On the radio

Ron Blue and Jeremy White discussed their new book, Surviving Financial Meltdown: Confident Decisions in an Uncertain World (Tyndale House) this week on the Focus on the Family radio program.

Part one is here, part two is here.

On Crown's MoneyLife program, Chuck Bentley chats today with Rusty Leonard of Stewardship Partners about "protecting your investments." Details here.

Posted by Joseph at 11:25 AM | Comments (0)
Category(s): Christian Interest, Family Finances

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"The million dollar misunderstanding"

Forbes offers a sobering look at the current college lending situation, and I have to warn you, it's not a pretty picture. One key change in recent years has been the rise in private lending (now 23% of the college lending market, up from 7% a decade ago), and while it may be necessary, it is resulting in some pretty unsavory behavior at the expense of a large swath of young kids.

That said, the article title is "The Great College Hoax," and the underlying theme seems to be that, because college costs - including financing debt - are rising faster than the income gap between degreed and non-degreed workers, college is becoming a bad deal. I'm not sure I'm on board with that idea. (I encourage you to read the article and discuss this below.)

The unfortunate reality is that most of the jobs that Americans find appealing today require a college degree (at least). Concluding that college is no longer a great deal, so we should all skip it and learn a trade instead, obviously doesn't work as a comprehensive solution.

That said, there are some serious flaws in the system that need to be addressed. One big flaw is actually related to the paragraph above, namely the idea that everyone should go to college. It has become popular to encourage kids from their earliest moments that they "can do anything they want to do" and such. It feels heartless to say that really isn't true, but is it actually more compassionate to let them find that out for themselves two years into a 4-year college degree, when they're already $20,000 in debt (compounding at 12%) and about to start a job paying the same amount per year as their accumulated debt ? It seems some better screening at the high school level would save a lot of debt-induced misery down the road. It seems we need to rediscover that some kids are better suited to move from high school to vocational school/training rather than college.

Again, just to be clear, this isn't me wanting to crush anyone's dream. This is me reading that "half of students entering college never earn a degree" and "Six in ten African-Americans depart without one." Given the costs involved, those statistics can't be allowed to continue as the status quo.

Another serious issue, and the most sickening part of the article from my perspective, deals with the role of private lending to college students. I'm not against that. I do think the following is insane, however:

Education lenders, unlike other consumer financiers, are not required to provide Truth in Lending disclosures before reeling in borrowers. A law passed last year requires advanced disclosure, but not until 2010.

I won't even start on the role of the universities themselves in foisting some of these particularly ugly loans on their students. Shameful.

There's lots more in this article to unpack. Give it a read and post your thoughts below.

Posted by Mark at 2:32 PM | Comments (0)
Category(s): College

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More "regression to mean" info

On Monday, I referenced a chart showing the market is currently priced some 40% below the long-term trend line that has been established over the past 200 years. It turns out, that chart is by no means the end of the story when it comes to plotting the market's historical path and what that means for the market's future direction as it "regresses to the mean" (i.e., moves back towards that long-term "normal" trend line).

Without going into all the details I've looked at this past week, this alternate site does a nice job of bringing out a couple of the key issues with these long-term trend analysis pieces. If you look at the two charts on that page, one shows the market currently right on the trend line. Presumably this would mean there could be plenty of downside still ahead. But the author explains that if you strip away changes in the way "official" inflation has been calculated since 1982, you get a trend chart that looks very similar to the one we looked at earlier in the week.

These charts raise a couple of issues. One, these charts start in 1871, whereas Monday's chart starts around 1800. Two, the inflation measurement obviously plays a big role in how these charts turn out.

It seems pretty clear that the starting point of the period measured makes a pretty significant difference in these long-term trend lines. But is the longer period necessarily better? Instinctively it would seem so, but the market was pretty different way back in 1871 and earlier (stocks were much less widely held, much more expensive to trade, plus a hundred other differences we could name). And it's a bit surprising that something as seemingly small as the changes to the official inflation statistic in 1982 would make such a huge difference in our conclusion.

Bottom line: take all these studies with a grain of salt. They do give us some interesting information to mull over, but it'd be pretty easy for us to see whatever we want to see in these charts, whether good or bad.

