Thursday, February 11, 2016

Nervous About the Stock Market?

     The stock market affects my life, and I bet it affects yours as well. Those of us without a pension have our "pension" (if we have one at all) in the form of an IRA or 401K, which is likely invested primarily in mutual funds holding stocks and bonds.

     But even for those who do have a pension ... where do you think the pension fund gets the money to pay your benefits? Largely from the stock market. One of the most significant holders of stock in America is CalPERS, the pension fund for California state, school and public agency employees.

     (Honestly, that's one of the things that makes me nervous about Bernie Sanders. I am no defender of Wall Street ethics, but I can only think that if the president were to go to war with Wall Street, as Sanders wants to do, one of the casualties would be my pension. So I'd be more comfortable with the reformist approach of Hillary Clinton who, for example, proposes the elimination of the egregious tax dodge called "carried interest" that allows executives to pay lower taxes on their income. Now, if we could only do something about those ceo's who ... oh, don't get me started, that's another subject.)

     Be that as it may, since the beginning of the year the stock market has swooned, making me more than a little nervous about my IRA. So I turned to my financial guru, Jeremy Kisner of Surevest Wealth Management in Phoenix, to gain a little perspective on the situation. Here, with his permission, I've distilled some of what he has to say to us retirees:

What Is Going on with This Market?
     Last year volatility in the stock market returned after several years of steady gains. The VIX, a measure of volatility also known as a “fear gauge”, has recently hovered between 20-30, representing 60 percent more volatility than a year ago. However, by historical standards, this is not unusual. From 1990 through 2014, the VIX spent nearly a third of its time between 20 and 30. Still, the uptick in volatility has been unnerving for many investors.

     The major stock market averages were essentially flat in 2015, while oil and other commodities were crushed. One of the culprits was the Chinese economy. But the headlines coming out of China obscure the fact that a lot of the U.S. economy is on fairly steady footing. We have record car sales, rising home values, low unemployment, low commodity prices for producers and low gas prices for consumers, strong corporate balance sheets, increasing profit margins, and decent retail sales numbers. Indeed the U.S. economy showed enough strength for the Federal Reserve to raise interest rates in December.

     What everyone wants to know is: Will markets continue to fall? When will they bounce back? Is this a time to get more conservative or more aggressive?
     For the answer, we can either look at history, or the predictions of market analysts. I try to ignore the analysts. Why? An article Strategists: Full of Bull reviewed 186 market forecasts over the past 19 years and reported the average forecast was not only wrong ... it was more wrong than if you had made no prediction at all!

     Market analysts have a bullish bias, with only 9 percent predicting a down market in years when the market was down. So far, this year is no exception. Analysts have an average forecast for 8 percent growth. Who knows? That may come to pass. But so far the lousy forecasting ability of these experts appears to be intact. So most investors are best served by ignoring forecasts by people in the media who espouse their convictions with authority -- and end up being wrong.
     Stock market corrections are actually a normal part of equity investing. The S&P 500 has declined 10 percent or more 29 times from 1935 through 2015. The average decline was 21 percent, occurring once every 2.75 years. In hindsight, there are explanations for these corrections. Yet trying to predict when the next one will occur is impossible. By the way, the average rebound from those declines has been 68 percent.

     So let's look at what has actually happened over the past 70 years. The stock market has ended up declining in more than half of the years when it was down in January. The average yearly decline was 3.2 percent. But that doesn’t sound too scary when you consider that we are already down about 10 percent year-to-date. One interesting point to add is that the worst January of the past 70 years was 2009 when the market dropped 8.6 percent in January. Stocks continued to sell off for a couple more months, but then rebounded to end the year up 26 percent!

     Stock market corrections are scary and unpredictable. Market analysts use all kinds of statistics to explain (in hindsight) what happened. The reality of the situation is financial markets are primarily driven by investor psychology based on short-term events, and it’s very difficult to determine how greedy or scared people will get at any moment.

