Investing for (or in) retirement gets harder

The newspapers are full of stories about how baby boomers who have squirreled money away are rethinking their investment approach, evidence coming from last year's net outflows from stock funds and the fascination that many retail investors now have with bonds.

With the combination of an increasingly "risk averse" baby boomer crowd that is rapidly approaching what they once thought was retirement age and after multiple collapsing asset bubbles seen over the past decade, you'd have to think that investing for retirement is now undergoing some fundamental changes - and these aren't the kind of changes that the folks on Wall Street will probably like.

A number of stories over the last few days have helped to make this point, starting with a USA Today report in which the lead interview subject makes it quite clear that he's had enough.

Near the stock market low last spring, with his losses nearing $200,000, Martin Blank, 67, a Florida retiree with four decades of investing experience, sold most of his stocks.

He liquidated 75% of his stock funds. He hasn't put that cash back in the market. And doesn't plan to.

That emotion-driven decision, made with his wife, Linda, nixed any chance of profiting from the 63% rally that began shortly after selling out in a state of anxiety.

But Blank has no regrets: "I have no desire to attempt to make back what I lost."

Forty years of investing and that's it - it's hard to blame Martin for his decision, but it's equally hard to understand how investing as we've come to know it since the mid-1980s can continue.

Recall that it was back in 1984 that 401ks were first introduced in the U.S. and ordinary folks were first given a modest amount of control over how their retirement money was invested. That morphed into near complete control years later and this all worked quite well up until the bull market in stocks ended in 2000.

The Christian Science Monitor looked at how prepared the baby boomer crowd is for retirement in this story and came away unconvinced that the "golden years" will be very pleasant for many.

The leading edge of the baby boomers – the postwar generation that led the way on everything from war protests to yuppiedom and two-income families – is about to experience another first: postcrash retirement.

With the first wave of boomers turning 64 this year, they have little time to make up their losses from the recent debacle of stocks and housing. Not since the late 1930s have workers on the cusp of retirement faced such a big one-two punch.

So how are they handling it? Not well. It's almost become a cliché to say most boomers haven't saved enough for retirement. Nearly a quarter of those who turn 50 this year say they haven't even started saving, according to a poll in January. Here's the surprising part: According to some experts, even those who have managed to stash away some savings must be careful not to invest the money too cautiously.

With life spans increasing – and many boomers dreaming of active retirements, among other factors – some advisers suggest that near-retirees keep a sizable holding in stocks. The old adage – subtracting one's age from 100 to get the proper stock allocation – just doesn't apply anymore, this camp believes.

I don't know about you, but this whole "double-down" thinking by investment advisors seems fraught with risk. Sure, doubling down last spring would have been a great idea, but there are probably a lot more investors like Martin Blank in that first story above than there are those who have the stomach to "buy when there's blood in the streets".

Even Jason Zweig in this piece from the weekend issue of the Wall Street Journal seems a little down on the whole idea of people navigating the years ahead using what has passed for conventional wisdom when it comes to investing.

For many investors, the market's turbulence hasn't just destroyed wealth. It has shattered their faith in the financial system itself.

Consider Philip Eberlin, 56 years old, who runs a woodwork-restoration business in Chicago Heights, Ill. Trading hot stocks a decade ago, Mr. Eberlin got burned on picks like Krispy Kreme and Tyco. In 2007 he got back into stocks, only to take another hit.

"Having been burned twice in 10 years," says Mr. Eberlin, he now has about 80% of his family's assets "protected from the market" in certificates of deposit and fixed annuities. "I don't have trust in Wall Street to help the small investor in any way, shape or form."

Mr. Eberlin isn't alone. Late last year, Decision Research of Eugene, Ore., asked Americans how much they trusted bankers and other Wall Street leaders "to reduce the risk of the financial challenges the country is facing now." On a scale of 1 to 5, with 1 meaning no trust at all, the rating averaged a paltry 1.7.

Where do you go from here?

On the one hand, it's great that people have the amount of control that they have over their own retirement planning but, on the other hand, retirement dreams are now fading fast for millions of Americans and we've probably got at least a few more years before this secular bull market in stocks is over.

If only more people had sold their stocks ten years ago and bought gold, there would be far more happy retirement stories today.

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Dashing retirement dreams in the U.K.

Factoring in major changes to the retirement aspirations of millions of baby boomers is not a phenomenon that is unique to the U.S. As discussed by Ian Cowie in today's Telegraph, the situation may be even worse across the pond as the government is in even more dire fiscal straits, now eyeing state pensions as a way to help square the books.

More than 20 years ago, the fraudster Peter Clowes – who stole thousands of pensioners' savings – told me: "I could have paid them all – if only I had been given more time."

Can't think why that memory came to mind this week when Cabinet minister Harriet Harman proposed scrapping the compulsory retirement age. From the Government's point of view, this change would have two happy effects.

It would cause millions of people to pay taxes for longer and also delay the point at which they ask for state pension promises to be honoured.

As regular readers will know, state pensions in this country are a massive Ponzi scheme which it would be illegal for anyone to operate in the private sector. National Insurance contributions deducted from workers' pay packets this week are used to pay next week's state pensions.

