Job 1...Not Wealth Creation

I have attended many professional meetings over the years where the focus comes down to how to assist clients with wealth creation. Well, on the white board in the conference room at present we have written "Job 1 is NOT wealth creation. Rather , it is helping clients avoid big mistakes". The degree to which we succeed largely depends on how "advisable" the client may be. The holistic and independent perspective we occupy provides us an advantage over most others.

We all are going to makes some mistakes but we must avoid large mistakes , particularly those that result from "big bets" on business and real estate ventures . These tend to be particularly harsh and can have totally wreck an otherwise sound financial plan. Wealth creation...long term wealth creation, is about discipline and diversification. Sometimes the best advice we can provide a client is three simple words "don't do that".

The Fragile Empire

a good piece recently from Prof Niall Ferguson (author of The Ascent of Money) here . He has an interesting, historic perspective . Towards the end of the piece he describes the role that perception plays in the outcome. Extreme? Perhaps...perhaps not.

The Retirement Conundrum

Here is a simple chart from Prof Greg Mankiw's blog (originally from the Economist) that quickly demonstrates the primary problem in funding retirement today. Over the past 40 years or so the period of time in retirement has roughly doubled in the U.S. All of this while savings have declined and lifestyles increased. Not exactly a formula for success.

What is required? Far higher savings both inside and outside retirement plans; postponing retirement until age 70 or so; avoiding huge costly mistakes (big bet business /real estate ventures, divorce ,etc.) ; and maintaining long term discipline.

Fannie & Freddie

Fannie Mae, Freddie Mac and FHA all continue to bleed tons of red ink. Fannie is the largest and recently tapped their unlimited government credit card for another $15.3 billion - the 10th straight quarterly loss. For the whole of 2009 the loss was $74.4 billion - about $200 million per day! These entities, chartered by the government to provide liquidity to the home mortgage market have become perhaps the single largest "time bomb" in the financial sector. The borrowings from the government are "off balance sheet" and therefore not considered part of the collective federal debt numbers that are repeated now with frequency. Yet , even a cursory glance at government bonds in the financial pages show these as government obligations. The companies have a huge negative net worth but guarantee over $5 trillion of mortgages. They have become corrupt political pawns that no one fully understands.

Healthcare Op-Ed in The State

The State paper (Columbia,SC) carried an opinion piece that I wrote (although they edited a good bit) on the possible unintended consequences of turning physicians into technicians following strict government mandated guidelines. It was timely because of the so called health care summit in Washington and the 21% Medicare fee cuts set to go into effect Monday for physicians. We converted the link here

All that Jazz

I came across an article headline yesterday by seasoned financial writer Jim Jubak "Ride this bull,but be ready to jump". The sub-heading was " the stocks you choose and when you buy can make a huge difference". Wow! Really? That is it? Hard to believe that even in the face of several decades of good evidence refuting the timing and stock selection thesis, it is still alive and well in the popular media. Why? Because they have space/time to fill .

Job One in maintaining discipline (the first "D" in the DADS -Discipline/Awareness of Costs/Diversification/Structure philosophy) is to block out the day to day noise. That is much harder today because of the myriad of media outlets pushing drivel out endlessly. Financial science provides powerful guidelines on how to have a successful investment experience. That said, returns are more dependent on investor behavior than stock or fund performance. Long term, disciplined investors have historically done much better than the market timers.

Birthplaces and Birthdays

The birthplace of Western Civilization, Greece, has been in the news lately over their huge debt problems . Today is also Presidents' Day- the ceremonial birthdays of Washington and Lincoln. By the standards of a country like Greece, we are still a young county perhaps just beginning to mature and facing the problems that go along with this process. The whole world is awash in debt and the strictures of heavy taxation have taken their toll in many of these countries such as Greece (along with Portugal, Spain, Ireland, Italy, England and others). Everyone on this side of the pond realizes the federal government here is rapidly approaching a debt crisis as well. My concern at present , however, is on many of the states where huge debt burdens are looming without any of the solutions available to the central government. For instance, California (which has an economy larger than Greece) is running a 22% budget deficit . A number of other states- Arizona, Florida, New Jersey and Illinois to name a few are facing similar issues. As property valuations decline and property tax revenues fall these budgets will be under yet additional stress.

All of this is a backdrop to what is broadly known as "crowding out" in the financial markets and generally creates lower growth for the economy and ultimately lower investment returns as well. Stay tuned.