Retirement Planning

Top 79. Aug 2, 2005 11:41 AM

» Normxxx - Fire your financial adviser

7 reasons to fire your financial adviser

By Liz Weston | 2 August 2005

It's your money. If your adviser commits one of these seven sins, it's time to show them the door. Among the top pink-slip prompts: ignoring your questions or breaking the law.

Peter Coyote was delighted with the returns money manager Reed Slatkin was making on the actor's investment portfolio.

Then Coyote discovered Slatkin's accounts weren't covered by the Securities Investor Protection Corp., which insures brokerage accounts against bankruptcy or fraud. That fact made Coyote nervous enough to close his account with the charismatic Santa Barbara, Calif., money man.

Coyote told me he didn't suspect anything was wrong. He just wanted his money to be insured.

Coyote's actions would prove prescient. Five years later, Slatkin filed for bankruptcy and regulators uncovered a massive Ponzi scheme that defrauded hundreds of investors, from Hollywood elite to retirees on fixed incomes.

The fabulous investments Slatkin boasted about were so much smoke and mirrors. He used new investors' money to pay bogus returns to prior investors, and he skimmed plenty of cash to pay for a lavish lifestyle that included a secluded estate and pricey artwork.

Your personal financial adviser doesn't need to be a con artist on such a grand scale to warrant a pink slip, however. There are plenty of other reasons to fire someone, from incompetence to arrogance to simple personality clashes.

If you're hearing any of the following from someone handling your money, it's time to consider pulling the plug.

'Who cares what you think?'
Financial planner Kelly Auslander of Orlando once worked for a brokerage that asked her to try to retain clients alienated by one of the company's star brokers.

"He bullied his clients, yelled at them and treated their money as if it were his," said Auslander, a Certified Financial Planner who serves on the board of directors of the Financial Planning Association of Central Florida. "The story was the same every time: The broker did not listen to the client, did not take (the client's) time frame, risk tolerance, goals or objectives into account. In every instance, the client felt unheard and out of control."

Auslander believes some clients are intimidated by their advisers' titles or auras of authority. But it's your money, not the adviser's, and if he won't listen, "you need to break up," Auslander said.

Obsessing about every little twitch in your account value isn't healthy. On the other hand, neither is long-term underperformance— at least when we're talking about your financial health.

If your portfolio hasn't at least matched the relevant benchmarks over the past two to three years, Los Angeles tax attorney Phil Holthouse said, it's time to consider some kind of change, including firing the underperforming adviser.

'Don't worry your little head'
Letting an adviser take over the reins can be "so very seductive," said author and H&R Block heiress Barbara Stanny. "You just want to be taken care of— we all do."

But you need to understand what's going on with your money, and you should be wary of any adviser who blows off your questions or tries to make you feel stupid for asking.

"A good financial adviser," said Stanny, who wrote "Prince Charming Isn't Coming: How Women Get Smart About Money," "wants an educated client."

Don't just assume your caretaking or condescending adviser can't switch gears, however. Stanny recommends soliciting friends for referrals to other advisers, then using a prepared list of questions to interview two or three of them (like the CFP Board of Standards' "10 Questions to Ask When Choosing a Financial Planner"). This exercise can inform you about how a good adviser-advisee relationship is supposed to work. Then you can return to your own adviser and discuss your need to be more involved in your finances.

Ideally, your adviser will respond enthusiastically to your desire to be a full-fledged partner in your financial situation. If not, you've already started the interview process for her replacement.

'It's not my fault ... and if it is, too bad'
Human beings make mistakes— it's inevitable. What separates the decent advisers from the cads is how they respond to their own errors.
The right way: Acknowledge the mistake and cover the appropriate costs. If your tax pro goofs on your return, for example, she should prepare and file an amended return at her own expense, said enrolled agent Eva Rosenberg, plus pay for any penalties incurred.

What you shouldn't expect, Rosenberg said, is for the pro to cough up any additional taxes you owe.

"You would have had to pay that money anyway" had the return been prepared correctly, said Rosenberg, who runs the TaxMama.com Web site.

(Good tax pros are divided about who should pay any additional interest assessed, by the way. Rosenberg figures it should be the client, since she had use of that money during the time it was actually owed to the IRS. Other pros said they would pick up the interest as a measure of good faith.)

'--------------'
What if all you ever hear from your adviser is … nothing?

You can't realistically expect an adviser to lavish all his time on you, especially if yours is one of his smaller accounts.

But if you have a question or concern, "you should get a return phone call and an explanation, some attention paid to you," Auslander said, "even if (your account is) only $500."

Before you fire an uncommunicative adviser, though, make sure the problem is really his fault. Tax pro Rosenberg said she hears complaints from people who insist they're being ignored by their tax preparers when actually the reverse is true.

"I always say you should visit your tax pro twice a year, like your dentist," Rosenberg said. Most tax pros are too busy during preparation time to spend quality time with their clients, which is why a second appointment a few months later is necessary for real tax planning.

What if your adviser talks, but not about important issues like how well your investments are performing or how much he's benefiting personally by recommending certain investments? Time to show him the door.

"If they won't answer direct questions about the fees being charged or how their performance is versus various benchmarks," said Holthouse. "If they're uncooperative in answering basic questions, that's a bad sign."

'I don't have to follow the rules'
If you continue working with someone you know is doing illegal or unethical things— well, you deserve what you get.

Let's say your tax pro invents a few deductions here and there to boost your refund. Turns out, she's done the same for many of her other clients— and the IRS just caught on. Your chances of getting audited just skyrocketed, since the feds will check as many of a dishonest preparer's returns as possible in hopes of collecting the maximum in unpaid taxes.

Besides, it's kind of like dating a married person: If the louse would cheat on a spouse, what makes you think the louse won't cheat on you? Someone who plays fast and loose with the government or her company is likely to do the same to her clients.

'We don't need no stinkin' credentials'
(Apologies to the writer of the great "stinkin' badges" scene in "The Treasure of the Sierra Madre.")

