• Mike V.

Weekend Reading



JPMorgan Wants to Hire People With Criminal Backgrounds


The bank said it wants to broaden its pool of potential employees after already hiring people with a felony conviction on their record. "Jamie Dimon believes, and we believe as a firm, that business has an important role to play in building a more inclusive economy." Financial institutions are regulated by the FDIC as far as hiring goes. The agency began relaxing the rules for criminals last year. JPMorgan has now "banned the box" that asks prospective employees whether they have a criminal record. Last year, 10% of its hires — 2,100 people — had a criminal record.


Bloomberg: US Consumers Report Their Incomes Don't Cover Their Expenses


Matthew Mish wrote in a recent report that 44% of consumers don't make enough money to cover their expenses. The new survey asked 2,100 respondents in the US about their current financial situation, at least 40% of the respondents said they experienced a credit problem, if that was a rejection of a credit card or a missing payment, or perhaps defaulting on a balance that was due, this was a 3% increase from last year, the survey found. Mish has written before that lower-income consumers have seen very little net worth improvement in the last decade. They've increased their debt burdens significantly through credit cards, auto loans, and student debt.


WSJ: The Rating Agencies Complicit In Scandal


Over the past two years, a key event is the systematic downgrade of billions of lowest-rated investment grade bonds to junk as a result of debt leverage going high newly downgraded junk bonds which institutional managers have to sell as a result of limitations on their mandate, in the process sending prices across the corporate sector lower. The lowest-rated, BBB sector is now nearly 60% of all investment grade bonds, and more than double the size of the entire junk bond market in the US, and 3.4x bigger than the European junk bond universe. After waiting for the downgrade cycle, with the occasional exception of a few notable downgrades such as PG&E and Ford, this wholesale event has failed to materialize. It appears that we will repeat the mistakes of the past. What was supposed to be a 2015 downgrade has dragged on for over 4 years while the rating agencies appear to be purposefully looking elsewhere to avoid the inevitable.


3 Steps To Target-Date Fund Investing


Target-date funds, in theory, offer retirement savers a no-fuss way to invest without having to worry about allocations, rebalancing, and glide paths. Just pick a fund closest to the date you’d like to retire and then sit back while the fund does the work. But many workers, including those who invest in the common 401(k) plan offerings, lack a basic understanding of target-date funds’ function and end up misusing them. The study by Fidelity, examined about 2.5 million investors in target-date funds, found that only 11% knew that the funds are structured so that workers need to invest in only one fund and only 14% knew that the funds rebalance over time.


Rob Austin, vice president and head of research, says one contributing factor to the lack of understanding surrounding target-date funds is that they’re built around a single variable—the age of the worker—and don’t incorporate factors such as risk tolerance, different attitudes about active and passive investing, different savings rates, existing 401(k) balances, and other household assets.

“You could have people who are about the same age but have drastically different investment outlooks,” he said.


Here, three common ways investors are misusing target-date funds:


1) Investing in multiple target-date funds. About 10% of target-date investors use more than one vintage, or target date, and among those who are only partially invested in TDFs, that percentage more than doubles, according to the study. Austin said that in some cases, there may be a good reason for this, such as when there is a large age difference between spouses and the 401(k) is expected to provide the bulk of the retirement income for both people. But in most cases, Austin said, using multiple TDFs is like going on several diets at once. “They’re not quite sure where they should have their money,” he said. “We can’t say for certain why people are doing this, but there clearly are some misperceptions about target-date funds because otherwise, people would be fully invested in just one. Could it work if you have multiple? Yes. Is that what a professional would do? No.”


2) People don’t stay invested for long. The study found that even though many target-date funds are labeled as “lifecycle funds,” 49% of people who are fully invested in them move out of them within 10 years. Austin theorized that this trend reflects a lack of understanding that TDFs are diversified funds, so when people look at their 401(k) statements, they grow concerned that they have “all their eggs in one basket” and therefore seek to diversify their investment portfolios.


3) When people stop using target-date funds, many make extreme changes to their asset allocation. Among those who stopped using target-date funds, 46% invested their entire portfolio in equities, while 14% went all-in on fixed income, according to the study. Those who moved fully away from target-date funds were most likely to be close to retirement age; 36% of people age 60 or older who switched from exclusive target-date-fund use chose not to use target funds at all. Austin said many users who switch to investing exclusively in equities are seeking higher returns as they near retirement. “It’s almost like pulling your goalie in hockey,” he said. “You’re taking on a riskier position so you can hopefully score some higher returns with your nest egg.”

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