Wednesday, December 31, 2014

The Certainty of Uncertainty

In my view, the best way to have a successful year in 2015 is to (1) prepare for the worst, (2) hope for the best, and (3) get ready to be surprised. In other words, nothing about the future is guaranteed.

That said, we still need to prepare ourselves for what may lie ahead, because often our 'well-laid' plans will 'surprise' us and work out for the best. Frequently, however, what we predicted and planned to happen isn't what happens at all. That's life.

And it's the same thing with investing. The so-called market professionals and pundits purport to tell us what lies ahead for both the economy and stock prices. Sometimes they are right but more often they are wrong. See The Big Economic Unknowns of 2015, From Unemployment to Oil.

Uncertainty is a fact of life. And predictions are dangerous --- especially those about the future. {But what other kind are there? And besides, they're fun to make.}

So the sooner we acknowledge that simple certain fact about an uncertain future, the better prepared we will be to handle life's many victories and setbacks alike.

The Consistency of Inconsistency, and How to Adapt Your Financial Goals tells the story of the certainty of life's uncertainties:

"From investing to world affairs, we tell ourselves that there’s so much information available that we can know what’s going to happen next. We tend to overlook that our certainty comes from selectively building a picture of the world that conforms to what we want to happen, not what will happen.

I see it all the time when people talk about trying to time the market by buying a bundle of stock at just the right moment. They’ll compile a list of recent events. Then, based on that list, they’ll express, with great certainty, that it’s time to get into the market. At that same moment, others will assert that it’s time to sell and get out of the market. It’s both entertaining and frustrating to hear different people use the exact same information to justify two opposite actions.

Unfortunately, the noise isn’t going to disappear any time soon. Change and uncertainty are consistent in their inconsistency. We don’t really know what will happen next, and we need to get better at living with that reality. We can start by putting the noise in context.

By accepting, or even embracing, the idea that uncertainty is part of the deal, that in itself becomes a type of certainty. Instead of being shocked by every change or unexpected piece of news, we adapt. We figure out another path that keeps us moving toward our goals.

If you do this yourself, you’ll soon discover that your certainty about uncertainty separates you from a lot of people. Just look around and listen. It’s mind-boggling how sure people are about what they “know” will happen in the future, even though their certainty is an illusion. . . .

Yes, it’s not easy to get comfortable with uncertainty. But as we know from the old saying, few things in life are certain except for death and taxes. There’s no reason to think we can’t learn to deal with the rest as it comes and end up pretty close to where we want to be anyway. It will just happen with fewer panic attacks along the way."

Summing Up

We were all told at an early age that there is nothing certain in life except death and taxes.

Nevertheless, we too often act as if nothing could be further from the truth.

We can affect most outcomes in a positive way, of course, and working diligently to do so is always a worthwhile endeavor.

That said, let's try our best not to be too shocked when the inevitable bad news arrives.

That's just life happening, and we shouldn't want it any other way. Why be bored?

That's my take.

Thanks. Bob.

Tuesday, December 30, 2014

"Cost Based Pricing" Is One Huge Reason College Costs Are Too High ... Easy to Get Government Sponsored Student Loans Don't Help

Government sponsored and subsidized entities price their services based on the costs incurred to provide those services, aka 'cost based pricing.' In contrast, private sector companies operate in a competitive world and practice 'price based costing.' They must generate a profit and still price their offerings low enough to attract customers. Thus, unlike the way things are done in the public arena, cost control in the competitive private sector is essential.

There is a world of difference between organizations that practice 'cost based pricing' and those who employ 'price based costing.'

College costs are too high. Student loans are easy to get. These loans make college costs higher than they otherwise would be, and make thereby big debtors out of young students at an early age. This debt dilemma affects college attendees from all backgrounds. (See Colleges' New Aid Target: the Middle Class.)

And contrary to popular belief, these student loans frequently do more harm to, than good for, those students and their families who receive them. And just why is that, you may ask?

Well, the vast majority of the money loaned to students for tuition goes to hire and compensate professors and administrators, but also for such things as building or renovating expensive campus facilities. The cost of college is essentially a cost based formula where all the costs of the college (primarily personnel related) are added together, and only then are tuition and fees determined.

And after all that has been factored into the equation, student loan balances fill in the remaining financial shortfall. Thus, what becomes free money to the college results from expensive loans to students. But that dirty little secret isn't even part of the college recruitment and enrollment discussion.

{NOTE: We're using student loans as the prime example of the dangers of debt which all too often begins at an early age. We're skipping other lender related problems such as (1) punitive interest rate credit cards, (2) lengthy car loans which make the purchase price high, monthly payments low, and result in the borrower going under water before the loan is paid off, and (3) low money down home mortgages to buy otherwise unaffordable houses, and which mortgages put all of the risk of a price decline on the often unsuspecting home buyers.}

Colleges Need a Business Productivity Audit is subtitled 'Professors are teaching less while administrators proliferate. Let's find out how all that tuition is being spent:'

"College tuition rates are ridiculously out of hand. Since the late 1970s, tuition has surged more than 1,000%, while the consumer-price index has risen only 240%. The percentage of annual household income required to pay the average private four-year tuition reached 36% in 2010, up from 16% in 1970. What explains the ever-increasing costs?

For one, three quarters of a typical college budget is spent on personnel expenses, including benefits. Yet the average professor spends much less time in the classroom today than two decades ago. In 2010 44% of full-time faculty reported that they spent nine or more hours a week in the classroom . . . . In 1989 more than 60% said they did. The traditional 12-15 hours a week teaching load is changing into a six-to-nine-hour workweek, a significant decrease in productivity. . . .

There’s another problem: The number of college administrators has increased 50% faster than the number of instructors since 2001, according to the Education Department. Administrative costs have far outpaced other college expenses during the past two decades.

There are numerous examples, but some of the more stunning cases include the University of Minnesota, which added 1,000 administrators in the past decade, reaching a ratio of one administrator for every 3.5 students . . . .

All the while, colleges launched a prestige arms race, dropping millions on extravagant buildings. Higher-education construction spending has doubled since 1994, with a peak of $15 billion in 2006 that has leveled off at $11 billion in recent years. . . .

On top of that, student-loan debt has skyrocketed to $1.2 trillion. Easy access to government loan money has given colleges license to boost tuition with no motivation to keep costs down. College counselors encourage incoming freshmen to take on unconscionably large loans that ultimately fatten school coffers. The institutions know they will not be held liable for missed loan payments. More than 20% of the nation’s households have incurred student debt, averaging $33,000 for the class of 2014 . . . . Default rates stand at 14%—higher than for mortgages, autos or credit cards.

In short, colleges and universities engaged in a spending spree because they can."

Summing Up

In the private sector, companies that don't offer competitive prices and compelling values cease to exist. They go broke.

But that market based price competition factor simply doesn't exist in our sick monopolistic system of government sponsored and subsidized higher education.

As colleges spend more, they just raise the price and 'help' the students secure more government loans to pay the higher tuition and fees. It's a monopoly with no price discipline imposed by the 'buyers.'

This makes a mockery of fiscal responsibility and the presumed fiduciary role of college leaders and their government allies. They certainly aren't acting in the best interests of American citizens, and especially college students and their hard working families.

If less money were available, then competition would be introduced and college costs would inevitably and properly decrease in dramatic fashion.

