Today's Market
by Dr Invest

Tonight I enjoyed the PBS, Frontline production called: The Retirement Gamble. Go the to following link:    FRONTLINE This is one of the BEST programs I have seen on the investment racket, a documentary that is honest and raises tremendous questions regarding your investment strategies.

I know that I have covered this topic before, but by paying 2% to your financial adviser, another 2% in management fees, and another 3% for annual inflation, you would need 7% return just to break even each year.

A study by Morningstar Inc. Investment Management Division, recently showed that the tried-and-true 4% initial retirement withdrawal rate over 30 years, with a 40% allocation to stocks, will only lead to a 48.2% success rate, the researchers found.

David Blanchet with Morningstar, sets the withdrawal rate at 2.8% for a 30 year draw-down of one's retirement with a 90% reliability. The assumption is that the economy will improve within the next five-years. Now let me interpret what that means in a few portfolios. 

The truth is shocking. Even with 2 million in your portfolio, you would only be able to draw-down $4,666 monthly. It is hardly the life of luxury you had wished for. 

Some 30 percent of Americans say they will need to work into their 80s to be comfortable in retirement.

Where is the delusion? The reality is that many people won’t be physically able to work into their 80s. According to the U.S. Administration on Aging’s Aging Integrated Database (AGID), 22.5 percent of Americans aged 60-84 reported employment disability—they were physically unable to work and receive disability payments because of that disability.

Some 34 percent of Americans think they’ll need less than 50 percent of their retirement income; yet, median household income is approximately $50,000.

Where is the delusion? One-third of middle-class Americans think that they will need $25,000 annually in retirement. For a family of two, since we can assume that the kids will have left the nest by then, this puts them less than $10,000 above the federal poverty line. 

Middle-class Americans believe, on average, their retirement healthcare costs will be $47,000.

Where is the delusion? Medicare out-of-pocket costs are expected to be between $240,000 and $430,000 for a 65 year old couple retiring today.

Middle-class Americans say they will need a median of $300,000 to retire. The same respondents said that, to date, they have saved a median of $25,000.

Where is the delusion? The average age of the interviewee was 50 years old—the ages ranged from 25 to 75 in the interview. This means that, assuming a retirement age of 66 years, they have 16 years to save $275,000. If you assume that the stock market goes up 5 percent per year—perhaps not the safest assumption one could make—then to hit that savings number, they need to save $11,070.69 per year, or 22.1 percent of the median income. However, 68 percent of middle-class Americans who have a 401(k) plan contribute 10 percent or less of their income to retirement.

Middle-class Americans think that a median safe withdrawal rate in retirement is 10 percent.

Where is the delusion? Dr. Wade Pfau, CFA, ran historical simulations for retirees from 1926 to 2000 to see how long retirement savings would last at a 10 percent withdrawal rate. 

Through 2009, only one year group would still have money—those who retired in 1982. Everyone else ran out of money, with their retirement funds lasting between 8 and 25 years. In more than two-thirds of the cases, retirees ran out of money before reaching the average life expectancy. Most financial planners recommend a 4 percent withdrawal rate, and some, like Dr. Pfau, indicate that 4 percent may be too aggressive.

MY CONCLUSION

I have already shown you the recent statistics. 2.8% is the best draw-down. My table shows that a $300,000 portfolio will give you $700 monthly or $8,400 annually. This is a far-cry from the $50,000 you will need annually in your retirement years. The average retirement benefit is $1,237 monthly or $14,844 annually.  $23,244 of annual income, truly leaves seniors in a financial crisis even if they happen to have a $300,000 portfolio. I have not subtracted inflation, financial management fees, school taxes, healthcare costs,  or the replacement costs for a vehicle or home repair. 

Without LARGE SUMS OF MONEY, your chances of lasting income is unlikely. 12% returns on stocks, even 5% returns on stocks seem fleeting. Some kind of alternative strategy will be needed beyond your investment portfolio to bring the returns needed to fund a reliable retirement. 

I am implementing some strategies presently, but can't cover all the strategies in this single venue.  

CREATIVE THINKING & INVESTING

If you have ten to fifteen years before retirement, good credit, are willing to handle some contracts and do some maintenance in a geographic area that is growing, rental property can be viable investment. If you purchase a duplex for $160,000 (and I do suggest duplexes), you rent should be 1% monthly of the value of the property or $1,600 monthly. So $800 per rental. This gives you what you need to pay school taxes, the mortgage, and still make a profit. You can super charge this investment, if you have equity in your home, by taking the equity and paying for the duplex OUTRIGHT. Then take the profit from the duplex and pay-down your home mortgage. You will be shocked at how quickly you can pay-off your mortgage on your home while paying against the principle at $13,200 annually; a thirty-year loan will be paid off in nine years if you keep to this plan. 

