At the beginning of each year, I compile a list of predictions that financial gurus and industry experts tell us are a "sure thing." And each year, I track how many of these predictions actually come true. So, it's now time for our second quarterly review of 10 financial predictions that pundits forecast as certain to occur in 2014.
Keep in mind that if these 10 predictions were really sure things, all -- or at least most -- of them should have happened. But as the research indicates, past isn't prologue, and no one is a good forecaster when it comes to performance. As is our practice, we give a score of +1 for a forecast that came true, a -1 for a prediction that turned out to be wrong, and a 0 for one that's basically a toss-up.
Our first sure thing is that, with the Fed announcing its plan to end quantitative easing, interest rates will rise. Thus, investors should and would limit bond holdings to the shortest maturities. Vanguard's Short-Term Bond Index Fund (VBISX) returned 0.93 percent, but its Intermediate-Term Bond Index Fund (VBIIX) returned 4.92 percent and its Long-Term Bond Index Fund (VBLTX) returned 12.04 percent. Score: -1
The second sure thing follows from the first. With the Fed finally tapering, and the predicted following rise in interest rates, emerging market equities would perform poorly. Vanguard's Emerging Markets Index Fund (VEIEX) returned 6.94 percent, underperforming the 7.05 percent return of Vanguard's 500 Index Fund (VFINX) by just 0.11 percentage points.
It's worth noting that the difference in returns between the emerging markets index and domestic large-cap index compared here narrowed to those 0.11 percentage points at the end of the second quarter from 2.2 percentage points at the end of the first quarter, when the VEIEX posted returns of -0.4 percent. While returns from the VEIEX have yet to fully catch returns from the domestic stock index in this example, they're already closing in, and it's only halfway through the year. Foreign and domestic equities are performing closely enough at this point time for us to call this forecast untrue. Score: -1
The third sure thing is that with the cyclically adjusted price-earnings ratio (CAPE) at 26.17 as we entered 2014, about 60 percent above its long-term average, stocks should be avoided. But as mentioned, VFINX returned 7.05 percent as of June 30, far outpacing its own first-quarter return of 1.76 percent and again outperforming cash and safe short-term bonds. Vanguard's Small Cap Index Fund (NAESX) returned a healthy 6.38 percent, while Vanguard's Large Value Index Fund (VIVAX), which returned 7.16 percent, and Vanguard's Small Cap Value Fund (VISVX), which returned 8.29 percent, finished the quarter by turning in even stronger performances. Score: -1
The fourth sure thing is that, with continuing fiscal and monetary stimulus being injected into the economy, we should see a sharp rise in inflation. In the last Consumer Price Index (CPI) report, released in June, the Consumer Price Index for All Urban Consumers (CPI-U) increased 0.4 percent in May on a seasonally adjusted basis. The first four months showed increases of just 0.1 percent, 0.1 percent, 0.2 percent, and 0.3 percent, respectively. While inflation has picked up a bit, we haven't seen the sharp rise that was predicted. However, given the recent uptick, we'll be generous. Until there's more information, I'll call this one a draw. Score: 0
The fifth sure thing follows from the fourth. It's that rising inflation should lead to a falling dollar. The dollar index closed 2013 at 80.29. It finished the first quarter at a virtually unchanged 80.28, and it closed the second quarter at a close 79.83. In addition, June 30 was the first time the index's low dipped under 80 since May 21, where it has been hovering all year. Score: -1
The sixth sure thing follows from the fourth and fifth. It's that gold should reverse the sharp fall it has experienced recently. Gold closed 2013 at $1,204.50. It ended the second quarter at $1,322.30. Score: +1
The seventh sure thing is that the municipal bond market should be hit both by interest rate increases and default problems, keeping investors away. We've seen neither rate increases nor default problems. Vanguard's Short-Term Tax Exempt Fund (VWSTX) returned 0.49 percent, its Intermediate-Term Tax Exempt Fund (VWITX) returned 4.68 percent and its Long-Term Tax Exempt Fund (VWLTX) returned 7.16 percent. Score: -1
The eighth sure thing is that economic recovery will continue down its tepid path. The Philadelphia Federal Reserve's Survey of Professional Forecasters predicted GDP growth of 2.6 percent in 2014. However, revised first-quarter GDP figures released in June came in at -2.9 percent. That's the worst first quarter for GDP since 2009. The plunge in the first-quarter data should also reverse, to some degree, a positive reading of GDP in the second quarter. Score: +1
The ninth sure thing is that, after defying the gurus in 2013, market volatility will rise. The VIX ended 2013 at 13.72. While it closed the first quarter slightly higher, at 13.88, it decreased significantly to close the second quarter at 11.57 after falling steadily for most of May and June. Score: -1
Our tenth and final sure thing is that active management will beat passive management in net returns. Despite an overwhelming amount of research to the contrary, 75 percent of advisors believed this to be true, according to an InvestmentNews report from January 2014. Technically, we'll have to wait for the annual SPIVA report to give a score on this one. We know, however, that there's really no such thing as a stock-picker's year.
