Schwartz Financial Weekly Commentary 9/1/14

Schwartz Financial Weekly Commentary

September 1, 2014

 

The Markets

 

There is no substitute for mental preparedness. Just ask any professional athlete or Navy SEAL. One essential aspect of metal preparation is situational awareness – being able to identify, process, and understand what is happening around you at any given time.

 

That’s been a challenge for bond investors this year. 2014’s Treasury market rally took economists (and everyone else) by surprise:

 

“Treasury yields lurched higher in May 2013, when the Fed first sketched out a timetable to wind down its bond-buying program, even though it didn’t actually begin the winding down until seven months later. Yields were expected to keep rising this year as that program ended and the Fed turned its attention to raising its short-term policy rate but, instead, yields have fallen as investors still seem enamored of bonds.”

 

A Bloomberg survey (August 8-13) found economists’ median forecast projected 10-year Treasury yields would be 2.7 percent by the end of September. The yield on 10-year U.S. Treasuries finished last week at 2.34 percent.

 

It’s likely bond market surprises may continue during the next few months. In fact, bond investors may want to mentally prepare themselves for a rough and bumpy ride. It’s likely analysts and investors will try to anticipate the Federal Reserve plans for increasing interest rates, and it’s not all that hard to imagine the type of volatility that could ensue. All you have to do is think back to the ups and downs that punctuated guesses about when the Fed might begin to end its bond-buying program.

 

Barron’s offered the opinion the first rate hike won’t happen until March of 2015, but that won’t stop anyone from speculating it could happen earlier. Conjecture, rumor, and supposition are likely to begin before the Federal Open Market Committee meeting on September 16, 2014.

 

No matter how markets twist during the next few months,investors should keep their wits about them. Being mentally prepared may help.

 


Data as of 8/29/14
1-Week
Y-T-D
1-Year
3-Year
5-Year
10-Year
Standard & Poor’s 500 (Domestic Stocks)
0.8%
8.4%
22.3%
18.3%
14.4%
6.2%
10-year Treasury Note (Yield Only)
2.3
NA
2.8
2.3
3.5
4.2
Gold (per ounce)
0.7
7.0
-8.7
-11.0
6.1
12.2
Bloomberg Commodity Index
0.9
0.7
-3.8
-7.8
0.1
-1.2
DJ Equity All REIT Total Return Index
0.4
20.1
23.2
15.3
18.7
9.2

S&P 500, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.

Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. N/A means not applicable.

 

life expectancy has been increasing by 15 minutes every hour for the last 50 years or so in the richer countries around the world, according to The Economist. That’s an increase of about 2.5 years per decade.

 

Longer lifespans are a mixed blessing. On the one hand, people may enjoy longer lives. On the other, the longer people live, the greater the chance that longevity risk – the possibility that life expectancy will exceed expectations – could negatively affect people, companies, and governments around the world.

 

One way to measure longevity risk is by estimating the cost of an aging society. The International Monetary Fund’s (IMF) 2012 Global Financial Stability Report calculated the potential cost of providing everyone in the world, age 65 and older, with the average income necessary to maintain his or her standard of living at its preretirement level. By 2050, assuming a replacement rate of 60 percent of preretirement income, the cost would be about 11.1 percent of gross domestic product (GDP) in developed economies and 5.9 percent of GDP in emerging economies – and that doesn’t include increases in health and long-term care costs. If longevity increases by three years, the estimated costs go up by almost 50 percent!

 

Insurance companies, employers with defined benefit (DB) pension plans, and governments are exposed to significant longevity risk. Insurers offer products designed to provide lifetime income. Employer-sponsored DB plans promise lifetime payments to employees who meet specific criteria. Governments with pension programs have made similar promises to citizens.

 

Many entities are looking for ways to effectively reduce their exposure to longevity risk. One way to manage longevity risk is to share it. An example would be to develop a “liquid longevity risk transfer market” where,

 

“…The “supply” of longevity risk would meet “demand” for that risk. That is, the risk would be transferred from those who hold it, including individuals, governments, and private providers of retirement income, to (re-) insurers, capital market participants, and private companies that might benefit from unexpected increases in longevity (providers of long-term care and healthcare, for example). In theory, the price of longevity risk would adjust to a level at which the risk would be optimally spread through market transactions.”

 

The overall longevity risk market could be sizeable. According to Risk.net, current global annuity and pension-related longevity risk exposure is between $15 trillion and $25 trillion.

 

Weekly Focus – Think About It

 

“Some cause happiness wherever they go; others whenever they go.”

–Oscar Wilde, Irish writer and poet

Value vs. Growth Investing (8/29/14)

0.85
9.53
4.19
4.76
24.91
20.62
17.30
0.77
9.79
3.92
4.64
25.08
20.48
16.49
0.61
8.95
3.97
3.31
22.28
21.94
17.13
0.51
11.46
4.78
6.45
30.68
21.17
18.13
1.21
8.97
3.00
4.15
22.25
18.50
14.34
1.01
10.22
4.91
5.34
25.74
21.27
19.61
0.85
11.98
4.59
5.27
28.31
22.32
20.57
1.01
8.17
5.76
6.43
22.04
17.76
19.14
1.19
10.79
4.38
4.28
27.31
23.88
19.13
1.26
4.74
5.01
4.34
20.64
20.03
18.54
0.92
6.41
4.96
4.23
22.81
19.37
18.16
1.94
0.58
5.38
4.97
15.34
18.76
18.36
0.95
7.17
4.68
3.89
23.83
22.00
19.02
0.68
9.37
4.17
3.77
23.51
21.85
17.95
0.69
10.07
5.00
6.34
27.83
20.31
18.41
1.19
9.21
3.38
4.16
23.40
19.83
15.64

 ©2004 Morningstar, Inc. All Rights Reserved. The information contained herein: (1) is proprietary to Morningstar; (2) is not warranted to be accurate, complete or timely. Morningstar is not responsible for any damages or losses arising from any use of this information and has not granted its consent to be considered or deemed an “expert” under the Securities Act of 1933. Past performance is no guarantee of future results.  Indices are unmanaged and while these indices can be invested in directly, this is neither a recommendation nor an offer to purchase.  This can only be done by prospectus and should be on the recommendation of a licensed professional.

