Economics Explained in Rap Format

I came across this amazing rap video which talks about boom and bust cycles, effects of low interest rates and government spending. Basically everything you ever wanted to know about the economy! So whether you believe in Austrian economics, or you’re a Keynesian, you’ll enjoy this video.


Have We Turned A Corner?

Previously, (in Should you Worry About Market Declines, and Staying the Course), I advised readers to ignore the news media and recent stock market declines and stick to their long-term investing goals.

This was in response to several client calls worrying about an impending market collapse. After the volatility of the last six months of 2015, and the near 10% losses in the first 6 weeks of 2016, it’s easy to get spooked and yearn for the safety of the sidelines.

But then, as often happens, the markets turned right around and rallied for the past 2 weeks, with nearly all asset classes coming close to erasing the losses for the year.

I guess the stock market really enjoyed the political circus that has been playing out between Donald Trump and all the other 32 presidential candidates!

The strongest gains came from the worst performers of the last year – Emerging Markets, Gold and Oil Companies.

The best performer was Gold (up 9% last week, and 18% for the year), and Gold Mining Stocks (up 5.5% for the week and 35% for the year), but this comes as no surprise.

After several years in a Zero Interest-Rate Environment (ZIRP), we’re now close to a Negative Interest Rate Environment (NIRP). And in negative interest rate environments, gold can be expected to do well.

A third of all global debt (nine trillion dollars worth!) has been issued with a negative yield. This includes the Eurozone, Scandinavian countries, and most recently Japan.

As I mentioned almost exactly a year ago today, the US is going to have a tough time raising interest rates when the yield on newly-issued global bonds is negative. (As a side note, in that letter I also predicted that intermediate-term Municipal Bonds would be the biggest beneficiary – a scenario that actually came true with Munies being one of the best performing asset classes last year!)

Sure enough, as predicted, even though the Federal Reserve increased the short-term rates, the yield on long-term US treasuries declined, and even mortgage rates have dropped to levels not seen since late-2012.

Incidentally, if you’re in a 30-year mortgage with an interest rate that’s over 3.75%, now is a great time to refinance.

Oil prices seem to have stabilized, and may have reached a bottom around $30/barrel, leading to a rally in Oil Companies which were up 9% last week and nearly 4% for the year.

And after 3 years of double-digit losses, Emerging Markets finally seemed to have turned a corner. They were up 9% last week, and up 1.5% year-to-date.

So does this mean the worst is behind us, and its smooth sailing from here?

I doubt it.

I still think we’re going to see a lot of volatility this year, with major declines followed by massive rallies.
But it doesn’t make sense to sell everything and sit on the sidelines.

After all, you don’t earn interest or dividends when you’re on the sidelines. And dividends are responsible for nearly half of your long-term investment returns.

So, as usual, just keep calm and stay invested!


Staying The Course


The market’s been quite volatile over the past several months. The talking heads on TV have been proclaiming it’s a bear market, with 2008-esq declines on the horizon.

In this environment, it’s easy to lose your nerve and consider bailing on your investment strategy, or at least curtailing your monthly investment contributions to your retirement accounts.

But the truth is hard to swallow – volatility is the just price you pay for investing in the stock market.

While it’s a rollercoaster ride, especially in terms of emotions, historically you would have earned 8-11% in a well-diversified portfolio over long periods of time. And by long periods we are talking more than 5 years. Not just a couple of months, or even a couple of years.

As I mentioned in the last post, I strongly recommend you stick with the long-term strategy you’ve decided upon, even if the next few months or years are volatile.

During the accumulation phase, your investment process consists of making periodic contributions that are invested into a sound strategy. Even the soundest strategies will not always seem that way, with long periods of drawdowns and losses. If you stop your contributions, you are breaking the process. This rarely leads to a better outcome.

Here’s a snippet from an interesting article I just read today:
…From more than 40 years of providing investment counsel to corporations, endowments and individual investors, I’ve learned that one of the keys to successful investing is to avoid the tendency to “catastrophize”—envisioning only the worst possible scenario.

