I. The United States
You know we've been in a recession. If you're employed, you're probably nervous about keeping your job. And if you're unemployed, you know we've been in recession better than I could ever tell you.
It's up to the National Bureau of Economic Research to provide the official beginning and ending dates for recessions, and if you're interested in how they do it, you can read about it here. For the rest of us, we saw a banking crisis start late last year, and while we may not have known the details of how it happened, we certainly knew why.
We saw every Jane, Jean and Judy buying houses they couldn't afford, getting a mortgage based on her ability to fog a mirror, and saw real estate prices zoom upward - like the Internet stock prices did in the late 1990's. A familiar pattern, with a familiar "pop" end the end of the bubble, accompanied by falling housing prices.
Then we really saw the force of this nasty recession.
Unlike the past, though, it is not the US that is leading the world out of recession. We're mired in debt and have failed to pass even one piece of financial reform legislation more than a year after causing a worldwide economic downturn. Although we appear to have stopped our economy from shrinking, we expect anemic growth at best for the next year or so.
II. Our Place in the World Economy
From the end of WWII through the remainder twentieth century, the US was the world's economic powerhouse. A significant reason for that was attributable to "good old Yankee ingenuity." During the war, we focused our best and brightest toward the war effort. Because military technology at that time had civilian application, our best minds transitioned easily from the war effort to consumer technology.
In the latter part of the 1900s, the US voted with our pocketbooks to stop looking for the union label and outsourced much of our manufacturing to countries who could produce our goods with lower employment costs. As a result, we became less a manufacturer and more a service provider to the world. Our techies were golden, and Wal-Mart, our merchant.
We imported much more than we exported, and became a debtor nation to our manufacturers, especially China. Thus, a great wealth transfer took place in the so-called "third world," where manufacturing jobs expanded feverishly. The Chinese built an enormous middle class from their export business.
Now, they finance about 25% of our national debt, which is the sum of all the deficits, or overspending we have accumulated every year - plus interest. For a look at our historic debt levels, read my July 15 article.
III. Popular Misconception
There is no doubt that our deficit is high. Without mitigating the seriousness of that situation, though, understanding China's reliance on the US as a major buyer of their manufactured goods is critically important as we evaluate our status as a debtor nation. Their population has accepted Communist rule with an unspoken financial contract that it expects to reap the benefits of newly acquired wealth. Should China stop buying our debt, which continues to be the highest quality in the world, it will also assist in further lessening the value of our dollar and likely fuel an inflationary fall into another recession.
Smart sellers don't bankrupt their main customers, and China is not stupid.
Further, while anyone can see that both China and India have been growing rapidly, we are not on the verge of losing our position as the primary financial powerhouse in the world. Much has been made of the meager savings rate in the States as compared with the thrifty Chinese. Upon closer look, however, it's apparent that the Chinese are thrifty largely because they cannot rely on their government to care for them. For example, the Chinese social security system currently has $94 per retiree, according to Steven Roach, head of Asian Operations at Morgan Stanley. Yes, our system also has problems, as the Social Security trust fund remains an IOU by Congress, but ours does have a long, unbroken history of payment. The Chinese are accustomed to caring for themselves during disasters, both natural and financial, and therefore tend to put more aside.
Last, while we attempt to once again define ourselves as the technological leader in such growth industries as "green technology," we have, without question, both the best institutions of higher learning that are necessary for cutting edge research and development, and an open door to the best minds in the world.
Having taught math-based analysis courses at UCLA, I can attest to the great difficulty I had during roll call in our first sessions. These unpronounceable names were from every corner of the world, and the university was delighted to have them.
Once again, a combination of our open door to great world minds, with Silicon Valley innovation may be our economic savior, moving from high technology to green energy, and selling it to the world.
IV. Future Course
Once we have economic stability and a health care policy that will not bankrupt our country, our next priority must be to get our financial house in order. Let's look what high debt does to the country by personalizing it a bit. Let's say you earn $60,000 per year. After taxes, you net $4,000 per month. Your mortgage payment is $1,500 per month, you have a second mortgage of $500 for major home repairs, your car payment is $600, and you have eight credit cards on which you pay an aggregate monthly payment of $850. That leaves you only $550 every month for food, clothes, medical, utilities, gasoline and car repairs, movies, and all other incidental expenses. You're in trouble. You're probably increasing your credit card debt every month, paying for necessities you couldn't afford after paying your debt. So, your credit card debt is growing, and you're barely hanging on.
Magnify that situation, and you have our Federal government. Yes, we had to pass the stimulus package to save ourselves from financial ruin. Yes, we have to address the unsustainably high cost of health care. But once that's done, we must cut expenses and pay down our debt, just like the person in our example, or risk the future of our economy.
We must also acknowledge that, within the next century, the US will be one of the world financial powerhouses, but not the only one. If China learns to cooperate with the rule of international trade, and if India streamlines its impossibly difficult tangle of red tape, than a less indebted US will share its position with them.
V. What We Do
What we do matters. We shopped at Wal-Mart. By doing so, we exported manufacturing jobs.
Now, we must demand that our deficits be reduced and focus on educating our young people to work in a much more competitive and complex world.
Education has always been a women's issue. We know that the answer to education is not primarily money. It's a contract between teachers, parents and children that excellence is expected, and failure is failure on a world order.
What we do matters.
