Magical Dollars
Thursday, June 10, 2010 at 11amBy John Friedman
Dollars are fungible.
They really are — kinda.
When most people hear that phrase, though, their only response is to say, “what’s fungible mean.”
Lawyers learn the word in lawschool, and a few others learn it in their work. But just about no one learns it as part of their daily living.
If you look up the word, you’re apt to see something about how one milliliter of corn oil is the same as every other milliliter of corn oil, so that, if you have seen one milliliter of corn oil, you quite literally have seen what they all look like. That’s what it means to be fungible. It means interchangeable.
So dollars are interchangeable. One dollar is like another is like another is like another. That green thing in your pocket which the germophobe in you might abhor, for instance, is the same as the information kept in clean, beautiful digital form by your bank indicating your ownership of $1.00, and both are the same as the dollar chip someone in Reno, Nevada just shoved down the throat of a dollar slot machine while smoking a cigarette and drinking a cheap scotch.
Rather unlike, say, spouses and kids, right? Loved ones are unique. They are not fungible.
* * *
Classical economists posit that we are all rationale economic beings (at least in the aggregate), and that part of that rationality means that we do not discriminate among different chunks of the same fungible good — we don’t care which milliliter of corn oil we get, and we don’t care which milliliter of corn oil someone else gets.
And, the thinking goes, we should view each dollar over which we have dominion the same as we view every other dollar over which we have dominion.
These days, wouldn’t’ch’ya know it, when it comes to predicting human behavior and the economic outcomes that, both individually and in the aggregate, it generates, classical economists are mostly on the run (their name gives it away, n’est ce pas?). People, it turns out, when serving in their roles as economic actors, making decisions and such, are just not all that rational; instead, they tend to act quite irrationally, and in fairly well-predictable ways.
So, yea, dollars are, in one sense, fungible, but, yea again, most human beings respond well to keeping certain dollars divided out from other dollars.
* * *
As a result, I, as well as most financial advisors, never hesitate to tell clients to view some of their dollars differently from they way they view other dollars of theirs.
For instance, I advise all clients to have a rainy-day-money account, and to have that account set up to be entirely separate from their day-to-day checking accounts and the like.
You have a rainy-day account, don’t you? The general advice is to have a rainy-day-account with at least six months’ worth of your monthly expenses sitting in cash, where you can get to it on a moment’s notice, ready to ably assist you whenever an unexpected nasty comes your way bearing dollar-denominated requirements. And, as long as we’re talking about these things, when clients can afford to do so, I always advise them to have sunny-day-accounts as well, for those occasions when an unexpected pleasure, bearing dollar-denominated requirements, come into their lives.
* * *
Taken to its logical extreme, then, each chunk of your dollars can be stored in a vessel specifically designed for it. Money saved up for putting your kids through college, for example, can be housed in a vessel specifically designed for that purpose (primarily 529 plans). And then there’s the segregated chunk which most everyone knows well, which is the money you are setting aside for your later years — money stored in retirement accounts.
Dollars held in retirement accounts, in particular, are held in highly specialized, very specifically designed types of accounts. I’ll save for another day, though, a discussion of all those different types of accounts. For the time being, I’ll just say that dollars held in retirement accounts are magical; they are not like your other dollars.
The main way the dollars in your retirement accounts are not like all your other dollars is that they have a very specific, and rare, tax flavor.
More specifically, those dollars either (a) have never been taxed, which is rare because you have in fact earned those dollars, and earned dollars are just about always taxed up the wazoo, what with social security taxes, income taxes, etc., exacting their pound of flesh, or (b) have been taxed, but they, as well as all their dollar-progeny, will never be taxed again, which is unusual because dollars begat by other dollars — dollar-progeny — are just about always taxed up the semi-wazoo (“semi” because they are subject only to income taxes, and not to social security, etc. taxes).
From there the specifics of the tax flavors get more and more involved. That is for another day.
For our purposes, it’s enough to realize that the dollars of yours residing inside of retirement accounts are magical dollars due to their unique tax flavoring.
They’re so special, in fact, that the government severely curtails how many dollars you can convert each year into magical dollars. For instance, this year you can put $16.5k into a 401k plan ($22k if you are 50 or older).