The fund has enormous and rising liabilities but no assets. Don't take my word for it; Nye Bevan – one of the founders of the welfare state – jovially admitted: "The great secret about the National Insurance fund is that there ain't no fund."

Of course, if the British were like us Americans and still had the world's reserve currency along with a natural (if somewhat shaky) source to finance its deficits, it wouldn't be looking inward just yet. When they begin to look inward in Washington D.C. to solve our problems, you'll know that we're really in trouble.

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Retirement hammock hooks

Following the realization that rising asset prices may not be the cure-all they were once believed to be in funding all sorts of future spending comes yet one more amusing way to look at the dour prospects faced by many private sector workers in their aspirations toward a life of leisure in their golden years (from the Tom Toles collection at the Washington Post).
Someday, years from now, the nation will undoubtedly look back and wonder what they could have possibly been thinking when, in the present era, public sector workers were permitted to retire with generous benefits at a relatively early age.

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How long can public pensions continue?

Combine a burst housing bubble (and all the attendant vanishing tax revenues) with poor investment returns and a system that was unsustainable to begin with and you have the public pension system in California as reported by Bruce Bialosky at Town Hall.

The law gives the employee pension benefits of 3.0% of their final income for each year of service. It also made the 3.0% amount retroactive to the beginning of their employment period. That means if you work 20 years you receive a pension benefit equal to 60% of your final income. The problem was compounded by how they calculated the income on which to base the pension.

Everything including the kitchen sink adds to the final income level. Things such as auto allowance and bonuses boost the final number. If the employee did not use vacation pay or holiday pay for the prior 10 years that adds to the base salary to determine the income. Understanding that in most private sector jobs when you do not use your vacation, you lose your vacation, the ability to accumulate vacation time opens up the system for vast manipulation. Peter Nowicki, the Moraga Orinda fire chief, retired at age 50. His final salary was a whopping $185,000, but small compared to his annual pension benefit of $241,000. Making that matter worse, Nowicki was hired as a consultant to the fire department for an additional $176,000 per year -- on top of his retirement benefit.

Caution would probably be advised here as we have friends and relatives in both California and Pennsylvania who are retired from the state educational system, now benefiting from this sort of government largess (though not to the same degree as the fire chief above).

It's probably no coincidence that both states had big problems balancing their budget this year and would have had to let thousands of workers go if not for the many billions of dollars that came pouring in from Washington D.C.

Last I heard, there were more than 4,000 retired public sector employees pulling down more than a hundred grand a year in California with Illinois apparently not far behind as reported here. Over the years, cities such as San Diego have been rife with double-dipping like Chief Nowicki above, what does not appear to be an isolated case.

In Los Angeles County there are over 3,000 people receiving greater than $100,000 per year in pension benefits. In San Francisco, it was found that 25% of employees’ income spiked up over 10% in the final year of their work. The San Francisco grand jury found that amount cost the city $132 million.

Some would argue why not game the system? Let’s say you start working for the government when you are 30 years old and work for 25 years. Your final income with all the fancy calculations ends up at $120,000. That means you would receive $90,000 plus full health care benefits. You can either live on that very nice retirement or you are free to get another position. After all, being 55 years old, you are still in your prime earnings years. Where in the private sector are there comparative opportunities?
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Private sector employees now receive less annual income than their public counterparts. Private sector employees will have to work well into their seventies to pay for these public sector employees’ retirement benefits which far exceed what the private sector offers. The public will, little by little, become aware of this upside-down arrangement.

The voters in California sent a strong message earlier in the year when they rejected the budget changes proposed by Sacramento and that's probably just the beginning (of course, lots of people are now voting with their feet in the Golden State).

It's funny that those who work in the public sector (at least the ones that I've spoken to on subjects such as this) have absolutely no appreciation for balancing budgets and making ends meet given the realities on the ground.

On the topic of "fixing" the public schools, one recent conversation went like this:

Retired teacher: "Doubling the number of teachers and cutting the classroom sizes in half is the only surefire way to provide consistently better education. You can't have 35 kids in a classroom and expect a quality education."

Me: "Where does the money come from to pay all these teachers?"

Retired teacher: "The taxpayers!"

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Calpers doubles down

What do you do when you've had a run of bad luck? Managers of the giant California pension fund, once valued at almost a quarter of a trillion dollars, apparently think increasing your bet is the appropriate response, as detailed in this report from the New York Times.

Big as California’s budget woes are today, so are the problems lurking in its biggest pension fund.

The fund, known as Calpers, lost nearly $60 billion in the financial markets last year. Though it has more than enough money to make its payments to retirees for many years, it has a serious long-term shortfall. Meanwhile, local governments in the state are pleading poverty and saying they cannot make the contributions that would be needed to shore it up.

Those problems now rest largely on the slim shoulders of Joseph A. Dear, the fund’s new head of investments. He is not an investment seer by training, but he thinks he has the cure for what ails Calpers, or the California Public Employees’ Retirement System, the largest in the nation with $180 billion in assets.

Since their fiscal year begins and ends at mid-year, it's difficult to compare the performance of the Calpers fund to other investments over the last eighteen months, but the 23 percent loss from mid-2008 to mid-2009 compares favorably with other pension funds.

Their approach going forward, however, runs counter to the more conservative approach recently adopted by many other institutional investors.

