Wednesday, February 26, 2014

Home Ownership Rates ... Down and Likely to Stay That Way ... Especially For Younger People

America's younger generation is not buying homes in the record numbers that were purchased prior to the recent housing bust and foreclosure 'boom.'

But that's not necessarily a bad thing as hopefully more people have come to better understand the risks associated with excessive mortgage borrowings in relation to their current and projected income.

In simple language, borrowing to buy a house is no longer viewed as a no-brainer. In fact, it never was.

Young families have only recovered a third of their wealth from Great Recession has the facts:


"Families led by those under 40 years old have only recovered about a third of the wealth they lost during the financial crisis, according to a study released by the St. Louis Fed’s Center for Household Financial Stability.

That’s not the case for the average middle-age or older family, which have nearly recovered to precrisis levels, the report said.

The main factor is that the home-price gains that have helped mainly older families rebuild equity has been more than offset by younger families’ retreat from homeownership.

“The homeownership rate among younger households has plunged in recent years, reflecting both the loss of many homes through foreclosure or other distressed sales, plus delayed entry into homeownership among newly formed households.  The house-price gains that have helped mainly older families to rebuild homeowners’ equity have been overshadowed among younger families by their ongoing retreat from homeownership as they struggle with excessive mortgage debt,” the report said.

The homeownership rate for the under-40s has dropped to 42.2% in 2013 from 50.1% in 2005. Middle-aged families (those led by someone 40-61) have seen their homeownership rate drop to 72.1% from 76.9% in 2005.

More depressingly, the report says the homeownership rate may never return to its peak level. While “at some point” it should stabilize for individual age groups and the population as a whole, the 2004 to 2006 levels may never reappear."

Summing Up

Housing prices continue to recover from recession lows, albeit slowly.

And new home construction remains at dramatically lower levels than the peak of a few years ago.

In addition, lenders are now requiring borrowers to have considerable "skin" in the game in the form of as much as 20% down payments. {NOTE: Although that 20% down payment was  a standard condition for getting a loan in the 1970's, it had become a relic of the past in recent decades.}

Finally, today's low interest rates won't last forever, and that will make home prices and affordability even a greater challenge in future years.

My take on all this is straightforward: It's the "new normal," and all things considered, that's a good thing.

Thanks. Bob.

Tuesday, February 18, 2014

Raising the Minimum Wage Will Cost 500,000 or Perhaps More Jobs ... Surprised? ... I'm Not

Surprise! The Congressional Budget Office (CBO) just got serious about truth telling and the minimum wage.

The surprise, of course, is that someone in today's government decided to tell the truth, and that means President Obama and his minions aren't going to like that one bit. Oh well, such is life.

Hurting the 0.3% is subtitled 'CBO says a $10.10 minimum wage could cost 500,000 jobs:'

"White House economic policy can be more than a little confusing these days. Among its novel claims of late have been that paying people longer not to work is a jobs stimulus, and that ObamaCare's incentives not to work are a virtue. Now comes news that a higher minimum wage is splendid even if it throws half a million poor people out of work.

The job loss news comes courtesy of the Congressional Budget Office, which on Tuesday retained some intellectual respectability by reporting what every economist already knows, which is that artificially high wage floors cost jobs. The Democratic-run budget shop examined Democratic proposals to raise the minimum wage to $9 or $10.10, and it found that they would both price some Americans out of the workforce.

CBO estimated that President Obama's latest proposal—$10.10 by 2016 from $7.25 today—could cost half a million Americans their jobs as "some jobs for low-wage workers would probably be eliminated, the income of most workers who became jobless would fall substantially, and the share of low-wage workers who were employed would probably fall slightly."

A wage of $0 an hour doesn't sound good, especially for the poor. But the White House rolled out chief economist Jason Furman to point out that the report overall was good news. "CBO's central estimate" is that the $10.10 minimum would "lead to a 0.3% decrease in employment," said Mr. Furman, who deserves a raise for having to make these arguments. "And CBO acknowledges that the employment impact could be essentially zero." Yes, but CBO also says that it could be as high as one million; the 500,000 figure splits the difference....

