More on TIPS

Yesterday, I linked to an article warning about the pitfalls of I-Bonds and reiterated that we think TIPS are a better way to add inflation protection to your bond portfolio. But that's not quite the end of the story.

Today, the Wall Street Journal points out the fact that TIPS mutual funds may not be as great an inflation hedge as you might expect. This is somewhat speculative, as TIPS are only about a decade old, and there hasn't been a period of significantly rising inflation during their brief life. So nobody knows exactly how they will behave. But that doesn't mean we can't make educated guesses, which is what this article does.

I encourage you to read the whole article, but in a nutshell, here's the deal. When you buy an individual TIPS bond, you get a fixed interest rate plus an adjustment for inflation. If you hold the bond to maturity, you get your full principal back. Pretty straightforward. The only moving component is the inflation adjustment, which moves up or down based actual measured inflation.

When you buy a TIPS fund however, you're buying a pool of TIPS bonds that have all manner of different maturity dates. Those individual bonds go up and down in value each day, primarily based on what interest rates are doing. In other words, with a TIPS fund, you introduce the impact of daily valuation changes into the equation, whereas when you buy a TIPS bond and hold it to maturity, there are no valuation changes. The individual TIPS bond is only going to fluctuate based on inflation changes, whereas the fund is going to fluctuate based on inflation changes as well as interest rate changes (which impact the demand for those bonds).

Here's how one expert interviewed for the article sums up these factors:

Anne Lester, a senior portfolio manager at J.P. Morgan Funds, has looked at how TIPS fit in a portfolio as an inflation hedge. During an inflation surge, she says, interest rates would be a negative for their prices. However, demand for TIPS likely would grow, supporting prices. Putting it all together, she says, TIPS would likely be a good shield against inflation, “but less inflation protection than you want.”

Ms. Lester’s group identified another set of circumstances that could lead to losses in TIPS: interest rates rising but inflation falling. Between July 1980 and July 1981, interest rates rose to about 15% from 10% while the CPI fell to 10% from 14%. The result: a“perfect storm” that could have sent TIPS down by about 20%.

Note that those hypothetical losses would impact TIPS fund holders, but not holders of individual TIPS who simply hold on to maturity. Those changes in value would apply if they were to sell their individual TIPS at that time, but could be avoided by holding to maturity, at which point their full principal would be returned.

SMI has typically focused on buying TIPS funds, primarily because it's so much easier for most investors. There are several good ones around, like Vanguard's VIPSX. But this does introduce a question regarding whether at least some investors might be better served going through the aggravation of buying individual TIPS bonds instead. They can be purchased through TreasuryDirect.

I'm not totally persuaded that everyone needs to suddenly quit using TIPS funds and start buying individual TIPS instead. The trade-off between maximum benefit and ease-of-use isn't completely settled in my mind. But it does make me think we'll need to ponder this "individual TIPS vs. TIPS funds" issue a bit more.

Bottom-line, we do think beginning to shift from traditional bonds to TIPS makes sense. TIPS are currently priced as if future inflation will remain low for many years. As you know if you've been reading recent SMI material, we too feel that deflation (rather than inflation) is the immediate threat. But we're also pretty convinced that as economic activity begins to pick back up eventually, so will inflationary pressures. If so, having switched from traditional bonds to TIPS (when they were priced for deflation) should pay off.

Posted by Mark at 2:36 PM
Category(s): Current Market Events, Retirement

Email this post

Stay clear of I Bonds

Nearly a decade ago, SMI ran an article comparing and contrasting TIPS and I-Bonds. They were both relatively new products designed to help fixed-income investors protect their portfolios against inflation. Since that time, TIPS have become more attractive and I-Bonds relatively less attractive, and as a result, SMI has revisited TIPS several times while largely ignoring I-Bonds.

Still, there's a decent chance that some readers who are concerned about future inflation might be considering buying I-Bonds. Chuck Jaffe has some advice for you: Don't. He feels pretty strongly they are a bad deal right now.

If you're trying to get some inflation protection on the fixed income side of your portfolio, I would agree that TIPS seem like a much better choice. Here's what I wrote about TIPS back in February. Then in May, we mentioned that bond investors could start replacing some of their regular bond index funds with TIPS as a protective hedge against inflation.

Posted by Mark at 2:29 PM
Category(s): Current Market Events

Email this post

What is the recession for?

I don't do a lot of listening to sermons and other material (mainly because I don't focus well on other tasks while I'm listening to something else). Blessed with more than enough to keep busy with at work, a relatively short commute, and a busy family life, that doesn't leave a lot of time to sit and listen.

