Archives For March 2012

I read this profile of Sara Blakely several days ago. I don’t know about you, but I like reading about how people attain their wealth. Sara Blakely’s story is particularly interesting because she’s now a billionaire and runs a private company (Spanx) with no debt. That’s a rarity this day and age.

I urge you to read the whole article. I want to focus on a few interesting bullet points:

• She took the LSAT twice to try to go to law school and failed both times.

• She worked several months at Disney’s Epcot helping to buckle seat belts for one of their rides.

• She went to work selling fax machines for Danka.

• She created Spanx basically by accident. She didn’t like wearing panty hose because they were hot but she liked the way the pantyhose covered her panty lines (can I say that on a financial blog?). So, she cut the legs off a pair of pantyhose and Spanx was formed.

• She used $5,000 of her savings over a two-year period to develop and launch her product.

• She wrote her own patent.

• She got her product into Neiman Marcus.

• She had no money for advertising so she went on a PR rampage.

• She shipped samples to Oprah Winfrey and eventually got Oprah to promote them on one of her “Favorite Things” episodes.

Interesting stuff.

What does this show us? One, you must have an idea. Two, you must plan. Three, you must go for it even though you may not feel ready.

I like to see people like Sara succeed.

This is a follow-up to yesterday’s post, which you can read here.

As I mentioned yesterday, I have monthly total return data for BOTH the S&P 500 Index and the Barclay’s Aggregate Bond Index going back to January 1991 (I have S&P data going back to 1926). I thought it would be interesting to look at how much a person could have accumulated over the last 21 years had they been able to invest their social security contributions on their own.

The results were somewhat surprising.

According to my numbers, the portfolio that offered the highest end value was the one invested 100% in the Aggregate Bond Index: SS Invested in S&P 500 with Bonds (1991 – 2009).

Actually, when you consider the way the market has gone over the last 20+ years, it’s not surprising that the bonds outperformed stocks from a dollar cost averaging standpoint. Why? For one, when you’re investing a small amount of money over a long period of time, it’s best for the market to trend upward slowly so that you can accumulate more shares at the beginning, which will increase in value as the market increases. What we saw in the 90s and 2000s was a massive run-up followed by a massive drop.

Anyway, were social security contributions your money, and you maxed out those contributions over the last 21 years, you (and your employer) would have contributed $176,779 (I’m only counting the portion that goes towards social security, not disability). Your account balance would have been somewhere in the neighborhood of $322,000 to $335,000 (depending on your chosen asset allocation). And…that’s only for the last 21 years. Most people work much longer than that. So, it’s not out of the question that the account would be worth $450,000 or more over a thirty year (or longer) career.

Now some may look at those numbers and think that what social security is offering is a better deal. Here’s the thing: there is no free lunch! If social security is paying out more than a person could have earned investing in stocks and bonds, then that tells us the program is based on taking from the current earners to pay the current recipients. It’s “fine” as long as there are a greater number of employees contributing than there are retirees receiving. Not only that, if you did max out your social security contributions over the last 21 years, the government most likely will consider you rich and will take back a portion of your social security payment by taxing them.

So take a look at the PDF I put together and let me know what you think. Is there anything else you would like to see?

NOTE:Also, if you have monthly total return data for the Aggregate Bond Index that goes back farther than 1991 (and you’re willing to share), please let me know. It would be cool to be able to run different scenarios using more data.

How’s that for a catchy title?

I have monthly total returns for the S&P 500 (S&P 90 prior to February 1957) going all the way back to January 1926. However, I only have the Barclay’s Aggregate Bond Index (formerly known as the Lehman Aggregate Bond Index) going back to January 1991.


I thought it would be interesting to look at different portfolio allocations and see how they would have performed from 1991 through 2011. I assumed a beginng balance of $100,000 and annual rebalancing at the end of each year. I started out with 100% stocks and no bonds and then decreased the stock allocation by 5% while increasing the bond allocation 5% until I got to 100% bonds. You can download a PDF of my findings here: S&P with Bonds (1991 – 2011).

