3 Things 4-19
Although MAS is a financial services company, not everything published herein will be about numbers or investing. But no matter the topic, we hope for three things: 1) That you find the time you spend engaged worthwhile. 2) That you’ll reach out to us for help in any of our areas of expertise if something we discuss creates an urging in you to do so. 3) That you’ll share this with somebody new each time you read it.
Thing One A Real-Life Annuity Example Revisited In last week’s annuity commentary, we mentioned the gains that could’ve been had if an S&P index fund had been chosen over the annuity. It should be noted that we did not intend that as a once-and-for-all-time endorsement of the S&P index fund for all retirees as an alternative to an annuity. Certainly, if a retiree had invested in the S&P ten years ago as an annuity alternative, they’d be more than pleased today, to say the least. The P/E ratio of the index ten years ago was around 15 so it was “fairly priced” on a historical and intrinsic basis when they bought in. In addition to that, and even more importantly, over the last ten years, the annualized and total rates of return (including dividends) were 13% and 233% respectively. If a retiree had put his $250,000 retirement nest egg into the S&P index in 2011 and withdrawn 10% annually (with a 2% inflation assumption baked in) he’d have roughly $320,000 in his account today. That’s after having withdrawn almost $25,000 more than was originally in the account. More than pleased is an understatement, right? But, as they say, past performance is no guarantee of future returns. Today, the P/E of the S&P is almost 30, or roughly double what it was ten years ago. And, though no one can predict what will happen in the financial markets with certainty, it’s probably unwise, given the current relative price level, to assume the rate of growth in the index will be the same, especially in the near term, as it has been for the last ten years. None of the above should be construed as advice either way, but rather some things to consider. For specific advice, reach out and we’ll be glad to help.
Thing Two It's All How You (Choose) To Look At It Paul Krugman and Thomas Sowell are both economists. Krugman is probably the more popular by the measure of media stardom as he is a writer at the New York Times and is also a frequent guest on the financial news channels. That said, we’ll leave it to you to decide which you prefer after reading Sowell’s rebuttal to a quotation attributed to Krugman below: Paul Krugman: “Rising income inequality isn’t new, but what happened under (George W) Bush was something entirely unprecedented. For the first time in our history, so much growth was being siphoned off to a small wealthy minority that most Americans were failing to gain ground even during a time of economic growth.” Thomas Sowell: “The statistics that the intelligentsia keep citing are much more consistent with their vision of America than the statistics they keep ignoring. The basic confusion is between statistical categories and flesh-and-blood people. It’s true that if you take the percentage of income that went to the top 20% in Year A and follow it for a decade you’ll find that it has gone up and you’ll say, ‘there’s a disparity here, the rich are getting richer'. But if you follow the statistics generated by the Internal Revenue Service, which can follow individuals over time, you’ll find that for those individuals in the bottom 20% of taxpayers in the first year, their income has nearly doubled by this later period while the income of the people at the top has increased by less. And if you get down to the very top (of income earners) it has actually gone down. So people are simply moving between the brackets from year to year. And the number of people in the bottom 20% in let’s say 1975 who are still there in 1991 is 5%. Twenty-nine percent will have gotten all the way to the top by then and the absolute majority will be in the top half. So you’re comparing what happens in these abstract statistical categories to flesh and blood people. Almost everybody’s personal life is an example of this. What were you making when you were 20 versus what you were making when you were 40?” So there you have it. We know which view gets more airplay, but which one do you think would do the most people the most good to hear and understand, Krugman’s or Sowell’s?
Thing Three Just A Thought "A society that puts equality before freedom will get neither. A society that puts freedom before equality will get a high degree of both." - Milton Friedman