From the Desk of Joe Rollins
Speaking from experience, you can tell you’re getting old when the cashier at the grocery store gives you a senior citizen’s discount without even asking for it. This happened to me for the first time two weeks ago, when I made an emergency run to the store to get Ava some diapers (of all things). With one child heading to college in just a year and another with 17 years to go before she starts college, I’ll take all the senior citizen discounts I can get to invest in their college funds…
The first six months of 2012 ended in a fever pitch on Friday, with stocks posting their biggest daily gains for the year. If this keeps up, my prediction that 2012 will have returns in the mid double-digits will come to fruition. If the year ends as I anticipate, then the rate of return on your investments for the year may be six to seven times the rate of inflation given that inflation is currently bordering on 2%.
The 2nd quarter of 2012 saw the markets retreat a bit, but they’re still posting above average returns so far for the year. Even after losing 2.8% for the quarter, the Standard & Poor’s Index of 500 Stocks is up an excellent 9.5% for the year; the Dow Jones Industrial Average is up 6.9%, although it lost 1.8% for the quarter, and; the NASDAQ Composite is up 13.3% for the year with losses of 4.8% for the quarter. Furthermore, even with the market’s terrible performance in April and May, the first six months of 2012 have actually provided rather nice returns.
As I pointed out in my “Blame it on the Greeks – AGAIN” post, I still believe that the European leaders will be able to come together to solve their issues in spite of the barrage of negative news we’re receiving concerning the euro-zone. Most countries are realizing that they simply cannot continue with high taxes and social welfare programs without disastrous results. And while we also have the never-ending circus of uncompromising Republicans and Democrats in Congress, I actually think this works to our benefit. The less our government gets involved in the private sector, the better we will all be.
As for the U.S.’s dawdling employment rate, the real reason employment lags is because of the bureaucracy in Washington. Tax rates are scheduled to increase on December 31, 2012, and the implications will be enormous if no compromise is reached. Both sides of the political aisle have refused to meet in the middle on anything, and therefore, nothing is happening. If a compromise is not reached on the tax laws that are set to expire at December 31st, then tax rates for almost every segment of the population will increase. I don’t think this will happen, but I can’t help but be concerned that the politicians will once again fail to compromise. Regardless, it’s safe to say that whether or not the tax breaks are extended or compromises are reached, tax rates in 2013 and later years will almost assuredly increase.
The negative sentiment these days regarding the financial markets is depressing. I hear almost daily opinions that the stock market is crooked and not worthy of a client investing his or her money. Given the very poor alternatives for investing, though, I wonder how these people intend to live once they retire. With interest rates paying next to nothing, these people will have a hard time building sufficient retirement assets.
An overview of the last 10 investment years should give you some perspective on how financial markets correct over time. The 10-year period ended June 30, 2012 includes some extraordinarily bad years. In fact, the S&P 500 had a record loss in 2008 of 37% and a loss in 2002 of 22%. However, the 10-year rate of return on these indices still continues to be a high multiple of the rate of inflation.
The Dow has averaged a 6% rate of return over the last decade; the S&P 500 has averaged 5.3%, and; the NASDAQ has averaged 8.1%. In each case, this is two to three times the rate of inflation during the same time period. Compounded interest can best be illustrated by an investment of $10,000 on July 1, 2002 in the DJIA that hasn’t been touched during the intervening decade. Today, that $10,000 investment would be worth $17,908 – almost double!
In comparison, the 10-year Treasury bond for the next 10 years pays 1.6%. As already mentioned, the inflation rate currently borders on 2%. Therefore, if you invest in the “safety” of a 10-year Treasury bond, then you will almost assuredly lose purchasing power over the next decade.
While the indices had admirable returns over the last decade, the actively managed mutual funds have performed better by a few percentage points. Even with the disastrous sell-off of 2008, actively managed mutual funds have outperformed the rate of inflation by at least a multiple of four. Things definitely are not all gloom and doom in the financial markets arena.
