Tag Archives: financial advice

It’s Bubble Time!

My Comments: I’ve been around long enough to have experienced some bubbles in the markets and they’re not pretty. Especially the one in 1987 when my colleagues and I stared at each other in disbelief as our money and that of our clients disappeared in a cloud of dust. We’re due for another. And while this article is mostly about a housing market bubble, we have one building in the S&P500 and the DOW. You should be very careful if you are in retirement or planning to enter it soon.

Chris Martenson / Feb. 27, 2017
It’s impossible to predict with certainty how much more insane our financial markets will get before an inevitable correction. But my personal bet is: A lot!

For my reasons why, take a few minutes to watch the chapter on bubbles below from The Crash Course. For those who haven’t seen it before, the takeaway is this: bubbles pop only when greed in the market has been exhausted. https://youtu.be/7KpwrJHC6_0

Bubbles make no sense economically. Or rationally. But they happen all the time as a part of the human condition. Even while financial bubbles are enabled by dumb monetary and banking decisions, their actual genesis is rooted in primal human emotions. Greed on the way up, and fear on the way down. The hardest part about these bubbles is not being swept up in them. As the above video shows, history is chock full of asset bubbles. We humans just never seem to learn. Like Charlie Brown’s endless attempts to kick Lucy’s football, we get suckered in by the promise of easy riches, only to end up flat on our back when the market suddenly yanks that promise away.

Wash, rinse, repeat.

Most of you reading this might be thinking “Hey, I’m a reasonable, intelligent person. I won’t fall victim to the next bubble.” Perhaps, but maybe not. The numbers say that the majority of you will. Unfortunately, being smart — even a genius — is no protection against being ruined by a bubble.

Remember from the video that even Sir Isaac Newton, easily one of the most brilliant humans ever to live, got his clock cleaned by the South Sea Bubble:
Bubbles are much easier to enter than to exit. As they build, all your friends and neighbors are diving into the pool and enjoying easy riches. You deserve some of that good fortune, right? And there will be plenty of eager parties willing to help you get on the bandwagon.

When the bubble pops, though, action becomes much harder to take. At first, everyone assumes that the sudden drop is a temporary aberration and that the party will shortly resume. As prices fall further — and they typically fall at a faster rate than when they were rising — folks become paralyzed by fear on the way down, slowly realizing that their paper profits may indeed be gone for good. At first they’re unwilling to give up the dream of the “sure thing” they so recently had, and then, once the losses start mounting, they find themselves resistant to locking in those losses by selling. Instead, they hold on to the increasingly threadbare hope that prices will at least recover to where they can ‘get their money back.’

Of course, that never happens. For all those who bought in during the mania, their money was hopelessly betrayed the moment they placed their bet. And that’s what bubbles are – merely bets. And that bet is: I bet I can get out before everyone else.

That’s mathematically impossible for the majority. It’s really only possible for a very tiny few who have the vision and the discipline (and more often than not, the luck) to pull it off. Very rare are the people who get out at the top.

Don’t Be A Victim

So, to avoid becoming victim in the future, the first thing you need is the clarity to know when you have a bubble on your hands.

Well, it really doesn’t get any clearer than this:
Why Toronto (and Other Cities) Inflate Housing Bubbles to the Bitter End
Feb 20, 2017

“Let’s drop the pretense. The Toronto housing market and the many cities surrounding it are in a housing bubble,” Bank of Montreal (NYSE:BMO) Chief Economist Doug Porter told clients in a note last week.

Many have called it “housing bubble” for a while, but now it’s official, according to BMO.

In January, the benchmark price and the average price were both up 22% year-over-year, with the average price of detached homes up 26%, of semi-detached homes 28%, of townhouses 27%, and of condos 15%. Double-digit price increases have become the rule in recent years.

But this jump was “the fastest increase since the late 1980s – a period pretty much everyone can agree was a true bubble – and a cool 21 percentage points faster than inflation and/or wage growth,” Porter explained in his note, cited by BNN.

Holy smokes! Or rather, what are people smoking up there? Bubble weed, or something. A 22% yr/yr gain? On top of a string of recent years of double-digit gains?

Here are two more features about bubbles we need to keep in mind:
1. Bubble exist when prices rise beyond what incomes can sustain
2. Bubbles always have a blow-off top

First, house prices rising a ‘cool’ 21 percentage points above wage growth over a single year is the very definition of bubble behavior. Simple math tells us that anyone who borrows to buy property eventually has to pay that loan back.

