Tag Archives: investment advice

This Is Not How A Bear Market Starts

My Comments: Today is Memorial Day, and the markets are closed in this country. It’s a day for us to instead remember those of us who gave their lives that we might continue with ours. Pray that fewer lives will be given in the years to come.

The following comes from someone whose name I do not know. But if you can wade through the math and graphics, you may find that the world is not about to end. At least financially.

Here’s how the author describes himself: “I have a degree in Math and Science from the University of Toronto, as well as a degree in education, also from U of T. I have traded private equity for 38 years and have developed a proprietary Price Modelling System which has provided me with consistent profitable trading success. In partnership with my computer scientist son, Aidan Gomez, we have automated this model using neural networks, and offer a Trade Alert service that lets subscribers replicate the trades we are involved in.”.

To see the charts, you’ll want to visit the source article HERE.

May 22, 2017 | ANG Traders

Summary
There has been much digital ink spilled trying to convince us that the bull market is on its last legs.

We present fundamental and technical reasons to support the idea of an ongoing bull market.

Black swans aside, this is not how bear markets start.

There has been, and continues to be, an inordinate amount of digital ink spilled promulgating the imminent demise of the bull market. Most of the arguments for this, center around the near-historic levels of certain metrics, such as PE ratios and S&P averages, but they ignore the factors that truly coincide with the launch of bear markets. In this piece, we will attempt to elucidate several of the metrics that we have correlated with bear or bull markets, and hopefully, show that the bull market is alive and well.

Rate Differential
When the 10-y minus the 2-y Treasury rate inverts, it has a way of marking the end of bull markets. When this differential turns negative, in conjunction with low unemployment, investors should look for an exit. Today, the unemployment rate is low, but not as low as in 2000 or 2007, and the 10-y minus 2-y rate is still a healthy +1%. It will take several sizable Fed rate hikes before the rate differential inverts (chart below). This does not look like the start of a bear market.

Fed Funds Rate

It is obvious that when the Fed raises rates, the bull market dies, but often when it comes to the market, what is obvious, is obviously wrong. In fact, three of the last four bull markets occurred while the Fed raised rates – the latest bull market being the exception (chart below). The Fed has lots of room to raise into a growing business cycle. Bear markets do not start when low rates are being raised.

Industrial Production
Except for a five-month period in 2002, a rising industrial production has coincided with a rising SPX. The chart below demonstrates this strong positive correlation. Bear markets do not start with rising industrial production.

GAAP Earnings

The Generally Accepted Accounting Principles (GAAP) earnings enjoy a positive correlation with the S&P 500. The GAAP earnings started rising two quarters ago, and the current quarter is shaping up to be positive also. Bear markets do not start with rising GAAP earnings.

Technical Indicators
The 8-month moving average remains above the 12-month moving average, the MACD is rising, the ADX is displaying a bullish pattern, and the RSI and stochastic are elevated, but they can remain elevated for long periods of time (chart below). This is not how bear markets start.

Investor Sentiment
Bull markets climb the proverbial “wall of worry.” There is a lot of geopolitical and intramural politics to worry about, and which are feeding the bull market. Bear markets do not start when there is fear around. They start when investors are confident and throw caution to the wind. The AAII investor sentiment indicator stands at a fearful 24% bullish sentiment, and 34% bearish sentiment (red and blue arrows respectively on the chart below). Bear markets start when bullish sentiment is over 50%, and bearish sentiment is under 30% (red and blue oval on the chart below). This is not how bear markets start.

In conclusion, the evidence presented paints a picture of a bull market that is still fearful and healthy. That is not to say that a black-swan won’t fall out of the sky and ruin the picnic, but judging from what we can and do know, a bear market is not imminent.

Social Security Rules

My Comments: For millions of us, Social Security is critical for keeping our heads above water. If you are just now entering the transition to retirement, what you read here is basic information you need to be aware of.

Wendy Connick / May 12, 2017

Calculating your Social Security benefits can get…complicated. It’s not just a matter of looking at the number on your Social Security statement and figuring that’s how much you’ll get. A number of different rules will have an impact on determining your final, actual benefit check, so it’s important to understand these rules and how they may affect your benefits.

