Tuesday, February 17, 2009
Monday, February 16, 2009
The New New Deal
Welcome to the newest beginning of the same old end.
U.S. taxpayers and their progeny are $790 billion dollars poorer today than they were on Friday. The stimulus plan, all 1,071 unread pages of it, raced through Congress like a streaker across a cricket pitch on the weekend. Before anyone was able to compute the vulgar image flashing before their eyes, it was out the door and stamped on the pages of regrettable historical moments.
And you can get ready for more naked embarrassment too. Obama says the mammoth package is "just the beginning" of his effort to buttress America's crumbling economy. We seem to recall expressing disgust at a spending package of similar size last year. What ever happened to that? Hmm, so much for "change."
But we shouldn't be too surprised. The path to peril - be it moral, political or economic - is well trodden with the footprints of fools...and everyone plays their part. Just how different, for instance, is Obama's Newer New Deal from Roosevelt's Old New Deal?
FDR's policies won approval (after pesky pro-constitutionalist Supreme Court justices died off and the bench was stacked with New Deal comrades) on the promise that his massive government-spending program would generate jobs and liberate the economy from the claws of the Great Depression. So, did it?
Harold L. Cole and Lee E. Ohanian, writing in The Wall Street Journal, provide some facts:
"In fact, there was even less work on average during the New Deal than before FDR took office. Total hours worked per adult, including government employees, were 18 per cent below their 1929 level between 1930-32, but were 23 per cent lower on average during the New Deal (1933-39)."
What happened to the typical peak-trough cycle that both fascinates free-market enthusiasts and infuriates meddling do-gooders? Well, the meddlers won, of course. And any time world improvers clamp down on peaks and troughs, booms and busts are only just around the corner.
In his column today, Bill Bonner lends us his eye to the past and examines the epic battle between those struggling for freedom and those who seek to plan, monitor and control every move for them. Beware, for history has a tendency to repeat...
-----------------------------------------
Bankers Pull Another Fast One
By Bill Bonner
Last week, the New York Times proposed "10 Questions Bank CEO's Should Face." Among them:
"The Treasury has proposed a $500,000 cap on executive compensation... Many of you have complained that you will lose your top talent. Are those the same people that helped lose your banks billions?"
Oh, you jokers at the NYT . Touché!
Yes, it's "open season" on bankers. And check the new dictionary. The word 'banker' has become synonymous with "reptile" or "scalawag." Drivers will soon be using it on the street. "F**** banker!" they will yell to the car that cuts them off. "Scumbag Millionaires," the Sun called them.
English bankers got slapped around on Monday. Then, on Wednesday, it was the Americans' turn. They were summoned to Washington by Congressman Barney Frank; be prepared for a "public flogging," the New York Times warned them.
In Paris, meanwhile, the bankers tried to stay ahead of the lynch mob by proposing to cut their own bonuses.
Everybody wants to kick the bankers when they are on the ground. Heck, we'd do it too...but the crowd around them is so thick; we can't get a boot in edgewise. Besides, there are bigger charlatans still standing. After all, bankers were just doing their jobs – separating fools from their money. What about those who were supposed to be protecting the fools?
But we are in a depression. And everyone has to play his part. The politicians feign moral outrage. The bankers feign contrition. The spectators feign to know what was going on and have a good time. It's a show with a subplot, we think. In the interest of seditious mischief, here we undertake to deconstruct it.
First we begin with a critic's remark: this is a well-rehearsed storyline. When the losers are unhorsed, they are almost always spat upon. Louis 16th's severed head was held up and subjected to "atrocious and indecent gestures"...Mussolini was hung on a lamp post. The bankers seem to be getting off easy.
Now, a comparison: the farce of '09 is nothing compared to the great show put on following the '29 crash. The weakness of the present spectacle is the cast. The chief American protagonist – Barney Frank – is no match for his role model, Ferdinand Pecora. Pecora was "the most brilliant lawyer of Italian extraction in the US," said the TIME magazine report of March 6, 1933. He "finished public schools at 12. At 18, after loping through his brother's law books, he was managing clerk of a law firm. Even on the most complex cases (which he, tireless, likes best) he never needs notes, never forgets a word of testimony once it is on the record... At 47, his black eyes flash, his black hair bristles."
But then, the victims are no match for Charles Edwin Mitchell either. "Billion Dollar Charlie" earned more than a million dollars in '29, when a million dollars was still real money. Senator Carter Glass said that he "more than 50 other men is responsible for this stock crash." But, as TIME reported, "neither the directors nor any other Manhattan banker knew anyone who, they believed, could do an equally good job of carrying the bank safely through storm and strife. That he has done the job, Ferdinand Pecora would be the last to deny. The statement of National City Bank [Mitchell's] was, on Dec. 31, 1932, the envy of nearly every bank in the US."
Still, the depression was on and Mitchell was damned for it. By 1933, he was out of a job. And now Jamie Dimon, Lord Stevenson, Andy Hornby, John Mack, Vikram Pandit, and Sir Fred Goodwin are in the dock.
'Yes, we have erred and strayed like lost sheep,' the bankers chant. "We are profoundly, and I think I would say unreservedly, sorry..." said Lord Stevenson, formerly of HBOS, on Tuesday. But "UK bankers find sorry is not enough," judged a headline on Wednesday morning. "I want groveling," wrote an opinionist to the LA Times . "I want show-trial sweating and stammering. I want their nine-figure bonus checks endorsed over to the rest of us...I want blood..."