However, I made time to listen to a John Piper sermon this morning titled What is the Recession For? Wow. Great stuff. Made me feel a little guilty that I haven't been contemplating and writing more along those lines these past several months. The text of the link above is good, but is more of a short summary (not word for word), so I strongly encourage you to listen to it or watch it if you can. (Download and podcast links are also available.)

Piper explores five of God's purposes in this recession:

1. He intends for this recession to expose hidden sin and so bring us to repentance and cleansing.
2. He intends to wake us up to the constant and desperate condition of the developing world where there is always and only recession of the worst kind.
3. He intends to relocate the roots of our joy in his grace rather than in our goods, in his mercy rather than our money, in his worth rather than our wealth.
4. He intends to advance his saving mission in the world — the spread of the gospel and the growth of his church — precisely at a time when human resources are least able to support it. This is how he guards his glory.
5. He intends for the church to care for its hurting members and to grow in the gift of love.

The point of my first paragraph was simply to point out that I don't take it lightly recommending you spend 42 minutes watching or listening to this sermon. But if you can find the time, I think it will be well worth the investment.

Posted by Mark at 11:09 AM
Category(s): Christian Interest, Economy

Email this post

'How many millions are in a trillion?'

That was the person-on-the-street question posed by Econ4U.org.

Do you know the answer?

In a companion telephone survey (with the question worded differently), 21 percent of respondents got the correct answer. It's a good illustration of how much difficulty we have comprehending these large numbers, as Mark pointed out in his post earlier today.

Posted by Joseph at 4:03 PM
Category(s): Economy

Email this post

National Debt road trip

Austin forwarded this to me last week during our writing frenzy. I think some of you will find it eye-opening, as I did.

One of the problems with discussions of government spending and debt is that the numbers are so huge. Most of us have no reference point for numbers in the billions and trillions, so we react much the same way to a report of a $300 billion deficit as we do a $500 billion deficit — they're both incomprehensibly huge.

This short video (less than 3 mins) does a good job of translating the pace of federal spending to something we're more familiar with: miles-per-hour on a cross-country road trip. Take a few minutes to watch it. You may be surprised.

Posted by Mark at 1:11 PM
Category(s): Economy, Inflation Watch

Email this post

Public vs. private health-care models

At the center of the health care debate is a fundamental disagreement over how American health care should be structured. The current system is structured around having private health insurance companies compete (though Medicare also covers a huge number of people and is a public plan).

The new plans being championed by President Obama and other prominent Democrats would change this, so that the government would largely replace private insurance companies in the primary role of funding health care. This is a contentious statement, as the effort has been carefully cloaked as simply adding a government option to compete with the other private insurers. The implications of this idea is central to the whole debate.

Reading an explanation of the new system from a proponent like Tom Daschle, it's easy to wonder what all the fuss is about. As President Obama said many times during his campaign, "if you like your current coverage, you can keep it." Ah, but for how long?

There are a lot of problems with a public health care system. Previous posts this week have dealt with the rationing a government plan will inevitably have to resort to, not to mention the fact that we're hardly in a position to pay for such a benefit. But these aren't such big problems if a government plan is simply going to be one option among many, right?

The thing is, this is the proverbial camel sticking its nose under the tent. Once government becomes a competitor to the private plans, there's little doubt that it will use its size and ability to set the rules to its advantage, eventually marginalizing (or completely eliminating) the private options. Even the long-time proponents of a government "single payer" health care system occasionally let slip that the current proposal is simply a first step towards that ultimate goal.

(If you doubt that, I encourage you to read this longer explanation of why a public option is likely to eventually become the only option.)

Thankfully, there are alternatives. Detractors of the private system say it has been tried and found wanting. But part of the reason it has been found wanting (which in itself is arguable — if you were to suddenly become gravely ill, would you rather be treated here or anywhere else in the world?) is the fact that government has been so involved in our health care system in so many ways and for so long.

Rather than make this post even longer by detailing all of this governmental involvement, allow me to simply point to this article making the case for several common-sense reforms of the current system, which would unwind some of the worst examples of government interference in the health care market. It's authored by (among others) Tom Coburn. For those not familiar with Coburn, he's known in Washington for two things primarily. First, being a genuine thorn in the side of all the big spenders in both parties, as he has fought earmark and pork spending in legendary fashion over the past decade. And second, he's known for being a practicing physician who has commuted back and forth between Washington and his home in Oklahoma so he could continue to practice medicine while serving in Congress. In other words, he knows a thing or two about the health care issue and he's not instinctively inclined to throw our money at the problem trying to fix it. Sounds like a good person to listen to on this issue.

