Monday, June 29, 2015

“Greece Exit” Vote Coming

Any way you look at it, the standoff between the nation of Greece and the leaders of the European Union is a mess.  But it may not be quite the problem that the press is making it out to be.

 In case you havent been following the story, the gist of it is that the Greek government, over a period of years that included the time it hosted the Summer Olympics, issued more bonds than, in retrospect, it could possibly pay back.  The total debt outstanding peaked at somewhere around $340 billion, which is actually more than the $242 billion in goods and services that the entire Greek economy produces in a year.   Youve no doubt heard about a series of bailouts organized by the European Union, the International Monetary Fund and other groups which have collectively extended loans and extensions amounting to $217 billion to date.  As you can see from Figure 2, on the right-hand side, roughly $4 billion in payments are due in July and more than $3 billion in August, after which time the payment schedule becomes somewhat more forgiving through 2022.


There are three problems with this picture.  First, it has become apparent that Greece doesnt have the money to make the July and August payments.  Second, in return for additional debt relief, the various creditors are asking that the Greek government do more than just balance its budget (which it has).  Their demands seem a bit harsh and somewhat picky when theyre organized in a list: Greece would have to reduce pension payments to current and retired workers by 40%, raise the retirement age to 67 in 2022 rather than 2025, phase out supplemental bonuses for poorer retirees in 2017 rather than 2018, and cut back on early retirement immediately.  (The proposals also include additional taxes on consumers but not businesses.) 

And third: the newly-elected Greek government, led by Alexis Tsipras of the Syriza party, ran on a platform of rejecting any further budget concessions and compromises.  This turned out to be an extremely successful political strategy: the party won 149 out of the 300 seats in the Greek Parliament in what is regarded as a rousing popular mandate.

Negotiations predictably broke down, and now the Syriza leaders are asking the Greek citizens to vote on whether they will accept the or reject the austerity measures that the EU creditors are demanding.  Polls suggest that the voters would like to keep their country in the Eurozone but that they oppose any additional budget reductions.  In other words, nobody knows how the referendum will end.  If the citizens of Greece reject austerity, it will present the European Union with a difficult choice: back down and continue to help Greece ease out of the crisis (which would be politically difficult to sell, especially to German voters), or deny the concessions that Greece needs, and effectively force Greece out of the Eurozone.

If the latter happens, then the future becomes a bit murky.  Greek banks have been shut down in advance of the July 5 vote, strongly suggesting that Greek leaders, holding a no vote, would no longer use the euro as its currency. They would print drachmas, which, in those frozen bank accounts, would replace euros at par.  The drachmas would immediately lose value on the international markets, which would allow Greece to undercut its competitors in the export markets.  Meanwhile, Greece could default on all or portions of its debt, and offer to pay drachmas instead.

Who loses in this scenario?  Everybody.  The European banks holding Greek debt, and private investors, are the obvious losers.  But closer to home, any Greek citizen who didnt get his/her money out of the bank before the freeze will have to accept a haircut on the deposits, as drachmas will inevitably be worth less than euros.

At the same time, many Greek banks are holding massive amounts of Greek government debt, which they need as collateral for European Central Bank loans that are keeping THEM (the banks) afloat.  Alternatively, Greece could offer everyone 50-70 cents on the dollar in debt repayments, and would probably get mostly takers from creditors who would like to put this whole saga behind them.

Do YOU lose in any of these scenarios?  If either side blinks, then the situation goes back to business as usual.  If Greek voters agree to give the EU what it wants, then some economists believe that the Greek economy will go into a steep recession, but your personal exposure to Greek companies is almost certainly minimal, and the problem will be temporary.

If Greek voters vote no, the EU negotiators remain intractable and Greece leaves the Eurozone, then you can expect breathless and sometimes scary headlines and short-term turmoil in European stocks, with some investors panicking and others uncertain.  But the smart money says that the Eurozone is strong enough to sustain the loss of one of its smallest economies, and Greece, too, will survive. 

The irony, which nobody seems to have noticed, is that after accepting many of the earlier austerity measures, the Greek government is actually running a budget surplus without the debt paymentssomething U.S. citizens can only dream of.  If the additional austerity measures do, eventually, get put in place, the subsequent recession would reduce tax receipts and push Greece back into deficits again. 

If youre a Greek citizen who hit the ATM machines after they had run out of money, then this is a pretty big crisis for your long-term financial situation.  Otherwise, like most so-called crises, the possibility of a Grexit and the upcoming special election in Greece is more about entertainment than about making or losing money in your long-term portfolio.