Be careful not to over-act, is our advice. Viewers might catch on. In London, the Guardian announced its own 12 questions to put to the bankers, including "why should profits be private, but losses be socialized?" Uh...that is a good question, but it is put to the wrong person. Why the bankers would want to offload their mistakes is a question even a Guardian reader could answer. Why else would they humiliate themselves publicly? Why would not a one of them dare show any fight? The pols control the money now; the bankers know it.
The question is better put to the inquisitor than to his victim. Why would the government wish to take on the losses? There, the answer is fairly easy too – power. Besides, it's not their money; it belongs to the same mouth-breathing yahoos who are enjoying the show. In fact, we have other questions we'd like to put to Barney Frank, John McFall and the rest of these sanctimonious meddlers: How many of you jackasses went short the financial sector? And if you're so smart, why didn't you warn the public about the housing bubble and the toxic asset meltdown? If your committees...and your armies of regulators at the SEC, FHA, FDIC, FSA or other agencies... could do nothing to prevent the crisis, what good are they? And how cometh it to be that the biggest financial fraud of all time took place right under your own employees' noses?
So you see, dear reader, how deliciously the plot turns? In the bubble years, the bankers ripped off the public...pretending to make them rich, of course...while the regulators looked the other way. Now, the politicians create a distraction, pretending to punish the bankers, while together they pick the public's pocket for $3 or $4 trillion more. The bankers are judged guilty; but the audience hangs.
Joel's Note: We've just got word that Bill and Addison are in the process of updating their widely acclaimed book Financial Reckoning Day, for rerelease. We'll keep an eye on when that will be available and let you know. In the meantime, might we suggest taking a few minutes to read over our equally popular Gold $2,000 Report . It details five ways to invest in our favorite metal, including one play that lets you nab some of it at as little as a penny per ounce.
--- Dan Amoss' Strategic Short Report ---
New Research Source Reveals...
The Bear Market Strategy So Powerful, Governments Have Tried to OUTLAW It At Least Three Times
This controversial and little-used "paddle strategy" once launched the family fortunes of a U.S. President...
Last year, it made as much as $10.96 million per day for one astute investor...
And it now stands behind the top three most profitable market moves in history...
For the first time, we're revealing the five-step secret that lets you do this...
-----------------------------------------
[Rude Endnote: "When are you going address the fact the U.S. owes China 1.5TRILLION in U.S. Govt Bond, and the Chinese do not want any more of our 30 year bonds at 3% interest yields?" cautions one reader.
"They WILL soon demand to be reimbursed in gold. The official price of $62.22 set in the 1970's, would wipe out the U.S.'s complete gold reserve.
"So Obama will call in or confiscate the gold in the hands of the American Public at large, pay them a mere 900 and ounce, make gold ownership a felony, then further devalue the U.S. Dollar by making the fixed price of gold $10,000 an ounce."
Rude: Oh dear reader, that hasn't happened since this first New Deal. This is the NEW New Deal. Sure, the Roosevelt administration called in the nation's gold – making it a crime for private citizens to hold the yellow metal – and then revalued gold upwards. Sure, in a stroke of a pen, debts denominated in dollars were clipped 60%.
But that was the OLD New Deal…THIS time it's different. (Choke, splutter, cough...)
We'll see you tomorrow.
Until then...
Cheers,
Joel Bowman
The Rude Awakening
Friday, February 6, 2009
America’s Financial History – How This Financial Mess Started
Money For Life!
The History, Root Cause, and Possible Way Out Of the Current Economic Swamp... The Law and Corporations... A long series of US Supreme Court decisions relating to corporations, and dating back to the 1809 US Supreme Court case before the Marshall Court of Bank of the United States vs. Deveaux, gave corporations citizenship by proxy. Numerous subsequent decisions affirmed and clarified that corporations had standing as citizens because their shareholders were citizens. These decisions also confirmed the long-standing concept of limited liability from English Common Law.1 The Manipulation of The Monetary System and The Income Tax System by the US Congress... Although the attempts to manage the US monetary system date back to the founding of the country2, it was not until the Wilson Administration in 1913 that the establishment of Federal Reserve Banking System was enacted into law.3 Congressional actions relating to the monetary system [banking and investing], especially the formation of the Securities and Exchange Commission in 1933 and the passage of The Congressional tinkering with the tax system is legendary. Its failures are apparent. Its irresponsibility is blatant. Its lack of morals and ethics are clear. The Pork Barrel Bail Out of 2009 demonstrates once again that congressional self-interest is the very fabric of the culture of the Dolts in DC [my fond term for the elected aristocracy who run and ruin our government]. Tying Them Together... This essay is not comprehensive. That would require an entire book. Rather, it aims to raise questions and draw a blueprint for you to follow in your own pursuit of the truth. The following observations are, therefore, presented succinctly and without comment. The standing of corporations and their executives and major shareholders is the background of the story that is unfolding. * The laws referenced above regulate corporations and corporate decision makers. They apply equally to the banking and investment businesses. * High-level executives recognize that their personal liability is limited to the value of their holdings in the companies they operate.4 * Since the compensation of these "C" level executives is significant and since they can use that compensation to purchase other assets, they can reduce their risk of personal loss relative to the failure of the enterprises they manage to just that portion of their substantial net worth that they directly invest in the companies they run. * They can also liquidate some portion of their ownership in the enterprises they operate5
* Public Utility related businesses · Enron, MCI, Qwest, etc.