Given what we know now about Social Security and Medicare's finances, many people would likely wish we could go back to the beginning of these programs and make changes that would make them more sustainable and less back-breaking financially. Folks, that point is exactly the point we're at today with this health care debate. If it gets passed in its present form, it's highly likely we'll be looking at this issue 20 years from now (if not sooner) the way we currently look at these other unsustainable government programs. The time to get educated on the issue and impact the outcome is now.

Posted by Mark at 3:17 PM
Category(s): Health Care

Email this post

June issue now available

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

Readers following our Fund Upgrading strategy are advised that four funds are being replaced this month.

SMI Web Members can read the write-ups of the new funds we're adding here.

Enjoy!

Posted by Mark at 3:42 PM
Category(s): SMI General Announcements

Email this post

Health Savings Accounts - the basics

Matthew posted yesterday on SMI's experience with Health Savings Accounts. It's a good read for those who may not have had a lot of direct exposure to these relatively new products.

Because Health Savings Accounts are an important part of many of the health care solutions being proposed as alternatives to the President's plan, it's important that people know exactly what they are. Many people aren't aware of the key differences, thinking "that thing I had 10 years ago at my last job" was either a Health Savings Account or at least was probably pretty much the same thing. Uh uh.

So for those who aren't clear on what exactly a Health Savings Account is and how it works, here is a short, well-constructed primer.

Take a few moments to learn the basics and you'll better understand the upcoming health care debate regarding the virtues (and vices) of a single government-payer system vs. a free-market, competition-based reform of the system.

Posted by Mark at 4:39 PM
Category(s): Health Care

Email this post

Health Savings Accounts in action

Sound Mind Investing went to HSAs for our employees in 2006. So with three years under our belts, we can vouch for how they affect spending decisions. Here's how they recently affected mine.

Let me first say that my wife Kim and I have been trying to pay our health care expenses out-of-pocket so that we can use our HSA as another type of retirement vehicle. And since we're more or less keeping our hands off of it, we might as well invest it, right? So every month, the company makes a deposit into our HSA which is held by The Sound Mind Investing Funds and used to purchase shares of SMIFX.

Now this is a great way to plan for retirement, but it's not cheap because remember, we're paying our health care costs out-of-pocket, NOT out of our HSA. So last year, when we had another baby, we had to have the cash to pay for the doctors and hospital visits if we didn't want to use some of our HSA investments in SMIFX.

But there's some good news. Once we meet our deductible, everything over that deductible is paid for by our insurer. So when December rolled around and we had finally met our deductible, I promptly scheduled visits to a chiropractor. I also scheduled a visit to a new allergist as it had been a while since I had been tested for allergies. It's a painful enough procedure without the cost. So at least getting it done for "free" helped soothe the burn a little.

Furthermore, our health plan covers prescriptions after the deductible is met. And wouldn't you know, the allergist prescribed three new medicines. We're on mail-order prescriptions where they send three month's worth at a time. This amounted to $600 worth of medicine that I didn't have to pay for. But I needed to get these prescriptions in before the end of 2008 because come 2009, we're back to paying everything ourselves. This is an HSA in action.

Fast forward to about four weeks ago, I started having heart palpitations. I'm a reasonably healthy guy and was a little concerned. I seem to read a story every year about some super fit athlete who dies unexpectedly from an undiagnosed heart ailment. But here's the thing — if I were going to be tested, it was going to cost me. It came down to peace of mind vs. what will likely be $1,000 worth of EKG's, stress tests, and Holter monitors. I decided it would be prudent to have the testing done regardless. As it turned out, my tests came back with good results. So yes, I'm paying a lot of money for what amounted to assurance. But that's okay. It was my decision. This is an HSA in action.

Fast forward to this morning. I've been battling a cold for a while, so when I was getting my allergy shots yesterday, I made an appointment for this afternoon with my allergist. But when I woke up, I felt a lot better. Cough was more or less gone and my voice was no longer hoarse. So I had a decision: Pay for a doctor visit when I'm potentially on the mends or forgo it and hope for the best? I canceled it first thing. This is an HSA in action.

HSAs are the real deal. There's a tax benefit, a choice benefit, and a cost benefit. They give the consumers the freedom to spend or save or invest based on what's best for his or her life situation. Giving the consumer the ability to decide for themselves how best to manage their health care costs — and pocket the savings — is an HSA in action.

Posted by Matthew at 9:58 AM
Category(s): Health Care

Email this post

Health care goes to the top of this week's blog coverage

In my role as benevolent dictator of SMI, I have declared this to be "health-care reform" coverage week on the blog. I've added a new category (in the right margin) for health care, and I've asked the team to focus primarily on topics related to health-care reform over the next few days in order to get this new category off to a strong start.

