Wednesday, August 24, 2016

North Carolina Pension Fund Sure Misses Harlan Boyles

Last week North Carolina State Treasurer Janet Cowell posted the Government Investment Operations Report for the North Carolina Retirement System Pension Fund for the fiscal year ending June 30, 2016.  The report says the treasurer spent $595 Million managing the $87 Billion pension fund investment portfolio.  That's up from just $57 Million when the pension was $59 Billion when Harlan Boyles retired in 2000.

NC Retirement System Pension Fund
Expense Ratio
Funding Ratio
S&P 500 Return*
7-year Annualized Return

While the pension fund assets have increased 47% since Harlan Boyles retired, the expenses incurred managing the investments have increased an astonishing 1,044% while the funding ratio has fallen 17 points.  This irresponsible explosion of investment expenses is a boon for Wall Street, but a silent fiscal catastrophe for North Carolina, the burden of which will be borne by the pensioners and taxpayers for years to come. 

Tuesday, August 9, 2016

Index Fund Returns Crush North Carolina Pension Returns (Again)

North Carolina Treasurer Janet Cowell recently released investment returns for the state pension fund.  The press release touted the returns as being slightly better than average over the past 5 years (45th percentile).  However, it is important to keep in mind that the NC pension fund fails to beat a simple mix of low-cost Vanguard index funds.

The table below shows the annualized returns of the NC pension fund compared to a simple portfolio of 5 Vanguard index mutual funds.

Annualized Investment Returns
as of 6/30/2016

*The Vanguard portfolio uses the same asset allocation the pension fund had when Harlan Boyles left office in 2000, before alternative investments were introduced to the portfolio. The analysis rebalanced the allocation of the Vanguard portfolio once per year.

Treasurer Cowell pointed out that the pension earned 8.5% annualized over the last 7 years - which approximates her tenure as North Carolina's Treasurer.  The simple Vanguard portfolio would have earned 11.2% over the same time period.  This difference of 2.7% per year for 7 years translates into $20 billion of lost returns during Treasurer Cowell's tenure.

For a state whose annual budget is $22 billion, the expansion of alternative investments in the pension fund from nearly zero to over 25% has been a silent fiscal catastrophe.    

Wednesday, February 4, 2015

Payroll Adjustment Calculator and Take Home Pay Estimator

It's tax season and many folks will realize they are getting a huge refund.  While this might be considered good news, it also means you've given the government an interest free loan all year.  Alternatively, perhaps you discover you underpaid your taxes during the year and find you even owe a penalty for underpaying during the year.  

Click here for a handy payroll adjustment calculator.  

Grab your latest pay stub and use this tool to help figure out what changes you need to make to your tax withholding.  If your pay stub does not include information about the allowances you are claiming, you may need to go to your company's payroll department and ask to see what your W-4 currently looks like.  

After using the above tool, fill out a new W-4 by clicking here.  Or, go back to your company's payroll department and ask to fill out a new W-4 to change your future tax withholdings. 

Sunday, January 25, 2015

The Key to Lower Healthcare Costs

The key to lower healthcare costs is high-deductible health insurance plans combined with websites like this one--> (click here).  The cost-sharing aspects of high-deductible health insurance plans like those attached to healthcare savings accounts (HSA) encourage patients to shop around for the best care at the best price for non-emergency care.  

The website above shines a light on certain hospitals and doctors that charge more than twice what similar hospitals and doctors charge for similar care.  I'd like to see the website above add patient reviews.  Reviews combined with clear pricing would do for healthcare costs what Amazon has done for almost everything else.

It's incredible to think, most of us put much more research effort into buying a new car, TV, vacation spot, or even a small power tool than we do choosing a doctor or hospital for hip replacement or hernia repair.  

Sunday, January 4, 2015

Historical Asset Class Returns 2014

Here's the latest historical asset class returns chart ending 2014.  Overall, a terrific year for investors with all but one asset class rising (I don't consider commodities an investment asset class).