Our total second-quarter score came in at -4, compared with a total first-quarter score of -3. Both scores exclude our 10th "sure thing," which we'll collect data on at year-end.
So far, it's pretty apparent that even the sure things haven't turned out so sure at all. Keep this in mind the next time you're tempted to give credence to some guru's forecast, and instead plan for the long-term.
Copyright © 2014, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.
Tim Maurer
Several years ago, my wife and I sat across from an experienced married couple squirming in their seats as though they feared we were about to deliver some terrible news. But the source of their discomfort was what they were about to drop on us.
You see, we were not yet married, but engaged, and the couple across the table was our mentor couple in our premarital class. Upon review of our personality profiles and piles of personal baggage, they felt it their duty to discourage us from further pursuing the sacred vows of matrimony. They’d never seen a hopeful couple more innately disparate, more inevitably destined for failure.
We are indeed vastly different, but one thing my wife, Andrea, and I share is a penchant for resisting authority. So with the blessing and support of family and friends, I’m thrilled to report we celebrated our 13th anniversary in April with our two wonderful boys, Kieran and Connor, ages 8 and 10.
We have never forgotten, however, the well-intended admonishment of our mentor couple. Indeed, we see much of life from vastly different perspectives, foremost among them our view of things financial. Apparently, we’re not alone. More than 50 percent of marriages end in divorce. More than 50 percent of those splits cite financial disputes as the primary reason for the breakup.
100 percent of marriages deal with money as a daily necessity.
This thought has occurred to me often, and I’ve come to realize that budgeting ranks up there with prayer and counseling as a precious few factors that have helped keep us together. Here are the top 10 ways budgeting has saved, and continues to save, our marriage:
10) Budgeting forces us to collaborate. It seems that as parents of young children, the level of commitments among work, school, church, sports and the arts leaves us functioning more as independent business partners than spouses. We’re almost always in short supply of adult conversation and genuine collaboration, and (strange as it may seem) budgeting gives us the context for both.
9) It offers healthy accountability. Ronald Reagan famously said, “Trust, but verify,” and while 100 percent verification of trust in our marriage would be stifling, we’ve found periodic accountability to be a healthy way to build faith and trust in each other. Our joint budgeting effort means all of our expenditures are accessible to the other. Scrutinizing every penny spent would be unfair (ahem, note to self), but knowing everything is visible is likely to encourage us each to spend more responsibly.
8) It humbles us. I’ve not found a more helpful tool in the pursuit of a successful marriage than humility, and since the use of money is so pervasive in our lives, small mistakes are the norm. Rarely a week goes by in which we don’t each humbly acknowledge that we erred in some capacity, humbly submitting our mistake to the other. And of course, a good budget is designed to withstand these small mistakes.
7) It provides an opportunity for reconciliation. These small errors in our budgeting provide fertile ground for a destructive tendency: that we’d develop a scorecard, real or implied, and shame the more regular offender (because there normally is one in most households). So for us, it’s very important that a humility ground rule is established: Anytime an offending spouse submits in humility to an irreversible mistake, forgiveness and reconciliation is the only way forward.
6) It gives us reason to celebrate. For each mistake, there are several successes in each budget cycle. The long-term success of our marriage is often built on a series of small victories, and we should never withhold an affirmation for completing a project under budget or enjoying the security of a buffer when an emergency arises.
5) It cuts down on surprises. So many aspects of our life are subject to variability and volatility. We can’t necessarily reduce the number of those surprises, but we can certainly reduce their negative impact by being financially prepared for them. Financial strain, and especially shock, pushes many marriages to (and over) the brink.
4) It makes us better parents. All of us parents could probably agree that it’s possible to spend too little OR too much on our children, right? We’re responsible to determine what the right levels of spending are for our children, and budgeting allows us to deliberately set aside appropriate levels of funding for education, clothing, sports, music and fun.
