STOCK MARKET....Brinker recommends that those in or near retirement use a balanced approach. Today, he told caller Wesley from Naperville: ..."Even if that balanced portfolio was 50% in the S&P 500 or the Total Stock Market Index and 50% in quality bonds - without going to long-term maturities because of the level of rates – it would still be a balanced portfolio in that context.…"
Honey EC: There are no changes to Brinker's recommended fully-invested asset-allocation. Today, he announced that the August issue of Marketimer would be available tomorrow.
BOND MARKET-INTEREST RATES
VANGUARD SAYS DON'T WORRY ABOUT RATES RISING IN LT BOND FUNDS.....Caller Jack from Minnesota said: "I've got a bond fund through Vanguard. I've talked to them a couple of times, and I pretty much get the same answer each time, so I want to run it by you. They say don't worry so much about the fact that bonds may drop somewhat in value when interest rates rise , because in the bond funds, each bond will mature over time and come back to face value. That in the long run it will be okay. What you take on that??Read Bluce's rebuttal to Brinker HERE.
VANGUARD BRINKER'S FAVORITE FUND FAMILY IN WHOLE WORLD.....Brinker replied to Jack: Let's do the math. It sounds great but let's do the math. Let's take the Total Bond Fund at that fund family. Now you know that that is my favorite fund family on the whole planet… I think most Moneytalk listeners know that…
HERE'S THE RATE RISE MATH, JACK.....Brinker said: "Here's the math: one of their popular funds is called the Total Bond Market. The Total Bond Fund is an extremely diversified bond fund. It has an average duration, currently, of 5.7 years. It has a current yield of 2.1%… Let's do the math for one year on a total return basis.… (Total return is how much money you have at the end of the year, including price change and including the interest were paid on the portfolio.) Here is the answer: how much money will I have at the end of the year with a 2.1 yield and a 5.7 year average duration? Interest rates go up during this period of 1%.… The principal value declines 5.7% which is the inverse of the duration. So $100 is now worth $94.30… Plus the interest it would earn which is 2.1% which would add $2.10. It would be $96.40. So at the end of a share, your $100, including the interest, would be worth $96.40. So a total return decline of 3.6%. That's the math Jack – that's the math.
GDP FOR Q2....Brinker comments: Real GDP increased at annual rate of 2.3% in second quarter....Previous quarter revised upwards at plus 0.6% annual....So far this year about 1.5%....
CHEAP GAS HELPS GDP INCREASE IN Q2......Brinker comments: We saw stronger consumer spending which is in part related to what's happened to energy prices.… Much of the money that was saved that was formerly going into the fuel tank was available for consumer discretionary spending – and that's what we saw in the second quarter… Another thing that happened was that government spending increased and that was helpful to the growth rate. Other things that were not helpful: there was a decline in capital expenditures and there was softer growth in the residential component of GDP.
WHAT'S NEXT FOR THE ECONOMY.....Brinker continued: So what happens here? In my opinion, we are going to see a better growth rate in the second half of 2015 than we have seen in the first half.
GANGBUSTERS RECOVERY - NOT! Brinker continued: But the reality is, the recovery that has come following the recession of 2008 has been as far from a gangbusters recovery as you can imagine… A lot of factors come in here – weaker demand on a global basis… The strong dollar continues to be a head wind that occurs as a result of the strong dollar and the GDP fall out in terms of the export account that happens related to the strong dollar.
INFLATION NO PROBLEM....Brinker continued: We are not seeing a whole lot happening there in terms of numbers that would be troubling. The numbers we're looking at right now remain very reasonable, and I doubt very much that we are going to see a reaction out of the Federal Reserve in terms of what's happening in inflation.
JOBS - UNEMPLOYMENT CLAIMS....Brinker continued: In terms of the job market, we continue to see these initial claims for unemployment insurance at a very low level. The last reading was 267,000 for the week. The number to watch is the four-week moving average, that one is 274,700. This is a very low number. In fact, this it's very close to the lowest number going all the way back 15+ years ago to the spring season of the year 2000. So there's no question that we are seeing an improvement in the labor markets. And we are even seeing a bit of a tightening trend in the labor markets. This always bears watching because one of the most important components of what happens in terms of prices going forward is what happens in the labor markets.
HOUSING MARKET STILL FAVORABLE....Brinker comments: Certainly the housing industry continues making positive contributions to the economy. The made Case-Shiller index remains unchanged.… No doubt about it, house prices have been rising on a trend basis.… National home prices for existing homes up 4.4% on a year-over-year basis.
