Friday Nite Wine (and Beer)

Another excursion into the world of Kirkland wines this week: a 2005 Napa Valley Meritage. 69% Merlot, 29% Cab Sav, 2 % Cab Franc it was a deep purple in color with an aroma of cedar. Initial hints of black cherry from the Merlot followed by the full bodiedness of the Cab Sav, black fruit concealed the tannins. They are there, I picked up on them but Mrs. RC found them to be well concealed. It ended with an elegant finish. A very good wine. While this was our last 2005, we recently picked up a couple bottles of the 2006 and are looking forward to those after this. Price was in the $16 a bottle range.

This week a bonus: In the spirit of the season I enjoyed a bottle of Post Road Pumpkin Ale. Good pumpkin flavor, not too heavy but not too lite. I enjoy sampling different pumpkin beers this time of year and thoroughly enjoyed this one. Definitely will add to the short list. It's worth picking up if you enjoy pumpkin beer.

Get Rid of the 401k?

A recent cover story in Time Magazine suggested just that. It’s lengthy but a worthwhile read, if nothing else to better understand fully what follows here.

The article was filled with stories about people who are nearing or in retirement and don’t have enough money. It states that they lost significant sums of money in their 401k over the difficult 10 years we have just experienced in the stock market. It then throws out some stats about how much better these people would have done with an old fashioned pension plan. The conclusion? Get rid of the 401k for everyone and go to a defined benefit pension plan.

Before I point out all the erroneous premises and conclusions with the article, let me start by pointing out where I, at least at a high level, agree with the article. First, there is a serious flaw in the 401k concept: giving people the tool and the ability, hell the mandate, to save for their own retirement without giving any education, advice, or guidance. The only “guidance” people are getting is from CNBC and they only encourage greed and fear. A good first step that I have seen is the introduction of Life Cycle, or Target Date, funds. Even better is when the company automatically sets up an employee in the 401k program and defaults him/her to the appropriate fund based on age. No, this really isn’t education but it at least gets you participating in a relatively appropriate choice. I do have issues with the Target Date funds in that they all have different ideas about what a Target Date should mean; there is no standard definition or guidelines for them. The result is some funds are taking on more risk than I would call appropriate. But, with no other option, they are a decent choice.

Now my problems with this article. Every one of the examples the author used and several hypothetical cases he uses have you losing 25%, 30% or more of your 401k the last 1 to 5 years before retirement. In other words, between 60 and 65 years of age, you lose 1/3 of your 401k value. Pretty scary sounding isn’t it? Picture me in a Jim Cramer moment here, jumping up on a table, pulling my hair and screaming WHY!? WHY!? WHY!? Why did they lose that much? They were most likely heavily invested in equities. At that age no one should be that much in equities and therefore no one should be losing that much. Is that because the 401k is bad? No, it’s because people were operating on ignorance, greed or fear. This does tie back into my criticism of the 401k. Without investment education, people will be ignorant of the important choices they need to make. At a minimum everyone should read Personal Finance for Dummies or something similar. Do a Google search for asset allocation like this one on Money.com. In the last 10 years before you retire your primary goal is protecting your retirement money, not having visions of life on a tropical beach because you are riding that Emerging Market wave with 100% of your account and making a killing. Don’t let greed take over.

He gives examples of how these people would be so much better off if they had a traditional pension plan and that’s why we should scrap the 401k and go to some kind of guaranteed income system for everyone. We already have something like that today. If you invest, appropriately, in a 401k, when you retire you can simply purchase an immediate annuity that gives you a fixed amount of income you need each month. Any difference left in your 401k you can then invest, and continue to grow that balance. Another option would be to offer an annuity in the 401k program that you can purchase as an alternative and have that guaranteed payout. I do have issues with offering tax-deferred variable annuities in a 401k, but, if it an option and those options are explained to people, it removes some of my oppositions.

This is my favorite. The author cites a 63 old retiree with $500,000 in a 401k, who spends $75,000 a year. He then states the retiree would be better off with a traditional pension. I have several issues with this one. First, spending $75,000 a year with a $500,000 401k balance? At that rate, he’ll run out of money in three years, no matter how you do the math. The author’s solution: under the old pension plan the retiree would be receiving a $2200 monthly check. Apparently the author did not do very well in 6th grade math because $2200 a month x 12 months a year = $26,400 a year. That is a far, far cry from the retiree’s $75,000 “need.” What if they purchased an immediate annuity with that $500,000? He has $3200 a month. Still a far cry from $75,000 but he is 45% wealthier than under the traditional pension plan. Looks like the author didn’t do that well in 3rd grade math either. So what is the retiree doing? He is watching CNBC so he can gamble on the market hoping to hit it big. Bad 401k or bad decision making by the retiree?