Health-care reform will likely be the biggest topic on the political agenda this summer, and it's very important that we all understand the issues and proposals. The reforms being discussed are far-reaching, and have major implications for your access to quality health care in the future as well as your financial well-being.

The Obama initiative was publicly launched at the White House Forum on Health Reform last March. At that time, the WSJ reported:

Mr. Obama made clear that he wants to help people with insurance today, and emphasized his interest in controlling spiraling health-care costs. He spoke about the need to cover the uninsured, but warned that it would break the bank to expand coverage to millions more Americans if costs are not brought under control....

On Capitol Hill, leaders of the Senate Finance Committee set out an aggressive schedule under which they hope to bring bipartisan legislation to the floor by June. House leaders said they want a floor vote by August, leaving time to reconcile the two chambers' bills before year end. [Full article]

As the debate unfolds, you'll hear terms like "universal health care," "single-payer health care," and "nationalized health care." These mean essentially the same thing. The term "socialized medicine" is also often used, but is controversial in some quarters. The important thing to recognize is that, by any name, such a program will inevitably lead to a lower quality of care. National Review Online gives its take as to why this is the case, with a special warning to the elderly:

With government in charge of health care, the objectification of human lives is inevitable. Governments must make resource-allocation decisions, which means that they must choose between eyesight-saving treatments for your grandmother and corrective orthopedic surgery for the kid next door....

Dr. Emanuel [one of Pres. Obama’s key advisers on medical policy] has embraced a technique for simplifying some of the tough calls: age discrimination.... We all were young once, the argument goes, so denying the elderly and weak in order to care for the young and fit is just.... Age discrimination is not a side effect of politically managed health care; it is a critical and fundamental feature of Britain’s National Health Service and other government-run health systems admired by Obama and his advisers. Under their arithmetic, the rewards of a procedure must be divided by the remaining life expectancy of the patient...

Obama’s other key physician adviser, Dr. David Blumenthal, shares Dr. Emanuel’s rigidly ideological view of health care, and aims to apply that ideology universally by subsidizing and mandating the use of a national “decision support” computer network for doctors, through which physicians will be gently advised by the national health czar in Washington what treatments are advisable on what occasions, and at what cost....

Given its inherently arbitrary character, centralized health-care planning will necessitate a certain amount of cruelty. If your mother and your child both were grievously sick, you might have to make a heart-wrenching resource-allocation decision between the two. Or you might not. Instead of deciding how to slice your medical-spending pie, you might decide to bake a bigger pie, forgoing other spending instead. But [Obama's advisers] seek to foreclose that option and, in fact, to aggravate the problem: A political program of reduced health-care spending means more scarcity, and more hard decisions. And those decisions, in Obama’s vision, will be made by the government, not by consumers of health care....

Free-market thinkers generally emphasize incentives, and those do matter. But information matters, too. Neither you nor your doctor is infallible, but it is extraordinarily unlikely that a remote panel of politically minded men in the nation’s capital are going to make better decisions about your health care than those made by you and your family, with the advice of your doctor, his colleagues — and that great gold mine of information: his competitors. Politicians have neither the incentives nor the information to do so.... [Full article]

The foregoing may turn out to be needlessly alarmist, but we won't know until more details concerning the Obama plan are released next month. Free-market champion Steve Forbes puts forth his ideas on the risks of further government intervention into health care, addresses some "myths" about the successes of Medicare and Medicaid, and offers his suggestions for changes that empower individuals, such as:

What are the alternatives to this health care nightmare? There are many positive, nongovernment things that could instead be done.

• Allow mandate-free insurance policies. True catastrophic health insurance — not the current dollar-for-dollar coverage — is very affordable.


• Permit people to buy health insurance across state lines. Removing such barriers would sharply increase competition.


• Make it easier for small businesses to buy insurance in a pool, whether through trade associations or other kinds of affiliations.


• Equalize the tax treatment of premiums. Companies get a tax deduction for health insurance premiums, as do the self-employed. Why not give that break to employees who choose to buy their own individual policies? They would get a deduction or a refundable tax credit (meaning if they don't have a tax liability they'd get an actual check from Uncle Sam). Many small businesses offer no insurance, or those that do may offer policies some workers find unsatisfactory. These folks should have the ability to easily get their own alternatives.


• Raise limits on contributions to HSAs and on permissible deductibles.

All of these ideas would substantially cut the number of un-insured. For those truly uninsurable, why not give them the medical equivalent of food stamps and subsidize their catastrophic health insurance premiums through private companies?

