Three Financial Facts of the Week: March 10, 2016

Japan
Wikimedia

Fact #1
Growth in “labor quality,” a measure of the skill set of the average worker, has declined in the last few years, according to a recent research note from J.P. Morgan Chase. In 2015, the growth in overall workforce skills contributed less than 0.1 percentage points to GDP growth, the smallest contribution of labor quality to growth since 1979.
Source: Wall Street Journal

Fact #2
Among industrialized economies, only the U.S. and Japan are growing at similar rates compared with their pre-financial crisis growth rate, after adjusting for changes in the working-age population, but both economies have still grown more slowly than expected.
Source: JobMarketMonitor.com

Fact #3
As tighter border controls are continuously put into place across Europe, the European Union could face up to 18 billion euros, or $19.6 billion, each year in lost business, steeper freight costs, and interruptions to supply chains, according to a recent report by the European Commission.
Source: New York Times

China Stumbles in Race to Pass US as Biggest Economy

Wang Zhao/Getty Images

For the first time in almost a decade, China has lost ground in catching up with the U.S. economy, when output is measured in dollars.

U.S. gross domestic product increased $590 billion in 2015 from a year earlier, according to data released Friday. China’s economy, while reporting 6.9 percent growth for the year, added $439 billion, as a weaker yuan sapped the value of output gains in dollar terms, according to data compiled by Bloomberg.

“The U.S. has come back from the financial crisis with robust technology innovation leading the recovery, while China’s economy is heading down,” said Niu Jun, an international- relations professor at Peking University. “The number itself isn’t a specific reason for being either too optimistic or pessimistic, but if China can’t successfully reform its economy, the real gap between the two will expand, and it will take longer for China to catch up.”

Last year was the first time since 2006 that China made no progress in closing the gap with the world’s largest economy. While the U.S. economy expanded 2.4 percent for a second straight year, China slowed to the weakest expansion pace in a quarter-century as old growth drivers like heavy industry and exports slow.

As for 2016, China’s economy is forecast to expand 6.5 percent in real terms, while the yuan is projected to depreciate to 6.79 against the dollar, down more than 7 percent from the average level in 2015.

“Whether China can catch up the U.S. in dollar terms is not important, but whether China can sustain its development is,” said Xia Le, a Hong Kong-based economist at Banco Bilbao Vizcaya Argentaria SA. “As long as China can expand 5 percent a year in the next decade, it’s only a matter of time until it surpassed the U.S.”

Written by Bloomberg News

(Source: MSN)

Special Report on the Recent Market Volatility

Market Crash

The last 5 trading days (August 18th – 25th) have been crazy ones in the market, with the Dow Jones Industrial Average down 9.39%. Here are five key points to help you understand how Lake Avenue Financial has been managing their client portfolios during this time.

1. This market correction, long overdue, is exactly what Lake Avenue Financial’s proactive portfolios are built for. We have been prepared for this correction and have been cautioning against one for the last 6 months.

2. Our hedge positions and conservative allocations are working exactly as intended. Our long-term investments in gold and managed futures have helped smooth out the ride and have actually appreciated in value during this last week.

3. Our investments in municipal bonds and short-term bonds bolstered our actively managed portfolios. The fixed income portion also has been a great place for clients to wait as we realized a financial “storm” was on the horizon. We will maintain these positions till we feel that the “storm” has passed.

4. We will be utilizing the dollar cost averaging strategy to get back into the equity markets. This strategy allows us to purchase shares of any stock, mutual fund or ETF over a 3 to 6 month time frame. This way, we are not trying to time the market. Instead, our clients are getting an average price per share. Thus reducing the impact of volatility in the markets.

5. Lake Avenue Financial has partnered with the cutting edge technology at Riskalyze to help pinpoint our client’s acceptable level of risk and reward with unparalleled accuracy. This helps us ensure that our client’s portfolio aligns with their investment goals and expectations.This technology allows us to make the right financial decisions, manage their assets more efficiently and minimize the volatility in our client’s accounts. We invite you to click on the button below for your free portfolio risk analysis.

With your FREE Portfolio Risk Analysis, you’ll finally be able to answer questions like…

What is my Risk Number?

Does my existing portfolio fit me?

How would I align my current portfolio with my Risk Number?


What would happen to your portfolio if the 2008 crash happened again? Or how would the bonds in your account react in a rising interest rate environment?

 

If you want the answer to these questions and more, just click on the button below!

How to Invest a Market that Might Keep Crashing

Last week was awful for world markets. And this week is off to a horrific start.

The bad news has some commenters warning that the end of the current bull market could be upon us.

Fortunately for investors, there’s a smart, time-tested way to keep investing even in the face of a crash, as long as you have a good long-term perspective.

There’s A Correct Way To Buy Stocks If You’re Convinced The Market Will Crash

The stock market is great for investors who have the benefit of long-term investing horizons. It’s also better suited for investors who aren’t concerned about perfectly timing market tops and bottoms.

Having said that, taking a longer-term view is good for investors worried that they may be buying at the top of the market.

