You've probably been hearing a lot about Greece recently, and before that about Dubai--two countries that were in danger of defaulting on what economic geeks call 'sovereign debt,' which basically means their country's equivalent of Treasury bonds. Dubai's problem was $26 billion in debt issued by Nakheel, its most prominent real estate developer, which was tacitly backed by the government. Order was restored last December when neighboring Abu Dhabi provided Nakheel with a $10 billion loan. Greece, meanwhile, has $28 billion in government debt due in April and May, and as you read this, the European Union is debating when and how to come to its rescue.
What you probably aren't hearing is that Portugal, Ireland, Italy and Spain are having similar troubles, and that in all cases, the problems were visible, and warnings were raised by economists, years before the budget crises came to a head. According to a report by The Economist, Greece's debt is now up to 112.6% of its gross domestic product. Ireland's is 65.8%, Spain's is 54.3%, Portugal's is 77.4% and Italy's is 114.6%. What makes Greece stand out is that suddenly foreign buyers are shying away from its government securities, sending the yield on ten-year notes soaring to 7.1%, and raising the cost of rolling over the debt--sending deficits even higher.
This, of course, is exactly the fear that haunts U.S. economists: that at some point, the world's bond buyers will lose confidence that America will ever get its debt situation under control. It also may be the underlying fear among people who attend the Tea Party rallies around the country. The real deficit problems in the U.S., however, are not found in government spending, per se, but the amount of money promised to future retirees in various forms. Lately, various financial planning conferences have heard presentations by David Walker, former head of the U.S. Government Accounting Office, now president of the Peter G. Peterson Foundation. Walker gives a terrific speech on how America is executing a reverse transfer of wealth from the younger generation and unborn to the Baby Boom generation. He does exactly what economists were doing in Greece for twenty years before the meltdown: tells us that the longer we wait to solve the problems, the more likely we are to face an unsolvable crisis.
Perhaps the easiest example to understand is Social Security, which was enacted during the Great Depression, at a time when the average person's lifespan was 65. 65 also happened to be the normal retirement year, which meant that most citizens collected no Social Security benefits at all; only those who lived an unusually long time would get back the money that was collected into the government retirement system. Fast-forward to today, when the average U.S. life expectancy is 78.2 years, and it is not uncommon for people to live to age 100. The same is true of Medicaid; when it was enacted, people were expected to receive benefits for a year or two, not additional decades. In all, according to "The Complete Idiot's Guide to Economics," 23% of the U.S. budget is spent on Social Security, 12% on Medicare, 7% on Medicaid; recently, Congressman Randy Forbes estimated that mandatory entitlements now represent 62% of all federal spending.
Greece never went through anything like the current wave of Tea Parties and activism. This may be a chance to channel all the anger over budget deficits into a real solution. But, as we are learning from European countries that spent too much for too long, the solution is not anger or warnings, but concrete action that addresses the real sources of fiscal imbalance--and perhaps most importantly, a willingness to sacrifice our way back to a balanced budget. Walker proposes means testing for Social Security recipients, arguing that it makes no sense to send government checks to billionaires. The government will have to ration health care and put it back on a budget. He tells people what you already know, what Greece and some of its neighbors are learning: it doesn't work any differently for governments than it does for people; the numbers are just a lot bigger.
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
321 West Washington St., Suite 329
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, February 25, 2010
Friday, February 19, 2010
The Joys of Estate Taxation
Most financial advisors think that our tax system is (how can we put this delicately?) not the most streamlined or user-friendly document we've ever worked with. The U.S. Government Printing Office says that our current IRS Tax Code runs to 13,458 pages and roughly 5.8 million words. (A little longer than ten copies of the unabridged version of Tolstoy's War and Peace.)
Most of the language is less fun to read than you might imagine, with phrases like: "If during any taxable year any building to which section 47(d) applied ceases (by reason of sale or other disposition, cancellation or abandonment of contract, or otherwise) to be, with respect to the taxpayer, property which, when placed in service, will be a qualified rehabilitated building, then the tax under this chapter for such taxable year shall be increased by an amount equal to the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from reducing to zero the credit determined under this subpart with respect to such building." (IRS Section 50, (a)(2)(A)).
But if you talk to professionals at industry conferences, they'll tell you that the messiest corner of the tax code involves the money you leave to your heirs. For instance, there's a lot of discussion in professional journals these days about when and how it's beneficial to convert a traditional IRA to a Roth. One factor in the decision: the rules governing inherited Roth IRAs are very different from inherited traditional IRAs. Meanwhile, whoever is administering the money left to heirs often has the joy of calculating something called the "income in respect of a decedent." And, in the convoluted logic of U.S. taxes, there are different tax breaks on assets that have gone up in value depending on whether they were owned as community property or joint tenancy.
Of course, when you decide who should inherit your IRA (Roth or otherwise), you simply specify this important information in your last will & testament, right? Wrong! (MUCH too logical!) Under our tax code, it doesn't matter what you say about your IRA in your will. Instead, you have to specify who will receive your IRA assets with a "beneficiary designation form"--that fun and exciting document which usually assumes (for reasons nobody has ever convincingly explained) that you want to give your retirement assets to your brothers and sisters rather than your children and grandchildren. (A lot of times, professionals have to substitute a custom-made form for the standard one offered by the IRA account's custodian).
Not surprisingly, a lot of people forget to update these forms as their life circumstances change, as they divorce and/or remarry. Ed Slott, a noted specialist in IRA distributions, has famously said that it is not uncommon for him to review beneficiary designations and find dead people listed as the inheritors. (This is not ideal from an estate planning perspective.)
