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Wednesday, 20 August 2014

Stock market bubble warnings grow louder



Some of the brightest minds in finance are sounding the alarm about a stock market bubble.

They aren't warning of an imminent crash, but their comments should remind investors that the current bull market -- over five years long -- can't last forever.

1. Nobel Prize-winning economist Robert Shiller: Valuations at "worrisome" levels.
 
"The United States stock market looks very expensive right now," Robert Shiller wrote in a recent column for The New York Times.
 
Shiller, a Yale University professor who is often cited as one of the most influential people in economics and finance in the world, created a metric that compares stock prices with corporate profits. The metric recently climbed above 25. That level has only been surpassed three times since 1881: 1929, 1999 and 2007.

Steep market tumbles followed each instance, including the bursting of the dotcom bubble in the early 2000s. The Nasdaq still hasn't fully recovered from that meltdown.

The Yale professor sounds bewildered by the lofty valuations for the stock market, which has nearly tripled since the March 2009 bear market lows.


But none of this means it's time to sell everything. Shiller notes that his gauge is a "very imprecise timing indicator" and said the market could "remain at these valuations for years."

2. Hedge fund king Carl Icahn believes there's a bubble.
 
"We can no longer simply depend on the Federal Reserve to keep filling the bunch bowl," the hedge fund billionaire wrote on Tumblr last week, referring to the numerous measures the Fed has taken to stimulate the U.S. economy.

Icahn described a "dangerous financial situation" that includes challenges tied to monetary policy, unemployment and income inequality.

He also said recent comments from Fed chief Janet Yellen at the International Monetary Fund "suggest, and I agree, that we are in an asset bubble."


Still, Icahn isn't calling for an imminent crash by any means. He acknowledged a bubble might not burst for "the next one, five, ten or 20 years."

It's also important to recall that Icahn currently owns billions of dollars worth of stocks. During the second quarter he even raised his stake in eBay (EBAY, Tech30) and added a new investment in Gannett (GCI). He still thinks there's value out there.

3. Ex-Treasury secretary Robert Rubin: Low rates could spark another financial crisis.
 
"The risk of excesses and the consequent instability have increased substantially," Rubin and Harvard professor Martin Feldstein wrote in an Op-Ed in The Wall Street Journal last week.

These financial luminaries (Feldstein served as chief economic adviser to President Ronald Reagan) didn't explicitly say whether a bubble already exists or if the Fed needs to hike rates now to prevent one.

However, they did advise the central bank to consider the possibility that the "excesses" caused by extremely low interest rates could "create financial crises."

Rubin and Feldstein pointed to record high stock prices, "dramatically" lower spreads on low-quality junk bonds and surging volumes of high-risk leveraged loans as alarming signs.

If hedge funds are holding assets that suddenly pop in a bubble, there's a risk of "contagion and snowballing effect" when they all hit the exits at the same time, the duo wrote.

Rubin should know about this threat. He was in charge of Treasury in 1998 when collapsing hedge fund Long-Term Capital Management imperiled the whole system. Ultimately Wall Street was forced to come to the rescue with a $3.6 billion industry-funded bailout.

Friday, 15 August 2014

Smart investors ignore the news

Chuck Jaffe

You can read the headlines, just don’t trade on them

If the market is making your head swim, you may be able to solve the problem by turning off, tuning out and dropping out of the 24-hour news cycle. 

That’s an odd suggestion coming from someone who works in the media, but what makes it doubly strange is that it’s prompted in part by the website I trust like no other, MarketWatch.com. Beyond simply being my employer, I trust the site because I know personally the quality people and journalists my fellow staffers are. 

But, last month, MarketWatch set a site record for the number of unique visitors to its news pages, which set me to wondering what kind of messages we were sending to both new and increasingly active visitors at a time when they were presumably drawn in looking for some measure of market guidance to calm their nerves or keep them on top of the financial news. 