Posted by Mark at 2:08 PM | Comments (0)
Category(s): Current Market Events

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Sector Rotation rankings

Sector Rotation is an advanced high-risk, high-reward strategy. It's important that you not launch a Sector Rotation strategy without carefully studying the explanatory article which lays out the pros and cons.

The preliminary monthly rankings for Sector Rotation are published for SMI web members on the first business day of each month.

Update: The historical performance file has been updated through 2008 (membership required). For the 1990-2008 period, the theoretical average annual return was 24.2%. That includes the super-profitable dot.com bubble trade in Amerindo Technology which is unlikely to recur; excluding that period, the strategy still returned 18.2% annually.

As the file shows, however, the returns have been very volatile. The returns for the most recent five years, for example, were +12.6%, +46.1%, -1.9%, +28.1%, and -31.5% respectively. It may be profitable, but it's not for the faint of heart.

Posted by Andrew at 3:27 PM | Comments (0)
Category(s): SMI Advanced Strategies

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Random new issue notes

A couple of quick follow-up notes to the new February issue just released:

• In the Level 4 report card, I mentioned the $700 million government TARP program. Must have been subconscious wishful thinking. That number should be $700 billion. We've corrected it online, but alas, 'tis too late to correct in the print version. I've already received 20 lashes with a wet noodle, with the other 20 to be administered after this blog post is complete.
• In Austin's editorial, he mentions that he has shifted the Upgrading portion of his portfolio exclusively to SMIFX for 2009, after using SMIVX for two-thirds of his Upgrading money last year.

  That may surprise some people (even though he notes it's an aggressive posture and that continuing with SMIVX is a more conservative approach). This is a great example of us offering what we're doing as an example, but we're definitely not trying to imply that readers should rush out and copy our exact approach. Austin's situation may be quite different than yours, as he's already 20% in bonds, with another 20% that can be out of the market entirely at any point (his market timing slice). He's clearly playing this Upgrading piece as aggressively as possible, but recognize that move is in the context of having as much as 40% of his portfolio deployed with very low risk.

  For a dose of contrast, my 2009 portfolio is 100% in equities (due to my younger age), so my overall stock/bond allocation is more aggressive than Austin's. (Remember, that's your most important investing decision - the one that will likely have a bigger impact on your eventual returns than any other.) I also have quite a bit more allocated to aggressive advanced strategies (Sector Rotation and a new idea we're working on) than Austin does. But with the roughly 70% of my portfolio that's devoted to Upgrading, I've still got nearly half of that in SMIVX. So I'm being more conservative with that particular piece, while being more aggressive with my portfolio as a whole.

  For those trying to decipher all this SMIFX vs. SMIVX talk, it basically breaks down this way. Your most aggressive posture would be 100% SMIFX (pure Upgrading). Your most conservative posture would be 100% SMIVX (hedged upgrading). And of course, the two can be combined in any measure between those extremes.

  I plan to reduce my VX holdings and increase my FX holdings when the All-Clear signal is given. But for now, I'm perfectly willing to give up a little upside potential in order to gain some downside protection in SMIVX. Likewise, if you're using the SMI Funds for part or all of your Upgrading money, you should feel comfortable adjusting the mix to your particular comfort level.

Posted by Mark at 2:38 PM | Comments (0)
Category(s): SMI General Announcements

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February issue now available

The February 2009 issue of the newsletter has just been posted to the website.

There are no changes to our Fund Upgrading lineup this month.

Posted by Mark at 1:11 PM | Comments (0)
Category(s): SMI General Announcements

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Peering over the ledge

We interrupt our normally optimistic reporting to bring you this view of what could go wrong...

Crown's MoneyLife radio program yesterday was a really good discussion of a recent Wall Street Journal article titled The Doomsayers Who Got It Right (subscription required). While you can't read the actual article unless you're a WSJ subscriber, the first link above is a loose transcription of the radio program which discusses many of the details in the article.

The article catches up with the current thinking of three prominent economists/money managers who predicted much of the economic crisis. An extremely brief summary of their views follows.

Jeremy Grantham points out that the unintended consequences of the government's response to the financial crisis are unknowable. He thinks there's a long-term risk of a surge in inflation and sees a better than 50-50 chance 2009 will see the stock market decline further. He's setting aside cash in case stocks fall significantly lower, though the article doesn't say he's actually predicting that. In fact, somewhat surprisingly to me, Grantham mentions that he expects real (after inflation) returns of 9.5% from foreign stocks and 7.5% from U.S. stocks over the next seven years. Those are both pretty decent numbers.