Mr. Dear wants to embrace some potentially high-risk investments in hopes of higher returns. He aims to pour billions more into beaten-down private equity and hedge funds. Junk bonds and California real estate also ride high on his list. And then there are timber, commodities and infrastructure.
That’s right, he wants to load up on many of the very assets that have been responsible for the fund’s recent plunge. Calpers’s real estate portfolio has tumbled 35 percent, and its private equity holdings are down 31 percent. What is more, under Mr. Dear’s predecessor, Calpers had to sell stocks in a falling market last year to fulfill calls for cash from its private equity and real estate partnerships. That led to bigger losses in its stock portfolio.

Mr. Dear remains a believer. Private investments, he asserts, will over the long haul outperform stocks by three percentage points a year, and that is necessary to keep Calpers on track to returning its goal of 7.75 percent annual returns.

“Three percent on a portfolio as large as ours makes a material difference,” he said.

If he can inch Calpers’s investment performance up, many problems will disappear. If not, Calpers may end up in an even bigger financial squeeze than it is today.

This has a great potential to end very badly...

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Retirement planning gets harder

Retirement planning sure has gotten a lot more difficult since the housing market and the stock market both went bust. Conventional wisdom used to be that, if you didn't save enough money and invest it well enough, your rising home equity would make up the difference for you - and possibly much, much more.

Obviously, that's changed rather dramatically.

I sometimes wonder what my old dentist thinks about real estate these days after reacting in shock when, about four years ago, the possibility was raised that home prices may not keep going up forever. The idea of home prices actually going down caused him to take a step back, drill still in hand, and after commenting, "My retirement is depending on it" when referring to his home equity, I said no more.

The crown turned out just fine.

According to this report at MarketWatch, an increasing number of Americans are now sufficiently past the shock phase in their reaction to what has transpired in the housing market in recent years that they're beginning to look at things with a clearer head.

This change in thinking splashes a good amount of cold water on what has been dogma at the National Association of Realtors - that homeownership is a way to build wealth.

Nearly half of American adults who participated in a recent survey said they no longer believe that homeownership is a realistic way to build wealth, the National Foundation for Credit Counseling reported on Monday.

The findings, from a recent survey of about 1,000 people, run counter to the long-held perception that a home should be part of a person's financial strategy, the NFCC said.

"It had been considered the cornerstone of wealth building," said Gail Cunningham, spokeswoman for the NFCC. Homeownership had been a significant tool that most people felt was necessary to prepare for retirement, she said in a phone interview.

Well, it's one thing to strive to own your home outright in order to reduce your living expenses and have a "home equity cushion" (gee - you don't hear that term much anymore) in case it's needed later in life.

That should be everyone's goal - a paid off house and zero debt make for a much more comfortable retirement regardless of one's income or spending level.

It's the people who extrapolated from rising home prices from 2002 to 2006 and were confounded as to how they were going to spend all that money that contributed greatly to the mess we are now working our way through.

Though it is going to be a long, painful adjustment, we'll all be much better off after we again start thinking about real estate as being a place to live rather than as an investment.

But, that takes away one important prop to the conventional wisdom that was late-1990s and early 2000s retirement planning.

What about the rest of it?

With more individuals allocating less money to "riskier" investments (given a more profound appreciation of said risk), and with housing now largely removed from the equation, it becomes even more improbable that things will work out well for aspiring retirees after the 2008 market meltdown.

And not only is this brave new world of retirement planning more difficult financially, but it's more difficult mentally and emotionally as well. This story at USA Today details how married couples are dealing with their new financial reality and planning for the long term.

If the economic downturn has forced you to rethink your plans for retirement, it's a good idea to discuss your concerns with your spouse or partner. Before you have this conversation though, you might want to clear the room of sharp objects. That way, nobody gets hurt.
In many households, it appears, retirement is an even more contentious topic than politics, religion or whose turn it is to walk the dog. A study by Fidelity Investments found that more than 80% of couples disagree about a major component of their retirement planning, such as the age at which they plan to retire, whether they'll work in retirement or where they'll live after they retire.

Fidelity found similar results when it conducted a couples survey in 2007, but now, the stakes are higher. Many couples in their 50s and 60s have seen their home equity evaporate and their savings diminished, forcing them to work longer or scale back plans.

At this point, particularly with the complications of paying for health care for existing conditions, more and more people seem to be resigning themselves to working until they drop dead, which, if you really like your job, isn't all that bad a plan.

Of course, if you don't like what you do or if they show you the door long before you were planning to leave, it's not a very good plan at all.

After the events of the last few years, there seem to be few certainties about retirement planning (or living in retirement for that matter) aside from the obvious one - things will probably never look quite so rosy as they did back in 2005.

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A million is not enough?

Here's some news that might make millions of aspiring American retirees spit up in their coffee this Monday morning - a million dollars might not be enough to retire.
My guess is that, after the events of the last year or two, most people don't want to know whether they'll have enough to retire, taking the popular "ostrich approach" to retirement planning (i.e., head in the sand).

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Not what it appears to be

A little humor from Mike Keefe of the Denver Post via Time Magazine. Can you imagine what this little village will look like in another 10 or 20 years? Not even the cats are real?

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We're all traders now...