Slatkin took in hundreds of millions of dollars despite the fact that he wasn't a registered investment adviser. His only credential was as an ordained minister of the Church of Scientology.

Needless to say, you should avoid people who aren't credentialed, or who don't have the right credentials for the kind of advice they're giving.

If someone's purporting to be a comprehensive financial planner, he should have an appropriate comprehensive credential— a CFP, a ChFC or a PFS (Personal Financial Specialist).

If he's selling insurance, he needs to have proper licensing from the state. If he's managing your money, he needs to be registered with the Securities and Exchange Commission or your state. If he's preparing your return, he should be a certified public accountant, an enrolled agent or a tax attorney.

The best time to investigate is before you entrust your finances. In the worst case scenario, you could be held accountable for bad deeds you knew nothing about.

Coyote, for example, has been sued by the bankruptcy trustee in the Slatkin case, along with a number of other investors who got out before the end with profits ranging from $629,000 to $5.9 million (Coyote's profits were reportedly about $944,000).

Not knowing about the Ponzi scheme didn't get these investors off the hook, since those who profit even unwittingly from scams are typically required to return the money by laws that prohibit "fraudulent conveyance" or the transfer of money to one party when it properly belongs to another.

Coyote wound up settling for $754,000.

'Oh, no. Not you again'
Your adviser may never say those words, but her tone may say it all. Or your own blood pressure may speak volumes, soaring every time you hear her voice.

It's just a fact of life: Sometimes personalities clash. If your adviser doesn't like you— or vice versa— somebody needs to be adult enough to suggest a change. Life's too short, and your finances too important, to spend any more time in a dysfunctional relationship.

Your adviser might be able to refer you to someone who's more on your wave-length. If not, find your own replacement using the interview process described above.

After the breakup
Once you've decided to bid your adviser adieu, consider the following:

Don't go off in a huff. If you act in anger, you could do something you'll later regret, Auslander said— like cash out a bunch of investments that will incur a fat tax bill. Consult with your replacement adviser about the best way to sever the old relationship.

Get your records back. It's important to stay civil at least long enough to collect any relevant documents you've entrusted to the adviser's care.

If necessary, notify the authorities. If you suspect or know your adviser is breaking the law, behaving unethically or regularly recommending unsuitable investments, consider tipping off the appropriate regulators. You might save someone else the trauma you've just experienced.

Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of this message is not to be construed as constituting market or investment advice. It is intended for educational purposes only. Individuals should consult with their own advisors for specific investment advice.

-- posted by Normxxx

http://online.barrons.com/article/SB1125...

Top 80. Sep 3, 2005 5:10 AM

» SteveT - Can You Afford to Retire?

Monday, September 5, 2005
EDITORIAL COMMENTARY

Can You Afford to Retire?
It depends on your work-to-retirement ratio

By ALEX J. POLLOCK

ON THIS LABOR DAY, WE SEE an important part of the compensation for a lifetime of work placed in doubt. There are deficits in every part of the pension system -- in Social Security, corporate and public defined-benefit plans, the Pension Benefit Guaranty Corp. We have heard much about contributing factors, primarily greater longevity and earlier retirement.

It's so simple that it's hard to fix. At the base of all pension finance is a fundamental arithmetic relationship: How many years you are going to work, compared to how many years you expect to have income without working.

Consider a typical contemporary case of working 40 years, with the expectation of living 20 more years without working. For example, working from the age of 22 to 62 (which was the average retirement age from 1995 through 2000), and then living in retirement to age 82. This is quite an ordinary scenario under modern conditions, although almost unimaginable just three generations ago.

The ratio of working to non-working retirement years is only two-to-one! Only two years of earning and saving to finance each year of living without earning. Think about it. If you have only two years of working to save enough to support one year of retirement, how much do you have to save during those two years, either by mandatory saving through a pension program or by voluntary saving? Obviously, a lot! Let's examine the numbers.

Starting With Bismarck

Consider two quite different cases.

The first is the situation of the original state retirement pension program, instituted by Chancellor Otto von Bismarck for Germany in 1889. The retirement age was 70. Adult life expectancy in those days was about 72. If work back then began, on average, at 16, that gave 54 working years to finance two years of retirement, a Work-To-Retirement ratio of 27:1.

The second case is based on the America of 1950. An average American back then would have worked 47 years, from age 20 to what was then the average retirement age of 67, with the expectation of living to 76. This would be nine years of retirement. Still, the work-to-retirement ratio was over 5:1. What does your savings rate have to be with five working years to cover each year of retirement? Obviously, a lot lower than when the ratio is only 2:1.

Let's get specific: At what rate do you have to save during 40 working years to provide enough income for 20 non-working retirement years?

Suppose we take 70% of ending wages as a reasonable retirement-income goal, as recommended by many financial planners. In addition, suppose that labor productivity and wages grow at a reasonable 1.5% annual rate during your career. And assume that you can save in a tax-deferred investment account.

We need to specify one more variable: The real, after-inflation rate of return on your savings. The long-run historical average of pre-tax real yields on long-term U.S. Treasury bonds is about 3%, although currently it is much less, about 1.75%, as indicated by inflation-indexed Treasuries. Going forward, a conservative portfolio of stocks and bonds might be expected to return 4% over inflation, on average, which would be a compound nominal return of 6% to 7%.

The analysis is sensitive to the optimism or pessimism of the return used, of course. Let's take the realistic compound real return of 4% and calculate what savings rate is needed to have enough at retirement to purchase a 20-year annuity, which would provide the target retirement income.

Investment Hurdle

Bad news: The required savings rate is over 14% of pre-tax income. Every working year, you need to save more than 14% of total pre-tax income and invest these savings at a compound real return of 4% in order to finance 20 non-working retirement years at 70% of the final year's wages.

Compare this to the current U.S. savings rate, which averaged about 1.5% during the past five years.