The magic, as it happens, is not unlimited.
Otherwise it wouldn’t be magic . . . and the mantra therefore has to be:
* * *
Now I have broadly railed against money managers in the past, because I think most normal people are better off without money managers, in that they can achieve as good a result (sometimes better) with far less effort by doing their own investing (so long as they do a certain kind of simple-is-as-simple-does investing) (also a topic for another day).
Today’s railing is far more narrow than that — far more nuts ‘n bolts’y than usual.
We start with the fact that almost all money managers charge an assets under management fee, also known as an AUM fee (said out loud as the three letters separately — A U M — rather than as the yogic magical sound of aaaaah ooooooo mmmmmmm). AUM fees typically equal 1% of assets under management per year, calculated as 0.25% of the end-of-quarter balance of the client’s assets held by the money-manager, and typically paid directly out of the client’s assets, as an auto-ding to the account.
Now just about every money manager whose work I have ever looked at takes his or her AUM fees against each account. So each non-retirement account, regardless of size, gets auto-dinged 0.25% per quarter, each retirement account, regardless of size, gets auto-dinged 0.25% per quarter, etc.
But that is, quite simply, often not in the client’s best interests. And having read this piece, you now know why: taking AUM fees out of each account, so that retirement accounts and non-retirement accounts alike are auto-dinged, has the wholly undesirable effect of using magical dollars when regular dollars will surely do.
After all, since it’s hard to get regular dollars converted into magical dollars, wouldn’t it be better to pay the entire AUM fee — for all the different kinds of accounts, all together — entirely from a single account in which the regular dollars reside?
I mean, why spend the magic when you can spend the ordinary?
Hmmm . . .
* * *
So, if you have an AUM-fee-charging money manager in your life, and if your MM is managing both retirement and non-retirement account money for you, then, please, ask your MM whether you are using some of your highly-desired, much-sought-after, quite-rare magical dollars when you could instead be using good ol‘, plain vanilla, totally fungible, corn-oil-like regular dollars, preferably from the non-retirement account with the largest balance.
In fact, why not tell your MM that you’d like to pay him or her with some of those germy green things in your pocket, so that each quarter you can can come in, look him or her straight in the eyes, plunk down your green things, and say, Here’s your fee. What did you do to earn it?, and then sit back and listen to what s/he has to say.
‘Til tomorrow, then, here’s to your overall financial health, and may it continuously improve.
1,119 words
A Debt Crisis or a Jobs Crisis?
Wednesday, June 9, 2010 at 9amBy John Friedman
Debate is heating up, pretty much to a boil, about whether our goose is just about cooked because we have too much debt, or whether our goose is just about cooked because we have too much unemployment.
Well, at least everyone agrees that the goose is in the oven . . .
* * *
It’s rather a balance sheet vs. income statement debate, isn’t it? Or you could just cut away the facade and lay it at the door of the class(ic) conflict that imbues our politics, our emotions, our perspectives and our beliefs: capital vs. labor, labor vs. capital.
As usual, the lefties side with labor and the righties side with capital.
So the lefties argue that we need to increase employment, which will (a) improve the government’s money-in/money-out situation (because employed people pay more in taxes and take fewer government support dollars than unemployed people) and which would (b) also increase consumer spending (because employed people spend more than unemployed people), and which would thereby (c) make up for the aggregate demand shortfall that’s the hallmark of a weak economy, all of which would (e) increase GDP.
And, they say, to increase employment, we need to have the government spend more in the short term, to prime the pump of aggregate demand, and then, once employment improves sufficiently, we can throttle down and attend to the deficit (because the increased employment replaces the loss to GDP resulting from lower government spending).
The righties argue that we need to decrease our deficit because our high level of debt is going to result in high inflation for a multitude of reasons, e.g., because government borrowing increases demand for loans, which increases interest rates, which then filters higher costs throughout the entire economy and increases the cost of doing business, and because the government, via The Fed, funds the deficit by increasing money supply a/k/a/printing money. They therefore argue that we need to cut government spending to reduce the annual deficit and ultimately our cumulative debt so that, voila, inflation stays low.
I’m not all that sure what they say about unemployment. Again, I have a harder time making the right’s arguments. Maybe, as some say, it’s not on their radar?