The solution proposed in the article is a government run pension plan (anyone think of Social Security) where you put in (they take from you) 5% of your pay and you get back 26% of your final salary. We all know how well Social Security is run so it makes perfect sense to expand it right? Think about this. If you invest 6% of your income starting in year 1 of your employment, have a 50% match by your company and invest in a money market fund in your 401k, then retire at age 65 with $100,000 salary you would have a $450,000 balance. You then purchase an immediate annuity and get $2900 a month, or $34,800 a year. That is with investing in nothing but a money market fund. Under the author’s plan you would get $25,000 a year. I know I don’t write for Time so maybe I am missing something but to me $34,800 a year is better than $25,000 a year.

I’m tired of hearing all these people, like the author, complain that no one is taking care of him and they want a nanny state to provide all these things. If they want to live that way, that’s fine with me as long as it doesn’t force me to. I like the 401k; I like having to ability to control my own destiny and I have averaged 9% a year over the past 5 years in my 401k. The S&P has averaged -8.5% a year over that same time. Has this been a “lousy idea, a financial flop, a rotten repository for our retirement reserves” for me as the author claims? I emphatically say no. Maybe he’s bitter because he lost a lot then went searching for others who did the same.

I do hope that companies figure out that their employees need help with their retirement investing. I also hope that investors give a lot of thought to retirement and when it is appropriate based on how much they have in savings. When you are 10 years away from retirement, start talking to a fee -only financial planner. They aren’t giving stock investment advice but will help ensure you are on the right track toward your retirement goal. They also won’t let you stay fully invested in stocks the year before you retire. At least I hope not.

Saturday Nite Wine

This week we had a bottle of Murphy-Goode Liars Dice Zinfandel 2006 from Sonoma County. A nice full bodied zin. Sweet and juicy with rich fruit flavors of black cherry and blackberry jam. Silky tannins in a raspberry driven, lingering finish. At around $18 it was an excellent value. Definitely something we will pick up again.

Dow Closes Above 10,000!

Everyone is excited about the Dow closing above 10,000 - all the CNBC talking heads are going on and on about it. Exactly 10 years ago, October 15, 1999, the Dow closed at 10,019. If you believed the buy and hold mantra and bought a Dow Jones mutual fund in October 1999 you would have a magnificent return of 0%. Ten years of nothing. Why is that better than a strategy with a clear plan to manage equity risk?

Fallacy that Holding Stocks for 20 Years Outperforms

Jason Zweig writes today at Yahoo:

Can you make the risk of stocks go away just by owning them long enough? Many investors still think so. “Over any 20-year period in history, in any market, an equity portfolio has outperformed a fixed-income portfolio,” one reader recently emailed me. “Warren Buffett believes in this rule as well,” he added, referring to Mr. Buffett’s bullish selling of long-term put options on the Standard & Poor’s 500-stock index in recent years. (Selling those puts will be profitable if U.S. stocks go up over the next decade or so.) As the philosopher Bertrand Russell warned, you shouldn’t mistake wishes for facts. Bonds have beaten stocks for as long as two decades — in the 20 years that ended this June 30, for example, as well as 1989 through 2008. Nor does Mr. Buffett believe stocks are sure to beat all other investments over the next 20 years. “I certainly don’t mean to say that,” Mr. Buffett told me this week. “I would say that if you hold the S&P 500 long enough, you will show some gain. I think the probability of owning equities for 25 years, and having them end up at a lower price than where you started, is probably 1 in 100.” But what about the probability that stocks will beat everything else, including bonds and inflation? “Who knows?” Mr. Buffett said. “People say that stocks have to be better than bonds, but I’ve pointed out just the opposite: That all depends on the starting price.” Why, then, do so many investors think stocks become safe if you simply hang on for at least 20 years? In the past, the longer the measurement period, the less the rate of return on stocks has varied. Any given year was a crapshoot. But over decades, stocks have tended to go up at a fairly steady average annual rate of 9% to 10%. If “risk” is the chance of deviating from that average, then that kind of risk has indeed declined over very long periods. But the risk of investing in stocks isn’t the chance that your rate of return might vary from an average; it is the possibility that stocks might wipe you out. That risk never goes away, no matter how long you hang on. The belief that extending your holding period can eliminate the risk of stocks is simply bogus. Time might be your ally. But it also might turn out to be your enemy. While a longer horizon gives you more opportunities to recover from crashes, it also gives you more opportunities to experience them. Look at the long-term average annual rate of return on stocks since 1926, when good data begin. From the market peak in 2007 to its trough this March, that long-term annual return fell only a smidgen, from 10.4% to 9.3%. But if you had $1 million in U.S. stocks on Sept. 30, 2007, you had only $498,300 left by March 1, 2009. If losing more than 50% of your money in a year-and-a-half isn’t risk, what is? What if you retired into the teeth of that bear market? If, as many financial advisers recommend, you withdrew 4% of your wealth in equal monthly installments for living expenses, your $1 million would have shrunk to less than $465,000. You now needed roughly a 115% gain just to get back to where you started, and you were left in the meantime with less than half as much money to live on. But time can turn out to be an enemy for anyone, not just retirees. A 50-year-old might have shrugged off the 38% fall in the U.S. stock market in 2000 to 2002 and told himself, “I have plenty of time to recover.” He’s now pushing 60 and, even after the market’s recent bounce, still has a 27% loss from two years ago — and is even down 14% from the beginning of 2000, according to Ibbotson Associates. He needs roughly a 38% gain just to get back to where he was in 2007. So does a 40-year-old. So does a 30-year-old. In short, you can’t count on time alone to bail you out on your U.S. stocks. That is what bonds and foreign stocks and cash and real estate are for. In his classic book “The Intelligent Investor,” Benjamin Graham — Mr. Buffett’s mentor — advised splitting your money equally between stocks and bonds. Graham added that your stock proportion should never go below 25% (when you think stocks are expensive and bonds are cheap) or above 75% (when stocks seem cheap). Graham’s rule remains a good starting point even today. If time turns out to be your enemy instead of your friend, you will be very glad to have some of your money elsewhere.

