degree of dignity when we reach age 90, age 95, age 100 and beyond.

Medical advances are allowing many of us to survive issues that 50 years ago simply resulted in death. Couple that with the “baby boomers”, those born in the years following WW II and you have enormous pressure on a system that is unprepared for it. One reaction in anticipation of this was Obamacare, something which those who perhaps don’t believe in global warming would rather decree we get rid of. Not going to happen. See my blog called This Train is Leaving the Station from earlier this month.

As a financial planner, I’ve steered people away from income annuities for years. It’s like handing your wallet to an insurance company and saying to them, “…send me a check every month for the rest of my life and you keep what’s left.” Just not an appealing thought.

But so many of us are now going to outlive our money that an insurance policy against living too long begins to make sense. At least for some of our money.


By Bob Seawright, Madison Avenue Securities

Since at least 1965 and the seminal research of Menachem Yaari, economists have recognized that retirees should convert far more of their assets into an income annuity at retirement than they do. That they so rarely do what they ought to do is known as the “annuity puzzle.”

In a new paper from the Journal of Economic Perspectives, Shlomo Benartzi, Alessandro Previtero and Richard Thaler offer their insights into why the annuity puzzle exists and how it might be solved. The authors frame the puzzle using Franco Modigliani’s famous formulation from his Nobel acceptance speech: “It is a well-known fact that annuity contracts, other than in the form of group insurance through pension systems, are extremely rare. Why this should be so is a subject of considerable current interest. It is still ill-understood.” It was true then (in 1985) and remains true today. Income annuities remain widely unpopular yet would help to solve a variety of complex problems with which retirees struggle and which cannot be solved otherwise.

The key problem dealt with by income annuities is longevity risk. This risk is increasing steadily in that life expectancies continue to expand throughout the developed world and is exacerbated because we are both retiring earlier and have less and less access to private pensions. Moreover, the distribution of longevity is wide – a 22-year difference between the 10th and 90th percentiles of the distribution for men (dying at 70 versus 92) and a 23-year difference between the 10th and 90th percentiles of the distribution for women (dying at 72 versus 95).

Income annuities hedge longevity risk simply and efficiently as risk pooling makes them 25-40 percent cheaper than do-it-yourself options. Thus retirees who purchase an income annuity assure themselves a higher level of consumption and guarantee it as well. As Benartzi, Thaler and Previtero point out, “You increase your consumption and eliminate risk at the same time… Who says there is no thing as a free lunch?”

A related problem faced by retirees who reject income annuities is the complexity that is added to their lives:
“Households who choose not to annuitize must learn a new skill, namely calculating the optimal drawdown rate over time. Given the complexity of this optimization problem, it is not surprising that retirees might err, either by under- or over-spending. These errors can easily be exacerbated by self-control problems if households have trouble sticking to their drawdown plans, either by spending too little or too much. By converting wealth into an annuity, individuals and households can simultaneously answer the conceptually difficult question of figuring out how much consumption is sustainable given the age and wealth of the consumer, and provide a monthly income target to help implement the plan.”

In general, Benartzi, Thaler and Previtero make the well-known case that greater reliance on income annuities would enable individuals to increase consumption, deal with uncertainty, and help people determine the right drawdown rate and timing of retirement. The puzzle, of course, is why so few people take advantage of them. In 2007, $300 billion was moved by retirees from defined benefit plans to IRAs while only $6.5 billion went to purchase income annuities. As stated by the authors, “the sum of this evidence makes a strong case that people should be making greater use of annuities, to increase their consumption level in retirement, deal with uncertainty, and help solve the cognitively difficult tasks of deciding how fast to draw down their wealth and when to start retirement. Why don’t they?”

One major hurdle is that the vast majority of 401(k) plans do not offer an annuitization option. That failure greatly reduces the number of retirees who will select annuitization – the easier default option wins a disproportionate amount of the time in virtually any setting. On the other hand, “when an annuity is a readily available option, many participants who have non-trivial account balances choose it.” In fact, in a study of a Swiss pension plan that made annuitization the default option, 73 percent elected the annuity, 17 percent elected a combination of the annuity and the lump sum, and the remaining 10 percent elected the lump sum in toto; for another plan where the lump sum is the default option, the take-up rate for the annuity was only 10 percent. Annuitization options should be provided and should be the default setting.

The authors also argue (perhaps a bit optimistically) that this failure to annuitize results more from the “choice environment” than from underlying preferences. An income replacement rate of 80 percent is more attractive than a 20 percent spending reduction. Framing matters. Thus an investment offering a $650 monthly return is selected only 21 percent of the time while a choice offering $650 of spending for life gets a 70 percent selection rate. The choice should be framed accordingly.