A classic strategy called dollar-cost averaging can help reduce risks surrounding an asset falling in price. The concept is straightforward — you invest a fixed amount of money in an asset once every fixed time period. If the asset’s price drops, you will be getting more shares of the asset for the same amount of money, and so if and when the price recovers, you will have spent less per share, on average, than if you had bought the shares at their peak pre-fall price.

Dollar-cost averaging isn’t about losing money as the stock market falls. It’s about buying increasing amounts of shares at cheaper prices, which means bigger returns during the rally.

How Dollar-Cost Averaging Worked Brilliantly During The Last Crash

To see this in action, we came up with a simplified thought experiment.

We considered what would have happened to an investor jumping into the stock market at the last peak: October 2007. This was arguably the worst time to buy. Our hypothetical investor puts $50 into an S&P 500 index fund at the start of every month, starting in October 2007 — the last stock market peak before the beginning of the great recession.

Here is what happened to the S&P 500 starting at that peak:

DCA SPX chart August 2015

© Provided by Business Insider DCA SPX chart August 2015   

The index dropped more or less steadily until the worst moments of the financial crisis in fall 2008, causing the full-on crash, and only began to turn around in March 2009.

The key to our investor’s experiment is that they are staying consistent. No matter how stock prices move, they will always put $50 into the index fund on the first trading day of every month.

Based on changes in the value of the S&P 500 index, we calculated our investor’s price return, less the $50 monthly cost:

DCA price return august 2015

© Provided by Business Insider DCA price return august 2015   

The value of our investor’s portfolio as of August 1, 2015, is $7,230.13. If they instead had taken their $50 each month and held it as cash, they would have just $4,750. So, the price return on this investment — even though they started at the last peak, just before the market started to go downhill — is $2,480.13.

This is a respectable 52.2% return. That averages out to about a 5.5% annual rate of return.

To get another perspective on this, here is the percent gain or loss, compared to taking $50 each month and holding it as cash:

DCA percent difference august 2015

© Provided by Business Insider DCA percent difference august 2015   

Things start out looking pretty dire, as the economy fell into its deep recession through mid-2009, with the S&P 500 reaching a minimum in March of that year. At the lowest point for our investor, at the start of February 2009, they would be down about 36%.

Because human beings are often overly averse to risk, our hypothetical investor might have been tempted to abandon their investment plans during the bad months. That is, they might look at this chart and panic about the drop:

DCA percent difference down arrow august 2015

© Provided by Business Insider DCA percent difference down arrow august 2015   

But if our investor sticks with their plan and keeps putting $50 in every month, even through the dark times, once the market bounces back, they end up doing quite well:

DCA percent difference up arrow august 2015

© Provided by Business Insider DCA percent difference up arrow august 2015

Here’s Why You Never Hear About This

Unfortunately, dollar-cost averaging isn’t sexy. It’s much sexier to sell at the top and buy at the bottom.

Obviously, your returns would be much higher if you win the stock market lottery by perfectly timing the tops and bottoms of the market. However, almost everyone who tries to do this will find themselves losing money and lots of it.

If you are investing for the long haul and can hang on through watching your portfolio’s value drop temporarily in bad times, starting to invest in stocks, even near a peak, may not be as terrifying as it looks. The market has always bounced back sooner or later; so if you can hold on until that later, don’t panic.

Written by Andy Kiersz of Business Insider

(Source: Business Insider)

Millennials Don’t Trust the Stock Market

In the years since the financial crisis, stocks have rebounded strongly, returning over 200% value to investors.

Despite this strong news, millennials are skeptical of diving in.

According to a survey done by Goldman Sachs, almost 40% of young people do not want to invest in the stock market at all. Another 45% say they are skeptical and would play it safe by investin small amounts or by trading low risk strategies.

It seems logical that millennials, usually defined as those age 18-30, would be cautious regarding the market. During their lifetimes there have been two major recessions, the dot-com bubble burst and the housing market crash.

Millennial trust in market

© Provided by Business Insider Millennial trust in market

Among those who said they wouldn’t invest, around 20% said they wouldn’t invest because they did not know enough about the market.

Goldman’s survey also asked how much time millennials would spend gathering financial advice if they were to invest in the market. 56% of those surveyed said the would spend an hour or less gathering information if they were going to make an investment. A little over a quarter said they would spend as much time as they needed to get the best advice.

time spent getting financial info

© Provided by Business Insider time spent getting financial info

Written by Bob Bryan of Business Insider

(Source: Business Insider)

7 Things You Need to Know About the Crisis in Greece

Copyright Trine Juel/Flickr
Copyright Trine Juel/Flickr

With Greece nearly certain to default on a 1.6-billion-euro bond payment due June 30, the long-feared prospect of Hellenic financial chaos is just about here.

The nation’s banks closed this weekend, and the government imposed controls of the movement of capital in and out of the country. A Greek referendum is set for Sunday, in which voters will decide whether to accept more austerity or face the prospect of being booted from Europe’s currency union.

