6/2:

"Happiness as a Driver of Risk-Avoiding Behavior" Free Download
CESifo Working Paper Series No. 3451

ROBERT J. B. GOUDIE, University of Warwick - Department of Statistics
Email:
SACH N. MUKHERJEE, University of Warwick - Department of Statistics
Email:
JAN-EMMANUEL DE NEVE, London School of Economics & Political Science (LSE)
Email:
ANDREW J. OSWALD, University of Warwick - Department of Economics, Institute for the Study of Labor (IZA)
Email:
STEPHEN WU, Hamilton College - Economics Department
Email:

Understanding the reasons why individuals take risks, particularly unnecessary risks, remains an important question in economics. We provide the first evidence of a powerful connection between happiness and risk-avoidance. Using data on 300,000 Americans, we demonstrate that happier individuals wear seatbelts more frequently. This result is obtained with five different methodological approaches, including Bayesian model-selection and an instrumented analysis based on unhappiness through widowhood. Independent longitudinal data corroborate the finding, showing that happiness is predictive of future motor vehicle accidents. Our results are consistent with a rational-choice explanation: happy people value life and thus act to preserve it.

Imagine living with 3 wives in one compound and never leaving the house for 5 years –  I think Bin Laden called the US Navy Seals  himself...

6/2: Past performance- , the S&P Persistence Scorecard, produced twice a year, tracks the consistency of top performers over consecutive annual periods. The latest Scorecard shows that very few funds manage to consistently repeat top-half or top-quartile performance. In fact, over the five years ending March 2011, only 0.96% of large-cap funds maintained a top-half ranking over five consecutive 12-month periods.

6/2:Financial Abuse Of Older Americans Has Increased Since 2008, According To Latest Data From The MetLife Mature Market Institute
Westport, CT - June 1, 2011 - Older Americans are losing $2.9 billion annually to elder financial abuse, a 12% increase from the $2.6 billion estimated in 2008, according to "The MetLife Study of Elder Financial Abuse: Crimes of Occasion, Desperation, and Predation Against America's Elders," 

6/2: Lotta crap- SUITABILITY WORKS - According to NAIFA, the belief that a uniform fiduciary standard would protect consumers better than the current suitability standards is a myth. A fiduciary standard requires a financial professional to put the client's interests first, while a suitability standard requires advisors to make certain the product they sell meets the needs of that consumer. According to NAIFA, the suitability standard is "robust and heavily enforced. A suitability standard is rules based and objective, as opposed to fiduciary, which is process-oriented and subjective." Many NAIFA members believe a fiduciary standard would force them to increase the costs of their services or leave the business entirely. That would not be a good thing for the economy or the many current clients of insurance and financial advisors...especially in the middle markets and small business arena.

There is no enforcement. No one has ever taught anything to substantiate suitability. It is and always has been just a word. This is moronic-  A suitability standard is rules based and objective, as opposed to fiduciary, which is process-oriented and subjective." 

6/2:

"Social Long Term Care Insurance and Redistribution" Free Download
CESifo Working Paper Series No. 3452

HELMUTH CREMER, University of Toulouse (GREMAQ & IDEI), Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Email:
PIERRE PESTIEAU, University of Liege - Research Center on Public and Population Economics, Centre for Economic Policy Research (CEPR), CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Email:

We study the role of social long term care (LTC) insurance when income taxation and private insurance markets are imperfect. Policy instruments include public provision of LTC as well as a subsidy on private insurance. The subsidy scheme may be linear or nonlinear. For the linear part we consider a continuous distribution of types, characterized by earnings and survival probabilities. In the nonlinear part, society consists of three types: poor, middle class and rich. The first type is too poor to provide for dependence; the middle class type purchases private insurance and the high income type is self-insured. The main questions are at what level LTC should be provided to the poor and whether it is desirable to subsidize private LTC for the middle class. Interestingly, the results are similar under both linear and nonlinear schemes. First, in both cases, a (marginal) subsidy of private LTC insurance is not desirable. As a matter of fact, private insurance purchases should typically be taxed (at least at the margin). Second, the desirability of public provision of LTC services depends on the way the income tax is restricted. In the linear case, it may be desirable only if no demogrant (uniform lump-sum transfer) is available. In the nonlinear case, public provision is desirable when the income tax is sufficiently restricted. Specifically, this is the case when the income is subject only to a proportional payroll tax while the LTC reimbursement policy can be nonlinear.


6/2: You figure it out- Predictive Systems: Living with Imperfect Predictors
by*
ˇLuboˇs P´astor
and
Robert F. Stambaugh
First draft: September 15, 2006
This version: July 21, 2008
Abstract
We develop a framework for estimating expected returns—a predictive system—that allows
predictors to be imperfectly correlated with the conditional expected return. When predictors
are imperfect, the estimated expected return depends on past returns in a manner that hinges
on the correlation between unexpected returns and innovations in expected returns. We find
empirically that prior beliefs about this correlation, which is most likely negative, substantially
affect estimates of expected returns as well as various inferences about predictability, including
assessments of a predictor’s usefulness. Compared to standard predictive regressions, predictive
systems deliver different expected returns with higher estimated precision.

6/2: And this one as well- Are Stocks Really Less Volatile in the Long Run?
ˇLUBOˇS P´ASTOR and ROBERT F. STAMBAUGH*

6/2:
> The conventional wisdom regarding the expected returns and volatility of equities is probably wrong. It is unwise to assume that U.S. equties will return the 7% real that they have in the past, or that stocks will be less volatile the longer they are held. First, investors in U.S. stocks in the past got lucky and that luck is unlikely to be repeated going forward. Second, the decrease in the volatility of stock returns over time is based on observed historical mean reversion; however, the uncertainty of future returns is higher over time and therefore expected volatility of future returns actually increases with time.

> Stocks should remain a part of a diversified portfolio; however, the amount allocated to stocks should be probably be lower than the conventional amount that is often recommended. The amount invested in stocks should be based on consideration of one's human capital. Human capital is a key factor in making investment decisions.

> In retirement, one's human capital goes to zero. Therefore, retirees should have a much smaller allocation to equities than commonly suggested. The 35%, 40%, or more that is commonly recommended and implemented in many target date funds at age 65, is too much.

> Age-based allocation rules, such as "age in bonds" should not be used in retirement. Instead, one should reduce the allocation to stocks to a modest level at retirement - 0erhaps 10% to 20% - and maintain that level throughout retirement.

> "Tail risk" insurance has become very popular since the 2007-2008 crash. However, this insurance has become quite expensive. Perhaps the rising price of gold and the negative real yields of T-Bills reflects the desire of investors to hold tail risk insurance. However, investors who are in a position to tolerate short term loss risk should be selling tail risk insurance instead of buying it, or at least not buying it at current prices.

> Passive index investing is the correct way to go for most investors. There might be active managers who can do better, but you and I don't have access to them even if there are.

> Invest in yourself first. For the foreseeable future there are very low expected yields everywhere you look in financial assets such as stocks, bonds, and commodities accompanied by high uncertainty. Investing in yourself - through education for example - has high expected return with very little downside risk.


6/1: I can do that:

Just three years before U.S. planes began bombing forces loyal to Col. Muammar al-Qaddafi,,Wall Street heavyweight Goldman Sachs (GS: 140.13, +1.47, +1.06%) reportedly enraged the Libyan leader by managing a $1.3 billion investment that lost a whopping 98% of its value.

6/`1: Here is a 'nice' article: But the stats are from 1946. Forgetabottit

results.

The Impact of Time Diversification on US Large Cap Equities using Annualized Return Data (1946-2009)

Holding Period

1 Year

5 Years

10 Years

20 Years

30 Years

Total Number of Periods

65

60

55

45

35

% Periods Meeting or Exceeding 5%

70.77%

76.67%

89.09%

100.00%

100.00%

Median

14.30%

13.24%

12.87%

11.68%

10.86%

Average

12.51%

11.70%

11.69%

11.43%

11.15%

Minimum

-37.00%

-2.39%

-1.38%

6.53%

9.46%

Maximum

52.60%

28.57%

20.07%

17.89%

13.75%

Delta (Max-Min)

89.60%

30.96%

21.45%

11.36%

4.30%

Standard Deviation

17.64%

7.43%

5.36%

3.09%

1.20%

6/1: Teach 401(k) Participants the Most Important Thing They Need to Know
"Remember, 401k investors have to plan on having only one chance to pick a right investment strategy to meet their goals. Plan sponsors need to help them focus on the practical, not on the theoretical."

6/1:  I knew it was bad but...........

Housing prices fell in March to their lowest point since the downturn began, erasing the last little bit of recovery from the depths achieved two years ago..

The Standard & Poor’s Case-Shiller Home Price Index for 20 large cities fell 0.8 percent from February, the eighth drop in a row. Prices are now down 33.1 percent from July 2006 peak.

“Home prices continue on their downward spiral with no relief in sight,” said David M. Blitzer, chairman of the S.& P. index committee.

Even as the economy began to fitfully recover in the last year, the percentage of homeowners dropped sharply, to 66.4 percent, from a peak of 69.2 percent in 2004. The ownership rate is now back to the level of 1998, and some housing experts say it could decline to the level of the 1980s or even earlier

The market signaled further trouble on Friday when the April index of pending deals was released by the National Association of Realtors. Analysts had predicted the index, which anticipates sales that will be completed in the next two months, would be down 1 percent from March. Instead, it plunged 11.6 percent.

a poll last November about when people thought the market would recover. A third of the respondents chose 2014 or later. But in a new poll, released this month, the percentage giving that answer rose to 54 percent.

The sharp decline in prices since 2006 has meant a lost decade for many owners. But what may prove even more discouraging to potential buyers is academic research showing that the financial rewards of ownership were uncertain even before the crash.

In a recent paper, a senior economist at the Federal Reserve Bank of Kansas City found that the notion that homeownership builds more wealth than investing was true only about half the time.


6/1:
Time for behavioral political economy? An analysis of articles in behavioral economics
Date: 2011-05-19
By: Berggren, Niclas (The Ratio Institute)
URL: http://d.repec.org/n?u=RePEc:hhs:ratioi:0166&r=cbe
This study analyzes leading research in behavioral economics to see whether it contains advocacy of paternalism and whether it addresses the potential cognitive limitations and biases of the policymakers who are going to implement paternalist policies. The findings reveal that 20.7% of the studied articles in behavioral economics propose paternalist policy action and that 95.5% of these do not contain any analysis of the cognitive ability of policymakers. This suggests that behavioral political economy, in which the analytical tools of behavioral economics are applied to political decision-makers as well, would offer a useful extension of the research program.

6/1:

Size Matters - When it Comes to Lies
Date: 2011-05-17
By: Gerald Eisenkopf (Department of Economics, University of Konstanz, Germany)
Ruslan Gurtoviy (Department of Business Administration, University of Trier, Germany)
Verena Utikal (Department of Economics, University of Erlangen-Nürnberg, Germany)
URL: http://d.repec.org/n?u=RePEc:knz:dpteco:1114&r=cbe
A small lie appears trivial but it obviously violates moral commandments. We analyze whether the preference for others’ truth telling is absolute or depends on the size of a lie. In a laboratory experiment we compare punishment for different sizes of lies controlling for the resulting economic harm. We find that people are sensitive to the size of a lie and that this behavioural pattern is driven by honest people. People who lie themselves punish softly in any context.

5/31:

Key bond yields fall amid global growth fears
Fall of 14%-15% in 10-year yields, the benchmark market interest rates for government bonds, has coincided with a sharp fall in inflation expectations in US, UK, Germany and Japan

5/30:
Debt: Joseph E. Gagnon,   Marc Hinterschweiger-  “That government debt will grow to dangerous and unsustainable levels in most advanced and many emerging economies over the next 25 years — if there are no changes in current tax rates or government benefit programs in retirement and health care — is virtually beyond dispute.”

debt as a percentage of gross domestic product is around 65 percent and rising fast. Much of the recent increase, up from 43 percent in 2007, is the result of the panic of 2008 and the ensuing recession, when the government stepped in to mitigate the damage.

5/30:  

Weak US data fuel fears of slowing recovery

By Robin Harding in Washington and Shannon Bond in New York

Published: May 26 2011 14:01 | Last updated: May 26 2011 18:15

The US economy has stumbled deeper into the mud of another soft patch, with revised data showing a weaker pattern of growth in the first quarter.

The Bureau of Economic Analysis kept its growth estimate at an annualised 1.8 per cent, dashing hopes that it would be revised upwards, and said that consumption growth was weaker than it previously thought



The latest data suggest the recovery will continue to be slow and painful, with average growth of about 3 per cent. That is only slightly above the long-run trend and will mean only a slow reduction in unemployment.

5/29: Getting better- but don't hold your breath. 


Government owned property- owner evicted.
Needs paint and minor repairs- good fixer-upper.
Possible lead contaminates.
Carpets need replacement- minor stains.
Safe neighborhood- close to law enforcement facilities.

5/29:

Dollar has a rough week as US growth disappoints
The euro has a volatile five sessions but still manages to fashion gains against the dollar, which is suffering from a disappointing update on first quarter growth and an increase in risk appetite

5/29:
EFM- I hear all sorts of arguments one way of the other about the sophistication of advisers. Oh Really? The fundamentals of investing have never been taught to a broker. RIAs are generally Series7 that filed with the SEC. If they were all so good, people wwould NOT have lost so much in 2000 nor 2008.

As for consumers- generally dumber than clams with money. They never got even as far as a broker.

