Tag Archives: investments

Vanguard’s Chairman Sees Muted Decade for Stocks After Long Rally

My Comments: Little is said these days about those who are investing for the future and are still working vs those investing for the future who are no longer working. Think of it as being defined as the accumulation phase of your life vs the distribution phase of your life.

Different rules apply. Vanguard Funds founder John Bogle famously suggested that the bond part of your portfolio, presumably the ‘safe’ part, should be equal in percentage terms to your age. If you were 70, for example, 70% of your portfolio should be in bonds.

Demographics, interest rates, and the profusion of new financial products has largely put Bogle’s dictum to bed. But it does illustrate the continued confusion caused by those who fail to recognize the difference between someone in their 50’s working hard to accumulate a sufficient pile of money for retirement from someone in their 70’s trying to make sure they don’t run out of money before they run out of life.

We are currently conditioned to positive returns from the markets, except for 2015, that started as we emerged from the Great Recession of 2008-2009. Those of you in the distribution phase of your life need to heed the warning expressed here.

By Nico Grant | January 17, 2018

F. William McNabb, Vanguard Group’s chairman, cautioned investors to consider reducing their stock exposure before the nearly 9-year-old rally ends.

“We would expect the next decade to actually be very modest on the equities side in the U.S., a little less so in Europe and a little less so in Asia,” McNabb said in a Bloomberg Television interview that aired Thursday. “But it’s still overall lower than long-term historical averages.”

Stock markets reached a fever pitch in 2017 as the S&P 500 Index hit record highs and the rally has continued this year. The advance, buoyed by low interest rates around the world, economic growth and the U.S. tax overhaul, has sparked concerns that valuations have gotten stretched, spurring some investors to brace for a decline.

McNabb, whose firm oversees about $5 trillion, said long-term investors may benefit by holding balanced portfolios with bonds as well as stocks.

“No one can predict what’s going to happen in the next 12 months,” he said. “Having just said that, I’m sure the equity market will continue to skyrocket for the next few months.”

McNabb, who ceded the role of chief executive officer of the Valley Forge, Pennsylvania-based firm to Tim Buckley this month, spoke to Bloomberg in Beijing, where Vanguard is eager to take advantage of China’s opening to foreign financial-services companies. The country’s government said it plans to remove ownership limits on banks and allow overseas firms to take majority stakes in local ventures.

“With some of the changes, it looks like there may be a path to doing retail mutual funds, depending on how things get interpreted,” McNabb said.

China’s assets under management are poised to climb more than fivefold by 2030 as the world’s second-biggest economy grows, according to estimates from Casey Quirk by Deloitte.

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The market will crash this year — and there’s a good reason why

My Comments: Frankly, I have no idea if it will or not, but I tend to pay attention when people smarter than I start talking about stuff that is clearly an existential threat to my financial well being and that of my clients, family and friends.

If the money you have saved is critical in terms of being able to pay your bills in the future, there are ways to protect yourself against downside risk and still participate in the upside promise of the markets.

Thomas H. Kee Jr. / President and CEO of Stock Traders Daily / April 25, 2018

The market is going to crash this year, and there is a very good reason why. The amount of money chasing stocks is drying up considerably, natural conditions are prevailing, and it is happening on the heels of the most expensive bull market in history.

The stimulus efforts of global central banks created a fabricated demand for stocks, bonds, and real estate, ever since the credit crisis, but as of April 2018 those combined efforts are now a drain on liquidity. As recently as last September the combined effort of the ECB and the FOMC was infusing $60 billion per month into these asset classes, like they had almost every month since the credit crisis — but now they are effectively selling $30 billion of assets per month. That is a $90 billion decline in the monthly demand for assets in seven short months.

Central banks are now a drain on liquidity, and it is happening when natural demand levels are significantly lower than where current demand for stocks, bonds, and real estate appears to be.

According to The Investment Rate — an indicator that measures lifetime investment cycles based on ingrained societal norms to identify longer term stock market and economic cycles in advance — we are currently in the third major down period in US history. The rate of change in the amount of new money available to be invested into the U.S. economy declines every year throughout this down cycle, just like it did during the Great Depression and stagflation. This down cycle also started in December of 2007.

Although the market began to decline directly in line with The Investment Rate’s leading indicator, the declines did not last very long. The Investment Rate tells us that the down period lasts much longer than just the credit crisis, and the declines The Investment Rate suggests are rooted in material changes to natural demand levels based on how we as people invest our money, so it identifies natural demand. The natural demand levels identified by The Investment Rate are much lower, and they decline consistently from 2007.

