November 1, 2018
US Inequality is Feeding on Itself
The fact that the richest Americans are grabbing such a big slice of the pie isn’t exactly breaking news.
What is news is that Wall Street is getting nervous about it. Moody’s Investors Service, a private watchdog for the federal government’s fiscal soundness, has concluded that inequality has reached the point that it threatens a system already being strained by increases in the federal debt. But Moody’s also noted that inequality is contributing to slower economic growth, which further aggravates inequality.
The high level of U.S. inequality today “sets us apart” from Canada, Australia, and several European countries, Moody’s said in an October report, “Widening Income Inequality Will Weigh on U.S. Credit Profile.”
Moody’s central concern is how inequality will affect the federal budget. When the economy slows in periods of high inequality, there are more lower-income households requiring support from costly programs like Medicaid. Federal tax revenues also decline during any downturn, leaving less money to pay for these means-tested programs and for social insurance programs like Social Security and Medicare.
The firm’s second concern is that inequality is a drag on the economy. When the middle-class is squeezed, for example, they have less money to buy consumer goods. And when the economy slows down, inequality can increase, as it did in the years after the 2008-2009 recession.
This has played out in a widening wealth gap, Moody’s said. The typical lower and middle-income worker’s net worth – assets minus liabilities – has shrunk since the recession, while net worth rose sharply for the people at the top.
One big reason for widening inequality is the stock market. Even though the market declined sharply this month, the post-recession bull market has beefed up investment portfolios – but only for the 50 percent of Americans who own company shares or stock mutual funds.
A second contribution to a widening wealth gap, post-recession, has been housing. A home is often the most valuable asset people own, so the steep drop in house prices and the spike in foreclosures were big setbacks for people who aspired to build wealth through homeownership. …Learn More
October 4, 2018
‘Retire Rich!’ Don’t Believe the Sales Pitch
If an alien were to drop in to study earthlings’ retirement, it would have to conclude that saving is either nearly hopeless or super easy.
Many Americans approach retirement planning with dread – hardly surprising, given that only about half of working-age adults are on track to have sufficient savings to retire in the lifestyle they’ve grown accustomed to while working.
But there purports to be an easier way – and it’s on YouTube. Googling “retirement” turns up all kinds of outlandish promises of nirvana for regular folks. Examples of YouTube titles are: “Retire Young. Retire Rich.” “Guaranteed Ways to Retire Rich.” “How to Retire in 10 Years – Much Easier Than You Think.” You get the picture.
Don’t be fooled. In a 401(k) world, what workers need is determination, planning, and persistence to ensure they’ll be prepared for old age. YouTube offers only magic bullets.
Many of these exploitative videos are targeted to 20-somethings new to the financial world, who may be more vulnerable and persuadable. But perhaps they are also able to attract hundreds or even thousands of viewers because they offer easy solutions to what may be our most anxiety-producing financial challenge: Will I ever be able to afford to retire?
Yes, one video claims. Retire at age 40! The self-appointed retirement expert in this video, who does not identify himself, hides behind cartoon illustrations on a white board to display his mathematical comparisons of workers who started saving at different ages. The point of this exercise is that people who start early will wind up with a better-funded retirement, due to compounding investment returns, than those who start in their 40s or 50s. So far so good.
But things quickly go downhill when he claims that it’s possible for a 23-year-old to retire in 17 years. You “don’t have to work another day in your life, and you’re still able to do the things you want to do,” he says, allowing this tantalizing prospect to sink in with the audience. But his retire-at-40 scheme has a catch – and it’s a big one. To achieve this goal, a 23-year-old would have to save half of his or her income. Young adults are trying to achieve independence – not move back in with their parents to follow his financial prescription. …Learn More
July 19, 2018
Work v. Save Options Quantified
One of Americans’ biggest financial challenges is proper planning to ensure that their standard of living doesn’t drop after they retire and the regular paychecks stop.
A new study has practical implications for baby boomers in urgent need of improving their retirement finances: working a few additional years carries a lot more financial punch than a last-ditch effort to save some extra money in a 401(k).
This point is made dramatically in a simple example in the study: if a head of household who is 10 years away from retiring increases his 401(k) contributions from 6 percent to 7 percent of pay (with a 3 percent employer match) for the next decade, he would get no more benefit than if he instead had decided to work just one additional month before retiring.
Of course, this estimate should be taken only as illustrative. To get their retirement finances into shape, many people should plan to work several more years than is typical today. Baby boomers tend to leave the labor force in their early- to mid-60s, even though more than four out of 10 boomers are on a path to a lower retirement standard of living. …Learn More
February 8, 2018
Cautionary Tale of Defrauding the Elderly
Two Morgan Stanley investment advisers agreed last week to plead guilty to stealing nearly $500,000 in a set of schemes that took particular aim at their elderly or retired clients, the U.S. Department of Justice charged. One client is in his mid-80s.
Multiple allegations detailed in the federal complaint demonstrate the creative ways that trusting older individuals might be deceived. For example, the Justice Department (DOJ) indicated that college tuition may have been the auspice or motivation for adviser and broker James S. Polese’s alleged fraud to obtain $320,000 from the client in his 80s – labeled Client B in the complaint.
