the long term

Investment Advisors like to talk about returns in the long term. By long term I generally mean somewhere between "more than 10 years" and "pretty much forever." We talk about the long term for good reason. In the short term, stock investments can swing in any direction - from the dark days of 2008 (S&P 500 down 37%) to the bounce the next year (up 28%) to a boring 2011 (barely up 2%) to the puzzlingly exhuberant 2013 (roaring up over 32%!). It just doesn't make sense to talk about what might happen in the next year or two. Looking back further the S&P 500 is generally cited to have average returns of about 7% a year (that happens to be bang at where returns have been for the past 10 years). But again, we don't know what will happen in any given year, only that the long term has been good.

We also talk about the long term because your biggest financial decision is a long term decision - retirement. The decision to end your income and rely on what you have saved is a huge decision that you can look forward to from your first paycheck.

It is also the long term that is your greatest helper when trying to reach that goal.

Returns can vary year to year, but thanks to compounding, having a positive return for a longer period is always better than that same return over a shorter period.

For example, at the oft-cited 7% return, $1 saved up for 20 years would turn into $3.87. If that is short of your savings goal, you need to adjust one of two things - the return or the time. To double this in the same time period, you would need a return near 11%. While the stock market has had plenty of 11%+ years, the long term average is still only 7% and you are unlikely to find 4% of outperformance that persists for 20 years.

The easiest way to double your money is just to wait. At the same average return on 7%, waiting another 10 years - or better yet - starting 10 years earlier, would turn your original $1 into $7.61. Chasing higher returns not only improbable, but is probably risky as well - but fortunately, time is on your side.

So there you go - the easiest way to double your money is just to wait. The more time you give yourself to save, the more you will have. Get started saving and investing as soon as possible!

paying off debt

Last week I paid off the last of my student loans. I did not have a lot to start with, so finally getting rid of them after only 4 years was not a difficult task.

Paying off debt can be a huge emotional relief. It seems like it would be a financially savvy move too - but that is not always the case. Let's look at when it makes sense, and when it does not. The general rule of thumb is that you should pay off debt when the interest rate is as high as, or higher than what you could earn on that money elsewhere. For a point of reference, I generally look at long term investments earning 6% or more (over 10-20 year periods).

Mortgages are the biggest debts Americans owe. These are very long term debts and money is cheap right now! With my mortgage at 3.5% I am in no hurry to pay that off, as I expect my long term investments to earn a premium over that. However, even at these low rates, there are special cases. There are various thresholds which may benefit the homeowner to be under:

• Paying a little extra off before you refinance may help put you under a threshold to get a better rate. Namely, prime rate mortgages generally require 20% equity or more, so if you owe $121,000 on a $150,000 home, paying an extra $1,000 might translate into big savings on interest. 
• Certain loans may have Mortgage Insurance Payments which go away once you hit a certain threshold. For instance, FHA loans typically require 22% equity before the mortgage insurance payment goes away. The insurance payment will vary with the program, so check with your mortgage servicer to see where your threshold is.
• Refinancing. If interest rates are lower than when you got your mortgage, look into refinancing. Though the monthly payment may be higher, a shorter term loan may have a lower interest rate, and the faster amortization will mean you pay less interest overall.

Credit Card debt is a big problem. While this is some of the most flexible debt you can obtain, you pay dearly for that flexibility.

• Check your interest rate. Rates on credit cards are typically variable and if you carry a balance, will probably only rise. Average APR right now is over 15%, though cards with rates from 20-30% are not uncommon. With an interest rate of 18%, every $66 you owe translates to about a dollar of interest a month - that's money you never benefited from.
• Many cards come with an introductory 0% APR. If you need to, take advantage of this, but you will want to pay down the balance aggressively before the interest rate shows up.
• Lower your total credit utilization. This is a question of thresholds again. Your utilization ratio is your total balance outstanding to your total credit available. This total is from all of the cards in your name - 50% would mean that the sum of all of your balances is half of the sum of all of your credit limits. The recommendation is to keep the ratio under 30%, but the lower you go, the better. This accounts for almost a third of your FICO credit score, so it may be worthwhile to pay down even a low or 0% interest card if you need your credit score to drift up.

