Tag Archives: financial advisor

Where To Invest

My Comments: There is a lot of fear these days about money. We all know that from time to time the markets experience a correction. Depending on how old you are and when you expect to use the funds you have, this fear is normal.

So how do you deal with it? Again, depending on your age and attitude about investment risk, you turn either to a trusted third party to make those decisions for you or you figure it out on your own. Or a little of both.

As a professional retirement income planner, I’ve got some experience with this question. But like everything else in life, I can only make an informed guess about the future. Here are some suggestions for you to consider.

By James Connington / Jun 26, 2017

With markets at all-time highs, investors are sitting on cash and struggling to decide how to use it.

The fear is that they will be investing at the worst possible moment, and face seeing investment values plunge if and when the market takes a downturn.
In Britain, seemingly unending political turmoil has been accompanied by a meteoric rise in the FTSE 100 index that many worry can’t continue.

When it comes to the US, neither active funds – which mainly fail to beat the market over any meaningful time period – or buying the incredibly expensive market, via an index tracker fund, look like appealing options.

Telegraph Money spoke to a selection of fund managers to help narrow some options that still offer a good balance between risk and reward.

All of these managers run multi-asset or multi-manager funds – all-in-one portfolios that contain a mix of shares, bonds, funds or other assets from a variety of sectors.

In theory, this should minimise the bias to a particular asset or region specialist managers may fall victim to.

Their picks include investment trusts specialising in property, European and Asian stocks, and the US energy sector.

Jacob Vijverberg, Kames Capital

Mr Vijverberg said he is less comfortable with assets that are dependent on earnings growth, such as regular stocks, because he thinks earnings expectations are too high.

Instead he highlighted global real estate investment trusts (Reits) as offering a good risk-reward balance.

A Reit is a listed company that owns and runs buildings to generate an income for investors.

Mr Vijverberg said: “We expect rates to stay low in the developed world, meanings Reits can continue borrowing cheaply. Additionally, rental contracts are generally linked to inflation, offering guaranteed income increases.”

He favours Reits that own properties used for logistical or industrial purposes, or hotels, rather than residential buildings.

In its multi-asset funds, Kames holds Tritax Big Box; this Reit invests in large warehouses and logistics facilities in Britain used by retailers such as Amazon. It charges 1pc.

Late last year, the Kames multi-asset team increased its investment in American Reits too, including Welltower, which invests in care homes and health facilities.

Welltower is listed on the New York Stock Exchange and is a part of the S&P 500 index. British investors should be able to access it via “fund shops” that offer international share dealing such as Hargreaves Lansdown and TD Direct.

John Husselbee, head of multi-asset at Liontrust

Mr Husselbee said that while stock markets continue to “shrug off” political events, “it’s hard to point to any sector that screams real value on a short to medium term view”.

He explained that diversification is therefore more important than usual, and so the best risk-reward proposition at present “lies in the developing markets of the Asia Pacific (excluding Japan) and emerging markets sectors”.

For Asia Pacific specifically, he said the region offers an “attractive and diversified dividend income”, which has value given many investors’ desperate hunt for income producing investments.

He highlighted Schroder Asian Income as one way to gain exposure, as it “provides a degree of safety in what can be a volatile market”. The fund charges 0.93pc and yields 3.5pc.

In the wider emerging markets sector, Mr Husselbee recommended Stewart Investors Global Emerging Markets Leaders. The fund charges 0.92pc.

Marcus Brookes, head of multi-manager investing at Schroders

Mr Brookes said European and Japanese stock markets offer better value than the US market at the moment.

This, he explained, is largely due to the lower valuations on offer, but also due to concerns that US company margins and sales “could be peaking”.
He said this would be a “worrying condition should the US experience an economic misstep”.

He explained: “In Europe and Japan we find relatively attractive valuations combined with margins and sales that are far from their peak.”

In his popular Schroder Multi Manager Diversity fund, Mr Brookes has around 6pc invested in the TM Sanditon European Select fund, and 4pc in the Man GLG Japan Core Alpha fund.

These charge 1.16pc and 0.9pc respectively.

Bill McQuaker, Fidelity

The US is the world’s biggest market, yet not all of its component sectors have been doing as well as the overall market.

Mr McQuaker picked out the energy sector as offering an investment opportunity.