In the old days of newspapers, I would have gone through a stack of front pages and looked at headlines. In the Internet world with its 24/7 action, that doesn’t work, because a busy news site will change its front page multiple times over the course of a day, and there’s not necessarily a record of what the site looked like with each of those changes. 

So I looked at “snapshots” of MarketWatch’s front page, one each day — just the top screen, always the first one available after 5 p.m. ET — just to see what titles would have captured the attention of an average investor seeking some guidance, perspective and outlook after the market had closed for the day. 

Here were some of the highlights, in chronological order, from July (I have removed the names of experts quoted; it’s unimportant if you actually recognize the name, but highly important that a news site wouldn’t use the name of a non-expert): 

•‘This is not an average, typical or normal bull market’ [expert] says
•Today’s bubbles aren’t like the famous bubbles of the past
•If ever the stock market flashed a ‘sell’ signal, it’s now
•‘Rotten rotation’ could signal bull market is living on borrowed time
•[Expert]: U.S. stocks will be ‘very disappointing’ for 10 years
•A stock correction is coming, then more years of gains; [expert]
•[Expert] There’s a big hole in the bull case for stocks
•We’re in the third biggest stock bubble in U.S. history
•Not much fallout from Gaza, Ukraine? Wait a year, says [expert]
•[Expert]: Great Crash of 2016, third $10 trillion loss this century
•Greenspan says bubbles can’t be stopped without ‘crunch’
•Buy-and-hold investing is impossible
•Stock bubble is ‘beyond 1929 and 2007’: economist
•Stock trader who called 3 crashes now sees a 20% collapse
•[Expert]: Wait to be uber-bearish until autumn 

That’s just 15 examples — one of them from my own column — less than half of the investing-oriented headlines that caught my eye. I would have included something from an expert suggesting a big gain ahead, but there weren’t any of those atop the pages I looked at (they could have been there at other times of day). 

It’s no wonder after a barrage of headlines like that that the first monthly measure of investor sentiment released for August — the Investors’ Business Daily Economic Optimism Index — was down sharply. 

But at a time when the round-the-clock news cycle and the ubiquity of social media makes it possible to not only read the stories but to feel like you can influence the news — or at least the thinking of others who have seen the same stories — it’s hard to believe there will ever be enough agreement between the bulls and bears to believe an overall sense of optimism. 

They’re no more likely to get together and see the situation in a remotely similar way than impassioned Republicans and Democrats would be to suddenly see key issues the same way, allowing for fast, easy progress. 

Meanwhile, if this stuff confuses the general public, it enriches the sharpies on Wall Street.
Malcolm Polley, president of Stewart Capital Advisors and co-manager of Stewart Capital Mid-Cap SCMFX +0.29% , could not have been more blunt about how the headlines are helpful to the industry, even if all they do is confuse the public. 

“To the extent that the news and information turns into crap — and that crap turns into volatility — that’s good for me,” he said. “For us, it’s information that creates a dramatic downward move in a price, where the information might be valid, or it might be misunderstood. … The knee-jerk reaction is ‘This looks bad, let’s get out,’ but that creates opportunities if you understand the situation, rather than just reacting to what you read or hear. 

“We like the information — and that there’s so much of it available — but most of it’s just noise.”
Moreover, the constant prognostications have made it so that everyone seems to think they can be a market weatherman, capable of spotting the next squall, shower or sunny day. Relying on that purported “expertise,” rather than trying to be prepared for all weather conditions is how someone finds themselves sitting inside on the sunny days or getting rained on without an umbrella during the showers. 

“The headlines and forecasts are interesting and funny, but they should teach investors to just give up on the short-term trends, because even if you are right there you’re not right for long,” said Ned Riley, president of Riley Asset Management in Boston. “I sometimes make short-term forecasts too, but I’d rather be right in the long-term.” 

In short, reading the analysis and looking at the headlines is fine; it makes you a more informed investor. 

Acting on it is where investors get themselves into trouble. 