A good financial planning professional can help you sort through these things, updating your beneficiary forms, helping you name contingent beneficiaries (who will receive your IRA if/when beneficiaries die), sorting through all the complicated issues surrounding Roth conversions and so forth. But lately, the most confusing part of the tax code has been the estate tax itself.
Why? If somebody had died last December 31, $3.5 million worth of his or her assets would pass to heirs free of federal estate taxes, and for amounts above that, the federal estate tax rate maxed out at 45%. If that same person had managed to survive until January 1, 2010, the U.S. Tax Code assesses ZERO federal estate taxes--none whatsoever--even if the deceased happens to be a multi-billionaire like Bill Gates or Warren Buffett.
It gets better. As things stand now, if that same famous multi-billionaire were to die in January of 2011 or any time thereafter, only $1 million of the ten-figure estate could be passed on estate-tax-free, and the tax rate is scheduled to go back up higher than it was last year, to a 55% maximum rate. Suddenly, a lot of people have to start thinking about estate taxes again. There is also a one-year change in how to calculate the capital gains tax on the sale of inherited assets, which will almost certainly affect many more people than the inheritance tax did (don't ask). Congress is looking at ways to fix this situation, maybe retroactively. For now, we have to live with the complexity--which I guess we should all be used to by now.
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
321 West Washington St., Suite 329
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.
Most of the language is less fun to read than you might imagine, with phrases like: "If during any taxable year any building to which section 47(d) applied ceases (by reason of sale or other disposition, cancellation or abandonment of contract, or otherwise) to be, with respect to the taxpayer, property which, when placed in service, will be a qualified rehabilitated building, then the tax under this chapter for such taxable year shall be increased by an amount equal to the aggregate decrease in the credits allowed under section 38 for all prior taxable years which would have resulted solely from reducing to zero the credit determined under this subpart with respect to such building." (IRS Section 50, (a)(2)(A)).
But if you talk to professionals at industry conferences, they'll tell you that the messiest corner of the tax code involves the money you leave to your heirs. For instance, there's a lot of discussion in professional journals these days about when and how it's beneficial to convert a traditional IRA to a Roth. One factor in the decision: the rules governing inherited Roth IRAs are very different from inherited traditional IRAs. Meanwhile, whoever is administering the money left to heirs often has the joy of calculating something called the "income in respect of a decedent." And, in the convoluted logic of U.S. taxes, there are different tax breaks on assets that have gone up in value depending on whether they were owned as community property or joint tenancy.
Of course, when you decide who should inherit your IRA (Roth or otherwise), you simply specify this important information in your last will & testament, right? Wrong! (MUCH too logical!) Under our tax code, it doesn't matter what you say about your IRA in your will. Instead, you have to specify who will receive your IRA assets with a "beneficiary designation form"--that fun and exciting document which usually assumes (for reasons nobody has ever convincingly explained) that you want to give your retirement assets to your brothers and sisters rather than your children and grandchildren. (A lot of times, professionals have to substitute a custom-made form for the standard one offered by the IRA account's custodian).
Not surprisingly, a lot of people forget to update these forms as their life circumstances change, as they divorce and/or remarry. Ed Slott, a noted specialist in IRA distributions, has famously said that it is not uncommon for him to review beneficiary designations and find dead people listed as the inheritors. (This is not ideal from an estate planning perspective.)
A good financial planning professional can help you sort through these things, updating your beneficiary forms, helping you name contingent beneficiaries (who will receive your IRA if/when beneficiaries die), sorting through all the complicated issues surrounding Roth conversions and so forth. But lately, the most confusing part of the tax code has been the estate tax itself.
Why? If somebody had died last December 31, $3.5 million worth of his or her assets would pass to heirs free of federal estate taxes, and for amounts above that, the federal estate tax rate maxed out at 45%. If that same person had managed to survive until January 1, 2010, the U.S. Tax Code assesses ZERO federal estate taxes--none whatsoever--even if the deceased happens to be a multi-billionaire like Bill Gates or Warren Buffett.
It gets better. As things stand now, if that same famous multi-billionaire were to die in January of 2011 or any time thereafter, only $1 million of the ten-figure estate could be passed on estate-tax-free, and the tax rate is scheduled to go back up higher than it was last year, to a 55% maximum rate. Suddenly, a lot of people have to start thinking about estate taxes again. There is also a one-year change in how to calculate the capital gains tax on the sale of inherited assets, which will almost certainly affect many more people than the inheritance tax did (don't ask). Congress is looking at ways to fix this situation, maybe retroactively. For now, we have to live with the complexity--which I guess we should all be used to by now.
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
321 West Washington St., Suite 329
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.
Monday, February 8, 2010
Good Company?
We're all hearing a lot about U.S. budget deficits, which are high by historical standards. According to figures compiled on the web site www.usGovernmentSpending.com, the projected deficit in 2010--8.54% of U.S. GDP (a measure of total economic output in the country) has been exceeded only four times in U.S. history: 1918 (11.88%), 1919 (16.86%), 1942 (12.04%), 1943 (28.05%), 1944 (22.35%), and 1945 (24.06%). A more normal figure is in the 2% to 5% range, although there were four recent years--1998 through 2001--when the government balance sheet showed a surplus. (The government also managed surpluses in 1969, 1960, 1956-57 and 1951-52.)
The size of the deficit is worrisome to economists. But an article in the January 14 issue of The Economist magazine says that we may have gotten through the recent banking meltdown fairly inexpensively. Previous systemic banking crises have, on average, cost 13% of GDP to resolve, according to the International Monetary Fund. But because the U.S. government offered its assistance in the form of loans (which were mostly paid back with interest by the big investment banks) and stock (which may appreciate in value), the final cost is now projected to be somewhere around $90 billion--almost all explained by losing investments in General Motors, Chrysler and AIG, and by subsidies to homeowners to help modify their mortgages. A proposed special tax on large investment banks could further reduce the cost to practically zero, and the Federal Reserve and the FDIC both made money on loan and bank-bond guarantees. The article cautions that a fair accounting would include the $111 billion capital infusion into Fannie Mae and Freddie Mac, which brings the total bailout cost to something less than 2% of GDP.