These required savings do include some part of Social Security taxes, although the return on those taxes will vary substantially with income and with the future politics of Social Security. The savings also include other involuntary savings, such as pension- plan contributions made by an employer on your behalf -- if you have a pension plan and if the employer remains solvent.

In any case, providing for 20 retirement years with savings from 40 working years requires something like Asian savings rates.

Our 1950 case, providing for nine years of retirement with 47 working years, with all the other assumptions the same, required a 6% savings rate. No problem. During the decade of the 1950s, personal savings alone averaged about 7% of pre-tax income.

In fact, from 1950 to 1990, the average personal savings rate was 7.7%. If we take this as defining a historical norm, and make the extreme assumption that it would be entirely devoted to retirement in a scenario of 40 working years and 20 retirement years, it would generate retirement income of about 38% of ending wages.

Of course, there is nothing magic or unalterable about the retirement ages of 62 or 65. If you are going to live another 20 years, you could work longer. But Americans generally are going in the opposite direction. They are rejecting the idea of long careers.

Corporate early-retirement programs, designed to save compensation expense today by putting increased costs into the pension plan tomorrow, notably move the fundamental work-to-retirement relationship in the wrong direction and make adequate pension finance that much harder to achieve. If we change our example to early retirement at 57, the work-to-retirement ratio drops to 1.4 to 1. The required savings for a 70% wage replacement will be 20%.

Laboring On

If you do continue working, the ratio rises rather quickly.

Say you started work at 22 and matched the Bismarck plan's retirement age of 70, then lived to 82. That's 48 years of work and 12 years of retirement; the ratio rises to 4:1. The required savings for the annuity with 70% wage replacement falls to 7% of pre-tax income.

You also can put the question the opposite way: If you are saving for retirement at a given rate, how many years should you plan on working to have sufficient money for your life expectancy when you retire? Assume again that your career-long investment returns beat inflation by 4% a year, on average. If your savings rate is 6% of your pre-tax income, you will need to work 50 years to retire for 10 years at the age of 72, with a work-to-retirement ratio of 5:1.

Save less than that and retirement will be financially less pleasant. If you can manage to save 10%, your requirement falls to 44 years working, with 16 years of retirement, beginning at age 66, a work-to-retirement ratio of 2.8:1. As stated before, you will need a savings rate of 14% to retire at 62 with an expected retirement of 20 years.

If you could adjust your personal work-to-retirement ratio to 5:1 by delaying retirement, your Social Security tax alone would provide the target retirement income -- if it were invested in a personal retirement account. This would leave your employer's Social Security tax to cover the disability, survivors, and other "safety net" aspects of Social Security.

The basic, sobering math explains why most Americans, and even most remaining defined-benefit pension plans, are hoping for unlikely returns on their investments in stocks and homes. They can't get to a long and comfortable retirement any other way, unless they want to face the reality of either saving a lot more or working long past age 62. This is the real choice.

-- posted by SteveT

Top 81. Oct 5, 2005 4:07 PM

» Normxxx - Guaranteed Retirement Disaster!

Your Retirement Disaster -- Guaranteed!

By Buck Hartzell (TMF Buck) | 29 September 2005

Invert, always invert.
I didn't say that, Carl Jacobi did. Jacobi, a famous mathematician, also excelled as a teacher. Among his other distinguished accomplishments, Jacobi discovered that you can solve for X by first determining what is not X. Today I'd like to apply that same strategy to another complex problem -- your retirement.

What does the perfect retirement look like? Good question. There isn't a specific answer, either. There is, however, a firm answer for what is not the perfect retirement, and my aim today is to instruct you on a surefire way to plan for a disastrous retirement. If you elect not to follow this checklist, you're probably well on your way to a worry-free retirement. The choice is yours.

Hope for the best
Don't worry about calculating how much you'll need for retirement; don't save or live below your means. After all, saving is much less fun than spending.

Consumer spending is 70% of our GNP. Government, corporate, and consumer debt levels are at all-time highs. Federal Reserve Chairman Alan Greenspan noted on Aug. 26 that "debt has fostered economic growth, which has created imbalances in the form of a housing boom and the swelling current account trade deficit." For a truly miserable retirement, just keep doing what we're doing. Make sure you live for the moment and mortgage tomorrow to the hilt.

Count on Uncle Sam
That's right, good old Uncle Sam will take care of you. Medicare and Social Security are all you'll ever need to live in the lap of luxury.

The average Social Security retirement benefit was less than $11,000 per year in 2003, and Medicare is bound to be around for a few more years before it runs out of money. So don't take control of your own destiny: Uncle Sam is looking out for you. Yeah, right!

Choose to decay
Earlier this year, Motley Fool Rule Your Retirement editor Robert Brokamp interviewed Chris Crowley, author of Younger Next Year: A Guide to Living Like 50 Until 80 and Beyond. Crowley offered some thoughts on how to live a healthy and vibrant retirement. But that's not our goal; for a truly unhappy and unhealthy retirement, follow these precepts:

1. Don't exercise. Exercise sends a constant "grow" message to your body to get stronger and more limber. By not exercising, your nerves will decay and your joints will wear out.
2. Eat junk. Indulge yourself with french fries, fast food, and delicious Krispy Kreme donuts. And don't ignore trans-fatty acids, high-fructose corn syrup, nicotine, and alcohol each and every day.
3. Disconnect and wither. Close up shop and narrow your social circles. The key to an unsuccessful retirement is a life of isolation.

Take (big) financial risks
Bond yields are low, and returns on cash are staggeringly low. Don't be satisfied with a measly 3% return on your cash. Follow the herd and get in on some volatile market action.

A good place to start is real estate, which is a no-brainer with prices flying so high today. You can employ all kinds of destructive instruments for a chance at better returns. Let's start with leverage. Borrow the money you need, and better yet, use an interest-only loan. Then speculate in a condo in Miami. Everybody else is doing it -- 40% to 70% of condos in the Miami area are being bought as investments. That could definitely end badly. Using large amounts of leverage in a speculative market is a fine recipe for fiscal disaster.

