Tuesday, December 31, 2013

Investing Made Simple ... Get the Facts

Beating the stock market isn't impossible but it's difficult --- especially for the so-called stock market experts.

And that's especially true if advisory fees, commissions and taxes are factored into the equation.

So what's the average long term individual investor to do? That's simple: PLAY FOR A TIE.

In short, keep the long term in mind and ignore the short term gyrations and inevitable volatility of the market.

And never confuse volatility or short term uncertainty with the right way to achieve long term investing success and financial security during our later years.

In other words, get the facts early and then decide how to best play the game.

But first, know how to play the game.

What's really wrong with investors and advisers captures the essence of the investing game when it says:

"The financial advisory business isn't exactly basking in glory at the present time. One reason is that it employs more scoundrels than absolutely necessary.

A risk-free investment is unlikely to yield an after-tax return greater than the rate of inflation. . . . 

The "Whatiffers" bore me. Each day contains enough uncertainty to give the fainthearted investor an excuse for avoiding equities. There is no such thing as the foreseeable future and uncertainty (what's left over after you think you've thought of everything) is our constant companion.                                        

The uncertainty inherent in investing is one reason why those who make economic and market predictions find such a large audience—even though, deep down inside, we know that most of them are just blowing self-promoting smoke.

I am a proponent of passive investing—a buy, hold and rebalance strategy using index funds. Yet only about 20% of the money that individual investors have in stock funds is indexed. The remaining 80% is actively managed—attempting to beat the market. So, it should come as no surprise that the majority of financial advisers that I meet promote active management. Most readily admit that only about one third of actively managed funds outperform a comparable index fund in any given year.

But here's the strange part. They all insist that their clients are owners of the charmed one third. It reminds me of Garrison Keillor's fictional hometown of Lake Wobegon, Minnesota—a place where all the women are strong, all the men are good-looking and all the financial advisers are above average.

In the 20 years ending in December 2012, the return for the average domestic stock fund investor was less than half of the return of the stock market. This performance differential is often referred to as the behavioral gap because it is caused by poorly timed, emotional investment decisions. After the market rises, investors become optimistic stock buyers. After the market declines, they turn into pessimistic stock sellers. This behavioral gap is often cited as evidence that investors need professional guidance. But in Morningstar Advisor it was reported that 83% of mutual fund-purchases are done under the guidance of financial advisers. The elephant in the room (standing next to the king with no clothes) is that bad advice offered by performance-chasing, market-timing advisers is a big part of investors' underperformance.

To invest successfully for retirement, you don't need to be skilled at stock picking or market timing.

You need a prudent long-term investment strategy that keeps an appropriate percentage of your assets permanently invested in equities so that you'll be invested during those unpredictable, short time periods that make stock investing profitable in the long run. Diversify broadly using low cost, tax efficient index funds, rebalance annually and let time take care of the rest.

Your portfolio is Superman. Market timing is kryptonite. Any questions?

If conversations with your financial adviser center on predictions, past performance and market beating ideas instead of a strategy to capture the market's long term return, you're playing a game of the blind leading the blind."                                        

Summing Up

Join the real pros and invest like a real expert.

Buy low cost index stock funds (like the S&P 500 from either Fidelity or Vanguard) and then resolve to stay the course.

And save as much as you can, beginning as early as you can.

That's because time flies, and time in the market is very much on the side of the long term individual investor.

That's the way to 'win the game' of securing a long and successful financially secure retirement.

Thanks. Bob.

Friday, December 27, 2013

The American Dream ... If You Can Dream It, You Can Do it ... Still Alive and Well

We have lots of serious issues, aka headwinds, that are making too many of our fellow Americans pessimistic about the future opportunities for our kids and grandkids. Ourselves as well.

A goal (at least here's my definition) starts out as nothing more than a dream with a timetable attached. Both are equally important. Yet the dream always comes first, and it always will be so.

But the American Dream is a dream that's never finally fulfilled and our work will never be finished. We are a 'rising' nation of 'becomers,' and 'dreamers,' and our society is always moving forward.

Right now we're not moving forward as fast as we'd like, and sometimes, as now, there's are detours and seemingly too-big-to-overcome obstacles along the way. But in the end, they are just 'rocks in the pond.'

And these rocks in the pond will be unintended but useful stepping stones which will aid us in creating a better America, and thereby continue to serve as a beacon of hope for the rest of the world.

But now let's be practical and face our current reality squarely. We're in a deep hole that we've dug for ourselves, albeit one dug with the "helpful leadership" of our elected officials over many years.

So it's time to begin to climb out of that deep hole. It's very much past time, in fact.

And when trying to get out of a deep hole, the best advice is to first stop digging.

5' 7" slam dunk champion Spud Webb perhaps said it best about the potential power of dreams: "If you can dream it, you can do it."

And so it is in America today. But first, here's a glance at our reality.

We have issues of too much debt, too big, too incompetent and too intrusive a government, a poor and too expensive system of education from kindergarten through college, and to top it off, an underfunded government run public sector pension system (city, state and national) and health care system (primarily national) that are pretty much train wrecks no longer waiting to happen but occurring in real time and right before our eyes.