Of course, the U.S. government is also spending money to pull the country out of recession. However, almost unnoticed in the deficit debate is the fact that almost all other countries around the world are also running up deficits--for the same purpose. A chart (below), taken from figures in the January 23 issue of The Economist (page 90) ranks the world's economies according to their 2009 deficits as a percentage of GDP. The chart also includes a second figure, which shows the current account deficit--basically the difference between the value of imports and exports. A negative number means that the country is spending more than it takes in; a positive number (as in China) means the country is taking in an excess of capital.
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
321 West Washington St., Suite 329
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.
The size of the deficit is worrisome to economists. But an article in the January 14 issue of The Economist magazine says that we may have gotten through the recent banking meltdown fairly inexpensively. Previous systemic banking crises have, on average, cost 13% of GDP to resolve, according to the International Monetary Fund. But because the U.S. government offered its assistance in the form of loans (which were mostly paid back with interest by the big investment banks) and stock (which may appreciate in value), the final cost is now projected to be somewhere around $90 billion--almost all explained by losing investments in General Motors, Chrysler and AIG, and by subsidies to homeowners to help modify their mortgages. A proposed special tax on large investment banks could further reduce the cost to practically zero, and the Federal Reserve and the FDIC both made money on loan and bank-bond guarantees. The article cautions that a fair accounting would include the $111 billion capital infusion into Fannie Mae and Freddie Mac, which brings the total bailout cost to something less than 2% of GDP.
Of course, the U.S. government is also spending money to pull the country out of recession. However, almost unnoticed in the deficit debate is the fact that almost all other countries around the world are also running up deficits--for the same purpose. A chart (below), taken from figures in the January 23 issue of The Economist (page 90) ranks the world's economies according to their 2009 deficits as a percentage of GDP. The chart also includes a second figure, which shows the current account deficit--basically the difference between the value of imports and exports. A negative number means that the country is spending more than it takes in; a positive number (as in China) means the country is taking in an excess of capital.
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
321 West Washington St., Suite 329
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.
Wednesday, February 3, 2010
THE DECADE IN REVIEW
THE DECADE IN REVIEW
A look at stocks, commodities and memories (good and bad).
A turbulent ten years. The 2000s gave us remarkable opportunity and remarkable volatility. They tested our patience, and many investment strategies. They taught us to hold on, hang in there and diversify.
Stocks. Was it really a "lost decade"? It depends on how you were invested. Yes, the Dow ended the 1990s at 11,497.12 and ended the 2000s at 10,428.05, amounting to a 9.30% slip. The S&P 500 lost 24.10% in the same interval. If you had invested a lump sum into an index fund tracking the S&P 500 on December 31, 1999 and left those assets untouched for ten years, you would have ended up with a sizable loss.1,2
Well, that sounds dismal - but how many of us actually invest this way? Very few of us make one lump sum investment and just watch it for ten years. Thanks to diversification, rebalancing and constant inflows of new money, quite a few investors were able to grow their assets and/or outperform the S&P 500 in the past decade.
The fact is, five sectors of the S&P 500 gained 10% or more across the 2000s - health care (+10.85%), utilities (+10.92%), materials (+24.91%), consumer staples (+31.84%) and energy (+102.12%).2
Few articles about the "lost decade" mention this notable factoid: the Russell 2000 advanced 23.90% during the 2000s.2 Mutual funds that focused on buying undervalued small-company stocks gained an average of 8.3% annually in the 2000s.3
Outside America, developing stock markets shattered all expectations while the developed markets mirrored American performance. Look at the decade-long gains in key indices in some of the BRIC nations, as measured by CNBC.com: China, +72%; India, +249%; Brazil, +301%; Russia, +863%. Compare all that with the benchmark indices in Japan (-44%), France (-34%), Great Britain (-22%) and Germany (-14%) in the past decade.4 Emerging market mutual funds gained an average of 9.3% per year in the last ten years.3
Commodities. It was a decade of amazing gains in the broad commodities market. From the end of 1999 to the end of 2009, gold advanced 278.52%. How about silver and copper? Silver gained 208.91% and king copper rose 287.78%. Crude oil rose 210.00% during the 2000s.2
How great a decade was it for the commodities sector? Only one notable commodity posted a ten-year loss from 12/31/1999 to 12/31/2009. That was palladium, which retreated 8.98%. On the other hand, we know that 16 commodities gained 100% or more across the decade.2
The two biggest gainers during the 2000s were a pair of crops: sugar (+340.36%) and cocoa (+293.31%).2
Highs and lows. We are 10 years past the bursting of the tech bubble - March 10 will mark the 10th anniversary of the NASDAQ's all-time high of 5,132.50.5 And of course, a decade-defining geopolitical event rocked the markets 18 months later.
General Motors and Chrysler filed for bankruptcy protection in 2009; at the start of the decade, so did Enron - the company that Fortune Magazine ranked as "most innovative" each year from 1995-2000.6 In 2008, Lehman Brothers, Morgan Stanley, Goldman Sachs, Merrill Lynch, and Washington Mutual either folded, mutated, or were bought up while AIG, Freddie Mac and Fannie Mae were bailed out.
