Will 2015 be the Year of the Bear?

January 12th, 2015

2015 year of bear

It’s interesting how many financial pundits are saying that we are still in a bull market because right now I can’t find much to justify it. In fact, there are some reasons to suspect that we may be in the initial phase of a major down-turn. Why? Consider the following:

1. Despite the fact that the major averages have been holding up fairly well, the VIX (volatility index) has jumped to bearish levels. (Anything above 15 is considered bearish and values over 20 are considered very bearish.)

2. Gold has been moving back up in spite of the fact that most financial experts are saying that gold has more room to fall. Some are even predicting a slide to $700. Historically, people buy gold for two main reasons–as a hedge against inflation and as a hedge against rising socio-economic uncertainty. There’s little inflation to be found anywhere in the world so the first reason is out, leaving us to think that perhaps the so-called "smart money" is anticipating a period of global economic turmoil, or stagnation at the very least.

3. The US dollar keeps pushing higher. A year ago, who would have thought that? What this could mean is that the greenback is not going the way of the dodo in terms of being pushed out as the world’s reserve currency as many pundits have argued. Despite the fact that the US economy is not going gangbusters, it’s still doing better than most major economies. China’s growth rate has been decelerating at a fast clip and I’m not sure if one can really believe the "official" growth rate as forecast by the Chinese government. (Copper prices have long been used as an indirect measure of Chinese growth and today the Copper etn (JJC) closed at a level not seen since mid-2009. The price of this tracking stock has been declining steadily since its peak in early 2011 and there doesn’t appear to be a bottom in sight.)

As a corollary to this, treasuries and investment grade corporate bonds have been soaring. The Long-Term Treasury etf (TLT) has risen 30% since the beginning of 2014. Compare that with the S&P 500 which has risen 10% in that time. Clearly, investors are preferring the safety of bonds to the risk of owning stocks. Moreover, stocks have become richly valued–the average price/earnings ratio (P/E) of the S&P 500 is currently hovering just below 20. That’s about 30% above its average historic level of 15.

4. Although employment has been rising, wages have been stagnating since the recession. This means that people have less money to spend on goods and services, essentially inhibiting growth. And what with the baby boomers retiring, spending will further decelerate (except for possibly in the rv, mobile home, and cruise markets). It’s going to be tough to expect the Millenials to pick up the slack since many of them are saddled with exorbitant student debt. This scenario does not bode well for further appreciation in real-estate, either; in fact, we could see prices fall quite a bit, especially in the upper echelons of the housing market which the boomers will want to sell and the Millenials can’t afford.

In short, as there doesn’t seem to be a lot of fuel to propel the stock market higher, moving to the sidelines could be a very prudent move.

Today’s market highlights: Outside of some breakouts in biotechs, one of the few bright spots was in precious metals. The Gold Miner etf (GDX) has been in rally mode since the beginning of November and today it pushed above minor resistance at $118. (Next stop is major resistance in the $120 area.) Silver has been a little late to this party but today’s move in some of the junior silver miners (SSRI, AG, EXK) suggest that it, too, could be in the initial phase of a turn-around. A break above $16.50 resistance in the Silver etf (SLV) would likely fuel a continued rally in the white metal.

Historical returns of traditional asset classes

October 10th, 2014

The other day an acquaintance said that her nearly grown son wants to invest for the future but he doesn’t have the time nor the market savvy to invest in anything outside of an index tracking stock or mutual fund. She thought that investing in the S&P 500 or perhaps gold would be the most beneficial, but I countered with the small cap Russell 2000 (IWM is the index’s most popular tracking stock).

Sure, it’s more volatile in the short-term but in the long term it’s been tough to beat. As a favor, I said I’d run the historical numbers for the traditional asset classes (1928 to present). She was blown away by the results:

Asset Class Total Return
Class %
Small cap stocks 2,040,481
REITs 738,445
Large cap stocks (S&P 500) 329,976
International stocks 206,415
Long-term corp bonds 15,502
Long-term gov’t bonds 10,451
Intermediate gov’t bonds 8,288
International bonds 6,073
T-bills (cash) 1,837
Gold (since 1928) 5,786

The above numbers reflect total returns since January, 1928 through September, 2014. (Total returns include price appreciation plus dividends.)

1. Small-caps clobber all other asset classes. Going forward, I believe that biotechs and new tech (alternative energies, internet, space exploration, nanotech, quantum entanglement technologies, etc.) will be among the big leaders.

