Tag Archives: financial advice

Don’t Screw Up Index Investing By Making These 3 Mistakes

My Comments: First, my thanks to all of you who wished us well during IRMA’s visit to Florida. We came through unscathed. We were without power for a number of days and believe me when I tell you cold showers every day are not much fun. And we are now watching Maria carefully.

Second, there is increasing evidence that active asset management is starting to pull ahead of passive investing, which is the focus of this article, written a year ago by Walter Updegrave. Some of the references may be out of date but not the underlying message.

Passive investing as a strategy is always ok for some of your money. Overlaying it with some tactical steps to add value is the next step, something that can be done effectively without going all in with skills you perhaps don’t have.

Walter Updegrave – August 10, 2016

For consistently competitive returns, index funds and their ETF counterparts are the way to go. If you doubt that, just take a look at this new Vanguard research paper that lays out the case for indexing and check out the latest S&P Dow Jones Indices index vs. active scorecard, which shows that fewer than 20% of large-company stock funds beat the Standard & Poor’s 500 index over the five- and 10-year periods ending Dec. 31. But just buying index funds and ETFs doesn’t guarantee investing success. To do that, you’ll also need to steer clear of these three all-too-common indexing mistakes.

Mistake #1: Assuming all index funds are cheap. Since index funds simply buy the stocks or bonds that make up indexes like the Standard & Poor’s 500 or Barclays U.S. Aggregate bond index rather than spend millions on costly research and manpower to identify which securities might perform best, they’re able to pass those savings along to shareholders in the form of lower annual fees. Lower fees translate to higher returns and more wealth over the long term. That advantage is especially valuable today given the forecasts for lower-than-usual investment returns in the years ahead.

But not all index funds and ETFs are bargains. While many are available at an annual cost of 0.10% or less, others sometimes charge 10 times or more than that amount, according to Morningstar data. For example, one fund, Rydex S&P 500 Class C, levies a whopping 2.31% in annual expenses, prompting this headline on a recent post about the fund on the American Institute For Economic Research’s Daily Economy blog: “Is This the Worst Mutual Fund in the World?”

Before you invest in an index fund or ETF, make it a point to know how much it charges in annual fees, especially if you’re investing through a broker or other financial adviser. Then don’t buy unless its expenses compare favorably to funds or ETFs that track the same benchmark. You can gauge whether you’re overpaying by seeing how the expenses of the fund you’re considering stack up versus the expenses of the index funds and ETFs that made the cut for the Money 50, Money Magazine’s list of the best mutual funds and ETFs.

Mistake #2: Playing the niche index game. The beauty of index investing is that it allows you to easily and inexpensively create a well-balanced portfolio for retirement savings or other money you’re looking to invest. For example, by combining just three funds—a total U.S. stock market index fund, a total international stock index fund and a total U.S. bond market index fund (or their ETF counterparts)—you have the foundation for a broadly diversified portfolio of stocks and bonds that can get you to and through retirement.

But many investors fall into the trap of believing that the more bases they cover, the more diversified and better off they’ll be. And investment firms are all too willing to oblige them by marketing ever more specialized index offerings, allowing investors to invest in indexes that track everything from wind power and cyber security to obesity and organic foods.

Diversity is a good thing, but you don’t want to overdo it. Once you have a diversified portfolio of stocks and bonds, the extra benefit you get from venturing into investments that focus on narrow slices of the market or obscure niches can be minuscule or even disappear, since more arcane investments often carry higher fees. You also run the risk of ending up with an unwieldy and overlapping jumble of holdings that’s difficult to manage. And, let’s face it, a lot of what’s done in the name of broader diversification is really more about riding the latest fad.

In short, the more you stick to tried-and-true index funds that track wide swaths of the market at a low cost and resist the temptation to invest in every new indexing variation some firm churns out, the less likely you’ll end up “di-worse-ifying” rather than diversifying your portfolio.

Mistake #3: Using index funds to gamble rather than invest. When the indexing revolution got underway back in the 1970s, the idea was for investors to track the performance of broad market benchmarks like the Standard & Poor’s 500 index. The rationale was that since it’s so difficult to outperform the market, investors are better off trying to match the market’s return as much as possible.

