Posted Feb 04
In a fascinating January 28 interview with James Montier (of Grantham Mayo van Otterloo [GMO] with $10 mil. account minmums!), Robert Huebscher teases out some thoughts & facts that warrant further study, if you would like to take the time to read it. (see What Worries Me Now) But I’ll save you some time with this bullet-point list:
- At the bottom of the market in 2009 “accounting authorities suspended FASB rule 157 . . . all of a sudden, financial institutions could lie with impuity” about their declining asset values. Is this one factor in the market run up? Possibly. But FASB157 was replaced by ASC820 which, by my reading, uses very reasonable asset valuation formulas. And won’t financial institutions continue to lie with impunity anyway as long as they remain almost entirely self-regulating? This is an important issue because the techniques used to assign a market value to assets and income streams directly affect stock prices and, therefore, your retirement account balances.
- He acknowledges the economic fact that government austerity is “likely to drag down profits and that remains a major source of concern”. The prevailing notion that taxes vanish into a black hole is so tired and, well, stupid that I’m glad to see a major fund manager dispel it. Government belt tightening- just for the sake of belt tightening, I might add -slows the circulation of money & hurts the economy.
- Montier recognizes that “this is the purgatory of low returns“. He goes on to say that “the perfect dry-powder asset would . . . give you liquidity, protect you from inflation, and it might generate a little bit of return”. And then, “Right now, of course, there is nothing that generates all three of those characteristics”.
It is this last assertion with which I heartily disagree. What if there were an asset which:
- Was principal guaranteed, every year. Not ever losing money enhances long term returns.
- Allowed you to use a “5% rule” or greater, depending on your age, (instead of the traditional “4% rule”* which is now considered excessive) for withdrawals
- Every year that you delay taking withdrawals, for up to 20 years, your income amount would increase by 7.2%
- You have 10-20% liquidity annually
- 100% liquidity of principal plus interest in the event of death or 10 years.
Those features would tend to meet Montier’s criteria, wouldn’t they? And the account minimum is $5000 as opposed to GMO’s $10 mil. Unfortunately, this particular product is going away on 2/24/2014.
*The lifetime retirement account withdrawal rate that assures you won’t run out of money before your life expectancy. It has recently been revised to 3%.