The money to pay back that property loan comes from wages. Ergo, property prices and wages cannot depart from each other forever, or even for very long, without a lot of repayment defaults resulting.

As for ending in a “blow-off top”, that’s just how history tells us bubbles finally exhaust themselves. They draw in every last sucker and lazy-thinking ‘investor’ until there’s no “greater fool” left willing to pay a higher price. This doesn’t require 100% participation from the local population; only 100% participation from everyone who can be drawn in. When that finally happens, that’s when the bubble bursts all of its own accord.

There’s another way for a bubble to end, but it practically never happens.

Responsible bankers and lenders could prevent the bubble’s formation by simply not lending ridiculous amounts. It almost never happens for the same reasons that people buy overpriced houses: greed and our social programming to follow the herd. If all your banker buddies are making big bucks writing loans to anyone who can fog a mirror, then you’ll be rewarded for doing the same. Nobody wants to be the lone, unpopular voice urging restraint when the crowds are going wild.

The quotes below from the 1850s show how this dynamic is nothing new to society:
Men, it has been well said, think in herds; it will be seen that they go mad in herds, while they only recover their senses slowly, one by one.
In reading The History of Nations, we find that, like individuals, they have their whims and their peculiarities, their seasons of excitement and recklessness, when they care not what they do. We find that whole communities suddenly fix their minds upon one object and go mad in its pursuit; that millions of people become simultaneously impressed with one delusion, and run after it, till their attention is caught by some new folly more captivating than the first.
―Charles Mackay,in Extraordinary Popular Delusions and the Madness of Crowds

Well, the good people of Toronto — as well as Vancouver, Palo Alto, Melbourne, and a large number of other real estate markets — have fixed their minds on the delusion that the recent skyrocketing price appreciation means that home prices will continue to always rise from here. So get in now! You can’t lose! Don’t risk getting priced out of the market!

What is particularly crazy about this is that we just saw 10 short years ago how this movie ends. But those caught up in the current mania simply aren’t thinking logically right now. They’re fully captured by the bubble mania. And, as before, it’s lonely out here for those of us trying to be the voice of sanity and reason. Nobody wants to hear that now. And later, once the painful correction has wrought its destruction, those of us who dared to sound an alert may be blamed as responsible for the losses – as if by pointing out the delusion we caused the burst to happen.

Conclusion
I could go on and on, risking being the boy who cried wolf, and point out all the other obvious bubbles infecting our financial landscape that all but assure a very difficult future of financial and economic pain. But I won’t at this time, having already pointed out the major bubbles in last week’s article, The Mother of All Financial Bubbles.

The delusion much of society wants to believe in is that we can get something for nothing. That is, to become rich, all we have to do is buy an asset like a house or Apple (NASDAQ:AAPL) stock and simply wait. The wealth will just magically arrive. No work performed, nothing new created, nothing done. Just buy, and wait.

Of course, even a cursory examination of all of life in nature (or before humans invented thin-air money printing) quickly reveals that actual wealth comes from hard work, usually coupled with taking risks. But somehow we’ve slipped back into the common and very human delusion of that our current culture has somehow figured out how to escape the old bonds of wealth creation. This time is different!

The Romans re-minted coins in smaller and less pure weights and it worked! For a while. Then its empire collapsed on itself. Zimbabwe (and now Venezuela) printed and it worked! For a while. Then its citizens were left impoverished. Society’s dangerous conceit is in thinking that somehow we’ve managed to, this time, escape the hard rules of wealth creation and have discovered a new principle by which we can all get wealthy without doing anything at all. All you have to do is play the game. Put your money to work! Buy stocks and houses and you can’t go wrong!

And it’s working! For now. But when we back up a bit, it’s pretty easy to see how this cannot be true. Not for the majority. Why? Because real wealth isn’t a paper gain on a house. Nor is it even money in the bank. Or a large stock portfolio. Real wealth consists the final things you consume: food, appliances, transportation, entertainment, clothes, energy, etc. Those are real things. They have to come from somewhere. Which means they have to be produced, stored, transported, and sold. By themselves, your cash and your stock portfolio have no value. Those are merely claims on true wealth.

