The Economy Has Hit Bottom

I like this article because it concentrates on fundamental truths -- economies do recover, sometimes with surprising gusto.

From the Wall Street Journal, 7-23-09 by Alan S. Blinder

"How’s the economy, you ask? I have the proverbial good news and bad news, but in this case, they’re exactly the same: The U.S. economy appears to be hitting bottom.
First, the good news. Right now, it looks like second-quarter GDP growth will come in only slightly negative, and third-quarter growth will finally turn positive. Compared to the catastrophic decline we recently experienced—with GDP dropping at roughly a 6% annual rate in the fourth quarter of last year and the first quarter of this year—that would be a gigantic improvement.

Furthermore, there is a reasonable chance—not a certainty, mind you, but a reasonable chance—that the second half of 2009 will surprise us on the upside. (Can anyone remember what an upside surprise feels like?) Three-percent growth is eminently doable. Four percent is even possible. Surprised? How, with all our economic travails, could we possibly mount such a boom? The answer is that this seemingly high growth scenario isn’t a boom at all. Rather, it follows directly from the arithmetic of hitting bottom."

For the entire article: http://tinyurl.com/msbhcj The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address.

Government Intervention and Stock Returns

An informative presentation by Dimensional Fund Advisors. They have a superlative research team.

"Should equity investors be alarmed by the prospect of greater government intervention in the US economy? Weston Wellington looks at examples of US intervention in the past and examines the record of stock returns around the world over the last thirty-nine years. The evidence suggests that government intervention is just one factor among many affecting stock returns, and that an above-average degree of intervention is not necessarily associated with below-average returns."

For the rest of the presentation: http://www.dfaus.com/library/videos/governme/

The Fight Over Who Will Guard Your Nest Egg

Another interesting article similar to the post just below, "Wary Investors Are Seeking Out Objective Voices ". Both argue that registered investment advisors have a fiduciary obligation to their client vs. the less stringent "suitable" standard provided by most other financial advisors.

From the Wall Street Journal, 3-28-09:

"A power struggle in Washington will shape how investors get the advice they need.

On one side are stockbrokers and other securities salespeople who work for Wall Street firms, banks and insurance companies. On the other are financial planners or investment advisers who often work for themselves or smaller firms.

Brokers are largely regulated by the Financial Industry Regulatory Authority, which is funded by the brokerage business itself and inspects firms every one or two years. Under Finra's rules, brokers must recommend only investments that are "suitable" for clients.

Advisers are regulated by the states or the Securities and Exchange Commission, which examines firms every six to 10 years on average. Advisers act out of "fiduciary duty," or the obligation to put their clients' interests first."

For the entire article: http://tinyurl.com/cd2bdb The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address.

Wary Investors Are Seeking Out Objective Voices

From the Wall Street Journal, 7-29-08:

"In the aftermath of the financial-market crisis, investors are leaving Wall Street to sign on with independent investment advisers.

Last year, registered investment advisers brought in more than $108 billion of net new assets into the three largest custodians, according to Charles Schwab Corp., which holds roughly $500 billion in assets for such advisers. By contrast, the four major Wall Street brokerage firms saw an outflow of $8 billion in 2008.

Investors seeking to repair their damaged nest eggs say the chief lure of independent advisers is more-objective guidance."

For the entire article:
http://tinyurl.com/m9x8b3
The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address.

Quote - Economics as a Profession

“Economics was the only profession where a person could be considered an expert without having once been right.”

- George Meany

All-bond allocation unwise despite equity jitters, says Ibbotson

A short article noting that while bond and stock returns were both about 8.5% over the past 40 years, expected future bond returns are 3 to 4% (annually) due to low current interest rates. A balanced portfolio of 60% stocks and 40% bonds returned 9.1% over the same 40 year period.

Read the entire article:
http://tinyurl.com/n5t8ny

Home Ownership Was Never a Road to Riches

There is a good article in the Wall Street Journal about this topic. The author (Neal Templin) starts out:

"My wife and I have sold all of our four previous homes for more than we paid for them—sometimes a lot more.

We’ve been pretty lucky. We’ve never overpaid much for a house, we’ve always bought in good school districts and decent neighborhoods, we’ve lived in neighborhoods where prices soared during the real-estate bubble, and we’ve been hurt but not decimated by the bursting of that bubble.

When I constructed a very basic cash-flow model for our home-buying history—selling price minus purchase price, renovations and repairs—it showed a roughly 3.5% annualized return on investment, from 1991 through the summer of last year. That’s when we sold our last home and bought our current one."

For the rest of the article:
http://tinyurl.com/m4xylp
The link works only for a few days. If you can't access the article, let me know and I will try to gain access for another short period. rich.chambersABC@gmail.com Spam prevention: Remove the ABC from the email address.

P.S. the number one reason home ownership does not lead to riches is that you have to live in it! Since you can't "spend" your home, it becomes wealth for your heirs but not for you. While it's true that some people can downsize and spend a portion of their home, it's quite rare when this is actually done in my experience. And yes, you can get a reverse mortgage, but this results in a significant wealth transfer to the reverse mortgage holder.