Wednesday, 29 December 2010
With decades to go before they retire, one might see those age 18 to 30 as having plenty of time and opportunity to save and plan for their future.
But the drumbeat of how older generations are scrambling to secure adequate retirement savings is being sounded for young people as well by Aon Hewitt, a global human resource consulting firm.
The usual suspects of stagnant wages, job insecurity and a steady decline in pension plan and retiree medical benefits may jeopardize the age group — termed by Aon Hewitt as being Generation Y, although other demographers give different years for inclusion in that group — as much, if not more, than their elders, research by the firm says.
Eight in 10 Aon Hewitt-defined Generation Y workers "will not meet all of their financial needs in retirement unless they significantly improve their saving and investing behaviors," the report claims.
After factoring in inflation and postretirement medical costs, its researchers project Generation Y workers will need to save 18.7 times their final pay in retirement resources — including Social Security, employer-provided defined benefit and defined contribution plans and employee savings — to maintain their current standard of living in retirement. A savings gap emerges, according to Aon Hewitt's research, because the generation's employees are on track to accumulate just 12.4 times their final pay, leaving a shortfall of 6.3 times pay, a third of their total needs.
The situation is "even bleaker" for workers without a pension plan, who have a shortfall of eight times pay, assuming no future leakage from withdrawals or cashouts, and that Social Security benefits are not reduced, rendering these scenarios optimistic at best.
Aon Hewitt cites many reasons for these shortfalls, including rising health care costs, increased life expectancy and the emergence of defined contribution plans as the primary retirement savings vehicle for most Americans. The biggest factor, however, could be Generation Y's saving and investing habits. Its analysis shows only half of Generation Y workers who are eligible to participate in a defined contribution plan do so, meaning they have accumulated very little savings, if anything, in their plan. Among those who do save, the average before-tax contribution rate is 5.3% of pay, with 41% of workers not saving enough to get the entire employer-provided match.
Even if workers do begin saving early, the new research claims that most cash out their savings well before retirement. Nearly 60% of Generation Y workers cash out their retirement savings when changing jobs, missing out on the opportunity for decades worth of tax-deferred growth on their investments. A 25-year-old who cashes out $5,000 from a retirement plan may potentially be sacrificing $56,000 at retirement in exchange for a small amount (perhaps only $3,500 after taxes and penalties are deducted).
"Younger workers will have fewer future benefits from their employers and potentially the government," says Pamela Hess, director of retirement research at Aon Hewitt. "They need to save a third more in their defined contribution plans than workers who are nearing retirement today, but there's clearly a lack of urgency to proactively save."
Copyrighted, Copyright © 2010 TheStreet.com. All rights reserved.
BALTIMORE (Stockpickr) -- 2010 is nearly behind us -- and what a year it's been. While the broad market's double-digit run-up has been nothing to scoff at, it's paled in comparison with the massive rallies that have taken place across specific industries and other asset classes.
Defense contractors are up nearly twice as much as the broad market this year; small-caps have rallied even more than that; and precious metal funds are up more than four times as much as the S&P in 2010.
But focused investing in those plays is easy when you have the benefit of hindsight. Instead, today we'll look at investments to focus on for 2011. With a new year just a few trading days away, a handful of industries stand out as attractive investments for 2011.
Here's a look at why you should be paying attention to these three investments in the coming year -- and how you can put these plays to work for your own portfolio.
1. Precious Metals
I mentioned earlier that precious metals funds are up more than four times as much as the market in 2010, and while that's an impressive bit of outperformance, there's little reason to believe that the trend is ending anytime soon. While equities took center stage earlier in the year, it was only during the second half of 2010 that hard commodities like precious metals really shined (no pun intended).
That's thanks in large part to another flight to quality that took hold as volatility ticked up around the beginning of the summer. But the commodity buying didn't let up when volatility (as measured by the VIX S&P 500 Volatility Index) tapered off just a couple months later. That's an attractive setup for contrarian investors right now, because it means that metals have supported their higher prices despite increased equity buying.
The easiest way to get exposure to metals is through ETFs like the SPDR Gold Trust or the iShares Silver Trust, each of which has a share price that corresponds to physical holdings of their respective metal, not just financial instruments that mirror gold or silver's movement.
For fundamentals-based investors, silver looks especially attractive right now. Significant amounts of silver are used in industrial processes, much of which can never be recovered. As a result, the amount of silver supply destroyed often outpaces production each year -- and despite that fact, silver sits at historically low discounts to gold (which doesn't have the same level of industrial demand).
Another viable option is in miners of the metals. Miners have prices that typically move in concert with the metal they mine, but they have the added speculative angle of potentially discovering large properties. That's an added factor that's made plays like Yamana Gold and Barrick especially attractive to investors seeking a higher risk/reward tradeoff for their portfolios. If you're new to mining plays, sticking with mature companies that own proven producing mines is a smart way to go for 2011.
Consumer spending has been a major theme for Main Street investors ever since 2008. After all, discretionary consumer dollars are a major engine for economic growth. And now, with consumer spending on the upswing, U.S. retailers look to be the biggest beneficiaries.
Most attractive are the mid- to high-end aspirational brands that took the hardest hits in 2008. While these aren't value plays -- most of these stocks have fully rebounded from their lows -- they do offer substantial growth prospects as shoppers become all the more willing to part with their cash. And with holiday-season sales still a few months from being reported to Wall Street, now could be the ideal time to pile up on these plays for 2011.
Among these stocks, Abercrombie & Fitch could sport one of the most springy prices. While ANF showed shareholders some horrific top-line declines in the midst of the credit crunch, the apparel company still boasts robust margins (the result of industry-high sale prices) and has been the subject of increasing analyst attention each quarter -- two factors that should spur buying.
Coach is another retail fashion stock that boasts high margins and exposure to a hard-to-crack niche. Unlike ANF, though, and much to many analysts' surprise, Coach actually fared relatively well during the recession. The company's bets on international growth are especially attractive right now as burgeoning numbers of middle-class consumers in emerging markets take to their malls to pick up attainable status symbols.
Investors looking for more stability should turn to Gap for a similarly positioned, if much less volatile play.
3. Tech Stocks
Investors in innovative technologies have always been well rewarded -- even in tentative economic conditions. But the tech sectorhasn't been able to shake the image of risk that's stuck with it since the dot-com bubble burst. A decade later, successful technology stocks are continuing to perform well, but they're investments that need to be predicated on more than just a good idea.
An easily monetized business model and the ability to raise capital in the market will continue to be two key attributes to look out for 2011's tech investors. While these stocks won't come cheap, expect upside in this sector at the hands of revenue growth.
Large-cap, mature tech firms such as Apple and Google should continue to be perennial performers. With "Wall Street Darling" status, massive scale, and significant cachet with the public, these two companies are well positioned for success. Of the two, Google could be an especially interesting investment case for 2011 thanks to the relative sluggishness of shares in 2010; the company currently trades for a historically low price-to-earnings ratio, and a smaller premium to book value than its tech sector peers.
That said, Google will need to slow the pace of acquisitions that aren't accretive to revenues if it wants to continue to look attractive.
For more stocks that could make good plays for next year, check out the 2011 Rally Stocks portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.
If you've made it this far into the toughest job market in decades without being laid off, chances are you're out of the danger zone.
"While businesses may not be hiring a whole lot next year, they won't be firing a whole lot either," says economist Joel Naroff.
Most economists agree that the worst is behind us, and that new job creation will pick up modestly as the year wears on. But worries about the slowpoke economy and the possibility of a double dip will keep companies from adding enough positions to make a serious dent in joblessness.
The consensus among 46 forecasters recently surveyed by the National Association for Business Economics is that the unemployment rate will end 2011 around 9.2%, from 9.6% now. It'll take another six years for unemployment to get back to pre-recession levels, according to estimates by the Congressional Budget Office.
Still, if you're a valued employee, the outlook is much brighter, as employers will focus on retaining and developing top talent rather than new hiring.
"Raises are back and for good reason," says Catherine Hartmann, a principal with Mercer's rewards consulting business. "The risk of losing key employees is top of mind as the economy recovers."
Nearly all companies intend to increase salaries this year -- by an average of 3%, according to Buck Consultants -- and to reward the best and the brightest with pay hikes nearly double the going rate. More employees can look forward to bonuses, too, with the amounts awarded going up.
Meanwhile, the draconian cost-cutting measures adopted during the downturn are becoming history: Nearly all companies that slashed their 401(k) match say they will have restored all or a portion of it by next summer, according to Towers Watson. Salary freezes are fading fast too, the Buck survey found.
If you're among the 14.8 million Americans who are still unemployed, however, 2011 continues to look bleak, but not hopeless. Though little new hiring is planned for the first half, openings should expand later in the year -- as long as the economy encounters no major hiccups.
Wildcard: A double-dip recession would put the brakes on any gains, says California State University Channel Islands economist Sung Won Sohn. Mass layoffs won't necessarily return, but raises and bonuses could suffer.
What to Watch: Track the monthly jobs report from the Bureau of Labor Statistics at bls.gov. The forecasted pickup of 153,000 jobs a month on average (fewer than 150,000 early in 2011, as many as 175,000 late in the year) should bring the unemployment rate down to 9.2% by the end of 2011.
Action Plan 1: Angle for that promotion. Tired of meekly accepting skimpy raises (or none at all) because you're grateful just to keep your job? If you're a valued employee, this is the year to press for more.