So how can it be possible for everyone to be exponentially increasing their claims on real wealth, without the underlying pie of real wealth itself, increasing at an equivalent rate? It’s not. And that’s the painful lesson that gets learned and re-learned as each new generation gets duped and then dumped by an asset bubble. Sadly, bubbles used to happen only once in a generation. Once those burned by the last bubble have died off, the younger generation has no living memory to prevent them from getting suckered by the next one. But for some reason, our current generation has something of an addiction to bubbles. We’ve lived through the tech stock bubble, the real estate bubble, and now we’re living inside the ‘everything’ bubble.

What’s wrong with us?

My advice is to sell your house if you live in Toronto, or a similarly bubblicious real estate market. Similarly, reduce your exposure to stocks and bonds at these record highs, and develop a wealth protection strategy with a financial adviser who understands the risks in today’s markets. Know what the bubble signs are and be smarter than Newton by standing aside, nodding knowingly, and tolerating your “smart” friends and neighbors. It’s one of the very hardest things to do, but it’s also one of the most important. Odds are high you’ll be proven the smart one once the current bubble bursts.

Investment Strategies for Your Retirement Accounts

InvestMy Comments: A phrase I’m known to use from time to time is that ‘life is generally better with more money than it is with less money.” While this might seem obvious, there are many people whose efforts to have more money have fallen flat. Here’s a few ideas that might help you.

Michelle Mabry, CFP®, AIF® January 26, 2017

With interest rates coming off a 36-year low and expected to rise, most investors expect to see bond prices fall and consequently deliver a negative return in what is considered a low-risk asset. We have seen a rebound in equities, and with the S&P 500 and Dow at all-time highs, some say the stock market is richly valued. As a retiree seeking income from your investments and looking to preserve your principal, where can you turn? What are ways retirees can invest for income and still minimize risk?

You have always heard you need a diversified portfolio and that has not changed, but what has changed is how you diversify it. Retirees need to determine the proper asset allocation of stocks, bonds, cash and alternatives based on income needs, time frame, and tolerance for risk.

How to Diversify Investments in Retirement

Let’s look at bonds first. If you invest in a traditional bond portfolio you are exposing yourself to interest-rate risk as rates rise and bond prices fall. You need to understand the average duration of the bond investments you hold. For example, a typical intermediate-term bond fund will have a duration of 5-10 years. If the average duration is eight years, then a 1% increase in rates will result in an 8% decrease in the net asset value (NAV). This would wipe out all the interest gains and then some. The shorter the duration, the less the potential loss.

So it is important to look for other assets that have low-risk characteristics or standard deviation similar to bonds but produce absolute returns, that is, a positive return regardless of which way rates are moving. Floating rate income, TIPs and some market neutral funds can be a good way to diversify your fixed-income portfolio. You may also want to look at structured notes as a way to produce yield and protect your downside.

Dividends as Equity

For the equity portion of your retirement portfolio, consider blue chip dividend-paying stocks or dividend growth strategies. Many large-cap funds pay dividends in excess of 2.5%, plus you have the upside appreciation potential over time to keep pace with inflation during your retirement years. Remember to keep focused on the longer term and not be too concerned with short-term volatility. Dividend-paying stocks have outperformed most other asset classes over time. Small-cap stocks have been one of the best-performing asset classes, so it would make sense to find dividend-paying small- and mid-cap equities as well.

When searching the universe of mutual funds and ETFs, there are not many of these, but a couple that have attracted our attention are WisdomTree Midcap Dividend Fund and WisdomTree Small Cap Dividend Fund with yields of 2.63% and 3.03% respectively as of December 30, 2016. Of close to 2,000 ETFs available in the U.S., a search revealed only four that are exclusively dividend-driven and which also hold just domestic small- or mid-cap stocks. Two of the portfolios feature issues that have exhibited dividend growth while the other two ETFs (the WisdomTree funds) include all dividend payers in their capitalization range.

Include Alternative Assets for Diversification

Also important in developing a portfolio for retirement is a focus on absolute return strategies, and many of these fall into the alternative asset class. Alternatives are anything that is not a stock, bond or cash. Alternatives have no correlation or negative correlation to other asset classes so they are great diversifiers. Our retired clients typically have one-third of their portfolio in alternatives. Examples include managed futures and long/short strategies as well as volatility strategies using options. An example is LJM Preservation and Growth which has shown a positive return every year since its inception 10 years ago with the exception of one year, 2013, when the stock market went straight up and there really was no volatility. The fund was up in 2008 when stocks and bonds were not, and therein lies the importance of a diversified portfolio to manage risk.