President Obama is pitching a higher minimum wage as a matter of economic justice, one more way to reduce the difference between rich and poor. But as the CBO report shows, for many of the poor it will merely push them out of the job market and even deeper into poverty."

Summing Up

Simple economics and common sense both say that if the price of something goes up, demand for that something goes down, all else being equal.

And so it is also true with respect to government mandated minimum wage increases for the exact same work and output levels.

What's so hard to understand about that?

Not a thing.

That's my take. And the CBO's too.

Thanks. Bob.

Monday, February 17, 2014

Investing in Stocks and the Combined Safety and Rewards Associated with 'Time Diversification'

The highest return lowest risk to investing over time is to buy and hold a diversified basket of stocks.

And for most of us, that means buying low cost index funds such as the S&P 500 index fund and then leaving it along for the next several decades.

It's time diversification and the set it and forget approach to achieving optimal investment returns over a working career.

And the sooner we start, the better off we'll be in the end.

Stocks are far less risky than you think is subtitled 'The advantages of sticking with equities over the long haul:'

"Most people try to reduce risk in their investment portfolio by seeking safe havens like bonds, or by moving money out of the parts of the market that scare them at any given moment.

But what if the best way to minimize risk was to simply buy and hold stocks for the long run?

In a world where many investors seemingly have given up on the idea that buy and hold can work, some new research from two college professors and the head of retirement research for Morningstar Investment Management suggests that stocks become less risky the longer you hold them, research which suggests that “set it and forget it” could be pretty good investment advice, and that you should overweight your portfolio toward stocks, even as you age and most people are becoming more conservative. . . . 

There are a lot of reasons why some investors, intuitively, believe that stocks are inherently more risky the longer you stick with them. For starters, there is the idea that the longer you stick with a portfolio, the more market gyrations, downturns and corrections you will live through. . . .
The concept behind the new research involves “time diversification,” an idea that experts and academics argue over, with some suggesting it’s real and powerful and others saying it doesn’t exist.                                        

You’ve heard of diversifying into different asset classes and across the international landscape and more, but time diversification simply suggests that the longer holding period effectively diminishes the effect of any short-run period, as has happened to folks who rode out the financial crisis of 2008 by sticking with the market through its ups and downs to get to its recent highs.

In short, investors are more risk-averse—they want to feel certain of bigger returns—during downturns and recessions, but are willing to accept more risk when the market is growing, and time diversification assumes that these swings will even out.

“One would think that in theory holding a diversified portfolio of cash, bonds and stocks creates the most amount of wealth 20 years from now,” Blanchett said. “That actually isn’t the case. If you look back over history, holding stocks over the long haul has been the optimal thing to do"….                                      

The research does not change the fact that there are still going to be good and bad times to buy stocks, it simply points out that investors benefit from being more aggressive—in the broad mix of stocks/bonds/cash, it suggests going more in the direction of equities than you might otherwise have been leaning—and from hanging on.
While Blanchett noted that economists might call doing a little of each strategy irrational if you believe the research that shows long-term providing that free lunch, he noted that doing a bit of each—having some very long-term money for part of a portfolio and another portion for short-term, trading-oriented activities—probably would make many people comfortable.

That said, the new research gives investors who had been hearing, feeling and otherwise thinking that buy-and-hold investing is dead a big reason to feel like maybe their investment philosophy has more merit than it has been given credit for.

It also gives them a reason to tilt their portfolios toward equities, despite the nervousness most investors have been feeling toward stocks since the turn of the century.

“The longer your holding period, the more aggressive you really can and should be. For an investor with an infinite time horizon—let’s just say 20 or 30 years—probably the lowest risk long-term investment for that investor is actually stocks,” Blanchett said. “Throughout history, holding a portfolio of all stocks has actually been less risky of all cash, if you look at the final income value after 30 years.

“The kicker is that people tend to look at their account statements on some regular intervals and they feel that pain long-term,” he added. “But really if you were going to buy something, put it in a lockbox and then come back and check it 20 years from now, hands down that would be stocks.”"

Summing Up

Contrary to popular belief, a stocks only investment strategy of buy-and-hold over a long period of time provides individual investors with both the safest and highest rate of return.

I realize that runs counter to what the gurus tell us, but I also know that it works.