The Dow hit a new high of 11,723 in January 2000, a post-9/11 closing low of 7,286 in October 2002, and then ended 2003 at 10,453 (as the DJIA gained 25.32% that year while the dollar lost 14.67%). The Dow hit new peaks of 11,727 on October 3, 2006 and 14,164 on October 9, 2007. A close of 11,215 on July 2, 2008 officially marked the start of a bear market.7
From March 9, 2009 closing lows to the end of the year, the Dow shot up 59.28% and the S&P 500 advanced 64.83%.2 This led to some to entertain tantalizing thoughts about the birth of a new bull market. Or it is simply a cyclical bull in a secular bear? The jury is still out, as the saying goes; we can hope for the best.
What did we learn? The 2000s taught us lessons about irrational exuberance (companies that had never made a dime were probably not worth billions) and lessons about the value of diversifying your portfolio. We also learned lessons in perseverance - those who stayed invested have seen their portfolios make a strong recovery.
The 2000s put investors through some seemingly unimaginable financial headlines. It was a rare decade, an aberrant one in stock market history - for example, the Dow hadn't had a negative decade since the 1930s, and it had advanced 228.25% over the 1980s and 317.59% for the 1990s.8 Will we see it make a double- or triple-digit advance in the next ten years? We don't know. Past performance is no indicator of future success.
Citations
1money.cnn.com/quote/historical/historical.html?pg=hi&close_date=12%2F31%2F99&mode=add&symb=DJIA [1/16/09]
2 cnbc.com/id/34645043 [12/31/09]
3 articles.latimes.com/2009/dec/31/business/la-fi-stocks31-2009dec31?pg=3 [12/31/09]
4 cnbc.com/id/34643111 [12/31/09]
5 smartmoney.com/investing/economy/the-financial-decade-in-review/?page=2 [12/31/09]
6 smartmoney.com/investing/economy/the-financial-decade-in-review/?page=4 [12/31/09]
7 the-privateer.com/chart/dow-long.html [12/31/09]
8 cnbc.com/id/34619797 [12/29/09]
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
321 West Washington St., Suite 329
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.
A look at stocks, commodities and memories (good and bad).
A turbulent ten years. The 2000s gave us remarkable opportunity and remarkable volatility. They tested our patience, and many investment strategies. They taught us to hold on, hang in there and diversify.
Stocks. Was it really a "lost decade"? It depends on how you were invested. Yes, the Dow ended the 1990s at 11,497.12 and ended the 2000s at 10,428.05, amounting to a 9.30% slip. The S&P 500 lost 24.10% in the same interval. If you had invested a lump sum into an index fund tracking the S&P 500 on December 31, 1999 and left those assets untouched for ten years, you would have ended up with a sizable loss.1,2
Well, that sounds dismal - but how many of us actually invest this way? Very few of us make one lump sum investment and just watch it for ten years. Thanks to diversification, rebalancing and constant inflows of new money, quite a few investors were able to grow their assets and/or outperform the S&P 500 in the past decade.
The fact is, five sectors of the S&P 500 gained 10% or more across the 2000s - health care (+10.85%), utilities (+10.92%), materials (+24.91%), consumer staples (+31.84%) and energy (+102.12%).2
Few articles about the "lost decade" mention this notable factoid: the Russell 2000 advanced 23.90% during the 2000s.2 Mutual funds that focused on buying undervalued small-company stocks gained an average of 8.3% annually in the 2000s.3
Outside America, developing stock markets shattered all expectations while the developed markets mirrored American performance. Look at the decade-long gains in key indices in some of the BRIC nations, as measured by CNBC.com: China, +72%; India, +249%; Brazil, +301%; Russia, +863%. Compare all that with the benchmark indices in Japan (-44%), France (-34%), Great Britain (-22%) and Germany (-14%) in the past decade.4 Emerging market mutual funds gained an average of 9.3% per year in the last ten years.3
Commodities. It was a decade of amazing gains in the broad commodities market. From the end of 1999 to the end of 2009, gold advanced 278.52%. How about silver and copper? Silver gained 208.91% and king copper rose 287.78%. Crude oil rose 210.00% during the 2000s.2
How great a decade was it for the commodities sector? Only one notable commodity posted a ten-year loss from 12/31/1999 to 12/31/2009. That was palladium, which retreated 8.98%. On the other hand, we know that 16 commodities gained 100% or more across the decade.2
The two biggest gainers during the 2000s were a pair of crops: sugar (+340.36%) and cocoa (+293.31%).2
Highs and lows. We are 10 years past the bursting of the tech bubble - March 10 will mark the 10th anniversary of the NASDAQ's all-time high of 5,132.50.5 And of course, a decade-defining geopolitical event rocked the markets 18 months later.
General Motors and Chrysler filed for bankruptcy protection in 2009; at the start of the decade, so did Enron - the company that Fortune Magazine ranked as "most innovative" each year from 1995-2000.6 In 2008, Lehman Brothers, Morgan Stanley, Goldman Sachs, Merrill Lynch, and Washington Mutual either folded, mutated, or were bought up while AIG, Freddie Mac and Fannie Mae were bailed out.
The Dow hit a new high of 11,723 in January 2000, a post-9/11 closing low of 7,286 in October 2002, and then ended 2003 at 10,453 (as the DJIA gained 25.32% that year while the dollar lost 14.67%). The Dow hit new peaks of 11,727 on October 3, 2006 and 14,164 on October 9, 2007. A close of 11,215 on July 2, 2008 officially marked the start of a bear market.7
From March 9, 2009 closing lows to the end of the year, the Dow shot up 59.28% and the S&P 500 advanced 64.83%.2 This led to some to entertain tantalizing thoughts about the birth of a new bull market. Or it is simply a cyclical bull in a secular bear? The jury is still out, as the saying goes; we can hope for the best.