Student loans are in the headlines in very scary ways lately. Rising use of student loans has been in a vicious cycle of being needed to pay ever higher tuition while also making it easier to bid up the cost of said tuition. In general, student loans are a great idea - it is some of the easiest debt you can get, and you expect to earn enough to comfortably pay for it when you graduate. The problem now is that people are not getting payed quite what they expected. Government program loans are typically fixed rate and for a 10 year term while private loans are have variable rate options and different terms. The lowest rates are for undergraduate loans, but graduate and parent loans are a much higher rate that may usefully be paid off early. There are repayment programs available to help ease the cost of the loans when you first start paying them back.

Debt can be intimidating, but that doesn't mean it can't be useful as well. The decision to pay off debt is just as important to consider carefully as the decision to take the debt on in the first place.

A CBO Report To Crow About!

While everyone was screaming and drawing battle lines over the latest CBO report on the Affordable Care Act, I was reading another CBO report—“Budget and Economic Outlook:   2014 to 2014.” You can find the report here http://www.cbo.gov/publication/45010 . It’s quite uplifting.

Since the Financial Crisis of 2008, growth in our economy has been tepid, coming in below 3% each year. In our office, we carefully follow the release of each piece of economic data. We noted the slow improvements in our economy since 2010 and saw a pick up in activity in 2013. It seemed that we were back on track. Our view is that this would continue into 2014. After the auspicious beginning in markets this year, our projections seemed too optimistic. Nice to know the CBO agrees with us!

According to the report, GDP growth is expected to be 3.1% for years 2014, 2015, 2016, AND 2017. While still not setting the world on fire, 3.1% is a healthy rate. Four years of this pace will be good for business!

Buried in the report is a comment about the improvement in state and local budgets. They are healing from the huge losses of the past few years and are finding themselves with more cash than expected. The result is that these state and local governments should begin spending again. More spending here means more economic growth.

And maybe some of their spending will involve hiring more people. THAT will be a welcome change, since 2/3 (TWO-THIRDS, you read that right!) of the job loss over the last five years has come from the government sector. The CBO projects the unemployment rate will stay above 6% until 2016. A turnaround in this trend will help with our stubborn unemployment situation.

And guess what else?

The federal deficit continues to shrink!! Much of that is due to improvements in tax revenue with an improving economy. The CBO expects a further reduction of $514 billion in 2014 and $478 billion in 2015. In 2016, they expect us to start losing ground again since we refuse to address the real problems in our budgetary process. In fact, with the exception of Social Security, healthcare programs, and net interest, all other government programs are seeing declining expenditures.

And inflation? Meh.

Don’t expect anything beyond 2.0% for the next few years.

I was all smiles until I got to the part covering 2018 and beyond. They are projecting a return to the snail’s pace for our economy at that point. I’ll be like Scarlet O’Hara and worry about that tomorrow! For now, I’m looking at the glass half full.

With all this positive news, why didn’t THIS report make the headlines?!?

The Education Puzzle

Mississippi has gone from next to last to LAST! Simply put, we can't get any worse.

Our education system is a mess. 90% of our students attend public schools from kindergarten through 12th grade. Across the state, the variation in quality is huge.

My daughter attended public school for all her pre-college years in Clinton, a top-rated program. She received an excellent education and was well-prepared for college classes. But Clinton is a town with above-average median household incomes and a supportive group of citizens.

Travel across the Jackson area and you'll find more of the same. In the towns of  Brandon and Madison, incomes and property values are higher than average. Support for the public systems is strong. Both have excellent schools, as well.

Head out into the county of Madison, and you'll find a different story. Drive a few miles down the road from Clinton to Raymond, and you'll see the variation. Take a drive into the Delta, and you'll find systems that aren't making the grade.

