The USA Today did a series of articles on insurance on Friday, March 25th, and I was a contributer to the article as noted below. And WTOP Radio also called me at 6:50 AM this morning and asked a few questions about last minute tax planning ideas.
As published in USA Today
Common insurance pluses, pitfalls
Cutting back now can leave you in a lurch
By Christine Dugas USA TODAY
"As American families are struggling just to pay their bills, it’s not surprising that many are putting off life insurance. Individual life insurance hit a 50-year low last year, according to LIMRA, an industry-sponsored group.
But during tough economic times people should not sit back and think they’re immortal, says Gordon Bernhardt, a fee-only financial planner in McLean, Va."
Click here to read the full article
Monday, March 28, 2011
Money and Marriage
They say opposites attract. So, what happens when a saver marries a spender? Differing fiscal philosophies don’t have to spell trouble for a marriage. To co-exist peacefully, follow these five tips:
- Share your past. Experts say we form our attitudes towards money in childhood. Understanding your partner’s roots may help you to appreciate his or her point of view.
- Care enough to compromise. Enumerate and negotiate your short- and long-term goals. Your budget should include the top goals of each partner as well as an appropriate amount of “mad money” for each partner to spend or save.
- Make it automatic. Having money automatically deducted from your paychecks ensures you both contribute regularly toward your goals – and avoid arguments.
- Talk money. Routinely scheduled discussions of just ten minutes a week can help avoid major money battles.
- Periodic reviews. Have an annual "board" meeting to review all of your accounts and remind each other where important documents are stored.
- Swap roles. If the saver hasn’t been to the grocery store in a decade, he or she should take the list and go food shopping, while the shopper/spender takes a stab at paying the monthly bills. This role reversal may result in an appreciation for your partner’s talents and perspective.
Monday, March 21, 2011
The Article’s Title Sums It All Up
The title of a new article on Knowledge@Wharton caught my eye: "If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?" Although multiple academic studies have found that index funds, which seek to match the performance of a broad market sector, consistently perform better than expensive actively managed funds where money managers try to beat the market, indexing (or passive management) accounts for only about 13% of assets in equity mutual funds.
Noting that most answers to the question, "Why do a majority of investors choose active management when passively managed funds perform better?" could be categorized under the umbrella "Investors aren’t very bright," Wharton finance professor Robert F. Stambaugh in a paper entitled, "On the Size of the Active Management Industry," co-authored with Lubos Pastor, a finance professor at the University of Chicago Booth School of Business, concludes that investors aren’t making foolish choices, but choose active management in a "kind of arms race to unearth a limited number of bargain-priced investments."
"We wanted to come up with a rational explanation for why, despite this rather mediocre track record for active management, the lion's share of money is still managed that way, as opposed to passively," Stambaugh says in the article.
"If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?" summarizes Stambaugh’s argument this way: "Investors' rational belief that active managers have a better chance of sniffing out good deals if there are not too many managers looking. A rational investor will pull money out of actively managed funds if the results are disappointing, but he will not pull out entirely because he realizes that other investors will withdraw money, too. That will leave less money to chase the few bargains, making them easier to find."
Acknowledging that industry marketing also has a hand in investors’ preferences, Stambaugh concludes, "There's no reason to resort to calling investors stupid if you can explain [their behavior] without doing that."
Noting that most answers to the question, "Why do a majority of investors choose active management when passively managed funds perform better?" could be categorized under the umbrella "Investors aren’t very bright," Wharton finance professor Robert F. Stambaugh in a paper entitled, "On the Size of the Active Management Industry," co-authored with Lubos Pastor, a finance professor at the University of Chicago Booth School of Business, concludes that investors aren’t making foolish choices, but choose active management in a "kind of arms race to unearth a limited number of bargain-priced investments."
"We wanted to come up with a rational explanation for why, despite this rather mediocre track record for active management, the lion's share of money is still managed that way, as opposed to passively," Stambaugh says in the article.
"If Index Funds Perform Better, Why Are Actively Managed Funds More Popular?" summarizes Stambaugh’s argument this way: "Investors' rational belief that active managers have a better chance of sniffing out good deals if there are not too many managers looking. A rational investor will pull money out of actively managed funds if the results are disappointing, but he will not pull out entirely because he realizes that other investors will withdraw money, too. That will leave less money to chase the few bargains, making them easier to find."
