Tag Archives: statistics

What’s Your Risk Number?

risk

Defining how much risk someone is willing to take can be difficult.  But in the investment world it’s critical.

Fear of risk keeps a lot of people away from investing their money, leaving them at the mercy of the banks and the people at the Federal Reserve.  The Fed has kept interest rates near zero for years, hoping that low rates will cause a rebound in the economy.  The downside of this policy is that traditional savings methods (saving accounts, CDs, buy & hold Treasuries) yield almost no growth.

Investors who are unsure of their risk tolerance and those who completely misjudge it are never quite sure if they are properly invested.  Fearing losses, they may put too much of their funds into “safe” investments, passing up chances to grow their money at more reasonable rates.  Then, fearing that they’ll miss all the upside potential, they get back into more “risky” investments and wind up investing too aggressively.  Then when the markets pull back, they end up pulling the plug, selling at market bottoms, locking in horrible losses, and sitting out the next market recovery until the market “feels safe” again to reinvest near the top and repeating the cycle.

There is a new tool available that help people define their personal “risk number.”

What is your risk number?

Your risk number defines how much risk you are prepared to take by walking you through several market scenarios, asking you to select which scenarios you are more comfortable with.     Let’s say that you have a $100,000 portfolio and in one scenario it could decline to $80,000 in a Bear Market or grow to $130,000 in a Bull Market, in another scenario it could decline to $70,000 or grow to $140,000, and in the third scenario it could decline to $90,000 or grow to $110,000.  Based on your responses, to the various scenarios, the system will generate your risk number.

How can you use that information?

If you are already an investor, you can determine whether you are taking an appropriate level of risk in your portfolio.  If the risk in your portfolio is much greater than your risk number, you can adjust your portfolio to become more conservative.  On the other hand, if you are more risk tolerant and you find that your portfolio is invested too conservatively, you can make adjustments to become less conservative.

Finding your risk number allows you to align your portfolio with your risk tolerance and achieve your personal financial goals.

To find out what your risk number is, click here .

 

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Diversification and Emerging Markets

A well-diversified portfolio typically includes emerging markets as one of its components.  “Emerging markets” is a generic term to identify those countries whose economies are developed, but still smaller than those of the world’s superpowers (i.e., USA, Europe, Japan).

To professional investors, a well-diversified portfolio includes many asset classes, not just the most obvious: U.S. Stocks (the S&P 500) and a U.S. bond fund.

The following illustration is a great illustration of the relative performance of some of the major asset classes.

callan-periodic-table-of-investment-returns

Here we have ten key indices ranked by performance over a 20-year period.  The best-performing index for each year is at the top of each column, and the worst is at the bottom.

It is natural for investors to want to own the stock, or the asset class that is currently “hot.”  It’s called the Bandwagon Effect and it’s one of the reasons that the average investor typically underperforms.  The top performer in any one year isn’t always the best performer the next year.

A successful investment strategy is to:

  • Maintain a portfolio diversified among asset classes,
  • Stick to an appropriate asset allocation for your particular goals and objectives,
  • Rebalance your portfolio once or twice a year to keep your asset allocation in line, essentially forcing you to sell what’s become expensive and buy what’s become cheap.

In other words, re-balance your portfolio regularly and you will benefit from the fact that some assets become cheap and provide buying opportunities and some become expensive and we should take some profits.

Which brings us to emerging markets, which have been a drag on the performance of diversified portfolios for several years.

“It was a summer of love for investment in emerging markets,” according to the latest MSCI Research Spotlight.  For example, Brazil, Taiwan, South Africa and India have all been big winners, MSCI said.

The MSCI Emerging Markets Index ended August up for the year 15 percent compared to a loss of 20 percent the prior year.

“We are seeing very strong performance,” Martin Small, head of U.S. i-Shares BlackRock, told the conference.

Emerging market equities “have outperformed the S&P so far this year by more than 800 basis points and the broader universe of developed markets by almost 1,000 basis points,” according to the October BlackRock report, “Is the Rally in Emerging Markets Sustainable?” The report said EM outperformance “is likely to continue into 2017.”

