Category: Penny Stocks

The Value Gap: ‘We don’t grow up with uncles, fathers, brothers who play golf with MDs or run desks’: Troy Prince is on a mission to bring minority traders to Wall Street

Editor’s note: An original version of this story incorrectly phrased the trading motto of Wall Street Bound. The story has been corrected.

Troy Prince, 49, wants to help aspiring minority traders realize their dreams of working on Wall Street.

MarketWatch photo illustration/Troy Prince, iStockphoto

Throughout Troy Prince’s 30-year finance career, which has included stints at Salomon Brothers and Wells Fargo and spanned several continents, he has been haunted by the fact that he would see so few faces that looked like his. When he asked his employers why, he said, they always responded, “We can’t find them.”

That never made sense to Prince, 49, who wants to help aspiring minority traders realize their dreams of working on Wall Street. The nonprofit he founded, Wall Street Bound, aims to provide access to financial-services careers for urban youth, targeting ethnic minorities largely between the ages of 18 and 24 who often coincide with more marginalized or low-income populations.

There is no shortage of research that demonstrates how far diversity in the finance world still has to go. Just four Fortune 500 CEOs are Black, Fortune reported in July; Roger Ferguson, the head of the financial-services company TIAA, is the lone Wall Street representative. A McKinsey study released in May found that minorities represented just 13% of U.S. and U.K. executive teams in large companies in 2019, an uptick from 7% in 2014.

Read:The first Black woman to head a major publisher talks about how lack of diversity hurts a company’s performance

An analysis of the 44 biggest U.S. banks released in February by the U.S. House Committee on Financial Services found that “although the workforce diversity demographics of the nation’s largest banks appear to align with the composition of the U.S. labor force, bank workforce diversity is more visible in entry-level rather than executive and senior-level positions.” More recently, Wells Fargo WFC, -0.32%  CEO Charles Scharf came under fire for remarking at a meeting over the summer that there is a lack of qualified minority candidates to meet the bank’s diversity goals.

Prince caught the trading bug from a stock-picking contest in high school, started making cold calls for a retail broker at Shearson Lehman Brothers at 17, then spent two years working for Salomon Brothers while attending New York University’s Stern School of Business. He graduated at 20, spending the next three decades as far away as Vietnam and as close as Wall Street.

“I grew up in the Bronx, exactly 11.2 miles from the New York Stock Exchange. How is the greatest economic engine mankind has ever known 11.2 miles from the poorest congressional district in America?” the founder and CEO of Wall Street Bound told MarketWatch in an interview conducted in late July and in subsequent emails. “When I moved back last year, it was just clear to me things haven’t gotten any better.”

Read:Bank of America will incorporate diversity analysis of asset managers after ‘huge amount’ of client requests

Even in these difficult pandemic times, Prince has been making strides. The past summer he hosted a successful virtual mini-boot camp, which drew appearances by billionaire investor Leon Cooperman and Mario Gabelli, the founder and CEO of GAMCO Investments, fellow Bronx natives.

Wall Street Bound has also partnered with the proprietary trading firm Maverick Trading, which will eventually allow graduates of the nonprofit’s Diverse Trader Training Program to trade the firm’s capital and keep between 70% and 80% of profits. The program, which will be virtual, will provide qualified candidates with preparation for front-office careers in finance, a technical knowledge base, live trading experience, mentorship and, importantly, an introduction to a network of employers looking to diversify their workplaces.

The school will launch as soon as he has the necessary funds. Here is more from MarketWatch’s interview with Prince, which is the latest installment of The Value Gap:

MarketWatch: What is Wall Street Bound all about?

Prince: Our motto is “Creating a path to Wall Street for urban youths.” The idea that … it doesn’t happen on its own, and it’s a two-sided endeavor. One, it’s a community that’s not typically exposed to these careers to the markets. The other side … schools that largely serve the Black and brown populations are not top recruiting schools for Wall Street, so there’s a mismatch there.

Also see:Three reasons you don’t see many people of color in the financial services industry — and how to fix it

MarketWatch: How has fundraising progressed from when you began in April 2019, through the Black Lives Matter movement and protests, and the pandemic?

Prince: We raised more money in the last few months of the BLM [Black Lives Matter] movement than in the year since we launched. That being said, we still have a ways to go towards reaching our $500,000 target. Fundraising is our No. 1 challenge to scaling the reach and scale of the mission and adding additional hands on deck to build execution capacity.

MarketWatch: What do you think the main fundraising challenges are?

Prince: Certainly the pandemic. I understand this is a moment of uncertainty for everyone, so of course, at times of uncertainty, it’s the most natural thing — people are concerned with you and yours. Secondly, again, I think it goes to what is also natural. You have to be moved or inspired by a certain story based on your own background. … Last but not least, as a new nonprofit CEO, I have to take responsibility myself to take the message out there and get into the right rooms.

MarketWatch: Can you describe some of the potential candidates who have asked to take part?

