Why would any investment "opportunity" guarantee a negative return to its investors, who happen to be some of the shrewdest minds in the banking industry?
This situation actually exists today--and the story is interesting. The European Central Bank has recently dropped its bank deposit rate to -0.1%. That means that if European-based lending institutions invest their assets in the Central Bank's money fund, they are guaranteed to receive less money when they take it back out again. The fund is a guaranteed loser.
The comparable number in the U.S.--the return offered by the U.S. Federal Reserve to banks that want to park their excess capital in an interest-bearing account--is 0.25%. That isn't very much, but many banks find it preferable to, for example, giving you a 30-year mortgage at around 4% (current rates, in other words) when the Fed's own economists expect the Fed Funds rate to reach 4% sometime in the next year or two. This explains why $4.34 trillion in bank reserves are sitting on the sidelines at a time when our economy sorely needs an investment boost. (You can see a graph of total reserve assets here: http://research.stlouisfed.org/fred2/series/WALCL). And it also explains why people with excellent credit scores are having trouble finding a bank willing to finance their home purchase.
So why has the ECB dropped its own rate below zero? By making it actually painful to park banking reserves, it wants to shake that sleeping money out of its accounts and back where it belongs: into the European economy. The strategy appears to be working; the graph shows that reserves have dropped--very suddenly, since the announcement--to their lowest point since 2011. This may be the only example in history where billions of dollars were invested in an investment "opportunity" that was absolutely, positively guaranteed to lose money.
Sources:
http://research.stlouisfed.org/fred2/series/WALCL
http://online.wsj.com/article/PR-CO-20140610-909448.html
http://www.latimes.com/business/la-fi-ecb-interest-rates-20140606-story.html
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Tuesday, June 24, 2014
Tuesday, June 17, 2014
ARE DAUGHTERS A BETTER "INVESTMENT"?
As Father's Day passes, a new survey from the online account aggregation firm Yodlee.com and Harris Interactive tells us that the financial relationship between fathers (and parents) can be very different for their sons vs. their daughters. The survey found that an astonishing 75% of young adult men (age 18-34) are receiving financial aid from their parents, compared with 59% for comparable age daughters. The financial dependency extends deep into adulthood; among sons aged 35-44, fully 32% are still living at home, while only 9% of women in that age bracket sleep in their former bedroom. Even those numbers understate the disparity, because more than a third of the women who are living with their parents are doing so to support them in old age, something that sons are, according to the report, far less likely to do.
Overall, daughters are 32% less likely to need their parents' money, and twice as likely to move back home because they're unemployed. By age 45, the survey found, most of these stark differences in financial independence have faded; sons lag only a few percentage points behind daughters in these two areas. But then a new discrepancy emerges. The survey found that older sons are half as likely as daughters to support their parents in old age.
Sources:
http://www.businessinsider.com/daughters-require-less-financial-support-2014-6
http://time.com/money/2861530/daughter-better-investment-than-son/
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Overall, daughters are 32% less likely to need their parents' money, and twice as likely to move back home because they're unemployed. By age 45, the survey found, most of these stark differences in financial independence have faded; sons lag only a few percentage points behind daughters in these two areas. But then a new discrepancy emerges. The survey found that older sons are half as likely as daughters to support their parents in old age.
Sources:
http://www.businessinsider.com/daughters-require-less-financial-support-2014-6
http://time.com/money/2861530/daughter-better-investment-than-son/
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES.
Thursday, June 12, 2014
CLASSIC INVESTING MISTAKES
How many can you prevent yourself from making?
Year after year, in bull and bear markets, investors make some all-too-common blunders. They have been written about, talked about, and critiqued at some length - and yet they are still made. You can chalk them up to psychology, human nature, perhaps even a degree of peer pressure. You just don't want to find yourself making them more than once.
#1: Caving into emotion. The deVere Group, which consults high net worth investors around the world, recently surveyed 880 of its clients and found that even with their experience, some had made the equivalent of a rookie mistake - 20% had let fear or greed prompt them into emotional investment decisions.1
Investors use past performance to justify their greed - it did well recently, I better buy more of it - but past performance is merely history and represents a micro factor versus macroeconomic factors influencing sectors and markets. Fear prompts panic selling. How many investors draw on technical analysis or even stop-loss limits when shares suddenly decline? A stop-loss limit is handy for those who don't want to watch the market every day - it instructs a brokerage to sell a stock if it drops below a specific value, often in the range of 8-10% of the purchase price.2
#2: Investing without a strategy. Some people invest with one idea in mind - making money. An outstanding goal to be sure, but it shouldn't blind them to other priorities such as tax efficiency, managing risk and reviewing asset allocation. Even 22% of the investors in the deVere poll confessed to this.1
#3: Not diversifying enough. Have you ever heard the phrase "familiarity bias"? This is when investors develop a "home team" attachment to an investment. Just as sports fans stick by the Celtics and the Cornhuskers and the Cubs through thick and thin, some investors stick with a few core investments for years. Maybe they work for XYZ Company or their mom did, or maybe they like what XYZ Company represents, so having a certain percentage of the portfolio in shares of XYZ Company gives them a good feeling. If XYZ Company craters, they won't feel so good. You can hold too much of one investment, especially if a company rewards you with its stock.2
Conversely, some portfolios are over diversified and hold too many investments. This is seldom the fault of investors; over time, they may end up with some shares of all the major companies in an industry group with a little help from Wall Street money managers. The core problem here is that not all of these companies can be winners.