If you’ve been changing your actions based on the news, the headlines or the websites you favor and it hasn’t been improving your investment results, it may be time to disconnect your portfolio from what you are reading and listening to. 

Said Riley: “If you get the long-term forecast wrong – if you miss out on the trend for the next few decades because you’re concerned about what could happen in the next few weeks or the few weeks after that – that’s how you wind up in real trouble. … It’s not about how many corrections or downturns you called right if all those moves don’t add up to making real money over a lifetime.”

 

The Recession's Over: Clean Your Financial House and Win

If you were an operations leader during the 2008 Financial Crisis and deep ensuing recession, you probably spent a lot of time on the phone like I did, literally begging vendors and business partners not to cancel credit lines or change payment terms vital to keeping a business afloat.

If that's the case, none of us were alone as total credit market debt held by American businesses peaked in 2008; contracting by $247.7 billion in 2009, the worst year of the downturn; not reaching 2008's levels again until 2011 or 2012.

So what happens when nearly a quarter of a trillion dollars in business credit is siphoned out of the economy in one year, customers pay you slowly for past business, banks stop lending, and customers stop buying new products?

Welcome to the world American COO's, CFO's, and CEO's faced just a few years ago: a period of intense struggle and fight or flight mode for many of us.

Thankfully, business lending regained traction, increasing from $11.66 trillion in 2008 to $13.60 trillion in 2013 and there's no longer scores of doom-and-gloom reports about small business owners who had their business credit cards cancelled with little notice from lenders.

Now that the "worst" seems to be over in this area, hopefully, business leaders are able to breathe again and get back to growing their companies after several tough years.

Here's some things to consider moving forward:

Clean Up Your Balance Sheet: If you still have unpaid balances with business partners, tally them up, formulate a realistic plan to retire your debt, and contact the vendors as soon as possible. Americans are a very forgiving lot, even in business, and professionals that you work with at one company can easily become new business partners in another organization someday.

Additionally, it's much easier to reinstate cancelled or dormant credit lines with vendors once you're paid up with them; providing you more resources that you can leverage as you go out to win more business and grow your company.

Shore Up Your Banking Relationships: Before the downturn, we worked with a fantastic business banker. He looked like a winner, was smart as a whip, and always had half a dozen ideas for helping us improve our business and maximize our relationship with his bank. Unfortunately for us, our banker received a promotion and we never "took" to his replacement; generally feeling that this individual had little sense of our business needs or our business in general.

However, in 2010, our business hit a rough patch and my weak relationship with our new banker became glaring; leading to us to briefly "audition" replacement banks, before being reassigned to work with a more proactive banker at our home bank.

Don't make the mistake I made several years ago. A growing business needs strong financial relationships and I didn't ask our new banker to lunch or bring them into our office to see if they had any genuine ability to help us. Instead, during a tough time, I worked with a stranger and that's exactly how our new banker treated us.

Now that the downturn's over and hopefully your overall business and balance sheet is in better shape; this is a great time to be scheduling lunch or a meeting with your business banker when you don't need them, so you can draw from a well filled with water instead of the dry well I dipped in four years ago.

Reward Your "Foxhole" Partners: Who stood by you through thick-and-thin when things got rough in 2009 and 2010? The business partners who didn't shut off your copiers or seize your computer equipment when you couldn't make regular payments and struggling to bring receivables in.

If you haven't done so, those business partners should be thanked and lionized by your organization. They stood by you during the worst of times; imagine what kind of partners they'll be now that things are improving.

Punish The Cowards: Who cut-and-ran when things got rough in 2009 and 2010? The business card issuer who cut your credit line by 70% or the vendor who put your account on cash-on-delivery (COD) status when you were trying to complete an important client assignment.

If you haven't done so, those business partners should be put under review by your organization. They didn't stand by you during the worst of times; why reward their cowardice and lack of faith in your business now that times are getting better.