Tuesday, October 27, 2009
Friday, October 23, 2009
The Female Retirement Dilemma
Issues involved with planning for retirement are different for women than they are for men. And understanding them can be the difference between comfort and poverty in our old age.
I. By Saving the Same Percentage, We Retire with Less Than Half Than Men
Let's look at the result of both men and women putting aside 10% of their earnings for retirement.
First, women current earn, on average $.80 for every dollar men earn. So now, for every $.10 in men's retirement accounts, women have $.08 - 20% less.
Next, women spend an average of eleven years of their productive working lives as an unpaid caregiver for a family member. Assuming a work life from college graduation at 22 to retirement at 65, that unpaid absence lessens our earning years by another 25%. That reduction in lifetime earnings, added to the fact that we lower salaries, results in us having $.06 for every $.10 men save for retirement - or 40% less.
So, if we assume average annual earnings of $60,000 during their careers, men will save $258,000 and women, $154,800, assuming that those savings are invested in assets that keep up with inflation.
At 65, a man will need ten years of retirement income from savings of $258,000. Invested in assets that keep up with inflation and taxes, he will have $25,800 per year for ten years.
A woman, because of her additional life expectancy will have a sixteen year retirement with savings of $154,800. Invested in assets that keep up with inflation and taxes, she will have $9,675 per year.
No wonder twice as many women than men live in poverty.
II. What To Do
First, homemakers who care for children or parents should have Spousal IRA accounts funded on their behalf every year. Considering that replacing all the functions provided would total approximately $30 thousand per year (Source: http://www.womenwork.org/resources/tipsheets/valuehomemaking.htm), it is only reasonable that your retirement is funded while you provide these services at no charge.
Second, women must learn to invest their retirement assets in a way that will maximize growth without taking an inordinate amount of risk. The two long term investments that provide the highest return are stocks and real estate.
In the last few years, we have witnessed the volatility both these investments have. But, let's put this into perspective. The stock market high was in August, 2007. Just over two years later, the market is down about 30% from its high. There are two considerations we must make:
It requires only that we gain the knowledge to take action and the willingness to provide for our future.
I. By Saving the Same Percentage, We Retire with Less Than Half Than Men
Let's look at the result of both men and women putting aside 10% of their earnings for retirement.
First, women current earn, on average $.80 for every dollar men earn. So now, for every $.10 in men's retirement accounts, women have $.08 - 20% less.
Next, women spend an average of eleven years of their productive working lives as an unpaid caregiver for a family member. Assuming a work life from college graduation at 22 to retirement at 65, that unpaid absence lessens our earning years by another 25%. That reduction in lifetime earnings, added to the fact that we lower salaries, results in us having $.06 for every $.10 men save for retirement - or 40% less.
So, if we assume average annual earnings of $60,000 during their careers, men will save $258,000 and women, $154,800, assuming that those savings are invested in assets that keep up with inflation.
At 65, a man will need ten years of retirement income from savings of $258,000. Invested in assets that keep up with inflation and taxes, he will have $25,800 per year for ten years.
A woman, because of her additional life expectancy will have a sixteen year retirement with savings of $154,800. Invested in assets that keep up with inflation and taxes, she will have $9,675 per year.
No wonder twice as many women than men live in poverty.
II. What To Do
First, homemakers who care for children or parents should have Spousal IRA accounts funded on their behalf every year. Considering that replacing all the functions provided would total approximately $30 thousand per year (Source: http://www.womenwork.org/resources/tipsheets/valuehomemaking.htm), it is only reasonable that your retirement is funded while you provide these services at no charge.
Second, women must learn to invest their retirement assets in a way that will maximize growth without taking an inordinate amount of risk. The two long term investments that provide the highest return are stocks and real estate.
In the last few years, we have witnessed the volatility both these investments have. But, let's put this into perspective. The stock market high was in August, 2007. Just over two years later, the market is down about 30% from its high. There are two considerations we must make:
- These are long term investments, intended for use in ten years or more. In the 30+ years since I've been in the business, I've witnessed a years-long 50%+ correction in the 70's, a heart-stopping drop in the '80's, a precipitous fall in the 90's, the dot com bubble bursting in the early part of this decade and the current correction. These are predictable, and those who have made wise stock investments and held them have fared far better, even at this point, from those who put their money in so-called "safe" investments, like money market accounts, Treasury Bills and insured savings accounts, which fail to stay ahead of inflation and taxes. Note that there were two times billionaire investor Warren Buffett publicly admitted to buying stock in US companies: once, during the correction in the 1970's; and the other, from March to year end, 2008.
- Even at retirement, we have life expectancies that mandate we stay ahead of inflation and taxes, and therefore advise consideration of keeping at least a portion of our long term portfolios in capital markets.
- Conversely, our short term (five years or less) cash flow needs must be kept in safe investments, so that our expenses are met and we are not tempted to sell our long term investments during market lows.
It requires only that we gain the knowledge to take action and the willingness to provide for our future.
Sunday, October 18, 2009
Why Inflation is Worse for Women
Inflation is one of those vagaries of economics that most people hear enough to have an idea of what it means, without being able to define it precisely. Why it's important to know exactly what it is - particularly for women.