2. Long-term corporate bonds are better than long term government bonds due to the risk premium (higher rate of interest earned) because of the possibility of default. (Government bonds are considered to be essentially risk-less.)

3. Real-estate investment trusts (REITs) have always been solid and should be a major component of any portfolio.

4. The returns of large-cap US stocks (aka the S&P 500) still dominate the returns of International stocks. (But frontier markets shouldn’t be overlooked as future sources of increasing growth.)

5. Gold: The yellow metal was actually illegal to own in bullion form from 1933 to 1974. During those years the price was fixed by the government but afterward the law was changed and the price was allowed to float. Gold has been a terrific investment over some periods since the mid-’70s but it’s been a bad one in recent years. Since its mid-2011 peak, the metal has shed about 36%. The good thing about gold is that it is portable; the bad thing is that it does not pay a dividend. The other bad thing is that gold doesn’t have much use outside of being decorative while platinum and palladium have use in industry.

6. Cash (T-bills): Over the long term, cash has not been king. Stashing your cash under the mattress is the worst place to put your money. But in times of unrest, it’s better than being in losing investments.


When considering asset allocation, you must also take into account your investment horizon. Are you in your early 20’s and investing for the next 50-70+ or are you much closer to retirement and need to shelter your nest egg? This is where Modern Portfolio Theory comes into play and why investing only in the currently highest returning asset classes is not always the best move because volatility risk must be taken into account.

Modern Portfolio Theory strives to minimize risk over the the long term but it can become a major hindrance to portfolio returns during sharp market corrections. To learn one way to utilize the benefits of the asset allocation strategy provided by Modern Portfolio Theory while also protecting your nest egg during sharp market corrections (especially if you’re looking at less than 20 years to retirement) please visit the Portfolio Preserver website.

[Note: Total return data was provided by the Portfolio Preserver

Is it about to rain on this rally?

July 3rd, 2014

Today’s better than expected jobs number helped hoist most of the major averages to new highs…and pushed the volatility index (VIX) to a low not seen since the beginning of 2007.  While historically the VIX has shown that it can stay at depressed levels for a while, there is an indication that it may not be hanging out here for much longer.

VVIX/VIX divergence
The VIX volatility index (VVIX) is a measure of the implied volatilities of the options that make up the VIX.  It is an indicator of the expected volatility of the 30-day forward price of the VIX. The VIX and the VVIX usually move in concert with each other but lately there’s been a divergence in direction.

The charts below show that from the beginning of February to mid-May the general trend of both indices was down.  Since then, the VIX has continued its downward trend but the VVIX seems to have reversed course and appears to be trending in the opposite direction.  While this could be just a temporary phenomenon that may be explained by the differences between the underlying models involved in the calculation of each index, it could also mean that the era of the ultra-low VIX and an ever rising market is coming to an end.

Not to rain on anyone’s Fourth of July picnic, but it might behoove long-term investors to consider buying put protection as a hedge especially since options are at fire sale prices. Remember, it’s better to carry an umbrella and not have to use it than to be caught without one in a sudden downpour.


VVIX chart

Sugar sours

June 30th, 2014

Sugar in a downward trending channel

The chart of the Sugar etf (SGG) has been trading in a downward trending channel. Friday, the stock was soundly rejected from its upper channel boundary and today the stock gapped lower continuing the trend. We’ll know if this downward trend is to continue if the stock rebounds from around the $52 level. To learn how to play channeling stocks, please scroll below to the Recipes box in the right column and check out “Chocolate Channeling Bars”.

Warren, Steve, or Bill: Qui es mas macho?

May 13th, 2014

Warren Buffett, aka the Oracle of Omaha, is considered by many to be one of the greatest, if not the greatest, investor of all time. And if I had been a long time shareholder of the Class A shares in his company, Berkshire-Hathaway (BRK.A), I’d be a very happy camper. But, if one had a choice among Microsoft, Apple, and Berkshire stock at the beginning of the tech revolution in 1990, would Berkshire have been the stock to own or could one have done better with Apple or Microsoft?

The 1990’s were a time of great change and also a time of great hype. Many companies with a stated mission but without a product or even a staff garnered investor interest and many of them fell by the wayside when the tech bubble burst. But some survived. The best CEOs not only had strong visions, but solid product lines to back them up—like Bill Gates and Steve Jobs.

