Your Retirement Calculator Is Lying to You

Your Retirement Calculator Is Lying to You

One thing I have learned in life is that people become very angry when you gently suggest to them that the way they have been getting rich will most likely not work in the future.  Unfortunately, when you work in the financial services industry, this can make it difficult to avoid awkward conversations.

Of course, a lot of people don’t bother sitting down in front of a real live person anymore in order to analyze their financial situation.  Instead, they choose to use an internet retirement calculator.  This has the advantage of allowing you to scream obscenities at it, safe in the knowledge that you can’t hurt the AI’s feelings.

Every financial company worth its salt has a retirement calculator on its website, including Vanguard, Fidelity, Charles Schwab, Edward Jones and many others.  They ask you to input a tangle of personal information like your age, current savings, salary, etc.  Then they spit a nice definitive answer back out at you.

Most of the time, the “bottom line” returned by a retirement calculator makes us feel anxious or inadequate.  Occasionally it makes us feel satisfied or superior.

But almost every retirement calculator asks for a single number that is more important than all the others.  It is a number that is hardly ever talked about, but is vitally important for investors.  This golden number is the return expectation, sometimes known as the discount rate.

Return expectations are crucial because a high rate of return will quickly grow even a small pile of money into a huge stash in very little time.  In contrast, a low rate of return means that a modest amount of savings will remain modest for an excessively long time.

We are all interested in achieving a high rate of return on our investments.  And the companies that design retirement calculators understand this.  They want us to feel good about our investment and retirement prospects.  Otherwise, we would all be too depressed to save anything – a situation which isn’t conducive to driving profits for large financial firms.

There is only one little problem for these financial firms and the retirement calculators they’ve created.  The default return expectations baked into most retirement calculators are, in a word, insane.  I’ve seen numbers that range from 5% on the low end to around 12% on the high end.

But these numbers are so unrealistic as to be laughable.  Even the 5% expected rate of return, while certainly better than double digit return assumptions, is unrealistically sanguine.  This is because the U.S. stock market (along with many other global equity markets) is trading at historically high valuations (warning: paywall).  A more realistic estimate for long-term stock returns would be in the 1% to 2% range, a possibility that effectively no one is planning for right now.

Relying on a balanced portfolio of stocks and bonds in order to pad the returns in your retirement calculator isn’t going to work either.  A variety of broad U.S. bond indices currently have yields between 3% and 4%.  These low bond returns will drag down the equity return portion of any balanced investment portfolio, assuming those future equity returns somehow manage to climb higher than 4%.

In other words, your investment plan, as validated by your favorite retirement calculator, is an impossible dream.  It is painting a fantasy of tropical white sand beaches and gently-lapping blue waves, when the ugly reality is likely to be trailer parks, dog food and squalor.

I get it.  You’re angry.  You don’t like me implying that the nice man who wears a crisp suit at your local brokerage office is lying to you.

And, to be honest, your investment advisor might not even be trying to intentionally mislead you.  He may simply be ignorant of reliable long-term valuation measures and what they portend for future asset returns.

Look, I’m not telling you this to make you upset.  I’m telling you because someone needs to tell you before it’s too late.  The financial media is full of cheerleaders, charlatans and hacks.  They will say whatever their boss tells them they should say in order to get next week’s paycheck.

They don’t have to live with the consequences of their bad financial advice.  You do.

So I implore you to get diversified – really diversified.  Don’t expect that adding another index fund to your 401-k is going to be enough.  It almost certainly won’t be.

Instead you’ll need to do some intellectual heavy lifting.  You’ll have to research investments that you never knew existed.  You’ll have to consider investments that might have seemed ludicrous just a few years ago.

Learn about investing in tangible assets, like fine art, precious metals, antiques and gemstones.  They aren’t a panacea by any stretch of the imagination, but they can’t be printed by the world’s deranged central bankers either.  And always be sure to take physical delivery of anything you buy.  In the future, if you can’t hold an asset in your hand, the chances are very good that you won’t own it in any meaningful sense of the word.