To do that, it helps to know the history of market returns. Consider the following examples:

  • From 1973 through 1974, the S&P 500 Index lost a total of 37%. Over the next five years, it returned almost 15% per year. And over 25 years, it returned more than 17% per year.
  • From April 2000 through February 2003, the S&P 500 Index lost an even greater total—more than 41%. Then, from March 2003 through October 2007, the index returned more than 100%, providing an annualized return of more than 16%.
  • From November 2007 through February 2009, the S&P 500 Index lost a still-greater total— more than 46%. Then, from March 2009 through November 2015, the index returned 227%, or more than 19% per year.

source: Reality Check For Investors by Larry Swedroe


 If you are uncomfortable with stock market volatility, your only other options are to invest in bonds, which will yield substantially lower returns than the stock market, or bank CD’s which basically guarantee you lose 1% to inflation every year.

But if you can hang in there, you will be rewarded with the juicy long-term market returns.

Pulling out and sitting in cash until you are comfortable with the volatility is a losing strategy. You cannot predict when you get positive or negative returns, and trying to time your entries and exits leads to missing out major returns.

If this volatility is making you lose sleep at night, maybe it’s time to adjust your asset allocation. Adding some more bonds, while lowering your long-term returns, will reduce the volatility and prevent you from making catastrophic mistakes.

What are catastrophic mistakes?

Selling out of your long-term holdings due to short-term volatlity definitely fits the bill.

Keep calm and just carrying on investing!


Should You Worry About The Market Declines?

The market celebrated the New Year by dropping 9% right out of the gate… It’s the worst start to a year ever… And the market is now at its lowest level since late 2014.

It’s natural to worry when the stock market has been down nearly everyday this year.

But regardless of how long you’ve been investing, it’s hard to accept that nothing unusual is happening in the market.

Declines of 10%-20% don’t signal the end of prosperity. They are normal market movements. And so long as you you hold high-quality, long-term investments in your investment accounts, you have nothing to worry about.

Building wealth comes from holding for the long term – including through market dips.

But I understand, it’s hard keeping calm. Especially since there’s so much to worry about….

Economic slowdown in China, lack of growth in Europe, collapsing oil prices, rising interest rates, ISIS, declining profit margins, extended valuations, stagnant wages, growing economic inequality, Hillary Clinton becoming president…or worse, Donald Trump!

If you watch CNBC, everyday they will have some talking head telling you how this is the just the beginning of the next crash, and how it’s going to be a repeat of 2008.

Someone like Peter Schiff, Dennis Gartman, or Marc Faber. Whoever they are, they will be welcomed as an expert,  and will be extremely pessimistic about the current economic environment, and have convincing reasons why we should sell everything.

Fear sells. Research shows we pay more attention to negative news or headlines.

We’re hardwired to believe pessimists. Someone with a pessimistic point of view always appears smarter, and we give them credit for digging below the surface. On the other hand, optimists appear as intellectually lazy, cheerleaders for the market.

Maybe there’s an evolutionary benefit to believing naysayers. Healthy skepticism is what keeps us alive and out of harm’s way.

Except when you take it too far.

And they will never tell you the track record of their so-called “expert”.

Consider these doomsday headlines from Marc Faber:

  • Faber on Hyperinflation: “Not A Matter Of If But When” -Business Insider, 9/23/2010
  • ‘The Bear Market Is Starting’ Marc Faber -CNBC, August 3, 2011
  • Faber: The Dollar’s Value In The Future Will Be Zero -Business Insider, 4/18/ 2011
  • Marc Faber: We Could Experience A 1987-Style Crash This Year -Business Insider, 5/10/2012
  • Marc Faber: Look out! A 1987-style crash is coming. -CNBC, August 8, 2013
  • 2014 crash will be worse than 1987’s: Marc Faber -CNBC, April 10, 2014
  • Dr. Doom calls bubble, adding to gloomy calls -CNBC, Nov 2, 2015

Every year, like a broken record, he has predicted an impending crash in the market.

If you had listened to Faber, you would have gotten out of the markets six years ago and missed one of the biggest bull markets of your life.

Eventually, he’ll be right.

But it doesn’t pay to panic and sell your investments just because there’s a chance of a major crash.

Since 1950, the market has experienced 147 declines of 5% or more, 40 “market corrections” of 10% or more, and 11 “bear markets” of a 20% drop.

We can learn a few things from these numbers.

First, the current market correction is normal. It happens, on average, every year and a half.

Second, it’d next to impossible to avoid these by “trading around them”.

If the market falls 5% and you sell your stocks in a panic… you would have been wrong 73% of the time. In 107 out of 147 pullbacks, a 5% fall represents the bottom, and then the market rebounds… So you would have sold low, and the market would have recovered without you.

