Send in the Clowns

July 7, 2011

Financial Planning ran a recent article discussing the brutally honest market view of Greggory Warren, a senior analyst at Morningstar. To wit:

Warren said the movement into bonds by investors was beginning to resemble the attitude towards real estate in the last decade. “You have people saying now that ‘bonds don’t go down’ just like they used to say about housing.”

Asked what he thought it would take to change this attitude, noting that the price of bonds fall as yields rise, he summed it up by saying, “a rise in interest rates.”

In other words, Morningstar is pointing out that the attitude of bond investors will change only after they get hammered in bonds. Comical (or sad, depending on how you look at it) as it is, that’s the retail investor experience with pretty much every asset class.

They love it as long as it’s working, and hate it after they’ve been drilled—there’s rarely any nuanced or logical middle ground. How about considering a systematic investment process driven by relative strength, instead of waiting until you’ve taken one in the chops?

Waiting to get punched

Source: www.areyougame.com

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Our National Pastime: Tinkering With CPI

July 7, 2011

The WSJ reports on the most recent sign that retirement planning is increasingly up to the individual:

One proposal under serious consideration would slow the way tax, spending and entitlement programs shift with inflation each year. The switch to using a different measure of inflation, known as a “chained” consumer-price index, is endorsed by many conservative and liberal groups who believe that inflation estimates in the government’s budget are overstated and lead the government to expand spending programs and adjust tax brackets too quickly, resulting in more spending and less revenue.

The Moment of Truth Project, a group established to help push into law last year’s White House deficit-reduction-panel proposal, projected that establishing a chained CPI measure would save roughly $300 billion over 10 years.

The biggest savings—an estimated $112 billion—would be from slowing the growth in the cost-of-living adjustments for Social Security beneficiaries. Another $33 billion would be saved by reducing cost-of-living adjustments for other federal programs. The Moment of Truth Project estimated that a chained CPI “would cause tax-bracket thresholds and other parameters to grow more slowly and raise an extra $87 billion” in revenue over 10 years. (my emphasis)

Tinkering with the CPI calculation has become a national pastime. Let’s just hope that Americans adjust their savings rates accordingly…

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The Three Biggest Drivers of Retirement Savings Success

July 7, 2011

Smart Money has an excellent article laying it all out. The data comes from a study of 3,000 workers by Putnam Investments. What they found is that behaviors matter more than anything else. To get right down to it, here are the three behaviors that brought the greatest success:

1. Employing a consistent, long-term savings and investing strategy.

2. Working with a financial adviser.

3. Saving money in your workplace retirement plan.

Having a consistent savings strategy was critical. And it truly was the behavior that was most important. From Smart Money:

The people who seemed most able to replace their current income in retirement – those who were on track to replace 100% or more of their current t income — and the people who seemed least able – those who were on track to replace less than 45% — had the same annual mean household income, $93,000. “A clear difference-maker appears to be behavior around savings,” not income, the survey concludes.

Having a good investing strategy like relative strength is important, but no investing strategy will get you to retirement successfully if you have no savings to invest. Successful savers were likely to have an automated savings plan, were likely to contribute heavily to their 401ks, and got help from a financial advisor to make sure they were on track.

I think one of the big values that a financial advisor can provide—besides helping clients select a reasonable investment strategy and discouraging them from emotional asset allocation—is to remind clients to save. And guess what? These behaviors are critical whether you are talking about retirement capital, or any other kind of capital. Savings is foundational for investment success.

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Fund Flows

July 7, 2011

The Investment Company Institute is the national association of U.S. investment companies, including mutual funds, closed-end funds, exchange-traded funds (ETFs), and unit investment trusts (UITs). Members of ICI manage total assets of $11.82 trillion and serve nearly 90 million shareholders. Flow estimates are derived from data collected covering more than 95 percent of industry assets and are adjusted to represent industry totals.

Retail mutual fund investors continue to pull the most money from domestic equities—the asset class with the best YTD performance.

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