At any rate, we are at about 10% unemployment overall (12% in CA). 10% is a tragic number for all of us, and a tragedy of an existence for the tens of millions of folks who are unemployed or under-employed folks, and for those who are parts of the immediate families of those folks.
A quick numb-crunch shows that we’re talking about something like 50 million folks — 50 million folks living in a tragedy of unemployment.
So how did I get to that number? Well, let’s start with the government’s figure of there being 20 million people or so out of work. And then let’s assume that each one of those people has, on average, a family of 2.6 people — that being some oft-heard number in demographics (though I think it might be the number of kids a family had in the 1960s . . . ). That’s 52 million people living in tragedy, and that’s equal to s the populations — every child, every woman and every man — of New York, Chicago, L.A. and the Bay Area combined — plus Miami and DC.
This unemployment stuff is tres serious stuff. There is much suffering in the land — more than usual, and by a lot.
* * *
Now, for argument’s sake, how’s about we assume that both arguments are equally as to whether our goose is cooked due to unemployment or due to high debt (even if they can’t peacefully and/or logically and/or factually coexist).
Where does that lead us? I mean, should we then err on the side of reducing unemployment (with increased inflation), or on the side of reducing the debt (with lower inflation)?
I, for one, would be happy to see more inflation if it also meant that 20 million more people would be able to sustain themselves, together with the 36 million or so spouses and kids in those newly-employed people’s families. That’s a whole lot of improved happiness (not to mention a whole lot of improved financial health, which is, after all, what this blog is all about).
And if that increased employment were to go hand in hand with interest rates and inflation rates going higher, in lock-step together, a lot of folks out there who have big chunks of their money-stored sitting in cash and the like would be quite happy, because they are all currently crying out for higher interest rates and more cash flow on those money-stored chunks.
And I would venture that they would be happier with higher interest rates even if their improved cashflows were immediately offset by higher prices — because it would just be so much better psychologically to have 3% inflation and 3% CDs, as opposed to 1% inflation and 1% CDs.
That’s human nature. Adding and subtracting machines we ain’t; intuiting and emoting machines we is.
And if interest rates were to increase more than inflation (which, from here, is quite possible, because from some perspectives we currently have negative real interest rates), then those with CDs as their main money boat-floater in retirement would see their increased cashflow not entirely offset by higher prices, and they’d be numerically better off to boot.
But wait: there’s more. If inflation were higher, people would spend more, which in turn would give the economy a much needed boost, and require less government spending to get aggregate demand back up.
That’s right: inflation makes people spend, and spend right away, because they know that prices are going up, so why wait for another day?
Deflation does just the opposite: it makes people delay spending. Just think about real estate, where deflation has been the norm for years, and many predict might be the norm for another three (or five or eight . . . ). How many people are chomping at the bit to buy buy buy real estate? And how many are waiting for prices to fall further, or to at least stabilize?
Now apply that to everything. Kind of scary isn’t it? Of such things lost decades are made.
By contrast, inflation looks like a walk in the park.
With higher employment and a bit of inflation, then, we very well might see a nice surge in aggregate demand, which in turn would increase employment, etc. Why, ‘fore long, we could have a healthy economy.
All we need is to take the first step, which might well require some more temporary stimulus to help people get back to work — or, at least, no de-stimulus, which is what Greece et al. are looking at right now, perhaps rightfully so (another blog entry that . . . ) and which the G20 seems to be thinking the entire globe should do as well.
I mean, isn’t putting on the brakes before hard times are vanquished pretty much what happened in the 30’s to turn some terrible years into a decade’s worth of The Great Depression? And didn’t Japan just go through a Lost Decade because it ended up in a deflationary-spiral environment, partially as a result of its government going austere at the wrong time?
* * *
So what does all this have to do with your overall financial health?
We’re talking macroeconomic theory here, which is the theory of large economic systems, such as countries and economies and currencies. More specifically, this piece is all about one of the central debates in macroeconomics, both now and pretty much over the last 70 years (The Great Depression being the great defining moment of macroeconomics), which also happens to lie at one of the principal right/left divides, i.e., the role of governments generally, and the role in governments in helping economies manage economic cycles specifically.