By rebalancing your investments quarterly or semi-annually back to the original investment allocations you can create the cash needed to sustain your monthly withdrawals in retirement until the next rebalance. We do not recommend a withdrawal rate in excess of 4% in light of current market and economic conditions.

Stock Manager of $37 Billion Doesn’t Believe the Earnings Hype

roller coaster2My Comments: Monday, post #2.

First, you don’t get to manage $37B unless you know what the hell you are doing.

Two, the higher we go, the harder will be the fall. Put a lot of your money in cash and keep it there until the dust settles.

by Jonas Cho Walsgard / February 19, 2017

Global stock investors may have their hopes set too high for 2017.

With rising stock prices, analysts may need to dial back their expectations with companies missing earnings growth estimates posing the biggest risk to equity markets, according to Robert Naess, who manages 35 billion euros ($37 billion) in stocks at Nordea Bank AB, Scandinavia’s largest bank.

“There’s too much optimism,” he said in an interview in Oslo on Wednesday. “It’s definitely too high. I’m pretty sure I’ll be right.”

Stocks have rallied amid signs of stabilization in China’s economy and bets that President Donald Trump will boost U.S. infrastructure spending, roll back regulations and cut taxes. The Standard and Poor’s 500 Index has risen 28 percent since hitting a low in February last year pushing up price to earnings to more than 21 times, the highest since 2009. Positive earnings per share growth is estimated at 15 percent for the S&P 500, according to data compiled by Bloomberg.

“This indicates that it’s a bit expensive,” the 52-year-old said.

Investors shouldn’t be fooled by top line sales growth as profitability is set to be squeezed by rising wages amid declining unemployment, the fund manager said. With margins already high, corporate earnings estimates will have to come down, he said.

Naess and his partner Claus Vorm quantitatively analyze thousands of companies to build a portfolio of about 100 “boring” stocks. They invest in companies with the most stable earnings and avoid expensive stocks, a strategy which delivered an 11 percent return for the Global Stable Equity Fund in 2016. It has returned 16 percent on average in the past five years, beating 96 percent of its peers.

The fund this year has boosted its stake in EBay Inc. while its biggest increases last year included Walgreens Boots Alliance Inc., Walt Disney Co., Verizon Communications Inc. and Apple Inc.

“It’s always better to have stable equities,” Naess said. “Long term you will get better returns. Good companies continue to be good. More cyclical companies have a tendency to stumble now and then.”

And while investors could be overestimating future company earnings, they may also be putting “too little weight” on potential risks from U.S. policy changes by President Donald Trump, such as potential trade conflicts, Naess said.

“There’s still risk with Trump even if the market receives it very positively,” he said. “There’s more risk now than before. The outcome range with Trump is wider.”

Have You Heard About The New Fiduciary Rule?

moneyMy Comments: This falls into a ‘did you know’ category. You’ll find an explanation of the term ‘fiduciary’ in paragraph four below.

Many of my followers are employed by universities and colleges, cities and counties, and other not-for-profit organizations across the country including churches. If this is you, then you may have money in a retirement plan sponsored by your employer, and it falls under IRS Code Section 403(b).

If you are employed in the private sector and have an employer sponsored retirement plan, then you fall under IRS Code Section 401(k). Or you might simply have an IRA account somewhere.

There is a new rule that will take effect on April 10, 2017, unless the Trump administration kills it, which they’ve said they will. The rule says that if I give you financial advice about your retirement money, that advice must be in YOUR best interest. I can’t just sell you something that is more or less suitable for someone your age; it has to be in your best interest.

A similar rule applies to doctors, attorneys, CPAs and architects, and has done so forever. The new rule says if I don’t act in your best interest, within the scope of an understanding of what exactly is in your best interest, I can be held accountable under the law and not be able to walk away saying “buyer beware”.

Here in Gainesville, Florida, there are tens of thousands of employees of the University of Florida, of Santa Fe College, of the City of Gainesville, of Alachua County and so on. If any of them participate in a sponsored plan, whomever is giving them advice is exempted from the new fiduciary rule.

That’s not to say that their advisor is not willing and able to be bound under a fiduciary standard, but it does say that neither they nor the firm they work for will be held accountable as a fiduciary if the new rule didn’t expressly exempt 403(b) accounts.

Buyer beware indeed.