What did we learn? The 2000s taught us lessons about irrational exuberance (companies that had never made a dime were probably not worth billions) and lessons about the value of diversifying your portfolio. We also learned lessons in perseverance - those who stayed invested have seen their portfolios make a strong recovery.
The 2000s put investors through some seemingly unimaginable financial headlines. It was a rare decade, an aberrant one in stock market history - for example, the Dow hadn't had a negative decade since the 1930s, and it had advanced 228.25% over the 1980s and 317.59% for the 1990s.8 Will we see it make a double- or triple-digit advance in the next ten years? We don't know. Past performance is no indicator of future success.
Citations
1money.cnn.com/quote/historical/historical.html?pg=hi&close_date=12%2F31%2F99&mode=add&symb=DJIA [1/16/09]
2 cnbc.com/id/34645043 [12/31/09]
3 articles.latimes.com/2009/dec/31/business/la-fi-stocks31-2009dec31?pg=3 [12/31/09]
4 cnbc.com/id/34643111 [12/31/09]
5 smartmoney.com/investing/economy/the-financial-decade-in-review/?page=2 [12/31/09]
6 smartmoney.com/investing/economy/the-financial-decade-in-review/?page=4 [12/31/09]
7 the-privateer.com/chart/dow-long.html [12/31/09]
8 cnbc.com/id/34619797 [12/29/09]
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
321 West Washington St., Suite 329
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.
Friday, January 29, 2010
Letter to Myself
An interesting financial planning idea that is making the rounds these days is also one of the simplest: a letter to yourself. More specifically, a letter from your future self to you, today.
Come again? Imagine yourself in five years, assuming everything has gone more or less as you hope it will. You're healthy, in good financial health and--well, you know your hopes much better than I do. The point is that the You-In-The-Future is writing a letter of thanks to the You-Today. Future You might thank Today You for exercising regularly, because Future You is fit and looks good. Future You might thank you for being thrifty and watching your budget, because in that future date, you're on track to retire comfortably--or you may even BE retired.
Future You might thank you for taking the time to smell the roses along the way, for maintaining close relationships with friends and family, for spending a little more time accomplishing goals (Writing a book? Starting a side business? Traveling to see relatives or the world?) instead of unproductive downtime in front of the TV.
Whatever it is, you are thanking yourself for taking these actions, and be specific about what you did. Then look over the letter, and know that these are all things which you will thank yourself for someday, make a commitment to do them, and save the letter.
Every week or two, take the letter out and take another look at it. Are you on course? Are you earning the thanks that Future You gave you?
The point here is that you want your future life to be as good as it can be--as full of fulfillment and happiness, joy and prosperity as possible, and your actions between now and then will--or will not--make that happen. The letter to yourself is a fantastically powerful reminder you that you're really counting on yourself to take care of yourself in the future.
Meanwhile, in between the times you spend with the letter, you can get to know a variety of Future Selves (You-Next-Week, You-Next-Year, You-Five-Years-In-The-Future), and begin to ask these future versions of you about decisions you make now. How much of the money you earn should be given to your future self for retirement? What would you, a week from now, like to have cleared off your desk? Would you like to have learned a new foreign language by this time next year? Are there things which are hard to do now, but which you will wish you had done? Chances are, you know what that person who will be you would really like you to be doing now, which lets you navigate through the complexities of your life with very clear vision.
And if you can do THAT, you'll be one of very few in a world where most of us are muddling through our days. You could be one of the few who arrives in the future with no regrets about how you spent the precious, irreplaceable hours of your life.
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
321 West Washington St., Suite 329
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.
Come again? Imagine yourself in five years, assuming everything has gone more or less as you hope it will. You're healthy, in good financial health and--well, you know your hopes much better than I do. The point is that the You-In-The-Future is writing a letter of thanks to the You-Today. Future You might thank Today You for exercising regularly, because Future You is fit and looks good. Future You might thank you for being thrifty and watching your budget, because in that future date, you're on track to retire comfortably--or you may even BE retired.
Future You might thank you for taking the time to smell the roses along the way, for maintaining close relationships with friends and family, for spending a little more time accomplishing goals (Writing a book? Starting a side business? Traveling to see relatives or the world?) instead of unproductive downtime in front of the TV.
Whatever it is, you are thanking yourself for taking these actions, and be specific about what you did. Then look over the letter, and know that these are all things which you will thank yourself for someday, make a commitment to do them, and save the letter.
Every week or two, take the letter out and take another look at it. Are you on course? Are you earning the thanks that Future You gave you?
The point here is that you want your future life to be as good as it can be--as full of fulfillment and happiness, joy and prosperity as possible, and your actions between now and then will--or will not--make that happen. The letter to yourself is a fantastically powerful reminder you that you're really counting on yourself to take care of yourself in the future.
Meanwhile, in between the times you spend with the letter, you can get to know a variety of Future Selves (You-Next-Week, You-Next-Year, You-Five-Years-In-The-Future), and begin to ask these future versions of you about decisions you make now. How much of the money you earn should be given to your future self for retirement? What would you, a week from now, like to have cleared off your desk? Would you like to have learned a new foreign language by this time next year? Are there things which are hard to do now, but which you will wish you had done? Chances are, you know what that person who will be you would really like you to be doing now, which lets you navigate through the complexities of your life with very clear vision.
And if you can do THAT, you'll be one of very few in a world where most of us are muddling through our days. You could be one of the few who arrives in the future with no regrets about how you spent the precious, irreplaceable hours of your life.
Sincerely,
William T. Morrissey, CFP®
Sound Financial Planning Inc.
wtmorrissey@soundfinancialplanning.net
Primary Office
321 West Washington St., Suite 329
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.