I understand that just throwing money at a school system is not the answer. More money does not, necessarily, mean better performing students. But I also know that our current funding system misses the point.

Schools in parts of our state with low-performing students that come from difficult family backgrounds need MORE time, attention, and, yes, money than those in nice, suburban Clinton or Brandon. But the structure of school funding in the state means that those with more just get even more, while those with less make do.

The issue of education funding continues to be clouded by our history. Desegregation led to a dual system of public and private schools in many places. In those systems where white families and white students remained, public schools succeeded. In areas where white flight led to largely African American students, public schools tended to falter. Those schools got the short shrift.

The change that came about due to Brown versus Board of Education has not been reversed here. In fact, it has become worse with black flight from blighted school systems. More and more African American families of means are moving to districts with good public schools. Who could blame anyone, black or white, from trying to provide their children with a good education?

But we're still left with a bunch of schools that are simply not cutting it. The students who need the most help are the ones stuck in poor-performing districts, and the result is a large number of our citizens without the education to help themselves or the economy of this state. What is there to do?

First, we must recognize the problems and their roots. Poor-performing districts should be handled aggressively by the State Board of Education. They should receive additional funding to address their added problems. While I'm not a fan of charter schools, some models may work better for these areas. We should consider using technology to deliver better instruction to these areas than can be efficiently delivered in the traditional setting. I wouldn't even oppose a type of boarding school for some students who lack support at home.

I think it's time for us to throw everything at the wall and see what sticks. Our poor educational system is leaving us on the bottom economically. It is resulting in two Mississippis-- one with hope and opportunity and one that is stuck and hopeless. When faced with this condition, what have we to got to lose? We can't get any worse. We're LAST!

Giving Us All A Bad Name!

I love a good story. And I love to see that story come to life on the big screen. But this time, I'm passing!

The Wolf of Wall Street has all the elements of a good, juicy story-- sex, lies, greed, and a major scam. It's the true story of Jordan Belfort, a Wall Street broker, who stole millions from his customers. Ryder read the book and declared Belfort to be "the worst person in the world." That was enough for me!

Never mind that Belfort left his customers holding the bag. He spent 22 months in prison, then bounced back by writing the book and selling the movie rights for a blockbuster directed by Martin Scorcese and starring Leonardo di Caprio. As part of his court settlement, he is required to make restitution to his former clients.

Belfort, true to form, is fudging on this agreement and finding a way to keep his ill-gotten gains. He is now on the speaker circuit and has another book coming out. What a colossal a**! Instead of profiting off his misdeeds, he should be put in stocks in the town square and left in the cold. His kind makes everyone in my business look bad-- and I don't appreciate it!

On December 26, 2013, a letter appeared in The LA Times http://blogs.laweekly.com/informer/2013/12/wolf_of_wall_street_prousalis.php which was written by the daughter of one of Belfort's cohorts in crime. In it, she reminds us of the excesses of Wall Street and the very real damage that gets left in the wake of such greed. Her advice? Don't put another dime in Belfort's pocket by reading his book, going to this movie, or hiring him as a speaker. He and his ilk are scum and should never be rewarded for bad behavior.

Suffice it to say, I'm not going to this movie.

I had the chance to hear John Bogle speak at a conference this year. Bogle is the founder of The Vanguard Group and has spent his professional life beating the drum for lower fees for investors. He was his usual, admonishing those in our business who produce nothing yet extract abnormal profits from their customers. Bogle is highly successful, but he got there by putting his clients first. This is the model I follow.

At New Perspectives, we may never have Belfort's wealth, but we will always keep our integrity. The trust placed in us by our clients is sacred, and we place our clients' interests above our own. So, don't put us in the same category as Jordan Belfort, or Bernie Madoff, or the dozens of other "financial professionals" who find themselves in the headlines. We plan to keep our heads down, do our jobs, take care of our clients, and stay out of the news!