Today, however, many investors see index funds as vehicles that can help them juice performance by quickly darting in and out of the stock or bond market as a whole or making bets on a sector they believe is poised to soar, be it growth, value, small stocks, energy, technology, whatever. ETFs are especially popular with such investors since, unlike regular index funds, ETFs are priced constantly throughout the day and can be traded the same as stocks.

Problem is, succeeding at this approach requires investors to have the foresight to know where the market or specific sectors are headed. That’s a dubious assumption at best. Consider how investors swarmed into tech and growth stocks at the end of the ’90s dot.com bubble, confident that double- or even triple-digit returns would continue, only to see shares crash and burn. Or, more recently, how pundits were predicting Armageddon for stocks in the wake of the Brexit vote, only to see the market climb to new highs.

Bottom line: Indexing works best when you use low-cost index funds that cover broad segments of the stock and bond markets as building blocks to create a diversified portfolio that matches your tolerance for risk—and that, aside from periodic rebalancing, you’ll stick with through good markets and bad. Remember that, and you’ll be more likely to benefit from all that indexing has to offer.


Why Sign Up for Medicare If I Have Insurance Already?

My Comments: I’m increasingly asked about signing up for Medicare at 65 or not. This happens as more and more of us are still working at age 65 and expect to keep working for several years to come. This article by Matthew Frankel will give you the background necessary to help your decision.

by Matthew Frankel \ Jul 16, 2017

The standard eligibility age for Medicare in the United States is 65. However, many people don’t know if they need to sign up for Medicare if they already have other health insurance coverage, such as through a job, a spouse’s employer, from their former employer, or through COBRA. Here’s a quick guide that can help you determine if you need to sign up for Medicare when you turn 65 or if you can wait longer without paying a penalty.

How Medicare works with your other insurance

When you have more than one insurance provider, there are certain rules that determine who pays what it owes first and who pays based on the remaining balance. For seniors who don’t have other insurance, Medicare is obviously the primary payer. However, when you have other insurance, it’s a little more complicated.

Depending on the type of insurance you have (group coverage, retiree coverage, COBRA, marketplace coverage, etc.), Medicare can either be the primary or the secondary payer. If Medicare would be a secondary payer to your current insurance, you can delay signing up for Medicare Part B. If your current insurance would become a secondary payer to Medicare, you should sign up during your initial enrollment period, which is the seven-month period that begins three months prior to the month you’ll turn 65.

It’s also worth noting that although I’m specifically mentioning Medicare Part B, which is medical insurance, this applies to Part A (hospital insurance) as well. However, Medicare Part A is free to the vast majority of Americans, so it’s probably worth signing up for Part A whether you’re required to or not. On the other hand, Medicare Part B has a monthly premium you’ll have to pay, which is why it can make sense to delay signing up if it’s not going to be your primary insurance.

Who can delay signing up for Medicare?

So, whose insurance remains the primary payer? In a nutshell, if you have coverage through your or your spouse’s current employment, and the employer has 20 or more employees, your insurance plan remains the primary payer.

If you aren’t sure if your employer meets the “group health coverage” criteria, ask your employer’s benefits manager.

If you do qualify, you can delay signing up for Medicare for as long as you (or your spouse) are still working. Once the employment or your employer-based health coverage ends, you’ll have eight months to sign up for Medicare Part B without paying a penalty, which is a permanently higher premium.

It’s also important to note that regardless of whether you’re still working or not, if you’ve already signed up for Social Security benefits, you’ll be automatically enrolled in Medicare Parts A and B when you turn 65. If you don’t want to keep Part B, you’ll need to cancel it (instructions are on the Medicare card you’ll receive).

Who should sign up at 65, even if they have other insurance?

This leaves a fairly long list of other types of insurance that become secondary payers to Medicare. Therefore, if you’re turning 65 and any of these situations apply to you, you should sign up for Medicare during your initial enrollment period.

• You have group coverage through your or your spouse’s employer, but the employer has fewer than 20 workers.

• You have retiree coverage, either through your former employer or your spouse’s former employer.

• You have group coverage through COBRA.