     Imagine if you had built a family business over the course of several decades. Today, your company is growing and highly profitable. Would you sell your company (or part of it) and buy it back every few months? Of course not. Yet today, investors can buy and sell shares in a nanosecond with very little transaction costs. This is why we have so much volatility. The short-term value of your investment portfolio is more reflective of investor sentiment than the long-term value of the underlying assets.

     It is helpful for investors to understand that market returns over the long run come down to two things: jobs and earnings. People will continue to buy products and services as long as they have jobs. Some people question the quality of jobs and the accuracy of the numbers, but job growth has exceeded expectations for the past year, and the unemployment rate is down to a healthy 4.9 percent.

     Earnings of publicly traded companies are historically traded by investors at a multiple of 15 times. This means if a company earns $1 per share, its stock trades at $15 per share. When the company grows its earnings, there is typically a corresponding increase in its stock price. The U.S. stock market is currently valued at about 15x earnings, near its historical average. Investors are usually rewarded for selling when earnings multiples rise significantly above their long-term averages and for buying when they fall below. In addition, having a globally diversified portfolio enables us to invest in markets that trade at discounts to ours as well as into asset classes that are out of favor (or, "on sale").

     Will companies be able to continue to grow and hire more people? Consider this: despite what may happen in the next couple of quarters, the global population is expected to increase from 7.3 to 9.6 billion people between now and 2050. That is a lot more customers to buy cars, computers, food, clothing and everything else. The world is growing, and so the companies in your investment portfolio are likely to find ever-more-profitable ways to serve their growing client bases.

     The most important part of successful investing is to find a viable strategy and stick with it. The worst thing to do is to second guess yourself because of a disappointing period. If you just stay the course, you can probably be “average”.  In most things in life we do not strive to be average. However, the average returns for stocks, bonds and balanced portfolios are the safest and surest way to grow your retirement portfolio over the long term. Most people think in a time horizon of weeks or months; and the common way people predict the future is to look at recent experience and expect it to continue into the future. The reality is that financial trends reverse themselves abruptly, making it hard to see any pattern in the time horizons that most investors consider. As an investor you have to train yourself to think in terms of years, even decades.

     Also, sometimes the “averages” seem suspect because we assume that yearly stock and bond market returns would be clustered around the average. But that is not the case. Market returns in any given year are rarely close to their long-term averages. For example, the average return for stocks from 1926 to 2014 was 10.2 percent. How many times during those 89 years do you think the annual return fell between 8 and 12 percent? Incredibly, that only happened six times.

     So you cannot expect an “average” return this year, or next. You may get much more or much less. But history has shown that over time, average returns will make your retirement plan work, even if in any given year, that may be hard to see. But as I covered in more detail in my article When Will You Need The Money? with time comes predictability … and averages.


Saturday, February 6, 2016

Never Trust Anyone Under 30

     A lot of things puzzle me about the state of affairs in this country. For example, we remember that the "youth vote" was so important back in 2008 to galvanize the Obama phenomenon and help elect the first black president.

     President Obama's signature accomplishment is the Affordable Care Act -- except now the Affordable Care Act is running into problems, mostly of the financial kind. Why? Because not enough young people are signing up to get medical insurance. So it turns out that the people who were behind this major social program are the very same ones who are now putting it in jeopardy and could even cause it to fail.

     You just can't trust those young people.

     Meanwhile, all the pundits are still talking about the youth vote, as if there's something special about it. They say Bernie Sanders represents the future because he is popular on college campuses. But they blast Hillary Clinton because her supporters are older, and so the supposition is that she represents the past.

Would the "youth vote" even recognize this place?
     I actually applaud the 74-year-old Sanders for appealing to young people. I think that in itself is to his credit.

     But my question is: What's so special about the youth vote? My vote counts every bit as much as a vote cast by anyone under 30. And people in our demographic group actually do vote -- a lot more than 20-somethings do.

     I'm in my 60s and plan to be around to vote in at least another three or four presidential elections, not to mention plenty of elections for senator, congressman, governor and everything else in between. So I'm the future, too.