Acknowledging that industry marketing also has a hand in investors’ preferences, Stambaugh concludes, "There's no reason to resort to calling investors stupid if you can explain [their behavior] without doing that."
Tuesday, March 15, 2011
The Unexpected Recovery
Last week on March 9, 2011, the world celebrated the two-year anniversaryof the low point in the global markets, the point of maximum pain and panic following the 2008 financial crisis and Great Recession.
On March 9, 2009, the S&P 500 Index had fallen to its low of 676.53, which is about where it had been almost 13 years before--on June 10th and October 3rd of 1996 it closed at 672.16 and 692.78, respectively. On March 9, 2011, the S&P 500 Index closed at 1321.15--a 95% increase from its low two years earlier but still down 18% from its all time high of 1565.15 on October 9, 2007. During the same two year period of time the Russell 2000 Index--an index that tracks small cap stocks--rose almost 140% from 343.26 to 821.19.
If you look back at the economic forecasts and market reports in March of 2009, you will not find a prediction that the markets would recover as they have. There was even some doubt whether the U.S. economy would survive intact, and the most common prediction was deflation, continued recession and more downside in the stock markets.
In retrospect, this most frightening time was the ideal time to shove all the chips on the table and bet everything on a stock market recover--but who had the intestinal fortitude for that? After the losses that virtually all investors had sustained, no matter where they had deployed their assets, few had the stomach, or the heart, to bet on a robust recovery. This is a terrific lesson in the value of disciplined investing; the consensus and our own gut feelings are often wrong and inevitably point us in the opposite direction from where the returns are going to come from next. In the past, every long-term upturn has been greater than the losses sustained in the prior bear market. We don't know how this one will end, but it seems to be following the same seemingly unlikely, but not unusual, course.
On March 9, 2009, the S&P 500 Index had fallen to its low of 676.53, which is about where it had been almost 13 years before--on June 10th and October 3rd of 1996 it closed at 672.16 and 692.78, respectively. On March 9, 2011, the S&P 500 Index closed at 1321.15--a 95% increase from its low two years earlier but still down 18% from its all time high of 1565.15 on October 9, 2007. During the same two year period of time the Russell 2000 Index--an index that tracks small cap stocks--rose almost 140% from 343.26 to 821.19.
If you look back at the economic forecasts and market reports in March of 2009, you will not find a prediction that the markets would recover as they have. There was even some doubt whether the U.S. economy would survive intact, and the most common prediction was deflation, continued recession and more downside in the stock markets.
In retrospect, this most frightening time was the ideal time to shove all the chips on the table and bet everything on a stock market recover--but who had the intestinal fortitude for that? After the losses that virtually all investors had sustained, no matter where they had deployed their assets, few had the stomach, or the heart, to bet on a robust recovery. This is a terrific lesson in the value of disciplined investing; the consensus and our own gut feelings are often wrong and inevitably point us in the opposite direction from where the returns are going to come from next. In the past, every long-term upturn has been greater than the losses sustained in the prior bear market. We don't know how this one will end, but it seems to be following the same seemingly unlikely, but not unusual, course.
Monday, March 14, 2011
Has the Recession Changed the Conspicuous Consumer?
We’ve all read articles suggesting that the Great Recession was a “generation-changing moment” where fast-spending consumers realized the errors of their ways. I remember reading the comment Jeff Immelt, chief executive officer of General Electric Co., made to a shareholder group, “If you think this is only a cycle, you’re just wrong. This is a permanent reset. There are going to be elements of the economy that will never be the same, ever.”
Although the recession is behind us, we are still dealing with slow economic growth, diminished investment returns, higher unemployment, tighter credit, the threat of inflation and higher taxes. These circumstances certainly will make the journey to your financial destination more difficult. But just how much has the American consumer changed to account for a new grade of difficulty? According to a recent study, not much.
“Conspicuous Consumption in a Recession: Toning it Down or Turning it Up?” forthcoming in the Journal of Consumer Psychology and co-authored by USC Marshall School of Business Associate Professor Joseph Nunes along with Xavier Drèze, Associate Professor of Marketing at UCLA's Anderson School of Management and USC Marshall School of Business doctoral student Young Jee Han, suggests that conspicuous consumption endures.
The authors conclude consumers remain interested in logo-laden products and are willing to pay premium prices for them. Whereas before the recession, consumers used luxury brand logos as a badge signifying their fiscal strength, and during the recession, consumers clung to luxury goods to prove that they were prospering even during the economic downturn.