And it all boils down to this- tell me what the risk is for the S&P 500 over a period of five years. If you can do that- and I bet no one reading the article can- then you are truly sophisticated. Unless you can do that for your own portfolio as well, you are clueless to the risk of potential loss to the allocation you have selected.

A consumer cannot select the risk of what they are doing by checking a few boxes off on a simplistic chart from a broker. Nonetheless, Vangaurd, fidelity et al do it because if they made in more concise, it would take longer than a commerical for "Can You Dance" and the attention span is lost.
Brokers like consumers to pick so they can avoid the fiduciary or even suitability responsibility.
Making money is not that difficult- it is the risk taken for every dollar expended. If you cannot identify the risk exposure, any offering or advice is suspect. You do not want to lose what has been earned. That is the real focus but it is not taught.

Errold Moody
PhD MSFP MBA LLB BSCE
Life and Disability Insurance Analyst

5/29:

Stock Prices and Monetary Policy Shocks: A General Equilibrium Approach" Fee Download
CEPR Discussion Paper No. DP8387

EDOUARD CHALLE, Ecole Polytechnique
Email:
CHRYSSI GIANNITSAROU, University of Cambridge - Faculty of Economics, Centre for Economic Policy Research (CEPR)
Email:

Recent empirical literature documents that unexpected changes in the nominal interest rates have a significant effect on stock prices: a 25-basis point increase in the Fed funds rate is associated with an immediate decrease in broad stock indices that may range from 0.5 to 2.3 percent, followed by a gradual decay as stock prices revert towards their long-run expected value. In this paper, we assess the ability of a general equilibrium New Keynesian asset-pricing model to account for these facts. The model we consider allows for staggered price and wage setting, as well as time-varying risk aversion through habit formation. We find that the model predicts a stock market response to policy shocks that matches empirical estimates, both qualitatively and quantitatively. Our findings are robust to a range of variations and parameterizations of the model.


5/29"  Fees- 
37 percent of individual advisers were charging management fees of more than 1.5 percent a year on portfolios of $250,000 to $500,000 that have an even mix of stocks and bonds. Meanwhile, just 23 percent levy fees of less than 1 percent.



These old broads and their fast cars................


5/29: Unemployment-  It will never go as low for the rest of my lifetime

A chorus of economists and labor market observers say that the "natural" or "structural" rate of unemployment has shifted up, meaning that Americans looking for work should get used to having a harder time finding it. The unemployment rate is currently 9% and could take until 2016 to reach the natural rate.

The so-called natural unemployment rate is somewhere around 7%, according to Mark Vitner, a senior economist at Wells Fargo. Other economists peg the natural unemployment rate somewhere between 5.5% and 7%. They said the figure will be held higher by a skills mismatch in the labor market that has been growing since the 1970s, the recent extension of unemployment benefits and the 2009 minimum wage increase.

Natural unemployment rate is a theoretical measure of what share of the workforce would be unemployed under ideal conditions given the underlying structure of the economy; that is, what goods and services that businesses are actually producing and the workers who produce them. Some economists and observers say that the structure of the economy has changed coming out of the recession.

Since 1996, the natural unemployment rate has hovered between 4.5% in 2000 and 5.8% in 2010, according to a periodic survey by the Federal Reserve Bank of Philadelphia. The Congressional Budget Office, which uses the rate to make forecasts and projections, currently pegs it at 5.2%.

For instance, there are about 600,000 job openings in education and health services and almost 600,000 in professional and business services according to the BLS. Both of these sectors have very high rates of job openings compared to total positions, about 3% each, meaning that there is a lack of talent to fill the positions. This is as opposed to construction, which currently has 67,000 job openings, which is only 1.2% of all such positions.

"Every survey that we've conducted has indicated that hiring managers are saying it's harder and harder to find the talent they're looking for at the professional level."

5/29: VVVVRRRRROOOOOOOMMMM:

some 36.9 million -- are not fit to drive and would fail a driving test if asked to take one today, according to a new survey of the nation's drivers.

Shocking as that may be, it's actually an improvement. Last year, 38 million received failing grades. Nationwide, the average score this year increased to 77.9% from 76.2% in 2010.



5/29:
Housing and Mortgages for Parents

This guide was created to educate parents on the options available to them to help their children to purchase a home.
After evaluating this guide, readers will have a better understanding of:















Never try to pass an elephant without using your blinker. 
5/29: Lots of foreclosures yet to come-

There's a three-year inventory of homes in foreclosure for sale, and that's devastating home prices.

Las Vegas has so many foreclosures that 53% of all the homes sold in Nevada are in some stage of foreclosure, according to a report from RealtyTrac, the online marketer of foreclosed properties.

Foreclosures represent 45% of sales in California and Arizona, and 28% of all existing home sales during the first three months of 2011.

"This is very bad for the economy," said Rick Sharga, a spokesman for RealtyTrac.

What's more, the homes are selling at steep discounts, especially so-called REOs, bank-owned homes that have been taken in foreclosure procedures.

The average REO cost on average about 35% less than comparable properties, according to RealtyTrac.

But in some areas, the discounts were ever greater: In New York State, the discount for REOs was 53% during the first quarter. And it was nearly 50% in Illinois, Ohio, and Wisconsin.

Also weighing on market prices are "short sales," homes where the selling price is less than what is owed by the borrowers. These sales sold at an average 9% discount.

Including both REOs and short sales, Ohio had the biggest discount of any state, at 41%.

There were 158,000 deals involving distressed properties nationwide during the first quarter, less than half the nearly 350,000 during the same period two years earlier.

With the slowed sales pace, it will take three years to burn through the inventory of 1.9 million distressed properties,


5/29: 
Euro contagion fears hit Spain and Italy
Worries over contagion spread to Europe’s equity markets, with stocks in Italy and Greece, the biggest fallers, down 3.3 per cent

5/29:

Search for yield boosts emerging economy debt
Rock-bottom interest rates in the western world have encouraged many institutional investors to increase their fund allocation to debt in developing countries


 5/26: IRAs hold 25% of all retirement monies, primiarily due to rollovers.

Overall Allocation3
In the entire EBRI IRA database in 2008, 38.5 percent of the IRA assets were in equities, 22.3 percent in
money, 13.6 percent in bonds, 12.1 percent in balanced funds, and 13.6 percent in other assets (Figure 1).4
When combining the allocation of balanced funds attributable to equities to the equity allocation, the total
equity holdings of IRA owners is 45.8 percent.5 Male and female IRA owners had virtually identical
allocations in bonds, equities (not including the balanced fund portion), and money. However, males were
slightly more likely to have assets in the other category, while females had a higher percentage of assets in
balanced funds. IRA owners under age 45 were more likely to be invested in equities and balanced funds
combined than those over age 45. Those over age 45 were more likely to be invested in bonds and other
assets. The percentage of assets in money across each age group was around 21 percent.
As the account balances increase, the percentage of assets in equities and balanced funds combined
declines. For instance, among those IRAs with balances from $10,000−$24,999, 50.4 percent of the assets

were in equities and 20.1 percent in balanced funds (70.5 percent combined), compared with 37.6 percent in
equities and 11.7 percent in balanced funds (49.3 percent combined) for IRAs with account balances of
$150,000−$249,999. IRAs with the largest balances ($250,000 or more) had more of the assets diversified
across all the asset categories—with the highest percentage of assets in bonds, money, and other assets—
than IRAs in any of the smaller-account balance categories.
Roth IRAs had the highest share of assets in equities (51.4 percent) and balanced funds (16.7 percent)
(Figure 2). Rollover IRAs had the lowest percentage in equities (at 35.8 percent), but had the highest
percentage of assets in money (at 24.2 percent) and the highest percentage in bonds. The higher allocation
to equities in Roths compared with rollovers can be explained by two reasons: Roth owners are younger on
average than rollover owners, and Roth IRAs tend to be supplemental savings funded by individual
contributions only, whereas rollovers tend to be the main or primary retirement savings for workers nearing
retirement or retirees. Consequently, the asset allocation reflects the period of the owner’s life and the share
of the retirement savings the accounts represent.
IRA Type Allocations
Gender—Within each IRA type, the asset allocation differences between genders is minimal (Figure
3). The bond, equity, money, and annuity allocations are virtually identical. In traditional IRAs, males had
39.2 percent of their assets in equities, while females had 39.1 percent. The one consistent difference across
the three IRA types (traditional, rollover, and Roth) is that males had a higher share of assets in other assets,
while females had more in balanced funds.
Age—The asset allocation across ages within each IRA type has some minor differences, but in
general the percentage allocated to equities and balanced funds declined as the owner aged, while the
percentage allocated to other assets increased (Figure 4). Assets in Roth IRAs had the most consistent
trends, with allocations to bonds, money, and other assets increasing with the age of the owner. The
allocation to balanced funds decreased as the owners aged, with the allocation to equities increasing with
age among those ages 35–44, before declining through age 70 or older.
Traditional and rollover IRAs have similar patterns of asset allocation, with the youngest owners (under age
25) having higher money, bond, and other asset allocations than those just older (ages 25−44). Allocations
to balanced funds and equities increase through age 44 then decline as age increased for both IRA types.
Account Balance—Except for the smallest accounts (less than $5,000), the percentage of assets in
equities and balanced funds declined across each type of IRA as the account balance increased (Figure 5).
Rollover IRAs had lower equity allocations consistently across account balances, while Roth IRAs had
consistently higher allocations. Bond allocations were highest for traditional IRAs. Roths had the highest use
of other assets, representing 20 percent of the assets for those with balances of $250,000 or more.



Chivalry is not dead. OK maybe wounded a bit

5/26:
Does Gender Affect Investors' Appetite for Risk?: Evidence from Peer-to-Peer Lending
Date: 2011
By: Nataliya Barasinska
URL: http://d.repec.org/n?u=RePEc:diw:diwwpp:dp1125&r=cbe
This study investigates the role of gender in financial risk-taking. Specifically, I ask whether female investors tend to fund less risky investment projects than males. To answer this question, I use real-life investment data collected at the largest German market for peer-to-peer lending. Investors' utility is assumed to be a function of the projects expected return and its standard deviation, whereas standard deviation serves as a measure of risk. Gender differences regarding the responses to projects' risk are tested by estimating a random parameter regression model that allows for variation of risk preferences across investors. Estimation results provide no evidence of gender differences in investors' risk propensity: On average, male and female investors respond similarly to the changes in the standard deviation of expected return. Moreover, no differences between male and female investors are found with respect to other characteristics of projects that may serve as a proxy for projects' risk. Significant gender differences in investors' tastes are found only with respect to preferred investment duration, purpose of investment project and borrowers' age.

5/26:

Stability and Change of Personality across the Life Course: The Impact of Age and Major Life Events on Mean-Level and Rank-Order Stability of the Big Five
Date: 2011
By: Jule Specht
Boris Egloff
Stefan C. Schmukle
URL: http://d.repec.org/n?u=RePEc:diw:diwsop:diw_sp377&r=cbe
Does personality change across the entire life course, and are those changes due to intrinsic maturation or major life experiences? This longitudinal study investigated changes in the mean levels and rank order of the Big Five personality traits in a heterogeneous sample of 14,718 Germans across all of adulthood. Latent change and latent moderated regression models provided four main findings: First, age had a complex curvilinear influence on mean levels of personality. Second, the rank-order stability of Emotional Stability, Extraversion, Openness, and Agreeableness all followed an inverted U-shaped function, reaching a peak between the ages of 40 and 60, and decreasing afterwards, whereas Conscientiousness showed a continuously increasing rank-order stability across adulthood. Third, personality predicted the occurrence of several objective major life events (selection effects) and changed in reaction to experiencing th ese events (socialization effects), suggesting that personality can change due to factors other than intrinsic maturation.<br /> Fourth, when events were clustered according to their valence, as is commonly done,<br /> effects of the environment on changes in personality were either overlooked or<br /> overgeneralized. In sum, our analyses show that personality changes throughout the life<br /> span, but with more pronounced changes in young and old ages, and that this change is<br /> partly attributable to social demands and experiences.

5/26:
On the Positive Effects of Overcon fident Self-Perception in Teams
Date: 2011-04
By: Ludwig, Sandra
Wichardt, Philip C.
Wickhorst, Hanke
URL: http://d.repec.org/n?u=RePEc:lmu:muenec:12246&r=cbe
In this paper, we study the individual payoff effects of overconfident self-perception in teams. In particular, we demonstrate that the welfare of an overconfident agent in a team of one rational and one overconfident agent or a team of two overconfident agents can be higher than that of the members of a team of two rational agents. This result holds irrespective of the assumption about the agents' awareness of their colleague's bias. Moreover, we show that an overcondent agent is always better of when he is unaware of a potential bias of his colleague.




The Fourth of July is Coming

5/26:  FINRA Ketchum: As firms face examination and other changes, they can be prepared by paying attention to fundamental values, Ketchum said. That includes making sure that financial advisors are completely educated on the financial products they sell, Ketchum said, particularly when it comes to Regulation D offerings, and truly operating with the best interest of the customer in mind.

And while firms are tempted to reduce their expenses now, Ketchum said, they should makes sure they have resources in place to deal with new regulatory focus areas.

“This is not the time to reduce your commitment to financial technology or otherwise on compliance investment,” Ketchum said.

FINRA’s annual conference comes amid an ongoing regulatory debate as to whether to create a self regulatory organization for investment advisors. FINRA has advocated for expanding its oversight to include both investment advisors and broker-dealers.

The ongoing debate could move forward with hearings this summer, Ketchum said Tuesday in a press conference, while it is impossible to predict if implementation will be “this year, next year or the year after.”

making sure their advisors understand the products they sell and truly acting in the best interest of the client,

How???????

