I was listening to a radio program by Bill Tatro on Money Radio 1510 at the end of last year, and he shifted his financial analysis into a psychological commentary on the set of people who had unrealistic monetary expectations. He noted a number of his clients have a mental block about living below their means. He said that they live under the guise that the next big raise was right around the corner or that their debt would work itself out. The concept of living on $25,000/year was impossible for these clients that he described as "having a $75,000 lifestyle on a $50,000 income." He said that these people suffer from a "have-to" curse, e.g. they have to drive a new car, they have to get the latest technology gadget, and they have to eat out more often than not. It made me realize that the most troubling gap in our country is not between "the haves and have-nots," but rather those who have and those who have-to.
Speaking from personal experience, I have to live below my means. Quitting my job to start a new career was extremely stressful, even though I had enough to live on. Originally, I built up a substantial amount of savings to live on, but even then, I was not psychologically prepared to watch it deplete so quickly. I got a part-time job in retail. Once I graduated school and got a job, I started living at that income level. It wasn't comfortable, in fact, it was very stressful as those closest to me knew. It felt as though I was spending almost everything that I earned (in reality, I made money during these 2 1/2 years of a reduced income, thanks to the exceptional market conditions in 2013). But I had scaled back my spending to the point that I was no longer pulling money from savings after I got my first full-time job, although my annual income was under $25K. Living that way left me unsatisfied. It was not the lifestyle to which I was accustomed.
Later in the show, Bill Tatro wondered aloud whether people were still familiar with the financial cliche "money doesn't grow on trees." Immediately, I thought of an episode of Keeping Up With The Kardashians, a show that I criticize more often than I watch, where Kendall Jenner asked her father for money, and he fed her that saying. She flippantly replied, "yes it does. Money is paper, and paper is made from trees." It was cute for 16-year-old Kendall to say, but I groaned instantly out of pity for knowing too many grown adults who feel the same way. They are the same people who have-to be "keeping up with the Kardashians," because I guess the Joneses aren't impressing anyone these days.
Financial advisers often speculate where their message is getting lost. The AICPA created a solid campaign around Benjamin Bankes, reminding people to "feed the pig," i.e. their piggy bank, and providing numerous examples of how to cut expenses. I believe the message is heard, but it is actively ignored by the have-tos in favor of the lingering effects from the message-less Occupy movement.
In short, I believe there is a certain resonating fear of income among my peer groups. When I was in high school, there were budding concerns of the youngest generation appearing to embrace (and to celebrate) failures while having an unspoken fear of success. It came to define the generation socially, especially those under the influence of the grunge music that dominated airwaves in the early 90s. Why ever try if there's nothing wrong with being a loser? The attainable goal of building productive members of society took a backseat to teaching every child to hold on to dreams.
On March 27, 2008, John Mayer posted a deeply thoughtful blog that he wrote "to shed a little light on why we're all in the same boat, no matter the shape of the life we lead: because every one of us were told since birth that we were special. We were spoken to by name through a television. We were promised we could be anything that we wanted to be, if only we believed it and then, faster than we saw coming, we were set loose into the world to shake hands with the millions of other people who were told the exact same thing."
The expectation of living a life to rival fantasy was abruptly halted by universal realities that our world failed to prepare us for because it was too busy pampering everyone equally. Last month, Oxfam released a report that 50% of the world's poorest people have the same combined wealth as the richest 85 individuals in the world. That same week, Pope Francis challenged the world's richest "to ensure humanity is served by wealth and not ruled by it."
Unfortunately, all the media coverage vilifying the rich continues to coddle an underachieving generation and seemingly to smoke screen individuals from aspiring towards a better life. Money cannot buy happiness, but life is a lot better without the endless stress cycle of not having enough money day-in and day-out. The only way to get ahead, though, is a matter of effort and determination. I hope to expand on that thought later. For now, I will just conclude that the have-tos find it easier to dream the life than live the dream.
Monday, February 24, 2014
Monday, February 17, 2014
myRA or the hiRA?