"Employers will be looking more than ever to differentiate between star performers and people who are contributing, but not at a high level," says New York City executive coach Alicia Whitaker.
Up to half of companies that are changing how and when they award raises have reallocated merit funds to give more to top performers than regular Joes and Janes; less than 10% used this strategy a year ago, according to Buck.
And as always, the best way to earn a big raise is to get promoted. Those pay bumps are budgeted for about 7% on average -- vs. 3% for the usual merit raise.
How to get ahead in this environment? Schedule separate meetings with your boss and a mentor to discuss your prospects for advancement. Be prepared to outline noteworthy accomplishments that helped the company (especially if they added to the bottom line) and specific contributions you hope to make in the future. And make the moves that follow.
Develop a new expertise. In planning compensation for next year, employers say "specialized industry knowledge" is the top reason they'll offer a bonus.
"People could become obsolete very quickly if they don't keep learning," says Whitaker. If you work in health care, make yourself familiar with the health care overhaul.
In finance, a deep knowledge of how the new reforms apply to your product could set you apart. Master the latest in your industry, whether it's technology solutions or marketing tools, even if your company has yet to adopt them.
Action Plan 2: Toot your own horn. Keep a portfolio of your best work to bring to your annual review, including testimonials like thank-you notes from colleagues or clients. "A lot of people think only artists have portfolios," says Laurence Shatkin, author of 2011 Career Plan, "but anyone can develop one."
Action Plan 3: Raise your visibility in-house. Make yourself known as an expert by sharing links to news about your field with your colleagues, posting insights to industry groups on LinkedIn, or volunteering to write for your company intranet or newsletter, says social-media strategist Diane Crompton. "It shows that you're relevant and up-to-date," she adds.
Action Plan 4: Nurture your network. Networking isn't just for job hunting. Tapping your well-oiled web of contacts to fill job openings at your company could impress your boss too, especially if you prove you have a good eye for talent. What's more, helping others means your contacts will be primed to help you down the road.
London-based hedge fund Derwent Capital Markets said it had successfully marketed a new venture to a series of high-net worth clients that makes investment choices using information gathered from over 100 million daily tweets.
Simply put: the fund mines the Twitter-verse to gauge market sentiment, and that information-which the firm futuristically brands as "The 4th Dimension" is used to drive the portfolio's holdings.
The 'Twitter Fund', officially marketed to clients as the Derwent Absolute Return Fund, has already attracted at least £25 million in investments, according to the fund's manager Paul Hawtin-who is also the firm's founder. And it is currently in discussions to hire John Bollen, an Indiana University professor who has championed academic theories linking market performance to Twitter moods.
In all, it's a bold strategy, with even bolder profit expectations.
Hawtin is confident he can achieve annual returns of 15-20 percent for the fund. But he hopes that's just the beginning. "I believe with the Twitter indicator (once fully optimized) we can achieve even better annual returns," he said in an emailed statement.
But even if the fund doesn't return a dime on its money, it may have already made history. Hawtin believes the Derwent Absolute Return Fund is the first ever "to use real time mood analysis as a major part of the investment decision process."
An informal search of publicly available hedge fund strategies seems to confirm that.
Asking investors to park millions in an investment vehicle that relies on the random musings of 190-plus million Twitter accounts was not without its challenges.
Hawtin says that investors were initially worried that the fund was simply going long or short based on its Twitter analysis. However, he says it's a more nuanced process than that. "Once they understand it's a far more sophisticated system they then realize the potential," he said.
Whether or not the fund can return on its lofty profit promises remains to be seen, but whatever the fund's future may be, it is sure to open the door for a new round of quantitative experimentation-as the investment world looks for new ways to profit from the endlessly vast amount of information streaming to blogs, Facebook, Twitter, and other social networking sites every second of every day.
Welcome to the 4th dimension.
When 18-year-old Robert White decided to jumpstart his retirement plan, he invested his life savings of $25,000 into an aggressive mutual fund.
Little did he know that just five years later, he would make a complete 180 and join the ranks of a new group of young investors who have become so risk averse by the wild market swings that they'd rather park their money in safety zones, like CDs or Treasurys.
Today, only 22% of investors under the age of 35 say they're willing to take on a substantial level of risk, according to the Investment Company Institute. Compare that with 2001, when that same group outpaced every other age bracket.
"We're coming off a series of financial crises that hit this young generation at points in their lives where external events shape strong opinions," said Christopher Geczy, adjunct associate professor of finance at University of Pennsylvania's Wharton School.
When White's fund began to slip with the broader market in 2008, he yanked his savings, now at $35,0000, and put the money into a short-term certificate of deposit with an annual return rate of 4%.
"It's almost embarrassing to talk to anyone about my portfolio because I know how stupid it is to normally keep my portfolio in cash," said White, now a 23-year-old graduate of Northern Arizona University.
While most investors have become more cautious during the decade, the biggest change has come from White's generation.
"Many of them have witnessed a decline in the wealth of their families and seen their parents delay retirement or even return to the workforce," said Geczy, who also serves as the academic director of Wharton's Wealth Management Initiative.
A recent Merrill Lynch survey of 1,000 affluent Americans, who boast more than $250,000 in investable assets, showed 56% of young investors consider themselves to be more conservative today than they were a year ago -- the highest percentage among all age groups.
"If you're in your 20s and are just starting to save for retirement, you've seen the market drop 55%, climb 88%, and drop again in a short span...If you're in your 30s and have been saving for the past decade, you've seen the stock market return essentially 0%," said Vanguard Chief Executive Bill McNabb, at a recent conference.
Members of Generation Y are also having a tougher time finding a job than their counterparts. The unemployment rate for workers under the age of 35 in August stood at more than 13%, compared to the nation's 9.6%.
White has mustered up the courage to return to the market but he is only dabbling in stocks with about 10% of his $60,000. That's a far cry from the 70% advisors typically recommend for young investors. The rest of White's cash is tucked away in a savings account.
He's hopeful he'll gain the confidence to boost his stock allocation to 75% this fall when he returns to his home of Maui and starts a job at a financial planning office.
"I'm just waiting to get the next piece of advice or news that will make me more comfortable about my decisions," said White.
Experts say White and his peers may be doing themselves a disservice by shunning stocks.
"The biggest risk for this generation is that they'll live too long. With medical breakthroughs, the reality is that many of them will live beyond 100," said Barry Nalebuff, a strategy professor at Yale's School of Management and co-author of Lifecycle Investing. "The only way they have enough assets to last them is to invest in stocks. If they don't, a lot of people will have to keep working way past when they want to because they won't have enough money saved up."
Nalebuff argues that young investors have decades of earnings to rake in, so they could plow 100% into a diverse portfolio of stocks and still offset the market's risks.
But that's little comfort to people like Neil Sowinski, 30, who remains unnerved by the market's swings. He pulled his money from stock market in January and dumped it into a Pimco bond fund, and advised his wife to do the same.
"We watched the tech bubble bust and then the housing bubble bust, and we lost money left and right but rode it all out," said Sowinski, an industrial mechanic in Racine, Wis. "After the market climbed back in 2009 and put us up about 15%, we pulled out because I felt that rally was just based on the government's stimulus and corporations cutting costs -- it wasn't sustainable."
He has $95,000 in bonds and is pleased with the 8% return so far, but he hopes to move back into the stock market for the long term.
Stocks have yielded an average of up to 7% each year after inflation over the last 200 years, while bonds have had a hard time squeezing out a 1% return rate, according to Wharton finance professor Jeremy Siegel.
It's the end of the year and Wall Street is busy selling their New Year forecasts.
According to 10 strategists and investment managers polled by Barron's, there's no cloud in the sky. The future's looking bright.
If you've followed Wall Street forecasts for a few years, you must have discerned a pattern: Forecasts are always rosy. If Wall Street analysts were meteorologists, their outlook would always be 'sunny' unless it is actually raining.
Therein lies the problem; Wall Street never sees hard rain coming and only offers an umbrella after investors have gotten trenched. The purpose of this article is to provide an out of the box forecast with analysis you won't hear on the Street.
Insiders vs. Analysts
Analysts have their optimistic disposition implanted by the companies they cover. Corporate managers have every incentive to stay positive for as long as they can.
Ironically, as CEOs project record high earnings, insider selling has picked up as
Investors Intelligence reports that: 'there was a sharp acceleration in the pace of insider selling over the last week, as if they suddenly all received word that the index highs would end.'
Who would you rather believe - analysts (and their sources) with an agenda or the action of insiders with skin in the game? Something doesn't seem right if insiders want you to do as they say but not as they do.
Mark Twain said that: 'When I find myself on the side of the majority, I know it's time to find a new place to side.' The majority of investors (and analysts) now believe in rising stock prices.
Sentiment gauges have recorded readings not registered since the 2007 all-time highs, or before the May 'Flash Crash.' This is usually a sign of a market that's getting ready to roll over.
This brings us to the first investment trap for 2011 - equities. After rallying more than 85%, the major indexes a la Dow (DJI: ^DJI), S&P (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) are simply overbought, over loved and overvalued. This doesn't mean that they have to crumble tomorrow, but NOW is the time to think about protection.
In each of the past three years, January trading has delivered a surprise shot of reality. Don't be surprised if it happens again in 2011.