He said: “The energy sector is down by around 20pc relative to the S&P 500 over the year to date, and would benefit from any rally in the oil price.”
This is something he views as likely due to global oil cartel OPEC’s extended production cuts, and the “overestimated” impact of US shale oil production on the global price of oil.

If you want to buy the whole US energy sector, BlackRock offers its iShares S&P 500 Energy Sector “exchange traded fund”.

The charge is 0.15pc, to track an index comprised of the S&P 500 stocks categorised as energy companies. Exxon Mobil and Chevron account for more than 40pc of the index.

The other option is a global energy fund that invests heavily in the US. Guinness Global Energy is often tipped by experts Telegraph Money speaks to. It is around half invested in the US, and charges 1.24pc.

Artemis Global Energy, Investec Global Energy and Schroder Global Energy are all between 40pc and 60pc US invested too.

Is Social Security Going Broke?

My Comments: In 1983, when Social Security was on the verge of going broke, Congress made some changes to keep it alive and well. It’s again on the verge of going broke and there are ways to fix it.

But were not yet close enough to the edge of the cliff for there to be the necessary political will to fix it.

You have to remember, things only get done within the context of ONE ELECTION CYCLE. Absent that pressure, the can gets kicked down the road. The remedy won’t likely appear until 2030. If then.

Social Security is expected to run out of money by 2034. Here’s the problem. by Matthew Frankel \ Mar 26, 2017

You may have heard certain things about Social Security’s financial condition — maybe that the system is “broke” or that it won’t be able to pay benefits for much longer. Fortunately, statements like these are a bit of an exaggeration. Social Security’s trust fund has plenty of money in it for the time being, but this isn’t expected to last beyond 2034. Here’s the truth about the current state of Social Security’s finances and why it is projected to run out of money in about 17 years.

The current and projected financial state of Social Security

According to the 2016 Social Security Trustees Report, the most recent available, the Social Security trust fund had roughly $2.8 trillion in reserves at the end of 2015. What’s more, Social Security has run at a surplus since 1982 and is projected to do so through 2019. In other words, for the next three years, Social Security’s income from taxes and investment revenue will exceed the cost of the benefits it pays out.

Unfortunately, that’s where the good news ends. In the year 2020, Social Security is projected to start running annual deficits, which are expected to grow quickly and continue for the foreseeable future. In order to pay benefits, reserve assets from the trust fund will need to be redeemed. As a result, the Social Security trust fund is expected to be completely depleted by 2034. After this point, the incoming tax revenue will only be enough to cover about three-fourths of promised benefits.

To be perfectly clear, the reason Social Security is expected to start running annual deficits and eventually run out of money isn’t because of fiscal mismanagement or anything of that nature. Rather, it’s a simple cash flow problem.

Reason 1: Baby boomers are retiring

It all starts with the post-World War 2 “baby boom.” During the time period from the end of the war until about 1964, babies were being born at some of the highest rates in modern history. To illustrate this, here are the total fertility rates, defined as the number of babies born per woman throughout her lifetime, based on the birth rate of that year, throughout our recent history.

As you can see, there was a huge uptick in the number of babies being born in the post-war decades. Since then, the total fertility rate has held steady at around two children per woman.
The baby boomer generation is generally defined to be Americans born between 1946 and 1964. Therefore, this group represents Americans ages 53 to 71 today. In other words, this is the group that is starting to retire now, and will continue to reach retirement age over the next decade and a half.

Reason 2: Modern medicine has resulted in longer life expectancies

The other contributing factor to Social Security’s expected financial woes is that modern medicine has resulted in Americans living longer lives and therefore collecting Social Security benefits for a greater number of years.

According to the Social Security Administration’s (SSA) life tables, a man who was born in 1900 lived for about 13 years after reaching the age of 65. However, a man born in 1960 (a member of the baby boomers I discussed earlier) is expected to live roughly 18 years after reaching 65 years of age. And the life expectancy improvement is nearly as dramatic for females as well. In other words, the current group of retirees is expected to collect Social Security benefits for almost five years longer than the group of retirees 60 years prior.

And this trend is expected to continue going forward. As you can see in the chart below, the average person born in 2000 will live over two decades after reaching the age of 65.


