Smart401k Blog

In the headlines

A look at some of the market movers over the past week:

• GE (NYSE: GE) disclosed that LG Electronics and Haier are the frontrunners to buy its appliance division
• Bank of America (NYSE: BAC) upped its investment in China Construction Bank
• New home sales posted an unexpected gain
• Costco (Nasdaq: COST) announced strong earnings, while Sears (Nasdaq: SHLD) continued to struggle
• The Microsoft (Nasdaq: MSFT) and Yahoo! (Nasdaq: YHOO) soap opera drags on
• Food prices aren’t cooling down yet
• United Airlines (Nasdaq: UAUA) broke off merger talks with US Air (NYSE: LCC)
• Harris Corp. (NYSE: HRS) has put itself up for sale and received some preliminary bids
• Bear Stearns officially bowed out as a stand-alone investment bank
• First quarter GDP was revised upward
• Dell (NYSE: DELL) released earnings that topped expectations

Commentary

Investors must have had an enjoyable Memorial Day holiday, because the pessimism of last week turned back around this week. Though the S&P 500 wasn’t able to make up all of the losses of last week, it did post a full week of gains that made up some of the lost ground.

No single event or theme dominated the week — unless, of course, you consider recession a single theme. Investors, analysts, and the media all still seem to be struggling to read the tea leaves, and we appear to be stuck in an economic gray area. Much of the truly dire predictions seem to have disappeared, though they’re still there if you look hard enough. Most market participants, however, have now seemed to settle on a moderate economic slowdown and are wrestling with the ultimate depth of the dip and the timing of a recovery.

Supporting the moderate slowdown crowd is consistently mixed data coming out of both earnings reports and economic releases. While there is no guarantee that the environment couldn’t take an abrupt turn back downward, the mixed data suggest that the downturn may be moderating if not getting ready to turn the corner. As the first quarter earnings season continues winding down, investors will likely be more focused on economic data such as the ISM manufacturing index and the employment report next week.

Looking ahead

Seth Klarman, renowned value investor and manager of The Baupost Group, closed a speech at MIT late last year by saying: “Ultimately, nothing should be more important to investors than the ability to sleep soundly at night.” In the context of his remarks, Seth was getting at the idea that investors should be focused on investing in reliable assets and not getting caught up in the short-term “horse race” of Wall Street.

As I’ve written in the past, investing is as much an exercise in psychology as anything else. The stock market has a tremendous ability to stoke the fires of fear and greed within investors — most often to their great detriment. Many investors that fall into the short term game that Seth warned of in his speech find that they end up not only preoccupied with their investments, but they don’t end up with the returns that they were so arduously chasing.

Fortunately, as we discuss week after week on this blog, there is a simple (though sometimes not easy!) solution to this problem. This solution starts with finding an asset allocation and asset selection that fits your personal goals and features solid, high quality funds. From there, all you have to do is stick to a steady investment schedule and tune out the day to day happenings in the crazy halls of Wall Street.

Of course, as I mentioned above, this strategy is simple but not easy. In other words, while I managed to fit the strategy into 51 words in two sentences, many investors will find it challenging at some point or another to stick to the game plan. Why? Well, the current market downturn provides a good example. Many investors are so concerned with terrible scenarios that may or may not play out that they aren’t investing — or worse, are pulling out funds — at a time when they should be investing more if anything.

Following the stock market horse race can be fun and exhilarating, but when it comes to where you put the money you want to retire on, it’s best to leave the racing to the jockeys.

By now most people have received their stimulus checks.  Like many others, I felt it was my duty to spend the money as quickly as possible to help stimulate the economy.  After all, that was the Government’s intention when announcing the refund, right?  Well after dreaming of all the wonderful things I could use the money for, I started to realize there were better options than just spending it on material goods or a night out on the town.  More urgent day-to-day needs and my longer term retirement goals came to mind.

While I was thinking through my own financial situation, I realized that it might be useful to share how I prioritized potential uses for my stimulus check.  At the top of my list are the day-to-day expenses that we all have such as food and gas.  With gas prices reaching all time highs and about to pass $4.00 per gallon, people have to pay more and more each time they go to the pump.  My co-workers and friends are now paying anywhere from $45 to $100 to fill up their car or truck, and as a result have far less for things like going out to dinner. 