And investing in a low cost index funds is the best choice for most individuals to make, since it requires no expertise, limited costs and requires no time to keep up with the daily ups and downs of the stock market.

Besides, it may feel better to not always know what's going on as the market swings between highs and lows over time.

In the long run, the swing is always to the high side.

That's not only my take: it's historical fact.

Thanks. Bob.

Tuesday, February 11, 2014

American Exceptionalism ... Dead or Alive? ... That's Up to Us

Occasionally we are obliged to consider something which causes us to rethink what we previously thought we knew. And a recent feature article in the 'National Journal' and titled 'The End of American Exceptionalism' (see link hereinbelow) caused me to do just that.

In the U. S., the belief in the idea or reality of American Exceptionalism is very much on the wane for younger Americans: issues such as the roles of (1) organized religion, (2) foreign policy and (3) our egalitarian 'classless' society have substantially different meanings for oldsters compared to the youngsters among us.

Suffice it to say that the America of today is perceived by young Americans to be vastly different from the opportunities I internalized while growing up after the end of World War II in a small working class town in central Illinois. In sum, as youngsters we were taught to believe that anything was possible and that we could accomplish anything if we worked hard enough, regardless of our starting point or current station in life.

Things have changed dramatically in what youngsters believe over the past half century, and many young people now believe that the American dream is dead. But while it's perhaps been seriously wounded, the idea of American Exceptionalism is not dead. Not by a long shot.

That said, The American Precariat is an editorial well worth reading and reflecting upon:

"When foreign visitors used to describe American culture, they generally settled on different versions of one trait: energy. Whether driven by crass motivations or spiritual ones, Americans, visitors agreed, worked more frantically, moved more and switched jobs more than just about anybody else on earth.

That’s changing. In the past 60 years, for example, Americans have become steadily less mobile. In 1950, 20 percent of Americans moved in a given year. Now, it’s around 12 percent. In the 1950s and 1960s, people lived in the same house for an average of five years; now people live in the same house for an average of 8.6 years. When it comes to geographic mobility, we are now at historic lows . . . .

Why is this happening? A few theories offer partial explanations, but only partial ones.

It is true that we are an aging nation and older people tend to move less. But today’s young people are much less mobile than young people from earlier generations. Between the 1980s and the 2000s alone, mobility among young adults dropped by 41 percent.

It’s also true that many people are locked into homes with underwater values. But as Timothy Noah pointed out in Washington Monthly, mobility among renters is down just as sharply as mobility among homeowners. . . .

No, a big factor here is a loss in self-confidence. It takes faith to move. You are putting yourself through temporary expense and hardship because you have faith that over the long run you will slingshot forward. . . .

Peter Beinart wrote a fascinating piece for National Journal, arguing that Americans used to have much more faith in capitalism, a classless society, America’s role in the world and organized religion than people from Europe. But now American attitudes resemble European attitudes, and when you just look at young people, American exceptionalism is basically gone....

Fifty percent of Americans over 65 believe America stands above all others as the greatest nation on earth. Only 27 percent of Americans ages 18 to 29 believe that. As late as 2003, Americans were more likely than Italians, Brits and Germans to say the “free market economy is the best system on which to base the future of the world.” By 2010, they were slightly less likely than those Europeans to embrace capitalism.

Thirty years ago, a vast majority of Americans identified as members of the middle class. But since 1988, the percentage of Americans who call themselves members of the “have-nots” has doubled. Today’s young people are more likely to believe success is a matter of luck, not effort, than earlier generations.

These pessimistic views bring to mind a concept that’s been floating around Europe: the Precariat. According to the British academic Guy Standing, the Precariat is the growing class of people living with short-term and part-time work with precarious living standards and “without a narrative of occupational development.” They live with multiple forms of insecurity and are liable to join protest movements across the political spectrum.

The American Precariat seems more hunkered down, insecure, risk averse, relying on friends and family but without faith in American possibilities. This fatalism is historically uncharacteristic of America."

Summing Up

Are our best days behind us? Are we no longer a unique and exceptional nation? Are we becoming just like Europe?

I say absolutely not.