More money flowing out than coming in

As a result of this combination of baby boomers retiring and senior citizens living longer lives, there will be far fewer workers paying Social Security tax for each beneficiary receiving retirement benefits. Image source: 2016 Social Security Trustees Report.

As you can see, from 1980 until almost 2010, the ratio stayed steady at 3.2-3.4 workers paying into Social Security per beneficiary. As of 2016, this ratio has already dropped well below 3-to-1, and is expected to decline rapidly over the next few decades, reaching a level of just 2.2 workers per beneficiary by 2035.

What can be done?

The good news is that there is still time to fix the problem, and there are two main ways it can be done.

• Decrease benefits, which could come in the form of an across-the-board cut, or increase the full retirement age, cut benefits to wealthy retirees, or several other ways.
• Raise Social Security taxes. The current tax rate is 6.2% for employers and employees, assessed on up to $127,200 of earned income. So, a tax increase could either be a higher tax rate or a raising or elimination of the taxable wage cap.

There’s no way to predict the eventual reform package that will be passed, but history tells us that something will be done. It’s just a matter of how long it will take Congress to act and what the eventual solution will look like.

Image sources: Social Security Administration.

A 60-40 Portfolio Could Return Less Than A Savings Account

My Comments: How fast will your money grow?

An expectation of growing money at an annual rate of 7% to 10% going forward is probably unrealistic.

Interest rates and inflation rates are relatively low, and global economic growth rates are likely to slow down over the next two decades. See my earlier posts to understand this: http://wp.me/p1wMgt-1Rp and http://wp.me/p1wMgt-1Qz

June 30, 2017 • Christopher Robbins

Over the next decade, the traditional 60-40 portfolio will post average lower annual returns than many online bank accounts do today, according to a web tool from Newport Beach, Calif.-based Research Affiliates.

A portfolio consisting of 60 percent equities and 40 percent bonds will post average annual real returns of just 50 basis points over the next decade, said Jim Masturzo, Research Affiliates’ senior vice president, asset allocation, on a Wednesday webcast.

“Investing is hard, and this market will kick you in the teeth,” said Masturzo. “The focus should be on how do we create portfolios well-positioned for the future that are able to meet our future spending obligations. For a majority of investors, risk is failing to meet their long-term spending needs.”

Masturzo explained that most of the firm’s assumptions lie on projections for 50 basis points of annual growth from large-cap stocks. The S&P 500 is projected to produce an average annual dividend yield of 2 percent and long-term earnings growth of 1.3 percent, but lose 2.8 percent in valuation annually.

By comparison, annual percentage yields of 1 percent or more are available in online savings accounts from Ally and Synchrony, and online checking accounts from Aspiration.

The low return estimate might come as a shock to some investors, admits Masturzo. In equities markets, earnings growth has failed to keep up with rising stock prices, while fixed-income returns will continue to be muted by low short-term interest rates and monetary tightening by central banks.

Yet a 60-40 portfolio had returned 4.9 percent net of inflation year to date through May 31, said Masturzo, with the Bloomberg Barclays U.S. Aggregate Bond Index yielding 1.2 percent, while U.S. large-cap stocks have returned 7.4 percent—a “spectacular rise in the markets.”

“The most common question we hear is: ‘Can this continue?’” said Masturzo. “I don’t know, but history tells us that it is unlikely.”

During the webcast, Masturzo used Research Affiliates’ newly updated Asset Allocation Interactive (AAI) tool to visually demonstrate the firm’s projections for future returns across asset classes, geographies and factors.

Research Affiliates predicts that there is a less than 1 percent chance that a traditional 60-40 portfolio will be able to post real returns of 5 percent or more over the next decade. The company assumes that the portfolio will generate a 2.4 percent average annual net yield, but an average annual valuation change of 1.9 percent.

A portfolio offering a 5 percent average annualized return is still possible, said Masturzo, but advisors would be better off optimizing returns through diversification and rebalancing than by adding risk.

Masturzo said that advisors and investors will have to think beyond traditional investments to generate yield and growth.

“Opportunities do exist beyond mainstream stocks and bonds to take advantage of asset classes with lower valuations or attractive cash flows,” Masturzo said. Yet most advisors are diversifying within highly correlated areas of the market and not across asset classes. Higher returns might be found in credit markets, commodities, REITs and private investment opportunities, and within non-U.S. markets.

