On investing, living on $60 a week, and knowing when you’ll die

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A bumpy ride

We are in the midst of the second longest bull market in history.

Regardless of the overall upward movement of the stock market, there are peaks and valleys along the way. A recent report from CFRA Research noted several interesting tidbits… During up years, since WWII, declines in the S&P have averaged more than 4%. Think about that more a moment. During a calendar year when the S&P makes money for the year, there are times when the S&P will be down for the year… by an average of 4%. This can make for a wild ride.

Here are a few more noteworthy bits from that report:

  • During bull markets since 1945, the S&P 500 experienced:
    • a pullback (a decline of 5.0%-9.9%) once a year, on average
    • a correction (a 10% to 19.9% decline) every 2.8 years, and
    • a bear market (-20%+) every 4.7 years.
  • Second, the S&P 500 suffered a year-to-date price decline in more than 80% of all years in which the S&P 500 recorded a positive annual performance since WWII.

Investing in the stock market can make for a bumpy ride. There are times when you might want to sell everything you own and put your money in your mattress, but over the long haul — and that’s how long your investment horizon should be — the stock market, especially the S&P 500 has been one of the best places to invest your money.

The 9.7% annualized return over the past 50 years means that a $1,000 investment 50 years ago would be worth over $100,000 today. If you were to add an extra $1,000 every year, you would have about $1.25 million. Try not to get too exciting went the market leaps forward, Try not to get too nervous when markets decline. Essentially, try to ignore the bumps in the road. Eventually, the market and the economy will likely rise.

Do you know when you will die?

When deciding when to start taking your Social Security retirement benefits, this may be the most important question. Should you take your benefits early or wait and take them later. If you knew when you would die, that would help you decide when to start taking your benefits. The longer you wait before starting to take your benefits, the more money you will receive each money, but if you die before you start taking your benefits, or soon thereafter, you will have left money on the table.

Making the most of Social Security requires some strategy to take advantage of the basic benefit rules, however. After you reach age 62, for every year you postpone taking Social Security (up to age 70), you could receive up to 8% more in future monthly payments. (Once you reach age 70, increases stop, so there is no benefit to waiting past age 70.) Members of a couple may also have the option of claiming benefits based on their own work record, or 50% of their spouse’s benefit. For couples with big differences in earnings, claiming the spousal benefit may be better than claiming your own.

Could you live on $60 a week?

After accounting for her fixed monthly expenses, rent, internet, phone, insurance, and two memberships: one for her gym membership and one for Citibike, Kathleen Elkins is halfway through her one-month experiment to see what it would be like to live on $60 a month. If push came to shove, I suspect I could live on $60 a week, but I sure wouldn’t want to, I like eating at restaurants. Regardless, I think it’s a really good experiment.

Can you afford auto insurance?

A new report indicates that millions of people can’t afford their auto insurance. The study defined “unaffordable” as when the ratio of the average auto premium to household income exceeded 2 percent. For instance, if the auto insurance annual premium is $1,000, the total household income would need to exceed $50,000 a year to be deemed acceptable. Note: that $1,000 premium is for one full year. (The average annual cost of car insurance paid in the United States was $907.38 in 2014.)

The report, from the Federal Insurance Office, analyzed premiums for basic liability automobile coverage in more than 9,000 ZIP codes with high proportions of “underserved” consumers, including minorities and people with low to moderate incomes. It found that rates were unaffordable in 845 of such ZIP codes, or about 9 percent of them. Nearly 19 million people live in the unaffordable areas, the report found.

Auto insurance is big business. The personal auto insurance market generated just under $200 billion in premiums in 2015. That accounts for more than 38 percent of all property and casualty insurance net premiums. You’ve almost certainly been bombarded by ads for auto insurers. There are many of them out there. There are nearly 900 personal auto insurers conducting business in part or all of the United States. Some are national, others are regional. Regardless, every single state has no fewer than 50 auto insurers, and 45 states have at least 100 insurers offering coverage for private vehicles.

Despite the existence of a competitive marketplace, nearly 30 million uninsured drivers drove on
U.S. roads in 2012. However, that number is on the decline. The percentage of uninsured drivers in the total U.S. population generally has decreased over the last five years. Not surprisingly,lower-income drivers are more likely to be uninsured, which could indicate a correlation with affordability.