The fundamentals of investing, insurance and annuities have never been taught. 

5/25: Bogle: What do you think of the state of Wall Street right now?
1. Wall Street is changing -- and not for the better -- because we’re in a culture of speculation. I would like investments to be the star show, and not in today’s cameo role. Furthermore, we’ve changed from a financial industry that was about stewardship for the small investor to it being all about marketing, selling and speculating. And that leads the average investor down the wrong path.
What’s important to note is that the stock market doesn’t create value -- companies create value. If a stock is overvalued, it’s good for the seller, bad for the buyer, and we are trading at volume levels that cannot be sustained. Individual investors should stay out of the game.

5/25: Bogle: Are you concerned the U.S. will go into default with the increasing debt burden and the debate over the debt cap?
1. There is always a chance the U.S. could go into default. And there’s always hope that we are able to handle this before it gets that far out of hand. But right now we can’t seem to get any movement out of the Congress. It’s a question of political will. We’ll be fine if Washington has the guts to change the situation.


A blond city girl named a.j. marries a Colorado rancher.

One morning, on his way out to check on the cows, the rancher says to a.j.,

'The insemination man is coming over to impregnate one of our cows today, so I drove a nail into the 2 by 4 just above where the cow's stall is in the barn. Please show him where the cow is when he gets here, OK?'

The rancher leaves for the fields. After a while, the artificial insemination man arrives and knocks on the front door.

a.j. takes him down to the barn. They walk along the row of cows and when a.j. sees the nail, she tells him, 'This is the one right here.'

The man, assuming he is dealing with an airhead blond, asks, 'Tell me lady, 'cause I'm dying to know; how would YOU know that this is the right cow to be bred?'

'That's simple," she said. "By the nail that's over its stall,' she explains very confidently.

Laughing rudely at her, the man says, 'And what, pray tell, is the nail for?'

The blond turns to walk away and says sweetly over her shoulder,

'I guess it's to hang your pants on.'


 5/25: MORE ON SINGLE DIGIT RETURNS Bogle- Reasonable expectations are that we will have returns of 7-8% in this decade in equities, and that bonds will yield 3-4% in the same time period.

5/25:
" Banking Crises: An Equal Opportunity Menace” confirmed what the worldly wise already knew: Governments around the world—including our own—are no more inclined to reveal their true financial condition today than in the past.

Such collective amnesia by the governed and lack of transparency by those who govern contribute to the human suffering that ensues in crisis after crisis. That is precisely why today’s fiscal and monetary damage control may be nearly as ineffective at stemming the tide as the various and sundry, and often experimental, interventions during the Great Depression. That statement is not made lightly. Early-stage fiscal policy initiatives, which produced far-less-than-advertised economic multiplier effects, have been hamstrung by political gridlock ever since. On the monetary side, Ben Bernanke, unlike many in positions of high political authority or the body politic itself, knows Depression history. The more pertinent question: Is he able to apply history’s lessons to today’s subtly similar yet significantly different set of challenges? Thus far, the results are not reassuring.

The pragmatic solution to economic unpleasantness throughout the last decade has been to repeatedly inject the economy with the adrenaline of cheap and easy money. The philosopher shudders in disbelief. The ongoing attempt to put off the consequences of years of cumulative excesses by jacking up the prices of assets to levels above their intrinsic worth is itself not without potentially dire consequences. The Fed’s current action of pushing interest rates down to near zero is having the effect of driving people out of the safer assets into the riskier ones, of sacrificing the prudent to save the foolish. Societies have crumbled for lesser transgressions.

That the extraordinary excesses built up in recent decades can be contained with so little proportional consequence boggles the mind. Whatever their motives, Oz-like governments are playing Russian roulette behind the curtain, which should be ample cause for us to match such recklessness with an equal measure of skepticism.

I believe that the spectacular market rise currently being celebrated has underpinnings similar to the cheap-money “fools’ rally” from 2003 to 2007—and that we are in both a secular bear market and an economic contraction that may not have seen its darkest days. Thinking into the future as we are inclined to do, the only development that would leave us scratching our heads would be further dramatic moves to the upside. We cannot forecast if, when, or how far the pendulum might swing, but our record suggests that sometimes we seem to be slightly ahead of the crowd in sniffing out trouble.

EFM- I cannot figure out the significant upward moveement of the market  with such an enormous deficit, no education about risk and international elements like Greece complewtely defulating on debt.  

"Most investors have been unaware of, indifferent toward, or become accustomed to chronically overvalued markets as the new norm. They suffered the consequences of ignorance or apathy in 2000–02 and 2007–09—and, just perhaps, history may repeat itself in the months or years ahead." 

In my new book being finished now, I state that there will be a 50/50 chance of two recessions per decade. I DO NOT SEE ANY OTHER REALISTIC COURSE FOR ECONOMIES  SO COMPLETELY OUT OF WHACK.

5/24: Behavioral finance- Baby Boomers on Retirement (PDF)
"In the interest of creating a healthy and effective retirement system, it is important that we understand participant emotions about retirement and how these emotions create barriers to getting needed professional retirement help. If we ignore participant emotions and needs and solely focus on the money management, we risk significant participant inaction."

5/24:  Door to Monetary Awards Against Fiduciaries Is Opening (PDF)

"[T]he Supreme Court has signaled that 'compensatory,' 'make-whole' monetary relief is available under ERISA's catch-all provision, Section 502(a)(3). . . . . [Also, the] impact of the Supreme Court's holding that the terms of an SPD cannot be enforced as if they were plan terms will have to be sorted out in future litigation. The decision appears to overturn the rule adopted by many circuits .
Very interesting.

5/24:
Schwab to Join the 401(k) Wars, Guns Blazing
"Charles Schwab. . . could dramatically change the way that workers invest for retirement. Schwab announced that it plans to offer employers a 401(k) package that includes only index funds as investment options. . . . In one fell swoop, an index-only 401(k) will address several problems that led policymakers a few years back to consider massive changes to the entire structure of retirement savings."

Yes it will help with fees. But it will not do essentially  anything with the underlying risk. Investments always have risk. So what is the risk of the S&P 500. If Schwab does not know- and I bet they do  not- they cannot be a fiduciary.

5/22: A List of Thirteen Ways of Looking at Aging
"Our extensive work on retirement policy covers the many ways the aging of America will trigger changes in how we work, retire, and spend federal resources."

5/22:
Financial Finesse: Poor Money Management at Root of Most Financial Stress
The vast majority of American employees are still under financial strain, even when the study looked at the least vulnerable demographic groups—men, those between ages 55 and 64, and workers who earned between $150,000 and $199,999 a year

5/22:

Advisors Need to Help Overcome Irrational Behavior
Allianz Global Investors white paper authored by UCLA professor Shlomo Benartzi is offering several tools drawn from the field of behavioral finance to help advisers help their clients.

To help investors overcome procrastination, Benartzi suggests that advisors ask them not to enter the market immediately but rather to pre-commit to entering at a certain point in the future. If the client agrees, he or she can then be asked to pinpoint a date when they would feel comfortable making the move. The result is that the once-balky client feels both committed and in control.

I disagree. It is the advisers responsibility to determine when is the best time to invest. A predetermined amount in 2000 or 2008 is a 'guaranteed loss' and serves no purpose. The adviser is responsible for DCAD as well.

And then- An effective way to rebuild trust using behavioral finance insights is to demonstrate competence and exhibit empathy, according to Benartzi. One counter-intuitive way for an advisor to demonstrate competence is to admit the role luck has played in achieving results for the client. Honesty resonates strongly and reinforces trust in clients, Benartzi says.

“I think the more you actually admit luck, the more you can brag about good outcomes—and explain when performance is actually due to bad luck,”

Bad luck can happen. But the losses sustained for 2000 and 2008 were due to incompetence by the advisers. Remember, they are not trained in the fundamentals of investing. 

Also, is bad luck now due to the drop in bond funds? They can now just effectively earn nothing more than their yield and with a much higher risk than previous since they can't get any appreciation anymore.  


5/22: 401(k) Plan Participants Using Almost Double the Investment Funds
"Why the increase? One simple reason is that the number of funds offered increased substantially. Today the average number of funds included in a 401(k) plan is 19.4 compared to only 6.3 in 1996."

5/22: Asset Allocation Fund Usage Rising in 401(k) Plans
"The popularity of asset allocation funds is expected to increase as investors become increasingly comfortable with relying on the investment expertise of providers rather than trying to 'do it yourself'."
What is the investment experience of the providers ? Not with a series 7. Not with a CFP. Not with an insruance license.  If it was all so good, few would have lost more than 20% in 2000 or 2008.

5/18:Fund managers losing faith in world economy

Investors’ belief in the world economy and corporate profitability is waning, with a majority of fund managers believing European growth will slow down,

A net 8 per cent of investors believe Europe’s economy will weaken in the next year, says the survey, which was concluded just before last week’s gross domestic product data from Germany and France provided a positive surprise.

Globally, concern is also mounting, with just a net 9 per cent of fund managers expecting corporate profits to increase and a net 10 per cent believing the world economy will improve, down from a net 58 per cent in February.

The survey underlines how investor confidence in the global growth outlook is falling after a weak first quarter.

expectations of annualised first-quarter US growth had started at 4 per cent, before the initial official estimate came in at 1.8 per cent.

In spite of worries about growth, risk appetite remains high and largely unchanged because of the belief that the zero interest rate policy of the US will continue for some time.

Defensive equity sectors such as healthcare have performed well, while cyclical stocks such as energy companies have suffered.

The survey showed how investors continue to believe China’s economy will weaken while demonstrating lower confidence in Brazil, but at the same time increasing exposure to emerging markets equities.


5/18:
2011 Annual Report of Social Security Trustees Shows Significant Worsening of Program's Finances
"The program's long-term actuarial deficit (over 75 years) is now 2.2 percentage points of payrolls. That's 30 basis points larger than was the case in last year's report, by far the largest increase in recent memory."

5/18:
Aruoba-Diebold-Scotti Business Conditions Index


Weak

5/17:
SOMETHING'S GOT TO GIVE – As Medicare Math 101 explains, Medicare numbers just don't add up. For example, an average couple retiring today has paid about $100,000 in Medicare taxes, but can be expected to receive about $300,000 in Medicare benefits. In addition, there is no incentive for seniors or their families to be concerned about the cost of health care. And then we have the sensitive issue of 25% of Medicare funds being spent on terminally-ill patients, some of it providing care that is not needed, provides no benefit or, worse yet, negatively impacts a patient's quality of life. Privatizing Medicare may not be the solution, but any realistic solution is going to require shared sacrifice.

5/17: HEALTH COSTS – Relentless medical inflation marches on, with the 2011 Milliman Medical Index report estimating that the cost of health care for a typical family of four has increased 7.3% this year, to $19,393. Meanwhile, the Kaiser Family Foundation reported that in 2008, the U.S. spent 91% more on per-capita health care expenditures and 58% more of its GDP on health care than the average for a group of 15 wealthy nations, including Canada, Japan and the United Kingdom.

5/17: LONG-TERM CARE COSTS – The 2011 Genworth survey of long-term care costs reports that the annual cost of long-term care in an assisted living facility increased 2.4% from 2010 to $39,135, while nursing home costs increased 3.4% to $77,745. The good news is that the hourly costs for homemaker services and for home health aide services stayed flat at $18 and $19 per hour respectively

5/17: HOME PRICES DOWN AGAIN – Home prices fell 4.6% during the first three months of 2011 compared to a year earlier. The median home price is now $158,700, a 30% drop from its 2006 high of $227,100. Much of the blame for the continuing declined in home prices is being pinned on the sales of foreclosed properties, which sell for about 20% less than conventional homes.

5/17: In One Year, Spending on Interest on the National Debt Is Greater Than Funding for Most Programs In 2010, the U.S. spent more on interest on the national debt than it spent on many federal departments, including Education and Veterans Affairs.

5/17:
 
Entitlements Will Consume All Tax Revenues by 2049 If the average historical level of tax revenue is extended, spending on Medicare, Medicaid and the Obamacare subsidy program, and Social Security will consume all revenues by 2049. Because entitlement spending is funded on autopilot, no revenue will be left to pay for other government spending, including constitutional functions such as defense.

5/17:

 


5/16: New term


5/16:

Comparing Group and Individual Choices under Risk and Ambiguity: An Experimental Study
Date: 2011-05-06
By: Marielle Brunette (Laboratoire d'Economie Forestiere, Nancy, France)
Laure Cabantous (Nottingham University Business School)
Stéphane Couture (Unité de Biométrie et Intelligence Artificielle (UBIA), Toulouse, France)
URL: http://d.repec.org/n?u=RePEc:bbr:workpa:15&r=cbe
In this paper, we build on the emerging literature on group decision-making to study the so-called ‘group shift’ effect, i.e., groups are less risk-averse than individuals. Our study complements past research in two ways. First, we study the group shift effect under two sources of uncertainty, namely risk where probabilities are known, and ambiguity where probabilities are imprecise. Second, we study the impact of the group decision rule (unanimity and majority) on group shift. Results from a lottery-choice experiment show a general tendency for the group shift effect, regardless of the decision rule. The group shift effect, however, is found to be significant only under risk in the unanimity treatment. Our study hence provides a clear test of the effect of the decision rule on the group shift effect under both risk and ambiguity.

