Lawyers Target College Retirement Plans

Nancy Mann Jackson wrote an article on January 23, 2017 detailing the challenges colleges face in using their retirement plans to better serve higher ed workers. She writes:

"Eight prominent universities—including University of Pennsylvania, Duke, Emory, Johns Hopkins, Vanderbilt and others—were hit with separate lawsuits in August 2016 alleging the institutions mishandled their employee retirement plans."

"In general, the lawsuits allege the universities breached those responsibilities by offering retirement plans that required employees to pay excessive fees and miss out on extra savings."

As the article mentions, the committees in charge of investments for retirement plans are increasingly offering index options and target date funds to their workers rather than find them in a situation where the offerings include an expensive actively managed fund that underperforms a less expensive index fund option. This is a risk fewer and fewer investors (institutional and individual) are willing to accept. Please read more about the indexing vs active management debate in Barry Rithotz's fantastic piece for BloombergView titled, Shift From Active to Passive Investing Isn’t What It Seems. It was published October 28, 2016 and succinctly summarizes how Bill Miller, a mutual fund manager, views the shift toward lower cost index funds.

Nancy's article, College Retirement Plans Under Attack at UniversityBusiness.com is well worth a read if you want to learn more about how litigators and regulators are changing the retirement plans institutions offer their employees.

January 2017 Market Update

“Trying to inspire someone who does not recognize that he has a problem is a recipe for defensiveness and resentment. Inspiration is something we must save for the interested.”

Blair Enns, author, The Win Without Pitching Manifesto

Let's review price, sentiment and valuation as we kick off a new year of investing.

Price

Source: CoreCapInvestments

Price action ended the year on a buy signal for stocks. The monthly moving average numbers continue to tell investors to stay in both US and Foreign developed stocks. This is based on month end closing prices above the 10 and 12 month moving averages for exchange traded funds VTI and VEU. Bonds remain the most unloved asset class as we enter 2017. See the moving average charts below for more information.

Sentiment

Source: CNN Money Fear & Greed Index

Investor sentiment remains about where we ended last month. Investors have seen their collective mood become significantly more greedy following the conclusion of the United States Presidential election. Is the mood euphoric or simply optimistic with euphoria waiting to set in later in the Trump presidency? We like to buy when fear is high, so if you are adding new money to this market, this indicator suggests you should dollar cost average over a few months rather than investing in one lump sum.

Valuation

Source: Morningstar Market Fair Value Graph

Valuation remains elevated. This has implications on long term investment results, but has minimal impact on short term direction of markets. Expensive markets frequently become more expensive. Investors are pricing in perceived improvements in tax policy and deregulation that they are hopeful will increase earnings of public US companies while simultaneously unleashing the animal spirits of the market. Humans are like insects attracted to the light in the woods. If the market for an asset class starts glowing brighter human nature is to increase our intensity of being drawn to the light of that asset class (stocks, bonds, REITs, hedge funds etc) regardless of the long term consequences. The flip side is if the light is out or very dull we avoid the asset class like we avoid a sloppy drunk on New Year's Eve.

Source: Doug Short Monthly Moving Averages December Month-End Update

In summary, the market continues to move higher as we start the new year. Bonds, as represented by the exchange traded fund IEF, remain the only broad asset class that monthly moving averages indicate investors should avoid. Real estate is followed as having one of two monthly indicators signaling to stay away from REITs. Remember to follow a well constructed financial plan, which should include a written investment policy statement. Before making any investment ask yourself: How does XYZ investment enhance my portfolio? Lastly, remember wealthy people purchase items that will go up in value based on increasing cash flows. Wise investing my friends.

Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.

CEO Retirement Plans in the USA

100 CEOs have company retirement funds worth $4.7 billion — a sum equal to the entire retirement savings of the 41 percent of U.S. families with the smallest nest eggs.

This $4.7 billion total is also equal to the entire retirement savings of the bottom: 

59 percent of African-American families

75 percent of Latino families

55 percent of female-headed households

44 percent of white working class households

Source: Institute for Policy Studies The Institute for Policy Studies (www.IPS-dc.org) is a multi-issue research center that has conducted path-breaking research on executive compensation for more than 20 years.

December Market Update: Buy the Rumor (Sell the News)

The 2016 U.S. election is history, and we've experienced the "Trump rally." Many believe this rally has been driven by folks selling bonds and rotating into stocks. For those of you keeping track,  moving average indicators ended the month telling investors to avoid REITs (VNQ) and 10-year treasuries (IEF). This last month has reminded us of many investing and life lessons. For investors it's another example that emotions shouldn't drive investment decisions. In the internet age, it is more important than ever for investors to have the right temperament to invest and follow a well constructed plan. Now, let's look at Price, Sentiment, and Valuation at the end of November.

Price

Since May 2016, when the 5-month simple moving average rose above the 12-month simple moving average, the US market has, surprisingly to many, not disappointed. Further, looking at the 10-month and 12-month simple moving averages the S&P 500 had another monthly close above those levels suggesting that investors stay in stocks.

Sentiment

This index has moved significantly from last month's reading of "Extreme Fear" to "Greed." Last month, this indicator was telling us to avoid going to cash before the election (like many traders may have done).

Valuation

"Investors are buying in to the notion that a Trump presidency/Republican Congress can move the needle on business and personal tax cuts, infrastructure spending, and reduced regulatory burdens across multiple sectors.  All that adds up to greater earnings power, and that $1/share bump from the Wall Street strategist crowd is a nod to that belief." - Nick Colas, Chief Strategist at Converges

Please read his guest post at the Big Picture Blog from December 1, 2016 titled, "Are US stocks cheap, expensive or fairly valued? " He discusses five points about the current valuation and argues that the "Trump rally" in US stocks is not just an "uptick in asset prices" stretching valuations.