Wednesday, June 10, 2015

The Value of Objective Planning

What is the value that people get when they work with an objective, client-focused financial planner?

Most planning firms are reluctant to toot their own hornspartly out of modesty, and partly out of a conviction that you probably have better things to do than read about how they help you with your financial life.  But every once in a while, its a good idea to stop and think about what you get for what you pay.

This list is organized in rough order of value, and if you feel you arent getting any of these benefits, please let us know immediately.

1) An independent financial planner helps protect you from financial predators.

Its a touchy issue in the profession whether advisors who put their clients interests first should be bashing the competition, but in fact the Wall Street firms that pretend to offer financial planning guidance are seldom (if ever) looking out for the best interests of their customers.  When you work with a broker (also known, on the business card, as a vice president of investments,) you will be presented with separately-managed accounts that look like mutual funds except they share their fees with the brokerage firm, plus a lot of investments that have to pay people to recommend themnever a good sign for the end investor. 

And since the investment markets are extremely complicated, its usually hard for a layperson to know when there are much better alternatives than the opportunities being presented.

2) An independent financial planner helps you keep track of--and make more efficient--your financial affairs. 

It is not uncommon for financial planners to talk with clients who once had a will drawn up, but theyre not sure exactly when.  Now that you mention it, theyre curious about what, exactly, it says.  Theres an insurance policy in a drawer somewhere, and it may be term or it may be a cash value contract; all the client knows for sure is that he writes a check to the insurance company every year.  Upon inspection, it turns out the auto insurance policy he happens to own is way more expensive than the lowest rate available in the market, and the homeowners policy hasnt been updated since the Clinton Administration. 

And the investments are not uncommonly a hodgepodge of what a broker sold the client based on what he was told by his bosses to recommend at different times during the relationship.

Hopefully, this was never you.  But it does offer a certain peace of mind to know that everything is organized, in one place, and that somebody is paying attention to the details.  Because in your financial life, the details matter.

3) An independent financial planner will stand between his/her clients and the dysfunctional emotional decisions that everybody makes with their own investments.
Do you remember how it felt when Lehman Brothers went down, and the U.S. government was bailing out General Motors?  Many people sold everything at the bottom, and then waited, and waited, and waited to get back into the markets until it was safe.  They never dreamed that the markets would go on a six year bull run that would take us to new record highs. 

The Morningstar organization has calculated the difference between investment returns and investor returnsthat is, between the returns people get vs. what the markets (or individual mutual funds) have delivered.  Results?  It is not unusual, during various time periods, for individual investors to get about half the returns of the market.  How is that possible?  They may be moving the portfolio around, or buying an attractive-looking hot fund or selling a great fund thats going through a rough patch.  They may sell out at the bottom of a scary period, or go all-in when the markets are about to take a nasty tumble. 

For many of us, the best approach is to find good, solid investments and stay the course through thick and thin, ups and downs.  But its very hard to do those things on your own.  An independent advisor provides a dose of objectivity right when you need it.

4) An independent financial planner is a strong advocate for your future.

You know the statistics about the savings rate in America (the 2000-2008 numbers hovered around 0% of income, spiked briefly after the Great Recession and are now back in the 1% range again).  But the keepers of these statistics dont tell you that they probably overstated the actual rate, because they didn't include things like increasing credit card balances or home equity loans.  When people put money in their savings account, and at the same time run up more debt, it counts as an increase in their savings.

The problem for most consumers is that there is no voice in their environment advising them to pay themselves a fair percentage of the income they earn.  Instead, theyre bombarded by messages which make powerful arguments to do the opposite: to buy this, that or something else.  The entire advertising community conspires to take those dollars out of their hands before they ever hit an investment account.

Advisors become that rare voice speaking out in favor of saving.  And in some cases, they help identify expenditures that are not in line with your stated future goals.  Which leads us to:

5) An independent financial planner helps people identify what is important in their lives and prioritize their goals.
How many people do you know who have taken the time to identify what they really want out of life? 

The incredibly sad truth is that the vast majority of people in our advanced, prosperous society have not taken the time to figure out what they really want out of the all-too-brief time they will spend on this planet.  And because they dont know their destination, they will never reach it.  They are, in a very real sense, at the mercy of whatever agenda others have for them.

An independent financial planner will ask questions in your initial interview which help you recognize what you dont know about what you want, and help you identify your most personal goals and desires.  That, alone, can be a priceless service.