 

Office Notes:

 

Retirement Bucket List

 

When it comes to retirement, here’s the first thing we at Schwartz Financial always tell our clients:

“If you want to work for the rest of your life, that’s your business.  If you don’t, that’s ours.”

When it comes to retirement, here’s the second thing we always tell our clients:

“If you can dream it, we can help you do it.”

All you need is a plan.  So what’s your plan for retirement?  Here are a few suggestions:

Write the next Great American Novel.
                                                                                           Raise horses on your farm.
        Start an entirely new career as a standup comic.
Learn how to cook Italian food … in Italy.
                                Work as a tour guide at the Guggenheim®.
    Follow the voyage of Darwin’s Beagle through the Galapagos.
                                                                   Listen to jazz in a smoky bar in Paris. 
Have the freedom to do what interests you versus what needs to be done.
                                      Design and build your own house. 
        Compete in AAU Masters swimming at 80.
                                                                         Spend a year in Rio. 
Restore an old sports car and drive to car shows. 
Work for human rights for people in third world countries.
Build a log cabin from the ground up.       Retrace the Endless Summer surf odyssey.  
                                                Drop anchor at every island in the Caribbean. 
        Build your collection of fine wines. 
Spend time with your grandchildren.

You want more?  We can help you do more.  Like:

Create a beautiful garden.  Give your spouse a chance at a career.  Ski for 100 days a season.  Volunteer in the inner-city neighborhood where you grew up.  Finally, finally use all of your frequent flyer miles.  Create a world that consists of nothing but a hammock, a pitcher of lemonade, and a stack of John Grisham novels.  Return to your family’s farm and try to make a go as a farmer.  Participate in guided tours of all the ancient wonders of the world.  Open your own bed and breakfast.  Finally get your college degree.  Trek to the Himalayas.  Visit all 50 states.  Start another career.  Scuba dive all over the world.  Visit every major-league ballpark.  Relax.  Go on a Safari in Africa.  Move to a college town and take all the classes you skipped 40 years ago.  Write movie reviews for the local weekly.  Climb a 20,000 foot mountain.  Rent a barge for a canal tour in Europe.  Invest in startup companies.  Coach youth soccer, baseball, and basketball.  Drive from Alaska to Patagonia.  Run the Boston and New York marathons.  Play as many of Golf Digest®’s top-100 courses as possible.  Play in a garage band.  Play bridge for money.  Just play!  Go on at least three cruises a year.  Act in community theater.  Visit all of the churches and museums that you successfully overlooked on your semester abroad.  Dinner and a movie … every night!  Learn to play the piano.  Be a couch potato.  Fix the sink.  Take a trip down the Nile.  Read Russian novels.  Run for local political office.  Absolutely nothing.  Give back to all of those who helped you.  Do all of the things you’ve been afraid of—skydiving, bungee jumping, and hang gliding.  RV along Route 66 with your spouse and your dogs.

As you know, I’ve been sending you information about different retirement topics for a while now.  It should be clear that my team and I can help you with any retirement challenge you’re ever likely to face. 

But retirement is about more than overcoming challenges.  It is about living the life you always wanted to live.  Your retirement is coming up, which means it’s time to start planning.  More than that, it’s time to start dreaming. 

So what are you waiting for?  Close your eyes and dream it.

We can help you do it.

Give me a call at 215-886-2122 to get started. 

 

Regards,

,

Michael L. Schwartz, RFC®, CWS®, CFS

 

P.S.  Please feel free to forward this commentary to family, friends, or colleagues.  If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added. 

 

Michael L. Schwartz, RFC, CWS, CFS, a registered principal offering securities and advisory services through Independent Financial Group, LLC., a registered broker-dealer and investment advisor.  Member FINRA-SIPC. Schwartz Financial and Independent Financial Group are unaffiliated entities.

 

This information is provided for informational purposes only and is not a solicitation or recommendation that any particular investor should purchase or sell any security. The information contained herein is obtained from sources believed to be reliable but its accuracy or completeness is not guaranteed.  Any opinions expressed herein are subject to change without notice.  An Index is a composite of securities that provides a performance benchmark.  Returns are presented for illustrative purposes only and are not intended to project the performance of any specific investment.  Indexes are unmanaged, do not incur management fees, costs and expenses and cannot be invested in directly.  Past performance is not a guarantee of future results.

 

* The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.

 

* The DJ Global ex US is an unmanaged group of non-U.S. securities designed to reflect the performance of the global equity securities that have readily available prices. 

 

* The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.

 

* Gold represents the London afternoon gold price fix as reported by the London Bullion Market Association.

 

* The DJ Commodity Index is designed to be a highly liquid and diversified benchmark for the commodity futures market. The Index is composed of futures contracts on 19 physical commodities and was launched on July 14, 1998.

 

* The DJ Equity All REIT TR Index measures the total return performance of the equity subcategory of the Real Estate Investment Trust (REIT) industry as calculated by Dow Jones.

 

* Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.

 

* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.

 

* Past performance does not guarantee future results.

 

* You cannot invest directly in an index.

 

* Consult your financial professional before making any investment decision.

 

* To unsubscribe from our “market commentary” please reply to this e-mail with    “Unsubscribe” in the subject line, or write us at “mike@schwartzfinancial.com”.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s