If you have even a mild interest in investing, it’s hard to avoid taper talk, the seemingly endless speculation as to when the Federal Reserve will begin winding down its $85-billion-a-month bond-buying stimulus, also known as QE3.
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Warm regards,
What the acronyms signify & what affects investors.
Dow. NASDAQ. S&P 500. Fear index. NYSE. Commodity prices. Earnings. Economic indicators. These are the gauges and signposts of investing, but if you stopped most people on the street, you’ll find they have only a hazy understanding of what these terms signify or reference. If you’ve ever been left dizzy by the jargon of the financial world, here is a brief article that may help clarify some of the arcana. Let’s start on Wall Street.
The major U.S. indices. The Dow Jones Industrial Average tracks how 30 publicly owned companies trade on a market day – the “blue chips”, 30 titans of U.S. and global business chosen by the Wall Street Journal, most not actually industrial. The NASDAQ Composite records the performance of 3,000+ companies on the NASDAQ Stock Market (see below), including many technology firms. The S&P 500 logs the performance of 500 leading publicly traded companies across ten different sectors (business/industry categories), as determined by financial research giant Standard & Poor’s (there was actually a Mr. Poor, hence the name).1,2 At the end of the trading day, these indices settle or “close” at a price level. The Dow is a price-weighted index – that is, its value each trading day rides up or down on the price movements of its 30 components. By contrast, the S&P 500 and NASDAQ (and most other stock indices) are cap-weighted, meaning the index value reflects the total market value of the companies in the index and not simply the prices of individual components. The S&P 500 has both a price return and a total return (the total return includes dividends).1,2While the nightly news tells everyone what the Dow did today, many seasoned investors pay more attention to the S&P 500, which represents about 70% of the value of the U.S. stock market. There are other indices that also grab Wall Street’s attention. Investors watch the Russell 2000 (which lists the “small caps”, usually newer and younger firms than found in the predominantly “large-cap” S&P 500) and the Wilshire 5000, which tracks stocks of almost every publicly owned company in America (6,000+ components). Eyes are also on the “fear index”, the CBOE VIX (Chicago Board Options Exchange Volatility Index), which measures investors’ expectations of volatility (read: market risk) in the S&P 500 for the next 30 days. Important multinational indices (the MSCI World and Emerging Markets indices, the Global Dow, the S&P Global 100, and many more) and foreign indices (Japan’s Nikkei 225, Germany’s DAX, China’s Shanghai Composite and many others) also get a look.2,3,4,5
The stock exchanges. Stocks trade on exchanges, with the most prominent in America being the New York Stock Exchange (NYSE), the “big board” at which celebrities are seen ringing the opening or closing bell. Other notable U.S. stock and securities markets include the American Stock Exchange (AMEX), the CBOE and the NASDAQ Stock Market. While the NYSE trading day runs from 9:30am-4:00pm EST, pre-market and after-hours trading also occurs as investors respond to earnings announced after or before the bell or overseas developments.
The NYMEX, the COMEX & the forex market. The CME Group of Chicago owns and operates the New York Mercantile Exchange (NYMEX), the biggest physical commodities exchange on the planet. The NYMEX tracks energy futures such as oil and natural gas and it also has a COMEX division for metals such as gold, silver and copper futures. (Platinum and palladium futures actually trade on the NYMEX instead of the COMEX.) Agricultural commodity futures and options are traded on the CME Group’s Chicago Mercantile Exchange. Over-the-counter currency trading occurs via the worldwide, decentralized forex (foreign exchange) market. Short-term movements in exchange rates do influence stocks. 6,7
The bond market. Further decentralized trading occurs here, conducted by institutional and individual investors, governments and traders buying, selling and issuing government, corporate and mortgage-linked securities (and other varieties). Bond prices fall when bond yields rise, and vice versa. Interest rate changes affect the bond market more than any other factor; credit rating adjustments and changes in the appetite for risk (i.e., a race to or retreat from stocks by investors) can also play roles.
