Bob’s Journal for 8/17/23

Household Allocations to Stocks Near Record Highs

The percentage of household assets invested in stocks is near all-time highs.

The other periods when stock ownership was this high turned out not to be good times to own stocks. At the end of the first quarter of 2023, households had 16.57% of their total assets invested in corporate equities, according to the Federal Reserve’s quarterly Flow of Funds data.

This is down from almost 19% in early 2021 at the pandemic bull market peak and is lower than the record 19.63% reached at the end of 1968. But the recent 16.57% level is higher than the 15.30% level reached at the end of the third quarter of 2022, near the bear market low.

The only other times the percentage of household wealth invested in stocks was near the current level were at the end of 1972 and the first quarter of 2000.

A look at long-term charts of the stock indexes shows that each of these periods was a bad time to be heavily weighted in stocks. Significant bear markets followed.

Most people don’t want to sell any stocks during an extended market rally. They want to follow the advice to let winners run, and they don’t want to miss out on additional profits if markets continue to rally.

But it’s important to be mindful of risk. You should have an investment policy indicating the level of risk you want to take, including a maximum level for the percentage of your portfolio that should be invested in stocks.

When a market rally pushes your stock allocation to or above your maximum level, it’s time to rebalance the portfolio. Reduce your exposure to stocks unless your appetite for risk has changed.

Social Security’s Problems Influence Claiming Decisions of Many People

Most Americans who aren’t yet receiving their Social Security retirement benefits plan to claim the benefits early, according to the 2023 Schroders US Retirement Survey.

Only 10% say they plan to wait until age 70 to claim the maximum Social Security retirement benefit.

Many plan to accelerate their benefits. About 40% say they will claim benefits between ages 62 and 65, ensuring that they won’t receive the full retirement benefit.

The survey revealed that 95% of those between the ages of 60 and 65 were aware they would be foregoing higher benefits by claiming when they currently plan. A full 72% of all age groups said they knew they would be claiming before full retirement age and were aware of the financial consequences.

Social Security’s pending solvency was the reason given most for taking benefits before 70 and before full retirement age. About 44% said they would claim early because they were concerned Social Security would run out of money or stop making payments.

This is an unfortunate misunderstanding of Social Security’s finances.

It is true that the most recent estimate is the Social Security retirement trust fund will run out of money in 2033. I think that estimate is optimistic, and the trust fund will run short of funds a few years before that.

But the full Social Security retirement program won’t run out of money at that point and won’t stop making payments to beneficiaries.

Social Security continues to collect payroll taxes from employees, employers and the self-employed. The official estimates are that for at least 75 years, those taxes will be sufficient to pay 75% to 80% of promised benefits.

The worst-case scenario is that Congress does nothing to shore up the system. When the trust fund runs out of money, Social Security will be forced to reduce benefit payments across the board by 20% to 25%. The exact cut will depend on estimates that year of the amount of tax revenues to be received and benefits to be paid.

I think it’s more likely that Congress will step in at the last minute and make some changes so that those in or near retirement won’t see benefit reductions, except perhaps for high-income people. My thinking at this point is that Congress is likely to make up a lot of the difference by supplementing Social Security with general revenues and moving Social Security away from being a self-supporting program.

If Congress doesn’t act and benefits are to be reduced, I want my benefits to be reduced from the higher level promised by waiting to claim them instead of the lower level received by claiming benefits early.

Social Security’s financial problems are causing people to make bad decisions that will cost them significant wealth during their retirement years. Understand the facts and the consequences of different options. Make the choice that’s best for the long term.

Aretha Franklin Estate Dispute Goes to Next Stage

More than five years after her death, the disposition of the estate of the “Queen of Soul,” Aretha Franklin, still is in dispute. That’s making the lawyers happy.

Despite her wealth, Franklin didn’t have an estate plan or formal will. There’s no evidence she discussed her wishes with a financial or estate planner.

After her death in August 2018, Franklin’s family and attorneys found three handwritten documents relevant to her estate.

There was a handwritten note from 2010 that simply was intended to revoke any prior wills. Another handwritten document, dated earlier in 2010, apparently was intended to be a will. It made specific bequests of real estate to each of her four sons and seemed to create separate trusts to benefit two of her sons who have special needs.