• You have TRICARE, the healthcare program for military service members, retirees, and their families. Retired service members must get Medicare Part B when eligible in order to keep their TRICARE coverage. (Note: If you’re still on active duty, you don’t have to enroll in Medicare until after you retire.)

• You have veterans’ benefits.

• You have coverage through the healthcare marketplace or have other private insurance. Once your Medicare coverage begins, you’ll no longer get any reduced premium or tax credit for marketplace coverage, and you should drop this coverage as you’ll no longer need it (unless you’re not eligible for premium-free Part A, which is not common).

If one of these situations applies to you and you don’t sign up for Medicare Part B during your initial enrollment period, you could face permanently higher premiums when you do.

The World’s Most Deceptive Chart

My Comments: First of all, Happy Labor Day to everyone. I trust you are able to take some time off to spend with family or do something fun to celebrate the end of summer. I’m working very hard these days to complete a project that I call Successful Retirement Secrets (SRS). My plan is to find a way to reach out to the millions of people not yet retired, and share with them secrets I’ve discovered over the years.

These comments from Lance Roberts surfaced a couple of months ago, but they are even more relevant today. He has a lot of charts, some of which I’ve chosen not to include. I have put a link to his article at the end.

If you have money invested and are wondering how all this talk with North Korea might catch up with your retirement, this is good stuff. On the right of this page is where you can schedule a short conversation with me if you are so inclined.

by Lance Roberts | May 7, 2017

I received an email last week which I thought was worth discussing.

“I just found your site and began reading the backlog of posts on the importance of managing risk and avoiding draw downs. However, the following chart would seem to counter that argument. In the long-term, bear markets seem harmless (and relatively small) as this literature would indicate?”

This same chart has been floating around the “inter-web,” in a couple of different forms for the last couple of months. Of course, if you study it at “face value” it certainly would appear that staying invested all the time certainly seems to be the optimal strategy.

The problem is the entire chart is deceptive.

More importantly, for those saving and investing for their retirement, it’s dangerous.

Here is why.

The first problem is the most obvious, and a topic I have addressed many times in past missives, you must worry about corrections.

The problem is you DIED long before ever achieving that 5% annualized long-term return.

Let’s look at this realistically.

The average American faces a real dilemma heading into retirement. Unfortunately, individuals only have a finite investing time horizon until they retire.

Therefore, as opposed to studies discussing “long term investing” without defining what the “long term” actually is – it is “TIME” that we should be focusing on.

Think about it for a moment. Most investors don’t start seriously saving for retirement until they are in their mid-40’s. This is because by the time they graduate college, land a job, get married, have kids and send them off to college, a real push toward saving for retirement is tough to do as incomes, while growing, haven’t reached their peak. This leaves most individuals with just 20 to 25 productive work years before retirement age to achieve investment goals.

This is where the problem is. There are periods in history, where returns over a 20-year period have been close to zero or even negative.”

Like now.

Outside of your personal longevity issue, it’s the “math” that is the primary problem.

The chart uses percentage returns which is extremely deceptive if you don’t examine the issue beyond a cursory glance. Let’s take a look at a quick example.

Let’s assume that an index goes from 1000 to 8000.
• 1000 to 2000 = 100% return
• 1000 to 3000 = 200% return
• 1000 to 4000 = 300% return
• 1000 to 8000 = 700% return

Great, an investor bought the index and generated a 700% return on their money.

See, why worry about a 50% correction in the market when you just gained 700%. Right?

Here is the problem with percentages.

A 50% correction does NOT leave you with a 650% gain.

A 50% correction is a subtraction of 4000 points which reduces your 700% gain to just 300%.

Then the problem now becomes the issue of having to regain those 4000 lost points just to break even.

It’s Not A Nominal Issue

The bull/bear chart first presented above is also a nominal chart, or rather, not adjusted for inflation.

So, I have rebuilt the analysis presented above using inflation-adjusted returns using Dr. Robert Shiller’s monthly data.

The first chart shows the S&P 500 from 1900 to present and I have drawn my measurement lines for the bull and bear market periods.

It’s A “Time” Problem.

If you have discovered the secret to eternal life, then stop reading now.

For the rest of us mere mortals, time matters.

If you are near to, or entering, retirement, there is a strong argument to be made for seriously rethinking the amount of equity risk currently being undertaken in portfolios.

