I really enjoy the television series, Monk. The hero is an insufferably neurotic police detective on extended disability due to his mental disorders. Monk is certain that something horrible is just about to happen, as he absolutely knows that the world is full of germs, poisons, and the like. The theme song, “It’s a Jungle Out There” written by Randy Newman is perfect for this show. It also seems to apply to retirement planning. On my vacation I bought a used copy of Dave Ramsey’s book, “The Total Money Makeover.” One of Dave’s principles is to only buy at a deep discount, so never pay retail for a Dave Ramsey Book? At any rate, I certainly agree with most of the book’s content and I certainly admire what he has accomplished. However, when I read his chapter on retirement planning I thought some of his assumptions were wildly optimistic. Because:
It's a jungle out there
Disorder and confusion everywhere
No one seems to care
Well I do
Hey, who’s in charge here?
Dave is assuming a 12% annual return on retail mutual funds, his preferred vehicle for individual investors. He is also assuming 4% inflation, giving a net return of 8%.
From a recent Wall Street Journal entitled, Retirement Disaster Ahead; John West and Rob Arnott of Research Affiliates observe that over the last half century, corporate earnings have grown at 1% per year in inflation adjusted terms. That would be 1.2% since 1900. The last century was the American Century. Can we expect a repeat with an aging population and a heavy public and private debt burden? Can we continue to grow our economy in real terms now that China is becoming the world’s industrial powerhouse?
West and Arnott are projecting a weighted return of 4.1% for a balanced portfolio of 60% stocks and 40% bonds. The return on a more aggressive portfolio might rise to 5.2%. Like Dave Ramsey, the major public pension funds are projecting an after inflation return of 8%. West and Arnott are projecting about 2.1%.
People think I'm crazy, 'cause I worry all the time
If you paid attention, you'd be worried too
Again, from the article, here is what those numbers actually mean.
Someone who saves $10,000 a year for 30 years and invests the money at 5.5% a year will end up with $760,000. Someone who only manages 2.5% ends up with $420,000, big difference.
Back in January I wrote another article on this subject entitled, “Counting our Chickens.” In this article I observed, “The author also asked some respected experts what guaranteed rate of return after taxes and inflation would be realistically acceptable. John C. Bogle, founder of the Vanguard Group of mutual funds replied, 2.5%. Elroy Dimson of London Business School, an expert on the history of market returns: 0.5%.”
Do you really want to bet your future on an 8% after inflation return on your investments? The title of the latest report by West and Arnott is “Hope is not a Strategy.”
As the song says,
I could be wrong now, but I don't think so!
'Cause there's a jungle out there.
It's a jungle out there.
Sunday, October 31, 2010
Saturday, October 30, 2010
Farms, Forests and Foothills
It was hard to return from vacation this year. We rented a cabin in the woods near Westminster, SC in Oconee County. At night there were no sounds but the barely audible passing of an occasional train or the distant complaints of a disturbed dog. The people of Westminster were polite, even kind. I have reached the age where the young women working at the grocery stores and the restaurants invariably address me as hun, honey, or darlin’ Everybody expects that you will be drinking sweet tea with your meal and the pace of life is just a lot slower than the Washington, DC area. I like the Northwest corner of South Carolina. We lived there for 9 years, leaving for Columbia in 1978. Somehow this area feels a lot like home.
Although the unemployment rate is a little above the national average in Greenville, Pickens, and Oconee County, it doesn’t have that bad feeling one gets from too many empty store fronts, battered cars, and that desperate depressed expression of too many bills and not enough month. The Dollar General Stores and Walmart are booming. Curiously, I saw a lot of expensive pickup trucks and not a few new cars in the parking lots of these establishments. It appears the locals are not interested in wasting their money on brand name consumables but are not going to give up their new F150 truck. There is a lot of light industry a few miles further North in Anderson and Greenville. There are even a few small plants near Westminster. I am not exactly sure why there is a discrepancy between the numbers (like average wage and unemployment rate) and a general feeling of well being. Perhaps, it is a combination of a low cost of living, low taxes, and a low crime rate. Perhaps, it is because much of the area is rural. People own farms and small independent logging operations seem to employ a lot of folks. I imagine that unemployment insurance plus an extended family with farms or an off the record part time job cutting trees makes for a better life during hard times.
