Category Archives: Investing

Negative Interest Rates

By Larry Luxenberg  

Desperately Seeking Yield

Investors are perplexed and concerned about continued low interest rates.

People who think of themselves as conservative investors like to rely on guaranteed fixed interest rates. Over the last six years that hasn’t been much fun.

In early 2009, the Federal Reserve Board lowered their short-term interest rate target to close to zero and it’s remained there ever since. It seems hard to believe but as recently as early 2008, the target was 4.25 percent.

Investors’ choices in this environment are unattractive: they can accept little risk and interest rates of close to zero or take on different kinds of risk.

Many investors refuse to take on risk. In fact, by some estimates as much as $3 trillion is invested at negative interest rates. With a negative interest rate it means that the investor is paying the issuer or custodian to hold their money. They’ll get less money back than they put in.

In a world of seemingly low interest rates forever, investors will take increasingly “clever” or risky moves to get higher yields. They may not recognize the risks until it’s too late but the risks are there. Prudent assessment of risks and an overall plan are the best ways to survive this period.

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International Stocks — Are They Still Good Investments?

By Larry Luxenberg  

The U.S. stock market has been on a tear for nearly five years. It’s sometimes hard to keep that in mind when we have a terrifying dip like we did last week. But over this five year period the U.S. stock market has nearly tripled.

Most foreign stock markets haven’t fared nearly as well. A month ago, the U.S. stock market represented 52 percent of the value of all global stock markets, according to Dimensional Fund Advisors. At year end 2007, the U.S. represented 41 percent of the world stock market value. That may not sound like a big deal but it amounts to $4.7 trillion.

In practical terms, many investors are getting discouraged about international investing when the U.S. is doing so well. But over the long term, international markets have outperformed the U.S.

With only five percent of world population and 25 percent of world Gross Domestic Product, it seems unlikely that in coming decades the U.S. will dominate global stock markets to this extent.

Prudent investors should look beyond the recent past and try to envision the world economy over the long term. If they do, they’ll realize that international stocks should be part of most well diversified portfolios.

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Pension Mistakes of Investors

By Larry Luxenberg  

Pension Woes
Recently the New York Times highlighted the troubles of the New York City pension system. The pool of money held to pay future benefits is at least $100 billion short of where it needs to be.

Experts debate the exact amount but it’s clear that there’s not enough money to cover obligations. The pension troubles consuming the budget, rising from 2 percent of total spending to 11 percent in a decade.

What’s also clear is that this huge institutional investor is making the same mistakes as ordinary, small investors: paying too little attention to something that cries out for focus, failing to properly allocate assets and falling prey to the siren song of unrealistically high projected returns in alluring investments.

It’s a shame that boring old stocks and bonds don’t have the pizzazz of alternative investments — hedge funds, private equity, venture capital.

The Times mentions that the pension system’s investment return goal was unrealistically high at 8 percent annually. Actual returns were two percent a year.

Individuals make the same mistakes and this doesn’t have to be; a little realism and some good planning go a long way toward achieving a successful and comfortable retirement. We can help.

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