The Independent Investor: A Taste of Things to Come

If you are a bond holder, the last few weeks may have come as a shock. Ever since the Fed raised the possibility of tapering their stimulus program, interest rates have spiked higher. For the first time in years, bondholders actually saw bond prices decline. Get used to it.

If you are a baby boomer, the price declines in all things that yield interest or income since May 22 might have you wondering what happened to your "safe" investments. All our professional lives we were told that bonds were "safe" for "conservative" investors, widows and orphans and for those among us that find the stock market too risky.

That was sage advice, if somewhat misleading. For the last 31 years, interest rates have been declining. As a result, bond prices have moved steadily higher. It wasn't that bonds, as an asset class, were without risk. It was simply that bonds were in a classic bull market. From 1982 to 2012, for example, the average annualized return of U.S. intermediate-term bonds have been 8.82 percent. In contrast, the S&P 500 Index had an annualized return of 11.14 percent.

So while we were telling ourselves that we were being conservative, in actuality we were riding a wave of speculation betting that interest rates would decline further and further and forever. Well, reader, the buck has stopped here. Interest rates can't go any lower. Nor is the natural order of things for interest rates to remain at historical lows forever. Something had to change and in this case it is the Fed.

The U.S. 10-year Treasury note is the interest rate most investors rely on as a benchmark. The rate on that security has spiked from 1.67 percent to 2.27 percent in 22 days. Some traders believe it will climb to 2.50 percent before it takes a breather. In the meantime, everything that provides some kind of interest or dividend payment has been clobbered in price. U.S. Treasury bonds, foreign bonds, both sovereign and corporate, U.S. investment grade and high yield bonds, even preferred stocks and other dividend paying equities have experienced a downdraft in price.

As a result, there has been a general outcry of dismay from legions of supposedly "conservative" investors. They are suddenly discovering that their money-making investments of three decades actually carry risk, specifically interest rate risk. As interest rates rise, bond prices decline. However, not all bonds prices decline at the same rate when interest rates rise. But right now, investors are not in the mood to differentiate which bonds (or stocks) they should hold and which they should sell. It is a classic case of throwing the baby out with the bathwater.

In hindsight, dividend and interest bearing securities have been in a bit of a bubble over the last year or two. Last year, for example, preferred stocks outperformed common stocks registering gains of as much as 17 percent. That is way above normal for a conservative investment. Junk bonds have been on a tear as well, gaining more than many common stocks over the last several years. Dividend paying stocks have had similar results.

Common sense would dictate that these defensive investments should not be outperforming their more aggressive brethren. I suspect that the prices of these securities, bid up to unrealistic levels over the last months, are simply coming back to earth.

It is understandable that, after three decades of gains, many bond investors have been lulled into believing that conservative and safe meant that, although the rate of interest they received from their fixed income investments could decline, the prices they paid for these investments would always be immune from any downside. It is true that if you bought that 5, 10, 20 or 30-year bond at the initial offering price you will receive the par value of that bond at the end of its life.

But between now and then, if interest rates continue to rise, get ready for some volatility that could makes the stock market look tame by comparison.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Retirement, Who Can Afford It?

Most Americans' retirement savings are under $25,000. That's old news. The new news is that with Social Security in jeopardy, medical costs skyrocketing and the chances of living longer better than ever, how do you expect to retire in the years ahead?

The short answer is most of us won't. But no matter how long you intend to remain on the job, at some point your legs, knees, back or brain will give out, whether you like it or not. For many baby boomers that time is right now, just when the politicians are telling us the country can’t afford to continue funding Social Security and Medicare. It isn't fair but those are the facts.

Honestly, this boomer generation has had its share of "retirement derailers," a word coined by Ameriprise Financial in its survey on the causes behind the retirement crisis in America. Their survey discovered that 90 percent of Americans, ages 50-70 with at least $100,000 of investible assets, have experienced at least one economic or life event that has gutted their retirement savings.

The average person, however, has had four such traumas. Loss of a job, recessions, stock market declines, periods of low interest rates and lifestyle changes such as supporting a grown child or grandchild are some of the derailers that the survey listed. Other causes listed were making bad investments, taking Social Security before retirement age and disappointment over the worth of pension plans.

Remember, too, that the Retirement Derailers Survey polled those with substantial retirement savings compared to the majority of American savers. The Employee Benefit Research Institute found that 57 percent of Americans have less than $25,000 in household savings and investments (excluding their home and pension benefits). Only half of those polled could raise $2,000 in cash if there was an unexpected emergency. Lessons that many older respondents learned such as saving earlier in their lives, acquiring more knowledge about investment and spending less on vacations and extras seem to be falling on deaf ears

Given these well-known facts, one might have expected the rate of the nation's savings would increase but actually the opposite has occurred. The percentage of people reporting that they are saving more for retirement has declined from 75 percent in 2009 to 66 percent today. Have we given up on saving?