Rule No. 1: Your base benefits are determined by your 35 highest-income years

When calculating your benefits, the Social Security Administration only looks at your 35 highest-income years. If you worked more than 35 years, the rest of your work history (and the money you paid into Social Security) simply doesn’t count toward your benefits calculation.

Rule No. 2: Social Security retirement benefits come in three flavors

Setting aside disability benefits, there are three kinds of Social Security benefits paid out during retirement: basic retirement benefits, spousal benefits, and survivor benefits. Retirement benefits are based on your earnings; spousal benefits are based on your spouse’s or ex-spouse’s earnings; and survivor benefits are based on your deceased spouse’s earnings. Spousal benefits can be up to one-half of your spouse’s full retirement benefits, while survivor benefits can be up to your deceased spouse’s full retirement benefits.

Rule No. 3: You can’t get both spousal and retirement benefits

If you are eligible for spousal benefits and standard retirement benefits based on your own earnings, you can’t get both types of benefits — you can only claim one. If your spouse earned significantly more than you did, this could result in your never actually getting your own retirement benefits.

Rule No. 4: Taking benefits early will cost you forever

If you start taking your Social Security benefits before “full retirement age” (which is typically either age 66 or 67, depending on your birth date), then your monthly benefit amount will be permanently reduced. Start taking benefits at age 62, the earliest possible start date, and your benefits will be reduced by as much as 30% for the rest of your life.

Rule No. 5: Claiming your benefits late results in larger monthly checks

If you wait until after full retirement age to claim your Social Security benefits, your monthly benefit check will increase by 8% for every year you wait. However, these credits stop accruing once you hit age 70 — meaning that it doesn’t make sense to wait longer than that to claim your benefits.

Rule No. 6: Working while receiving Social Security benefits may reduce your benefit checks

If you earn more than $16,920 per year (in 2017) while also receiving Social Security benefits and are under full retirement age, your benefits will be reduced by one dollar for every two dollars that you earn above this base amount. Once you’re above full retirement age, your earnings will no longer limit your benefits. What’s more, the Social Security Administration will credit you for the benefits you didn’t receive in previous years due to earning extra money, and will add that amount to your future benefits.

Rule No. 7: Social Security benefits are capped

For 2017, if you claim your Social Security benefits at full retirement age, the most you can get is $2,687 per month. You’ll get the maximum if your Average Indexed Monthly Earnings during your 35 highest income years was at least $8,843 (indexed means that your earnings are weighted to account for inflation). If you wait until age 70 to claim your Social Security benefits, then the most you can get in 2017 is $3,538 a month. The average Social Security benefit for 2017 is $1,360 per month.

Rule No. 8: Your Social Security benefits may be taxed

If one half of your Social Security benefit plus your other taxable income for the year plus nontaxable interest is equal to or greater than $32,000 (for married filing jointly) or $25,000 (for unmarried taxpayers) then your Social Security benefits will be partially taxable. Just how much of your Social Security benefits will be taxed depends on how much taxable income you have for the year. Nontaxable income, such as distributions from a Roth account, doesn’t count toward this threshold.

Putting it all together

It’s best to get familiar with the Social Security rules well before you’re ready to retire. If you wait until you want to start claiming benefits, you may miss some important opportunities to bump up your benefits. Still, it’s better to learn these rules late than to never learn them at all.

An Overvalued Stock Market?

My Comments: Dr. Doom here again. And boy, do I love this first chart. Many of my colleagues have been encouraging our clients to sit on the sidelines now for about two years or more. And we’ve been blasted because the DOW and the S&P just keeps going up.

Unless you believe the world has been reinvented, it will turn down. At least for a while. And if you have money critically placed to help you in your retirement, my suggestion is to play the odds that the market will turn against you.

There are ways to protect yourself and still make money, but that’s for another day when I change from Dr. Doom to Mr. Happy.