Greenville, the largest city in the area is remarkable. When we left the area in 1978, Greenville was a dying textile center with a decaying downtown. The crime rate was climbing and property values were heading down. Thanks to Mayor Max Heller, something of a local hero, Greenville has been reborn. Main Street is now an attractive upscale food court. There are new office buildings in the downtown skyline that house regional banking centers and insurance companies. The city government built a new cultural center and a very nice river park with interesting walking paths, transforming one of the worst sections of the old city into a magnet for both locals and visitors. Some of the old textile mills have been reborn as condos, restaurants, or offices. BMW, Michelin, and small auto part factories have provided a new generation of factory jobs. It is a changed city. My wife, along with several groups of young girls spent a Saturday morning looking for 9 small bronze mice hidden along Main Street. By the way, she found them all.
One of the things that surprised me was the number of large Baptist and Pentecostal/Charismatic churches in the three Northern counties. It is hard to understand how the population could support so many large, fairly prosperous looking churches. It is not unusual to spot a large brick church complex with a sizable parking lot located in what appears to be the middle of nowhere. There is a Presbyterian church in Westminster and I spotted a number of Mennonites in the local grocery store but no evidence of Episcopalians or Catholics in Oconee County.
The poets tell us, “You can’t go home again.” To a degree that is true. My wife and I visited Furman University, our first college, after a 25 year absence. It was unrecognizable. There were so many new buildings on the same campus it felt claustrophobic. We still have friends and family in the area. Our relationships, the fields, and the forest are older, but they all still feel like home.
Although the unemployment rate is a little above the national average in Greenville, Pickens, and Oconee County, it doesn’t have that bad feeling one gets from too many empty store fronts, battered cars, and that desperate depressed expression of too many bills and not enough month. The Dollar General Stores and Walmart are booming. Curiously, I saw a lot of expensive pickup trucks and not a few new cars in the parking lots of these establishments. It appears the locals are not interested in wasting their money on brand name consumables but are not going to give up their new F150 truck. There is a lot of light industry a few miles further North in Anderson and Greenville. There are even a few small plants near Westminster. I am not exactly sure why there is a discrepancy between the numbers (like average wage and unemployment rate) and a general feeling of well being. Perhaps, it is a combination of a low cost of living, low taxes, and a low crime rate. Perhaps, it is because much of the area is rural. People own farms and small independent logging operations seem to employ a lot of folks. I imagine that unemployment insurance plus an extended family with farms or an off the record part time job cutting trees makes for a better life during hard times.
Greenville, the largest city in the area is remarkable. When we left the area in 1978, Greenville was a dying textile center with a decaying downtown. The crime rate was climbing and property values were heading down. Thanks to Mayor Max Heller, something of a local hero, Greenville has been reborn. Main Street is now an attractive upscale food court. There are new office buildings in the downtown skyline that house regional banking centers and insurance companies. The city government built a new cultural center and a very nice river park with interesting walking paths, transforming one of the worst sections of the old city into a magnet for both locals and visitors. Some of the old textile mills have been reborn as condos, restaurants, or offices. BMW, Michelin, and small auto part factories have provided a new generation of factory jobs. It is a changed city. My wife, along with several groups of young girls spent a Saturday morning looking for 9 small bronze mice hidden along Main Street. By the way, she found them all.
One of the things that surprised me was the number of large Baptist and Pentecostal/Charismatic churches in the three Northern counties. It is hard to understand how the population could support so many large, fairly prosperous looking churches. It is not unusual to spot a large brick church complex with a sizable parking lot located in what appears to be the middle of nowhere. There is a Presbyterian church in Westminster and I spotted a number of Mennonites in the local grocery store but no evidence of Episcopalians or Catholics in Oconee County.
The poets tell us, “You can’t go home again.” To a degree that is true. My wife and I visited Furman University, our first college, after a 25 year absence. It was unrecognizable. There were so many new buildings on the same campus it felt claustrophobic. We still have friends and family in the area. Our relationships, the fields, and the forest are older, but they all still feel like home.
Saturday, October 2, 2010
Artificial Intelligence?
As I was thinking about the list of problem solving tips presented last week in “Problem Solving III (10 Habits of Mind for Investor),” it began to sound very much like how an intelligent child interacts with the world, at least until he or she learns about doubt and fear. In fact it sounded somewhat like some of the definitions of intelligence I discovered while writing a research paper on Artificial Intelligence. I present one of those lists from my paper for your consideration. I think it can describe the actions of a toddler exploring a back yard or a 60 year old man tottering about the stock markets.
The best short list describing attributes that indicate intelligence that I found in my readings comes from Godel Escher Bach by Douglas R. Hofstadter.
1) To respond to situations very flexibly;
2) To take advantage of fortuitous circumstances;
3) To make sense out of ambiguous or contradictory messages;
4) To recognize the relative importance of different elements of a situations;
5) To find similarities between situations despite differences which may separate them;
6) To draw distinctions between situations despite similarities which may link them;
7) To synthesize new concepts by taking old concepts and putting them together in new ways;
8) To come up with ideas which are novel;
The best short list describing attributes that indicate intelligence that I found in my readings comes from Godel Escher Bach by Douglas R. Hofstadter.
