Study Links Medical Costs and Personal Bankruptcy – BloombergBusinessWeek 06-04-09

Salient to Investors:

David Himmelstein and Steffie Woolhandler of Harvard Medical School, Elizabeth Warren of Harvard Law School, and Deborah Thorne at Ohio University found:

  • Medical problems caused 62% of all personal bankruptcies filed in the US in 2007, and of those, 78% had medical insurance at the start of their illness, including 60.3% who had private coverage, not Medicare or Medicaid.
  • Filers were mostly solidly middle class before medical disaster hit, with 2/3 home owners and 3/5 had attended college.
  • Medically bankrupt families with private insurance reported average out-of pocket medical bills of $17,749. The uninsured’s bills averaged $26,971. Families who started out with insurance but lost it during their illness, medical bills averaged $22,658.
  • More than 90% of medically related bankruptcies were caused by high medical bills directly or medical costs that were so high the family was forced to mortgage their home. The remaining 8% went bankrupt because a medical problem caused them to lose income.
  • Individuals with diabetes and neurological illnesses such as MS had the highest costs, an average of $26,971 and $34,167, respectively.
  • Hospital bills were the largest single expense for half of all medically bankrupt families.

Himmelstein said health insurance offers little protection for middle-class Americans as most have policies with so many loopholes, co-payments, and deductibles that illness can put you in the poorhouse – your family is just one serious illness away from bankruptcy.

Woolhandler said covering the uninsured is not enough, reform also needs to help families with insurance by upgrading their coverage and assuring that they never lose it.

In 1981, only 8% of families filing for bankruptcy cited a serious medical problem as the reason, and in a 2001 study of 5 states, the same researchers found that illness or medical bills contributed to 50% of all filings.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.

Keeping faith with stocks – London Business School March 2009

Salient to Investors:

Elroy Dimson, Paul Marsh  at London Business School and Mike Staunton at London Share Price Database write:

A decade is too short to judge stock returns.

The last decade has been the lost decade. Since 2000, the MSCI World index has lost a third of its value in real terms, while the major markets all gave negative real returns of an annualized -4 per cent to -6 per cent.

The 1990s was a golden age as inflation fell from the high levels of the 1970s and late 1980s, lowering interest rates and bond yields, and expected profits growth accelerated leading to strong performance from equities (except in Japan), bonds and T-bills.

$1 invested in US equities in 1900 with dividends reinvested grew at an annualized rate of 9.2 percent per year to $14,276 by the end of 2008, versus an almost 25-fold increase in consumer prices. $1 invested in equities in 1900 showed annualized real returns of 6%, or purchasing power by 582 times, versus 2.1% in bonds, or 9.9 times, and 1% in T-bills, or 2.9 times.

The two world wars were less damaging to world equities – real returns of -18 per cent and -12 per cent – than the peacetime bear markets – real returns of -44 per cent to -54 per cent.

The worst bear market was 1929 to 1931 – the world index fell by 54 per cent in real US dollar terms – followed by the current crash at -53 per cent.  The 21st century has hosted 2 of the 4 worst bear markets in history.

The four “golden ages” were the 1990s when the world index showed a real return of 113 per cent, the 1980s with a 255 per cent real return, the decade after WWI with a 206 per cent real return, and from 1949 to 1959 with a return of 516 per cent.

Using the US experience could give a misleading impression of equity returns elsewhere or of future equity returns for the USA itself because of “success” bias – since 1900 the US rapidly became the world’s foremost political, military, and economic power.

Over the last 109 years, the real equity return was positive in every location, typically at 3 to 6 per cent, and equities were the best performing asset class everywhere. Bonds beat bills everywhere except Germany.

In most countries bonds gave a positive real return, but 5 countries experienced negative returns and were also among the worst equity performers – their poor performance dates back to the first half of the 20th century, and were the countries that suffered most from the ravages of war and civil strife, and from periods of high or hyperinflation, typically associated with wars and their aftermath.

The US was not the top performer, nor were its returns especially high relative to the world averages. Many of the best performing equity markets over the last 109 years tended to be resource-rich and, quite often, New World countries.

Over the long run, investment in equities has been accompanied by significant volatility.

Treasury bills are preferred over long-term government bonds as the risk-free benchmark because bonds are subject to uncertainty about future inflation and real interest rates.

The annualized premium, relative to bills from 1900 to 2008, was 5% for the US, 3.7% for the world ex-US and 4.2% for the world:  relative to bonds was 3.8% for the US and 3.4% for the world.

Over a single year, equities are so volatile that most of an investor’s return comes from capital gains or losses, with dividends adding a relatively modest amount, but the longer the investment horizon, the more important is dividend income. For the seriously long-term investor, the value of a portfolio corresponds closely to the present value of dividends, while the present value of the eventual capital appreciation dwindles greatly in significance.

Real US dividends grew at an annualized rate of just 1.2 per cent, while most countries recorded less than 1 per cent. Dividends and probably earnings have barely outpaced inflation. Over the last 109 years, the price/dividend ratio of the world index grew by just 0.36 per cent per year.

The annualized historical risk premium relative to bills on a globally diversified equity portfolio was 4.2 per cent, comprising 3.2 per cent for the amount by which annual dividends exceeded the real risk free rate, 0.65 per cent per year from real dividend growth, and 0.36 per cent per year from an increase in the price to dividend ratio.

Dividend growth turned out to be higher than expected. From 1900 to 1949, the annualized real return on the world equity index was 3.5 per cent. From 1950 to 1999 the annualized real return was 9 per cent.

The 4.2 per cent per year historical equity premium on the world index exceeded expectations, and was higher than the premium investors required in advance. Adjusting for non-repeatable factors, we infer that investors expect an annualized equity premium relative to bills of 3 to 3.5 per cent, below the long run historical premium and well below the premium in the second half of the 20th century.

Investors should not expect an immediate return to either previous market levels or previous high rates of return as markets will take a long time to recover from the battering they have received during the credit and banking crisis. We were spoiled by the high returns of the 1980s and 1990s.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.

The Stock Market: A Look Back – Investopedia 02-26-09

Salient to Investors:

Elroy Dimson, Paul Marsh and Mike Staunton, authors of “Triumph Of The Optimists: 101 Years Of Global Investment Returns” (2002) wrote:

During the last century, the US achieved market dominance, the exchanges were consolidated, and secular sector rotation occurred.

Most of the available historical stock market data for the years prior to 1970 was only for the US market.

The US stock market was the big winner of the 20th century, increasing its weighting to 47% of the world’s total, while generally outperforming the rest of the world’s markets due to larger investments in physical and human capital, greater technological advancement, and greater productivity growth.

The UK took much longer to recover from the world wars, slowed by a diminished role after the collapse of the British Empire and the complicated bureaucracies of the colonial system. Problems with defense spending, labor, productivity and investment plagued the British economy and markets until the mid 1970s.

The US suffered relatively little disruption to its stock market during the world wars and did not have the prolonged declines that many European and Asian markets experienced. The US economy largely benefited from the wars, with GM and IBM thriving. (Phillipe Jorion and William N. Goetzmann said the Japanese stock market saw a 95% decline in real returns between 1944 and 1949.)

The economic and stock market performance in the US has not been typical of other countries and, therefore, should not necessarily be extrapolated into the future.

The stock markets of 1900 had more regional exchanges than those of today – the US and UK each had 20 to 30 different regional exchanges.

Short-term sector rotation pales in comparison to the changes that can take place over the long-term. The economies of 1900 and 2000 had few similarities – 84% of the sectors represented by market cap today were of immaterial size or non-existent in 1900.

Paul Bairoch and Richard Kozul-Wright said that between 1930 and 1990, the cost of a 3-minute telephone call from New York to London dropped from $245 to $3.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.

How to Make the Most of Your 401(k) Plan – The Wall Street Journal 12-17-08

Salient to Investors:

If you are beginning your career, you are probably in a lower tax bracket than you will be at retirement so a Roth (401)k may make sense, unless you think your income will decline at retirement age, when a regular 401(k) may make sense – or both if you can afford it.

Have a long-term investment plan with a mix of low-cost mutual funds and stick with it even if the market falters.

Don’t touch your 401(k) before you retire.

Think about paying off high-interest debt with 401(k) loans, especially high-interest credit card debt, but remember in most cases, the loan must be repaid within 5 years, and if you leave your company, normally within 60 days, or else you will get hit with income taxes and early withdrawal fees.

Roll over the funds if you leave your job.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.

Gone Fishin’: Seasonality in Trading Activity and Asset Prices – Princeton October 2007

Salient to Investors:

Harrison Hong at Princeton and Jialin Yu at Columbia find:

  • Data from 51 stock markets shows that trading activity falls during the summer because investors are gone fishin’.
  • Stock returns are lower in the summer than non-summer. This effect is larger for the top ten markets than for the markets outside the top ten and more pronounced in Europe and North America than in other regions. Stock returns are lower during the summer for countries with significant declines in trading activity.
  • Turnover and returns are a bit higher during the winter but these effects are not statistically significant.
  • Share turnover was substantially higher during the dot-com period than after the collapse of internet stock prices.
  • Share turnover and liquidity tend to be higher during periods when the market is doing well. There is no difference in turnover between May to October and the rest of the year.

Lamont and Frazzini (2007) find that stock returns are higher around earnings announcements.

Bouman and Jacobsen document that mean return is lower from May to October compared to the rest of the year for a large cross-section of 37 countries.

Kamstra, Kramer and Levi posit that seasonal affective disorder (related to a lack of sunlight) increases investor risk aversion and find consistent with their hypothesis that returns are lower during the summer when there is more daylight in a sample of nine countries.

Read the full article at

Seasonality and the Stock Market – Graziadio Business Review 2006 Volume 9 Issue 4

Salient to Investors:

Professor Marshall Nickles at Pepperdine writes:

The most broadly disseminated personal investment advice is mediocre; otherwise the public would likely be wealthier.

Buying stocks on November 1 and selling on April 30 – the Favorable Period Strategy (FPS). Buying stocks on May 1 and selling on October 31 – the Unfavorable Period Strategy (UPS).

The Ulcer Index – the size of price declines from stock market peaks over a period of time – for the period 1970-2005 for the DJIA was 13 percent versus 16 percent for the S&P500 and higher for the Russell 2000 and others broad market indices. During severe market declines, indexes with higher Ulcer Index readings fall faster and further in price.

The central risk of simply buying and holding the DJIA is is that it is easy to stick with in a rising market but not in a falling market – facing drawdown, or unrealized loss, when everyone is often so negative and the temptation to sell is irresistible.

A buy and hold strategy can face a market moving sideways or down for periods as long as ten years – the total return for the DJIA during the 1970s decade was only 3.65 percent.

Periodic losses require gains that are much larger than the losses themselves in order to offset them. A $10,000 portfolio earning 17 percent over a ten-year period would grow to $48,070, but the a $10,000 portfolio losing 10 percent of its value every other year, but earning 27 percent in the alternate years would grow to only $19,500. The portfolio that loses 10 percent in alternate years would need to earn 52 percent during the positive years to match the first portfolio.

From January 1973 to October 2002, 4 of the five bear markets experienced market lows during the period May 1 to October 31.

From 1-1-70 to 12-31-05, $10,000 fully invested in the DJIA from November 1 to April 30 would have returned 1,681 percent versus 1,266 percent for a buy and hold strategy and minus 15 percent for a strategy invested from May 1 to October 31.

Investing only in the year before the presidential election and in the money market for the other three years the return was 2,406 percent and with no losing years.

Investing in the DJIA from November 1 to April 30 only, but invested for the entire pre-presidential election years (9) during the period would have returned 4,685 percent with 5 losing years.

Read the full article at

The Downward Spiral – The Millennium Adventure 02-05-03

Salient to Investors:

Jim Rogers Writes:

  • The dollar is in a decline that could lose its status as the world’s reserve currency, which would lead to a huge decline in the standard of US living.
  • A sound currency reflects solid economic fundamentals: little or no debt, a trade surplus, a stable balance of payments, and growing international reserves.
  • US national debt to foreigners is $6.4 trillion, with interest payments last year of $333 billion. US imports greatly exceed exports. Direct foreign investment is declining every year. US reserves of $60 billion would last 3 minutes if creditors began cashing in.
  • Greenspan is the grand maestro of this economic debacle.
  • Imprudent monetary and fiscal behavior has always led to economic disaster. In 1920s Germany, in 1970s England which had to be bailed out by the IMF – in 50 years Britain had lost its status as the richest nation in the world and its Empire.
  • Long the Swiss franc, Japanese yen and Danish krone, despite their governments adopting the US dangerous habit of manipulating their own currencies to compete in the world market.
  • The success or failure of the Euro is one of the most important questions of the twenty-first century. The world needs the Euro, because it needs an alternative to the dollar.The European Union has everything going for it—an enormous population base, a balance of trade surplus, most of its nations are creditors, not debtors.
  • Long the euro despite it being a flawed currency because many member nations don’t run a tight ship. Germany has again started running up huge debts, the Portuguese are running an enormous deficit, the French says they are going to ignore the treaty establishing the euro.
  • The Chinese yuan may eventually have its day in the sun, certainly if the euro fails.

Read the full article at

Click here to receive free and immediate email alerts of the latest forecasts.