As much as The Investment Rate serves to identify natural demand levels, when stimulus was introduced by Ben Bernanke a second source of new money was born. The stimulus efforts by the FOMC and the ECB added new money to the demand side of stocks, bonds, and real estate, with the intention of spurring prices higher to induce the wealth affect. The policies were successful, asset prices have increased aggressively, but there are repercussions.

Asset prices increased so much that the valuation of the S&P 500, Dow Jones industrial average, Russell 2000, and NASDAQ 100 at the end of last year made them more expensive than in any other bull market in history. In other words, we just experienced the most expensive bull market in history, and the PE multiple of 25 times earnings on the S&P 500 was driven by the constant capital infusions coming from central bank stimulus programs.

Not only were these programs unprecedented given their size, but they also told us what they were going to buy, when they were going to buy it, and how much they were going to buy, every month, in advance, every year since the credit crisis. At no time in history has Wall Street been able to identify when buyers were going to come in like they have during this stimulus phase.

However, now the stimulus phase is over and not only are these central banks no longer a positive influence on liquidity, but they are now removing liquidity from the financial system as well.

This is happening at a time when natural demand levels as those are defined by The Investment Rate are also significantly lower than where demand currently seems to be, and that creates a double whammy on liquidity. The demand for equities this year is far less than it was last year as a result of these two demand side factors. Because price is based on supply and demand, and because demand is cratering, prices are likely to fall. This applies to stocks, bonds, and real estate.

Guggenheim investment chief sees a recession and a 40% plunge in stocks ahead

My Comments: We can argue ‘till we’re blue in the face about when this is going to happen and none of us will be right. Just know it will happen.

There’s a reference in Scott Minerd’s comments below about the Fed raising interest rates. Here is a chart I found some time ago that shows interest rate trends since 1790. 225 years and there have been only FOUR points that define the end of a downward interest rate trend. The last one is where we are today.

The last uptrend ran from 1946 through 1981. What this tells me is that for the rest of my life, interest rates are going to trend upward, and with that trend we’ll see all kinds of consequences. Like before, some will be good and some will be bad. Good luck.

Scott Minerd, Guggenheim Partners, April 6, 2018

Guggenheim’s head of investing sees a tough road ahead for the market and economy, with a sharp recession and a 40 percent decline in stocks looming.
Scott Minerd, who warned clients in a recent note that the market is on a “collision course with disaster,” expects the worst of the damage to start in late 2019 and into 2020.

Along with the decline in equities, a rise in corporate bond defaults is likely as the Federal Reserve raises interest rates and companies struggle to pay off record debt levels.

“For the next year … equities will probably continue to go up as we have all these stock buybacks and free cash flow,” Minerd told CNBC’s Brian Sullivan in a “Worldwide Exchange” interview. “Ultimately, when the chickens come home to roost and we have a recession, we’re going to see a lot of pressure on equities especially as defaults rise, and I think once we reach a peak that we’ll probably see a 40 percent retracement in equities.”

One of the main problems is that Congress and President Donald Trump have pushed through aggressive fiscal policies at a time when the Fed is looking to control growth with higher interest rates and less accommodative monetary policy.

Corporate debt currently stands at a record $8.83 trillion, according to Securities Industry and Financial Markets Association data. Higher rates will make it harder for companies to refinance and will put pressure on them once the stimulative effects of tax cuts wear off, Minerd said.

Once short-term rates hit 3 percent, that will be enough to drive up defaults and cause a recession, he added.

“As interest rates keep ratcheting higher, with record levels of corporate debt it’s going to be harder and harder to service,” Minerd said. “At some point, as the economy starts to mature and as cash flows start to stabilize and decline, it’s going to be difficult for everybody to pay this interest.”

“Defaults are going to be concentrated in corporate America, where in the past downturn they were basically focused in areas of consumer activity,” he added.

From there, Minerd figures the Fed will get involved, going back to the quantitative easing policies that helped pull the economy out of the last recession and pushed a surge in stock market prices but also coincided with lackluster economic growth.

“All that will do is defer the problem into the future and allow excesses to continue to build and the collision course that we’re on will just come later and probably be worse,” he said.

12 Retirement Investment Factors That Are Frequently Overlooked

My Comments: They say money is the root of all evil. While that may be a fundamental truth, it’s also true that in our 21st Century society, having more money is better than having less money.

As I develop my online course focused on helping people achieve a successful retirement, the idea behind having more money when you retire depends to a large degree on making good investment decisions along the way.