I. What It Is
Inflation is simply the measurement of how much prices rise every year. The most dramatic example of inflation is the price of houses. When I was about six years old, my parents bought a house in a suburb north of Los Angeles for $35,000. Even with the dramatic downward adjustment of house prices in that area within the last few years, that house is worth over $750,000. Over that time, the price of that home has grown at an annual rate of over 6.25%.
The way an annual growth rate works is
Price multiplied by Growth Rate equals New Price.
For example, the first year would be $35,000 X 6.25% = $2,187.50. New Price is $35,000 + $2,187.50 = $37,187.50.
The second year would be $37,187.50 X 6.25 = $2,324.22. $37,187.50 + $2,324.22 = $39,411.72. As you can see, the amount of growth in the second year is higher, because the New Price in the second year is higher.
This additional growth happens every year, and is called the effect of compounding.
II. Inflation and Women
Women live longer than men. Consequently, their investments have to last longer than men's do, in order for women to last for their longer lifespan. When you add to our longevity the fact that we earn less than men (currently about $.80 to the dollar) and average eleven years outside the workforce as non-paid caregivers for family members, it's easy to see that we start with less money, and need to make our money do more, or risk facing poverty in our old age.
III. The Risk of No Risk
The recent correction has been a stark reminder that short term volatility is a fact of life in the stock market. Many have said, "I'm never putting money into the market again. I'm sticking with safe investments." While it is certainly an understandable reaction, it is one that could risk women's long-term financial well being. Here's why.
The common economic barometer for a "no risk" investment is the one year Treasury Bill. Safety is assured, as repayment by the United States Treasury is considered certain. As of October 16, the one year Treasury Bill is paying .36%.
You must pay Federal taxes on the interest earned on your Treasury Bill. Married people earning less than $137,050 have a marginal tax rate of 25%.
Inflation over the last year has run about .31%.
So, your actual return for this "safe" investment is
.36%, Interest Rate, minus
.09% Tax Rate (25% tax on .36%), minus
.31% Inflation (the rise in costs over one year), equals
-.04%
After inflation and taxes (called "real return") you are behind where you started.
As a long term investment, this safe investment is a guaranteed loser.
IV. Some Other Types of Investments
We saw that the type of safety provided by Treasury Bills will actually lose ground over the long term. So, what's a girl to do?
A. Bonds
Bonds are loans. Treasury Bills are loans to the US government.
You can also loan money to corporations, who will pay you back, with interest. Corporate bonds are rated as to the certainty of repayment. "Investment grade" bonds are considered safe, and "junk bonds" are just what they sound like. High interest and low probability of repayment.
An investment grade bond is currently paying 5.62% for eight years.
5.62% Interest Rate, minus
1.41% Tax Rate (25% of 5.62%), minus
0.31% Inflation equals
3.90%
Your risk is that inflation will rise (as virtually every economist agrees it will) over the next eight years, and cut further into your return. But, at least you're staying ahead of inflation.
B. Stocks
Owning stock is owning a piece of a company. Owning stock in just one company is very risky, because if that company has financial problems you can lose some, or in cases like Enron and WorldCom, even all of your money.
Most people diversify their investments by owning many companies. One way of doing that is to invest in an index, like the Dow Jones Industrial Average or the Standard and Poor's 500 Average. Since the Dow has 30 stocks and the Standard and Poor's Index has 500, the latter is a more diversified investment, and is the measurement against which most fund managers base their performance.
Over very long periods of time, the stock market's return is about 9.8%, about 3.5% of which is dividend payments.
9.80% Return, minus
0.85% Tax Rate (3.5% dividend payment times 25%), minus
0.31% Inflation, equals
8.64%
There are a thousand provisos here. The growth in your investment (besides dividends) is taxable when you sell it. Current inflation rates are extraordinarily low, so your normalized return is more like 6.5% than 8.64%. But, in general, you get the point. Your money grows much faster in the market - EXCEPT there are predictable and certain big price fluctuations. You just saw one.
I've seen one in the 70's that took half the value of the market away in a long, grueling grind downward that lasted years. I saw one in 1987 that dropped far and fast. I saw one in the 90's. And there is this one.
So, short term money does not belong here. If you need it in five years, it doesn't belong here.
C. Real Estate
Real estate investments (not your home) have returns that are very similar to stocks. As you have seen, this too is a volatile enterprise. It's also highly specialized and takes a very large initial investment.
V. Risk and Return
If you know the risk, it is lessened. If you have a long term horizon, know that the stock market is VERY volatile and NEVER either sell in a panic - or invest money you need within five years - than you won't be spooked when the inevitable happens.
For those of us who are 50 and older, adding more bonds and lessening stock exposure is smart, as older women have less tolerance for price fluctuations than younger women. Some use the simple equation of subtracting their age from 100, and putting that amount in diversified stocks, and the rest in bonds.
VI. The Bottom Line
Let's say you're saving $7,500 a year for the next ten years for your retirement. Using the examples provided above:
In a Treasury Bill, you'll end up with $74,865 (less than your original investment).
With Corporate Bonds, you'll have $89,628
With Stocks, you'll have $112,008.
Yes, there will be volatility in the stock market. But, with your long term horizon, you'll know better than to panic and sell, and help yourself not be one of the 13% of women living in poverty at age 75.