* Banking and Finance · FannieMae, FreddieMac, All of these factors and the businesses that relied on them conspired to distort Americans view of their personal economies. Americans developed a mindset over the past 30+ years that has led them individually and collectively into a dungeon of debt. It has also distorted the simple and true path to a successful personal economy. 1 My apologies to legal scholars and historians for abbreviating a couple of hundred books on this subject.
|
The History and Root Cause of the Debt Paradigm... |
Thursday, February 5, 2009
Where Should You Be Investing Your money
Where Should You Be
Investing Your Money?
In recent years, you have not been able to pick up a newspaper, or magazine that doesn't have an article touting the benefits of investing in mutual funds.
While the first mutual fund was invented back in the 1930s, they didn't really become popular until the great bull market of 1982 to 2000. Since then, mutual funds have been pushed by many financial advisors as "the only way to invest!" Almost everyone has owned mutual funds at some point, if only through their company 401k or personal IRA. Many people still own mutual funds in spite of the recent stock market declines and the current scandals surrounding the investment industry.
In the past 50 years, mutual funds have gone from an $18 billion also-ran in the financial-services industry to a $12 trillion titan. Mutual Funds now enjoy an unchallenged position of leadership, with 90 million US investors.
Most of the growth of mutual funds is attributed to introduction of the 401(k) and other qualified plans during the past two decades. Today, 10% of household financial assets are invested in 401(k) and Individual Retirement Accounts (IRAs), up from 6 percent in 1990, and mutual funds manage 47 percent of those assets. Households also have invested in mutual funds outside of qualified plans. Mutual funds manage $4.4 trillion of assets that households hold in those taxable accounts.
And, it's no wonder mutual funds became so popular in the 80's and 90's, when the media and investment houses were reporting huge unprecedented returns, in the US stock market.
In the 80's the S&P 500 Index (the benchmark everyone compares to) went from 107.94 to 353.40. That's an average annual return of 12.59% over those 10 years.
In the 90's, we had one of the best times in the history for the U.S. stock market. The S&P 500 Index went from 353.40 to 1469.25. That's a staggering total return of 347% in just 10 years, or an average annual return of 15.31%.
Now compare that to the lack luster years of the 60's and 70's:
In the 60's the S&P 500 Index went from 59.89 to 92.06. That's an average annual return of 4.39% over those 10 years.
In the 70's the S&P 500 Index went from 92.06 to 107.94. That's an average annual return of only 1.60% per year, over those 10 years.
If you had actually received annual returns comparable to those of the S&P 500 Index during those 40 years (1960 though 2000) you would have averaged 8.33% per year.
However, when you consider that most mutual funds won't even come close to matching the S&P 500 Index over 30 or 40 years, and then you subtract the annual fees, it gives you an entirely different view of the validity and benefits of investing in mutual funds.
Average Mutual Fund Expenses…
Sales charge 1.01%
12b-1 fees 0.37%
Expense ratio 1.35%
Transaction costs* 1.32%
Total 4.05%
*The average turnover of all mutual funds is 110%. The average transaction fee is estimated at 1.2%. This is an estimate only as mutual funds do not have to reveal this number and therefore do not.
So, even if you were lucky enough to find a mutual fund that had a total return comparable to that of the S&P 500 Index over the past 40 years, your net return after expenses would only be 4.28%. (8.33-4.05) Remember, you'll pay those expenses each year, whether your investment makes money or not.
To fully understand the impact of expenses… Glorianne Stromberg, a financial services expert was quoted as saying "Every 1% you pay in fees or charges will reduce your capital by about 20% over 25 years. That could mean the difference between being comfortably well off and struggling to make ends meet."
As an example, at 10% per year, a $10,000 investment compounded over fifty years would yield $1,170,000. The same investment compounded at only 8% would yield just $470,000. That is a whopping sixty-percent difference amounting to $700,000.
And, we haven't even considered that from the beginning of 2000 through 2008, the S&P 500 Index has gone down from 1,469.25 to 903.25. That's a total loss of (-48.53%)… or average annual loss of (-5.90%) over those 8 years. Overall, the average mutual fund plunged 30 percent in 2008, and many didn't fare as well as the S&P 500 index, which fell 38 percent for its worst year since 1937.
If you add in the last 8 years, the average return for the S&P 500 Index over the past 48 years is only 5.82%. Now, subtract the average expenses of 4.05% and your net return is only 1.77%. And, that's only if you were lucky enough to have found a mutual fund that performed as well as the S&P 500 Index over those 48 years.
What's your chance of you having picked a mutual fund that performed as well as the S&P 500 Index?
Since 1960, the mutual fund industry has grown from 160 funds and $18 billion in assets under management to today where there are over 8,000 stock mutual funds with combined assets of $12.356 trillion. During the 1990s, 55% of equity funds failed, almost four times the 14% failure rate of the 1960s.
Most people tend to pick a mutual funds based on recent performance history. When do you think a mutual fund company decides to advertise a specific fund - just after a bad period or a great period? Of course, they advertise a fund just after it has had a great return and typically, just as it's about to cool off. These hot funds historically do very poorly after their best period. After studying mutual fund performance figures over a 20 year period, I have found that over the subsequent 3, 5, and 10 year periods, a whopping 80% of these "star" funds performed worse than the average similar fund.
Unfortunately, according to the folks at the Motley Fool, only 10 of the ten thousand actively managed mutual funds available today, managed to consistently beat the S&P 500 Index over the past ten years. Remember, history tells us that very few, if any, of these top performing mutual funds will manage to beat the S&P 500 Index in the next 10 years.
