Bob’s Journal for 10/19
How to Earn Top Long-Term Returns
The best way to earn higher returns than most investors over the long term is to avoid investment losses.
It is a good idea to read the periodic client memos from Howard Marks of Oaktree Capital. You come across classic insights such as that one accompanied by detailed explanations including anecdotes to support the ideas.
In his latest memo, Marks recounts a conversation he had with a pension fund chief in 1990. The pension fund honcho said that in his 14 years on the job, his fund almost always was in the second quartile when the annual returns of pension funds were ranked. His fund never was better than the 27th percentile and never less than the 47th percentile.
But those solid, steady returns produced great long-term results. Over the full 14-year period, the pension fund’s returns were in the top 4% of all pension funds.
The key to top long-term returns isn’t earning spectacular returns during any period or picking the next big winner. The key is to avoid big losses. In years when the indexes are down a lot, you want to lose a lot less.
It’s simple arithmetic. After suffering a decline, you must earn a higher percentage than you lost to recover the capital. When an investment declines by 20%, it takes a return of about 25% to get back to even.
Social Security, Medicare 2024 COLAs Are Announced
The release of the September Consumer Price Index was followed quickly by the release of cost-of-living adjustments (COLAs) for various parts of Social Security and Medicare. The COLAs take effect January 1, 2024.
Benefits paid by Social Security will increase by 3.2% from their 2023 levels.
In addition, the maximum monthly benefit for a worker who starts benefits at full retirement age in 2024 will rise to $3,822 from $3,627 in 2023.
The Social Security Administration estimates that the average benefit in 2024 will be $1,907 per month, up from $1,848 in 2023. In married couples in which each spouse is receiving benefits, the average total benefit will be $3,033.
For those still working, the maximum earnings subject to Social Security payroll or self-employment taxes will be $168,600 in 2024, rising from $160,200 in 2023.
For those who are working while receiving Social Security retirement benefits, the maximum that can be earned while working in 2024 without causing a reduction in benefits will be $22,320 per year (or $1,860 per month) for those younger than full retirement age and $59,520 annually ($4,960 per month) in the year a person reaches full retirement age. There’s no limit on earnings beginning the month a beneficiary reaches full retirement age.
The monthly basic Part B Medicare premium will increase by $9.80 to $174.70 on Jan. 1. The annual deductible for Part B will increase by $14 to $240.
The additional Part B premiums paid by higher-income beneficiaries under the Medicare premium surtax (also known as IRMAA) will rise by about 8% in 2024. The maximum total monthly premium will be $594.00. That will apply to individuals who had adjusted gross incomes greater than $500,000 in 2022 and married couples whose adjusted gross incomes exceeded $750,000. There are lower Medicare surtaxes at lower income levels, with the surtax beginning for individuals with adjusted gross incomes exceeding $103,000 and married couples with adjusted gross incomes exceeding $206,000.
Higher-income beneficiaries also pay a surtax on their Part D prescription drug premiums. The maximum monthly surtax on the Part D premiums in 2024 will be $81.00.
Know the Inflation Data the Fed Follows
Most people know that the inflation data will determine when the Federal Reserve changes its monetary policy, but most people don’t know which numbers the Fed gives the greatest weight.
The media follow the Consumer Price Index (CPI) the most. It is released by the Department of Labor each month, usually in the second week. Related to that is the core CPI, which is the CPI minus food and energy.
The CPI isn’t favored by many economists, especially those at the Fed. While the CPI has several shortcomings, the major one is the complicated estimate for owner-occupied housing. Economists tend to view it as inaccurate and that the housing component of the CPI is too large.
For those reasons, many economists prefer the Personal Consumption Expenditure (PCE) Price Index. This usually is issued the day after the monthly gross domestic product (GDP) report. The PCE Price Index estimates housing inflation in a different way than the CPI and gives housing less weight.
Even better to many economists is the core PCE Price Index, which excludes food and energy.
But the housing component of the PCE Price Index still has a lot of noise. That’s why the current Fed chairman is said to prefer the “super core” PCE Price Index, which excludes food, energy and housing. You can find it on the website of the St. Louis Federal Reserve Bank.
Another inflation measure that is believed to be more accurate than the CPI and is given some consideration by Fed members is the Median Consumer Price Index compiled by the Cleveland Federal Reserve Bank.
The Median CPI starts with the regular CPI data to compute the median price change in all the CPI components. This is an attempt to define a core inflation rate and exclude a lot of the “noise” that economists believe exists in the better-known measures. The Cleveland Fed says its research indicates this is a better indicator of the inflation trend than the other measures.
While Wall Street and the media obsess over the monthly releases of the CPI and even the Producer Price Index, Fed officials pay more attention to these other measures when setting policy.
The Data
Retail sales increased 0.7% in September, and August’s number was revised higher to a 0.8% increase in sales.
Excluding autos and gas, retail sales increased 0.6% in September and 0.3% in August.
Over 12 months, retail sales increased 3.8% through September after rising 2.9% through August.
Housing starts increased 7% in September after declining 12.5% in August. September had the biggest increase in starts since May. The number of starts in August was a three-year low.
Industrial production rose 0.3% in September after being unchanged in August. Over 12 months, industrial production increased 0.1% through both September and August.
Manufacturing production increased 0.4% in September after declining 0.1% in August. Over 12 months, manufacturing production declined 0.8% through September and 0.9% through August.
Optimism continues to decline among home builders, according to the National Association of Home Builders (NAHB). The Housing Market Index fell to 40 in October from 44 in September.
October is the third consecutive month the index declined and brought the index to its lowest level since January. The index was at 56 in July but was in the low 30s in late 2022.
The Consumer Price Index (CPI) increased 0.4% in September after rising 0.6% in August. Over 12 months, the CPI was up 3.7% through both September and August.
The core CPI, which excludes food and energy, increased 0.3% in both September and August. Over 12 months, the core CPI rose 4.1% through September after being up 4.3% through August.
The preliminary Consumer Sentiment Index from the University of Michigan through mid-October was down to 63 after being 68.1 at the end of September.
The mid-October level is the lowest in five months. Assessments of both current conditions and expectations declined and each was at its lowest level in five months. Consumers said they were concerned about inflation and future business conditions.
The Empire State Manufacturing Index fell to negative 4.6 in October from 1.9 in September.
New unemployment claims were unchanged at 209,000 in the latest week. The seven-month low of 202,000 was reached in September.
Continuing claims, which lag a week behind new claims, increased to 1.702 million from 1.672 million.
The Markets
The S&P 500 rose 0.34% for the week ended with Tuesday’s close. The Dow Jones Industrial Average gained 0.75%. The Russell 2000 fell 0.58%. The All-Country World Index (excluding U.S. stocks) lost 0.49%. Emerging market equities declined 0.39%.
Long-term treasuries lost 1.63% for the week. Investment-grade bonds fell 1.36%. Treasury Inflation-Protected Securities (TIPS) retreated 0.32%. High-yield bonds declined 1.12%.
On the currency front, the U.S. dollar rose 0.51%.
Energy-based commodities increased 1.65%. Broader-based commodities rose 1.41%. Gold gained 3.32%.
Bob’s News & Updates
My latest book is “Retirement Watch: The Essential Guide to Retiring in the 2020s.” Learn more and order by clicking here and here. Join those writing favorable reviews.
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