Similarly, a typical consumer perceives that he “is taking a considerable sum of money and putting it at risk – the risk being that the consumer will die young, making the purchase a bad deal.” Loss aversion comes into play here too. Since losing hurts about twice as much as winning feels good, the perceived monetary loss of dying early carries more weight than the possibility of monetary gain achieved by beating the actuarial tables, especially because a lump sum payment feels like a “sure thing.”

So-called “mental accounting” is another significant behavioral factor in this area, with investors reluctant to write a big check to purchase a series of small monthly checks, which seems like a bad deal to many. That’s because once we have something – and an account balance or a lump sum option makes us feel like we have something of real value – we are generally reluctant to give it up (loss aversion again).

Finally, Benartzi, Thaler and Previtero explore policy interventions that have improved savings accumulation behavior and which improve retirement income choices. They see the key challenge as helping consumers – who often see income annuities as a risk since they might die before getting their “money’s worth” – view income annuities as part of a risk-reduction strategy. This approach is particularly promising in that earlier research has shown that people fear outliving their money more than they fear death itself.

The authors proffer two general policy considerations worth exploring in this regard. With respect to Social Security, they suggest that since accrued Social Security benefits can keep growing through age 70, the Social Security Administration should stop labeling different retirement ages as “full” or “normal.” These labels may well be influencing selected retirement dates negatively. They also suggest a “claim and suspend” option for all retirees and that the SSA “encourage people to give careful thought to postponing taking benefits.”

The second category of recommended policy changes “involves increasing the supply of easy-to-find annuity options for those of retirement age with 401(k) and other defined contribution plans.” Doing so will take government action to make current regulations clearer and will also require employer cooperation.

The annuity puzzle is not insoluble. But solving it will require concerted effort by both government and the private sector so that more retirees will have assured lifetime income.

Thought for the Week

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My Comments: I have a relationship with a company in San Diego that is my source for new ideaa and products that fall into the category of Long Term Care and other insurance products that are appropriate for many of my clients.

Each week I get an email from them with a Thought of the Week and from time to time, that thought is well worth sharing with whomever it is who reads my blogs. I KNOW as least several people who do.

Here is what arrived this week with minor editing. Many people these days are concerned about where their money is going to come from 10 – 15 – 20 years from now. This describes a potential source.

From Gene Pastula, CFP

We create dozens of SPIA (Single Premium Income Annuity) illustrations per week but only about 1/3 ever get placed in the clients’ portfolio. Having observed this for a few years now and spoken with many advisors, I have come to the conclusion that it is the advisors who are “waiting for the rates to increase”. In the meantime, their clients are receiving less and less interest or accepting more and more risk than they would like.

The typical SPIA is providing a 6-8% annual income, 70% +/- of which is tax-free. That’s better than bonds and will last a lifetime. It’s a personal pension the give the client the most secure, predictable income from any of the assets in the portfolio. And if you are one of those advisors waiting for rates to go up, keep in mind that increases in interest rates have only a partial correlation to SPIA rates since a high percentage of the income is from principal. The way to get the most total money from the SPIA is to start early and live a long time. Waiting for rates to increase just reduces the total time they will receive the income.

Regarding those Variable Annuities; with the expenses and the portfolio restrictions, you cannot be seriously proposing them for competitive growth if you are also including the guaranteed role-ups and income riders. Index Annuities have the same rollups and guaranteed income for half the cost or less and the client will never see their portfolio go down.

Do you wonder why variable annuity sales are down and index annuity sales are up? Clients are buying the same guarantees you sold them in VAs but prefer the assurances of safety of their money that Index products provide. Call Josh and he will answer your questions.

By the way, the Fed met recently: They are going to continue on their path till unemployment hits 6.5% and inflation slows to 2.5%. They predicted no change in rates till 2015. Then what; you think they are going to jump rates to 6% and destroy all the bondholders in the country? Come on!

America’s Problem is Not Political Gridlock

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My Comment:US-Capitol-Bldg An interesting observation from someone who has spent many years in leadership roles in our society.

By Lawrence Summers | Bloomberg | FT

Throughout US history, division and slow change have been the norm rather than the exception

With last week’s release of the president’s budget, Washington has once again descended into partisan squabbling. In the US today, there is pervasive concern about the basic functioning of democracy. Congress is viewed less favourably than ever before in the history of opinion polling. There is widespread revulsion at political figures seemingly unable to reach agreement on measures to reduce future budget deficits. Pundits and politicians alike condemn “gridlock”. Angry movements, such as Occupy Wall Street and the Tea Party, are present and still active on the extremes of both sides of the political spectrum.

