April is financial literacy month. I believe that lack of financial knowledge is one of the most critical problems that our country faces. (more…)
Archive for the ‘pensions’ Category
Posted in Bonds, Books, debt, Diversification, financial planning, Inflation, pensions, Portfolio Investing 101, Retirement, Stock Investing, tagged college costs, Fees, fiduciary resposibility, financial literacy, saving on April 18, 2013 | Leave a Comment »
Posted in 401(k), Asset Allocation, Diversification, Long-term investing, Mutual Funds, pensions, Retirement, Risk, tagged glidepath, pension protection act, retirement plan participants, risk targets, Target Date Folios, Target Date Funds, target percentage, traditional target on January 29, 2013 | Leave a Comment »
The intent of target date strategies is to provide investors with fully-diversified portfolios that evolve appropriately as investors age. Target date funds have enjoyed enormous growth over recent years, not least because the Pension Protection Act of 2006 allows employers to direct retirement plan participants into these funds as the default investment option. Consultancy Casey Quirk projects that target date funds will hold almost half of all assets in 401(k) plans by 2020.
Target Date Folios are an alternative to traditional target date funds, launched on the Folio Investing platform in December of 2007. These portfolios now have more than five years of performance history. Prior to the design of the Folios, a detailed analysis of target date funds suggested that they could be considerably improved. The Folios were designed to provide investors with an enhanced target date solution. In this article, I will discuss the design and performance of the Folios and target date mutual funds over this tumultuous period. The risk and return characteristics of these funds and Folios provides insight into the effectiveness of different approaches to portfolio design and diversification. (more…)
Posted in 401(k), Asset Allocation, Bonds, ETFs, pensions, Retirement, retirement income, retirement planning, Risk, Taxes, Uncategorized, tagged Bill Gross, fixed income, folios, high yield bonds, income exempt, interest rates, Meredith Whitney, muni, Municipal Bonds, public pensions, QE, Quantitative Easing, Target Date Folios, Treasury bonds on November 19, 2012 | Leave a Comment »
Municipal bonds are issued by states and municipalities and typically have tax advantages relative to other fixed income assets. In general, income from muni bonds is tax exempt at the federal level and at the state level for investors living in the issuing state. Municipal bonds have historically been favored by investors in high tax brackets who, of course, derive more benefit from the tax exemptions by virtue of being in the highest tax brackets. (more…)
Posted in 401(k), Asset Allocation, financial planning, Long-term investing, pension plans, pensions, Portfolio Investing 101, Retirement, retirement planning, tagged 457(b), baby boomers, economy, household income, IRA, presidential election season, retirees, retirement research, Savings, traditional pensions, underemployment, unemployment on September 21, 2012 | 10 Comments »
We Are In Trouble: Part One of Our Special Five Part Series
As the presidential election season of 2012 has gotten underway, there is a massive issue that has gotten very little attention: how Americans will sustain themselves in retirement. In 2010, there were 40 million Americans over the age of 65. By 2030, that number is expected to rise to 70 million, which represents 20% of the total population. At the same time, we have moved from a workforce with traditional pensions to one in which each person chooses how much to save and how to invest that money.
Only 42% of American private-sector workers between ages 25 and 64 have any type of retirement plan in their current job. The majority of Americans (67%) who have access to a pension plan have only self-directed accounts such as 401(k)’s and similar accounts (such as 457(b) plans which cover those who work at non-profits or who are employed by the state or local government organizations). A large number of Americans also have IRAs. We refer to these types of retirement plans as Defined Contribution (DC) plans as opposed to Defined Benefit (DB) plans, the traditional pensions that used to be the norm. (more…)
Posted in 401(k), Active Investing, Asset Allocation, Behavioral Finance, debt, Diversification, Dividends, ETFs, financial planning, Inflation, Investors, Leverage, Long-term investing, Low Cost Investing, Market Outlook, Markets, Passive Investing, pensions, Portfolio Investing 101, Retirement, retirement income, retirement planning, Risk, Stock Investing, Uncategorized, Volatility, Wealth on August 3, 2012 | 4 Comments »
Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.