Being theoretical, the practical application of this piece has to do with you smartening up your mind. Smartening up, as an end in itself, can help to improve your overall financial health because you will better understand the external environment out there — the sea upon which your financial health floats and bobs and weaves, tossed about by what is going on out there.
* * *
So how to smarten-up?
The macroeconomics I’ve learned recently I learned via several sites that I read every day, and which I recommend to you.
I have already mentioned Krugman. Reading PK every day will take no more than five minutes (ever once in a while longer), and will smarten you up bigtime. Find him here.
A more investing oriented, but still lefty, site (a very rare combination, as the vast majority of investing folks are righties) is The Big Picture blog, by Barry Ritholtz. Find him here.
A more renaissance-man/liberal arts’y approach (his topics are all over the place, and just about always quite interesting) abounds at Paul Kedrosky’s site. Find it here.
* * *
Now am I saying that getting smarter about macroeconomics will help you predict the future macroeconomic situation?
No.
I am not a big believer in even a certifiable genius being able to predict future macroeconomic events, let alone normal people. And, as to those who says they can so predict, I suggest that you ask them how well they predicted the current euro problem, plus the last two bubbles plus The Great Recession, etc. Because if their predictions are useful, they have to do better than a random guess would do; they have to be right a lot, not just as to the event, but as to the timing of the event.
And when I hear of people not only making these predictions, but also then basing their financial heath decisions on those predictions, it strikes me as resting those decisions on superstition, magic and alchemy.
Instead, I’m a big believer in making financial health decisions that assume that the external world out there is unpredictable, and are based on that assumption.
As in, give me the wisdom to know that which I cannot control, and to accept it for what it is.
* * *
But I am saying that smartening up on this stuff is good for you as an end in itself, and that it can also help you improve your overall financial health, over the very-long-run, via you helping like-minded smart people achieve positions of political power (yes, that would be the very long run side of things, and that means voting every chance you get).
Because if you believe in The Big Us — that we are all in this together, that someone else’s woes are our own (which I believe to be a very lefty mindset — remember how Obama got slammed for using the word empathy and how Bill Clinton parodies of the past always included the line I feel your pain) — then you might also believe that having your unemployed brothers and sisters find work is more important than having a near-zero inflation rate, and you might also come to believe that we can have low inflation and great employment figures, while also keeping the long-term debt ultimately in check. Yay.
So, yes, let’s do take the goose out of the oven, and let’s focus on getting that nasty unemployment rate down, shall we?
‘Til tomorrow then, here’s to your financial health and may it continuously improve.
1,407 words.
The Uncertainty Principle, Applied to One Aspect of Financial Health
Tuesday, June 8, 2010 at 9amBy John Friedman
Following on the heels of yesterday’s post about the imagery of portfolio planning, today’s post is about some other language I’ve been using, with varying degrees of success.
Today, then, we leave behind the simple world of airplanes that definitely fly, and charge into the world of quantum mechanics generally, and of Heisenberg‘s Uncertainty Principle specifically — a world in which airplanes might, or might not, fly, depending on . . . how you look at it.
Now I’ll be the first to admit that this stuff can be hard. In fact, reading about quantum mechanics can leave your head hurting — kind of like what happens when I think about negative interest rates — because the thoughts of Heisenberg and Schrodinger, involving eigenstates and maybe-dead cats and the like, are all so very much removed from our everyday experience that they can be bewilderingly confusing.
But that confusion can ultimately leave things, perhaps, just a little more illuminated, so it’s off, into the world of uncertainty, we go!
* * *
As a result of the difficult-for-most-everybody nature inherent in quantum mechanics, lay versions of its basic concepts abound.
The lay version I want to focus on is, thankfully, straightforward enough. Here the idea is that, even though our eyes and minds tell us that a given object has certain characteristics (the chair is red, for example or, more in keeping with the topic, the subatomic particle is located on a certain part of the red chair), it’s entirely within the realm of possibility that the object has displayed many different characteristics (the chair has also been black, and the subatomic particle has also been located on a different part of the chair), but that when we looked, the object just so happened to be that way (black or red, but not both, and here or there, but not both).
