December 6, 2023

Bucks Blog: Dealing With Uncertainty

As Paul Sullivan writes in this week’s Wealth Matters column, 2012 was a year of uncertainty, and it looks as if 2013 will at least begin that way. And with investors’ memories of the collapse in equity markets in 2008 still fresh, financial advisers say they have spent much of the last 12 months trying to get their clients to let go of their fears.

As one adviser told Paul, the markets’ performance in the next five years will probably not be similar to its performance in the last five. So investors should move away from worrying about whether they will get their money back and start thinking about making money.

What about you? Do you feel confident in the markets, despite worries about the fiscal negotiations? What have you done with your investments and what are you planning to do in the new year?

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Bucks: Six Tips for Setting Your Financial Goals

width=480Carl Richards

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at BAM Advisor Services. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

If you managed to get unstuck and created your personal balance sheet recently, then you should have a really clear idea of where you are today. The next questions you need to be address are these: Where do you want to go? What are your financial goals?

This can be a frustrating process, since it involves making some really important decisions under extreme uncertainty. None of us know what next week will look like, let alone where we will be in 30 years. On top of that, making financial goals involves a whole bunch of assumptions — guesses, really.

We have to guess what our 60- or 80-year-old self will want to do. We have to guess what the markets will do, where interest rates will be and how much we can save. Those reasons and many more often lead us to forget that this is a process. We get stuck, unsure what to do next.

Well, despite all the uncertainty and assumptions, we need to have goals. It reminds me of the conversation between Alice and the Cheshire Cat:

“Would you tell me, please, which way I ought to go from here?”

“That depends a good deal on where you want to get to,” said the Cat.

“I don’t much care where,” said Alice.

“Then it doesn’t matter which way you go,” said the Cat.

“— so long as I get somewhere,” Alice added as an explanation.

“Oh, you’re sure to do that,” said the Cat, “if you only walk long enough.”

But the problem is that we do care where we end up, and part of deciding where to go depends on setting goals.

So there are a few really important things to keep in mind here. Before you get too excited or frustrated, here are a few things to consider.

1. These are guesses. 

While it is important to admit these are guesses, you should still make them the best guesses you can. Be specific. Just saying, “I want to save for college for my kids,” isn’t enough. How about, “I’ll find $100 to add to a specific 529 account on the 15th of each month”?

Even though you need to be specific, give yourself permission to be flexible. An attitude of flexibility goes a long way toward dealing with uncertainty. There is something very powerful about having specific goals but not obsessing about them.

2. These goals will change.

It’s a continuing process, and it will change because life changes. But don’t let this knowledge stop you from doing it. You need to start somewhere.

3. Think of these goals as the destination on a trip.

You would never spend a bunch of time and energy worrying about whether you should take a car, train or plane without first deciding where you are going. Yet we spend countless hours researching the merits of one investment over another before we even decide on our goals. Why are you stressing about what stocks to pick if you don’t have goals in mind?

4. Prioritize these goals.

Once you have them all written down, rank each goal in terms of importance and urgency. Sometimes you will have to deal with something that is urgent, like paying off a credit card bill, so you can move on to something really important, like saving for retirement.

5. This is a process.

If you set goals and then forget about them forever, that is a worthless event. This is a process. Since we’ve given ourselves permission to change our assumptions about the future as more information becomes available, we need to do it. Part of the process of planning involves revisiting your goals periodically to see how you are doing and making course corrections when needed.

6. Let go!

As important as it is to regularly review your progress, it’s also very important to let go of the need to obsess over your goals. Define where you want to go, review your goals at set times, and in between, let go of them! Goals for the future are important, but so is living today. Find that balance.

This list may not seem like a big deal, but you would be surprised at the number of people who cannot tell you their goals, let alone break them down into categories or rank their priority. Once you have your goals, you will be able to move on to the next step: making a plan.

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Bucks Blog: Weighing Prepaid Cards vs. Checking Accounts

Prepaid cards can be a better deal than checking accounts for some people, but the cards need more consumer safeguards, a new report from the Pew Charitable Trusts finds.

Along with the report, “Loaded with Uncertainty,” Pew introduced an online tool to help consumers determine which option is best for them.

