Britain’s Challenges Are More Basic Than Brexit

The Brexit vote is coming! The Brexit vote is coming!

Much has been written and said about what might happen if U.K. voters decide to ditch the European Union tomorrow, and much of it hasn’t been reassuring. The U.K.’s economy will slow. U.K. companies will be poorer. Jobs will be lost. George Soros thinks the pound will plunge — even more than it did when he made $1 billion betting against it back in 1992.

That sounds bad. But before investors freak out about a Brexit-induced meltdown in the U.K., they would be wise to consider the current state of play.

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Rip Off the S&P 500’s Cover. What’s Inside?

Passive investing has plenty going for it. It’s cheap. It’s tax efficient. It has paid investors handsomely over long periods. And it’s, well, passive — all you have to do is sip lemonade and watch the grass grow.

The poster child for passively buying the market, of course, is the S&P 500 — the first index fund — and it has been particularly generous to investors in recent years. The S&P 500 Index has returned 11.6 percent annually over the last five years from June 2011 to May 2016 (including dividends), while the S&P 500 Value Index — an active strategy that excludes pricey growth companies from its basket of stocks — returned just 10.5 percent annually over the same period.

But the S&P 500’s run may be coming to an end. Active strategies have outshined the S&P 500 so far this year. And the S&P 500 Value has returned 5.3 percent this year through May, whereas the S&P 500 has returned just 3.6 percent.

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Retirement Investing’s Magic Number Is $16,500

I wrote a column earlier this week about U.S. workers’ widespread and well-founded anxiety about retirement, and how, in the absence of any meaningful public or private efforts to address those concerns, many plan to work into their 70s.

I proposed that this newly-contemplated fifth decade of work presents a golden opportunity to fund retirements quite cheaply — for just $16,500 per worker by my estimation — assuming that: 1) We set aside that money at the beginning of workers’ careers in order to leverage the magic of 50 years of compounding returns, and 2) We invest the money in a straightforward 50-50 U.S. stock-bond portfolio.

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A Simple Recipe for the 50-Year Investor

U.S. workers are worried about retirement, and who can blame them? We’re living longer. Social security looks increasingly overburdened. Employers have ditched pensions in favor of laughably inadequate 401(k)s and other defined contribution plans.

According to Willis Towers Watson, a human resource consulting firm, 71 percent of full-time employees believe that social security will be “much less generous” when they retire than it is today — and 76 percent believe that they will be “much worse off” in retirement than their parents.

In the absence of any meaningful effort by the public or private sector to address those fears, many workers are doing the only thing they can do: planning to work longer. About 47 percent of full-time employees who are members of a retirement plan told Willis Towers Watson that they would work longer if they thought that their retirement income would fall short (the other, less popular, options were to save more, live more frugally, or hope for the best). And 28 percent of full-time employees expect to work past the age of 70 (including 5 percent who expect to never retire).

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Stop Lying to Yourself About Value Investing

Value investing has been in the doghouse for a decade. That’s right, growth stocks have trounced value stocks for a DECADE.

Some investors are betting that it’s finally value’s time to shine. According to Bloomberg data, investors poured $5.5 billion into value ETFs and withdrew $6.2 billion from growth ETFs so far this year.

Part of value investors’ newfound enthusiasm springs from classic folklore – the old adage that value stocks outperform during expansions and languish during contractions. If the Fed’s insistence on raising rates is a signal that the U.S. economy is picking up steam, then it’s a new day for value stocks, right?

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Is Smart Beta Investing Really Smarter?

In the brave new world of next generation, active investment management, smart beta is all the rage. Smart beta relies on five major strategies — or “factors” — to fine tune market returns:

Value – buying cheap companies

Size – buying small companies

Quality – buying highly profitable and stable companies

Momentum – buying the trend

Low Volatility – buying defensive companies

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Investing: A Random Talk With Malkiel

For decades, Burton Malkiel has been a leading advocate of the efficient market hypothesis and its logical extension, the low-cost, passive approach to investing — as outlined in his bestselling book, “A Random Walk Down Wall Street.” Dr. Malkiel is a Princeton economist and Chief Investment Officer of a robo-adviser, Wealthfront.

I had the opportunity to chat with Dr. Malkiel recently about smart beta, his Wealthfront portfolios, and how investors should think about rock-bottom interest rates.

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Yes, 401Ks Are Broken. Let’s Fix Them

Ted Benna, the man widely regarded as the father of the 401(k) plan, recently reflected on his creation – and he wasn’t happy. Benna laments that 401(k)s have become so complicated and so expensive and so rife with opportunities for mistakes.

As we know, 401(k)s and other defined contribution plans have become the go-to retirement plans for private sector workers. According to the Employee Benefit Research Institute, 84 percent of private sector workers who participated in an employment-based retirement plan were enrolled in a traditional pension in 1979. By 2011, 93 percent were enrolled in a 401(k) or other defined contribution plan. (401(k)s are the largest and most common type of defined contribution plan).

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Pimco Wants Some Junk in Its Trunk

Pimco is gearing up for a junk bond binge — or at least opening the door to that possibility. The Pimco Total Return Fund, Pimco’s flagship bond fund, will be permitted to invest up to 20 percent of the Fund in junk bonds beginning on June 13, up from 10 percent currently.

The Fund’s current allocation to junk bonds is only 2.5 percent, so the new 20 percent ceiling would be a monster eightfold increase in the Fund’s allocation to junk bonds if fully utilized.

Why now? Mark Kiesel, Pimco’s chief investment officer for global credit and one of the Fund’s managers, told Bloomberg News that the junk bond market “is as attractive as it’s been in four or five years.”

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