Bob Rodriguez sees the economic slide continuing much longer than most. He says his concern isn't the next two years, "but period three through 10." He expects high inflation during that time and GDP growth of less than 2% per year, which would mean a very slow recovery.

Much of this prognosis is based on a change he sees in the U.S. consumer from spender to saver. The Crown program pointed out that the paradox here is that it's a great thing at the individual level for people to quit spending so much and start saving - exactly the right prescription for personal financial health. But 70% of our national economy is made up of consumer purchases, so if the savings rate does go from 1%, where it's been in recent years, to 7%-10%, where Bob Rodriguez sees it moving to by next year, that means the economy as a whole is going nowhere fast.

As an investing blog, it's also worth noting that Rodriguez was buying stocks in October and November for the first time in over a year, though mostly in the energy sector where prices for real assets (like oil) will likely rise as inflation catches hold.

Peter Schiff is probably the most bearish of the group, expecting massive inflation and sharply higher interest rates as foreign investors eventually refuse to buy U.S. debt. He sees the dollar dropping significantly in that scenario and foreign markets outperforming U.S. markets by a significant margin as a result. (Detractors would point out that while many of Schiff's dire predictions have panned out, his actual investment performance has been poor, as his investments have been mainly overseas stocks and commodity-based, both of which were hammered in the downturn last year.)

There's value in examining the "what if's" these bearish views present. The most important take-away from an article like this is probably not so much on the investing side (though there are elements there worth exploring, and we likely will in the months to come), but the personal finance side. If these men are right, the economy is not going to get better anytime soon. In these scenarios, it is paramount that readers do the hard thing in preparing themselves financially by spending less than they earn, paying down debt, and establishing an emergency savings reserve. Don't assume things will bounce back quickly.

I really appreciated the conclusion of MoneyLife host Chuck Bentley's take on all this, which you can find at the end of the program or transcript (linked to above). He explained that as Christians, we don't have to put a positive or optimistic "spin" on this sort of news, but we can and should have hope about the future, in spite of what may come economically because God can and will redeem even the tough things that happen to us. Read or listen to the ending of his program for his full take. It's good stuff.

As you know, SMI doesn't put a lot of faith in any expert's predictions. So we're not going to get all panicky about these predictions. But it is worth soberly considering these gloomier outlooks so as to prepare ourselves in case they are accurate. That starts with getting our personal finances in order, and then ripples into our investing decisions. Again, the investing implications of all this are a little beyond the scope of this post, but we'll likely delve a little deeper into some of this in the future.

Posted by Mark at 4:29 PM | Comments (0)
Category(s): Economy, Inflation Watch

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Inauguration

I hope you were able to pause for a few minutes today to take in the inauguration of our new President. If not, I encourage you to watch at least a little bit of the footage tonight on one of the news shows.

Regardless of where you stand on the political spectrum, I think it's healthy to occasionally suspend any disbelief and soak in the scope of what we're witnessing. The peaceful transfer of power back and forth between opposition governments, as the U.S. has done periodically for over 230 years now, is an amazing and inspiring thing in and of itself. For most of history, and in fact through much of the world today, this simple feat is unthinkable. To have an African-American ascend to the pinnacle of American power today just makes it that much more historic.

I know I'm not telling you anything you don't already know, but sometimes we have to consciously pause and let these things sink in or they pass us by.

I also would encourage you to take a moment to pray for our new President today. At SMI, we're praying that the Lord will grant President Obama wisdom, discernment, and courage as he leads our country over these next four years.

Posted by Mark at 3:49 PM | Comments (0)

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Market valuation

One of the problems with evidence showing whether the market is "correctly" valued is that there are so many measures of market valuation. Trot out evidence based on a particular market statistic, say the Price-Earnings (P/E) ratio, and someone else will reply with an opposite conclusion using a different statistic.

I point that out merely to explain that in presenting information like what follows, we're not necessarily trying to build a case based on that information. In this case, I've got interesting information about the market potentially being undervalued. That doesn't mean we're saying everyone should race out and buy based on this information. It's just a single data point to ponder.

That said, I found this chart by Peter Brimelow and Edwin Rubenstein to be very intriguing.