For the counter argument, read John Hussman weekly commentary for 11/28/2016:

"The stock market has reestablished an extreme overvalued, overbought, overbullish syndrome of conditions that - unlike much of half-cycle advance from 2009 to mid-2014 - lacks internal uniformity, particularly among interest-sensitive and globally-sensitive sectors. For that reason, the recent marginal highs are more consistent with a “blowoff” than a “breakout.” From a short-term perspective, it’s important to emphasize that if market internals were to become more uniformly favorable, we could infer a more robust shift toward risk-seeking among investors. That, in turn, could encourage a more neutral or constructive near-term view despite offensive valuations. As the data stand, however, the recent post-election advance appears much like the post-Brexit rally in global markets, where nearly all of the gains were compressed in the first 12 trading days, after which the enthusiasm flamed out. "By John P. Hussman, Ph.D.President, Hussman Investment Trust

In summary, price action tells us to remain in stocks, sentiment is getting greedy and valuation is adjusting for presumed increasing earnings in 2017. Let's see if bonds reverse course and longer dated interest rates start to drop after the Fed decision December 14, 2016 (if not sooner). For those of you concerned about the bond market, here is the best piece I've read on the subject from the economists Van Hoisington and Lacy Hunt at Hoisington Investment Management:

"Markets have a pronounced tendency to rush to judgment when policy changes occur. When the Obama stimulus of 2009 was announced, the presumption was that it would lead to an inflationary boom. Similarly, the unveiling of QE1 raised expectations of a runaway inflation. Yet, neither happened. The economics are not different now. Under present conditions, it is our judgment that the declining secular trend in Treasury bond yields remains intact."

Enjoy the holidays. Wise investing my friends.

Please consult a qualified financial advisor before making any investment decisions. This blog is for educational purposes only and does NOT constitute individual investment advice.

Careful with Vehicle Expenses

For most American households, transportation costs eat up more of the annual budget than anything other than the house itself. Nearly all of that transportation money is spent on cars and car-related expenses. Data collected by the Bureau of Labor Statistics shows that transportation is the second-biggest expense for most households across the U.S. Hence, we need to be careful with vehicle expenses. Here are some general rules of thumb:

1) 20/4/10 rule: This simply states when purchasing a car put at least 20% down, finance for no more than 4 years and keep the monthly payments to no more than 10% of your gross income. If you need to finance for more than 4 years it is a sign that you cannot afford the vehicle.

2) Vehicle expenses including vehicle payments, insurance, and maintenance should not exceed 20% of your monthly take home pay.

3) Total value of your vehicles should be less than half your annual income.

Why do we want to be smart with vehicle costs? Seems like a no brainer, but for those of you who need a basic rule of building wealth, remember rich people buy assets that appreciate and most vehicles depreciate in value. After 5 years of ownership most new cars are worth 37% of what you paid for it. If you weren't following these guidelines and purchased a new car for $40,000 while making $50,000 per year you'd lose $25,200 in 5 years or $5,040 per year on average. If you were making $50,000 per year that is a negative savings rate (-10% per year $5,040/$50,000=0.1008x100=10.08% per year). Your car is literally killing any chance you have of getting ahead in life.

Let's run this example through our guidelines:

Guideline 1: To purchase a $40,000 vehicle, you would need 20% down ($40,000x0.20=$8,000), per month payment for 48 months equals $667 to $730 (0% loan to 4.5% loan),  10% of gross income is $5,000 for the year or $417 per month. Your monthly payment $667 is greater than $417 per month. Result: don't buy this vehicle.

Guideline 2: If you make $50,000 per year your take home pay is roughly $38,700. This is $3,225 per month. Your total car expenses should not exceed $645 per month ($3,225x0.20=$645) Monthly payment on a four year loan with 0% interest equals $667. Not factoring in your other vehicle expenses like registration fees, insurance, etc. $667 is greater than $645 per month. Result: don't buy this vehicle.

Guideline 3: This is the simplest calculation, half of your income is $25,000 and $40,000 is greater than half your income. Result: don't buy this vehicle.

"Car payments and big car purchases will make you broke and keep you broke," Dave Ramsey. The alternative to an unaffordable car, if you make $50,000 per year in income, you can most likely afford a car worth $15,000-$20,000. Click for useful auto loan calculators.

American Savings Challenges Continue with Shift to 401(k) - How Can We Fix this Picture?

The State of American Retirement: How 401(k)'s have failed most American Workers by Monique Morrissey, Economic Policy Institute (EPI)

US News - Why the Average Family Has Only $5,000 for Retirement by Brian O'Connell

401(k) & IRA Balances - Fidelity Q3 Analysis

Bloomberg's Suzanne Woolley reported the following findings from Fidelity:

The average IRA balance rose 5 percent in the third quarter and is up 6 percent year over year, to a balance of $94,100, up from $66,100 five years ago.

The average 401(k) balance gained for the second quarter in a row, inching up 2 percent, to $90,600 for the third quarter. That amount is a 7 percent jump from 2015's third quarter and up from an average of $64,300 five years ago, according to Fidelity Investments. Fidelity administers 401(k) plans for more than 14 million plan participants.

People who have had a 401(k) with the same company for 15 years have average account balances of $331,200.

Fidelity press release with more information.