Here are 12 ideas that might help you make better decisions about your money than you are making right now.

Mar 6, 2018 Forbes Finance Council

Preparing for retirement is a lifetime process. Your clients are constantly wondering if there will be enough money to survive, and it is up to you to ensure their investments earn in a way that they are happy with. You need to stay abreast of the trends, tips and long-term investment options that can help them achieve their financial goals.

With many people worried they will not have enough money saved for retirement, it is your job as a financial professional to calm their fears and help them put their money where it makes the most sense. But, are you really aware of all the aspects that affect their ability to save enough for retirement?

To answer this question, 12 members of Forbes Finance Council share the one facet of retirement investing that is most often overlooked. Here is what they had to say:

1. Risk Mitigation
Target retirement funds are a great option, as they automatically adjust risk based on age and relative distance to retirement age. Employees often use the risk assessment tool when establishing their employer-sponsored 401(k) plan but fail to maintain these settings. This poses a risk to both account rebalancing and age-risk correlation. – Collin Greene, ShipHawk

2. Purpose
Research shows that those who don’t have a purpose in life tend to have poorer health. This means that, despite a good investment portfolio, if there isn’t a life plan to go along with it, you will be rich but depressed. Make sure life planning is done in conjunction with investment planning. – Darryl Lyons, PAX Financial Group LLC

3. Life Expectancy
People underestimate how long retirement can last, and with advances in medicine and science, the “problems” from living longer are only getting worse. If you retire at age 65, you may have about a 25% chance of living past age 90, for instance. That’s why I often advise clients to invest as if they’ll live to be 100. Your plan should be conservative and make similar assumptions. – Elle Kaplan, LexION Capital

4. Behavioral Finance
The 2017 Nobel Prize in Economic Sciences was awarded to Richard Thaler, the father of behavioral finance. Having clients understand the emotions and psychology of money can be the determining factor in success or failure when it comes to investing. Many investors act under the influence of behavioral biases, often leading to less than optimal decisions. Teach clients how to correct these actions. – Lance Scott, Bay Harbor Wealth Management

5. Annual Portfolio Rebalancing
During the year, some assets will outperform others, and an annual rebalance of the portfolio should occur. This allows the investor to take profits from the investments that did very well and invest the proceeds in investments that did not perform. This process reaffirms the mantra “buy low, sell high,” and will help you grow your retirement portfolio over the long term. – Alexander Koury, Values Quest

6. Safe Money Options
Fixed annuities have caps that limit growth, but the trade-off is safety. Diversifying with fixed annuities provides a way to accumulate savings with peace of mind that your hard-earned money is safe from a market correction. Yes, it takes longer, and yes, the market could outperform it, but at the end of the day, you need to know there are safe retirement options with guarantees. – Drew Gurley, Redbird Advisors

7. Inflation
A 1% rise in inflation barely shutters an eye in one year. If this continues for the next 20 years, when you may have planned for $60,000 per year for your retirement, your purchasing power will have declined to the equivalent of $49,000. And, that is assuming inflation doesn’t rise to more than 1%. Taking this into consideration, saving more than you need to live off becomes a necessity. – Stacy Francis, Francis Financial, Inc.

8. Aging In Place
Studies have shown that 83% of retirees wish to stay in their own homes. A much smaller number consider using their home equity as a source of income. There are many ways to tap into wealth accrued through home ownership. Some of these include home equity loans, reverse mortgages and sale-leasebacks (typically to a family member or heir). Consider leveraging home equity to age in place. – Ismael Wrixen, FE International

9. Medical Expenses
Inevitably, no matter their economic background or their age, very few of the people I speak with think about the medical circumstances they are going to face. That’s why I am such a proponent of a Health Savings Account (HSA). It is like a quasi-retirement account that we can put money in and use going forward until we start to retire. – Justin Goodbread, Heritage Investors

10. The IRA Account
I’m a big fan of the individual retirement account, or IRA, but it’s an obvious way of saving that often gets overlooked. Many working adults make contributions to their IRA, but they don’t think about how it will see them through retirement. IRAs give you more flexibility than the 401(k) you can get at work. You’ll have the opportunity to diversify with CDs, annuities, stocks and bonds. – Shane Hurley, RedFynn Technologies

11. Diversification
People often overlook diversification; as a result, their investments are subject to unnecessary risk. Many believe they are diversified because they invest in mutual funds, but the truth is they are investing in a single asset class: equities. True diversification can be achieved only with truly self-directed IRA, which allows investments in alternative assets, such as real estate or private lending. – Dmitriy Fomichenko, Sense Financial Services LLC