Sectors with the biggest gains include retail (NYSEArca: XRT - News), consumer discretionary (NYSEArca: XLY - News), materials (NYSEArca: XLB - News), and technology and these are also the most vulnerable to correction.
Even though it defies Wall Street's approach of linear extrapolation, sectors that do well one year, rarely top the list the following year. It would make sense to either buy put protection - which is historically cheap due to a low VIX - or set mental stop-loss safety levels to avoid suffering through a painful correction.
In an effort to keep this article brief, we won't delve into the Europe crisis. One of the ETF Profit Strategy Newsletter's predictions for 2010 was an increase in sovereign debt defaults. The Europe crisis will be with us for a while and will turn into a big drag for developed markets (NYSEArca: EFA - News) eventually.
A rush for tax-free yield drove investors into municipal bonds. Chasing yields can be a pricey mistake. If you plot dividend yields against stock prices over the past 100 years, you'll quickly notice that periods of low yields are generally a good time to sell, not buy stocks.
The muni bond market has been an obvious, but ignored, house of cards. California is nearly bankrupt and every other state or municipality has seen their tax revenue dwindle. Loaning money to municipalities is like giving a car loan to someone who just lost their job. The default risk is high.
On August 26, the very day Treasuries and muni bonds topped - the ETF Profit Strategy Newsletter told its subscribers to get out of muni bonds, corporate bonds and Treasuries. Prices for bonds have tumbled since and the danger isn't over. The three trillion muni bond market is in serious danger. Now is the time to worry about return of your money, not return on your money.
Not all is as it seems and if you put your trust in the Fed, you may soon be disappointed. Quantitative easing in general, and QE2 in particular, was supposed to stimulate the economy, increase inflation and the money supply.
As the chart above shows, it didn't do any of the above. QE2 also was intended to lower interest rates to increase lending and make mortgages more affordable. The chart below shows what the interest of the 10-Yr Treasury has done since QE2 was launched.
The Fed is treating the previous indulgence in debt by taking on even more debt. This is like taking more heroin to kick a drug addiction. It will keep you functioning for a while, but eventually your system will shut down. The only chance of success is to detox.
The Minefield Looks Pretty
To sum up, we are looking at a minefield covered by a beautiful blanket of flowers. The Fed - although it's failed to jolt the economy - has succeeded in inflating stocks (NYSEArca: VTI - News) and commodities (NYSEArca: DBA - News). It has served as fertilizer for fake growth.
But sentiment is indicative of a market ready to roll over. Similar sentiment readings and warnings by the ETF Profit Strategy Newsletter in December 2008, January 2010, and April 2010 led to declines from 9 - 29%. Aside from Fed induced liquidity, there's not been much reason to believe this time will be different.
In terms of breadth, we note that fewer than 80% of S&P 500 stocks are above their 50-day moving averages, as the index itself is moving from one marginal new high to the next. There were also fewer new 52-week highs in December than there were during the April highs.
Enjoy the Sight, Mind the Feel
Creeping up trends like the current one can go on for weeks. But take a look at the price action leading to the April highs and it becomes clear that such stair stepping up trends tend to end very abruptly and without warning.
That doesn't mean the market has to crumble tomorrow, but if you choose to maneuver through trap-infested territory, it pays to be careful and protect yourself.
The ETF Profit Strategy Newsletter provides important support/resistance levels that serve as an early warning signal twice a week. The break of certain resistance levels could break the bull's spirit and cause an April/May like air-pocket decline.
For many Americans, the recession is finally over.
Economic growth in 2011 is likely to exceed 3 percent, and perhaps even hit 4 percent. That would be the best performance in more than a decade. Workers who held onto their jobs during the Great Recession can finally exhale, with growing confidence that their job security is improving. Companies are grudgingly starting to hire back a few of the unemployed. And the latest stimulus and tax-cut plan out of Washington will put cash into practically every taxpayer's pocket, just to make sure the economy keeps marching forward.
Yet the economic landscape in the aftermath of the Great Recession is littered with wreckage. Battered industries like construction and real estate won't return to normal for years. A few states, including California and Illinois, are nearly insolvent, with tax hikes and service cuts the only way out. Homeowners have lost trillions of dollars' worth of home equity, thanks to the housing bust. And the number of Americans who remain unemployed is far larger than at any time since the Great Depression.
For millions of Americans, in other words, 2011 won't feel like a recovery at all, but like the fourth year of a painfully long recession. Here's who is likely to feel it most:
The unemployed. It goes without saying that the jobless are America's have-nots, and they amount to an uncomfortably large group: More than 15 million people. The biggest economic question for 2011 is whether unemployment begins to fall consistently, or stays stuck at stratospheric levels. A true recovery won't occur unless more Americans have jobs and money to spend, so forcing unemployment down is in everybody's interest.
The unemployed got a break in the stimulus plan recently passed by Congress, which contains an extension of jobless benefits for the long-term unemployed that will last throughout 2011. But that could be a mixed blessing. Some of the jobless may be tempted to accept unemployment benefits instead of taking low-paying work, since it could add up more money. But prolonged joblessness can also be a pernicious situation that permanently pushes people into an underclass of labor-force dropouts. As unemployment drags on, it becomes much harder to find work down the road, since skills erode, contacts move on, and employers look askance at long periods of inactivity. On the other hand, many employers will be happy to hire jobless folks who show initiative and desire, especially as hiring picks up and the pool of available workers shrinks.
The undereducated. The value of education has never been clearer. The unemployment rate for people who never graduated high school is 15 percent--depression-level joblessness. For high-school grads with no college, unemployment is 10.4 percent, and for college grads it's just 4.9 percent. Unskilled or low-skilled jobs in manufacturing, construction, and other fields will return slowly, if at all, since many of them can be outsourced to other countries where labor costs are lower. That makes education the single-biggest determinant of career success.
Workers in shrinking industries. In the private sector, most of the big layoffs have abated, with many companies starting to rebuild slowly after three years of severe cutbacks. And a few industries, like healthcare and energy, never experienced much of a recession in the first place. But some industries are still stuck in the doldrums, with ongoing job cuts and an overall sense of gloom. Lower-end computer programmers, for instance, continue to lose jobs as companies outsource routine work to high-tech meccas like India. Traditional publishing and broadcasting are industries in permanent decline, as news, entertainment, and books go digital. And it could take a decade or more for all the jobs lost in construction and real-estate--once a vibrant part of the economy--to return. People with jobs in industries such as these will continue to find raises scarce and promotions hard to come by, since there's a glut of workers and shrinking opportunity. And people looking for jobs in these fields may come up empty for years.
Government employees. Government work used to be considered recession-proof. No more. For starters, President Obama has proposed a two-year pay freeze for federal workers, which won't stop all pay increases but would eliminate many cost-of-living raises. That may only be the beginning. Efforts to trim the federal budget will hit federal agencies sooner or later, with likely cutbacks in staffing, benefits, and maybe even pay.
Sharp cutbacks are already happening in many state and local governments. Fire and police departments, schools, and many agencies once thought off-limits have been squeezed as states and cities battle to close gaping budget deficits. The pain could spread in 2011, since federal stimulus money that buoyed local governments in 2009 and 2010 is running out. And a huge battle is brewing over benefits and pensions for public workers, which are underfunded in hundreds of municipalities. Coming up with the money, in many cases, will require tax increases--on voters who are struggling themselves and in no mood to sacrifice more to fund somebody else's retirement. That means life could get tougher for millions of government workers.
Drivers. Gas prices have been drifting upward to nearly $3 per gallon, from about $2.62 a year ago. And energy analysts expect them to stay there or go higher in 2011, thanks to oil prices that are approaching $100 per barrel. And that's happening in a fairly soft global economy that has curtailed demand for oil in many countries, which means there could be a price spike if growth turns out to be stronger than expected. Back in 2008, when pump prices topped $4 per gallon, drivers reacted by driving less and downsizing their wheels. But for many, the lesson was short-lived: Lower-mileage trucks and SUVs have been making a comeback, thanks partly to discounts designed to move slow-selling merchandise. That could make buyer's remorse a surprise theme of 2011.
Homeowners. Americans have lost about $9 trillion worth of household wealth since 2007, largely because of falling home values. The rout isn't over, unfortunately. Most forecasters think home values will decline another 5 to 10 percent in 2011, as high unemployment causes more foreclosures and a glut of homes pushes prices down. The good news, if there is any, is that the housing market may finally hit bottom in 2011, with home values stabilizing after five years of declines. That doesn't mean home prices will shoot up any time soon. But once buyers believe that prices have stopped falling, they'll be more inclined to buy, the first step back toward a healthy housing market. Stabilizing home values will also help owners do better financial planning, since they'll have a firm idea what their home is worth.
Spenders. A strong holiday shopping season suggests that the venerable American consumer is back in force--which would be a shame. Many consumers accustomed to impulse shopping and everyday conveniences are suffering "frugality fatigue," after three years of paying down debt and going without. So they're buying things that make them feel good. The satisfaction, however, may not last. The U.S. economy faces an austere and volatile future, since the U.S. government's massive debt--about $14 trillion--needs to be paid down sooner or later. The only way to do it will be to cut benefits and subsidies that millions rely on, and raise taxes, reducing take-home pay for most Americans.
Most likely, that will produce a slow-growing economy with relatively high unemployment. People with low expenses and a fat rainy-day fund will have the kind of flexibility necessary to adjust and get ahead. But those living on the edge--especially those with a lot of debt--could find themselves stuck in a hole they can't get out of. The next year or two may provide some breathing room to get ready for that. And by now, we ought to know that spending rarely paves a road to prosperity.
