Trovena Weblog

“Stocks Tarnished by ‘Lost Decade:’ U.S. Shares in Longest Funk Since 1970s”

That was the headline in a Wednesday, March 26th Wall Street Journal, article by E.S. Browning.  The article made the following additional claims:

“The Stock market is trading right where it was nine years ago.  Stocks, long touted as the best investment for the long term, have been one of the worst investments over the nine-year period, trounced even by lowly Treasury bonds.”

“…the S&P 500 has risen an average of just 1.3% a year over the past 10 years,…it has fallen 0.37% a year [for the past nine years] and for the past eight, it is off 1.4% a year.”

In reading this, I could not help but get a little angry, for two reasons.  First, the information is plain wrong, or very misleading at best.  Second, once again the media’s failure to report the whole story is letting the money management world off the hook.  Let me address these issues one at a time.

Do you make charitable contributions to your alma mater?

RING!  RING!

Me:  "Hello?"

Voice on the other end:  "Hello, may I speak with Eric?"

Me:  "You got him."

Voice on the other end:  "Hi Eric this is Jimmie from the USC Annual Giving office.  I'm currently a business major, about to finish my junior year."

Me:  "Cool.  I was a business major."  (of course, they already knew that)

Jimmie:  "That's great.  Did you live on campus?  I live in Webb Tower."

Me:  "No way, I lived in Webb Tower!  In fact, I was an RA there."  (and of course, they already knew that too)

Jimmie:  "You should see the remodeling that they have done to the place.  The whole building has wireless Internet.  I love living there."

Me:  "Glad to hear that.  I had some great times in that building."

Jimmie:  "Of course, we rely on contributions from alumni like yourself to continually update and modernize the campus facilities, as well as attract world class faculty.  We thank you for your generous donation last year.  Can we count on a larger contribution this year?"

Me:  "Sure, what the heck."

This morning, I read an article entitled, "The Key to Alumni Giving" in The Journal of Queen's University in Ontario, Canada.  It is an interesting insight to the behind the scenes work of the University fundraisers at their various levels.

What is Planned Giving?

The concept of planned giving is anything but new.  In fact, my guess is that it has been going on for a few centuries.  Recently, however, there seems to be a buzz in the non-profit, fundraising community around planned giving.  "What is it?"  "How does it work?"  Most importantly, "how do we get some of it?"

The origin and rise of the 401(k)

Let's say you are 65 years old.  Which sounds like more money?

• $455,140 now, or
• $3,000 per month for life.

It wasn't too long ago (if one generation counts as "not too long ago") when pensions were considered the default retirement plan for most Americans.  Work for a good company, get your gold pen at retirement (if you're retired, what do you need a fancy pen for?), and sit back while the pension money rolls in.  This is where the phrase "seniors on a fixed income" originated.  Between Social Security and pension income, their income was not expected to increase much over time.  Conversely, inflation during the 70s and early 80s far outpaced any increase that they could expect in retirement income.  Sadly, standards of living were ravaged.

In the 1980s, an obscure piece of tax code, section 401(k), ushered in the largest and most popular retirement plan for an entire generation of Americans, and perhaps more to come.

Here's a Housing Bailout Plan that I can support

Let me start by saying that I am opposed to a housing bailout.  In theory, at least.  My basic opposition to a housing bailout can be summarized in two words:  Moral Hazard.

Far too many of the homeowners who are now going into foreclosure or in danger or doing so were speculators/investors, or buyers who bought way more house than they could afford with the expectation that prices would continue to rise.  In other words, they were also speculators.  The fact that prices stopped rising should not mean that taxpayer money comes to the rescue.  This would violate everything I believe about free capital markets.

Moral hazard simply means that risk, when taken with the hope of reward, must actually bear the consequences of that risk.  If government intervention prevents that from happening, an increasingly high level of risk taking will take place next time around, to the extent that the systemic consequences will be too high for all of us to bear.

But here's my take.  There is a lot of talk going on about how the housing crisis will bring the economy down to its knees if left to its own devices.  Not sure I buy that, but it seems that our leaders have.  Due to this, there appears to be bi-partisan support for a bailout of some form.

While, I remain philosophically opposed to a bailout (and don't try to rename it, any government action to aid failing homeowners is a bailout), if one is going to happen anyway, here is what I would support.

Time Magazine: "Ignore the Headlines"

There was an article in Time Magazine a couple of weeks ago titled, "Ignore the Headlines."  Ironically, I couldn't agree more with the headline, but less with the content of the article.  So, I suppose in this case, I would argue, "read the headline, ignore the article."

Essentially, the article give a snippet of advice from famed investor, Peter Lynch, that there has always been news to make investors wary, but despite the gloom and doom headlines of each era, investing in stocks over the long term has been a good thing.  This much I agree with.

But then the writer digresses to real estate.  He makes the mistake of quoting the Chief Economist of the mortgage lending firm, Lending Tree.

What do the terms "fee-only" and "fiduciary" mean?

“It is difficult to get a man to understand something when his salary depends on his not understanding it."

-Upton Sinclair

A quiet battle has been brewing in the financial advisory business over advisor compensation, and more importantly, advisors' fiduciary duties. 

Identifying your risk tolerance

This was in response to a recent press request that our office received.  The journalist, Don Korn of Black Enterprise Magazine, was writing an article about the importance of identifying your risk tolerance prior to investing.  His publisher was looking for an online risk tolerance questionnaire that they could direct readers to.

The problem is that all risk tolerance questionnaires are inherently flawed.  They may provide a decent starting point for an investor or adviser, but they are generally too easy for the user to "game" their answers.  Most investors taking such a questionnaire, have a predetermined notion of what they believe to be their risk tolerance.

The internet is certainly not at a loss for risk tolerance questionnaires.  Most of the major money sites have some version.  One of the better ones is found at MSN Money.  The questions are interesting, and not necessarily in the format that you might expect for an investment risk tolerance questionnaire.

Re-Defining Risk

In my last post, I believe I succeeded in putting any unwitting readers to sleep by providing the academic/economic definitions of investment risk.  However, in real life, there are two risks that we see on a regular basis that I think are much more important to address.