The report divides consumers into three types in terms of their banking expertise: “savvy,” who use direct deposit and avoid fees whenever possible; “basic,” who aren’t as proficient at avoiding fees and have at least one overdraft fee a month; and “inexperienced,” who make heavy use of services but typically pay two overdraft fees a month.

Then, the researchers applied those characteristics to more than 200 checking accounts offered by the 12 largest banks, and 52 prepaid cards available online, to see which accounts best-suited each category.

For savvy consumers, checking accounts are the most economical, with a median monthly cost of about $4, compared with $4.50 for prepaid cards. Inexperienced consumers, however, did better with prepaid cards, which cost them a median of about $29 a month, compared with $94 for checking accounts.

Still, the cards carry myriad fees, and disclosure isn’t uniform. So just because a card doesn’t disclose that it charges a fee, for instance, doesn’t mean that it doesn’t charge it. There’s simply no way for consumers to know until they end up incurring the charge.

Also, balances on prepaid cards don’t always have clear protection from F.D.I.C. insurance, the report found. If a bank fails, the agency reimburses deposits up to $250,000. But many companies that offer prepaid cards aren’t banks and don’t hold the funds themselves. Rather, they pool funds in large accounts at a third-party bank, where the money may be covered by so-called “pass-through” insurance, which may be more tenuous, the report says.

Of the 52 cards Pew studied, only three indicated that they lacked F.D.I.C. insurance. But there is no federal oversight or supervision of prepaid companies that aren’t banks, to make sure the proper requirements for the insurance are met, Pew found.

“Claims of F.D.I.C. insurance in cases where portions of consumers’ funds may in fact be uninsured create a false sense of security for unsuspecting consumers,” the report said.

The report urges the federal Consumer Financial Protection Bureau to create better oversight of the cards.

Do you use prepaid cards? Do you prefer them to checking accounts?

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Bucks Blog: Riding Out Tax Uncertainty

The subject of Paul Sullivan’s Wealth Matters column this week is tax strategies for the new year. The problem is that with Congress at loggerheads again about fiscal policies, tax advisers are not even trying to guess what will happen in the next year or so about matters like the estate tax and the expiring Bush-era tax cuts.

Their only advice is to get your financial affairs in order — and that applies not only to the wealthy but also to middle-class taxpayers.

Are you making any changes in your finances before what promises to be an uncertain two years of tax policy? Please share your strategies below.

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Essay: Luck Is Just the Spark for Business Giants

And maybe that’s true — if you just want to be merely good, not much better than average. But what if you want to build or do something great? And what if you want to do so in today’s unstable and unpredictable world?

Recently, we completed a nine-year research study of some of the most extreme business successes of modern times. We examined entrepreneurs who built small enterprises into companies that outperformed their industries by a factor of 10 in highly turbulent environments. We call them 10Xers, for “10 times success.”

The very nature of this study — how some people thrive in uncertainty, lead in chaos, deal with a world full of big, disruptive forces that we cannot predict or control — led us to smack into the question, “Just what is the role of luck?”

Could it be that leaders’ skills account for the difference between just meeting their industry’s average performance (1X success) and doubling it (2X)? But that luck accounts for all the difference between 2X and 10X?

Maybe, or maybe not.

But how on Earth could we go about quantifying something as elusive as “luck”? The breakthrough came in seeing luck as an event, not as some indefinable aura. We defined a “luck event” as one that meets three tests. First, some significant aspect of the event occurs largely or entirely independent of the actions of the enterprise’s main actors. Second, the event has a potentially significant consequence — good or bad. And, third, it has some element of unpredictability.

We systematically found 230 significant luck events across the history of our study’s subjects. We considered good luck, bad luck, the timing of luck and the size of “luck spikes.” Adding up the evidence, we found that the 10X cases weren’t generally “luckier” than the comparison cases. (We compared the 10X companies with a control group of companies that failed to become great in the same extreme environments.)

The 10X cases and the control group both had luck, good and bad, in comparable amounts, so the evidence leads us to conclude that luck doesn’t cause 10X success. The crucial question is not, “Are you lucky?” but “Do you get a high return on luck?”