After accounting for day-to-day living expenses, I turned my attention to high interest credit card debt.  If you consider the average household credit card debt is roughly $3,000 with an APR around 19%, it makes sense to try to pay it off as soon as possible.  In fact, a survey by the Harris Poll revealed that 38% of respondents said they will use a lump of their rebate checks to help pay off credit cards.  With such high interest rates, especially those with APR’s above 15-16%, it only makes sense to use this money to pay off credit cards.

Next on my list would be adding to an emergency fund or possibly funding an investment account.  In the Harris Poll mentioned above, over 35% said their rebate checks were going straight into their savings account. I think this is a great idea for those that are building an emergency fund and suggest six months of living expenses as a goal. If you have your day-to-day expenses accounted for, don’t have high interest credit card debt and have an emergency fund built already, you might want to consider investing it.

By using the stimulus check for these expenses, you will free up some money from each paycheck.  I’d suggest investing this portion and increasing your contributions to your 401k.  Unfortunately, I have seen a recent trend where people are doing the opposite, and are actually reducing their 401k contributions.  This trend will have long lasting effects. You might not see it now or in a year, but 10, 15, or 20 years from now, you will see the dramatic effects.  (To see how a change as small as 1% could affect your retirement plan try the “What May My 401k Be Worth?” calculator on the Calculate Your Progress page.)

There are many different options for how to use your stimulus check.  Instead of feeling obligated to spend the money on electronics or entertainment as I first did, I simply ask that you take a look at all of your options and decide what is best for you and your family.

Jeff Studebaker, Investment Advisor

I wanted to let you know that we recently posted two new articles in the Smart401k Insights section of our Tools & Resources page.  The first article ”A Primer on Annuities“ was written in response to numerous inquiries from our clients who had questions about annuities.  We tried to cover everything from “what is an annuity?” to “what should I be aware of before buying an annuity?” and everything in between. 

The second article titled “Smart Savings: Start Now“ is the first in a series of articles about how and where to save during different life stages.  With graduation upon us we decided to start the series by addressing new college grads and those who are just starting to think about saving.  The article provides an introduction to several different savings vehicles and a step-by-step plan on how to get started.  If you know someone who is in this situation you might want to consider combining the article with a gift certificate to Smart401k so they get off on the right foot with their 401(k).  To purchase a gift certificate click here.

We hope that you find the blog interesting and useful.  Most of the articles have been about issues that we hear about from you or see in the news.  We would like to start answering more questions from you and addressing topics that you find interesting.  You can email us directly at info@smart401k.com or post a response/question to one of our posts if you’d like to know more about a specific topic.  As always, our advisors are here to answer any questions you might have.

Scott H

In the headlines

A look at some of the market movers over the past week:

• The dance between Microsoft (Nasdaq: MSFT) and Yahoo! (Nasdaq: YHOO) is back on
• Electronic Arts (Nasdaq: ERTS) is still pursuing Take-Two Interactive (Nasdaq: TTWO)
• The National Association of Business Economics thinks that the US economy will return to growth after the second quarter
• Home Depot (NYSE: HD) couldn’t fight off the tough housing market conditions
• The government’s homeowner rescue plan is gaining momentum
• Leading indicators suggest that the economy is not quite in recession
• The producer price index rose less than expected
• The $53 billion buyout of BCE (NYSE: BCE) may be on thin ice
• The market didn’t like the insinuation that the Fed may be done cutting rates
• American Airlines (NYSE: AMR) announced a major capacity cut
• Home prices are continuing to plunge

Commentary

The recent optimism was tempered a bit this week as economic reports made investors reconsider how quickly they wanted to bid stocks back up from their lows. Not all of the news was bad — a measure of economic leading indicators rose for a second consecutive month, suggesting that the economy is not in dire straits. However, the producer price index — a measure of inflation — showed prices for goods other than food and energy rising more than expected.

More impactful was the release of the Federal Reserve’s minutes from its most recent meeting. In short, the notes said that the risks of inflation are now balancing out the risks to economic growth, which suggests that more interest rate cuts are unlikely. The market clearly took this as bad news, but it should be noted that this could also be read as the Fed’s belief that the economy is stabilizing and no longer requires resuscitation from rate cuts.

Looking ahead

What we can be assured of looking ahead is that the market will continue to bounce around. The overwhelming deluge of bad news seems to be over, and we now have more of a balance of good with the bad. Most analysts and economists continue to believe that the economy will see marked recovery in the second half of the year. Of course, however sure they may be of that, consensus projections often turn out to miss the target. For that reason, we continue to suggest that long term investors keep on their investing schedule and not try to time the market.

