Rampant Pessimism

Why Investors Flee Equities?

Pessimism among investors has reached epic proportions. The headline above ran last week in the New York Times and led off a discussion of why investors have pulled $130 billion out of the stock market this year.

The previous week, a Times story said “retail investors are not great at trading stocks and many earn poor returns or lose money.” These stories reflect the generally poorly performing markets and terrible economy in recent years.

A generation ago, Businessweek magazine had a cover story on the “Death of Equities.”  Three years after that 1979 article, the greatest bull market of our lifetimes began in August 1982.

Just this week, Bill Gross, the most well known bond manager wrote, “the cult of equity is dying.” It’s dangerous to make predictions since they are frequently wrong. But it’s safe to say that this spate of pessimism, even when well reasoned, is more a reflection of a dismal past than a view into the future.

Investors lurch between despair and euphoria. Risks lurk in both and a successful investor must avoid both extreme pessimism and too much good cheer. Right now most investors can only see a bleak picture and they need to broaden their view.

Secure Retirement Planning

The Right Choices

Recently I talked to someone nearing retirement. The timing wasn’t totally his choice and he was nervous. As he talked I realized he didn’t grasp what critical choices he has to make now or understand the options. He didn’t see where he needed to put the most thought and energy.

Often we sweat the small stuff and don’t grasp the big picture. He couldn’t tell whether he was in good financial shape or not and he didn’t have a way to measure it.

Eventually, I identified the most important choice that he will have to make soon. That choice could determine the comfort and security of his wife for decades if he dies first. Statistically, that is likely to be the case. And yet many people don’t think of this as a real choice or anything important. Or even whether to involve her.

This item is couched in technical language and not flagged in big or bold type. It’s easy to gloss over and down the road you may even forget you had a choice. But its impact could be profound.

Those are the things I like to help people with. Get the big things right and the rest generally falls into place.

Easy and Simple?

The “Simple” Social Security Formula

I was excited to read that Prof. Laurence Kotlikoff had put together a simple formula for deciding when to claim Social Security retirement benefits. Prof. Kotlikoff is one of the country’s top experts on consumer finance and I thought he had found the Holy Grail for one of the most difficult problems in retirement planning. It was disappointing to finally see his “simple formula.” After making some simplifying assumptions, he boils his formula down to 9 variables.

               B(a) = PIA(a) x (1 – e(n)) x (1 + d(n)) x Z(a) + max((.5 x PIA*(a) – PIA(a) x (1+d(n))) x E(a), 0) x (1- u(a,q,n,m)) x D(a)

Here’s the link to the complete article in a recent edition of Forbes Magazine:

http://www.forbes.com/sites/kotlikoff/2012/07/17/when-should-i-take-social-security-a-simple-formula/

http://www.forbes.com/sites/kotlikoff/2012/07/17/when-should-i-take-social-security-a-simple-formula/ 

Frequently I run across people who think that personal finance is easy and simple and that reading a few magazines or newsletters and catching an occasional cable television show on the markets will give them all the information they need. I don’t claim to have all the answers but if you’d like to tackle that formula together, give me a call.