"Let's do more to help Americans save for retirement. Today, most workers don't have a pension. A Social Security check often isn't enough on its own. And while the stock market has doubled over the last five years, that doesn't help folks who don't have 401(k)s. That's why (...) I will direct the Treasury to create a new way for working Americans to start their own retirement savings: myRA." -- President Barack Obama, January 28, 2014 (SOTU)
Personally I have mixed thoughts about the myRA, which is apparently a more positive stance than the vocal majority out of the financial industry. The pros/cons of myRA are quite transparent.
On paper, the myRA program just makes great sense to me. The White House released the first Fact Sheet on the accounts this week. The most obvious point of contention from the financial industry is the forced investments into Treasury securities, but I have no issue with that restriction. It prevents myRA investments from higher risk equities as to not discourage novice investors by starting off on the wrong foot, e.g. buying at the peak of the market, or by fostering more distrust where participants could have less in their myRA after putting money into it.
The problem is that most dissenters from the investment industry cannot turn off their own minds and view things from the mindset of a non-investor. Professionals know what is best to prepare for retirement, because they know how the business works, but the problem is that large percent of the population who do not know how investments work or, even worse, where to start. This investment is exclusively for their benefit.
Fortunately, I am in a rare situation where I spent 10 years in the financial industry, and then spent the past three years under-employed while I tried to start a new career in the legal field. Having a couple jobs making less than the proposed minimum wage during that time enables me to appreciate things like this myRA proposal differently. I did not have access to a 401(k) in my past two jobs. In my case, I opted to hold off on retirement contributions because I was still pulling money out of my investments for living expenses, but my experience was a temporary situation with a visible end in sight. If this opportunity existed, I most likely would have put $5 (or more, knowing me) to this type of retirement account just to continue active contributions to my retirement.
Obviously, I could have set money aside each paycheck to contribute into my Roth IRA once the accumulated balance reached the minimum additional investment amounts, but the reality is that I did not think to do so because it was not a visible option. Therein lies the problem: saving for retirement, outside of employer retirement plans, must be a priority. Conversely, myRA investing should capture participation rates that exceed individual retirement plans and inch closer to the participation rates that employer retirement plans have.
My initial concern on the myRA project is how it seems the more popular myRAs are, the more expensive the program will become. Won't the accounting of these millions of myRAs at balances under $100 be a tremendous expense? There is a valid reason why the finance industry has set minimum initial investment amounts. Unless they are waiving the accounting requirements to give them an advantage over what the financial industry can offer, I do not understand why the reporting expenses would be lower for a myRA than for the current IRA options.
That said, the pros and cons of any situation are not mutually exclusive, but considering them separately is necessary to move toward a conclusion. And just like investing, personal emotion holds the least amount of weight. The dissent from investment professionals is valid, but they should consider those concerns on par with clients who delay investing because of their own personal emotion; in each case, it is best to think of personal opinions as an obstacle and not a valid reason for dismissal.
Personally I have mixed thoughts about the myRA, which is apparently a more positive stance than the vocal majority out of the financial industry. The pros/cons of myRA are quite transparent.
On paper, the myRA program just makes great sense to me. The White House released the first Fact Sheet on the accounts this week. The most obvious point of contention from the financial industry is the forced investments into Treasury securities, but I have no issue with that restriction. It prevents myRA investments from higher risk equities as to not discourage novice investors by starting off on the wrong foot, e.g. buying at the peak of the market, or by fostering more distrust where participants could have less in their myRA after putting money into it.
The problem is that most dissenters from the investment industry cannot turn off their own minds and view things from the mindset of a non-investor. Professionals know what is best to prepare for retirement, because they know how the business works, but the problem is that large percent of the population who do not know how investments work or, even worse, where to start. This investment is exclusively for their benefit.
Fortunately, I am in a rare situation where I spent 10 years in the financial industry, and then spent the past three years under-employed while I tried to start a new career in the legal field. Having a couple jobs making less than the proposed minimum wage during that time enables me to appreciate things like this myRA proposal differently. I did not have access to a 401(k) in my past two jobs. In my case, I opted to hold off on retirement contributions because I was still pulling money out of my investments for living expenses, but my experience was a temporary situation with a visible end in sight. If this opportunity existed, I most likely would have put $5 (or more, knowing me) to this type of retirement account just to continue active contributions to my retirement.