Return on luck: We call it ROL.

SO why did Bill Gates become a 10Xer, building a great software company in the personal computer revolution? Through one lens, you might see Mr. Gates as incredibly lucky. He just happened to have been born into an upper-middle-class American family that had the resources to send him to a private school. His family happened to enroll him at Lakeside School in Seattle, which had a Teletype connection to a computer upon which he could learn to program — something that was unusual for schools in the late 1960s and early ’70s.

He also just happened to have been born at the right time, coming of age as the advancement of microelectronics made the PC inevitable. Had he been born 10 years later, or even just five years later, he would have missed the moment.

Mr. Gates’s friend Paul Allen just happened to see a cover article in the January 1975 issue of Popular Electronics, titled “World’s First Microcomputer Kit to Rival Commercial Models.” It was about the Altair, designed by a small company in Albuquerque. Mr. Gates and Mr. Allen had the idea to convert the programming language Basic into a product that could be used on the Altair, which would put them in position to be the first to sell such a product for a personal computer. Mr. Gates went to college at Harvard, which just happened to have a PDP-10 computer upon which he could develop and test his ideas.

Wow, Bill Gates was really lucky, right?

Yes, he was. But luck is not why Bill Gates became a 10Xer. Consider these questions:

• Was Bill Gates the only person of his era who grew up in an upper middle-class American family?

• Was he the only person born in the mid-1950s who attended a secondary school with access to computing?

Jim Collins is the author of the worldwide best seller “Good to Great.” This article was adapted from “Great by Choice: Uncertainty, Chaos, and Luck — Why Some Thrive Despite Them All,” which was written with Morten T. Hansen and published this month.

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Uncertainty Driving Treasury Bill Fluctuations

But these are not normal times.

In the last two weeks — and particularly late last week — there were moves in Treasury bill prices that indicated rising worry that the American government might not honor its obligations, or at least might not do so on time.

The worst impact was on bills that come due in August and early September. Prices of bills that mature after that suffered a little, but there seemed to be more confidence that by then the political impasse over raising the debt ceiling would have been resolved.

Of course, a month ago there was great confidence on Wall Street that a resolution would have been reached well before Tuesday, when the Obama administration said the government would otherwise run out of money.

A Treasury bill is simply a promise by the United States government that it will pay $10,000 on a particular date. Under normal circumstances, of course, a bill that matures a month from now would cost a little less than one that matures next week.

But that was not true on Friday. The $10,000 bill that matures this Thursday traded for as little as $9,970.50, a discount of $29.50. But a bill that matures Sept. 29 — eight weeks later — never traded for less than $9,991.50, a discount of $8.50.

Why would anyone pay less for a dollar to be delivered within a week than they would pay for one to be delivered nearly two months later?

The answer is certainty, or a lack thereof.

To many investors in Treasury bills, time is critical. Bills are often held because a company knows it must come up with a large amount of cash on a particular day. If you owe $10,000 this Thursday, then owning a Treasury bill maturing that day would normally mean you were completely covered.

But what if there is a day or two delay? Or a week or two? What if no one will buy it from you on the due date without a significant discount in price? If that means you cannot meet your obligations, you may face a penalty far larger than a few dollars. Do you really want to take that risk?

Some chose not to last week, and that was why prices fell.

The prices seen last week, it should be noted, did not indicate real worries about a default that continues for a substantial period of time. There is, after all, no doubt that the United States can meet its obligations if its government is willing to do so. The question is one of will.

The discounts may seem teeny, and they would be if interest rates were at normal levels. But the Federal Reserve has pushed rates down, and money the world over has flowed to Treasury bills in a flight to safety. They are normally viewed as the very definition of a risk-free investment.

In fact, there have been times when Treasury bills sold for more than face value. That would seem to make no sense, but such bills are sometimes seen as more convenient than cash.

Just two weeks ago, the $10,000 Treasury bill that matures on Aug. 11 traded for $10,000.50. On Friday, it traded for $9,973.50.

When the bills that mature on Thursday were issued in February, the discount was only $8.50, providing an annual interest rate of 0.17 percent. An investor who held that bill for 25 of the 26 weeks, and then sold late last week, ended up with a loss.