Is this where we're headed? Where companies that handle the retirement money for millions of Americans encourage their customers to "profit regardless of market direction"?
It's hard to believe that people who don't know the difference between a mutual fund and Mutual of Omaha are going to be successfully trained to hedge their investment portfolios and short the market, but somebody is going to be making money on this new trend somehow.

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What good are mutual fund managers?

As if the average 401k investor doesn't already have enough on his plate these days, word comes in this WSJ report($) that more than two-thirds of managed funds - the foundation of nearly every company retirement plan - underperform the index they are measured against.

Investors in actively managed mutual funds for the past five years have reason to wonder what they have been paying for: A new study from Standard & Poor's finds that 70% of large-cap fund managers who use the S&P 500-stock index as a benchmark for comparison have failed to match the performance of the index over that time.

That is double-bad news, given that the index was down 19% in the five years that ended Dec. 31. The failure of active management is replicated across almost all categories, not only U.S. stock funds but also bond funds and even emerging-markets funds.

What's more, those numbers are similar to the previous five-year cycle. From the close of Dec. 31, 2003 to Dec. 31, 2008, the S&P 500 fell 18.8%, but still beat 71.9% of U.S. actively managed large-capitalization funds, according to S&P Index Services.

It's been a while since I've looked at any 401k plan offerings - any ETFs in there yet?

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Not so stable value funds

With all the other things in the world for investors to worry about these days, whether or not stable value funds are appropriately names shouldn't be one of them, but according to this Wall Street Jounal report, apparently it is.

An unnerving new crack emerged in the $520 billion stable-value fund market as an offering for workers at Chrysler LLC dropped 11%, highlighting strains in yet another supposedly safe investment.
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Stable-value funds, available only in tax-deferred savings plans such as 401(k)s, are designed to provide capital preservation and smooth, positive returns. But Chrysler Stable Value Fund B, offered to certain Chrysler employees and retirees through company savings plans, paid out only 89 cents on the dollar when the fund was liquidated earlier this year. Chrysler declined to say how much money was in the fund.
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Investors have been pouring money into stable-value funds in recent months seeking shelter from the market storm. These funds generally invest in bonds and then use bank or insurance-company contracts to smooth results.

It shouldn't be too surprising that these funds are running into trouble, particularly since insurance companies are involved. Realistically, how else do you pay three or four percent in returns when the best you can do elsewhere is about half that amount?

Someone must be taking some big risks somewhere that are not being disclosed or it's just another Ponzie scheme - some combination of AIG accounting or Bernie Madoff investing.

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The perils of not questioning everything

Yesterday, Fidelity Investments sent information to me and perhaps millions (or at least hundreds of thousands) of other people like me who have retirement accounts with their firm in what was clearly an attempt to compel squeamish stock investors to get back in the market while the gettin's good.

In a piece titled The Perils of Herding to Cash, they make the case that a high percentage of money market holdings to overall fund holdings is an indication that it's a good time to buy stocks, presenting the blurry chart you see further below as prime evidence.

The stock market tumbled more than 50% since its peak in 2007, causing many investors to flee to cash. At the end of 2008, the percentage of all mutual fund assets invested in money market funds (37%) stood at its highest level on record, surpassing the previous peak during the bear market of 2002 (34%).

Now, the first thing that should come to mind when you hear about a percentage change such as this, where there are two moving parts - cash and non-cash holdings - is that statistics can be very misleading.

A change in one can dramatically affect the composition of the whole and, given the magnitude of the change we've seen over the last year in the bread-and-butter offerings from big retirement companies like Fidelity - big U.S. stock funds - a rapidly changing percentage of assets held as cash may not be what it appears.

[Note: If you already know where this is heading, you probably also already understand that this is akin to having forgotten to rebalance your investment portfolio and letting last years market crash take care of that job for you.]

Here's the chart, along with the rest of the research note.

S&P 500 - Money Market Assets
Source: Lexis Nexis, Strategic Insight, FMRCo (MARE) as of 12/31/2008.

Fleeing to cash during a bear market reduces one's exposure to stocks when they are at historically lower prices. Back in October 2002, although a new bull market had begun, investors kept an above average level of cash until February '04 -- meaning in the aggregate, investors overallocated to cash during a 15-month period when stocks rose more than 30%.1 As a result, some investors who kept long-term capital tied up in cash likely missed out on big gains in the early stages of a rebound.

Bottom line: Ineffective market timing can be costly
Historically, many investors overcome with fear have increased cash positions during bear markets but have been slow to reallocate to stocks in the early stages of a new bull market. This sell-low, buy-high behavior is a suboptimal strategy, and can cause investors to end up with returns that are worse than the market's average performance.

Perhaps just owning U.S. stocks has been the more fundamental suboptimal strategy...

Obviously, the chart and the words make a compelling case for what the Fidelity research team thinks investors should be doing right now, but, when you look a little deeper, it gets much more interesting and greatly lessens the importance of the argument being made.

Consider the following, based on the two data points cited above in the chart below - the market peak in 2007 (indicated in red) and the end of 2008 when the cash held totaled 37 percent (indicated in violet).
If you had $100,000 invested exclusively in cash and an S&P500 index fund in May of 2007 in the ratios shown above, you'd have $80,000 in stocks and $20,000 in cash.

Fast forward to late-2008 and notice that the cash percentage has risen to 37 percent as the S&P500 has dropped some 42 percent.

