For the first time in my life, I am being asked when I plan to retire. It seems like only yesterday, when as a ten or twelve year old, I would sit in church on Sunday mornings thinking I would never finish my education, let alone turn sixty-five, then considered a normal retirement age. Now I am sixty-seven and advising clients on retirement planning.
Sooner or later, almost every retired client of our firm; a young sixty something or the very old; the moderately wealthy or the very rich; the big livers or thrifty old ladies, all ask the same question: “Will I run out of money in my lifetime?” I have come to the conclusion that no matter how wealthy you are, you will know you are old when you think you might run out of money. (more…)
The United States and the world suffered through a miserable quarter of political and economic disappointments. The Arab Spring turned into an Arab nightmare as Egypt’s President Morsi was ousted in a military coup, leaving the country in a state of civil unrest. Citizens of neighboring Syria, suffering through a seemingly endless civil war, were unbelievably subjected to a ruthless poison gas attack that killed fourteen hundred people, many of them children. A stunned world watched as President Obama’s threatened missile retaliation was averted at the eleventh hour by the almost fictional villain, former KGB Chief and now Russian President Vladmir Putin, who brokered a deal for peace in exchange for the destruction of Syria’s chemical weapons stockpiles. In late September, there was an Al-Qaeda-led massacre in a Kenyan shopping center. Kenya, we believed, is one of the more peaceful nations in Africa. Finally, a deranged man attacked the Naval Shipyard in Washington, resulting in twelve deaths. (more…)
‘Uncertainty fatigue’ has set in among investors
By Eileen Ambrose, The Baltimore Sun October 13, 2013
Not too long ago someone asked me what kind of an investor I was. I was tempted to make a joke of the question and answer simply, “A good one.” But then I thought of one of my old professors at Columbia Business School, Benjamin Graham, and I realized the depth of the question.
Graham lived from 1894 to 1976, wrote extensively, and was widely accepted as one of the most influential investment minds of all-time. He was credited with educating many investment luminaries including Warren Buffet, former Goldman Sachs partner Leon Cooperman, Mario Gabelli of the Gabelli Asset Management and, of course, me! (more…)
The results for the second quarter were good. We estimate that the domestic economy, supported by continued gains in housing and solid automobile sales, expanded at a rate of 1.7% in Q2 2013. The current economic expansion, which began in February 2009, is now 52 months old and approaching the average 57 month expansion in the post WWII period.
If we view this recovery in terms of employment, corporate profits, and gross domestic product growth, it is clear employment is the laggard. One possible explanation could be that our economy is becoming more productive, benefitting from investments in the information revolution, which are more widespread than previously thought. This development has lowered labor needs. Another explanation could be that corporations were surprised at the suddenness and the magnitude of the fall in the economy in 2008. The recent credit crisis was fueled by the bankruptcy of Lehman Brothers, which resulted in the bankruptcies of General Motors and Chrysler. These events pushed any number of companies to the brink of insolvency. Managements, shocked by the closing of credit markets, became very reluctant to add full-time employees, contributing to the current employment woes. The third factor potentially retarding employment levels is the uncertainty surrounding the implementation of the Affordable Care Act, which impacts 18% of the US economy. Many of the details of the program are unresolved.
It’s the Economy, Stupid — Bill Clinton, 1992
It’s the Fed, Stupid — Hardesty Capital Management, 2013
The stock market performed exceptionally well in the first quarter of 2013. In fact, the Dow Jones Industrial Average broke through its 2007 high of 14,400 on March 11 and finished the quarter with a total return of 11.9%. The S&P 500 flirted with its all-time high and closed the quarter at 1,569, just above its former peak of 1,565, and had a total return of 10.6%.
Also notable was the failure of the bond market to keep pace with the stock market, confirming our long-held fears that the bond market was vulnerable to a rise in yields, which occurred in the quarter. The 10-year Treasury yield rose from an all-time low of 1.41% in July 2012 to 2.06% on March 11, only to fall back to 1.86% by March 31. With interest rates at such low levels, even small movements resulted in extraordinary price volatility, both up and down, in bonds.
Since the S&P 500’s closing low of 683 on March 6, 2009, the index has recovered 130% to 1,569. It took the S&P over 4 years to recover to its old highs. Investors have remained fearful of equities long after the 2009 lows were established. As the chart on the next page indicates, large outflows of funds from equity mutual funds continued almost monthly until early 2013. The big gains in equity prices have been accompanied by large increases in earnings. This means that the market is paying the same (or even lower!) price per dollar of earnings. As a result, valuations remain very reasonable (see chart, back page). In addition, many retail stock brokers report strong resistance on the part of small investors to increasing exposure to equities. Perverse as this may sound, the absence of the small investor provides a large reservoir of funds for future equity investment, which in turn will support or even increase equity prices down the road. (more…)
Ignoring political drama in Washington could be the new norm
By Eileen Ambrose, The Baltimore Sun 7:30 p.m. EST, March 8, 2013
Baltimore-area money managers like what they see ahead for the U.S. economy.
By Gary Haber, The Baltimore Business Journal Jan 25, 2013, 6:00am EST
Despite an acrimonious, bordering on uncivilized, debate between the executive and legislative branches of the government, a major tax reform bill was passed and signed into law in the predawn hours of January 2nd. Regardless of when the legislation was signed, it appears our nation has avoided a journey into an economic twilight zone known as the “fiscal cliff.”
The eleventh-hour rescue appears to have temporarily avoided a crisis, but virtually no party to the legislation is satisfied with the outcome. Some would say that the can was again kicked down the road, and major issues remain. Sometime in the first quarter of 2013, perhaps as early as March 1st, additional authorizations will be necessary to increase the Federal debt limit, which created a near-crisis in August of 2011 when it was last addressed. The consequence of that crisis was the loss of the country’s AAA bond rating, and it appears this debt limit problem will be every bit as contentious as that of 18 months ago. Be assured that the hostile environment in Washington associated with economic issues will be with us for quite some time. (more…)
Over the last 30 years, there have been monumental changes to the investment advisory industry in our region. Many great, locally owned firms, like Alex Brown and Mercantile Safe Deposit & Trust, are gone. Others, such as T. Rowe Price and Legg Mason, survived and thrived. Dozens of small money management firms have been created as professionals left larger organizations over the years to start their own. As a result of these movements, the local investment advisory landscape is currently dominated by brokers, Registered Investment Advisors, and banks. RIAs seem to be growing the fastest at the moment, primarily because that business model appeals the most to both clients and practitioners.
The brokerage industry has witnessed mass defections to the RIA model as brokers have struggled with the shrinking compensation levels they have been forced to endure. Most of the compensation to brokers in the past was centered on transaction-based fees and 12b-1 fees from mutual funds. As brokerage firms reduced payouts and attempted to shift clients toward an assetbased fee, many in the industry decided to start their own practice as RIAs. Entire companies were formed to provide platforms for these disenfranchised brokers to start their businesses. (more…)
If you own stock, the fiscal cliff could be your chance to cash in.
By Gary Haber, The Baltimore Business Journal Dec 14, 2012, 6:00am EST
Economically, the doldrums settled in this summer. This is not altogether surprising considering the myriad issues confronting countries all over the world. The European financial crisis, the Fiscal Cliff, and the Presidential election are all weighing on the minds of corporate and government leaders. As we approach crunch time for these major events, rhetoric has increased and economic activity has slowed. During the quarter, U.S. economic activity stumbled along at a growth rate of less than 2%. This frustrating performance resulted in a continuation of high levels of unemployment and a significant number of workers who have ceased looking for work. This subset of discouraged workers, known as “Series U-6,” has now reached 6.6% of the workforce, and when added to the official unemployment rate of 8.1%, results in a level of 14.7%. While U-6 has improved, it is still unacceptably high.
In spite of these pending issues, our economy continues to push ahead, albeit at a slower-than-desired rate. This, however, is much better than many other parts of the world. Cracks appeared in the great Chinese economic wall, yet Asia as a whole maintained reasonable forward momentum. The same cannot be said for Europe. Finance ministers grappled with lingering effects of excessive borrowings that violated many countries’ pledges for responsible fiscal policies that were accepted as a condition of joining the Euro. Although European economic growth proved disappointing, we sense the financial challenges did not worsen during the quarter. (more…)
I recently met with a prosperous couple, each well-employed and contemplating retirement. They have children that are grown, a house that is paid for, a combined income around $150,000, and employer 401(k)s exceeding $1,000,000. They don’t have an extravagant lifestyle, but see the best years of their lives in plain view. The last thing they want to do is speculate in the stock market, because the stock portions of their 401(k)s have languished and the economic news is frightening. Principle preservation is their primary concern. A safe portfolio of bond mutual funds and annuities sounds right to them.