That is not supposed to happen with a risk-free investment. But until now, no one feared that Congress would refuse to allow the government to live up to its obligations.

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Economic View: The Annuity Puzzle

Dave can count on a traditional pension, paying $4,000 a month for the rest of his life. Ron, on the other hand, will receive his benefits in a lump sum that he must manage himself. Ron has a lot of choices, but all have consequences. For example, he could put the money into a conservative bond portfolio and by spending the interest and drawing down the principle he could also spend $4,000 a month. If Ron does that, though, he can expect to run out of money sometime around the age of 85, which the actuarial tables tell him he has a 30 percent chance of reaching. Or he could draw down only $3,000 a month. He wouldn’t have as much to live on each month, but his money should last until he reached 100.

Who is likely to be happier right now? Dave or Ron?

If this question seems a no-brainer, welcome to the club. Nearly everyone seems to prefer the certainty of Dave’s pension to Ron’s complex options.

But here’s the rub: Although people like Dave who have them tend to love them, old-fashioned “defined benefit” pensions are a vanishing breed. On the other hand, people like Ron — with defined-contribution plans like 401(k)s — can transform their uncertainty into a guaranteed monthly income stream that mirrors the payouts of a traditional pension plan. They can do so by buying an annuity — but when offered the chance, nearly everyone declines.

Economists call this the “annuity puzzle.” Using standard assumptions, economists have shown that buyers of annuities are assured more annual income for the rest of their lives, compared with people who self-manage their portfolios. One reason is that those who buy annuities and die early end up subsidizing those who die later.

So, why don’t more people buy annuities with their 401(k) dollars?

Here’s one part of the answer: Some people think that buying an annuity is in some way a bad deal for their heirs. But that need not be true. First of all, a retiree can decide to set aside some portion of a retirement nest egg for bequests, either immediately or at a later date. Second, if a retiree chooses to manage his or her own money, the heirs may face the following possibilities: Either they get financially “lucky” and the parent dies young, leaving a bequest, or they are financially “unlucky,” meaning that the parent lives a long life, and the heirs take on the burden of support. If you have aging parents, you might ask yourself how much you’d be willing to pay to insure that you will never have to figure out how to explain to your spouse, or whomever you may be living with, that your mother is moving in.

There are other explanations for the unpopularity of annuities, but I think two are especially important. The first is that buying one can be scary and complicated. Workers have become accustomed to having their employers narrow their set of choices to a manageable few, whether in their 401(k) plans or in their choice of health and life insurance providers. By contrast, very few 401(k)’s offer a specific annuity option that has been blessed by the company’s human resources department. Shopping for an annuity with hundreds of thousands of dollars at stake can be daunting, even for an economist.

The second problem is more psychological. Rather than viewing an annuity as providing insurance in the event that one lives past 85 or 90, most people seem to consider buying an annuity as a gamble, in which one has to live a certain number of years just to break even. But, as the example of Dave and Ron shows, it’s is the decision to self-manage your retirement wealth that is the risky one.

The most complex and unknowable part of that risk is in predicting how long you will live. Even if there are no medical advances in the coming years, according to the Social Security Administration, a man turning 65 now has almost a 20 percent chance of living to 90, and a woman at this age has nearly a one-third chance. This means that a husband who retires when his wife is 65 ought to include in his plans a one-third chance that his wife will live for 25 more years. (A “joint and survivor” annuity that pays until both members of a couple die is the only way I know for those who are not wealthy to confidently solve this problem.)

An annuity can also help people with another important decision: when to retire. It’s hard to have any idea of how much money is enough to finance an appropriate lifestyle in retirement. But if a lump sum is translated into a monthly income, it’s much easier to determine whether you have enough put away to afford to stop working. If you decide, for example, that you can get by on 70 percent of preretirement income, you can just keep working until you have accrued that level of benefits.

IN the absence of annuities, there is reason to worry that many workers are having trouble with this decision. Over the last 60 years, the Bureau of Labor Statistics reports that the average age at which Americans retire has trended downward by more than five years, from 66.9 to 61.6. Of course, there is nothing wrong with choosing to retire a bit earlier, but over the same period, live expectancy has risen by four years and will likely continue to climb, meaning that retirees have to fund at least an additional nine years of retirement. Those who manage their own retirement assets can only hope that they have saved enough.