All that said, we also have the 'can do' legacy of those who came before us and the God given natural and Constitutionally guaranteed individual rights of "life, liberty and the pursuit of happiness." That's more than enough to see us through the hard times.

So don't worry; be happy. It's always darkest before the dawn and a revitalized and freedom loving group of Americans are beginning to take the reins from an incompetent and coercive government knows best gang that apparently hasn't a clue --- at least not yet.

It's about time.

Underestimating the American Dream tells the story well:

"The American public has been subjected to a seemingly endless stream of books, articles and commentaries on the downsizing or outright death of the American dream. A Google search for "the death of the American dream" yields more than 276 million citations. Nobel Prize-winning economist Joseph Stiglitz said last year that "the American Dream is a myth" because "inequality is worse than you think." Even President Obama speaks of "diminished levels of upward mobility."
Commentators almost always define the American dream as the expectation of rapidly increasing material wealth. But this perspective unnecessarily narrows the concept, setting it up for dismissal as a corpse or a fantasy whenever the economy slows down.
The American dream has always included material aspiration, especially for those who start out with little or nothing. But as James Truslow Adams —who popularized the term in his 1931 history, "The Epic of America"—wrote, it was "not a dream of motor cars and high wages merely, but a dream of social order in which each man and each woman shall be able to attain to the fullest stature of which they are innately capable, and be recognized by others for what they are, regardless of the fortuitous circumstances of birth or position." It was the freedom to seek and pursue one's own path. Most important, it was the freedom to follow one's conscience without constraints from governmental authorities.
The American dream in its full sense has been especially evocative for young people and immigrants. I have a vivid memory from my own youth of how stirring this idea can be.
As a ninth-grade sports reporter for my high-school newspaper, I covered a soccer match against a team of immigrant kids from then-communist Eastern Europe. They were great players but ragged and indigent: I can still picture the green pepper and bacon-fat sandwiches that their mothers had packed for their lunches. Yet when I spoke with these boys, I heard them talk excitedly about the American dream.
What did it mean for them? One mentioned an uncle back home who was in jail for a sign he carried. Another said that his parents were forced to conceal their religious views in their old country. There was also talk about our wide-open American culture, the amazing prospect of being able to pursue whatever careers they wanted, and, yes, the hope of getting rich. It was a heady mix, fueled by desires that ran the gamut from the material to the spiritual.
Now, decades later, I've had another chance to observe how young people envision the American dream, in a three-year study my research team at the Stanford Graduate School of Education will complete in June 2014. As part of our study, we ask native-born and immigrant youth what they think about American citizenship. We've had a wide range of responses from hundreds of young people, with scores of them offering more elevated and broadly conceived views than can be found in today's standard daily news feed.
Here's what one 18-year-old, native-born student had to say: "I think the American dream is that people can be who they are. Like freedom of religion, freedom of speech, freedom of action and stuff. I do believe in that. People can be who they want to be. They shouldn't be influenced by the government, influenced by anyone else, other than themselves, to be themselves." . . .
If the American dream is dismissed as dead or never existing, or confined to its narrowest dimensions of material gain, it may seem that our future prospects are dim. But for those who appreciate the elevated meanings of the American dream that have triggered hope in good times and bad, it can be a self-fulfilling prophecy, a harbinger for a nation that is still rising."
Summing Up
So here's the deal.
The American Dream is alive and well.
Let's all work hard and continuously to keep it going.
We the People are in charge, and that's good enough for me to remain a "dreamer."
Now let's all get to the "doing" part of moving forward.
Future generations are depending on us, just as we depended on prior generations of dreamers and doers.
We'll win. We always do.
That's my take.
Thanks. Bob.

Thursday, December 26, 2013

Markets ... Competition or Cooperation ... The Meaning of Words

The Affordable Care Act isn't going to be affordable, even when it's finally implemented, whenever that may be.

And Social Security doesn't involve affordable and genuine 'insurance,' even though it's called that.

Neither is named properly, and government knows best monopoly based inefficiencies and lack of customer focus are the norm. That's government ineptitude, waste and coercion in action.

It's the same for the U.S. Postal Service (stamps are going up in price again) and public education, including college.

Yet many, if not most, of We the People have some aversion to free markets and choose to believe, albeit wrongly, that government and elected politicians can and will protect us from ourselves.

But we have no such aversion to competition, of course, when we cheer for our favorite athletic teams. We just want our team to win and understand that losing is part of the game.

So let's change a word and call it free market cooperation instead of free market competition.

Calling it free market cooperation makes sense to me since free market activity requires the willingness, cooperation and consent of both buyer and seller in order for a market based transaction to occur.

