Before discussing this week’s topic I want to share a quick observation about this week's Federal Open Market Committee (FOMC) meeting. The forecasts released yesterday show reduced expectations for where the Fed funds rate will be over the few years. For example, seven members now expect the target to remain at or below 1.5% next year. Three months ago, only two members were this dovish. The forecasts can be seen by looking at the “dots,” meaning the charts included in the release of the FOMC’s economic projections. (You can see the current set of forecasts and those from previous meetings on the Federal Reserve’s website. Click on “PDF” under “Projections Materials” for a given meeting). This change in forecasts implies expectations for a slower pace of future rate increases—after the first one occurs—though what actually does happen remains very much dependent on future data.
The investment industry reached a generational milestone. The Wall Street Journal says withdrawals from 401(k) plans exceeded contributions in 2013, the latest year complete data is available for. The shift ends of streak of expansion that had lasted decades.
Baby boomers are responsible for this shift. Citing data from JPMorgan Chase & Co. and the Census Bureau, the newspaper says 3.5 million Americans are projected to retire this year, up from 2.7 million in 2010.
The actual amount to be pulled from 401(k) plans is unknown. Two forecasts published by The Wall Street Journal estimate outflows to persist until at least 2019 or until 2030—a big difference. Vanguard, which recently published its annual “How America Saves” report, says just 3.6% of defined-contribution (DC) plan (e.g., 401(k) plan) participants took a withdrawal last year from plans offering withdrawals (84% of Vanguard DC plans do). Though a higher percentage of participants took cash withdrawals (3.3%), participants rolling over their savings to an IRA (0.3%) were significantly older—a median age of 62, versus 51 for all participants taking a withdrawal.
What happens next is uncertain. The demographic trends have been well-known for a long time, so to see withdrawals starting to exceed contributions is not surprising. But a person in relatively good health cannot expect to retire at age 65 or 70 and live off of cash savings unless he or she has a large enough pension and/or considerable net worth, due to the combined risks of inflation and longevity (meaning a long lifespan). As such, most new retirees will need to keep investing their retirement savings. This makes “where will they put their savings?” the big question for the investment industry.
As an association of individual investors, we believe individuals can be empowered to become effective managers of their own portfolios. Many of you reading this are proof that this is true. The definition of what an effective manager is varies by person, with some AAII members hand-selecting all of their stocks and bonds, while others use funds, an adviser, annuities or some combination thereof. There is never a one-size-fits-all approach, and the investment industry is trying to adapt to this reality.
Those of you entering retirement or merely switching jobs face a decision about what do with your 401(k) plan savings. The decision whether to keep your account unchanged or move it elsewhere depends on both your employer’s plan and what you would do with the money if you withdrew it from the plan. Rolling over your 401(k) to an individual retirement account (IRA) dramatically increases investment choices. Too many choices, however, can lead to no decision being made. Keeping your 401(k) where it is, or with your plan sponsor—if your (former) employer requires you to roll it over (contact your HR department to ensure you know exactly what the rules are)—may allow you to keep your current allocations unchanged.
When deciding what to do, pay attention to costs. Depending on your employer’s plan, you may be able to get a similar allocation at a lower cost by not rolling the account over to an IRA. This may hold true for actively managed funds, especially if your (former) employer’s plan offers access to institutional funds. On the other hand, rolling over your 401(k) savings to an IRA (traditional or Roth) would give more choice and more control even if the fees on the actively managed funds are higher.
The big thing is to spend time thinking through what you want to do and execute on the strategy, realizing that you can change your decision in the future.
- From Saver to Spender: Managing Your Money in Retirement – Carrie Schwab-Pomerantz listed nine steps to increase the odds of having a successful retirement.
- A Checklist for Rolling over 401(k) Savings – Simple steps you should take before rolling over a 401(k) plan.
- What Did You Do With Your 401(k) When You Retired? – Tell us on the AAII.com Discussion Board.
Three new stocks were added to the Model Shadow Stock Portfolio this month: CDI Corp. (CDI), Ultra Clean Holdings, Inc. (UCTT) and Vishay Precision Group (VPG). With excess funds, we also added to our position in Salem Media Group (SALM), as it passed the Shadow Stock screen this month and was underweighted in the portfolio. Four stocks were deleted: Five Star Quality Care, Inc. (FVE), International Shipholding Corp. (ISH), Kimball International (KBAL) and Mitcham Industries, Inc. (MIND).
Twenty stocks passed the Shadow Stock screen at the start of June. When choosing among qualifying stocks when the portfolio has insufficient funds to buy them all, we will consider transactions costs measured by the bid/ask spread. Additionally, going forward we will be giving preference to U.S. stocks. Four stocks in the portfolio qualified for purchase at the start of May: Salem Media Group (SALM), SigmaTron International (SGMA), Universal Stainless & Alloy (USAP) and Willis Lease Finance Corp. (WLFC). Qualified stocks are companies held within the Model Shadow Stock Portfolio that currently meet the purchase rules. (They are designated as “qualified” in the notes column of the Model Shadow Stock Portfolio table.)
The maximum price-to-book rule for adding a stock was increased from 0.80 to 1.00 to reflect the increases that the average price-to-book ratio has experienced in recent years. The change means that the sell rule based on the price-to-book ratio is increased to 3.00.
No stocks in the Model Shadow portfolio are currently approaching their value or size limit. No stocks are currently on probation for producing negative earnings over the last four quarters. Stocks on probation are potential sell candidates at the next quarterly review in September.