Annuities may make some of these issues easier to solve, but few Americans actually choose to buy them. Whether the cause is a possibly rational fear of the viability of insurance companies, or misconceptions about whether annuities increase rather than decrease risk, the market hasn’t figured out how to sell these products successfully. Might there be a role for government? Tune in next time for some thoughts on that question.

Richard H. Thaler is a professor of economics and behavioral science at the Booth School of Business at the University of Chicago. He is also an academic adviser to the Allianz Global Investors Center for Behavioral Finance, a part of Allianz, which sells financial products including annuities. The company was not consulted for this column.  

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Defying Doubters, AT&T Profit Rises 39%

ATT, the nation’s largest telecommunications company, reported a 39 percent increase in its first-quarter profit on Wednesday, despite losing the exclusive rights to sell the iPhone in the United States midway through the period.

The company posted net income of $3.4 billion, or 57 cents a share, up from $2.5 billion, or 41 cents a share, a year earlier. Revenue climbed more than 2 percent, to $31.2 billion from $30.5 billion.

ATT’s income met Wall Street forecasts while its revenue was slightly better than the forecast for $31.26 billion, but the company’s stock fell 18 cents, to $30.13 a share.

ATT said it activated 3.6 million iPhone accounts during the period, nearly a million more than it activated a year earlier, easing concerns that Verizon, which began selling the iPhone in February, would cut into its market share immediately.

Nearly a quarter of the new iPhone subscribers were new to ATT. The company also said that the number of subscribers who left the carrier stayed roughly the same as last year. In addition, ATT added two million wireless subscribers in the quarter, a slight increase from the 1.9 million that it added in the first quarter a year earlier. ATT’s overall pool of subscribers, which includes cable and land line customers, rose to 97.5 million, a 12 percent increase from a year earlier.

“We entered this quarter and this year with questions and uncertainty, in part related to the end of the iPhone exclusivity and its impact,” said Richard Lindner, the chief financial officer of ATT, during a call to analysts and investors. “Hopefully we’ve answered those questions.”

Ralph de la Vega, the company’s chief mobility officer, said ATT’s marketing push, which included commercials that highlighted technical limitations of Verizon’s CDMA network that do not allow smartphone owners to make voice calls and simultaneously perform data functions like browsing the Web, as being instrumental in retaining subscribers.

The company also attributed the popularity of connected devices like tablet computers, Kindles and personal Wi-Fi hot spots, as lifting the company’s profits. ATT and third-party retailers sold 421,000 of those during the quarter, although the vast majority of those sales were iPad 3Gs, which made up 322,000 of those sales.

But analysts said it might be too soon to determine what the overall impact of the Verizon iPhone will be on ATT.

“Is this as bad as it gets or will the real impact come only later with the iPhone 5,” wrote Craig Moffett, an analyst with Sanford C. Bernstein Research, in a note to investors.

The fifth-generation of the iPhone, which some speculate could be introduced by Apple in the fall, might be the true litmus test for the carriers, who will have to compete for customers whose current contracts are expiring as well as those intending to upgrade.

Mr. Moffett noted that while ATT did, however, beat analysts’ expectations that it would lose about 50,000 of its contract subscribers, adding instead 62,000 contract customers, the figure was down from the same period a year earlier, when ATT gained 512,000 new customers on contract.

Charles S. Golvin, a wireless industry analyst at Forrester Research, said the majority of the growth in the wireless industry stemmed from people who have never had a smartphone before.

“At this point, there aren’t any new contract customers in the United States,” he said. “It’s all about smartphone newcomers and stealing customers away from their competitors.” He noted that for the time being ATT was still selling an older version of the iPhone, the 3GS, for $49, which might be behind the surge in iPhone activations for ATT.

“There is something really appealing to someone who has never had a smartphone before to be able to get one for $50,” he said. But once the iPhone 5 arrives, he said, “we’ll really see how much customers care about the network they are on.”

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