Historical Asset Class Returns Chart 2013

2013 was a fantastic year for investors unless you mistakenly thought gold was an investment (Buying gold is a speculation, NOT an investment since it pays no dividends or interest. However, it is very pretty!).  Gold fell -28% in 2013 while US stocks rose 32-38%.  Long-term bonds and Treasury Inflation-Protected Securities (TIPS) had one of their worst years on record with each falling -9% in value in 2013.  In addition, tax-free bonds lost roughly -2% while high-yield or junk bonds returned +5%.

Hopefully you were not unfortunate enough to fall for a slick Wall Street pitch to "diversify" by "betting" on the following commodity prices.  However, I know certain prominent investors were burned by these sales pitches. 

2013 Returns
Crude Oil -2%
Heating Oil -3%
Aluminum -10%
Wheat -15%
Gold -28%
Silver -37%
Corn -38%

The chart above shows the last 15 years of investment returns by asset class. On the far right I have calculated the 20-year average for each asset class and pointed out the best and worst annual returns for the past 20 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 9-14% annual returns over 20 years while the various bond classes averaged just 5-7%.  
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 11 out of the past 15 years (and 20 out of the past 25 years).

Great Op-Ed by SEANC regarding North Carolina Retirement System

Great Op-Ed in Raleigh's News and Observer by Ardis Watkins of the State Employees Association of North Carolina (SEANC):  
"The Truth About the Underperforming NC Retirement Fund"

State of North Carolina's Budget (Tax Revenues and Expenditures)

Two cool pie charts outlining where North Carolina's money comes from and where it goes can be found by clicking here. 

It Appears the North Carolina State Treasurer is in Violation of G.S. 147-68

The North Carolina State Treasurer is required by law (G.S. 147-68) to make quarterly reports to the State Legislature.  These quarterly reports have always been posted to the Treasurer's website (click here and see the bottom of the page).  However, no reports have been posted since December of last year (2012).  It appears the Treasurer is fully three quarters behind in complying with the law, and will soon be a full year behind in her quarterly reports.

 These "Government Investment Operations Reports" (commonly referred to as the "Gov Ops Reports") are the only place investment expenses are ever reported for the North Carolina Retirement System (NCRS) pension fund.  Most notably, these reports include the amounts paid to external investment managers.  

These expenses are not even reported in the so-called "Annual Report" of the Treasurer - which is completely ridiculous.  If expenses are not reported in a Treasurer's Annual Report, why have the report at all?  There are plenty of happy pictures of the Treasurer and staff in the Annual Report, but not a single page that I would consider a "financial statement."  In the most recent Annual Report (18-month old data as of 6/30/2012), a single page (p. 100) contains one simple summary table which is the only list of expenses to be found in the entire report.  No details what so ever, just one summary table.  And, this lone table of expenses does not even include a comparison to last year's expenses.

MOST IMPORTANT, the one table of expenditures buried on page 100 of the Annual Report DOES NOT include ALL of the Treasurer's or NCRS departmental expenses.

North Carolina Retirement System Pension Fund Should Index

Last week I blogged about how bad North Carolina's pension investment returns have been.  This week, I thought I'd point out a simple solution to the poor performance.  A simple portfolio of Vanguard Index Mutual Funds not only would beat the performance of North Carolina's pension, but has outperformed more than 75% of all public pensions over the past 3, 5, and 10 year periods. (Click here and see page 4 for investment returns of all public pensions). 

	North Carolina Pension Investment Returns as of 9/30/2013
		1-Year		3-Year		5-Year		10-Year
	North Carolina Pension	9.97%		8.82%		7.78%		6.89%
	Median Public Pension	12.25%		10.29%		8.23%		7.27%
	Passive Index Mutual Funds*	12.33%		12.00%		10.33%		8.42%
	NC Under-performance vs. Index Funds	-2.36%		-3.18%		-2.55%		-1.53%
	NC Tax-payer cost for under-performance	$2	Billion	$8	Billion	$11	Billion	$13	Billion

Why all pensions don't index is a mystery to me?  North Carolina’s pension at $83 billion, like many public pensions, are so large, it's inconceivable that their 240+ external managers could collectively outperform "the market."  It is ridiculous – and expensive – for them to even try. 

North Carolina Pension Investment Performance is Bad, Again

North Carolina Treasurer Janet Cowell recently released North Carolina’s pension investment returns.  As usual, the press release did not provide any relevant point of reference as to whether the returns were “good” or “bad” other than to compare them to an obscure, undefined, and obviously cherry picked benchmark.  On the surface, it would appear the returns are “good” since every return for every time period was higher than this mysterious, ever changing, self-managed and self-serving “benchmark.”

I thought I’d compare North Carolina pension investment returns to the average public pension returns as published by The Bank of New York Mellon Public Pension Universe (click here and see page 4).  Glancing at the table below, I believe the word “bad” adequately describes North Carolina’s pension investment performance.  Over any time period one wishes to compare, the North Carolina pension investment performance lags the median public pension returns.

North Carolina Pension Investment Returns as of 9/30/2013
	1-Year		3-Year		5-Year		10-Year
North Carolina	9.97%		8.82%		7.78%		6.89%
Median Public Pension	12.25%		10.29%		8.23%		7.27%
Under-performance	-2.28%		-1.47%		-0.45%		-0.38%

Just to put the last year’s investment performance in perspective, if the $83 billion North Carolina pension merely had average returns, the pension would have earned an extra $2 billion. This is roughly the equivalent of 10% of the entire North Carolina state annual budget!  Or, this $2 billion short fall is roughly the equivalent of 20% of the entire state's annual spending on education. 

If you are a state employee or teacher and you are upset about budget cuts and a lack of raises, just imagine what the state of North Carolina could do with an extra $2 billion. That could be a reality if only your pension investments could achieve “average” returns.

Same-Sex Marriage and Tax Return Filing Status in North Carolina

The Internal Revenue Service (IRS) now allows same-sex married couples to file a "married filing jointly" tax return.  However, many states do not allow these couples to file using the "married filing jointly" status.  My home state of North Carolina recently released a directive for these couples outlining how to file.  You can read the full directive by clicking here. 

These couples will file their federal tax return using the "married filing jointly" tax status, but will also need to recalculate a separate "pro forma" federal tax return under the single status for each individual (or head of household as the case may be).  Both will need to file separately with North Carolina and attach a "pro forma" federal tax return to their state tax return.  

Thus, these couples will need to fill out a total of 5 income tax returns:

1 - Federal income tax return submitted to the IRS (Married)
2 - Federal income tax returns submitted to the North Carolina Department of Revenue (Single)
2 - State income tax returns submitted to the North Carolina Department of Revenue (Single)

Please feel free to send me your questions on this or any other topic at:  InvestorCookbooks(at)gmail.com