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Mom was right…………. September 24, 2015

Posted by forwardfinancialplanning1 in Financial Planning, High Yield Bond Funds, International Equity Funds, Investing-General, Large Cap Growth.
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There was no shortage of parental wisdom in the household of my youth.  And, while neither of my parents had an abundance of formal education, growing up in the Great Depression had taught them many important life lessons.  My mom would frequently remind us to set aside and save some money “for a rainy day.”  It’s a shame that so many Americans failed to learn these important financial axioms.

I’m basing this lament on some recent data released from a survey by bankrate.com.  They found that 30 million Americans had tapped retirement savings in the last 12 months to pay for an unexpected expense. Baby boomers were the most likely age grouping to have done so as some 26% of those aged 50-64 answered that their finances had deteriorated and 17% had used a 401k or similar retirement savings account to pay for an emergency expense.

Some years I spent in the in-bound call center of a major 401k plan administrator also reinforced this message.  Three fourths of the calls we took were to assist a plan participant who was originating a 401k plan loan to themselves.  Likewise, many calls were for “hardship withdrawals” which do even greater damage to a participant’s retirement preparation.  Many callers would comment that they “had to do it because of an unforeseen emergency” such as a car repair, a leaky roof or what have you.  I can remember several poor souls who paid a $100 loan origination fee (levied by their employer) to borrow $1,000 from their balance.

PEOPLE!!!!  —–Cars are going to have problems, roofs are going to leak and kids are going to break their  eye glasses.  These shouldn’t be surprises in life but rather they are certainties……………..the only surprise should be the form in which the emergency will take.   Emergency funds should be in place for emergencies!!!


Does this seem stupid to everyone else too???? February 25, 2015

Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Economic Conditions, Intermediate Term Bond Funds, Long Term Bond Funds, Short Term Bond Funds.
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Read where Germany has just sold 5 year government debt securities at a yield of -.08%. In January, they sold the same securities at -.05%. Also saw where Finland recently issued some government debt at a negative yield. My question for all readers is, “How can this make sense??”

A negative yield on a newly issued bond essentially means that the German/Finnish governments actually GOT PAID to borrow money!!! Some of the explanations for this perverse behavior cite the requirement for commercial banks to hold these high quality debt securities to meet regulatory capital requirements. That is, the banks in a fractional reserve system have to hold something of value to protect their depositors. This makes sense, but wouldn’t the banks accomplish the same thing (and avoid an expense) by simply holding on to their cash? Purchasing an investment that’s guaranteed to lose money is totally illogical. Just the same, I wish I could get paid to borrow money………..

Occasionally, they do something right in D.C. February 14, 2015

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Economic Conditions, Intermediate Term Bond Funds, Long Term Bond Funds, Short Term Bond Funds.
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It’s usually pretty easy to find something to complain about when one considers what’s going on in Washington DC. If not, many in the media would be out of work. However, some recent reading led me to conclude that occasionally, they do something in Washington that could actually be described as “smart”.

It’s no secret that interest rates around the world are at rock bottom levels. U.S. banks and credit unions are paying depositors virtually pennies in interest on substantial balances. The interest yields in Europe and Japan are even lower, which makes US Treasury debt look very favorable to foreigners. Due to this substantial worldwide demand, the US government is able to finance its borrowings at very favorable rates.

How favorable? A year ago, 30 year US Treasury securities yielded about 4%. As of January 30, 2015, this figure was 2.2%. And, the term structure of the US government’s borrowings has lengthened. Treasuries maturing in three years or less comprise only 48% of US government debt compared to 58% six years ago. The portion of debt coming due within the next year is approaching levels last seen in the 1950’s. The government now pays less interest than it did in 2008, despite the fact that the amount of outstanding US debt has more than doubled to $12.5 trillion during this time period.

These circumstances might be akin to an astute household which refinances its mortgage debt when 30 year fixed rates have fallen greatly. Perhaps they lock in a home equity loan to pay off some higher cost debt while interest rates are way down (For the sake of argument, we’ll ignore the fact that they may be collateralizing a previously unsecured debt). And while it must be conceded that excessive debt is never a good thing, it’s highly unlikely that the US government is going to run a budget surplus any time soon. Similarly, it’s a rare household that can buy a house without a mortgage. So, if we accept the notion that the US government is going to borrow (and that the household will borrow for a home purchase) locking in historically low rates for longer periods of time is actually pretty smart behavior.

The tide has turned on mutual fund cash flows December 9, 2013

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Economic Conditions, Equity Mutual Funds, Investing-General.
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Regular readers probably got tired of postings in 2011 and 2012 which at the time, noted the inordinately large cash outflows from stock mutual funds and the enormous inflows into bond mutual funds. (One can check the archive for postings on 12/12/2011, 01/02/2012, 01/10/2012, 8/13/2012 et. al. for details). The main theme of these postings was to point out a possible application of the famed Warren Buffet quote, “Be fearful when others are greedy and greedy when others are fearful.” While not recommending that investors abandon bonds, the main message suggested that stocks might be poised to do well, due to the apprehension of mutual fund investors to commit money to equities. The strong returns experienced in 2013 seem to have validated Buffet’s axiom.