If you are a Millennial, as I pointed out recently, there is also a strong case for accumulating a large amount of cash and waiting for the next great investing opportunity.

Unfortunately, most investors remain woefully behind their promised financial plans. Given current valuations, and the ongoing impact of “emotional decision making,” the outcome is not likely going to improve over the next decade.

For investors, understanding potential returns from any given valuation point is crucial when considering putting their “savings” at risk. Risk is an important concept as it is a function of “loss.” The more risk that is taken within a portfolio, the greater the destruction of capital will be when reversions occur.

Many individuals have been led to believe that investing in the financial markets is their only option for retiring. Unfortunately, they have fallen into the same trap as most pension funds, which is believing market performance will make up for a “savings” shortfall.

However, the real world damage that market declines inflict on investors, and pension funds, hoping to garner annualized 8% returns to make up for the lack of savings is all too real and virtually impossible to recover from. When investors lose money in the market it is possible to regain the lost principal given enough time; however, what can never be recovered is the lost “time” between today and retirement.

Time” is extremely finite and the most precious commodity that investors have.

In the end – yes, market corrections are indeed very bad for your portfolio in the long run. However, before sticking your head in the sand and ignoring market risk based on an article touting “long-term investing always wins,” ask yourself who really benefits?

This time is “not different.”

The only difference will be what triggers the next valuation reversion when it occurs.

If the last two bear markets haven’t taught you this by now, I am not sure what will. Maybe the third time will be the “charm.”

Source: https://seekingalpha.com/article/4052547-worlds-deceptive-chart

The Danger From Low-Skilled Immigrants: Not Having Them

My Comments: To Make America Great Again, the presumably well intentioned mantra for those leading the GOP these days, someone has to overcome ignorance of economics and start paying attention to reality.

A positive corporate bottom line is the driving force for a healthy US economy. To reach that goal, we need people willing to spend time in the trenches doing whatever grunt work is necessary. Despite machines that increasingly automate the grunt work, a supply of young people has to match the demand created until artificial intelligence takes over.

The supply of labor is not going to miraculously appear. A greater number of us are old and fragile, and fertility rates among young men are declining. Exactly who is going to look after all us old folks because we refuse to hurry up and die?

We should be encouraging immigration and refugees. Yes, there is a potential security threat, which implies applying resources to screen and maintain a reasonable level of security. And yes, someone is probably going to get killed or maimed or whatever when someone nefarious sneaks through.

The laws of supply and demand are well known. Right now we have an increasing demand for labor, which can only stabilize with either more people being allowed into the country, or a large increase in the cost of labor to force more of into the trenches. Either that or starve, in which case you die. Some would have that happen since dead people are less likely to vote against those wanting to restrict immigration.

Eduardo Porter \ August 8, 2017

Let’s just say it plainly: The United States needs more low-skilled immigrants.

You might consider, for starters, the enormous demand for low-skilled workers, which could well go unmet as the baby boom generation ages out of the labor force, eroding the labor supply. Eight of the 15 occupations expected to experience the fastest growth between 2014 and 2024 — personal care and home health aides, food preparation workers, janitors and the like — require no schooling at all.

“Ten years from now, there are going to be lots of older people with relatively few low-skilled workers to change their bedpans,” said David Card, a professor of economics at the University of California, Berkeley. “That is going to be a huge problem.”

But the argument for low-skilled immigration is not just about filling an employment hole. The millions of immigrants of little skill who swept into the work force in the 25 years up to the onset of the Great Recession — the men washing dishes in the back of the restaurant, the women emptying the trash bins in office buildings — have largely improved the lives of Americans.

The politics of immigration are driven, to this day, by the proposition that immigrant laborers take the jobs and depress the wages of Americans competing with them in the work force. It is a mechanical statement of the law of supply and demand: More workers spilling in over the border will inevitably reduce the price of work.

This proposition underpins President Trump’s threat to get rid of the 11 million unauthorized immigrants living in the country. It is used to justify his plan to cut legal immigration into the country by half and create a point system to ensure that only immigrants with high skills are allowed entrance in the future.