How to Roll Back the Demonizing of Free Markets is subtitled ''Competition carries a negative connotation, despite its contributions to human happiness:'

"In a November manifesto, Pope Francis attacked the "tyranny of markets." It's the latest iteration of a mounting distaste for free markets. Here in the United States, we have twice elected a president who is attempting to engineer one-sixth of the economy with a centrally controlled mechanism for health insurance, and regulating as many other markets as he and his regulatory minions can. . . .
How can we explain this . . . fear of markets—given the overwhelming evidence that such institutions provide the greatest wealth, health and happiness for humankind?
Economists like myself deserve a part of the blame: The way we use the term competition instead of cooperation fosters anti-market bias. "Competition" carries a negative connotation because it implies winners and losers, and our minds naturally feel sympathy for the losers. But cooperation evokes a positive response: It's a win-win situation with no losers. And in fact the word competition doesn't depict market activity as aptly as the word cooperation. The "competitive economy" would be better described as the "cooperative economy."
Consider the most basic economic unit, the transaction. A transaction is cooperative because both parties gain from a voluntary exchange. There is competition in markets, but it's actually competition for the right to cooperate. Firms must compete for the privilege of selling to consumers—for the right to cooperate with consumers. Workers compete for the right to cooperate with employers. Competition matters because it ensures that the most efficient players will gain the right to cooperate on the best terms available. But competition plays a supporting role, while cooperation makes markets thrive.
Cooperation isn't just more important in the economic sphere—it's also more common. We cooperate with everyone involved in making all the products we buy and sell, millions of people we'll never know. We compete, on the other hand, with only a few individuals or firms....
This discussion may seem semantic, but words have meaning and power. People would feel much more favorably toward a "cooperative economy" than a "competitive economy."
Here's an example. Wal-Mart comes to town and several small businesses disappear. How do we represent that event? If we think in competitive terms, we say, "Wal-Mart has outcompeted small firms and driven them out of business." If we take a cooperative view of the same event, we say, "Wal-Mart has done a better job of cooperating with customers by selling them things on better terms, and the small firms were not able to cooperate as well." Same facts, but a very different emotional reaction....
Economists originally borrowed the competition metaphor from sports, events that exist to choose winners and losers. But in economics, everyone can win from exchange. Economists should make that distinction if they want to convince more people that a market economy is a powerful tool for human flourishing."
Summing Up
Whatever we choose to call it, cooperation or competition, the free market results in transactions involving the consensual and voluntary exchange of goods and services between individuals in contrast to government waste and coercion through inefficient non-customer focused bureaucracies and monopolies.

It's just the nature of the systems employed by a society and not the nature of the individuals who are employed by those systems.
The difference between market and government produced outcomes is tremendous and either increases or diminishes the general well being and prosperity of societies as a whole.
Less government and more free market 'cooperation' is essential to get people back to work, our economy growing strongly again, and our government and personal debt situation under control.
In the end, We the People must destroy our over-dependence on debt, or our debt will destroy us.
A 'cooperative economy' is simply a must.
That's my take.
Thanks. Bob.

Wednesday, December 25, 2013

Merry Christmas ... Our Right to be Free from an Incompetent and Coercive Government ... May It Endure Forever

We live in a free country of equals. We also have a rich heritage of personal freedoms which are guaranteed and include, but are not limited to, the Constitutional rights to life, liberty, and the pursuit of happiness.

And that right to pursue happiness includes our own personal definition of happiness, however we choose to define it, so long as it doesn't interfere with the rights of other free individuals.

Freedom and Christmas go together, and the point is well made in an editorial from 1949 titled In Hoc Anno Domini:

"When Saul of Tarsus set out on his journey to Damascus the whole of the known world lay in bondage. There was one state, and it was Rome. There was one master for it all, and he was Tiberius Caesar.
Everywhere there was civil order, for the arm of the Roman law was long. Everywhere there was stability, in government and in society, for the centurions saw that it was so.
But everywhere there was something else, too. There was oppression—for those who were not the friends of Tiberius Caesar. There was the tax gatherer to take the grain from the fields and the flax from the spindle to feed the legions or to fill the hungry treasury from which divine Caesar gave largess to the people. There was the impressor to find recruits for the circuses. There were executioners to quiet those whom the Emperor proscribed. What was a man for but to serve Caesar?
There was the persecution of men who dared think differently, who heard strange voices or read strange manuscripts. There was enslavement of men whose tribes came not from Rome, disdain for those who did not have the familiar visage. And most of all, there was everywhere a contempt for human life. What, to the strong, was one man more or less in a crowded world?
Then, of a sudden, there was a light in the world, and a man from Galilee saying, Render unto Caesar the things which are Caesar's and unto God the things that are God's.
And the voice from Galilee, which would defy Caesar, offered a new Kingdom in which each man could walk upright and bow to none but his God. Inasmuch as ye have done it unto one of the least of these my brethren, ye have done it unto me. And he sent this gospel of the Kingdom of Man into the uttermost ends of the earth.
So the light came into the world and the men who lived in darkness were afraid, and they tried to lower a curtain so that man would still believe salvation lay with the leaders.
But it came to pass for a while in divers places that the truth did set man free, although the men of darkness were offended and they tried to put out the light. The voice said, Haste ye. Walk while you have the light, lest darkness come upon you, for he that walketh in darkness knoweth not whither he goeth.
Along the road to Damascus the light shone brightly. But afterward Paul of Tarsus, too, was sore afraid. He feared that other Caesars, other prophets, might one day persuade men that man was nothing save a servant unto them, that men might yield up their birthright from God for pottage and walk no more in freedom.
Then might it come to pass that darkness would settle again over the lands and there would be a burning of books and men would think only of what they should eat and what they should wear, and would give heed only to new Caesars and to false prophets. Then might it come to pass that men would not look upward to see even a winter's star in the East, and once more, there would be no light at all in the darkness.
And so Paul, the apostle of the Son of Man, spoke to his brethren, the Galatians, the words he would have us remember afterward in each of the years of his Lord:
Stand fast therefore in the liberty wherewith Christ has made us free and be not entangled again with the yoke of bondage."
Summing Up
Life, liberty and the pursuit of happiness are just a few of the 'unalienable' natural or God given rights possessed by all Americans.
At the same time, the actions of big, intrusive, incompetent and coercive governments (local, state and national) represent constant threats to those natural or God given individual rights.
So here's my wordy but sincere Christmas wish this year: let's be ever vigilant of protecting our individual freedoms while always demonstrating concern and generosity for the general welfare of our community and broader society by willingly coming to the aid of those among us who are in need of help.
Merry Christmas. Bob.