Say you’re braver than that, and you wait until until the market falls 10% to sell. This would mean that you’re trying to avoid a bear market drop of 20%. Even then, you’d be wrong 72.5% of the time – only 11 out of 40 pullbacks of 10% or more turn into a bear market. And again, the market will rise without you.

In fact, you probably would have sold out last Wednesday, and missed the tremendous rally on Thursday and Friday, where the S&P 500 index gained almost 5% from the midweek lows.

Selling in a panic almost never pays off.

As I’ve mentioned before, you never want to let your emotions get the better of you. Successful investing requires patience, a process/strategy, and discipline.

Don’t let the talking heads on CNBC (half of whom have paid to be a “guest”) scare you out of your investments, or process.

If anything, a major decline is an opportunity to buy stellar global companies at a discount.

Since 2010, stock market volatility has been significantly lower than normal, possibly caused by Quantitative Easing. (Quantitative Easing is an unconventional monetary policy in which a central bank purchases government securities or other securities from the market in order to lower interest rates and increase the money supply). Since the Federal Reserve has ended this program, and embarked on the quest for higher interest rates, I expect volatility to return.

You should expect the volatility of past 3 months to continue. If anything, the market might be more volatile than normal, probably for the next year or two.

Even if the current correction turns into a major bear market, within 2 years, on average, you’ll be back where you were before the decline started. And during that time, your contributions and reinvested dividends will be buying stocks at a discount.

The stock market is the only market where shoppers run out of the store the minute everything goes on sale!

If you’re already in retirement, or just on the verge of retiring, a big decline may impact your retirement planning. However, your allocation of stocks and bonds should have already been appropriately adjusted to enable you to live off your bond/cash until the market recovers. Depending on the severity, you may have to reduce your spending, but these too should have been predetermined and should not come as a surprise.

For everyone else, especially those who are many decades away from retirement, a long, protracted bear market will set you up for spectacular returns in the future.

So turn off your TV, stick to your investment process, and pray for a major decline in the stock market.


Historic Day For The Dow

Today was a historic day for the Dow Jones Index – and a harrowing day for investors. The blue chip stock index fell 1,089 points, the biggest intraday move in the history the index, before recovering to a loss of only 588.

Over the past three months, the S&P 500 has dropped about 7.5%. There hasn’t really been any safe haven as global markets have dropped as well.

Except for bonds, every other asset class is down for the year to some extent. The biggest losers have been Emerging Markets and Commodities, down 19% and 22% year-to-date.

Today’s action was the culmination of what’s been an incredibly bad week for the global markets.

The S&P 500 is now down 10% from the peak this year, and is officially in a correction.

As I mentioned in my last post, we were anticipating a 10% or even a 20% decline sometime in the near future.

On average, the market drops 10% about once a year. However, we’ve gone 4 years without this sort of correction –  it was only a matter of time before the market dropped.

And, as usual, the news outlets are full of doom and gloom articles predicting the end of the world. After all, bad news sells.

But you shouldn’t worry too much about a decline of this magnitude.

Unlike 2008, we’re not on the verge of a major recession, nor are the financial institutions on the verge of collapse (at least not yet!). The current environment is not similar to 2000 either, where technology stocks were ridiculously overvalued, and the overall stock market was twice as expensive as it is today.

Today’s market is fairly valued, trading at a P/E of 18.

The P/E or Price-to-Earnings ratio denotes how much someone is willing to pay for a dollar of earnings. A P/E of 18 means investors are willing to pay 18 times earnings. 18 times earnings is a fairly valued market. Above 25 it’s getting expensive. Above 35 and you should be extremely cautious.

Sometimes investors get caught up in the euphoria of owning stocks, and are willing to pay any price.

This is the scenario that recently unfolded in China.

The Shanghai Composite Index soared 133% in the past year until it was trading for over 40 times earnings. This year alone, it was up 60% at the peak before eventually crashing. Instead of being up 60%, it’s now down 1% for the year.

A lot of ordinary middle-class Chinese investors got hurt, speculating in something they didn’t understand. Just like in the US stock market 15 years ago, and the US housing market 7 years ago.

But we’re nowhere close that level of frothiness in the US markets today.

Over the past several decades a well-diversified global portfolio with 80% equities and 20% bonds has returned between 9-11% over any 20 year period.

Historic returns by asset allocation


(Click to Enlarge)


However, there have been very few years during the entire timeframe when the portfolio actually delivered 9-11% in any given year. We either see 11%+ returns (such as 2013, when this 80/20 portfolio returned about 15%) or below 9% returns (like 2014 when this 80/20 portfolio returned about 3%).