Prince: [He describes some of the 200 emails he has received from as far away as Africa and Saudi Arabia, some of which he has shared on his LinkedIn page.] A young man from Florida: “I started teaching myself to trade at age 15 or 16, Latino, I grew up, my parents picked fruit, during quarantine and corona I’ve been massively trading.” A young man from Canada, clearly of South Asian descent by his last name, he’s studying mathematics, and he said: “I’ve noticed my colleagues get interviews and the job opportunities where I haven’t, can you help me?” A Native American: “I’m a trader at Maverick, this is an opportunity I would like my two Black nieces to have that I didn’t have at their age.” … Just constantly these stories.

A theme that comes up quite often from these young Black and brown kids who want to learn to trade: More than one say they want to learn to give back to their community. It reminds me of why I’m doing this.

MarketWatch: What are the biggest obstacles for people of color trying to get into finance?

Prince: One is awareness, two is social capital. We don’t grow up with uncles, fathers, brothers who play golf with MDs or run desks. That’s not our typical story. The network, the introductions …

MarketWatch: What does the financial industry need to do to bring more people of color into the sector?

Prince: Support Wall Street Bound and other organizations that are intentionally trying to bridge the opportunity divide between the capital markets, financial services careers and urban talent. Wall Street on its own is incapable of recruiting and training urban talent. And the urban talent on its own is incapable of cracking open the doors. There has to be intentionality and a bridge, an organization bringing those two together. It’s the only way.

MarketWatch: How important is financial literacy to reducing the racial wealth gap?

Prince: Financial literacy on its own doesn’t get you to the point where you have the additional income and asset to invest. It has to be coupled with the income conversations, the behavior conversations and the investment conversations. … Even if you became the world’s smartest investor, you’re Warren Buffett, you’ve got 500 bucks in the bank, you double it in a year and now you’ve got 1,000 bucks in the bank. That’s not moving the needle. The average Black family has one-tenth the net worth of the average white family.

MarketWatch: What makes a good trader? What are you looking for?

Prince: Humility, discipline, intellectual curiosity, hunger we have in spades, willingness to put in the hard work. Most people do not recognize how difficult a job it is and how long it takes.

MarketWatch: In working with young people, what are the biggest misconceptions you’ve run into about money markets?

Prince: With young people, it’s for them to recognize it’s a long journey to mastery. The length of time to become aware of that first step along that journey is not mastery of concept or mastery of analysis; it’s mastery of self. And that is absolutely where they get misperceptions.

You can’t be a trader without being disciplined and without knowing yourself, and that’s where most of the work needs to be done, as opposed to the technical skills. … Most people don’t realize trading is probably 80% mental. Focus on analysis, which tools, understanding who you are and coming up with a trading plan according to your own specific personality. Know your strengths and weaknesses.

Everyone knows the old adage — cut your losers short, let your winners run. No one is able to do it. Why?

The Tell: Here’s how to invest for the next decade

MarketWatch photo illustration/iStockphoto

For many of us, 2020 can’t end soon enough.

Here’s a way to pass the time while you’re counting down the days: consider your investing plan – the one you’re going to have for the next decade, that is.

A new report from research and analytics provider Morningstar offers some suggestions. It’s titled “24 stocks for 2030,” but you don’t need to wait nine years to buy their picks.

But wait, you say – it was impossible to predict anything that happened in 2020. How on earth can anyone look so far ahead? Morningstar says it encourages investors to buy and hold for the long term – and one of the priorities it analyses is a company’s competitive advantage, not its recent quarterly performance.

With that in mind, here are the five themes the company is highlighting, along with some of their most highly-rated stocks to express each idea.

Cannabis: Morningstar forecasts the $10 billion U.S. market to grow to more than $80 billion by 2030. Aphria APHA, -0.85% is their top-rated stock pick for the category, with five stars.

5G: Companies that enable 5G-related services, like semiconductors and equipment vendors, stand to benefit from the new network. Among Morningstar’s recommendations, Nokia NOK, -2.34% gets four stars.  

Electric vehicles: By 2030, one in five cars will be powered by electricity, Morningstar forecasts. But it should only take until 2025 for electric vehicles to be as cost-effective and functional as internal combustion engine-powered vehicles. Morningstar’s two five-star picks in this category are BMW and Sociedad Quimica Y Minera De Chile SA. The only U.S.-domiciled company in the list, General Motors Co. GM, -1.16%, gets four stars, and the firm notes it has no economic moat.

See: California aims to halt sales of new gas-powered cars

Renewable energy: It should account for 22% of electricity generation by 2030, a hefty increase from the 7-8% share it now represents, Morningstar thinks. “We think wind growth estimates are overstated and that solar will be the key disruptor,” they add. Edison International EIX, +0.45% is a company that invests in the infrastructure to support renewable energy. It gets four stars from Morningstar analysts.

Big pharma/biotech: Like many analysts looking at the space, Morningstar thinks big advances in science – cell therapy and gene therapy, to name a few – will transform pharma and biotech in the coming decade. Roche ROG, -0.25% gets five stars in this category, and Morningstar deems its economic moat to be “wide.”

Read next: Stock fund outflows reach nearly two-year high as selloff intensifies

The Margin: Ohio mom tasered, arrested for trespassing after not wearing a mask at a middle school football game

A viral video showing an Ohio woman being tasered and dragged away from a middle school football game after refusing to wear a mask is refueling the debate over the enforcement of social distancing guidelines during the pandemic.