I had a conversation with a client the other day who could not get the financial calamity of 2008 out of her mind. The fear of it happening again was paralyzing her – the mere thought of reinvesting her cash (even though it was generating nearly a zero rate of return) was turning her into an insomniac. I conceded that the S&P 500 was down 37% in 2008, but pointed out that since March of 2009, the markets have been up over 100%.
Even with 2008’s massive losses, if she had invested only in the DJIA stocks for the last decade, she would have generated a 6% return per year. Even with these overwhelmingly positive facts, however, I couldn’t persuade her to reinvest her cash. It’s worrisome when investors heed the advice of the uninformed and make rigid, poor decisions regarding their financial futures.
I particularly worry about young people today. With 30 to 40 years left before retirement, young people with only modest amounts to invest should be accumulating significant financial assets. Unfortunately, so many of them aren’t investing a dime. The same applies to middle-age people, who are often not investing enough for their retirement years. Many people were so blinded by the losses that occurred during 2007 and 2008 that they’ll never trust equity investing again. This is an enormous mistake, in my opinion.
In truth, the fundamentals for investing in the U.S. stock market continue to be excellent. The reservations being expressed that Europeans will adopt austerity measures that will make U.S. corporations less profitable are unfounded. There is no evidence that Europeans will spend less money on the basic commodities that they have always needed just because the government is cutting back.
Furthermore, corporate profits for this quarter should be superb, and should once again hit all-time highs. The cost of gasoline is down dramatically, inflation is under control, and other than employment, the economy is moving forward nicely. While all of us would like a higher GDP growth, the fact that it is still growing at a 2% clip is encouraging.
I’ve been asked several times over the last week for my opinion regarding the Supreme Court’s ruling to uphold Obamacare. I actually believe the 5-4 decision was well thought-out and written by Chief Justice John Roberts, and it certainly argues for whether or not you want a bigger or smaller government. In November, voting one way will vote for Obamacare, and voting the other way will vote against it. In my opinion, an entitlement program that will tax citizens and burden our economy should be decided by the people and not the courts, and I believe that’s what Roberts intended in the decision. The Court ruled that the law couldn’t be upheld under the Constitution’s Commerce Clause, but that the law could be considered a tax, and therefore, was constitutional under Congress’s taxation power.
At any rate, it’s now possible for voters to express their opinions and vote the law up or down in the November elections. What could be more democratic and positive for our country other than letting the majority decide?
It’s also clear that Washington will do nothing to boost the economy – they are clueless on how to stimulate the economy, and their unwillingness to compromise isn’t helping matters. The president’s idea was to hire more teachers, policemen and firemen. But the problem with that strategy is that these are all public sector jobs, and therefore, they are created through taxes. As a taxpayer, I take great offense in paying Federal taxes to fund school districts, fire departments and police departments nationwide. That’s not to say that funding those departments is unnecessary – I just believe they should be local functions, not federal.
The answer to our economic woes lies in the private sector. If it’s stimulated and allowed to function on its own, GDP will pick up. But if it’s taxed and overregulated, then it will continue to creep along. Note, however, that under either scenario, the economy will continue to grow and wealth will continue to be created through equity investing. From a financial standpoint, the first half of 2012 was admirable. The second half of 2012 is not likely to go straight up, but the results for the year as a whole should still be very good.
I wish I could talk more people into investing on a consistent and regular basis. There are so many benefits to the dollar cost averaging investment strategy that it’s hard to argue against it, but so few investors take advantage of it. I see a relatively small percentage of people’s salaries invested in 401(k) plans, and almost no one makes non-deductible IRA contributions. When the day comes for them to retire, however, I believe those individuals will be very sorry they didn’t invest more regularly.
As the hot months of summer continue, we again invite you to meet with us to discuss your financial goals. Please keep in mind that our expertise stretches beyond investing. We can assist you with your estate planning and life insurance needs, your tax situation, educational financial planning, and other strategies to assure a comfortable financial life. Our open door policy is in effect 24/7, and we always welcome the opportunity to discuss your financial objectives with you.
As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.