Steve Hunt | April 12, 2017

Since Donald Trump became the 45th president of the United States of America, the S&P 500 has jumped more than 8%. However, at least five different major financial indicators, along with a chorus of financial experts, agree: The stock market is alarmingly overvalued.

We’ve seen these historical moments before: a great boon before a great crash. President Coolidge’s era of excess in the 1920s led directly to the Great Depression. The dotcom boom in the 1990s was followed by a recession. The mortgage bubble burst us into the 21st Century’s Great Recession.

In March 2009, the S&P bottomed at 666. Today it’s trading around 2,300. This marks one of the longest bull markets in history, sparked largely by the Federal Reserve’s low interest rates. In the last decade, the Fed has shouldered a massive amount of debt to keep the economy afloat after the housing crisis, rolling out multiple rounds of quantitative easing. The national debt doubled between 2007 and 2017, from $9.2 trillion to $18.9 trillion.

Moreover, the Committee for a Responsible Federal Budget, a non-partisan group advocating for responsible government spending and debt reduction, predicts that the federal budget could increase by $5.3 trillion in the next decade, raising the deficit by as much as 25%.

Still, consumer confidence was at a 16-year high in March. Investors appear to be displaying optimism for the American economy by investing in stocks, an attitudinal response to President Trump’s rhetoric of unbounded economic expansion.

Unfortunately, the surge in the stock market does not reflect an economy grounded in reasonable economic growth. Financial strategist Michael Pento points out that historically, a recession has occurred in the U.S. about every five years and we’re long overdue.

Generally speaking, when the stock market is overvalued at the extreme levels we are seeing now, a sharp reversal occurs. The bubble bursts. The last time stocks were identified as being riskier than they are now was in 1929 and 1999.

Here are five financial indicators that show an overvalued stock market.

1. According to CAPE the Stock Market Is Overvalued By 75%
Case Shiller’s cyclically adjusted price-to-earnings (CAPE) ratio is a widely respected valuation measure of the U.S. S&P 500 equity market, originated by Nobel Prize-winning economist Robert Shiller. Though CAPE shows the stock market as overpriced since the 1990s (the 10-year CAPE average is 16, meaning that for every $1 a company makes, an investor pays $16), it hasn’t been this high since 2002 and 2007, directly before the last two crashes. For reference, the ratio was at 45 before the dotcom bubble burst in 2002. As of April 11, 2017, the ratio stood at 28.75.

Shiller recently warned against the dangerous “narrative” sparked by the Trump administration. Markets are rising based on unrealistic optimism over future prospects, despite the fact that the market bubble resembles the days leading up to the 1929 crash. Shiller warns that “something is not quite right with the supposedly strong and expanding U.S. economy.”

2. Corporate-Equities-to-GDP Ratio Is At Third-Highest Point in History
There are two primary “Warren Buffet Indicators,” named as such because the famous billionaire identified them as his favorite market valuation tools. One measures corporate equities against gross domestic product (GDP) and the other measures market-cap to GDP.

In December 2016, Wall Street jumped to 27.9 times the corporate earnings of the past 10 years, which registers as extreme on CAPE. It’s only been higher twice since 1950 – in 1999 at the height of the dotcom bubble and in late 2015. As of March 2017, the corporate-equities-to-GDP ratio was 125.3.

3. Wilshire 5000-to-GDP Ratio Is At Third-Highest Point in History

The Wilshire 5000-to-GDP is Buffet’s other favorite indicator – a market-cap weighted index of all U.S.-headquartered stocks traded on the major exchanges. A reading of 100% shows stocks valued fairly – anything over that reflects stock market overvaluation. The Wilshire index as a percentage of U.S. GDP is at 130%, much higher than the 45-year average, which stands around 75%.

4. Goldman Sachs S&P 500 Valuation Shows Stocks Overvalued By 88%
According to Goldman Sachs’ valuation of the S&P, the market is in the 88th percentile on an aggregate basis and in the 98th percentile on a median basis.

5. BofA S&P 500 Valuations Show Stocks Overvalued on 17 Out of 20
As of December 2016, Bank of America showed that the S&P is above average prices along 17 different measures, with overvaluation standing at more than 20% for nine of those.

