Before you read this post, read this article here. So the question is, did you end up like the turkey over these last two weeks or so? It's really incredible when you step back a moment and look at what the market has done since late July. Consider the following: -- Starting July 22 (a Friday) through today (August 11), the Dow Jones has gone down 11 of the 15 trading days in that time frame. -- The Dow has declined 12.5% since July 21's point (12,724) to today (11,143). Whether the market can hang on to today's sizable gains (+412) remains to be seen in this volatile environment, so we could easily head lower than 11,143. -- In the last 15 trading days, we've seen three days of triple digit declines: Aug 4 (-513), Aug 8 (-635), and Aug 10 (-520). Experiencing even one of these kinds of days would be considered a rare event, much less three in a span of five trading days. Many people went into July 22 thinking they had a "conservative" or "moderate risk" portfolio. After 12.5% (or higher) losses, many of those same individuals now realize they had high risk portfolios all along. The problem is, no one told them that when their portfolios were constructed. Worse yet, a good number of these individuals were planning on living off of these investments within the next couple years. Undoubtedly, those plans have now been delayed, perhaps for some time as the economy and markets struggle to find their footing. Isn't it funny how the market can take 12.5%+ from your portfolio in a matter of a few days, but it never seems to put 12.5% into your portfolio in a matter of a few days? Of course, I'm sure you've heard it a million times before, but it bears repeating: once you lose 12.5% you have to make back an even greater percentage just to get back to even. This often equates to needing a couple of years to earn back what's lost in a couple of days. To me, that sounds like a very high risk proposition. This is exactly why Nassim Taleb, author of the "The Black Swan: The Impact of the Highly Improbable" advocates a "barbell strategy" approach for the individual investor's portfolio. In short, instead of trying to construct a medium risk or conservative portfolio, one should split their assets into an 80/20 allocation: 80% in extremely safe (relatively speaking) instruments like CDs, money markets, or cash; and 20% in very high risk investments such as options (or other securities that have a high payoff potential). Of course, this 80/20 mix can be tailored for what fits you best, but the general principle remains the same. Again, think of the markets the way the turkey should think of Thanksgiving. Given that premise, if you have any flexibility at all, take a closer look at how you can construct a portfolio that is more robust to these market fluctuations and perhaps even benefits from them. Click on the Black Swan or Nassim Taleb categories in the right hand column to read more about this subject.
Not sure who said that, and I don't mean to be flippant, but it sure seems to ring true. From the standpoint of our economy, failing to change at this time will almost certainly prove fatal to what economic prosperity may lie in our future. I thought it would be fitting on this Election Day to summarize some of the basic steps needed to bring our debt-fueled, consumption-based economy back from the brink:1. Lower everyone’s taxesEveryone in this country paying taxes needs some kind of tax relief. Even the wealthiest individuals who create businesses and jobs need lower taxes in order to incentivize them to expand existing businesses and/or create new ones. If we want to see more job creation in our country, we need to ditch the soak-the-rich mentality. That approach has helped yield a significant exodus of jobs overseas. While it's true the wealthy have plenty of income to spare to pay more taxes, corporate and capital gains taxes are what they care about most, and those are too high compared to other countries. For example, Singapore has no capital gains tax whatsoever, while ours is 15% and headed to 28% when the Bush tax cuts expire.It goes without saying that middle- and lower-middle class wage earners are paying too much in taxes. When you take the 28% income tax rate, add the 6.2% Social Security tax, 1.45% Medicare tax, and your state sales tax (mine is almost 6% in Virginia) you’re barely left with half your income (about 58% in this case, to be exact). Put another way, we have to work through the month of May to fulfill our tax obligation and before we start earning any money for ourselves. The more we pay in taxes, the less we have to spend (which supports our current economy, based heavily on consumption) or save (which will hopefully support a future economic condition, based on production).In addition to the above reasons, we must also recognize the fact that the higher the tax rates go, the less total tax revenue collected by the government (see the Laffer curve). High taxes encourage creative evasion within the tax code, as well as an incentive to earn less and be less productive to avoid paying into the higher tax brackets. Lower taxes facilitate more investment, spending, and saving, all of which positively impact the overall economy. Growing this economic pie benefits the government’s efforts to collect greater tax revenues.2. Reduce onerous government