Margin Debt Number

Margin debt collated by the New York Stock Exchange peaked in February at $466bn and stood at $463bn in August. The peak in 2007 was $381bn. It hit a low of $173bn in early 2009. Margin debt is always a factor when the market corrects or goes into a bear market.

Valuation

With the Dow Jones Industrial average negative for the year, I thought it would be a good time to highlight valuation. Doug Short recently updated a post on what he calls the Buffet Valuation Indicator. Doug starts the update with this:

Market Cap to GDP is a long-term valuation indicator that has become popular in recent years, thanks to Warren Buffett. Back in 2001 he remarked in a Fortune Magazine interview that "it is probably the best single measure of where valuations stand at any given moment."

He goes on to write:

In a CNBC interview earlier this spring CNBC interview (April 23rd), Warren Buffett expressed his view that stocks aren't "too frothy". However, both the "Buffett Index" and the Wilshire 5000 variant suggest that today's market is indeed at lofty valuations, now above the housing-bubble peak in 2007. In fact, the more timely of the two (Wilshire / GDP) has risen for eight consecutive quarters and is now approaching two standard deviations above its mean -- a level exceeded for six quarters during the dot.com bubble.

He ends with a chart showing this indicator compared to the S&P 500 with this:

One final comment: While I see this indicator as a general gauge of market valuation, it it's not useful for short-term market timing, as this overlay with the S&P 500 makes clear.

Read the whole post and review the graphs. Making a financial plan involves discussing how you'll react to downturns in the market and planning for 10% corrections and bear markets. When markets decline I feel the people who start deviating from their plan are the people who misunderstood their risk tolerance and do not have adequate emergency savings and/or cash flow. There are market forces that scare everyone, if you feel overly concerned when your portfolio declines you probably need to revisit your plan with yourself, your loved ones, or a qualified financial planner. Please also review some perspective from Barry Ritholtz who writes the Big Picture blog and recently wrote this piece for Bloomberg. He has 8 data points in his article and more wisdom at the end. I'll share two:

1. U.S. stock markets haven't experienced a 10 percent correction since October 2011.

2. As the "Stock Traders Almanac" is fond of pointing out, the six months that follow October are on average the best half of the year for equities. Whether that is because October affords a better entry price or is due to some other factor is both hotly debated and unresolved.

Diversification Matters

Walter Upgrave at the Wall Street Journal shares his thoughts about diversification. As we cross 17,000 on the Dow let's look at what we can do to diversify portfolios (click on the chart below to learn more):

Please read the article (subscription required) or google search How Much Diversification is Too Much by Walter. Another take on the case for diversification is made by Paul Merriman with the portfolio he calls the ultimate buy and hold portfolio. Here is his article and the graphs. As is obvious, please consult a financial advisor before making any financial decisions. We only provide education, not personal recommendations.

The Path to Financial Prosperity and Security

1. Don't spend beyond your means

2. Educate yourself

3. Pick the right field

4. Save (and invest) early

5. Don't swing for the fences

6. Keep yourself covered

7. Be wise about a windfall

8. Hang onto cars (and houses)

9. Avoid debt

Source Kiplinger Read what they mean for each item and see if you meet their criteria.

Debt in America

This is an update on debt in America from the Urban Institute:

Debt can be constructive, allowing people to build equity in homes or finance education, but it can also burden families into the future. Total debt is driven by mortgage debt; both are highly concentrated in high-cost housing markets, mostly along the coasts. Among Americans with a credit file, average total debt was $53,850 in 2013, but was substantially higher for people with a mortgage ($209,768) than people without a mortgage ($11,592).

Source: Urban Institute Complete Study

U.S. Household Net Worth Drops

The NY Times brings us this update from the Russell Sage Foundation:

The inflation-adjusted net worth for the typical household was $87,992 in 2003. Ten years later, it was only $56,335, or a 36 percent decline, according to a study financed by the Russell Sage Foundation. Those are the figures for a household at the median point in the wealth distribution — the level at which there are an equal number of households whose worth is higher and lower. But during the same period, the net worth of wealthy households increased substantially.

“The housing bubble basically hid a trend of declining financial wealth at the median that began in 2001,” said Fabian T. Pfeffer, the University of Michigan professor who is lead author of the Russell Sage Foundation study.

Here is the study.

Bull market sends 401(k)s soaring to record highs

Fidelity analyzed its accounts for 13 million workers with 401(k) plans as well as its IRA balances for individuals at the end of the second quarter.

• The average 401(k) balance rose 12.9% to $91,000, a record high, up from $80,600 at the end of the second quarter of 2013. This represents accounts from a wide range of workers, including those just starting their careers and others nearing retirement.

• The average balance in a Fidelity Individual Retirement Account (IRA) at the end of the quarter was $92,600, another record high, up 14.7% compared with the same time last year.

• 77% of the growth in account balances is due to the stock market; 23% is due to employee and employer contributions.

• The average balance for employees who have been saving in their 401(k) for 10 years increased 15% over the last decade to $246,200.

• Employees contributed an average of $6,050 to their 401(k)s this past year; employers contributed an average of an additional $3,540.

Source