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.

Continue reading “Retirement Investing’s Magic Number Is $16,500”

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).

Continue reading “A Simple Recipe for the 50-Year Investor”

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?

Continue reading “Stop Lying to Yourself About Value Investing”

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

Continue reading “Is Smart Beta Investing Really Smarter?”

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.

Continue reading “Investing: A Random Talk With Malkiel”

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).

Continue reading “Yes, 401Ks Are Broken. Let’s Fix Them”

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.”

Continue reading “Pimco Wants Some Junk in Its Trunk”

Private Equity’s Diminishing Returns

Investors can’t get enough of private equity. According to research firm Preqin, private equity firms’ assets under management ballooned from $580 billion in 2000 to $2.4 trillion by June 2015 (the latest date for which numbers are available).

Private equity investing has become de rigueur for big money managers ever since The Yale Endowment made piles of money in the funds years ago — making private equity a fixture for money managers trying to emulate Yale’s model.

Current expectations for low returns on U.S. stocks and bonds, at a time when many hedge funds are stumbling, has also left many investors seeking private equity returns to breathe life into their portfolios.

Continue reading “Private Equity’s Diminishing Returns”

Does Buffett Really Love the S&P 500?

Warren Buffett crooned one of his greatest hits for groupies attending Berkshire Hathaway’s annual meeting in Omaha last weekend: “Just buy an S&P index fund and sit for the next 50 years.”

Buffett has a well-deserved reputation as a legendary investor, but if ordinary folks want to mimic the master, the last place they should be parking their funds is the S&P 500.

Buffett is a big fan of the S&P 500. He has already declared that 90 percent of the money he leaves to his wife will be invested in Vanguard’s S&P 500 index fund. He also wagered a million dollars that Vanguard’s S&P 500 index fund would beat a basket of hedge funds over ten years from 2008 to 2017. (The S&P 500 index fund is currently crushing the hedgies.)

Continue reading “Does Buffett Really Love the S&P 500?”