1) To respond to situations very flexibly;
2) To take advantage of fortuitous circumstances;
3) To make sense out of ambiguous or contradictory messages;
4) To recognize the relative importance of different elements of a situations;
5) To find similarities between situations despite differences which may separate them;
6) To draw distinctions between situations despite similarities which may link them;
7) To synthesize new concepts by taking old concepts and putting them together in new ways;
8) To come up with ideas which are novel;
Stone Cold Facts II
Here are the facts. Your political persuasions make no difference. These are the problems that confront this nation.
Our nation is in debt to the tune of 13.9 Trillion Dollars.
We have underfunded liabilities (such as Social Security) that are calculated at 55 Trillion Dollars.
Many of our states and municipalities are on the verge of bankruptcy. If these entities were required to abide by normal rules of accounting they would already be considered insolvent.
The problem is rapidly getting worse as the Federal Government is currently borrowing roughly 40 cents for every dollar it spends.
The individual American consumer is possibly in worse shape than his Government. The last official number I could find was 13.7 Trillion Dollars, including mortgages. Current estimates run about 16.2 Trillion Dollars.
We are rapidly approaching several historically important tipping points. Any one of these may or may not prove significant, but they frequently mark the beginning of the end for a nation.
1)The national debt is roughly equal to the nation’s Gross Domestic Product.
2)The interest on the national debt approaches 15% of Government expenditures
3)More than 50% of the individuals in a country are net beneficiaries of Governmental expenditures.
By the way, number 3 on this list is almost unavoidable as the Baby Boom approaches retirement.
We are told by economists that our structural unemployment level is now approximately 9%. That means we can’t expect the unemployment level to get much better than 9% in the foreseeable future. What this means in human terms is there are 26 million Americans who are unemployed or working less than full time because no work is available. It means that 41 million Americans are on the current equivalent of food stamps. This is the highest number in history.
Over the last 20 years, our public policies have resulted in the exportation of approximately 20 million American jobs to countries like China and India. The stable wealth creating factory jobs with good benefits that made this country the envy of the world are gone, perhaps forever.
Debt that can not be repaid will not be repaid. It is repudiated or it is inflated out of existence by a devaluation of the underlying currency. When this occurs, the unintended second order effects are often rather unpleasant. They include the rise of dictators, military coupes, world wars, civil wars, and revolutions.
At this point, fixing blame is not the issue. These problems will not be solved in one year or in ten, but we must begin to head in a different direction, both as individuals and as a country, or we face extinction.
Our nation is in debt to the tune of 13.9 Trillion Dollars.
We have underfunded liabilities (such as Social Security) that are calculated at 55 Trillion Dollars.
Many of our states and municipalities are on the verge of bankruptcy. If these entities were required to abide by normal rules of accounting they would already be considered insolvent.
The problem is rapidly getting worse as the Federal Government is currently borrowing roughly 40 cents for every dollar it spends.
The individual American consumer is possibly in worse shape than his Government. The last official number I could find was 13.7 Trillion Dollars, including mortgages. Current estimates run about 16.2 Trillion Dollars.
We are rapidly approaching several historically important tipping points. Any one of these may or may not prove significant, but they frequently mark the beginning of the end for a nation.
1)The national debt is roughly equal to the nation’s Gross Domestic Product.
2)The interest on the national debt approaches 15% of Government expenditures
3)More than 50% of the individuals in a country are net beneficiaries of Governmental expenditures.
By the way, number 3 on this list is almost unavoidable as the Baby Boom approaches retirement.
We are told by economists that our structural unemployment level is now approximately 9%. That means we can’t expect the unemployment level to get much better than 9% in the foreseeable future. What this means in human terms is there are 26 million Americans who are unemployed or working less than full time because no work is available. It means that 41 million Americans are on the current equivalent of food stamps. This is the highest number in history.
Over the last 20 years, our public policies have resulted in the exportation of approximately 20 million American jobs to countries like China and India. The stable wealth creating factory jobs with good benefits that made this country the envy of the world are gone, perhaps forever.
Debt that can not be repaid will not be repaid. It is repudiated or it is inflated out of existence by a devaluation of the underlying currency. When this occurs, the unintended second order effects are often rather unpleasant. They include the rise of dictators, military coupes, world wars, civil wars, and revolutions.
At this point, fixing blame is not the issue. These problems will not be solved in one year or in ten, but we must begin to head in a different direction, both as individuals and as a country, or we face extinction.
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