The recent dismal performance of mutual funds' has contributed to the anguish of most retirement investors who saw a slump in their 401Ks that will probably prolong their working lives. And, with the losses in the retirement accounts, many retirees are being forced to go back to work. Disappointment understandably runs deep among investors who together have $9.4 trillion in U.S. mutual funds.
Warren Buffet, the world's greatest investor, said it best; "I would not invest in mutual funds, but if I did, I would choose an index fund. For most small investors who don't have time to research individual companies, cheap index funds are the best way to invest in the stock market."
First, an Index Mutual Fund is much cheaper to run than a typical actively managed mutual fund, because they track a target benchmark, rather than constantly buying and selling securities in an attempt to outperform the market. Thus index funds generally have lower advisory fees, operating expenses, and trading costs than actively managed funds. Once you eliminate those analysts' salaries, an index fund can cut its costs tremendously and those savings can be passed along to investors in the form of higher returns.
Second, Index Mutual Funds perform better than most actively managed funds. During the 1990s, in one of the best times in history for the market, the S&P 500 Index provided an annualized return of 17.3%, (including reinvestment of dividends and capital gains) compared with just 13.9% for the average equity mutual fund. During the 1990s, the total shortfall between actively managed mutual funds and the market as measured by the S&P 500 Index was a whopping 3.4% per year. And, that doesn't take into account the expense ratios, fees and loads in those funds, which would bring the return down to 9.85%. And that is in one of the best times in history for the stock market!
In more recent history, only 4% of diversified US stock mutual funds have beaten the performance of the S&P 500 Index, over the past 10 years ending in 2007.
Of course, investing in an index mutual fund guarantees that you'll never outperform the overall market.
So, where should you be investing your money? Where would you have fared better with your investments over the past 28 years?
$100,000 Invested On Dec. 31, 1980 In A Hypothetical S&P Index Mutual Fund…
(That probably would have outperformed all actively managed mutual funds)
Would Be Worth Approximately - $428,014
(That's after annual fees and expenses of 2.5% for the past 28 years)
$100,000 Invested On Dec. 31, 1980 In A Hypothetical Index Annuity
Would Be Worth Approximately - $553,263
(Based On An 80% Participation Rate)
(They do not charge management fees and they are 100% tax-efficient)
$100,000 Invested On Dec. 31, 1980 In A Typical Deferred Annuity
Would Be Worth Approximately - $583,162
(Based On An Average Of 6.5% Interest During The Past 28 Years)
(They do not charge management fees and they are 100% tax-efficient)
Who knows what the future will bring. Will the stock market continue to deteriorate? Probably. Will interest rates start to climb? Who knows? One thing for sure, most average middle-income families can't afford to lose what little money they've saved.
Where Should You Be
Investing Your Money?
In recent years, you have not been able to pick up a newspaper, or magazine that doesn't have an article touting the benefits of investing in mutual funds.
While the first mutual fund was invented back in the 1930s, they didn't really become popular until the great bull market of 1982 to 2000. Since then, mutual funds have been pushed by many financial advisors as "the only way to invest!" Almost everyone has owned mutual funds at some point, if only through their company 401k or personal IRA. Many people still own mutual funds in spite of the recent stock market declines and the current scandals surrounding the investment industry.
In the past 50 years, mutual funds have gone from an $18 billion also-ran in the financial-services industry to a $12 trillion titan. Mutual Funds now enjoy an unchallenged position of leadership, with 90 million US investors.
Most of the growth of mutual funds is attributed to introduction of the 401(k) and other qualified plans during the past two decades. Today, 10% of household financial assets are invested in 401(k) and Individual Retirement Accounts (IRAs), up from 6 percent in 1990, and mutual funds manage 47 percent of those assets. Households also have invested in mutual funds outside of qualified plans. Mutual funds manage $4.4 trillion of assets that households hold in those taxable accounts.
And, it's no wonder mutual funds became so popular in the 80's and 90's, when the media and investment houses were reporting huge unprecedented returns, in the US stock market.
In the 80's the S&P 500 Index (the benchmark everyone compares to) went from 107.94 to 353.40. That's an average annual return of 12.59% over those 10 years.
In the 90's, we had one of the best times in the history for the U.S. stock market. The S&P 500 Index went from 353.40 to 1469.25. That's a staggering total return of 347% in just 10 years, or an average annual return of 15.31%.
Now compare that to the lack luster years of the 60's and 70's:
In the 60's the S&P 500 Index went from 59.89 to 92.06. That's an average annual return of 4.39% over those 10 years.
In the 70's the S&P 500 Index went from 92.06 to 107.94. That's an average annual return of only 1.60% per year, over those 10 years.
If you had actually received annual returns comparable to those of the S&P 500 Index during those 40 years (1960 though 2000) you would have averaged 8.33% per year.
However, when you consider that most mutual funds won't even come close to matching the S&P 500 Index over 30 or 40 years, and then you subtract the annual fees, it gives you an entirely different view of the validity and benefits of investing in mutual funds.
Average Mutual Fund Expenses…
Sales charge 1.01%
12b-1 fees 0.37%
Expense ratio 1.35%
Transaction costs* 1.32%
Total 4.05%
*The average turnover of all mutual funds is 110%. The average transaction fee is estimated at 1.2%. This is an estimate only as mutual funds do not have to reveal this number and therefore do not.