Monday, January 25, 2010
What's Going On
One of the most important jobs we do that you never see is reading. As you know, our lives are awash in a constant flood of information, and even we professionals sometimes struggle to make sense out of it. To make matters worse, the headlines often don't help us figure out what's going on.
For instance, is there still a threat of deflation, which was in the headlines at this time last year? Since May, the CPI has been +.1% (May), +.7% (June), flat (July), +.4% (August) +.2% (September), +.3% (October) and +.4% (November, the most recent statistic we have). For the most recent 12 months, consumer prices have risen 1.8%. This is in contrast to the 1.4% drop in consumer prices reported by the Bureau of Labor Statistics over the second half of 2008, when a lot of economists were talking nervously about a deflationary spiral. No headlines have declared this, but the deflation threat appears to be over; the question now is whether inflation will remain as mild as it has been or, as the economy recovers, will it take off?
Since you always hope to get more return on your investments than the inflation rate, are there any investments that look especially weak if, indeed, the threat of deflation is over? In an effort to avoid any losses, a lot of investors and institutions have parked their money in short-term investments; by one estimate, there is now about 90% as much money ($11.7 trillion) in money market accounts and short-term Treasuries, than in the Wilshire 5000 stocks ($13.1 trillion) currently.
But is this really avoiding losses? 3-month Treasuries are paying about 0.3%; 6-month issues now pay .16% and 12-month T-bonds are yielding .37%, which is well below the inflation rate. Every rise in the CPI means the value of their money is going down--which is something else we aren't reading about in the headlines. Money market funds, meanwhile, are at record lows.
Meanwhile, we've all been reading screaming headlines about debt problems in Dubai, one of the oil-rich countries on the Persian Gulf. But Dubai makes up just 0.1% of the global economy. What hasn't been reported is that, very quietly, the sovereign wealth funds in Qatar and Kuwait have been selling their stakes in U.S. companies, and raising capital. More recently, Saudi Arabia, Kuwait, Bahrain and Qatar are now creating their own petro-currency (http://www.ritholtz.com/blog/2009/12/persian-gulf-currency-union-and-the-forex-risk-to-nations-everywhere/ ), which will be called the "Gulfo," and are in the process of creating a regional central bank along the lines of Europe's monetary union.
Will the Gulf States Union (or whatever it is called) need to pump more oil in order to balance their fiscal ledgers and support their new currency? Does that mean oil prices will drop further--at least temporarily, as all these issues get sorted out?
There's one more subject that's getting a lot of headlines lately: unemployment. Recently, we've heard some rare good news, that fewer jobs are being lost now than a year or six months ago. What isn't being reported is that every month that jobs are lost puts America deeper into a hole that it will need to climb out of eventually.
How big is this hole? Has anybody tried to calculate it? Economist Paul Krugman recently suggested that with eight million jobs lost since the start of the recession, plus 100,000 new Americans moving into the work force every month, the economy would need to create an average of 300,000 new jobs a month in order to get to something close to full employment five years down the road. So if you see any number lower than 300,000 new jobs created, you'll know that this particular hole is getting deeper.
This makes it easier to interpret some of the forecasts that you may be reading, such as the recent study by the Bureau of Labor Statistics, which estimates that the economy will create 15.3 million new jobs in the next ten years. Do the math, and that comes out to about 125,000 a month.
None of this helps us predict the future, of course. But it does show that much of the information that we receive, and the way the information is presented, can be dis-informing (at worst) or (more often) take our attention off what's really going on in the world. There's a lot more to know than what the headlines are telling us.
Now, if you'll excuse me, I have to get back to reading...
Sincerely,
William T. Morrissey, CFP®
__________________________________________________________
Friends or family need a little extra help? To refer a client, call us and we will help you get your friends and family members on-board with our services. To learn more about the types of clients we serve, visit our website at www.SoundFinancialPlanning.net .
__________________________________________________________
Sound Financial Planning, Inc.
www.SoundFinancialPlanning.net
Primary Office
321 West Washington St., Suite 329
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.
For instance, is there still a threat of deflation, which was in the headlines at this time last year? Since May, the CPI has been +.1% (May), +.7% (June), flat (July), +.4% (August) +.2% (September), +.3% (October) and +.4% (November, the most recent statistic we have). For the most recent 12 months, consumer prices have risen 1.8%. This is in contrast to the 1.4% drop in consumer prices reported by the Bureau of Labor Statistics over the second half of 2008, when a lot of economists were talking nervously about a deflationary spiral. No headlines have declared this, but the deflation threat appears to be over; the question now is whether inflation will remain as mild as it has been or, as the economy recovers, will it take off?
Since you always hope to get more return on your investments than the inflation rate, are there any investments that look especially weak if, indeed, the threat of deflation is over? In an effort to avoid any losses, a lot of investors and institutions have parked their money in short-term investments; by one estimate, there is now about 90% as much money ($11.7 trillion) in money market accounts and short-term Treasuries, than in the Wilshire 5000 stocks ($13.1 trillion) currently.
But is this really avoiding losses? 3-month Treasuries are paying about 0.3%; 6-month issues now pay .16% and 12-month T-bonds are yielding .37%, which is well below the inflation rate. Every rise in the CPI means the value of their money is going down--which is something else we aren't reading about in the headlines. Money market funds, meanwhile, are at record lows.