Who ‘da man–Warren, Bill, or Steve…or Mr. Market?
If investors had been open to putting money into Bill Gates (MSFT) and Steve Jobs (AAPL) at the beginning of 1990 (January 2nd to be exact) while also putting money into Warren Buffett (BRK.A) as well as the overall market (represented here by the S&P 500), they would have realized the following returns:


[Note: All stock prices are split adjusted. “Div” means dividend. Please see the note regarding dividends below.]

I don’t know about you, but I was surprised to see Bill come out on top.  I thought for sure Steve had it sewn up.  What was even more surprising, though, was how both Bill and Steve trounced Warren—that was certainly unexpected.  (Maybe Buffett should rethink his aversion to tech.) But he shouldn’t feel too badly as Berkshire’s returns still smoked that of the S&P 500.

A note on dividends

The above chart isn’t exactly an apples to apples comparison when it comes to the return calculations including dividends.  For the S&P 500, dividends are reinvested when distributed.  However, for Apple and Microsoft, the dividends are received by the shareholder in cash and not reinvested. If they were reinvested, the total returns could be higher. Berkshire has never paid a dividend, although some of its constituent companies do.  These dividends are folded into Berkshire’s stock price.

The Three Seven Aught Mystery

March 16th, 2014

I’m writing this article for several reasons. First off, I’m very concerned over the passengers on the plane who don’t deserve their fate. Second, I’m concerned over the raison d’etre of the “hijacking.” Third, I’m a huge mystery buff—and this is a mystery worthy of Sherlock Holmes or Hercule Poirot.

Let’s consider some of the facts:

1. The plane took off just fine.

2. It flew on course for about fifty minutes, or until the captain turned off the seat-belt sign which was over water.

3. After that, the transponders were turned off and there was no further communication from the cockpit.

Question #1: What happened after that?

We can go into a lot of theories but the fact that it wasn’t tracked by radar nor did anyone see it explode or crash leads me to believe that it was commandeered by people already on board. If it was just a piece of cargo on the plane that someone wanted, they could have kept the plane on the ground to search it. No, they wanted someone or someones on board—and they wanted them out of touch of civilization.

Personally, I think the flight was commandeered from the start with the intended landing site the US military base at Diego Garcia in the Indian Ocean. There were seven hours of fuel in the plane, more than enough to land there. The people responsible for taking over the cockpit probably positioned themselves in the bathrooms or in the seats of one or two or more of the five passengers who checked in but didn’t get on board (which is a huge anomaly!). For this to take place, the flight crew had to know about it. Some of them may have been involved in it or they may have been led to think that they were playing a part in something else entirely.

Once the plane was in the air, the passengers were tranquilized by airborne, liquid, or other means for either the rest of the flight or, for those who didn’t matter, perhaps for the rest of their lives. I truly hope the latter is not the case.

After that, it wouldn’t be difficult for a US naval airforce pilot to turn the plane west and guide it over water–undetected to radar and satellites–to the US military base at Diego Garcia in the Indian Ocean. Diego Garcia can land a plane of this size and hide it in their hangars. They can also hide passengers (either dead or alive) on the island or transport them someplace in submarines or otherwise. (The coral atoll makes a great sub base.) The base is also an Air Force Satellite Control Network Station which might explain a lot of things.

Question #2: Why?

The major concern is what the US would want with 370. Maybe the government needed to interrogate/take out one or more people on it. If it was just a piece of cargo on the plane, they could have accomplished that before the plane took off, as mentioned earlier.

I read on the internet that some Snowden affiliates may have been on board. Or, perhaps there was something else involved of which we know nothing, nor shall we. I just hope it was something worthy of scrapping two hundred thirty nine lives.

Of course, this is all armchair conjecture…

May truth and justice rule.

Can you do better than a chimp? End of year portfolio results

December 31st, 2013

In a StockTalk posted on Seekingalpha.com on August 27th, I mentioned an article published by two Italian researchers who found that investing at random worked out just as well or better than using a well-defined stock selection strategy and with less volatility, too. In light of this article, several of my readers thought that it would be interesting to see how some random portfolios as well as some strategy-defined portfolios fared against each other as well as to the overall market.

