Sound Advice

Annuities?   Few would argue that the promise of guaranteed income for life has an encouraging ring to it.   Indeed, there is a product offered by insurance companies that does offer such a prospect.   The deal is straightforward.   You give the insurance company your money and the company agrees to pay you a stated rate of return for a specified period of time, often as long as you live.   That’s the typical model of a fixed annuity.   From a business perspective, the insurance company is betting that the return on the investment it is making with the funds you are transferring to them will exceed the regular payments it is making to you.   If the specified term is however long you will live, the company ends up ahead if you die early.   If you outlive the expected term, you are the winner. With a fixed annuity, the money is gone once it’s transferred.   What’s more, the rate of return specified in the agreement is usually fixed. ...

Interesting Returns   Although the pandemic and the situation in Ukraine remain important concerns, Wall Street has become increasingly focused on unusually high (albeit perhaps temporary) inflation and prospective actions by the Fed to get price increases under control.   Some days, the investment markets react dramatically to developments in this area.   On others, apparent calm prevails. However one views what lies ahead for interest rates, there are certain realities.   As rates rise, prices for bonds fall, especially for those with long maturities.   The offset, though, is the increasing attractiveness of bonds when interest yields on bonds compare more favorably to dividend yields on common stocks. To get a clearer view of the impact of rising interest rates on stocks, I compared the annual changes in interest rates on bonds to the annual returns from the S&P500 stock index for the last 50 years.   Over the five-decade span, rates rose in as...

Pullback . . . and then what?   The one certainty about the stock market is well illustrated by an account of a 1955 story about J. Pierpont Morgan given by the U.S. Secretary of the Treasury George M. Humphrey. The story is as follows: Somebody said: ‘Mr. Morgan, you are familiar with the stock market.?’ He said: ‘Yes.’ They said: ‘You know quite a lot about it?’   And he said: ‘Yes, I do.’ They said: ‘Do you think you can tell us what the stock market will do?’   He said: ‘Yes, I can.’   They said: ‘That is very interesting.   Will you please do so?’   He said: ‘Yes. It will fluctuate.’ Equally on point is a quotation from Benjamin Graham, widely known as the father of value investing and co-author with David Dodd of the recognized text on Security Analysis: “Most of the time common stocks are subject to irrational and excessive price fluctuations in both directions as the consequence of the ingrained tendency of most people to speculate or ga...

Information? There is no shortage of useless information about investing provided by the media, both broadcast and print.   On a nonstop basis, the public is bombarded by recommendations for the best stocks or funds to buy, an endless list of reasons why the markets are going up or down, and opportunities to take advantage of the latest approaches using artificial intelligence and other mysterious black box strategies for making fortunes.   And I suppose there are still some folks who would be willing to sell you the Brooklyn Bridge. This valueless stream comes from popular outlets as well as supposedly esteemed professionals.   In a recent article, Jeff Sommer of The New York Times focused on the gyrations of the investment markets and the commentary from well-known Wall Streeters about the events in Ukraine. Here’s an excerpt from a recent interview between Mr. Sommer and Eugene Fama, the University of Chicago economist who is widely known as the father of the ef...

The Outlook: Short-Term Rattle, Long-Term Rebound (excerpted from the New York Times)   Global markets usually weaken as wars approach, strengthen before wars end, and treat human calamity with breathtaking indifference. That’s been a common historical pattern, anyway.   And, with some important caveats, it seems to be playing out with Russia’s invasion of Ukraine. President Vladimir V. Putin of Russia has already rattled stock, bond, and commodity markets.   U.S. stocks have gyrated wildly since the start of the war, with the S&P 500 falling at one point into what Wall Street calls a correction – a decline of at least 10% from the most recent high – before regaining ground. The escalating conflict has shifted the value of mutual funds and exchange-traded funds in millions of retirement accounts, even for people who have not thought deeply about Eastern Europe and who have never invested directly in oil, gas or other commodities. Mr. Putin’s invasion of Uk...