However, the tide appears to have reversed. The attached link from Vanguard notes that for the first time in years, equity funds are attracting strong cash inflows while bond funds are experiencing negative cash flows. The link is:

The article makes for good reading as it suggests that these inflows be noted as a good reason to rebalance one’s portfolio. Vanguard wisely suggests that one should always adhere to one’s long term plan and that maintaining the appropriate asset allocation is an important part of implementing that plan. For most long term investors, this would presently suggest that one’s equity exposure should be trimmed back to its target percentage with a corresponding increase in bond exposure. Of course, this means reducing one’s holdings of a “hot” asset class only to be replaced by the asset class that others are selling.

Easy to follow? No.
Contrarian? Yes
Solid long term financial strategy? Yes

If it’s not the Great Rotation, it must be “market timing”…………. July 16, 2013

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Investing-General, Money Market Mutual Funds.
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Good financial planners discourage market timing, but it’s likely that such wise advice often falls on deaf ears. An examination of recent fund flows illustrates an example of where this may be taking place. Market pundits have been forecasting a “Great Rotation” for many months. For those unfamiliar with this term, it predicts that the substantial cash inflows into bonds (as well bond ETF’s and mutual funds) over the past few years will stop at some point. This line of thinking further suggests that rising interest rates will cause investors to abandon bonds, with the stock market being the obvious place for the money to go. This so-called “great rotation” will punish bond holders who are slow to react and subsequently drive equity prices through the roof.

Well, we recently got a glimpse of what this may look like, and as usual, the conventional wisdom was wrong. Interest rates spiked after Fed Chairman Ben Bernanke’s comments regarding possible reductions in the Fed’s bond buying activity. The rise in interest rates caused major outflows from bond funds as Trim Tabs reported outflows of $67.9 billion in June and another $11.8 billion during the period July 1-11. But did that money rotate into the stock market?

Apparently not. Savings deposits grew by $74.8 billion in June while money market mutual funds saw inflows of $33 billion. Equity funds and ETF’s took in only $20.8 billion from June 1 through July 11. Not much of a rotation…………

Further thought regarding these developments suggests that the huge inflows into these cash like investments are not being drawn by the expectation of investment returns. After all, saving rates and money market fund yields are practically zero. The only logical explanation is that the funds are being “parked” within these cash equivalents until their owners figure out where to go next. Hmmm…looks like market timing to me.

It’s deja vue all over again in the bond market April 17, 2013

Posted by forwardfinancialplanning1 in Bond Index Funds, Bond Mutual Funds, Intermediate Term Bond Funds, Long Term Bond Funds.
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We’re sure that Yogi Berra would have some words of wisdom to describe what’s taken place in the bond market this year. The year began with all of the “smart money” heralding the Great Rotation from grossly overpriced bonds into somewhat underloved stocks. And, for the first eight weeks or so, it appeared that they were correct. The interest rate on ten Year US Treasuries flirted with 2.00% and the Barclay’s US Aggregate Bond Index (a good proxy for the general bond market) actually reported a loss (-0.12%) for the first quarter. Stock prices rose and equity mutual funds reported cash inflows. Pundits everywhere were forecasting still more of the same in the second quarter.

However, here we are in mid-April and the interest rate on the Ten Year US Treasury has not only completely retraced its ascent, it has actually fallen to 1.70%, below its December 31, 2012 close of 1.76%. And, all of the professional money managers who had shorted bonds are licking their wounds and scrambling to cover their positions. Does this retreat to lower interest rates make sense? Perhaps not, but we clearly must be reminded from time to time of the wisdom of John Maynard Keynes’ observation, that “the market can stay irrational longer than you can stay solvent.”

Stocks becoming scarce March 24, 2013

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Investing-General.
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For more than 18 months, we’ve been posting about the plethora of “fearful” investors and not surprisingly, the stock markt has done well during this period. It’commonly said that “a bull market climbs a wall of worry” and the huge cash inflows into bond mutual funds clearly confirms that many are worried about things both great and small.

But a recnt article in USA Today called our attention to yet another circumstance that may bode well for the equity markets in the future. There are simply fewer and fewer publicly traded companies whose shares are being offered on a stock exchange. From year end 2000 to 2012, the number of publicly traded stocks in the Wilshire 5000 (a well known measure of the “total stock market”) has fallen from 6,639 to 3,687. The reasons for this are varied (mergers, going private, et. al.) but the simple fact remains that there are fewer investible exchange traded company stocks from which to choose.

Diminished supply generally causes price to rise, even if demand does not increase. Will this be the case with stock prices? We’ll see how the future unfolds, but one has to ask, “With the U.S. Government and corporations flooding the bond market with new issuance and this shrinkage of equity securities taking place, where will the “smart money be going?”