To this end, eight portfolios each consisting of ten stocks were presented: four of them were randomly selected (using a few different random stock generating schemes) and the other four were based on a single selection criterion, each of a completely different flavor. All stocks were purchased in equal dollar amounts using the end of day prices on August 30th. We checked in on these portfolios in late October and I said that I would do the same at the end of the year, so here are the final results. For comparison purposes, note that the S&P 500 returned 13.2% since 8/30.

In descending order of return:

#1. TruffelPig’s Biotech Pix: +26.2%. SA reader and biotech investor, TruffelPig, managed to root out a lot of winning stocks as all three of his portfolios topped the leader board. His hand-picked biotech portfolio was the winner with seven out of his ten picks returning over 20%. He hit a home run with Mako Surgical (MAKO) which got acquired at $30/share on December 17th at double the position price. (For reference, the biotech etf (IBB) gained 17.2% in this time period.)

#2. TruffelPig’s Growth Pix: +24.2%. Mr. TP’s hand-picked portfolio of growth stocks included three big winners from his biotech portfolio including Mako Surgical, making it a shoo-in for second place. The second biggest winner in this portfolio was 3-d printer maker 3D systems (DDD) which gained over 75%.

#3. TruffelPig’s Random Pix: +18.5%. Not only does Mr. TP have the Midas touch when it comes to companies with innovative/disruptive technologies, but his random stock selection algorithm is pretty good, too. He got dealt a winning hand with Solar City (SCTY, +81%), Novavax (NVAX, +63%), and Yahoo (YHOO, +49%) which helped offset the 27% loss in Dex Media (DXM).

#4. Wheel’s Random Pix: +13.1%. SA reader Wheel’s randomly generated portfolio produced only one minor loser (COLX, -5%). Its two biggest winners were Kingold Jewelry (KGJI, +37%) and Pacific Biosciences (PACB, +25%).

#5. Weed’s Random Pix: +8.9%. SA reader Weed’s randomly generated portfolio suffered a small loss with Ford (F, -5%) and a larger one with JC Penney (JCP, -27%). Those losses were more than offset by gains in Lockheed Martin (LMT, +21%) and Western Digital (WDC, +35%).

#6. My Yearly Lows > $2: +6.8%. This portfolio was generated from stocks hitting new yearly lows that were greater than $2 as of 8/30/13. I picked these in order of increasing price, selecting those nearest $2 first. I wanted to focus just on stocks and eliminated exchange-traded vehicles (etfs, etns) and closed-ended funds from consideration. I hit a ten-bagger with LTX Credence (LTXC, +97%) but took a big hit with Tower Group (TWGP, -76%). Sure, this portfolio didn’t do nearly as well as the S&P, but it still managed to beat the “Best of the Best” which is…

#7. SA Pro-Long Ideas: +6.7%. As an SA contributor, this result is really embarrassing. One would think that these stocks–featured in articles written by analysts and other industry professionals and hand-selected by the SA editors to be “Pro-worthy”–would significantly outperform the overall market. But if any portfolio can lend credence to the thesis that a chimp can do better than an active money manager, the performance of this portfolio should do it.

#8. My Random Pix: 3.6%. A few months ago this portfolio was doing very well. Despite coming in last, it’s still not doing too badly considering there were no big winners to offset the losses put in by Alamos Gold (AGI, -26%) and biotech stock Stemline Therapeutics (STML, -43%). Ah well, that is the luck of the draw…


Is there anything to be learned from this limited exercise? We saw that some of the best performing stocks were those with innovative/disruptive products in hot industry groups (biotechs, 3-d printing, electric cars, solar energy, etc.) or they were badly beaten down and ripe for a comeback (YHOO, LTXC). Those that professional stock pickers thought would do well were unable (as a group) to outperform the broader market.

So, maybe Jack Bogle got it (mostly) right when he said that investors should just buy the S&P 500 and sit back and fuhgettaboutit. I’d like to modify that recipe by adding the element of market timing: when the market starts to fall, either exit or hedge the position. When it turns back up again, re-enter the position. The trick-naturally!–is when to do this…but that’s the subject of another article.

Happy New Year!

*To see the composition of all eight portfolios, please check my 10/24/13 blog.

How far can we run on empty?

October 17th, 2013

Here’s a table showing the most current metrics on the S&P 500. Also included are the historical mean and median values as well and the current values compared to them.

*All table values from multpl.com. Please see their website for associated tables and graphs.

