Luck Has a Lot to Do With It

I seem to be on a niceness streak lately. Yesterday brought another item written by somebody other than me which I nevertheless liked. Try as Investors Might, So Much Depends on Chance, from The Wall Street Journal, tells us that a person’s lifetime of investment returns is dependent primarily on  accidents of birth rather than skill.

We spend a lot of time wrestling with investment selection angst. This mutual fund or that one, active or passive, 20% in bonds or 50% in bonds, and so on. Those are important and hard questions, but there is a forest-for-the-trees danger here.

The biggest driver of long-term investment returns is not an investor’s skill but the overall market returns over the period. In other words, whether you wind up living large or living modestly at 70 is largely luck.

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More News from Surveyland

It is time to make another visit to the bounty of information that our nations’ intrepid polling companies gather for our enjoyment. I usually start these visits with a short proviso about how survey data about what people say to strangers who call them on the phone can’t hold a candle to data about what people actually do. Often I point out that survey respondents tend to be neither candid nor thoughtful in their responses.

Today I am going to skip all that. I will just give examples.

The Rich are Optimistic?

On July 12 Gallup found that Upper-Income Americans See Living Standards Improving. Depending on your outlook, that might have given you a sense of second order optimism, after all, those rich folks must know more than the rest of us, or perhaps bitterness of the-rich-just-get-richer sort.

In either case the feeling was likely short-lived because four days later The New York Times carried the front page headline Wealthy Reduce Buying in a Blow to the Recovery. The Times story was largely a compilation of anecdotes and quotes from assorted “analysts” who like to see their names in print. But the gist was that rich folks are pessimistic enough about the future to cut back on spending.

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The Mysterious Cash-In Refinance

Today I am going to explain something complicated, so pay attention. Particularly if you write for the Wall Street Journal. My topic has to do with the exotic topic of homeownership.

Many homeowners owe money on a special type of loan collateralized by the house, called a mortgage. Sometimes, they “refinance” these mortgages, often to take advantage of a lower interest rate. Generally, that is no more complicated than paying off lender A with money borrowed from lender B.

However, and here is where it gets really confusing, sometimes the money from lender B is not the exact same amount owed to lender A. If more money comes from lender B, then the refinancing is termed “cash-out.” It is called that because the borrower actually leaves the closing with more cash than they had previously.

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When to Start Collecting Social Security, Revisited

Today is the first anniversary of the posting of one of my few evergreen items, When to Start Collecting Social Security. Coincidentally, just yesterday I came across an item in Smart Money that made me realize I needed to update my analysis to include an interesting wrinkle in the Social Security rules.

To recap, a person is allowed to decide when to start drawing Social Security payments from the government. You can get them at 62, at 70, or anyplace in between. There is an obvious attraction to getting it sooner rather than later, and about 45% of those eligible choose to start getting the checks on their 62nd birthday.

The reason that the other 55% hold off is that the older you are when you start, the bigger the checks become. The payments for a person starting at 70 are about 70% higher than for a person starting at 62. (But relatively few hold out all the way until 70. The median age is 63.)

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Strategic Mortgage Defaults and the Rich

It is rare that I read something I wished I had written, and even rarer that it come from a source belonging to the old media. When that happens I get one  of my infrequent opportunities to write something positive.

So today I write nice things about a post at The Atlantic by Megan McArdle. (Okay, so a blog post is not exactly old media, but it’s from the The Atlantic, a magazine older than most rocks.) Of course, in saying nice things about that post I will be saying un-nice things about its subject, the New York Times. There is only so charming I can be.

Last week the Times, a publication I really need to learn not to take seriously, ran an article on its front page that was moronic even by its own rapidly decaying standards. Biggest Defaulters on Mortgages Are the Rich told us that rich folks are more likely to strategically default on their mortgage than ordinary wholesome middle class folks.

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