Buy what you don't know
There's no need to research your investments or even know exactly what business they're in. Don't get caught on the sidelines while others are getting rich on stocks like Google (Nasdaq: GOOG) and Taser (Nasdaq: TASR). (Whoops! Guess we missed that last one.) Remember, these are just pieces of paper -- not parts of a business. And no matter how much you pay, there will always be someone else wanting to pay more. Above all, avoid index funds. There's nothing worse than the (sometimes) slow and steady growth of the S&P 500 (AMEX: SPY).

Or if you don't feel confident picking your own stocks, pay a lot for a full-service broker like those at Morgan Stanley or Merrill Lynch. Or, a "good" Mutual Fund with a hefty load; after all, the more they charge, the better they must be. Right?

But for some truly great opportunities, keep tabs on recent IPOs, penny stocks, lottery tickets, and online gaming.

Put all your eggs in one basket
Asset allocation is for fuddy-duddies. Make sure you invest all of your savings in few obscure, high-risk investments. If you want to make some serious money, you've got to pick something that's difficult to understand and very technical. And, having found it, if it is going through the roof shortly, why not put all your money on it?

Robert also interviewed financial planner Roger Gibson in August. According to Gibson, "When you reduce the volatility of a portfolio, all other things being equal, the rate at which money compounds increases." That's no way to ruin your retirement. Buy the most volatile "ultra" growth stocks.

Spend more than you should
You just retired and earned yourself an extra 40 hours of free time each week. What are you going to do? Eating out and shopping are two great hobbies. We've heard a lot of stories from folks who took the lump sum and spent it in the first five years! If you want to be sure you run out of money, withdraw at least 10% of your nest egg each year. That's more than double what Robert has recommended to his Rule Your Retirement subscribers. Hey, imported cars, new clothes, big-screen TVs, and 40-foot RVs don't come cheap.

Foolish final thoughts
You should now have several excellent ideas of how to ruin your retirement.

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

<img align="left" src="http://images.amazon.com/images/P/1879384620.01._PIdp-schmooS,TopRight,7,-26_SCMZZZZZZZ_.jpg" border="0"> Unexpected Returns: Understanding Secular Stock Market Cycles
by Ed Easterling

Top 82. Oct 9, 2005 3:20 PM

» Normxxx - Waiting For 'Average'

Waiting For 'Average'

By Ed Easterling | 9 October 2005

“The long-term average return from the stock market is 10.4%. As the earliest baby boomers are now beginning to retire, they will be relying upon their investments for income. The latest boomers have two more decades to compound their savings into a retirement payload. At 10%, boomers young and old--so to speak--have a good chance of a secure retirement. Yet, from 2005, what length of time is needed to assure the long-term average return?

NEVER! — Investors from today will never achieve the long-term "average" return. Not in ten years, twenty years, fifty years, or the seventy-nine years that represent the most recognized long-term average return.

According to the 2005 Yearbook published by Ibbotson Associates, the long-term average return from the stock market is 10.4% (pg. 29). Ibbotson starts their long-term series of financial data in 1926 (pgs. 27, 201). Eight decades is a long, seemingly credible period of time— why shouldn't today's investors reasonably expect a similar return over the next one, two, or eight decades?

There are only three components to stock market returns: earnings growth, valuation-level changes (i.e. the change in the P/E ratio), and dividend yields. A discussion of these three components will confirm that a reasonable future return assumption is less than two-thirds of the long-term average.”

(Note: This is important since many media outlets continue to present the idea that since interest rates are low— stocks are cheap and built for long term returns. However, interest rates have nothing to do with the long term return of stock market investing)

“Before we look forward, let's look backwards for insights. Let's use the certainty of history to explain the contribution of each of the components to the long-term average of 10.4%. According to Ibbotson, earnings growth contributed 5.0% to the long-term average (pgs. 178, 180). Since P/E ratios were 10.2 in 1926, the effect of the increase to 20.7 at the end of 2004 provided 0.9% to the long-term average (pg. 179). Finally, partially related to the starting and average P/E ratios, the dividend yield averaged 4.5% over Ibbotson's period of choice (pg. 180). Combined together, the compounded total return (before transaction costs, fees, expenses, etc.) averaged 10.4%.”

(Note: This coincides with our simplified model of long term returns that we have used in the past which is 6% in capital appreciation (adjusted for valuation expansion) and 4% in dividend yields equals 10% annualized long term returns. However, our model also subtracts out inflation at 4.2% historically over the last 105 years which leaves investors with a 5.8% real long term market returns.)

“So looking forward, from conditions that exist at the starting point of 2005, what are reasonable assumptions for the three factors over the next few decades? To assist in the discussion, concepts and data from the book

will be referenced.

First and foremost, we can eliminate the impact of significantly higher P/Es— the level of valuation cannot be reasonably expected to double to 41 over the next seventy-nine years. Given that we are near historical highs for the P/E ratio (excluding the two bubbles during the past century), any further material increase in P/Es in unrealistic. Past bull markets peaked with P/Es in the low to mid 20s; there are financial reasons, explained in Unexpected Returns (pg. 155-161), that P/E ratios cannot be sustained above the mid-20s. Therefore, if P/Es can at least be maintained at currently high levels, the best-case long-term return is 9.5%, the long-term average of 10.4% less the 0.9% impact of P/E expansion.

The second component, earnings growth, is closely tied to economic growth. Over the past decades and century, as discussed in chapter 7 of Unexpected Returns, earnings growth is closing related to Gross Domestic Product ("GDP"). GDP growth is comprised of real growth in GDP plus inflation. Today, inflation is being tightly controlled by the Federal Reserve Bank and is running below the historical average. As a result, future nominal earnings would be expected to grow at a slower rate than the historical past. Although it may not be much of a change, a 1% slower nominal growth rate shaves almost another 1% off of the potential return provided by earnings growth. Please keep in mind that if inflation does increase, the resulting decline in P/E ratios will more than offset the benefit to earnings growth. So with the more optimistic low-inflation scenario, we're down to a best-case long-term return of 8.5%.