The woman identified by police as Alecia D. Kitts got into the altercation with school resource officer Chris Smith at the Logan High School Stadium early Wednesday evening. The incident was recorded by a bystander, and the original video quickly racked up more than 44,000 views on Facebook FB, +0.43%  before going viral on Google-owned YouTube GOOG, -0.13% and TWTR, -0.07%.  

After Smith reportedly asked Kitts to wear a mask, she refused because she said that she has asthma, according to a Logan Police Department press release also posted to Facebook. After repeatedly asking her to either put on a mask or leave, he told her that she was under arrest for criminal trespassing and asked her to put her hands behind her back, which she refused to do, the report alleged.

The incident escalated as Kitt began yelling at the officer, and another woman began interfering with the arrest, according to the Logan Police report. Kitts can be heard on the video yelling, “Get off of me! I will not put my hands behind my back. I’m not criminally doing nothing wrong!” She also yelled “What the f— is wrong with you?” and said Smith was “arresting me for nothing.”

Smith reportedly warned her to comply or he would deploy his Taser. When she continued to resist, the report says he “placed his Taser on her shoulder area and drive stunned her once. (A “drive stun” is when the Taser is held against the subject’s body and the trigger pulled with no probes being fired, causing pain but not an incapacitating effect.) He was able to successfully handcuff the female at that time.”

Spectators on the video can be heard audibly gasping and yelling as the officer drive stuns her. “Tased somebody over a mask,” one can be heard saying.

Kitts was charged with criminal trespassing and released at the scene. While she was not charged for not wearing a mask, additional charges are pending, the report said.

The Logan-Hocking Local School District told NBC affiliate WCMH that Kitt was there cheering for the opposing football team, Marietta City School. What’s more, Logan-Hocking schools were put on lockdown on Thursday after receiving threats that law enforcement believe stem from the incident.

“An attendee was asked to comply with the Ohio High School Athletic Association’s and the athletic facility’s policies,” the district’s superintendent Monte Bainter told NBC News in a statement. “The attendee refused to do so and consequently was asked to leave by the attending law enforcement officer. After resisting the request to exit the premises, the individual was apprehended at the discretion of the attending law enforcement officer.”

The video drew outrage on social media, with many viewers pointing out that it appeared Kitt was more than six feet apart from other spectators on the outdoor risers. “100% social distancing but NOT wearing a mask. This is insane,” tweeted one.

“This is a case of vast overreach,” wrote another, while one woman argued, “This is NOT America.”

Others noted that she was tasered for resisting arrest — not for her refusal to wear a mask. “It’s generally a bad idea to fight with armed men wearing badges,” tweeted one viewer. Another noted, “She had a mask in her pocket and went through all this because she didn’t want to put it on. Smh [shaking my head].”

Also on Wednesday, an Idaho man was arrested for not wearing a mask while singing at an outdoor worship service in the Moscow City Hall parking lot. Gabriel Rench, a Latah County commission candidate, was one of three people arrested at the “psalm sing” attended by more than 150 people for violating a coronavirus mask/social distancing order.

Many Americans have chafed over mask mandates and other social distancing orders designed to limit the spread of the coronavirus that causes COVID-19. The virus spreads from person to person primarily through respiratory droplets, so CDC guidelines call for wearing a mask that covers both your nose and your mouth to prevent spreading your own droplets and ingesting droplets from other people. At least 230,000 cases of the coronavirus may have been prevented due to government orders requiring face masks in 15 states and the District of Columbia between April and mid-May, according to one study by two University of Iowa professors. Another study suggests that nearly 45,000 U.S. deaths from coronavirus could be prevented by November if 95% of the population wore masks.

As of Friday morning, the U.S. had 6.98 million confirmed coronavirus cases and 202,819 deaths, leading the world in the number of infections and deaths.

Top Ten: Weekend reads: Your money or your pickup truck

During such a difficult year, with millions of people becoming unemployed under circumstances they couldn’t have imagined, bankruptcy has gone from being an abstract idea to reality. But hindsight can provide insight. Ben Carlson takes a thoughtful look at some of the long-term buying and borrowing choices people have made, and boils the facts down to some simple advice about how to improve your overall financial health.

Can you build a retirement nest egg?

Mark Hulbert offers a quick quiz to help you gauge your financial smarts. Financial illiteracy leads to dangerous investment behavior that can endanger your retirement.

Boiling it down:Kevin O’Leary says investing $100 a week will make you a millionaire by retirement

The hiking at Upper Table Rock and Lower Table Rock is about 15 miles north of Medford, Ore.

courtesy Visit Medford

Where should you live?

This week Silvia Ascarelli helps a couple who plan to retire in five years and want to move out of Michigan to an affordable city with an easier climate that offers plenty of cultural and outdoor activities.

Try the MarketWatch retirement location tool here.

More money questions

MarketWatch’s Moneyist weighs in when a husband asks: “My wife had a baby in June. She has $140,000 in student loans — and just asked for my ‘blessing’ to work part time”.

The Chevy Bolt. Shares of General Motors trade very low to earnings estimates.

Chevrolet

A time for value stocks?

There are five coronavirus vaccines in final testing stages. If you are confident the deployment of vaccines will lead to a sustained economic recovery, it may be best to turn your focus to value stocks now. Here are 30 stocks in the S&P 500 priced cheapest to 2022 earnings estimates.