By Mark P. Cussen, CFP®, CMFC, AFC | November 1, 2016

The Department of Labor’s (DOL) new rules that automatically elevate all financial advisors who work with retirement plans or accounts to the status of a fiduciary have already had a substantial impact on the retirement planning industry. Large firms are spending millions of dollars in their effort to restructure their business and compensation models to comply with these regulations. The goal of the new rule is to prevent advisors from recommending products that pay high commissions to them, but aren’t necessarily in the best interests of the client.

However, the new rules only apply to IRAs and qualified retirement plans in the private sector. They do not apply to 403(b) or other retirement plans that are used by non-profit entities that qualify as charities under Section 501(c)3 of the Internal Revenue Code. And this segment of the retirement planning market is considered one of the worst when it comes to plans that have high fees, poor investment choices and lax management by plan custodians.

The Need for Reform

403(b) plans in particular are common retirement plans for educators. Marcia Wagner, principal at The Wagner Law Group, told InvestmentNews in an interview, “It’s almost laissez-faire. The teachers can be marketed by people who are very good providers to the marketplace and people who aren’t, and it’s a problem.” Despite their similarity to qualified plans in terms of contribution limits and plan sponsorship, 403(b) plans do not fall under ERISA guidelines and are therefore not subject to the new requirements of the DOL rule.

Jania Stout, the practice leader and co-founder of the Fiduciary Plan Advisors group at HighTower Advisors echoed Wagner’s sentiments in an interview with InvestmentNews. “It’s kind of like the Wild, Wild West. Teachers are really at the mercy of whoever’s sitting in the cafeteria they’re walking into that day. It could be a good representative. Or they’re trying to put them in a product that’s two or three times more expensive.”

Other Exempt Plans

Private plans at higher educational institutions and some churches are also exempt from ERISA guidelines as well as state and federal defined contribution plans, such as the thrift savings plan. It is also possible to structure a plan that would normally fall under ERISA guidelines so that it becomes exempt, such as by prohibiting employer contributions. 457 plans are also immune from ERISA regulations. (See also, The Fiduciary Rule’s Impact: How It’s Already Being Felt.)

And some schools even set up their plans with an open type of arrangement where any vendor can offer investment options in their 403(b) plan as long as certain requirements are met. There are consequently some plans that have over a hundred different vendors offering investment alternatives to plan participants. Obviously, this level of diversity gives the plan participants thousands of investment options to choose from, which can be overwhelming for many participants who are not financially savvy. And many participants also have no idea how much they are paying in investment fees.

TIAA-CREF published a report in 2010 that revealed the average annual asset management fee for school retirement plans in the state of California was a whopping 211 basis points, while participants in Texas school plans were paying 171 basis points. Both of these states use the open-access approach with their plans. But participants in schools in states with controlled access paid much less. Plan participants in Iowa and Arizona only paid 87 and 80 basis points per year for each of those respective plans.

The Bottom Line

Although the sponsors of plans that fall outside of ERISA guidelines will not be legally required to meet the requirements of the DOL’s new fiduciary rules, they may feel pressure from their members or from the school districts to begin moving in that direction. Time will tell how the DOL fiduciary rule impacts these plans.

Turning 65 this year? Don’t overlook these 3 steps

retirement_roadMy Comments: The transition from working FOR money to having money FOR YOU is full of tension and hard to answer questions. If you’re beyond this stage, then don’t bother with this. On the other hand, if it’s today or in your future, then this is good stuff.

Gail MarksJarvis / The Chicago Tribune / January 6, 2017

If you will be turning 65 this year and plan to keep working, you have essential money decisions to make that can’t be ignored.

The arrival of your 65th birthday requires that you take specific steps so you don’t get in trouble with the government on Medicare rules and face fines later. And the years around your birthday command attention to money details that could make the difference between having plenty of money for retirement and running out of funds early. So don’t drift by this major time in your life without attention to the three issues people at age 65, or near retirement, must address.

Sign up for Medicare. When you are 65, you will be eligible to start taking Medicare to cover some of your doctor, hospital and other medical costs. Full Medicare coverage is not free so you typically don’t want to start taking it if you are still working full time, aren’t on Social Security and will have solid, affordable medical coverage at work until you decide to retire. But you can sign up for Medicare at 65 and get a small part of Medicare — the free benefits that cover some hospital care — even if you don’t need the full Medicare package while working. (See http://www.ssa.gov/pubs/EN-05-10530.pdf.) Signing up doesn’t have to mean you give up your health insurance at work. And the hospital coverage you get free through Medicare Part A can supplement the health insurance you have through your workplace insurance, said Philip Moeller, who walks people through the confusing Medicare requirements in his book, “Get What’s Yours for Medicare.”