     If you want to know what the youth vote is really about, check out this Salon video to see how much college students know about American history vs. what they know about Snooki and Brad Pitt. And then ask yourself: Do we really want to put our future in the hands of these young  people?

Tuesday, February 2, 2016

Remember Him?

     He was born in March 1914 in a small, remote town called Rumford, known primarily for its paper mill. The population was 898 in 1890 but grew to over 8,000 by 1920. Then came the Depression and the paper business was decimated. Today the population of Rumford is back down to about 5,000, and the town is known mostly for a nearby ski resort.

     His father, Stephen Marciszewski, had immigrated to the United States from Poland in 1903. He changed his name and married Josephine Cznaranecka from Buffalo, NY. The father worked as a tailor, and his son, who was shy but also known to have a temper, worked with him in the tailor shop as a boy.

Rumford in 1905
     He attended a small liberal arts college, then went to Cornell University where in 1939 he collected his law degree. After a stint in the Navy, he went home, not to Rumford, but to the nearby "big city" of Waterville. He started practicing law, but after a few years he was bitten by the political bug. Do you know who he is?

     He joined the Democratic party in his solidly Republican state, then ran for the state legislature and won. A few years later, the Democratic party was looking for somebody to stand for governor. He agreed to run, out of a "sense of duty," even though nobody expected a Democrat to win.

     The story goes that he had been offered a full partnership at a prestigious law firm. The job was tempting, since he had a growing family (he eventually had five children), along with some unpaid medical bills and a mortgage on a new house. But he nevertheless stuck with his political commitment, choosing "society over self," and went forward with the campaign. When he won his upset victory and entered the governor's office, he reportedly owed $5,000 in medical bills, and his salary as governor was $10,000 a year.

     He served out his term and was re-elected. Then he decided to run for the U. S. Senate. He won with 60 percent of the vote and was re-elected three times, in 1964, 1970 and 1976.

     In the Senate he developed a reputation for honesty and straight talk, but that made him run afoul of Lyndon Johnson, especially later on when he came out against the Vietnam War. Nevertheless, he worked tirelessly bringing home money and projects to his home state of Maine, and he became an early environmentalist, campaigning for laws to curb pollution and passing legislation requiring lower emissions from the automobile companies.

     In 1968 he was nominated for vice president, joining Hubert Humphrey in opposition to Richard Nixon. The Democrats won only 13 states, losing 301 to 191 in the electoral college -- as third-party candidate George Wallace took five southern states and 46 electoral votes.

     So Edmund Muskie went back to the Senate where he was a fiscal conservative, trying to hold down excessive government spending, but also continued to support liberal social causes such as civil rights and the environment. In 1972, Muskie threw his hat into the presidential ring. Initially, he was considered the front runner. He won the Iowa caucus. But his victory was somewhat hollow as George McGovern made an unexpectedly strong showing. Muskie also won the New Hampshire primary, but again, by less than expected.

     There were rumors in the press that Muskie had taken drugs. There were claims that he had used the derogatory term "Canucks" to refer to French Canadians. Then a newspaper reported that Muskie's wife drank too much and used off-color language. Muskie stood up and made an impassioned defense of his wife during a New Hampshire snowstorm. The press said Muskie broke down in tears. Muskie claimed he wasn't crying; there was melting snow on his cheeks. The issue of the tears was never settled, but either way his reputation as the strong, reasoned, level-headed candidate was tarnished, and his presidential campaign fell apart.

Ed Muskie in 1980
     Ed Muskie went back to the Senate until 1980 when President Jimmy Carter named him Secretary of State, after Cyrus Vance resigned in opposition to Carter's ill-fated attempt to rescue the American hostages in Iran. Muskie tried to use diplomacy to free the hostages, but he ran out of time as Carter lost the election to Ronald Reagan. At the end of his term, Carter awarded Muskie the Presidential Medal of Freedom, on Jan. 16, 1981.