You can read the whole article for the details, but the short version is this. Jeremy Siegel's 200-year data set for the stock market has found that returns have averaged a very consistent 7% real return (after inflation) since the beginning of the 1800s. Brimelow and Rubenstein take that average and chart how far above or below that long-term average the stock market currently is.

That data has showed extremes in valuation at data points that, in hindsight, did in fact prove to be market extremes. Examples include being 85% above the trend in 1999, and a remarkably similar 40% below trend in 1981, 41% below in 1974, and 42% below in 1932. Obviously all of those were key market highs and lows.

What does the data show now? Through January 14, their data shows the market 43.1% below trend. That's the farthest below the trend the market has ever reached in the 200 years of data available.

That's not to say the market couldn't go even further to the down side. What it does mean is that by this particular measure, extremes are being reached on the low side. In the past, when these types of extremes have been reached, there has been a strong tendency for the market to "revert to the mean," or move back towards the long-term trend line.

That would imply this is a strong buying opportunity in advance of a sustained market advance that would bring the market closer to the long-term trend line. But again, the timing is anything but certain. Still, it's worth noting for long-term investors.

Posted by Mark at 3:37 PM | Comments (0)
Category(s): Current Market Events

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Where the money is going

In case you're wondering where all that "stimulus" money is likely to go, the chairman of the House Appropriations Committee - Democrat David Obey of Wisconsin - has laid it all out in an easy-to-read executive summary (PDF). (NOTE: Like many political documents, this one has a certain "spin" to it.)

New York Times economics editor Catherine Rampell presents Chairman Obey's spending breakdown in a handy pie chart.

One thing in the stimulus breakdown that is a bit misleading is the number ascribed to "tax cuts." Much of that figure is actually payments to people (perhaps as many as 45 million people) who have no federal income tax liability in the first place, therefore such "cuts" are not cuts in the strict sense of the word.

Details about the soon-to-be-introduced tax measures are sketchy in this news release from House Ways and Means Chairman Charles Rangel (D-N.Y.). But the release does list two tax "credits" designed to benefit people who pay no income tax.

Meanwhile, The Hill newspaper reports that Appropriations Chairman Obey thinks the $825 billion stimulus measure "may undershoot the mark." He suggested that Congress may have to spend even more money to stimulate the economy.

UPDATE: If you'd like to read the stimulus bill for yourself (warning: it's 258 pages), go to ReadTheStimulus.org.

Posted by Joseph at 1:52 PM | Comments (0)
Category(s): Economy

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Foreclosure map

This map shows how foreclosures are impacting various parts of the country. It's a great reminder that real estate is local, and as a result, the national average statistics being commonly referenced these days actually mean dramatically different things for different regions.

Posted by Mark at 1:13 PM | Comments (0)
Category(s): Economy

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'One fund in 1,700 made money in '08'

That unhappy headline from the Wall Street Journal is a memorable summary of the worst year in the market since the late 1930s.

What was the one diversified U.S.-stock fund that made money in 2008? The tiny ($50.2 million) Forester Value Fund, which posted a return of 0.4%.

A WSJ graphic showing the average total return of diversified U.S.-stock funds is here.

Posted by Joseph at 11:06 AM | Comments (0)
Category(s): Mutual Funds

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401(k)/403(b) contribution limits for '09

The yearly amount you're allowed to set aside in a 401(k) or 403(b) retirement plan went up by $1,000 last week. For 2009, the limit is $16,500, a 6.5% increase over the $15,500 limit in 2008.

The limit for "catch up" contributions has risen, too. If you were born before 1960, you can contribute an additional $5,500 to a 401(k) or 403(b) - up from $5,000 last year - for a total contribution of $22,000.

Related: The changes in 401(k)/403(b) limits are mirrored by the government's Thrift Savings Plan for federal employees. The elective deferral limit for 2009 is now $16,500, and the limit on catch-up contributions (for those born before 1960) has risen to$5,500.

Unfortunately, the contribution limit for IRAs remains unchanged for 2009. It is still capped at $5,000, although workers who are 50 or over can set aside $6,000.

The Wall Street Journal has a round-up of tax changes that took effect on Jan. 1, including a simple table showing the 2009 federal income tax brackets.

Of course, tax brackets and rates are subject to change.