Best regards,
Joe Rollins
Speaking from experience, you can tell you’re getting old when the cashier at the grocery store gives you a senior citizen’s discount without even asking for it. This happened to me for the first time two weeks ago, when I made an emergency run to the store to get Ava some diapers (of all things). With one child heading to college in just a year and another with 17 years to go before she starts college, I’ll take all the senior citizen discounts I can get to invest in their college funds…
The first six months of 2012 ended in a fever pitch on Friday, with stocks posting their biggest daily gains for the year. If this keeps up, my prediction that 2012 will have returns in the mid double-digits will come to fruition. If the year ends as I anticipate, then the rate of return on your investments for the year may be six to seven times the rate of inflation given that inflation is currently bordering on 2%.
The 2nd quarter of 2012 saw the markets retreat a bit, but they’re still posting above average returns so far for the year. Even after losing 2.8% for the quarter, the Standard & Poor’s Index of 500 Stocks is up an excellent 9.5% for the year; the Dow Jones Industrial Average is up 6.9%, although it lost 1.8% for the quarter, and; the NASDAQ Composite is up 13.3% for the year with losses of 4.8% for the quarter. Furthermore, even with the market’s terrible performance in April and May, the first six months of 2012 have actually provided rather nice returns.
As I pointed out in my “Blame it on the Greeks – AGAIN” post, I still believe that the European leaders will be able to come together to solve their issues in spite of the barrage of negative news we’re receiving concerning the euro-zone. Most countries are realizing that they simply cannot continue with high taxes and social welfare programs without disastrous results. And while we also have the never-ending circus of uncompromising Republicans and Democrats in Congress, I actually think this works to our benefit. The less our government gets involved in the private sector, the better we will all be.
As for the U.S.’s dawdling employment rate, the real reason employment lags is because of the bureaucracy in Washington. Tax rates are scheduled to increase on December 31, 2012, and the implications will be enormous if no compromise is reached. Both sides of the political aisle have refused to meet in the middle on anything, and therefore, nothing is happening. If a compromise is not reached on the tax laws that are set to expire at December 31st, then tax rates for almost every segment of the population will increase. I don’t think this will happen, but I can’t help but be concerned that the politicians will once again fail to compromise. Regardless, it’s safe to say that whether or not the tax breaks are extended or compromises are reached, tax rates in 2013 and later years will almost assuredly increase.
The negative sentiment these days regarding the financial markets is depressing. I hear almost daily opinions that the stock market is crooked and not worthy of a client investing his or her money. Given the very poor alternatives for investing, though, I wonder how these people intend to live once they retire. With interest rates paying next to nothing, these people will have a hard time building sufficient retirement assets.
An overview of the last 10 investment years should give you some perspective on how financial markets correct over time. The 10-year period ended June 30, 2012 includes some extraordinarily bad years. In fact, the S&P 500 had a record loss in 2008 of 37% and a loss in 2002 of 22%. However, the 10-year rate of return on these indices still continues to be a high multiple of the rate of inflation.
The Dow has averaged a 6% rate of return over the last decade; the S&P 500 has averaged 5.3%, and; the NASDAQ has averaged 8.1%. In each case, this is two to three times the rate of inflation during the same time period. Compounded interest can best be illustrated by an investment of $10,000 on July 1, 2002 in the DJIA that hasn’t been touched during the intervening decade. Today, that $10,000 investment would be worth $17,908 – almost double!
In comparison, the 10-year Treasury bond for the next 10 years pays 1.6%. As already mentioned, the inflation rate currently borders on 2%. Therefore, if you invest in the “safety” of a 10-year Treasury bond, then you will almost assuredly lose purchasing power over the next decade.
While the indices had admirable returns over the last decade, the actively managed mutual funds have performed better by a few percentage points. Even with the disastrous sell-off of 2008, actively managed mutual funds have outperformed the rate of inflation by at least a multiple of four. Things definitely are not all gloom and doom in the financial markets arena.