regulation on businessWhat regulations you might ask? I don't know. Somebody else needs to figure that out. I do know that in comparison to countries that are now perceived as business-friendly (you can pick almost any from the Asia-Pacific Rim), the US has one of the most burdensome regulatory environments around. Regulations costs businesses money, since they have to spend money complying with all of the regulations. Money spent on regulatory compliance is money not spent on salaries, business expansion, job creation, etc, etc. If we want more vibrancy in our job market and higher wages to go with it, we have to be willing to loosen the reins on businesses.But what if these companies abuse the looser regulatory environment? If (and it’s an enormous “if”) the government doesn’t meddle and play favorites with different companies or industries, and the market is allowed to correct the abuses, then things will sort themselves out. I know that may sound like a dissatisfying answer, but it’s the reality of the free market. One company perpetuates too many abuses on its customers, and word will spread, adversely impacting that company and leading to a change in its policy or even potential bankruptcy as it loses business.3. Freeze/cap/stop/cease and desist with the government spendingWe're $14 trillion in debt and counting (fast). Estimates for FY11 budget deficit have come in around $1.3 trillion. New records are being set every year for this kind of runaway spending. Bloomberg Businessweek reports in its October 25 issue that $1 trillion-a-year interest payments on our debt are realistic within the decade.It comes down to this: The more the government spends, the more life becomes expensive for you and me. A little oversimplified, but it's essentially true. Big government costs big dollars.And so we need much smaller government to balance out the excesses already foisted upon us. Across the board budget cuts, scaled-down military operations overseas, and even shuttering of useless government agencies is in order if we want to pull back from the brink of national bankruptcy. While we could debate the merits of big versus small government all day long, it’s a moot argument – we’re too broke to afford a big government, no matter whether it’s good for us or not. Analogizing the US to a drunken sailor is now clichéd. We need new terminology to characterize this profoundly reckless and wasteful debt being perpetrated on our future generations.4. Reform our entitlement programsSocial Security, Medicare, and the new health care plan add up to some astronomical figures cost-wise. We're easily talking about 11-figure, mind-boggling sums of money that will be required to pay for all of these programs. Who's going to come up with it? Where will it come from? The answers to those questions do not bode well for you and I (worse for our children and grandchildren), and so the only real answer is that those programs must be discontinued at some point. Take Social Security for example. By the time I collect it, it will be worth far less to me than someone collecting it today, and will represent a very small piece of the pie in terms of income sources for my retirement. But the economic burden it's causing today in terms of the payroll taxes it requires is disproportionately high. I don't pretend to have the answer to this problem, but I have to believe that some sort of orderly phase-out of the program, whereby seniors and those close to retirement still receive the full benefit while younger individuals gradually pay less and less over time, will have to be part of the solution. Personally, I'll be glad to get the 6.2% tax back into my pocket. Let me decide how to allocate that money, not the government. The outlook is no less grim for Medicare. Bloomberg Businessweek reports that Medicare will cost $929 billion a year by 2020, and with no substantial changes to the program it’ll be rendered insolvent in seven years.The government over-promised and now it must under-deliver.5. Lower our expectationsThe economic rut that we now find ourselves in has just begun, and it will last a long time. (If you go by Depression standards, which started in 1929 and lasted through WWII [approximate total of 16 years], we should be out of this hole by around 2024.) Accordingly, our expectations need to be lowered in terms of our standard of living, salaries, benefits, social programs provided by the government, and so on. In other words, we need to be prepared to do more for less to rectify past imbalances. We will have to work harder to rebuild a viable, production-based, consumption-second economy that grows our GDP, balances our trade deficits, and gradually liquidates the mountain of debt we now find ourselves under.Conversely, the typical litany of over-promises and empty rhetoric that all will be well delivered to us by our elected officials is frankly wasting the precious time we do have to act. Someone needs to level with us and acknowledge the economic realities facing the country, while offering apolitical solutions that ignore popularity and restore fiscal responsibility.What are your suggestions for improving our country’s economic health going forward? I invite you to leave suggestions in the comment box. I may decide to use some of them as discussion for a future blog post.