Obviously, I could have set money aside each paycheck to contribute into my Roth IRA once the accumulated balance reached the minimum additional investment amounts, but the reality is that I did not think to do so because it was not a visible option. Therein lies the problem: saving for retirement, outside of employer retirement plans, must be a priority. Conversely, myRA investing should capture participation rates that exceed individual retirement plans and inch closer to the participation rates that employer retirement plans have.
My initial concern on the myRA project is how it seems the more popular myRAs are, the more expensive the program will become. Won't the accounting of these millions of myRAs at balances under $100 be a tremendous expense? There is a valid reason why the finance industry has set minimum initial investment amounts. Unless they are waiving the accounting requirements to give them an advantage over what the financial industry can offer, I do not understand why the reporting expenses would be lower for a myRA than for the current IRA options.
That said, the pros and cons of any situation are not mutually exclusive, but considering them separately is necessary to move toward a conclusion. And just like investing, personal emotion holds the least amount of weight. The dissent from investment professionals is valid, but they should consider those concerns on par with clients who delay investing because of their own personal emotion; in each case, it is best to think of personal opinions as an obstacle and not a valid reason for dismissal.
For additional information available on the proposed myRA program, please visit http://www.whitehouse.gov/blog/2014/02/11/myra-helping-millions-americans-save-retirement
Monday, February 10, 2014
The Full Motley: 1Q, 2014
It is hard to believe that we are almost halfway through the first quarter of 2014. Because, personally, it feels as though we should be further along than that! Regardless, there have been a couple years in which the first quarter of the year has been so strong that there was not a day in the remaining 9 months that was lower than where the year started. Obviously, this is not one of those years!
Market fluctuations are part of the game. The market does not always rise and never falls anymore than people do expect to always be happy and never be sad. The point, much like life, is to expect things will be better in multiple years to come based on the choices we make now. Few people are expecting the market to be up 10% by the end of the year (like I predicted it would be in my annual preview) but if the market falls 10%-15% in the first half of the year, then it would have another six full months to gain another 25% when the bears hibernate. That is not to insure a strong probability, but merely assessing possibility.
Overall, my account is down from where it started this year, as expected, but I was intrigued to see which fund had been performing best so far this quarter (which is to say, it had lost the least). It turned out to be my actively managed large cap fund. None of the moves to rebalance equaled 1% of my overall portfolio, but I performed the rebalance in my former-employer's account.
Perhaps the more interesting situation nowadays is that my former-employer's 401(k) account is not my only active 401(k) account these days. Having been on the job for two full months now, my new employer's 401(k) account is going to grow exponentially. My hope is that it will grow higher than the markets fall, but when buying into the market, having a depressed market is hardly a bad thing. Additionally, I would be able to revisit past investment strategies, such as directing all new money into one fund or sector and then rebalance quarterly. It would make more sense to rebalance that account quarterly and then only rebalance this former-employer's 401(k) twice a year.
In future years, I may need to revisit my rebalancing methodology entirely. The option to roll my old 401(k) account into my new account exists, but the investment options are superior in my old account, so it is an option that does not appeal to me at this point. Additionally, I could roll my old 401(k) account into my Roth IRA. But, as for right now, I prefer having it separated.
It will be more interesting in May to see how my new 401(k) looks since I will have been contributing to that account for six months by that point. And, of course, it is anyone's guess where the major indexes will be at that time!
Market fluctuations are part of the game. The market does not always rise and never falls anymore than people do expect to always be happy and never be sad. The point, much like life, is to expect things will be better in multiple years to come based on the choices we make now. Few people are expecting the market to be up 10% by the end of the year (like I predicted it would be in my annual preview) but if the market falls 10%-15% in the first half of the year, then it would have another six full months to gain another 25% when the bears hibernate. That is not to insure a strong probability, but merely assessing possibility.