Notes on the above table
1. Earnings, on average, have risen steadily since the 1870’s and are now nearing the all-time high of 95.32 hit in June, 2007.
2. P/E ratio has been widely fluctuating since the early 1990’s. P/E at all-time high of 123.79 in May, 2009. Historically, there’s been strong resistance at 22.5. For that to happen today, the S&P would have to hit 1983 (assuming the above earnings figure of 88.13).
3.Schiller P/E widely fluctuates. Though current price is high, it’s no where near 1999 all-time high of 44.2 and is still slightly below pre-recession high of around 27.5. (Data from 1880.)
4. Price/Sales nearing 10 year high. (Data from 2000.)
5. Price/Book hasn’t been above 3 since 2003. (Data from 2000.)
6. Book Value at all-time high (since 1999).
7. Dividend Yield falling on average since 1870’s.
8. Real dividend rising on average since 1870’s.
9. Dividend growth at all time high in 2012, just over 17.5%.

If we believe the Fed will continue its dovish stance (assuming Janet Yellen is sworn in as the next Fed chair) and barring any black swan events, we could see the S&P 500 continue to rally to the 1983 area. However, should the presumed scenario not play out, it’s not unreasonable to assume a sharp sell-off given the fact that many of the market metrics are well above their historical norms. How low could we go? Using the historical mean P/E of 15.50 and current earnings per share of 88.13, it’s very possible the S&P could drop 20% from today’s closing value of 1733 to the 1366 level.

Is there an optimal time to begin taking Social Security?

September 24th, 2013

There comes a time in everyone’s life when they must make a choice about when to begin taking their Social Security benefits. The conventional wisdom shared by many investment advisers is that the longer you wait, the better. You can choose to begin taking benefits anytime between the ages of 62 and 70. The catch here is that each year after age 62 that you delay taking benefits means an increase in the monthly amount up to the age of 70 after which there is no benefit to any further delays.

There are many Social Security calculators out there but most do not consider important factors such as inflation, the Cost Of Living Allowance (COLA) which is the number the government comes up with every year to determine the annual increase in Social Security benefits, the return on your investments, taxes, etc. The main reason these calculators ignore these important inputs is that predicting rates over long periods of time isn’t an exact science.

But I don’t think that ignoring them altogether is the correct approach either. We know that rates are not going to be zero (except perhaps for the current rate of return on conservative fixed income investments such as Treasuries) and any reasonable assumption will produce more realistic results than omitting them altogether. In an attempt to assess the differences, I wrote my own calculator taking into consideration the above mentioned factors. This article will show how the addition of these factors can make a big difference in determining the optimum time to begin taking benefits and we’ll see that the optimum time is not always in alignment with the conventional wisdom.

The calculator

The figure below shows the data fields that form the inputs to the calculations. Note that this calculator does not consider the complex issue of spousal benefits or benefit penalties for continuing to work while receiving benefits. This latter issue is discussed at the end of this article.

Figure 1. Calculator Parameters

Present Value vs Total Payments

The crux of the computation is the net Present Value (PV), the stream of payments made to you discounted back to today’s dollars. [The net Present Value is illustrated at the top of Figure 1 where the Present Value (Pv) is today and payments are received monthly starting one month from today.] This is the main difference between the approach here and the usual approach which is to consider only unadjusted absolute amounts. That is, the total amount of benefits you will have received at the end of your life based on your life expectancy.

The factors mentioned above, inflation, COLA, investment return, and taxes along with the benefit increase you would get by delaying taking benefits, are all included in the calculator’s analysis. The latter values can be found in this table on the Social Security web site. Using these and your personal information (more about these in a minute), the calculator figures out the optimum number of years you should delay benefits based on the maximum total dollar value of your benefits package. This sum is expressed in today’s dollars. [Note that the rate of benefit increases due to delay in taking them are based on your year of birth.]

Determination of your personal input parameters

Besides your year of birth, the parameters you will need to input are the “Monthly Payment Amount at Early Retirement” and your estimated life expectancy.

The monthly payment amount can be obtained from your personal benefits calculator on the Social Security Website. This number is your monthly check amount if you begin taking benefits at age 62. It is based on your earnings history and you must provide secure personal information to obtain it. Let’s assume for this analysis that you were born in 1952 (you are now 61) and your monthly benefit will start at $1,050 per month. This may or may not be a typical amount.