I. What It Is
Inflation is simply the measurement of how much prices rise every year. The most dramatic example of inflation is the price of houses. When I was about six years old, my parents bought a house in a suburb north of Los Angeles for $35,000. Even with the dramatic downward adjustment of house prices in that area within the last few years, that house is worth over $750,000. Over that time, the price of that home has grown at an annual rate of over 6.25%.
The way an annual growth rate works is
Price multiplied by Growth Rate equals New Price.
For example, the first year would be $35,000 X 6.25% = $2,187.50. New Price is $35,000 + $2,187.50 = $37,187.50.
The second year would be $37,187.50 X 6.25 = $2,324.22. $37,187.50 + $2,324.22 = $39,411.72. As you can see, the amount of growth in the second year is higher, because the New Price in the second year is higher.
This additional growth happens every year, and is called the effect of compounding.
II. Inflation and Women
Women live longer than men. Consequently, their investments have to last longer than men's do, in order for women to last for their longer lifespan. When you add to our longevity the fact that we earn less than men (currently about $.80 to the dollar) and average eleven years outside the workforce as non-paid caregivers for family members, it's easy to see that we start with less money, and need to make our money do more, or risk facing poverty in our old age.
III. The Risk of No Risk
The recent correction has been a stark reminder that short term volatility is a fact of life in the stock market. Many have said, "I'm never putting money into the market again. I'm sticking with safe investments." While it is certainly an understandable reaction, it is one that could risk women's long-term financial well being. Here's why.
The common economic barometer for a "no risk" investment is the one year Treasury Bill. Safety is assured, as repayment by the United States Treasury is considered certain. As of October 16, the one year Treasury Bill is paying .36%.
You must pay Federal taxes on the interest earned on your Treasury Bill. Married people earning less than $137,050 have a marginal tax rate of 25%.
Inflation over the last year has run about .31%.
So, your actual return for this "safe" investment is
.36%, Interest Rate, minus
.09% Tax Rate (25% tax on .36%), minus
.31% Inflation (the rise in costs over one year), equals
-.04%
After inflation and taxes (called "real return") you are behind where you started.
As a long term investment, this safe investment is a guaranteed loser.
IV. Some Other Types of Investments
We saw that the type of safety provided by Treasury Bills will actually lose ground over the long term. So, what's a girl to do?
A. Bonds
Bonds are loans. Treasury Bills are loans to the US government.
You can also loan money to corporations, who will pay you back, with interest. Corporate bonds are rated as to the certainty of repayment. "Investment grade" bonds are considered safe, and "junk bonds" are just what they sound like. High interest and low probability of repayment.
An investment grade bond is currently paying 5.62% for eight years.
5.62% Interest Rate, minus
1.41% Tax Rate (25% of 5.62%), minus
0.31% Inflation equals
3.90%
Your risk is that inflation will rise (as virtually every economist agrees it will) over the next eight years, and cut further into your return. But, at least you're staying ahead of inflation.
B. Stocks
Owning stock is owning a piece of a company. Owning stock in just one company is very risky, because if that company has financial problems you can lose some, or in cases like Enron and WorldCom, even all of your money.
Most people diversify their investments by owning many companies. One way of doing that is to invest in an index, like the Dow Jones Industrial Average or the Standard and Poor's 500 Average. Since the Dow has 30 stocks and the Standard and Poor's Index has 500, the latter is a more diversified investment, and is the measurement against which most fund managers base their performance.
Over very long periods of time, the stock market's return is about 9.8%, about 3.5% of which is dividend payments.
9.80% Return, minus
0.85% Tax Rate (3.5% dividend payment times 25%), minus
0.31% Inflation, equals
8.64%
There are a thousand provisos here. The growth in your investment (besides dividends) is taxable when you sell it. Current inflation rates are extraordinarily low, so your normalized return is more like 6.5% than 8.64%. But, in general, you get the point. Your money grows much faster in the market - EXCEPT there are predictable and certain big price fluctuations. You just saw one.
I've seen one in the 70's that took half the value of the market away in a long, grueling grind downward that lasted years. I saw one in 1987 that dropped far and fast. I saw one in the 90's. And there is this one.
So, short term money does not belong here. If you need it in five years, it doesn't belong here.
C. Real Estate
Real estate investments (not your home) have returns that are very similar to stocks. As you have seen, this too is a volatile enterprise. It's also highly specialized and takes a very large initial investment.
V. Risk and Return
If you know the risk, it is lessened. If you have a long term horizon, know that the stock market is VERY volatile and NEVER either sell in a panic - or invest money you need within five years - than you won't be spooked when the inevitable happens.
For those of us who are 50 and older, adding more bonds and lessening stock exposure is smart, as older women have less tolerance for price fluctuations than younger women. Some use the simple equation of subtracting their age from 100, and putting that amount in diversified stocks, and the rest in bonds.
VI. The Bottom Line
Let's say you're saving $7,500 a year for the next ten years for your retirement. Using the examples provided above:
In a Treasury Bill, you'll end up with $74,865 (less than your original investment).
With Corporate Bonds, you'll have $89,628
With Stocks, you'll have $112,008.
Yes, there will be volatility in the stock market. But, with your long term horizon, you'll know better than to panic and sell, and help yourself not be one of the 13% of women living in poverty at age 75.
Tuesday, October 13, 2009
Who Can You Trust?
Loss of Trust
Bernard Madoff defied the odds by returning a consistent 12% annual return to his investors.