Or, if you want to hurt your head further, you can think of it instead of as the object simultaneously having all those characteristics — the chair is both red all over and black all over, and the subatomic particle is in various places on both the red-all-over and black-all-over chair — and that the very act of observing the object delineated those characteristics down to the single characteristic we observed.
To lay it down even further, you can say that the very act of observing an object takes the probabilities swirling around that object down to a single actuality. More picturesquely, you can think of the object as existing as a probability cloud of differing existences which, when observed, condensates down to a single solitary existence.
* * *
You can look on Wikipedia for something that sets this idea out, nicely and simply, but nothing is spot on, because physicists are not lay people, and because quantum mechanics and the uncertainty principle are mathematically-derived ideas which, thus far, have proven to be stupendously and insanely accurate, so physicists are loathe to mooshy up their beautiful theory to make it understandable for those using Wikipedia. Can you blame ’em?
The articles coming closest to the lay version I’m using here are the articles on wave function collapse and the observer effect (sound about right, n’est ce pas?), the latter of which states in part as follows:
In physics, the term observer effect refers to changes that the act of observation will make on the phenomenon being observed. This is often the result of instruments that, by necessity, alter the state of what they measure in some manner. A commonplace example is checking the pressure in an automobile tire; this is difficult to do without letting out some of the air, thus changing the pressure.
So: you look at it, you change it.
* * *
Now, given that we are all lay people in here, let’s just say that there are some things in this world that seem to have more to do with probabilities than with actualities, and that, with some input from us, we can make them actualities.
The future clearly works like this. For example, there are all sorts of probabilities about what you will be doing precisely 24 hours from now. The passage of time, though, will make those probabilities collapse, slowly but surely, so that 20 hours from now fewer possibilities remain extant, while 23 hours from now even fewer will still be in the running, and then at one minute shy of the appointed hour the possibilities will be quite limited indeed, until at that very moment 24 hours from now there will be but one actuality. At that point, time plus you will have conspired to make that moment what it is, and what it is not.
* * *
The present can work like this as well. And here is where we loop back into financial health. Can you think of anything in your current financial life, right at this very moment in time, that is something more akin to a probability than a reality?
Hmmm . . .
There are lots.
In here, though, let’s focus in on the number showing up as the balance on your most recent end-of-month investment account statement. Surely that number changes not just daily, but, with respect to stocks, infinitesimal-moment-to-infinitesimal-moment, at least during stock market hours (which are mostly from 6:30 am to 1 pm West Coast time, Monday through Friday).
And surely, even if you don’t look at that account often, you have a general idea about what it might be worth — what the probabilities are — because, for example, if it was worth $100 one month ago, you know with some degree of probability that it could be worth, say, $99 or $101 today (or $90 if you have been paying attention to this blog), while you also know that it is extremely unlikely that is is worth, say, $200, while $2,000 is even more unlikely and $2,000,000 is for all intents and purposes impossible.
The same thing is true even if you do look at that account often. If it is worth $100 now, you know that it might be worth $99 or $101 at the close of the market today, or even $97 (last week) or $102. But $200, $2,000 and $2,000,000 are still unlikely. Observation in this context, then, doesn’t make any difference, other than you knowing more about the portfolio (by way of more recent information) and therefore being able to reduce the probabilities some.
Seen this way, the number on your end-of-month statement is just one big probability cloud, artificially frozen in time, at the end of the last hour of the last market day of the last completed month — like a strobe light catching a frenetic dancer in some contorted position, suspended in mid air.
This, then, is the key to this entire linguistic/imagery-istic exercise: the only thing that stops that number from moving about and being uncertain — the only thing that takes that number from a possibility to an actuality — is converting it into something that does not change value, ever. And what might that be?
How about cash (and, yes, I am ignoring currency devaluations and broken bucks courtesy of The Reserve Fund and the like)?
Cash has no probability cloud; it’s an actuality, not a possibility. You want certainty? Then go to cash. Absent that, then please say hello to my little friend uncertainty.
* * *
So please think of an investment, if you can (it can be difficult . . . ), as a probability cloud, because, at any given moment, it is never, ever worth the number shown on a brokerage statement. Instead, that investment has only one value: that value is in the future, and it is the number of dollars, as of the very moment when you, through the sheer force of your effects on the universe and on the particular chunk of it that this particular investment represents, exert your will and convert that investment of yours into cash hard cash (also known as selling the investment).