The final component, dividend yield, is directly and mathematically related to the starting level of valuation— the P/E ratio (Unexpected Returns, pg. 103-105). In 1926, when the P/E ratio was close to 10, the dividend yield was approximately 5%. At the current P/E of 20, the normalized dividend yield drops to near 2.5%. The dividend policy and payout rates for companies do not change as the result of the level of its P/E ratio. A company that generates $2 per share will typically pay out $1 per share in dividends regardless of whether its stock price is $20 or $40 (i.e. 10x P/E or 20x P/E). Yet the dividend yield when the P/E is 10 will be 5% ($1 dividend on a $20 price), while the dividend yield at a P/E of 20 will be 2.5% ($2 dividend on a $40 price). The effect of today's valuation levels, P/E near 20, reduces the expected yield by more than 2% versus the historical dividend yield. As a result, our best-case future long-term return approaches 6%.”

(Note: Adding it back up for you: 10.4% historical average return since 1926 minus 0.9% for lack of P/E expansion minus another 1% for slower earnings growth and finally subtract 2.5% for lower dividend yield equals a best case long term return projected forward over the next 79 years of roughly 6%: 10.4% - 0.9% - 1.0% - 2.5% = 6.0%)

“Of our three components in the future, two of them— earnings growth and dividend yield— are good soldiers that will provide a fairly predictable contribution to total return near 6%. The third component— changes in the P/E ratio— will determine whether realized returns are near 6% or are much less. The trend in P/E ratios significantly impacts multi-year returns. During periods when the P/E increases, earnings growth is multiplied; whereas, periods of P/E declines mitigate EPS growth. The result is periods known as secular stock market cycles. From currently high levels, any decline in P/Es will reduce long-term returns below 6%. The magnitude of the shortfall will depend upon whether the decline stops at the historically average level or further declines to typical secular market lows.

The discussion of the components for future returns is complete— all three parts indicate below average returns in the future. Earnings growth will be lower than average, unless inflation increases. Dividend yields will be well below average as a result of current valuation levels. P/Es cannot contribute their past benefits due to their currently high levels. Finally, a decrease in P/Es, due to higher inflation or other factors, would offset the resulting modest gains in earnings growth. In the aggregate, investors can expect that the long-term return, based upon 2005 as the starting point, will be less than two-thirds of the historical average. Once P/Es retreat to average levels, future long-term returns from that point will increase. From now to then, investors would suffer the effects of a P/E decline. And only when the starting point for P/Es is again at 10.2 can investors expect that the historical long-term average return will again be possible.

As a result of the current environment and conditions, investors have two alternatives: reasonable expectations or blind hope. Unfortunately for the boomers, historically average returns are not in the cards.”

But What About Markowitz, MPT, & Your Stock Market Investments?

“Modern Portfolio Theory ("MPT"), the model that acclaimed a Nobel Prize, should come with a warning label. "Use with caution. It's only as good as your assumptions." What did Harry Markowitz intend to impart with his ground-breaking research and what are the implications given a reasonable view of future long-term returns from today?

Harry Markowitz published his research titled "Portfolio Selection" in The Journal of Finance during 1952. He led with: ‘The process of selecting a portfolio may be divided into two stages. The first stage starts with observation and experience and ends with beliefs about the future performances of available securities. The second stage starts with the relevant beliefs about future performances and ends with the choice of the portfolio. This paper is concerned with the second stage.’

Help! What about the first stage? What do you mean that the assumptions are OUR responsibility?!!

It's been many decades since the article was first published. Many, many ‘buy-and-hold’ constituents have reiterated their mantra in concert with Dr. Markowitz. However, that isn't what he intended. Yes, investors should only be rewarded for taking risks that can't be neutralized. Yes, stocks have more risk than bonds and over time have realized higher returns. BUT, what if your timeframe isn't 75 to 100 years and what if you are starting from a period of relatively high valuations and the expectation of below-average future returns?

Please Dr. Markowitz, help me with my 10 to 20 year investment horizon. For that, we can use the historical 10 to 20 year horizons for the stage one assumptions. That is the first stage to which Markowitz referred— before MPT can be applied to my portfolio.

Since 1900, there have been 86 twenty-year periods, the first was from 1900 to 1919 and eighty-five double decade periods thereafter. The results can be sorted into two groups: those above the average and those below the average. Is there a way to determine whether the next twenty years is likely to be a top half or bottom half period? This would enable us to improve our outlook by using an above-average or below-average return assumption.”

(Note: A chart of the 86 periods referred to above shows the 20 year periods that had an average return of greater than the 10% long term average return and the 20 year periods that had a return below the long term average of 10%. The graph shows that there are MORE 20 year periods that produce below average returns versus above average.)

“One characteristic that is blatantly obvious for the two halves is the starting level of valuation in the market as determined by the price/earnings ratio (P/E). It's the bellwether measure of prices in the stock market. Almost unanimously throughout the past century, when the P/E is above average, subsequent returns are below average. As well, below average P/E's historically delivered above average returns.”

(Note: Consult a table that shows the year and P/E ratio for that year and shows what your average return would be over the next 20 years if you invested in that year. Of course, there are no 20 year average returns after 1986 because 20 years have not elapsed as of yet.)

“‘So since the current P/E is well above average, shouldn't the assumption for Markowitz's model be below average returns? Wouldn't this be consistent with the assessment of future returns provided earlier?’

Markowitz gave us the holy grail to portfolio management; conventional wisdom has forgotten or ignored the need to use appropriate assumptions— the essential "first stage" of portfolio management. As Markowitz emphasizes, it is our responsibility to use ‘observation and experience’ to develop ‘beliefs about the future performances.’ Although future performance of the stock market cannot be predicted with certainty, through observation and experience we may be able to at least refine the assumptions into above-average or below-average territory. Based upon current market valuations, it is very likely that we're in the 'below-average' batters box and should include a below-average return assumption for the next twenty years and even longer.