As captivating as the markets can be, sometimes the best investing medicine is to unplug from them. So, with that, go out and have a wonderful Memorial Day weekend!

In the headlines

A look at some of the market movers over the past week

• HSBC (NYSE: HBC) started out the week announcing that bad debt expense for the first quarter wasn’t as bad as some had expected
• Research in Motion (Nasdaq: RIMM) fired back against Apple‘s (Nasdaq: AAPL) iPhone
• Investors were encouraged by a lackluster, but not terrible, report from MBIA (NYSE: MBI)
• Hewlett-Packard (NYSE: HPQ) announced a $12 billion acquisition of EDS (NYSE: EDS)
• Wal-Mart‘s (NYSE: WMT) earnings beat forecasts but its outlook didn’t encourage
• US retail sales painted a mixed picture
• US foreclosures are only getting worse
• ArcelorMittal (NYSE: MT) rode global demand to a favorable first quarter
• CBS (NYSE: CBS) announced that it is acquiring CNET (Nasdaq: CNET) for $1.8 billion
• Inflation in April was less than had been previously forecast
• Billionaire Carl Icahn has jumped into the Yahoo! (Nasdaq: YHOO) fray
• Macy’s (NYSE: M) is planning to open FAO Schwarz toy boutiques in 685 of its stores

Commentary

It’s not a stretch to say that it was a really good week for the markets. Not only were they up, up, and up, but they were notably docile. As I’ve said previously, in a recovery I’m looking for not only a market that’s moving up, but a reduction in the type of extreme volatility that suggests that nobody has any clue what’s going on. We had both this week, and it’s become a bit of a trend. It’s been nearly a month now since the last time the S&P 500 has moved more than 2% in a single day, and the S&P is up around 4% over that period.

Back in mid-March, we hit a low on the S&P that put the index down just a hair over 20% — just barely enough for investors to really consider it a market downturn — from the intraday peak in mid-October of last year. Since then we’ve charged back around 13% and remain a bit under 10% from that October peak.

The recovery may seem a bit hasty, after all, we’re still seeing anemic economic growth and weak consumer spending and it’s expected to get worse. But it’s important to keep in mind that the economy and the stock market are not one in the same. Stock prices began declining when economic growth was still robust, and, as it has happened in the past, they are expected to recover ahead of the economy.

Looking ahead

We’ve still got inflation, recession, oil prices, consumer spending, the housing market, and financial company write-downs — to name a few — that all have a lot of power to spook the market. And of course we don’t want to discount the unknown, because it’s actually the risks aren’t even on the radar now that will really put some fear into investors.

Of course that’s not to say that investors will get spooked. Unless something really unexpected shows up or the credit market starts deteriorating at an accelerated pace, the market will likely drift flat-to-slightly-up until we start getting second quarter earnings reports. Many companies have said that they expect the second quarter will continue to be slow but that growth will pick back up in the back half of the year. Come second quarter earnings season we will start hearing from companies whether or not that will be the case, and afterwards we’ll certainly see a reaction from the market one way or the other.

Not surprisingly, we continue to recommend that if you’re investing for the long term, your best bet is to tune out the day-to-day concerns of the stock market and financial press. Keeping a diversified portfolio of high quality funds and investing on a set schedule is a great way to earn attractive returns with little effort.

I read a report today from the Employee Benefit Research Institute (“EBRI”) that stated Americans have become more worried about the state of their retirement savings than they have been in the past. In fact, the number of people who are very confident that they will have a comfortable retirement dropped by about a quarter since last year to 27% (the largest drop in the surveys 18 year history). A lot of this is probably related to the current state of the economy and people’s uneasiness with the market. However, a number of things jumped out at me in the article that reinforced the need to build a nest egg now rather than in the future.

According to EBRI, 49% of surveyed individuals have less than $50,000 saved for retirement, and 28% have no retirement savings at all (if you exclude the value of their primary residence and defined benefit plans). This in and of itself is alarming, but what I found more alarming is what people believe to be an adequate amount of savings. According to the survey, 25% of individuals think they need less than $250,000, and an additional 16% of individuals believe they need $250,000-$499,000 in retirement savings. Now, I can’t say for sure whether they are right or not, but it seems awfully low when you consider things like increased life expectancy and rapidly rising healthcare costs. In addition, less than half of those surveyed had actually gone through the steps of estimating how much they’ll need in retirement (with a calculator or a financial advisor). Of those that did take the time to calculate their need, almost 50% made changes to their retirement planning (the most frequently cited change was to either start saving or to invest more).