And there will be times when your account has negative returns. Maybe for a few years in a row.

Over your investment lifetime, there will be at least one or two periods when your portfolio will drop 25% or more (as it did in 2008). Despite these huge declines, the nature of the markets and compound interest will ensure a high probably of achieving satisfactory results. So long as you don’t panic and bail at the bottom of the market.

This is easier said than done. Imagine if you had several hundred thousand dollars in your account and you’d just lost $200,000. In this situation most people cry uncle and change their investment strategy.

Don’t let these short term drops in the market upset you, and derail your investment plans.

In fact, you should pray for a severe and protracted bear market so you can keep buying stocks at a cheap price.

Remember, when the price of stocks fall, they become less expensive and also less risky. However, the stock market is the only market where investors flee when they see a bargain!

The only time you’d hate these huge drawdowns in your portfolio is when you’re close to, or in retirement. But, your asset allocation should have already been modified to adjust for this, and your exposure to stocks would have declined in favor of bonds. This lowered exposure to stocks would have helped moderate the losses in your portfolio.

You’ve probably heard stories of older investors who lost 50-60% of their 401ks in 2008 and had to either put off retirement or go back to work.

These are the people who didn’t have the proper asset allocation, and had too much exposure to stocks, or volatile asset classes like REITs, commodities or small-cap stocks. The difference between a portfolio that has 60% in equities and one with 90% equities is the difference between losing 35%, and losing 55%.

A 35% loss stings, but a 55% loss results in sheer panic.

And when people panic, they tend to behave in a manner that is injurious to their health, or in this case, their long-term financial well-being.

I personally know several investors whose portfolios lost 50-75% of their value in 2008/2009 and they moved everything to cash.

Some of them are still in cash.

Meanwhile, the S&P 500 is up just over 200% since the bottom in 2009. Compared to that increase, this 10-20% loss is minor blip. As in 2008 and 2009, staying in the market through this turmoil may prove to be a very wise move.

If you have a long-term horizon, don’t let short-term events derail your investment plans. If anything, see them as an opportunity to buy stocks at a discount.

We’ve taken this opportunity in the markets to rebalance our client portfolios. In a bull market, this strategy forces you to take profits along the way. In a correction, it makes you buy back some of the assets that have dropped in price. In effect, this time-tested strategy takes a lot of the emotions out of our investment process and forces us to sell high and buy low.

Stay the course.



2015 has been a roller coaster ride so far.

The stock market was down in January, up in February, and is now trending back down again in March.

Long term bond prices (US 20-year treasuries) were up 10% in January, and then drifted back down again.

And then there was today, Friday March 6th 2015, where the entire investment landscape was awash in a sea of red. It’s unusual to see all asset classes decline at the same time.

Usually, at least stocks and bonds move in opposite directions. But today everything was down – US and International stocks and bonds, real estate, energy, precious metals, you name it.

The only things up were the US Dollar, which is currently enjoying decade highs against other currencies.  And interest rates.

The yield on the 10-year treasury bond jumped from 2.1% to 2.25%, on the news of better-than-expected employment numbers.

This is likely what contributed to the major sell-off in the market today.

This may sound contradictory – better employment numbers means the economy is improving. And an improving economy should be better for the stock market, right? Unfortunately not. There’s no correlation between GDP growth and investment returns.

Investors are worried that an improving economy means the Federal Reserve will start increasing interest rates. Higher interest rates hurt businesses, and could kill the nascent recovery in the housing markets.

It’s also interesting that a lot of publicly-traded companies are issuing debt at historically low prices and using that money to buy back their stock. Companies like IBM and Apple are borrowing money at less than 3%, and instead of using that money to grow their business, they’re opting to reduce the number of shares. This acts to make each share more valuable. (Consider cutting a pizza into 4 slices instead of 8  – each slice is bigger, and thus more valuable). This phenomena has been driving a lot of the growth in the stock market, which is why large companies have outperformed smaller companies over the past few years. (Larger, more established companies can borrow money more easily and cheaply than smaller companies).

Higher interest rates could put the brakes on the bull market in stocks that has been going on for the past six years. And that’s what caused a lot of worry in the markets today.

So should we worry about rising interest rates?

I don’t think so. At least not yet.