The worry lines are finally starting to fade.
After 18 months of a stutter-step recovery, the economy seems to be gathering steam. Most companies that survived the recession are lean and profitable, and there's a good chance they'll begin hiring again in 2011. Consumers who have jobs feel better about their prospects, which means they'll be more comfortable spending money. The latest stimulus and tax-cut plan out of Washington is surprisingly meaty, with the impact likely to be felt in many American households. "Despite threats, 2011 is shaping up to be a better year for the U.S. economy," writes economist Mark Zandi of Moody's Analytics, who predicts healthy growth in 2011 of nearly 4 percent. "After three years of recession and weak recovery, the change will feel significant."
The benefits will be spread unevenly, however, and high unemployment will be a huge, nagging problem. Many Americans may simply live in the wrong region or work in the wrong industry, which will keep them out of the job market or cause them to miss the updraft that lifts the overall economy. Here's who's likely to benefit the most from positive economic trends in 2011:
Stock investors. Perhaps the biggest beneficiary of bailouts and stimulus programs has been the stock market, which has surged since early 2009 thanks to deep corporate cost-cutting, record profits, and the Federal Reserve's "quantitative easing," meant to drive investors out of safe assets like government securities and into riskier assets like stocks. Since March 2009, the S&P 500 has soared by about 85 percent--and the rally could continue throughout 2011. Stock movements are notoriously hard to predict, and a financial shock or other ugly surprise could deflate the market. But many Wall Street analysts believe stocks may still be undervalued, despite all the repair work companies have done on their balance sheets over the last two years. Bank of America Merrill Lynch, for instance, predicts that the S&P 500 will rise another 13 percent or so in 2011. More conservative predictions still call for 5 to 7 percent gains.
There's a floor of sorts to stock prices at the moment, since the Fed is trying mightily to help companies recover from the recession, so they start hiring again, and to help ordinary Americans rebuild their investment and retirement portfolios. So the Fed is likely to continue with quantitative easing, and keep interest rates at rock-bottom lows, until it feels the economy is recovering on its own. Since the first quarter of 2009, in fact, the Fed has helped Americans recover about $6 trillion worth of lost wealth, virtually all of that through gains in financial portfolios. Since household net worth is still down about $9 trillion, or 14 percent, from the peak levels of 2007--all of that due to falling home values--the Fed plans to stay on the case indefinitely.
Multinational U.S. companies. Another reason stock indices like the S&P 500 have skyrocketed is strong growth in developing economies like China, India, and Brazil. Such "emerging markets" are riskier than the developed economies of Europe and the United States, but companies with sales or investments there, such as IBM, Microsoft, Hewlett-Packard, and Boeing can also earn much higher returns than in the developed world. Companies in the S&P 500 index, for example, earn about 40 percent of their pre-tax income from emerging markets, which helps explain why corporate profits have soared and stock prices surged, even though the U.S. economy has been weak. American companies with a strong overseas presence tend to be more stable than companies with a regional focus, which is good news even for local employees who never travel abroad.
Workers in growing industries. Healthy companies in stable industries are starting to get back to normal, with profits up and hiring beginning to resume. Healthcare is probably the most well-known recession-resistant industry, with hiring up in virtually every field even during the recession. But other industries like energy, mining, Web publishing, high-end IT work, public transportation, and even waste management have been growing as well. And other industries that cut back during the recession--such as retail, hospitality, and warehousing--are starting to replace some of the jobs lost.
It's vital to work in a growing industry because that's where the opportunities for promotions, career advancement, and raises are likely to be concentrated. The recession caused the temporary contraction of some industries, which will bounce back as they have after other downturns. But it also accelerated the long-term decline of industries like textiles, print publishing, and lower-end information technology. And industries like construction were hit so hard that it will still be years before hiring returns to meaningful levels. In shrinking industries, it will continue to feel like a recession, with ongoing layoffs, scarce raises, and few opportunities to get ahead.
Taxpayers. The recent tax deal negotiated by President Obama and Congressional Republicans lowers taxes for Americans at every income level, by keeping income tax rates where they are (instead of allowing them to rise, as the prior law would have done), cutting other taxes like the Social Security withholding, and extending other tax incentives. For a family with income between $50,000 and $75,000, that adds up to an annual tax savings of $2,260, on average, according to the Tax Policy Center. For an average family earning between $100,000 and $200,000, it's a $6,212 windfall. That's a big chunk of change that will make a difference for many families. But don't get used to it. It's a near certainty that taxes will rise at some point, to help pay down the ballooning national debt. Taxpayers probably have until the 2013, at least, before federal tax hikes become a serious possibility.
Savers. The Fed's efforts to push interest rates to historic lows have slashed costs for borrowers, but they've also crushed savers dependent on interest income. Savers may finally start to feel a little relief in 2011. Interest rates have started to creep upward from low points reached in early November, and most analysts expect a modest rise in Treasury rates in 2011, which in turn will raise interest rates on some savings accounts and perhaps boost the return of fixed-income investments. Once the economy is healthy again, the Federal Reserve will start to raise short-term rates, which will directly affect savings accounts. That doesn't seem likely until 2012 or 2013, but if growth is better than expected, it could happen in 2011. Plus, most forecasters expect inflation to stay very low for the next year, which is good news for those on fixed incomes.
Home buyers. The buyer's market will continue into 2011, with home prices likely to fall another 5 to 10 percent or so--but finally hit a bottom in many markets within the next 12 months. The recent uptick in mortgage rates has caused worries about buyers packing it in, but even if 30-year rates hit 5.5 or 6 percent, they'd still be low by historical standards. It's also possible that rising rates will motivate buyers who have been sitting on the fence, convincing them to make an offer instead of waiting for rates to rise even more. A bit of increased activity could also convince reluctant sellers to accept low-ball offers while they're on the table. And lending standards should gradually ease in 2011, making more buyers eligible for mortgages. It will be a long time before the overall housing market returns to normal, but buyers with solid finances, stable jobs, and a bit of gumption could get remarkable deals in 2011. Optimism needs to start somewhere.
Do You Need an Excuse?
Like the proverbial grasshopper, some people neglect to save for retirement and have plenty of excuses to justify their lack of foresight.
Every year, the Employee Benefit Research Institute conducts its retirement confidence survey to gauge how prepared Americans are for retirement. The 2010 survey, released in March, found that 54 percent of workers have less than $25,000 saved, excluding the value of their home and any defined benefit plans.
The justifications are endless and investment advisers have heard them all. While some excuses are grounded in reality, others defy logic.
I'm Paying for My Kid's College Education
Higher education costs money, as does retirement. Though it's a noble goal to fund Junior's college education, it shouldn't come at the expense of saving for retirement.
"Everyone wants to retire; not every kid goes to college," says Peter Donohoe, Certified Financial Planner at PRW Associates in Quincy, Mass.
"If you do have kids that go to college, there are options for kids, student loans and scholarships," he says.
Obviously, no such loans exist for retirees. Given the near extinction of defined benefit plans — those pension plans where companies foot the retirement bill — workers need to completely overhaul their spending and saving priorities.
"People have not been willing to make the sacrifice to save more for retirement. This is really going to hit home when we see people hitting retirement age and not being able to retire," says Carrie Coghill Kuntz, director of consumer education for FreeScore.com.
My Parents Died Young
Expecting to die young is not a retirement plan. It's tragic when it happens, but it cannot be relied upon as a reason to spend every cent in the present.
"Health and medicine are different now, and statistics are showing that people are living a decade longer. What happens if you don't die at 60?" says Certified Financial Planner Susan Hirshman, president of SHE Ltd., a financial services consulting firm, and author of "Does This Make My Assets Look Fat?"
Another investment adviser runs her clients' financial plans to age 100.
"We tell our clients to have their retirements funded 120 percent. I say, 'Listen, do you have an aunt or uncle who lived into their 90s?' People don't realize how much they really need to save for retirement," says Rosann Roge, a Certified Financial Planner at R.W. Roge & Co. in Bohemia, N.Y.
The prospect of being a penniless 99-year-old should spur many people to save more, but procrastination persists.
I'll Live on Social Security
According to the 2010 trustees report from the Social Security Administration, Social Security reserves will run out in 2037. Projected tax income should be able to cover 75 percent of benefits through 2084. The best-case scenario for younger generations of Americans, with no action from Congress, is 75 percent of their scheduled benefits.
That will be far from adequate to cover living and health care expenses. Today, full Social Security benefits barely allow seniors to surpass the poverty line. The average monthly benefit for retirees is $1,172, according to the Social Security Administration.
"People believe that their lifestyles will change significantly in retirement. And study after study has shown that it does not. Many planners say that people will need 70 (percent) to 80 percent of their working income as retirees. I'm up there closer to 100 percent," says Hirshman.
As the maximum Social Security payout is $2,300 per month, it's likely that savings will have to make up a large portion of your future retirement income.
I'll Keep Working
More Americans are continuing to work into their golden years. The Bureau of Labor Statistics predicts that by 2018, workers 55 and older will make up nearly a quarter of the country's working population, or 23.9 percent.
"My biggest worry is what happens to those people when they physically can't work anymore," Kuntz says.