Let's teach our young college friends to have a healthy aversion to debt lest they find themselves in a deep hole from which it will be very difficult to escape.

That's my take.

Thanks. Bob.

Monday, December 29, 2014

When Investing for the Long Haul, Don't Be Your Own Worst Enemy

Stocks go up and down. The only sure short term bet is that share prices will fluctuate and sometimes violently.

Long term, however, the market's direction is up.

The simple fact is that emotionalism plays a much larger role than it should when it comes to investing for the long haul.

In other words, individual investors have a tendency to do the wrong thing by buying high and selling low.  It's not the intelligence part that makes us our own worst enemy. Instead it's the emotional side.

How Investors Sabotage Their Own Performance is subtitled 'People Often Fall Prey to Biases that Harm Their Returns. How to Recognize the Pitfalls:'

"It’s funny what a bull market can do to our brains. . . .

Money earned passively in the market, rather than from toiling at work, can feel easier to gamble with. It is a dangerous bias psychologists call the “house-money effect.”. . .

Everyone wants to assume that they can think rationally. But with bear markets now a fading memory . . . now is an important time to understand the common behavioral biases that cause investors to make regrettable decisions during bull markets.

Here are five others.

The backfire effect. This is a powerful bias that causes us to double down on our beliefs when exposed to opposing viewpoints.

“We think this response occurs because people respond defensively to being told that their side is wrong about a controversial factual issue,” says Brendan Nyhan, an assistant professor of government at Dartmouth College, who has studied the backfire effect in politics.

“In the process of defending that view, they can end up convincing themselves to believe it even more than they otherwise would have if they had not been challenged,” he says.

The same flaw can run wild in investing debates.

If you are convinced that we are in a lasting bull market, how do you feel when you hear someone say that stock valuations are historically high, or that we are overdue for a correction?

If you find yourself so critical of opposing views that you become even more convinced the bull market will last, watch out. Once your priorities shift from determining the truth to blindly defending your original views, you have lost the ability to think rationally.
Confirmation bias. This flaw causes us to seek out only information that confirms what we already believe.

Access to financial opinions has exploded in recent years . . . . But it can be dangerous, because no matter what you believe—and no matter how wrong those beliefs may be—you can likely find dozens of investors who agree with you. Having other people confirm your views may cause you to become more convinced that those views are correct.

Charles Darwin had a knack for obsessing over information that disproved his own theories. Investors should try to do the same.
Anchoring bias. This phenomenon causes us to cling to an irrelevant piece of information when estimating how much something is worth.

Your opinion on how much a stock is worth may be anchored to how much you paid for it. If you paid $100 for a share of Apple stock, you are probably more likely to think shares are worth more than $100 than another investor who paid $80 for the stock.

But the market doesn’t know how much either you of you paid for the shares. And it doesn’t care what either of you think is a fair price. Markets will do as they please, regardless of what price you are fixated on.

Recency bias. This one is simple: It is another term for the tendency to use the recent past as a guide to the future.

People like patterns. If stocks have just gone up, the natural tendency is to assume they will keeping going up—at least until they go down, and then we assume they will keep going down....

Markets move in cycles, but people forecast in straight lines. That is recency bias, and it is particularly dangerous after a long bull market.

Blind-spot bias. This—the most dangerous investing bias—is a flaw that causes us to think the biases described above affect other people, but not ourselves."

Summing Up

Individual investing has to be a long term commitment in order to be successful.

Part of successful individual investing includes the ability to understand the role that our emotions and biases tend to play when stock prices decline.

Since we humans tend to react more quickly to negative events than to positive occurrences, we are much more likely to do the exact wrong things at market bottoms and tops. We too often panic and sell when the market is falling rapidly, and then turn right around and buy when stocks are rising.

That's the losing buy high and sell low 'model,' and it's harmful to one's long term financial health and well being.

So becoming better acquainted with our emotional side is perhaps the best thing we need to know about individual investing.

And the second best thing to learn is the power of compounding and the rule of 72 (money doubles each time the number of years multiplied by the percentage annual rate of return equals 72, as in 12 x 6, 9 x 8).

So start early, stay the course, and reap the long term benefits of a rising stock market.

That's my take.

Thanks. Bob.

Sunday, December 28, 2014

American Governance ... An Informed Citizenry is a Fundamental Requirement of a Well Functioning Society of Equals

American citizenship in the world's oldest democracy is a wonderful thing. But it comes with civic obligations and responsibilities. It's definitely not a free thing.

Somewhere along the way too many of us seem to have forgotten that for our nation to prosper, it must be made up of free, hard working, educated and informed American citizens.

As Americans we are each equally free to pursue our individual goals, but there are no guaranteed outcomes. General Douglas MacArthur said it best, "There is no security on this earth; there is only opportunity." So while we are blessed with unlimited opportunities, what we do with those opportunities is up to us. We're free to choose and pursue our way through life as we see fit.

Our government is there to serve us, and not to tell us what to do or to do for us that which we can do for ourselves.

Perhaps the 'Father of our Constitution' James Madison put it best in 1788 when he wrote the following in The Federalist Papers: No. 51:

"Ambition must be made to counteract ambition. The interest of the man must be connected with the constitutional rights of the place. It may be a reflection on human nature, that such devices are necessary to control the abuses of government. But what is government itself, but the greatest of all reflections on human nature? If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary. In framing a government which is to be administered by men over men, the great difficulty lies in this: you must first enable the government to control the governed; and in the next place oblige it to control itself.

A dependence on the people is, no doubt, the primary control on the government; but experience has taught mankind the necessity of auxiliary precautions."

Freedom in a democratic form of government requires its members to properly assume and discharge their civic responsibilities. In that regard, an informed electorate is essential. However, it's not a given and it doesn't happen automatically. It must be learned and continuously practiced.

Civics Instruction Moves Up in Class is subtitled 'More states mandate tests on the Subject Amid a Movement for Use of Citizenship Exam:'

"After years on the back burner of the nation’s educational agenda, civics is making a comeback, with a number of states mandating new classes or assessments and a burgeoning national push for high-school seniors to pass the exam required of new citizens. . . .

Recent national reports show students could use a lesson in civics, which generally studies the role of citizens in public issues and covers such topics as how to dissect current events or apply the Constitution to modern issues. About two-thirds of students tested below proficient on the civics portion of the National Assessment of Educational Progress in both 2006 and 2010. Only 10 states require a social-studies test to graduate from high school, according to the Education Commission of the States. . . .
A Center on Education Policy study found in 2007 that about 45% of elementary schools reported cutting time for other subjects to focus on math and reading. And only about one in three elementary teachers reported covering civics subjects on a regular basis, according to federal survey data taken in 2006 and 2010.

Proponents say enhancing civics instruction could help reverse low voter turnout—about one in five adults ages 18 to 29 voted in the 2014 midterms, according to researchers at Tufts University’s Tisch College of Citizenship and Public Service—and address mounting frustration with dysfunction in Washington. They also say it can help increase engagement by minorities and the poor, who typically receive less civics education than more affluent and white students.

“There’s a stronger sense from people now that we must do something in order to be functional as a nation and at the community level,” said Meira Levinson, an associate professor of education at Harvard University who has studied civic-empowerment issues.