So, the question is, "How much of the change in the cash percentage was attributable to the lesser value of stocks and how much had to do with people "herding" into cash?"

Well, that $80,000 in stocks is now worth just under $47,000 and, assuming a modest return on the $20,000 in cash brings that to around $21,000.

This leads to the conclusion that, without doing any "herding" at all (i.e., no stock sales), the cash as a percentage of overall assets has moved from 20 percent to 31 percent!

Assuming no inflows or outflows to simplify this entire discussion, it turns out that about two-thirds in the change to the bottom portion of that chart - from May of 2007 to late-2008 - was due to declining stock prices, not people panicking.

While this may have been unintentional, it does raise serious questions about their motives.

Anyone who did hit the sell button over the last year must surely look at that chart and see themselves in that rapidly rising green section at the bottom and wish to become part of the future rise of the orange curve at the top.

But, as it turns out, that green area isn't really what it appears to be.

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The myth about financial myths

Kiplinger.com, the purveyor of various and sundry business publications including the monthly Kiplinger's Personal Finance magazine (a poor cousin to industry leader Money Magazine that is often ridiculed in these pages) files this report on ten financial myths.

Apparently in no particular order, they are:

1 - There's always a hot market somewhere
2 - Real estate behaves differently from other investments
3 - Reliable dividend payers are safer than other stocks
4 - Foreign creditors can drain the U.S. Treasury overnight
5 - Gold is the best place to hide in a lousy economy
6 - Life insurance is not a good investment
7 - The economic downturn dooms the dollar to irrelevance
8 - Mass layoffs reward investors
9 - It's crucial to diversify a stock portfolio by investing style
10 -A near-perfect credit score will get you the best loan rate

Naturally, the glaring omission in this list is something - anything - having to do with an idea that is quickly losing favor among retail investors, namely, "stocks for the long run".

This is particularly true for those individuals who are now at or near retirement and for good reason - their "long run" isn't so long any more.

Kiplinger is likely of the opinion, along with huge swaths of what remains of the financial industry, that this thesis will never be discredited as long as the long run can be extended indefinitely.

They may be right.

About the closest you get to an admission that things aren't going so well in the portfolios of millions of retail investors is number 9 where they talk about Morningstar "style boxes" and how, instead of attempting to fill them all up, maybe you should take the plunge with something a little different, stopping short of recommending one of those new long-short funds that may have been added to your menu of investment fund options.

Geez...

Personal finance magazines are still stuck on stage one of the Five Stages of Grief -Denial.

Of course it was item number five that drew my attention and, for whatever reason, Yahoo! Finance saw fit to make it the "teaser" subtitle on their main page a short time ago.
The truth about gold - yes, please tell us.

Here it is - prepare to be underwhelmed:

MYTH 5. Gold is the best place to hide in a lousy economy. In early February, an ounce of gold traded for $910. That's just where it sat a year ago, when world economies weren't so bad off. But foreign and domestic stocks, real estate, oil and riskier classes of bonds have all tanked since, and now gold looks -- ahem -- as good as gold. However, gold does not typically benefit from a recession. As inflation slows, people buy less jewelry, industry uses less gold, and strapped governments sell reserves to raise cash.

Truth: Gold tends to rally in prosperous times, when you have inflation, easy credit and flush buyers (kind of reminds you of real estate. . . ).

It's important to always keep an eye out for when Money Magazine, Kiplinger, and their ilk start writing glowing editorials about gold because that's when you should be calling the local coin shop to make sure they have enough cash on hand to exchange for the ounces you're about to bring in.

We are still far from reaching that point if this piece is any indication.

If they had provided an unbiased view of things, they'd have simply said:

Myth 5. Gold is a bad investment. Gold pays no dividends and earns no interest making it unworthy of consideration for your investment portfolio.

Truth: Gold has been a very good investment over the last decade - it's about the only thing that has gone up each and every year.

When you read that, go collect your gold and silver coins and bars and make that call.

It seems that the real myth here is the one about those who write about financial myths - that they have your best interests in mind.

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A few million fewer millionaires

Not more than a couple years ago, back when both real estate and stocks were still booming, anyone with a decent size retirement account and a little investment property could count themselves as part of the seven figure club. Of course, the year 2008 changed all that and new details of our vanishing wealth are provided in this CNN/Money report:

Millions are no longer millionaires
The financial crisis has weighed heavily on American households, and millionaires are no exception, according to a report released Wednesday.

The number of American households with a net worth of $1 million or more, excluding the value of their primary residence, fell 27% to 6.7 million in 2008 from an all-time high of 9.2 million the year before, according to a report from market research firm Spectrem Group.
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Affluent households, defined as those with a net worth of $500,000 or more, declined 28% to 11.3 million from 15.7 million.

Even the very rich have not been immune. Households worth $5 million or more, excluding primary residence, fell 28% to 840,000 last year from 1.16 million households in 2007.

Declines in "asset classes available to the nation's wealthiest investors" were blamed for the sudden change in fortune, apparently too few in the upper crust considering cash or gold worthy of their consideration, to their detriment.

Well, it looks like some of them are looking at cash now.

A majority of respondents said they are shifting capital into safer assets such as cash. But about 30% of those surveyed, mostly younger households, indicated that they are still buying stocks.