"Studies show that the reason people retire early has to do with health issues more than anything else. You never know what your health is going to be," she says.
Not to mention the state of the job market.
A study from the John J. Heldrich Center for Workforce Development at Rutgers University found that workers who lost their jobs in 2009 as a result of the recession were still struggling six months later. Only 12 percent of those 50 and older had found full or part-time work compared to 21 percent of workers ages 30 to 49, and 29 percent of those ages 18 to 29.
Clearly, the health of the job market is far from certain, and jobs will not always be abundant.
Too Many Current Expenses
Not everyone fritters away their money on junk. In many cases, there are just too many expenses in the present to even think about the future.
The expenses can run the gamut from workers sandwiched between the expenses of young kids and elderly parents to student loan payments or credit card debt.
"There are so many current obligations and expenses that some people are not thinking about themselves. They are just making ends meet and hopefully, by some miracle, have some money for retirement," says Hirshman.
No matter what the cause, the cure for overextended finances may be old-fashioned budgeting.
"Getting back to the basics in terms of budgeting can help someone find the resources for saving for retirement. It's like making your mortgage payment. It has to be done. It hasn't sunk in yet how important it is," says Kuntz.
That means tracking expenses and cutting spending to the bone.
"You have to look at trade-offs, what is it going to take to get (to retirement)," says Hirshman. "Don't consider it deprivation today. Think of what you're getting tomorrow."
With no income, retirement planning is forced to take a backseat to such trivialities as food and shelter.
"Retirement savings is one of the first things to go because it is discretionary. In order to live, you don't need to squirrel away 10 percent of your pay," says Donohoe.
Though anyone who's unemployed would like to save as much as possible, it can be difficult to make retirement contributions when the job search turns into a six-month slog.
"There are times when clients really do need to lower how much they are saving for retirement in these situations," says Donohoe.
Once you're back on your feet, retirement planning can swing back into full force.
Copyrighted, Bankrate.com. All rights reserved.
Saturday, 25 December 2010
The recent agreement in Washington to resolve the tax impasse has led many economists to re-check their assumptions about the economy in 2011. Their conclusion: the outlook for 2011 just got a little better. Let's look at the specific economic indicators, and where most think they will be by the end of 2011.
I recently noted that there is a major distinction between 2.5% and 3.5% GDP growth in our economy. Just a few weeks ago, an economics think tank predicted growth of just 2.6% in 2011, which would be insufficient to help get various parts of the economy moving. Now, a different survey of economists conducted by The Wall Street Journal has economists singing a different tune. They now think the economy will grow 3.0% next year. The reason for their optimism: the new tax agreement that should help brighten the fortunes of the middle class, as income tax rates will stay lower, unemployment benefits will be extended, and payroll taxes will be temporarily reduced.
You could argue that these moves only serve to boost the long-term budget deficit. But a number of economists think that rising economic growth is the greatest panacea for long-term budget deficits, as tax revenue increases, so the chorus of deficit hawks has been fairly quiet in recent days.
Here is the latest thinking on several key economic factors. Later on, I'll explain what it means for how you should position yourself going into next year ... .
It's a bit worrisome that economists keep expecting weekly unemployment claims to keep on dropping, yet they remain stubbornly above 400,000, week after week. The good news: the era of large layoffs appears to have ended. The bad news: it's hard to find any major company that has announced plans for a big surge in hiring in 2011.
These next few months will be crucial. Companies tend to formulate their plans every January, and it's quite conceivable that fourth-quarter conference calls will be dominated by talk of expansion plans. With all that cash sitting on the sidelines, and with economists increasingly expecting a slightly more robust economic picture in 2011, the time for employment gains may finally be at hand. But don't expect a jobs boom.
A look back at the 1990s is instructive. Unemployment peaked in June, 1992 at 7.8%. It finished that year at 7.4%. In each of the next two years, the unemployment rate fell a full percentage point, but stayed in the mid 5% range for a few more years before falling yet further in the latter part of the decade. By that logic, today's unemployment rate may fall to 9% by the end of next year (which is still quite high), and to 7% by the end of 2013. And 7% unemployment is still a rate at which economic growth has traditionally been muted. For a whole host of reasons, it looks increasingly unlikely that we'll see unemployment below 5% again in coming years. And a variety of industries are adjusting to this "new normal."
Filled up your gas tank lately? Where I live, I'm now paying $3.25 a gallon. And that hurts. The upward move comes from a surge in oil from $70 this summer to a recent $90. I was concerned last month that we were headed for $90 oil, but I didn't expect to get there so quickly. My gut tells me we're not done yet.
Economic growth of 3% or higher in the United States in 2011 would be a happy development for investors. But that is also likely to lead many to expect further gains in oil demand. After all, fast-growing economies like China and Brazil are already consuming ever-increasing amounts of oil, and any further increase in global demand is likely to start leading to supply strains.
The International Energy Agency now sees global oil demand for 2011 at 88.8 million barrels a day, up 260,000 barrels a day from its previous outlook. Forecast.org sees oil hitting $106 by next July. Let's hope they're wrong. Simply put, many consumers and a range of industries would come under considerable pressure if oil made another +20% move in the coming year.
Action to Take: A firming economy, slowly falling unemployment and rising oil prices would have clear implications for investors.
GDP growth at or above 3% is likely enough to keep corporate sales and profits rising at a decent clip in 2011, as many already expect. Discretionary stocks could be the real winners as consumers dine out more, take more trips, buy more home furnishings and -- drum roll please -- start buying more homes. And a rebounding home sector would yield many ancillary benefits in terms of truck sales, local tax revenue, consumer electronics, etc.
Yet investors would also react to rising oil prices by shunning energy-intensive industries such as airlines, agriculture and chemicals (excepting chemicals that rely on cheaper natural gas).
As a final thought, those increasingly bullish economists noted earlier will need to see improving employment trends in the next few months. If the unemployment rate fails to improve at all during the next three months, those GDP forecasts are likely to come right back down and stocks could give up all of the impressive gains they've posted since Labor Day.
There are forecasts everywhere of better times ahead in terms of employment, retail, inflation, GDP. David Rosenberg is having none of it. He sees the market as heavily propped up by the Fed. This is his look forward for 2011.
1. In Barron’s look-ahead piece, not one strategist sees the prospect for a market decline. This is called group-think. Moreover, the percentage of brokerage house analysts and economists to raise their 2011 GDP forecasts has risen substantially. Out of 49 economists surveyed, 35 say the U.S. economy will outperform the already upwardly revised GDP forecasts, only 14 say we will underperform. This is capitulation of historical proportions.
The last time S&P yields were around this level was in the summer of 2000, and we know what happened shortly after that.
2. The weekly fund flow data from the ICI showed not only massive outflows, but in aggregate, retail investors withdrew a RECORD net $8.6 billion from bond funds during the week ended December 15 (on top of the $1.7 billion of outflows in the prior week). Maybe now all the bond bears will shut their traps over this “bond-bubble” nonsense.
3. Investors Intelligence now shows the bull share heading up to 58.8% from 55.8% a week ago, and the bear share is up to 20.6% from 20.5%. So bullish sentiment has now reached a new high for the year and is now the highest since 2007 ― just ahead of the market slide.
4. It may pay to have a look at Dow 1929-1949 analog lined up with January 2000. We are getting very close to the May 1940 sell-off when Germany invaded France. As a loyal reader and trusted friend notified us yesterday, “fighting” war may be similar to the sovereign debt war raging in Europe today. (Have a look at the jarring article on page 20 of today’s FT — Germany is not immune to the contagion gripping Europe.)
5. What about the S&P 500 dividend yield, and this comes courtesy of an old pal from Merrill Lynch who is currently an investment advisor. Over the course of 2010, numerous analysts were saying that people must own stocks because the dividend yields will be more than that of the 10-year Treasury. But alas, here we are today with the S&P 500 dividend yield at 2% and the 10-year T-note yield at 3.3%.
From a historical standpoint, the yield on the S&P 500 is very low ― too low, in fact. This smacks of a market top and underscores the point that the market is too optimistic in the sense that investors are willing to forgo yield because they assume that they will get the return via the capital gain. In essence, dividend yields are supposed to be higher than the risk free yield in a fairly valued market because the higher yield is “supposed to” compensate the investor for taking on extra risk. The last time S&P yields were around this level was in the summer of 2000, and we know what happened shortly after that. When the S&P yield gets to its long-term average of 4.35%, maybe even a little higher, then stocks will likely be a long-term buy.
6. The equity market in gold terms has been plummeting for about a decade and will continue to do so. When measured in Federal Reserve Notes, the Dow has done great. But there has been no market recovery when benchmarked against the most reliable currency in the world. Back in 2000, it took over 40oz of gold to buy the Dow; now it takes a little more than 8oz. This is typical of secular bear markets and this ends when the Dow can be bought with less than 2oz of gold. Even then, an undershoot could very well take the ratio to 1:1.
7. As Bob Farrell is clearly indicating in his work, momentum and market breadth have been lacking. The number of stocks in the S&P 500 that are making 52-week highs is declining even though the index continues to make new 52-week highs.
8. Stocks are overvalued at the present levels. For December, the Shiller P/E ratio says stocks are now trading at a whopping 22.7 times earnings! In normal economic periods, the Shiller P/E is between 14 and 16 times earnings. Coming out of the bursting of a credit bubble, the P/E ratio historically is 12. Coming out of a credit bubble of the magnitude we just had, the P/E should be at single digits.