Free-market dynamics have worked in virtually every other part of the economy, spurring production and innovation and helping us get more for less. Food is even more basic than health care. We don't have a third-party-payer system for food (except for food stamps). Result: Today people spend a smaller portion of their income for food than they did decades ago. And the variety of foods is greater than ever. Free markets can do the same with regard to health care; governments manifestly cannot. [Full article]

According to a recent Rasmussen poll, the American people are hardly crying out for a major game-changer in health care coverage or treatment:

Seventy percent (70%) of Americans with health insurance rate their coverage as good or excellent. Twenty-three percent (23%) say their insurance coverage is fair, and six percent (6%) rate it as poor, according to a new Rasmussen Reports national telephone survey.

Overall, including those without insurance, 62% rate the health care they receive as good or excellent, while eight percent (8%) say it’s poor. For Americans with health insurance, satisfaction is a bit higher: 70% say their health care is good or excellent, while just four percent (4%) view it as poor. These findings are virtually unchanged from a survey in July of last year....

Americans are closely divided on whether it’s a good idea to establish a government health insurance company to compete with private health insurance companies. Forty-three percent (43%) of voters think the quality of health care in America will get worse if a government-run health insurance plan is created to compete with private plans.

But 63% of voters agree with President Obama that “we must make it a priority to give every single American quality affordable health care.” In December, however, 58% of voters were opposed to any kind of government-controlled health plan if it meant they had to change their own insurance coverage. [Full article]

This is clearly an area where, if we're not careful, the government-mandated "cure" will be worse than the disease.

Posted by Austin at 1:36 PM
Category(s): Health Care

Email this post

Cutting costs on digital services

UPDATE: Andrew here... Matt's post below is right on target. It motivated me to check on the various things I receive, and what I found surprised me so much I decided to repost his original entry with my findings. One thing I found was an online special for my home telephone service. I will continue to get the same basic package for $19/mo less than what I was paying. Additionally, I found an extra $4 monthly charge for a billing fee I was able to get removed. So, all-in-all I'm saving $276 a year! That's a lot of cash back in this Pryor household for merely checking in on my phone company. So, invest the time to review your services. You may be surprised at the kind of return you get. Here's Matthew's original post again...

Weren't we supposed to be paperless by now? Not only are we still buying paper (maybe more now than ever), we have all these digital costs piling up. I love a cool piece of tech as much as the next guy, but I'm less than thrilled about the added expenses.

How to Cut the Beastly Cost of Digital Services gives some good advice on how to make small but meaningful changes:

• DON’T ASK, DON’T TELL: Cable, satellite and telephone companies can only be overjoyed that millions of their customers take no action to lower their bills, and instead routinely pay much too much for overpriced plans they purchased a decade ago.
• IF THEY SAY NO, THREATEN TO SWITCH: If you’re thinking about switching to another satellite, cable or phone provider, call your current one and let 'em know.
• BUNDLE YOUR SERVICES: With traditional landline ownership dwindling as more customers use only cellphones, the major phone and cable companies are chockablock with packages intended to keep you from straying.
• RECONSIDER THIRD-PARTY CARRIERS: Once, third-party long-distance companies offered cheaper long-distance calling than you could get from your local provider, but that might no longer be the case.
• ASK FOR CORPORATE DISCOUNTS, MONITOR WEB SITES FOR DEALS, AND IF ALL ELSE FAILS, DOWNGRADE

Have you tried any of these? Or maybe you know of some better ways that aren't listed?

Me? I'm ready to get rid of our landline altogether since we have cell phones (which I finally succumbed to in 2009). Most of the calls aren't for me anyway. That'd save about $350 year. Hmm, that's about how much I'd need to buy one of them fancy new paperless Kindles...

Posted by Matthew at 1:35 PM
Category(s): Family Finances

Email this post

Get free 'specialty' credit reports

In our current issue of SMI, Andrew Pryor explains how to get a free copy of your credit reports and why it's important to do so.

But did you know that there "specialty" credit reports as well — ones that document such things as your check-writing history, medical payments, tenant history, and insurance claims? I didn't know that until I came across this post on Mark Oleson's "Financial Tip of the Week" blog:

FTC regulations require companies that prepare reports on consumers for employment, insurance claims, rental, check writing, and medical records history, [to] as a minimum establish a toll free telephone number for ordering the free file disclosures. Many companies also provide information for ordering the file online.

As is the case with credit reports, you are eligible for one free report per year (i.e., one insurance report, one tenancy report, etc.)....

It makes sense to order a specialty report before shopping for new insurance, opening a new checking account, and prior to renting.... Consumers who find errors in a specialty report have the same rights to dispute as with errors found in a credit report.

Several specialty reports are available via this site.