Stanford Financial assured its clients that they were investing in safe, insured certificates of deposit.
WorldCom's balance sheet was remarkable in its ability to grow profitably.
All were lies. Investors in each of these enterprises lost billions of dollars.
Market Volatility
Even those women who were fortunate enough to invest with honest advisers see their retirement savings cut by 1/3. We are understandably very hesitant to assume risk in this environment.
Disadvantages for Women Investors
Adding to those challenges, women also face the facts that we:
Last October, I discussed this situation using an example of a woman I called Sarah. http://beyondjane.com/lifestyle/issues/women-and-money-the-upcoming-financial-tsunami/ While she had saved almost $32 thousand, collected $2000 per month in Social Security payments and owns her $335 thousand house free and clear, she was unable to maintain even basic living expenses. Why?
Sarah invested 70% of her money in so-called "safe" investments like insured Money Market Funds and Bonds. While her investments grew slowly and predictably, after deducting the loss of spending power due to inflation, her investments barely kept up during the time she was saving. To make matters worse, she has a long life expectency after retirement that will damage her spending power with these investments even further.
That's what not to do.
While, as we've seen lately, the stock market and real estate investments can be wildly volatile in the short term, over the long term they are the investments that are most likely to grow in excess of inflation.
Stocks? Now?
Last November, I advised getting back into the stock market http://bizcovering.com/investing/its-time-to-start-buying/ If you had followed that advice and bought the S&P 500 index, that investment would have grown by 11.3%. A combination of money market funds and bonds would have grown by 2.5%. Inflation would cut your return on the S&P 500 to 11%, and 2.2% on your bonds.
That could be the difference between a comfortable retirement and one where you can barely pay your bills.
Women and Poverty
According the Center for American Progress, "elderly women are far more likely to be poor than elderly men." More than twice the number of women over 75 are poor compared to men. Those are the facts. We need to face them.
The Real Risk
The real risk we take is not taking risk. We know that, over time, the stock market and the real estate market are the two investments that grow in excess of inflation over time. We know that both can be volatile over the short term.
The Ten Commandments for Investing
1. Buy low. Sell high.
That means buy when nobody else wants to. That means buy on sale.
2. Diversify
The Standard & Poor's 500 Index can be purchased for a little over $1000 per share right now. It gives you a stake in 500 large companies, mostly based in the US.
3. The market is volatile.
Don't sell in a panic. (See #1.)
4. You have an 81 year life expectency.
Even when you're retired you need investments that will outperform inflation. One simple rule of thumb? Subtract your age from 100. Put that percentage of your investments in stock.
5. It's not too late.
Maybe you waited until now to start investing, and you think it's too late to start. It's not.
6. It's not too complicated.
You're smart. You can do this.
7. Don't be afraid of risk.
Be afraid of being old and poor instead.
8. Debt is bad.
Pay it off. That's a good initial investment, if you're just getting started.
9. Pay low commissions.
They diminish your return on investment. Use a discount broker, like ScotTrade or TD Ameritrade.
10. Keep investing.
Put money aside for yourself, and invest regularly. Putting yourself first is not selfish. It's smart.
Bernard Madoff defied the odds by returning a consistent 12% annual return to his investors.
Stanford Financial assured its clients that they were investing in safe, insured certificates of deposit.
WorldCom's balance sheet was remarkable in its ability to grow profitably.
All were lies. Investors in each of these enterprises lost billions of dollars.
Market Volatility
Even those women who were fortunate enough to invest with honest advisers see their retirement savings cut by 1/3. We are understandably very hesitant to assume risk in this environment.
Disadvantages for Women Investors
Adding to those challenges, women also face the facts that we:
- Earn $.80 for every dollar men earn;
- On average, are out of the work force for eleven productive years as an unpaid care giver for a family member; and
- Women live longer than men.
Last October, I discussed this situation using an example of a woman I called Sarah. http://beyondjane.com/lifestyle/issues/women-and-money-the-upcoming-financial-tsunami/ While she had saved almost $32 thousand, collected $2000 per month in Social Security payments and owns her $335 thousand house free and clear, she was unable to maintain even basic living expenses. Why?
Sarah invested 70% of her money in so-called "safe" investments like insured Money Market Funds and Bonds. While her investments grew slowly and predictably, after deducting the loss of spending power due to inflation, her investments barely kept up during the time she was saving. To make matters worse, she has a long life expectency after retirement that will damage her spending power with these investments even further.
That's what not to do.
While, as we've seen lately, the stock market and real estate investments can be wildly volatile in the short term, over the long term they are the investments that are most likely to grow in excess of inflation.
Stocks? Now?
Last November, I advised getting back into the stock market http://bizcovering.com/investing/its-time-to-start-buying/ If you had followed that advice and bought the S&P 500 index, that investment would have grown by 11.3%. A combination of money market funds and bonds would have grown by 2.5%. Inflation would cut your return on the S&P 500 to 11%, and 2.2% on your bonds.
That could be the difference between a comfortable retirement and one where you can barely pay your bills.
Women and Poverty
According the Center for American Progress, "elderly women are far more likely to be poor than elderly men." More than twice the number of women over 75 are poor compared to men. Those are the facts. We need to face them.
The Real Risk
The real risk we take is not taking risk. We know that, over time, the stock market and the real estate market are the two investments that grow in excess of inflation over time. We know that both can be volatile over the short term.