5/16:

An Unlucky Feeling: Persistent Overestimation of Absolute Performance with Noisy Feedback

5/16: I will be dead by then but...........The Medicare Trust Fund will be exhausted by 2024 -- five years earlier than estimated in 2010. A weakening economy is the main culprit for the sudden weakness

The Social Security Trust Fund will dry up by 2036, a year earlier than previously expected, as social security benefits continue to exceed payroll tax revenues. Benefit payments are expected to surpass taxes by $46 billion in 2011. This would mark the second consecutive year of deficit-funding for the fund and marks the first deficit since 1983


I taught governmental programs for years  as continuing education. From the late 80s, it was as obvious that the increases were going to overwhelm the system. It is too late to fix it so now they will have to dest least some can survive.


5/15:
PBGC Premium Increases Could Receive Attention in Budget and Deficit Reduction Discussions
"President Obama's budget proposal for fiscal 2012 and other deficit reduction proposals would increase PBGC premiums for some DB plan sponsors, and the House Budget Committee is considering the idea."

5/15:  
Most Affluent Plan Participants Not Completely Satisfied with Current Employer-Sponsored Retirement Plan Provider
"Satisfaction levels are lowest among Gen X investors (40% on average), with Baby Boomers being only slightly more satisfied (48%), according to a press release."

5/15: Oh really???? Rep. McCarthy says that while consumers clearly need to be protected from broker/advisor abuses, it is also important to “protect a process that enables individual brokers to provide consumers with the advice they need to help ensure they have retirement security in their golden years.”

How can a broker advise if they have never been taught the fundamentals of investing.

5/15:
The Potential Impact of the Great Recession on Future Retirement Incomes
"The results show that the recession will reduce average annual incomes at age 70 by 4.3 percent, or $2,300 per person."

5/15: Kitces report- if a VUL policy has a death benefit of
$500,000 and has accumulated up to $200,000 of cash
value, the policyowner pays for cost of insurance
charges on $300,000 (the difference between the death
benefit and cash value, which is the amount at risk for
the insurance company) in addition to other policy
expenses. If the policy, invested heavily in equities for
long-term growth, experiences a significant short-term
decline of 30%, the cash value drops to $140,000. This
in turn causes the amount at risk to increase to
$360,000, which means all else being equal, the cost of
insurance charges will RISE by a whopping 20% (paying for $360,000 worth of cost of insurance
charges, instead of only $300,000) to cover the costs
of the higher amount at risk. As a result, withdrawals
of policy expenses to maintain the coverage will be
higher - rising at the exact time that the cash value
declines (in fact, because the cash value declined),
exacerbating any setback and slowing the pace of a
recovery. In other words, the policy expenses will
actually force the liquidation of even more cash value
during a downturn!

And  be careful of loans: Policies that are intended to accumulate significant and
ongoing loans must be evaluated especially carefully,
due to the fact that if the policy lapses, the entire loan
balance is treated as part of the proceeds received, even
if the net cash value (after loans) is near $0; in such
scenarios, the policyowner thus may generate an
incredibly large tax liability attributable to a significant
amount of cumulative gains over the lifetime of the
policy, even while having no cash value available to pay
for the tax liability (because it was previously extracted
in the form of loans).


5/12:
Discussion of Issues Attendant with Current Asset-Based Fee Structure for Retirement Plans
"One of the great ironies of asset-based fees is that they do sometimes go down, and at the most 'inconvenient' times. One need look back only as far as the fourth quarter of 2008 to remember that precipitous decline in asset values - and asset-value-based fees - at the very same time that many noted a steep increase in the 'care and feeding' of plan sponsors and participants

5/12: TERM INSURANCE: 


Can I get a refund for these?


5/12: More home problems: 

For the last three years, federal agencies have backed new mortgages as large as $729,750 in desirable neighborhoods in high-cost states like California, New York, New Jersey, Connecticut and Massachusetts. Without the government covering the risk of default, many lenders would have refused to make the loans. With the economy in free fall, Congress broadened its traditionally generous support of housing to a substantial degree.

But now Democrats and Republicans agree that the taxpayer should no longer be responsible for homes valued well above the national average, and are about to turn a top slice of the housing market into a testing ground for whether the private mortgage market can once again go it alone. The result, analysts say, will be higher-cost loans and fewer potential buyers for more expensive homes.


The federal government last year backed nine out of 10 new mortgages nationwide, and losses from soured loans are still mounting. Fannie Mae, which buys mortgages from lenders and packages them for investors, said last week it needed an additional $6.2 billion in aid, bringing the cost of its rescue to nearly $100 billion.

The loan limits were $417,000 everywhere in the country before the economy swooned in 2008. The new limits will be determined by various formulas, including the median price in the county, but will not fall back to their precrisis levels. 

WHEN DID STUPIDITY BECOME A POINT OF VIEW?

5/11: Social Security Benefits, Finances, and Policy Options: A Primer
"Users can download the PowerPoint presentation and sort the slides in a different order or pick and choose a subset to use. The presentation includes talking points that go with each slide. . . . The PDF versions include both the slides and the notes pages that go with them on the same page."

5/11:
Benchmarking of Retirement Plan Expenses (PDF)
"This analysis is based upon data entered into PlanTools by professionals evaluating retirement plans. The data reflected in this analysis is not from a survey - what a service provider might charge a client, but instead actually identifies what a service provider has charged a client for the categories of services listed in this analysis."

5/11: Key Drivers of Investor Behavior
"This paper looks at how participants' decision-making is influenced by: Prevailing market conditions; Level of engagement and inertia; Advances in plan and investment menu design."

5/10:
Lapse-  12.7 percent of whole life insurance policyholders will lapse their policies in the first year, 8.1 percent will lapse in the second year and another 5.5 percent will lapse in the third year." 12.7 + 8.1 + 5.5 = 26.3% So that means that 26.3% of cash value insurance policies are canceled within the first 3 years.


5/10: Housing prices-

Average home prices are down 8% from a year ago, 3% over the quarter, and are falling at about 1% every month

And the percentage of homeowners in negative-equity positions — with a home worth less than its mortgage — has rocketed to 28%, a new crisis high.

, a record 16.3 million families are upside-down on their home loans

only four metro areas in America that have leveled out, or risen, lately. Notably, two of those are in stricken Florida — Fort Myers and Sarasota.



There are tons of foreclosures and short sales on the market. And there are plenty more sitting in the wings. Banks are holding back big shadow inventories of homes. And that means you can get a great deal



5/10:

"The American Middle Class Under Stress" has some stunning facts that highlight the struggles the average American is having getting a decent-paying job and keeping up with rising cost of living.

Here are just some of the sobering facts:

-- There are 8.5 million people receiving unemployment insurance and over 40 million receiving food stamps.

-- At the current pace of job creation, the economy won't return to full employment until 2018.

-- Middle-income jobs are disappearing from the economy. The share of middle-income jobs in the United States has fallen from 52% in 1980 to 42% in 2010.

-- Middle-income jobs have been replaced by low-income jobs, which now make up 41% of total employment.

-- 17 million Americans with college degrees are doing jobs that require less than the skill levels associated with a bachelor's degree.

-- Over the past year, nominal wages grew only 1.7% while all consumer prices, including food and energy, increased by 2.7%.

-- Wages and salaries have fallen from 60% of personal income in 1980 to 51% in 2010. Government transfers have risen from 11.7% of personal income in 1980 to 18.4% in 2010, a post-war high.

The bottom line is simple says Schwenninger: The middle class is shrinking, which threatens the social composition and stability of the world's biggest economy. "I worry that we're becoming a barbell society - a lot of money wealth and power at the top, increasing hollowness at the center, which I think provides the stability and the heart and soul of the society... and then too many people in fear of falling down."

At the current pace of job creation, the economy won’t return to full employment until 2018.

The share of middle-income jobs in the United States has fallen from 52% in 1980 to 42% in 2010.
Middle-income jobs have been replaced by low-income jobs, which now make up 41% of total employment.

17 million Americans with college degrees are doing jobs that require less than the skill levels associated with a bachelor’s degree.
Just under 30% of flight attendants and 16% of telemarketers have bachelor’s degrees even though this credential is not necessary for these jobs.

Over the past year, nominal wages grew only 1.7% while all consumer prices, including food and energy, increased by 2.7%.
The spending power of many American families has therefore declined.

There are 8.5 million people receiving unemployment insurance and over 40 million receiving food stamps.

Health care spending increased from 9.5% of personal consumption in 1980 to 16.3% in 2010.

The share of personal consumption spent on food and energy has risen from 13.4% in 2002 to 15.3% in 2010.

While the outlook in the equity market is uncertain, housing prices have resumed their decline and could fall another 10% to 20%,due to the pressure from theshadow inventory.
At the end of 2010, 23.1% of all residential properties with a mortgage were underwater, with total negative equity nationwide of $750 billion.

Over the past three decades, household debt as a share of disposable income increased from 68% to 116%.

The median value of retirement savings for retirees is $45,000.
The average retiree has a retirement savings shortfall of $47,732, with larger shortfalls among low-income Americans.



5/9:
The Riskiness of Risk Models
Date: 2011-04-11
By: Grossman, Zachary
URL: http://d.repec.org/n?u=RePEc:cdl:ucsbec:1937484&r=cbe
How does overconfidence arise and persist in the face of experience and feedback? We examine experimentally how individuals' beliefs about their absolute, as opposed to relative, performance on a quiz react to noisy, but unbiased, feedback. Participants believe themselves to have received `unlucky' feedback and they overestimate their own scores, but they exhibit no overconfidence in non-ego-relevant beliefs---in this case, about others' scores. Unlike previous studies of relative performance estimates, we find this to be driven by overconfident priors, as opposed to biased updating, which suggests that social comparisons contribute to biased information processing. While feedback improves performance estimates, this learning does not translate into improved estimates of subsequent performances. This suggests that people use performance feedback to update their beliefs about their ability differently than they do to updat e their beliefs about their performance, contributing to the persistence of overconfidence.
Date: 2011-03
By: Christophe Boucher (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, A.A.Advisors-QCG - ABN AMRO)
Bertrand Maillet (CES - Centre d'économie de la Sorbonne - CNRS : UMR8174 - Université Panthéon-Sorbonne - Paris I, A.A.Advisors-QCG - ABN AMRO, EIF - Europlace Institute of Finance)
URL: http://d.repec.org/n?u=RePEc:hal:cesptp:halshs-00587779&r=fmk
We provide an economic valuation of the riskiness of risk models by directly measuring the impact of model risks (specification and estimation risks) on VaR estimates. We find that integrating the model risk into the VaR computations implies a substantial minimum correction of the order of 10-40% of VaR levels. We also present results of a practical method - based on a backtesting framework - for incorporating the model risk into the VaR estimates.

5/9:
Stock Volatility During the Recent Financial Crisis
Date: 2011-04
By: G. William Schwert
URL: http://d.repec.org/n?u=RePEc:nbr:nberwo:16976&r=fmk
This paper uses monthly returns from 1802-2010, daily returns from 1885-2010, and intraday returns from 1982-2010 in the United States to show how stock volatility has changed over time. It also uses various measures of volatility implied by option prices to infer what the market was expecting to happen in the months following the financial crisis in late 2008. This episode was associated with historically high levels of stock market volatility, particularly among financial sector stocks, but the market did not expect volatility to remain high for long and it did not. This is in sharp contrast to the prolonged periods of high volatility during the Great Depression. Similar analysis of stock volatility in the United Kingdom and Japan reinforces the notion that the volatility seen in the 2008 crisis was relatively short-lived. While there is a link between stock volatility and real economic activity, such as unemployment ra tes, it can be misleading.

5/9:
Majority of Seniors Fear Public Policy Will Derail Their Retirement Plans
"More than half of retirees ages 55 to 79 fear that changes to the Medicare and Social Security programs, as well as increases in taxes, will affect their ability to afford retirement

5/8: Who Never Receives Social Security Benefits? (PDF)
"We estimate that about 4 percent of individuals aged 62-84 in 2010 will never receive Social Security benefits. This article describes the prevalence, demographic characteristics, and economic well-being of this group."

5/8:
Five Things You Must Be Aware of as a Plan Fiduciary
"Knowing that you ARE a fiduciary is, obviously, the first thing you need to be aware of, because there are legal requirements that need to be followed. Many fiduciaries do not know that by not following the basic standards of conduct, they are likely to be personally liable to restore any losses to the plan."

5/8:

Mortality and Other Rate Tables

Fascinating reading on a dull day

5/8:
Jobs Report Has More Bad News Than Good News
There was more bad news than met the eye to Friday’s jobs report, even beyond the bump up in the unemployment rate.

While the top-line number of 244,000 jobs created sounded great when it came off the tape, the internals were somewhat weaker. In particular, the household survey, which is an actual head count, suggested that the job creation barely kept up with the expansion of the labor force.

You cannot have a good economy without good jobs. The employment may go up but if they are all at McDonallds.......


5/8:



5/2: Live forever- In 1900, the average life expectancy in the United States was 49. It is now 77.9, and rising.

"His mother should have thrown him away and kept the stork." - Mae West


5/2:

Eurocoin holds broadly steady in April

- In April the Eurocoin indicator stood at 0.60%, basically in line with the results for the previous two months (0.57%); this signals the continuation of the underlying recovery in euro-area economic activity.

- The result reflects the positive responses to business opinion surveys and the good performance of foreign trade, while developments in the stock market were a negative factor.

-

5/2: “Ulysses contract”  — or a “commitment memorandum” that spells out what to do when the markets move 25 percent up or down. The adviser and the investor are both supposed to sign it — agreeing in advance, perhaps, to buy more stocks in a market plunge, and not to sell. Conversely, when markets soar, they may be committed to selling overvalued stocks, not buying more of them — rebalancing the portfolio to restore an agreed-upon asset mix.