Will self-driving cars have an impact on the auto insurance industry? A report from Business Insider projects that by 2020 — just three years from now — there could be as many as 10 million self-driving cars on the road. As a result, the number of accidents is expected to drop sharply, currently more than 90% of accidents are caused by driver error. That could lower insurance bills for consumers.

While rates may eventually come down, it might take a while. With just 10 million self-driving vehicles on the road, there will still be numerous vehicles driven by a human of the road. The insurance companies will still be charging sizable premiums for a while. Eventually though, rates will likely decline.

According to the Insurance Information Institute (III) even if you don’t plan on getting one, all consumers are likely to financially benefit from self-driving cars. If self-driving cars do in fact make roads safer, insurance companies may need to consider lowering their premiums across the board. Warren Buffett acknowledges that the self-driving car will be great for society, but not so great for his company. Buffett’s company, Berkshire Hathaway, owns GEICO. (When rates decline due to fewer accidents, “we would not be throwing a party at our insurance business,” says Buffett.

Can you hear me?

Here’s a new telemarketing scam…  The caller asks: “Can you hear me?”. It seems they want to record your voice saying “yes” so that they can exploit you with various schemes to charge you phone account, etc. Probably best to answer their question with one of your own: “Who’s calling?,” or better yet if you don’t recognize the number, let it go to voicemail. If you do answer, maybe you should just hang up. Police in Virginia are now warning people about this scam, which has also been recently reported in Florida, and, in 2016, in Pennsylvania.

Higher priced items are always better, right?

Typically people believe that more expense items are better than cheaper, comparable items. High priced cars are better than cheap cars; a $500 suit is better than a $99 suit; luxury hotels are better than ordinary hotels. I’m not going to argue whether any of these beliefs are accurate or not. I only bring the topic up because it also applies to mutual funds. Are funds that charge higher annual expense ratio (fees) better than other funds that charge less?

It’s actually easier to gauge whether one fund is better than another fund; much easier than deciding whether one car is better than another. With funds, the annual returns are the most important metric for most of us. Funds that return more — net of fees — are likely better investments.

Morningstar looked a various mutual funds to see if paying more in fees results in better returns. Not surprisingly, looking at historic five and ten year returns, those funds with higher fees did not (on average) perform better than those with lower fees.

They created four categories of funds, lowest fees to highest fees. Then within each of these groups, they broke out overall performance of these funds into four groups – highest to lowest returns.

The best performers in all four groups:

Avg. Expense Ratio (%)

Worst Performers (%)

0.73

7.56

1.16

7.18

1.56

7.69

2.17

6.95

The performance difference (noted in the right column) shows a modest variance regardless of the annual fees (the left column), The same holds true for the worst performers:

Avg. Expense Ratio (%)

Worst Performers (%)

0.73

(1.92)

1.16

(2.04)

1.56

(2.15)

2.17

(2.70)

The amount that you spend in expense ratios has little correlation with a fund’s performance. In this instance, the most expense funds performed the worst, on average. This is just a five-year time frame, so it’s not all that relevant. Further, past performance is not necessarily the best indicator of how well a fund will do in the future.

Morningstar says it well:

…expense ratios are the place to start for mutual funds. You can see how a fund’s fees stack up by checking the fee level listed next to the expense ratios near the top of the fund quote page. A Low fee level means a fund is in the cheapest 20% of its distribution group. Look for funds with strong managers, good strategies, good stewardship, and good performance over the manager’s entire tenure, too. You want to understand past performance, but don’t read too much into recent returns.

Regardless of how well or poorly these managed funds performed, the overriding issue is performance again their index. The typical estimation is that at least 80% of actively managed funds under-perform their associated index. The Financial Times reports that 99% of actively managed U.S. equity funds under-perform — almost all U.S., global, and EM funds — have failed to beat their benchmark since 2006. That’s all mutual funds, not just those that are structured to perform against the S&P 500. For instance, there are also small cap funds, emerging market funds, etc.

Most people are simply better off putting their money into passively managed funds and simply letting time and the magic of compounding do the heavy lifting for them… and more people are heeding this advice. Since the financial crisis, Vanguard Group Inc. has seen its assets under management soar from $800 billion to $4 trillion, most of which is in passive index funds, all of which are low cost.

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