The Ten Commandments for Investing
1. Buy low. Sell high.
That means buy when nobody else wants to. That means buy on sale.
2. Diversify
The Standard & Poor's 500 Index can be purchased for a little over $1000 per share right now. It gives you a stake in 500 large companies, mostly based in the US.
3. The market is volatile.
Don't sell in a panic. (See #1.)
4. You have an 81 year life expectency.
Even when you're retired you need investments that will outperform inflation. One simple rule of thumb? Subtract your age from 100. Put that percentage of your investments in stock.
5. It's not too late.
Maybe you waited until now to start investing, and you think it's too late to start. It's not.
6. It's not too complicated.
You're smart. You can do this.
7. Don't be afraid of risk.
Be afraid of being old and poor instead.
8. Debt is bad.
Pay it off. That's a good initial investment, if you're just getting started.
9. Pay low commissions.
They diminish your return on investment. Use a discount broker, like ScotTrade or TD Ameritrade.
10. Keep investing.
Put money aside for yourself, and invest regularly. Putting yourself first is not selfish. It's smart.
Friday, October 9, 2009
It's Up! It's Down! It's Cheap! It's Expensive!
If you listen to the business news, a myriad of market pundits are shouting,
Well, as always, I think the best judge of that is you. All you need is some information, and you're likely to make a much better decision with your money than anyone who has an agenda.
I. What do we mean when we say "the market?"
Many of you have heard of the Dow Jones Industrial Average, often called the "Dow." The Dow is thirty companies (3M, AT&T, Alcoa, American Express, B of A, Boeing, Caterpillar, Chevron, Cisco, Coke, Disney, DuPont, Exxon, GE, HP, Home Depot, IBM, Johnson & Johnson, Kraft, McDonalds, Merck, Microsoft, JP Morgan, Pfizer, P&G, Travelers, United Tech, Verizon and Wal-Mart.) Since there are about 5000 publicly traded companies, so this is a rather small snapshot.
A much better measurement of the market is the Standard & Poor's 500 (S&P 500), which are 500 large publicly traded stocks, most of which are based in the US. Let's use this much broader index when we refer to the market.
II. What is a P/E?
A P/E is a fraction which consists of
Last year, the P/E was 28.37. The market was trading at 1099.23, and it earned $38.74 over the last twelve months. The market is cheaper than it was last year, but you knew that.
The real question is what is a "normal" P/E? The historic long term average for the S&P 500 is 15.82. So, this index is cheaper than its long term average.
III. The Market is Ahead of Itself
Let's see if people who say this are right. At its low last March, the S&P 500 traded at 666.79. It is now
These people may be right, except for one thing. The market is a discounting mechanism. That means it is priced for events about 6 - 9 months in the future.
Do you think things are getting better? Do you think we're on the road to economic recovery? If so, the market may be fairly priced (but not the bargain in was in March). If not, you probably think it's come too far too fast. Your opinion is as good as any.
IV. If you don't get in now, you'll miss this upturn.
If the best reason you can give for doing something now is that prices will go to the moon if you don't, then you're using the same reasoning that people used to buy Internet stocks in the late 1990's and houses in this decade. It's not a good reason to buy.
V. Buy gold
Gold is, historically, a TERRIBLE investment. What it is, however, is a hedge, and insurance policy against disaster. If currencies lose value (like our dollar has in the recent economic meltdown), people rush to gold as an internationally accepted commodity.
If you think the US economy is going to hell in a hand basket, buy gold. Otherwise, it's ridiculously expensive (an all time hight of $1050 per ounce), and is much more likely to go down over the long term than it is to go up.
So, there you have it. You have all the information you need to be a pundit. Draw your conclusions based on the facts, and act accordingly.
- "Beware! The market has gotten ahead of itself!"
- "If you don't get in now, you'll miss this upturn!"
- "The market is getting very expensive here!"
- "The market is historically very cheap!"
- "Buy gold!"
Well, as always, I think the best judge of that is you. All you need is some information, and you're likely to make a much better decision with your money than anyone who has an agenda.
I. What do we mean when we say "the market?"
Many of you have heard of the Dow Jones Industrial Average, often called the "Dow." The Dow is thirty companies (3M, AT&T, Alcoa, American Express, B of A, Boeing, Caterpillar, Chevron, Cisco, Coke, Disney, DuPont, Exxon, GE, HP, Home Depot, IBM, Johnson & Johnson, Kraft, McDonalds, Merck, Microsoft, JP Morgan, Pfizer, P&G, Travelers, United Tech, Verizon and Wal-Mart.) Since there are about 5000 publicly traded companies, so this is a rather small snapshot.
A much better measurement of the market is the Standard & Poor's 500 (S&P 500), which are 500 large publicly traded stocks, most of which are based in the US. Let's use this much broader index when we refer to the market.
II. What is a P/E?
A P/E is a fraction which consists of
- The Price of the index as the numerator, and
- The Earnings for that index as the denominator.
Last year, the P/E was 28.37. The market was trading at 1099.23, and it earned $38.74 over the last twelve months. The market is cheaper than it was last year, but you knew that.
The real question is what is a "normal" P/E? The historic long term average for the S&P 500 is 15.82. So, this index is cheaper than its long term average.