Barry Ritholz (of The Big Picture and a Sunday Business columnist at The Washington Post) recently contributed Investors’ 10 most common mistakes to The Washington Post Business Section quarterly investing section. It’s a commentary that he has been working on for a while — the ten topics are listed with links to longer discussions of each common mistake here. I created my own investing “checklist” (here) in response to Barry’s original list. For yet one more iteration of the theme, I offer my list of Investors’ 10 Most Common Behavioral Biases. There are a number of others, of course, and more will continue to be uncovered. But I think that these are the key ones. (more…)
Posted in 401(k), Active Investing, Asset Allocation, Diversification, financial planning, Income Investing, Long-term investing, Low Cost Investing, Market Outlook, Market Timing, pension plans, pensions, Retirement, retirement income, retirement planning, Risk, Stock Investing, Uncategorized, Volatility, Wealth, tagged Calpers, IRA, mortgage, pensions, retirement on July 31, 2012 | 8 Comments »
Last week, we posted an article from Michael Lewitt, Vice President and Portfolio Manager at Cumberland Advisors called “The Pension Dilemma” that talked about how America’s largest pension fund, the California Public Employees Retirement Systems (CALPERS) reported an abysmal 1% return on its investments for the past year (ending June 30, 2012).
CALPERS has been in the news lately for several reasons:
- The California state pension is a bellwether for other state-run retirement systems across the U.S. that are also forced to face one of the most challenging periods in history: low interest rates, volatile markets and slow economic growth.
- CALPERS missed their own internal targets by more than 7.2% and then blamed their underperformance partly on picks made by individual investment managers (which CALPERS declined to name).
- The CALPERS underperformance has shaken the confidence that many investors have in their own pension funds.
What Does This Means for the Average Investor?
Retirement planning is a passion for us here at the Portfolioist. Yes, go ahead and laugh at the use of the word “passion” if you must—but that’s how we truly feel—especially in these turbulent economic times. (more…)
Posted in Asset Allocation, Behavioral Finance, Diversification, Income Investing, Inflation, Investors, Leverage, Long-term investing, Market Outlook, Market Timing, pension plans, pensions, Retirement, retirement income, retirement planning, Risk, Stock Investing, Uncategorized, Volatility, Wealth, tagged Calpers, cumberland advisors, economic turbulence, pension plans, recovery, retirement on July 23, 2012 | 2 Comments »
Guest Post by Contributing Editor, Michael Lewitt, Vice President and Portfolio Manager, Cumberland Advisors. We thought this was an interesting article and thought our readers would too. Enjoy.
America’s largest pension fund, the California Public Employees Retirement System (CALPERS), reported a 1% return on its investments for the 12 months that ended June 30, 2012. This disappointing return fell woefully short of the plan’s target return of 7.5%. (more…)
Posted in Uncategorized, Markets, Retirement, Wealth, Investors, Portfolio Investing 101, Behavioral Finance, Market Timing, Stock Investing, Market Outlook, Financial Advisors, pensions, pension plans, retirement income, retirement planning, tagged 2012 Retirement Confidence Survey, ERBI. retirement on June 1, 2012 | 2 Comments »
Guest post by Contributing Editor, Robert P. Seawright, Chief Investment and Information Officer for Madison Avenue Securities.
Psychologist Walter Mischel’s famous 1972 marshmallow experiment, was designed to study children’s ability to defer gratification. In the actual experiment, the researchers analyzed how long each child resisted the temptation to eat a marshmallow placed in front of them in order to obtain a second marshmallow later and whether or not doing so was correlated with future success. The kids’ struggles to hold out for the extra marshmallow is poignant and hits home with all of us (watch kids re-create the experiment in this video).
Over 600 children who took part in the original experiment. A small minority ate the marshmallow immediately. Of those who attempted to wait, less than one-third deferred gratification long enough to get the second marshmallow. The others struggled to resist temptation and held out for an average of less than three minutes. Any of us struggling to diet or just to eat right will surely relate. For most of us, a bird in the hand is better than two in the bush, no matter how likely we are to acquire the two later.
As it turned out, those children who waited and got the second marshmallow did better later in life. A follow-up study in 1988 showed that (more…)
Posted in Behavioral Finance, Bonds, book review, Commodities, Corporate Governance, debt, Diversification, financial planning, Global Investing, Leverage, Long-term investing, Market Outlook, Market Timing, pension plans, pensions, Personalization, retirement planning, Risk, Stock Investing, Uncategorized, Volatility, Wealth, tagged China, energy, energy policy, Euro, Europe, european debt, FDIC, France, Iran, Italy, Obama, oil, Persian Gulf, Spain on May 2, 2012 | 1 Comment »
Guest Post by Contributing Editor, David Kotok, Chairman and Chief Investment Officer, Cumberland Advisors.
How do we avoid walking into a “left hook” in the markets? That was the discussion this week during a client review.
“Can’t you see them coming and avoid them?” he asked. Well maybe some folks can, but the issue of investing with possible shocks as an outcome is a very difficult one.
