No one knows what future tax rates are going to be in the future. Everyone, however, knows the tax codes needs to be reformed.
It is no scholar who thinks that future tax rates are likely to be lower while deductions will be less.
How then should you plan for saving in your retirement accounts. Obviously it depends upon your current marginal tax rate vs your future marginal tax rate. One known, one unknown. The thing to remember is that current marginal tax rates are artificially low compared to what they will be in the future. Now while they may drop tax rate levels, with fewer deductions, I suspect future marginal tax rates will be on average higher than today. All of which pitches for the Roth over the tax deferred vehicle.
Thursday, May 7, 2015
Wednesday, May 6, 2015
Everyone Is Shy Of Calling A Top
Everyone is gun shy about calling a top in equities or bonds.
Too often in the recent past anyone who has called a top has been steam-rolled. As a result it is only ideologues and dogmatists who have been calling a top for years who are left to carry the flag.
I don't think we are in a bubble, but I do think the market is way overextended. The contrarian in me wants to take the under.
Too often in the recent past anyone who has called a top has been steam-rolled. As a result it is only ideologues and dogmatists who have been calling a top for years who are left to carry the flag.
I don't think we are in a bubble, but I do think the market is way overextended. The contrarian in me wants to take the under.
Monday, May 4, 2015
Saturday, May 2, 2015
Synthetic Deferred Annuity
Given that I have never dealt with annuities and given that I have never liked them (because investment texts degrade them because of their high cost and complexity), it has been really interesting for me to discover that academics love annuities. There seems like almost universal support for annuities as the solution to retirement income spending needs (at least deferred income annuities).
The initial investment for a lifetime deferred fixed annuity paying $1000/mo in 20 years is $26,894.
The PV of a deferred fixed annuity based on 20 years of monthly $1000 fixed payments is $57,108 (assuming 5% discount rate).
Looks like the annuity is a much better deal than trying to construct it yourself.
The initial investment for a lifetime deferred fixed annuity paying $1000/mo in 20 years is $26,894.
The PV of a deferred fixed annuity based on 20 years of monthly $1000 fixed payments is $57,108 (assuming 5% discount rate).
Looks like the annuity is a much better deal than trying to construct it yourself.
Return Myopia
Return myopia is the fixation on return to the neglect of risk.
A myopic focus on yield is a classic case of focusing on return and neglecting the risk side of the equation.
A myopic focus on yield is a classic case of focusing on return and neglecting the risk side of the equation.
Yield Chasing: There Is No Free Lunch
There is no free lunch.
The temptation to chase higher yielding securities is a ephemera.
Higher yields reflect greater risk. He who neglects that basic signal is subject to the laws of economics.
To the piper a price will be paid.
The temptation to chase higher yielding securities is a ephemera.
Higher yields reflect greater risk. He who neglects that basic signal is subject to the laws of economics.
To the piper a price will be paid.
Friday, May 1, 2015
Variant Perception and Edge: Value vs Growth
There are only two possible options for variant perception for both value and growth investors.
Both investor types are forecasting either higher growth rates or higher margins or a combination of those two factors compared to the market consensus and what is baked into the stock price today.
It is as simple as that. One other possible variant perception relates to the realm of undervalued/hidden/latent assets which occurs more on the value side of the divide (although effectively that is the implied assumption also on the growth side).
So for a growth investor when they come across a growth company trading at 30x forward earnings, implying 30%pa 5 yr growth and 20% operating margins, to have a variant perception they are either forecasting growth greater than 30% and/or operating margins greater than 20%. Implicitly they are also forecasting the future multiple to be 30x or greater. Lots of moving parts in that equation and lots of hope (the future) embedded in todays price. As long term holders the odds are usually not in their favor. Although if they hit the jackpot and get a genuine emerging leader that turns into a market leader then all their misses are likely to be made up by that one single hit.
For a value investor, looking at a company trading at 10x forward earnings with consensus growth of 0%pa for 5 years and operating margins of 5%, the variant perception hurdle does not appear all that great. The risk in this space is a company going the way of the dinosaur.
Both investor types are forecasting either higher growth rates or higher margins or a combination of those two factors compared to the market consensus and what is baked into the stock price today.
It is as simple as that. One other possible variant perception relates to the realm of undervalued/hidden/latent assets which occurs more on the value side of the divide (although effectively that is the implied assumption also on the growth side).
So for a growth investor when they come across a growth company trading at 30x forward earnings, implying 30%pa 5 yr growth and 20% operating margins, to have a variant perception they are either forecasting growth greater than 30% and/or operating margins greater than 20%. Implicitly they are also forecasting the future multiple to be 30x or greater. Lots of moving parts in that equation and lots of hope (the future) embedded in todays price. As long term holders the odds are usually not in their favor. Although if they hit the jackpot and get a genuine emerging leader that turns into a market leader then all their misses are likely to be made up by that one single hit.
For a value investor, looking at a company trading at 10x forward earnings with consensus growth of 0%pa for 5 years and operating margins of 5%, the variant perception hurdle does not appear all that great. The risk in this space is a company going the way of the dinosaur.
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