This bubble may burst

Home sales continue to surge, but Keith Jurow looks ahead to a looming problem for the U.S. housing market. Foreclosure and eviction moratoriums have been extended through the end of the year, but that’s just around the corner.

Getty Images

Clean energy stocks

Debbie Carlson explains why the market for alternative energy stocks has changed (after years of underperformance), and why the long-term path ahead looks very good.

Also:Climate change has now reached a tipping point among global investors

Social Security — this election and beyond

Brett Arends explains the long-term problems with Social Security — this isn’t a partisan argument, but based on numbers crunched by the Congressional Budget Office. Without changes, the system may be forced to lower payments as soon as 10 years from now.

Related:Here’s how much your Social Security payments will rise next year

A memorial in front of the U.S. Supreme Court for the late Justice Ruth Bader Ginsburg in Washington, D.C.

Alex Wong/Getty Images

What next for the Supreme Court

As Supreme Court Justice Ruth Bader Ginsburg lies in state in the U.S. Capitol, Andrew Keshner and Jacob Passy look ahead at four upcoming cases before the high court that have money implications for families and businesses.

Also:5 things to know about Trump’s possible Supreme Court picks — including how Barbara Lagoa could help Trump win Florida

AndThis chart shows which of Trump’s Supreme Court possibilities is the one most likely to stay conservative

Want more from MarketWatch? Sign up for this and other newsletters, and get the latest news, personal finance and investing advice.

Even with a toddler, this couple’s cost of living is less than $25,000 a year — this is how they do it

Raising children is expensive, but that hasn’t stopped Nic and Court from keeping their annual expenses below $25,000, even with a 2-year-old daughter.

It helps that the two are masters at the FIRE movement, short for “Financial Independence, Retire Early.” The Calgary, Alberta, couple officially became financially independent two years ago, when their daughter was born. Nic no longer works, and Court works part-time. Even still, they save half of her salary.

From smart moves in their 20s to financial independence in their 30s

They live well below their means. The couple, who blog at Modern FImily, have $890,000 put away for their future, including five years’ worth of expenses in cash, and spend less than $25,000 a year.

“What we are able to do now in our 30s with a child, a lot of it stems from setting us up to be in this position when we were in our 20s,” Court said. Back then, they did it so that they could pay down debts such as student loans and a mortgage while also traveling, but the financial habits they developed a decade ahead made it easier to raise a child while being financially conscious. “We never really let lifestyle creep impact us.”

They don’t have cable, so they’re not influenced by advertisements, Court said. Health care is much more affordable in Canada than it is in the U.S., which naturally helps them keep their annual costs down. They’ve bought used, reliable cars so there aren’t costly repairs or monthly car payments. Much of their entertainment involves free or low-cost activities, such as ice skating on the local frozen ponds and tobogganing on hills in the winter, and walking around the neighborhood and by the creek during the summer. The only store their daughter ever sees them go to on a consistent basis is the supermarket. They cook a lot of their own meals.

“We are spending all of our time with her and show her we love her that way rather than feel the need to compensate by buying toys,” Court said.

Of course, they do still buy clothes and toys for their daughter, Finn, but much of those purchases are secondhand or hand-me-downs. The car seat for their daughter was new, but otherwise they often rely on online community groups to find families who want to get rid of stuff their babies never or barely used.

“There might be a stigma toward hand-me-downs and secondhand, but they’re using these items for maybe a couple of months, so they’re likely in good shape,” Court said. They buy bins of clothes, sometimes with 50 different items, for around $20.

Finn has a toy box that’s filled with all of her toys, and every week her parents switch out what comes out of the box, that way she can use her imagination and get creative about how they all work together. Some days, it will be toy trucks and a stroller, other days a doll. They rotate books by using the local library, as well as the little free community libraries near them (where neighbors place books in a box and pick out others to take home).

They are considering welcoming a second baby into their family, and have already run the numbers for that. Nic and Court save $2,500 a year per child for college expenses, as well as have extra money set aside in their budget to account for an additional child — money that will go toward clothes, extra food, activities and so on. They’ll also have some of Finn’s old clothes and items, like a high chair and stroller, that a sibling can use.

In the meantime, they will focus on teaching their daughter about money in an open way. Although Finn is only 2, they’ve already started to teach her the meaning of money. They collect and recycle their bottles for 5 cents apiece, bring her to the bottle depot and have her receive the money so that it can go in the piggy bank (except for the occasional trip for ice cream).

The pair also has Finn help around the house so that she can observe them working to repair their stuff. When they were caulking the bathroom, they had their daughter sit with them and pretend to caulk (with a sealed container). When she gets older, they’ll encourage her to work, such as mowing lawns or getting a job at a coffee shop.

“You learn so much from your parents and your surroundings by absorbing day-to-day life,” Court said.

Mark Hulbert: Hope to retire someday? See if you can answer these six simple questions

So you think you’re financially astute?

Then try taking the following financial literacy test containing just three basic questions about interest rates, inflation and diversification. Despite being quite elementary, only 34% of adults aged 38 to 64 are able to answer all three correctly. Among millennials this percentage is just 16%.