Posted by Joseph at 11:52 AM
Category(s): Family Finances

Email this post

Endless rise of cable prices

Consumer Reports' piece, "Cable Rates' Endless Rise," outlines how cable prices are consistently going higher:

Rates...have spiked 122 percent since 1995, the Federal Communications Commission noted recently. That's three times the rate of inflation.

It goes on to push the need for à la carte pricing, allowing customers to pick and choose which channels they want to pay for. However, I've heard industry experts make compelling arguments that this would actually lead to higher prices.

The money-saver in me says cheaper is better, so I'll stick with the package deal. But I also hate subsidizing channels that consistently put forth filth. Might be worth it to pay more overall in order to "support" only those networks that produce family-friendly content.

Putting aside the idea that people who don't like the pricing do have the option to cancel their service, what do you make of a different pricing structure?

Posted by Matthew at 4:11 PM
Category(s): Family Finances

Email this post

Bear market bottoming process

Last week I posted on a Barron's article that emphasized the idea that finding a bear market low is typically "a process rather than an event."

Today I found some great charts that illustrate this point. As you click through the charts, you'll get a feel for the common bottoming process that often occurs. Sometimes the final low happens first, followed by a retest. Other times, the final low happens while retesting a prior low point. (And sometimes the pattern doesn't fit at all — that's just the reality of investing in stocks.)

One other interesting point I hadn't noticed before — over the past several decades, once the market rebounds as much as it has since the March lows, the bottom has been in. In other words, by the time you saw a 30+% rally, the new bull market was underway.

I don't necessarily trust that 100% this time around. As the "4 Bears" chart shows, rallies the size of which we're currently experiencing are certainly possible within the context of a continuing bear market. I just hadn't been aware they're so rare (i.e., none in the past six decades of bear markets).

Most readers know that we don't make predictions, mainly because we know they're mostly worthless, and we're investing from a long-term plan rather than based on short-term events. That said, I've mentally been expecting a retest of some sort this summer. Seeing this does make me consider more strongly the possibility that may not occur. I'm not going too far out on that "new bull market" branch just yet though — not with a scary chart like this reminding me that things can still get worse before they get better.

Posted by Mark at 4:47 PM
Category(s): Current Market Events

Email this post

Outlook for Social Security darkens

The 2009 report from the Social Security Board of Trustees is due to be released any day now. Preliminary indications are that the system's financial outlook has gone from bad to worse.

A story in the Washington Post notes that "the [Social Security] trust fund's annual surplus is forecast to all but vanish next year — nearly a decade ahead of schedule — and deprive the government of billions of dollars it had been counting on to help balance the nation's books."

The Treasury Department has for decades borrowed money from the Social Security trust fund to finance government operations. If it is no longer able to do so, it could be forced to borrow an additional $700 billion over the next decade from China, Japan and other investors. And at some point, perhaps as early as 2017, according to the [Congressional Budget Office], the Treasury would have to start repaying the billions it has borrowed from the trust fund over the past 25 years, driving the nation further into debt or forcing Congress to raise taxes....

The trust fund has long taken in more in revenue from payroll taxes and other sources than it pays out in benefits.... But the rapidly deteriorating economy — particularly the loss of more than 4 million jobs — has driven those numbers much lower much faster, with the surplus expected to hit $16 billion this year [rather than the $80 billion originally forecast] and only $3 billion next year....

Though [President] Obama has pledged to address the precarious financial situation of Social Security, the administration currently has no plans to do so. Under pressure from congressional Democrats who argued that Social Security should not be at the top of the new administration's agenda, the White House last month dropped a proposal to name a task force to reexamine the program.

Future Social Security obligations have long been the "800-pound gorilla" sitting in the middle of Washington's living room — readily apparent but generally unacknowledged.

Proposals for fixing/reforming/improving Social Security have been around for decades, but they remain only proposals. Will members of Congress continue to ignore the warnings, just as they failed to heed warnings about Fannie Mae and Freddie Mac?

Posted by Joseph at 4:05 PM
Category(s): Economy, Taxes

Email this post

"I will keep on expecting you to help me. I praise you more and more."

These regular posts from the Living Psalms were initiated when the market was at its lows and the economic outlook was grim. As conditions have begun to improve, you may have become a little more optimistic. The soothing words of the Psalms don't seem quite as relevant when the sky isn't falling. We're at the halfway point of the Psalms, and I think this may be a good place to temporarily halt these posts as we wait to see what the summer holds for us. Regardless, our hope, as always, is in the Lord.