     Muskie stayed on in Washington and practiced law. In 1987 he was appointed a member of the President's Special Review Board known as the Tower Commission to investigate the Reagan administration's role in the Iran-Contra affair. The commission ultimately implicated Oliver North but found that Reagan himself was only accountable for a "lax managerial style."

     Muskie died in in 1996 at age 81, and is buried in Arlington National Cemetery, lauded as a man who according to author David Revin, "sees change not in radical, but incremental terms," and who "sees leadership as identifying problems, altering people, persuading them to a course of action and assembling the political muscle to put it through."

Saturday, January 30, 2016

Behind the Florida Scenery

     You spend a couple of weeks in Florida, and you know it can't all be sunshine, warm sand and beautiful sunsets.

     If you're there for that long, you're sure to get a few dark, rainy days -- windy enough to blow over the umbrellas at the pool ...

     This is not a river or stream; it's a culvert that hasn't drained because of all the rain.

     And this is not a pond. They say the mosquito season is going to be bad this year.

     It didn't rain every day. But still, I had time to go to a flea market . . .

     where I bought a decorative dragonfly and saw a live macaw at one of the booths.

     I made a few friends playing table tennis at the local recreation hall.

     And then, yeah . . .  there's the traffic.

     Still, a beautiful sunset over the Gulf of Mexico.

     And so, goodbye to Florida.

Monday, January 25, 2016

New Take on Nostalgia

     Julian Barnes in his book The Sense of an Ending characterizes nostalgia not as a sentimental memory of "something that wasn't even true at the time," but instead as, "the powerful recollection of strong emotions -- and a regret that such feelings are no longer present in our lives."

     He confesses that he's nostalgic about the early years with his ex-wife, the birth of his daughter, and a road trip taken long ago. "And if we're talking about strong feelings that will never come again, I suppose it's possible to be nostalgic about remembered pain as well as remembered pleasure."

     So is anyone nostalgic about Star Wars? Kathy Gottberg on her blog SMARTLiving365 recalls going to see the original Star Wars with her fiance back in 1977 and marveling at how the innovative film brought the classic story of good versus evil to the screen in a visually exhilarating way. Now, so many years later, with the release of Star Wars: The Force Awakens she offers Five Smart and Timeless Lessons from Star Wars, which include several observations about the Force -- and how these days age, color or gender doesn't matter when it comes to saving the Galaxy.

     Meanwhile, Meryl Baer of Six Decades and Counting gets nostalgic remembering the music of the rock and roll greats we all grew up with. In Rock Stars Voice Our Story she recalls the night of Jan. 23, 1986, when the first Rock and Roll Hall of Fame induction ceremony made history in New York City. And if you don't remember the ceremony (which you probably don't) you surely do remember some of the musicians honored that night, from Chuck Berry and Little Richard to Elvis Presley, the Everly Brothers and a dozen other icons.

     Linda Myers, of Thoughts from a Bag Lady in Waiting, also waxes nostalgic in Snowbirds in Year 4, but her "powerful recollections" go back only a few years, reflecting how people have come to spend their winters at the Voyager RV Resort in Tuscon, Ariz. If that in itself doesn't bring you, oh, say ... a beautiful mornin', then you should know that her husband has a lead part in the Voyagers Light Opera Company's production of Oklahoma!

     Meanwhile, Rita R. Robison, consumer journalist, is bringing us back into the kitchen. In Which Oils Should You Use? she gives us the sizzle on which oils are better for cooking and which are more appropriate for salads. Then for a second helping she serves up New Evidence on Food Dyes, which reports on a recent study from the Center for Science in the Public Interest about the safety of coloring agents in our food.

     Finally, Laura Lee Cater has discovered that she shares something in common with today's 20-somethings. Like Millennials, she usually opts to choose a . . . well, to find out take a trip over to Millennials and Me (at 60!) and discover the common element that inspires her to fondly recall the days when she went island hopping across the Caribbean and country hopping through East Asia.