Even if the US economy is improving, there is no inflation on the horizon. The Federal Reserve uses rate increases to help curb inflation. But seeing as there isn’t any, the Fed will be hesitant to raise rates too high or too fast.

Even if the Federal Reserve does increase the short-term rates they can’t impact long-term rates, which are set by market forces. And market forces are unlikely to let long-term rates rise any time soon.

While we’re seeing positive economic growth at home, globally, the picture looks a lot more glum.

Europe is in shambles with a recession, high unemployment, over-leveraged countries, and fears of deflation. Commodity-driven economies like Canada and Australia have been hurt by the sharp decline in oil and metal prices.  Even China, which used to be the growth engine of the world, is seeing a slowdown in its economy. And then there’s conflict in Ukraine and Russia.

To help counter this declining economic picture, 17 central banks have cut  interest rates this year.

Europe is trying so hard to stimulate economic growth, banks are paying people to borrow money! (Source: New York Times)

And already 16% of global government debt has negative yields. Yes, the yield on bonds of Germany, Switzerland, France, Belgium, Denmark, Finland, Sweden, Austria and the Netherlands is less than zero.

You give the government your hard-earned money and after a certain amount of time, you get less money back.

Not only governments, but even global food giant Nestle was able to issue short-term bonds last month with a negative yield.

If this wasn’t bad enough, the European Central Bank just initiated a trillion-Euro quantitative easing program. Injecting this kind of money in to the economy will further devalue the Euro and ensure that interest rates on European government bonds stay negative. 

There is an awful lot of money sloshing around, and it needs to find a home.

I’ll bet that a lot of it ends up in US treasuries. When US 10-year bond yields 2% more than German 10-year bond, that’s an easy bet to make. (Surprisingly,even countries like Portugal and Spain whose bonds are rating as “junk”, have lower interest rates than the US! Usually, when you lend money to subprime borrowers, you charge them a higher interest rate).

This demand for US treasuries will prop up bond prices and continue to keep the yield low. And until things turn around globally, I doubt we’re going to see an increase in the yield on long-term debt.

And wealthy foreigners, who are facing the prospect of negative yields in their devaluing home currency, may instead choose to park their cash US real estate instead.

So I’d say there is a chance the real estate boom might continue for a little bit longer.

And compared to the guaranteed loss of purchasing power with negative-yielding bonds, gold is starting to look like a high-yield investment! Maybe, 2015 will see a change in the sentiment towards gold as well.

Does this mean it’s smooth sailing for the stock market?

Not necessarily.

The current bull market in US stocks is getting long in the tooth. It’s been six years since we’ve seen a major correction. So it wouldn’t be unreasonable to see a 20% correction within the next year or year-and-a-half.

A correction isn’t something to be feared. It gives the market time to digest its gains, and for investors to buy in at a cheaper price.

Even if you’re fully invested, you shouldn’t panic and bail in anticipation of a bear market. More money has been lost in anticipation of a correction than in actual corrections.

Besides, foreign developed and emerging markets have been lagging the US stock market for the past few years and are between 20% and 30% cheaper from a valuation standpoint. It’s about time they played catch-up.

So, as I often like to point out, maintaining a globally-diversified portfolio will prove to best the best course of action.

However, I think the major beneficiary of this situation will be intermediate-term Municipal Bonds.

Most investors overlook Munies, which this is a mistake, especially for high earners.

If you’re in a high tax bracket you might be able to pick up bonds with an 7.5% tax-equivalent yield. That’s a great opportunity in this low-interest rate environment.







There’s Always Something To Worry About

2014 is almost over.

And fear has dominated the news headlines for most of the year.

We had a war between Russia and the Ukraine, bombings in the Middle East, Ebola reaching the US, a military coup in Thailand, ISIS, fears of European recession, an actual recession in Japan, civil unrest in Ferguson, and Black Friday retail sales that were widely reported as being a bust (the implication being that the US consumer is broke).

We also dealt with the announcement that the Federal Reserve will end Quantitative Easing this year, which led to widespread fear that interest rates would soar, leading to a stock market and real estate collapse.

And we just witnessed a collapse in oil prices, which has renewed the fear of recession.

Meanwhile, the bull market in US stocks has kept chugging along. US stocks have continued to surprise both investors and market “experts” alike by returning 13% this year.

While stocks in Developed and Emerging countries have severely lagged US stocks, long-term US Government bonds are up an unbelievable 18%. (Bond prices and interest rates move in opposite directions. The reason why long-term bonds are up so much is because the corresponding interest rates have dropped quite a bit).