Oh no. Can't we hang on to the hope that this time will be different? Or must we (rationally) include scenarios that present below average assumptions?

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 83. Nov 4, 2005 2:44 PM

» Normxxx - How Much Is Enough?

How Much Is Enough?

By Billy and Akaisha Kaderli | 4 November 2005

A regular feature of The Motley Fool's Rule Your Retirement service is our success stories— profiles of people who have become financially independent. One of the most remarkable stories is about Billy and Akaisha Kaderli, who, at age 38, left their fast-track lives, moved to Nevis, West Indies, in the Caribbean, and started traveling the world. Their story follows.

The challenge was not realistic. No matter how hard or long we worked, we couldn't compete with Bill Gates' net worth. It just wasn't going to happen.

Once we got that fantasy out of the way, we asked ourselves: How much money is enough to retire? What size of nest egg do we need?

Obviously, this is a personal decision, and it's one that should be taken seriously.

For us, the amount we required to live per year was determined to be $20,000 (in 1990 dollars), and it needed to be generated from our financial holdings. But what amount of capital would do that for us? And how would we allocate that sum of money? Stocks? Bonds? CDs? Annuities?

How one invests his or her money is a question of risk management. Many years ago, we learned that we could be owners (equities) or lenders (bonds). Through business experience, we realized that we could make more money owning a business than lending money to one, though the risks are greater.

Working in the brokerage business demystified the stock market for us. We had owned stocks for years, so we decided to use equities for our portfolio. The fact that stocks have produced a compound annual average return of 10% for the past 70 years made investing in equities a common-sense approach for us, as well as a risk we were willing to take.

Once we made this decision, the math was easy. For every $100,000 invested, approximately $10,000 in annual income could be produced. So, bare-bones, we could meet our goal on just $200,000 invested. But that's cutting things too closely, and it did not allow for inflation, emergencies, unexpected expenses, or market downturns. In fact, as often discussed in The Motley Fool's Rule Your Retirement service, a much safer withdrawal rate is in the neighborhood of 4% a year. But we did discover that we were on the right track to achieve our financial freedom.

If stocks are too risky for you, and if you prefer CDs or bonds, the size of your nest egg will need to reflect your preference and the lower returns that it will generate. There is no "one size fits all." When it comes to your portfolio, you must be comfortable and confident with your personal risk tolerance.

Do you ever have enough money?

When you reach the amount that allows you not to hold a job any longer, your life opens up. You might choose to work, but you no longer have to do so. When you reach this stage, the income generated from your financial holdings supports your base lifestyle expenditures.

Once the funds for comfortable living, gift-giving, and emergencies are covered, how much more do you need? "You can't take it with you" is a common phrase, and it's true. In the game of life, the one with the most money doesn't win anything different from the one that came in last. We ultimately all get the same prize. So what we choose to do with our time and money here is up to each one of us. How do you want to spend your money and time?

You must realistically decide what lifestyle you want to live and what your desires are for your future. If you want to buy yachts and fabulous cars, or utilize high-end travel and dining options, then perhaps you need to keep working. If a simpler lifestyle appeals to you, then you could need less than you think. Some experts say that 25 times your current expenses is an excellent starting point. If you're confident that your portfolio can produce enough income to cover your expenses, plus inflation, we believe you're already there. It's really that simple.

In 1991, Billy and Akaisha Kaderli retired from the brokerage and restaurant businesses to a life of international travel. Visit their website at http://RetireEarlyLifestyle.com, and check out their new CD book, The Adventurer's Guide to Early Retirement.

P I C T U R E O F T H E W E E K

A Dental Menu In Thailand. Could The U.S. Do The Same?
(Prices Are In Thai Baht. 40 B = $1 USD)

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 84. Nov 7, 2005 9:42 AM

» Normxxx - This time is different?

This time is different?

-- posted by Normxxx

Top 85. Nov 21, 2005 9:35 AM

» Normxxx - Permanent Tourist

Permanent Tourist (PT)

By Harry Schultz | 21 November 2005

PT
A wise old PT hand sent me this valid comment: "All countries are unfree in different ways. So a PT will pick a place that is easy on his/her proclivities & harsh on things they don't care about. Depending on your lifestyle, there are probably many places far freer for most people than the leading Anglo Saxon democracies. U just have to look around & test the waters before settling in for a few years of good fishing."

••••• It gets ever harder to write PT copy, especially as Anglo Saxon nations follow like cowardly sheep behind Washington's neo cons, who continue to delete individual freedoms & impose ever more restrictions. Yet, on a trip to Switzerland 3wks ago I found free-spirited people are fighting back, but with more subtle approaches. Freedom is hard to smother to death. This requires U read between the lines, from now on. E.g., new types of credit cards are available that don't have your name or address & not your bank (but some bank). If U surf the Net U may find them, or via some small Swiss banks which now offer them to clients (only).

We entered a new slave age in about 1970, which escalated sharply in the 80's, 90's & went ballistic since 2000. Our political masters want us to have zero liberty, privacy, choice. That is not conjecture. They require that in order to control us, which may be a subliminal need for some of them. They've achieved much of this aim. U have to think further out of the box now. Becoming a free man/woman (PT) via "Permanent Tourist" was always the best route, however U implement it. Some leave their country & return later to a different location to make a fresh start with no ties to the former city. Some leave & only return for short visits. Some never return. Many change (or set in motion to change) citizenships, though that's optional, except for Americans, Filipinos & some Scandinavians.

PT is a broad category that U may wish to employ only in regard to sending funds abroad so it's out of reach of where U live. History says that's prime wisdom. Some employ certain PT tactics just to be low profile, & stay put. Some prepare a nest abroad just in case, & prepare to leave on 1-day notice. Some keep citizenship but prefer to live abroad in a safer or freer environment. Etc.

•••Using E-mail to communicate sensitive, private subjects is very non-PT. It ranges between stupid & ridiculous + lazy— even if encoded— in fact, coding can attract attention. Snailmail (post) is most private. Faxing is a compromise, as is courier.

