Financing retirement

Risk Happens Fast

As last night’s 8.2 magnitude earthquake in Mexico illustrates, risk happens fast. We are now conditioned to three beliefs: things will continue as they are today indefinitely, the Federal Reserve will always save us, and we’ll be able to dodge out of the way.

Nine years ago today, that wasn’t the case. One of the largest investment banks, Lehman Brothers, was allowed to go bankrupt and default on its bonds. The stock market fell 25% in one month. The decision to let Lehman Brothers sink beneath the waves was a political choice, based on traditional attitudes towards free capital markets, and one lesson we all learned was that some corporations are “too big to fail.” The global political aftermath of the Lehman Brothers debacle was so painful that it’s doubtful it would happen again.

But the choice to rescue any and all carries risks as well, doesn’t it? We risk rescuing businesses which OUGHT TO FAIL and we reduce the efficiency and effectiveness of the global economy as a result.

It’s worth remembering also that almost nobody was able to dodge out of the way of the Lehman default. Our asset allocations going into the chaos determined our overall performance. As Mark Hulbert and Doug Kass have written, risk happens fast, too fast to dodge out of the way. Diversification has a price, but it also has a benefit.

Read more here.

We send our prayers to those damaged by the earthquake and by Hurricanes Harvey and Irma. It’s a busy world out there.

Are Small Stocks Leaving the Party?

The market for small stocks just turned negative for the year. That’s big news, and you aren’t likely to hear it elsewhere because it disrupts the narrative of a rising stock market.

Why is it happening? This article provides more data to suggest stock market overvaluation. In this case, it’s the small stock markets, exemplified by the Russell 2000 Index. What’s more, this downturn is a divergence: the performance of the Russell 2000 Index is now negative for the year whereas the market for large cap stocks is up. Shades of 2000.

However, this mild decline in the small stock arena, combined with the insecurity created by terrorism in Europe, is likely to trigger a Federal Reserve stall of plans to raise interest rates. So a decline is by no means certain. We simply need to remain aware. Since we are diversified and modestly defensive, if a real downturn DOES occur, we’ll be buyers. When that will actually happen is anyone’s guess.

The Biggest Iceberg Of Unrecognized Risk

It’s a ship-killer.

While we obsess about the stock market, an even-bigger financial challenge is possibly looming in the future. Yet few people are paying attention.

Debt has once again risen to outlandish proportions. Especially, state-driven debt and pension obligations may have reached a level which is impossible to pay back.

Read more about yet another state’s financial struggle here.

Why don’t we clearly know if these massive commitments are fundable?

Because we don’t know how much the economy will grow in the future.

Also we don’t know if sanity will emerge and spending will be reduced.

And, finally, we don’t know what actuaries will define as future contribution requirements for the large pension plans.

All this has deep implications for our economy and especially our bond markets. As investors, diversification is key, since we can’t really know where and when debt defaults might occur, if ever.

To help with this, we’re keep municipal bond investors diversified into nation-wide municipal bond mutual funds and not just state-of-residence-only mutual funds. Yes, you’ll pay a bit more taxes, but you’ll probably be safer.

In the taxable bond arena, we’ll keep most of our long term bonds in our asset allocation funds, so the managers have a non-bond place to run if a crisis suddenly pops up.

Most likely we’ll simply muddle by, as tends to happen. Patience, courage, and discipline.

Have a great weekend.

What is different about the S&P 500’s longest losing streak in 8 years…

…Is that it’s a paper cut. Most days the market has barely declined at all. We don’t know what will happen. So far, not much.

To prevent becoming too concerned about day-to-day price volatility, check out this ultra-long stock market chart here.

Fascinating! Investing works. Stay the course…even if it gets a bit bumpy.

How to create wealth which lasts generations

One of my fascinations is how to pass on wealth between generations. It amazes me how people can succeed magnificently at wealth transfers, and can even prepare the following generations for wealth which they themselves never enjoyed. Or sometimes they can blow things to shreds. Life is a lot harder than we would like to realize, and providing for future generations in terms of education and actual wealth is a profound blessing. There’s a lot to learn from the European and Asian families who have managed this successfully for centuries. Read here what billionaires do.