But the biggest winner this year has been US REITS (Real Estate Investment Trusts), returning a whopping 28% year to date. So much for rising interest rates hurting performance!
The biggest loser has been commodities, with a commonly used basket of commodities down 20% for the year.
This isn’t surprising since commodities usually have an inverse relationship with the US dollar – as the dollar strengthens against other currencies, commodity prices tend to fall.
And right now, the US dollar is at a seven-year high against major currencies. Not something anyone would have predicted back in 2008 when we thought we were on the verge of financial collapse.

The main lesson here is there’s no such thing as a sure bet in the stock market.

No one can predict which asset class will have the best performance, which is why maintaining a well-diversified portfolio is the best strategy.

This past week has been a rough one for the market.

We might even be on the verge of a correction (although I doubt it). It has been three years since we have experienced a 10% decline in US stocks – which is unusual, since this event usually occurs at least once year.
On the other hand, we are also entering the historically most-bullish time of the year for the stock market. And there is also research that indicates the high likelihood of strong market performance during this period in the presidential election cycle.
If your investment time horizon is longer than 25 years (including both the accumulation and distribution phases) then use any pullback or correction as a good buying opportunity. Remember that stocks, as a group, become less-risky after they fall in price. Use the recent weakness and bullish time of year to make your year-end IRA contributions.

Wish you all a very Merry Christmas, Hanukkah, Kwanza, or Festivus!


Economic Review: What’s Next For The Stock Market?

Last week, the US stock market closed at an all-time high.

And I’ve received multiple queries asking if this is a true reflection of the economy and what is the best course of action to take right now.

Has there been a meaningful economic recovery at all?

Every time I turn on the radio or TV I hear polarizing views on this topic. Either the economy just hasn’t recovered and we’re in a stock-market (or real estate) bubble on the verge of collapse, or the economy is chugging along like everything is peaches and cream.

Of course, reality lies somewhere in the middle.

Unlike the typical post-recession recovery, this one features below-average job creation, stagnant wages, weak retail sales, and disappointing GDP growth.  But, these represent the average.

The recovery hasn’t been evenly distributed, with some sectors far outpacing others.

At the lower end, minimum wage jobs are plentiful, but it’s next to impossible to support a family on one.  If you’re a low or medium-skilled worker, plenty of jobs are available, although the wages are flat or even slightly lower than they were in 2007.

At the other end of the spectrum, people with graduate degrees face an unemployment rate of less than 3%. Especially those employed in sectors like technology, science, engineering or math, which pay 50% more than the median US wage.

Or, if you’re working in the booming Shale Oil regions of North Dakota, unemployment is virtually zero. Even Walmart, which is notorious for being a poor paymaster, is willing to start off its employees at $17.20 an hour.

Instead of creating jobs, the Federal Reserve’s quantitative easing and zero interest rate policies may have just helped boost stock prices and real estate values.

But if you don’t own any assets or have access to cheap financing, these policies aren’t really helping you.

Less than 65% of the US population owns real estate.  And only 50% of the people own any stocks.

If anything, it would appear that the Federal Reserve policies seem to be increasing the divide between the bottom half and the top half of society.

Over the long term, this increasing disparity is bad for the economy.  We want a virtuous cycle, where increased wages for everyone leads to higher consumer spending and thus a more robust economy.

And it might be even worse than it appears on the surface.

According to the Pew Research Center, the top 7% of households have gotten 28% richer while the bottom 93% saw their wealth decline 4%.

While there are certain caveats to their methodology (like using income vs. net worth, or mean vs. median numbers, as well as differing sources of data), it’s directionally accurate. The richer someone is, the more likely he is to own stocks and real estate, and it makes sense he or she would benefit disproportionally in the current environment.

But in general, the average person can’t be bothered with their investments.

According to a recent survey of 1,000 US investors by Gallup, 30% thought US stocks were flat, or had declined last year. This is in the face of a record performance in terms of stock market gains. And only 7% of investors were aware of this performance.  This means 93% of investors were unaware of the stock market’s record performance.

If I had to guess, it’s probably the same 93% who’ve seen their wealth decline in the past five years.

Looking back at every 5-year period since 1871, the last 5 year period has been the 4th best time to be an investor. In fact, over the past decade, the stock market returns have been pretty much in line with the long term average returns we’ve seen over the past several decades.