Posted by Joseph at 2:18 PM | Comments (0)
Category(s): Retirement

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2008 exposes 529 Plan risk

Many parents saving for college utilize Section 529 Plans as a primary savings vehicle. One of the features many people like about these plans is the ability to get set up on an "age track" that shifts the account into more conservative investments as the college date approaches.

While that sounds great in theory, the huge losses of 2008 have exposed that not all 529 plans are created equal when it comes to what that shift to safety actually means. As this study shows, some states move to very conservative fare in the years immediately preceding college, while others leave a decent amount invested in stocks right to the end.

This New York Times article explores the pros and cons of the various state allocation approaches. If you're thinking through the options available to you as a college saver, this article is a worthwhile read.

Posted by Mark at 3:39 PM | Comments (0)
Category(s): College

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I.O.U.S.A.

When we chose Where Does the Money Go? as our October 2008 cover article, we couldn't foresee the incredible binge of government spending on the immediate horizon. The TARP bailout package weighed in at $750 billion, which is partially responsible for the estimate out this week that the government will run a deficit of $1.2 trillion dollars for fiscal year 2009.

Actually, that deficit number - staggering as it is - is hopelessly optimistic. That's because it's before the stimulus package currently being debated is even considered. That package is expected to cost somewhere between $800 billion and $1.3 trillion (what's a half trillion among friends?). Add that into the mix, and you get something like U.S. News & World Report's estimate of a $2.2 trillion deficit for the year.

To put that number even somewhat in perspective, consider that 2008's deficit of $400 billion was an all-time record. We're looking at a shortfall in 2009 more than five times as large as the previous record amount!

Before I begin hyperventilating, I'll get to my original point of this post: CNN is airing the critically acclaimed documentary I.O.U.S.A. twice this weekend. It's a film examining "the rapidly growing national debt and its consequences for the United States and its citizens."

Note that I have not seen the film, so I can't vouch for what's said or any of the content. But if there was ever a time for a national conversation about government spending, this is certainly it.

CNN is airing the movie at 2 p.m. EST on Saturday, and 3 p.m. EST on Sunday.

Posted by Mark at 2:17 PM | Comments (0)
Category(s): Economy

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4 reasons to hold...and 4 to sell

Chuck Jaffe has a list of 4 reasons to hold on, as well as 4 reasons you might want to sell. Read the whole list and see which set of points you think is stronger.

Frequent readers of this weblog are already familiar with 3 of Jaffe's 4 arguments for continuing to hold on:

2. The stock market typically leads the economy out of a recession by about six months.

If you believe the recession will last another 12 months, therefore, history would suggest a market rebound would begin with the start of summer. The economy won't get healthy overnight, but waiting for the recession to end before you invest means missing out on six months of big bounce-back.

3. You are closer to the end of the downturn than the beginning.

You stuck with your strategy, believing it would work. Bailing on it now -- especially without a clear-cut next move -- could mean getting the worst of everything. If your focus is on what's next, your outlook should look a little better than your recent past.

4. Your timing stinks.

Many people say they will sacrifice the move from the very bottom, expecting to recognize a new rally in progress and climb aboard. Alas, anyone looking to sell now is ignoring that fact that since November 21, the market is up about 25%. Obviously, if you're not diving in right now, then it will take a move much bigger than 25% to get comfortable with jumping aboard.

That last point is the key to why market timing is so difficult. I can't imagine there are many people who sold at some point during the past year that are seriously considering buying right now. Yet if a 25% move higher isn't enough to pull those sellers back in, what will be? 40%? 50%? Most people who sell during a downturn take so long to get comfortable buying again that they miss a huge part of the next bull market. That dynamic is exactly why individual investors have a well documented history of selling near market lows and buying near market highs. That's the opposite of the "buy low, sell high" ideal.

Jaffe also lists 4 reasons you might want to sell now. Not surprisingly, I don't find this set nearly as compelling. But there are a couple of decent reasons in this list, including:

1. You need the money in the next five years.

Five years is the new "short term." Even if you believe in the long-term trends which suggest another rally in time, keeping money in the market that you expect to need in short order is a bad idea. Short-term needs require the sacrifice of potential returns in exchange for the security of your stash.

2. It will get worse before it gets better.

It may always be darkest before the dawn, but there's a real question of whether it's daybreak yet. ... If you can't sleep at night or endure more pain, you must protect yourself by pulling back to where you can get your rest. You may have to make up the shortfall by saving more, but you will rest easier, which may be worth more than money.