Sing to the Lord, all the earth! Sing of his glorious name! Tell the world how wonderful he is. How awe-inspiring are your deeds, O God! How great your power! ... Let everyone bless God and sing his praises; for he holds our lives in his hands, and he holds our feet to the path. ... Come and hear, all of you who reverence the Lord, and I will tell you what he did for me: For I cried to him for help with praises ready on my tongue. He would not have listened if I had not confessed my sins. But he listened! He heard my prayer! He paid attention to it! Blessed be God, who didn’t turn away when I was praying and didn’t refuse me his kindness and love. From Psalm 66

I will keep on expecting you to help me. I praise you more and more. I cannot count the times when you have faithfully rescued me from danger. I will tell everyone how good you are, and of your constant, daily care. I walk in the strength of the Lord God. I tell everyone that you alone are just and good. O God, you have helped me from my earliest childhood—and I have constantly testified to others of the wonderful things you do. ... Your power and goodness, Lord, reach to the highest heavens. You have done such wonderful things. Where is there another God like you? From Psalm 71

You love me! You are holding my right hand! You will keep on guiding me all my life with your wisdom and counsel, and afterwards receive me into the glories of heaven! Whom have I in heaven but you? And I desire no one on earth as much as you! My health fails; my spirits droop, yet God remains! He is the strength of my heart; he is mine forever! ... I get as close to him as I can! I have chosen him, and I will tell everyone about the wonderful ways he rescues me. From Psalm 73

How we thank you, Lord! Your mighty miracles give proof that you care. From Psalm 75

Posted by Austin at 4:50 PM
Category(s): Christian Interest

Email this post

And a little child shall lead them

The winner of the 2009 Financial Literacy Poster Contest, sponsored by the National Foundation for Credit Counseling, is fourth-grader Jenna Fink of Sparks Elementary School in Frisco, Texas (near Dallas).

See her winning entry here (PDF).

"At such a young age, Jenna did an incredible job illustrating the importance of saving money, living within your means and sticking to a budget," said Todd Mark, vice president of education for the Consumer Credit Counseling Service of Dallas.

Posted by Joseph at 2:08 PM
Category(s): Family Finances

Email this post

"Obama to Secured Creditors: Drop Dead"

I've been watching the slow demolition of the auto industry from a distance, with increasing alarm at the federal government's involvement. This article, which focuses on the Chrysler situation, nevertheless does a good job (it seems to me) in laying out the implications for the economy and investing markets as a whole. Your comments invited, especially you folks in the auto industry.

Posted by Austin at 12:11 PM
Category(s): Current Market Events

Email this post

Banks now vs. tech in 2002

Here's an interesting Barron's article comparing the behavior of the banking sector today to that of the tech sector back in 2002. As you likely recall, tech led the bear market down from 2000-2002, whereas the banking sector has been the primary culprit in the current bear market.

Particularly noteworthy is the author's emphasis on the fact that bottoming is typically "a process, not an event." What that means in simplest terms is that trying to figure out whether the bear market bottomed in early March may be answering the wrong question, as there could very well be a significant retest from today's levels even if the ultimate bottom is already in place. In other words, don't expect stocks to continue racing straight up from here into the next bull market.

You've been hearing similar things in this blog for a month or two now, but this is a helpful look back to see how this process played out the last time around. As always, managing your expectations can be a key factor in sticking to your long-term investing plan.

Posted by Mark at 4:12 PM
Category(s): Current Market Events

Email this post

Saving on groceries

Consumer Reports' May cover article entitled "Shop Smart & Save Big" is an informative piece on shopping for groceries. The entire piece is reserved for members, but here are a couple highlights they left open:

13 ways to save arms you with a strategy when navigating the store.

Great everyday products profiles items that are worth the money.

Another note of interest is the result they came to when comparing 30 products at warehouse clubs to "Savvy shopping" (someone who found the best deals on perishables/national brands, searched for coupons in newspapers and online, and used store bonus card): Warehouse clubs were 6% cheaper. And warehouse clubs were only 1% more than only buying store brands at the supermarket.

Warehouse prices being cheaper than supermarket prices should not be news to SMI readers. But I was pleasantly surprised to see that buying only store brands hardly made a difference.

What I'd really like to see is how warehouse clubs fare against grocery saving systems used by The Grocery Game and/or Little Miss Know It All.

If you use one of these systems, we'd love to hear how it's going. Until then, I'll continue shopping at Costco guilt-free.