Tuesday, December 24, 2013

For We the People as Individual 401(k) and IRA Investors, Time Is Very Much on Our Side .... Compared to the Pension Plan Experts, We'll Achieve Superior Investment Results Over the Long Run

The vast majority of the pro and con arguments put forth by the so-called experts and even media pundits concerning the value of pension plans compared to 401(k) or IRA plans have been one sided and wrongheaded as well.

So let's set the record straight since knowledge is power.

The portability of 401(k) plans, the real world funding with real world contributions by both employers and employees (instead of often empty and unfulfilled promises by plan sponsors), the absence of paying high fees to "expert" advisors by pension plans (for no value added to what the market will bring on its unmanaged own), and the fact that anything left over will go to our heirs, when added together make the clear, compelling and convincing case that 401(k) plans are superior.

And that's true regardless of what private and public sector union leaders and government officials have to say.

When investing our own money, aka MOM, we individuals have time on our side compared to the "experts," and that's the biggest advantage of all. We also care more, much more, about our personal economic well being and that of our families as well.

So now let's look closer at this '401(k) is better' investment theory 'heresy' I'm presenting for your full and fair consideration.

The Goals of Traders and Investors Are Light-Years Apart tells the 'time is on our side' story of individual investors well:

"The Goals of Traders and Investors Are Light-Years Apart

Last week, I came across a story involving Wall Street, helicopters and the business of collecting and selling private data. It sounds like the perfect setup for an article in The Onion, but it’s true and a perfect example of Wall Street’s obsession with the speed of information.       

A firm specializing in nonpublic data collection and analysis hired a helicopter to fly over oil storage tanks. Using a heat-sensitive camera, the helicopter recorded tank levels. The goal? Get an early estimate of oil stocks on hand in the United States before the official numbers were released.       
This kind of data is like catnip to traders who deal in oil, but it doesn’t come cheap. The oil report costs $90,000 a year.
Despite the big price tag, we keep seeing more stories about how Wall Street firms and traders keep trying to one-up one another. The result seems to be bigger and bigger trades and bigger and bigger paydays for the people who use this information and happen to end up on the right side of a trade.
And it doesn’t stop with data.
Today, trading firms pay for the privilege of placing their servers in the same building as stock exchange servers so trades can happen in milliseconds. As Jerry Adler wrote for Wired in 2012, To “make things fair, engineers scrupulously add extra lengths of cable to equalize the runs among all the servers. Yes, we are talking about a few feet plus or minus. At nearly the speed of light.”
This sounds insane to the average investor, particularly when we put it in the context of our investing experience. Most of us are focused on making sure food gets on the table, keeping a roof over our heads, putting a little toward college and maybe saving enough to retire before we turn 70.
The trading game is clearly rigged, but what we should care about — investing — isn’t. When we’re talking about Wall Street firms, we’re usually talking about traders. Traders by profession are much more interested in moving money around and finding ways to extract some in the process.
Average investors, on the other hand, have specific goals that they’re saving for in the long term. In fact, I think the explanation for Wall Street’s focus on speed comes down to something really simple: time.
Wall Street changes its mind (trades) every millisecond. Investors (in theory) change their portfolios as life changes over the years. Wall Street focuses on quarterly earnings. Investors focus on retiring in 30 years. It’s the ultimate short-term versus long-term strategy, and speed matters in the short term, but not so much in the long term.
We’re talking about two completely different universes. Traders care about trades measured in milliseconds and servers separated by a few feet. Investors care (or should, anyway) about our goals and values. Those two perspectives will rarely align because again, it’s about short term versus long term.
However, I understand how tempting it is to think we ought to play the trading version of the game.
After all, there’s a lot of money on the table, right? But we already have access to what these firms are doing in the form of hedge funds or “alternative” mutual funds, and they haven’t exactly been a game changer for most individual investors. For the fifth year in a row, hedge funds on average have trailed the Standard & Poor's 500-stock index, this year by a wide margin — 8.31 percent returns compared with the S.&P.'s 29.1 percent through November. . . . 
Forget about hedge funds for a minute. Even most mutual funds disappoint, with almost 80 percent of them underperforming their index each year. But being hypercompetitive Americans, we don’t want to accept average. We work hard, so it shouldn’t be a stretch to find the 20 percent that will outperform....     
Look, if your goal is to be a trader trying to play in the big leagues, then yes, you might be at a disadvantage if you’re competing against people who have more or faster information. But if your goal is to be an investor, then we already have the data that shows us how we win: Build a low-cost, diversified portfolio and hold on to it for a long time."
Summing Up      
Owning a low-cost S&P 500 Index Fund or a low-cost, diversified portfolio of stocks isn’t a strategy that will make big headlines, and it most definitely won’t help pension plan managers and other "experts" max out their annual bonuses at our expense.
Neither will it allow the so-called "experts" and "fiduciaries" to pretend that they are safeguarding our financial future and acting on our behalf instead of their own.
Nor will it allow plan sponsors to fail to fund the 401(k) promised contributions in a timely and transparent manner.
Nor will it end up in our forfeiting any remaining balance at death. The money will go to our heirs and loved ones.
What a 401(k) will do is let time, stock market performance over time, and the nonpayment of big fees to "experts" work for us throughout our lives and beyond. Time will be on our side.
The message is simple and direct: don't believe the peddlers of the falsehood that pension plans are inherently superior to 401(k) plans. That's a crock.
Thanks. Bob.