What moves the markets up and down? Information – or more precisely, the way large institutional investors respond to it. Things really move when the equilibrium of the market is upset by either positive or negative breaking news – it could be a geopolitical development, a natural disaster, a central bank decision, a comment from a Federal Reserve official or the Treasury Secretary, it could be many things. It could be earnings reports – corporate earnings are sometimes called the “mother’s milk” of stocks, and when two or three big companies beat estimates, Wall Street may see big gains that day.The markets also respond to an ongoing stream of economic news releases from the federal government and other organizations. Federal Reserve policy announcements (interest rate adjustments, the implementation or cessation of stimulus efforts) get the most attention, and the Labor Department’s monthly employment report finishes second. Other critical monthly releases include the Commerce Department’s consumer spending report, the Bureau of Labor Statistics Consumer Price Index measuring consumer inflation, and monthly reports on existing home sales (from the National Association of Realtors), new home sales (from the Census Bureau) and home values (via the S&P/Case-Shiller Home Price Index). There are other key reports: the occasionally contradictory consumer confidence surveys from the University of Michigan and the Conference Board (the CB poll is more respected, as it surveys 5,000 people; the Michigan poll surveys only 500, but asks many more questions) and the Institute for Supply Management’s monthly purchasing manager indexes assessing the health of the manufacturing and non-manufacturing sectors of the economy (these are simply surveys of purchasing managers at businesses, minus hard data).8,9
Hopefully, this makes things a little less mysterious. It takes a while to get to know the financial world and its pulse, but that knowledge may reward you in tangible and intangible ways.
Warm Regards,
Citations.
1 – investorguide.com/article/11617/introduction-to-stock-indexes-djia-and-the-nasdaq-igu/ [1/25/13]
2 – fool.com/school/indices/sp500.htm [6/6/13]
3 – fool.com/school/indices/russell2000.htm [6/6/13]
4 – fool.com/school/indices/Wilshire5000.htm [6/6/13]
5 – investopedia.com/terms/v/vix.asp [6/6/13]
6 – investopedia.com/terms/n/nymex.asp [6/6/13]
7 – cmegroup.com/trading/agricultural/ [6/6/13]
8 – foxnews.com/us/2012/05/29/how-2-us-consumer-confidence-surveys-differ/ [5/29/12]
9 – briefing.com/Investor/Calendars/Economic/Releases/napm.htm [6/3/13]
What makes financial sense for some baby boomers may not make sense for you.
There is no “typical” retirement. Many baby boomers want one and believe that they will have one, and their futures may indeed unfold as planned. For others, the story will be different. Just as there is no routine retirement, there are no rote financial moves that should be made before or during this phase of life, and no universal truths about the retirement experience.
Here are some commonly held assumptions – suppositions that may or may not prove true for you, depending on your financial and lifestyle circumstances.
#1. You should take Social Security as late as possible. Generally speaking, this is a smart move. If you were born in the years from 1943-1954, your monthly benefit will be 25% smaller if you claim Social Security at 62 instead of your “full” retirement age of 66. If you wait until 70 to take Social Security, your monthly benefit will be 32% larger than if you had taken it at 66.1
So why would anyone apply for Social Security benefits in their early 60s? The fact is, some seniors really need the income now. Some have health issues or the prospect of hereditary diseases influencing their choice. Single retirees don’t have a second, spousal income to count on, and that is another factor in the decision. For most people, waiting longer implies a larger lifetime payout from America’s retirement trust. Not everyone can bank on longevity or relative affluence, however.
