DYI Comments: Despite the massive overvaluation only the most wealthy have benefited from this market rise. This of course could end up being far more temporary than permanent due to excessively high PE multiple 25.60 and sub atomic low dividend yield of 1.88%. This group if they don't move to a more conservative investment posture AND accept a lower percentage withdraw their capital will easily decline. Moving this group from being confident to a retiree's greatest financial fear; outliving their money. Moving back into the workforce in your late 70's is extremely slim, in your 80's is absurd.
Retirement confidence bounces back, but only among wealthy savers
(Reuters) - Americans who owned stocks in 2013 are feeling better about their retirement prospects than they did just a few years ago. For everyone else, not so much.
Most disturbing, the survey found no progress among a large segment of workers in accumulating retirement savings. Thirty-six percent of all workers say they have less than $1,000 saved for retirement, and 68 percent of workers earning $35,000 or less have saved less than $1,000.DYI Continues: The most taunting task is convincing a young person to take serious of your retirement needs. Retirement 30 or 40 years in the future is an eternity away from reality. Of course starting early it is so much easier and far less expensive.
For both young and old DYI has advocated a conservative investment mix of 40% stocks and 60% bonds for all pension accounts. My opinion is that 401k's or Roth or standard IRA's are pension vehicles and by their very nature (the money must be there) conservatively managed. They should never be used for aggressive investing and certainly not designed to "play the market" as a speculator. [DYI's aggressive portfolio is for moneys outside of a pension attempting to produce higher returns].
Unfortunately due to our "jacked up" stock and bond markets current returns will be sub par for our pension plans. Our advice for the young person (or middle aged) is to continue with their standard percentage (DYI recommends 15%) into their 401k or IRA. Any additional moneys that can be saved should be used to build out our model portfolio. In other words due to high valuations it is not time to attempt to pre-fund one's retirement with large amounts of savings. Our retiree's will need to accept a current withdraw at 2% or less (if possible) or they will have an unacceptable decline in net worth with the real possibility of out living their money.
How sub par will the returns be? Let's check in with John Hussman of the Hussman Funds.
A “Hideous Opportunity Set”Based on valuation methods that have maintained a near-90% correlation with actual subsequent market returns not only historically but also in recent decades, we presently estimate 10-year nominal total returns for the S&P 500 Index averaging just 2.3% annually. It is worth remembering that these same methods indicated the likelihood of 10-year S&P 500 total returns averaging 10-12% annually in late-2008 and early-2009 (our 2009 insistence on stress-testing against Depression-era data was not based on valuation concerns). Moreover, our current estimates of prospective S&P 500 total returns are negative on every horizon shorter than about 7 years. Meanwhile, corporate bond yields and spreads are near record lows, Treasury bill yields are near zero, and the 10-year Treasury bond yield is just over 2.7%. Our friend James Montier at GMO correctly calls this a “hideous opportunity set.”
DYI Continues: Why are future returns so dismal? Here are a few reasons....To give an indication of how hideous the opportunity set of both short- and long-horizon investors has become as a result of quantitative easing and Fed-induced speculation, the chart below shows the estimated return of a balanced portfolio that assumes an allocation of 20% in Treasury bills, 20% in corporate bonds, 20% in Treasury bonds, and 40% in the S&P 500. We currently estimate that the prospective 10-year return on such a balanced portfolio is now at the lowest level in history, at just over 2% annually. The process of driving security prices higher and prospective long-term returns lower has been greatly satisfying over the short-run. The future will be a mirror image, as it was following other historic speculative episodes.
By Michael Lombardi
March 13, 2014
OR
Wall Street’s Calling The Sheep To Slaughter: Smart Money Getting Out of Dodge
We also know that some pretty smart portfolio managers – mostly value oriented – are also sitting on a lot of cash. FPA Crescent fund, run by Steve Romick, is sitting on 44% cash in the fund. That is significant, in my opinion, because FPA managed to outperform the market by a rather wide margin in 2008 when it was down just 20%. Sequoia Fund, another fund that outperformed in 2008 and like FPA has a very long track record, has 18% cash. Yacktman Focused Fund, down 23% in 2008, has 20% of their portfolio in cash.
And last but not least, let’s not forget the author of the quote that leads this article, none other than Warren Buffet in a shareholder letter from 1988. While Berkshire has been adding to its stock holdings, cash is building up faster than Buffet and his acolytes can deploy it. Cash rose in the latest quarter to almost $50 billion against a stock portfolio of a bit over $100 billion. Now that sounds like a big allocation to cash but it really isn’t apples to apples compared to a mutual fund because Berkshire has a lot of operating businesses. Buffet has said he likes to keep $20 billion in cash around just in case his reinsurance business gets hit hard one year. But it should make you pause a bit that Buffet can’t find enough bargains to keep his cash down to his preferred level.
Do You Feel the Same as DYI?
The VIX volatility index has been bouncing around near the bottom of its historic range. Stock market leverage, as measured by margin debt, has been setting records month after month, while the volume on the New York Stock Exchange has been declining since the last crash and now languishes at lows not seen this millennium. And the percentage of stock market bears in the Investor Intelligence Sentiment survey is hovering at around 15%, the lowest since early 1987, a few months before the epic crash when "portfolio insurance," invented, engineered, and provided by the geniuses on Wall Street, had once and for all eliminated the risks in the stock market.
DYIIn February, Goldman’s Chief US Equity Strategist David Kostin wrote in his report “When does the party end?" that the enterprise-to-sales ratio was “now the highest in 35 years (and probably far longer), surpassing even the dotcom bubble.”
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