Aren't you glad it's not 2009 or 2010 anymore?

Tuesday, 29 July 2014

3 Money Myths to Avoid at All Costs

Myths are very troublesome because they’re hard to dispel. What’s worse – if a myth crosses over from the realm of obscurity and becomes mainstream “belief,” that’s when the trouble starts.


The sad thing is that a lot of people end up getting hurt by accepting myths as truth – especially when it comes to financial myths that many wrongly assume are right.

So before you mistakenly set yourself on a course for financial disaster, read about the 3 money myths you should avoid at all costs!

#1 Your Cash Savings are Completely Safe Sitting In a Bank Account

One myth that most Singaporeans thankfully recognise is reality that their Central Provident Fund (CPF) account savings probably won’t be enough to retire comfortably on.

If you’ve read our article on what you can use your CPF for other than retirement, you already know that you’re pretty much limited to using it on housing, investing, education and insurance.

Of course, there are restrictions to how (and how much) you can use. Plus, you know that your money is effectively trapped until you reach the drawdown age (63 currently).

So where else can you put your cash savings, especially if you want to be able to access your money? For many, the only “safe” option is to place their savings in a savings account.

Yes, your cash will be safe in a Singapore bank. They are some of the most stable and safest in the world after all (although if something does happen, your account is only insured up to a maximum of $50,000 with the Deposit Insurance Scheme (DIS) – which is something to think about).

However, you’re forgetting one thing – the interest earned on your savings account is pathetically low, even on the best of savings accounts.

It’s simple arithmetic – if you’re making only 1%+ on your savings account deposit but the rate of inflation is 3% each year (or worse), your money isn’t safe at all. It’s actually being lost through inflation.
What can you do?

Learn about investing – because it’s the only way you can grow your money with an interest rate that’s sure to beat inflation. If you’re not very knowledgeable about investing, make sure to check out our Investing Learning Center to increase your knowledge.

#2 Your Expensive Home Renovations Will Greatly Increase Your Property’s Value

You already know that your home is the biggest purchase (and investment) you’ll ever make. It doesn’t matter whether you purchased a Housing Development Board (HDB) flat or a condominium, the possibility to see your property purchase soar in value exists.

Chances are you already know (hopefully) that a property’s value is really driven by a combination of nearby amenities (schools, public transport, malls, etc.), view and rental yields (no oversupply of flats/condos).
However, many homeowners mistakenly think that trendy renovations will greatly boost their property’s value.

That’s a huge and costly myth that has left many home owners in shock when a valuation comes back much lower than anticipated.

The reason why most renovations fall flat when it comes to boosting a property’s value is simple – not everyone has the same aesthetic taste and “trendy” renovations change with time. 

The reality is that expensive renovations won’t increase the value of your property as much as you expect it to.

If you’re going to renovate your home and want some increase in value – go with functional renovations such as walk-in wardrobes, kitchen islands, wet rooms and partitioning that combines two rooms (ex. a kitchen that doubles as a study/TV room).

#3 You Should Fully Be Invested in Bonds during Your Retirement Years

On myth #1, you learned that investing is pretty much the only way to ensure your money grows at a rate that beats inflation.

During your journey into investing, you’ll learn about portfolio diversification and the how you should adjust your investment portfolio periodically as you reach retirement age.

Basically, when you begin investing in your 20s and 30s, your portfolio will be more stock-heavy. Stocks are higher risk, but also provide higher returns – making it easier for you to reach your retirement goals.
However, as you age and hit your 40s and 50s, your “appetite” for risk and higher returns becomes less as you become more focussed on bringing in “steady” returns that are less risky. That usually means you’ll become more reliant on “safe” investment products such like bonds.

Once you hit retirement though, you shouldn’t just turn your invest your entire portfolio in bonds. That’s actually a dangerous move considering the life expectancy for Singaporeans is 82. That means if you retire at 65, you need to make sure your nest egg lasts for another 17 years at least. And if you put turn everything into bonds, you’ll run the risk of outliving your savings.