I don’t think you can automatically expect to garner double digit returns in any asset class.  But you will have a much better chance of meeting your financial goals if you have a healthy allocation to tangible assets.  Your retirement calculator may whisper sweet little lies into your ear, but don’t be fooled.  The investing future belongs to those who refuse to be deceived.

 

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The End of Inexpensive Fine Vintage Jewelry

The End of Inexpensive Fine Vintage Jewelry

I have noticed a startling trend in the fine vintage jewelry space.  Good quality antique jewelry is getting harder and harder to find for reasonable prices.  Of course if money is no object, it is still possible to buy superb pieces at outrageous prices.  Alas, few of us find ourselves willing to do that.

As recently as 6 or 7 years ago, I could still walk into an antique or consignment shop and find multiple pieces of fine vintage jewelry in the $300 to $800 range.  These were pieces crafted from solid karat gold and set with high quality gemstones.

Sometimes the stones set in this jewelry would be one of the big four gemstones: rubies, sapphires, emeralds and diamonds.  If this were the case, the gems would often be on the smaller side, generally less than 1/2 carat.  Alternatively, I could find fine vintage jewelry with larger, centerpiece examples of valuable second tier gemstones, like aquamarine, tourmaline or spinel.

In either case, this fine vintage jewelry was eminently investable, as well as strikingly beautiful.  And at only a few hundred dollars per piece, they were also affordable.  Unfortunately, wicked inflation has been hard at work in the antique jewelry market.

At first, it was the pieces set with the larger first tier gemstones that skyrocketed in value.  The diamond jewelry was some of the first to go, not because white diamonds are particularly rare or desirable, but because everyone quickly recognized their value.

The large rubies, emeralds and sapphires were the next to disappear.  Natural rubies, in particular, are very rare stones.  Their relative abundance in 20th century jewelry is actually a quirk of Burmese-Thai geological luck, never to be repeated.

Prices for antique emerald jewelry were not far behind their ruby counterparts.  This is in spite of the fact that substantial new emerald deposits were discovered in Africa in the 1960s and 1970s.  These African sources have now come online, making significant contributions to global emerald supplies.  But demand is still outstripping supply, leading to ever increasing emerald prices.

Even sapphire – the most common of the big three colored gemstones – eventually succumbed to the insatiable demand for inexpensive fine vintage jewelry.  Sapphire prices had been depressed for decades due to the introduction of heat treatment techniques that were perfected in the late 1970s, followed by beryllium diffusion treatments around the year 2000.  But now that the considerable inventories created via these treatment processes are finally exhausted, sapphire jewelry prices are moving inexorably higher.

Price increases for fine vintage jewelry were not limited to pieces set with diamonds, rubies, emeralds and sapphires, though.  Next, price inflation spread to good quality second tier gemstones.  These are stones like non-emerald beryl, precious topaz, fancy-colored garnets, peridot, etc.

You used to be able to buy good quality antique jewelry set with these stones for $500 or $600 all day long.  Now it is becoming harder and harder to find them for reasonable prices.

I recently wrote a Spotlight article about an artisan-made modernist pendant that illustrates this point perfectly.  It is crafted from solid karat gold and is set with a variety of low-to-moderate value gemstones.

Yet, the asking price is $849.  And it isn’t a bad price either.  In fact, it is a very good price – so good, in fact, that I think it would make an excellent investment.

If you had looked to purchase this piece on the second-hand market 10 or 15 years ago, I think you could have easily had it for perhaps $400 or $500.  Not anymore, though.  The price has permanently ratcheted upward, and there is every probability it will continue to go up.

In my opinion, the reasonable prices for fine vintage jewelry that we had enjoyed for many decades were a by-product of low precious metal and gemstone prices from the 1980s through the early 2000s.  This mirrored the general collapse in commodity prices over the same period.

For example, in 1980 the price of a flawless, D-color 1 carat diamond peaked at around $60,000 a carat due to rampant inflation fears.  Then the price declined until the late 1990s, when the same stone could be purchased for around $15,000.  Currently, a white diamond of this size and quality would sell for about $20,000.