The “Life Expectancy” field is the number of years you expect to live beyond age 62. Here is an average life expectancy calculator from the Social Security website. If you want more precise probabilities, there is a calculator on the Vanguard web site. Using the Vanguard calculator, Figure 2 is a plot of the probability of reaching a certain age for the average 62 year old American.

Figure 2. Life Expectancy

An Example

Let’s input some typical values and see what the calculator tells us. Let’s assume that you are now 62 and expect to enjoy life for another 25 years. Judging by Figure 2, your estimate may be a bit optimistic as the likelihood of living to 87 is 44% if you’re female and only 31% if you’re male. (On the glass half-full side, health care could improve in the near future which would up these percentages.)

The current COLA is 1.7% per the U.S. Government experts on how your cost of living is increasing each year. That may have nothing at all to do with reality. The annual rate of inflation is how fast costs are really increasing and are expected to increase in the near future. Let’s assume a value of 3% over the long haul. [FYI, retirement homes are currently adjusting their rent and annual service increases by 5% per year.]

The investment return rate should be based on a fairly conservative portfolio because you need the money now and can’t afford to sit out prolonged bear markets in volatile investments. Let’s say your portfolio will return on average 5% annually over the next 25 years.

If you will be spending your benefit check each month rather than adding it to your portfolio then enter zero for the investment return rate. This can alter the results substantially. Your tax bracket should also be low as you are no longer working and generating wage income. Let’s assume 15% and pray there are no increases in the tax rate.

Based on these inputs, you should wait three years until the age of 65 to begin taking benefits. The Present Value of the stream of benefit payments over 22 (25 minus 3) years will be just over $400,000. You can try other “Number of Years Delay” from 0 to 8 and see how these compare. The calculator actually does this automatically and plots the results. For this example, the plot is shown in Figure 3 below.

Figure 3. Delaying Benefits Considering Various Percentage Rates

You can see that by delaying taking benefits until the age of 65 produces the highest net Present Value of the stream of payments. It is not a simple increase where the longer you delay the better. In this example, taking benefits anywhere between two and four years won’t make a huge difference, but delaying benefits for more than five years can make a significant dent in your overall retirement income.

The impact of life expectancy

Another analysis you can do with the calculator is to vary your life expectancy. Using the input values in the above example and varying the life expectancy up to 40 years, the graph in Figure 4 is generated. Each data point in this plot represents the optimum number of years to delay from an associated plot similar to Figure 3 above.

Figure 4. Life Expectancy Analysis Considering Various Percentage Rates

Figure 4 is very interesting in that it tells you that you’ll be better off taking benefits right away if you expect to live for up to 23 more years. After that, the best delay rises until it maxes out at age 70 which won’t be optimal until you reach the near-centenarian age of 98, not very likely for either sex according to Figure 2.

The effect of varying the rate of return on investments

Varying the assumed investment rate of return affects the Present Value of your total benefits considerably as well as the optimum number of years to delay. Table 1 below shows these results based on the example above.

Table 1. Effect of Varying Assumed Investment Interest Rate
Rate Present Value Best Years Delay
0% $260,003 7
1% $281,239 7
2% $305,405 6
3% $332,566 6
4% $363,901 5
5% $401,148 3
6% $447,236 0
7% $504,336 0
8% $570,304 0
9% $646,685 0
10% $735,309 0

To summarize, the lower the return on your investments, the longer you should wait until taking benefits.

Other considerations

You can see how important it is to consider the litany of variables that pertain to this question of when to best start taking your Social Security benefits. If you construct a table similar to the one above that varies the rate of inflation, the results will be that the greater the disparity between the actual rate of inflation over the COLA, the more important it is to take benefits now and not delay. Raising your tax bracket does not affect the number of years to best delay; it merely lowers your expected return in current dollars.

Results if You Don’t Discount

The reason this article was written in the first place was to see if the common assumption of ignoring factors such as inflation, COLA, investment return, and taxes was the right thing to do. In that regard, let’s zero those out and perform the computations again. Using the input parameters and assumptions in the example, Figure 5 shows the value of taking benefits for the various years of delay. You can see that, in this instance, it is apparently better to delay taking benefits as long as possible.