#4: Slipshod tax management of investments. Sometimes certain investments within a taxable account will lose money, yet because of past gains they have made, the investor is stuck with capital gains tax. Some investments are better held in taxable accounts and others in tax-deferred accounts, as various types of investments are taxed at varying rates. When you retire and tap into your savings, you can potentially improve tax efficiency by drawing down your taxable accounts first, so that you'll face the capital gains tax rate (which may be 15% or even 0%) instead of the ordinary income tax rate.3
Also, when you pull money from your taxable accounts first, your tax-advantaged accounts get a little more time to grow and compound. If they are large, another year or two of growth and compounding could prove beneficial.
#5: Seldom reviewing portfolio allocations. A long-term asset allocation strategy starts with defined percentages. Over time - and it may not take much time - the percentage allocations go out of whack. A bull market may result in a greater percentage of your portfolio assets being held in stock, and while this overweighting may seem reasonable in the near term, it may not be what you want in the long term.
#6: Investing (or reinvesting) near a market peak. Many investors play the market in one direction, which is up - they buy with expectations that a sector or the broad market will keep climbing. Short selling stocks (i.e., seek to exploit falling stock prices) takes more skill than many investors have. A buy-and-hold philosophy may prove very rewarding, as long as you don't hold too rigidly or too long in the event of a sustained, systemic shock to the markets.
An even keel promotes a steady course. Fear, greed, bias, randomness, inattention - these are the root causes of the classic investing blunders. We have all made them; patience and experience may help us avoid them in the future.
Citations.
1 - thestreet.com/story/12733263/1/5-investing-mistakes-millionaires-make--but-theyre-still-rich.html [6/4/14]
2 - abcnews.go.com/Business/avoiding-sins-investing/story?id=18969850#.UXBFuco7bAJ [4/16/13]
3 - tinyurl.com/l6lkrfu [2/12/14]
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO PETER MONTOYA.
Wednesday, June 11, 2014
RETIREMENT SPENDING REVISITED
How much are you going to spend in retirement? What once seemed like a simple question has become incredibly complicated in recent years.
Why? First of all, a diminishing number of people actually plan to leave work and embrace leisure on a full-time basis, and those who do seem to be doing it later than people from earlier generations. Of the oldest baby boomers, who are now age 68, only 52% are actually retired. 21% are still working full-time. According to a Gallup survey, 37% of Americans say they plan to work full-time past the age of 65, but that may be underestimating the actual shift in preference. A 2012 survey conducted by Transamerica found that just 19% of workers expect to retire full-time by age 65.
When people DO leave the workplace, it now appears that some of the assumptions about their spending habits will have to be revisited. The default assumption for many retirement plans is that what you spend now for things like food, clothing etc. will remain pretty much the same the day after retirement as they were the day before. Your home mortgage may or may not go away in retirement and the expenses related to commuting to and from work will diminish. When you sort it all out, you end up with a baseline spending plan, which includes a new car every few years, dining out occasionally, making home improvements, and other basic necessities. These expenses have traditionally been assumed to increase each year roughly with the inflation rate.
On top of that, it was assumed that in the vigorous early years of retirement, people would spend more on travel and country club memberships than they did when they were working, so their overall expenses would go up the day after they retire and gradually diminish as they found it harder and harder to play 18 holes of golf every day. At some point in the age curve, health expenses would start to rise. The people who study retirement expenditures talked about a "smile" graph of expenses, where it cost more to live and play in the earlier and later years of retirement than in the middle years.
What's wrong with that? For one thing, when you look at the Bureau of Labor Statistics data on what people actually spend in their later years, it contradicts this comfortable smile pattern. People between the ages of 65 and 74 tended, on average, to increase their annual spending levels between 1.11 percentage points and 1.78 percentage points more per year more than the inflation rate. Over that decade of their lives, any assumption that used the inflation rate would undercount their aggregate spending by somewhere between 11% and 19%. People age 75 and older accelerated their actual spending to (again over the course of the next decade) between 13% and 22% more than the inflation statistics would suggest. After that, healthcare costs would start to dominate the spending pattern.
To make things more complicated, the statistics suggest that retirees tend to cut back on their spending whenever the investment markets go down. In 2009, people age 75 and older, on average, spent less than they did the year before, and they actually spent less than that in 2010. That same year, the average spending of people age 65-75 declined a remarkable 3.55%. As your wealth goes down, so too does your spending.