So, even if you were lucky enough to find a mutual fund that had a total return comparable to that of the S&P 500 Index over the past 40 years, your net return after expenses would only be 4.28%. (8.33-4.05) Remember, you'll pay those expenses each year, whether your investment makes money or not.
To fully understand the impact of expenses… Glorianne Stromberg, a financial services expert was quoted as saying "Every 1% you pay in fees or charges will reduce your capital by about 20% over 25 years. That could mean the difference between being comfortably well off and struggling to make ends meet."
As an example, at 10% per year, a $10,000 investment compounded over fifty years would yield $1,170,000. The same investment compounded at only 8% would yield just $470,000. That is a whopping sixty-percent difference amounting to $700,000.
And, we haven't even considered that from the beginning of 2000 through 2008, the S&P 500 Index has gone down from 1,469.25 to 903.25. That's a total loss of (-48.53%)… or average annual loss of (-5.90%) over those 8 years. Overall, the average mutual fund plunged 30 percent in 2008, and many didn't fare as well as the S&P 500 index, which fell 38 percent for its worst year since 1937.
If you add in the last 8 years, the average return for the S&P 500 Index over the past 48 years is only 5.82%. Now, subtract the average expenses of 4.05% and your net return is only 1.77%. And, that's only if you were lucky enough to have found a mutual fund that performed as well as the S&P 500 Index over those 48 years.
What's your chance of you having picked a mutual fund that performed as well as the S&P 500 Index?
Since 1960, the mutual fund industry has grown from 160 funds and $18 billion in assets under management to today where there are over 8,000 stock mutual funds with combined assets of $12.356 trillion. During the 1990s, 55% of equity funds failed, almost four times the 14% failure rate of the 1960s.
Most people tend to pick a mutual funds based on recent performance history. When do you think a mutual fund company decides to advertise a specific fund - just after a bad period or a great period? Of course, they advertise a fund just after it has had a great return and typically, just as it's about to cool off. These hot funds historically do very poorly after their best period. After studying mutual fund performance figures over a 20 year period, I have found that over the subsequent 3, 5, and 10 year periods, a whopping 80% of these "star" funds performed worse than the average similar fund.
Unfortunately, according to the folks at the Motley Fool, only 10 of the ten thousand actively managed mutual funds available today, managed to consistently beat the S&P 500 Index over the past ten years. Remember, history tells us that very few, if any, of these top performing mutual funds will manage to beat the S&P 500 Index in the next 10 years.
The recent dismal performance of mutual funds' has contributed to the anguish of most retirement investors who saw a slump in their 401Ks that will probably prolong their working lives. And, with the losses in the retirement accounts, many retirees are being forced to go back to work. Disappointment understandably runs deep among investors who together have $9.4 trillion in U.S. mutual funds.
Warren Buffet, the world's greatest investor, said it best; "I would not invest in mutual funds, but if I did, I would choose an index fund. For most small investors who don't have time to research individual companies, cheap index funds are the best way to invest in the stock market."
First, an Index Mutual Fund is much cheaper to run than a typical actively managed mutual fund, because they track a target benchmark, rather than constantly buying and selling securities in an attempt to outperform the market. Thus index funds generally have lower advisory fees, operating expenses, and trading costs than actively managed funds. Once you eliminate those analysts' salaries, an index fund can cut its costs tremendously and those savings can be passed along to investors in the form of higher returns.
Second, Index Mutual Funds perform better than most actively managed funds. During the 1990s, in one of the best times in history for the market, the S&P 500 Index provided an annualized return of 17.3%, (including reinvestment of dividends and capital gains) compared with just 13.9% for the average equity mutual fund. During the 1990s, the total shortfall between actively managed mutual funds and the market as measured by the S&P 500 Index was a whopping 3.4% per year. And, that doesn't take into account the expense ratios, fees and loads in those funds, which would bring the return down to 9.85%. And that is in one of the best times in history for the stock market!
In more recent history, only 4% of diversified US stock mutual funds have beaten the performance of the S&P 500 Index, over the past 10 years ending in 2007.
Of course, investing in an index mutual fund guarantees that you'll never outperform the overall market.
So, where should you be investing your money? Where would you have fared better with your investments over the past 28 years?
$100,000 Invested On Dec. 31, 1980 In A Hypothetical S&P Index Mutual Fund…
(That probably would have outperformed all actively managed mutual funds)
Would Be Worth Approximately - $428,014
(That's after annual fees and expenses of 2.5% for the past 28 years)
$100,000 Invested On Dec. 31, 1980 In A Hypothetical Index Annuity
Would Be Worth Approximately - $553,263
(Based On An 80% Participation Rate)
(They do not charge management fees and they are 100% tax-efficient)
$100,000 Invested On Dec. 31, 1980 In A Typical Deferred Annuity
Would Be Worth Approximately - $583,162
(Based On An Average Of 6.5% Interest During The Past 28 Years)
(They do not charge management fees and they are 100% tax-efficient)
Who knows what the future will bring. Will the stock market continue to deteriorate? Probably. Will interest rates start to climb? Who knows? One thing for sure, most average middle-income families can't afford to lose what little money they've saved.
Where Should You Be
Investing Your Money?
In recent years, you have not been able to pick up a newspaper, or magazine that doesn't have an article touting the benefits of investing in mutual funds.