Figure 5. Delaying Benefits Without Discounting

Life Expectancy Analysis Without Discounting

Figure 6 below repeats Figure 4 but uses percentage rates of zero on COLA, inflation, and investment return, and taxes. In this case, delaying benefits is beneficial if you live for a mere 14 additional years. According to Figure 2, this represents a 75% chance for a man and an 80% chance for a woman. If you expect to live after the age of 85 (roughly the current life expectancy), then you’ll receive no extra benefit for waiting. Funny how that worked out!

Figure 6. Life Expectancy Analysis Without Discounting

Further thoughts and the future of Social Security

Based on these last two charts, it would seem that delaying benefits as long as possible is the best way to go. Unfortunately, this is what drives conventional wisdom. Ignoring important interest rate factors, as we have seen, can make a huge difference.

So far we have examined this problem from a purely theoretical point of view. All well and good but these analyses won’t amount to that proverbial hill of beans unless the government cooperates.

What the analysis here does not take into account are the fundamental risks: the risk of government action to reduce or potentially even eliminate your benefits based on some arbitrary criteria in the future to meet some perceived financial crisis. Benefit reductions, COLA elimination, means testing, retirement age increases, changes in the tax code, etc. These are all potential threats that could severely affect your monthly benefit check. Social Security, after all, is not a welfare program; it is your money that you already paid to the government that is being given back to you. The problem is that this money has been spent, not saved, by the government who is passing the buck to the younger generation. But the problem is that the worker base (i.e., young people entering the work force) is eroding which could spell real trouble for the certainty of your benefits in the future.

As explained in this publication the Social Security administration really wants you to be actually retired before you take your benefits. If you need to keep working beyond age 62 up to your full retirement age they will penalize you by reducing your benefits by $1 for every $2 you earn over the current wage limit, currently $15,120. So, if you earn substantially more than this through wages, that could wipe out all of your benefits. In this case it would make no sense to take your benefits until you truly stop working or reduce your earned income substantially.

Try the calculator yourself

You can try this calculator yourself by running the demo of the Portfolio Preserver asset allocation software. Bring up the Java program demo from the “Preserver Professional” page, Select “Calculations” from the menu bar at the top of the screen, then select “Financial Calculations” from the pull down menu, and then select the “Social Security Payout” tab. [Note: You will probably need the latest version of Java available here. Also, the software is not always compatible with Apple devices.]

As with all such exercises, readers are advised to consult their own investment professional or accountant before making any decisions regarding their personal finances.

Get My Sizzling Summer Stock Picks

July 21st, 2013

Join Me for My Summer Cook-Out Webinar With Mark Chaikin

Wednesday July 24, 2013

Click Below to Register. Choose One of Two Convenient Times

Session 1: 4:15-4:35 pm EDT  OR 
Session 2: 9:00-9:20 pm EDT

Please join me Wednesday when Marc Chaikin and I will team up to serve you our menu of the most sizzling summer stock picks. Highlights of this 20-minute webinar include:

I’ll review my hand-picked Stocks of the Day — compelling stocks that are ready to rock — and selected Stock Darlings — stocks for longer term core holdings or for income-generating covered call strategies.

Stock Market Expert Marc Chaikin* will give the Chaikin Analytics perspective on these same stocks, demonstrating how you can overlay his proven Analytics on your own or anyone else’s stock picking methodology; how to use the Chaikin Power Gauge to evaluate these stocks; and how his proprietary Buy/Sell Signals to help you identify timely entry and exit points.

This should be a fun and engaging session, so please join us. And feel free to forward this webinar invitation to your friends, family and colleagues. All are welcome.

Can’t attend the webinar? Register and we’ll send you the video. Log-in details will be emailed to you shortly after your registration is received. There is no fee to attend.

Dr. Kris

Founder, StockMarketCookBook.com

* After more than 40 years on Wall Street, stock market expert Marc Chaikin founded Chaikin Analytics to deliver proven stock research and analytics to professional money managers and self-directed investors.

Disclaimer: Stock Market Cook Book, LLC is not registered as a securities broker-dealer or investment advisor either with the U.S. Securities and Exchange Commission or with any state securities regulatory authority. Stock Market Cook Book does not recommend the purchase of any stock or advise on the suitability of any trade or investment. The information presented is generic in nature and is not to be construed as an endorsement, recommendation, investment advice or any offer or solicitation to buy or sell securities or any kind, but solely as information requiring further research as to suitability, accuracy and appropriateness. Users bear sole responsibility for their own investment research and decisions.