Posted by Matthew at 10:03 AM
Category(s): Family Finances

Email this post

Current market behavior typical of bull beginnings

In this look at current market dynamics, Jon Markman does a good job of helping the reader understand why stocks started moving up even before there were signs of an economic turnaround, and why they have continued to do so. After beginning with a sad, but all too common, story about a friend's portfolio, he goes on to explain the current anguish of those who sold their stock holdings during the early 2009 plunge prior to the 30%+ rebound since then:

All those investors who sold heavily in February and March, when volume blasted to multiyear peaks and prices spiraled into the ground, now face the two most vexing investor maladies of them all: not the usual two-headed devil of fear and greed, but the fearsome pairing of regret and envy.

And oh, baby, is regret corrosive. Every day you see the market rise when you're out of stocks after taking a big loss eats at your mind like an acid. It burns at your psyche until you'll do anything to make it go away. And because there is only one thing that can make that happen — buying stocks on the rise — you can see why stocks have relentlessly jumped higher of late. Every little dip is met with buying, and every big dip is met with even more buying....

Strangely enough, veterans will tell you this is actually how most bull cycles start: in disbelief and rage. You might think bear markets end when the economy begins to improve in a pervasive way and big companies start to report better earnings. But that's a fantasy, a children's fable. Just as bear markets begin when everything is great, bull markets begin when everything stinks.

His take is consistent with my observations and experiences over the past 30 years. Key takeaway: "At this point, the key issue that all sides must recognize is that the U.S. government and Federal Reserve have declared war on depression and will do what it takes to win [emphasis added].

Update: FYI, the market was off just -0.6% year-to-date through April. This after being down more than 24% at the March low. The preliminary report on Upgrading through April is for a year-to-date gain of +2.4%.

Posted by Austin at 10:48 AM
Category(s): Current Market Events

Email this post

"This one thing I know: God is for me!"

Admit it ... you feel a lot better about your financial life since I started posting these passages from the Living Psalms (the last one is here). Of course it doesn't hurt that the market is up 24% since my first Psalms post on March 10. But even if it were still at lower levels, it's always good to be reassured that our heavenly Father is in control, is utterly faithful to His children, and can be trusted to provide our "daily bread."

When I am afraid, I will put my confidence in you. Yes, I will trust the promises of God. And since I am trusting him, what can mere man do to me? ... This one thing I know: God is for me! I am trusting God—oh, praise his promises! From Psalm 56

O God, have pity, for I am trusting you! I will hide beneath the shadow of your wings until this storm is past. I will cry to the God of heaven who does such wonders for me. He will send down help from heaven to save me because of his love and his faithfulness.... O God, my heart is quiet and confident. No wonder I can sing your praises!... Your kindness and love are as vast as the heavens. Your faithfulness is higher than the skies. Yes, be exalted, O God, above the heavens. May your glory shine throughout the earth. From Psalm 57

O God my Strength! I will sing your praises, for you are my place of safety. My God is changeless in his love for me, and he will come and help me.... I will sing each morning about your power and mercy. For you have been my high tower of refuge, a place of safety in the day of my distress. O my Strength, to you I sing my praises; for you are my high tower of safety, my God of mercy. From Psalm 59

How I wish I could go into your sanctuary to see your strength and glory, for your love and kindness are better to me than life itself. How I praise you! I will bless you as long as I live, lifting up my hands to you in prayer. At last I shall be fully satisfied; I will praise you with great joy. From Psalm 63

Posted by Austin at 5:06 PM
Category(s): Christian Interest

Email this post

Coupon Sites

Whenever I shop online, I do a quick check for coupon codes that I can apply to my order. I'd say half the time, I've been able to find some savings in less than five minutes. But I've often wondered which site was the best for fear that I was leaving money on the table.

In The 10 Best Coupon Sites by PC Mag, they do a nice summary on each of their favorites. Of those they've listed that I've used, RetailMeNot.com is my favorite. It's easy to find merchants I'm looking for and there's even a success rating for each code. They also have a message forum and other features but I really only have experience with the coupon codes.

What about you? Do you have a favorite online destination for coupons or coupon codes? If so, please share.

Posted by Matthew at 2:44 PM
Category(s): Family Finances

Email this post

Sector Rotation Change

As we've noted the past few months, our current Sector Rotation recommendation has been holding roughly half of its assets in cash. That worked wonderfully when the market was falling like a rock, but has kept it from participating much in the rally the past several weeks. Altogether, it worked out quite well for SR investors, as the fund lost only 10.5% since it was recommended last October. That's less than half the -22.9% loss of the Wilshire 5000 during that time (and this from a strategy that is typically much more aggressive than the market).

Despite our gratitude for this recommended fund protecting our capital during the worst of the market decline, the fund has now fallen out of the top quartile, so it's time to move to a replacement.

Want to see what the Sector Rotation fund recommendation is? Become a Web Member today!

Posted by Mark at 10:53 AM
Category(s): SMI Advanced Strategies

Email this post