While the first mutual fund was invented back in the 1930s, they didn't really become popular until the great bull market of 1982 to 2000. Since then, mutual funds have been pushed by many financial advisors as "the only way to invest!" Almost everyone has owned mutual funds at some point, if only through their company 401k or personal IRA. Many people still own mutual funds in spite of the recent stock market declines and the current scandals surrounding the investment industry.
In the past 50 years, mutual funds have gone from an $18 billion also-ran in the financial-services industry to a $12 trillion titan. Mutual Funds now enjoy an unchallenged position of leadership, with 90 million US investors.
Most of the growth of mutual funds is attributed to introduction of the 401(k) and other qualified plans during the past two decades. Today, 10% of household financial assets are invested in 401(k) and Individual Retirement Accounts (IRAs), up from 6 percent in 1990, and mutual funds manage 47 percent of those assets. Households also have invested in mutual funds outside of qualified plans. Mutual funds manage $4.4 trillion of assets that households hold in those taxable accounts.
And, it's no wonder mutual funds became so popular in the 80's and 90's, when the media and investment houses were reporting huge unprecedented returns, in the US stock market.
In the 80's the S&P 500 Index (the benchmark everyone compares to) went from 107.94 to 353.40. That's an average annual return of 12.59% over those 10 years.
In the 90's, we had one of the best times in the history for the U.S. stock market. The S&P 500 Index went from 353.40 to 1469.25. That's a staggering total return of 347% in just 10 years, or an average annual return of 15.31%.
Now compare that to the lack luster years of the 60's and 70's:
In the 60's the S&P 500 Index went from 59.89 to 92.06. That's an average annual return of 4.39% over those 10 years.
In the 70's the S&P 500 Index went from 92.06 to 107.94. That's an average annual return of only 1.60% per year, over those 10 years.
If you had actually received annual returns comparable to those of the S&P 500 Index during those 40 years (1960 though 2000) you would have averaged 8.33% per year.
However, when you consider that most mutual funds won't even come close to matching the S&P 500 Index over 30 or 40 years, and then you subtract the annual fees, it gives you an entirely different view of the validity and benefits of investing in mutual funds.
Average Mutual Fund Expenses…
Sales charge 1.01%
12b-1 fees 0.37%
Expense ratio 1.35%
Transaction costs* 1.32%
Total 4.05%
*The average turnover of all mutual funds is 110%. The average transaction fee is estimated at 1.2%. This is an estimate only as mutual funds do not have to reveal this number and therefore do not.
So, even if you were lucky enough to find a mutual fund that had a total return comparable to that of the S&P 500 Index over the past 40 years, your net return after expenses would only be 4.28%. (8.33-4.05) Remember, you'll pay those expenses each year, whether your investment makes money or not.
To fully understand the impact of expenses… Glorianne Stromberg, a financial services expert was quoted as saying "Every 1% you pay in fees or charges will reduce your capital by about 20% over 25 years. That could mean the difference between being comfortably well off and struggling to make ends meet."
As an example, at 10% per year, a $10,000 investment compounded over fifty years would yield $1,170,000. The same investment compounded at only 8% would yield just $470,000. That is a whopping sixty-percent difference amounting to $700,000.
And, we haven't even considered that from the beginning of 2000 through 2008, the S&P 500 Index has gone down from 1,469.25 to 903.25. That's a total loss of (-48.53%)… or average annual loss of (-5.90%) over those 8 years. Overall, the average mutual fund plunged 30 percent in 2008, and many didn't fare as well as the S&P 500 index, which fell 38 percent for its worst year since 1937.
If you add in the last 8 years, the average return for the S&P 500 Index over the past 48 years is only 5.82%. Now, subtract the average expenses of 4.05% and your net return is only 1.77%. And, that's only if you were lucky enough to have found a mutual fund that performed as well as the S&P 500 Index over those 48 years.
What's your chance of you having picked a mutual fund that performed as well as the S&P 500 Index?
Since 1960, the mutual fund industry has grown from 160 funds and $18 billion in assets under management to today where there are over 8,000 stock mutual funds with combined assets of $12.356 trillion. During the 1990s, 55% of equity funds failed, almost four times the 14% failure rate of the 1960s.
Most people tend to pick a mutual funds based on recent performance history. When do you think a mutual fund company decides to advertise a specific fund - just after a bad period or a great period? Of course, they advertise a fund just after it has had a great return and typically, just as it's about to cool off. These hot funds historically do very poorly after their best period. After studying mutual fund performance figures over a 20 year period, I have found that over the subsequent 3, 5, and 10 year periods, a whopping 80% of these "star" funds performed worse than the average similar fund.
Unfortunately, according to the folks at the Motley Fool, only 10 of the ten thousand actively managed mutual funds available today, managed to consistently beat the S&P 500 Index over the past ten years. Remember, history tells us that very few, if any, of these top performing mutual funds will manage to beat the S&P 500 Index in the next 10 years.
The recent dismal performance of mutual funds' has contributed to the anguish of most retirement investors who saw a slump in their 401Ks that will probably prolong their working lives. And, with the losses in the retirement accounts, many retirees are being forced to go back to work. Disappointment understandably runs deep among investors who together have $9.4 trillion in U.S. mutual funds.
Warren Buffet, the world's greatest investor, said it best; "I would not invest in mutual funds, but if I did, I would choose an index fund. For most small investors who don't have time to research individual companies, cheap index funds are the best way to invest in the stock market."