Until then, any number that you or someone else places on the investment is a mere probability inside of a substantial probability cloud.
So when your portfolio goes down 10% (like it has recently), think of it as a shift of the probability cloud. That 10% difference is not cash; it’s not real. And when your portfolio goes up 10% (like it often does during a year’s time), think of it as a shift of the probability cloud. That 10% difference is not cash; it’s not real. True, an up probability cloud is more fun than a down probability cloud, but all of it is mere information — mere probabilities, amid major uncertainties — rather than an actuality.
As it turns out, then, when it comes to investments (and here we can include real estate, because it’s been mighty uncertain the past handful of years, yes?) there’s no there there until you bring the investment into the world in which we live, which is a world in which our economic needs are met via cash, not via probability clouds.
Until then, it’s all naught but a maybe-dead cat.
‘Til tomorrow then, here’s to your financial health, and may it continuously improve.
1,061 words
Painting Yourself into a Corner, as Applied to Retirement Planning
Monday, June 7, 2010 at 11amBy John Friedman
One of the funnest, most difficult parts of my work is coming up with language to help clients understand concepts that tend towards the not-so-easily-understood side of things. Because, even though I often rail against the financial services industrial complex (the FSIC) for the jargon it uses, and for its complexification of things, the underlying reality is that some of the ideas upon which a person’s financial health rests, unfortunately, tend to be complex.
Here, then, is some new language/imagery I’ve been working on to help simplify and explain portfolio design generally, and, more specifically, how to design a portfolio to generate cash when that’s what it has to do for you.
* * *
When you fly into SFO on a clear day, and are on approach, you are apt to see out the window (if you’re on the correct side of the plane) another plane that is startlingly close, paralleling your plane’s approach. It has to be a clear day because on foggy days (which are most of them), the powers-that-be do not allow parallel landings, but on a beautiful day (like today) you will just about always be landing in parallel with another plane.
Now what you can’t see from the plane, but which you can see if you are, say, coming up 280 and looking over at the airport from way up above in the coastal hills of The Peninsula, is that there are just about always three or four planes coming in on the same flight path, nicely spread out for, say, a landing every five minutes.
So on a clear day, there might be eight different planes approaching, all in rows, all spread out, each to come in at the right time, coming in two-by-two-by-two-by-two, for a nice 2 by 4 configuration.
* * *
A person’s stored-up money should be designed along the same lines. That is, it should have a bunch of different chunks, all lined up, ready to do what they are destined and designed to do, at their given time.
More specifically, when the time comes for you to start using your stored wealth to replace your paycheck and support your lifestyle (what the heck — I’ll use my normal language, and stick with the transportation motif: when you need cash to float your boat), you should have chunks of stored-up money that are lined up, on approach, ready for landing, with a chunk landing roughly every five years.
In this imagery, “landing” is equivalent to “in cash and ready to be used to float my boat” while “lined up and on approach” is equivalent to “close enough to cash so that, regardless of what the stock market does during the next five years, the dollars in this chunk will be worth something very close to a dollar (maybe even a tad more), and I therefore won’t have to be counting on lucky timing of stock sales to have a nicely floated boat.”
For instance, if you are saving for retirement, then as soon as you are, say, ten years or less away from the moment at which you need to start taking withdrawals from your stored-up money to replace your now-gone paycheck, you should have at least one, or better yet two or three, chunks of money on approach, lined up for landing.
Here that means that you should have sufficient money in bonds or CDs or something else that is close to cash, or even good ol‘ cash, to last you a full five years. And then, just like the planes, as one chunk lands (i.e., is in cash), you should have one or more other chunks on approach. You would then design one of those chunks still on approach to be ready to go (i.e. in cash or near cash or maybe bonds) about five years from now; it should also be large enough to last you five years once you start using it. And at the same time you would also design another chunk to be ready to go in about 10 years, and to also last for about five years once you start using it.
Think of it this way:
The ten year money is cruising at altitude.
The five-year money has the flaps down and is descending.
The zero-year money has the landing gear down and is about to smoke the tires.
Got it?
Good.