Looking at the data across these five different metrics, it would be hard to make an evidence-based case for an accurately valued stock market. Instead, what some analysts are calling “Trump hope” seems to be spurring the rush into the rising S&P. It might be weeks, or it might be months or years, but at some point there’s a whole lot of hurt waiting to happen.

Considering the larger picture of growing consumer and national debt, paired with continuing global and civil tensions, the S&P’s performance is an incomplete picture at the very least and a red flag of looming economic collapse at the very worst. Either way, investing too heavily in rising stocks now could easily be considered a bold display of misplaced confidence

Medicare Statistics

My Comments: Medicare is a critical element for retired Americans. These statistics are not jaw-dropping but re-affirm our need to be very careful about making changes to Medicare.

I’m not convinced the folks in Congress have my best interests in mind when they talk about making changes.

Consider yourself enlightened.

Maurie Backman | Apr 20, 2017

You’re probably aware that Medicare provides health coverage for seniors 65 and older. But did you know that Medicare has several distinct parts, each of which provides its own set of services?

Here’s a quick breakdown:
• Medicare Part A covers hospital visits and skilled nursing facilities.
• Medicare Part B covers preventative services like doctor visits and diagnostic testing.
• Medicare Part D covers prescription drugs.

There’s also Part C, Medicare Advantage, that offers a host of additional services. Whether you’re approaching retirement or are many years away, here are a few key Medicare statistics you should be aware of.

1. There are 57 million Medicare enrollees in the U.S. 
A good 16% of the U.S. population is covered by Medicare, but it’s not just seniors who get to enroll. Younger Americans with disabilities are also eligible for coverage.

2. About 11 million people on Medicare are also covered by Medicaid.
Though Medicare offers a wide array of health benefits for seniors, it doesn’t pay for everything. In fact, about 20% of Medicare enrollees rely on Medicaid to pay for services Medicare won’t cover, such as nursing home care.

3. Net Medicare spending totaled $588 billion in 2016.
That’s about 15% of the federal budget. And that number is expected to rise to nearly 18% of the budget in about a decade’s time.

4. The standard Medicare Part B premium amount in 2017 is $134.
Many people assume that Medicare enrollees don’t pay a premium to get coverage, but it isn’t true at all. While Part A is generally free for most seniors, Part B comes at an estimated cost of $134 per month. That number may also be higher depending on your income, or lower if you were collecting Social Security as of earlier this year and had your Part B premiums deducted directly from your benefits.

5. Poor health can be 2.5 times as expensive for Medicare enrollees.
A 2014 report by the Kaiser Family Foundation (KFF) revealed that the typical Medicare enrollee who identified as being in poor health had out-of-pocket costs that totaled 2.5 times the amount healthier beneficiaries faced. This is just one reason it’s crucial for Medicare enrollees to capitalize on the program’s free preventative-care services. Catching medical issues early can often result in a world of savings.

6. A single hospital stay under Medicare can cost almost $4,500 out of pocket. 
Here’s some more discouraging news out of KFF. Back in 2010, Medicare enrollees who had a single hospital stay incurred $4,475, on average, in out-of-pocket costs.

7. Medicare enrollees 85 and older spend three times more on healthcare than those aged 65 to 7.  It’s probably not shocking news that older seniors spend more money on medical care than those a decade or more their junior. But what may be surprising is just how much those 85 and over wind up spending. According to KFF, in 2010, Medicare enrollees 85 and older spent close to $6,000 to cover their healthcare needs.

8. In 2015, 243 medical professionals were charged with Medicare fraud. It’s not uncommon for members of the medical establishment to engage in Medicare fraud, whether it’s in the form of inflating bills, performing (and charging for) unnecessary procedures, or billing for services that were never rendered. The good news, however, is that officials are getting better at identifying and prosecuting Medicare fraud. In fact, in 2007, the Medicare Fraud Strike Force was created to put a stop to fraudulent activity that eats away at the program’s limited financial resources.