1. How bad is the problem? 

Greece owes foreign creditors about 280 billion euros, including $242.8 billion to public or quasi-public entities, such as the International Monetary Fund, the European Commission and European Central Bank. It doesn’t have the cash to make the interest payment due this week, and the failure to make a deal to restructure and refinance the obligation raises the prospect of an imminent default. The two sides are talking about an 18-billion-euro package to refinance some of that debt.

Greece’s private creditors took a write-down of about 75 percent on debt owed to them in 2012, but the public entities have resisted a similar move.

2. Why have talks broken down? 

The so-called Troika of the IMF, ECB and EC are looking for a combination of spending cuts (the most politically sensitive of which are to pensions that function as the Greek equivalent of Social Security) and tax increases. Greece’s top tax rate of 42 percent already applies to annual incomes as low as 42,000 euros. In addition, the nation has a value-added tax of as high as 23 percent, and Social Security taxes are also much higher than in the U.S. The country is already having huge problems collecting taxes it is owed. Greek Prime Minister Alexis Tsipras, pointing to the nation’s 25.6 percent unemployment rate, argues that Greece can’t handle more austerity.

3. What did the government do this weekend?

Greece’s anti-austerity Syriza party called for an election, hoping voters would back its push to get creditors to back down. It also imposed so-called capital controls to halt the flight of money out of the country and closed banks for a week.

While most domestic transactions are little affected, there is a daily cash-withdrawal limit of 60 euros, and international transactions are subject to approval. Greek banks had been reporting a sharp decrease in deposit balances since at least April, cutting into the banks’ ability to meet their own international obligations. Europe has also been helping Greek banks with a program called Emergency Liquidity Assistance, but Goldman Sachs economist Huw Pill said Sunday that the assistance could end early this week as the rest of Europe tries to cap its total exposure to Greece.

“Although the Greek government has repeatedly stressed that this is not a referendum on Greece’s euro membership, we believe that in practice it is,” IHS Global Insight economist Diego Iscaro wrote Monday. “In the event of a ‘no’ win, Greece’s euro zone membership will be seriously jeopardized. The creditors are unlikely to change their position markedly, and it would be impossible for the Greek government to accept the current proposal after being defeated by popular vote.”

4. How will the mess affect the markets in Europe and the U.S.?

European markets traded sharply lower on Monday, and the Dow Jones Industrial Average opened nearly 1 percent lower in New York. But the effect may be short-lived: S&P Capital IQ published a 70-year historical analysis of past market shocks that found events like this produce an average decline of 2.4 percent on the next trading day, which has been recovered in an average of 14 trading days.

“Greece represents less than 2 percent of the EU’s GDP,” S&P strategist Sam Stovall wrote. “By itself, its default or exit won’t upend the EU. … Yet if this drachma drama triggers a market decline in excess of 10 percent, not seen since October 2011, it may be a blessing in disguise. As history has shown, prior market shocks have usually proven to be better opportunities to buy than bail, primarily because the events did not dramatically alter the course of global economic growth.”

5. What happens if Greece leaves the euro or is forced to leave the euro?

Estimates of how little Greek drachmas may be worth are all over the place, from 340 to the U.S. dollar to as little as 1,000 drachmas to the dollar. Even before Greece is (or isn’t) forced to leave the currency union, there is talk of the government meeting its obligations in so-called “parallel currency,” whose value is highly uncertain.

6. Has the IMF’s austerity program worked so far?

No. Austerity has been the rule in Greece since the first debt-restructuring program was approved in 2010. But Greece’s unemployment rate has nearly tripled since, and annual gross domestic product has dropped 100 billion euros, or almost 30 percent. Greece’s slashed spending and tax hikes brought the nation’s “primary deficit,” or deficit before debt-service payments, into surplus territory in 2010. But the program was the equivalent of slamming on the economy’s brakes: Output dropped so rapidly that the primary deficit is now again 2 percent of Greek gross domestic product even with tough controls on spending. That’s not much different than the U.S., but the U.S deficit as a percentage of output is declining because the U.S. economy Is growing.

7. What does this mean for Greek tourism?

Uncertainty overshadows Greek tourism. And the stakes of not interrupting tourism are high indeed: Tourism accounts for 18 percent of the nation’s economy and employs a quarter of its workers, according to the Association of Greek Tourism Enterprises. Greece attracts as many as 17 million annual visitors, twice the nation’s population, and is virtually the only industry still growing in a nation where an estimated 59 businesses are closing each day.

But already, tourists are reporting difficulty getting cash, because automated teller machines are running out, and the threat of capital controls had some merchants unwilling to accept credit cards. Over time, leaving the euro and devaluing the drachma would lead to a period where Greek vacations should be very cheap for Western tourists.

How long that would last, and the impact it would have on hotels and other merchants, is hard to forecast. But resort owners are resisting creditor proposals to end or curtail their tax breaks for resorts on more remote islands and to raise the value-added tax on lodging.

Written by Tim Mullaney of CNBC

(Source: CNBC)