Monday, December 23, 2013

Investing Lessons ... And Why 401(k) Plans Are Superior to Pension Plans, Contrary to What the Public Sector Union and Government Officials May Say

A good article summarizing investing lessons we should learn is worth quoting at length and is titled Seven things you should have learned in 2013 --- but didn't. It's subtitled 'Investing lessons that should serve in 2014 and beyond.'

Here goes:

"It’s that tiresome time of year when financial pundits trot out “investing lessons” from the last 12 months. . . .                                                                               
Here are strategies that will serve you well in 2014 — and perhaps longer.

1. Buy and hold works

Vanguard sucked up $130 billion of inflows in 2012 thanks to its rather boring but effective lineup of low-cost index funds. And investors who piled in were richly rewarded in 2013, as the major indexes delivered their best run since 2003.                                        

But if you think this was just a one-year fluke, think again. Consider the S&P has provided a total return of about 10% on average every year from 1926. And more recently, the total annual return of the S&P has averaged about 15% since 1970.

Also consider that when Mark Hulbert compiled his five-year rankings of more than 200 investment-advisory services a few months ago, the top three were ALL buy and hold strategies.

The lesson of 2013 isn’t just that buy-and-hold investing worked (past tense), but that it works (present tense). Remember this before you start tinkering or fretting about valuations in 2014.

2. Forecasting doesn’t work

Robert Seawright recently put together a great list of Wall Street’s “best” forecasts for 2013… which all missed the mark by between 16% and 30%. . . . 

Sure, some forecasters get it right. But nobody gets it right frequently enough to be depended upon — so stop using investment bank research as your primary source for buy or sell calls. It will only end in disappointment.

3. Stop (Obsessing about Inflation)

If you want to have a fun debate on “real” vs. perceived inflation, much in the way folks debate whether the original “Star Trek” or “The Next Generation” was the superior television series, feel free.

But please don’t let your hyperventilation about hyperinflation lose you money — again — in 2014.
Consumer price data from the Bureau of Labor and Statistics shows the rate of inflation hasn’t been above 2% since October 2012, and hasn’t been above 3% since December 2011....                                       

4. Be careful with long-term bond funds


The “taper” officially started this week as the Fed cut back on bond purchases.

And while no one knows precisely how the Fed’s rates policy will evolve in 2014, a few months back we did get a taste of what happens with even a modest uptick in interest rates.

Rates have rolled back a bit, but you can bet they will rise again at some point in 2014. This rough period of rising yields in early 2013 will be instructive as to how things may play out in the New Year.                                         

Consider this as you plot your long-term bond fund holdings in 2014.

5. You have a LONG way to go

What an amazing 2013, right? Well, when you thank your lucky starts for those 25% gains you enjoyed this year, you may want to pray for a repeat performance in 2014. And 2015. And 2016…

Because even after these gains, the average American is woefully behind when it comes to retirement planning.

In early 2013, Fidelity was quick to announce that its average IRA balance this year hit a five-year high… but that was to just $81,000 . The same for Fidelity’s average 401(k) balance of those over 55 — it was up nicely, but only to $255,000.

The old rule of thumb used to be that a retiree needed about 10 times their last year’s salary to retire comfortable. But nowadays, with Americans living longer and health care expenses spiraling ever higher, even a million dollars in your retirement portfolio may only buy a modest retirement should you be lucky enough to live 20 to 30 more years after quitting the rat race. . .

6. Personal preference is not an investment strategy.

{My translation: Don't get caught up investing in the latest thing by listening to your friendly neighbor, or even to your friendly stock broker who is trying to get you to trade often.

Instead do your homework or make sure someone you trust is doing it for you. Otherwise just stay invested in low cost index funds like the S&P 500.}

7. You can’t win if you don’t play

Look, calling the next bubble is fun if you’re a financial media troll looking for page views or if you’re just making conversation while huddled in your bunker this holiday season.

But bubble talk has been incredibly unproductive in every sense over the last few years.

And it will continue to be so in 2014. . . . 

The Investors Intelligence Survey conducted after Thanksgiving showed about 85% of investors were bullish — the highest reading since 1987.                                         

Oh yeah, and the S&P is up 25%, its best year since 2003.