For investors who have included emerging markets in their portfolios, their patience and discipline is being rewarded this year.  For those who want to have a portfolio that’s properly diversified but don’t have the expertise to do it themselves, give us a call.

 

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The Public Pension Crisis

Government workers at all levels are likely to have pension plans but there is a big question about the plans’ ability to pay.

According to the Bureau of Labor Statistics (BLS), 92% percent of full-time government employees like teachers and police officers are eligible for pensions, known as “defined benefit plans.”

According to the BLS about 22% of workers in the private sector have pensions, down from 42% in 1990.  In the private sector, retirement plans are much more likely to be 401(k) plans, known as “defined contribution plans.”  Part of the reason for this is that some large companies, like General Motors, accrued huge pension liabilities over the years that they were unable to pay.

Since the Federal Government can print money, federal employees are not worried.  However, states and municipalities depend on their tax base and can’t print money.  That’s where the problem comes in.  Some estimates claim the unfunded liability of public pension plans exceeded $3 trillion dollars.

According to Governing, the city of Chicago’s has an unfunded pension liability of almost $20,000 per capita.  Other cities are somewhat better off, but no big city has a fully funded pension account.  Dallas and Denver, for example are on the hook for between $8,000 and $9,000 per resident.  It’s difficult to even measure the amount of indebtedness because political leaders really don’t want to discuss it.

The problem has been exacerbated by rate-of-return assumptions that are unrealistic.  Most pension funds assume that their assets will grow at rates of seven to eight percent per year indefinitely, a virtual impossibility in this age of low interest rates and sluggish growth.

What does that mean for public employees?   They may want to cast a wary eye on Puerto Rico and some cities in California who have gone into default.  As a wise man once said, “something that can’t go on forever, won’t.”  A little planning ahead won’t hurt.

Whether you are a public employee or work in the private sector we welcome your inquiries.

 

 

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Inflation Ready to Rise

Brian Wesbury is one of our favorite economists and market commentators.  One of the key indicators the Federal Reserve is watching is the rate of inflation.  The Fed wants the “core” inflation rate to be 2%.  We are not in favor of any inflation at all, but we are not the Federal Reserve so it’s worth looking at the numbers they are looking at.

Wesbury:

The consumer price index is up only 1.1% in the past year. The Fed’s preferred measure of inflation – for personal consumption expenditures, or PCE – is up 1.0%. The US doesn’t face deflation, but the overall inflation statistics are, and have remained, low.

But the money supply is accelerating, the jobs market looks very tight, and underneath the calm exterior, there are some green shoots of inflationary pressure.

The “core” measures of inflation, which exclude volatile food and energy prices, are not nearly as contained as overall measures. And before you say everyone has to eat and drive, realize that both food an energy prices are volatile and global in nature. They don’t always reveal true underlying price pressures.

The ‘core” CPI is up 2.3% in the past year, while the “core” PCE index is up 1.7%. In other words, a drop in food and energy prices has been masking underlying inflation that is already at or near the Fed’s 2% target. Energy prices have stabilized and food prices will rise again. As a result, soon, overall inflation measures are going to be running higher than the Fed’s target.

Housing costs are up 3.4% in the past year and medical care costs are up 3.4%.

Although some (usually Keynesian) analysts are waiting for much higher growth in wages before they fear rising inflation, the fact is that wage growth is already accelerating. Average hourly earnings are up 2.6% in the past year versus a 2.0% gain only two years ago. Moreover, as a paper earlier this year from the San Francisco Fed pointed out, this acceleration is happening in spite of the retirement of relatively high-wage Baby Boomers and the re-entry into the labor force of workers with below-average skills.

But we don’t think wages cause inflation – money does. Inflation is too much money chasing too few goods. The Fed has held short-term interest rates at artificially low levels for the past several years while it’s expanded its balance sheet to unprecedented levels. Monetary policy has been loose.

… M2 has expanded at an 8.6% annualized rate. More money brings more inflation.