Nevertheless, "The End of American Exceptionalism" by Peter Beinart (click on the reference hereinabove) is well worth taking the time to read.

Then after reading and duly reflecting on what Mr. Beinart has to say, let's all work hard to get back to being 'all that we can be,' both as individuals and as a society. That's the America I know and have long loved.

That's also our job #1.

At least that's my take.

Thanks. Bob.

Saturday, February 8, 2014

Income Inequality .... Rich or Poor .... It's All Relative

Does it matter that some of us have more material things than others, assuming we all have more than enough to live comfortable lives? The answer is yes.

Notable & Quotable tells us why. It's human nature at work

[D]oes income generally grow faster for people in the lowest fifth of the population or people in the highest?

It's the lowest, because many of those people are young, low-paid people just starting out on their careers, while many of the richest fifth are older people at the peak of their pay, about to retire. That is to say, the category "poorest fifth" may not seem to show much change, but the people in it do. Income mobility is far from dead: 80 per cent of people born in households below the poverty line escape poverty when they reach adulthood.

None of this is meant to imply that people are wrong to resent inequality in income or wealth, or be bothered about the winner-take-all features of executive pay in recent decades. Indeed, my point is rather the reverse: to try to understand why it is that people mind so much today, when in many ways inequality is so much less acute, and absolute poverty so much less prevalent, than it was in, say, 1900 or 1950. Now that starvation and squalor are mostly avoidable, so what if somebody else has a yacht?

The short answer is that surely we always have and always will care more about relative than absolute differences. This is no surprise to evolutionary biologists. The reproductive rewards went not to the peacock with a good enough tail, but to the one with the best tail. A few thousand years ago, the bloke with one more cow than the other bloke got the girl, and it would have cut little ice to try to reassure the loser by pointing out that he had more cows than his grandfather, that they were better cows, or that he had more than enough cows to feed himself anyway. What mattered was that he had fewer cows."

Summing Up

So now we know the theory of relativity applies to how much we have compared to our 'rich' neighbor.

And not compared to people in general or the rest of the world.

In terms of simple human understanding and envy, we want more relative to what others have.

And the politicians do everything they can to exploit that fact all the time, thereby making our society weaker as a result.

That's my take.

Thanks. Bob.

Thursday, February 6, 2014

In Investing Mr. Market Is the Expert ... And He Doesn't Charge High Fees Either

Warren Buffett is a pro. He's also a very smart man who knows how to win a wager.

A few years ago he bet that a low cost index fund of stocks would outperform a group of professional managers, giving due consideration to both the investments and the fee charges.

Let's review the current situation as revealed in Buffett Has Big Lead in Stock Bet vs. Experts:

Warren Buffett has a big lead in a bet that tests whether a low-fee stock index fund does better than experts over 10 years.
Why is this man smiling? Warren Buffett has a big lead in a bet that tests whether a low-fee stock index fund does better than experts over 10 years.

With four years remaining, Warren Buffett has a commanding lead in a decade-long bet that put a low-fee stock index fund up against a portfolio of high-priced hedge funds.

Buffett put his money behind his long-held argument that "experts" don't do better than the stock market as a whole. It's the basis of his argument that the fees "helpers" charge investors usually aren't justified.

In a Fortune piece, long-time Buffett friend Carol Loomis writes that after six years the fund Buffett selected for the wager, the Vanguard 500 Index Fund Admiral Shares, was up 43.8 percent at the end of 2013.

The other side of the bet is a collection of five hedge funds of funds chosen by New York-based Protégé Partners.

After all fees, their average gain was about 12.5 percent. The names of the funds have not been revealed."

Summing Up

The best way to make money is not to spend it.

And the best way to invest over the long run is to own a diversified basket of blue chip stocks.

And for most people, that's an S&P Index Fund or something similar.

That's perhaps boring, but it's profitable.

And that's all I have to say about that (Forrest Gump).

Thanks. Bob.

Wednesday, February 5, 2014

Job Killers, Common Sense and Why Politics Sucks

Things are getting crazier and crazier in Washington these days.

Raising the minimum wage in a weak economy will destroy jobs. Is Economy Too Fragile to Raise the Minimum Wage? has this to say:

"President Barack Obama says a minimum wage boost can help lift low-income workers out of poverty. A new study says a pay increase amid economic uncertainty could damage the job prospects of those the policy intends to help.