It is funny how the financial markets can make smart people do really stupid things.  The top performing asset class in 2014 was long-term bonds which rose nearly 20% in 2014.  In fact, US Treasury bonds with maturities longer than 20 years rose nearly 30% in 2014! 

This must come as a nasty a surprise, to the North Carolina State Treasurer who sold billions of dollars of bonds just before they sky-rocketed in value.  This was just the latest example of North Carolina Treasurer Janet Cowell zigging while the markets zagged.  Five years ago Ms. Cowell sold stocks in favor of "inflation-sensitive" assets (aka: commodities).  Her inflation portfolio has lost value over the past five years while the stock market rose each and every year and is now at all-time record highs.  2014 was another dismal year for speculators in commodities.  Oops! Sorry, North Carolina pensioners, likely no COLA (cost of living adjustment) for you.

If you rebalanced your portfolio last year (and you should always rebalance once or twice each year) you would have PURCHASED long-term bonds after they fell in 2013.  If you did, congrats, you are a better investor than North Carolina's State Treasurer.

The chart above shows the last 15 years of investment returns by asset class. On the far right I have calculated the 25-year average for each asset class and pointed out the best and worst annual returns for the past 25 years for each asset class.  I love this chart - which is why I put it on the back cover of every book I have written.  Almost everything you need to know about investing can be learned from this chart:
  1. Stocks beat bonds over the long-run.  In the far right columns of the chart you will notice that all 4 of the major stock classes have a higher 20-year average return than all 4 of the major bond classes. You will notice that the various stock classes averaged 8-14% annual returns over 25 years while the various bond classes averaged just 5-8%.  
  2. Stocks don't beat bonds EVERY year, but they win about 75-80% of the time.  You will also notice that a stock class claimed the top spot in 10 out of the past 15 years (and 19 out of the past 25 years).

Friday, October 31, 2014

How to Win at Investing

Below are links to short clips of a fantastic documentary called "How to Win the Losers Game." The documentary, produced by Sensible Investing, basically tells you the nasty truths about investing, but also tells you the very best way to go about investing.  Much of the documentary is focused on the United Kingdom, but most of the data and statistics hold true here in the United States as well the rest of the world.  

Regardless of where you live and invest, regardless of your age, EVERYONE should watch these video clips.  
In a nutshell, the lowest cost investment strategy will always beat a more expensive strategy.  So, you should index everything and ignore the so-called "experts" that chatter endlessly about the ups and downs of the markets, and always stay the course.  

Part 1  (6:02)
Part 2  (7:38)
Part 3 (10:41)
Part 4 (12:08)
Part 5  (8:37)
Part 6 (13:16)
Part 7  (8:14)
Part 8  (9:49)
Part 9  (8:55)
Part 10 (10.01)

If you are on Twitter, @InvestSensibly is well worth following.  (I'm on Twitter too @relmbo). 

Monday, October 20, 2014

The Self-Employed Should Open a Solo 401(k)

I ran some calculations on a self-employed retirement calculator, and as the chart below clearly shows, the Solo 401(k) is a superior retirement plan for the self-employed regardless of income level.  The Solo 401(k) allows self-employed individuals to put more money into a tax-advantaged account while reducing taxable income better than any other retirement vehicle.  

The one advantage the SEP IRA has, is that it can be opened AFTER the tax year has ended.  A SEP IRA can be created as late as April 15th (or as late as October 15th if you extend your tax return) for the previous tax year.  Thus, while the Solo 401(k) is the best way to go, you must open the 401(k) account before the end of your tax year (December 31st). 

Being self-employed means you are both the employee and employer when it comes to retirement plans.  You must create the solo 401(k) account before December 31st and make the employee contribution also before December 31st.  However, the employer contribution can be made as late as April 15th the following year (or October 15th if you extend your tax return).

Self-employed individuals can contribute up to 100% of their compensation to a maximum of $17,500 (plus an additional $5,500 if aged 50+) for their employee portion and up to 25% of net income for the employer contribution up to $34,500 for a grand total combined maximum contribution of $52,000 for 2014 ($57,500 if aged 50+).