Tag Archives: Investing

Paying for a Child’s Retirement for the Price of a Car

By Larry Luxenberg  

One of the best presents you can give a child is to fund their retirement. And it costs about the same as a modest car. The key to the gift is time. Having a long time to invest is critical but it costs you nothing but patience.

First let me explain how this works and then the four ways it could go wrong.

The initial step is to fund a Roth IRA. A child must have earned income but you can contribute an equivalent sum up to $5,500 a year to the child’s Roth. A Roth provides no deduction on the way in but if you hold it until age 59 1/2, there’s no tax on the way out. A $5,000 contribution to a Roth at age 20 and invested 100 percent in a diversified stock fund, earning the long-term return of stocks, would be worth $587,000 at age 70.

This sounds too easy so what could go wrong?

First, Congress could change the law so that the withdrawal would be taxed.

Secondly, inflation could eat up some or all of the returns. At the 3 percent inflation which has been the U.S. average in recent years, inflation would drive down the purchasing power by a third. Still, it would be a nice bundle to have in retirement.

Third, stocks could have disappointing returns. The longer one owns a diversified fund of stocks, the more likely that returns will be good but there are no guarantees in the stock market.

Finally, the child could mess things up in a variety of ways: invade the account early, change the investing approach or some other, unanticipated way.

Still, for the price of a regular car or less than a full semester at a good college, a parent could prepay a child’s entire retirement. An interesting idea and one I believe in strongly enough to try it.

 

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Good News for Investors

By Larry Luxenberg  

Recently, economic columnist Robert Samuelson wrote a column explaining why so many ordinary Americans perceive their situations as terrible despite what is frequently described as a great economy with record low unemployment.

His argument is that these workers are comparing their situations — lack of raises. a struggle to support their families and to get ahead — with that of a recent golden era. Samuelson maintains that the previous golden era was the result of unrepeatable forces.

This may not seem like good news for investors but their fortunes are not closely tied to workers. The long sluggish recovery that has lasted nearly 10 years is better for investors than the boom/bust of earlier, more robust recoveries with stronger growth but more frequent recessions. Often, what’s good for workers is also good for investors but not always and this may be one of those cases.

What economists at Pimco have termed “The New Normal” may leave workers pining for a bygone era but investors may applaud. Investors have been fretting that the Great Bull Market that began in August, 1982 and carried the Dow Jones Industrial Average to 10,000 in the late 1990s before resuming in March, 2009, may be nearing its end.

Instead, despite trade wars and unraveling of international alliances and general disquiet and upheavel, the long-term picture for investors might remain bright.https://wapo.st/2mClCV4?tid=ss_mail&utm_term=.5a152b7d96be

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The U.K. Returns to Being an Island

By Larry Luxenberg  

Last week we had the referendum heard round the world. Voters in the United Kingdom turned their backs on the Continent after 43 years.

Investors worldwide were fearful and fled equities in droves. In two days the Dow Jones Industrial Average fell 871 points.

And then a strange thing happened. Investors decided that perhaps the sky was not falling after all. Counting a one day run up before the vote, in just four trading days, the Dow had nearly returned to its level of the week before. By the fifth day, it was actually 100 points higher.

This is yet another lesson that investors should not react rashly to emotional events. In the short run, markets are highly unpredictable. Study after study going back a century has shown that investors are likely to hurt themselves by quickly reacting to events and trading emotionally.

The research firm Dalbar has shown that current investors receive about one-third of the return of the mutual funds they invest in because they make ill-timed moves in and out.

It feels uncomfortable to sit there and do nothing while the world is falling apart. But do it anyway. Your wallet will thank you.

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The Danger of Market Timing

By Larry Luxenberg  

The Three Dangerous Times

The three particularly dangerous times for investors: when markets go up, when they go down and when they are flat.

For the last two years, U.S. markets have been in a narrow trading range. Some days the market is up a lot, some days it’s down big. But overall, for two years the broad market is close to flat — up 3 percent a year — a third of the long-term average.

During a long flat period, investors get bored and are often up to mischief, searching for alternatives that promise much and mask danger.

In bear markets — the market often plunges quickly –and  investors are prone to panic and do things that imperil their finances for many years.

When the market is doing well — bull markets — people get exuberant and overconfident and may take on greater risks and obligations than they intend. This sets them up for failure in the next cycle.

Given this bleak picture, what should investors do to improve their odds of success? Investors need to be patient, avoid emotional decisions and think long-term.

None of this is easy but it’s important for a successful investment experience.

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Savings and Tax Time

By Larry Luxenberg  

In a month, personal income taxes are due. You still have time to fund a Regular IRA or a Roth IRA for calendar year 2015.

IRAs are a good way to save for retirement and everyone who can afford to fund an IRA, should consider doing it. There are different eligibility rules for each and which one you should use depends on many factors.

Among the key factors for picking between an IRA and a Roth are your current and future tax rates, when you’ll need the money and where it’s going.

If your tax rate is low now and may be higher in retirement, you might be more inclined to fund a Roth. If your tax rates are the reverse — high now, and low later — you’d be more likely to do an IRA.

Except for higher income people, contributions to an IRA are deductible but taxable on withdrawal. Roth contributions get no deduction but aren’t taxable if taken out after the account has been open for five years and the holder is over age 59 1/2.

