Retirement Balances at Fidelity Hit Record Levels

On February 2, 2017 Fidelity released its retirement savings balance information for the fourth quarter of 2016. Fidelity shared the following (please read the press release for more information):

"Key to a successful retirement strategy is having a solid contribution rate and not tapping your 401(k) for short-term expenses," said Kevin Barry, president, Workplace Investing, Fidelity Investments. "More than one-in-four Fidelity 401(k) savers increased their savings rate in 2016—an all-time high, and the number of people with a 401(k) loan dropped to its lowest point in seven years. This shows people are taking the right steps towards reaching their retirement savings goals and illustrates how the 401(k) is helping millions of people prepare for retirement."

Fidelity reveals savers have a record average 401(k) balance. Fidelity attributes the higher balances to increasing contributions and stock market performance taking the average 401(k) balance to an all-time high of $92,500 at the end of Q4, topping the previous high of $92,100 in Q1 2015 and an increase of $4,300 from a year ago. This is how the average 401(k) and average IRA have changed over the last five years:
 

To put these numbers in context, Vanguard released their How America Saves report in June of 2016. In it they state:

In 2015, the average account balance for Vanguard participants was $96,288; the median balance was $26,405.

Even though Americans still aren't saving enough for retirement, these are positive trends and hopefully show that the changes made in the Pension Protection Act of 2006 are starting to have a positive impact on Americans' retirement savings.

February Market Update

Let's look at price, sentiment and valuation as we enter the second month of 2017.

Price

Price action based on monthly market closes shows that investors should be in stocks. A calender event known as the “January trifecta” has established itself at the end of January. Please read Sue Chang's article A Trio of Trends Points to More Upside for Stocks at MarketWatch. This trifecta is based on the so-called Santa Claus rally, the market’s direction in the first five days of January, and the January Barometer all showing positive market returns. Similar to last month, the monthly moving averages tell us to tactically avoid bonds (tracking ETF IEF). REITs, as represented by the ETF VNQ, show a mixed picture. VNQ is trading above its 12-month simple moving average and below its 10-month simple moving average. For the S&P 500, the month end price shows that the 5-month moving average remains above the 12-month moving average, which creates a positive environment to be long S&P 500. As we ended January market technicians saw an island top pattern in the market. This pattern frequently happens before a 5% correction. The market is also due for a 5% correction as it has been 7.2 months without one. The strength of the stock market rally since November is also fading. Corrections are extremely difficult to predict, but a pause in the rally is easily justified especially going into February, one of the historically dullest months for US markets.


Sentiment

Sentiment, as characterized by the CNN Money Fear & Greed index has shifted to neutral with a reading of 50. This is a drop from 70 last month. Short term sentiment indicators have turned weak, while mid-term and long-term sentiment indicators remain strong for the S&P 500. To keep this update balanced and to metaphorically throw some cold water on those of you who are inspired or euphoric about the current rally, John Hussman wrote in his January 23 weekly commentary:

"Last week, an unusual set of classifiers that we monitor raised red flags, with two of our three “crash signatures” now suggesting the likelihood of a market loss in excess of -25% in the months ahead (the last time these signatures were active was between April-October 2008). This would potentially represent the opening salvo of a more extended completion to the current market cycle. No single variable drives these signatures. Rather, they capture unsual combinations of market conditions that may include offensive valuations, dispersion across market internals, credit market weakness, lopsided bullish sentiment, Federal Reserve tightening, or other features. While these signatures are quantitative, my impression is that there is far more potential for economic and social disruption than appears to be reflected in the current speculative pitch. I should also be clear that these signatures are not forecasts but classifications that we’ve constructed to identify highly unusual events. The difference is that a forecast says “we expect this particular outcome in this specific instance,” while a classifier says “we identify the same signature of conditions that has regularly preceded this particular outcome in the past.” It’s a subtle distinction, but an important one. We needn't rely on forecasts. Rather, we continue to align ourselves with the prevailing evidence at each point in time, and our outlook will shift as the evidence does."

Valuation

The market remains overvalued. Please read Mark Hulbert's opinion piece The Biggest Threat to Your Money Now? Ignoring the Scent of a Bear Market. Mark writes,

"To be sure, valuation measures exert only weak gravitational pull on the markets over the shorter term. So there’s nothing guaranteeing that a market drop is imminent because of the market’s current overvaluation. 

But someday we will look back at the World Economic Forum’s current sanguine assessment of financial risks with the disdain that we today view its doom and gloom assessment from 2009."

Summary
Price action remains positive for the S&P 500 and we have an accelerating economy as we start 2017. The market is due for a 5% correction and sentiment has weakened from the end of December. Valuation remains high. Tactically, only short-term traders should be adjusting their allocations. Nothing in the month-end data tells me to be on the lookout for a major correction (greater than 10%) in the month of February. I anticipate February could end up like the historical numbers above with very lackluster returns. Wise investing my friends and let me end this update with a quote from Charlie Munger:

"People are trying to be smart. All I am trying to do is not be idiotic, but it's harder than most people think." 

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.

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.