The Savings Paradox

Let's take a moment to review a theory proposed by John Maynard Keynes almost 100 years ago. Everyone would agree that it is beneficial for an individual to save money. However, what happens when a society saves too much? The savings paradox suggests that when society as a whole does not spend money less goods are consumed, leading to businesses being less profitable. Consequently, wages are lowered and jobs are lost, causing people to have less money and to be able to afford to save less. Thus, if an entire population saved more, our total savings rate would stay steady or even decrease over time because of lower incomes and a weaker economy.

Non-Keynesian economists argue that if people stop spending prices will fall, stimulating demand. Additionally, people have a choice of saving money either by putting it under their mattress or by loaning it to someone who will spend it. More people saving represents an increase in supply of loanable funds, which will lower the cost of borrowing. If the cost of borrowing is low, more people will borrow and spend funds, which will stimulate the economy and bring incomes back to normal levels.

This debate continues today. Whichever camp you fall into, almost everyone agrees that reasonable spending and saving levels are desirable. Besides, there is a difference between saving money and delaying purchases. Saving is a fiscally responsible action. Delaying purchases is the type of action that, done on a large scale, can cause an economy to falter.

Trash is King

Since the recent stock market rally began on March 9th, the S&P 500 is up 28%. Interestingly, the market sectors that were beaten down the most since the crash that began on October 9th, 2007, are the sectors that have performed the best during the current surge. Financial stocks, down about 70% during the market pullback, are now up 76% from their market lows. Industrials, which dropped 50% during the decline, are now up about 45% since the recovery.

It had been widely believed that the best place to be whenever stocks recovered would be high-quality companies with the resources to tough out an extended difficult economic environment. Instead, companies with high levels of debts and poor rates of return on equity have comeback the strongest.

It's not uncommon for the sectors that were hit hardest during the market collapse to lead the comeback. The same happened in 2003. However, some believe the rebound is going to have to quickly transition to high-quality stocks in order to be sustainable. The more optimistic view is that despite the lopsided nature of the recent rally, the rebound has been broad-based and that most stocks, regardless of sector or quality, have been participating.

This is a heavy week for earnings reports. Companies reporting include Pfizer, Office Depot, Sun Microsystems, U.S. Steel, Starbucks, Visa, Comcast, Exxon, Dow Chemical, MetLife, and Chevron. Stay tuned.

Chart of the Day

I thought I would steal a post from chartoftheday.com

For some perspective on the latest stock market action, today's chart presents the current trend of the S&P 500. As today's chart illustrates, following the October 2007 peak, the S&P 500 traded within a relatively narrow downward sloping trend channel. That trend was interrupted by a historic financial meltdown. Since the meltdown, the S&P 500 has resumed trading within the confines of a trend channel (albeit in a volatile fashion) and is currently testing resistance.

A Quick Note

I will be out of the office the week of Monday, April 20th, thru Friday, April 24th. I will do my best to check my email whenever possible. If you have an urgent matter, please feel free to call my office at (801) 56-MONEY and one of my fellow fee only financial advisors will assist you.

Thanks, and have a great week!

Losing Faith?

According to a study conducted by the Employee Benefit Research Institute and published by the Wall Street Journal, workers' and retirees' confidence about their retirement security has deteriorated sharply during the past two years. The survey of 1,257 Americans found that the percentage of workers who are very confident about having enough money to retire comfortably has dropped to 13% this year, a record low. That is down from 18% in 2008, and a record high of 27% in 2007.

According to Jack VanDerhei, a survey co-author, retirees are waking up to what amounts to "a huge gap between what people think it's going to take to retire comfortably and what it actually takes." With 49% of people 55 and older having saved less than $50,000, many people will be forced to settle for "a much lower standard of living in retirement than what they had hoped for."

Additionally, only 25% of today's workers are highly optimistic about covering basic expenses such as food and housing costs in retirement, down from 34% in 2008. Just 13% say they are very likely to have enough to defray medical expenses, down from 18%. Those figures are down from 40% and 20%, respectively, in 2007.

However, the survey wasn't all negative, and found that many people are taking action to shore up their retirement plans. Of people who are not confident in their ability to retire comfortably, 81% have cut spending, 38% say they are working more hours or have taken a second job, 25% have sought advice from a financial professional, and 25% are saving more. In fact, only 11% are cutting back their contributions to their retirement accounts.

If you have doubts about your ability to retire comfortably, or would just like to ensure you are still on track to meet your financial goals, now would be a great time to speak with an independent, fee only financial advisor. Please call to schedule a complimentary consultation.

HEADLINE: This Recession Has Been Bad

Above is a chart that compares the S&P 500 earnings performance during the current economic recession (the red line) to that of the tech bubble recession (the gold line) and the average recession dating back to 1936 (the blue line). As you might expect, the current decline in earnings has been significantly worse than during the average recession, and is now worse than during the bursting of the tech bubble.

Note that earnings bottom out and start to improve near the 18 month mark during both the average recession and during the recession of 2001-2002. How far into the current recession are we? About 17 months. This is more evidence that the market may be close to hitting bottom (if it hasn't done so already). Another observation that is worthwhile is to compare how quickly the economy bounced back after the last recession compared to after the average recession. History suggests that the further earnings decline during the market pullback, the quicker earnings increase during the recovery.

The Financial Plan - Why it is Important to Limit Loss

The Pain to Gain Ratio

If you lose 5% of your portfolio, it takes a gain of 5.3% to get back to even.
If you lose 20% of your portfolio, it takes a gain of 25% to get back to even.
If you lose 50% of your portfolio, it takes a gain of 100% to get back to even.
If you lose 90% of your portfolio, it takes a gain of 900% to get back to even.

Conclusion: If you limit your losses, the road back to prosperity is much easier. Work with your financial advisor to develop an investment strategy that appropriately reflects your individual risk tolerance.

Fee Only Financial Planners Unite in Salt Lake City

In case you missed us, many of the fee only financial planners and NAPFA members in the Salt Lake City, Utah area met to support the "Your Money Bus Tour" that is traveling across America. The event, which took place at the Salt Lake City Library on Friday, April 3rd, was a success for several reasons.

First and foremost, we accomplished what we set out to do. Many individuals stopped by for a free consultation with an educated, fee only advisor and I believe we answered a lot of questions. People needed help with issues such as social security, debt elimination, IRAs and 401ks, health insurance, and estate planning problems. Many simply had a general desire to learn more about personal finance. I also believe we succeeded in opening some eyes to the difference between a fee only financial advisor and a traditional, commission-based financial advisor.

Another benefit of the event is that it provided an opportunity for all the fee only financial planners in the area (there are about 20 of us in the State) to get together and discuss the current investment environment. There are many ways to skin a cat, and I found that most planners run their business in a way that is unique. By getting together, I believe we all learned beneficial ways to add value to our client relationships, and methods to improve our practices.

Of course, if you missed the "Your Money Bus Tour" stop in Salt Lake City but would be interested in a free consultation with a fee only, independent financial planner and NAPFA member, I would be happy to help in any way possible. Please don't hesitate to contact me to arrange a consultation.

Your Money Bus Tour in Salt Lake Today

Just a reminder that the "Your Money Bus" is in Salt Lake City, Utah today. The bus will be located at the downtown Salt Lake City library from noon to 5:00. Fee-only financial planners will be on hand for free consultations to help individuals with a variety of issues. I'll be volunteering, so please stop by and say hello.