The gain is the depreciation of the duplex against your income taxes, plus $13,200 in rental income. Go back to the above chart an look at how much money you need to return $14,000 annually....yeah, $500,000 in an investment portfolio. The advantage is that if inflation grows 20% per year, the inflation is passed on to the tenants. Not very ideal for them, but better than a 20% loss in your rental income that year. By adding $14,844, the average social security retirement benefit to the $13,200 of rental income, your total retirement income just went up to $28,044. Add to that $8,400 for the $300,000 you still have in your investment portfolio and you are getting $36,444 as your retirement package. One last benefit is that you have your home loan paid off and the asset of a rental property worth $160,000 or more. DON'T CARRY DEBT into retirement! Under the right conditions you can create positive cash flow, but debt can create a negative cash flow when you need the retirement. STAY OUT OF DEBT!

Recently, I was speaking with a friend. He told me how his dad had taught him the benefit of initiative and work. In his college years, while other students were playing pool and partying, he was making money. He had purchased a bucket, a squeegee, some towels, and glass cleaner. Going from business to business, he offered to wash their windows. In a few weeks, he had gained a clientele of regular paying customers. He said, dad never paid for my college, I got no loans, and I even sent money home. For $12, he earned a degree and had money as well. He later became a key executive for a major corporation. 

Don't tell me that there are not opportunities for someone with a creative mind and the willingness to work.

More later.

(The above information is for entertainment purposes only and not to be used as investment advice.)

Today's Market
by Dr Invest

Led astray! It happens when we don't depend upon reliable instruments. While in flight school, my instructor placed a hood over my face. It blocked my straight forward vision, but I could still see my instruments. He led me through a series of turns, climbs, and stalls. Each time a new challenge came, my emotions told me things that my instruments were not telling me. I learned that day, that you can't fly by the seat of your pants, nor can you really depend upon your senses and emotion. You must scan your instruments and determine your course by all the reliable data.

There are similarities between piloting a plane and directing your own investments. You need reliable data to pilot through the clouds, the rain, and the lightening. There are adverse winds that pitch and toss your plane creating many contrary emotions and feelings. Likewise, in the market, things are not always clear. Many voices clamor for your attention and they are contradictory in advice. To find your direction in the market, you need clear cut rules. Rules are often practical, but are contrary to your first impulses. For example, when you see other people making 10% to 12% in the stock market in the first four months of the year, your first impulse is to empty your bank account to invest in stocks so you can catch some of these big gains. This kind of assumption may not prove reliable.

   Since the lows of 2009, we have seen a gain of 119% in the DOW JONES. Considering that the bull runs for only around 4 years on average, there is an expectation of increased risk with each day the market climbs higher.

By back testing, you get a false indicator for stocks. All the indicators would point to higher and higher gains because the market has continued climbing, but back testing would not indicate that the market is on the verge of a collapse. Recent bumps in the market are indicating that the bull is getting tired. It is possible that the bull could run even higher, drawing naive investors into a market that is ready for a serious decline. It is also possible that the end of the bull run is now. Regardless of the promises of a bright new future and unending economic growth, the economic data is showing a faltering economy.

At this time, I am placing stop-sells on all investments and waiting for a significant downtrend before returning to stocks. I have suggested that there is a possible HEAD AND SHOULDERS PATTERN. This could bring a 10% decline, with a rise of around 5% before a final and more deep decline in August of September of this year. I am willing to wait, because I know that the opportunity to see gains come when the cycle moves to the bottom.
 
                                                                 MARKET CYCLES

Our example is that if it takes 8 years for a full market cycle and the gain is 100% over the eight year period, the annual rate of return is 12.5% per year. This is a reasonable rate of return, provided you are not caught in the downtrend of the market cycle. We are presently at the peak of the market cycle. Wait to buy at the bottom or near bottom. This would be a decline of 30% to 40%.  

(Note: the above information is for entertainment purposes only and not to be used as investment advice.)

Today's Market
by Dr Invest

My dad was a great hunter and demanded that celebrate the hunt, just as he and his father had. Even though I haven't hunted in years, I learned some very practical things while on the hunt. After shooting an animal that ran into the bush, I was ready to immediately follow. My dad placed his had on my shoulder and said, "Son, wait!"  Whispering in my ear, he explained; "A wounded animal can make you his prey, give him time to die."

While watching the market, I have learned that the market refuses to decline peacefully. The economy has been declining for sometime, as documented by the ERCI at http://www.businesscycle.com/.  I BEG YOU, go and read this webpage. The economy has been in a recession for the past six months, even though the stock market has been climbing.