If you’ve struggled with your investment returns during the past five years, your future performance is unlikely to be any better.

This year the stock market has performed better than most people expected.

Nearly every single asset class is up for the year, including last year’s worst performer – Gold Mining Stocks which are up about 25%, followed by US Real Estate Stocks which are up 21%.

Overall, every single one of our diversified portfolios is up over 6% (individual account performance may differ based on when they were funded), with the exception of our Dividend Stock portfolio which was up over 10%, outpacing the return of the S&P500.

Meanwhile, it seems like there are a lot of “experts” on TV calling for a crash.

Mostly recently, founder of the Prudent Bear Fund (BEARX) – David Tice, called for a 60% crash in stocks.

He’s made similar calls in 2012 and 2010. And he’s been wrong every time. Meanwhile the BEARX fund has had a negative rate of return over every time period – it basically lost money over the past 1 year, 3 years, 5 years, 10 years, and 15 years.

Meanwhile, it charges 1.75% in fees and manages nearly half a billion dollars.

How do you manage so much money, charge such high fees, and yet provide such lousy performance?

By selling fear.

But, the real poster child for fear mongering is John Hussmann.

Author of a weekly newsletter, John Hussman has a PhD in economics and has been bearish on the US economy for the past several years. His fund, the Hussman Strategic Growth Fund (HSGFX), has also managed to provide negative returns over every time period.  Unlike BEARX, however, he even managed to lose money in 2008.

He’s figured out how to lose money in every possible situation. Quite an achievement!

But his fund manages over a billion dollars. With a 1.08% expense ratio, he manages to pull in over $10 million a year for the privilege of losing money.  What a great gig!

While bearish “experts” like Tice and Hussman frequently cite the poor economic recovery as a reason for expecting a major stock market crash, I’d like to point out that there is absolutely no correlation between GDP growth and stock market returns. The economist has an interesting article on this illusion of growth.

As an example, look at Greece – while it’s economy has been shrinking over the past few years, the Greece country fund (GREK) has been a top performer returning 29% and 24% in 2012 and 2013 respectively.

So what do you do?

My advice is to ignore all the news you hear on TV. These “experts” usually have some hidden agenda and have often paid a couple of thousand dollars to be on show.  Additionally their grandiose predictions and passionate sound bites help boosting TV ratings.

You’re better off turning off the financial news and reading some good books instead.

Don’t get me wrong. We will definitely see a decline in the stock market at some point.

In fact, a 20% decline typically occurs once every 4 years, and a 30% decline once a decade. But this is a normal and expected part of the investment process.

So far, our academically-proven process of investing in a diverse portfolio coupled with regular rebalancing has been working extremely well. And we expect this methodology to continue to provide great results into the far future.

So my advice is to continue investing according to your long-term strategy. If the market declines, you’ll be making future purchases at a discount.

And regardless of what happens in the near-term, your long-term performance is determined by your time in the market, and not by timing the market.

It’s the last day of the last weekend of summer.  Spend your time enjoying it and not worrying about the short-term fluctuations in the market.

If you’d like to sit down to discuss your financial situation, or need a second opinion on your portfolio, I’m always happy to do so.

Wish you a happy Labor Day!





Is It A Good Time To Buy Real Estate?

As I write it this, the national housing market seems to be recovering slowly, although it is showing signs of slowing down again.

But certain markets seem to be going crazy.

Southern California, where I live, is one of them and the real estate market is on fire right now.

I’m currently in the market for a house myself, and I’ve also received several queries from clients asking if it’s a good time to buy real estate.

My misgivings about the real estate market in Southern California have been building over the past year, during which time home prices (and rents) have jumped about 20-25%. Despite the rental price increase, it is cheaper to rent than it is to buy.

My major concern was that Private Equity firms bought more than 20,000 homes last year as investments.  While this forces prices upward in the short-term, I worry about what will happen if they decide to sell them all at once.

Private Equity firms are not long-term investors. Highly opportunistic, they’ll bail as soon as something else looks better. Even if nothing does, they probably will start looking to liquidate in about three to five years.

On the negative side, the median wage has been roughly flat for the past five years – and 11% of LA County residents are on food stamps.

Mortgage applications have also been declining every month for a year, as fewer people now qualify for mortgages.  However, this has been offset by an increase in the number of all-cash home purchases.

Currently, 30% of all home sales are to all-cash buyers. Based on anecdotes from real estate agents, investors and lawyers, it seems like there are a large number of rich business owners from South East Asia are looking to park money in the SoCal real estate market.