Those results are sobering enough. But what’s even more striking is the disconnect between these low scores and investors’ self-perception. More than 71% of older adults rate themselves as having “high financial knowledge.” The comparable percentage among millennials is only slightly lower at 62%.

These results are reported in a just-published study, “Millennials and money: Financial preparedness and money management practices before COVID-19.” Its authors, all affiliated with the Global Financial Literacy Excellence Center at George Washington University, are Annamaria Lusardi (the Center’s founder and director), Andrea Hasler, and Andrea Bolognesi.

Here are these three basic questions for which the researchers report “shockingly low” levels of financial literacy. They were devised a decade ago by Lusardi and Olivia Mitchell, a professor at the Wharton School of the University of Pennsylvania, and have been so widely used since then that many researchers now refer to them as the “Big Three” of financial literacy. (The correct answers, should you have any doubt, are listed at the end of this column.)

• Suppose you had $100 in a savings account and the interest rate was 2% per year. After five years, how much do you think you would have in the account if you left the money to grow? [More than $102; Exactly $102; Less than $102; Don’t know; Prefer not to say]

• Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? [More than today; Exactly the same; Less than today; Don’t know; Prefer not to say]

• Buying a single company’s stock usually provides a safer return than a stock mutual fund. [True; False; Don’t know; Prefer not to say]

Since you are regular readers of MarketWatch and subscribers to Retirement Weekly, I have no doubt that you correctly answered all three questions. But can you answer the following three bonus questions as well? Only 7% of older adults could answer all six questions correctly, and just 3% of millennials. These three additional questions are:

• If interest rates rise, what will typically happen to bond prices? [They will rise; They will fall; They will stay the same; There is no relationship between bond prices and the interest rate; Don’t know; Prefer not to say]

• Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double? [Less than 2 years; At least 2 years but less than 5 years; At least 5 years but less than 10 years; At least 10 years; Don’t know; Prefer not to say]

• A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less. [True; False; Don’t know; Prefer not to say]

There are several reasons to focus on how few are able to answer these questions correctly. The most important is that there is a direct causal connection between illiteracy and reduced retirement financial security. This has been shown empirically, such as in this study by Lusardi and Mitchell. The authors of this recent report give a few examples, including the widespread use among millennials of “alternative financial services.”

“Alternative financial services are forms of short-term borrowing that fall outside of the traditional banking sector. It includes borrowing using auto title loans, payday loans, pawnshops, and rent-to-own stores. These are particularly expensive forms of borrowing, with APRs as high as 400% or more and, as such, have been defined as high-cost borrowing methods. In 2018, a staggering 43% of millennials reported using at least one form of alternative financial service in the [prior] five years.”

This surprising reliance on high-cost-borrowing methods becomes less surprising when we focus on millennials’ answer to the second of the bonus questions above—the one that asks about compound interest. Just 32% of them could answer it correctly. The researchers found that higher levels of financial literacy were correlated with less reliance on alternative financial services.

Another reason to focus on financial literacy is to warn you about the dangers of overconfidence. Chances are good that you rate your financial literacy to be higher than it really is. And overconfidence leads to pursue particularly risky behaviors.

The investment moral I draw from this new report is the importance of using the services of a retirement financial expert. Having someone to bounce your ideas off of is an excellent way of making sure you haven’t built your retirement financial security on a shaky foundation. Having this reality check is important for all of us, even if we are in that small minority of investors who can correctly answer all six financial literacy questions.

Most of all, be on guard against overconfidence. Humility is a virtue.

Correct answers to the 6 financial literacy questions

1. Suppose you had $100 in a savings account and the interest rate was 2% per year. After 5 years, how much do you think you would have in the account if you left the money to grow? More than $102

2. Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account? Less than today

3. Buying a single company’s stock usually provides a safer return than a stock mutual fund. False

4. If interest rates rise, what will typically happen to bond prices? They will fall

5. Suppose you owe $1,000 on a loan and the interest rate you are charged is 20% per year compounded annually. If you didn’t pay anything off, at this interest rate, how many years would it take for the amount you owe to double? At least 2 years but less than 5 years

6. A 15-year mortgage typically requires higher monthly payments than a 30-year mortgage, but the total interest paid over the life of the loan will be less. True

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

Mark Hulbert: Is sequence risk really a big deal for retirees?

News flash: Sequence risk is not a huge threat to your retirement after all.

This is big news, since this kind of risk has received outsize attention in recent years from financial planners (including me, I must confess). Some commentators have even deemed it to be the biggest single risk faced by retirees and soon-to-be retirees.

Read: Americans’ love affair with pickup trucks might be derailing their retirement plans

Sequence risk, of course, refers to the possibility of running out of money in retirement because of the order in which the markets’ best and worst years occur. This risk exists even if the markets’ overall returns during your retirement are every bit as good as in those of others who don’t run out of money.

That certainly seems scary enough. But just-completed academic research concludes that sequence risk, while real, is far too often exaggerated—leading retirees to pursue unnecessarily conservative strategies and reduce their standard of living.

The research, by Javier Estrada, a professor of finance at IESE Business School in Barcelona, is entitled: “Sequence Risk: Is It Really a Big Deal?” His conclusion is that “retirees should be informed, but not obsess, about sequence risk.”