I disagree. If the market moves 10%- 15% in a flat economy, that's a correction. If it moves more than 10%+ in a bad economy, the losses can approach 50%. And you wnat to be fully invested???

5/2: Going down



5/1: SEC poses plan to curb credit ratings reliance

Congress may have ordered agencies that regulate financial institutions to stop relying on credit ratings by firms such as Moody's and Standard & Poor's, but regulators are still struggling to come up with an alternative.

One of the painful lessons of the mortgage meltdown was that securities stamped with the highest ratings turned out to be poor investments.

5/1: Bibles and investing-We went to a live event in Colorado Springs in March, so we are just getting our feet wet. It makes me sick the money we have wasted on whole life policies. These were sold to us as the perfect college fund. It was something we signed up for and just kept paying thinking we were doing the right thing. We have paid just over $46,000.00 and are in the process of cashing out and hoping we get $15,000.00, now when our son is 16. It makes me want to cry!! Worse yet, it was purchased through a church organization,and that just seems so much worse!!

5/1: Reply to never using a broker, insurance agent or financial planner

In referencing a broker, that is all I stated. Not MBA, not CFA. A broker has never been taught the fundamentals of investing. It makes no sense to use them at all. Secondly, if one buys stocks as their allocations, they are effectively violating all standards of suitability via unsystematic risk. How many stocks must you have in a portfolio in order to be properly diversified? They are not taught how to use a financial calculator. Actually not much different than RIAs since most came from the brokerage industry and used the series 7 as the required knowledge base. 

Even with MBAs and CFAs, many still regard standard deviation and volatility as risk. Categorically false.

An insurance agent has no background and training even in illustrations. Certainly no insight to all the new products such as indexed annuities and guaranteed payouts. They are not taught how to use a financial calculator. One needs an agent with at least 10 years of experience but because I have been around so long,  I do not trust their judgment overall. Experience versus commissions- guess who will win. Very very few people have done the research to figure out what the real life applications of product actually are.

A financial planner is what? A CFP? Sorry- as one who go it in 1984 I said, "I don't think I know that much." And I didn't. And they don't. The CFP is still just one semester on money. Not a semester on investments, a semester on behavior- just one semester on everything universally taught by a CFP. There is no risk of loss. Fact is, standard deviation is taught incorrectly. Effectively nothing on how correlations work in the real world.  They may be OK for the most sophomoric issues (whatever they may be).
Minimum is a degree in planning. Still not a panacea but at least 75% more comprehensive than a CFP or ChFC. 
Must have insurance license at a minimum and the license to do fee advisement as required by state.
Preferable to use a fee planner but there are very few who do it the ‘correct’ way. My point is exactly what Rick Ferri alluded to- financial planners really end up doing a simplistic financial plan with the almost sole intent to get assets under management. The ‘correct’ way is to charge for time in a retainer. But few consumers opt for that strategy since marketing prevails towards ‘beat the market’ like BetterInvesting.org or the ethical positions and competency suggested by NAFPA, Garret et al.

Pundits can say they are the best. Not one is legal in CA (and most other states) to do financial planning and nary anyone cares. Marketing prevails.

So where does one go?? I have no referrals since I really don’t know of those that do it on a retainer. Even then I might not refer since many/most also lost their clients tons of money in the dotcom and real estate messes. Consumers should know what their risk is given any allocation. This is done ONLY by use of a personal financial calculator. No calculator, no fiduciary. They have to learn how to preserve their assets. AS Peter Bernstein noted, “the consequences may be greater than the statistics.

But there are no presentations- certainly 401ks-  describing that simply because the educators come from the ranks of the ill informed and may spew out the same rhetoric as the rest of the industry.

Enough for now.

"He is not only dull himself; he is the cause of dullness in others."
 Samuel Johnson



5/1: 401(k) Participants' Awareness and Understanding of Fees: Survey Results
"Despite the need for knowledge, seven in ten are not aware that they pay fees to their 401(k) plan provider to maintain their account. When told of these fees, six in ten are not aware of the amount they pay in fees to maintain their account."

5/1: The AARP 401(k) Fee Calculator
"This calculator can: Help determine the fees associated with individual plans and compares them to the average for a low-cost 401(k) investor. [Free registration is required.]"

5/1: Less retirement: 

more than one-quarter of Americans are worried they won't have enough money for a comfortable retirement.

To help employees plan for retirement, many HR leaders and retirement experts focus on increasing 401(k) savings rates, but they should also focus on the way employees draw-down their savings when they retire, experts say.

"I think it is absolutely an issue that HR professionals need to be paying attention to," says Brad Kuebler, a principal in the Minneapolis office of Milliman, an actuarial and consulting firm. "There really is a lack of options for [workers] when they get into the drawdown phase. ... That is a pretty critical time to start doing research and figuring out what to do."

Assets in 401(k) plans reached $3.075 trillion in 2010

The typical participant in a 401(k) plan, she said, has about $78,000 in his or her account, which -- assuming the standard 4-percent drawdown each year -- equates to about $3,200 a year for that retiree,



5/1: Aruoba-Diebold-Scotti Business Conditions Index

5/1: Retirement

400 benefits-program decision makers weighed in on the topic of retirement transition. :

These survey findings help debunk a myth that just providing employees with more retirement-related information or education will generate better retirement outcomes,” 

“For decades, employers have devoted a wide range of retirement resources, matching retirement plan contributions, employee-education efforts, and the like, toward the goal of helping their employees enjoy positive retirement lifestyles,” Eckman said. “Add in the immense resources of the Internet and today’s employees should, theoretically, be better equipped than ever to make good decisions. But the nation’s benefits directors are telling us the opposite.”

4/28: Emergency: Despite increasing signs of a stabilizing U.S. economy, 19 percent of Americans — including 17 percent of full-time workers — have been compelled to take money from their retirement savings in the last year to cover urgent financial needs, the Financial Security Index found.

4/28:







4/28: The New Ideal Retirement Age
"Most Americans now expect to retire at age 65 or later. Over a third (37 percent) of workers plan to retire after age 65, up from just 15 percent in 1995."

4/28: Reading- Ron Rhodes-  To accept the premise, advanced by many who oppose the fiduciary standard of conduct, that
investors are responsible for understanding what they read and then will act prudently thereafter, it is
necessary to conclude that investors are not only armed with timely and adequate disclosure, but also
that they possess an ability to understand the disclosures which have been provided to them, both
intellectually and unhampered by behavioral biases. However, consumer ability to understand is not
only difficult due to the enormous knowledge base required to undertake decisions in dealing with a
highly complex financial world, but also due to bounds upon human behavior that limit the extent to
which people actually and effectively pursue utility maximization. Individuals possess substantial
barriers, resulting from behavioral biases, to the provision of informed consent, even after full
disclosure.
Moreover, not only can marketers who are familiar with behavioral research manipulate consumers
by taking advantage of weaknesses in human cognition, but ... competitive pressures almost
guarantee that they will do so. As evidence of the foregoing, many registered representatives,
insurance agents, and investment advisers have been trained by consultants to first establish a
relationship with a prospective client based upon trust and confidence, long before any discussion of
fees or products; such training is commonplace in the securities industry.

4/28: Oy! China has decided to serve the world another surprise. Following last week's announcement by PBoC Governor Zhou (Where's Waldo) Xiaochuan that the country's excessive stockpile of USD reserves has to be urgently diversified, today we get a sense of just how big the upcoming Chinese defection from the "buy US debt" Nash equilibrium will be. Not surprisingly, China appears to be getting ready to cut its USD reserves by roughly the amount of dollars that was recently printed by the Fed, or $2 trilion or so

4/28: Gas prices-
Matt Lewis, an economist at Ohio State University, has been studying gas prices for more than a decade. He's considered some of the usual allegations, like pricing fixing and collusion among stations. He doesn't entirely discount those, but he thinks he's found a better explanation for the fast rise/slow fall phenomenon. Here's his theory in a nutshell: When prices fall, consumers are so relieved that they stop shopping around for the best price. That eliminates the normal downward pressure on gas prices and allows stations to squeeze out a few more cents of profit while prices slowly fall

4/28: JKimmy Carter and Jeremy Grantham-

Accelerated demand from developing countries, especially China, has caused an unprecedented shift in the price structure of resources: after 100 hundred years or more of price declines, they are now rising, and in the last 8 years have undone, remarkably, the effects of the last 100-year decline! Statistically, also, the level of price rises makes it extremely unlikely that the old trend is still in place. If I am right, we are now entering a period in which, like it or not, we must finally follow President Carter's advice to develop a thoughtful energy policy and give up our carefree  and careless ways with resources.


4/27: Life Insurance Illustrations Model Regulation   (NAIC)

4/27: fiduciary- Deputy Treasury Secretary Neal Wolin reiterated Obama administration support for a universal fiduciary duty for retail investment advice

4/27: Like Avis, we are number 2:

According to the latest IMF official forecasts, China's economy will surpass that of America in real terms in 2016 — just five years from now.

it casts a deepening cloud over both the U.S. dollar and the giant Treasury market, which have been propped up for decades by their privileged status as the liabilities of the world's hegemonic power.

Under Purchasing Power Parties, the Chinese economy will expand from $11.2 trillion this year to $19 trillion in 2016. Meanwhile the size of the U.S. economy will rise from $15.2 trillion to $18.8 trillion. That would take America's share of the world output down to 17.7%, the lowest in modern times. China's would reach 18%, and rising.

Just 10 years ago, the U.S. economy was three times the size of China's.

China's neighbors in Asia are already waking up to the dangers. "The region is overwhelmingly looking to the U.S. in a way that it hasn't done in the past," he said. "They see the U.S. as a counterweight to China. They also see American hegemony over the last half-century as fairly benign. In China they see the rise of an economic power that is not benevolent, that can be predatory. They don't see it as a benign hegemony."

There are two systems in collision," said Ralph Gomory, research professor at NYU's Stern business school. "They have a state-guided form of capitalism, and we have a much freer former of capitalism." What we have seen, he said, is "a massive shift in capability from the U.S. to China. What we have done is traded jobs for profit. The jobs have moved to China. The capability erodes in the U.S. and grows in China. That's very destructive. That is a big reason why the U.S. is becoming more and more polarized between a small, very rich class and an eroding middle class. The people who get the profits are very different from the people who lost the wages."

4/27:
Consumer Preferences for 99-ending prices: the mediating role of price consciousness
Date: 2011-04
By: Charlotte Gaston-Breton
URL: http://d.repec.org/n?u=RePEc:cte:wbrepe:wb110503&r=cbe
This research addresses the persuasive effect of 99-ending prices and carries out a choice-based conjoint analysis among 318 shoppers. We propose that 99-ending prone consumers engage in a heuristic process either consciously — they consider a 99-ending as a signal for a “good deal�— or unconsciously — they round down 99-ending prices. This conceptual framework leads to non-intuitive and completely new sets of hypotheses in the examination of the drivers, mediator and moderators of 99-ending preferences. Results indicate that consumers who are more price conscious are more likely to choose 99-ending prices. Indeed, low involved shoppers (especially those with a low hedonic and symbolic involvement profile), low educated, low income and younger shoppers are prone to choose the 99-ending option. We also demonstrate that the magnitude of this 99-ending effect depends on the price level of the product category and t he positioning of the brands. The theoretical contributions to the manner in which consumers process 99-endings has implications for retailers, pricing managers and social welfare

4/27:
  1. Date: 2011-04
    By: James Alm (Department of Economics, Tulane University)
    URL: http://d.repec.org/n?u=RePEc:tul:wpaper:1102&r=cbe
    "Behavioral economics", or the application of methods and evidence from other social sciences to economics, has increased greatly in significance in the last two decades. An important method by which many of its predictions have been tested has been via laboratory experiments. In this paper I survey and assess experimental tests of various applications of behavioral economics to the specific area of public economics, or "behavioral public economics". I discuss the basic elements of behavioral economics, the methodology of experimental economics, applications of experimental methods to behavioral public economics, and topics in which future applications should prove useful.
    Keywords: experimental methods, behavioral economics
    JEL: C9
  2. Date: 2011-04-12
    By: Maroš Servátka
    Steven Tucker
    Radovan Vadovi� (University of Canterbury)
    URL: http://d.repec.org/n?u=RePEc:cbt:econwp:11/13&r=cbe
    Should one use words or money to foster trust of the other party if no means of enforcing trustworthiness are available? This paper reports an experiment studying the effectiveness of two types of mechanisms for promoting trust: a costly gift and a costless message as well as their mutual interaction. We nest our findings in the standard version of the investment game. Our data provide evidence that while both stand-alone mechanisms enhance trust, and a gift performs significantly worse than a message. Moreover, when a gift is combined with sending a message, it can be counterproductive
    Keywords: Communication; content analysis; experimental economics; gift giving; investment game; message; trust; trustworthiness
4/27:
Market response to investor sentiment
Date: 2011
By: Hengelbrock, Jördis
Theissen, Erik
Westheide, Christian
URL: http://d.repec.org/n?u=RePEc:zbw:cfrwps:1101&r=cbe
Recent empirical research suggests that measures of investor sentiment have predictive power for future stock returns over the intermediate and long term. Given the widespread publication of sentiment indicators, smart investors should trade on the information conveyed by such indicators and thus trigger an immediate market response to their publication. The present paper is the first to empirically analyze whether an immediate response can be identified from the data. We use survey-based sentiment indicators from two countries (Germany and the US). Consistent with previous research we find there is predictability at intermediate time horizons. For the US, however, the predictability disappears after 1994. Using event study methodology we find that the publication of sentiment indicators affects market returns. The sign of the immediate response is the same as that of the predictability over the intermediate term. This fi nding is consistent with the idea that sentiment is related to mispricing, but is inconsistent with the idea that the sentiment indicator provides information about future expected returns. --

4/27: Regulation of Professional Designations
States in BLUE have enacted regulations or legislation or have issued special notices regarding the use of professional designations by registered representatives and investment advisor representatives.