* * *
Now let’s get even more specific here. The first chunk — the chunk that is landing — would be cash, and it would be a big enough chunk of cash to last you five years (including the after-tax interest, paltry thought it might be, that the chunk generates during those five years).
At that same time, the chunk that is five years away from landing would be in bonds. And as it gets closer to landing, you would change that chunk over to be closer and closer to cash, e.g., it could be partially in corporate bonds (the stocky part of the bond world) when it is five years from landing, but when it is, say, two years from landing it should be in more boring government bonds (read: the less likely to lose value part of the bond world — the bondy part of the bond world).
And the chunk that is ten years away from landing would be in stocks, but you would be keeping your eye out for a good time to convert some or all of those stocks to bonds well before the five-years and counting mark.
About two months ago, for instance, was one of those periods where a lot of people — me included — were saying that anyone thinking about raising spendable cash via stock sales should be moving faster rather than slower in doing so, because the stock market had been going up, with barely a pause, for more than a year, and because, like Icarus, that sort of high-flying rarely lasts without a big pause or a big drop.
So that was a good time to bring some of your ten-year money (stocks) down to five-year money (bonds, but the usual idea of putting the proceeds of stock sales into bonds was less of a no-brainer than usual as a result of the very low interest rate environment we are experiencing and The Vice Versa Rule, which states that when interest rates start going up, the value of your bonds will go down).
* * *
To not do this — to not have your planes on approach, staggered and coming in for their respective landings every five minutes or, less visually but more accurately, to not have your portfolio chunks on approach, staggered and coming in for their respective landings every five years — is to paint yourself into a corner (to add yet another image).
That corner — the one from which it is hard to escape — is this: you find yourself needing to raise cash for spending, but the stock market has just retreated 10% (as it has done in the past two months) (or retreated 20% or 30% which it does on a fairly regular basis, or . . . or retreated 60%, which it did in 2008/2009), and although you would really, really, like to not have to sell at 90% prices (or 80% or 70% or 40% prices), alas, you are stuck. Your plane has to land, even it if is not the right time to land. So you find yourself selling stocks, even though you are pretty sure it is a rotten time to be selling.
You painted yourself into landing your plane before you started the descent, before you put the flaps down, and before you put the landing wheels down. It’s gonna be a very rough landing. Ouch.
* * *
As you think about retirement planning, then, or, for that matter, any other financial planning done in contemplation of needing to take withdrawals from your portfolio (age-based 529 plans for college funding work like this as well), please keep in your mind’s eye the planes on approach at SFO, coming in two by two by two by two, all staggered and staged, so that one can come in after another after another after another, each in its own time, each with its own specific role to play, each to support your overall financial health, and each to help you avoid an unfortunate viewing, from your perch in the only unpainted corner of the room (which is nowhere close to the door), of your financial health going through a forced landing, directly from cruising altitude and at cruising speed, and all without the considerable benefit of landing gear.
‘Til tomorrow then, here’s to your financial health, and may it continuously improve.
1037 words
Lookback at Week 1 of Daily Blogging, and a Brief Comment re: Jobs Report
Friday, June 4, 2010 at 11amBy John Friedman
Oops. Yesterday’s post went long.
Lesson learned: explaining something that is a big mystery to most folks is hard to do (for me anyway) in a quick posting. How does Krugman do it?
I’m keeping stats (remember the MBA’ism: that which is measured is controlled, and remember this Friedman’ism: that which is publicly declared is hard to back away from).
Here they are:
| Date | Words | Title Words | Spaces | Spaces per Word | Content | |||||
| 6/1/10 | 333 | 8 | 1,701 | 5.11 | Intro | |||||
| 6/2/10 | 744 | 3 | 4,198 | 5.64 | Capital Punishment for Corporations |
|||||
| 6/3/10 | 1,808 | 9 | 9,955 | 5.51 | AAPL, MSFT, Growth vs. Value |
The trend is not good. Not good at all.
So why count title words? Because one comment I got on the Goldman piece was that, upon receiving the email, one spouse had said to the other, Jeeze, another email from John, and this time even the title is long.
And why count spaces per word? I do that in an effort to see if my language is getting more jargony. I don’t know whether this is a valid measure of jargon-creep, but, hey, the two numbers were already there, and dividing one number by the other is so very easy to do in Excel that I figured I would just go ahead and do it and see if the data-exhaust proved interesting.