That's the conclusion of a recent report by the Deloitte Center for Financial Services. They found that 60 percent of pre-retirees are convinced that future health-care costs will eat up their savings no matter how much they stash away.  In addition, almost 40 percent believe that investment returns will never be high enough to afford even the simplest retirement no matter how much they save.

One wonders if these polls would have a different result if taken in a growing economy with full unemployment and a robust stock market. Although the economy and unemployment leave much to be desired, the stock market is at record highs. The average 401(K) retirement balance for U.S. workers also hit a record high in the first quarter, up 75 percent since March, 2009. Workers, 55 and older, did even better. Those pre-retirees have seen their average balance nearly double to $255,000 from $130,700 back in 2009.

But those are the exception, not the rule; there are millions of Americans who do not even have an IRA, let alone an employee-sponsored savings plan. If the majority of Americans think at all about retirement, they mistakenly assume that Social Security is the retirement plan of the nation. Unfortunately, it is at best a supplemental program to years of private savings of which most of us have none. If ever there was a Black Swan event lurking in the future surely this would be one.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: What Happens If You Can't Afford Obamacare?

We have all been inundated with the pros and cons of Obamacare. It has become so ubiquitous in our daily lives that most of us have simply tuned it out. We can't afford to do that much longer.

As most readers know, Obamacare, formally named the Patient Protection and Affordable Care Act, will become the law of the land on Jan. 1, 2014. However, as early as October of this year, a new way of buying health insurance will be available to consumers through an online insurance marketplace. So decision time approaches.

But what about all those who have no health care and believe they can't afford to buy it? What do they do? There have been times earlier in my life when I was unemployed. I could barely afford to feed and house myself let alone worry about health insurance. Besides, I was young, healthy and felt I would live forever so what did I need to shell out a couple hundred dollars a month for unnecessary insurance?  Fortunately I had no family at the time. If I had, I would have been in a real bind.

So I can understand how many of us look at this national health care scheme with anger and even fear. After all, the law says that if we don’t join up and obtain healthcare we are going to be fined. What many lower and even middle income families fail to understand is that there is help out there. All we need do is ask.

At last count there are nearly 26 million Americans that could be eligible for a health insurance subsidy, but few know enough about the provisions of the health care act to apply. I'll keep it simple. If you are a member of a working family with annual earnings between $47,100 and $94,200, you will most likely be able to apply for a subsidy. Over a third of those eligible to apply will be between ages 18 and 34 years old. Anyone who is not a member of a government health insurance program (Medicare or Medicaid) and does not have access to an affordable plan at their work place can apply to the government to help pay their premiums. These subsidies will be paid directly to the insurance companies, so there are no out-of-pocket expense requirements.

Starting in October, we will all be able to buy insurance through one of the state-run online health coverage exchanges with health coverage beginning in January. You will be able to choose between four levels of coverage: platinum, gold, silver and bronze. Each of the four plans will offer different premiums and out-of-pocket expense charges.

So let's say you are a family of four earning $94,200 a year and buy a silver premium plan. Preliminary estimates project that such a plan would cost $12,500, but that number could be higher or lower depending upon where you live. The government would pick up $3,550 of that. The exact amount depends on your actual earned income. The idea is to make sure that all individuals pay about the same percentage of their income for health insurance.

For those of us who already have insurance, you will have to decide whether to keep your existing plans or buy insurance on the online exchange. Naturally, you will be able to choose the provider you want based on who offers the most attractive package in terms of affordability and coverage. For all of us, be prepared for mistakes, misunderstandings and some confusion but that is no reason to stick your head in the sand. We are only three months away from making some important decisions so start paying attention.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Sticker Shock in Housing Market

The housing market has been in the doldrums so long that most of us believe that when we are ready to buy a new home there will be plenty of deals out there. Think again, the rising costs of everything from land to labor are causing new home prices to climb.

As U.S. residential real estate begins to rebound from its worst downturn since the Great Depression, the pace of recovery is beginning to cause bottlenecks in all sorts of areas. Suppliers of various building materials, for example, after shutting down much of their operations over the last few years, suddenly are besieged with orders from homebuilders across the nation. Unfortunately, it will take time, money and a willingness to expand in order to meet this new demand.

In the meantime, prices go up. Here are just a few examples: the price of gypsum (a key ingredient in drywall) is now only 6 percent below its peak price during the housing boom of 2006. Cement is 99 percent of its 2006 peak price while lumber is 93 percent of peak pricing. Those producers and distributors who have materials for sale are benefiting from these higher prices, but don't expect them to willy-nilly start expanding capacity.