None of this means hyperinflation is finally on its way. In the past, inflation has taken time to build, leaving room for the Fed to respond by shrinking its balance sheet and getting back to a more normal monetary policy.

In the meantime, this will be the last year in a long while, where we see inflation below the Fed’s 2% target. Look for both higher inflation and interest rates in the years ahead.

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Slow and steady wins the race

Tortoise-and-the-Hare

 

We have all heard Aesop’s Fable about the race between the tortoise and the hare.  The hare, convinced that he was much faster than the tortoise, took time out for a meal and a nap.   When he woke up he realized his mistake but the tortoise crossed the finish line first.

It seems that this fable is especially true about how people grow rich when investing.   There are some spectacularly wealth people who got that way virtually over night – we have all read about them – but the vast majority of the “High Net Worth” (HNW) people –  those with at least $3 million in investable assets – did it the tortoise way.

The interesting thing about these HNW people is that they rose from the poor and the middle class; they did not inherit their wealth.

A study by Bank of America and U.S. Trust found that 77% – more than three quarters – of their clients grew their wealth slowly.  83% said that they grew rich by making small wins rather than taking large risks.  They grew their wealth by careful investing and avoiding major losses.

In our practice we have met quite a few people who managed to turn modest incomes into multi-million dollar portfolios.  We have also spoken with people who took big investment risks only to fail, and have to continue to work long after they planned to retire.

It’s up to each one of us to decide what race we wish to run.  But keep in mind that the odds favor the tortoise over the hare.  And if you have a problem with the slow-but-steady approach to wealth, get a good RIA who will guide you.

 

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Before the Bell 4/8/2016

Markets at a Glance

Major Stock Indexes

(Yesterday’s Close)

8:56 AM EDT 4/8/2016

Last Change % CHG
DJIA 17541.96 -174.09 -0.98%
Nasdaq 4848.37 -72.35 -1.47%
S&P 500 2041.91 -24.75 -1.20%
Russell 2000 1092.79 -16.03 -1.45%
Global Dow 2278.87 11.68 0.52%
Japan: Nikkei 225 15821.52 71.68 0.46%
Stoxx Europe 600 332.18 4.08 1.24%
UK: FTSE 100 6193.97 57.08 0.93%

Currencies

8:56 AM EDT 4/8/2016

last(mid) change
Euro (EUR/USD) 1.1360 -0.0019
Yen (USD/JPY) 108.70 0.49
Pound (GBP/USD) 1.4084 0.0028
Australia $ (AUD/USD) 0.7548 0.0042
Swiss Franc (USD/CHF) 0.9569 0.0011
WSJ Dollar Index 86.44 -0.09

Futures

8:46 AM EDT 4/8/2016

last change % chg
Crude Oil 39.12 1.86 4.99%
Brent Crude 41.24 1.81 4.59%
Gold 1234.5 -3.0 -0.24%
Silver 15.190 0.032 0.21%
E-mini DJIA 17573 115 0.66%
E-mini S&P 500 2050.50 15.50 0.76%
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Stocks, Bonds, Currencies and Commodities at the End of the First Quarter

Markets at a Glance

Major Stock Indexes

9:22 AM EDT 4/1/2016

Last Change % CHG
DJIA 17685.09 -31.57 -0.18%
Nasdaq 4869.85 0.55 0.01%
S&P 500 2059.74 -4.21 -0.20%
Russell 2000 1114.03 3.59 0.32%
Global Dow 2285.09 -29.76 -1.29%
Japan: Nikkei 225 16164.16 -594.51 -3.55%
Stoxx Europe 600 329.64 -7.90 -2.34%
UK: FTSE 100 6086.65 -88.25 -1.43%

Currencies

9:22 AM EDT 4/1/2016

last(mid) change
Euro (EUR/USD) 1.1379 -0.0002
Yen (USD/JPY) 112.04 -0.54
Pound (GBP/USD) 1.4210 -0.0150
Australia $ (AUD/USD) 0.7621 -0.0036
Swiss Franc (USD/CHF) 0.9607 -0.0010
WSJ Dollar Index 86.79 0.21

