The Last Period of Deflation

Housing has been in a deflationary period since 2006 but not the economy overall. In March of 2009 stocks began a huge rally after this article below was written, though stock yields may never reach 5% again: 

Per Merrill Lynch Advisor magazine in February 2009, will deflation (lower prices) jeopardize the recovery?

"...The last period of true deflation in the U.S. was 1954-1955. One bright spot was that dividend yields were 5% according to Mr. Rosenberg.

In Japan, according to Mr. Bernstein, stock rallied more than 33% in some years through deflationary periods of the 1990’s...."

Expected Return is What Counts

When prices go down buy and hold. Why? Because of future returns...

Here are two concepts about "expected return" quoted from economists Fama and French at their website: www.dfaus.com :

"...in the short run the number of shares outstanding is fixed. As a result, changes in risk cannot affect the aggregate portfolio of all investors; you cannot reduce your equity position unless someone else is willing to increase his. Changes in risk can, however, affect price. When risk goes up I expect prices to fall and expected returns to rise..."

AND

"...the onset of high volatility should be associated with price declines that increase expected returns going forward (to compensate investors for the higher volatility), and the onset of a low volatility period should be associated with price increases that lower expected returns going forward. As a result, if you bounce in and out of the market in response to variation in volatility, you are likely to be in when expected returns are low and out when expected returns are high..."

Book: The Behavior Gap by Carl Richards

I recently read a good book entitled "The Behavior Gap" by Carl Richards and encourage you to read it. He writes that "...financial plans are useless...". Basically the author means that the "process" is vital but the "product" can be stagnant if it is based on a range of variables (no one knows for sure) combined with a long time period (that just compounds the inability to guess inflation rates, investment returns, etc.).

He uses cute "back of the napkin" simple charts that you can find at his website: http://www.behaviorgap.com

Here is an example quote from the book, "...decisions should be made on principles not on our feelings about what's going to happen...". The example he gives is someone who is unwilling to give up an investment that makes up too much of their portfolio. The principle: "...it is always a bad idea to have too much of your net worth wrapped up in a single investment..."

Behavior Gap

Thanks to Chuck Rylant (www.chuckrylant.com) who introduced Carl Richards book and sketches on his blog:

http://www.behaviorgap.com/sketches/

Another effective perspective on financial planning.

Planning to wait until 60, 66 or later to retire?

In a December 2011 article in the Financial-Planning magazine (I do not recall the author of this particular article), based on 2006 data, "...40% of adults between 51 and 55 who were employed full-time lost their jobs because of a layoff or shuttered business. When they find new employment, older workers earn less. The median wage of older career changers fell by 57% for those who had been laid off, and 5% for those who left their jobs..."

The time to plan is now. The time to save and invest is now.

What Does a Loss Really Mean to You?

This quote really puts investment performance into perspective if you have 10, 20 or more years of future earnings to add to your retirement assets. Your "human capital" (what you make) can be very important to your overall financial health.

From Nobel Laureate Robert Merton (Morningstar video clip created in 2011):

“…If we only focus on the financial piece and we say we put a 100% of that in equities, when you just look at what happens to that, it looks very risky. We say to ourselves, "We had a decline of 30%; equities have lost 30%."

But if we look at it more holistically and say, "Really it’s not that bad. They only have 10% of their retirement assets in this, because the other 90% is future contributions," then saying a decline of 30% is really only 3%....”

Management of Assets

It is rare that an advisor who only manages your investable assets can secure your retirement income.

Tax planning, cash flow analysis, careful spending, reduced/minimized debts, insuring risks and reasonable withdrawal rates are just as important (if not more so) than the asset management portion.

Has your advisor asked about these other areas of your financial life?