Walking A Financial Tightrope

by: SA For FAs
Summary

University of Chicago: A majority of Americans couldn’t afford to miss more than one paycheck.

John Vincent tracks Warren Buffett’s heavily concentrated portfolio.

Thought For The Day: Financial planning requires the ability to see in today’s actions tomorrow’s potential outcomes.

The Changing Face Of Value Investing

“During Q4 2018, Berkshire Hathaway’s (BRK.A, BRK.B) 13F stock portfolio value increased ~9%, from $183B to $199B. The top five positions account for ~64% of the portfolio: Apple Inc. (AAPL), Bank of America (BAC), Wells Fargo (WFC), Coca-Cola (KO), and American Express (AXP). There are 45 individual stock positions, many of which are minutely small compared to the overall size of the portfolio.” (John Vincent)

India

“If Modi's Bharatiya Janata Party-led National Democratic Alliance secures a parliamentary majority when results are announced on May 23, as recent opinion polls suggest, market sentiment is expected to improve. This could help boost portfolio flows and direct investment flows, which would push market interest rates down. We believe the improved sentiment would be good for financial stocks…” (AllianceBernstein)

Financial Disaster In The Making

“Fifty-one percent of working adults indicated that missing more than one paycheck would mean that they could not cover necessities without accessing savings, according to a new AmeriSpeak® Spotlight on Personal Finance survey from NORC at the University of Chicago. An additional 15 percent would experience hardship after missing two paychecks.” (NORC at the University of Chicago press release)

Thought For The Day

It’s been a several years already since the first time I observed a survey reporting that 63% of Americans did not have $1,000 in their checking or savings account, or that a majority could not make a $500 emergency repair, or that the median working-age couple had just $5,000 saved for retirement.

So the latest survey, released yesterday by NORC at the University of Chicago, contains no surprises. It’s the same bad news, perhaps just a degree or two worse. A large plurality of Americans, 31%, simply couldn’t make it without a single paycheck; an additional 20% could miss just one paycheck, bringing our total to a majority of Americans; and an additional 15% could miss two, bringing our total to two-thirds of all Americans who would scrounge for other means of getting by.

According to the survey, those coping strategies including the following:

Decreasing spending on optional expenses (73 percent); termination of regular savings (43 percent) or retirement contributions (28 percent); and withdrawal of funds from regular savings (40 percent).

But not all Americans have savings they can rely on, and so “one-third (31 percent) of households report that they would need to skip the purchase of essentials if they missed two paychecks…” And what would these Americans do once they find that essentials are, well, essential? I quote from the NORC release:

Almost half (47 percent) of households indicated they would turn to credit cards. More alarming is that 17 percent would take a paycheck, auto, or other type of short-term loan. With interest rates in the 400-800 percent range, turning to these short-term loans as a substitute for regular income can be a costly alternative.”

That the umpteenth survey over the past several years has identified the exact same problem gives us a fairly high level of confidence that Americans are financially stretched. That this level of quasi-destitution (“quasi” because most people lead a comfortable middle-class life, albeit balanced on a highwire) takes place a decade into a market growth cycle, which currently sports the lowest unemployment rate in a half a century, would seem to signal an unprecedented crisis lies ahead. That is because when the next downturn removes a good many of those paychecks for periods likely to exceed two months, the inadequacy of private resources may expose the inherent harshness of economics.

Perhaps one lesson we can take from all of this is that one should not assume that living within one’s means is the same as not relying on credit. Actually, living within one’s means requires saving money for the inevitable shocks as well. Stated differently, financial planning requires the ability to see in today’s actions tomorrow’s potential outcomes.

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Note To Readers: Beginning next week, I will be moving to a podcast-only format as Seeking Alpha continues to invest in this burgeoning new area. I expect to offer more interviews in addition to my shorter market commentaries. I also intend to introduce more content of interest to financial advisors specifically, and welcome FAs’ input into the type of content you would most like to hear. For all listeners, both FA and non-FA, the objective remains to empower investors to navigate the formidable ascent toward investment success.

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