9. More than 17 million Americans are enrolled in a Medicare Advantage plan. Medicare Advantage is an alternative to traditional Medicare that offers a number of key benefits, such as coverage for additional services (including dental and vision care) and limits on out-of-pocket spending. Between 1999 and 2016, 10 million Americans signed up for a Medicare Advantage plan, and enrollment now represents roughly 30% of the Medicare market on a whole.

10. A good 38% of Medicare funding comes from payroll taxes.
Nobody likes paying taxes, but without them, Medicare simply wouldn’t have enough money to stay afloat. Currently, the Medicare tax rate is 2.9% for most workers (which, for salaried employees, is split down the middle between worker and employer), but higher earners making more than $200,000 a year pay an additional 0.9%.

Getting educated about Medicare can help you make the most of this crucial health program. It pays to learn more about how Medicare works so that you can take full advantage when it’s your turn to start using those benefits.

A Message for My Children and Grandchildren

Slow Economic Growth Will Be Around For A Long Time

My Comments: I have my doubts that Hillary Clinton could have fixed this, but with 45 in the WH, there is virtually NO chance this problem will be fixed.

And the longer it takes to fix it, assuming it can be fixed, the very people who voted for 45 are going to be the ones first affected by our governments inability and unwillingness to find a remedy.

The headwinds faced by the next two generations are staggering. There is very little I can do to help those following in my footsteps to increase their chances of success. All I can do is write blog posts like this and hope there are a few people paying attention.

Steven Hansen on March 26, 2017

The Trump Administration has targeted 4% economic growth.

The consumer is tapped out, and trends show they cannot increase their contribution to GDP growth.

Does this mean the slack will be taken up by government and business spending?

The White House website reads:
To get the economy back on track, President Trump has outlined a bold plan to create 25 million new American jobs in the next decade and return to 4 percent annual economic growth

Elected officials have very shallow and misguided views of economic gearing. I have no problem with people setting goals pushing the limits of what MAY be possible. However, USA economic growth of 4% year-over-year is likely impossible without massive deficit spending. Economic dynamics are simply not there for the consumer segment of the economy to expand spending.

Life Cycle Spending

The life-cycle hypothesis says consumers save during earning years and dis-save when they retire. The logic of this hypothesis implies that retirees spend at the same rate as they did when they were working. This ain’t true. Good posts on this subject were published by the Richmond Fed.

One assertion:
Consumption may be lower for young people than the model predicts if they are credit constrained. They may wish to borrow against expected higher future earnings but can do so only if lenders extend the credit to them. Uncertainty may play a role as well. Since young individuals don’t know exactly what their future earnings potential will be, they may hesitate to accumulate a lot of debt for fear that they won’t be able to pay it off.

Uncertainty plays a role at the end of life as well. Since individuals do not know exactly how long they will live, it is hard for them to smoothly draw down their wealth throughout retirement. Retirees may also save more than predicted because they wish to leave some of their wealth to their descendants. Finally, the drop in consumption at the end of the life cycle could be due to “hyperbolic discounting.” Behavioral economists have advanced the idea that individuals have trouble planning for the future, which leads them to save too little to maintain their level of consumption after retirement.

No question millennials are saddled with significantly more education debt not faced by previous generations. There are now more than 75 million millennials, making it a larger demographic group than the boomers. Because our politicians have shifted the bulk of costs of university education to the students, millennials are now carrying $1.4T of student loans. Roughly this pulls $100 billion of spending from this group annually which is now used for student loan repayment. Just the effect of student loans are a 0.5% headwind on GDP.

Being a boomer, I get a front row seat to retirement issues. I have friends who thought they were going to get a pension after retirement. Most are getting less than expected due to cutbacks. The corporation I worked for never had pensions but actually a really good 401(k). I got to ride the markets where investing was brainless as it was real hard to lose. But just in time for many boomers retirement, there was the great market crash of 2008. Many thought their 401(k) or IRA was the engine for retirement income – the reality is that the retirement accounts themselves became part of retirement income. From my perspective, the majority of boomers are tapped out, with little or no ability to increase spending [and most likely are figuring out ways to shrink spending].