Meanwhile, coalitions in seven states have launched a growing movement to require students to pass the U.S. citizenship exam before they can graduate. By the end of next year, proponents aim to introduce and pass legislation in 12 to 15 states.

“So little has been done over so many years now, let’s make sure we take that one solid first step,” said Sam Stone, political director for the Civics Education Initiative, an affiliate of the Joe Foss Institute, a nonpartisan nonprofit based in Scottsdale, Ariz.

But some backers of more civics study doubt the value of the 100-question citizenship exam, arguing it is more about rote memorization than learning how to be a better citizen.

“This is addressing the right problem with the wrong solution,” said Ted McConnell, executive director of the Campaign for the Civic Mission of Schools, a nonprofit that advocates for civic learning.

American high schools typically offered three classes in civics and government until the 1960s, according to Mr. McConnell’s group. More typical nowadays is an “American government” class that focuses on the structure of democracy more than the practicalities of making it work. Mr. McConnell said schools need more hands-on instruction now, not another test.

Some caution that jumping into civics instruction could invite teachers’ political biases into the classroom. “Teachers need training on how to lead discussions on controversial issues,” said Anna Saavedra, associate policy researcher for RAND Corp, a nonpartisan nonprofit, who supports greater attention to civics in the classroom. “There are ways for teachers to learn that, but it’s a learned skill.”

Only 15% of civics and government teachers surveyed in a 2013 national report from Tufts University’s Tisch College of Citizenship and Public Service said they had been mentored or coached by an expert or administrator."

Summing Up

Here's my question --- Who will teach the teachers about our democratic freedoms and civic responsibilities?

And who will teach the teachers about the relationship of our free enterprise system to a free and prosperous society of equals?

Sadly, too many of us act as if an educated and informed citizenry aren't all that important to a free, successful and prosperous America.

And too many of us believe that a thriving and entrepreneurially oriented economy is over and belonged to an America that no longer exists.

The hard work and sacrifices of our Founders gave us this wonderful thing we call America.They took nothing for granted. Neither should we.

Let's teach our kids and grandkids a much needed civics lesson about what being a free and informed American really means, including the hard working part.

Both they and we will be glad we did.

That's my take.

Thanks. Bob.

Saturday, December 27, 2014

Our Weakened System of Education ... Inputs and Outputs ... The M.B.A. Example and the Capability of U.S. Students Compared to Asians

The benefits we derive from things are a direct result of the time and effort we put into those same things. We refer to this input-output connection as productivity, aka the relation between what goes in and what comes out.

The more we get out of any given amount of effort in terms of time, money, or machinery, the more productive we are. And in the final analysis, it is this thing we call productivity that determines our individual, national and global prosperity. Inputs generate outputs.

In education the discussion seems to always focus on spending more money and not the skills, knowledge or capabilities of the finished product, aka the 'educated' individual. But in education, as elsewhere, productivity matters most, and outputs must become Job #1.

Compared to the rest of the world, the overall U.S. educational system, all the way from K-12 through college, is too expensive and our students are becoming uncompetitive globally.

As a result, the system is sending warning signals about our nation's future competitiveness, and in turn, our future prosperity.

So let's wake up while there's still plenty of time to fix what ails us educationally. And let's make sure that our young graduates are prepared to compete with all comers in the competitive global marketplace of the future.

On B-School Test, Americans Fail to Measure Up offers this gruesome commentary:

"New waves of Indians and Chinese are taking America’s business-school entrance exam, and that’s causing a big problem for America’s prospective M.B.A.s.

Why? The foreign students are much better at the test.

Asia-Pacific students have shown a mastery of the quantitative portion of the four-part Graduate Management Admission Test. That has skewed mean test scores upward, and vexed U.S. students, whose results are looking increasingly poor in comparison. . . .

The GMAT, administered by the Graduate Management Admission Council, is typically required to apply to M.B.A. programs, along with undergraduate transcripts, essay responses and letters of recommendation. Students at top programs like Harvard Business School and Stanford Graduate School of Business have mean GMAT rankings around the 96th percentile.

Of the test’s four sections—writing, integrated reasoning, quantitative and verbal—admissions officers view results from the quantitative section as a key predictor of business school success.

Percentile rankings are calculated using a raw score—for the quantitative section, typically between 0 and 51. In 2004, a raw score of 48 in the quantitative section yielded a ranking in the 86th percentile, according to GMAC; today, that same score would land the test-taker in the 74th percentile.

U.S. students’ raw scores on the quantitative section have remained roughly flat over the last decade at around 33, but their percentile ranking has fallen as more of their higher-scoring international counterparts take the exam.

Hires with Western training are in demand overseas, and students from Asia are flocking to U.S. business schools. Asia-Pacific students comprise 44% of current GMAT test-takers, up from a decade ago, when they represented 22%, according to GMAC. U.S. students, once the majority of test-takers, now comprise 36% of the whole.

On average, Asia citizens fare better on the quantitative section of the exam than Americans do, according to GMAC data. This year, the mean raw score for students in the Asian-Pacific region on that section was 45, above the global mean of 38 and the U.S. mean of 33. . . .

The shifting data give an impression that U.S. student aptitude is declining, said Sangeet Chowfla, GMAC’s chief executive officer. He said schools have complained to him that the test’s global rankings were becoming more difficult to interpret and asked for new ways to assess both U.S. and foreign test-takers separately.

To address those concerns, GMAC in September introduced a benchmarking tool that allows admissions officers to compare applicants against their own cohort, filtering scores and percentile rankings by world region, country, gender and college grade-point average. . . .

Rather than effectively creating a different standard for U.S. students, one admissions officer at a top-ranked business school said American students need better math instruction, starting in elementary school. Students in South and East Asia tend to have a strong grounding in math fundamentals during school . . . .

American business schools . . . don’t want to become factories for high-scoring test-takers from abroad."

Summing Up

Relative performance counts. That's why we keep score.

Facts are stubborn things, but knowing what's what will wake us up and ensure that the U.S. remains the top performing economy in the world.

And for that to happen, America's students must be the top performers as well.

Our system of education needs careful and immediate national attention to fix what's wrong and continue to build upon what's right.

That's my take.

Thanks. Bob.

Friday, December 26, 2014

The Truth About Home Ownership as a Financial Investment ... It's Not a Good One

Home ownership is a good thing. It's long been the "American Dream." But it's definitely not a money maker. Not even close.

Let's not mistakenly assume that home ownership's long term benefits are comparable to or better than what we can earn by consistently saving and investing our long term 'patient' money in a diversified basket of blue chip dividend paying stocks.

In fact, stock market performance over the long haul is a huge winner when compared to investing in homes or any other financial asset. Stocks have generated inflation adjusted returns of ~6% over the long term while homes have only broken even in inflation adjusted money. Earning 6% more annually will double the initial investment over 12 years and over 36 years will accumulate to ~8 times more than housing's average annual return of zero.

So by all means, but only when you can afford to do so, buy a nice house in a nice neighborhood. Just don't borrow to the hilt and believe the myth that homes are a great financial investment. Because they aren't.

Home Buyers Are Optimistic but Not Wild-Eyed in one short paragraph tells the story about the housing market as a poor financial investment:

"Ten years from now, there could be another housing boom or bust. But since 1890, the average appreciation of inflation-corrected home prices in the United States has been only a third of 1 percent a year. That’s why housing hasn’t been a great investment. And in 10 years, it may be almost equally likely that real home prices will be higher or lower than they are today."