Overall, my account is down from where it started this year, as expected, but I was intrigued to see which fund had been performing best so far this quarter (which is to say, it had lost the least). It turned out to be my actively managed large cap fund. None of the moves to rebalance equaled 1% of my overall portfolio, but I performed the rebalance in my former-employer's account.
Perhaps the more interesting situation nowadays is that my former-employer's 401(k) account is not my only active 401(k) account these days. Having been on the job for two full months now, my new employer's 401(k) account is going to grow exponentially. My hope is that it will grow higher than the markets fall, but when buying into the market, having a depressed market is hardly a bad thing. Additionally, I would be able to revisit past investment strategies, such as directing all new money into one fund or sector and then rebalance quarterly. It would make more sense to rebalance that account quarterly and then only rebalance this former-employer's 401(k) twice a year.
In future years, I may need to revisit my rebalancing methodology entirely. The option to roll my old 401(k) account into my new account exists, but the investment options are superior in my old account, so it is an option that does not appeal to me at this point. Additionally, I could roll my old 401(k) account into my Roth IRA. But, as for right now, I prefer having it separated.
It will be more interesting in May to see how my new 401(k) looks since I will have been contributing to that account for six months by that point. And, of course, it is anyone's guess where the major indexes will be at that time!
Monday, February 3, 2014
Guilt-Free Investing
I apologize in advance that the complexity of this entry is a bit backwards. It will start with the most complex information first and then simplify into more attainable concepts. There are countless measures to the market, but one commonly quoted is CNNFN's own "Fear and Greed Index." According to Investopedia, it measures those two primary emotions that drive investors as generated by seven indicators:
1. Stock Price Momentum - as measured by the S&P 500 versus its 125-day moving average.
2. Stock Price Strength - based on the number of stocks hitting 52-week highs versus those hitting 52-week lows on the NYSE.
3. Stock Price Breadth - as measured by trading volumes in rising stocks against declining stocks.
4. Put and Call Options - based on the Put/Call ratio.
5. Junk Bond Demand - as measured by the spread between yields on investment grade bonds and junk bonds.
6. Market Volatility - as measured by the CBOE Volatility Index or VIX.
7. Safe Haven Demand - based on the difference in returns for stocks versus Treasuries.
Each of these seven indicators is measured on a single scale from 0 to 100 with 50 denoting a neutral reading, and a higher reading signaling more greed. The index is then computed by taking an equal-weighted average of the seven indicators.
Furthermore, "Investopedia explains the Fear and Greed Index is a contrarian index of sorts, which is based on the premise that excessive fear can result in stocks trading well below their intrinsic values while unbridled greed can result in stocks being bid up far above what they should be worth.
"The index can therefore be used to signal potential turning points in the equity markets. For example, the index sank to a low of 12 on Sept. 17, 2008, when the S&P 500 fell to a three-year low in the aftermath of the Lehman Brothers bankruptcy and the near-demise of insurance giant AIG. It traded over 90 in September 2012 as global equities rallied following the Federal Reserve's third round of quantitative easing (QE3)."
Accordingly, the nature of investing itself is based on fear and greed, both of which are commonly identified as sinful emotions. Is there any way to achieve guilt-free investing? Fortunately, the answer is yes.
John Bogle, best known for as the creator of index funds, has rallied against the sinful actions leading up to the incidents like the collapse of the Lehman Brothers, and Enron before it, as an irrational exuberance of greed in a way. His 2009 book Enough opened with a tale of accomplished authors Kurt Vonnegut and Joseph Heller attending a party by a billionaire hedge fund manager in Shelter Island. Vonnegut noted how that gentleman "(has) made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, 'Yes, but I have something he will never have ... enough'."
The temptation to reach for more is equally balanced by the fear of losing too much, which is why the Fear and Greed Index is relevant to daily market watchers. However, those emotions are controllable. Ignoring them and deciding that they will have no power are both successful methods for keeping them in check (the success of either of them most likely varies by each person). The fact is that no one started investing to lose money, and long-term investors are far more likely than not to gain, which is a success. Comparing it to other fields of greener grass is the first mistake. Concepts like "opportunity costs" truly exist and worthwhile factors for decision making, but they should stay in proportion to higher drivers that are more important.
