Trovena Weblog

The Great Safety Net of 2008 (aka Housing Bill) Signed Into Law

There's a phrase that has grown in popularity and use over the last year or so, "privatize profits and socialize losses."  It's not used in a positive manner.  The thinking is something like this.  Everyone is happy to let markets roam free when they are going up and many are making a killing, but when prices drop and losses mount, government intervention appears.  Recently, the phrase has been applied to Bear Stearns, Fannie Mae, Freddie Mac, and now Homeowners facing foreclosure.

After reversing course on his promise to veto earlier proposed housing bailout bills, President Bush made good on his vow made last week to sign the latest version passed by Congress.  With unusual expediency, the bill flew through both the House and Senate and was signed into law today.

Americans seem split on their support for a government sponsored housing bailout.  According to a Gallup Poll in March, as reported in the USA Today, 56% supported government aid to borrowers; 42% opposed it.  In another poll, 53% oppose government intervention, 29% favor federal aid, and 17% were not sure.  Either way, it appears to be a hot button issue for many.  The media remain focused on the sad stories of people losing their houses, while those opposing a bailout have been highly vocal, even starting a web site specifically for this issue.

My personal belief is that markets will run their course in a more efficient manner than government intervention.  But if price volatility is a concern, then upside volatility is just as concerning as downside volatility.

One of the rules of business is that you shouldn't talk politics in the office.  Since this is a company blog, it's pretty much the same thing.  So, I'll refrain from further politicizing.  Actually, the reason for this post is to bring to everyone's attention what is actually in this bill and how it may affect our clients and other interested parties.

Mid Year Market Commentary

Now that we are halfway through the year, I thought it would be a good idea to provide you with some perspective on the market, and our globally diversified, asset class portfolios.

I stumbled across an interesting statistic over the weekend: in June 2008, the US Stock Market had its worst June ever since the great depression. Worst June? It raised an interesting question, or rather a series of questions. What about March or May? How about June 23rd? Where did June 23rd fall in the history of June 23rds? Should we care?

It is now official, we are in the midst of a bear market, and the press loves it. Nothing like doom and gloom to help sell newspapers. However, if you read no further, rest assured, this too will pass.

FDIC, SIPC and the safety of your money

Not surprisingly, with the endless news coverage of the failure of IndyMac Bank (sensationalism at its finest!), a question on everyone's mind is, "just how safe is my money?"  Let's face it, the last thing any of us want is to find ourselves standing in line for hours outside our bank or brokerage office hoping to get our money back.  For our clients, and any other interested parties, we wanted to address the issue of safety of funds.

The majority of our clients' assets are custodied at Charles Schwab & Co., so most of this will address the safety of assets at Schwab.  Some of our clients' assets are custodied at TD Ameritrade, and the protections that they offer are effectively the same.

Principle among concerns that clients have expressed to our office are:

1. I have more than $100,000 at a bank, should I go take some of it out?
2. How safe is the money market (cash) portion of my brokerage account in the event of a Schwab bankruptcy?
3. How safe are the investments (mutual funds, stocks, bonds, CDs, etc.) in my account if there was trouble at Schwab?
4. How safe are the underlying investments, not in terms of investment loss, but loss due to insolvency by the investment manager (DFA, MLM, Payden Funds, etc.)?

Ruh-Roh Shaggy, Time to brush up on FDIC limits!

Down goes IndyMac Bank, and with it the 2nd largest bank to fail since the creation of the FDIC.  Not to mention an estimated $1 billion in uninsured deposits.  How is it that these deposits are uninsured?  Simple, they are above the FDIC limits.

With the fall of IndyMac, all the buzz is around which bank (or banks) is next.  Plenty of names are suggested, but I don't want to pull a Schumer and cause a run on any of the troubles thrifts.  You know, by inciting all eight people who read this blog to go take their money out.

This seems like an appropriate time to review FDIC insurance limits.  Here's the easy way to remember it, FDIC covers your for up to $100,000 per depositor, not per account.  There are myriad ways to multiply the limits, and to learn ALL about it, read on...

Stock Pickers Watch 2008 - Mid Year Review

Back in January, I scanned the popular financial media for the ubiquitous "Stocks you gotta own in 2008!" articles.  No surprise, there was no shortage.  I posted a link to articles from Smart Money, Kiplinger, MSN and Fortune.  The plan was simple.  Track the picks through the year, and see if the "experts" have any insight/crystal ball.

Halfway through the year, here are the results as of June 30, 2008:

Online Retirement Income Calculators - Deeply flawed, but still kinda useful

We had an inquiry from a Money Magazine reporter doing a story on online retirement calculators.  The basic question, "what is the best way to use these calculators?"

Let me start by saying that I am a big fan of online calculators.  They have given the consumer far more information than they once had.  Mortgage calculations used to be a total mystery to the average consumer.  At least now, there’s a way for them to do the calculations themselves (not that anyone does).

That being said, I think retirement income calculators are HIGHLY flawed.  They suffer the same problem as cash value life insurance illustrations.  Namely, they assume linear returns.  Let me give you an example using the three links that three different online retirement income calculators.  Let’s say that you have a client who just turned 65 and is about to retire on nothing but their portfolio of $1,000,000.  No Social Security, no pension.  They need an income of $60,000.  We will assume a diversified portfolio with an expected return of 9%.

Pretty reasonable, right?  We're simplifying things by taking taxes out of the picture initially.  It's just a matter of crunching the numbers, right?  I actually entered this little experiment assuming that each of the calculators would produce similar results.  I couldn't be more wrong.