Investors might also consider active strategies to produce differentiated returns, said Masturzo.

“Alpha is an important part of this discussion, especially when you’re talking about expensive asset classes,” he said. “We’re big believers in adding value through contrarian trading.”

At the heart of the tool is a scatterplot of risk and return demonstrating historical data or expectations from Research Affiliates projecting an efficient frontier defining a normal distribution around a portfolio’s probable returns.

The AAI tool is an interactive web tool that provides expected return data across more than 130 assets and model portfolios. The tool allows advisors to create and customize their own portfolios, or to blend existing portfolios to view expected and optimized returns and risk across five different currencies, and to discover correlations within their portfolios.

AAI also allows users to view cyclically adjusted price-to-earnings (CAPE) ratios across equity markets and compare them with each other, or compare current valuations against the historical range for each market.

During his demonstration, Masturzo used the AAI tool to show that, based on the Research Affiliates projections, increasing the volatility of a 60-40 portfolio by 14 percent by diversifying away from bonds and U.S. stocks is still not enough for it to reliably post 5 percent average annualized returns.

“Increasing volatility tolerance is a bad approach to achieving 5 percent real returns,” said Masturzo. “For those who want to do so, we believe you should approach a maverick approach to risk and add value beyond a passive approach by accessing contrarian advice within asset classes.”

Protectionists Are Wrong About Unemployment

My Comments: This doesn’t tell the whole story. But it helps. And, yes, this does have political implications.

Make America Great Again is a very complicated matter. What a surprise. And you thought it would be easy and would happen overnight after we drained the swamp. Well…

Donald Boudreaux is a senior fellow with the F.A. Hayek Program for Advanced Study in Philosophy, Politics, and Economics at the Mercatus Center at George Mason University, a Mercatus Center Board Member, a professor of economics and former economics-department chair at George Mason University. He writes:

What I think is missed is the average income for those employed. We know there is an increasing disparity between those at the top and those at the bottom. We have to find a way to turn this around, or there will be more than just rioting in the streets. It’s in our best interest to do this, not just for those in the middle and the bottom, but also for those at the top. If no one can afford what those at the top are offering, no one will buy it.

The following quote is from pages 30-31 of my Mercatus Center colleague Daniel Griswold’s excellent 2009 volume, Mad About Trade (footnotes excluded):

In the past four decades, during a time of expanding trade and globalization, the U.S. workforce and total employment have each roughly doubled…. Since 1970, the number of people employed in the U.S. economy has increased at an average annual rate of 2.22 percent, virtually the same as the 2.25 percent average annual growth in the labor force. Despite fears of lost jobs from trade, total employment in the U.S. economy during the recession year of 2008 was still 8.4 million workers higher than during the 2001 recession, 27.6 million more than during the 1991 recession, and 45.8 million more than the 1981-82 downturn.

Nor is there any long-term, upward trend in the unemployment rate. In fact, even counting the recession year of 2008, the average unemployment rate during the decade of the 2000s has been 5.1 percent. That rate compares to an average jobless rate of 5.8 percent in the go-go 1990s and 7.3 percent in the 1980s.

After decades of demographic upheaval, technological transformations, rising levels of trade, and recessions and recoveries, the U.S. economy has continued to add jobs, and the unemployment rate shows no long-term trend upward. Obviously, an increasingly globalized U.S. economy is perfectly compatible with a growing number of jobs and full employment.

The Next Recession

My Comments: It’s a given there will be a ‘next recession’. People much smarter than me say it’s not many months away. It’s a normal event and we’ll most likely survive.

What we may not survive, however, apart from a random collision with an asteroid, are the effects of income inequality across the planet and the massive debt overhang facing us in this country. Combine those two forces and you know there’s going to be chaos down the road.

Olivier Garret, Forbes Contributor / Jun 26, 2017

In the coming years, we will have to deal with the largest twin bubbles in history. It’s global debt (especially government debt) and the even larger bubble of government promises.

Together, these twin bubbles make up what investor John Mauldin calls “The Great Reset.” Nobody can tell how this crisis will play out, but one thing is for sure, it will affect everyone in a big way.

The Debt Burden Is at a Breaking Point

The mere existence of these bubbles has profound economic implications, as research shows high debt levels weigh heavily on economic growth.