First, an Index Mutual Fund is much cheaper to run than a typical actively managed mutual fund, because they track a target benchmark, rather than constantly buying and selling securities in an attempt to outperform the market. Thus index funds generally have lower advisory fees, operating expenses, and trading costs than actively managed funds. Once you eliminate those analysts' salaries, an index fund can cut its costs tremendously and those savings can be passed along to investors in the form of higher returns.
Second, Index Mutual Funds perform better than most actively managed funds. During the 1990s, in one of the best times in history for the market, the S&P 500 Index provided an annualized return of 17.3%, (including reinvestment of dividends and capital gains) compared with just 13.9% for the average equity mutual fund. During the 1990s, the total shortfall between actively managed mutual funds and the market as measured by the S&P 500 Index was a whopping 3.4% per year. And, that doesn't take into account the expense ratios, fees and loads in those funds, which would bring the return down to 9.85%. And that is in one of the best times in history for the stock market!
In more recent history, only 4% of diversified US stock mutual funds have beaten the performance of the S&P 500 Index, over the past 10 years ending in 2007.
Of course, investing in an index mutual fund guarantees that you'll never outperform the overall market.
So, where should you be investing your money? Where would you have fared better with your investments over the past 28 years?
$100,000 Invested On Dec. 31, 1980 In A Hypothetical S&P Index Mutual Fund…
(That probably would have outperformed all actively managed mutual funds)
Would Be Worth Approximately - $428,014
(That's after annual fees and expenses of 2.5% for the past 28 years)
$100,000 Invested On Dec. 31, 1980 In A Hypothetical Index Annuity
Would Be Worth Approximately - $553,263
(Based On An 80% Participation Rate)
(They do not charge management fees and they are 100% tax-efficient)
$100,000 Invested On Dec. 31, 1980 In A Typical Deferred Annuity
Would Be Worth Approximately - $583,162
(Based On An Average Of 6.5% Interest During The Past 28 Years)
(They do not charge management fees and they are 100% tax-efficient)
Who knows what the future will bring. Will the stock market continue to deteriorate? Probably. Will interest rates start to climb? Who knows? One thing for sure, most average middle-income families can't afford to lose what little money they've saved.
Tuesday, January 27, 2009
Saturday, December 27, 2008
Madoff and Other Piles of BS****
An Investing Lesson from Bernie Madoff
By Jon Herring
Petty criminals go to jail, while the biggest criminals of all are promoted, appointed and elected to the highest positions of power. Bernie Madoff didn’t exactly run the country. But he did run one of the world’s largest financial exchanges, when he served as Chairman of the NASDAQ.
Certainly you’re familiar with the story. Madoff ran a classic pyramid scheme, where yesterday’s “investors” were paid off with the money of new ones. The fraud finally collapsed when there were not enough new victims to support the growing withdrawals. In a story that has become all too common in modern finance, the former “pillar of the community” turns out to be a slick con man with an amazing lack of conscience.
Certainly Madoff must be in shackles at Guantanamo Bay right now. Perhaps he has already been tortured and moved to solitary confinement. Nope. Even worse. He is currently under home detention with a nightly curfew (a curfew!).
The mainstream press often presents a story like this as if it is an open and shut case. But like many of Madoff’s investors, I would venture that there is a LOT we don’t know about what went on here.
First, we are asked to believe that not one, but DOZENS of sophisticated hedge funds and international banks circumvented their internal risk control procedures and did not carry out even the most elementary due diligence. They invested in a black box system with constantly high returns, a lack of third party oversight, a total obfuscation of what was actually being invested in, and a one-man accounting firm auditing the multi-billion dollar operation.
We are also asked to believe that Madoff orchestrated the entire fraud, acting alone. Neither his family, his traders, his inner circle, nor his employees had any idea that anything was amiss. Puh-lease!
Neither of these scenarios is fully plausible, in my opinion. My purpose in this essay is not to dissect the scam. I’m sure the details will be forthcoming in the months ahead – if not from the mainstream press, then certainly from other reliable sources.
Rather, my intent is to discuss what we can learn from this situation and how can it guide your investing in the months and years ahead.
What Have We Learned?
We certainly have learned that we cannot always rely on what we hear and what we see at first glance. I am reminded of a sales meeting I had in 2000 with executives of Enron at their headquarters in Houston. After my presentation, I was given a short tour and asked if I wanted to see their trading operation. It turns out that a couple dozen Wall Street analysts were there as well. We all left duly impressed.
It wasn’t until a year or so later that I learned the whole thing was a sham. Not only were the company’s profits “pretend”, but so was the trading floor. It might as well have been a movie set. Enron had staffed and “decorated” the trading floor to impress – make that, deceive – Wall Street analysts into believing that the company was operating a thriving energy trading operation.
In a BBC article, Enron employee Carol Elkin said, “It was an elaborate Hollywood production that we went through every year when the analysts were going to be there to impress them to make our stock go up. It was absurd that we were doing this. But the most absurd part was that it worked.”
It has not been a good decade for the reputation of American business. There is an old proverb that says, “The fish rots from the head down.” In the case of America, I am saddened to say that the proverb applies. The New York Times suggests that Madoff’s scam “may be the largest Ponzi scheme in history.” Unfortunately, it is not even close.
The Ponzi Scheme of “Unfunded Liabilities”
There is no bigger Ponzi scheme than those operated by the Federal government – Social Security and Medicare. Both programs are nothing but an inverted pyramid with money from new contributions going to pay withdrawals. The only difference is that Charles Ponzi and Bernie Madoff didn’t force people to give them money.