The report did not bode well for financial advisers. Only 36% of those surveyed said they have a satisfactory relationship with their primary financial adviser. That's down from 85% last year.

Wow.

The double-whammy of plunging home values and plunging stock prices has really put a dent in the business of dispensing financial advice, or so it seems.

I remember a conversation with a co-worker back around 2005 or 2006 who boasted of having hired a financial adviser to manage all their new-found (housing) wealth. His wife had just been laid off and had embarked on a new career in real estate so, naturally, a deeper foray into investment property was the natural way to spend all that home equity, along with a more aggressive stock portfolio.

Sometimes I wonder how these people have fared, but not very often.

Hopefully, this millionaire didn't have all his money in Vegas real estate and financial stocks.
Seriously, this is what comes up when you do a Google image search on millionaire.

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Dow 5,000 and "permanent capitulation"

Above the story($) on the front page of the Money & Investing section of today's Wall Street Journal about how all the most successful hedge fund managers are now plowing their money into dumb 'ol gold comes this report($) of how, under conditions that are not far-fetched at all, the Dow Jones Industrial Average could drop to 5,000.

That duo of revelations must have caused orange juice to induce a bit more indigestion than usual this morning in hundreds of thousands of investors' bellies.

And the number of comments for these two reports in their online incarnation tells an interesting tale about how investor interest remains squarely with equities rather than dumb 'ol gold despite the failings of the former and the impressive gains of the latter so far in the new century, a period that has not been kind to stocks.

Actually, it was no contest - 104 comments for equities and just 8 for dumb 'ol gold.

We'll get to the comments in a second, but first the story about stocks.

Just how low can stocks go?

Despite Friday's small gain, the Dow Jones Industrial Average marked its fourth consecutive week of losses as it tumbled through the 7000-point mark and spiraled to new 12-year lows. The Standard & Poor's 500-stock index is trading below 700 for the first time since 1996.

As earnings estimates are ratcheted down and hopes for a quick economic fix fade, the once-inconceivable notion of returning to Dow 5000 or S&P 500 at 500 looks a little less far-fetched.
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The current 2009 earnings estimate for S&P companies is about $64 a share, down from about $113 last April, according to S&P. Goldman is now predicting $40, having cut its forecast from $53 in late February. Bank of America Merrill Lynch estimates $46 a share, and Citigroup is predicting $51.
At $64, the S&P is trading at about 11 times earnings. At $40, the index is at about 17 times.

According to Goldman's data, the bottom of the 1974 bear market had a forward P/E of 11.3. At the trough in 1982, it was 8.5. Put a multiple of 10 with estimates of $40 to $50 a share and the S&P comes out at 400 and 500.

There's lots more there, none of which can top the Dow 5,000/S&P500 500 angles, but flipping to the comments in the online version reveals a startling, MarketWatch-like 100+ entries led by these words of wisdom from one Jay Adkisson, apparently a Civil War buff, from whence the second half of the title above was extracted:

There is definitely a lot of *permanent* capitulation going on. A friend of mine who sold his company a few years back and retired finally went to cash completely because he and his wife couldn't risk any more market losses, and they are giving up their vacation home. They will never go back into the market, and since they are probably typical of many retirees and near-retirees, this means that a good-sized segment of those who otherwise would have invested in equities are now permanently out of the market -- meaning that the market will not be making permanent gains for some time.

On the other hand, for the rest of us who saw the bubble bursting and didn't suffer any losses, it will soon be a great market to buy -- maybe not until late Fall or early 2010, but that time will come.

On a sort-of-related note, it must be interesting these days to listen to financial advisors explain to their clients why there wasn't safety in a properly diverse asset-allocated portfolio after all .......................

Yes, that must be interesting.................

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Renters wealthier than homeowners?

This report from CNN details the findings in a paper by David Rosnick and Dean Baker at the Center for Economic and Policy Research in which it was discovered that those who have been renting over the last five years are now wealthier than those who "own" their homes.

Whaaaaaat? (think Jon Stewart in a Home Alone pose)

That kind of flies in the face of everything you might hear from the National Association of Realtors about housing being such a great investment, but there it is:

The CEPR also found that people who were renting homes in 2004 will have more wealth in 2009 than those who were owners. That's true for all five wealth groups the study analyzed, from the poorest to the wealthiest.
"The collapse of the housing bubble, which led to the current recession, has already destroyed almost $6 trillion dollars in housing wealth for homeowners," said report co-author Dean Baker. "This reality is compounded by the recent collapse of the stock market. Many baby boomers will only have Social Security and Medicare to rely on in their retirement."

It's important to note that Dean Baker is one of only about two economists in the world who, not only recognized the housing bubble in real time, but took the additional step of cashing out a few years ago, transforming himself into a renter, about whom he speaks so highly now.

As an added bonus, Peter Schiff (also a renter in recent years) makes a guest appearance:

Peter Schiff, president of Euro Pacific Capital, an investment firm specializing in overseas investments and a noted bear on housing market issues, thinks there's a good chance home prices will continue their steep decline.

"Real estate has to be priced like any other goods," he said. "Home prices have to reflect the economic reality. You buy for shelter, not to make money. You don't need to own a house. I'm a perfect example."

