Permanent Value

Week In Review – 2/13/15

Bruce Doole
February 13th, 2015

How To Live A Happier Financial Life

Biggest time waster: commuting
I don’t look back at my career with many regrets—except commuting. NJ Transit, the commuter rail system that runs trains into New York City, stole countless hours that I would love to have back.

I have come to view the classic trade-off—accepting a long commute as the price of a big house in the ’burbs—as a pact with the devil. Indeed, research suggests commuting is terrible for happiness. One example: A study in Sweden found that a long commute increases the risk that a couple will separate by 40%.

Best investment attribute: humility
Wall Street wants you to believe you can beat the market, because market-beating efforts are a big moneymaker—for financial firms. But it hasn’t worked out so well for investors.

Yes, Warren Buffett has beaten the market over a lifetime of investing. But there aren’t many others.

The math of investing is brutal. Before costs, we collectively earn the market’s return. After costs, investors—as a group—must inevitably lag behind.

Trading stocks may offer an adrenaline rush and buying actively managed funds can allow us to dream of riches, just like lottery tickets. But managing money should be about making money, not entertainment. If you want to notch decent returns, put your ego aside and put your money in broadly diversified index funds with rock-bottom annual expenses.

Key to financial success: cheap housing
A third of the money spent by the typical household goes toward housing. Add car payments and other transportation costs, and you’re at more than half. My advice: Try to keep those two costs well below 50% of your income, especially in your early adult years.

The less you spend each month on housing, cars, utilities and other fixed costs, the less financial stress you’ll suffer. You’ll also have more money for discretionary “fun” spending, be in better shape if you lose your job, and need less income to sustain your standard of living once retired.

Most important, low fixed costs make it easier to save a hefty sum every month—and that, more than anything, will drive your financial success. I’ve met thousands of ordinary Americans who have amassed seven-figure portfolios. The vast majority share one attribute: They’re great savers.

Best way to spend money: experiences
I believe money can buy happiness, but you have to spend with care. My advice: Use your spare cash for experiences, not possessions. Pay for the family vacation. Go to a concert. Head out to dinner with friends. This will strike many as counterintuitive. Possessions seem appealing, because they have lasting value, while experiences leave us with nothing tangible.

But this is also the reason experiences can bring more happiness: We have not only the event itself, but also the anticipation before and the fond memories after—and those memories aren’t soiled by the messy reality of some object that gets dirty, breaks down and is eventually discarded.

Top financial goal: not working for money
Unless you have enough saved for retirement, you need an income. But if possible, never work just for a paycheck. I believe the keys to a fulfilling life are spending our days doing what we’re passionate about and our evenings with friends and family.

Problem is, the career that makes us happy in our 20s may not be satisfying in our 40s—and the new career we want to pursue may not be as lucrative. What to do?

Avoid the acquisition treadmill of bigger homes and better cars, and instead save like crazy in your 20s and 30s. Do that, and you could buy yourself the freedom to spend the rest of your life on your terms, rather than one dictated by car leases, credit-card bills and mortgage payments.

– Jonathan Clements, The Wall Street Journal

Week In Review – 2/6/15

Bruce Doole
February 6th, 2015

Roubini, O’Neill: Oil Prices Will Rise Again Soon
The global economists disagree, though, on where oil prices will end the year

Economists Nouriel Roubini and Jim O’Neill may disagree on where oil prices are headed precisely, but they both see it strengthening in 2015, according to interviews Wednesday on Bloomberg TV.

When asked if oil had most likely hit a bottom, Roubini said “yes.” His reasoning? “The fall in oil prices is leading to a reduction in [the number of] oil rigs in the U.S., and that is going to lead to a lag in production,” explained the New York University professor, who also chairs Roubini Global Economics.

“Other producers with high marginal costs will produce less, and everybody will invest less in capacity,” Roubini said, noting that capital expenditures in the sector are “going to be down 25%-35% this year.

“The fundamentals suggest that things are gradually going higher to $60-$65 per barrel by year end,” Roubini noted.

When asked whether OPEC or U.S. shale producers will blink first and cut production, the economist said, “I don’t see Saudi Arabia blinking any time soon.”

O’Neill’s View

O’Neill, former chairman of Goldman Sachs Asset Management International, is even more upbeat on where the commodity is headed.

“It has fallen so dramatically from November, on top of an already powerful trend,” O’Neill said. “I hope what we are seeing today this is part of a reversal. I see the right price for oil as $80 a barrel, as I thought three years ago.”

There are reasons for a reversal (on the upside) to occur, he explained. “It is not, for the big players, in their long-term interest for oil to continue dropping” in price, “and that includes the United States.”

While stable oil prices are something that “never happens,” O’Neill sees them moving “to $70-$80” per barrel by year end.

As for the current strength of the U.S. dollar, “It’s remarkable,” the economist said.

But a strong dollar may not be the best thing for the U.S.’ continuing recovery.

“I don’t see it in the interest of the United States to go back to [increases in the value of the dollar like those of] the mid-‘80s and the late-‘90s,” O’Neill said. “If I’m the U.S. Treasury secretary, I am not going to allow it.”

– Janet Levaux, Think Advisor

Week in Review (5/8/14)

Bruce Doole
May 8th, 2014

Analysis: How Inflation Affects a Portfolio

Portfolio Options

The past 20-plus years have provided generally favorable conditions for a 60/40 (stock/bond) portfolio. Interest rates have been in decline since 1982 — witness the 6.4% average annualized return for U.S. bonds since 1991 — and inflation has averaged 2.5% since 1991. Both of these factors provided a tailwind for bonds.

Yet should inflation and interest rates both begin to rise, U.S. bonds will face a stiff headwind. It will be vitally important to build multi-asset portfolios that include diverse ingredients that are more resilient to the headwind of rising rates and inflation — such as commodities and real estate. The venerable, but underdiversified, 60/40 portfolio is not positioned to thrive during such conditions.

Among the portfolio options, the inflation-adjusted performance of the 60/40 portfolio was devastated during periods of high inflation, dropping to a median net return of 2.67% from a median gross return of 9.46%. During the more favorable periods of low inflation, the 60/40 portfolio showed a much smaller difference between gross and net performance, with an 11.86% gross return vs. a 9.37% net return.

The 60/40 portfolio is highly vulnerable to inflation because of the 40% allocation to bonds, which suffer in periods of high inflation. The inflation-adjusted performance of the seven-asset portfolio shows more downside protection in times of high inflation, largely because of the inclusion of commodities: Its median gross return of 13.68% in high inflation periods fell to a more manageable 6.66% when adjusted for inflation.

Inflation’s Impact

It’s impossible to evaluate asset class performance without factoring in the impact of inflation on returns. When inflation is factored into performance, every asset class — and both portfolios — had higher net returns during periods of low inflation except one: commodities. The inflation-adjusted net performance of commodities was 18.31% during periods of high inflation — surprisingly close to the asset class’ 24.66% gross performance during periods of high inflation.

The net returns of U.S. bonds also suffered greatly when inflation was high. Notice that when inflation was high, U.S. bonds had gross returns of 7.4% but inflation-adjusted returns of only 2.18%. The real-world (net) performance of U.S. bonds obviously favors periods of low inflation and is hurt during periods of high inflation.

The inflation-adjusted performance of real estate is also better during periods of low inflation, whereas gross returns were basically the same during high and low inflation.

This Week’s Economic Data

Jobless claims rose to 344,000 for the week of April 26.

The ISM Manufacturing Index rose 1.2 points to a better-than-expected level of 54.9.

The unemployment rate fell to 6.3% in March.

 

Source: Financial Planning Magazine/ Ivy Fund