#2. You’ll probably live 15-20 years after you retire. You may live much longer, especially if you are a woman. According to the Census Bureau, the population of Americans 100 or older grew 65.8% between 1980 and 2010, and 82.8% of centenarians were women in 2010. The real eye-opener: in 2010, slightly more than a third of America’s centenarians lived alone in their own homes. Had their retirement expenses lessened with time? Doubtful to say the least.2
#3. You should step back from growth investing as you get older. As many investors age, they shift portfolio assets into investment vehicles that offer less risk than stocks and stock funds. This is a well-regarded, long-established tenet of asset allocation. Does it apply for everyone? No. Some retirees may need to invest for growth well into their 60s or 70s because their retirement savings are meager. There are retirement planners who actually favor aggressive growth investing for life, arguing that the rewards outweigh the risks at any age.
#4. The way most people invest is the way you should invest. Again, just as there is no typical retirement, there is no typical asset allocation strategy or investment that works for everyone. Your time horizon, your risk tolerance, and your current retirement nest egg represent just three of the variables to consider when you evaluate whether you should or should not enter into a particular investment.
#5. Going Roth is a no-brainer. Not necessarily. If you are mulling a Roth IRA or Roth 401(k) conversion, the big question is whether the tax savings in the end will be worth the tax you will pay on the conversion today. The younger you are – roughly speaking – the greater the possibility the answer will be “yes”, as your highest-earning years are likely in the future. If you are older and at or near your peak earning potential, the conversion may not be worth it at all.
#6. A lump sum payout represents a good deal. Some corporations are offering current and/or former workers a choice of receiving pension plan assets in a lump sum payout instead of periodic payments. They aren’t doing this out of generosity; they are doing it because actuaries have advised them to lessen their retirement obligations to loyal employees. For many pension plan participants, electing not to take the lump sum and sticking with the lifelong periodic payments may make more sense in the long run. The question is, can the retiree invest the lump sum in such a way that might produce more money over the long run, or not? The lump sum payout does offer liquidity and flexibility that the periodic payments don’t, but there are few things as economically reassuring as predictable, recurring retirement income. Longevity is another factor in this decision.
#7. Living it up in your 60s won’t hurt you in your 80s. Some couples withdraw much more than they should from their savings in the early years of retirement. After a few years, they notice a drawdown happening – their portfolio isn’t returning enough to replenish their retirement nest egg, and so the fear of outliving their money grows. This is a good argument for living beneath your means while still carefully planning and budgeting some “epic adventures” along the way.
Your retirement plan should be created and periodically revised with an understanding of the unique circumstances of your life and your unique financial objectives. There is no such thing as generic retirement planning, and that is because none of us will have generic retirements.
Sincerely,
Don’t ignore it. Here’s why.
Here’s the scenario … you get a card in the mail, one of those little reminders that tells you it’s time for your annual financial checkup. Your reaction: I’ll take care of that later. Here’s why you should look forward to it.
Why do I need an annual review? Because things change, and during the course of the last 12 months, you may have … changed jobs, made major purchases, welcomed a new child, retired, bought or sold a residence, decided upon new goals. These developments can change your financial objectives. Also, it is just sensible to measure your financial progress. If you are not making progress in accumulating assets, or if you are assuming too much risk as a result of your current portfolio or financial decisions, it’s time for change.
The annual review is a “deep breath” where you can get away from daily distractions and think clearly about financial planning.
Just imagine. Imagine letting your investments go for five or ten years, assuming that they’re doing okay while you wonder what the quarterly statements mean. Imagine being a few years from retirement only to find you have less than a year’s salary in savings. Imagine passing away and leaving unresolved money issues for your loved ones, or subjecting them to a contentious probate process.
These scenarios are all too real; people run to financial advisors for help with them every day. If they had only reviewed what was happening with their lives financially, they could have planned to avoid these issues in advance. Putting things off can be dangerous.
This is an ideal time to take a look under the hood – financially speaking. During your annual review, you can estimate your net worth, and also possibly learn about any tax changes that might affect your investments, business or estate. It’s also a good time to make voluntary IRA contributions, and get college funding and financial aid applications underway.
Financial planning is not an event you do once in your lifetime and forget about. Financial planning should be an ongoing priority.