Posted by Mark at 10:04 AM | Comments (0)
Category(s): Current Market Events

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No 'required minimum distributions' in 2009

While you were otherwise occupied during holiday season, Congress was passing a potential tax break for retirees (Pres. Bush signed the bill on Dec. 23). The break applies applies to IRA, 401(k) and 403(b) owners who are at least 70½.

Lawmakers temporarily suspended (for tax year 2009) the "required minimum distribution."

Retirement-plan rules generally mandate minimum annual distributions once the account owner reaches 70½, even if the owner doesn't need the money right away and would rather leave it invested.

Congress decided to suspend that requirement because so many retirement accounts have been hit hard by the market downturn. The idea is to allow time for account values to recover before forcing retirees to take their money out.

Of course, since this is a tax-related matter, it's all bit more complicated than it would seem at first. Details here from the Wall Street Journal.

Posted by Joseph at 9:38 AM | Comments (0)
Category(s): Taxes

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Lowest mortgage rates in decades

Mortgage rates continue to drop to levels not seen in decades. 30-year fixed rates are hovering around 5%, while 15-year rates are approaching 4.5%.

We've blogged on the idea of refinancing a current mortgage before recently, but it's worth mentioning again because it's such an easy way for many families to put money back in their pockets (or better yet, get out of debt sooner!).

The catch here is that only those with solid credit scores are going to qualify for these refinancing rates. But this is one case where following the biblical priorities of paying down debt and establishing savings (two disciplines which will presumably have helped your credit scores) can have a very direct and tangible impact on your finances. I know several friends who had "good" rates before that have recently refinanced into "great" rates. It's worth looking into.

Note that while these lower rates are great for refinancers, many are still warning new buyers about purchasing too soon.

Posted by Mark at 3:20 PM | Comments (1)
Category(s): Family Finances

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IRA-related tax change: Turning a 'distribution' into a donation

Buried amidst the 451 pages of the Emergency Economic Stabilization Act of 2008 (i.e., the bailout of the U.S financial system) are two short sentences that may help you - as well as your church or favorite charity. The requirements: You must have a traditional IRA and be older than 70½.

The two sentences bring back a tax break that had expired at the end of 2007. The resurrected provision, now extended though 2009, allows older taxpayers to donate as much as $100,000 directly from an individual retirement account to a qualified charity tax free.

Without this provision, an IRA owner who wanted to make such a donation would first have to receive the money as "income," then make the donation - meaning that a significant amount of the money would be consumed by income taxes.

But there is more here than just an income tax consideration. An IRA distribution received as income can affect the taxability of Social Security benefits, the size of Medicare Part B premiums, and eligibility for moving funds from a traditional IRA to a Roth.

The reinstated tax law creates a "win-win." The person with the IRA avoids taxes, while the church or charity gets a larger donation than it otherwise would have if the money had passed through the tax man's hands first. (If a husband and wife each have IRAs and meet the age requirements, both can take advantage of the tax break.)

Two things to watch out for if you want to make a donation directly from your IRA:

• Be sure the money never comes into your possession (if it does, it will be considered a taxable distribution);
• Make certain the church or charity knows your name and address - you'll need a proper receipt in case you get audited.

Also keep in mind that the tax-savings benefit of a direct-from-your-IRA donation means you cannot claim the donation as a charitable deduction, too. No "double dipping" allowed.

Any direct-to-charity donations from your IRA must be made before New Year's Day 2010. That's when the tax break is scheduled to expire once again - unless, of course, Congress makes yet another change.

For more on "qualified charitable deductions," see IRS Publication 590 (HTML | PDF).

Posted by Joseph at 3:06 PM | Comments (0)
Category(s): Giving and Stewardship

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Investing is boring...and that's okay

Was catching up on some reading over the holidays and came across a great interview with Charles Schwab in the October issue of Portfolio magazine. If you've got a few minutes, I definitely recommend it.

Among the issues he tackles:

• Why it's smart to invest during a bear market.
• Why nobody knows when we've hit the bottom.
• Why our savings rate is a national emergency.

Plus lots more.

Posted by Mark at 4:34 PM | Comments (0)
Category(s): Investing Principles

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'Does the free market corrode moral character?'

That's the latest "Big Question" posed by the John Templeton Foundation. (Mark blogged about the Foundation's "Big Questions" series last June.)

