Disclaimer: Information presented on this program is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Discussions and answers to questions do not involve the rendering of personalized investment advice, but are limited to the dissemination of general information and may not be suitable for members of the listening audience. A professional adviser should be consulted before implementing any of the strategies presented.
Does Your Company Offer a Brokerage Window?
Posted on Friday, July 19, 2013
My question for today, ďAre you stuck choosing from the menu of investments inside of your 401k, or can you go outside your companies menu of mutual funds while youíre still working for the company?Ē
Now, most employees and even many employers are unaware that there is something called a brokerage window that allows you to expand your existing investment options beyond the limited menu of mutual funds that your company 401k currently offers you. This window allows you to choose from thousands of investments that are not on your 401k menu, giving you access to best in class funds, stocks bonds and just about anything else that you can imagine. Let me give you and example: Letís say you have a 401k with the ABC Company, and the plan custodian is Fidelity. And letís say your plan offers 25 different mutual funds to choose from anywhere from growth to value to target retirement date funds.
The challenge for employees and employers is that many 401kís do not offer the top performing funds available in each space, and even fewer of them update their menus as funds underperform or over perform. And we find this to be true especially with big companies. Their menu of choices, many times, has not been updated for years and they have a ton of 1 and 2 star funds and a few good ones here and there. So, from an employeeís perspective, you want access to the best funds in each category to ensure that youíre most important retirement asset performs well enough over the years to allow you to retire. From the employerís perspective, you want to give your employees access to the best investments available, not only to make them happy and increase their chances of a stable retirement, but also to protect your company from breach of fiduciary responsibility lawsuits. Many law suits against employers have been filed by groups of employees arguing that the company did not give employees access to the best investments available, hurting their chances of a secure retirement. So, a brokerage window solves issues on both sides of this issue. It allows employees to go outside the fixed menu to access the best in class funds available, and it protects the employer from law suits. So it really is a win win.
Currently, of all of the 401k plans in America, about 50% already have brokerage windows installed yet only 3% of employees take advantage of them because most employees donít even know they exist. So if you are an employee and want to know if your employer has this window already installed in your current plan, send me an email with the name of your company and I can quickly tell you. If the answer is yes, you can either use it on your own like a self directed IRA or my team and I can help you make the right choices when it comes to your risk tolerance and integrating it with the rest of your investments. If it turns out that you donít have a window in your 401k we can help you get your employer to install one.
As the Dow Jones and the S&P500 break new highs this morning, the question that begs to be asked is: How do you know when a market is a bubble thatís close to bursting? Are there any tell-tale signs that signal the coming of a major correction, or are we destined to be victimís of these sudden losses in our retirement and investment portfolios from now until the end of time?
Letís talk about our bloated stock market thatís gone from 6600 on the Dow in 2009 to todayís new high of 15572 in only 4 years, while economic growth and prosperity has seen barely any improvement to speak of. So the question I posed was, ďHow do you know when a market is a bubble thatís close to bursting?Ē Now many people smarter than I would argue that bubbles are almost impossible to identify because the very nature of a bubble is that people wildly jump into a particular market, driving prices higher than anyone thought possible. So, in that frenzy itís hard to see what is real and what is hype. But I think there are some tell-tale signs that I have seen repeat themselves over my 30 year career as a portfolio manager and a financial advisor that I think are worth mentioning. And all of these signs seem to occur close to the top of bubbles:
1) Fear of missing out (herd instinct)
2) Bad News is Good News and Good News is Good news
3) New economic paradigms (no more inflation)
4) When Government is the driving force behind prosperity
So, am I telling you to run for the hills and sell all of your stocks? Not at all, what I am saying is to recognize that we are on borrowed time with this stock market run, and that many of the signs of a bubble are undeniable, and that it is only a matter of time before we will experience another huge downturn.
As expected, Fed Chairman Ben Bernanke sneezes and the whole bond market gets a cold. Last week, after some mildly suggestive comments about the possibility of QE3 ending early (if the economics justified that), the bond market took a huge hit in value, over the fear that if the Fed pulls out the needle and stops buying $85 billion per month of Treasuries and Mortgage bonds, that the price of bonds everywhere will fall and yields will rise. In theory, that is accurate because whenever the biggest buyer leaves any market prices fall, but hereís the question: Whatís it going to take for investors to start focusing on the real economic numbers, instead of trying to read into every sentence from the Fed meetings? So should you start selling your bonds and shifting them to stocks? Are bonds riskier than stocks at this point?
Letís take a look at what all the excitement is about in the bond market and how the market thought they heard Chairman Ben Bernanke say something that he said he didnít really say. If youíve been following the financial news in the last week, you know that Mr. Market thought it heard Mr. Bernanke say that he might consider slowing down QE3 a bit earlier than his 2015 target IF the economic data justified those actions. Well Mr. Market heard everything Chairman Bernanke said EXCEPT the IF part. Shortly after the comments were made, the bond market sold off sharply over the fear that if big daddy pulls out the needle and slows down or even stops buying $85 billion of bonds from the market per month, that prices would fall and interest rates would rise, which is exactly what will happen.
So, letís take a step back for a moment and first off, look at the real numbers and the promises that the Fed Chairman has consistently repeated countless times. The latest attempt to stimulate the most stimulus resistant economy America has ever seen (including the great depression) is referred to as QE3 and was aptly renamed on this show as QEternity, because it had no dollar limit and no official end date.
Now, as true as that may be, what QEternity did have was quantitative measurements of the economy that would determine whether or not the stimulus would slow down or end.
These quantitative measurements were unemployment needed to drop to 6.5% and our economy needed to start growing at an annual rate of 2.5%. Seems pretty clear to me but somehow, while someone was dissecting Mr. Bernankeís sentences during the Fed meeting, it was interpreted that all bets are off and stimulus is ready to end. So, regardless of why that happened or what might have been said to confuse or mislead the markets, letís see if the reality of ending QEternity is viable any time soon.
Weíre now about 4 years into the ďrecoveryĒ and we have record unemployment of 7.6% and GDP growth of 1.4%. Now when I say ďrecord unemploymentĒ Iím not just trying to be dramatic to entertain you (although I have been known to do that), the fact is that never before in the history of the United States Of America have we been 4+ years into a recovery and had 7.6% unemployment. Never. And never before have we printed and thrown this much money at a problem with barely any results. And please donít point to the real estate market over the last year as some kind of proof that the governments plan is working. Remember, we had super low rates for over 4 years, and real estate did nothing and its movement in the last year has little to do with rates. But we donít have time to talk real estate today, because thatís another fascinating show in itself. So, back to unemployment at 7.6%. From the beginning of QETernity, the target to back off the stimulus was 6.5% unemployment. We are miles away from that number.
OK so how about the growth of our nation? The true measurement of the strength of our economy is known as the GDP. The target for that one is to grow the economy at an annualized rate of 2.5%, in order to back off the stimulus. Last month our annualized growth rate in America was a barely alive 1%, and for the entire quarter, the annualized grow rate of our great nation was 1.4%...a far cry from 2.5%.
So here is my take on all of this noise. The numbers are what they are, and with record high unemployment of 7.6% (5 trillion later) and an economy that is barely growing at about 1.4%, we are nowhere near what we need to slow down the spigot of government money, according to Chairman Bernanke.
So having said all of that, itís my guess that bonds will have a nice rebound over the summer, driving yields back down and prices back up. I could be wrong, and it wouldnít be the first time, but thatís what makes sense to me. As for stocks, the stage is set for a big correction, so be conservative.
So gold continues to get crushed with little economic justification for its decline. So what just happened? Are central banks dumping gold to encourage even more money to move into the over-bloated stock market? Are speculative traders causing the drop and just waiting for all of the amateurs to get out so they can get back in? Is gold dead since inflation seems to be a problem of the past? Has the world started to trust government again?
Well before I answer those fascinating questions, letís just stop and remember the three things that drive gold prices as an investment: Fear of inflation, distrust of government printed fiat currency and geopolitical instability.
Alright, so letís talk about inflation. Basically, we have none at the moment with a 1.4% GDP growth, which is way below Chairman Bernankeís target of 2.5%, which is the official number that we are told will shut down the money printing party of $85 billion a month that he and the boys at the Fed are currently doing. The other condition, if you recall, is getting unemployment down to 6.5% from its current 7.6%. OK, so even though we donít have any inflation to speak of right now, unless people believe that inflation is a thing of the past and unbridled money printing has no inflationary consequences, I think the inflation fear factor is still in play.
OK, how about distrust of government? Well, in a recent survey here in America, the most stable government in the world, 72% of people surveyed by Pew research said that they do not trust their government! Imagine if that poll was taken in Turkey, Europe, Sweden or any of the other places where thousands of protestors are demonstrating. So, I think the distrust factor is still really high, and I think that covers geopolitical instability as well.
As far as fundamental reasons people would want to own gold, they have not changed. So what has changed? Well, there are many theories out there that Iíve studied, and none of them make much sense to me. Most of them seem to contradict the others, except for oneÖIf the largest holders of gold on the planet are quietly selling some of their stash, then all fundamental bets are off for the moment. One theory that is reasonable is that the US government, which happens to own 8000 tons of gold, almost 3X more than any other country, is dumping a bit to drive the price down in order to drive more people into other investments that make the economy look better, like stocks and real estate. And if you think about it, gold does nothing for the economy and simultaneously makes other investments look bad in comparison when it gets real expensive. And remember, gold has been a better investment than stocks, bonds and real estate for the last 13, 10, 7 and 5 year periods, so to think that the FED might want to help gold off its high horse a bit is not crazy.
Now, while this may sound a bit like a conspiracy theory, keep in mind, the Federal Reserve is constantly manipulating things to get us to act in a certain way. For example, keeping interest rates at artificially low rates is designed to manipulate people into borrowing and spending more money and more recently, to make bonds less attractive than stocks.
Flooding the system with printed money is designed to weaken the dollar, making our exports cheaper and to artificially suppress interest rates on Treasury bonds. The Fed even is allowed to go in and buy stocks to stabilize the markets or drive them up a bit, if they deem that appropriate. So, to say that itís a far-fetched idea that the Fed might be selling some of their 8000 tons of gold to crack the price and make things in other areas look better is naive.
Now, obviously I donít know whatís really causing the unexplainable drop in gold, but I will say that for you longer term players, gold is cheap here although in the short term, it may get cheaper.
So what should you do? Well if you are a trader, there is probably some more downside here until it gets to its next support level, which is around 1150 from its current price of 1225 per ounce. If you are a longer term thinker there are several ways to play gold: hold onto it, buy more or hedge your position with options which can limit your downside as well as let you participate in some of the upside when this trend reverses.
After 7 months of almost uninterrupted gains for major US stock indexes, in the last 2 days the S&P500 has been smacked and is now 5% below its all time high set about a month ago. So, did Ben Bernanke do it again? Did his comments at this weekís Fed meetings convince the financial markets that he might actually at some point start backing off of his $85 billion per month stimulus plan known as QEternity? Are investors around the world over-reacting as many markets today are plunging, fearing a world with less American dollars being pumped into the system, or is this the beginning of a long overdue market correction right in time for the favorite season for correctionsÖsummer? Also, how should gold be reacting to this versus what itís really doing?
Letís take a quick look at what the heck is happening in the financial markets and how the market seems to be panicking a bit from the cryptic comments of Chairman Bernanke that basically said, ďsomedayĒ, based on bunch of feelings and not definitive economics, that he might, maybe, possibly slow down the spigot of government dollars being printed and pumped into the balance sheet of banks under what is known as QE3, a program created by the Fed to buy about $85 billion per month of treasury and mortgage off the balance sheets of banks and put them on ours. Now, I could easily sit here and rip into the merits of governments buying bonds from banks simply as another form of bank bailouts, but I wonít. I could rant and rave about how the government is devaluing our dollars in order to allow banks to dump mortgage and treasury bonds and replace them with cash which firms up their balance sheet and reserves at our expense as a countryÖbut I wonít. I could tell you how hyperinflation is historically the outcome of any government who does what we are doingÖ but I wonít, because none of it matters at the moment. What I mean is that in the long run, real economics always trump government policy and manipulations. Sure, government fiscal policy can have an impact on certain some things for a while, but real economics always win out and always have.
So, if things donít seem to makes sense to you in the financial markets, donít feel bad, because things donít make sense when things are artificially manipulated to a point where the markets and prices are so disconnected from the underlying realities that you start to go numb as an investor.
Let me give you a recent example of things that donít make sense. Ben Bernanke indicated that if the economy continues its slow recovery that he might be able to back off on the artificial stimulation. Now on the surface, you would think that the market would celebrate that because it means the economy might actually be able to eventually stand on its own, which should be good for stocks, yet today and in recent days, the market feels like it is starting to panic and is possibly setting itself up for a good old summer crash. Here is another interesting thing that doesnít make sense on the surface: housing prices over the last year have started to rise for the first time since 2006, and yet we are at a 60 year low of the percentage of Americans that own homes. How could that be if we have less people buying new homes, yet prices are rising? If you listened to the show a few weeks ago, you know that the residential real estate market is dominated by investors who have no intention of living in the homes they buy, and that is a formula for a short term rise in prices and a long term sell off as soon as the cap rates donít work any longer for the investors. Here is the last one Iíll mention today: Gold has been the number one performing investment for the last 10 years, 7 years and 5 years, and yet, during that period, we had barely any inflation at all. And today gold is plummeting again; almost 32% off its high from April of 2011, and the fear is that that we may never see inflation again, because we havenít for a while.
The world might seem like itís gone mad, but have no fearÖthe fundamentals will rule, which means stock prices will likely be much lower at some point, gold will likely be much higher and real estate will not recover back to its artificially inflated numbers of 2006, which we all know was caused by a bubble, not real economics. And speaking of bubbles, remember the rule: bubbles cannot be reinflated once they burst, only new ones can be created, and in this case, it looks like the government pulled the needle out of the real estate bubble and stuck it into the stock market.
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