But it is largely wrong. It misses many things: that less-skilled immigrants are also consumers of American-made goods and services; that their cheap labor raises economic output and also reduces prices. It misses the fact that their children tend to have substantially more skills. In fact, the children of immigrants contribute more to state fiscal coffers than do other native-born Americans, according to a report by the National Academies.

When Should You Apply for Social Security

My Comments: Brian Stoffel has identified 3 critical elements for everyone not yet retired and receiving Social Security benefits. And they are not just about money and the role it plays in people’s lives. I could point out some flaws in his arguments, but the message is real.

Brian Stoffel | Apr 17, 2017

You can choose to take Social Security as early as age 62, and as late as age 70. When to claim your benefits is a question many retirees take a long time to consider. To make the best decision, it’s important to look at how your monthly benefits change based on when you begin receiving them.

Currently, the average retirement benefit check from the program is $1,360, and the average retirement age is the earliest option, 62. But if recipients waited, these checks could get much bigger. Here’s what it would look like for those born in 1954 and earlier:

As you can see, those aren’t small differences. On the one hand, if you wait until age 70, your monthly benefit will be a whopping 76% higher than if you claim right away. On the other hand, if you do decide to delay your benefits that long, you’ll go almost a decade with no Social Security income coming in even though it was an option.

While there are tons of different variables that affect when you should apply for Social Security benefits, the following three questions often play an outsize role.

1. How do you feel when you get up and go to work in the morning?
This may seem like an odd place to start, but hear me out. Most people worry about having enough money to retire — that is an important concern, and we’ll get to it in a bit. But there’s one big blind spot to tackle first: hedonic adaptation.

You’ve likely heard hedonic adaptation being used in the context of getting used to lifestyle improvements, as in, “Even after buying the new car to keep up with the Joneses, Mark was still miserable — that’s hedonic adaptation for you.”

But in truth, it works both ways: We can have much less materially, and not be nearly as depressed about it as we’d expect.

If you want proof, I point you toward a Merrill Lynch/Age Wave survey that came out in 2015. When respondents of different ages were asked how often they felt happy, content, relaxed, and/or anxious, here’s how they responded:

And lest you think that this was just a survey of wealthy respondents, it was “nationally representative of age, gender, ethnicity, income, and geography.”

The bottom line is that if you hate your work and you can make ends meet on Social Security plus other sources of income, you shouldn’t wait to apply for benefits.

2. Can you make ends meet?
Of course, we can’t forget entirely about money. In the survey mentioned above, 7% of retirees said retirement was less fun and more stressful than pre-retirement years. The main culprit: financial concerns.

Almost all retirees report spending less in retirement than while they were working, and these expenses continue to fall as people age. Of course, everyone has heard about rising healthcare costs — and it’s true that healthcare expenses do jump. But there’s a host of other realities that keep costs down: less money spent on transportation costs commuting to and from work, a drop in food costs as you can make your own food more often, and a house finally being paid off in full, to name a few.

In general, you’ll need to calculate how much income you’ll get from three streams:
• Social Security and/or pensions
• Withdrawals from your own retirement accounts, using the 4% rule
• Other forms of income

The “other” forms of income could come from rental properties you own or even part-time work.

The bottom line is that you should try living for six months on this income to ensure that it’s suitable.

3. Have you coordinated with your spouse?
Finally, we have to deal with the sobering reality that one partner often lives longer than another. In that situation, Social Security has a simple rule: The surviving spouse gets to either keep his or her current benefit, or assume the benefit of the deceased — whichever is larger.

It’s important to remember that, statistically speaking, wives will live longer than their husbands. And if husbands were the higher earners, they may want to consider waiting as long as possible to claim their benefit, as it maximizes what their wives will receive after they pass away.

In this respect, there are a dizzying number of variables to consider, and I suggest doing further reading to figure out which will be best for you and your partner.

In the end, if you can answer these three questions accurately, you’ve got a good grasp on the factors affecting when to claim Social Security benefits.

I Inherited a Roth IRA. Now what?

My Comments: More and more people have Roth IRA accounts. A common question about retirement is whether to draw money from their Roth IRA first or take money from their non-Roth retirement accounts first.