It probably doesn’t surprise you that retirement savings is at the top of my mind, but what might surprise you more is that for most people it isn’t even in the top six of most pressing financial issues. It ranks behind things such as cost of living, insurance costs and paying down debt which are all important things. So you might be wondering what you can do to start building your nest egg without impairing your ability to live and pay the bills.

First, I would suggest calculating how much you might need to live how you want in retirement. This will show you how close or far you are from your retirement goal. If you want to experiment with the calculation you can try one of our calculators at http://www.smart401k.com/Calculate.aspx (I’d suggest using the calculator titled – Are My Current Retirement Savings Sufficient?). Its generally believed that you need to replace 70-80% of your pre-retirement annual income to maintain your current lifestyle. If you’re like me and want to travel the world, you might need as much or more than your current level of income. I also found it interesting to play around with rates of return on your pre and post retirement savings and number of years you’ll spend in retirement.

Next, I’d look at what you can do to make your retirement more secure. The easiest and probably most painless way to increase your savings is to increase your contributions to your 401(k). I wrote a previous post about what increasing your contribution by 1% can mean to you at retirement (“How much is a Latte Worth?“) … so give up that latte already! Then I would check to see if your plan has an auto-escalation feature, and if so, I would set it up so that your contribution increases by 1% a year. This will enable you to increase the amount you are saving without impacting your lifestyle (as long as you get a raise of more than 1% a year you won’t even notice the change). If you can do more than 1%, then do it, it’ll pay off in the future when you’re enjoying your retirement.

Scott H

Source: Employee Benefit Research Institute: The 2008 Retirement Confidence Survey

In the headlines

A look at some of the market movers over the past week:

• The Yahoo! (Nasdaq: YHOO) and Microsoft (Nasdaq: MSFT) drama ended when Microsoft pulled its bid
• Rumors flew that Deutsche Telekom (NYSE: DT) will be making a bid for Sprint (NYSE: S)
• Berkshire Hathaway (NYSE: BRK-A) investors flocked to Omaha for the company’s annual meeting
• More airline mergers could be in the works
• UBS (NYSE: UBS) continued to report losses
• Bank of America (NYSE: BAC) said that it is staying the course with Countrywide (NYSE: CFC) despite rumors to the contrary
• Oil is still unstoppable and Goldman Sachs (NYSE: GS) thinks it could hit $200 per barrel
• Sprint (NYSE: S) and Clearwire (Nasdaq: CLWR) announced a $14.5 billion WiMax joint venture
• Disney (NYSE: DIS) defied critics with its quarterly report
• Cisco (Nasdaq: CSCO) reported earnings that were good enough to calm investors
• AIG (NYSE: AIG) owned up to another huge loss
• Circuit City (NYSE: CC) is giving more consideration to the buyout offer from Blockbuster (NYSE: BBI)
• Citigroup (NYSE: C) is doing some more internal cleaning

Commentary

With the Federal Reserve meeting and its 25 basis point interest rate cut in the past, investors were free to get back to focusing on earnings reports. Earnings were a mixed bag and didn’t seem to be compelling enough to convince investors that either the trajectory of the economy will be worse than expected or considerably better than expected.

However, the week wasn’t without news that riled the market. Oil prices continue to loom large as a stumbling block for the economy and the projection from Goldman Sachs analyst Arjun Murti didn’t waylay anyone’s concerns. It’s particularly notable that Murti’s prediction didn’t come out of left field. In 2005 Murti said that he expected oil prices to rise as high as $105 through 2009 — a prediction that was obviously a bit conservative.

Additionally, the demise of the Yahoo! and Microsoft talks, as well as the rumors that Bank of America could walk away from Countrywide conspired to spook investors. The consummation of major acquisitions can be seen as a vote of confidence in the future, and it’s likely that investors are taking these data points as signs that major companies are getting less bullish about what’s ahead.

Looking ahead

We’re not through earnings season yet, and we can expect continued scrutiny with major companies like Sprint, Wal-Mart (NYSE: WMT), Freddie Mac (NYSE: FRE), Macy’s (NYSE: M), and Hewlett Packard (NYSE: HPQ) on deck to report next week. Expect that oil will also continue to be a big focus as high prices lead to more discussion over whether this is a potential lasting trend fueled by fundamentals or a shorter term speculative bubble.