12. Market Crash
Everyone plans on positive returns in their retirement portfolios, but what will you do when the market crashes and a large chunk of your money disappears? You need to plan for this inevitability and have a strategy on how to bounce back. Without a strategy, you might be inclined to make decisions based on fear rather than sound investment advice. – Vlad Rusz, Vlad Corp. USA

Vanguard’s Chairman Sees Muted Decade for Stocks After Long Rally

My Comments: Little is said these days about those who are investing for the future and are still working vs those investing for the future who are no longer working. Think of it as being defined as the accumulation phase of your life vs the distribution phase of your life.

Different rules apply. Vanguard Funds founder John Bogle famously suggested that the bond part of your portfolio, presumably the ‘safe’ part, should be equal in percentage terms to your age. If you were 70, for example, 70% of your portfolio should be in bonds.

Demographics, interest rates, and the profusion of new financial products has largely put Bogle’s dictum to bed. But it does illustrate the continued confusion caused by those who fail to recognize the difference between someone in their 50’s working hard to accumulate a sufficient pile of money for retirement from someone in their 70’s trying to make sure they don’t run out of money before they run out of life.

We are currently conditioned to positive returns from the markets, except for 2015, that started as we emerged from the Great Recession of 2008-2009. Those of you in the distribution phase of your life need to heed the warning expressed here.

By Nico Grant | January 17, 2018

F. William McNabb, Vanguard Group’s chairman, cautioned investors to consider reducing their stock exposure before the nearly 9-year-old rally ends.

“We would expect the next decade to actually be very modest on the equities side in the U.S., a little less so in Europe and a little less so in Asia,” McNabb said in a Bloomberg Television interview that aired Thursday. “But it’s still overall lower than long-term historical averages.”

Stock markets reached a fever pitch in 2017 as the S&P 500 Index hit record highs and the rally has continued this year. The advance, buoyed by low interest rates around the world, economic growth and the U.S. tax overhaul, has sparked concerns that valuations have gotten stretched, spurring some investors to brace for a decline.

McNabb, whose firm oversees about $5 trillion, said long-term investors may benefit by holding balanced portfolios with bonds as well as stocks.

“No one can predict what’s going to happen in the next 12 months,” he said. “Having just said that, I’m sure the equity market will continue to skyrocket for the next few months.”

McNabb, who ceded the role of chief executive officer of the Valley Forge, Pennsylvania-based firm to Tim Buckley this month, spoke to Bloomberg in Beijing, where Vanguard is eager to take advantage of China’s opening to foreign financial-services companies. The country’s government said it plans to remove ownership limits on banks and allow overseas firms to take majority stakes in local ventures.

“With some of the changes, it looks like there may be a path to doing retail mutual funds, depending on how things get interpreted,” McNabb said.

How your 401(k) can survive and thrive in the next bear market

My Comments: Some of you reading this have money in 401(k)s and 403(b)s and cannot simply remove it and place it somewhere safer. Which means you’re completely exposed to the vagaries of the markets and you can only hope for the best.

I learned long ago that HOPE is not an effective investment strategy. So these words from Adam Shell may make your life a little easier. If you want more information, you know how to reach me.

Adam Shell, March 9, 2018

The nine-year stretch of rising stock prices won’t last forever. So now’s a good time for investors to bear-proof their 401(k)s before the next financial storm.

The current bull market, now the second-longest ever and celebrating its 9th birthday on Friday, is most likely in its final stages, Wall Street pros say. That means a bear market will occur at some point, and the stock market will tumble at least 20% from its peak.

What could cause it and when? No one can know for sure. A recession perhaps, or a surge in interest rates and inflation? An unexpected event or investors getting too giddy about stocks and driving prices up to unsustainable levels? All could be the triggers of a big drop in stocks.

Remember, if you have any money invested in stocks, you won’t be able to avoid all the pain that a bear inflicts on your 401(k). While a drop of 20% from a prior peak is the classic definition of a bear market, most drops are more sizable. The average decline for the Standard & Poor’s 500 stock index in the 13 bears since 1929 is 39.9%, S&P Dow Jones Indices says. A swoon of that size would shrink a $100,000 investment in an index tracking the broad market to roughly $60,000.

Prepare ahead of time

“The best way to survive a bear market is to be financially prepared before one happens,” says Jamie Cox, managing partner for Harris Financial Group.