* * *
The jobs report came out today — the NFP, as Barry Ritholz (and others) call it. Predictions had been for a boffo number of $700k+ new Non-Farm Payroll jobs. It came in at less than two-thirds of that, but initial punditry (it takes a while to go through all the data) indicates that all but 20k of the new jobs were due to the U.S. census hiring a bunch of people. So it’s a very disappointing number, and the markets are falling (off 3% or more as I write this, with the Dow again below 10000) (factoid: many style guides for publications call for never using a comma in Dow numbers).
Now I could get all political about this. And surely some politics will come in here, because job growth is a thoroughly political issue, stemming right from the labor vs. capital dialectic that has informed economic and political thinking for the past 150 years (not to mention having informed real life since . . . well, since the first time two or more organisms somewhere in this ol‘ universe ever hung out together).
The fact is that, without job growth, whatever recovery we have is fairly meaningless to everyone, and 10000% meaningless to those seeking jobs. We are, after all, all in this together (which, unto itself, is a very political statement, yes?).
* * *
A year ago lefty economists argued that the stimulus package was too small by at least half, i.e., that the hole it was trying to fill was about twice as big as the stim.
More technically and jargony, they argued that the shortfall in aggregate demand was closer to $2 trillion than to $1 trillion (out of an economy of about $14 trillion). So think of this $2 trillion figure as the amount of economic activity that these economists view the economy as having the capacity to generate, minus the actual economic activity generated.
To plug that hole, they argued, you need to have the government spend more — an argument that anyone who ever took Econ 101 knows is what Keynes was all about.
The righty economists, on the other hand, argued that Keynes doesn’t work, and that government spending is bad. Bad, bad, bad.
I have to confess that I am less able to make the righties‘ arguments because I don’t totally understand them. And perhaps it is also because, as many argue, their arguments have no basis in reality.
At any rate, the result of all this, as embodied in a deadlocked Senate, was to do a stimulus half the size the lefties thought appropriate (let’s see, if you average the $2 trillion the lefties want. and the $0 trillion the righties want, you end up with a stimulus package of less than $1 trillion, a sizable portion of which is tax cuts, which most academics believe do not foster aggregate demand nearly as efficiently as government spending).
* * *
So here we are today, with today’s NFP putting thoughts of a double-dip recession squarely back into the picture, i.e., a post-recession recovery that peters out, never having really gained traction, to be replaced by a second recession, hopefully not as severe as The Great Recession.
Let’s hope not. Most folks I know just can’t take any more of this. Of course, they will if they have to, but for most people the mantra was to just get through 2009, which meant that, when 2010 finally rolled around, they just didn’t have the spirit left to deal with yet more bad times.
And what to do about this? How to maintain your financial health? The answer is to (a) spend less, which (b) requires rejiggering one’s fun-ometer to appreciate things that are free or at least less expensive, and (c) de-risk your money-in (it’s still not a great time to quit your job and pursue your dream . . . ), and (d) be smart about your money-stored.
Ah, but this latter point is especially hard, because, right now, everything having to do with money-stored is scary.
Bonds are scary (with historically low interest rates, one of these days interest rates will go back up, and the Vice-Versa Rule says interest-rates-up-leads-to-bond-prices-down and vice versa).
Stocks are scary (up some 60% from their 3/9/09 lows).
Cash is not scary (but it is expensive in terms of opportunity cost).
And real estate is real scary (no explanation needed here!).
So there are no easy answers when it comes to money-stored.
Hmmm . . . might it be wise to have someone who knows what s/he is doing help you figure out what to do with your money-stored?
* * *
We close, as before, with the foldback, both to the top of this piece and to yesterday’s piece.
So you wanna see how stale MSFT’s ideas are? Use the spell-checking in Google’s Blogger (the tool I use to post these pieces). It uses a very different approach compared to the approach MSFT has used in its products for what, the past 20 years? And it is in some ways very much better — eye-opening at the least. The cloud it is good.
‘Til tomorrow then, here’s to your financial health, and may it continuously improve (notwithstanding risks of double dips, etc.).
P.S. 989 words. The trend it is reversed.
.