“Do you position for the worst outcome?” If yes, you would never invest in anything.
“Is there a middle road?” We think so and that is why we use a combination of ETFs and bonds and recommend diversifying risk among several asset classes.
Below this introduction is a partial list of upcoming potential shocks. As readers will note, we can see the potential shock relatively clearly. Scott MacDonald of MC Asset Management calls them “dangerous seas ahead.” His maritime metaphors sequence the Titanic and Lusitania. Lehman-AIG and the meltdown were the Titanic. “This leaves us to wonder if the U.S. economy is not like the Lusitania, operating in a high risk environment, but felt to be safe from prowling German U-boats in the North Atlantic.” ponders Scott.
Of course, we cannot know the result of a potential risk before it happens. We cannot know the outcome and the policy shift. Therefore, the anticipatory period preceding the risk and the aftermath (if as and when the risk is realized) are not symmetrical. In other words, you are investing in asymmetry. Knowing this in advance allows for an asset-allocation rebalancing as the circumstances and probabilities change. In other words: reassess, reassess, reassess risks and rebalance, rebalance, rebalance.
Some of the discussion in our new book addresses these types of asymmetries. See Amazon.com, From Bear to Bull with ETFs or visit Cumberland’s website. In the book, we actually show the comparison with the ten sectors of the S&P 500 index and the relative performance of each sector in the bear and in the subsequent bull market.
Now let’s get to some potential shocks and comment about them:
- Possible Shock Number 1: The Fed will cease “Operation Twist” on June 30. They confirmed the policy shift as recently as this last meeting and Bernanke’s statement. What will a twist cessation bring to bond yields? Will it change home mortgage interest rates? Delay a housing market recovery? Alter the steepness of the yield curve? Or the flatness of the yield curve? What happens to bond credit spreads? Pricing of repo collateral? Maybe the whole thing will pass as a non-event. Nobody knows.
- Possible Shock Number 2:The so-called “fiscal cliff” is approaching at year-end. Strategas’ Dan Clifton and Jason Trennert have hammered this theme. Their summary identifies three elements:“… roughly one-third of the entire tax code expiring at the end of the year, the spending sequester beginning on January 2, a debt ceiling increase needed in the six weeks after the election and before the end of the year.”How much will markets anticipate these outcomes? How deep is fiscal drag? Is there a fiscal drag? Is Ricardian equivalence dead? How large is the policy shift danger to our country from the Congress? From this President? From next year’s President (re-elected or new)? All of these tax-spend-borrow outcomes are probable in the present-day realm of American politics. That puts our American destiny in the hands of a class of people who are very unpopular and despised by the majority of American citizens. Our politicians have become the scurrilous, scatological scoundrels that we elect and send to Washington. (We include both political parties in this opprobrium). Jack Bittner asks if we should limit all pols to a single term.
- Possible Shock Number 3: The Bank of Japan has leaped to the top of the G4 central banks when it comes to balance-sheet expansion. BOJ announced an increase in the rate of asset purchases and an extension of the duration of the Japanese sovereign debt it will buy. Initial market reaction was that this plan is “not enough.” BOJ is trying to get Japan’s inflation rate UP! They have not succeeded in the past. Is this time different? What will be the impact on the foreign exchange markets? Will the yen weaken? If so, which currency will strengthen? We have written in the past that FX market adjustments are quite distorted when the G4 central banks are all maintaining their policy interest rates near zero.
- Possible Shock Number 4:The FDIC limit on non-interest-bearing demand deposit insurance is scheduled to revert back to the pre-crisis level at the end of this year. We quote from the FDIC website:“From December 31, 2010 through December 31, 2012, at all FDIC-insured institutions, deposits held in non-interest-bearing transaction accounts will be fully insured regardless of the amount in the account. For more information, see the FDIC’s comprehensive guide, Your Insured Deposits.”What will be the impact in the money-market end of the yield curve? Will there be an extension of the termination date if markets begin to tighten? What will happen to repo rates? Repo collateral pricing? How closely is the Fed watching this development, since the Fed has been providing the market with more repo collateral (T-bills) through its Operation Twist? Is there a relationship, or will there be one? Can the banking system withstand larger withdrawals of zero-interest deposits if corporate agents deem deposits to be insecure without FDIC insurance coverage? (Note that the FDIC just closed five more banks this week. In the case of the Bank of Eastern Shore, Cambridge, Maryland, the FDIC has not found a buyer or merger partner, and the uninsured depositors are at risk of loss. Readers who are still worried about the safety of their bank deposits may check the FDIC website for the current rules).