To illustrate both the existence of sequence risk and how it’s exaggerated, imagine that the stock market’s return in each year of your retirement will be equal to what it actually was in any calendar year picked at random from all years since 1900. Imagine further that you utilize a standard 4% withdrawal strategy.

Read: Kevin O’Leary says investing $100 a week will make you a millionaire

On the one hand, Estrada concedes, it’s theoretically possible in this scenario that you will run out of money less than 10 years into retirement. That would be the case if the worst stock market years of the last 120 years all occur in the first years of your retirement.

On the other hand, Estrada is quick to point out, an unbroken sequence of 10 horrible years is an unrealistic assumption. Bad years are typically interspersed with good years. So to assume the very worst years, all in a row, goes too far.

A specific example can help to make this clearer. Consider the worst 10 calendar years for the S&P 500 SPX, +0.32%  since 1900. Though these years did not occur in sequence, if they were to have occurred all in a row the stock market’s annualized real-return over that 10-year period would be minus 11.0% annualized. If your retirement portfolio were substantially invested in equities, and this return occurred over the first 10 years of your retirement, your portfolio would very likely run out of money.

But no actual 30-year period in U.S. stock market history has ever begun with an annualized real loss of anything close to minus 11.0%. In fact, the worst actual 10-year performance for the stock market since 1900 was a loss of 4.4% annualized—which occurred from 1911 through 1920, the decade that encompassed World War I. While certainly not great, that’s a lot better than minus 11.0% annualized.

Just because no 30-year period has ever come close to beginning with an annualized real loss of 11.0% doesn’t mean it couldn’t happen, needless to say. But the theoretical possibility of its occurrence is not the same as it’s being likely. Estrada draws the following analogy: “Being attacked by a shark is a scary prospect, but the fact that shark attacks rarely happen should be a factor in an individual’s decision about whether or not to go for a swim.”

According to Estrada, a 4% withdrawal strategy actually failed just 4.4% of the time since 1900. And when analyzing the particular sequence of bad annual returns that led to those failures, he found that a different sequence of those same returns would have prevented those failures more than 90% of the time. So the odds of sequence risk sabotaging your retirement are quite low.

Estrada concludes: “Rational individuals consider both the impact of an event and the probability of its occurrence; hence advisers that highlight the dangers of sequence risk but do not discuss its probability of occurring are not really helping retirees.”

A flexible withdrawal strategy

In any case, notice that the already-low failure rate assumed in these simulations assume a constant inflation-adjusted withdrawal from your retirement portfolio each and every year. This failure rate can be lowered even further if you’re willing to reduce the amount you withdraw after particularly bad years in the market.

To be sure, reducing the amount you withdraw is an unpleasant prospect, since it means reducing your retirement standard of living. But, Estrada emphasizes, in most cases a very modest reduction is all that’s needed to preserve the financial sustainability of your portfolio. In 41% of the simulations he ran, in fact, a reduction of less than 10% was all that’s needed.

It’s also worth emphasizing that a flexible withdrawal strategy can also work to your benefit. It allows you to take out more than originally planned following years in which the market has done particularly well, for example. You could always put that extra amount in a rainy-day fund to support your retirement following years of poor market returns.

I devoted a Retirement Weekly column a year ago to Estrada’s research on these so-called “dynamic” withdrawal strategies, so I won’t go into the subject in great depth here. The point I want to make in this column is that sequence risk, which is already quite small, is rendered even smaller by employing a dynamic withdrawal strategy.

The bottom line? Once you subject sequence risk to a reality check, you are likely to conclude that this is one thing you can, if not check off your worry list entirely, put far down that list.

Mark Hulbert is a regular contributor to MarketWatch. His Hulbert Ratings tracks investment newsletters that pay a flat fee to be audited. He can be reached at mark@hulbertratings.com.

Outside the Box: Americans’ love affair with pickup trucks might be derailing their retirement plans

The Wall Street Journal recently shared the story of a couple who is struggling because the pandemic has upended their jobs and income. To make matters worse, they’re dealing with a massive amount of consumer debt.

The article says:

“The Denton, Texas, couple pay $4,400 a month on their mortgage, four car loans and leases, and student debt, Ms. Scott-White said. Minimum required monthly credit-card payments total about $700. The debt was manageable pre-pandemic, she said.

“She deferred lease payments on her Infiniti QX60 for three months and started paying again with unemployment benefits. Her husband traded in his Ford F-150 in August for a lower-cost car and reduced his original monthly payment of $820 by about $100, and his income covers the $2,100 mortgage.” (Emphasis added.)

The Ford F, -1.99%  F-150 payment stuck out to me for a couple of reasons. Maybe it’s because I live in Michigan, but I see Ford trucks all over the roads. And a monthly outlay of $820 is quite high for a car payment, especially when you consider this family has credit card debt and three other car loans or leases.

After doing some digging, it’s no surprise I see so many Ford F-Series trucks on the road. It’s been the best-selling vehicle in the United States for 39 straight years. (And it looks like 2020 will make it 40 in a row.)

In fact, the top three vehicles in the U.S. over the past seven years are pickup trucks:

That’s more than 13.2 million new pickups sold from 2013-2019, and these are only the most popular models.