The 2010 will was incomplete and didn’t contain many details needed to determine Franklin’s intent to distribute the full estate.

Those two documents were found in a locked cabinet.

Beneath the cushions in a couch, another handwritten document dated 2014 was discovered. This document also was a will but didn’t specifically revoke the 2010 will.

The 2014 will referred to the disposition of Franklin’s recording contract royalties and added her cousins to the beneficiaries of that money in addition to her sons.

This will also didn’t have many necessary details. Neither document appointed an executor, so a court appointed Franklin’s niece. The executor couldn’t decide which document to follow, and the sons disagreed on which document should control.

The executor asked the probate court to decide, and it submitted the dispute to a jury trial.

The jury recently ruled that the 2014 document was the valid will.

But the saga still has more stages. There are many ambiguities and unaddressed issues in the 2014 document. If the surviving family members can’t agree on how the estate should be distributed, the dispute will return to the court for resolution. In the meantime, the lawyers continue to bill everyone.

The Data

Retail sales increased 0.7% in July, which follows a 0.3% increase in June. Excluding autos and gas, sales increased 1% in July, the highest monthly increase for that measure in six months.

Sales in July were 3.2% higher than 12 months earlier, a substantial rise from the 1.6% increase, as of June, and the highest 12-month increase in five months.

These monthly sales numbers aren’t indexed for inflation.

The Consumer Price Index (CPI) increased 0.2% in July, the same rate as in June. Over 12 months, the CPI increased 3.2%, up from 3.0% at the end of June.

The core CPI, which excludes food and energy, also increased 0.2% in both July and June. Over 12 months, the core CPI increased 4.7% as of the end of July, down from 4.8% at the end of June.

The Producer Price Index (PPI) increased 0.3% in July after being unchanged in June. The 12-month increase in the PPI, as of July, was 0.8%, up from 0.2% as of June.

The core PPI, which excludes food and energy, increased 0.3% in July after declining 0.1% in June. The 12-month increase in the core PPI was 2.4% as of both July and June.

Industrial production increased 1.0% in July after declining 0.8% in June. Over 12 months, production is down 0.2% through July.

Manufacturing production increased 0.5% in July, following a 0.5% decline in June. Manufacturing production in July was 0.7% lower than 12 months earlier.

Home builders became less optimistic in August. The Housing Market Index from the National Association of Home Builders (NAHB) was 50 in August, down from 56 in July. The July number was the highest since June 2022.

The index was 45 in April and was at a recent low of 31 in December 2022.

Housing starts increased 3.9% in July after declining 11.7% in June. Single-family home starts increased 6.7% while multi-family home starts were unchanged.

The preliminary Consumer Sentiment Index from the University of Michigan was 71 as of mid-August, down from 71.6 at the end of July, according to the University of Michigan. The July reading was the highest end-of-month level since October 2021. In May, the index was only 59.2.

Assessments of current conditions improved while expectations for the future were reduced.

The Empire State Manufacturing Index tumbled to negative 19 in August from positive 1.1 in July. That’s the first negative number for this index in three months.

New unemployment claims increased by 21,000 to 248,000 in the latest week. After several weeks of declines, that brings the number of claims to its highest level in a month.

Continuing claims, which lag a week behind new claims, decreased to 1.674 million from 1.692 million.

The Markets

The S&P 500 lost 1.31% for the week ended with Tuesday’s close. The Dow Jones Industrial Average fell 0.97%. The Russell 2000 tumbled 2.56%. The All-Country World Index (excluding U.S. stocks) declined 2.19%. Emerging market equities retreated 2.68%.

Long-term treasuries lost 2.18% for the week. Investment-grade bonds fell 1.51%. Treasury Inflation-Protected Securities (TIPS) declined 1.22%. High-yield bonds decreased 0.49%.

On the currency front, the U.S. dollar rose 0.84%.

Energy-based commodities fell 1.91%. Broader-based commodities lost 2.21%. Gold declined 1.18%.

Bob’s News & Updates

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A recent five-star review of my book, “The New Rules of Retirement” on amazon.com said, “A complete retirement guide! One of the best books on this topic!” Click for more details about the revised edition of “The New Rules of Retirement.”

If you’re interested in my books, check my amazon.com author’s page.

I’m a senior contributor to the Forbes.com blog. You can view my contributor page here.

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