4/26: The Boglehead blog says you cannot determine your risk exposure. (True if you do not have a calculator)

Yes you do know what you can potentially lose. Take the percentage of SD for each allocation of stock and bonds. Figure how long you are going to hold this. Take the SD and divide it by the square root of the number of years to be held.

Risk of loss is 1 mnus the number above to the power of the number of years. That equals the possible loss given just a one standard deviation movement.

More simply, if the economy tanks, figure you will lose from 30% to 70% of your total assets.

The inverted yield curve is a 100% indicator of recessions where 40%+ average is lost. When you see this curve or similar, you DCA down. Your losses should not exceed 20% max. Less if bonds holdings were significant

As for bonds right now- the probability is about 85% that the next decade or TWO could show losses due to real or perceived increases in inflation.

this was a very short lesson. Lots more obviously involved. Also mandatory to read Bernstein's Capital Ideas and Mandlebrot's The (Mis)behavior of Markets. Also must have financial calculator.  No FC? Then you cannot determine risk of loss for your own allocation. If FC, you do a mix back and forth to see what the loss exposure might be and what you can supposedly live with.  That is if you simply held the allocation. The idea is to adjust risk as correlations move to 1.0.

4/25: Definition of the Term “Fiduciary” Proposed Rule
DOL responses- I am there

4/25: Returns: most scholars believe that the equity risk premium has decreased. A decrease in the equity risk premium decreases the market’s expected rate of return and it raises the market’s price-earnings and price-dividends ratios.

4//21: Send me money-  CEOs Earn 343 Times More Than Typical Workers
"'Despite the collapse of the financial market at the hands of executives less than 3 years ago, the disparity between CEO and workers' pay has continued to grow to levels that are simply stunning,'

I do not earn 343 times fhe average worker and therefore want the money. If not money, send me fishing gear.

Actually most of my decades of accumulation of  fishing gear was recently stolen. Know of anyone that wants to get rid of some fresh water stufff? I am serious.  It has been a pretty difficult loss. Thousands of lure and flies gone.

4/21: Affinity Scams
a few examples of affinity fraud from a Wikipedia article on the subject:
4/21:
Implied correlation from VaR
Date: 2011-03
By: John Cotter
Fran\c{c}ois Longin
URL: http://d.repec.org/n?u=RePEc:arx:papers:1103.5655&r=rmg
Value at risk (VaR) is a risk measure that has been widely implemented by financial institutions. This paper measures the correlation among asset price changes implied from VaR calculation. Empirical results using US and UK equity indexes show that implied correlation is not constant but tends to be higher for events in the left tails (crashes) than in the right tails (booms).

4/21:
How Unlucky is 25-Sigma?
Date: 2011-03
By: Kevin Dowd
John Cotter
Chris Humphrey
Margaret Woods
URL: http://d.repec.org/n?u=RePEc:arx:papers:1103.5672&r=rmg
One of the more memorable moments of last summer's credit crunch came when the CFO of Goldman Sachs, David Viniar, announced in August that Goldman's flagship GEO hedge fund had lost 27% of its value since the start of the year. As Mr. Viniar explained, "We were seeing things that were 25-standard deviation moves, several days in a row."

4/21: Experts??: Pension plans and participants routinely depend on experts for guidance in making important investment decisions. They turn to these investment professionals for reliable advice on how best to manage and safeguard retirement assets. Most would assume that these experts give their advice as fiduciaries, obligated to act with prudence and undivided loyalty to the plans' financial interests, rather than in their own interests — and that's exactly what the Employee Retirement Income Security Act of 1974 provides. However, a regulation issued in 1975 by the Department of Labor substantially narrowed the statutory fiduciary definition, making it far too easy for today's advisers to avoid fiduciary responsibility,

ERISA's fiduciary standard is one of the highest standards of care available under the law. ERISA provides that a retirement plan fiduciary must act with prudence and undivided loyalty to the participants in that plan. Among other things, the law says that anyone providing investment advice for a fee, either direct or indirect, is a fiduciary. The department's 1975 rule restricted this definition by creating a five-part test for the definition to be met. At the time, most retirement plans were defined benefit plans; 401(k
\
Among the key elements of the five-part test was the requirement that the advice had to be given on a regular basis and that it had to be given pursuant to a mutual understanding that the advice would be the primary basis for the investment decision. This means that advice given infrequently, however flawed or conflicted, is seldom actionable by the department. That advice could concern all of a plan's assets and it still wouldn't be treated as fiduciary advice if given on a one-time basis. Moreover, unless both the plan official and the adviser understand that the advice serves as a primary basis for the investment decision, advisers who base their advice on their own financial interests rather than the plan's can't be held accountable under ERISA for the resulting losses.

What defines an expert? Not a series 7 that is for sure.

4/21:College Atlas

4/21: I must be dead already- for each additional hour of television a person sat and watched per day, the risk of dying rose by 11 percent.

4/21: History Suggests Rates May Not Rise Right Away. The latest official U.S. recession began on 12/31/07 and ended 21 months ago on 6/30/09. In the two prior U.S. recessions experienced in the past 25 years, the Federal Reserve first raised interest rates 34 and 31 months after the recession officially ended

4/20: College Admmissions Profile  allows students, parents, and educators to look up individual colleges and universities, and see what is required to be admitted to each.




Man. I have had a really crappy day.

4/20:  

The Yield Curve as a Leading Indicator
Read this!

Q. Is there causality from economic activity to the yield curve?


A. Most of the literature in this field deals with the yield curve as a predictor of future activity, but in principle there could be influences in the opposite direction, from economic activity to the yield curve. In a dynamic theoretical model with rational expectations, such as Estrella (2005a), both directions play a role. The term spread contains expectations of future activity, and it is affected by current monetary policy, which is influenced in turn by current economic activity. Empirically, Estrella and Hardouvelis (1990) use U.S. data to examine the effect of monetary policy on the yield curve, and Estrella and Mishkin (1997) perform a similar analysis for a panel of European economies. Evans and Marshall (2001) find consistent evidence that monetary policy shocks affect the nominal yield curve. In the context of a vector autoregression, Diebold, Rudebusch and Aruoba (2004) find that the influence in the direction from activity to the term structure is even stronger than the predictive relationships (though Stock and Watson (2003) warn about overinterpretation of such results). In general, theory and evidence are both supportive of a bidirectional relationship.

4/20: THE weather map

4/20: Justifiable in most cases: No matter how earnest or committed employers might be, PPA provided a dangerous weapon that could be used against them. Employees had to have set, accurate, reliable avenues on which they could rely for information. If they didn't understand asset allocation, giving them a pamphlet or telling them about a half-hour meeting in six months wasn't going to cut it. A serious dip in the market that brought losses to retirement plans could result in a raft of lawsuits from employees who blamed their problems not on their own unwillingness to learn, but on the company itself.

The point being that the employer or educational provider had a duty to indicate that investors have at least a 50/50 chance in a decade of losing over 50% of their invested assets. That is just a fact. 

4/19:
The Role of Intuition and Reasoning in Driving Aversion to Risk and Ambiguity
Date: 2011-04-05
By: Jeffrey V. Butler (Einaudi Institute for Economics and Finance (EIEF))
Luigi Guiso (European University Institute and EIEF)
Tullio Jappelli (University of Naples Federico II, CSEF and CEPR)
URL: http://d.repec.org/n?u=RePEc:sef:csefwp:282&r=cbe
Using information on a large sample of retail investors and experimental data we find that risk aversion and risk ambiguity are correlated: individuals who dislike risk also dislike ambiguity. We show that what links these traits is the way people handle decisions. Intuitive thinkers are less averse to risk and less averse to ambiguity than individuals who base their decisions on effortful reasoning. We confirm this finding in a series of experiments. One interpretation of our results is that the high-speed of intuitive thinking puts intuitive thinkers at a comparative advantage in situations involving high risk and ambiguity, making them less averse to both. Consistent with this view we show evidence from the field and from the lab that intuitive thinkers perform better than deliberative thinkers when making decisions in highly ambiguous and risky environments. We also find that attitudes toward risk and ambiguity are re lated to different individual characteristics and wealth. While the wealthy are less averse to risk, they dislike ambiguity more, a finding that has implications for financial puzzles.

4/19: Don't care:  If anybody who had something to do with employee retirement plans needed a dose of reality regarding the level of understanding and knowledge participants had about their money, how it was being invested and what the outcomes were, a recent poll provided it.

Results of the poll, which sought input from HR professionals and investment counselors, demonstrated dramatically that a large portion of those who invest in company-sponsored retirement plans do not comprehend how their money is being invested.

Worse, they seem to make no effort to learn. Or, maybe it's that corporate America has not provided the appropriate tools..


61.8% of HR professionals reported that 25% or fewer people knew what "asset allocation means and how it works," while 68.3% of investment counselors said the same.

When asked whether employees "requested additional assistance or a meeting," 67.4% of HR pros said that 25% or fewer did that, while 64.1% of investment folks reported that figure.

The climate of knowledge - or lack thereof - that prevails among employees who invest in company-sponsored retirement plans could be summed up by one comment from an employee that was related by one human resources manager in the survey: "I hear so many bad things about the financial world that I don't know who I can trust. So, I do nothing."

4/19: Going down:  

The deficit problem has become crushing since the financial crisis of 2008. Now for every dollar the federal government spends, it takes in less than 60 cents in revenue.

A budget deficit running at nearly 10 percent of output and expected to grow will likely further swell a public debt load that's already more than 60 percent of the country's gross domestic product.

"Because the U.S. has, relative to its AAA peers, what we consider to be very large budget deficits and rising government indebtedness, and the path to addressing these is not clear to us, we have revised our outlook on the long-term rating to negative from stable,"

the greenback is down about 5 percent against major currencies in 2011, and record low interest rates together with the S&P move will do little to make it more attractive


4/17: TAX HIKES BACK - Well, it has been a solid four months of the current tax rates and Senate Democrats are discussing plans to introduce tax policy changes that they say would raise federal revenues and broaden the budget debate beyond discretionary spending cuts. Some say why not just "tax the rich," but we say:
4/17:

GAO Testimony: Financial Literacy: The Federal Government's Role in Empowering Americans to Make Sound Financial Choices
"The multiagency Financial Literacy and Education Commission, which coordinates federal efforts, has acted on recommendations GAO made in 2006 related to public-private partnerships, studies of duplication and effectiveness, and the Commission's MyMoney.gov Web site." (U.S. Government Accountability Office)


4/14: Fraud
NAPFA takes the fiduciary brand to new levels. Its members must sign a Fiduciary Oath. Its Focus on Fiduciary page has links to: Definition of Fiduciary, Fiduciary Difference, Fiduciary Information, Fiduciary Questionnaire, Fiduciary Voice Podcast (with more than 40 individual episodes of the "Focus on the Fiduciary Show"), and three fiduciary-related videos. In case the message has not gotten through, one video bears the unsubtle title "Brokers vs. Advisers" and features an image of a fistful of dollars over the words: "People who look out for their commissions." That's not just marketing; that's bare knuckles marketing.

Find any NAPFA in CA who is legal to do fee planning?
Good luck

4/14:

Do Social Security Statements Affect Knowledge and Behavior?

Deciding when to retire and claim Social Security benefits is one of the most important financial decisions that workers face. Therefore, ensuring that they have easy access to clear and timely information about their benefit options is a key goal for policymakers. In 1995, the Social Security Administration introduced the “Statement,” a record of past earnings and a summary of estimated benefits at selected claiming ages that is designed to help workers plan for retirement. The Statement is now mailed annually to all workers age 25 and over.

While the Statement has the potential to be a very valuable tool, little research has been done on its impact. A Gallup survey revealed that individuals who had received a Statement had a significant increase in their understanding of basic Social Security features. The most recent U.S. Government Accountability Office report on the Statement found that 66 percent of workers remember receiving a Statement and 90 percent of these workers say that they remember the amount of estimated Social Security benefits. These findings suggest that the Statement might improve knowledge, but provide no information about whether it changes behavior


4/14: Why “diversification” isn’t working

But the risk is wrong. Do you know why?

4/13:
Are you talking to your clients about risk?
The financial crisis has changed the way clients think about risk, planners say. Now, many planners are looking for new ways to speak to clients about risk tolerance in order to improve their investment choices. That includes revamping questionnaires to better understand how clients perceive risk and striving to explain investment strategies in clients' own terms.

Kind of a joke

4/13"
401(k) Plans Are Designed for Mediocrity
"The other funds offered in a 401(k) normally are a mix of large cap, midcap and small cap, bonds and international funds. The reason for this small, diverse group of funds is to allow people to create an asset allocation model based on the efficient market theory -- which is blatantly false."

4/13: Mutual Funds vs. ETFs: The 401(k) Format War
"Summary: A format war is when there is a competition between mutually incompatible proprietary formats that compete for the same market."