I’m sure there are people in certain professions who need a truck, but I’m not sure how so many millions of people afford the payments on them.

If you get all of the bells and whistles such as four-wheel drive, extended cab and such, these trucks can run anywhere from $50,000 to $70,000.

Truck poor

For a 60-month loan at 4%, that’s a monthly payment in the $800-$1,300 range, depending on your down payment. And these numbers don’t include extras like gas or insurance. That’s a lot of money for a truck if you’re not regularly using it on the job.

I understand why it can be hard to save more for many families.

Some people simply don’t make enough money. Others are bogged down with student loans. And then there are those who have seen their careers or businesses upended by the 2009 financial crisis and 2020 pandemic.

But there are certainly people out there who spend far more than they should on their vehicle(s), and it is inhibiting their ability to get ahead financially. Adam Ozimek, an economist at Upwork, shared similar thoughts on Twitter:

Ozimek’s hurdle rate for buying a $40,000 car are a touch higher than mine, but the point remains that there are plenty of people driving expensive cars who don’t have enough savings elsewhere.

Spending priorities

I know I shouldn’t judge other people’s spending habits, but I’m constantly looking at decked-out trucks and SUVs on the road and thinking to myself, “I wonder if that person maxes out their 401(k)?” Or: “Do they have an emergency fund set up because you can’t spend that Land Rover in a pinch?”

The difference between the monthly payment on a $45,000 vehicle and a $20,000 vehicle is basically enough to max out your individual retirement account (IRA) in a given year. The difference between a new $70,000 truck and a $20,000 used model would be enough to fund nearly 60% of the way toward maxing out your 401(k). And a new vehicle depreciates the minute you drive it off the lot while your retirement savings grow over the long term.

Driving an inexpensive car is one of the biggest levers people can pull to free themselves up financially to save more.

It’s also true that the good feelings you get from buying a more expensive vehicle are fleeting. Researchers from the University of Michigan studied drivers of a BMW BMW, -2.60%, Honda HMC, -0.04%  Accord and Ford Escort.

During a short trip such as a test drive, people reported more positive feelings for a luxury brand like a BMW. This is because you’re hyper-aware about all of the features that come in a more expensive ride during that initial drive.

The happiness factor

But once people began taking the cars for longer trips, those feelings all but evaporated. The correlation of positive feelings to the price of the car was essentially zero. Once you get behind the wheel enough times, the novelty wears off and it becomes more about traffic, other drivers on the road and getting from point A to point B.

I’m not saying people can’t have nice things. I don’t want to be that personal-finance scold who constantly tells people all of the things they can’t spend money on.

But if you’re struggling financially, your vehicle is the perfect place to find some wiggle room since a more expensive car or truck isn’t going to make you any happier.

Ben Carlson is the author of the investing blog “A Wealth of Common Sense,” where this was first published. It is reprinted with permission. Follow him on Twitter @awealthofcs.

The Tell: Stock fund outflows reach nearly two-year high as selloff intensifies

Where is the money going?

Adem Altan/Agence France-Presse/Getty Images

U.S equity mutual funds and exchange-traded funds last week saw their biggest weekly outflows in nearly two years last week amid a month-long market swoon.

Stock funds saw outflows of $26.87 billion in the week ending Sept. 23, according to BofA. That was the largest since the market tumble of December 2018.

September has been a roller-coaster ride for fund flows: in the prior week, funds took in $22.67 billion, the largest weekly haul since March 2019.

It’s been a rough month for stocks, with major benchmarks on track Friday for their fourth straight weekly loss and headed for their first monthly declines since March. The S&P 500 SPX, +0.35% was on track for a weekly loss of more than 2% and remains down more than 7% so far this month after hitting an all-time high on Sept. 2. The Dow Jones Industrial Average DJIA, +0.21% is down more than 3% this week and was on track for a nearly 6% monthly fall.

This past week, high-yield bond funds reported a $4.94 billion outflow, the biggest since March, while flows into investment-grade bond funds slowed to $5.63 billion, from $7.05 billion the week before. In the year to date, high-yield funds overall have gained 11.7%, while high yield ETFs are up 26.6%. The Federal Reserve has been using ETFs to help steady markets in the aftermath of the coronavirus-induced panic of March.

Money-market funds picked up $1.33 billion in the September 23 week, after seeing outflows of $51.37 in the prior week, “due in part to large corporate tax payments on September 15,” BofA explained.

Market Extra: Why stock-market investors are starting to freak out about the 2020 election

Less than a month and a half from the 2020 presidential elections and investors are starting to get panicky about the race for the White House and what that presidential contest means for already rocky markets in the coming weeks.

However, it isn’t the outcome that appears to be causing trepidation on Wall Street: Investors can position for a win by Democratic challenger oe Biden or a second term for President Donald Trump.

It is the growing sense that results of the election won’t be decided on Nov. 3; and on top of that that, it is the possibility that even if a winner can be identified in the race between former Vice President Joe Biden and incumbent President Donald Trump, a transition won’t be a smooth one.

“It’s a real fear—and one that, in many respects, I share,” wrote Brad McMillan, chief investment officer for Commonwealth Financial Network in a Wednesday note.

“The fear is that if we get a disputed election, it could lead to disruption and possibly even violence. If so, we could well see markets take a significant hit,” McMillan wrote.