9. The potential for a significant down-leg in home prices is being underestimated. The unsold existing inventory is still 80% above the historical norm, at 3.7 million. And that does not include the ‘shadow’ foreclosed inventory. According to some superb research conducted by the Dallas Fed, completing the mean-reversion process would entail a further 23% decline in real home prices from here. In a near zero percent inflation environment, that is one massive decline in nominal terms. Prices may not hit their ultimate bottom until some point in 2015.
10. Arguably the most understated, yet significant, issue facing both U.S. economy and U.S. markets is the escalating fiscal strains at the state and local government levels, particularly those jurisdictions with uncomfortably high pension liabilities. Have a look at Alabama town shows the cost of neglecting a pension fund on the front page of the NYT as well as Chapter 9 weighed in pension woes on page C1 on WSJ.
Consumer spending was taken down 0.4 of a percentage point to 2.4%, which of course you never would have guessed from those “ripping” retail sales numbers.
In the absence of Chapter 9 declarations or dramatic federal aid, fixing the fiscal problems at lower levels of government is very likely going to require some radical restraint, perhaps even breaking up existing contracts for current retirees and tapping tax payers for additional revenues. The story has some how become lost in all the excitement over the New Tax Deal cobbled together between the White House and the lame duck Congress just a few weeks ago.
NEW YORK (CNNMoney.com) -- Employers watch out: Your workers can't wait to quit.
According to a recent survey by job-placement firm Manpower, 84% of employees plan to look for a new position in 2011. That's up from just 60% last year.
Most employees have sat tight through the recession, not even considering other jobs because so few firms were hiring. For the past few years, the Labor Department's quits rate, which serves as a barometer of workers' ability to change jobs, has hovered near an all-time low.
But after years of increased work and frozen compensation, "a lot of people will be looking because they're disappointed with their current jobs," said Paul Bernard, a veteran executive coach and career management advisor who runs his own firm.
Douglas Matthews, president and chief operating officer for Right Management, a division of Manpower, called the results "a wake-up call to management. ... This finding is more about employee dissatisfaction and discontent than projected turnover," he said.
Despite a disappointing jobs report last month, experts agree that the employment picture will likely improve going forward, although hiring will be slow.
Double life of the American worker
"A lot of people who have jobs are considering looking for new work this year," said Charles Purdy, a career expert at Monster+HotJobs. "I don't know if we're going to see a huge uptick in the number of jobs, but I do think we'll see a huge surge in the number of people looking for work, even among people who are already employed."
Austin and Lauren will be two of them. (Both asked that their last names not be used.)
Austin has worked as the general manager for a small manufacturing company for six years, but he has his sights set on a job with the federal government.
"I am definitely ready to make a move now," he said. "I want to change because I feel that I would be more successful and have more challenges working in a Federal agency representing the interests of multiple private small businesses."
Austin has applied to positions at the Department of Commerce, Homeland Security and the State Department. But until hiring picks up, he is maintaining his current employment while campaigning for his next career in the New Year, or what he calls "maintaining and campaigning."
Lauren wants to leave the marketing position she landed soon after graduating in May. She said she feels lucky to have any job at all, "but it's definitely not what I expected."
"I'm currently in an environment where I'm not learning anything and am not challenged by any of my work," she said. "It just makes me feel like I'm wasting my time."
Even with less than a year of experience under her belt, Lauren plans to look for another opportunity in 2011. "What I'm hoping with the new year is that since most companies do their budgets around this time, they'll have room for new employees," she said.
But Bernard warns that they shouldn't leave their day jobs too soon. "People need to have realistic expectations," he cautioned. "It could still take 10 months to find a job."
NEW YORK (CNNMoney.com) -- The gap between the rich and the middle class is larger than it has ever been due to the bursting of the housing bubble.
The richest 1% of U.S. households had a net worth 225 times greater than that of the average American household in 2009, according to analysis conducted by the Economic Policy Institute, a liberal think tank. That's up from the previous record of 190 times greater, which was set in 2004.
The widening gap came even as wealthy households' average net worth tumbled 27% -- to about $14 million -- between 2007 to 2009. That's the first time that they suffered a decline since the three-year period of 1992 to 1995.
Meanwhile, the average family's net worth plunged 41% -- to just $62,200 -- from 2007 to 2009, according to EPI's calculations.
"The typical person lost more because a bigger percentage of their wealth in 2007 had been the value of their home," said Heidi Shierholz, an economist with EPI.
5 billionaires who skated on the death tax
The poorest U.S. households have had a negative net worth in every reading dating back to 1962, meaning that their debts and other liabilities outweigh their assets. They fell deeper into a hole the last two years, with their net worth falling to negative $27,000 on average, or nearly twice as much as they owed two years earlier.
0:00 /1:21Considering yourself 'rich'
Net worth is a measure of a family's total assets, including real estate, bank balances, stock holdings and retirement funds, minus all of their liabilities, such as mortgages and other consumer debt.
The EPI estimate uses figures from the Federal Reserve's survey of consumer finances for 2007 estimates, and the Fed's flow of funds report on household wealth for the more recent reading.
Thursday, 23 December 2010
Strategists are almost universal in expectations for the market to climb from 10 percent to 20 percent in 2011, and investor polls show bullishness around 60 percent. Those are numbers reminiscent of October 2007, just before the worst of the financial crisis hit and the market lost more than half its value.
At the same time, stocks have been climbing steadily higher during what is a normally great month, rising 6 percent even on low volume. Finally, more than 3,400 new highs have been hit this month on the New York Stock Exchange.
It's at just such times of massive exuberance that the market is poised for a letdown.
"One of the things that increases the risk is indeed the rise in optimism," says James Paulsen, chief investment strategist at Wells Capital Management in Minneapolis. "We're still going to have a decent year, but I think the risk is higher going into the year than it's been."
Peaking investor sentiment and nearly unfettered runs higher are, almost by definition, what precedes market falls. Feeling that the best of the market has been achieved for the moment, investors itchy to take profits step in and sell their shares.
The good news is that such selloffs lead to buying opportunities and are thus only temporary, except during chronic bear markets.
So while hesitance such as Paulsen's is creeping more quickly into the market, it's still not changing the overall bullish scenario for the year ahead.
"I'm thinking we're going to have a correction the second or third week of January-a nice correction of 5 to 7 percent. Everybody is way too bullish," says Dave Rovelli, managing director of US equity trading at Canaccord Adams in New York. "We're melting up on no volume."
The trick for investors, then, will be how to take some downside protection while not missing out on any further moves higher.
Strategies are breaking into two camps: Taking money off the table before the end of the year and waiting for a substantial dip to provide another buying opportunity, or grabbing for safety, such as in bonds, and employing a buy-and-hold bunker mentality to ride out volatility storms that could erupt in what for months has been an uncommonly complacent market.
"I'd definitely put some stops in just so you can buy again," Rovelli says. Fed Chairman Ben Bernanke "has been putting all this money into the system and people are going to buy equities. So you buy, but the trade is you take some profits and then wait to buy some more."
Similarly, Citigroup's chief investment strategist, Tobias Lefovich, is advising clients that "thinking like a trader rather than an investor is still appropriate as a new secular bull market does not seem probable quite yet."
"[A]n overshoot above and beyond our conservative S&P 500 year-end 2011 target of 1,300 is very plausible and a run to 1,400 or higher cannot be ruled out, but we struggle with its sustainability..." Lefkovich wrote in a note to clients. "Note that we have seen strategists around the Street bump up outlooks recently in what appears to be a bidding war for even more bullish views."
Such optimism, he wrote, means "the related upside surprise factor is diminishing," so some of the anticipated 2011 gains on economic strength already have been priced into the 2010 market.
Trying to time the market's gyrations, though, is a difficult endeavor, and some, like Paulson and Ryan Detrick, senior analyst at Schaeffer's Investment Research in Cincinnati, think investors need to be careful about getting too driven by contrarian signs.
Fund flows, after all, are showing that money is still coming out of domestic equity funds, signaling that while polls may show high investor sentiment, behavioral patterns do not. Equity funds took in $3 billion over the most recent six-day period, showing growth for only the first time since April.
"There's an interesting dichotomy. They may say they're bullish, but their money doesn't say they're bullish," Detrick says. "We'd have some pretty tight stops. But we wouldn't necessarily go out and sell everything, because this can continue for another month."
Instead, investors may want to shift some allocations, putting some money into Treasurys, which have been getting beaten up lately but remain a safe haven.
"Every investor should have long-term parameters that set up diversification guidelines, and you should never violate those," Paulsen says. "I still own Treasury bonds even though I hate them. I do that because I know I am going to be wrong over periods of time, and that protects you from yourself. What you should really strive to get right over time is the longer-term investment strategy."
Wednesday, 22 December 2010
By the end of this month, you will have invested an entire year of your life into 2010. You can let that year slide silently into 2011, or you can do some additional work to make the most of your investment.
Your career (and life in general) can be an excellent research and development experiment, packed with insights and knowledge to build on in the future. But to unlock those insights, you have to pay attention.
Here are three questions that will help you mine the past year for all its value, and a fourth to help you create a positive foundation as you move into 2011:
1. What energized me? Why?
Look back at your work over the last year. What energized you? When did you feel in the groove? When were you most engaged? What were you doing? Then look at those answers and ask, Why? Why did that energize you? What was it about that experience that helped you find your groove? Why was it so engaging? Asking why helps you dig below the surface and identify the real source of the energy.