In his State of the Union address last week, the president called on Congress to increase the minimum wage to $10.10 per hour, from $7.25. “Americans overwhelmingly agree that no one who works full time should ever have to raise a family in poverty,” Mr. Obama said.

But Joseph Sabia, an economist at San Diego State University, said minimum-wage increases aren’t the poverty-fighting tool the president thinks. In a newly released study, Mr. Sabia found that minimum-wage increases hit employment for low-skilled workers particularly hard in times of high unemployment.

“There’s never a good time to raise the minimum wage,” Mr. Sabia said during a presentation last week in Washington. “But times of economic uncertainty and recession are the worst times.”

Economists have argued for years about the precise effect of the minimum wage on low-skilled workers. Mr. Sabia tries to shed new light on the topic by focusing his argument on the economy’s health at the time of a minimum wage increase.

Among high-school dropouts under the age of 25, a group that disproportionately earns the lowest pay, a 10% increase in the minimum wage will reduce employment for the group by 2.1% when the overall unemployment rate is less than 5%.

But when the unemployment rate in a state exceeds 8%, that same group sees their employment fall 4.2% when the minimum wage rises by 10%. The president is backing a 39% jump in the wage.

If the new rate were to take effect when a state is entering a period of high unemployment, “that could result in a nearly 16% reduction in low-wage jobs,” Mr. Sabia said . . . .

California, Illinois and five other states had unemployment rates at 8% or higher in December, according to the Labor Department.


The ObamaCare legislation will enable people to opt not to work and still retain health coverage, thereby destroying more jobs. Notable & Quotable has this to say about that, quoting from the government's report on the effect of ObamaCare on future employment:

"From the Congressional Budget Office report "Budget and Economic Outlook: 2014 to 2024" released Tuesday:

The [Affordable Care Act's] largest impact on labor markets will probably occur after 2016, once its major provisions have taken full effect and overall economic output nears its maximum sustainable level. CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.

Because the largest declines in labor supply will probably occur among lower-wage workers, the reduction in aggregate compensation (wages, salaries, and fringe benefits) and the impact on the overall economy will be proportionally smaller than the reduction in hours worked. . . .

CBO's estimate that the ACA will reduce employment reflects some of the inherent trade-offs involved in designing such legislation. Subsidies that help lower-income people purchase an expensive product like health insurance must be relatively large to encourage a significant proportion of eligible people to enroll. If those subsidies are phased out with rising income in order to limit their total costs, the phaseout effectively raises people's marginal tax rates (the tax rates applying to their last dollar of income), thus discouraging work. In addition, if the subsidies are financed at least in part by higher taxes, those taxes will further discourage work or create other economic distortions, depending on how the taxes are designed. Alternatively, if subsidies are not phased out or eliminated with rising income, then the increase in taxes required to finance the subsidies would be much larger.


The ObamaCare legislation will also  cause employers to convert many full time workers to part time status (30 hour week requirement), thereby destroying more jobs.


Free trade legislation will expand trade and create more jobs, according to common sense and President Obama as well. Yet in direct opposition to President Obama on this issue, his sidekick in the Senate Harry Reid has vowed to halt trade legislation which would create more jobs, thereby destroying jobs instead.


Public employee unions are all about limiting productivity, encouraging rich retirement benefits and enabling lots of workers to retire at an early age with full benefits for the rest of their lives, thereby causing government to cost more and take more money from the taxpayers to pay for the ever expanding government sector, thereby destroying more jobs. And this is being done as well with defending unaffordable public employee pension plans at the exclusion of creating new 401(k) offerings, thereby destroying more jobs.

And then there's the Keystone Pipeline project and its five year and counting delay so far.


And on and on and on and on ................


Summing Up

It seems like there's a pattern here encouraging people not to work, and it's a disturbing one.

Productivity gains from existing workers and output gains from having more of our citizens employed have made our country the richest nation on earth.

And the one with the most freedom and opportunity as well. Not guaranteed and equal outcomes, mind you, but something much better than that ---- guaranteed equal opportunity and freedom for one and all to choose our own path to happiness, however we may chose to define or describe it.