BRINKER FLUMMOXED-GET RID OF ADVISOR....Caller Carl from San Jose wants to take some stock market profits to lower his holdings to 50% but got bad advice from his broker.
Brinker replied: There are flaws in this advise that are enough to flummox one. Flaw number one Mr. Carl: you have all this money over here in a tax privileged account – leave that alone. Go over here in your taxable account where you have immense gains, realize gains, pay the taxes – which is mistake one number one, in my opinion because you can do it in your tax privileged with no capital gains tax. Mistake number two: take the proceeds put it in municipal bonds at a time when we are looking at near historic all-time lows in municipal bond rates. If I had an advisor like that, I'd be looking elsewhere.
DON'T PAY TO BUY AN ANNUITY....Caller Ray from Iowa has a financial advisor that wants him to buy an annuity which has a 5% surrender charge....Brinker replied: The thing that amazes me is that any insurance company out there is able to hoodwink people – and that's the only word I can think of – hoodwink people into buying annuities with 5% surrender charges for ever.… The Vanguard annuity program has no surrender charges. How do these insurance companies hoodwink people into these kinds of schemes?
BE AFRAID, VERY AFRAID, OF PUERTO RICO PAPER.... Brinker comments: The way I look at it is that Puerto Rico is the US version of Greece. Here's why I say that. Years now, the banks around the world and in Europe have had to prepare for the inevitable, which is that Greece is a bankrupt nation. Whether it's papered over not – right now it's papered over.… Puerto Rico is a bankrupt Commonwealth, in my opinion. I realize it's been papered over so far, but it's bankrupt in my view. Individual investors and banks have had to prepare for this inevitability. So I'm assuming that the only people that hold Puerto Rico paper today are the people that understand the enormous risk of holding Puerto Rico paper.
BRINKER TAKES IT ON THE CHIN ABOUT HIS 4% ADVICE: Caller Douglas from Hoosierland said: "Three weeks ago I tried to call and couldn't get through to you you had a caller who invested $58,000 over 30 years and his current portfolio worth was $2.3 million. Analyzing that when he was talking with you, he had over 100 stocks and he had $29,000 income off the dividend. One of those stocks paid a 10% dividend. Your advice to him was to sell that – decrease it down to 4% – and pay the tax, $35,000, because it was outside of the protected account and then by the total stock market at today's rate. To me that's a lousy call. He's got 100 stocks. You can have a portfolio with 25 stocks that's a balanced portfolio. I've done very similar over 30 years. And you're going to tell him pay the tax to get 6% out of that and put it in total stock market at the highest it's ever been. Bad call!"
Brinker's reply to Douglas: "Only I said if he subscribes to my view that you don't want to have a heavily weighted position in any one stock. If he disagrees with that, he can do whatever he wants."
Honey EC: I clearly remember the call that Douglas was referring to, but unfortunately, I did not cover it in my summary. I have to sometimes make difficult choices -- and that was a bad one.
However, Blog Research Team (BRT) Member, Jeffchristie checked his notes and this is what he wrote to me: "On 19 July, the first caller was Jack from Elgin Illinois. He has a net worth of $3 mil in 113 common stocks. Biggest position was $400k in Macdonalds. Bob told him to reduce to 4 %."
NOTHING WILL HAPPEN UNTIL CHAIR JANET YELLEN BLINKS OR WINKS IN MID-SEPTEMBER..... Brinker said: All eyes will be on the Fed in mid-September when they have their next pajama party. And that will be a news conference and statement meeting. Right now, nobody knows whether they will or will not raise rates in mid-September. The odds on it are pretty close. If you go out and look at the betting parlors, they are pretty close to 50-50. It's pretty close to even-Stephen out there as to whether Chair Janet will blink in mid-September, or whether she will wink. We don't know. What we do know is that the next Fed meeting is mid-September, nothing is going to happen until then.
MEDICAL CARE INFLATION....Caller Tom from Tuscon asked what medical inflation would be over the next six months. Brinker replied: It's hard to pinpoint it that way. As you well know, a lot of it has to do with what's happening with Medicare spending in general.… Over the last 12 months, the year-over-year change in medical care service expenditures is 2.3% according to the CPI index figures. Over the last six months, the annualized rate of growth has been 2.4%.… So I think a reasonable estimate for medical care service inflation over the next year would be something in the general area of 2 1/2%.
FRANKJ'S THIRD-HOUR GUEST-AUTHOR SUMMARY
Bob’s third hour guest on August 2, 2015 was John D. Spooner, investment advisor in Boston and the author of 5 books, including No One Ever Told Us That, Money and Life: Letters to My Grandchildren.