The more you understand what energizes you, the more likely you are to bring that energy into 2011 and beyond.
2. What drained me?
Next, take a look at the flipside. What drained your energy? What left you feeling depleted? What felt out of alignment with who you really are? What grated on you? Again, consider the answers to these questions, and then ask why.
By understanding what drains you, you can figure out how to eliminate--or at least reduce--the sources of those energy drains. If you don't look for specifics about what drains you, you're likely to keep repeating it.
3. What challenges helped me grow? How?
Assuming you were alive and conscious during 2010, the year probably presented you with no shortage of opportunities for growth. Some of those opportunities may have resulted in growth on the spot, like having to work through a challenging situation and learning new problem-solving approaches along the way. Others probably remained seeds of potential growth, like when you failed and moved on immediately to what came next, rather than stopping to ask what you could have done differently.
Too often we don't want to spend time with the discomfort of bumps and bruises, and as a result, we lose what they have to offer. Taking a look at your growth experiences and distilling the lessons you learned is a great way to squeeze all the value you can from the past year.
4. What am I grateful for?
It's easy to get caught up in the challenges of life. To make your outlook more positive, look at the last year through the lens of gratitude. What are you grateful for? Maybe you're thankful for big accomplishments, like having a job you love (or having a job at all). Or maybe you're grateful for life's smaller pleasures, such as enjoying frequent conversations with a co-worker about a shared interest.
Your work life doesn't exist in an isolated silo. What happens in your personal life affects how you feel about work. So take a look at your life from all angles and build a full spectrum picture of gratitude.
If you're on a roll, you might also ask yourself these seven more year-in-review questions to squeeze as much value as possible from the last twelve months.
Whether your 2010 was the best of times or the worst of times, looking back can offer a treasure trove of insight and opportunity for growth--if you take the time to dig into what you learned. And since you've already invested the time into last year, doesn't it make sense to use it to make 2011 the best it can be?
After years as a professional malcontent, Curt Rosengren discovered the power of passion. As speaker, author, and coach, Rosengren helps people create careers that energize and inspire them. His book, 101 Ways to Get Wild About, and his E-book, The Occupational Adventure Guide, offer people tools for turning dreams into reality. Rosengren's blog, The M.A.P. Maker, explores how to craft a life of meaning, abundance, and passion.
You don't need to change your oil every 3,000 miles.
Here's a secret that mechanics don't want you to know: You really don't need to have your oil changed every 3,000 miles.
It's a waste of a precious resource -- not to mention money -- to take your car in every 3,000 miles or three months, experts say. On average, most cars don't need an oil change for 7,500 miles.
"The oil change itself is a loss leader," said Austin Davis, whose family has been in the car-maintenance business in Houston since 1937. He's the author of "What Your Car Mechanic Doesn't Want You to Know" and has a website called MyHonestMechanic.com.
"Most repair shops will lose money or at best break even on a $25 to $28 oil change," he said. "The whole idea is to get you to also buy an air filter, rotate your tires or buy something else while you're there."
[Click here to check auto rates in your area.]
Complaints about auto repairs consistently rank among the top 10 grievances filed to state attorneys general, according to the National Association of Attorneys General. In 2008, the latest figures available, auto repair complaints ranked No. 6 on the list.
Because car manufacturing has become so sophisticated and less reliant on human intervention -- more computers and technology are producing and installing parts, for example -- the car-repair business isn't as robust as it was 10 and even five years ago.
"The easiest way to make up for money that you're losing or to increase profits is to turn up the up-sell button on all your services," said Philip Reed, senior consumer-advice editor for Edmunds.com. "Mechanics want you to get brake jobs earlier than you need them or change oil filters more frequently."
Sometimes, however, we are our worst enemies when it comes to explaining what is wrong with the car and giving away too much information. "Never reveal your budget," said Mr. Davis. "If there's steam pouring out of the hood of your Mercedes, don't tell the guy 'I hope this isn't going to cost me $2,000.'
"He'll be thinking, 'How about $1,995,'" he said.
There are no hard-and-fast rules about maintaining cars because they're all different. But experts do agree on this rule of thumb: Use your car manual as your guide. It will tell you at what mileage mark the oil should be changed or the transmission fluids flushed and what intervals that maintenance should follow as well as a host of other upkeep tips.
"If there's a conflict between what the owner's manual recommends and what the dealer recommends, follow the owner's manual," said Reed. "The manufacturer made the car; they should know what it takes to maintain it and keep it running."
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Pay attention too to the warranty packages. Cars known for dependability will guarantee parts for as many as 70,000 miles. That's almost the equivalent of driving around the earth three times.
"Cars today are just so well made that the failure rates of parts is close to nil," Davis said.
But long before it does come time to turn the keys over to a mechanic, find one that is trustworthy enough with which to build a long relationship.
"If you develop a relationship with your mechanic, you're much less likely to be ripped off," said Brandy Schaffels, content manager for the TrueCar.com website. "They'll go out of their way to help you." She had a mechanic who built an air-conditioner compressor by hand at a substantial savings to buying a new one.
"If your instinct tells you that what they're telling you doesn't sound right, double-check it with another mechanic," she said.
Go in prepared. Edmunds.com has a plethora of educational and how-to categories on its site. Davis compiled a maintenance schedule for a variety of cars. See the list here.
Schaffels also recommended purchasing a device that can plug into the car's port and diagnose why the check-engine or brake light is on; that part is available at do-it-yourself car-parts stores.
Other sites such as MotorTrend.com, 2carpros.com and 10w40.com can expand a car novice's vocabulary and know-how as well.
Here's a primer that will help you from getting scammed by mechanics.
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"Be wary of inspections," Davis said. A 40,000-mile inspection package at $400, for example, will call for a check on everything from the oil and brake pads to the door hinges.
"You pay them $400 to tear your car apart and look for additional repairs to sell you," Davis said. "That's a great business model right there."
You don't need to replace or flush transmission fluids until 25,000 to 30,000 miles. Some cars won't need the transmission fluids touched for 50,000 to 60,000 miles and some manufacturers are moving toward using fluid that will never needs to be replaced.
Look at the brake pads yourself before committing to new pads and think about changing them yourself. "It's a really well-kept secret that changing a brake pad is pretty easy," Reed said. "People get freaked out with brakes thinking that if they don't do it correctly, the car won't stop. If there's a problem with your brakes, you'll know right away."
Don't fret either if the mechanic says the brakes are about 50% worn down. They don't need to be replaced until they're 85% to 90% worn.
Ask for the replaced parts. Some states may require that the old parts are given to car owners with the itemized bill. But know what you're getting. Davis said he once gave an established customer an old air-conditioning compressor rather than the water pump he replaced to make the point. "We had a nice discussion about what a water pump is, what it does and what it looks like," he said.
Put chalks marks on car tires before having them rotated. Tire rotation is important because it keeps the wear and tear on the tires even and it extends the life of the tires. With all the turning, stopping and parallel parking, the front tires wear out substantially quicker than the back.
When you have them rotated, you are swapping the front tires for the back, not side-to-side or criss-crossing. But it's tough to tell if the tires have been actually changed unless you put chalks marks on them -- say, FL for front left, RR for rear right, etc.
Tire rotations are directly tied to certain mileage marks. There's a 5,000-mile minimum by some manufacturers, but 7,500 miles is the average. Some tires don't have to be rotated for as many as 20,000 miles.
Beware of the check-engine light. It's another profit center for a lot of dealerships and garages. The check-engine light is a sensor that is telling you that something is amiss in the car. It doesn't mean the car will self-destruct or die suddenly on a highway.
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"Probably the most common cause of the check-engine light is that the gas cap is not on tight enough," Reed said. The sensor has responded to the extra oxygen going through the gas line and it will go off once the cap has been tightened or the entire tank has been used.
Many mechanics will offer free diagnostic tests to tell you why the check-engine light is on. Consider that another red flag.
"Mechanics can tell you anything once the check-engine light comes on," Reed said.
Ask the mechanic to show you the problems. If the transmission fluid is not pink, but a dark brown, it's time to change it. If it's gritty because of accumulated pieces of metal and plastic, changing it could cause the transmission to slip further. If the dip stick for the transmission smells like barbeque sauce, then there are problems.
"Don't be afraid to ask them to explain these things to you," Davis said.
Keep a precise record of repairs and check them before you bring the car in. Schaffels said she used to keep a log of every tank of gas she purchased, where the mileage stood, what she paid for the gas and how the fuel economy tracked.
"If your vehicle's fuel economy has changed, it tells you that something needs to be adjusted," she said. It could be as simple as putting air in the tires to replacing rotors or plugs.
Know your car. Listen to how it starts and stops, how the wheels and brakes sound when you turn corners or come to quick stops. How does the motor hum? Does it rattle anywhere? Know how your car sounds when it's running well so that you know what sounds bad when it's not
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"If you know what it sounds like when it's not running well, that makes it easier for the mechanic to fix the problem," Schaffels said.
Communicate well. The worst thing you could do is throw the keys on the counter and tell the mechanic to figure out what is wrong with the car. Let him know what your problem was, what the sound was you were hearing and from where.
"Give the mechanic enough information about the problem so that he's not spending hours and your money to figure the thing out," Davis said. "You don't walk into your dentist and say, 'I'm pretty sure it's that tooth. Just go ahead and pull it.'"