The allegations included that Polese, age 51, knew a $50,000 loan from Client B for his children’s college expenses was prohibited by Morgan Stanley and was “a conflict of interest between the client and his adviser,” said the complaint, which was filed last week in U.S. District Court in Boston.
Polese and Cornelius Peterson, who both live in the Boston metropolitan area, also worked together to divert money from Client A and also a Client B to a failed wind farm investment without their knowledge, the complaint said. A third client allegedly paid inflated fees.
The brazen allegations in this case come amid reports that financial fraud against the elderly is on the rise. Retired people with nest eggs can be enticing targets for scam artists, and the elderly are “likely financially vulnerable” if they are experiencing cognitive decline, one study said. Further, a trusting senior might have more difficulty detecting financial deceptions that involve complex transactions. (Little detail about the clients’ personal situations was disclosed in the court documents.)
Morgan Stanley said that it fired Polese and Peterson in June 2017 immediately after uncovering the fraudulent activities and “referred the misconduct to regulatory and law enforcement agencies.” The two are registered brokers, and the Securities and Exchange Commission was involved in the investigation. The brokers agreed to plead guilty, said a statement from the U.S. Attorney in Massachusetts. A plea hearing is scheduled for February 15.
Client A and Client B were involved in the wind farm investment, the complaint said: Client A lost $100,000 after Peterson made “false statements” to his employer “when he signed a form stating that Client A had verbally authorized the $100,000 [wind farm] investment.” Client B, a businessman, was unaware that his funds were being used to support the wind farm, in the form of a loan account that could be used as a collateral backstop to the project, according to the charges. Although the funds were never used, Client B’s money was nevertheless put at risk, DOJ said, and he paid $12,000 in fees associated with the transaction.
Boston attorney Carol Starkey said her client, Peterson, age 28, was a “minor participant” and noted that Polese, who is 23 years his senior, was Peterson’s supervisor. Polese’s attorney did not respond to requests for a comment. …Learn More
January 25, 2018
Just Half of Americans Enjoy Bull Market
The stock market’s 19 percent climb in 2017 was nothing short of impressive. This year, it has gained another 6 percent.
This means that many boomers with 401(k)s are feeling a little more secure about retirement – at least for now. That more people feel they will be able to afford a vacation this summer with their children. And that Warren Buffett is getting richer even faster.
But one in two Americans isn’t at the party. According to the Survey of Consumer Finances in 2016, the Federal Reserve Board’s latest triennial survey and the most comprehensive look at Americans’ personal finances, 48 percent of U.S. families do not own equities.
Less surprising is how stock holdings break out at various income levels. About 30 percent of families with earnings in the bottom half of all incomes own equities, whether in the form of 401(k) investments, brokerage accounts, mutual funds, or individual stocks. For these lower-paid workers, the 2.5 percent average increase in hourly wages in 2017 is usually more meaningful. But inflation increased 2.1 percent last year, leaving them with just 0.4 percent more spending money, according to U.S. Bureau of Labor Statistics wage and inflation data. This is half of 2016’s inflation-adjusted wage gain.
In the next highest income group – from the middle-income level up to the 90th percentile – about 70 percent of families own equities in various forms. In the top 10 percent, the vast majority do (94 percent).
The chasm between the well-heeled and ordinary workers has been widening. Stock ownership is one prism through which to view that inequality. …
March 20, 2012
Buy, Hold and Be Happy?
When an investor selects a mutual fund that’s hot, it usually backfires.
Morningstar Inc. generated the evidence for Squared Away: it essentially analyzed returns for two types of investors in the nation’s 25 largest fund companies – from PIMCO, Fidelity Investments and Vanguard Group on down. Using fund flow and performance data, it compared returns to a theoretical investor who stayed put for an entire decade to the returns that investors in funds actually experienced, given that they move into and out of funds.
Investors earned 3.8 percent per year, on average, over the decade ending Dec. 31, 2011, the Chicago fund tracker said. If they had stayed put, they would’ve earned 5.3 percent. The results were not equal, because some of us make brilliant moves but more of us make dumb moves, such as buying high and selling low.
The gap – 1.5 percentage points – “is bigger than [fund] expense ratios,” said Don Phillips, Morningstar president of fund research. Investors “really hurt themselves that much.”
To be fair to 401(k) investors, their inertia is great. Those who select funds from employer-run plans typically buy and hold. But more money – about $1 trillion more – sits in Individual Retirement Accounts, where investors are more likely to trade on their own or to have brokers or advisers recommending new funds, whether motivated by their own commissions or their clients’ goals.
To try to improve returns, Phillips listed three types of funds investors should avoid: …Learn More
February 21, 2012
Investment Humor Not an Oxymoron
You have to admire a financial writer and editor with the guts to put this on his LinkedIn profile: “While many Wall Street people go to Harvard or Yale University to learn about business, Ron went to art school.”
The cartoons shown here are in a humorous financial book by Ronald DeLegge 2d, who said he first earned his chops as an insurance salesman at a small Midwestern company that eventually became part of AIG. His cartoons appear in “Gents with no ¢ents: A closer look at Wall Street, its customers, financial regulators, and the media.” Dave Clegg was the illustrator.