The total debt-to-GDP ratio is at 248% today. The non-partisan Congressional Budget Office (CBO) projects it will rise to 280% by 2027. And that’s assuming nominal GDP grows at 4% per annum.

Despite the post-election optimism, nominal GDP growth in 2016 was just 2.95%—making it the fifth-worst year on record since 1948. There are no signs it will pick up soon either.

That means the reality may be even gloomier than what the CBO projects.

If a higher debt burden means lower growth, the recovery from the next recession, whenever it arrives, will be even slower than the last.

Now Count in Government Promises

Those sky-high debt-to-GDP ratios don’t factor in the unfunded liabilities—pensions, Medicare, and Social Security, which the US Government has promised to millions of Americans. Those total about $100 trillion today.

The chart below shows that by 2019 those unfunded liabilities, along with defense and interest, will consume ALL tax revenue:

Last year, the first baby boomers turned 70. The average boomer has just $136,000 in retirement savings. If that individual lives for 15 years after retirement, his annual income comes to just $9,000.

Because boomers are living longer and need income, they’re staying in the job market longer. The fastest employment growth now is among people 65 and older.

However, with 1.5 million boomers turning 70 every year for the next decade, a huge strain will be put on government finances in the form of pensions and Social Security.

But the pension crisis isn’t just in the US.

A Citibank report shows that the OECD countries face $78 trillion in unfunded pension liabilities. That is at least 50% more than their total GDP.

Pension obligations are growing faster than GDP in most, if not all, of those countries. Those obligations sit on top of a 325% global debt-to-GDP ratio.

Prepare in Advance

Politicians and central bankers could try to “fix” these problems in several ways.

They could default on the debt and pension obligations, or they could print money to fund them. There is no way of knowing ahead of time how these bubbles play out.
What we do know is the chosen approach will bring a different type of volatility and effect on the markets.

For investors, this will be a period of enormous volatility.

That’s why it’s essential to arm yourself with the knowledge of how to deal with this volatility ahead of time.

Are You Ready For The Next Crash?

My Comments: Dr. Doom here once again! Fundamentally, I’m an optimist, except when the shadows of doom are clearly in the wings. If your money is exposed to the markets, I encourage you to read this.

If you can, look carefully at the chart and note the changes in key metrics for our economy between the two time periods.

In part, this explains why the Tea Party in Washington wants to kill any improvements to health care. But without explaining and encouraging an understanding of these metrics, whatever legitimacy the current Congress has for limiting money spent on health care goes down the drain.

I choose to ignore the author’s recommendations about what stocks to buy; I’m more interested in the coming fundamental upheaval in our ability to sustain our standards of living.

by SHAWN LANGLOIS Mar 4, 2017

The man behind the iBankCoin blog on Thursday morning asked his readers: “Where were you when Snap ripped off America?”

While his rant focused on the wild valuation the Snapchat parent SNAP, -7.95% reached in its debut, others may see the booming IPO as a last gasp before the bubble pops like it did back in the days of Pets.com and Webvan.

But the truth is, this market climate — which has seen record runups for the Dow DJIA, +0.07% , S&P 500 SPX, -0.01% and Nasdaq COMP, +0.17% — is nothing like we saw during the dot-com hey day. By many measures, it’s actually worse, according to numbers crunched this week by 720 Global’s Michael Lebowitz.

“Even though current valuation measures are not as extreme as in 1999, today’s economic underpinnings are not as robust as they were then,” he wrote. “Such perspective allows for a unique quantification, a comparison of valuations and economic activity, to show that today’s P/E ratio might be more overvalued than those observed in 1999.”

In this chart, Lebowitz stacks up the metrics from the years running up to the dot-com explosion versus what we’ve seen since 2012:

Lebowitz acknowledged, of course, that equity valuations back in 1999 were, as proven after the fact, “grossly elevated.”

But when put up against a backdrop of economic factors, he says those numbers appear to be relatively tame compared with today.

“Some will likely argue with this analysis and claim that Donald Trump’s pro-growth agenda will invigorate the outlook for the economy and corporate earnings,” he wrote. “While that is a possibility, that argument is highly speculative as such policies face numerous headwinds along the path to implementation. Economic, demographic and productivity trends all portend stagnation.”

