Why Play is Vital - No Matter Your Age

Monday, March 16th, 2009

Make sure you watch this highly enlightening video about the vitality of all forms of play, of recreation.

A pioneer in research on play, Stuart Brown says humor, games, roughhousing, flirtation and fantasy are more than just fun. Plenty of play in childhood makes for happy, smart adults — and keeping it up can make us smarter at any age. (Recorded at Serious Play in May 2008, in Pasadena, California. Duration: 26:42.)

Tags: Adults, Duration, Fantasy, Flirtation, Fun, Humor Games, Pasadena California, Pioneer, Play In Childhood, Serious Play, Smart, Vitality
Posted in Markets | No Comments »

WSJ: Deleveraging - it’s not over till it’s over

Monday, March 16th, 2009

The following is from the Wall Street Journal, March 11, 2009.

“Deleveraging has more to go. Just how far could become clearer when the Federal Reserve releases fourth-quarter flow-of-funds data Thursday. The third quarter marked the first decline in household debt since recordkeeping began in 1952, fueled by a record 2.4% drop in mortgage debt.

“Debt likely shrank even faster in the fourth quarter. According to already-released Fed data, non-mortgage consumer credit fell at a 3.2% annual rate. Another decline in mortgage debt, which is four times as big as non-consumer debt, is almost certain, given the collapse in sales and home-equity extraction, as well as surging loan delinquencies and defaults.

“Shedding more debt would be a healthy thing, since household debt levels in the third quarter were equal to 96% of gross domestic product and 130% of disposable income.

“The trick is figuring out just how far this deleveraging should go. There is ‘no magic number’, suggests T. Rowe Price chief economist Alan Levenson, but one benchmark could be 1998, when foreign savings began to rise. Back then, the percentage of household income spent satisfying creditors was less than 12%, in line with the long-term average, compared with a near-record 14% now.

“Household debt was just 66% of GDP in 1998; and returning to that level would entail a 30% plunge in debt. That may be too extreme, particularly if the US homeownership rate keeps a floor under mortgage debt, despite declining from its 2005 peak.

“Suffice to say that consumer debt ratios will likely keep falling. An income boom would do the trick painlessly, but that seems unlikely. Otherwise, consumer spending will slow, keeping pressure on the financial sector, which is shedding debt much more slowly than households.”

Source: Jeff D. Opdyke, The Wall Street Journal, March 11, 2009.

Hat tip: Investment Postcards

Tags: Chief Economist, Consumer Debt, Consumer Spending, Debt Levels, Debt Ratios, Delinquencies, Disposable Income, Fed Data, Financial Sector, Hat Tip, Homeownership Rate, Household Debt, Household Income, Levenson, Magic Number, Mortgage Debt, Opdyke, Recordkeeping, T Rowe Price, Wall Street Journal
Posted in Markets | No Comments »

David Swensen: How to Sleep Soundly

Monday, March 16th, 2009

Yale’s Alumni Magazine for March/April 2009, features Marc Gunther’s interview with Yale Endowment’s Super-Investor, David Swensen, and details some of Swensen’s key advice to investors about portfolio management. It is a must read. Here is an excerpt.

In just under a quarter-century as Yale’s chief investment officer, David Swensen ‘80PhD has generated Bernard Madoff-like returns — except that Swensen made his money honestly. Under his leadership, Yale’s endowment has generated an astonishing 20 consecutive years of positive returns, from 1988 to 2008.

Yale Alumni Magazine: Has it been a difficult time for you?

Swensen: In some ways, yes. I absolutely love the idea of producing ever-increasing levels of support for Yale. Looking ahead to the next few years, that’s not going to be in the cards. That’s a difficult reality to deal with.

But in terms of the day-to-day work, managing through this economic and financial crisis is absolutely fascinating. It’s exhausting, but fascinating.

Y: It may be fascinating to you, but it’s discouraging for those of us who have watched our 401(k) values plummet. Given all the turmoil and uncertainty, what should individual investors do?

S: If an individual investor followed the program I outlined in Unconventional Success [see box], they probably did reasonably well, through the crisis, thus far. They’d have 15 percent of their assets in U.S. Treasury bonds. They’d have another 15 percent in U.S. Treasury inflation-protected securities. Those two asset classes have performed well.

Of course, the other 70 percent of assets are in equities, which have not done well. With all assets, I recommend that people invest in index funds because they’re transparent, understandable, and low-cost. So, the equity holdings have gone down step-by-step with the declines in the market.

I recommend that investors rebalance.

But I also recommend that investors rebalance. Rebalancing is even more important amidst these huge declines in the stock market because it presents a great opportunity. People can sell the Treasury securities that have appreciated dramatically to bring their allocation to the 15 percent target, and they can redeploy those funds into domestic equities and foreign equities and emerging market equities and real estate investment trusts, all of which are now much cheaper, and therefore have higher prospective returns.

Y: Explain this idea of asset allocation, please.

S: Asset allocation is the tool that you use to determine the risk and return characteristics of your portfolio. It’s overwhelmingly important in terms of the results you achieve. In fact, studies show that asset allocation is responsible for more than 100 percent of the positive returns generated by investors.

Y: How can that be?

S: It’s because the other two factors, security selection and market timing, are a net negative. That’s not surprising. They’re what economists would call zero-sum games. If somebody wins by buying Microsoft, then there has to be a loser on the other side who sold Microsoft. If it were free to trade Microsoft, the amount by which the winner wins would equal the amount by which the loser loses. But it’s not free. It costs money. It costs money in the form of market impact and commissions if you’re trading for your own account, and it costs money in terms of paying fancy fees if you are relying upon an investment advisor or mutual fund to make these security-specific decisions. For the community as a whole, all those fees are a drag on returns.

That’s why the most sensible approach is to come up with specific asset allocation targets that you can implement with low-cost, passively managed index funds and rebalance regularly. You’ll end up beating the overwhelming majority of participants in the financial markets.

Y: So people should not be afraid of stocks now?

S: Not only should they not be afraid, they should be enthusiastic. One of the great ironies is that if you had talked to the average investor 18 months ago, he or she would have thought it was a pretty good idea to buy stocks. In recent months, the same investors despair about their portfolio and are fearful about putting money into the equity market.

That’s 180 degrees wrong. They should have been cautious 18 months ago, when prices were much higher than they are now. They should be enthusiastic today.

Y: That runs counter to human nature.

S: That’s one of the really tricky things about the investment world. It’s very different from a lot of things we deal with, day in and day out. If you talk to a businessman, a businessman is going to feed the winners and kill the losers. But in the investment world, when you’ve got a winner you should be suspicious about what’s next. And if you’ve got a loser, you should be hopeful — although not naively hopeful.

To read the whole interview, plus the additional material, click here. (make sure you read the items highlighted in blue on the right hand side)

Tags: Asset Classes, Bernard Madoff, Chief Investment Officer, David Swensen, Equity Holdings, Index Funds, Individual Investor, Individual Investors, Inflation Protected Securities, Marc Gunther, Portfolio Management, Quarter Century, Rebalance, Rebalancing, Treasury Inflation Protected Securities, U S Treasury, U S Treasury Bonds, Unconventional Success, Yale Alumni Magazine, Yale Endowment
Posted in Bonds, Emerging Markets, Markets, Oil and Gas | No Comments »