Goods-Producing Workers vs. Government Payroll

I think this chart is both shocking and self-explanatory, and a clear picture of one of the many trends working against freedom and prosperity.  But, on the positive side, this is also testament to the ever increasing productivity of manufacturers, despite increased regulatory hurdles.

Quote of the Day: Thomas Jefferson

"It is error alone that needs the support of government. Truth can stand by itself."

~ Thomas Jefferson

Ponder these words for a few minutes. Think about the past year, the financial markets, the government's actions. Think in broader terms about government in general, the areas where it keeps expanding and the "errors" that in continues to subsidize.

Paul Farrell: Who Can You Trust But Yourself

Quote of the Day: J. Scott Armstrong

“No matter how much evidence exists that seers do not exist, suckers will pay for the existence of seers.”

~ J. Scott Armstrong’s Seer-Sucker Theory on Expert Forecasts

Smart Money Magazine's 10 Stocks for Next Decade (2000 - 2009)

Ever wonder why many investors say ignore the noise of the market and just keep things simple by investing in indexes?  Take a look at the recommendations from Smart Money magazine in December of 1999 to hold for the next decade.  How prescient were these geniuses?  Try to take a look at the results below without laughing:


AOL (merged with Time Warner in one of the dumbest business deals in modern history, stock went down at least 70% in 2000-2002, such a dog that Time-Warner spun it out in 2009 as its own company to be rid of it)

Broadcom ($91 then, $30 now)

CitiGroup ($29 then, $4 now ...would be bankrupt without the generosity of the government)

Inktomi (stock peaked in March 2000, acquired by Yahoo)

MCI WorldCom (bankrupt, bought by Verizon)

Monsanto (best results on this list, $39 then, $82.69 now)

Nokia ($39 then, $12.69 now)

Nortel Networks (bankrupt)

Red Hat ($105 then, $30.98 now)

Scientific Atlanta (acquired by Cisco in 2005)


How would you have fared investing in these gems and holding for the entire decade?  While I don't have an exact figure, the winners on this list are few and outnumbered by the bankruptcies.  Needless to say, the know-nothing investor who plopped 50% of his money in a total stock market index and 50% in a total bond market index would have a better result than the above portfolio of "winners" picked by the experts.  So what is the moral of this story?  Ignore the noise, keep things simple, take no risk where the odds aren't in your favor.

Nearly 2/3 of the Continental US has a White Christmas

More evidence in that global warming is having a dramatic impact on the weather of the US. NOAA maps indicate that close to 2/3 of the Continental US experienced a white Christmas this year. Ho, ho, ho, here's wishing everyone a Merry Christmas and a Happy New Year.

The Purpose of a Bond Allocation in Your Portfolio

If the long-term return on stocks is 8-11% and the long-term return on bonds is 4-6%, why should I own any bonds?

This question is often asked by folks condition by the bull markets of the golden decades of the 1980's and 1990's into thinking that the road to wealth lies in being 100% invested in stocks, and that bonds are a loser's game. After the tin decade of the 2000's, where bonds returned around 5% a year and stocks around -1.5% a year, the wise advice that your bond allocation should come close to matching your age might be more apparent. The emotion turmoil of the financial market meltdown of 2008-2009 caused many people to sell low once their pain threshold for losses had been crossed only to see the market rebound months later. My preferred portfolio allocation for almost all investors is the traditional 60/40 split between stocks and bonds to balance growth and stability.  The primary reasons for having bonds are:

1. Risk Management.  When generational bear markets hit like 2008-2009, your bond allocation will limit your downside, provide more stability, and make it easier emotionally to stay the course with your investment plan.  Bonds have a lower volatility than stocks, and the shorter the bond duration the less the volatility.
   
2. Low Correlation between asset classes.  Bonds and stocks often move in opposite directions, and are influenced by different factors in the economy.
3. Steady, reliable compounding of income. 
   
4. No one knows what the future holds. 
   

People will not get rich off of bond investing, but mixed with stocks in a balanced portfolio they help provide stability and the right overall asset mix can come close to approximating the overall return of the market with less volatility enabling investors to sleep better at night.

Some passive bond funds that I like currently include the usual suspects: Vanguard Total Bond Market Index, Vanguard Intermediate Term Bond Index, and Vanguard Short Term Bond Index.  Active funds that I like are Dodge & Cox Income, Harbor Bond Fund Institutional, and for the more risk tolerant Lomis Sayles Bond Fund and TCW Total Return Bond.

Health Care Reform: Designed to Fail

Today, sadly, the Senate passed its version of "health care reform." No one knows exactly what is in the bill, but one thing is certain-- it is designed to fail. By failure, I mean it will do the opposite of what the politicians are touting as its benefits: the cost will be substantially more than advertised, the savings will not materialize, it will add significantly to the deficit, it will reduce competition and innovation, taxes will have to be increased beyond what is already in the plan, it will result in healthcare rationing, and a black market for healthcare services to compensate for its shortcomings. Its failures will usher in the next set of healthcare reform fixes that will have as its inevitable a single payer system for the US... that is in fact the goal and endgame of healthcare reform... command and control healthcare by government bureaucrats. The US political leadership has chosen to take another step further away from the marketplace with its natural cost control mechanisms in favor of top-down profit and price controls for the healthcare industry when what we really need is a Wal-Mart for healthcare and a resetting of attitudes that rights are not something that can be dispensed by politicians confiscating other people's money.

For other perspectives on alternate care read Scott Jagow at Marketplace on his recent experience getting "Fast, Cheap, and Happy Health Care" at a Minute Clinic.

For an intelligent discussion on the subject, here is Richard Epstein: