I often encounter people who expect my investment advice should focus on at least one of two things: identifying the investments that will earn the highest returns in the next short-term, and forecasting the returns of different investments, but especially the stock indexes. Instead, I focus on risk management. The returns will take care of themselves. You need to identify the risks you don’t want to take and remove them from your portfolio. Here’s a good example of why the other approach to investing isnt’ a good idea. It’s a profile of hedge fund manager John Paulson. He focus on looking for the next big winner and forecasting returns for assets. He had a mediocre career for a long time. Then, he hit it big with a bet against housing during the boom. Since then, he’s stumbled badly. Overall, he’s probably done well. The few investors who were with him when he bet against housing did well if they cashed in their gains. But those who kept their funds with him or who gave him money only after hearing about his winning bet against housing aren’t doing so well.
After his success in 2007, the amount of money in his funds grew to more than $30 billion. Things went swimmingly until 2011 came along. His two largest funds, Paulson Advantage and Advantage Plus, lost 36 percent and 52 percent that year, and the red streak has continued into 2012, with Advantage and Advantage Plus down 6.3 percent and 9.3 percent as of the end of May.
The housing market has hit bottom and is recovering. Those are the points you see in a lot of headlines and commentary. Unfortunately, I think they’re jumping the gun. There’s still a large amount of unsold inventory, known as shadow inventory, that is likely to come on the market in the next year or two. Also, many people don’t have the credit ratings and down payments they need to obtain mortgages. Here’s a review of some of the reasons to expect housing won’t recover until 2014 or even 2015.
My colleague Morgan Brennan also makes a compelling case for a bottoming of the housing market. Her “boots on the ground” reporting shows that realtors are experiencing inventory shortages. However one wonders how these reports can be reconciled with what would seem to be some hard data about overall housing supply, especially when one considers distressed housing and foreclosures.
Are these bidding wars in places like Eden Prairie merely seasonal? Or as Morgan reports, do they merely represent cretain hard hit markets with pent up demand rebounding. And what about the so called shadow inventory of unsold homes?
Each year Morningstar stages a conference in June at which prominent mutual fund managers make speeches or participate in panel discussions. The conference is targeted at financial advisors who recommend mutual funds or include them in portfolios they manage for clients. Yet, many investors would enjoy the discussions and benefit from hearing the views of the fund managers. You won’t hear any secrets and aren’t likely to learn much that isn’t in the shareholder letters of many of the fund managers. But it’s a good immersion in the full range of fund investment options.
You can learn many of the key concepts by reading Morningstar’s conference coverage on its web site. You can read summaries of the keynote addresses and hear fund managers discuss Europe, value stocks, various types of bonds, emerging markets, portfolio strategies, even how to invest cash, and more.
Financial planner and former Morningstar director of financial planning Sue Stevens said she has cut back on Treasuries in her client portfolios, and that it’s important to educate clients and manage their expectations. Based on her own work and that of others, she’s been trying to get investors to accept the reality of 4% to 5% returns for several years from a balanced portfolio.
Ameriks said investors should remember the traditional role of bonds in a portfolio. They’re there for safety and diversification. It can be perilous to sell a broadly diversified bond portfolio like the Vanguard Total Bond Market Index, which figures prominently in Vanguard’s Target Retirement portfolios, because of its huge stake in low-yielding government bonds. Deflationary pressures and fear of financial crises can keep bond yields low longer than many investors expect, as has happened in recent years. “We’re reluctant to second-guess the markets,” said Ameriks.
The question of whether or not to buy long-term care insurance perplexes many people. They don’t know how to approach the issue and don’t want to be led around by an insurance agent seeking a commission. If you’re in that situation, or simply want a decent road map to analyzing the decision, consider this post. It covers many of the issues we discuss in detail in Retirement Watch. It’s not a complete discussion, of course. But for those who simply don’t know where to start or need a template to organize their thoughts, it should be a big help.
Will you need long-term care? Almost seven of every ten of us will need some sort of personal assistance after age 65, and we’ll need that help for an average of about three years. For many people, however, the assistance needed will be relatively modest, can be provided by family members and might not be covered by LTC insurance anyway. That’s because to qualify for LTC benefits you must need help with at least two of five “activities of daily living,” such as getting in and out of bed, bathing, dressing, eating or going to the bathroom. What’s more, you’ll need it for an extended period, since policies typically don’t cover the first 90 days of care. On the other hand, 20% of seniors will need care for five years or more, and 5% will spend more than $100,000 of their own money on this assistance.
There’s a media frenzy about today’s Supreme Court decision on the Affordable Care Act of 2010. A lot of it is uninformed and even mistaken. (Apparently both CNN and Fox News initially reported that hte law was overturned.) The important consideration for those of us who aren’t in the political spinning game is: What comes next? That’s why I refer you to this post that asks five big questions about the medical care industry now that part of the law will go forward. Read it to have your thoughts provoked and focused on the right things.