You should always keep anywhere from 20% to 50%+ of your investment portfolio in stocks, depending on your risk appetite.

That’s to ensure that your portfolio continues to generate returns so you can maintain your retirement lifestyle for as long as possible.

The 3 Biggest Financial Objectives You Should Aim For in Your 40s

Ah, the wonderful 40s – the years when you begin to experience the personal drama of dealing with teenage children, greying hair, weight gain and just about every symptom of “midlife crisis” known to science.


Yeah, there will be plenty of personal and professional distractions to deal with. But this isn’t the time to let your financial “guard” down so you could start cruising through life.

If you’re able to eliminate your credit card debt (or keep it to a very manageable level), build up a comfortable emergency fund (at least three, but preferably six months’ or more worth of your monthly salary) and pay great attention to the performance of your investment portfolio – you’re on the right track towards making the financial objectives in your 40s more achievable.

Here are the 3 biggest financial objectives you should aim for in your glorious 40s:

#1 Prioritising Your Nest Egg

Your 40s will be the “prime” period in your professional life. It’s the decade when you’re advancing to higher positions in your career, which equates to more income. In fact, your 40s will be the time when your (hopefully) increasing income will play a large role in accumulating wealth for the future.

I can’t stress this enough – this decade is extremely important when it comes to your career AND retirement future. If you’re stuck in a dead-end job or you’re not receiving the annual pay raise you deserve, it’s in your best interest to go to a company that will.

Remember – from this point on you only have a limited amount of working years left.

Seriously, your career (and growing income) is important because it will fuel your effort to put more cash into your retirement savings – and that should be your first financial priority!

If you have that squared away, you should then focus on freeing up as much cash as possible to put into savings.

So pay down any credit card/unsecured debts to free up more cash, build up additional revenue streams (ex. Freelance), downgrade certain aspects of your lifestyle and if you have the capacity – set aside some money for your kids’ future education expenses with an education savings account if you haven’t already.

#2 Ensuring Your Investment Portfolio Performs Well

If you jumped into the investment game during your 20s and took a more “hands off” approach to portfolio management in your 30s – you’ll definitely want to change that in your 40s! Well… unless you hire a highly competent fund manager with reasonable fees who can monitor, advise and adjust your portfolio for maximum returns.

If you haven’t been didn’t monitor your portfolio too closely during your 30s, it’s probably because it was performing reasonably well and there was no need to make any major adjustments (otherwise, you would have made them right?).

You’ll want to be more hands on with your investing during your 40s because these are your “high-income” years – that means you’ll have more money on the line as you pump more cash into growing your nest egg.
That also means you’ll need to re-evaluate your investment goals and appetite for risk.

For example, if your goal for retirement savings goal you set in your late 20s is less than half of the value of your portfolio in your 40s – you’re going to have to make a choice on whether you want to take more risk by having a stock-heavy portfolio that’ll hopefully generate more returns quicker.

#3 Maintaining Control Over Your Spending

Going into your 40s with fewer financial liabilities will leave you feeling like you’ve won the retirement “game” already. You might even begin to have thoughts of early retirement if you’re especially confident.

It’s great to be in a position where you have minimal or no credit card/unsecured debt to drag your finances down. However, keep in mind that celebrating “victory” too early by losing control of your spending in your 40s can really turn your retirement into a living hell.

The point is that you haven’t “won” the retirement game yet. Well… maybe if you’ve earned millions by your 40s because you invented some life changing product or got damn lucky with your investments – then you got me. But the reality for most of us is that we’ll still need to keep our ultimate retirement goal(s) in perspective.

It’s completely fine to want to take an expensive holiday in the Maldives, purchase a new car or renovate your home with a more modern look – as long as it doesn’t interfere with objectives #1 and #2 on this list.
So pamper yourself a bit. You certainly deserve it. But do it in moderation please?

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