Be nice. Your car breaks down on your way to work the day of the huge presentation. You're angry and desperate. It's not the mechanic's fault, so don't direct your frustration at him. It could end up costing you. Davis's father charged a 10% penalty premium for customers who were rude to him or his employees because of car breakdowns.
Saturday, 18 December 2010
It's never too early to start with New Year's resolutions, particularly as you enter the holiday season and begin contemplating how to best strengthen your family's financial future.
Here are five financial resolutions that will put you ahead of the curve over the long run.
1. Lay a balanced investment groundwork. Does your current asset allocation--the mix of securities in your investment portfolio--still match your risk tolerance and time horizon? Complete a risk tolerance questionnaire each year to make sure your asset allocation is aligned with the risk you are willing to assume. You can find many samples of these online or through your employer-sponsored retirement plan.
Why go through this exercise? Quite simply, stock market performance over the past few years may have shifted the value of your stock holdings above or below the level you had originally intended. This is a particularly worthwhile consideration given the extreme market volatility of the past few years. If your stock holdings have changed meaningfully in value, consider rebalancing--either by selling some of your stock or bond investments or by purchasing more stock, bond, or cash investments.
2. Create a nest for the future. Rather than just hoping you'll have enough for a comfortable retirement, take some time to calculate how much you'll need--and how much you'll need to save.
Think it through in terms of what your "must have" expenses might be, such as housing, and what your "nice to have" expenses could be, like an annual vacation to the tropics or a ski resort. Once you've figured out what your future liabilities could be, you can establish a realistic accumulation goal and ensure that you're on course to reach it. If you don't know how much you are going to need to retire comfortably, how will you know how much to save?
3. Check your family's financial security system. Savings and investments can be wiped out through some unforeseen calamity if you don't have the right financial security system in place. Far too many people are shockingly under-insured, and this is a shame, because insurance can help protect you and your loved ones from the costs of accidents, illness, disability, and death. As such, it is an important part of any sound financial plan.
Your individual need for coverage will depend on your personal circumstances, including your age, family, and financial situation. A young, single person, for example, may not need much life insurance. A person with a growing family, on the other hand, may need to ensure adequate financial protection for loved ones.
Whatever your particular situation may be, it's always best to go through a checklist of what insurance you have--and equally important, what kind of insurance you lack--and determine how to best fill in that gap to safeguard your family's financial future.
4. Preserve the assets you've accumulated. You may not enjoy thinking about what will happen after you're gone, but failing to plan could cost your family and loved ones. A sound estate plan can help preserve your assets and keep them from being unnecessarily reduced by taxes. Studies show that more than half of Americans die without a will. Your estate plan should include an up-to-date will, a power of attorney, a living will, and may make use of tools for charitable giving and joint ownership of property.
5. Debt can threaten the foundation. While you're putting the rest of your financial plan in order, don't neglect credit card balances or other outstanding debt. Consider ways to either reduce your debt or manage it better. For example, you might be able to save on interest charges by consolidating and transferring your credit card balance or by refinancing your mortgage.
Your financial house is a complex structure that needs regular upkeep. By keeping it in order throughout the year, you'll be well on your way to reaching your goals.
Finally, as with any New Year's resolution, it's all about the follow-through. How many times have you had a great idea and a moment later you couldn't remember it? Try using some of the financial aggregation tools that are available for free online. One of my favorites is Mint.com. Good luck!
Doug Lockwood, CFP, is a Partner at Harbor Lights Financial Group, a full service wealth-management team that has been dedicated to assisting clients in the accumulation and preservation of their wealth for over 18 years. He was recently named one of America's Top 100 Financial Advisors by Registered Rep magazine (August 2010) based on assets under management.
Doug Lockwood is a registered representative with and securities offered and advisory services through LPL Financial, a Registered Investment Advisor, Member FINRA/SIPC. LPL Financial is not affiliated with Mint.com.
BOSTON (TheStreet) -- Even the Oracle of Omaha has those investments he might do over if given the chance.
In a recent annual letter to Berkshire Hathaway shareholders, an eagerly awaited piece of investing insight, Buffett cops to several mistakes. Among them: authorizing the purchase of a large amount of ConocoPhillips stock when oil and gas prices were near their peak. A dramatic fall in energy prices soon followed.
"The terrible timing of my purchase has cost Berkshire several billion dollars," Buffett wrote, segueing into regret over a $244 million parlay in two Irish banks "that appeared cheap" but soon incurred an 89% loss on the initial investment.
"The tennis crowd would call my mistakes 'unforced errors,'" Buffett said.
When a Buffett, Bill Gross or Larry Fink publicly discusses bad decisions, it makes headlines. But there is hardly an investor, pro or amateur, who doesn't have some woeful tale of a sure thing that wasn't or can't-miss advice that did. The key is learning from mistakes and moving on.
Take profits when you have them and don't get greedy -- a lesson learned the hard way by Jonathan Polson, a financial adviser for Wells Fargo Advisors in South Carolina.
"When I was in college, I traded options on the side," he says. "One trade was with Services Acquisition when it was buying Jamba Juice. I had some massive gains on calls, up 45%, then 60%. Well, I became greedy, thought the rise would continue and I would just double my money. What ended up happening was that I let my gains become losses."
Later on, in 2007, he recalled having held on too long when, as a working professional, his "clients were up big and didn't want to sell."
"I simply told them it's time to take the gains before someone else takes them from you," he says. "I have made it a discipline ever since to take profits once I hit the 20%-plus mark. Even if it still goes up some, it's a disciplined approach that can keep my clients from some pain."
Joseph Montanaro, a certified financial planner for USAA, says that, as a younger man, he made the mistake of not preserving savings as an emergency fund, instead taking on an unhealthy dose of risk.
"In the late '90s, everything was grow, grow, grow," he says. "I decided, 'Why leave money sitting on the sideline in cash when I could make big money?'"
He followed that seemingly ideal plan, putting money he had saved for a rainy day directly into the stock market.
"Flash forward to 2002, I'm getting ready to take a new job in San Antonio and ended up having to cash out the investments, which had been hammered, in order to cover moving expenses," he says. "Not heeding the lesson of keeping an emergency fund in place ended up costing me a whole lot. My assets were down 60% to 70% of what they would have been had I just left them in savings."
He often tells clients of that error in judgment to keep them from doing the something similar.
"It is hard to get excited about savings, but there is certainly a purpose, a place and, as my example indicates, a reason."
Sometimes even well-meaning advice can cause more harm than good.
Montanaro still less than fondly recalls the first stock he ever bought, a purchase made while attending the United States Military Academy at West Point.
"It was a bull market environment," he says. "You could throw a dart at the wall and you were going to be a winner. I had a personal finance class and the professor, a captain in the Army, was sharing his stock picks with us, one of which was Crazy Eddie."
Crazy Eddie was a chain of consumer electronics stores, perhaps best known for commercials featuring screaming co-founder Eddie Antar and the pronouncement that prices were so low they were "insaaaaaaaaaaaaane."
"He gave us this idea," Montanaro says. "So we decided we were going to pool our money and buy that stock."
Buying shares in August 1987, they saw it go up a bit. Then came a nosedive following the stock market crash of Black Monday.
Things only got worse when fraudulent business practices led to a grand jury investigation, an SEC inquiry and jail time for Antar (who, for a time, tried to hide out in Israel after cashing out millions of dollars of stock). The company went bankrupt, its shares rendered worthless.
"That was the first stock I picked, but it wasn't the last one by any means," Montanaro says. "Even after having experienced that I still had a little bit of that gunslinger in me, the confidence that I could pick the right stocks."
These days, he preaches a compromise between that risky instinct and not getting burned.
"I've got the core part of my portfolio that is going be broad-based indexes and things like mutual funds," he says. "I may still tinker a bit on the periphery of the market, but not to the level that if I lose that money it is going to put my financial situation at risk. I share that with people all the time. Hey, if you've got that desire I understand it. But limit it to such a level that whatever happens, good or bad, doesn't put you at risk."
As far as bad advice goes, Daniel Shaffer thinks the media doles out its fair share.
"People need to see the bigger picture and not the day-to-day hype we hear from the media," says Shaffer, president and CEO of Harrison, N.Y.-based Shaffer Asset Management. "There are people I have spoken to who are literally glued to the media and make decisions based on what they hear."
"There is a major divergence between financial advisers being bullish and their clients who are not," he adds. "They can't convince their clients to get into the market."
Shaffer, whose book Profiting in Economic Storms: A Historic Guide to Surviving Depression, Deflation, Hyperinflation and Market Bubbles was released last month by Wiley, says he relies "on a technical analysis of the market and a longer-term view." His bearish advice: "Short this market, wait for the next few years and slowly inch into real estate investment trusts or other types of real estate."
Shaffer says that many investors would do well to trust their own instincts and observations, and not be pushed into a given strategy by advice that doesn't feel right to them.
"In this day and age, with the click of a computer, you can get 10 different opinions," he says. "People need to realize what their risk level is and what their beliefs are. Sometimes they could be just as good, if not better than, what they are hearing or reading in the news. Some people have a gut feeling because they are in the business arena, not in the investment arena, and they have a good pulse on what is really happening with credit and their customers and cash flow. They are right in the heart of it."
-- Written by Joe Mont in Boston.