Yahoo Finance ran an article last week reporting that Americans are collectively $6.6 trillion short of what they need for retirement savings. This is a staggering figure, no doubt, and it is the tip of the iceberg that represents the declining economic standard of living in our country.By way of context, the report focused on individuals between the ages of 32-64, assumed a 3 percent rate of return (ROR) on current assets, no cuts to pensions, and no increases in the Social Security retirement age. The report went so far as to note that if the ROR were adjusted to the Treasury Inflation Protected Securities (TIPS) rate, currently a meager 1.87%, the retirement savings shortfall swells to $7.9 trillion. (TIPS are bonds designed to return a rate that keeps pace with inflation.)I think that when you’re dealing with numbers this large, it becomes too esoteric for the mind to grasp. In other words, what does this really mean for the individual? How does it affect the hardworking people who saved and invested, only to find that they are nowhere near the amount of money they need to retire? At the very least, it calls into question the manner and method by which so many of us have planned for this stage of our lives. In a larger sense I think it’s a commentary on where the entire nation stands economically. This report should prompt all investors to take a close look at the assumptions upon which their retirement planning is based. Financial advisors will often tell their clients that the stock market is the best place to grow the necessary wealth for retirement, primarily because over time, it’s gone steadily upward. This is a generally accepted assumption, rarely challenged or scrutinized too closely. The problem arises when the projected exit point for an investor just so happens to lie in the vicinity of such a pronounced decline in the market. Individuals looking to retire in the 2008-2015 time frame found the ’08 collapse to be extremely untimely. So while it’s true that the market has averaged decent single digit returns over the years, and it does move in a generally upward trend, your timing in and out of it is crucial. This may sound self-evident, but is too frequently overlooked in retirement planning. The article went on to infer that the report’s findings were particularly untimely due to the fact that the White House panel commissioned to examine our country’s fiscal problems has recommended cutting Social Security and raising the retirement age…as if this were being done just to spite the millions of Americans who were already in a financial hole for retirement. The fact is that the economic predicament we’re in as a nation no longer allows for programs like Social Security, since we’re effectively broke. (When you earn $14 trillion a year but you owe $50-70 trillion, you’re broke.) It’s just that no one in politics is willing to come out and level with us that the only solution here besides fiscal insolvency is to discontinue these social programs. So we have a very difficult convergence of events here. Americans are collectively trillions shy of their retirement goals while their safety net is quickly looking like it may be forfeit, especially for the younger end of the 32-64 age range cited in the report. (Individuals in the latter portion of this age range will receive “full” benefits but likely find they don’t buy very much.) All this effectively points to the fact that the notion of retirement is less and less attainable, and at the very least, won’t be anything like what we envisioned. It’s one thing to be retired and jet setting throughout Europe; it’s another to be retired and unable to keep the fridge stocked.And consider this: if many Americans nearing retirement age, or currently retired but finding difficulty keeping up financially, need to return to the workforce, what jobs will be waiting for them? As I’ve posted before on this blog, the job prospects in this country are worsening, with millions of jobs lost for good and the lower-paying service sector jobs increasingly becoming the only option available. I plan to write more in future posts about the retirement myth and examine some different ways you can look at your approach to retirement savings. The report I’ve discussed in this post provides the basis for re-looking this subject, as it highlights the vast gap between what Americans need to retire and what they actually have. I fear that this gap will continue to grow, forcing more and more of us to make some very difficult financial decisions down the road.
|
RSS Feed