The success of the index fund is a win against fear and greed. One of the most telling descriptions Bogle has given about index funds is that it enables every American to participate in the economy, effectively giving the average Americans access to "their fair share" of the American economy. When the market rises, the index fund increases. If the market retreats, the index fund will lose value. If investors create a simple portfolio by selecting index funds, then there should be no opportunity for greed (and likewise, if their intentions are pure, then there should be little concern for fear), and the profits realized are not a matter of wanting more, but simply partaking in the American economy. Setting aside any displaced intentions, pure index fund investors can enjoy guilt-free investing.
1. Stock Price Momentum - as measured by the S&P 500 versus its 125-day moving average.
2. Stock Price Strength - based on the number of stocks hitting 52-week highs versus those hitting 52-week lows on the NYSE.
3. Stock Price Breadth - as measured by trading volumes in rising stocks against declining stocks.
4. Put and Call Options - based on the Put/Call ratio.
5. Junk Bond Demand - as measured by the spread between yields on investment grade bonds and junk bonds.
6. Market Volatility - as measured by the CBOE Volatility Index or VIX.
7. Safe Haven Demand - based on the difference in returns for stocks versus Treasuries.
Each of these seven indicators is measured on a single scale from 0 to 100 with 50 denoting a neutral reading, and a higher reading signaling more greed. The index is then computed by taking an equal-weighted average of the seven indicators.
Furthermore, "Investopedia explains the Fear and Greed Index is a contrarian index of sorts, which is based on the premise that excessive fear can result in stocks trading well below their intrinsic values while unbridled greed can result in stocks being bid up far above what they should be worth.
"The index can therefore be used to signal potential turning points in the equity markets. For example, the index sank to a low of 12 on Sept. 17, 2008, when the S&P 500 fell to a three-year low in the aftermath of the Lehman Brothers bankruptcy and the near-demise of insurance giant AIG. It traded over 90 in September 2012 as global equities rallied following the Federal Reserve's third round of quantitative easing (QE3)."
Accordingly, the nature of investing itself is based on fear and greed, both of which are commonly identified as sinful emotions. Is there any way to achieve guilt-free investing? Fortunately, the answer is yes.
John Bogle, best known for as the creator of index funds, has rallied against the sinful actions leading up to the incidents like the collapse of the Lehman Brothers, and Enron before it, as an irrational exuberance of greed in a way. His 2009 book Enough opened with a tale of accomplished authors Kurt Vonnegut and Joseph Heller attending a party by a billionaire hedge fund manager in Shelter Island. Vonnegut noted how that gentleman "(has) made more money in a single day than Heller had earned from his wildly popular novel Catch-22 over its whole history. Heller responds, 'Yes, but I have something he will never have ... enough'."
The temptation to reach for more is equally balanced by the fear of losing too much, which is why the Fear and Greed Index is relevant to daily market watchers. However, those emotions are controllable. Ignoring them and deciding that they will have no power are both successful methods for keeping them in check (the success of either of them most likely varies by each person). The fact is that no one started investing to lose money, and long-term investors are far more likely than not to gain, which is a success. Comparing it to other fields of greener grass is the first mistake. Concepts like "opportunity costs" truly exist and worthwhile factors for decision making, but they should stay in proportion to higher drivers that are more important.
The success of the index fund is a win against fear and greed. One of the most telling descriptions Bogle has given about index funds is that it enables every American to participate in the economy, effectively giving the average Americans access to "their fair share" of the American economy. When the market rises, the index fund increases. If the market retreats, the index fund will lose value. If investors create a simple portfolio by selecting index funds, then there should be no opportunity for greed (and likewise, if their intentions are pure, then there should be little concern for fear), and the profits realized are not a matter of wanting more, but simply partaking in the American economy. Setting aside any displaced intentions, pure index fund investors can enjoy guilt-free investing.
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