3) It shows our dependence on each other. Andrea and I do think differently, and this inevitably leads to divisive thoughts like these: “You know, I think I could do this better on my own!” But this decries the very essence of marriage as an institution in which each partner’s primary objective is to serve the other. The process of budgeting puts our (literal and emotional) dependence on each other on full display. That makes us vulnerable, but it’s good.
2) It preserves a healthy level of independence. The income production in most households is almost never perfectly equitable. Andrea sacrificed a successful career in the financial industry when she chose to stay home with our young children. This has been an incredible blessing in our family, but it’s also a breeding ground for insecurity and manipulation as I might have a tendency to overestimate my contribution to the family’s finances and underestimate Andrea’s. It is imperative, then, that part of our budget is the preservation of a certain amount of financial independence for each spouse. To offset this income inequity, we’ve established “His and Hers” accounts with unilateral privileges. Many shun budgeting as too restrictive, but properly implemented, it actually gives us room to breathe financially.
1) It preserves date night! One of the interactions I’ve enjoyed most throughout my career was with a client who is a generation or two my senior. He and his wife have five kids(!) and appear to be more in love today than they’ve ever been. I got up the nerve to ask this gentleman his secret to marriage and parenting. His answer? They never fail to set aside time—and money—for each other as a couple. He made a convincing case that we are better parents when we deliberately set aside time to be together, away from the kids, and not just for date nights but also for long weekends and even weeklong vacations to remind ourselves that before we were parents we were lovers. This proved difficult for Andrea and me because by the time we got to the end of most months, we’d already spent our discretionary cash on the rest of life and felt like we were taking funding away from other things to line up a babysitter and enjoy a night or weekend out. So now, much as we have preserved His and Hers accounts, we also have an Ours account.
Budgeting is not the slightest bit romantic, but it has the ability to promote and preserve the romance in our marriages and keep us on the right side of that daunting 50 percent divorce statistic.
This commentary originally appeared January 12, 2012, on Forbes.com.
by Brian Zdrowak
Have you ever tried to see how long you could hold your breath underwater? When I was a kid, whether on family vacations in Picton, Ontario or at a friend’s pool, I would challenge others to see who could last the longest. For the first few seconds, it feels as if you could hold your breath all day. It became a struggle for me after 30 seconds. In the times that I was too far under, panic would set in as I rushed to the surface to be followed by a rush of air and great relief.
With the recent stock market highs, I feel like many of us are holding our breath on the direction of the market and what it means for our financial goals, including retirement. When I hear people say, “If the stock market can continue like this for just a few more years, I will be OK,” I get the feeling that we are setting ourselves up for disappointment, especially by ceding control of our financial plans to the whims of the market.
It feels like we are underwater, trying to hold our breath the longest and hoping that when we pop out of the water for that breath of air, all will be OK. When you think about it, this cannot have a good ending. Who are we fooling but ourselves if we only believe we will not struggle mightily with the next stock market downturn? Yes, there will be another downturn; we just don't know when.
Recently, I was in California, where buildings are constructed to withstand the earthquake tremors that are a part of everyday life. The stock market has its own tremors. Rather than holding our breath and planning with hope, why not build a financial plan that will withstand the tremors of the market?
Let’s be realistic: Isn’t it better to be honest with yourself, even if it means planning to spend less, save more or work longer? I know it can be frustrating when reality interferes with dreams, but at least control of your destiny resides with you and not with the fortunes or ill fortunes of the stock market.
My limit for staying underwater is 45 seconds. For some of us, maybe we have already held our breath for too long. When the market goes down (and it will go down), we will find that we are in much deeper water than we thought, and that old familiar panic might set in.
So take back control by sitting down with a trusted financial advisor to talk about making a plan that incorporates your goals and dreams. By putting together a strong financial plan, you will weather the tremors of the market and still be able to breathe easy, no matter which direction the market decides to go next.
Copyright © 2014, The BAM ALLIANCE. This material and any opinions contained are derived from sources believed to be reliable, but its accuracy and the opinions based thereon are not guaranteed. The content of this publication is for general information only and is not intended to serve as specific financial, accounting or tax advice. To be distributed only by a Registered Investment Advisor firm. Information regarding references to third-party sites: Referenced third-party sites are not under our control, and we are not responsible for the contents of any linked site or any link contained in a linked site, or any changes or updates to such sites. Any link provided to you is only as a convenience, and the inclusion of any link does not imply our endorsement of the site.