Summing Up

Despite popular belief, over a long period of time homeownership has never been a good financial investment compared to alternatives like the stock market.

When the bubble burst in the housing market a few years ago, it caused lots of pain and anguish among countless overly leveraged home owners. And home equity loans which were taken out before the price bubble burst resulted in thousands of home foreclosures and personal bankruptcies.

Home ownership is nice, assuming the home is affordable.

But as a low risk undertaking and money maker, it isn't. That's a ruinous myth.

That's my take.

Thanks. Bob.

Wednesday, December 24, 2014

Merry Christmas ... A Message of Hope and Freedom

Each year I enjoy reading In Hoc Anno Domini (In this year of our Lord), written in 1949. I hope you do as well:

"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

Merry Christmas.

Freedom is such a wonderful gift. Let's not waste it.

Thanks. Bob.

Monday, December 22, 2014

Why Owning Stocks for the Long Haul Makes Sense ... The Stock Market's Historical Performance Points Upward

The only thing certain about the stock market is that it fluctuates. While it generally moves up, it sometimes goes down. Over a long period of time, however, its central tendency is rewardingly upward.

And with only several trading days remaining, 2014 has proved to be another strong year, following on the heels of a gangbuster performance in 2013.

What will happen to prices in 2015, of course, nobody knows. That said, the odds are that stocks will climb higher again next year, based solely on their historical performance. But there are several other positive factors pointing toward higher prices in 2015 as well, such as the improving U.S. economy, higher employment levels, low energy prices, low inflation and continuing low interest rates.

The stock market's very merry 200-year history tells the story:

"The stock market’s merry performance over time

Since 1825, the stock market has produced an annual gain 71% of the time, or 134 times, while losing ground just 55 times. A standard distribution chart, which happens to take the shape of a Christmas tree, shows how for most years, the market moves within a range of zero to up 10%."
Summing Up

In recent years, stocks have been solid performers each year since 2009, as the above chart shows.

And in most of the past 200 years, but by no means all, the market has done well for individual investors.

So if you're not inclined to panic and sell when the market declines, which it inevitably will from time to time, it's always a good time for long term individual investors to be invested in stocks.

And with respect to the rest of 2014 and 2015 specifically, things still look good to me.

Thanks. Bob.

How to Become a Millionaire the Simple Way ... Earn, Save and Invest ... The Key is in the Saving and Investing

When I was growing up in the 50's, a TV weekly show called "The Millionaire" was one of my favorites. At the beginning of each 30 minute episode, wealthy fictional character John Beresford Tipton, Jr. instructed his assistant to deliver a cashier's check for $1 million to a deserving and unsuspecting recipient. We never saw Tipton's face.

While Tipton wasn't real, of course, over a working lifetime most individuals who recognize and appreciate the different roles of earning, saving and investing have the opportunity to become "millionaires." Over the long haul, it's not how much we earn but instead what we save and how we invest those savings that will matter most.

The key is to do the right things in their proper order. First, we should avoid or minimize unnecessary debt, including large student loans. After completing our education, we need to land a good job, then discipline ourselves to spend less than we earn, and then set aside a healthy portion of those savings to invest in the ownership of blue chip stocks over the next several decades. That's it.

And while the educate, earn, save and stock ownership route to "millionaire" status may not be as easy as receiving a check from an unknown benefactor, it is definitely achievable, even though most people will never believe that to be the case. Here's why they are wrong.

The benefits of saving some of what we earn are enormous over time. The compound interest 'rule of 72' formula (an investment doubles each time the number of years multiplied by the percentage average annual return equal 72, as in 9 years x 8%) can work wonders for us, whether it's in the form of knowledge, skills, or financial returns.

A half a percent that can change your retirement offers this simple lesson concerning the long term beneficial effects of compounding:

"(Let's consider) the lifetime impact of gaining an extra 0.5% of annual investment return. . . .

The key here is to think about the long term. Many investors habitually think in terms of what we gain or lose in a short period: a month, a quarter, a year, a decade — or even all the years until we will retire. The accumulation phase of investing, in other words.

But the advantages of an extra 0.5% in return don't stop when you retire because your portfolio will continue working for you as long as you live. . . .

The long-term difference between earning a lifetime portfolio return of 8% and earning 8.5% . . . (is) a modest increase of about 6% in return in a single year.

But would you believe that seemingly small difference could boost your nest egg at retirement by 16%? Would you believe it could boost your retirement income by 24%? Would you believe it could boost the money you leave to your heirs by 31%? In each case, you should believe that.

Let's look at some numbers:

If you save $5,000 a year for 40 years and make only 8% (the "small" mistake), you'll retire with about $1.46 million. But if you earn 8.5% instead, you'll retire with nearly $1.7 million. The additional $230,000 or so may not seem like enough to change your life, but that additional portfolio value is worth more than all of the money you invested over the years. Result: You retire with 16% more.

Your gains don’t stop there. Assume you continue earning either 8% or 8.5% while you withdraw 4% of your portfolio each year and that you live for 25 years after retirement. If your lifetime return is 8%, your total retirement withdrawals are just shy of $2.5 million. If your lifetime return is 8.5% instead, you withdraw about $3.1 million. That's an extra $600,000 for your "golden years," a bonus of three times the total dollars you originally saved.

Your heirs will also have plenty of reasons to be grateful for your 0.5% boost in return. If your lifetime return was 8%, your estate will be worth about $3.9 million. If you earned 8.5% instead, your estate is worth more than $5.1 million.

To sum this up, at 8% your initial savings (totaling $200,000) turn into $6,447,194 — the sum of what you take out in retirement and what you leave in your estate. At 8.5%, the comparable number is $8,283,312.

That difference, about $1.8 million, came only from the extra half-percentage-point of return.

(There are) . . . places you are likely to find such a deal.

The most obvious place . . . is to invest in funds with lower expense ratios. A typical actively managed equity fund charges expenses of more than 1%. A typical index fund charges less than half as much. Bingo, you've got it done. . . .

A second place you are likely to find an extra 0.5% is to bump up your equity allocation by 10 percentage points. For example, you would have achieved that from 1970 through 2013 by investing 60% in equities instead of only 50%.

A third source of higher returns that is extremely obvious to me: Adding equity asset classes that have long histories of outperforming the S&P 500 Index . . . .

This is known as diversification, and it's one of the smartest things investors can do. . . .

There are plenty of other smart moves that investors can make to boost their lifetime returns, but if you act on one or more of these three suggestions, you'll likely add more than a half percentage point to your return."

Summing Up

The math works. And while acquiring wealth by saving and investing may not be the easiest thing to do behaviorally, it is both simple and very much doable.

If more individuals would internalize, understand and apply the compounding rule of 72 (investment doubles each time the percentage return multiplied by the number of years = 72), our financial lives would be comfortable ones.

Financial well being is not the equivalent of high earnings. Instead it's consistently saving and investing a portion of those earnings over a long period of time that matters most.

That's my take.

Thanks. Bob.

Sunday, December 21, 2014

Race and Job Related Killings in America .... "Hyphenated-Americans"

Two New York police officers (See Slain NYPD Officers Were Partners) were assassinated yesterday simply because they were 'white' (Hispanic and Asian) and doing their jobs.