If you are going to keep working after 65, you simply say on the Medicare form you fill out that you won’t be claiming the form of insurance yet that covers doctors because you have solid coverage through work. (See faq.ssa.gov/link/portal/34011/34019/Article/3773/How-do-I-sign-up-for-Medicare.) In other words, you aren’t taking Medicare Part B at that time. Part B is the Medicare insurance that you will use later in retirement to pay for doctors, outpatient treatment and supplies like knee braces or walkers.

After doing the basic sign-up at age 65, you will get a Medicare card in the mail and you will start being eligible for one of the three parts of Medicare: Part A. Later, when you actually retire, or when you don’t have solid medical insurance through work, you will need to sign up for full Medicare coverage. Then, you will be able to rely on all three parts of Medicare — Part A for hospitals, Part B for doctors, equipment like leg braces and walkers and outpatient medical services, and Part D for some prescriptions. For Part B, you will pay premiums each month — typically $104.90, although what you pay depends on your income. Your drug Part D cost depends on the plan you choose from numerous insurance companies, and you need to scrutinize them carefully to make sure they cover your particular prescriptions. Monthly premiums for popular drug plans range from about $18 to more than $66 and swing dramatically depending on where you live, Moeller said.

If you plan to rely on your employer insurance while working, beware: Employers can’t kick you out of their health insurance at 65 or as you age, but that rule applies only to businesses with 20 or more employees, Moeller notes. So if you work for a small company with only a few employees, at age 65 you could end up needing to sign up for Medicare and also start using — and paying for — all three types of Medicare: Parts A, B and D. Your employer is supposed to tell you if your insurance through work is considered to be sufficient enough that you don’t have to apply for full Medicare. If not, you will have to apply for full Medicare including Parts A and B.

If you don’t have acceptable coverage at work, and fail to sign up for Medicare when 65, the government can penalize you throughout your retirement. When you start using Medicare Part B for doctors, the penalties could boost your monthly payments by 10 percent for each full 12-month period. (See http://www.medicare.gov/your-medicare-costs/part-b-costs/penalty/part-b-late-enrollment-penalty.html.) If you miss the deadline for signing up for drug coverage through Part D, another penalty on drug coverage can last through retirement. (See http://www.medicare.gov/part-d/costs/penalty/part-d-late-enrollment-penalty.html.) There are specific times during the year when you must enroll. Make sure you pay attention to enrollment periods because there is no leeway.

If possible, wait on Social Security. Although you can start getting Medicare at age 65, and must pay attention to paperwork then, Social Security is different.

You don’t have to apply for Social Security at a certain age, and the longer you wait, the better. Most people who are around 65 now won’t be able to retire and get full Social Security retirement benefits until they are at least 66. If they are healthy and can work until 70, they will boost their Social Security benefits significantly. For each year a person waits to retire after 66, the person can increase his or her Social Security payments 8 percent a year. And there are also cost-of-living increases in Social Security benefits annually. Those payments are guaranteed. You aren’t going to find a guarantee like that in any investment. That makes waiting to retire a smart move if possible.

Budgeting and investing. When you start depending on Medicare, you will not be able to count on it for all your medical needs. Full Medicare covers only about half of your medical expenses. So as you plan for retirement, you will need to shop for supplemental insurance that picks up where Medicare leaves off. There are two types: Medigap insurance and Medicare Advantage plans. They differ in what they charge, what they cover, and whether they apply to your community, or cover your medicines, your doctors and the places where you might travel. Costs vary broadly with some of the expensive Medigap plans costing well over $600 a month per person. (See Medicare’s PlanFinder http://www.medicare.gov/find-a-plan/questions/home.aspx.)

Also, realize that your income impacts what you will be charged for Medicare and the taxes you pay on Social Security. So financial planners suggest that people examine their savings a few years before retiring to ensure that during retirement they have a blend of IRA and Roth IRA plans. Roth IRAs don’t get taxed in retirement and IRAs are taxed. So by plucking a little money from each of the two plans for expenses each year, retirees can keep their taxes down and hold on to more of their Social Security and Medicare benefits than they would if they didn’t consider tax implications.