4/13:
Social Security figures heavily in boomers' retirement plans
About 45% of Americans age 45 to 65 doubt they have the resources to retire comfortably, and about 65% will depend on Social Security, according to a survey by the Associated Press and LifeGoesStrong.com. A large percentage also said the financial crisis has led them to delay retirement. Only about 10% of respondents reported being very sure about their ability to retire in comfort based on their current assets

4/12: ERROLD F. MOODY JR.                                                                                                                  
April 8, 2011

Public Hearing on Definition of Fiduciary
EBSA's Office of Regulations and Interpretations,
Attn: Public Hearing on Definition of Fiduciary
Room N-5655
U.S. Department of Labor
200 Constitution Ave. NW
Washington, DC, 20210

RE: U.S. DEPARTMENT OF LABOR
EMPLOYEE BENEFITS SECURITY ADMINISTRATION
DEFINITION OF FIDUCIARY INVESTMENT ADVICE

Gentlemen,

I have reviewed all the comments on both days of the testimony, positions by the financial planning community, Schapiro’s comments on the necessity of consumer education and just about everything else in regards to knowledge and competency for ‘broker’s, planners, arbitrators, attorneys et al for over two decades. There are lots of pros and cons regarding who should do what, are commissions the devil incarnate, are fee advisers absolved of ethical conflicts (not even close) but nary a word on whether the advisers identified can act under suitability rules never mind fiduciary. No they can’t.
Brokers?
Neither the DOL nor the industry understands the problem. In fact, the DOL panelists are validating deceit of the industry in their own testimony. And the bulk of testimony from participants could be an attempt to validate an egregious deception to the DOL, consumers and just about everyone else.
What is it? You are all using the term ‘broker’ in the two days of testimony. That is almost a complete lack of understanding of what goes on in the real world. Here is a sample: 

“Independent broker/dealers and their representatives are especially well suited to provide middle-class Americans with the investment products and services necessary to achieve their retirement security and other financial objectives and goals.

When I call my broker and say, "Bernie" "what should I buy?"

But if I ask my broker to send me his firm's research on Cisco, and that research contains a buy rating and a price target available to all the firm's clients, that advice is not individualized and arguably should not carry with it fiduciary responsibility, at least when it's provided to plan fiduciaries.

If all brokers who provide market color or investment information are deemed to be fiduciaries regardless of the intentions of the parties, the vast majority of commission-based accounts may move towards fee-based asset arrangements.

The Department's proposals would deem a broker a fiduciary merely because it is complying with industry rules intended to set standards for brokers  who are not investment advisers.”

The DOL's expanded definition of fiduciary is expected to limit brokers' ability to recommend their firms' proprietary investment products to employers, and to prohibit them from collecting commissions from product sponsors.
Brokers can continue working with plan clients as recordkeepers without accepting the fiduciary standard of care, but some plan sponsors might want to bring in third-party plan advisors to help them make fund selections.”
End

The point is that there are no retail brokers left in the U.S. They have been called various monikers for decades.  First it was ‘vice president’ or ‘senior vice president’ depending on the amount of commissions generated.  In the late 90s the titles expanded to include ‘financial planners, advisers, consultants, wealth manager’ and more all with the clear intent to show that the individual agent has an extended ability to apply far greater  competency than just acting as a sales person.
Go into Wells Fargo, BofA, Chase, Merrill etc. all across America and one is inundated galore with supposed professionalism with all the signs pointing to ‘financial whatevers’. But not a single card with the term broker or registered representative. You have to live in a tomb to miss this clear marketing attempt to sway the naive consumer to utilize one of a firm’s unknowledgeable reps (lack of fundamentals).  
In testimony last year in an arbitration I stated that if you are want to be called a financial ‘whatever’ you must  be held accountable to that level of competency. The defense attorney asked if the use was illegal. It is not.  But it absolutely is a breach of a fiduciary duty, suitability et al to attempt to state you are something other that what you are. To sway consumers with marketing may be OK with a Bud Light commercial, but the allowance  in marketing for lifetime assets to ‘brokers’ who have had nothing more than a one week course in securities is patently absurd. 
I repeat- there have not been any retail brokers for over a decade.  It is a travesty to the public to allow this. Fix this now. It is an absolute breach. 
Knowledge
This is the key to suitability and fiduciary ability. I find the inherent lack of knowledge in the industry to be absolutely abhorrent. And no one steps up and wonders why so much goes wrong.  This is noted about the rule- from 1975- “The advisor must (1) render advice as to the value of securities or other property, or make recommendations as to the advisability of investing in, purchasing or selling securities or other property and do so (2) on a regular basis (3) pursuant to a mutual agreement, arrangement or understanding, with the plan or a plan fiduciary that (4) the advice will serve as a primary basis for investment decisions with respect to plan assets, and that (5) the advice will be individualized based on the particular needs of the plan.” OK- how???

Thirty five years ago there may have been some assumption about the knowledge and ability of a securities licensee.  Not any more. Not even close.  Specifically, “the adviser must render advice....” How? A series 7 is so sophomoric in its knowledge base since at least the mid/late 1980s, they are so far behind the times that they may never catch up. 

There are two points to this- the first will invalidate most ‘brokers’ and broker/dealers from offering fiduciary advice to customers. (I am excluding appraisers and more that are outside my expertise and involvement.) I am directing my commentary to those that deal directly with the various plans covered by the DOL- for that matter, any organization or rule including ERISA, SEC, FINRA, state governmental entities and so on. And that is that a broker or registered representative, by definition those with a series 6, 7, 24, 63, etc., have never been taught the fundamentals of investing. It is disingenuous for any governmental organization to suggest competency (real life knowledge) in working with retirement plans, ERISA standards, providing education, etc. unless you know what the background of the agent is. I will repeat this statement again- the fundamentals of investing have never been taught to a broker, are not now, and may  never will be unless and until the governmental entities have a clue to what a professional adviser must know. After all, if one does not know diversification by the numbers, under what scenario can any instruction, advice, education be passed on to the public? It is not just diversification that is missing in instruction for licensing- asset allocation, standard deviation, correlation, risk of loss, budgeting, efficient market theory, capital asset pricing, Sharpe ratio and on and on. No training in the use of a financial calculator. Why would anyone use an adviser who does not know how money works (though they try to indicate they have a computer at work. Not even close.).

There is nothing on ‘suitability’ in licensing since it effectively appears as a word only. No real life application of product.  Of course one can say- and the industry does- that 20 or 30 years of experience is more than adequate time to address additional sophistication in the needed areas of investing. And one would therefore choose a witch doctor with 50 years of experience over that of a relatively new physician with a full medical degree and residency overseen by other professionals. A compliance officer or supervisor with none of the underlying fundamentals as a basis for a suitability determination is also a pretty useless decisionmaker save for the most mundane of issues (whatever those may be). 

As for the attorneys at any of the firms- there is nothing in the education that offers the fundamentals of investing. Any subsequent position has to be based on a very limited opinion rather than the fundamentals of investing. Never meant one who understood the true meaning of diversification. Or an arbitrator. Admittedly there must be some- just never met any.  

In fact, I  doubt anyone that anyone at the DOL has bothered to learn diversification since my attempt in 1995 to suggest updated education to the fundamentals. No one knew what I was talking about.  (*How many stocks must you have in a portfolio in order to insulate it due  to unsystematic risk? If you do not know that, then you cannot get to risk. If you cannot get to risk, you cannot get to suitability.)  Sure diversification is mentioned in the series 7 classroom material but that is the extent (generally don’t put all your eggs in one basket. And that means??? If it cannot be defined with numbers, it is pretty useless.)  The bottom line is that the sale of most individual securities is a breach of suitability- and obviously fiduciary responsibility- because there are not enough stocks in the portfolio  to keep risk ‘acceptable’. As a result of that gross ineptness across all levels of industry knowledge, we had Enron, Worldcom, Adelphia and devastation on thousands upon thousands of retirees that should not have happened. Some basic education- none of which has stayed up with the times over the last 35 years- could have tempered much of the financial ruin and saved many a retiree.

Risk

Here is the second major problem. Whenever a portfolio is designed, where the are the numbers for risk? Is there anything taught on risk of loss in a portfolio? No. So how is risk designed for the consumer? It starts with a complete hack job with client questionnaires. The consumer is required to indicate what their risk is. The consumer is going to the adviser to ask what they should do, not vice versa. The difficulty is that there are NO definitive standards for risk. What is conservative, moderate, aggressive, speculative? The answers would be totally variant for both consumers and advisers. And universally just as useless. There must be consistency in an explanation of risk.

That statement begs the issue- isn’t risk known by standard deviation (SD)? No. How about volatility? No. Yet so many offerings to American consumers tend to include something about standard deviation as risk since so many ‘brokers/advisors’ use Morningstar reports. But there is nary a reader of these reports that has a clue to the annual standard deviation of the numbers mentioned therein (trick question which I doubt any reader will recognize. Hence the problem.) 

It is true that SD goes down over time and that is what is presented- as though the risk goes down. It is a breach of duty to ever allow SD to be used even with some caveat or exculpatory disclaimer in the ‘small print’. Why? It is the fact that the risk of LOSS goes up the longer you hold equities. How much you can lose is the key to deciding what one will do. 

And where is risk of loss? Nowhere to be found. This lack of fiduciary focus is the reason we got into the mess in 2000 and further in 2008. An inability to teach what is necessary to consumers. If there had been some simple coursework identifying real life risk, a great number of Americans could have avoided the bulk of losses they have sustained. But the  risk of loss is not generated in any of the computerized software by any firm dealing under DOL standards. Or ERISA. One cannot offer education regarding risk and reward without the necessity and ability to at least show the exposure to risk for effectively any allocation. It can be done. It must be done. If not, the Dodd Frank requirements are useless. (Most allocations will have at least a 50% possible loss over time- though that can be in as short as one year.) Every equities investor (401k in particular) needs a fiduciary to address that statistic (which can only be done by a personal financial calculator at present. Firms do not want to include it because it would open up difficult dialogue with the advisor and inherently reduce sales).

Further, any fiduciary viewing the economics before  2000 and 2008 should have identified the overriding economic risks. But where was the knowledge? Where was the real life element of the inverted yield curve. (It is a 100% indicator of a recession.) Unemployment. Real Estate. Dollar. Asia. Even if certain issues are touched upon, there are none of the potential  implications in licensing preparation. In any case, what can one expect from a one week licensing course that does not include the fundamentals.

And while I am on the subject, where is correlation? No adviser, no software program can do an allocation without addressing the very difficult movement of one investment to another. A fiduciary must be able to do it. But it is not in the series 7, series 24, or any others, CFPs included.  How can you even have suitability applied? You cannot. And one can sure not be a fiduciary. Since the subject is not addressed anyplace in any rule, I have to assume that the DOL, SEC, FINRA and more are clueless to what is necessary for fiduciary responsibility.

Returns

Testimony noted representations to consumers about returns- and of course the education under 401ks et al include various groupings of performance coupled with some pretty Powerpoint graphs. Almost universally they are based on past history that starts in 1900 or maybe 1925, or 1960 or ?????  If one backtests (also not taught) enough, it is possible to make certain scenarios appear better or worse. No matter, past results are an emotional and professional crutch for advisors unwilling to spend time in the present and look to the future.  One does not really have to read or think- just let the computer dump out an allocation that is the same for just about anyone and then sit back with a buy and hold and reap the money from fee advisement.  Just where has the broker/advisor added value?

Doing nothing can work- if one is lucky. It also is the reason we  are in the financial devastation we are now in. Yes, there might be some sophomoric commentary about risk- returns are not guaranteed, etc. Not good enough when risk of loss can be calculated for each consumer’s allocation. It can be taught- but again,one needs a personal financial calculator. And the use of a financial calculator is not required by a broker. Nor attorneys dealing in any securities matters. Nor compliance officers. Nor supervisors with a series 24, nor arbitrators.  How is anyone going to be a fiduciary to a plan without knowing how money works? They cannot. 


Registered Investment Advisers

Next is the competency of Registered Investment Advisers per se. While the SEC regs demand a fiduciary duty to consumers, where is the knowledge to justify it? There are a few CFAs, PhDs, MBAs in the mix but the bulk of the RIAs came from the brokerage industry and used the series 7 as the background for the RIA (like myself in 1984). Hence the comment- the fundamentals are not there either. And recognize that there are NO continuing education requirements. So why is it not apparent that the lack of knowledge was one of the key reasons for the failure of so many allocations in 2000 and 2008? 

 Annuities

There have been comments about the inclusion of annuities in the education and inclusion in 401ks. Where will this education come from?  Certainly not from RIAs. There is nothing that covers indexed annuities, step ups or guaranteed income streams. Anyone doing this is going to have to have a insurance license and/or a mandatory fee insurance license from the 30+ states that require one. Otherwise how can they present the appropriate knowledge, experience or competency? 

Life Insurance

No education of retirement can de done without covering the policies that are already in existence. For the purposes of this short paper, I will exclude the issues about the necessity of having insurance when one is younger. It is the fact that many retirees already have insurance purchased decades ago. Perhaps there is an idle comment about the decision of whether one needs to keep old insurance that may no longer is needed or too expensive and that would be it. So just surrender the policy.  And that would be wrong. Unneeded policies for the old or sick become an asset that can be sold for greater than the existing cash surrender value. A fiduciary has to know what a life settlement is and how they work. This asset could greatly assist many retirees.

Long Term Care

No retirement education can exist without addressing the need to cover for the eventuality of assisted living and nursing home care. It is expensive and while not being an absolute statistic, it must be formally addressed in the retirement budget. An RIA has no background in annuities, life insurance, life settlements or long term care. A fiduciary explaining retirement is responsible for all of these sections and more.