If history is our guide, then foreigners are more likely to invest in real estate at market peaks rather than market bottoms.

The last time we saw a large influx of foreign buyers was during “Baburu Keizai”, or Japan’s bubble economy in 1990. It was said that a square inch in Tokyo’s Ginza district was more expensive than a square mile of land in the US.

And it ended badly for Japanese investors.

With home prices reaching astronomical levels all over Asia, could it be we’re going to see history repeat itself?

Given this economic backdrop, why would I be willing to buy a home in this market?

Why would I be willing to tie up a major portion of my networth in an illiquid asset with uncertain prospects?

Why would I be willing to join the 39,000 foreigners who moved to Los Angeles County in the past year and maybe buy at the top of the market?

Why would I be willing to pay 20% more to own a home vs. renting it (even after factoring in the tax break)?

Why would I promote the current home-buying frenzy that has resulted in 87.8% of homes having multiple offers, and 53% of them selling for over the asking price?

Is it because I think home ownership is a good investment?

Do I think that paying 4.7% over list price and besting four other offers is the hallmark of a smart investor?

No, not at all.

The best reason to buy your own home is for your own personal reasons, not economic ones.

Despite what the media tells you, your home is not your largest investment. If it is, it just means you’ve done a lousy job of saving and investing for your future. Catherine Rampell over at the Washington Post has an excellent article on the “fetishization” of home ownership.

Over the past century, homes appreciated at 0.3% over inflation, and far, far less than the 10.11% of stock market returns.

Your home is not an investment. It’s a money pit.

You buy it because it provides shelter, warmth and a safe, stable place to raise a family. And especially for men (who become more grouchy as they get older), it provides a place to barricade themselves from their neighbors!

Your home is your largest liability, and should be treated as such.

As a liability, you need to make sure you don’t become house-horny and bite off more house than you can afford. (House-horniness is an emotional condition that stems from lusting over champagne homes on a beer budget, and often results in misery: source Dr Housing Bubble)

Keeping your loan balance under 3.5 or 4 times your annual household income will help prevent becoming house-poor. (Ideally, you want it around 3 times household income).

When considering your purchase, don’t forget to include property taxes, insurance costs (which should also include an umbrella policy), HOA fees or maintenance, and larger utilities & water bills.

Since you can no longer complain to your landlord or building supervisor if something breaks, it’s now your responsibility to fix everything. So count on additional headaches too.

As embarrassing as it is to admit that we got in to a small bidding war during what’s possibly a market peak, at least we are in a position to afford it and not be house poor.

And unlike the previous bubble, I can take solace in the fact that I’m competing with all-cash buyers and not minimum wage workers with NINJA loans (No Income, No Jobs or Assets).

But that still doesn’t make it a good investment!

The point is not to confuse a home purchase with an investment.  Unless you’re planning to rent out all the spare bedrooms and cover all your costs. (Something I would have considered if I was 20 and single).

With an investment, you expect to make money, either through regular dividends or interest payments, or when you sell.

With your own home, the best you should expect is to break even when you sell (after considering inflation and opportunity costs).

I don’t expect to sell this home for decades, but when I do I know inflation will have boosted its value. It’ll probably sell for five times it’s currently worth – but that will be because everything will cost five times more, not because it’s a great investment.

So if you’re in the market for house as well, make sure you buy something that won’t make you house poor and because it’s the right time in your life to make that sort of long-term commitment.

Also be cognizant of the fact that you could be living in your house for a lot longer than you realize.

If property prices drop you could find yourself underwater with no down payment for a larger home. Alternatively, if the economy recovers causing a spike in interest rates, you might not be able to afford a bigger house with the larger mortgage payment.

Owning a home also limits your mobility in terms of future employment opportunities.

But so long as you have a stable job, can afford the payments and are okay with the possibility of having to stay put for longer than expected, you should be fine.



The Truth Behind Hidden 401(k) Plan Fees

Five years, Bloomberg ran a special about the hidden fees in nearly all 401(k) plans.

Most participants thinks that there no fees in these plans. Over half of HR managers also think the same thing.


Since then, things have gotten slightly better, but not by much.

Congress has since mandated that all plans disclose the fees charged to the participants in 401(k) plans, it’s still notoriously hard to figure out.

One way the average user can figure out their fees is using While it may not be 100% accurate, it’s still a step in the right direction.