Once burned, company managements are going to make sure that this new-found demand is not simply a flash in the pan. They will wait until they are sure that future demand and higher prices are sustainable over the longer turn before reopening closed plants and hiring more workers — if they can find them.

It may be hard to believe, given the nation's unemployment rate, but skilled labor is increasingly difficult to locate in both the construction industry and the sectors that supply materials. During the great housing layoff, carpenters, bricklayers, frame builders, equipment operators, electricians, plumbers and more were forced to abandon their professions and for many their geographic location in order to feed themselves and their families. Many migrated into the energy business or wherever else they could find work.

Although we don't like to admit it, Mexican workers (illegally here or otherwise) are also scarce. Many of them went back to Mexico during the recession and never returned. Others abandoned states like Arizona after lawmakers passed stricter immigration laws aimed at undocumented workers.

Even land in the form of finished lots is a scarce commodity. During the last five years, the pipeline of approved finished lots was drawn down nationwide and few new projects were initiated. It will take longer than you think before that pipeline is refilled. Remember that developers must go through a long and onerous process to prepare land for new construction. Some state and local governments require years of deliberation before approving residential projects. In the meantime, finished lots are going up in price.

Homebuilders are between a rock and a hard place. Costs are increasing. They can do one of two things: eat the costs, thereby reducing their profits, or pass them on to consumers in the form of higher sticker prices. Obviously, they would prefer the latter, but that remains somewhat difficult because of the comparatively few potential homebuyers who can qualify for a mortgage.

If builders raise prices too much, the buyers will balk and look elsewhere, namely in the stock of existing homes for sale. That may well be a good thing because it will reduce the stock of existing inventory waiting to be sold.

In the process it will bid up existing home prices and eventually shrink the gap with newly-built housing. Either way, if you have been postponing your purchase of a home in hopes of a great deal, that time has come and gone.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.

The Independent Investor: Online Education Is Not a Panacea

Over the last decade, online enrollment in college classes has exploded. Many hope that it will ultimately help reduce the burgeoning future costs of a college education. The evidence, thus far, indicates that we have a long way to go.

At the outset, readers should understand that there are two initiatives that have yet to converge in online education. There are MOOCs (Massive Open Online Courses) offered for free by several universities and colleges, although in some cases the educational institution will issue a certificate or letter of completion (for a price).

These MOOC courses enroll hundreds of thousands of students in 150 or more countries worldwide. The courses are usually developed and taught by big-name educators and function as promotional tools for the teacher and their college or university. The students, in turn, benefit from the acquisition of new information, knowledge and skills, as well as making connections with fellow students from all over the world.

There are also online tuition courses offered by colleges and universities where students pay tuition comparable to what they pay for the traditional physical college class and receive college credit for successfully completing these courses. Back in 2002, only 34.5 pecent of colleges offered online courses; today that figure has grown to 62.4 percent. There are, however, some interesting dimensions to these classes and who enrolls in them, according to the online education company, Learning House.

In a July 2012 report, Learning House found that 80 percent of online students lived within 100 miles of the physical campus of their online educational institute and many lived even closer — within commuting distance and with good reason.

Studies have found that students still need the physical interaction of the classroom. Evidently, face time with the teacher remains an important element of the educational process. So students may enroll in one or two online courses because of a part-time job or other scheduling conflict, but they still take the majority of their classes on campus.

There are also some unexpected issues that have cropped up within the online classroom. Columbia University's College Research Center found that the attrition rate of students attending online courses is quite high. In some cases, especially in the highly popular MOOC courses, those students who failed to complete the courses approached 90 percent. Higher attrition rates also plague smaller classes as well.

Some studies indicate that online classes are better suited for highly motivated, highly skilled students; while those students who struggle or who have failed to master the basics like math and English, do poorly. Unfortunately, that accounts for a great number of today's students who are also having the hardest time affording college tuition.  

There is also some concern that only certain subjects, such as mathematics, computer science and engineering, can be effectively taught online. It may be more difficult to teach liberal sciences such as writing, communications or even lab work. There are also technology issues that can make the best course a nightmare to attend because of poor or inadequate video, document sharing, discussion boards, etc.

That does not mean that online education will not continue to grow. I believe it will and online learning will ultimately find its niche within the educational system. However, I see little evidence that it will alleviate climbing college tuition costs any time soon.

Bill Schmick is registered as an investment adviser representative with Berkshire Money Management. Bill’s forecasts and opinions are purely his own. None of the information presented here should be construed as an endorsement of BMM or a solicitation to become a client of BMM. Direct inquires to Bill at 1-888-232-6072 (toll free) or email him at Bill@afewdollarsmore.com.