6) An independent financial planner can help people turn seemingly impossible goals into a routine that can achieve them.

After years of running retirement planning spreadsheets, and working with successful individuals in the community, advisors eventually master one of the truly magical lessons of life: that any enormous goal can be broken down into manageable, monthly increments, and achieved by routine and persistence.  You save X amount of dollars every month in a portfolio that gets something close to what the market offers, and you will retire with a sum of money that seems impossible to you now. 

Clients who have goals that they dont believe they can achieve are put on a schedule that will get them there as a matter of routine.

Of course, this list doesnt include specialized services like making retirement planning projections, charitable planning, creating special needs trusts for a disabled child, evaluating disability and long-term care insuranceand it doesnt mention the comfortable knowledge that you can call an expert for advice on virtually any financial subject, and youll get an answer that is not tainted by a sales agenda.

The point is that the services offered by an independent financial planner can have enormous value to people who are motivated to enjoy successful, prosperous lives.  An independent planners only goal is your success and prosperity, which should not bebut isunusual in our financial world.

Monday, June 01, 2015

The Harm in Financial Journalism

In most areas of our lives, the more information you get, and the more up-to-the-minute it is, the better we can do business and make astute decisions.  It is interesting that investing is one area where the opposite is true.

Were not talking here about the second-by-second blips on a Bloomberg terminal that traders and computer algorithms use to make quick-twitch buys and sells.  Were talking about the normal news reports, cable TV investment reports and investing articles that youre bombarded with on a daily basis.  In general, the news and data supplied by consumer journalists is almost always harmful to your financial health. 

How?  Consider profiles of mutual funds and mutual fund managers.  The quarterly profiles in Barrons and the articles in Money, Kiplingers and the Wall Street Journal tend to focus a bright spotlight of attention on the hot fundsthat is, funds that outperformed their peers (and the market) in the previous quarter.  Three months worth of track record is statistical nonsense, but the hot fund manager is interviewed with breathless deference normally given to a certified genius.  It is interesting that seldom if ever is the next quarters genius the same as the last one.  Anyone who invests with the fund of the hour is in grave danger of suffering a regression to the meanwhich means losses when compared with the indices.

Even one-year and five-year rankings have no predictive value, particularly when the focus is on outliers who were well ahead of their peers.  Meanwhile, when we arent reading about hot managers, were hearing about what the stock market did (or is doing) today.  Todays price movements are, to a statistician, meaningless white noise, indicative of nothing remotely significant about the future.  The markets go up today, down tomorrow, up for a week, down for a week, and during each of these time periods, analysts try to tell us the causes of these random bounces.  They would be more productively employed trying to explain the causes behind each of the waves in the ocean, yet we cant help listening to their plausible explanations as to why this earnings report, that jobs report, or some other speculation on what the Federal Reserve Board will or will not do has affected our investment outlook.

And, of course, at market tops, when new money is chasing returns at the most dangerous possible time, the news reports are telling us how the markets have been going up, up, up.  When markets are depressed, and it is the best possible time to put new money to work, the news reports are telling us all the bad news about months of market losses.  Swimming against that tide is nearly impossible, even for professionals.

There may be meaningful information among this chatter, but its unlikely that most of us will see it amid the noisy background.  Back in the late 1990s, one analyst who couldnt believe how much people were paying for tech stocks finally broke through the background noise by pointing out that Amazons share price had reached approximately the same level as the entire yearly economic output of the nation of Iceland, plus a few 747 cargo jets to carry it all back to the U.S.  Of course, few listened, and the bursting tech bubble cost a lot of investors a fortune.

Today, were being told that the current market rally is long in the tooth, that the Fed is going to raise rates soon, that market valuations are kind of high, and of course that certain fund managers did really well last quarter and yesterdays market was up or down.  The problem is that we were hearing exactly the same things last year and the year before (remember?), and still the market churned ahead, cranking out new record highs.

Unlike just about any other activity you might pursue, the best, most astute way to invest is to turn off the noise and let the markets carry you where they must.  The short-term drops tend to become buying opportunities in the long run, and over time, the U.S. and global economies reflect the underlying growth in value generated by millions of workers who go to work each day and build that value.  Investor sentiment will swing around with the unhelpful prodding of journalists and pundits, but people who stay the course have always seen new market highs eventually, while people who react to every positive or negative report tend to fare much less well.  When it comes to the markets, wisdom trumps up-to-the-minute knowledge every time. 

Maybe somebody should tell that to the journalists.