Futures

9:12 AM EDT 4/1/2016

last change % chg
Crude Oil 36.99 -1.35 -3.52%
Brent Crude 38.81 -1.52 -3.77%
Gold 1219.9 -15.7 -1.27%
Silver 14.980 -0.484 -3.13%
E-mini DJIA 17486 -109 -0.62%
E-mini S&P 500 2038.25 -13.25 -0.65%
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Global Stocks Lower After Brussels Explosions

Major Stock Indexes

4:09 PM EDT 3/22/2016

Last Change % CHG
DJIA 17582.57 -41.30 -0.23%
Nasdaq 4821.66 12.79 0.27%
S&P 500 2049.80 -1.80 -0.09%
Russell 2000 1096.95 -1.63 -0.15%
Global Dow 2315.94 -7.42 -0.32%
Japan: Nikkei 225 17048.55 323.74 1.94%
Stoxx Europe 600 340.30 -0.52 -0.15%
UK: FTSE 100 6192.74 8.16 0.13%

 

Currencies

4:09 PM EDT 3/22/2016

last(mid) change
Euro (EUR/USD) 1.1224 -0.0018
Yen (USD/JPY) 112.28 0.33
Pound (GBP/USD) 1.4214 -0.0154
Australia $ (AUD/USD) 0.7623 0.0045
Swiss Franc (USD/CHF) 0.9724 0.0025
WSJ Dollar Index 87.26 0.10

Futures

3:59 PM EDT 3/22/2016

last change % chg
Crude Oil 41.48 -0.04 -0.10%
Brent Crude 42.54 0.31 0.73%
Gold 1248.5 4.3 0.35%
Silver 15.895 0.048 0.30%
E-mini DJIA 17497 -31 -0.18%
E-mini S&P 500 2041.75 -1.00 -0.05%

Government Bonds

4:08 PM EDT 3/22/2016

price chg yield
U.S. 10 Year -6/32 1.939
German 10 Year 7/32 0.215
Japan 10 Year 3/32 -0.101
 
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At the Close 3/4/2016

Markets at a Glance

Major Stock Indexes

4:18 PM EST 3/4/2016

Last Change % CHG
DJIA 17006.77 62.87 0.37%
Nasdaq 4717.02 9.60 0.20%
S&P 500 1999.99 6.59 0.33%
Russell 2000 1081.94 5.89 0.55%
Global Dow 2260.78 21.25 0.95%
Japan: Nikkei 225 17014.78 54.62 0.32%
Stoxx Europe 600 341.80 2.38 0.70%
UK: FTSE 100 6199.43 68.97 1.13%

Currencies

4:18 PM EST 3/4/2016

last(mid) change
Euro (EUR/USD) 1.1012 0.0055
Yen (USD/JPY) 113.88 0.18
Pound (GBP/USD) 1.4232 0.0055
Australia $ (AUD/USD) 0.7429 0.0077
Swiss Franc (USD/CHF) 0.9928 0.0005
WSJ Dollar Index 88.80 -0.41

Futures

4:08 PM EST 3/4/2016

last change % chg
Crude Oil 36.22 1.65 4.77%
Brent Crude 38.91 1.84 4.96%
Gold 1262.4 4.2 0.33%
Silver 15.535 0.389 2.57%
E-mini DJIA 16965 46 0.27%
E-mini S&P 500 1994.75 4.25 0.21%

Have a great weekend.

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At the close 3/3/2016

Major Stock Indexes

4:13 PM EST 3/3/2016

Last Change % CHG
DJIA 16943.90 44.58 0.26%
Nasdaq 4707.42 4.00 0.09%
S&P 500 1993.40 6.95 0.35%
Russell 2000 1075.96 10.28 0.96%
Global Dow 2241.14 22.44 1.01%
Japan: Nikkei 225 16960.16 213.61 1.28%
Stoxx Europe 600 339.42 -1.55 -0.45%
UK: FTSE 100 6130.46 -16.60 -0.27%
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