The title for the book came from a comment a graduate student made to Mr. Spooner after a talk on finances: “No one ever told us that.” That comment got him thinking about a book that would be useful to young people. Schools don’t teach financial acumen and too many parents want to be “buddies” with their children and they don’t have “the talk” (about money management).
MoneyTalk regulars know that this topic is high on Bob’s hit parade.
There were some great quotes sprinkled throughout the interview. I think the reader might get a feel for Mr. Spooner’s commonsense outlook if we start with them:
=> “If my taxes are lower I can be more generous to my workers and to charities,” This was John’s reaction to Bob’s question about Bernie Sanders’ 90% top federal income tax recommendation.
=> “All pigs are equal but some pigs are more equal.” (With a nod to George Orwell, author of Animal Farm). Mr. Spooner’s answer when Bob asked him what he thought of HRC’s proposal to raise the capital gains tax rate. (I guess Bob doesn’t want to say the full name of Hillary Rodham Clinton for some reason).
=> “There is no work-life balance; it has to be work for a long time.” This one proved to be an irritant to the last caller who thinks kids today are great and wanted to know what’s so important about working until you die.
=> “Take an old pro to lunch.” If you’re a young person working somewhere, invite a long-time employee to go to lunch. (Earth to young person, this means YOU pay.) You’ll have a chance to talk to this individual one on one – this came up during the discussion of 401K’s and why some young people fail to take advantage of this investment opportunity where they work.
=> “Real money is made long term.”
=> “Fear and greed dictate the movement of the markets.”
On entrepreneurship, John said his office is in a building with a large advertising firm that must employ 500 people who all seem to be 27 years old. In the elevator they stare at their smart phones. He sometimes breaks into their reverie with a question about where they see themselves in 5 years. The answers seem to be 1) “being an entrepreneur,” or, 2) “I don’t even know where I’ll be next week.”
His advice in this area is to start young if you want to be an entrepreneur. Take advice only from successful people. Forget doing a business plan, they aren’t worth anything. Make a two page summary of the business that your grandmother can understand. Study accounting and learn about a balance sheet. Then sell your product, make sure you get paid and have customers who will talk up your business.
The callers included a woman from Oregon who owns some businesses with her husband. She provided a memorable quote regarding young people as employees, “kids don’t know anything, they can’t even unplug a toilet.” (In this age of 1.3 gallon flushes, they’d better learn. And you young guys…you better know that this is one household chore reserved exclusively for YOU.)
Tom, calling from Chicago is a 46 year old business owner who wants to protect his employees from themselves. He provides some tax sheltered investments to them in his business, but he said he’s always getting questions on whether they can take the money out.
Carl from Illinois brought up the concept of “delayed gratification.” He didn’t get a credit card until his mid 30’s and he’s only ever bought two new cars. The guest was on board but they didn’t get much time to discuss it.
Bob brought the interview to a close at 3:51 pm.
Now for editorial comment. Bob: With this quality guest, a full hour interview would have been barely adequate. I may be biased because I think the financial education of the younger generation is the first step toward making them better citizens and smarter voters.
The first segment of the third hour is taken up with a bunch of economic news. Does anybody really listen to you talking about what’s going to be coming out in the week ahead? Then the interview starts about 16 minutes or so after the hour and almost always wraps up around 50 minutes after the hour. I think you barely scratch the surface with some of these guests.
The book is available of course on Amazon. I took a quick inside. It may be just the ticket if you have a child, grandchild, niece, nephew, whatever who could benefit from Mr. Spooner’s message.Honey here: Thank you Frank...This was a remarkable and interesting guest. Finally Brinker had on someone who was not a college professor indoctrinating young "skulls full of mush" with the beauties of Socialism and government control. I agree that Brinker wastes time covering "what's coming out next week." This information is available at this website: Bloomberg Economic Calendar
JEFFCHRISTIE'S MONEYTALK FINAL EXAM QUESTION
What word did Bob Brinker use to describe what an insurance company does to sell an annuity with a 5% surrender charge?Honey here: Welcome back Jeff! I'm glad to know that a shark didn't get you....
A) Hornswoggle. B) Bamboozle. C) Hoodwink. D) Swindle.
Brinker's guest-author was John Spooner: No One Ever Told Us That: Money and Life Lessons for Young Adults
Los Angeles. KABC 790. Moneytalk plays two hours later in the evening. They podcast and ARCHIVE podcasts.
(summary posted at 7:55pm PDT)