Let's hope and trust that more and more of our fellow Americans will soon come to their senses and stop listening to all the progressive and populist nonsense which is so pervasive today.

And stop listening to much of the Republican nonsense being put forward as well.

Politics sucks. We the People deserve better from our public servants, and we'd better start demanding it.

That's my take.

Thanks. Bob.

Tuesday, February 4, 2014

Investing Advice from an Old Codger for the Working Youngsters Among Us ... You Just Don't Get It .... The Effects of Inflation Over Time Need to be Taken Into Consideration

Inflation isn't a problem these days and probably won't be for many years to come. In my view, the bigger risk is deflation and that augurs poorly for borrowers.

That said, the results that matter to long term investors over time are real inflation adjusted results and not nominal returns. In that regard, the evidence is clear: stocks after inflation beat cash equivalents by at least 6% annually.

Relative to zero real returns, that means a doubling of the initial amount invested each 12 years, when $1 becomes $2 in the first 12 years, then that $2 becomes $4 after 24 years, the $4 becomes $8 after 36 years and the $8 becomes $16 after 48 years.

So here's the math quiz: Which in real inflation adjusted terms is greater? $16, $8, $4, $2 or $1? 'Nuf said.

The only really legitimate way to accumulate real assets over a working career is to save regularly and invest those savings in assets that will earn greater than the rate of inflation over time. Today that's stocks and pretty much only stocks, at least for individual savers and investors.

With the bursting of the real estate bubble a few years ago, the leveraged residential real estate investment became widely recognized for the risky gamble, if not fiction, that it was. Throw in home equity borrowing and the mess was made even worse.

So how are our young people saving and investing their money today? In the wrong places, as a general rule. Although admittedly risky (what isn't?), stocks are the only way to win over time for savers and investors. And the youngsters among us have decades to prove the point to themselves, if only they will get started.

That said, Risk-Averse Youth paints a troubling picture of the habits of today's younger generation:

"Millennials, contrary to public opinion, are prudishly conservative investors, not the “lazy, entitled narcissists” of lore. But they sure could learn a thing or two from their elders about investing. . . .

In a study conducted by UBS, of some 1,600 affluent and high net-worth investors, Millennials kept a startling 52% of their portfolio in cash, with 7% in fixed income, and just 28% in stocks (the remainder is a catch-all category, including alternative investments and commodities, labelled “Other”). By itself, unreasonably conservative, but particularly so when stacked against the average asset allocations of non-Millennials, ages 37-plus, who kept 23% cash, 15% in fixed income, and 46% in stocks.

“The Next Gen investor is markedly conservative, more like the WWII generation who came of age during the Great Depression and are in retirement,” UBS concluded.

Having come of age during the financial crisis, a deep skepticism of the stock market seems to be behind their preference for cash piles. UBS asked, “How did you, or do you, plan to achieve success? Please select up to three most important factors.” Millennials chose a few obvious factors, like “working hard” and “saving/living frugally;” only 28% picked “long-term investing,” their second to last choice. Investing for the long haul was the top selection of 52% of the non-Millennials. . . .

What they don’t realize, perhaps, is that their second largest asset class –“cash, CDs, and money markets”—are earning negative returns after inflation, slowly eroding their nest eggs. Over the past 141 years, equities on average have returned 6% annually, after inflation. That data even includes the most recent financial crisis and the Great Depression. (Millennials wanting to better understand why, historically, investing in the stock market is wise, should read Barron’s recent cover, “We Were Right!”)

So how should an aspiring Penta millionaire be positioned for the future? One simple tip is to learn from his or her elders. TIGER 21 is an organization of 240 investors, each with an average $23 million in assets and 30% of whom are finance professionals still actively managing assets for clients. On a monthly basis, TIGER members get together for a workshop named “Portfolio Defense,” whereby 10 to 14 peers sit down to discuss, or perhaps a better word is “criticize,” each other’s asset allocation.

Contrary to the hunkering Millennials, TIGER members are ratcheting up the risk continuum. Their allocation to risky assets—public and private equity— has become an overwhelming portion of their overall portfolio, now at 73%. . . .