Returns for this Decade

I was responding to a question this weekend where I went into my normal soapbox speech about being in the right areas of the market at the right times and how you don't simply change based on the changing of the calendar as most standard asset allocation pie charts direct you to do. Your standard asset allocation pie would have you overweight large cap stocks (as in the S&P 500) and underweight small cap, international and emerging market stocks with that differential growing as you move along in age. Their argument is that large caps are less risky and that small caps are more risky.

Below I show how certain areas of the market have done this decade using their corresponding ETFs as a proxy. The two worst areas have both been in the large cap space: the S&P 500 is down -26.69% since Jan 1 2000 and the NASDAQ 100 which is down -53.41%. That means that in the next 15 months the S&P has to go up almost 27% just to break even over the past 10 years.

I don't know about you, but to me the real risk in investing is the risk of losing money in which case large cap equities have been the most risky not the least risky.

S&P 500 (SPY)	-26.69%
NASDAQ 100 (NDX)	-53.41%
S&P 600 Small Cap (SML)	63.48%
MSCI EAFE (EFA)	-5.83%
MSCI Emerging Markets (EEM)	124.22%
Money Market	30.04%
Lehman Aggregate Bond (AGG)	41.43%

Dow 2009 High, Strong Commodities and Weak Dollar

The Dow hit a closing high for 2009 as the rally that began in March continues. We did see some risk indicators turn negative this week so we are beginning to dust off our defensive plays. This may mean setting tighter stop loss points, raising cash or buying inverse funds depending on your risk tolerance. We are still in a longer bullish trend but we may be starting to see that pull back that everyone has been calling for.

Commodities were strong this week as gold hit a new all time high. We also saw our indicators for commodities turn back to positive after a period of consolidation. We would be over weighting commodities and commodity related stocks here.

Along with the strength in commodities we saw weakness in the dollar. This would have us leaning toward commodities, obviously, as well as non-US areas of the market of which emerging markets have reestablished themselves as leaders.

Charleston, SC 2009

Ms. Rivah Capital and I spent a few days in Charleston this week and had a lovely time. We stayed at the Vendue Inn and I highly recommend it if you will be visiting Charleston. It is just off East Bay and very close to most everything.

A few of the highlights: of course we go for the food and drink so that's what I will mention.

Monday night was Peninsula Grill. Second time there and it was as good as I remember. The coconut cake is to die for but the surprise hit of the night was the appetizer: a piece of tuna tartare and a tuna cake with Asian slaw. Outstanding!

Tuesday for lunch at Magnolia's. I wish we had been there another night so we could have done dinner there. A must try. The blue crab soup was probably the best I've had in Charleston. Shrimp and grits was good but not outstanding while the Fried Green Tomato BLT was very good.

Tuesday night was FIG (Food Is Good) which was a hit. They use mainly local ingredients so the menu changes nightly based on what they get in. Roasted tomato tart for an appetizer, Trigger fish and Red Snapper for entrees and all were excellent. We will be back to FIG.

We stopped at A W Shucks on our way out for lunch based on a "recommendation" of a local. Never listen to unsolicited recommendations. While not bad, it was unimpressive and in Charleston that equals a disappointment.

Friday Night Wine (on Saturday)

We were spending some time away this past week in Charleston and Myrtle Beach so I didn't have a chance to post last week.

While in Charleston we had a 2000 Jade Mountain Merlot from Napa Valley. Black Cherry and vanilla notes with great body and a beautiful finish. This wine was excellent. Unfortunately it was my only bottle and had been sitting in my cellar for a few years. Retail at the time was $35.

This week we pulled out a 2006 Santa Margherita Pinot Grigio from Alto Adige/Valdadige region of Italy. Dry, fruity and complex with a very nice finish. Very tasty wine. Retail was $18.