His bottom line: “There is little justification for paying such a historically steep premium for what could likely be feeble earnings growth for years to come.”

Retirement: Get Help or Not?

My Comments: Some people have an innate ability to look after money. Others, not so much.

This is especially critical as you transition from working FOR money to when money is working FOR YOU. We call this retirement.

It’s further complicated because the financial advice industry is now undergoing a massive shift in how you receive that “advice” and how much you pay for it. How do you you choose that person or company and are they worth the effort? Are the fees they charge justified?

The article that follows is an attempt to help you work through this question. Know that the conclusions reached by the author may no longer be valid.

By Nick Thornton October 26, 2015

New analysis of investment returns from managed accounts shows participants who are using the option (to get help) often have a substantial advantage over those who don’t, according to a study published by Empower Retirement.

In “The Haves and the Have-Nots: What is the Potential Value of Managed Accounts,” the industry’s second largest record keeper examined the account performance of more than 315,000 participants in almost 1,800 plans, from 2010 to 2015.

The average annualized return from managed accounts was 9.77 percent, net of fees, compared to 7.85 percent for participants who don’t use a managed account option.

Moreover, participant accounts without managed options experienced a wide discrepancy in rates of returns.

The data shows a spread of nearly 11.5% between the best- and worst-performing non-managed accounts.

But managed accounts experienced substantially less volatility in their performance — only about a 4 percent spread between the best and worst performing accounts.

Empower’s study, which was conducted with its subsidiary RIA, Advised Assets Group, suggests the difference in both the extra returns seen in managed accounts, and the wide variance in returns with non-managed accounts, is largely explained by behavioral finance.

Ed Murphy, president of Empower, says managed accounts can neutralize participants’ natural instinct for loss aversion, which can influence the stasis so often experienced in non-managed accounts.

That fear can keep savers in a poorly balanced strategy.

“Managed accounts can take the emotion out of investing,” said Murphy in an interview. “More and more, participants are showing they want help designing and managing a strategy. A managed approach can give participants the confidence they need that investments in their plan are properly allocated.”

Murphy said Empower is seeing growth in terms of the number of plans adopting a managed option and the number of participants actually enrolling in them. Because of their relative novelty in the market, previous comparisons have been hampered by limited data.

But this year’s study incorporated data from 64 percent more plans and 159 percent more participants than last year’s study, as more savers have been enrolled in managed accounts long enough to be eligible for review.

That suggests a more accurate accounting of how well managed accounts are faring, said Murphy.

“The results are convincing,” he added. “Look at the compounding effect of an annual difference in 200 basis points. Over a participant’s lifetime, it can mean an astronomical increase in retirement savings.”

Fees are important, underscored Murphy, because he thinks an excessive preoccupation with cost can have the adverse affect of participants overlooking the need to understand their risk profile. That can result in volatile, and often lack-luster, returns.

Earlier this year, Cogent Reports, the financial services research arm of Market Strategies International, released research showing one-fifth of plans with at least $500 million in assets are defaulting participants into managed accounts.

That’s a notable increase from just last year, when only 5 percent of such plans were doing so.

As adoption has grown, and as more record keepers and advisors create managed products for the market, some have suggested they are poised to replace target-date funds as the next evolution in plan design.

Murphy is skeptical of that theory, and says both options will have their place for the foreseeable future, as different investors will be attracted to different strategies.

But he does say the conventional target-date strategy is “outmoded.”

“Take two 40-year-old participants. One has saved, the other hasn’t. One has a history of cancer, the other is healthy. Both are put in the same TDF with the same glide path. There’s not enough personalization,” said Murphy.

“And there is a substantial difference in the risk different funds with the same glide path take on. I think people purchase them without a full appreciation of the risk involved,” he said.

That said, he doesn’t see target-date funds going away. He does, however, see them evolving.

Anecdotally, Murphy says interest in managed accounts is growing with all types of sponsors, but that their popularity is particularly notable among sponsors of public plans, such as state and local governments.

Still, challenges remain. Education on managed accounts, and their value proposition, remains essential.

“We believe this new paper presents a strong empirical case for considering managed accounts as part of a plan sponsor’s offering to its plan participants. We will be sharing it with both advisors and clients as a way to drive the discussion further,” he said.