However, the eventual result will be the same, just on a much larger scale. As the withdrawals inevitably swamp the new contributions, both programs will end in disaster and disgrace.
And for that matter, what is the difference from Madoff’s scheme and that of the big banks who have finally had to admit that their own financial statements were bogus and many of their “assets” worthless. If nothing else, I hope that people are finally waking up to the fact that in a fiat money system, the entire economy is based on a Ponzi scheme of ever-expanding debt.
Where Was the Regulation?
Inevitably, when a fraud of this magnitude comes to light, politicians and pundits come out of the woodwork saying that we need better regulation and more laws. Wrong! Fraud is already illegal. And as long as we have a crony capitalist system, cronyism will always trump regulation.
The regulators are invariably selected from the organizations they are meant to regulate. The public agencies become corrupted and ultimately beholden to powerful private interests.
And in any case, regulation can actually be part of the problem. The SEC has helped to foster a mentality of trustworthiness in the financial system that we now know was undeserved. When investors are lulled to sleep by the illusion of regulation, they make decisions they would not otherwise make.
So What Can You Trust?
Am I suggesting that you can’t trust the government… the banks… the regulators… the financial exchanges… or even the companies we invest in? Well, not necessarily. But I am suggesting that you keep a wary eye on all of the above as far as your money is concerned.
I would also suggest that you invest a portion of your assets in the rare asset that has no counterparty risk – physical gold and silver. Gold that you can hold in your hand. If all else fails, you still have something that has maintained its value and has been desired for virtually all of human history.
INTERNAL ENDORSEMENT
The Coming Gold Rush of 2009 Could Hand You Safe Gains of 408%
If you think it’s too late to make big money in the precious metals bull market, it’s time to think again. The financial crisis has caused tremendous pain… but the “solutions” are likely to make the situation even worse in the long run. But there is a way to protect and grow your wealth… with inflation proof, depression proof gold!
Click here to learn how to turn the gold rush of 2009 into safe gains of 408%
Half Way to Hell
By Rusty McDougal
The US is in a mess that will inevitably be seen as one for the ages. Comparisons will be made with the Great Depression of the 1930s but that one won’t hold a candle to the presently unfolding one. How long is it going to take to get through this financial and economic disaster?
Three of my friends from dental school and I just got together for a Christmas dinner. This has been going on for 32 years. This year we went to a steak house appropriately named “Bones”. I was shocked how crowded and thriving this high-end restaurant was. No economic problems on those plates.
The real world is another story altogether and this was a main topic of conversation amongst the four of us. I suspect we all save up BS and bluster during the year to throw at each other during these meetings but I can only prove that on my part.
Last year I threw out the 2008 label of “Year of the Bailouts”. I’m not sure any of my fellow diners remembered so I was a little more emphatic this year. Regardless, the same result with their memories is expected.
2009 should see the US dollar fall by 30 to 40%!
One buddy asked if that is a bad thing and I assured him it will be. You’re looking at a global earthquake here as a cascading dollar will disrupt a multitude of other markets. Precious metals, Treasury debts, stocks and business in general will be impacted by a falling dollar, "Plunging Dollar - What, Me Worry?" You will be also.
The conversation veered to how long it will take to hit bottom on the economic and financial side. I stated we’re about halfway there in extremely bad news coming our way. One friend agreed but another wanted to believe we’re close to the bottom here and now. The fourth was distracted by a waitress, his steak or a shiny object and had zero input.
What are the signs that tell us we’re only halfway to the bottom? The magnitude of the fraud coming out of the NY/DC Axis of Weasels is just becoming apparent. Americans are in denial. Global observers are completely astounded that the various officials, like Paulson, Bernanke and the SEC, remain in charge of our economy and finances even though their policies and phony ideals are what have caused these problems to begin with.
History is replete with appropriate methods of dealing with those who fleece the public:
It’s time to hear a few large thuds. Bets should be made on which shaped heads will roll the truest and furthest. We’re way past tar and feathers at this point.
In all seriousness (as if I’m not) the US public needs to wake up. Here’s a partial list of events yet to unfold:
Commercial real estate is every bit as compromised as residential
Insurance companies are full of toxic financial products
Pension funds are full of toxic products and failing investments
Credit card debts, tuition loans and car loans are going belly up
Fraud remains endemic in our money and our markets
The remaining big banks are on life support
Bailouts have only shored up crony capitalists to date
Derivatives continue to implode behind the scenes
Resetting of mortgage loans is going to cause another round of defaults and foreclosures
Government “solutions” are destined to worsen the problems
Municipal bonds are failing
Numerous states like California, Arizona and Florida are bankrupt
A lot of hedge funds are imploding
Interestingly, I’ve recently read commentary about what exactly the definition of a depression is. The “D” Word is now thrown out with more and more regularity. IDE readers have a leg up on the newcomers "The 'D' Word" - 2/27/2008, "The 'D' Word: Part 2 Not Your Father's Recession" - 3/5/2008 and "The 'D' Word: Part 3 Your Cheatin' Heart or My Lyin' Eyes?" - 3/12/2008. Most still can’t discern the times.
Hang on to your hats (and your heads), we’re only halfway to the bottom. There is hell to be paid.
Invest Resourcefully,
Rusty
Tuesday, December 23, 2008
Credit Crisis
"The kind of thinking that will solve the world's credit crisis problems will be of a different order to the kind of thinking that created those problems in the first place."
—Albert Einstein/Andre Payne
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