Since the March lows, the market has recovered significantly. Despite the optimism, it’s questionable whether there have been any clear signs that the mortgage and credit crunch, and the related pressure on consumers, is truly behind us. This means that there is the potential for renewed pessimism to take the market back down a bit in the short term. However, we are still more than 10% below last October’s peak, so if this is a legitimate recovery in progress then we still have a ways to go.

Those on a steady investment schedule should continue at the same pace — that will still be the easiest path to good results. Investors with more flexibility in their investing may want to watch for any major dips for an opportunity to invest additional funds.

As I was waiting for my latte this morning, I began to wonder what it was worth to my retirement…..

• If you‘re 30 years old or younger it could be worth more than $60,000….
• For someone with at least 25 years until they will need the funds, it could be worth more than $25,000….
• And for someone with at least 15 years until they will need the funds, it could be worth almost $10,000….

You might be saying, “Wow, that’s a lot of money, but I just can’t alter my current budget?”

Well, you could start by drinking one less latte a week.  Increasing the amount you save in your 401(k) by $25 per month or less than $4.50 per week in take home pay (using a 30% combined tax rate) could help you build an additional nestegg for your retirement.

• For example, if you make $30,000 a year it would mean investing just 1% of you salary into your 401(k) plan. At $50,000 a year you would only need to defer slightly more than 0.5% of your annual salary.

What’s our point?  One of the most common statements people make is that they can’t save any more money or that increasing their deferral amount won’t be worthwhile.  Well, if you can skip one latte a week, you will be in a better place for your retirement.

Scott H

Methodology:  This example is for illustrative purposes only.  We used an investment schedule of $25/month, a tax-deferred account and an 8.5% annual return (this return does not represent the return of a particular investment option) to project the account balance

In the headlines

A look at some of the market movers over the past week:

• Mars, with the help of Warren Buffett and Berkshire Hathaway (NYSE: BRK-A), cut a deal to buy William Wrigley Jr. (NYSE: WWY)
• Visa (NYSE: V) shares fell despite reporting better than expecting results
• The major oil and gas players were reporting stellar numbers
• Citigroup (NYSE: C) raised another $4.5 billion in new stock to bolster its books
• Kirk Kerkorian continued to build his stake in Ford (NYSE: F)
• Home prices continued to plummet while foreclosures soared
• The Federal Reserve cut its target rate by a quarter point
• The US economy grew at an anemic 0.6% pace in the first quarter
• Economic reports continue to portray tough times, though some numbers have been better than expected

Commentary

Earnings continued to flood the newswires this week, though with somewhat less fanfare and impact. The majority of the reports came out of the technology and energy sectors, which investors seem to be less interested when it comes to projecting the direction of the broader market.

Despite the small size of the interest rate cut, the Federal Reserve had rapt attention from the market this week. The 25 basis point cut did end up meeting the expectations of most, but the statement released with the cut seemed to disappoint, since it did not make the Fed’s next move particularly clear. However, unless economic conditions deteriorate significantly before the next meeting, the most likely scenario is that the Fed is done lowering rates for the near future.

On the economic front, the picture is still little changed. Though the positive first quarter GDP growth was taken as a positive by some, the quality of the growth was poor, and most economists think we are still sliding. Other economic reports during the week showed a somewhat mixed picture — some confirmed the economic deterioration that has been widely projected, while others suggested that though the economy is weak it may not be slumping at as brisk of a pace as feared. Taken as a whole, it’s obvious that we have yet to hit an economic turning point, though it’s possible that the slope of the decline may be flattening out.

Looking ahead

When it comes to investing, risks run along multiple vectors. Often it can be difficult to pin down a good bet on multiple vectors at once, so the best approach is to try as much as possible to maximize exposure to the particular vector that you feel you have a handle on, while minimizing exposure to the others.

Two highly visible vectors in investing are direction and timing. Direction is simply which way the price of a particular investment will move, while timing is the schedule of when the movements will take place. We can surmise pretty easily that insight into both vectors at the same time would provide optimal results — in other words, you know which direction the market is headed and exactly when the turn is going to come. For practical purposes, though, timing has been an element that has often eluded the best investors and the smartest economists. For the individual investor it can be darn near impossible. This is exactly the reason why the investment plan that we recommend is one of continuous, steady investments over time. This strategy allows you to capture the gains from global growth trends while minimizing the risk of trying to time the market.

In these times of uncertainty, we continue to believe that this is the best strategy for individual investors to follow. Future growth in both the US and global economies looks promising, though the timing of the particular cycles are far less clear. Keeping a steady investment program is the best way to capture the former, while protecting your portfolio from surprise fluctuations in the latter.