Saving or Lack Thereof

An even larger drag on the potential of ever seeing 4% growth comes from a historically low savings rate. Consider that consumers can only spend more if they make more money, borrow money, or save less. Median incomes have been stagnant for the last 17 years, and the saving rate is at the lowest level seen in the last 70 years. As far as borrowing money, where does the money come from to pay back the loan (if there is no additional income or little savings)?
• Before 2000, it was not uncommon to see 5% GDP growth. Since 2010, the USA was lucky to see 2.5% growth.
• Before 1980, consumers were saving over 10% of their income. Since 2000, savings have been averaging 5%.

Yet, the consumer portion of the economy has been growing (also meaning the business portion of the economy is contracting). The graph below plots disposable personal income portion of GDP. [note that consumer income and expenditures have historically grown at the same rate].

Note in the above graphic that there is significant variation from period to period. Most of this variation comes from changes in the savings rate from period to period. The graph below removes savings from disposable income.

 

 

 

 

 

 

Note since 2000 that the consumer segment of the economy stopped growing – but between 1967 and 2000, the consumer was the growth engine for the economy. To get to 4% economic growth, one would need to get more money into the hands of the consumer.

How Can the USA More Than Double the Rate of Growth?

“___________________________ [fill in the blank]. The real question is NOT whether the USA needs to see 4% growth, but how to improve the quality of life for the median American.”

3 Secrets to a Comfortable Retirement

My Comments: These lists are usually somewhat pathetic. Why just 3 secrets; why not 5? And these are not really secrets. But I needed something to try and catch your attention today so here are 3 Secrets!

I think it’s very possible that the next 30 years are going to be far less ‘profitable’ than were the last 30 years. So if you are in your 40’s and have enough presence of mind to know that there’s a high chance you’ll live into your 90’s, what follows makes a lot of sense. But I can tell you that when I was in my 40’s, having enough money to enjoy retirement never crossed my mind.

Walter Updegrave  |  January 17, 2017

The main goal of retirement planning is to be able to maintain roughly the same standard of living after your career as during it. But achieving that goal can a challenge. For example, the latest Transamerica Retirement Survey of Workers found that 40% of baby boomers expect their standard of living to fall during retirement, 83% of Generation Xers believe they’ll have a harder time achieving financial security than their parents, and only 18% of millennials say they’re very confident about their retirement prospects.
So how can you avoid having to ratchet down your lifestyle after calling it a career? Here are three ways:

1. Live below your means during your working years. This simple concept is something that many people have difficulty pulling off. Indeed, a 2016 Guardian Life survey on financial confidence found that nearly two-thirds of Americans say they’re not good at living within their means, let alone below them. But this is critical for two reasons: By saving consistently, a portion of your earnings today will be available for future spending when the paychecks stop. And the lifestyle you will be trying to continue in retirement won’t be as costly as what it might have been without the saving.

Granted, some people face such difficult financial circumstances that they have little choice but to spend all they earn. The issue for most of us, however, is finding a way to turn the resolve to save into actual dollars in a retirement account. The best way to tilt the odds in your favor is to make saving automatic, such as by enrolling in a 401(k) or other workplace retirement plan that moves money from your paycheck before you can even get your hands on it.

Generally, you want to set aside 15% or so of pay each year (including any money your employer kicks in), although you may need to step it up a bit if you’re getting a late start. If you can’t hit your target right away, you can work up to it gradually by boosting your savings rate a percentage point or so each year you receive a raise. If a 401(k) or similar plan isn’t an option where you work, you can sign up for an automatic investing plan and have money transferred each month from your checking account into an IRA at a mutual fund company.

Putting your savings regimen on autopilot allows you to bypass the chief obstacle to saving—you, or more accurately, your natural impulse to spend. It makes it more likely that the money you intend to save actually ends up getting saved. Further, if, say, 10% to 15% of your paycheck is going into your 401(k), then you pretty much have to arrange your life so that you’re able to live on the remaining 85% to 90%. In other words, you’re effectively forced to live below your means.