III. The Market is Ahead of Itself
Let's see if people who say this are right. At its low last March, the S&P 500 traded at 666.79. It is now
- Up 60% from its low of 666.79 last March, and
- Down 30% from its high of 1564.74 in October, 2007
These people may be right, except for one thing. The market is a discounting mechanism. That means it is priced for events about 6 - 9 months in the future.
Do you think things are getting better? Do you think we're on the road to economic recovery? If so, the market may be fairly priced (but not the bargain in was in March). If not, you probably think it's come too far too fast. Your opinion is as good as any.
IV. If you don't get in now, you'll miss this upturn.
If the best reason you can give for doing something now is that prices will go to the moon if you don't, then you're using the same reasoning that people used to buy Internet stocks in the late 1990's and houses in this decade. It's not a good reason to buy.
V. Buy gold
Gold is, historically, a TERRIBLE investment. What it is, however, is a hedge, and insurance policy against disaster. If currencies lose value (like our dollar has in the recent economic meltdown), people rush to gold as an internationally accepted commodity.
If you think the US economy is going to hell in a hand basket, buy gold. Otherwise, it's ridiculously expensive (an all time hight of $1050 per ounce), and is much more likely to go down over the long term than it is to go up.
So, there you have it. You have all the information you need to be a pundit. Draw your conclusions based on the facts, and act accordingly.
Wednesday, October 7, 2009
What If We Had A Financial Meltdown - And Did Nothing
I. What Financial Reform Says
Earlier this year, we discussed the Obama Administration's financial regulation proposals in detail, breaking the discussion into a four part series. Here is the full text of the proposal http://documents.nytimes.com/draft-of-president-obama-s-financial-regulation-proposal#p=2
If you didn't have a chance to read that discussion, here it is.
Given the severity of the recent recession, not to mention its causes, the one issue I did not discuss was the possibility that Congress would take no action at all.
So, of course, that's exactly what our elected representatives did. Or, did NOT do, to be more precise.
II. What does Financial Reform have in common with Health Care Reform?
Last month, http://womensfinancialplanning.blogspot.com/2009/09/health-care-reform-meets-financial.html we saw how financial reform is inextricably entwined with health care reform. As you know, an integral part of health care reform addresses insurance reform,e.g., mandatory covering of pre-existing conditions, the much-discussed "public option" and so on.
Since we, as taxpayer/owners of insurance bohemoth American International Group ("AIG"), have paid $1400 per family to date for its bailout, after it took extraordinary unregulated risk in the housing market, you'd think this issue would demand resolution.
Think again.
Whether you support the "public option," a government-run program that will compete with insurance companies, or the insurance "co-op," designed to provide a more competitive environment for health insurance, know this. Insurance is regulated by each state - not the Federal government - and in many states, as much as 85% of health insurance is held by one insurer.
If this were true for Microsoft, the company would be sued for having a monopoly in that state. Yet, it is okay for insurance companies, because each state operates with different rules.
This is unnecessarily complicated, non-competitive and does absolutely nothing for anyone except insurance companies.
III. Dare we ask that two things be done at once?
If you think it's too much to address financial reform and health care reform in one Congressional session, then be prepared for more of the same.
If not, you may want to drop a quick note to your elected representatives, with whom, by the way, financial lobbyists have spent $3.4 billion to ensure their support.
Here's where to find them. http://www.visi.com/juan/congress/
Earlier this year, we discussed the Obama Administration's financial regulation proposals in detail, breaking the discussion into a four part series. Here is the full text of the proposal http://documents.nytimes.com/draft-of-president-obama-s-financial-regulation-proposal#p=2
If you didn't have a chance to read that discussion, here it is.
- http://womensfinancialplanning.blogspot.com/2009/07/obama-administration-financial.html
- http://womensfinancialplanning.blogspot.com/2009/07/obama-administration-financial_07.html
- http://womensfinancialplanning.blogspot.com/2009/07/president-obamas-financial-regulation.html
- http://womensfinancialplanning.blogspot.com/2009/07/president-obamas-financial-regulation_10.html
Given the severity of the recent recession, not to mention its causes, the one issue I did not discuss was the possibility that Congress would take no action at all.
So, of course, that's exactly what our elected representatives did. Or, did NOT do, to be more precise.
II. What does Financial Reform have in common with Health Care Reform?
Last month, http://womensfinancialplanning.blogspot.com/2009/09/health-care-reform-meets-financial.html we saw how financial reform is inextricably entwined with health care reform. As you know, an integral part of health care reform addresses insurance reform,e.g., mandatory covering of pre-existing conditions, the much-discussed "public option" and so on.
Since we, as taxpayer/owners of insurance bohemoth American International Group ("AIG"), have paid $1400 per family to date for its bailout, after it took extraordinary unregulated risk in the housing market, you'd think this issue would demand resolution.
Think again.
Whether you support the "public option," a government-run program that will compete with insurance companies, or the insurance "co-op," designed to provide a more competitive environment for health insurance, know this. Insurance is regulated by each state - not the Federal government - and in many states, as much as 85% of health insurance is held by one insurer.
If this were true for Microsoft, the company would be sued for having a monopoly in that state. Yet, it is okay for insurance companies, because each state operates with different rules.
This is unnecessarily complicated, non-competitive and does absolutely nothing for anyone except insurance companies.