Some investors have blindly placed their money into the market with the promise by financial advisers that the market will continue its upward trend. There is are no fundamentals that support an advancing economy, excepting that among the world of ugly economies our is only a little less ugly.

For our economy to recover, people will need to: have a job, payoff their debt, have excess money to spend in stores and restaurants, and save money. The majority of Americans do not possess these things. Even if they have a job, it is not a job that pays what they once made and many people are working two jobs that they hate. (Only 65% of the population has jobs. Around 60% of Americans no longer have good credit. Most of the housing purchases are by investors who are looking for a place to invest their money that is safe, but over 60% of the people wanting to buy homes can't even qualify for those loans under the new Dodd-Frank bill.)

Where will the money come from to fuel the continued rise in stock prices? Please help me here. The economy is failing and the Bull Market is beginning to grey, beginning to show its age. The Bull is wounded, but not yet down. He may be able to regain his footing and push the DOW up to 15,000 before the end of the summer, but his demise is certain. The risk of investing at this time, will result in a significant loss of 30% to 40% in the immediate future.

No matter how much Bernanke and the Federal Reserve stimulate, it cannot change the fundamentals of the economy. Companies can't hire because there are no proven customers buying, there are no proven customers buying because companies are not seriously hiring. The government's answer is higher taxes and more regulations for corporations that increase their operating costs. And now, for the first time, the government is projecting that the national healthcare program will cost much more than originally projected. With 48% of all jobs being government jobs and 47% of all citizens in the U.S. getting some kind of entitlement, one has to ask, "Who will pay for all this?"

It appears that for years to come, we will continue on this course of economic stagnation. Still, investments could return significant gains, but only when the cycle has reached bottom. Presently, the business cycle is at the top, so now is not the time to buy equities.

Enough said! If you have stayed in stocks, put a stop-sell on your investments. If you are not invested in stocks at this time, don't buy stocks. Just as we saw this week, when the stock market turns down it turn down dramatically.

(Note: The above information is for entertainment purposes only and not to be used as investment advice.)

Today's Market
by Dr Invest

Today, however momentarily, saw the market in a real way. Since the middle of March the DOW has been in a place of accumulation, it is uncertain whether the DOW will move up or return to mean. Look at the chart below:

What is depicted in this chart is a HEAD & SHOULDER'S PATTERN returning to a previous low. (The low could be 13,000 or even 12,500) This is a short-term downtrend in the market that will likely end by early to late July.

It is possible that the present trend marked in light blue, will continue upward. But I am expecting that given no more than a month, we will see the first down leg of the head moving to the right shoulder shown in the brown. Many traders do sell in May to take profits. There are a number of indicators showing a slowdown in the market and the North Korean effect, along with continued deepening of the recession in Europe will all play their part in seasonal slowdown. Since we have been measuring the ebb and tide of recessions, the average length of a bull market has been 4 to 5 years. We started into our 5th year in 2013. Investors have been told to trust the U.S. government, they will keep our markets safe; yet, experience shows us that the government prefers the banking institutions over the investors.

Investors will throw good sense to the wind and will really begin in earnest buying stocks toward the end of the Summer, expecting the current trend of growth to continue. The brief downtrend will be seen as a buying opportunity, not a reason to get out of the market. A small 10% correction could be followed by a buying frenzy that returns the market to the all-time highs and even moves into the 15,000 range for the DOW. But beware, this exuberance could be followed by a 30% to 40% drop in the market.  The Federal Reserve is certain to encourage the growth of stocks by their QUANTITATIVE EASING, but there are already signs of increased inflation showing up in commodities, and the dangers of inflation can out pace the benefits of more liquidity. Several economist are already predicting that this over exuberance in the market will end in tears. I agree!

Rather than investing in stocks when they have reached a 4 year high, I am waiting for a significant fall in the market. A 10% decline is not what I am looking for. I am looking for a 30% to 40% decline. That kind of decline would be definitive and would open the door for investment and some real gains.

Call it investment discipline, either you are all in or all out at this time. If you are all in, then protect your stocks with a STOP-SELL. If you are all out, then wait for a more prime time to enter the market.

I mentioned in the previous article, John Hussman's definition of RISK as being a predictable outcome, verses UNCERTAINTY as an unpredictable outcome. While I believe that the Federal Reserve will do everything in its power to keep the economy functioning, I also believe that what the Federal Reserve is doing experimental (its never been done before) and will have an UNCERTAIN OUTCOME. I don't want to expose my life savings to this kind of unpredictability.

For now, I remain in TIP and BND. I am out of IAU and WMT presently. In the next few weeks, we should see TIP and BND begin to perform better. I am reminded that it is better to be out of the market wishing you were in, than to be in the market wishing you were out.

(note: the above article is for entertainment purposes only and not be be used as investment advice.)