The murderer (See Police Combing Through Shooting Suspect's Arrest History and Violent Day) drove to New York from Baltimore earlier in the day apparently for that express purpose. Why?

Well, the why may be directly related to racial stereotyping and the ongoing anti-police inflammatory rhetoric by 'leaders' like Mayor Bill de Blasio of New York City (See For de Blasio, Attack Comes Amid Tension Over Police), the omnipresent Reverend Al Sharpton, Attorney General Eric Holder and even President Barack Obama.

All that said, the individual who committed these heinous crimes is the individual solely responsible for the actual killings. Inflammatory commentary by public officials is not criminal. It's harmful and irresponsible, but it's not criminal.

We need to stop treating and addressing individual persons as members of a favored or hated group. In that regard, our police protect us when doing their jobs. Both 'white' police and black police.

And a few of our fellow citizens say harmful things and sometimes commit crimes of unspeakable violence.

These 'hyphenated-Americans' are individuals that we unfortunately are prone to identify as White, African, Hispanic, Asian or members of other groups, and who share with all other individual Americans equal rights and responsibilities as citizens of this, the greatest nation and most wonderful country in the history of the world.

As individual hyphenated-Americans, we perform different and necessary jobs for which we are capable and compensated. But those jobs that we do often don't fairly represent who we are.

So let's stop viewing others as cops, mayors, preachers, teachers, politicians and others. Let's start viewing them as individual human beings who happen to do different jobs.

Keeping the peace and protecting their fellow citizens is what police officers do. Are there bad guys doing those jobs? I'm sure some are.

And it's the same with other citizens doing other jobs. There are both individuals as bad guys and good guys in America. But let's not forget that the vast majority are good guys.

So as individuals let's try to get labels and superficialities such as skin pigmentation and job duties out of the conversation and 'picture' when dealing with our fellow Americans.

And with respect to the vital jobs that our police officers perform, let's be happy that they are willing to go out there to do their jobs, keep the peace and protect us from the bad guys. Because while they may be few in absolute numbers, there really are too many bad guys out there. Far too many.

It's time to calm down and have a reasoned discussion among Americans of all persuasions. Is this too much to ask the same of our 'leaders?' I think not.

That's my take.

Thanks. Bob.

Saturday, December 20, 2014

Obama on "Canadian" Oil, Global Markets and Consumer Benefits ..... In Politics, Stupid Is as Stupid Does

The price of oil has decreased by more than 50% in recent months. The decline isn't over. Less than $2 per gallon of gas has either arrived or is on its way to a gas station near you.

Yet all this good news on the energy front has happened with zero help from President Obama. In fact, his administration has consistently and repeatedly opposed all steps to increase American energy independence during his 'reign.' The Keystone XL Pipeline delay is clearly exhibit #1.

Yesterday he lectured us on why the approval of the pipeline won't help American consumers, He said that since the oil originates in Canada, it won't benefit American consumers. Who's stupid?

He neglected to mention that North Dakota is not part of Canada, that the Canadians are our friends and allies, or that transporting oil by pipeline is far safer than movement by rail. Or that building a pipeline will provide Americans with needed high paying jobs. And so on.

My hope is that his 'stupid' attempt to fool us on this one will be recognized for what it is --- another effort to appease the greenies that will be seen by Americans as just another political stunt. And that even his jobs seeking union supporters will see through this rather feeble and transparent effort to once again distort reality.

My further guess is that the pipeline will be approved and built, albeit many years later and at a cost many billions of dollars higher than should have been the case. 

As an economist, President Obama is proving himself to be as inept as the constitutional lawyer he purports to be. The only real expertise he's ever demonstrated is political, and that is something we need less of -- much less, in fact.

Responsible leadership and the willingness to do the right thing for all Americans have long been the missing ingredients of this presidency.

Obama on Oil Markets is subtitled 'Supply and demand seem to be elusive concepts:'

"President Obama was trained in law, not economics, but we’d have thought he’d have picked up at least some basic knowledge about the dismal science in his six years in the White House. It sure didn’t sound like it based on his soliloquy about oil markets in his end-of-year Friday press conference.

The President was asked what he might do if the new Congress sends him a bill approving the Keystone XL pipeline. Mr. Obama dodged that one. But he did ruminate at length on the market impact of “Canadian oil” that he said would be the only oil flowing through the pipeline. “At issue in Keystone is not American oil,” he said, conveniently omitting that American oil from the Bakken Shale in North Dakota will also flow via the pipeline. But let’s be generous and assume he’s misinformed.

Mr. Obama’s market analysis is more remarkable and worth quoting at length: “So there’s no—I won’t say ‘no’—there is very little impact, nominal impact, on U.S. gas prices—what the average American consumer cares about—by having this pipeline come through. And sometimes the way this gets sold is, let’s get this oil and it’s going to come here. And the implication is, is that’s going to lower gas prices here in the United States. It’s not. There’s a global oil market. It’s very good for Canadian oil companies and it’s good for the Canadian oil industry, but it’s not going to be a huge benefit to U.S. consumers. It’s not even going to be a nominal benefit to U.S. consumers.”

Let’s break that down. The oil market is global, but somehow adding to the global supply of oil via the pipeline is not going to affect the global price for oil, so it won’t affect American gasoline prices. That doesn’t seem to pass the basic supply-demand test.

But it also overlooks that refiners on the Gulf Coast can handle Canada’s heavy crude, which means more lighter crude from the Bakken and Eagle Ford Shales would be available to export onto the global oil market. If global supplies increase, all other things being equal, the global oil price would fall for everyone—including American consumers."

Summing Up

I've long believed that politics sucks and believe it even more with each passing day.

During the Obama 'reign,' the American people --- all of us --- are needlessly suffering while the sick political games continue uniterrupted in Washington.

Let's "help" the politicians understand that We the People are united and sick and tired of paying to watch them play their self interested games. Together we can cause them to begin doing what they were elected to do --- the people's work.

That's my take.

Thanks. Bob.

Friday, December 19, 2014

Are Our Public Sector Police and Teachers' Unions Too Powerful?

We've heard and read much recently about police brutality and racial discrimination in the Michael Brown and Eric Garner cases.

We've also heard much about the need to spend more and more taxpayer money if we want to realize better outcomes in our urban public schools.

We also hear lots about income inequality and that something needs to be done about it.

So why don't we allow vouchers and thereby do more about improving our educational outcomes, since we know that educational inequality and income inequality are highly correlated?

Unfortunately, what we don't hear much about are the powerful public sector unions and whether these are inherently forces for good with respect to our police forces and public schools.

The Union Future contains an interesting, informative and insightful take on the largely out-of-the-spotlight role of powerful public sector unions concerning the current state of urban policing and public schools:

"Over the past decades, the case for enhancing union power has grown both stronger and weaker. On the one hand, as wages have stagnated while profits have soared, it does seem that there is something out of whack in the balance of power between labor and capital. Workers need some new way to collectively bargain for more money.
On the other hand, unions, and especially public-sector unions, have done a lot over the past decades to rigidify workplaces, especially government. Teachers’ unions have become the single biggest impediment to school reform. Police unions have become an impediment to police reform.
If you look at all the proposals that have been discussed since the cases of Michael Brown in Ferguson, Mo., and Eric Garner in New York, you find that somewhere or other around the country, police unions have opposed all of them:
But it’s very hard to remove the bad apples from the force. Trying to protect their members, unions have weakened accountability. The investigation process is softer on police than it would be on anyone else. In parts of the country, contract rules stipulate that officers get a 48-hour cooling-off period before having to respond to questions. They have access to the names and testimony of their accusers. They can be questioned only by one person at a time. They can’t be threatened with disciplinary action during questioning.