The Model Shadow Stock Portfolio's 3.3% decline for May atypically trails both of its comparison benchmarks: The Vanguard Small Cap Index fund (NAESX) gained 2.0% and the DFA US Micro Cap Index fund (DFSCX) gained 1.4% in May. Year to date, the Shadow Stock Portfolio has gained 1.2%, while NAESX is up 5.0% and DFSCX is up 2.5% over the same time period. Since its inception in 1993, the Model Shadow Stock Portfolio has a compound annual average return of 16.7%, while the Vanguard Total Stock Market Index fund (VTSMX) has gained 9.4% annually over the same period.
There were no changes to the Model Fund Portfolio this month.
The Model Fund Portfolio gained 0.2% in May compared to a 1.4% increase for the Vanguard Total Stock Market Index fund. Since its inception in June of 2003, the Model Fund Portfolio has a compound annual average return of 9.2%, slightly below the Vanguard Total Stock Market Index fund over the same time period, which gained 9.5%.
Nike (NKE) will be the first Dow Jones industrial average component to report second-quarter earnings when it releases its results on Thursday. Joining it will be fellow S&P 500 members Carnival Corp. (CCL) and Darden Restaurants (DRI) on Tuesday; Bed Bath & Beyond (BBBY), Lennar Corp. (LEN) and Monsanto Company (MON) on Wednesday; and Accenture PLC (ACN) and Micron Technology (MU) on Thursday.
May existing home sales will be the week’s first economic report of note, with a Monday release date. Tuesday will feature May durable goods orders, May new home sales and the June PMI manufacturing index flash. The final estimate of first-quarter GDP will be released on Wednesday. Thursday will feature May personal income and spending. The University of Michigan’s final June consumer sentiment survey will be released on Friday.
The Treasury Department will auction $26 billion of two-year notes on Tuesday, $35 billion of five-year notes on Wednesday and $29 billion of seven-year notes on Thursday.
Kansas City Federal Reserve Bank President Esther George will speak publicly on Friday.
- Stocks: An Underappreciated Asset Class in Retiree Portfolios
- 16 Financial Ratios for Analyzing a Company’s Strengths and Weaknesses
- Understanding Asset Bubbles and How to React to Them
Optimism rebounded and pessimism rose to a 10-month high in the latest AAII Sentiment Survey. The changes came as neutral sentiment plunged to its lowest level since early April.
Bullish sentiment, expectations that stock prices will rise over the next six months, jumped 5.4 percentage points to 25.4%. The rebound follows what had been the lowest level of optimism since April 11, 2013. Even with the increase, bullish sentiment is below its historical average of 30% for a seventh consecutive week. The last time optimism experienced a similar consecutive week stretch of below-average readings was January 16 through February 27, 2003.
Neutral sentiment, expectations that stock prices will stay essentially unchanged over the next six months, fell 7.1 percentage points to 40.3%. This is the lowest reading since April 2, 2015 (32.6%). It also ends a record streak of 10 consecutive weeks with neutral sentiment at or above 45%. Nonetheless, neutral sentiment is above its historical average of 31.0% for the 24th consecutive week.
Bearish sentiment, expectations that stock prices will fall over the next six months, rose 1.7 percentage points to 34.3%. Pessimism was last higher on August 7, 2014 (38.2%). This week’s increase keeps bearish sentiment above its historical average of 30.0% for just the sixth time this year.
Though individual investors’ short-term outlook became more polarized this week, neutral sentiment remains at an unusually high level—even with this week’s drop. There is not a single reason to explain the higher level of polarization this week, particularly since the Federal Open Market Committee’s statement was released near the end of this week’s survey period, though the shift does follow what had been a very low reading for bullish sentiment. The level of optimism registered last week was among the 40 lowest in the survey’s history.
Even with this week’s changes, optimism remains at an unusually low level and neutral sentiment, as noted above, remains at an unusually high level. Both such occurrences have typically been followed by better-than-average six- and 12-month returns for the S&P 500. For more information, see my May 21 AAII Investor Update, Unusually High Neutral Sentiment Often Followed by Good Returns. (There is no guarantee, however, that history will repeat.)
Some AAII members are concerned about the possibility of a bigger decline in stock prices occurring, the pace of economic growth and lack of wage growth, valuations, the impact of the stronger dollar on earnings and geopolitical events. Keeping other AAII members encouraged are the ongoing bull market, sustained economic expansion, earnings growth and still-accommodative monetary policy.
This week’s special question asked AAII members how they thought the average consumer is faring relative to a year ago. About one-third (32%) of all respondents said the average consumer is doing better. An additional 12% said the average consumer is doing somewhat or slightly better. The ongoing improvement within the job market was the most common reason given as to why. Lower fuel prices were a secondary reason, and were cited by the majority of all respondents. Slightly more than 20% of respondents said the average consumer is faring about the same as last year, with several citing low wage growth as a headwind. More than 21% of respondents think the average consumer is worse off or is otherwise struggling, primarily because of wage increases not keeping up with inflation in goods and services other than fuel.
Here is a sampling of the responses:
- “Better. Gas prices are down and real wages are up from a year ago, resulting in improved consumer confidence.”
- “Better. Wages are improving and the cost of living is the same or better, mostly from lower gasoline prices.”
- “I think slightly less well than before. Gas prices are down, but food costs seem higher.”
- “I would say generally better. It seems like retail and dining establishments are busy.”
- “Not as well. Food prices have increased and salaries have not kept up.”
- “No different as wages have stagnated.”
Bullish: 25.4%, up 5.4 points
Neutral: 40.3%, down 7.1 points
Bearish: 34.3%, up 1.7 points
Bullish: 39.0%
Neutral: 31.0%
Bearish: 30.0%
Local Chapter Meetings
June 11, 2015 Apple Is Separating Your Mind From Your Wallet
June 4, 2015 Signs of a Sequel Playing Out for the Bond Market
May 28, 2015 Making Buy and Hold Work
May 21, 2015 Unusually High Neutral Sentiment Often Followed by Good Returns