Meanwhile, profound changes are redefining the global order. Emerging economies, led by China, are converging towards the west. Beyond the current economic downturn lies the even more serious challenge of the rise of technologies, which may raise average productivity but will displace large numbers of workers. Public debt is increasing in a way that is without precedent except in times of total war. A combination of an ageing population and the rising prices of health and education will put pressure on future budgets.

Anyone who has worked in a political position in Washington has had ample experience with great frustration. Almost everyone in US politics feels there is much that is essential yet unfeasible in the current environment. Many yearn for a return to an imagined era when centrists in both parties negotiated bipartisan compromises that moved the country forward. Yet fears about the functioning of the US government have been a recurring feature of the political landscape since Virginian Patrick Henry’s 1791 assertion that the spirit of the revolution had been lost.

It is sobering to contrast today’s concern about political paralysis with that which gripped Washington during the early 1960s. Then, the prevailing diagnosis was that a lack of cohesive and responsible parties for voters to choose from precluded the clear electoral mandates necessary for decisive action. While there was a flurry of legislation passed in the 1964-66 period after a Democratic electoral landslide, Vietnam and Watergate followed, all leading to President Jimmy Carter’s declaration of a crisis of the national spirit. Despite the rose-tinted view today, there was hardly high rapport in Washington during Ronald Reagan’s presidency. During his time in office Bill Clinton worked hard at compromising with a US Congress controlled by Republicans, only to be impeached by the House of Representatives.

Throughout American history, division and slow change have been the norm rather than the exception. While often frustrating, this has not always been a bad thing.

There were probably too few checks and balances as the US entered the Vietnam and Iraq wars. There should have been more checks and balances in place before the huge tax cuts of 1981, 2001 and 2003, or to avert the many unfunded entitlement expansions of the past few decades. Most experts would agree that it is a good thing that politics thwarted the effort to establish a guaranteed annual income in the late 1960s and early 1970s and the effort to put in place a “single-payer” healthcare system during the 1970s.

The great mistake of the gridlock theorists is to suppose that all progress comes from legislation and that more legislation consistently represents more progress. While these are seen as years of gridlock, consider what has happened in the past five years.

The US moved faster to contain a systemic financial crisis than any country facing such an episode has done in the past generation. Through all the fractiousness, enough change has taken place that without further policy action, the ratio of debt to gross domestic product is expected to decline for the next five years. Beyond that, the outlook depends largely on healthcare costs – but their growth has slowed to the rate of GDP growth for three years now – the first such slowdown in half a century. At last, universal healthcare has been passed and is now being implemented. Within a decade it is likely that the US will no longer be a net importer of fossil fuels. Financial regulation is not in a fully satisfactory place but has received its most substantial overhaul in 75 years. Most schools and teachers are for the first time evaluated on objective metrics of performance. Gay marriage has become widely accepted across the states.

No comparable list can be put forth for Japan or countries in western Europe. Yes, change comes rapidly to some of the authoritarian societies of Asia. But it may not endure and may not always be for the better.

Anyone prone to pessimism about the US would do well to ponder the alarm with which it viewed the Soviet Union after it launched the Sputnik satellite or Japan’s economic rise in the 1980s and the early 1990s. One of America’s greatest strengths is its ability to defy its own prophecies of doom.

None of this is to say that the US does not face huge challenges. But these are not due to structural obstacles. They are about finding solutions to problems such as rising inequality and climate change – where we do not quite know the way forward. This is not a problem of gridlock – it is a problem of vision.

The writer is Charles W. Eliot university professor at Harvard and a former US Treasury secretary

The Cycle of Market Psychology

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My Comments: It seems the DOW hits a new record every week and everyone is wondering when the penny is going to drop and once again, we fall into the abyss. Most of us think it will happen, but not anytime soon. Here’s another analysis worth reading.

By Jeffrey Dow Jones

This week (April 8) kicks off earnings season in the market. Even though we go through it four times a year, it’s a time when investors should be paying extra attention.

Earnings are important because ultimately, fundamentals are the only thing that matter. When you get down to it, a share of stock is worth nothing more than the future stream of cash flows that it will generate. During the tech bubble it became fashionable to ignore earnings altogether because there weren’t any. Someday, everybody said, the earnings would be HUGE!

So let me revise that: earnings aren’t the only thing that matter.

There is also psychology.

The way that psychology factors into the market is that investors are willing to pay different prices today for earnings in the future. When they’re feeling really great, they’re willing to pay a lot for $1 of earnings. When they’re scared or pessimistic, they aren’t willing to pay much for that $1.