It depends. Any money not yet taxed is going to get taxed. Period. The Roth IRA money comes out tax free; the taxes have already been paid. If your non-spouse beneficiary is in a high tax bracket, it may be better for them to get it in the form of Roth money.

Most beneficiaries are simply happy to get unexpected money. If they have to pay tax, it’s not an issue. You can run a million scenarios and when all is said and done, it makes little difference in the grand scheme of things.

June 28, 2013 by Dan Moisand at MarketWatch.com

When you inherit retirement plans, the rules for how those funds are taxed and the options available to the beneficiary vary based on the type of account and whether the beneficiary is a spouse or not.

Today I explain to a non-spouse beneficiary some of the rules that apply to inheriting a Roth IRA. I also answer a reader question about one way to increase her Social Security payments even though she started taking benefits early at a reduced rate.

Q. My Dad is 74, and he has a ROTH IRA as well as a 401(k). When he passes away, my mom will inherit the retirement accounts, and then we his sons will. My question is can I, as a non spouse beneficiary, rollover the ROTH IRA into my personal ROTH IRA? — C.B.

A. No you cannot roll the Roth IRA money into your personal Roth IRA. Only spouses may do that. If your mother rolls the Roth IRA into her own Roth IRA, it is treated as though she had always been the owner of those funds, so those funds will continue to be exempt from Required Minimum Distributions (RMD), an attractive feature of Roth IRA’s. Also, she would name the beneficiaries. It is important to check that the beneficiary designations on all accounts match the wishes of the current account owners.

The beneficiary designation trumps anything written in one’s will or trust agreements. I saw a case in which the wife had a small IRA that named her church as primary beneficiary. When her husband died, she rolled his account into her IRA but did not change her beneficiary designation. When she passed away, the church was entitled to all of the funds. This was an unpleasant surprise to the beneficiaries.

You have two basic options as a non-spouse inheritor; take a lump sum or, transfer the funds into an account titled as an “inherited Roth IRA.” Taking the lump sum is pretty simple. The lump sum you receive is not subject to tax. Once you get your check, if you wish to invest any part of it, it will be taxed just like funds in any other non-retirement account.

Most inheritors with an eye on the long term prefer to rollover the money to an inherited Roth IRA. The assets continue to grow untaxed, you can choose your own beneficiaries and withdrawals are tax free.

You cannot, however, let all the account just sit in the inherited Roth IRA. By Dec. 31 of the year after the year in which the owner died, you must have begun taking required minimum distributions (RMD) annually. If you don’t make the RMD by that deadline, you will need to have withdrawn all the assets by the end of the fifth year after the year of death.

The RMD you will be subject to is based upon the IRS’s single life expectancy table. The value of the account on Dec. 31 of the year death is divided by the beneficiary’s life expectancy listed on that table to obtain the first RMD amount. For example, if you are 55 at the time, the table says your life expectancy is 29.6, you would divide the Dec. 31 value by 29.6. In the following year, you use the following Dec. 31 value and divide by one less year (28.6). The next year, use the value as of the next Dec. 31 and 27.6.

You mentioned you had brothers. There is one more step to consider. If your mom lists more than one person as beneficiary, you should have the shares of the account separated into individual inherited Roth IRAs by Dec. 31 of the year following the year of death. This enables each beneficiary to use their own life expectancy. Otherwise, distributions are calculated based upon the oldest beneficiary’s age causing distributions to occur faster than necessary.

This can be particularly important with non-Roth retirement money like a 401(k) in which distributions are taxable. Generally, beneficiaries wish to have the smallest RMD’s possible in order to control taxation better. A beneficiary can always take more than the RMD but the lower the minimum, the more flexibility in tax planning.

Again, make sure all the beneficiary designations on all accounts reflect the owner’s wishes. It should be noted that the rules are different if any of the beneficiaries are beneficiaries through a trust that is named as beneficiary of a retirement account. Naming a trust can be helpful but if not done correctly, can result in an acceleration of taxation.

Also, to accommodate an account holder’s specific wishes, many attorneys prepare customized beneficiary designations. Not all 401(k) plans will accept customized beneficiary designations so many will roll those funds into a traditional IRA.

Rates Won’t Skyrocket, So Ignore the Cassandra Chorus

My Comments: The last time interest rates started moving upward in a long term up trend was 1946. This lasted until 1981. Then they started moving down again.