Meanwhile, we've all been reading screaming headlines about debt problems in Dubai, one of the oil-rich countries on the Persian Gulf. But Dubai makes up just 0.1% of the global economy. What hasn't been reported is that, very quietly, the sovereign wealth funds in Qatar and Kuwait have been selling their stakes in U.S. companies, and raising capital. More recently, Saudi Arabia, Kuwait, Bahrain and Qatar are now creating their own petro-currency (http://www.ritholtz.com/blog/2009/12/persian-gulf-currency-union-and-the-forex-risk-to-nations-everywhere/ ), which will be called the "Gulfo," and are in the process of creating a regional central bank along the lines of Europe's monetary union.
Will the Gulf States Union (or whatever it is called) need to pump more oil in order to balance their fiscal ledgers and support their new currency? Does that mean oil prices will drop further--at least temporarily, as all these issues get sorted out?
There's one more subject that's getting a lot of headlines lately: unemployment. Recently, we've heard some rare good news, that fewer jobs are being lost now than a year or six months ago. What isn't being reported is that every month that jobs are lost puts America deeper into a hole that it will need to climb out of eventually.
How big is this hole? Has anybody tried to calculate it? Economist Paul Krugman recently suggested that with eight million jobs lost since the start of the recession, plus 100,000 new Americans moving into the work force every month, the economy would need to create an average of 300,000 new jobs a month in order to get to something close to full employment five years down the road. So if you see any number lower than 300,000 new jobs created, you'll know that this particular hole is getting deeper.
This makes it easier to interpret some of the forecasts that you may be reading, such as the recent study by the Bureau of Labor Statistics, which estimates that the economy will create 15.3 million new jobs in the next ten years. Do the math, and that comes out to about 125,000 a month.
None of this helps us predict the future, of course. But it does show that much of the information that we receive, and the way the information is presented, can be dis-informing (at worst) or (more often) take our attention off what's really going on in the world. There's a lot more to know than what the headlines are telling us.
Now, if you'll excuse me, I have to get back to reading...
Sincerely,
William T. Morrissey, CFP®
__________________________________________________________
Friends or family need a little extra help? To refer a client, call us and we will help you get your friends and family members on-board with our services. To learn more about the types of clients we serve, visit our website at www.SoundFinancialPlanning.net .
__________________________________________________________
Sound Financial Planning, Inc.
www.SoundFinancialPlanning.net
Primary Office
321 West Washington St., Suite 329
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.
A Murky Crystal Ball
It's a good thing that financial planners and advisors aren't paid to predict the future because, well, nobody seems to be doing a very good job of it lately. I hope you'll remember this as all the major financial magazines come out with their yearly "Here's what will happen in 2010" cover stories.
Reading through some back issues, we find that at this time two years ago, nobody, anywhere, was predicting a 4th quarter meltdown in the investment markets, or the global economy tottering on the edge of disaster. In fact, not a one of the prognosticators seems to have realized that the U.S. economy had already fallen into a recession.
If you read the magazine issues in early September, right before the markets suddenly went into a 400-point free-fall in two trading days (triggered, you probably remember, by the collapse of Lehman Brothers, the AIG bailout and the federal rescue of Fannie Mae and Freddie Mac), you realize that nobody had a clue that a storm was brewing on the horizon. The Wall Street Journal talked confidently about Lehman's efforts to secure a line of credit or divest some assets, and the consensus seemed to be that the damage from the burst housing bubble had been safely contained. Postmortem articles about the crisis show that the Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson, who both watch the economic numbers DAILY, were caught totally flat-footed.
Closer to home, in January of 2009, economists and pundits were talking about the possibility of a sustained market drop similar to the slow investment torture the Japanese have experienced since 1989. Kiplinger's magazine identified the people who had been most right in their 2008 predictions and asked them what they thought was going to happen in 2009. Not a one of them predicted what actually happened: a dramatic rise in stock prices (the S&P 500 touched bottom on March 6 with an intraday price of 666.79 and rose to over 1,100 currently), a sharply rising dollar and an end to the economic recession--what economists are now describing as a jobless recovery.
Here's what they actually said. David Tice, chief equity strategist for Federated Investors, told the magazine's readers that "The dollar will decline, and it's very possible that inflation will pick up. The S&P 500 index could easily fall to 450 or so. This will be a longer-term decline," he added, and gave the worst advice possible for investors over the next three quarters, saying that "Investors should be selling equities and conserving cash."
Bob Rodriguez and Tom Atteberry, of First Pacific Advisors, confidently predicted that: "The upturn won't come until 2010, and when it does, it will look very sluggish and lethargic."
Economist Nouriel Roubini told Kiplinger readers: "I expect that the recession will be very severe and that it won't be over before the end of 2009. I think there is a further 15% to 20% downside risk for global and U.S. stocks, and a further 15% to 20% downside risk for commodity prices. So 2009 will be a year of recession and deflation."
Peter Schiff, president of Euro Pacific Capital, missed the appreciation of the dollar, the dramatically low interest rates and the economic recovery--all in a couple of sentences. "The dollar is going to resume its fall," he said, "leading to a resurgence in the bull market in commodities. That will pierce the bubble in the bond market, causing interest rates to go up. So we're going to be in a depressionary environment, but with rising prices and rising interest rates. Our economy will be a mess for years and years to come."
The worst advice was being given right at the bottom in March, when global stock prices were about to reward patient investors with an amazing rally. Consider this evaluation from the March 5 issue of Business Week magazine:
All told, more than $10 trillion of stock market wealth has vanished, and with it the confidence that springs from financial security. "We are looking at a 60% to 70% chance that this bear market is not over," says Robert D. Arnott, chairman of Research Affiliates, a Pasadena (Calif.) firm that manages $25 billion.
The article went on to predict "more debt busts and government trial and error until things get set right again. That could mean two more years of bouncing around and then another six or so before the Dow is back above 14,000. Not long ago, such an outcome would have seemed unimaginably bleak. Given the other possibilities, it doesn't seem so bad now."