Has the bull market run its course? March 19, 2013

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Investing-General.
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We’ve been blogging for numerous months regarding the abnormal degree of risk aversion being displayed by market participants. This has been manifested most decidedly by the huge cash inflows into bond mutual funds and the tremendous outflows from stock mutual funds. The financial press has recently been noting that virtually all of the stock market losses generated in the 2007-2009 bear market have been restored and that the risk averse are reconsidering their fears.

We’re even seeing numerous articles with titles such as “How to Learn to Love (Stocks) Again” (Kiplinger’s, April 2013) begin to grace the newstands.

These factors might cause our normally contrarian nature to suggest that the “party’s nearly over for stocks”. After all, the notorious American Association of Individual Investors survey recently found that 48% of respondents are bullish on the stock market, which is well above its long term average of 38%. Numerous money managers cite this regular AAII survey as a nearly “sure-fire” indicator to “do the opposite” which would suggest that the stock market’s headed for a fall.

Well, it’s been said that the most dangerous words in investing are, “this time it’s different”, but perhaps that may actually be the circumstance at present. The forward looking stock market P/E ratio is about 13-14 times projected earnings which is clearly not excessive when compared to its historical levels. And, with interest rates on 10 year Treasuries hovering around 2%, the bond market’s not providing much that’s an attractive alternative to equities. But, probably the most overwhelming statistic comes from re-examining those mutual fund flows.

Some are suggesting that the $41 billion January 2013 inflows into stock mutual funds indicate that the “Great Rotation” from bonds to stocks is already well underway. But, history has shown that stock funds commonly receive inflows in January as investors put year end bonuses to work. And, when one considers that this $41 billion pales in comparison to the $548 billion that exited stock funds between 2008 and 2012, it’s easy to conclude that a lot of potential stock purchasing power is still sitting on the sidelines.

So, while our crystal ball is not working any better today than it has in the past, it appears that there are more reasons to want to own stocks than to eschew them.

Overbought bonds–oversold stocks–another posting March 3, 2013

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Investing-General.
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At the risk of sounding like the proverbial “broken record” (for those under 40, that’s a music recording that sticks and continuously replays the same track), we’ve uncovered even more evidence that there remains a good deal of skepticism about stocks (which we feel is healthy) while bonds seem poised for a period of tough sledding. Regular readers will note that we’ve posted on this very subject at least five times over the past 18 months. But, here it is one more time………

Bond yields are at record lows and as we all know, that means bond prices are in the stratosphere. The chase for yield has driven the riskiest parts of the bond market into treacherous waters. Based on the Bank of America Merrill Lynch Global High Yield Index, the spread between high yield bonds and government debt has declined by 16.69% since 2008 and now sits at about 5.25%. In 2012, $33 billion was poured into junk bond mutual funds and ETF’s which represented a 55% increase over the previous year. To paraphrase a quote from a US Supreme Court Justice about pornography, “I can’t describe irrational exuberance in bonds, but I know it when I see it.”

Equities, on the other hand, are underowned. Gallup released a report last April that noted that only 53% of households owned stocks which was down from 65% in 2007. This 53% figure was the lowest reading since Gallup began conducting this annual survey in 1998. Even more recently in June 2012, the Federal Reserve’s Survey of Consumer Finances reported that households owning equities fell below 50% for the first time in decades. So, while the stock run-up in January and February may cause one to search for signs of an imminent correction, there’s ample evidence that many potential buyers are still on the sidelines.

Are others becoming greedy? February 15, 2013

Posted by forwardfinancialplanning1 in Bond Mutual Funds, Equity Mutual Funds, Investing-General.
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Over the past two years we’ve posted several times (Dec 14, 2011, Jan 2, 2012, Jan 10, 2012 and Aug 13, 2012) commenting that the enormous cash inflows into bond mutual funds indicated that “others are fearful”. And, not surprisingly, the equity markets have turned in a stellar performance during this time frame.

However, there may be signs that this fear is receding and of course, in the investing world, fear is usually replaced by greed. In January, equity mutual funds saw a net inflow of $34 billion which represented the largest single monthly increase since January 1996. This rush to stocks mutual funds and ETF’s was roughly double the equity inflows of January 2012.

Likewise, the markets didn’t disappoint, with the Dow turning in its best January performance since 1994 and the S&P 500 surpassing every January since 1997.

Does this mean that the rising market that started in March of 2009 is due to fall? Perhaps this will be the case but one might argue that the bull still has “a ways to run.” Bonds, which are the most logical financial alternative to stocks, don’t look very appealing with a 10 year Treasury yield hovering around 2%. Commodities are notoriously volatile and gold appears to be range-bound after breaking out of a 20+ year slump. Real Estate burned so many people during the 2007-08 meltdown that it might be difficult to convince the masses to plunge back into this arena.

So, there may not be a compelling argument against stocks, other than the fact that they have come a long way since March 2009. But, there are definitely clouds starting to form on the horizon and investors should ignore these warning signs at their peril.