Sending funds offshore, wherever U live, is now not optional. It's now essential— to preserve your buying power, safety & accessibility. And, whereas before that was just with a nestegg sum, now it should be the majority of liquid assets. Feel free to ignore this counsel; it's your life! U want to start all over again? U feel snug as a bug in a rug? Bugs get vacuumed.

Since creating the PT concept decades ago, it has spread far & wide. Many young Turks have taken up the reins from me, retired from the field. I get a chuckle when I see my prior copy coming back on the Net from young bucks. One such is David MacGregor, Sovereign Life Enterprises, 126 Aldersgate St, London, EC1 A4JQ, UK. I don't know him, but he writes interesting copy. Here is one such bit, regurgitated: "This strategy is often known as being a 'PT'— which means Perpetual Traveller. It can also mean: Permanent Tourist; Prior Taxpayer; Possibility Thinker; Post Tyranny; Privacy Tactician, & any other positive label U can think of that spells 'PT'."

•••• If U want legal/structural advice from a real PT lawyer/advisor, in Channel Isles, contact Hslm Stefan Gomoll at SG@SGLAW.CO.UK. Fax +44 1481 832802.

•••• I hear that an ultimate PT book by 'grandpa' will be out by Xmas. Will try to get details for next HSL.

••••Meantime, be a Positive Thinker to be a Prosperous Trader or Timetraveler. .

PT #2
Rare coins solve some PT problems for US readers says US coin dealer Hslm Ed Lee. He says "U can privatize a big % of your assets via collectibles like rare US coins. Why? No gov reports needed on buy or sell so it's private, & portable (unlike heavy bullion coins). Not subject to confiscation. US gov values rare coins at face value upon US exit (vs bullion coins at mkt value). Rare nickel just sold for $4.15 mil; can take in carry-on luggage, & 100% legal. Rare coins also offer legal tax-deferred/tax-free trading for other rare coins, as with real estate, except property trades require a gov report. A rare privacy opportunity. Only buy rare coins from reputable dealers w/low overhead, & all must be lab-graded by NGC or PCGS. When sold, $ can be wired to any nation U choose for PT life. Some feel US gov will move against non-rare gold as terrorists can use. For more info contact me (47 yrs coin experience). Free consult re the above. OK mention hsl. Edlee2001@aol.com. Tel 603-429-0869/ 800-836-6000; fax: 603-429-2095."

[Normxxx Here: If you are not prepared to take up numismatism, avoid rare coins! It is not a market for amateurs (if any are).

Best (non-financial advice): Learn a second language; or two, or three... Try to get another (non-U.S.) passport.

Stay (relatively) liquid. Things can change quite literally overnight! ]

Uncle Harry D (for Demystifying) Schultz

______________

The contents of this letter/report does not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

-- posted by Normxxx

Top 86. Dec 12, 2005 10:21 AM

» Normxxx - ElderDrugs?

Kids and their parents sit down for the talk

By Richard Wolf, USA TODAY | 12 December 2005

An unlikely topic is being wedged between the turkey and the TV football this holiday season: Medicare's new prescription drug coverage.

Children of Medicare beneficiaries— some of them on Medicare themselves— are sitting down with their mothers and fathers to pick a plan. With about 3,000 private plans nationally, and several dozen in every state, it's not a simple task. The plans offer a range of premiums and co-payments and drug formularies, forcing many families to do considerable research and arithmetic.

[Normxxx Here: Moreover, the plans are free to alter their conditions and terms almost at will, and those already signed up are without recourse for about a year. Bait and switch? ]

Some families have succeeded and become closer in the process. Many have been overwhelmed by the range of options. Others have been sent from agency to agency and given conflicting advice.

"If you are enrolling somebody in a drug plan and their drugs are their life, you want to make darn sure that you have the correct information," says Barbara Feltes of Portland, Maine, who's struggling to help her elderly mother, Anna.

The Medicare drug program, passed by Congress in 2003, is being implemented nationwide. Less than a month into the sign-up period, government, private and non-profit groups are offering help, from websites and phone lines to one-on-one counseling. Wherever they go, those experts are besieged not only by seniors but by their baby boomer children.

In New Jersey for Thanksgiving, Howard Houghton, a county government insurance counselor in Fairfax, Va., couldn't sit down to dinner until he had helped his mother and his aunt, and then his brother-in-law, who was trying to pick a plan for his mother in Connecticut. "I figured if I didn't do it, I wouldn't get a meal," he quips.

With real money at stake, seniors— only about 25% of whom use the Internet— increasingly are relying on their children to sort through the Medicare maze. That help is encouraged by federal officials, who have launched an ad campaign to encourage children to assist their parents. "We want people talking about this," says Kathleen Harrington, director of external affairs for the Centers for Medicare and Medicaid Services.

The ad campaign is part of the government's effort to educate seniors and their children, in hopes that 28 million to 30 million of Medicare's 42 million beneficiaries join. The six-month sign-up period began Nov. 15; officials will release initial enrollment data next week. Coverage begins Jan. 1.

'This is a manageable decision'

For Michael Leavitt, secretary of the Department of Health and Human Services— the man in charge of the nation's Medicare system— enrolling his parents over Thanksgiving was easy. It also was "rewarding," he says. And it will save them a bunch of money on their health insurance.

Leavitt lined up the drugs taken by his father, Dixie, 76, and mother, Anne, 73, of Cedar City, Utah, on a desk and entered them into the "Plan Finder" on Medicare's website. "Medicare will do the math," he says. Within an hour, he had selected a plan with monthly premiums of $6.33 that will reduce their costs from about $7,000 to $2,200 a year.

[Normxxx Here: At least until the plan is changed. ]

He also had learned some things for the first time about their health.

"We had a powerful experience," Leavitt, 54, told a gathering here at the Newark Senior Center recently. "This is a manageable decision."

