Nothing has really changed at all since I was a young man striking out on my own, opting not to rent, purchasing that first property, yet the question begs to be answered again and again and again, and its not going to go away! Will you outlive your retirement savings during your golden years??? How much risk are you willing to take to assure that doesnt happen??? Are your retirement-saving habits and, even more important, your banking decisions sound??? Think on this. Last year, many banks, especially big ones, entered into long-term relationships with their securities portfolios, promising hundreds of billions of dollars of assets will be held to maturity. As a result, the banks may appear to have higher book values and be better capitalized in the eyes of regulators even if the value of these securities declines. That should make investors wary!!! The amount of securities banks pledge to hold to maturity rose last year by 61%, to $492.3 billion. J.P. Morgan Chase increased the amount of securities it designates this way by nearly $20 billion in last years fourth quarter. When securities are classified as held to maturity, they are carried at their original cost, typically face value. Declines in market values hit neither book value nor earnings. Their value is written down only if they are considered to be permanently impaired. Its no coincidence this occurred as long-term interest rates started rising, which sends bond prices lower. The greater use of the held-to-maturity classification helped banks to potentially avoid billions of dollars in losses. That is because most securities held by banks are designated as trading instruments or as being available for sale. In the former instance, gains and losses are based on market values and flow through earnings. In the latter, bonds are marked to market prices, but the change runs through shareholders equity; while earnings arent affected, book values are. But the embrace of held to maturity wasnt just caused by rising rates. It was also a response to changing capital and liquidity regulations. Under older rules, unrealized losses on available-for-sale securities didnt hit capital ratios. Starting in 2015, that will no longer be the case for banks with more than $250 billion of assets. New liquidity rules add another wrinkle. They will likely require the largest U.S. banks to collectively hold about $2 trillion of liquid assets. So while banks will have to hold additional securities to meet the new requirements, volatility could cause swings in capital ratios. Shifting assets into held-to-maturity buckets helps banks sidestep this problem. But that isnt without its own hazards. Ironically, given the liquidity rule is partly driving this, such a shift may actually reduce bank liquidity. That is because accounting rules penalize a company for selling anything deemed held to maturity; so such securities may become less liquid. Whats more, if the value of the assets has declined, the bank would incur sudden losses by selling them. That would be an unwelcome shock to investors and capital ratios. The bigger problem is that the rise of held-to-maturity holdings risks reviving the old problem of gaps between a banks regulatory capital position and its actual financial strength. In a time of market stress, investors might once again start to doubt regulatory measures. That can be lethal for a bank, as many found in the last bout of market turmoil. Dont go overboard when deciding how much of your portfolio to put into stocks!!! This advice is particularly timely now, as memories fade of the 2007-09 bear market and many investors find themselves with swollen stock allocations, either consciously, or unwittingly through failing to rebalance their holdings. The Investment Company Institute, a fund-industry trade group, reports that more than a quarter of investors have 100% of their individual retirement accounts invested in stocks including those between 60 and 64 years old. Another 16% have at least 80% of their IRAs in stocks. Most people recognize they need to lean heavily on stocks to fund retirement. Yet the extra return you earn for going with an all-equity portfolio is small relative to a traditional balanced portfolio that puts just 60% in stocks and the other 40% in bonds. Since Jan. 1st, 1926, according to Ibbotson Associates, an index fund benchmarked to the S&P 500 or its predecessor would have produced a 10% average annual return, assuming dividends were reinvested. A portfolio that allocated just 60% to this S&P index fund and the remainder to the intermediate-term of the U.S. Treasurys, which are considered risk-free, would have gained 8.7% annualized, or 1.4 percentage points a year less, on average. That certainly appears to be a rather modest price to pay for cutting your portfolios risk nearly in half, as measured by volatility of returns. To be sure, this small annual difference compounds into something larger if you have the uncommon discipline to hold through thick and thin. Over 20 years, for example, $100 invested in the stock index fund would grow to $682, versus $529 for the 60/40 portfolio. investingvalues/?p=1005
Posted on: Sun, 29 Jun 2014 18:59:49 +0000
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