That means not having 100% of your money invested in stocks near a market top. It also means maintaining low levels of debt and having some emergency savings to avoid having to sell stocks in a down market to raise cash, he says.

From a portfolio standpoint, make sure your investment mix isn’t too risky. Are you loaded up on high-fliers that have greater odds of suffering steep drops if the market tanks? Make sure you own some “defensive” stocks, such as utilities, consumer companies that sell everyday staples like soap and cereal, or health care names, which tend to hold up better when markets fall overall.

“Investors should take the time to control the parts of their portfolios they can control,” Cox advises.

If, for example, your portfolio was designed to have 60% in stocks, and that percentage has ballooned to 80% due to the long period of rising stock prices, consider “rebalancing” your portfolio now. Sell some stock to get back to your initial 60% target.

Play defense

The time to be aggressive in the market is when stocks are up, and you can make tactical moves likes cashing out stocks, says Woody Dorsey, a behavioral finance expert and president of Market Semiotics, a Castleton, Vt.-based investment research firm. It makes more sense, he adds, to be defensive when the market is entering or in a period of falling prices.

“Does a bear market mean an investor needs to freak out? No. But it does mean you should be more careful,” Dorsey says. “If the market is going to be difficult for one or two years, just get more defensive. Keep in simple.”

One simple strategy to employ is to get “less exposed to the market and raise cash,” Dorsey says. “Most people are not used to that message, but it’s a good message.” While a normal portfolio might consist of 60% stocks and 40% bonds, a bear market portfolio, he says, might be 30% cash, 30% U.S. stocks and the rest in foreign investments and bonds.

Main Street investors could also consider defensive strategies employed by professional money managers, he says. They can buy things that hold up better in tough times, such as gold. Or add to “alternative” investments that rise when stocks fall, such as exchange-traded funds that profit when market volatility is on the rise or funds that can short the market, or profit from falling prices.

Identify severity of bear

The next bear isn’t likely to be as severe as the epic one following the Great Recession or the dive in early 2000 after the dot-com bubble burst, says Liz Ann Sonders, chief investment strategist at Charles Schwab. Both of those bears saw market drops of about 50% or more.

“The next bear will be a more traditional one that likely comes from the market sniffing out a coming recession,” she explains. “We don’t think it will be caused by a global financial crisis or bubble bursting.”

That means fear levels likely won’t spike quite as high. Investors will also have a better idea of when the bear market might hit, as it will be foreshadowed by signs of a slowing economy.

It also suggests the market will likely rebound more quickly than the average bear of 21 months. As a result, employing basic investment principles, such as portfolio rebalancing, diversification and buying shares on a regular basis, which forces folks to snap up shares when prices are cheaper, can help investors emerge from the next bear market in decent shape.

“Diversification and rebalancing are boring to talk about,” says Sonders. “But they are more useful strategies than all the hyperbole on when to get in or get out of the market, which is not an investment strategy.”

Buy the ‘big’ dips

There are big market swings even in bear markets. A way investors can play it is to buy shares on the days or periods when stocks are under intense selling pressure. “There will be lots of wild swings,” says Mike Wilson, U.S. equity strategist at Morgan Stanley.

Investors have to take advantage of stock prices when they are depressed and present good value, he says, even if it seems like a scary thing to do at the time.

“You have to be willing to step in” when market valuations fall a lot, no matter what’s going on in the world, Wilson advises.

Your Retirement Money

My Comments: If you’ve read my blog posts these past few months and years, you know that I have no idea what is coming next.

What I do know, however, is that anyone who says “it’s different this time” is full of s**t. It’s the nature of the beast for there to be corrections, and it’s just a matter of time for one to appear. On the other hand, telling everyone ‘the sky is falling’ soon gets old, and essentially useless.

My entire focus these days is helping people retire with more money, the opposite of which is to retire with less money. Personally, I’d rather have more money.

If you have any money fully exposed to what I call downside risk, and are uncomfortable with simply ‘staying the course’, here are three articles that appeared in my inbox in the past few days.

You should be interested in preserving your nest egg from a potential downturn, one that will make it harder to pay your bills in the future.

Making informed decisions about your money starts with paying attention and being able to tuck in your tail before the door slams shut.

I make no apologies for any political implications associated with the three articles.

Economics are never 100% divorced from politics. It doesn’t matter who is pulling the strings.

What matters is that the strings are being pulled, and how that pulling will affect you and your bank accounts. These three articles are worth reading if you have any doubts about having enough money when you retire…

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