Art Hogan, National Securities chief market strategist, told MarketWatch on Thursday that he was primarily fielding questions around election volatility from clients. “That’s the No. 1 question we get right now,” the strategist said. “How will the election affect the market and the economy?”

“It is natural to have a great deal of trepidation heading into November,” Hogan said. “This is a unique situation insomuch as the pandemic is likely to produce a lot more mail-in votes and it is more difficult to get your arms around what will happen.”

Late Wednesday, Trump may amplified anxieties on Wall Street by implying that he may not peacefully relinquish power to Biden, should the Democrat prevail in the coming election. “Well, we’re going to have to see what happens,” he told reporters at news briefing at the White House on Wednesday when asked if he would commit to a peaceful transition of power.

Read: Historian who has accurately called every election since 1984 says Biden will beat Trump in 2020 race

Trump has claimed that mail-in ballots, which will become a central feature of this election due to the efforts to reduce the spread of the COVID-19 pandemic by limiting in-person voting, could undermine the election outcome.

The 45th president appeared to urge states to dispense with mail-in votes in favor of Americans physically going to polling stations. Get rid of “the ballots and you’ll have a very…there won’t be a transfer, frankly. There’ll be a continuation,” Trump said. “The mail-in ballots are out of control.”

“Investors continue to ask me if they should get out of the market to ‘sit out this election,’ wrote Brian Levitt, Invesco’s global market strategist, in a Wednesday research note.

Levitt tells investors to resist the impulse to cash in their chips ahead of this election. However, the fear of seismic swings in the market is palpable. That’s particularly, after September has delivered on its promise as the worst month for stocks and October, the second-worst month, looms large.

A lack of additional stimulus for those out-of-work Americans, hit hardest by the coronavirus outbreak, a lack of clarity on what more the Federal Reserve will do to help calm investor jitters and a feeling that the market enjoyed too brisk a run-up in the aftermath of the worst of the pandemic-induced selling is part of the cocktail contributing to the current unease, experts say.

The S&P 500 index SPX, +0.34% has climbed nearly 45% since hitting a bear-market low in late March, but the broad-market index is currently attempting to avoid a jaunt into correction territory, commonly defined as a drop of at least 10% from a recent peak. The Nasdaq Composite COMP, +0.84%, which already stumbled into correction earlier this month, has climbed 55% since its March lows and the Dow Jones Industrial Average DJIA, +0.19% has advanced by about 44% since that time.

Concerns about outsize volatility related to the election prompted Interactive Brokers to demand that its clients put up more money in making leveraged bets on financial securities heading into November.

“Elevated option implied volatilities indicate that the markets will be confronting elevated volatility both before and after the November 2020 election,” the brokerage wrote in a note to clients.

Related: Contrarians bet against election volatility, arguing market swings likely to be less extreme than feared

Charlie McElligott, a popular equity derivative strategist at Nomura, who has called a number of recent volatility shocks in the market, said that some traders see the election as a “generational” opportunity, setting up the derivatives market for some make-or-break trades.

“This also likely means that some brave [volatility] traders will try to take advantage as a perceived ‘generational’ opportunity to sell this POST- NOV election ‘richness’ (Dec / Jan) — could be a career ‘maker or breaker,’” he wrote in a recent report.

He said trading around the election holds the potential for some to see “monster returns if the event were to pass and all that crash is puked back into the ether…or conversely be turned to dust into a God-forbid realization of chaos, with civil disorder, dual claims to the throne etc.,”

DJ Peterson, the president of Longview Global Advisors, an Los Angeles-based geopolitical consulting firm, outlined for MarketWatch a number of potential risk scenarios that he’s looking at tied to the election.

  • Voting results delayed past 48 hours (72 max)
  • Trump claims the vote counting process and/or certified results are rigged, fraudulent
  • Left-and right groups converge on election offices, police caught in between
  • Left and right groups clash in the streets of Washington
  • Trump calls out the military to restore order or protect the White House
  • Use of military is viewed as defending Trump, military is politicized

Peterson described the above as “primary risk factors.” and he sees these as the highest risk scenarios in which the election is too close to call and is bogged down in recounts a la 2000.

Indeed, the 2000 presidential election wasn’t decided until mid-December as lawyers and surrogates for Democrat Al Gore and Republican George W. Bush engaged in a battle over Florida recounts that made everyone an expert on butterfly ballots and the varieties of chad produced when voters punch ballots.

MarketWatch’s William Watts reports that the S&P 500 tumbled more than 8% between the Nov. 7 election in 2000 and the Dec. 15, when the winner was finally decided (see attached chart):

Twenty years later, Hogan says that this time it will be “impossible to know what the final results will be and what combination of Congress and White House will look like.”

Hogan agrees with the notion that investors should say invested in this market but advocates rebalancing as a good method, in which investors sell some their biggest winners, like megacap technology shares, and reposition in some of the more beaten up categories like banks or other cyclicals.

“I’m not going to tackle you at the door” if you want to sell some but “I favor rebalancing,” Hogan said.

He also notes that the election itself takes a back seat to the overall economic recovery from the pandemic and treatments and remedies for the pandemic are still going to be a key driver.