I had a conversation with a client the other day who could not get the financial calamity of 2008 out of her mind. The fear of it happening again was paralyzing her – the mere thought of reinvesting her cash (even though it was generating nearly a zero rate of return) was turning her into an insomniac. I conceded that the S&P 500 was down 37% in 2008, but pointed out that since March of 2009, the markets have been up over 100%.
Even with 2008’s massive losses, if she had invested only in the DJIA stocks for the last decade, she would have generated a 6% return per year. Even with these overwhelmingly positive facts, however, I couldn’t persuade her to reinvest her cash. It’s worrisome when investors heed the advice of the uninformed and make rigid, poor decisions regarding their financial futures.
I particularly worry about young people today. With 30 to 40 years left before retirement, young people with only modest amounts to invest should be accumulating significant financial assets. Unfortunately, so many of them aren’t investing a dime. The same applies to middle-age people, who are often not investing enough for their retirement years. Many people were so blinded by the losses that occurred during 2007 and 2008 that they’ll never trust equity investing again. This is an enormous mistake, in my opinion.
In truth, the fundamentals for investing in the U.S. stock market continue to be excellent. The reservations being expressed that Europeans will adopt austerity measures that will make U.S. corporations less profitable are unfounded. There is no evidence that Europeans will spend less money on the basic commodities that they have always needed just because the government is cutting back.
Furthermore, corporate profits for this quarter should be superb, and should once again hit all-time highs. The cost of gasoline is down dramatically, inflation is under control, and other than employment, the economy is moving forward nicely. While all of us would like a higher GDP growth, the fact that it is still growing at a 2% clip is encouraging.
I’ve been asked several times over the last week for my opinion regarding the Supreme Court’s ruling to uphold Obamacare. I actually believe the 5-4 decision was well thought-out and written by Chief Justice John Roberts, and it certainly argues for whether or not you want a bigger or smaller government. In November, voting one way will vote for Obamacare, and voting the other way will vote against it. In my opinion, an entitlement program that will tax citizens and burden our economy should be decided by the people and not the courts, and I believe that’s what Roberts intended in the decision. The Court ruled that the law couldn’t be upheld under the Constitution’s Commerce Clause, but that the law could be considered a tax, and therefore, was constitutional under Congress’s taxation power.
At any rate, it’s now possible for voters to express their opinions and vote the law up or down in the November elections. What could be more democratic and positive for our country other than letting the majority decide?
It’s also clear that Washington will do nothing to boost the economy – they are clueless on how to stimulate the economy, and their unwillingness to compromise isn’t helping matters. The president’s idea was to hire more teachers, policemen and firemen. But the problem with that strategy is that these are all public sector jobs, and therefore, they are created through taxes. As a taxpayer, I take great offense in paying Federal taxes to fund school districts, fire departments and police departments nationwide. That’s not to say that funding those departments is unnecessary – I just believe they should be local functions, not federal.
The answer to our economic woes lies in the private sector. If it’s stimulated and allowed to function on its own, GDP will pick up. But if it’s taxed and overregulated, then it will continue to creep along. Note, however, that under either scenario, the economy will continue to grow and wealth will continue to be created through equity investing. From a financial standpoint, the first half of 2012 was admirable. The second half of 2012 is not likely to go straight up, but the results for the year as a whole should still be very good.
I wish I could talk more people into investing on a consistent and regular basis. There are so many benefits to the dollar cost averaging investment strategy that it’s hard to argue against it, but so few investors take advantage of it. I see a relatively small percentage of people’s salaries invested in 401(k) plans, and almost no one makes non-deductible IRA contributions. When the day comes for them to retire, however, I believe those individuals will be very sorry they didn’t invest more regularly.
As the hot months of summer continue, we again invite you to meet with us to discuss your financial goals. Please keep in mind that our expertise stretches beyond investing. We can assist you with your estate planning and life insurance needs, your tax situation, educational financial planning, and other strategies to assure a comfortable financial life. Our open door policy is in effect 24/7, and we always welcome the opportunity to discuss your financial objectives with you.
As always, the foregoing are my opinions, assumptions and forecasts. It is perfectly possible that I am wrong.
Best regards,
Joe Rollins