If some of your money might go to a charity, a Regular IRA would be good since you won’t owe tax on the distribution (up to $100,000) if you are older than 70 1/2.

If you are younger than 50, you can contribute $5,500 to an IRA or Roth as can your spouse. Those older than 50 can contribute an extra $1,000 annually.

The younger you are, the more time your investments have to work for you. Regular contributions to IRAs or Roths can be a key part of your retirement savings.

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A Dark and Dangerous World?

By Larry Luxenberg  

For years I’ve felt like a lonely optimist in a dark and dangerous world.

In 2007, the U.S. economy was booming. House prices soared, unemployment was rare and anything seemed possible.

Then came the Great Recession, stock market collapse and the world financial system’s near failure. No one knew what to do.

Since that scary winter of 2009, the U.S. economy has rebounded. Car sales have doubled and housing starts quadrupled. The unemployment rate is half the recession peak.

Anecdotally, the pickup is dramatic. Help wanted signs have sprouted in store windows, trucks clog highways and realtors occasionally smile. The stock market has nearly tripled. For the first time in years, U.S. energy independence is possible.

Yet most Americans believe the country is on the wrong path. Only a month ago, the stock market plunged amid a weakening economy and troubles in China.

While problems never disappear, perspective is in order. U.S. GDP is up $3 trillion from the recession low to $17.4 trillion. The number of people with jobs in the U.S. is up by 10 million from 2009 to 148 million now.

Is everything perfect? No. But gloom and doom are overstated. After a scary drop in late August and September, the stock market rebounded and is flat for the year.

An investor must be an optimist and it’s possible they are at least partly right.

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The Sun Doesn’t Always Shine

By Larry Luxenberg  

We now have a solar roof and it takes care of our electrical needs on sunny days but the sun doesn’t always shine. At night, our panels rest. During storms and very cloudy days, the panels aren’t at peak efficiency.

Yet when it comes to personal finances, I generally come across people whose planning assumes that the sun will always shine.

Many of these people are do it yourselfers where one partner in a couple handles the finances and does it well. But what happens when that person gets too busy or injured or sick or passes away?

What about when old age and diminished mental capacity don’t permit them to perform in the way they’d like?

What happens to a couple who are living together for many years when the storms finally roll in?

Not long ago, someone asked me what happens if the bull market ends? Will the stock market go down?

I told him the question is wrong. We know the market always goes up and down.

The long-term trend for a century has been up but we know the market will go down and we need to plan for that.

We enjoy the sunshine and warm weather, the lazy days of summer. But we don’t throw out our umbrellas and raincoats and keep our flashlights handy.

We know that the sun doesn’t always shine and we always need to keep in mind the possibility of stormy days ahead and prepare accordingly.

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Bashing Index Funds

By Larry Luxenberg  

Index Funds have attained a near untouchable status among the financial press and investors. And for good reason. The funds — at least the highly diversified ones — are regularly among the top long-term investments. Recently, a Bloomberg article took an opposite tack, bashing index funds for being mindless machines that let nimble investors exploit their announced intentions. The article is harsh but accurate. Index funds are predictable and not perfect investments but they do serve many investors well. There are approaches that take the index funds as a useful starting point, attempt to preserve what’s good and enhance returns by avoiding some of the index fund flaws. Trading is one significant area. Index funds buy and sell holding whenever an index changes essentially letting the marketplace know what you are going to trade before you do it. A more patient approach to trading can lead to significant gains. For the rest of the gory details, here’s the link to “Can you really game index funds?” http://www.bloombergview.com/articles/2015-07-07/can-you-really-game-index-funds-

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Bond Bubble

By Larry Luxenberg  

If there were a bond bubble, this is what it would look like: trillions of dollars of Eurobonds going for negative interest rates, the 10 year German bund yielding pennies and Mexico promising to pay back bonds in 100 years with an interest rate of 4 percent. More than half of the world’s government bonds are yielding less than one percent. We don’t have any experience with this kind of a world. We know it won’t last forever but we don’t know when and how it will end. We do know that we should be careful in buying bonds. None of this means that we shouldn’t buy bonds or that everyone will lose money. A good guess is that many, if not most, of these bond buyers haven’t thought through the end game and if trouble comes, it will be unexpected. There are many reasons why interest rates are so low. One is that the Great Recession was so terrifying that people still haven’t recovered. They aren’t willing to sign up for risky assets and as a consequence they have made a once safe asset one of the riskiest. As the saying goes, buyer beware.

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A Disciplined Approach to Investing

By Larry Luxenberg  

Like Mining Low Grade Ore

 
Most investors look for a big strike, a huge vein of ore. It’s always possible that they will find it but the odds are heavily against them.

Successful investing is more like mining for low grade ore. It’s a less exciting, methodical process that takes a long time. But with careful attention to strategy and execution, the probability of success is much higher.

Working with low grade ore isn’t as exciting and you’ll never have one of those “Eureka” moments. But neither do you have the frustration of one barren mine after another.

Investors look for the magic stock or the magic fund, a lottery ticket, that will bring them quick riches. In practice what works is a long-term, diversified portfolio with careful attention to minimizing taxes, watching costs and removing emotion from the process.

Those who react to the latest news or are constantly on the lookout for a winner fly in the face of decades of market history. While there is a logic and temptation to that approach, nearly all academic literature belies this notion.

Once in a blue moon, investment lightning strikes. Do you want to put your future on the line with those odds?

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