Why the Stock Market Is Stacked Against Donald Trump

My Comments: I don’t think of myself as a woe and gloom person. I really want stocks and bonds to perform well and make money for my clients. That’s the ideal outcome for them and for me.

But as you’ve heard me say before, we do not live in a perfect world. And right now it’s far from perfect in terms of the markets and the opportunities for our investment portfolios to grow.

I wish I had a perfect answer, but I don’t.

by Shawn Tully | December 1, 2016

For a few golden weeks in November, U.S. stock markets loved Donald Trump. As this magazine went to press in late November, equities were in the middle of a record-setting rally that charged Wall Street pundits and strategists with a fresh sense of optimism. Market watchers at Goldman Sachs GS 2.54% , JPMorgan Chase JPM 1.98% , and Raymond James RJF 2.34% cited Trump’s pledge to roll back burdensome regulations and lower corporate tax rates as decidedly bullish for U.S. stocks.

But for investors who study the forces that govern stock prices long term, the outlook was no more upbeat after the election than it was before—and it was far from terrific. Put simply, equities are really, really expensive, and only became more so after Trump’s surprise victory. “The best predictor of future returns is whether you buy at low or high prices relative to earnings,” says Chris Brightman, chief investment officer of Research Affiliates, a firm that oversees strategies for $161 billion in mutual funds and ETFs. “Today individual investors and fund managers who expect the near-double-digit returns we’ve seen over history will be sorely disappointed.”

James Montier, a value investor at asset-management firm GMO, provided this dim appraisal of U.S. stocks: “This is a hideously expensive market, and I don’t need to own it.”

Take a deeper dive into the thinking of pessimists like these, and it’s hard not to reach similar conclusions. (More on that in a moment.) Fortunately, investors can garner much bigger rewards by looking beyond the super-rich American market and beyond stocks in general. This is the time to take a broad, venturesome view encompassing all the best—meaning mainly the cheapest—places to put your money.

As we’ll see, spreading your portfolio across a broad range of underpriced assets can add crucial percentage points to your returns. Best of all: If you do it thoughtfully, you can improve your odds while shouldering little or no extra risk.

Go Abroad

Chris Brightman, chief investment officer of Research Affiliates, thinks that a foreign-centric stock portfolio could outperform a U.S.-only portfolio by as much as three percentage points a year over the next decade.

Play Inflation
Rising inflation could be a mixed blessing for stocks. But it’s good for investors in floating-rate bank loans (whose interest payments rise with inflation) and TIPS, Treasury securities whose principal rises with consumer prices.

Collect a Check

When stock price growth is sluggish, dividends account for a much bigger share of investors’ gains. The problem: Dividend-paying stocks are historically expensive right now.

Let’s examine why the near future for U.S. stocks looks downbeat. Over the past 100 years, the S&P 500 has delivered average annual returns of 9.6%. Wall Street optimists and many pension fund managers believe that past is prologue and that equities will continue to deliver those historical returns. But it won’t happen for a while for one reason: On average the folks who pocketed those nearly double-digit gains in past decades were buying at far lower prices than the big valuations prevailing today.

Here’s why the market math is so daunting. When you purchase a broad swath of equities, say an S&P 500 index fund, the returns you can expect over the next decade or so comprise four building blocks: the starting dividend yield, projected growth in real earnings per share, expected inflation, and the expected change in “valuation”—that is, the expansion or contraction in the price/earnings (P/E) multiple.

Let’s start with the first building block: the dividend yield. The main reason high prices foretell paltry gains is that rich valuations make dividend yields smaller. It’s dividends that have provided the richest rewards to investors. Since 1871, the S&P dividend yield has averaged 4.9%, though it has been lower in recent decades.

The problem is today’s highly elevated P/E ratio. The P/E of the S&P 500 stands at 24; that’s well above the average of 16 over the past century, and 19 since around 1990. Big U.S. companies, on average, pay out half their earnings in dividends. But because the “P” is so towering, you get far fewer dollars in dividends for every dollar you pay for stocks. Today the S&P dividend yield stands at a slim 2%.

So how much will the second building block—real growth in earnings per share—add to that weak yield? In today’s bluebird forecasts for stocks, the biggest fallacy is highly inflated expectations for earnings. “Since the mid-1980s, profits have grown at unusually high rates, giving rise to the mistaken idea that we were in a ‘new normal,’ ” says Brightman. “Earnings rose to a historically high share of national income that they couldn’t possibly sustain.” In fact, the inevitable decline has already begun. S&P profits, based on trailing earnings per share over the past four quarters, peaked in September 2014 and have dropped by 15% over the past two years.