Joseph Miro, a Delaware state legislator, wanted to sign up his mother, Elvira, 93, on Thanksgiving without missing too much football. "It took me 33 minutes from beginning to end," he says.

Last year, Elvira Miro paid about $1,400 for her medications, and about $800 this year with a Medicare drug card. Her son selected a plan with a monthly premium of more than $50 but generous coverage, so that if his mother needs more drugs in the future, "that will represent a huge savings." For next year, her costs will drop to $648.

"Family members, caregivers, they really need to be involved, because it is intimidating for an adult," Miro says. "And it's that much more intimidating for an older person, especially a person like my mother, who doesn't even know how to turn a computer on. Having been through it, it's not such a horrible situation."

It also can bring parents and children closer.

Doris Doran of Falls Church, Va., doesn't need much help figuring out her options. The 77-year-old has attended two information sessions and boiled it down to a grid comparing three plans: one with a low premium, one with a high premium and one in the middle. She's leaning toward a plan sponsored by AARP that she thinks will cover all five of her medications and save her $100 a month.

Still, daughter Pam, 53, is monitoring things to make sure her mom chooses well. "I need to learn this stuff anyway," Pam Doran says. "I don't want something to happen where all of a sudden I'm clueless."

Doing the homework

For others, the process is proving more daunting.

Tim Janaitis admits that for years, his mother, Jean, in Upstate New York was almost "out of sight, out of mind" because other relatives were nearby. But after she fell and broke her hip this year at age 88, Janaitis moved her to an Arlington, Va., retirement home and assumed responsibility for her. That means trying to decipher the Medicare law for his mother, who takes about a dozen daily medicines.

He took time from work to attend an information session last week at Brighton Gardens, his mother's new home, and emerged somewhat overwhelmed.

"I'm just starting to pick-ax my way through all of this," says Janaitis, 60. "I'm very apprehensive about selecting the right plan or making the right decision. I'm going to have to do a lot of homework."

At 78, Hilda Miles doesn't anticipate much problem picking a prescription drug plan for herself. She only takes Motrin, for knee pain, and an occasional sleeping pill. She'll pick a cheap plan "in case I get a catastrophic illness. Then I would need drugs," she says.

But her problem doesn't end there. Miles, who lives outside Richmond, Va., is more worried about her 100-year-old mother, Joan Adams. "Of course, my mother takes lots of medicines," she says— about 15, which cost $250 to $300 a month. Adams is just over the income limit to get extra financial assistance.

Miles has a computer, but she has not visited the Medicare website. "I don't like getting on the computer a whole lot," she says. After talking it over with a friend in the insurance business, Miles chose a plan for her mother last week that will reduce her out-of-pocket costs, but not by much. "I still don't know if I understand it," she says.

Katherine Oliver is a half-century younger than Miles, but she too must pick a plan for her mother. Sylvia Oliver, 61, just started on Medicare due to a lung condition after two years on Social Securitydisability. So Katherine, 27, went to a session in Richmond, where she was "the youngest person in the room."

For now, her mother's out-of-pocket drug costs are only about $100 a month. But last spring, she was diagnosed with non-Hodgkin's lymphoma, a form of cancer, and her costs are likely to increase. That makes the younger Oliver nervous.

"It's just really frightening, because it's her future we're talking about," Katherine Oliver says. She has called some insurance plans directly to get more information. Her advice: "Start this three months before you go on Medicare, because it takes about that long to get it all figured out."

The responsibility for her mother's health weighs heavily as well on Pat Pfeifer, 52, of Delaware. She recently quit her job to take care of her mother, Dell Deady, 82, who has Alzheimer's disease. Deady takes five drugs costing about $150 a month.

With no computer at home, both of them attended Leavitt's session here late last month. By the end, Pfeifer was still confused. "I need to go home and read the packet," she said. "All of this happened so fast."

Finding the right information

Things are happening even faster for seniors who have been getting their drugs from Medicaid, the federal-state program for low-income Americans. They are being automatically enrolled in Medicare plans that usually won't cost them anything. Still, families must find out if those plans cover their medications.

Barbara Feltes' mom was placed in a drug plan by Medicare, but initially it didn't appear on the Plan Finder. Feltes made a series of phone calls but feels that the people on the other end of the phone "only have a limited knowledge."

Unlike many of her peers, Feltes isn't satisfied to simply match up her mother's drugs with a plan. She wants to know about generics, about "step therapy" that could mandate other drugs first, about the rules on prior authorization. She's not keeping the plan assigned to her mother and is investigating others.

Natalie Thomas of Atlanta has been working with her mother, Madeline, 75, to get Medicare drug coverage for her father. Lamar Thomas, who turned 80 on Saturday, lives in a nursing home in Fitzgerald, Ga., and has vascular dementia. Her mother mistakenly shredded a letter regarding her father's automatic switch from Medicaid to Medicare drug coverage. The result was seemingly endless calls to Medicare, Medicaid and Social Security to get a new letter. Now his pharmacist is checking to see if the plan covers his drugs.

"I don't know what my mother would have done had I not been in the field that I'm in," says Thomas, who works for Georgia's elder rights program. "She was actually in tears on Thanksgiving Day about this."

The experience has left Thomas convinced that children hold the key to making Medicare's prescription drug coverage a success. Without them, she says, seniors "are going to opt to not enroll in the plans at all, which is a dangerous thing."

For their hard work, children of all ages hope for a happy ending to their Medicare sagas.

"I think it's a shame we have to go through all of this," says Miles, the woman with the 100-year-old mom. "But I guess we're lucky, in a way, that they've got a plan. I just hope it will work."

-- posted by Normxxx

http://www.heritage.org/Research/SocialS...

Top 87. Jan 13, 2006 3:39 PM

» smile_1 - baby-boom Net Worth projections

Estimated Average Net worth of Baby Boomers at age 65 compiled by Heritage foundation from Federal Reserve Board of Governors, ?2001 Survey of Consumer Finances".

above gif from this article:

http://www.heritage.org/Research/SocialS...

-- posted by smile_1