This approach isn’t foolproof. You can always sabotage yourself by running up lots of credit-card or other debt in order to overspend. But if you avoid piling on debt, save consistently and track your progress periodically—which you can do with a good retirement calculator like this free version from T. Rowe Price—you’ll reduce the chance that you’ll have to live a more meager lifestyle than you’d envisioned in retirement.

2. Learn to take pleasure in small things. Preparing for a secure and comfortable retirement is certainly important, but you don’t want to focus on saving and controlling spending so much that you don’t enjoy life. Fortunately, you don’t have to live large to be happy. On the contrary. Research shows that the pleasure you receive from spending even on major expenditures and big luxuries quickly fades. So indulging in more small, less-expensive purchases may actually lead to greater happiness than splurging on high-price items.

For example, in a paper titled “If Money Doesn’t Make You Happy, Then You Probably Aren’t Spending It Right,” researchers exploring the relationship between spending and happiness note that “if we inevitably adapt to the greatest delights that money can buy, then it may be better to indulge in a variety of frequent, small pleasures—double lattes, uptown pedicures, and high-thread-count socks—rather than pouring money into large purchases, such as sports cars, dream vacations, and front-row concert tickets.”

Clearly, you’re not going to eliminate all big-ticket expenditures during your life. But to the extent that you can find less costly yet still effective ways to treat yourself, you’ll free up more money to save for retirement and be better able to manage your spending after you retire without forcing yourself to live like an ascetic.

3. Get a bigger investment bang for your savings buck. Saving regularly by living below your means is the surest way to avoid seeing your standard of living fall in retirement. But another form of saving—reducing the amount you shell out in investment costs and fees—can also help. How? Simple. Morningstar research shows that lower costs tend to boost returns, which allows you to build a larger nest egg during your career and can lower your risk of depleting your savings prematurely after you retire.

The easiest way to reap the benefits of lower investing costs is to invest your savings as much as possible in a broadly diversified portfolio of index funds or ETFs, many of which you can find with annual expenses of 0.20% or less, vs. 1% to 1.5% for many actively managed funds. Low-cost index funds and ETFs can also bestow an advantage beyond their cost savings—namely, the more you stick to a straightforward mix of stock and bond index funds, the less likely you are to fall for gimmicky or exotic investments that can make it more difficult to manage your retirement portfolio and possibly drag down long-term returns.

I can’t guarantee, of course, that following these three guidelines will allow you to maintain your pre-retirement standard of living throughout your post-career life. But I can say that doing so should definitely tilt the odds in your favor.

Walter Updegrave is the editor of RealDealRetirement.com.

Investment Test

moneyMy Comments: I have no idea where the following came from. I found them in my archives and decided the respective statements and explanation are still very relevant. And besides, today is Monday and that’s when I post stuff about investing money. My apologies for not being able to correctly attribute this post.

Which investment has the highest average annual returns, historically?

Since 1978, according to Morningstar, stocks have returned an average annual 11.6%, compared with 11.1% for real estate, 8.9% for bonds and just 5.2% for the shiny yellow metal.

When yields go down, bond prices go up.

If market interest rates fall, which means new bonds will be issued with lower yields, the prices of outstanding bonds will rise. It’s simple supply and demand. Say you purchase a $10,000, 10-year bond with a 2% yield. That gives you $200 a year in interest. Now imagine that rates fall and new 10-years are issued at 1%. A buyer can choose between your bond, yielding 2% and paying $200 annually, or a new bond paying just $100 a year. Naturally, your bond will command a premium price in the secondary market. Similarly, if new bonds are yielding 3%, your 2% bond will become less attractive and will have to sell at a discount to attract any interest. So while the yield of your bond remains fixed for the life of the security, the market will adjust the price you can get for it to reflect current market rates.

The higher the yield on a dividend-paying stock, the safer the investment.

In fact, the opposite might be the case. Find the yield by dividing the stock’s dividend per share by the share price. If the high yield reflects an overly generous dividend, you have to ask yourself whether the company has the cash to sustain it. Look for a positive free cash flow, which means a company has invested what it needs to maintain its business and has money left over to spend on dividends. Another measure is the stock’s payout ratio—the percentage of earnings paid out in dividends. The average payout ratio for the S&P 500 has been around 40% recently. A spiking yield likely indicates a sinking stock price. That’s a red flag that demands further investigation.