He has rented for years and reports that the owners of his current home, after subtracting for property taxes and insurance, are receiving a cash-flow return on their investment of less than 1%.

"Real estate is overpriced if owners get just a 1% return," he said.

It's funny to think that buying a house to make money to fund your retirement was a commonly held view amongst economists a few years ago.

That is, back when they were dismissing the zero-savings rate as being irrelevant in our new modern economy with "financial innovation" that seemingly knew no bounds.

There's no word on whether co-author David Rosnick also rents.

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Secular bear markets and a river in Egypt

I don't know. I suppose that if most of what I did over the last few decades revolved around compelling individual investors to buy stocks for the long run, come what may, it might be difficult to look at things objectively.

Denial is a powerful force in the world and perhaps one of the most under-appreciated.

These days, a lot of people are having a very hard time with the whole idea that individual ownership of stocks (and now real estate) is not the panacea that they once thought.

That doesn't, however, stop them from encouraging individuals to just "tough it out", likely knowing that, eventually, their advice will pay off - whether or not that advice will pay off in time to fund the retirement of a generation of baby boomers is another question entirely.

Word comes this morning from the Wall Street Journal's always-interesting Jason Zweig that it might be some time before things are hunky-dory again.

In this story coming in advance of tomorrow's update of long-term investment returns by finance professor Elroy Dimson of London Business School, the news is decidedly unfriendly for your typical aspiring retiree with money in the stock market.

The good professor estimated that we'll have to wait nine more years before stocks have even half a chance of hitting their highs of 2007. That is, back when millions of baby boomers started eyeing their retirement account balances again as the housing bubble was meeting its pin.

Those aren't very good odds at all - a 50 percent chance in nine years? 2018?

Who knows what the condition of the U.S. or global economy will be by then?

If you're still sticking with the program of "stocks for the long run", maybe this report at Money Magazine will cheer you up. In one of the daffiest assessments of equity markets that have crossed my computer screen in quite some time, Paul J. Lim, a senior editor at Money Magazine explains how the lost decade that just occurred, really wasn't such a loss.

Yes, it's true that the Dow Jones industrial average sits more than 1,000 points below where it was 10 years ago. But that's irrelevant to your investing strategy for three reasons. First, it's an arbitrary amount of time. We're hung up on it because 10, as University of California-Berkeley finance professor Terrance Odean notes, "is a nice round number we can all relate to."

Second, the market's performance over the past decade is a red herring because the period you're judging starts near the absolute pinnacle of irrational exuberance, when stock valuations - as measured by price/earnings ratios - were absurdly high. If you measure from the end of the last bear market, in October 2002 - when stock prices were still higher than average, by the way - you'll see that the Dow has returned 4.5% a year (including dividends) while the Standard & Poor's 500 index has gained 3.4% annually.

Third, as T. Rowe Price financial planner Stuart Ritter notes, "The only people the lost decade accurately applies to are those who invested absolutely nothing before the late 1990s, put all of their money in at the market peak and invested absolutely nothing ever since." If such an unlucky soul does exist, history suggests that he'll be rewarded.

And, the moral of the story is, of course, stick with the plan - stocks for the long run.

Eventually they'll all be right again... time uncertain...

I'll never forget that info-session back in 2001 when I was first coming of age with this whole stock market/retirement planning trip when the Fidelity rep hemmed and hawed when he was asked why we should continue to invest in stocks after an eighteen year run had just come convincingly to an end the year prior.

I asked, "Don't these markets move in long 'secular' cycles of 15 or 20 years? If so, doesn't that mean that we're due for a 'secular' bear market?"

He didn't really know what to say - he was just a twenty-something trying to stick to the script before a crowd of thirty- and forty-somethings who were starting to think seriously about their retirement planning.

Some, more than others, obviously.

Jason Zweig is a fabulous writer and Money Magazine is great for evaluating whether or not you should upgrade your kitchen, but I stopped listening to their investment advice years ago.

That was a good decision.

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Out with the thirty years and out

Last week's WSJ story by Paul Ingrassia about cushy retirement options available to workers at U.S. automakers showed up at MSN Money this morning. That's a good thing, because otherwise it would have been missed.

GM's Plan: Subsidize Our 48-Year-Old Retirees
Lots of taxpayers would like to get the deal UAW workers still get

GM's new restructuring plan seeks another $16.6 billion in government aid -- for now. Chrysler wants an additional $5 billion. The $30 billion that GM has either received or requested since December doesn't count the $8 billion it wants to develop fuel-efficient cars, and another $6 billion it's soliciting from foreign governments.

For these taxpayer subsidies, the government could buy hundreds of thousands of GM cars a month and give them to deserving citizens. Make mine a Corvette, please.

In a brief digression from the point of this story, why is it that these zany proposals are sounding better and better these days?

Buy up millions of cars and give them away to people who could probably use a new set of wheels or pay off millions of mortgages to make the financial industry solvent?

These ideas increasingly appear to be a better alternative than pushing more and more government bailout/stimulus money toward what appears to be a black hole.

Back to the story...

Before deciding what to do with Detroit's demands, uh, requests, government officials first need to confront a fundamental question: How could so many smart people produce such a disastrous result? Make no mistake, there have been many bright minds in the American auto industry over the years -- at the auto makers, the United Auto Workers union, and the components companies. Most of them saw today's troubles coming for years, even decades.