What I found interesting was the portfolio that brought the biggest balance at the end of 2011 was the 95% stocks/5% bonds. Not only that, it delivered a better return with slightly less volatility—as measured by the monthly standard deviation.

Another interesting finding was how well the 70% stocks/30% bonds portfolio did. Take a look at the charts for the 100% stock portfolio and the 70/30 portfolio:

As you can tell from the charts, the 70/30 had significantly less volatility than the 100% stock portfolio. It captured 97% of the all stock allocation but only experienced 70% of volatility* (again, measured by monthly standard deviation). It seems like a reasonable trade-off to me.

But, that’s not the only way to look at it.

Another way to look at it is to look at potential retirement income. For instance, let’s say you want to withdraw 4% of your account balance upon retirement. Here are the different income amounts based on the ending values of the portfolios:

It’s important to note that past returns aren’t predictors of future results. That’s something to keep in mind when deciding on how to allocate your portfolio. I tend to be more on the aggressive side with our retirement portfolio but these findings are making me rethink my strategy. That said, I can accept more volatility now for hopefully higher income at retirement.


*To arrive at that number, I simply divided the monthly standard deviation for the 70/30 portfolio by the standard deviation for the 100% stock portfolio.

This is the first I have heard of this story: Annuity Case Chills Insurance Agents.

Last month, Glenn Neasham, an independent insurance agent, was ordered to spend 90 days in jail on a felony-theft conviction for selling a complex annuity to an 83-year-old woman who prosecutors alleged had shown signs of dementia.

The agent’s conviction, by a state-court jury in Lake County, Calif., is sending shivers down the spines of Mr. Neasham’s peers across the country. They can’t recall another case where an agent was sent behind bars for selling an annuity.

The guy talked the woman into putting $175,000 into an equity-indexed annuity. His commission: $14,000 (8 percent). I know it’s not the same product, but the commissions for $175,000 put into American Funds mutual funds are 3.5%.


There is a quick way to end these abuses: stop paying bigger commissions for these products.

Now, it’s important to note that we do not have all the information. I just think putting an 83-year old into an equity-indexed annuity is not looking out for her best interest.

Let the ticked-off insurance agents’ vitriol begin…

Anyone seen this yet? Why I am Leaving Goldman Sachs.

Mr. Smith’s problem with Goldman Sachs?

To put the problem in the simplest terms, the interests of the client continue to be sidelined in the way the firm operates and thinks about making money.

Tell me one commission-based company (or any company for that matter) that isn’t that way?

This is a very critical piece. Give it a read if you have a couple of minutes.

Should he have written it?

I hope this guy never wants to work in banking again.

UPDATE:. I thought this snippet from a WSJ piece was interesting…

 Given the vagueness of the allegations, even Goldman’s pledge to “examine” them sounds silly. (Imagine the scene: “Hi, I am Goldman’s chief inspector. Did you call your clients ‘muppets’?”)

Instead of “examining” unprovable accusations, Goldman and other banks should ditch the “clients- first” mantra they constantly recite and state clearly what they are about.

Rather than extolling Goldman’s “client-driven” culture, as they did in their response to Mr Smith last week, Mr Blankfein and his No. 2 Gary Cohn should have seized the opportunity to explain how the business of finance really works.

Banks aren’t charities—they should have said—and they don’t just seek to make money for customers. They also have shareholders, employees and executives who want to get paid.

Financial bosses try to do everything legally possible to satisfy all their constituencies, but conflicts are inevitable. Customers and the public should be aware of that.

Better late than never…

Here are the year-to-date total return numbers for the S&P 500, S&P Midcap 400, S&P Smallcap 600, MSCI EAFE, MSCI ACWI ex US, MSCI Emerging Markets, Barclay’s Aggregate Bond Index (formerly the Lehman Aggregate Bond Index), Oil, and Gold.

I’m thinking of adding the returns for the corresponding exchange-traded funds so we can compare the results. Thoughts?

My father-in-law sent this to me the other day and I thought it was worth sharing. Enjoy.