- Will the law disrupt the health insurance market? Changing the way health insurance works in the U.S. is one of the biggest and most obvious goals of ObamaCare. It could result in higher premiums. An alternative case is that it will slowly eliminate fee-for-service payment, creating new systems called Affordable Care Organizations that help control costs by paying for patients’ health levels, not their care.But the biggest potential disruption is the idea that the health insurance exchanges created by the law, which are now nebulous, will allow companies other than existing giants such as Wellpoint and Cigna to enter the health insurance market. What if big health systems start offering insurance on their own because the cost of entry has gone down? Nobody knows what these changes will really do, but they represent maybe the biggest potential outgrowth of the law.
For some time China supported its exports by maintaining a fixed or controlled exchange rate between its currency and the dollar. It did this by having the central bank buy dollars from the private sector, especially corporations, in exchange for China’s currency. Recent data, assembled by Standard Charter and reported by FTAlphaville blog, note a change. The central bank appears to be purchasing fewer dollars than in the recent past. Is this a sign China wants its currency to rise in value against the dollar?
Apparently note. Standard Charter also notes that corporate China is selling short dollars and selling them short far more than they should if they simply were managing the currency against their exports and imports. The central bank changed its dollar purchase strategy, because it wants relative stability of the currency. If it continued its dollar purchase policy coupled with the corporate short dollar position, the Chinese currency would rise against the dollar. So, likely the apparent policy change really is not a policy change. It is a change in the tactics required to keep the currency in the desired range.
This can be viewed as corporate China’s “short dollar” position. We wonder a bit about the accuracy of these numbers, but the trend is important. If corporate China was deleveraging this position, we would see a lot more USD buying in the onshore FX market and much more CNY weakness.
We believe setting off such a deleveraging process is something the People?s Bank of China (PBoC) would very much prefer to avoid (more on this below).
The prevailing view is that most mutual fund managers perform poorly and most investors do a poor job of selecting mutual funds. Some of us have been aware of the limits of these studies and how those limits make the conclusions misleading. For example, the numbers can change when the “captive” mutual funds of brokers and insurance companies are eliminated. A new study addresses some other shortcomings and paints a better picture of mutual funds and the investors who select them.
The study first looked at funds based on their asset size. The thesis was that funds with few assets shouldn’t be counted as much as larger funds. When a fund has a small number of assets, that means it attracts few investors. Why should it be weighted the same as a larger fund that investors like? When funds are weighted this way, the results change. The study found most investors put their money in funds that do well. The bad news is the funds that do well tend to raise their fees over time and take away their superior returns. The lesson for investors is to select good actively-managed mutual funds but switch out of them when they become popular and big.
But has the criticism of mutual funds gone too far? Perhaps. The new study, which was released this week by National Bureau of Economic Research, finds that a lot of mutual fund managers do earn their keep. And funds that do well tend to stay hot for a while. What’s more, individuals seem to do a pretty good job of picking the funds that will be the winners.
We learned a long ago at Retirement Watch not to act based on headlines or even on rules of thumb. You have to look at the data and draw your own conclusions. An excellent demonstration occurred this week. An international agency generated a report on financial crises that, among other things, concluded that most financial crises start in September. And it wasn’t even a close call. The chart accompanying the article, which was reproduced on many web sites, showed September far and away was the time when most financial crises start, after reviewing a period from 1970-2011.
Not so fast. One blogger hunted down the original paper and its data and found some interesting anomalies. They boil down to a conclusion that the data in the original paper don’t support the conclusions drawn from the chart or from the paper by most Internet posters of the chart. Some of the bloggers even withdraw their initial comments after reviewing the link above. Take a few minutes to read the link, and then don’t worry too much about the importance of September.
Yesterday I discussed concerns voiced by the Bank of International Settlements and others that monetary policy is becoming less effective and more monetary stimulus could cause more harm than good. A group of charts were published on The Big Picture blog showing how monetary stimulus has become less effective in hte investment markets with each successive effort. One chart also anticipates that we will return to the lows of either December 2011 or October 2011.
Many investors have been screaming for quantitative easing, round three. They say markets were down after the last Fed meeting, because the Fed didn’t announce another round of QE. But cooler heads are warning that investors shouldn’t want more monetary stimulus from the Fed or the ECB. Sure, the past rounds were very helpful in avoiding meltdowns in the U.S. and Europe. But now the central banks are running out of ammunition. Also, the stimulus had some secondary effects that were negative, such as large jumps in commodity prices. Another round of massive monetary stimulus would have more negative effects and deliver fewer positive benefits. We need fiscal policy changes, which means elected officials have to stop delaying and make hard decisions.
One prominent promoter of these thoughts is the Bank of International Settlements, which recently issued its annual report. It says there’s a crisis in central banking. The report and the arguments were well reported in FTAlphaville blog at the link.
While the BIS report echoes the point that accommodative policy is no longer enough, it ironically advises that governments should become mindful about fiscal sustainability rather than, in the very specific case of the US, look beyond perceived constraints and actively go about creating more safe assets:
First, prolonged unusually accommodative monetary conditions mask underlying balance sheet problems and reduce incentives to address them head-on. Necessary fiscal consolidation and structural reform to restore fiscal sustainability could be delayed. Indeed, as discussed in more detail in Chapter V, more determined action by sovereigns is needed to restore their risk-free status, which is essential for both macroeconomic and financial stability in the longer term.
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