You’d think that psychology would be a difficult thing to measure quantitatively, but it really isn’t. You simply look at the price-to-earnings ratio. That will tell you exactly how much investors are willing to pay for that dollar of earnings, and when you relate that to historical P/E ratios, you can get a pretty good sense about the psychology of the current market.

We talked a bit about this last week, but some of this is worth repeating. In particular, there are two images you really need to make sure you understand. Here is the first:

This is a list of one-directional markets i.e. bull markets without any kind of significant correction or cyclical bear market. All of them eventually ended with a nasty down move. Nothing goes up forever, of course. But as you can see, some ran longer than others.

This table does something really cool. It isolates the degree to which each of these moves was driven by change in sentiment. The rallies at the top of the table were driven more by fundamentals. The ones at the bottom were driven more by multiple expansion.

Of the greatest, continual bull markets in history, you can see that the one we’re currently in is largely due to improving sentiment. In other words, earnings have improved in recent years, just not a lot relative to historical earnings. You can see now why today’s environment is such a marvelous puzzle for market historians.

That’s all handy to know. But what you really care about is the column on the far right, the one called “subsequent bear market loss.” When you look at it, you’ll notice a disturbing trend: the more the market was driven by sentiment, the bigger to subsequent correction was.

There aren’t a ton of data points on here, but the basic idea underpinning this whole study is solid. Markets can only get so cheap before smart investors step in and say, “OK, enough is enough, y’all are crazy.” When a large portion of the rally is fueled by legitimate economic growth, stock prices have a much bigger cushion under them than when the rally is driven by sentiment.

This brings us to the next image you need to sear into your temporal lobe.
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This Train is Leaving the Station

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healthcare reformMy Comments: First, I’ve been a supporter of Obamacare since day one. Not because its a panacea for what ails us, but because without it, none of the stakeholders individually have enough leverage to effect meaningful change. By that I mean, doctors, hospitals, insurance companies, Big Pharma, and of course, patients like you and me. The only path to reform is a force with enough leverage so that those above mentioned stakeholders are forced to adapt.

I’ve also asserted that what we see ten years down the road will not resemble the PPACA as passed in any meaningful way. Implementation will force adjustments as unintended consequences surface and everyone tries to stake their claim to a legitimate piece of the action.

I’m also reminded of comments made in a recent Time magazine feature that focused on a new way unfolding to combat cancer. Egos are being squashed in the interest of team work and continued funding is a function of actionable and positive results, not how many scientific papers are published. It was said to be totally unworkable, until it became workable and there is no going back. What took ten years to get from idea to those with cancer now takes two years.

By Jim Toedtman

Mention health care costs, and Mark McClellan talks about train tracks.

Few people know more about the dynamics and details of the nation’s health care system than McClellan, the former director of the Food and Drug Administration and then the Centers for Medicare and Medicaid Services. One set of tracks, he says, carries the current train – with doctors, hospitals, insurance and pharmaceutical companies organized around paying for specific tasks performed.

What we must do, he continues, is construct a second set of tracks where health care is provided by teams delivering comprehensive care, where doctor’s payments are determined by the results, where digital records are widely shared and where costs are mitigated by a vastly expanded pool of people with insurance.

This is the heart of the health care reform that was approved by Congress, was affirmed by the courts and is being implemented this year.

We have a health care system that consumes 17 percent of the national economy and is unsustaintable if it follows the current tracks.

Today, new tracks are being built, complete with a set of guideposts, a checklist of both critical questions and potential milestones.

Will companies cover their workers? Employer-provided health insurance remains the linchpin of the nation’s health care system, covering nearly 60% of those under 65. But in a sluggish economy, companies may be tempted to curtail coverage.

Will the unisured enroll? This is really the heart of the effort. The 21 million 25 – 30 year olds must enroll, even though they may consider health insurance unnecessary, because their enrollment will help finance the system. Of the total 56 million now uninsured, the Congressional Budget Office projects 25 million will enroll by 2020. Those who delay enrollment face taxes that escalate as the years pass.

Is there adequate staff? Meeting the medical needs of the new enrollees will stretch the nation’s already thin workforce. A shortage of 91,500 doctors and 1.2 millin nurses is projected by 2020.

Are the state insurance marketplaces set? And are their base insurance policies affordable?

Patients, finally, have a critical role in helping refocus our system on results rather than the number of services provided, on individualized and preventive care rather than automatically utilizing the latest gadgets and technology.

As patients, we must engage and begin persuing smart health steps that prevent chronic disease. Attention stakeholders! All aboard!

Source: http://pubs.aarp.org/aarpbulletin/201304_DC?folio=3#pg3