AAII Investor Update: Health Care Costs and Your Portfolio

Thursday, June 28, 2012
Charles Rotblut, CFA
AAII Journal Editor

AAII Resources

Investing in Health Care Reform
Mutual fund managers reveal which industries will benefit.

Health Care Reform’s Tax Implications
Taxes associated with the law go into effect in 2013.

AAII Discussion Boards
Are health care stocks now more attractive?

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Sentiment Survey

This week’s AAII Sentiment Survey results:
  Bullish: 28.7%, down 4.2 points
  Neutral: 27.0%, down 4.3 points
  Bearish: 44.4%, up 8.5 points

Long-term averages:
  Bullish: 39%
  Neutral: 31%
  Bearish: 30%

Take the AAII Sentiment Survey »


Today, the Supreme Court ruled to largely uphold the Affordable Care Act. The law will have tax implications for individuals with high incomes, but will also expand access to health care for many others. Depending on the outcome of the November elections, and what Congress can actually agree on, the law could potentially be altered or replaced.

Though the ruling will occupy the news for days and weeks to come, the topic that deserves more attention is how to provide quality health care in a cost-effective manner. The Centers for Medicare & Medicaid Services projects that national health expenditures will account for 19.6% of U.S. GDP by 2021. The Congressional Budget Office (CBO) recently calculated that “spending on the major federal health care programs alone would grow from more than 5% of GDP today to almost 10% in 2037 and would continue to increase thereafter.”

These rising costs mean greater out-of-pocket expenditures in the future. Given longer expected lifespans, new retirees can anticipate spending more money during the retirement years than previous generations. This outlook has implications for how a portfolio should be allocated in retirement.

Many financial planners already suggest anticipating a longer lifespan than actuarial tables estimate when investing in retirement, and rising health care costs add to the need to include a growth component in your portfolio. Our conservative asset allocation model suggests maintaining a 50% exposure to equities, diversified among large-, mid- and small-cap domestic stocks and international stocks. In the Briefly Noted section of the forthcoming July AAII Journal, Christine Fahlund of T. Rowe Price suggests investors in their 80s should still consider a 40% allocation to stocks. The rationale for the high allocation is that you need your assets to grow, and at a rate that preserves your ability to purchase goods and services.

Notes From the Morningstar Investment Conference

Last week, I attended the Morningstar Investment Conference, one of the largest conferences of the year for the mutual fund industry. To keep this update from being unreasonably long, I’m going to focus on a couple takeaways regarding retirement and asset allocation.

Reinforcing the need for allocating to stocks in retirement was David Blanchett, the head of retirement research for Morningstar. David pointed out that the longer a person lives, the longer his life expectancy becomes and therefore the more money he will need in retirement.

In a separate panel discussion, John Ameriks, who leads Vanguard’s Investment Counseling & Research group, said the goal for retirees is a portfolio that provides a return above the rate of inflation. He further observed that as bad as things have been, a diversified portfolio would have produced positive returns. During the same session, Sue Stevens, CEO of Stevens Wealth Management, suggested that pre-retirees who are concerned about the future of Social Security should assume a smaller government benefit in their retirement planning. (This means setting aside more money for retirement savings.)

More on AAII.com


The Week Ahead

No S&P 500 members are currently scheduled to report earnings next week. Alcoa (AA) will “officially” start second-quarter earnings season when it reports on July 9.

The markets will be closed on Wednesday, July 4, in observance of Independence Day.

The week’s first economic reports will be the June ISM manufacturing index and May construction spending, with both published on Monday. Tuesday will feature May factory orders. The June ISM non-manufacturing index and the ADP Employment Report will be published on Thursday. Friday will feature June jobs data, including the unemployment rate and the change in nonfarm payrolls.

No Federal Reserve officials are currently scheduled to speak next week.

AAII Sentiment Survey

The percentage of individual investors describing themselves as bearish rebounded by 8.5 percentage points to 44.4% in the latest AAII Sentiment Survey. Meanwhile, both bullish and neutral sentiment declined.

Bullish sentiment, expectations that stock prices will rise over the next six months, fell 4.2 percentage points to 28.7%. This is the seventh time in the past 12 weeks that optimism has been below 30%. It is also the 13th consecutive week that bullish sentiment has been below its historical average of 39%.

Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 4.3 percentage points to 27.0%. The historical average is 31%.

Bearish sentiment, expectations that stock prices will fall over the next six months, jumped 8.5 percentage points to 44.4%. This is the 11th time in 12 weeks that bearish sentiment has been above its historical average of 30%.

This week’s changes brought pessimistic levels back to where they were near the start of June. We are continuing to see ongoing pessimism among individual investors about the short-term direction of stock prices. The current 13-week streak of below-average bullish sentiment is the longest since a 14-week stretch from December 20, 2007, through March 20, 2008. The current eight-week streak of above average bearish sentiment is the longest since a 14-week stretch from July 21, 2011, through October 20, 2011.

AAII members continue to be casting a wary eye toward events in Europe and are concerned about the slowing pace of economic growth in here in the United States.

This week’s special question asked AAII members what near-term catalyst would change their sentiment toward stocks. The largest number of respondents said some type of resolution to the European sovereign debt would be a positive catalyst. Other potential bullish catalysts included stronger U.S. economic growth, the outcome of the U.S. presidential election (respondents differed between whether a win by Mitt Romney or a President Obama would be a positive catalyst) and a resolution to the forthcoming expiration of tax cuts and the implementation of spending cuts (the so-called “fiscal cliff”).

Some members foresaw potentially negative catalysts. These members cited a worsening of the European sovereign debt crisis and slower economic growth in either the U.S. or China.

Here is a sampling of the responses:

  • “A solid plan to deal with the European crisis that member nations stand behind would be bullish for the market.”
  • “If Europe settles its government/bank liquidity problems, I would be more bullish.”
  • “More jobs being created in the United States would create an avalanche of buying in the market.”
  • “Even a partial compromise by Congress and the White House on closing the deficit would make me very bullish. I’m expecting that will occur when pigs fly.”
  • “A slowdown in the U.S. economy would make me somewhat more bearish over the short term.”

» Take the sentiment survey