“Don’t put off until tomorrow what you can do today.” ~ Benjamin Franklin
Happy planning,
Most financial experts advise us to wait until full retirement age, or even longer, before we begin receiving our retirement benefit from Social Security. There are good reasons for this. Social Security is like an annuity, providing a guaranteed monthly income for the rest of your life. It addresses the problem of: What do I do if I run out of money? With Social Security, you never run out of money.
For many of us – people born between 1943 and 1954 – the regular retirement age is 66. You’re eligible for Social Security as early as age 62, but you suffer a penalty if you start then. You can also delay taking benefits until 70, and then you get a bonus.
The penalty for taking Social Security early is around 7 percent a year, and the bonus for delaying is also about 7 percent a year. If your benefit at age 66 is figured at the average of $1,268 a month, then you’ll only receive about $1,180 per month if you sign up at age 65. If you wait until 67, your benefit will grow to almost $1,360. And if you can delay until age 70, your monthly benefit will expand by almost a third to around $1,660 – for the rest of your life, even if you live to 100.
For most people this is a good deal. It’s a 7 percent increase each year that is risk free. Compare that return to the rate on a two-year U.S. Treasury bill of less than 1 percent.
So why would you grab Social Security when it’s first offered? There are four good reasons:
You need the money. Sure, you get a 7 percent return on Social Security if you postpone your benefit, but that only helps if you can afford to wait. It’s like putting money into a savings account. But if you need Social Security to pay rent and buy groceries, then go ahead and start benefits at age 62. You’ve earned it, you need it and it’s available. And by the way, you have plenty of company. The majority of people eligible for Social Security start drawing benefits before full retirement age.
You’re in poor health. A friend of mine just turned 60. He’s got high blood pressure and has already suffered one heart attack. Plus, he has diabetes. He realizes he probably will not survive to age 83, the life expectancy of a typical 60-year-old male. So he intends to start Social Security as soon as he can, at age 62. Unfortunately, he’s betting against his own longevity, but given his medical history, he’s making the smart move. If, for whatever reason, you don’t expect to live into your 80s and 90s, then it makes sense to start your benefits at a younger age.
You’re a financial genius. You don’t have to prove any need to collect Social Security. You don’t even have to be retired. It is perfectly legal to start benefits at age 62 and stash the money in your own private investment account. For most people, this doesn’t make sense, because remember, you’re getting a risk-free 7 percent return from the government for waiting, and you probably can’t do that well by yourself. But if you’re the next Warren Buffett, or have a sure-fire investment opportunity, then there’s a case for taking Social Security early and investing it on your own. Remember, though, you may have to pay income tax on your benefit if you’re still working or if you have other income.
If benefits change. Social Security is billed as a certain benefit for our old age, safely put away in the proverbial “lock box.” But this isn’t really true. Social Security was put in place by politicians of the 20th century. Future benefits depend on politicians of the 21st century. In recent years economists have begun to worry that the government can’t afford all the payments promised to future beneficiaries, particularly as baby boomers retire. There’s nothing, other than political pressure, to stop Congress from “bending the curve” toward lower benefits, or more likely, taxing away benefits from people affluent enough to postpone their payouts. If, in your judgment, the political risk of a lower benefit outweighs the “risk-free” 7 percent return, then it may make sense to take the money while it’s still available. But again, remember that benefits are subject to taxation if you’re below full retirement age and still working.
The decision of when to begin Social Security depends on your individual situation. The Social Security Administration helps us out with a retirement planner, which includes a link to your own personal account. Go take a look. Then you be the judge.
Tom Sightings is a former publishing executive who was eased into early retirement in his mid-50s. He lives in the New York area and blogs at Sightings at 60, where he covers health, finance, retirement and other concerns of baby boomers who realize that somehow they have grown up.
http://news.yahoo.com/why-collect-social-security-early-160217648.html