Summary

I have read most blogs, articles, reports, presentations, etc., on fiduciary duty for decades and nary a one has ever mentioned competency via knowledge. FINRA doesn’t want to rock the boat; the SEC is... well the SEC and  guided by a commissioner who refused to include the fundamentals of investing when at FINRA; state governmental entities - like the others- are underfunded and not all that competent either. All have been swayed, cajoled and marketed  to maintain the status quo over the past 35 years. It is financially beneficial for the industry. Knowledge would certainly slow sales. When I went to the NASD in the mid 90s with a proposal to instruct arbitrators, I was told that the industry would never allow it since it would slow sales (true). In the mid 2000s with another ‘suggestion’ to increase education overall, I was met with Schapiro’s office that FINRA was a procedural entity, not a substantiative one. The writing was on the wall- the industry pretty much controls what happens.

The exponential surge of technology from the mid 1990s has changed every facet of our lives. Increased volatility is now the norm, as is 24 hour trading, derivatives, lack of pensions, longer lives, instantaneous transfer of information (not necessarily knowledge), Alzheimers, terrorism and more. Old  school financial education- actually the lack thereof - has left consumers and advisers living on past history as their guide to the future. It is obvious that the old homilies and inviolate  theories that became dogma were and are not suited to this new world order. We need forward thinking fiduciaries who understand the past but are duty bound to do the heavy lifting to move into an entirely different economic arena. Thirty five year old licensing material with no true focus towards risk has left the entire nation in a financial mess. ‘Brokers’ do not exist and the advisors acting in almost any capacity- and certainly as a fiduciary- must increase their grasp and understanding of real life product application. The series 7 and 24 have never provided the fundamentals of investing.

You can hear all the testimony you want about the formal inclusion of fiduciary standards. But the key is mandatory education with absolute coverage of the fundamentals of investing and insurance/annuities.
 
Dodd Frank has provided an opportunity to scale up an industry far different from a marketing system with very little substance. Fiduciary duty is where the adviser has the requisite skills to provide knowledge. Maybe 35 years ago but not for the last 15- 20 years.

Fix this.  

Very Truly,


Errold F. Moody Jr

* How many stocks- for the uninitiated, it is up to 350. If you are trying to establish a formal allocation out of stock, good luck in analyzing that many and the corresponding correlations (impossible for both consumers and advisers.)  
           

4/11: backtesting: This was an AIG 10,000,000 policy under premium financing.  The insurance firm out of NY was traveling from state to state presenting illustrations at 10% plus which represented a ‘portion’ of the returns that were shown from past history. The return was projected in the illustration for 50 years where they could not only pay off the loan but have amassed a large sum of money to boot.  (

What the firm had done (prior to 2008)- but a lot are still doing now- was develop a computer program that went through past history to find out what indexes worked the best. They would take 75% of the return of the best that year plus 25% of the second best return and nothing for the third. They had come up with the S&P 500, Stoxx and the Hang Seng. It could have been anything- but that is what the computer showed.

But none of the past returns were identified in the contract so  I went back and got the numbers of each for the past 15 years or so and computed the results myself. It showed a 17.53% annual average return by using the various percentages . Heck of a deal. But was it what they were doing?  So I called AIG and talked to the managers etc. They had no clue to what was going on. So I finally got to the floor attorney and he said that they suggested that agents use not more than 90% of the 17.53%- which was still 15.77%. So the agents had taken about 60% of the 17.53 to show customers they were being conservative.

The report stopped the transaction but she still wanted to do something with them.   Don’t know what happened after that since she was not my client

4/11:

"Trust in Public Institutions Over the Business Cycle" Free Download


CESifo Working Paper Series No. 3389

BETSEY STEVENSON, University of Pennsylvania - The Wharton School, CESifo (Center for Economic Studies and Ifo Institute for Economic Research)
Email:
JUSTIN WOLFERS, University of Pennsylvania - Business & Public Policy Department, National Bureau of Economic Research (NBER), Institute for the Study of Labor (IZA), Centre for Economic Policy Research (CEPR), Federal Reserve Bank of San Francisco, CESifo (Center for Economic Studies and Ifo Institute for Economic Research), Kiel Institute for the World Economy
Email:

We document that trust in public institutions — and particularly trust in banks, business and government — has declined over recent years. U.S. time series evidence suggests that this partly reflects the pro-cyclical nature of trust in institutions. Cross-country comparisons reveal a clear legacy of the Great Recession, and those countries whose unemployment grew the most suffered the biggest loss in confidence in institutions, particularly in trust in government and the financial sector. Finally, analysis of several repeated cross-sections of confidence within U.S. states yields similar qualitative patterns, but much smaller magnitudes in response to state-specific shocks. 

4/11:


4/10:

Dan Fuss: A 20-Year Bear Market For Bonds

Is Starting

The odds are five out of six, or about 83%, that interest rates will rises, albeit with breaks and intervals, for the next 20 years,

I have already taken clients out of bonds


4/10:

India is still grappling with extreme poverty, but on the other end of the spectrum, a wealthy class is emerging that could represent opportunities for U.S. advisors


I have noted recently that up to half the visitors to my site were from India.

India is still grappling with extreme poverty, but on the other end of the spectrum, a wealthy class is emerging that could represent opportunities for U.S. advisors

4/10: NASAA
Directory Of Securities Laws & Regulations

The links below will take visitors to pages within the websites of NASAA members containing information about individual state, proivincial, or territorial securities laws, rules and regulations. By clicking on the name of a state, province, or territory, you will be redirected to that jurisdiction's website. Information presented on this Web site is collected, maintained, and provided for the convenience of the user. While every effort is made to keep such information accurate and up- to-date, NASAA does not certify the authenticity of information herein that originates from third parties. NASAA shall under no circumstances be liable for any actions taken or omissions made in reliance on any information contained herein or for any other consequences of any such reliance.


State Rule Proposals: Click here for a list of proposed state rules.


U.S.




Alabama

Illinois

Montana

Puerto Rico

Alaska

Indiana

Nebraska

Rhode Island

Arizona

Iowa

Nevada

South Carolina

Arkansas

Kansas

New Hampshire

South Dakota

California

Kentucky

New Jersey

Tennessee

Colorado

Louisiana

New Mexico

Texas

Connecticut

Maine

New York

Utah

Delaware

Maryland

North Carolina

Vermont

Dist. of Columbia

Massachusetts

North Dakota

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Florida

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Ohio

Washington

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Minnesota

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West Virginia

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Oregon

Wisconsin

Idaho

Missouri

Pennsylvania

Wyoming

CANADA



Alberta

Northwest Territories

Québec

British Columbia

Nova Scotia

Saskatchewan

Manitoba

Nunavut

Yukon

New Brunswick

Ontario


Newfoundland & Labrador

Prince Edward Island




4/10: Part III --- Administrative, Miscellaneous, and Procedural
Update for Weighted Average Interest Rates, Yield Curves, and Segment Rates
Notice 2011-33
This notice provides guidance as to the corporate bond weighted average interest rate and
the permissible range of interest rates specified under § 412(b)(5)(B)(ii)(II) of the Internal Revenue
Code as in effect for plan years beginning before 2008. It also provides guidance on the corporate
bond monthly yield curve (and the corresponding spot segment rates), and the 24-month average
segment rates under § 430(h)(2). In addition, this notice provides guidance as to the interest rate
on 30-year Treasury securities under § 417(e)(3)(A)(ii)(II) as in effect for plan years beginning
before 2008, the 30-year Treasury weighted average rate under § 431(c)(6)(E)(ii)(I), and the
minimum present value segment rates under § 417(e)(3)(D) as in effect for plan years beginning
after 2007.
CORPORATE BOND WEIGHTED AVERAGE INTEREST RATE
Sections 412(b)(5)(B)(ii) and 412(l)(7)(C)(i), as amended by the Pension Funding Equity Act
of 2004 and by the Pension Protection Act of 2006 (PPA), provide that the interest rates used to
calculate current liability and to determine the required contribution under § 412(l) for plan years
beginning in 2004 through 2007 must be within a permissible range based on the weighted average
of the rates of interest on amounts invested conservatively in long term investment grade corporate
bonds during the 4-year period ending on the last day before the beginning of the plan year.
Notice 2004-34, 2004-1 C.B. 848, provides guidelines for determining the corporate bond
weighted average interest rate and the resulting permissible range of interest rates used to
calculate current liability. That notice establishes that the corporate bond weighted average is
based on the monthly composite corporate bond rate derived from designated corporate bond
indices. The methodology for determining the monthly composite corporate bond rate as set forth
in Notice 2004-34 continues to apply in determining that rate. See Notice 2006-75, 2006-2 C.B.
366.
The composite corporate bond rate for March 2011 is 5.60 percent. Pursuant to Notice
2004-34, the Service has determined this rate as the average of the monthly yields for the included
corporate bond indices for that month.
The following corporate bond weighted average interest rate was determined for plan years
beginning in the month shown below.
For Plan Years
Beginning in Permissible Range
Month Year
Corporate
Bond Weighted
Average 90% to 100%
April 2011 6.06 5.45 6.06
YIELD CURVE AND SEGMENT RATES
Generally for plan years beginning after 2007 (except for delayed effective dates for certain
plans under sections 104, 105, and 106 of PPA), § 430 of the Code specifies the minimum funding
requirements that apply to single employer plans pursuant to § 412. Section 430(h)(2) specifies the
interest rates that must be used to determine a plan’s target normal cost and funding target. Under
this provision, present value is generally determined using three 24-month average interest rates
(“segment rates”), each of which applies to cash flows during specified periods. However, an
election may be made under § 430(h)(2)(D)(ii) to use the monthly yield curve in place of the
segment rates. Section 430(h)(2)G) set forth a transitional rule applicable to plan years beginning
in 2008 and 2009 under which the segment rates were blended with the corporate bond weighted
average described above, including an election under § 430(h)(2)(G)(iv) for an employer to use the
segment rates without the transitional rule.
Notice 2007-81, 2007-44 I.R.B. 899, provides guidelines for determining the monthly
corporate bond yield curve, and the 24-month average corporate bond segment rates used to
compute the target normal cost and the funding target. Pursuant to Notice 2007-81, the monthly
corporate bond yield curve derived from March 2011 data is in Table I at the end of this notice. The
spot first, second, and third segment rates for the month of March 2011 are, respectively, 1.91,
5.23, and 6.46. The three 24-month average corporate bond segment rates applicable for April
2011 are as follows:
First
Segment
Second
Segment
Third
Segment
2.51 5.59 6.38
The transitional rule of § 430(h)(2)(G) does not apply to plan years beginning after December 31,
2009. Therefore, for a plan year beginning after 2009 with a lookback month to April 2011, the
funding segment rates are the three 24-month average corporate bond segment rates applicable for
April 2011, listed above without blending for any transitional period.
30-YEAR TREASURY SECURITIES INTEREST RATES
Section 417(e)(3)(A)(ii)(II) (prior to amendment by PPA) defines the applicable interest rate,
which must be used for purposes of determining the minimum present value of a participant’s
benefit under § 417(e)(1) and (2), as the annual rate of interest on 30-year Treasury securities for
the month before the date of distribution or such other time as the Secretary may by regulations
prescribe. Section 1.417(e)-1(d)(3) of the Income Tax Regulations provides that the applicable
interest rate for a month is the annual rate of interest on 30-year Treasury securities as specified by
the Commissioner for that month in revenue rulings, notices or other guidance published in the
Internal Revenue Bulletin.
The rate of interest on 30-year Treasury securities for March 2011 is 4.51 percent. The
Service has determined this rate as the average of the daily determinations of yield on the 30-year
Treasury bond maturing in February 2041.
Generally for plan years beginning after 2007, § 431 specifies the minimum funding
requirements that apply to multiemployer plans pursuant to § 412. Section 431(c)(6)(B) specifies a
minimum amount for the full-funding limitation described in section 431(c)(6)(A), based on the
plan’s current liability. Section 431(c)(6)(E)(ii)(I) provides that the interest rate used to calculate
current liability for this purpose must be no more than 5 percent above and no more than 10 percent
below the weighted average of the rates of interest on 30-year Treasury securities during the fouryear
period ending on the last day before the beginning of the plan year. Notice 88-73, 1988-2 C.B.
383, provides guidelines for determining the weighted average interest rate. The following rates
were determined for plan years beginning in the month shown below.
For Plan Years
Beginning in Permissible Range
Month Year
30-Year
Treasury
Weighted
Average 90% to 105%
April 2011 4.28 3.86 4.50
MINIMUM PRESENT VALUE SEGMENT RATES
Generally for plan years beginning after December 31, 2007, the applicable interest rates
under § 417(e)(3)(D) are segment rates computed without regard to a 24-month average. For plan
years beginning in 2008 through 2011, the applicable interest rates are the monthly spot segment
rates blended with the applicable rate under § 417(e)(3)(A)(ii)(II) as in effect for plan years
beginning in 2007. Notice 2007-81 provides guidelines for determining the minimum present value
segment rates. Pursuant to that notice, the minimum present value transitional segment rates
determined for March 2011, taking into account the March 2011 30-year Treasury rate of 4.51
stated above, are as follows:
For Plan
Years
Beginning in
First Segment Second
Segment
Third
Segment
2010 2.95 4.94 5.68
2011 2.43 5.09 6.07


4/10:
Insurance Industry Outlook: High Hurdles loom in 2011 & Beyond; "With regulatory reform a work in progress, both in the United States and globally, carriers face an extended period in which they won't know what will be expected of them, what compliance demands and costs they'll face, or even whether they can remain viable in certain markets."

They got that right

4/10:

FINRA Institute at Wharton

Certified Regulatory and Compliance Professional (CRCP) Program