The price of gold followed a similar path.  After achieving a secular high of around $850 in 1980, the coveted yellow metal then entered a vicious, two decade long bear market.  Its value finally put in a double-bottom of $275 in 1999 and 2001.  Currently, an ounce of gold trades for around $1,300.

Now that the value of jewelry raw materials has risen sharply, an impact on the pricing of existing fine vintage jewelry was inevitable.  It has simply taken more than a decade for old inventory and stale prices to clear from the marketplace.  Now that the overhang is gone, it is clear that the value of fine vintage jewelry will continue to rise for the foreseeable future.

 

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1944 English Sterling Silver Art Deco Cigarette Case

1944 English Sterling Silver Art Deco Cigarette Case
Photo Credit: Dart Silver Ltd

1944 English Sterling Silver Art Deco Cigarette Case

Asking Price: $199.72 (price as of 2018; item no longer available)

Pros:

-This sleek Art Deco cigarette case was made in Birmingham, England in 1944.  It is impressively crafted from solid sterling silver and has a gilt interior.

-This Art Deco cigarette case measures 12.8 cm (5 inches) long by 8.6 cm (3.4 inches) wide.  It weighs in at a hefty 191.3 grams, or 6.15 troy ounces.  This is exceptionally heavy for a vintage cigarette case and is an important indicator of quality construction.

-Sterling silver cigarette cases were popular from the late 19th century right up until the 1970s.  Today they are a favorite of vintage tobacciana collectors.

-Given its gross weight of 6.15 troy ounces, this art deco cigarette case contains approximately 5.69 troy ounces of pure silver.  This is worth about $93 with the spot price of silver hovering around $16.40 per troy ounce.  Therefore, the case is trading at a premium of around 114% over its melt value, which is very reasonable for a 75 year old vintage item in almost perfect condition.

-The British city of Birmingham was famous for the quality and abundance of its sterling smallwares in the 19th and early 20th century.  This included jewelry, snuff boxes, liquor labels and card cases, along with a multitude of other silver trinkets.

-The styling of this vintage Art Deco cigarette case is a sight to behold.  An engine-turned diamond pattern alternates with elegant linear design elements, inviting the viewer’s eyes to dance across its silver surface.

-Non-smokers who are interested in antique cigarette cases can adapt them to modern times by using them as billfolds, wallets or business card holders.  Honestly, any slim item that you might want to store would pair well with this sterling silver Mid-Century masterpiece.

-I feel that antique sterling cigarette cases are one of the most undervalued areas in the antiques market today.  And this example – with its heavy gauge silver, excellent construction and superb Art Deco design – is well worth the $200 asking price.

 

Cons:

-This Art Deco cigarette case is too big to easily fit into your pants pocket.  If you opt to use it as a wallet or billfold, you will have to keep it in a jacket pocket, suit pocket or a purse.

-This vintage sterling silver cigarette case is monogrammed.  A lot of collectors don’t like monogrammed silver, but I don’t see it as a significant deterrent.  Instead, I view monograms as part of the history of a piece.

-The maker’s mark for this Art Deco cigarette case is “EJE”.  Unfortunately, this mid-century Birmingham silversmith’s mark has yet to be identified.  The desirability of the piece would be slightly enhanced if the maker were known.

 

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What’s Your Financial Exit Strategy?

What's Your Financial Exit Strategy?

I am firmly convinced that every investor should have a financial exit strategy.  I define this as any way your investments can reasonably pay-off, even if the markets remain stubbornly against you.

For example, a dividend investor doesn’t count on having to sell his securities for more than their purchase price, although such an outcome would certainly be welcome.  Instead, his implicit financial exit strategy is simply holding his stocks until the dividends have grown large enough to constitute a substantial portion of their original cost.  This is also called yield-on-cost – a sacred concept for many dividend investors.

Another example of a financial exit strategy would be applicable to growth investors.  These investors buy rapidly growing (but often cashflow negative) small or medium-sized companies in the hopes that the market will recognize and reward this success with an elevated share price.  But if the market, for whatever reason, chooses to low-ball a growth investor, he can continue to hold the company until it eventually becomes large and successful.  At that point, the firm will almost always pay out a generous dividend.  This eventual dividend cashflow is the financial exit strategy for growth investors.