You think it’s really all going to stop NOW, after what we’ve been through?

To be clear, I’d never advocate dumping every penny into stocks because of the big risk involved with that. But 2013 should be proof positive of there is ALSO great risk (or in economic jargon, “opportunity cost”) that comes with sitting out the stock market.

If you keep sitting on your hands, you will never do better than the measly returns offered by the bond market and so-called “high interest” CDs.

If that’s your idea of a winning hand, so be it. But if not, consider upping the ante for a few hands in 2014 – even if the lion’s share of your portfolio is focused on capital preservation."

Summing Up

Investing in stocks over the long haul is absolutely the right thing to do.

In fact, long term 401(k) investing beats pension funds, despite what the public sector union leadership and local government officials may say. (NOTE: A 401(k) account is portable (you can take it with you when you change jobs), and it's funded with real money through cash payments up front from employer as well as employee contributions, unlike many public sector pension promises. Finally, index funds outperform managed funds and do so with less expense being charged to the individual's account.

What's not to like?

That's my take, unpopular as it may be.

More to come.

Thanks. Bob.             

Sunday, December 22, 2013

Stock Market Investing is Simple .... Don't Predict the Short Term ... Invest in Stocks and Be Happy Over the Long Term

It's that time of year when stock market predictions by the so-called "experts" for the new year are taking place.

My advice for you is to ignore the experts and the short term annual calendar and take the time to understand the overwhelmingly clear long term benefits of investing in stocks.

In the short term, prices will fluctuate, of course, and they often go down, sometimes quickly and dramatically.

In the long term, however, stock prices will increase at a rate considerably faster than  inflation and at a rate which surpasses such alternatives as money market funds, bonds, real estate, gold and other investments.

So if you are using a calendar when investing, use one measured in years and not days, weeks or even 12 months.

And if you are young enough to have decades left before retiring, invest as much as you can as early as you can and as consistently as you can, and don't worry about the daily or even annual fluctuations in prices.

When they "go on sale," you can get more bang for your long term investment buck.

Why Market Forecasts Are So Bad concludes correctly that annual forecasts by the so-called experts are often worse than random guesses:

"The oracles known as Wall Street strategists have spoken: The S&P 500 will rise 6.4% by the end of next year. But the evidence shows you'd do just as well guessing yourself.
It isn't supposed to be that way. Strategists use complex models to forecast earnings growth, price/earnings ratios and other market-driving factors. In the 21st century, apparently, that effort has been for naught.
Take the predictions that strategists made in December 2012, attempting to forecast the S&P 500 this year.

Research firm Birinyi Associates collected such projections by 11 strategists from Wall Street's largest firms . . . . On average, the analysts thought the S&P 500 would rise 8.2% in 2013. The S&P 500 has actually risen 27.5% this year through Friday, not including dividends—a difference of 19.3 percentage points.
To put that in perspective, let's say you pinned a list of all the annual S&P 500 percentage changes since 1929 on a wall and blindly threw a dart at it.
More than half the time, the number you landed on would have come closer to 2013's actual price change than the analyst consensus for the year, a Wall Street Journal analysis shows, based on data from Birinyi and historical returns.
Since 2000, analysts have also done worse than the dart thrower in 2001, 2002 and 2008. Winning 10 out of 14 times wouldn't be so bad—were it not against such a mindless opponent.
Forecasting stock returns a year in advance is exceedingly difficult. Often, failing to foresee one big event, such as the Federal Reserve's decision not to slow its bond-buying program in September, can mean the difference between being close or whiffing, says Tobias Levkovich, chief U.S. equity strategist at Citigroup.                                          
Last December, Mr. Levkovich thought the S&P would close at 1615 this year. That made him the most accurate of strategists Birinyi tracks, but the estimate is still on track to be much too low. On Friday, the S&P 500 closed at 1818.32.
Mr. Levkovich says he thinks Congress's fiscal progress has also been an unexpected positive for the market. . . .
Say that at the end of each year, you found the median annual change in the S&P 500 since 1929 and used that as your guess for the next year's price change. For example, in 2006, your guess would have been 9.06%—the median price change between 1929 and 2005.
That method would have beaten the strategists half the time since 2000, according to a Wall Street Journal analysis. . . .
So what's the problem?
For one, since 2000 the strategists as a group have never forecast a drop in stocks. The upward bias makes some sense; stocks have risen in 55 of 85 years going back to 1929.
But the optimism could also reflect Wall Street's tendency to be forgiving of bullish strategists who end up being wrong, says Citigroup's Mr. Levkovich.
He says a Wall Street friend once gave him some advice: "If you're a bull and you're wrong, you're forgiven. If you're a bull and you're right, they love you. If you're a bear and you're right, you're respected. If you're a bear and you're wrong, you're fired."
Mr. Levkovich, who thinks the S&P will rise to 1900 next year, says that he would make a negative forecast if the circumstances warranted it.
But the larger issue might be simpler: Forecasting the stock market accurately is extremely difficult, if not impossible, says Masako Darrough, an accounting professor at Baruch College who has researched biases in analysts' earnings forecasts.
Rather than invest more or less in stocks based on strategist calls, she says most investors are better off sticking with their usual allocations and, for planning purposes, to assume that stocks over the long run will rise at their usual pace.
Since 1926, large-company stocks have had an average annual total return of 9.8% including dividends ....                     
Cut strategists who must make projections some slack, but don't bet on their accuracy either."
Summing Up
My short term crystal ball says that stocks will appreciate by 10% or more in 2014 and that the S&P 500 has a great chance to surpass 2,000. That makes me an unmitigated bull, I guess.
However, my short term crystal ball also says that stocks will probably fall sometime during the year by 5%-10% and scare many people out of the market. So if you are a "Nervous Nellie," either don't watch or stay away from investing in stocks.
But if you stay away from long term saving and stock investing, you'll be doing the wrong thing for yourself and your family.
My long term crystal ball, based on more than 40 years of personal investing, says that stocks will by a wide margin outperform other forms of investment over time. They always have and always will.
As a result, stocks are absolutely the best place to put your savings for the long haul.
And very probably in 2014 as well.
More to come.
Thanks. Bob.

Saturday, December 21, 2013

The 'Labor-Electoral Complex' and Public Finances

Many of our major cities are broke.

At the same time, many individual states and our national government are fiscal and budgetary train wrecks as well.

In sum, we are witnessing in real time, including but not limited to, such things as the following: that our public sector pensions and health care promises for public workers are unaffordable, our increasingly nationalized health care system is a mess, and our efforts to educate our young people through a government knows best system of public education (including K-12 through college) is needlessly expensive and rapidly becoming uncompetitive on a worldwide basis.

Meanwhile, Social Security and Medicare are operating in a field of dreams.

Financial literacy is pervasive throughout our society.

Simply put, we don't know what we need to know and can't afford to keep doing what we've been doing.

Government is not the answer to our problems: We the People are.

Despite our many problems, there's growing hope as We the People get "mad as hell" and become aware that depending on self interested government knows best officials is a losing strategy, and that self reliance, embracing personal freedoms and taking responsibility for our actions are the only true and lasting solutions to our many and deep moral and financial problems as individuals, families and as a nation.

We'll focus herein on what outgoing Mayor Bloomberg of New York has labeled the 'Labor-Electoral Complex' and the debilitating impact it has had and continues to have on many of our larger cities such as New York, Detroit, Chicago and others too numerous to mention.

The 'Labor-Electoral Complex' has this to stay:

"New York Mayor Mike Bloomberg . . . saved his best speech for last. . . . he coined a term this week that deserves national currency—the "labor-electoral complex."
That's how he described the public union political machine that has ruined so many American cities. "We cannot afford for our elected officials to put their own futures ahead of the next generation's, and to continue perpetuating a labor-electoral complex that is undermining our collective future," the mayor told the New York Economic Club. Cities are dynamic and attractive places to live, but their future is jeopardized by "the explosion in the cost of pension and health-care benefits for municipal workers."
He knows this from hard experience. When he took office in 2001, New York City spent $1.5 billion a year on pensions. Now it spends $8.2 billion, nearly a 500% increase when inflation rose by only 35%. Add health-care costs, and benefit payments are swallowing an ever larger share of the city budget. . . .
Everybody knows this has to change, but Mr. Bloomberg nailed the main obstacle to reform with his reference to the "labor-electoral complex." This is the cozy relationship between public unions and politicians that dominates modern urban government. . . .
Union cash helps elect politicians who then reward the unions with higher pay and benefits. The cycle repeats until taxes become destructive and spending is unaffordable. Exhibit A is Detroit. But some 38 local governments have filed for bankruptcy since 2010, "largely because of out-of-control pension costs," Mr. Bloomberg said."
Summing Up
Government doesn't know best.
In fact, politicians often don't even try to do what's best for We the People.
They are too busy "feathering their own nests" and "lining their own pockets" while pretending to serve the public interest.
As individuals we have to begin to aggressively assert our rights and take more responsibility for how we live our own lives.
Fundamental change in how we allow our governments at all levels to spend and borrow on our behalf, and not do so at the expense of future generations, is essential.
So let's get busy acquiring the necessary knowledge and having the courage to stand up for what's right.
And not blindly trusting our "elected trustees" to do what's right for us.
Our kids and grandkids are depending on us.
Knowledge is power.
More to come.
Thanks. Bob.

Friday, December 20, 2013

Excessive Debt Levels ... Not Just the Governments' (City, State and National) Problem to Solve .... We the People Have Huge Issues with Too Many Borrowings as Well

There's an old saying I like very much which says that if we're doing the wrong thing, we're probably doing it poorly.

And so it is with saving, investing, spending and borrowing.

We have a national debt of ~$17 trillion which in reality is closer to $100 trillion, and we incur annual deficits in the hundreds of billions of dollars. Yet we proclaim success when the politicians arrive at another deficit increasing deal for the next two years. Next they'll proclaim success when agreeing not to shut down the government early in 2014 by agreeing to raise the debt ceiling.

But the debts will continue to grow and the deficits will continue to flow.

Meanwhile, the Federal Reserve is reducing its bond purchases, aka tapering, and will continue to do so over the next year, thus beginning a process which will hopefully assist in stabilizing our precarious financial position as a nation.

Long term interest rates will rise in small amounts as the tapering unfolds, but short term rates should stay at historical lows for several more years.

The stock market is gong higher, the U.S. dollar is getting stronger, oil prices are going lower, inflation is not an immediate concern, and economic growth is improving. Unemployment is too high but going lower.


We have too little knowledge about our personal financial matters, which has led to too little knowledge about our governments' (city, state and national, including entitlements) financial matters, including debt obligations as well as unfunded liabilities, which when combined have led to excessive borrowings at both the personal and government levels.

And what we do manage to save as individuals is often invested poorly while what we borrow is too much and frequently pursuant to poor terms.

So I'll sum up by quoting a few uncomfortable facts from Meltdown Averted: Bernanke Struggled to Stoke Growth:

"After a financial crisis he didn't see coming, Ben Bernanke steered the U.S. away from a potentially devastating panic. Yet five years later, the recovery he helped engineer with extraordinary policies remains frustratingly weak.
As Mr. Bernanke prepares for his final days as Federal Reserve chairman, that legacy—a mix of failings, boldness, persistence and frustration—is coming into sharper focus, and with it a clearer picture of the power and limitations of modern central banking. . . . 

It is widely accepted that the landmark policies Mr. Bernanke championed during and after the crisis—rock-bottom interest rates, loans to banks and controversial bond buying—averted an economic calamity. Their failure to spur a vigorous recovery, however, has created perhaps the biggest unanswered question about Mr. Bernanke's legacy.
"I wish I was leaving with the unemployment rate at 5% instead of 7%," he said wistfully during a November discussion with high-school teachers. . . .
Yet the economy has grown at an average annual rate of just 2.3% since the recession ended in mid-2009, versus a 4.1% average for the first four years of other expansions since World War II. Had it grown at that rate, today's $15.8 trillion U.S. economy would be larger by $1.25 trillion, about the total annual output of Mexico.
The explanations for slow growth are complex: lingering effects of a run-up in household debt; a turn toward tighter fiscal policy at the state, local and federal levels; damage to the financial system from the crisis; structural changes in the economy such as slowing population growth; business and household risk aversion; and the limitations of the central bank's tool kit.

Lawrence Summers, the former Treasury secretary and White House adviser, wonders whether the U.S. suffers from an ailment he and others describe as "secular stagnation": a long-standing reduction in the pace of growth related to slow labor-force expansion or waning productivity gains, masked by the technology and housing bubbles.

"A central bank cannot fix this," Mr. Summers said. But it can avoid making the problem worse, he added, by keeping interest rates as low as possible to encourage economic activity. "If [Mr. Bernanke] had not maintained a loose orientation to monetary policy, we could have easily gone back into recession" after 2009, Mr. Summers said.
Another theory is that the housing bubble itself was the underlying cause of economic lassitude, with effects that still haven't disappeared. Debt is a claim on future income and spending. U.S. household debt soared to $13.8 trillion by the end of 2008 from $7 trillion in 2000. That debt outpaced gains in after-tax income by more than $3 trillion. . . .
The housing-boom run-up in debt is an effect some attribute to easy-money policies the Fed adopted earlier, during the post-tech-bubble slump. Its low-rate policies before the financial crisis "provided the fuel to inflate the real-estate bubble," said Michael Bordo, a Rutgers University professor of economic history. . . .

In any case, households since the 2008 crisis have pared $884 billion of their debt—diverting funds that might otherwise have gone to consumption during the recovery." . . .
Summing Up
We have to reduce debt levels in relation to the size of our economy.

And as individuals we have to clean up our act with respect to debt levels associated with student loans, credit cards, home mortgages and auto loans, too.

And learn to save enough and then manage our individual retirement accounts well in 401(k) plans as we transition from pension plans in the public sector.

As we do these necessary things and as the economy grows, our economic issues will subside over time.
Hopefully, we will now take the time to understand that knowledge about how things work is essential to our well being and that of our kids and grandkids over time, as well as that of our nation.
Saving, investing, spending and borrowing .... all have been done poorly these past few decades.
It's time to learn our lesson and get on with the "pursuit of happiness" in our own particular lives.
That's my take.

More to come.
Thanks. Bob.

Thursday, December 19, 2013

Stocks at Record Highs ... Where Now?

The stock market hit another record high yesterday.

The Dow is over $16,000 and the S&P 500 index has passed $1800. Both are up considerably more than 20% for the year.

Where now?

Well, my crystal ball says that for long term oriented savers and investors, the market's tendency is to go higher (it always does).

Accordingly, I recommend that you take a look at what I said ALMOST ONE YEAR AGO in a post dated January 27, 2013 which was titled "Stock Prices ... Up or down from Here? ... Long Term Up .... Short Term????.

So if you are a long term investor, it's a good time to reflect on what's happening and resolve anew to stay the course.

However, if you're a short term trader or "Nervous Nellie" type, now may be a good time to take some money off the table or keep your money in your pockets.

As for the direction of the market and the benefit of owning stocks for the long haul, the movement of prices from the "lower left to the upper right of the chart" very much remains in place, as it has for the past few hundred years.

Contrary to popular opinion, it's the only sensible thing to do.

Thanks. Bob.