Weighing in on the matter of how the market affects moral character - for good or ill - are such notables as Michael Novak (author of The Spirit of Democratic Capitalism), John Bogle (founder of Vanguard), and Garry Kasparov (former world chess champion, now a political leader in Russia).

If you enjoy the "world of ideas," the Big Questions site is worth your time.

Posted by Joseph at 1:00 PM | Comments (0)
Category(s): Economy

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2008: As bad as it gets

Given the pain induced by the markets in 2008, it's probably not a huge surprise to learn that with the final numbers now in, last year was the worst decline the markets have suffered since 1931. That was 77 years ago. If it seemed like last year was beyond everyone's frame of reference, that's because it was - very few of today's investors have ever witnessed a year like we just experienced.

In a way, that's actually good news. We've just taken the toughest punch the market will likely ever throw at us. It hurt, it definitely wasn't fun, but hopefully you're still standing.

"Yes, but how do we recover from the damage of a year like that?" I'm seeing that type of questioning from many sources (in particular, those criticizing non-market timing investing approaches).

The answer is to continue following your discipline. New bull markets often gain rapidly in their early stages. In 2003, Upgrading soared 52% in just 9 months, once the March retest of the earlier bottom was complete. That type of performance goes a long way towards erasing the damage of the previous bear market. (Nor was it an isolated case - here are several more examples of sharp rebounds off of bear market bottoms.)

Of course, it's possible the bear market isn't over. And even if it is, it's also possible we could see a retest, a la October 2002 - March 2003. Still, for those who have made it this far, it seems well worth the current risk to stay invested so as not to miss the early returns of the next bull market whenever it begins.

For buy-and-hold investors, the hardest task is gutting out a steep market decline. We've just had the worst calendar year example of that in 77 years. That's as tough as it gets.

The situation is quite different for the market-timers. They look good now, but their hardest task still lies ahead: deciding when to get back into the market. Few will get back in before the typically large initial gains of the next bull market are made.

The timing crowd has been able to relax of late while buy-and-hold investors have been uncomfortable (to put it mildly). At some point, those roles will reverse. If you've spent the past year on the uncomfortable side, I wouldn't suggest volunteering to switch teams at this point.

Posted by Mark at 4:21 PM | Comments (0)
Category(s): Current Market Events

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Prepaid tuition plans gain in popularity

MarketWatch reports that prepaid tuition plans, a lesser-used option offered by many state-run 529 college-savings programs, are regaining some of their earlier popularity.

For years, families have preferred the savings type of 529 plan - named for the relevant section of the tax code - salting away after-tax dollars, investing them in mutual funds and other investments, and then taking the money out, tax-free, when the time comes to pay for school.

But as many of these accounts have been savaged by the market's plunge this year, families are now turning to the prepaid variety of 529....

Prepaid plans allow families to lock in current tuition rates by making an upfront cash payment in exchange for tuition contracts or credits tied to current rates. They can prepay either the full tuition bill or a portion of it, typically based on the average tuition costs in the state. States usually manage the money, and when a student finally enrolls, he won't have to pay more - no matter how much tuition costs have risen.

If investors buy only a portion, that same amount is credited toward future tuition bills. In general, the tuition guarantee applies only to state schools within that state, though you can use the money to pay for out-of-state schools. If a beneficiary elects not to attend a college covered by the plan, the investor can withdraw his contributions, usually with interest....

In most cases, the account holder or beneficiary must live in a state in order to invest in its prepaid plan. Two states - Massachusetts and Alabama - allow anyone to invest in their plans.

There is also one private-school plan...that is open to anyone: the Independent 529 Plan. It allows investors to lock in tuition at nearly 280 colleges, ranging from small liberal-arts schools such as Grinnell and Oberlin to larger universities such as Stanford, Princeton and Duke....

Now looks to be a particularly good time to lock in current prepaid rates, as most programs will likely boost prices for next year's enrollment, given state budget shortfalls, sagging endowments and a drop in charitable giving. While average tuition and fees at four-year public universities increased 6.4% for the 2008-2009 academic year, according to the College Board's latest annual report, some experts predict double-digit tuition increases at major public universities.

Not all states have prepaid plans. To find out if your state does, check here and here.

Posted by Joseph at 12:01 PM | Comments (0)
Category(s): College

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