Now, 36 years later, they have once again started upward. The central bank, known as the FED, started moving them back up about a year ago. Granted, the increases are tiny, but I believe it’s the start of an long, upward trend.

If you expect to live another 20 – 30 years, the financial landscape you’re used to is going to be very different. Rising interest rates are going to influence the value of your retirement accounts and other funds, the money you will use to sustain your standard of living going forward.

Just thinking about it could give you a headache…

By Scott Minerd, Chairman of Investments and Global CIO, Guggenheim Partners – July 17, 2017

When markets suddenly change short-term trends or direction, prognostication abounds to explain the most recent gyrations. Often, those who missed the move leading up to the sudden change by sticking to an earlier erroneous call will suddenly issue statements to vindicate the veracity of their earlier predictions. Others, looking to justify the conventional wisdom, will seize an opportunity as proof that the masses were right and the conventional wisdom, whether empirically true or not, still holds.

Such has been the events of recent days.

With the sudden rise of rates around the world, the pundits present the recent selloff as proof that long rates are bound to skyrocket as a result of any number of factors including reduction of the Federal Reserve’s (Fed) balance sheet, tapering of quantitative easing by foreign central banks, lurking inflation and growth, fiscal stimulus from Washington, D.C., and so on.

In moments like these, I think it is wise to step back and grasp the big picture. The Fed is on course to continue raising rates. If it does not, it is only due to weakening growth or inflation. Either way, case history tells us that the yield curve will continue to flatten.

As for ‎skyrocketing long rates, that seems unlikely during the current economic cycle. Virtually every business cycle ends with an inverted yield curve. If the yield on the 10-year Treasury note were to ‎rise to 3 percent, that would imply an overnight rate at 3 percent or higher. Using a number of metrics, an overnight rate of 3 percent would be so restrictive as to induce a recession.

Even the Fed, which has notoriously forecast rates higher than the market delivers, sees the longer term “terminal” rate (the apex of the policy interest rate during the business cycle) at 3 percent. Given the structural debt load on corporate balance sheets, a 3 percent short-term rate would ultimately prove unsustainable. With a cap on short-term rates around 3 percent, the likelihood that long-term rates could be sustained above 3 percent for any period of time is low.

Then again, there is a fairly good argument that the terminal short-term rate may be lower than 3 percent. Deflationary headwinds continue to restrain price increases. With declining energy and commodity prices, supply gluts in automobiles, competitive restraints on retail merchandise such as groceries and apparel, and a growing inventory of new apartments weighing on owner-equivalent rents, these headwinds are unlikely to dissipate anytime soon. Since inflation is tamed when real rates rise enough to choke off economic expansion, the lower the level of inflation, the lower is the nominal rate necessary to restrain it.

If that is the case, then the terminal rate is likely to be closer to 2 percent.

Only time will tell but that scenario argues for less policy tightening by the Fed as further rate increases are likely to slow the economy and inflation more than expected.

There is also the issue of valuation. Many routinely argue that bonds and stocks are overvalued yet the empirical evidence is sketchy.

As for interest rates, the last era of financial repression between the 1930s and 1950s resulted in long-term rates remaining below 3 percent for more than 20 years. The argument that 10-year yields need to be close to nominal gross domestic product (GDP) growth rates is equally unsound as, aside from the era of opportunistic disinflation from 1980 into early in the new millennium, 10-year yields on balance were below nominal growth rates for most of the past century.

Finally, the downtrend in long-term rates that began in the early 1980s is firmly intact. ‎To break that 35-year trend, the 10-year note would need to yield more than 3 percent for some period of time. Even if we did break that downtrend, history shows that rates will tend to move in a sideways consolidation for a number of years, often retesting the lows more than once.

The simple truth is that, while rates may trend higher in the near term, the risk is that we have not reached the point where the macro economy can sustain persistently higher rates. If anything, political, military, and market uncertainties would more likely lead to another sudden decline in rates rather than a massive spike upward.

Investors would be wise to ignore the growing chorus of Cassandra cries and look through the noise to the fundamentals. There are many things to be concerned about in the world but skyrocketing rates is not likely among them.