"I frankly don't see how we're going to meet the foreign competition," said Henry Ford II, then chairman and CEO of Ford Motor Co., on May 13, 1971, right after the annual shareholders' meeting. "We've only seen the beginning," he predicted. Regarding American's increasing preference for small cars, Henry II declared: "Mini car, mini profits."

That was a couple years before Detroit agreed to let auto workers retire with full pension and benefits after 30 years on the job, regardless of their age. In practice, that meant a worker could start at age 18, retire at 48, and spend more years collecting a pension and free health care than he or she actually spent working. It wasn't long before even union officials realized they had created a monster.

In 1977, UAW Vice President Irving Bluestone said he was "flabbergasted" that so many workers were retiring at age 55 or younger. "We were aware that the trend to early retirement was escalating . . . but we were surprised at the escalation in 1976," Mr. Bluestone declared. "It is astounding."

None of this is ancient history. The 30-and-out retirement program persists -- a sacred part of the inflated cost structure that makes it unprofitable for Detroit to make small cars in America.

While there are no easy solutions, particularly for those who were made promises that should be kept, generous pensions are a growing "wedge" issue between workers in the public sector and workers in the large non-unionized portion of the private sector.

After hearing so many stories about public employees in California making huge salaries and then "double-dipping" in one way or another in their later years, this growing disparity in retirement benefits is likely to come to a head now that unemployment in the private sector is racing toward levels not seen in decades.

Back when private sector wages were soaring and stocks held in 401k plans were making big advances, income for public employees lagged and "traditional" pensions looked dated.

Then, you could make a case for a more generous retirement system for public workers which, truth be told, is still probably a better way to go through life for most people - get used to a more modest income while you work, then get a stress-free retirement income that was just a little below your last salary.

But now, after public sector incomes played catch-up for years with no big drop-off in retirement benefits, the gap between public and private workers is tilted decidedly toward the former, a development that more people in the private sector will surely protest given the abundance of free time that many of them now have.

This may not end well.

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We're in Bend! Oregon!

If not for the logistics (i.e., hotel room table, awkward laptop keyboard, no slippers, and, most importantly, American Idol coming on in about 15 minutes), after having arrived in Bend, Oregon, there just might be a Jim Kunstler type riff on the end of suburbia.
But, given these constraints, all that can be offered up here is the image above which, for those of you who have been to this town on the eastern slopes of the Cascade Range surely understands, represents conditions that are about as good as they'll ever get for unchecked consumerism in the western U.S.

Apparently, foreclosures accounted for almost 70 percent of all existing home sales during the month of December - we just might move here.

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Target-date funds disappoint

Should anyone be surprised that "target-date" retirement funds failed to shield investors from the storm last year?

In recent years, these were said to be the savior of 401k plans. The idea behind them was simple enough - just keep piling money into the fund whose name corresponds to the year you plan to retire, and some manager somewhere will take care of the rest by buying you a heavy helping of stocks when you're decades away from calling it quits, then shifting to a heavier weighting of bonds as you get older.

According to this report in MarketWatch, things aren't exactly working out as planned.

Target-date retirement funds were supposed to be the greatest thing since sliced bread. Then 2008 happened. And all of the 264 target-date funds sold by the 39 mutual fund firms that market them performed poorly and contrary to expectations.

Indeed, the most conservative target-date retirement funds - those designed to produce income - fell on average 17% in 2008 and the riskiest target date retirement funds - designed for those retiring in 2055 - fell on average a whopping 39.8%, according to a recent report from Ibbotson Associates, a Morningstar company.

Not a single target-date fund had a positive return, according to Tom Idzorek, Ibbotson's director of research and author of the report.

As if there wasn't already enough working against conventional wisdom when it comes to retirement planning, you get results like this.

If I still had a 401k, the bulk of it would probably still be in one of those stable value funds - they always seemed to produce a decent positive return even in the worst of times, but then you never know which insurance company is going to run into trouble these days.

Apparently, no matter how close to retirement you were - at a point in your life where you want stable income - the target-date funds failed.

But what was especially troubling, according to Idzorek, was the disparity in performance among funds for those in or near retirement. Target-date funds designed for those retiring in 2010 -- next year -- were all over the map. The best of the 31 funds with 2010 in their name fell 3.5%, while the worst fell 41.3%.

What gives? To understand the problem, you have to get under the hood of these funds. In short, target-date funds are collections of other mutual funds actively managed by an adviser. Typically, the adviser buys a mix of stock and bond funds, usually from the in-house fund family, and then adjusts the mix over time, reducing the percentage invested in risky assets -- stock funds -- the closer the fund gets to its target date.

But every fund firm has a different take on what a target-date fund is and how it should be managed. Each firm has its own theory on what the mix of stock and bond funds should be. And each firm has its own theory on what's called the glide path, how the mix of stock and bond funds should change as the fund nears its target date.

Thus, funds with the same target date could have entirely different stock-bond mixes: one firm's 2010 might have 20% in stocks while another's could have 40%.

There's a good discussion of risk tolerance and risk capacity at the end, though nothing on the subject of "risk" that is anywhere close to the inanity of this item from a couple weeks ago.

The entire piece is well worth a look.

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