Microsoft and Apple are classic examples of this approach in real life.  They both began as small, rapidly growing companies that paid no dividends (and required lots of financing) and ended up as massively successful companies that paid large dividends.  If, as a growth investor, you felt that they were not being awarded the proper growth multiple, you could simply continue to hold, waiting for your financial exit strategy to work.

But a theoretical financial exit strategy isn’t always foolproof.  It is possible that a dividend investor’s chosen stock fails to grow its dividend, in which case the default method of cost-on-yield escape is non-operative.  Likewise, a growth investor may find that his rapidly expanding company runs out of liquidity or faces a shrinking customer base due to a recession.  In these instances, that small, formerly fast growing company will never mature into the large, dominant firm originally forecast.

And this brings us to our pertinent question for the day: What is your financial exit strategy?  Unfortunately, I think for many investors the answer is “I don’t have one!”

The raging bull market of the past 9 years has made many market participants complacent.  They either believe they don’t need a financial exit strategy or that relying on central banks’ endless quantitative easing (QE) is sufficient.  But I think this is a poor substitute for actual risk control.

And this line of reasoning inevitably brings us back to my favorite asset class – hard assets like fine art, antiques and precious metals.  Even a modest allocation to these overlooked tangible assets can help diversify a traditional stock and bond portfolio in a way that other paper assets cannot.  And this realization has extremely important future implications for your financial health.

Under normal circumstances, a portfolio composed solely of stocks, bonds and cash is safe enough.  But we are not living in normal times.  Instead, we are drifting through the hazy twilight of our current debt-laden, dollar-based age, which is sometimes known as Bretton Woods II.

I recently stumbled across a whitepaper from a financial firm called Myrmikan Capital, LLC that illustrates my worries about our current financial predicament quite succinctly.  I have excerpted the pertinent portion below:

In 1940, for example, when the roaring ’20s had been fully liquidated, the Fed’s gold backed its liabilities by 88%.  There was very little credit in the dollar system, which made it a good time to own stocks.  By the top of the 1960s bubble, the Fed had monetized so many government bonds that, at the pegged and London market price of $35 per ounce, gold backed the Fed’s liabilities by just 12%.  That was a great time to own gold (had it been legal for Americans to do so).

On January 21, 1980, the spot price of gold hit a peak of $875, which meant that the gold on the Fed’s balance sheet backed its liabilities by 133% – in order words, its liabilities were overbacked by 33%.  That was not a good time to own gold.  Today, the Fed reports it holds 8,133 tonnes of gold, worth $349.4 billion at $1,330 per ounce, which equals 7.9% of the Fed’s reported $4.4 trillion in liabilities.  Now is a good time to own gold.  Better than in 1968, in fact.

Prior to reading this, I had written an article on the stair-step pattern clearly visible in the long-term price of gold, which perfectly mirrors Myrmikan Capital’s analysis.  This is frightening stuff, or it should be for any conventional stock or bond investor.  Simply put, the Federal Reserve and other global central banks are engaged in naked inflationism.  And while the ultimately negative consequences of their profligate monetary policy have not yet arrived for the most part, stand assured that they are coming.

I have an analogy to describe the current financial system.  Suppose you are attending a wild rave on the top floor of a ramshackle apartment complex.  The guests are, without exception, all either drunk or high.  The booze and drugs are flowing freely.  And suddenly someone opens up a closet and discovers boxes filled with fireworks and oil-soaked rags.  The party guests are enamored with this find and waste no time breaking out their lighters.

You and I both know what is going to happen.  That is why, in this analogy, I am slowly edging towards the apartment’s fire escape.  I want to be the first one out when the inevitable disaster strikes, because very, very few people will manage to escape.  Tangible assets – precious metals, antiques and fine art – are a way to emerge financially intact from such as catastrophe.  They give you a viable financial exit strategy from a market that loves playing with fire.

 

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