Millennials have largely missed the stock market recovery these past few years. When an old codger starts wheezing on about investing in the stock market, a better strategy – to rolling eyes – is actually listening to what he has to say."

Summing Up

Here's what I say to the youngsters among us who are keeping their savings in cash equivalents while worrying about the risk of owning stocks over time.

You're being foolish. $16 is greater than $1.

But there's uncertainty and volatility involved along the way.

Still, in order to earn real returns in investing, it's just like stealing second base in baseball.

First you have to get on first (get a job and start saving).

But even after getting to first base, you can't steal second with your foot still on first (invest those savings in stocks).

And if you don't get to second, you'll never score a run (income security when reaching old codger status).

That's this old codger's take.

Thanks. Bob.

Monday, February 3, 2014

Sound Advice For Nervous Long Term Investors .... Do Nothing!

Jack Bogle, founder of the Vanguard Group of mutual funds, is the acknowledged guru of low cost index fund investing and a proponent of the positive impact of compounding over time. He also follows the advice of Ben Franklin, as we'll see,

Here's Bogle's latest missive about the turmoil in the market these days and what we should do about it. For what it's worth, he articulates my sentiments exactly.

Jack Bogle's advice for a rocky market: Follow Ben Franklin says this:

"The civic virtue that Benjamin Franklin brought to his entrepreneurship and invention has overshadowed the remarkable wisdom of this investment sage. Perhaps because it is so simple that it seems unremarkable, this wisdom goes virtually unheralded among his other grand accomplishments.

With his simple precepts, he would have realized that in this new age of investing, we have ignored the crucial lesson: Simplicity trumps complexity. . . .

Perhaps the best place to begin is with Franklin's acute understanding of the miracle of compound interest. . . . (aka) "the magic of compounding."

Similarly, for as long as I can remember, compound interest has been at the center of my own investment thinking. The opening words in the very first chapter of my very first book (Bogle on Mutual Funds, Irwin Professional Publishing, 1993.... the value of $1,000 invested in stocks in 1872 would have grown to $27,710,000 in 1992 [when the book was published and the historical rate of return on stocks was 8.8 percent.] ... the magic of compounding writ large."...

 Since a comfortable retirement is the principal objective of nearly all U.S. families, in my book, "The Battle for the Soul of Capitalism," I use a 65-year time horizon, one that assumes a 45-year working career (to age 65) and a further 20 years of life (to age 85) based on today's actuarial tables: "$1000 invested at the outset of the period, earning an assumed annual return of, say, 8 percent would have a final value of $148,780—the magic of compounding returns."

But I quickly warned that this total was unlikely to be achieved. Why? Because the obvious magic-of-compounding returns was all too likely to be overwhelmed by the subtle tyranny of compounding costs—a concept that, in a simpler age, even the great Franklin failed to contemplate. Here's what happens:

"Assuming an annual intermediation cost (by mutual fund managers) of only 2.5 percent, the 8 percent return would be reduced to 5.5 percent. At that rate, the same initial $1000 would have a final value of only $32,465—the tyranny of compounding costs. The triumph of tyranny over magic, then, is reflected in a stunning reduction of almost 80 percent in accumulated wealth for the investor ... consumed ... by our financial system."

When our financial system—essentially our money managers, marketers of investment products and stockbrokers—put up zero percent of the capital and assume zero percent of the risk yet receive fully 80 percent of the return, something has gone terribly wrong in our financial system. As I note in the book, "the shift in our system from owners' capitalism to managers' capitalism has been devastating to investors."

The principles of sensible savings and investing are time-tested, perhaps even eternal. The way to wealth, it turns out, is to avoid the high-cost, high-turnover, opportunistic marketing modalities that characterize today's financial service system and rely on the magic of compounding returns. While the interests of the business are served by the aphorism "Don't just stand there. Do something!" the interests of investors are served by an approach that is its diametrical opposite: "Don't do something. Just stand there!"

—By Jack Bogle, founder of The Vanguard Group"

Summing Up

Personally, I'm just standing there right now, doing nothing.

My next move, whenever it occurs, will be to buy and not to sell.

Thanks. Bob.