A reader sent me a link to a tool published by ING. Ingyournumber.com asks for six simple inputs and spits out, with clever animation, your “number,” that is, the dollar amount you will need at the start of retirement.
The six inputs are your current age, martial status, current income, planned age of retirement, desired annual retirement income, and through what age you want to have income. (In other words, how long you expect to live.)
I can immediately see why they need the last three, but the first three are mysterious. My Money Blog wrote about this tool in September and attempted to reverse-engineer the inputs. His theory on the current age input is that it is used to work out how many years you have until retirement, which is then used to adjust your retirement income needs for inflation. Apparently, all inputs are assumed to be in 2010 dollars.
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How much would you pay to lend money to the government? Most of us have this arrogant idea that the government should pay us to borrow our money. And yet, last week a Treasury auction of $10 billion in 5-year bonds resulted in a price that will yield negative 0.55% to their new owners.
It is not quite as crazy as it sounds. These are Treasury Inflation Protected Securities (or TIPS) that will yield inflation plus some stated interest rate. So these bonds are set to return to their owners inflation minus 0.55% over five years. Given that normal unprotected five year bonds are currently paying only 1.18%, this implies a five year average inflation rate of 1.73%.
Annual inflation over the past five years has averaged 1.83% and over the past twenty five it has been 2.82%. If you think inflation over the next five years will be higher than 1.73%, then the TIPS, negative interest and all, are a better bet than the regular Treasurys.
So it is not crazy after all.
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Is now a good time to invest in stocks?
Like the weather, the market outlook is a topic that can always be discussed, whatever the circumstances, and generally without much in the way of a definitive conclusion. It is often reduced to a question of whether or not the market is expensive or cheap just now.
Lately, the most popular measure of market valuation appears to be the current market price divided by the last ten years average earnings. This is variously known as PE10, the cyclically adjusted PE (CAPE), or Shiller’s PE, in honor of the Yale economist Robert Shiller who has popularized it. (But would never claim to have invented it. He calls it CAPE and so shall I.)
In just the past week, CAPE was sagely mentioned in both The New York Times and The Wall Street Journal. The Times called it “a conservative method” and used it to make the case that stocks are not particularly cheap at the moment. The Journal used it to make the argument that the market can be effectively timed, but left it to the reader to draw his own short-term conclusions.
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Time to review the latest cutting-edge academic research, as discussed in our country’s leading business newspaper. A report in the Wall Street Journal from Monday brings us two items that expand our understanding of that mysterious beast known as the stock market.
The first item is a recently released report from the Investment Company Institute (the trade group for mutual fund companies) which revealed that the average mutual fund investor’s willingness to take risk is lower now than it was two years ago before the market experienced its well publicized unpleasantness.
It is a report that is just chock full of enlightening insights. A person only needs to skim the chart captions to learn a lot. Turns out, “Tax-Deferred Accounts Are A Popular Way to Hold Mutual Funds.” And “Fund Performance Is the Most Important Factor Shaping Opinions of the Fund Industry.” Further, “Mutual Fund Industry Favorability Rises and Falls with Stock Market Performance.”
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Earlier this week The Wall Street Journal ran a piece on, of all things, the importance of the correlation coefficients between the returns of investments. I have mixed feelings about it.
On the one hand, correlation between asset returns is a neglected subject of great importance. The mid-Twentieth Century realization of its central role was the start of modern financial theory as we now know it. A professional level understanding of risk begins and ends with correlations, so it would make some sense for amateur investors to know at least the basics.
On the other hand, the article serves as a good reminder of why they know so little. Despite being called Why the Math of Correlation Matters, it contains no math. This might be because the author worried that her readers would find the math scary and hard, but I fear it is because the author herself finds it scary and hard.
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The six inputs are your current age, martial status, current income, planned age of retirement, desired annual retirement income, and through what age you want to have income. (In other words, how long you expect to live.)
Investing, Media, PF Blogs | Frank Curmudgeon | 
November 3, 2010 11:59 am | 
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