The hardest part about investing is controlling the natural urge to sell when the market has cratered, or to buy when the market is euphoric. But that's like going to the mall and waiting to buy until all the sales are over and prices have gone up, and then, as soon as the store has its next 25% off sale, going back and selling whatever you bought. Nobody would even think of doing that with their holiday gift purchases, but it's normal behavior in the investment markets.
The unhappy truth is that nobody can foresee the future, and the investment markets tend to be far less predictable than other areas of our lives. Like it or not, we venture blindly forth every day, control what we can control (investment costs, taxes and savings rates), and generally make more money in the upturns than we do in the downturns. Years ago, a pundit threw up his hands and said: "I don't know what the markets will do tomorrow, or next week, or next month.
There, finally, is a prediction I can endorse.
Sincerely,
William T. Morrissey, CFP®
___________________________________________________________
Friends or family need a little extra help? To refer a client, call us and we will help you get your friends and family members on-board with our services. To learn more about the types of clients we serve, visit our website at www.SoundFinancialPlanning.net .
___________________________________________________________
Sound Financial Planning, Inc.
www.SoundFinancialPlanning.net
Primary Office
321 West Washington St., Suite 329
Mount Vernon, WA 98273
Phone: (360) 336-6527
Secondary Office
650 Mullis St., Suite 101
Friday Harbor, WA 98250
(360) 378-3022
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Reading through some back issues, we find that at this time two years ago, nobody, anywhere, was predicting a 4th quarter meltdown in the investment markets, or the global economy tottering on the edge of disaster. In fact, not a one of the prognosticators seems to have realized that the U.S. economy had already fallen into a recession.
If you read the magazine issues in early September, right before the markets suddenly went into a 400-point free-fall in two trading days (triggered, you probably remember, by the collapse of Lehman Brothers, the AIG bailout and the federal rescue of Fannie Mae and Freddie Mac), you realize that nobody had a clue that a storm was brewing on the horizon. The Wall Street Journal talked confidently about Lehman's efforts to secure a line of credit or divest some assets, and the consensus seemed to be that the damage from the burst housing bubble had been safely contained. Postmortem articles about the crisis show that the Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson, who both watch the economic numbers DAILY, were caught totally flat-footed.
Closer to home, in January of 2009, economists and pundits were talking about the possibility of a sustained market drop similar to the slow investment torture the Japanese have experienced since 1989. Kiplinger's magazine identified the people who had been most right in their 2008 predictions and asked them what they thought was going to happen in 2009. Not a one of them predicted what actually happened: a dramatic rise in stock prices (the S&P 500 touched bottom on March 6 with an intraday price of 666.79 and rose to over 1,100 currently), a sharply rising dollar and an end to the economic recession--what economists are now describing as a jobless recovery.
Here's what they actually said. David Tice, chief equity strategist for Federated Investors, told the magazine's readers that "The dollar will decline, and it's very possible that inflation will pick up. The S&P 500 index could easily fall to 450 or so. This will be a longer-term decline," he added, and gave the worst advice possible for investors over the next three quarters, saying that "Investors should be selling equities and conserving cash."
Bob Rodriguez and Tom Atteberry, of First Pacific Advisors, confidently predicted that: "The upturn won't come until 2010, and when it does, it will look very sluggish and lethargic."
Economist Nouriel Roubini told Kiplinger readers: "I expect that the recession will be very severe and that it won't be over before the end of 2009. I think there is a further 15% to 20% downside risk for global and U.S. stocks, and a further 15% to 20% downside risk for commodity prices. So 2009 will be a year of recession and deflation."
Peter Schiff, president of Euro Pacific Capital, missed the appreciation of the dollar, the dramatically low interest rates and the economic recovery--all in a couple of sentences. "The dollar is going to resume its fall," he said, "leading to a resurgence in the bull market in commodities. That will pierce the bubble in the bond market, causing interest rates to go up. So we're going to be in a depressionary environment, but with rising prices and rising interest rates. Our economy will be a mess for years and years to come."
The worst advice was being given right at the bottom in March, when global stock prices were about to reward patient investors with an amazing rally. Consider this evaluation from the March 5 issue of Business Week magazine:
All told, more than $10 trillion of stock market wealth has vanished, and with it the confidence that springs from financial security. "We are looking at a 60% to 70% chance that this bear market is not over," says Robert D. Arnott, chairman of Research Affiliates, a Pasadena (Calif.) firm that manages $25 billion.
The article went on to predict "more debt busts and government trial and error until things get set right again. That could mean two more years of bouncing around and then another six or so before the Dow is back above 14,000. Not long ago, such an outcome would have seemed unimaginably bleak. Given the other possibilities, it doesn't seem so bad now."
The hardest part about investing is controlling the natural urge to sell when the market has cratered, or to buy when the market is euphoric. But that's like going to the mall and waiting to buy until all the sales are over and prices have gone up, and then, as soon as the store has its next 25% off sale, going back and selling whatever you bought. Nobody would even think of doing that with their holiday gift purchases, but it's normal behavior in the investment markets.
The unhappy truth is that nobody can foresee the future, and the investment markets tend to be far less predictable than other areas of our lives. Like it or not, we venture blindly forth every day, control what we can control (investment costs, taxes and savings rates), and generally make more money in the upturns than we do in the downturns. Years ago, a pundit threw up his hands and said: "I don't know what the markets will do tomorrow, or next week, or next month.
There, finally, is a prediction I can endorse.
Sincerely,
William T. Morrissey, CFP®
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Sound Financial Planning, Inc.
www.SoundFinancialPlanning.net
Primary Office
321 West Washington St., Suite 329
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.
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