A company’s market capitalization is calculated by multiplying the stock price by the number of shares outstanding.

Although definitions vary, so-called large-capitalization stocks are generally considered to be those with a market value of $5 billion or more; mid-cap stocks fall within the $2 billion to $5 billion range; and small-cap stocks are classified as those with a market value of less than $2 billion. Slicing and dicing a little further gets you mega-caps, at $100 billion or more, and micro-caps, at $50 million to $300 million.

Stocks aren’t in a bear market until they lose 20% of their value.

The classic definition of a bear market is a 20% decline from the previous peak, although the average loss suffered in 13 bear markets since 1929 is nearly 40%, measured by losses in Standard & Poor’s 500-stock index (not including dividends). A stock market “correction” is generally considered to be a pullback of at least 10%. Since World War II, there have been 11 bear markets and 21 corrections.

The best time to buy stocks is at the start of an economic expansion. The best time to sell is when there’s a recession.

The stock market anticipates the economy, not the other way around, typically by six to nine months. By the time you know there’s a recession, your portfolio has most likely already taken a big hit, and by the time a recession is pronounced over, stocks have usually been off to the races for a while. The Great Recession began in December 2007, according to the National Bureau of Economic Research, the official arbiter of recessions and expansions. But stocks had already peaked in October. And if you missed the start of the bull market on March 9, 2009, because you were waiting for the recession’s end, which came in June of that year, you’d have missed a 64% rally.

A stock with a low price-earnings ratio is always a better bargain than a stock with a high P/E.

Context matters with P/Es, which are calculated by dividing a company’s stock price by its earnings per share, often estimated for the coming 12 months. What’s high for a mature utility company could be low for a fast-growing tech stock, for example. Stocks in the utilities and tech sectors recently sported average P/Es of 18 and 17, respectively. Based on historical norms, that implied that utilities were overvalued by 19%, while tech stocks were 17% undervalued. In the same way, analysts at S&P Global recently considered biotech drugmaker Regeneron Pharmaceuticals, with a P/E approaching 25, to be a better buy than blue-chip pharmaceutical firm Pfizer, with a P/E of 12. P/Es are most useful when comparing a company with its peer group, or comparing an industry with its long-term average.

A strategy that calls for investing a fixed amount at regular intervals is known as:

Dollar-cost averaging can lower the average cost of shares because you are spreading out your purchases, hopefully buying more when prices are lower and fewer when prices are high. If you invest all of your money at once, rather than at regular intervals, you might get unlucky and buy the stock at or near its peak price.

The strategy also helps curb harmful behavioral inclinations. If you’re apprehensive about investing, dollar-cost averaging makes it easier to take the plunge by spreading your risk over an extended period. Once you’re in the market, the strategy can help you stick to your plan. Putting everything into the market at once guarantees that you’ll know all too well how much you’ve lost if you happen to invest at the wrong time. Investing at intervals erases that fixed reference point, making it easier to keep your cool.

How many companies in Standard & Poor’s 500-stock index have a triple-A credit rating?

Microsoft and Johnson & Johnson are the only companies to sport Standard & Poor’s highest rating, after ExxonMobil lost its AAA rating in April 2016. In 1980, 32 S&P 500 companies carried the coveted triple-A rating. Apple, which has the largest weight in the S&P index, has an AA+ rating.

In investing, the pleasure of making money trumps the pain of losing.

Investors feel the pain of a loss about twice as much as they feel the pleasure of the same-size gain, say market behavior psychologists. This loss aversion can contribute to a number of investing mistakes. Investors who fear a loss, and especially those who have recently suffered one, can be reluctant to take risks that are entirely appropriate. For example, many investors shunned the stock market after the 2007-09 financial crisis, missing out on significant gains. Loss aversion can also cause an investor to sell what should be a long-term holding too soon, after a short-term hiccup. Conversely, an investor might hold on to a losing investment too long, reluctant to lock in the loss.