Although earnings careen in a zigzag pattern from year to year, their trend stretching over long periods is remarkably consistent. U.S. profits expand with the overall economy, growing at an annual clip that has exceeded 3% over the past century. But what matters to investors is earnings per share, what they’re effectively receiving in dividends, buybacks, and reinvested profits that drive capital gains. And it turns out EPS expands at just half that rate, or around 1.5%, adjusted for inflation.

The reason for the big lag is twofold. First, companies constantly issue new stock to reward executives and make acquisitions, and the new issues far exceed buybacks. Those extra shares dilute the portion of profits flowing to existing shareholders. Second, new enterprises, often funded by IPOs, invade their markets and reduce the incumbents’ share of the industry’s profit pie. “Profits can grow above trend for certain periods, but they’re still elevated,” says Brightman. “The best assumption is that they grow at the historical real rate of 1.5%.”

To sum up so far: A 2% dividend yield, plus the 1.5% projected EPS growth, should deliver a future real return of 3.5% a year for the next decade. Add the third building block, the approximately 2% inflation predicted by the Fed, and the total expected return on big-cap U.S. equities comes to just 5.5%.

Can Stocks, Bonds, Metals, Currencies All Be Wrong About Trump? Yes

bear-market-bearMy Comments: Perhaps it’s just time to go along for the ride and hope for the best. But I’ve never thought “hope” was an effective investment strategy. If the chance of a Lloyd’s of London type event was not so high, I’d be much happier.

By James Mackintosh | Nov. 28, 2016

Markets may not be the perfectly efficient trading venues of economic theory, but they do tend to be internally consistent. And so it is with Donald Trump. Three weeks after he won the U.S. election, pretty much every investment is telling the same story: renewed growth and inflation in the U.S., no retaliation by emerging markets for any tariffs he might impose and no foreign-policy mistakes.

As a result, there are multiple confirmations for the market’s interpretation of Mr. Trump, whether you look at the prices of shares, bonds, gold, metals or the dollar. How could so many asset classes be wrong?

Actually, quite easily. The danger is that investors are responding to their own prejudices, then receiving reinforcement from one another. While the market is internally consistent, that isn’t enough if it has misjudged the big picture—as it often does on the economy, and even more so on presidents.

The moves since Election Day are big, but in reality are just the acceleration of a trend that already was under way. The market noticed the scent of growth in the summer, and had been slowly switching away from bearish bets since the time Americans went to vote.

Bonds offer the most obvious example, with 10-year Treasury yields (which move inversely to prices) hitting a new low of 1.32% in early July, and rising ever since. By the election they were up to 1.86%, and have since leapt to 2.33%. Investors who held on have lost 7.4% in the 10-year since early July, the most over a similar period since the so-called taper tantrum of 2013.

The pattern in equities has been similar. As bond yields rose, growth-sensitive cyclical stocks beat safer defensive shares. By Election Day, cyclicals were well ahead, and have since gone stratospheric. Meanwhile, prices for industrial metals are surging. Gold has been left behind.

The market often misreads these big macro stories. Take the 2013 taper tantrum, or a period in 2010 when markets bet big on a rapid postrecession recovery—only for panic to set in when the economy proved weak.

One hopes Mr. Trump will inherit a recovering economy and boost growth further, and those who jumped onto market momentum will be right, if for the wrong reason.

But history suggests markets aren’t that good at judging presidents. And that presidents just aren’t that important to stock prices. The worst performance of U.S. stocks between Election Day and Inauguration Day came ahead of Franklin Roosevelt, Richard Nixon and Barack Obama’s first terms and Lyndon Johnson’s 1964 election, according to calculations by Birinyi Associates. Yet after FDR and Mr. Obama took office, the market boomed, while it did perfectly well under Nixon and LBJ.

The market wildly misjudged the potential of Herbert Hoover. His election-to-inauguration stock price jump hasn’t been bettered, but the 1929 crash was on his watch and no president since has overseen such poor returns. Dwight Eisenhower was rare, being welcomed with strongly rising stock prices which carried on up once he took office.

The 3.4% rise in the S&P 500 since the election is already more than Ronald Reagan received between the vote and inauguration in either of his terms. Maybe this time the market’s right, and a new boom beckons. Maybe.