- Possible Shock Number 5: Watch the price and futures prices of Brent crude. Many are sanguine about oil and energy pricing and the gasoline price. We are not. Libyan production is not coming back in a hurry (hat tip to Barclays for superb research on the risk of Libyan civil war). Geopolitical risk is high in the Persian Gulf (Iran) and in Nigeria (see the developing news story of turmoil in this important oil-producing country). Worldwide demand for oil inexorably rises. U.S. energy policy still fails to accelerate our move to energy independence. Despite Energy Secretary Salazar’s protestations, the fact is that the Obama Administration has a failed energy policy and continues to pursue it. We do not drill, we do not encourage the use of natural gas in an accelerated and proactive way, and we do stymie new production and exploration. We do have pipelines running in the wrong directions, and we do have distorted domestic oil pricing because of excess inventories in Cushing, Oklahoma. At Cumberland, we remain attentive to this sector even as the market has become sanguine about it. We continue to hold our oil-energy-exploration and oil-service positions. The range of forecasts of the oil price is a mile wide. We have seen a low of $40 a barrel within two years and a high of $175. We lean to the higher price, not the lower one.
Reassess and Rebalance
I will stop now with the list of possible shocks and leave it to the reader’s imagination to complete this compendium with thoughts about Europe or China slowing or future inflation risk. Here is how we see the portfolio management decision. Remember this is today. It could change tomorrow, next week, next month or next year. The operative structure is reassess, reassess, reassess, rebalance, rebalance, rebalance.
Cumberland continues its fully invested approach using ETFs. We have been in that mode since the bear-market bottom of October 3. We think the bull market that started on October 3 is only half over as to price change and only one-third to one-fourth over as to time. Of course, any shock could derail this forecast. Our bond portfolios are slowly repositioning to a hedged or defensive mode. We have time. The process of moving from the present very low interest rates will require years and be volatile but gradual. Interest rates cannot go below zero. To get them above zero and into a more normal relationship, the G4 central banks must neutralize over four trillion dollars equivalent of excess reserves. Collectively they are still enlarging this position and are a long way from extraction from it.
Two items are recommended:
- Read “Death of a Theory,” by St. Louis Fed president James Bullard, in the March-April/2012 monthly bulletin of that bank.
- For analysis of last year’s bear market and the ensuing bull market, readers may wish to consult our new book, From Bear to Bull with ETFs. We thank readers for their responses so far. For the first time in our life, we have had a three-week-running best-selling book. All links to book distribution will be constantly updated on Cumberland’s website.
(Disclosure: The views and opinions expressed here are those of the author(s) and do not necessarily reflect the views of the Portfolioist. Cumberland Advisors is unaffiliated with FOLIOfn Investments.)
About David R. Kotok:
David R. Kotok co-founded Cumberland Advisors in 1973 and has been its Chief Investment Officer since inception. Mr. Kotok’s articles and financial commentary have appeared in The New York Times, The Wall Street Journal, Barron’s, and other publications. He is a frequent guest on financial television including Bloomberg Television, CNBC and Fox. He also contributes to radio networks such as NPR and media organizations like Bloomberg Radio, among others.
- Understanding France’s Credit Rating Downgrade
- Sell in May? 9 Trillion Reasons to Say “No”
- Chasing Yield: Is the Flow into Munis and High Yield Bonds Rational?
Folio Investing The brokerage with a better way. Securities products and services offered through FOLIOfn Investments, Inc. Member FINRA/SIPC.
Posted in Active Investing, debt, Diversification, financial planning, Investors, Leverage, Long-term investing, Market Outlook, Market Timing, Markets, mortgages, Mutual Funds, pension plans, pensions, Real Estate, Retirement, retirement income, retirement planning, Risk, Stock Investing, Uncategorized, Volatility, Wealth, tagged budget, credit card debt, financial literacy, housing bubble, student loan debt on April 24, 2012 | 3 Comments »
April is Financial Literacy Month.
All month long, I have been trying to think of how to write a post that can express the depth of my conviction that the lack of financial knowledge is at the core of some of the biggest problems that we, as individuals (and as a nation) are facing.
There are so many areas in which we can see the enormous problems created by a lack of financial literacy that, frankly, I don’t even know where to start. In fact, the Wall Street Journal just ran an article about college graduates who have little hope of ever being financially secure given their enormous levels of student loan debt. (Even President Obama isn’t exempt: he admitted today that he paid off his student loans just 8 years ago.)
This is a big problem. (more…)