Utilizing data from Louis Vuitton and Gucci, the researchers found that products introduced during the recession, at a time when one would think frugality would be “in,” displayed the luxury brand logo even more prominently than in previous years. More surprising was the fact that handbag prices actually increased during the recession. Said Professor Nunes in a university press release, “These are savvy companies that really understand their customers; they understand that they cater to a certain segment that desires products used to signal their status. That desire doesn’t go away, even in hard times.”
Interesting. Study after study indicates that American workers are delaying retirement to make up for losses suffered in the recession. Could it be we are willing to work longer to ensure we don’t have to lower our standard of living? Perhaps we should be asking ourselves – Are designer handbags, and other luxury trappings, essential to our happiness?
Although the recession is behind us, we are still dealing with slow economic growth, diminished investment returns, higher unemployment, tighter credit, the threat of inflation and higher taxes. These circumstances certainly will make the journey to your financial destination more difficult. But just how much has the American consumer changed to account for a new grade of difficulty? According to a recent study, not much.
“Conspicuous Consumption in a Recession: Toning it Down or Turning it Up?” forthcoming in the Journal of Consumer Psychology and co-authored by USC Marshall School of Business Associate Professor Joseph Nunes along with Xavier Drèze, Associate Professor of Marketing at UCLA's Anderson School of Management and USC Marshall School of Business doctoral student Young Jee Han, suggests that conspicuous consumption endures.
The authors conclude consumers remain interested in logo-laden products and are willing to pay premium prices for them. Whereas before the recession, consumers used luxury brand logos as a badge signifying their fiscal strength, and during the recession, consumers clung to luxury goods to prove that they were prospering even during the economic downturn.
Utilizing data from Louis Vuitton and Gucci, the researchers found that products introduced during the recession, at a time when one would think frugality would be “in,” displayed the luxury brand logo even more prominently than in previous years. More surprising was the fact that handbag prices actually increased during the recession. Said Professor Nunes in a university press release, “These are savvy companies that really understand their customers; they understand that they cater to a certain segment that desires products used to signal their status. That desire doesn’t go away, even in hard times.”
Interesting. Study after study indicates that American workers are delaying retirement to make up for losses suffered in the recession. Could it be we are willing to work longer to ensure we don’t have to lower our standard of living? Perhaps we should be asking ourselves – Are designer handbags, and other luxury trappings, essential to our happiness?
Monday, March 7, 2011
Is College Worth It?
Here’s a statistic that recently gave me pause: 45 percent of college students demonstrate no significant improvement in a range of skills, including critical thinking, complex reasoning, and writing during their first two years of college. The findings come from an analysis of more than 2,300 undergraduates at twenty-four institutions and are shared in Academically Adrift, a book written by Richard Arum and Josipa Roksa. The author’s research draws on survey responses, transcript data, and results from the Collegiate Learning Assessment, a standardized test administered to students in their first semester and again at the end of their sophomore year.
For parents struggling to pay soaring tuition costs, many from savings they’ve been contributing to since their children were born, this statistic will be alarming. Many will no doubt counter the findings shared in Academically Adrift with the bevy of statistics about how much more college graduates earn over their lifetime, or how, as a recent College Board study “Education Pays 2010” finds, they have been less negatively impacted by the recession than those with just a high school diploma. Turning the tables, in Academically Adrift, the authors offer their analysis of who profits from college and, most importantly, how colleges must transform themselves to respond to the changing needs of today’s students is illuminating and instructive.
If you’re wrestling with college costs, you’ll be interested in an article on my web site, “Give College Funding the Old College Try.”
For parents struggling to pay soaring tuition costs, many from savings they’ve been contributing to since their children were born, this statistic will be alarming. Many will no doubt counter the findings shared in Academically Adrift with the bevy of statistics about how much more college graduates earn over their lifetime, or how, as a recent College Board study “Education Pays 2010” finds, they have been less negatively impacted by the recession than those with just a high school diploma. Turning the tables, in Academically Adrift, the authors offer their analysis of who profits from college and, most importantly, how colleges must transform themselves to respond to the changing needs of today’s students is illuminating and instructive.
If you’re wrestling with college costs, you’ll be interested in an article on my web site, “Give College Funding the Old College Try.”
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