More seriously, cops who are punished can be reinstated through a secretive appeals process that favors job retention over public safety. In The Atlantic, Conor Friedersdorf has a riveting piece with egregious stories of cops who have returned to the force after clear incompetence. Hector Jimenez was an Oakland, Calif., cop who shot and killed an unarmed 20-year-old man in 2007. Seven months later, he killed another unarmed man, shooting him in the back three times while he ran away. The city paid damages. Jimenez was fired. But he appealed through his union and was reinstated with back pay. . . .

COMMUNITY RELATIONS In Philadelphia, a civilian oversight commission suggested that police officers apologize to citizens who complain of being mistreated. The local chief of the Fraternal Order of Police responded with a hysterical letter in March 2012 claiming that the commission was trying “to further weaken and demoralize the Philadelphia Police Department in a time of crisis with a significantly growing crime problem in this city. ... Your group poses a direct threat to public safety in this city. A threat which should no longer be tolerated by our citizens or their government.”
We get mad at racism, but most government outrages have structural roots. The left doesn’t want to go after police unions because they’re unions. The right doesn’t want to because they represent law and order. Politicians of all stripes shy away because they are powerful.
Now we have a test case to see if the people who march about the Garner case have the stamina to force change. Legitimate union advocacy has become extreme because it has gone unchecked. Most cops do hard jobs well, but right now there’s a crisis of accountability."
Summing Up
We should all be held accountable for our actions.
In the public sector, it's time for the politicians to start acting as leaders and stop deferring to the wishes of the too powerful public union officials.
As soon as that happens, our citizens as members of a nation of equals will be the big winners.
As will the tens of thousands of hard working and well intentioned and self disciplined individual teachers and police officers.
That's my take.
Thanks. Bob.

Thursday, December 18, 2014

Oil Prices Down ... Stock Prices Up ... This Is Fun

It's been another good day for American consumers and individual investors.

Oil prices dropped more than 4% today and no end to the decline is in sight. How low they will go, nobody knows. See Oil Prices Resume Slide.

And the Dow added another 421 points, or 2.43%, to its huge 288 point increase yesterday. That's a two day increase of 709 points. How high they will go, nobody knows. See U.S. Stocks Jump on Fed Reassurance.

While nothing about the future is guaranteed with respect to what will happen tomorrow, next week, or next year, things look good for the home team U.S.A. as we exit 2014 and prepare to enter 2015.

Specifically, it's very likely that we'll see continued good news about the U.S. economy, oil prices, stock market investing, inflation, interest rate and even the geopolitical fronts.

Europe and Japan will benefit from lower energy prices, and the real wild card for global stability will be what, if anything, the Russians and OPEC countries try to do about oil production, of course.

But all in all, things look good.

That's my take.

Thanks. Bob.

Wednesday, December 17, 2014

Stock Market Rally Today Signals Good Things Ahead ... Five Reasons Why Stocks May Continue Climbing Through 2015

The Dow rallied today and finished 288 points higher than when trading began this morning. But that's only one day, so what's ahead? Good things, in my view, and several signs are pointing to why that's the case.

There at least five solid reasons to expect the U.S. economy to continue to improve markedly and for stock prices to rise appreciably as we go through 2015.

1 - The Federal Reserve this afternoon announced that it will be a long time before U.S. interest rates increase by very much. See Fed Sticks to Patient Tack on Rates.

2 - Oil prices are low and perhaps headed even lower. Consumer spending as well as sales, profits and operating costs for U.S businesses (other than energy companies) will continue to show considerable ongoing improvements as a result. See Oil Drives Decline in U.S. Inflation.

3 - The U.S. dollar is the strongest currency in the world now and is likely to continue as such, signaling that U.S. prices of imported goods will remain low and that inflation will remain well under control.

4 - Global geopolitical conditions are unsettled but it's in nobody's interests, including the Russians, to stir the pot further. Hence, I expect that these global tensions will ease in the coming weeks and months.

5 - The U.S. economy is gradually strengthening and each of the above enumerated factors should add to our economy's positive performance and job growth in 2015 and beyond.

Finally, please consider this. Predictions concerning the future (what other kind are there?) are always subject to being wrong, of course, and mine are no exception to that well established rule.

Nevertheless, despite these unsettling times, I am bullish on America, our economy, job growth and the stock market as we finish 2014 and head into 2015 and beyond.

That's my take.

Thanks. Bob.

Don't Tap Into That 401(k) Until Retirement

At the expense of their future selves, many people spend too much in the present and don't save and invest sufficiently for their future financial well being.

One example is that eligible individuals frequently don't even save and invest in available 401(k) employer match opportunities. And to make matters worse, many who do contribute withdraw funds prior to retirement.

Getting it almost right in the present and then undoing that right thing by ignoring the future won't result in a happy ending. So if you are currently doing the common sense thing by saving and investing in a 401(k), do yourself a big favor and find a way not to touch that money until retirement.

Combating a Flood of Early 401(k) Withdrawals has the story:

"One of the biggest problems with these accounts has nothing to do with how much we can put in. Instead, it’s the amount that so many people take out long before they retire.

Over a quarter of households that use one of these plans take out money for purposes other than retirement expenses at some point. In 2010, 9.3 percent of households who save in this way paid a penalty to take money out. . . . Millions of people are clearly not using 401(k) plans as retirement accounts at all, and it’s a threat to their financial health.

“It’s not a system of retirement accounts,” said Stephen P. Utkus, the director of retirement research at Vanguard. “In effect, they have become dual-purpose systems for retirement and short-term consumption needs.”

How did this happen? Early on in the history of these accounts, there was concern that if there wasn’t some way for people to get the money out, they wouldn’t deposit any in the first place. Now, account holders may be able to take what are known as hardship withdrawals if they’re in financial trouble. Moreover, job changers often choose to pull out some or all of the money and pay income tax on it plus a 10 percent penalty.
The breach tends to be especially big when people are between jobs. Earlier this year, Fidelity revealed that 35 percent of its participants took out part or all of the money in their workplace retirement plans when leaving a job in 2013. Among those from ages 20 to 39, 41 percent took the money.

The big question is why, and the answer is that leading plan administrators like Fidelity and Vanguard don’t know for sure. . . . “Some people see a withdrawal as an opportunity to pay off debt,” said Jeanne Thompson, a Fidelity vice president. “They don’t see the balance as being big enough to matter.”

Or their long-term retirement savings matter less when the 401(k) balance is dwarfed by their current loans. . . .

Another big reason that people pull their money: Their former employer makes them. The employers have the right to kick out former employees with small 401(k) balances, given the hassle of tracking small balances and the whereabouts of the people who leave them behind. According to Fidelity, among the plans that don’t have the kick-them-out rule, 35 percent of the people with less than $1,000 cashed out when they left a job. But at employers that do eject the low-balance account holders, 72 percent took the cash instead of rolling the money over into an individual retirement account. . . .