III. Dare we ask that two things be done at once?
If you think it's too much to address financial reform and health care reform in one Congressional session, then be prepared for more of the same.
If not, you may want to drop a quick note to your elected representatives, with whom, by the way, financial lobbyists have spent $3.4 billion to ensure their support.
Here's where to find them. http://www.visi.com/juan/congress/
Saturday, October 3, 2009
Important Pricey Leather Handbag Information
I. Gender Marketing says. . .
Men identify deeply with their jobs. They're hardwired for task orientation. When they lose their jobs, they tend to lose their identity.
"Women are . . . worried about their jobs, but not to the extent that they feel their . . .existence is being threatened, and so they are in the mood to buy despite the crisis," gender marketing expert Diana Jaffe told Reuters recently.
So, do we conclude that men face the current economic slump by questioning their identity and cutting back on spending, and women make themselves feel better by shopping for pricey leather handbags?
II. Why do we buy?
Maybe watching "Madmen" has hurled us back in time and made us behave as though we were living in far less liberated 1960's. Maybe we are taking the ostrich approach to managing our money, and, like Nero, are fiddling while Rome burns. Maybe, in this particular case, we should behave more like men - but for very different reasons.
We need not define ourselves by the way we earn a living in order to face our current economic situation. We can continue to be well-rounded human beings who know that our net worth and our self worth are very different. But in order to pursue the things that bring us happiness, we'd best ensure we have a roof over our head and food on our table in our old age before we buy "pricey leather handbags."
Yet, the fashion industry send us messages - four times a year, via preposterously thin teen-age girls - that we "need" what they offer. Do we? Does spending money on handbags and shoes really make us feel good enough to forego providing for our long term needs?
III. Put Yourself First
If you have put aside enough for yourself to live comfortably for the rest of your life and you need a handbag, by all means buy one, as long as you have the money. But if you have not provided for your long term security, exactly what do you accomplish by buying something that you truly cannot afford?
The appearance of wealth is nothing. It is for someone else. It speaks to others - not you.
IV. You Say
Times are difficult. Current times are more difficult than the grueling recession that took place in the 1970's, when I began working in finance. It was a time when wealth was lost in a grinding market correction that took place over years and cut portfolios in half. Inflation was out of control and job losses made the national mood grim. It was also the time when Warren Buffett invested heavily in the stock market and earned wealth that is measured only slightly less than that of Microsoft founder Bill Gates.
It is your right to buy whatever you want, whenever you want. You can be tempted by the fashion industry to buy gladiator shoes, designer bags or whatever it is - as long as it speaks to your authentic self.
You can also decide to put that money aside in investments that will outperform the ravages of inflation, like stocks and real estate, which will provide for you for the rest of your life.
One in four of us will live to age 95. Elderly and destitute with a pricey handbag in my closet, is not the choice I make for myself. I invite you to join me in defying gender marketing research, and investing your time and resources in investing in your future.
Men identify deeply with their jobs. They're hardwired for task orientation. When they lose their jobs, they tend to lose their identity.
"Women are . . . worried about their jobs, but not to the extent that they feel their . . .existence is being threatened, and so they are in the mood to buy despite the crisis," gender marketing expert Diana Jaffe told Reuters recently.
So, do we conclude that men face the current economic slump by questioning their identity and cutting back on spending, and women make themselves feel better by shopping for pricey leather handbags?
II. Why do we buy?
Maybe watching "Madmen" has hurled us back in time and made us behave as though we were living in far less liberated 1960's. Maybe we are taking the ostrich approach to managing our money, and, like Nero, are fiddling while Rome burns. Maybe, in this particular case, we should behave more like men - but for very different reasons.
We need not define ourselves by the way we earn a living in order to face our current economic situation. We can continue to be well-rounded human beings who know that our net worth and our self worth are very different. But in order to pursue the things that bring us happiness, we'd best ensure we have a roof over our head and food on our table in our old age before we buy "pricey leather handbags."
Yet, the fashion industry send us messages - four times a year, via preposterously thin teen-age girls - that we "need" what they offer. Do we? Does spending money on handbags and shoes really make us feel good enough to forego providing for our long term needs?
III. Put Yourself First
If you have put aside enough for yourself to live comfortably for the rest of your life and you need a handbag, by all means buy one, as long as you have the money. But if you have not provided for your long term security, exactly what do you accomplish by buying something that you truly cannot afford?
The appearance of wealth is nothing. It is for someone else. It speaks to others - not you.
IV. You Say
Times are difficult. Current times are more difficult than the grueling recession that took place in the 1970's, when I began working in finance. It was a time when wealth was lost in a grinding market correction that took place over years and cut portfolios in half. Inflation was out of control and job losses made the national mood grim. It was also the time when Warren Buffett invested heavily in the stock market and earned wealth that is measured only slightly less than that of Microsoft founder Bill Gates.
It is your right to buy whatever you want, whenever you want. You can be tempted by the fashion industry to buy gladiator shoes, designer bags or whatever it is - as long as it speaks to your authentic self.
You can also decide to put that money aside in investments that will outperform the ravages of inflation, like stocks and real estate, which will provide for you for the rest of your life.
One in four of us will live to age 95. Elderly and destitute with a pricey handbag in my closet, is not the choice I make for myself. I invite you to join me in defying gender marketing research, and investing your time and resources in investing in your future.
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