Paper Chase: Social Impact Investing and Comfortable Retirement
GDP grew at 3.2% in the 4th quarter and consumer spending exports and investments were all strong. The Fed has decided to slow bond purchases from $85 billion a month to $65 billion a month showing real confidence in the economy.
Janet Yellen’s confirmation allows us to look back on the tenure of Ben Bernanke as Fed chair. Bernanke managed to avoid lengthy and sharp deflation that is indicative of deep recessions like the ones we’ve seen after deep recessions in the past. There have certainly been bumps in the road with the unwinding of the stimulus and questions about the costs versus the benefits. I think a B is a fair grade.
Right Time to Taper?
In spite of a weaker than expected employment report, the economy is still doing alright allowing the Fed to slow the pace of stimulus. Since the announcement was originally made, investors have had nine months to adjust so it’s not unexpected. While the markets have reacted to hints of a reduction, there was no market dislocation in December when bond reduction began.
There were several factors among the emerging market nations in distress including homegrown high inflation and big current account deficits. These countries were also slow to raise rates, and many countries have upcoming elections all leading to potential political and economic uncertainty.
While the Fed can’t do much, there are measures it can take to temper the effects of declining emerging markets. International swap agreements would give dollar liquidity to other central banks around the world. The Fed could also increase their asset purchases with much reluctance.
Coming off of a bullish 2013, it’s certainly possible that we have a year of volatile, flattish markets. The market could certainly decline, or economic reports could weaken it, but I think the correction has ended. The market was looking for a reason for correction, and I believe emerging markets provided that. The momentum is positive all around in the United States. We’ve had back to back quarters of 5% growth from the private sector, making the U.S. a beacon of global stability. I expect the dollar to continue to go up.
What I’m Doing
Investors today expect and prepare for the worse. Now is the time to take advantage of the correction to get more weighted in stocks and slightly away from bonds, though it would be preferable to put more cash into play instead of reducing your bond position. I would look particularly in sectors that got beat up such as materials, industrials, and manufacturing.
MyRa investments will be in treasury bonds with no employer contribution. The principal, which can be withdrawn without a tax penalty, has a limit of $15,000 or thirty years of saving. MyRa is a modest, low yielding plan providing total security. While the ten year return is 3.61%, instruments earning 7-8% will be necessary to retire comfortably.
What should you consider to retire comfortably? Well, a couple in good health at sixty on average will have one partner live until 92. This means at sixty, you’ll most likely have one-third of your life left. If you’re now in your twenties, you will most likely live into your nineties. In other words, start a savings plan towards retirement immediately.
There is a retirement crisis in the country that will bear out over the next decades. Workers are not saving towards retirement, and company plans that provide defined benefits which now include defined contribution, lack participation. This problem is pervasive in the private sector. The public sector does a better job of saving.
People don’t save because they either can’t afford to, or they fear the market. Lack of wage growth and mobility towards jobs exacerbates this phenomenon. Quite simply, people are spending what they earn and have forgotten how to save.
Social Impact Investing
Celebrities and bankers are very involved in social impact investing. Bono and Brian Moynihan of Bank of America team up for red.org to prevent mother to child transmission of HIV in the world’s poorest countries. Bank of America reaches one out of every two American households and Red.org has generated over $240 million. Matt Damon has helped launch water.org, a social impact investing fund that brings micro-financing loan capital to the developing world assisting those without access to affordable capital.
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