Account holder ignorance may also contribute to the decision to withdraw money. “There is a complete lack of understanding of the tax implications,” said . . . (the) chief behavioral economist at Allianz Global Investors, who has done pioneering research on getting people to save more. “And given that we’re generally myopic, I don’t think people understand the long-term implications in terms of what it would cost in terms of retirement.”

In fact, young adults who spend their balance today will lose part of it to taxes and penalties and would have seen that balance increase many times over."

Summing Up

Individuals contributing to a 401(k) should resist the temptation to withdraw any funds prior to retirement. It's simply too costly in many ways.

Early withdrawals often represent an expensive way to access money and always serve to undo much of the good work involved in saving and investing for the long term.

So when there's a need, do your best to find another source of funds for those 'emergencies' during your working years.

By so doing, your older self will thank you for what your younger self did.

That's my take.

Thanks. Bob.

Tuesday, December 16, 2014

Public Sector Pension Plan Participants Should Beware .... Your Promised Benefits Could Be in Serious Jeopardy

We have commented recently about the necessity for individual participants in 401(k) plans to learn how to save and invest for their retirement needs.

And now there are even more reasons to do so. Congressional action has just been taken which may remove the widely believed to be hard and fast inviolability of pension plan promises made to plan members. The just passed spending bill calls for pension benefit reductions in seriously underfunded private sector multiemployer plans.

Although the potential 'spillover' effect is not certain, of course, this congressional action could signal a huge move away from fulfilling the promises and protecting the benefits of underfunded and unaffordable pension benefits for public sector employees. It definitely looks like potentially a precedent setting move.

Pension Change Seen as Setting a Precedent is subtitled 'Measure Allowing Multiemployer Plans to Trim Benefits Could Open Door to Broader Changes:'

"A measure included in Congress’s mammoth spending bill permits benefit cuts for retirees in one kind of pension plan, a big shift that lawmakers and others believe could set a precedent for other troubled retirement programs.

The legislation is aimed at defusing a potentially explosive problem—the deteriorating condition of what are known as multiemployer plans, jointly run by unions and employers. The bill cleared by the Senate late Saturday would allow troubled funds to cut benefits for current retirees in some circumstances. That is an exception to a long-standing federal rule against cutbacks in private-pension benefits.

Lawmakers and experts, while divided over the merits of the change, largely agreed that it could well be the first of many. . . .

The bill could encourage similar cutbacks in troubled state and local pension plans, and possibly even Social Security and Medicare . . . .

The bill’s chief backers said last week they were seeking only to address the specific problems of multiemployer plans and weren’t aiming to influence broader debates over other retirement programs.

“There is a unique crisis facing millions of people with multiemployer pensions that are threatened by numerous plans’ imminent bankruptcy, and we worked together to design the best bipartisan solution available to protect the retirement benefits of this very specific group of workers,” Reps. John Kline (R., Minn.) and George Miller (D., Calif.) said in a statement.

Other lawmakers say the new legislation could encourage policy makers to consider cutbacks in benefits in a variety of underfunded retirement programs.

“We have a [retirement funding] problem out there, there’s no question, and it has to be dealt with,” said Sen. Ben Cardin (D., Md.), who has helped draft other major pension-law changes in recent years. Mr. Cardin said he sees “a lot of merit” in the multiemployer legislation. But there will be “great fear that this will be a precedent” for dealing with those problems, he added. . . .

Multiemployer plans are jointly run by unions and employers, and they are common in trucking, retail, construction and some other industries. There are about 1,400 in all, covering about 10 million people. Because of declining ratios of active workers to retirees, and loose funding standards, some of the larger plans, such as the Teamsters’ Central States fund, are in dire financial condition.

The failure of just a few of these plans would quickly bankrupt the federal pension safety net. The safety-net agency, the Pension Benefit Guaranty Corp., recently raised its projected long-term deficit for multiemployer plans to $42 billion.

Many states and local governments already have started taking steps to shore up underfunded pension plans. Changes include rollbacks of promised future benefit increases and bigger contributions and work requirements for employees. Only a handful of governments have reduced benefit payments so far.

As of fiscal year 2013, public-employee funds faced long-term deficits of more than $1 trillion, with liabilities of about $3.8 trillion and assets of about $2.73 trillion, and an average funding level of 72%, according to the National Association of State Retirement Administrators. Funding levels have been declining fairly steadily. . . .

“It’s almost certain that other situations where plans are distressed from a funding standpoint are going to be viewed from the prism that it’s now possible to” cut benefits, said Brian Graff, chief executive of the American Society of Pension Professionals & Actuaries, a trade group. “There are other situations where plans are similarly funded at extremely low levels where you could see this possibly coming up.”"

Summing Up

Although this specific legislation relates to multiemployer plans in the private sector, the issue of underfunding and unaffordability very much remains a huge unanswered question in search of a solution for the public sector pension plans.

The sponsors, aka the elected representatives of the taxpayers, are between that taxpayer rock and the hard place occupied by the public sector employees.

On the one hand, pension benefits for many public sector employees have been promised by government officials (representing the taxpayers) to millions of public sector employee groups.

Yet on the other hand, these same government officials conveniently 'forgot' to mention to the taxpayers that their taxes would have to be increased dramatically to honor these commitments.

As a result, something has to give, and so it will.

Compromise will happen but how much in the form of forgone benefits by individual retirees and how much in the form of increased taxes by individual taxpayers is the operative problem in search of a solution. Accordingly, in the end nobody will win this one.

Stay tuned.

Thanks. Bob.

Monday, December 15, 2014

DIY Saving and Investing ... Either Set a Goal and Then Get Started or Get Started and Then Set a Goal ... Either Way Works

Most of us need to do a much better job of saving and investing for ourselves and our families. That's a well known fact.

But most of us don't make a sufficient effort to do so. That's also a well known fact.

In large measure that's because we don't believe we're qualified to do so, and we properly don't want to pay 'experts' for advice which isn't worth the prices they charge. At least that's my view. Thus, we're stuck.

How millennials and Generation X investors can conquer their fear of finances has this to say:

"We’ve all read the news about how Generation X and millennials just aren’t getting with the financial program. Saving and investing are both falling short of where they need to be, while incomes just aren’t growing.

But can you blame them? They’ve grown to adulthood and early middle age living though the Great Recession watching their parents’ tried-and-true institutions turn out to be tried but perhaps not so true. They trust in things they can figure out for themselves, yet financial services has long persisted among the more opaque industries.

Making things worse, these adults have developed some pretty deep-seated fears about managing their money, which has left them hamstrung on the sidelines. . . .

Investors ages 18-44 are the least likely to speak with an investment advisor. A full 74% of millennials (age 18-34) and 66% of Gen Xers (age 35-44) who have considered investing say speaking to an in-person advisor has actually stopped them from investing, period. In other words, regardless of a need for financial guidance, nearly all younger adults today wouldn’t turn to a traditional advisor to get the help they seriously need. Interestingly, those with children under 18 in their households are significantly more resistant than those without children — despite the fact that parents have even more long-term financial goals to plan for than non-parents.

What are the top reasons why talking to a traditional financial advisor has stopped these 18 to 44-year-olds from investing?