How can we predict these things in advance? We can't. And it's important to remember that these broad statistics don't apply to your individual circumstances; they just suggest things that most of us should watch out for. The only clear conclusion of the research, thus far, is that we should probably make conservative assumptions about spending, and hope we're pleasantly surprised as the years go on.
Sources:
Retirement:
http://capricorn.bc.edu/agingandwork/database/browse/facts/fact_record/5670/all
Spending:
http://www.marketwatch.com/story/hedonic-pleasure-index-going-beyond-the-cpi-2013-01-23
http://www.advisorperspectives.com/newsletters12/47-fallacies2.php
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES
Why? First of all, a diminishing number of people actually plan to leave work and embrace leisure on a full-time basis, and those who do seem to be doing it later than people from earlier generations. Of the oldest baby boomers, who are now age 68, only 52% are actually retired. 21% are still working full-time. According to a Gallup survey, 37% of Americans say they plan to work full-time past the age of 65, but that may be underestimating the actual shift in preference. A 2012 survey conducted by Transamerica found that just 19% of workers expect to retire full-time by age 65.
When people DO leave the workplace, it now appears that some of the assumptions about their spending habits will have to be revisited. The default assumption for many retirement plans is that what you spend now for things like food, clothing etc. will remain pretty much the same the day after retirement as they were the day before. Your home mortgage may or may not go away in retirement and the expenses related to commuting to and from work will diminish. When you sort it all out, you end up with a baseline spending plan, which includes a new car every few years, dining out occasionally, making home improvements, and other basic necessities. These expenses have traditionally been assumed to increase each year roughly with the inflation rate.
On top of that, it was assumed that in the vigorous early years of retirement, people would spend more on travel and country club memberships than they did when they were working, so their overall expenses would go up the day after they retire and gradually diminish as they found it harder and harder to play 18 holes of golf every day. At some point in the age curve, health expenses would start to rise. The people who study retirement expenditures talked about a "smile" graph of expenses, where it cost more to live and play in the earlier and later years of retirement than in the middle years.
What's wrong with that? For one thing, when you look at the Bureau of Labor Statistics data on what people actually spend in their later years, it contradicts this comfortable smile pattern. People between the ages of 65 and 74 tended, on average, to increase their annual spending levels between 1.11 percentage points and 1.78 percentage points more per year more than the inflation rate. Over that decade of their lives, any assumption that used the inflation rate would undercount their aggregate spending by somewhere between 11% and 19%. People age 75 and older accelerated their actual spending to (again over the course of the next decade) between 13% and 22% more than the inflation statistics would suggest. After that, healthcare costs would start to dominate the spending pattern.
To make things more complicated, the statistics suggest that retirees tend to cut back on their spending whenever the investment markets go down. In 2009, people age 75 and older, on average, spent less than they did the year before, and they actually spent less than that in 2010. That same year, the average spending of people age 65-75 declined a remarkable 3.55%. As your wealth goes down, so too does your spending.
How can we predict these things in advance? We can't. And it's important to remember that these broad statistics don't apply to your individual circumstances; they just suggest things that most of us should watch out for. The only clear conclusion of the research, thus far, is that we should probably make conservative assumptions about spending, and hope we're pleasantly surprised as the years go on.
Sources:
Retirement:
http://capricorn.bc.edu/agingandwork/database/browse/facts/fact_record/5670/all
Spending:
http://www.marketwatch.com/story/hedonic-pleasure-index-going-beyond-the-cpi-2013-01-23
http://www.advisorperspectives.com/newsletters12/47-fallacies2.php
Sincerely,
William T. Morrissey and Tammy Prouty
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
425 Commercial Street, Suite 203
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
PLEASE READ THIS WARNING: All e-mail sent to or from this address will be received or otherwise recorded by the Sound Financial Planning, Inc. corporate e-mail system and is subject to archival, monitoring and/or review, by and/or disclosure to, someone other than the recipient. This message is intended only for the use of the person(s) ("intended recipient") to whom it is addressed. It may contain information that is privileged and confidential. If you are not the intended recipient, please contact the sender as soon as possible and delete the message without reading it or making a copy. Any dissemination, distribution, copying, or other use of this message or any of its content by any person other than the intended recipient is strictly prohibited. Sound Financial Planning, Inc. has taken precautions to screen this message for viruses, but we cannot guarantee that it is virus free nor are we responsible for any damage that may be caused by this message. Sound Financial Planning, Inc. only transacts business in states where it is properly registered or notice filed, or excluded or exempted from registration requirements. Follow-up and individualized responses that involve either the effecting or attempting to effect transactions in securities or the rendering of personalized investment advice for compensation, as the case may be, will not be made absent compliance with state investment adviser and investment adviser representative registration requirements, or an applicable exemption or exclusion. This information should not be construed as investment advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. WE WOULD LIKE TO CREDIT THIS ARTICLE'S CONTENT TO BOB VERES
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