This financial plan resonates with just about everyone who is retired or thinking about it. A reasonable rate of return with principle protection is doable and worry-free, right? Well, as in most circumstances, perception and reality often take different paths. First, let’s do the math and compare their working income to their potential retirement income at various rates of return: (more…)
We’re going to try something new on the Hardesty blog. In addition to giving you weekly updates about what we think was important that week, we want to hear from you. With that in mind, we are starting an “Ask Hardesty” column in our blog in which we’ll be answering questions that you send in. The questions can be about an investing concept that isn’t quite clear, something in the financial news, or anything investment-related. Just e-mail johnk@hardestycap.com.
Our first question is seemingly the most basic:
What should I invest in? -Tina D.
It seems the most basic to the asker, but it is perhaps the most complicated to answer. Unfortunately, the answer is going to be, “It depends.” It depends on the timeframe of the investment, your resources, what your goals for the investment are, and your tolerance for risk, among other things.
These are too many variables for just one concise blog post. As such, we’ll look at one at a time in a multi-part post, to be compiled at the end.
Risk
Let’s first consider the most fundamental part of your investments: the level of risk you are taking. Generally, investors think of “risk” as “How much money could I lose?” whereas we at HCM prefer to think of this question in terms of “What kind of price swings might I experience?” The difference might be subtle to a novice investor, so we won’t dwell on it. Basically, with risk, you need to know that in order to make money in the long term, you have to be willing to risk losing money in the short term.
Something else that is essential to understand but is not generally well-understood is that risk and return are not only related, but almost interchangeable. A higher return means a higher risk. At HCM, we have seen countless examples of investors losing money in a supposedly higher-return investment that they thought was “safe.” However, what the market is telling you by offering a higher rate of return is that you are taking more risk. There may be some exception to this rule, but we are certainly not aware of one.
In general, stocks have higher returns (more risk) over time than bonds. Bonds return more than money market funds (cash). Even within these categories, we can have differing levels of return: some stocks are riskier than others, as you might imagine.
If you need your money back in two years to pay for a child’s education, you shouldn’t take as much risk as if you are looking to start saving for your retirement that is thirty or forty years away. Over thirty years, you shouldearn the 8-10% long-term average that stocks provide, even if you lose 25% in the first two. But if you need the money in two years, you can’t take those kinds of risks.
If you can’t stomach the thought of a 45% loss of your investments, you will need to choose safer asset classes than just stocks. Similarly, if you are risk-seeking, you might want to take a higher weighting in riskier stocks than others in a situation similar to yours. Whatever your situation, you need to understand the risks you are (or aren’t) taking.
In sum, when investing, you first need to consider how much risk you want to take over your entire investment portfolio. If you are conservative on risk, it doesn’t mean you can’t have 2% of your assets in a tech stock, as long as your overall average risk is where you want it to be.
The concept of risk and return is one we will return to often. If your goal for the question “What should I invest in?” is a hot stock tip without considering all of these things, you may want to reconsider your strategy.
Look for the next segment soon.
The fast start the economy and markets enjoyed in the first quarter of 2012 faltered as the year progressed. Stocks fell sharply from April to May only to recover modestly in June. For the quarter the S&P 500 declined 2.75%, but for the first half of 2012, the S&P 500 advanced 9.49%. The fixed income markets continued to respond to Federal Reserve Chairman Bernanke’s stated goal of stable, low interest rates. The 10-year treasury began the quarter at 2.22% and finished the quarter at 1.67%.
Signs of a possible economic slowdown in the U.S. emerged late in the quarter as employment gains slowed sharply, retail sales ex-autos stalled, and capital spending slowed markedly. In addition, consumer confidence fell for the fourth consecutive month in June and the ISM Purchasing Managers Index fell below the critical level of 50 (see chart), which means manufacturing contracted. Put simply, the U.S. economy has been unable to establish a steady recovery pattern, and nobody seems to have a clear explanation as to why the economy cannot sustain upward momentum. (more…)