1) Cost (will I get soaked?)

2) Trust (will they really do what’s best for me?)

3) Judgment over their financial position and limited financial knowledge . . . .

So how can the millennial and Generation X investor break through the financial fear factor? . . . you need to know it’s okay to start small, making sure you’re 100% comfortable with an institution’s fee structure and build from there. The key here is to just get started.

Fear comes from a sense of losing control. But once these investors understand they can set the course, the speed and are the ones with their hands on the wheel, there’s a lot less to fear."

Summing Up

We will never finish what we don't start. Getting started is the prerequisite to reaching any goal.

And if we don't know where we're going, any road will get us there. Specific goals are simply dreams accompanied by timetables.

The secret to successful individual investing is in the doing. There is no guaranteed path to financial security, as there is no guaranteed path to anything else in life.

And when saving and investing, there is no one road to travel. We must each make our road as we go. So if you haven't already begun, get going.

That's my take.

Thanks. Bob.

Sunday, December 14, 2014

Defined Contribution 401(k) Plans Are Replacing Defined Benefit Pension Plans .... That's a Big Deal

We  have long been in the process of transitioning from employer guaranteed pension benefits to employee provided unguaranteed retirement 401(k) benefits. That's a big deal.

The responsibility for individual planning, funding, investing and preparing for a financially secure future has changed in a big way. At the same time, however, people haven't received the necessary training and education required to do the job. That's also a big deal.

Since more and more the responsibility for providing financial security and retirement income now belongs to us as individuals, taking the time to become knowledgeable about the basics of 401(k) investing will certainly be time well spent.

In the 'old' days, employer provided guaranteed defined benefit pension plans were the norm. Those plans enabled individuals to avoid any responsibility with respect to planning and for the most part providing for their financial security.

A combination of Social Security and employer provided pension benefits formed the traditional route to achieving a secure and satisfactory level of retirement income. But today it's quite often not that way, and it definitely won't be that way tomorrow.

Individual employees will be responsible for setting aside enough money and then investing that money properly to achieve a successful and secure retirement income result. Those who commit themselves to learning by doing will be well rewarded for having done so. It's not that hard to do.

12 Things to Know About Retirement tells the developing story of how things have changed and are changing:
"(Here's) a four-part recipe for assuring that Americans can afford to retire comfortably:

Work longer. Fix Social Security. Save more through 401(k) accounts. And consider home equity as retirement savings.

(These) . . . facts about retirement that are well known to experts and little understood by the public (and by some politicians). . . .

1. Well into the 19th century, about half of the men who made it to age 80 still worked; retirement usually meant a couple of years, most of them in poor health.

2. In 1960, the average number of years spent in retirement was 13. In 2010, it was 20 because so many people retired earlier and lifespans had lengthened. Under current trends, it’s projected to be 22 years in 2050.

3. Among men age 65 in 1980, half could expect to live beyond age 79.7. In 2000, half could expect to live beyond age 82.6. Among those who’ll turn 65 in 2020, half are expected to live beyond age 84.7. . . .

7. The share of wages that Social Security will replace for the typical worker who retires at age 65 was 48% in 1980, 37% in 2000 and, under current trends, will be 34% in 2020.

8. Americans have $3.1 trillion in assets in defined-benefit plans (those that pay a pre-set amount), $4.7 trillion in defined-contribution plans (such as 401(k) accounts), and $6.2 trillion in individual retirement accounts. . . .

10. About 20% of the workers who are eligible for employer-provided 401(k) retirement plans do not participate.

11. Of those who do participate in employer-provided 401(k)s, only 10% contribute the maximum amount allowed by the tax law.

12.  Among households with a worker age 55 to 64, about 52% have a 401(k) and, of those, the median balance in 2013 was $111,000."

Summing Up

Times have changed in retirement planning and funding. They will change even more as companies and governments transition more and more to defined contribution plans.

Public employee pension plans are too costly and have become unaffordable due to lack of proper funding and the rich unfunded benefits that have been promised. It's sad but it's true.

Self reliance is on its way to retirement planning and investing. Thus, it's time for all young people to take this subject seriously while there's still time to achieve a favorable outcome.

That's my take.

Thanks. Bob.

Friday, December 12, 2014

As Stock and Oil Markets Tumble, Stay Calm and 'Don't Peek' ... This Too Shall Pass

This was a lousy week for stock market investors, and the Dow dropped more than 300 points Friday. But it was an even worse week for energy prices as the price per barrel of oil dropped by ~12% for the week and more than $2 Friday, hitting a closing price of $57.77 per barrel.

So it's fair to say that this was the week that was, and the appropriate question to ask is "Now what?

When markets tumble, our tendency is to do something and that usually means that we may panic and sell. That's the exact wrong thing to do

During market turmoil, sitting tight and doing nothing is the best 'action' for long term oriented individual investors. If anything, it's time to buy when stocks drop in price and are 'on sale.'

But if you're still inclined to do something and sitting tight or simply counting to 100 slowly doesn't work for you, then try this -- close your eyes --- don't peek. This too shall pass.

When markets tumble, be like Bogle -- 'Don't Peek' offers sound advice for individual investors during times of extreme market volatility and unrest:

"Will there be a Santa Claus rally this year? . . .

Importantly, this isn't just a game in which the clock has run out and managers get to start over. For retirement investors, a lost year really hurts. Compounding money in a risk-adjusted portfolio is the only reasonable way to build a truly reliable retirement. Sitting out one or two years with a low return creates real long-term pain. . . .

Risk-adjusted investing is an important concept, one that many people misunderstand. If you are going to be in the market for many years — and that's what retirement investors do — the goal isn't to grab a market-beating year. Rather, you should do nothing at all.

Common sense

To quote John Bogle, founder of the Vanguard Group and a longtime proponent of passive investing: "One of my favorite rules is 'Don't peek.' Don't let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns."

The reason why you don't peek is risk. If you target a specific return, say, 8% annually, the next question you must ask yourself is, "How much risk can I withstand to reach for 9%?"

A young person just starting a new job might answer that question quite differently from a 60-year-old. Given the decades of investing ahead of a 22-year-old, a decline in the stock market of 20% or 30% isn't a disaster. In fact, it's an opportunity: Stocks are on sale! . . .

Nothing easier

The larger concern is continually underperforming the stock market, year after year. Just by using the Rule of 72, we know that a 10% return will double a portfolio in a little more than seven years (7.27 to be exact).

An active manager who returns 5% net of fees needs close to double the time to double your retirement balance (14.21 years). . . .

The answer isn't that complicated. Build a simple, low-cost portfolio . . . and rebalance . . . year in and year out. Nothing could be easier to do."

Summing Up

The week just ended was a rough one for short term oriented stock market traders.

For long term individual investors, however, it was only one 'down' week out of hundreds more 'up' weeks to come.

Thus, it's no time to panic. In fact, the continuing huge drop in the price of oil (it fell 12% this week alone) will make our U.S. economic recovery stronger as consumers will have more money to spend and businesses will incur lower costs.

And to top it off, a strong U.S. dollar will keep domestic inflation under control which will facilitate low interest rates well into the future, even as the U.S. economy continues to gain strength.

So if you're getting nervous about the short term moves in the stock market, just try not to peek.

That's Mr. Bogle's take, and it's mine as well.

Thanks. Bob.