Investments Archives - Page 2 of 3

Financial Tip #7: Invest in Series I Savings Bonds whenever possible

Middle income households should purchase some Series I Bonds from the Treasury annually.

Tip #7: Series I Savings Bonds should be included in every investor’s portfolio. This asset purchased directly from the U.S. Treasury without fees is an effective hedge against inflation and higher interest rates.

Characteristics and rules governing Series I bonds: The Series I bond, an accrual bond issued by the U.S. Treasury tied to inflation, is described here.

Key Features of Series I Bonds:

Backed by the full faith of the U.S. Treasury

Cannot be redeemed until one year after issue.

Redemptions prior to five years from issue date forfeiture of one quarter of interest.

The composite interest rate changes every six months,

The interest rate is based on two components – a fixed rate and the inflation rate.

The composite rate is guaranteed to not fall below zero.

The interest is taxed when the bond is redeemed.

Bond matures and stops paying interest after 30 years.

The Treasury limits annual purchases of the bonds to $15,000 per person with a limit of $10,000 on electronic purchases and $5,000 on paper purchases. The paper Series I bonds can only be purchased through refunds from the IRS.

Reasons for Purchasing Series I Bonds:

Series I Bonds, unlike traditional bonds and bond ETFs, do not fall in value.

In the current low-interest rate high valuation environment, traditional bonds and stock prices are almost certain to decline in value.

A retired person with I-Bonds outside of a 401(k) plan can respond to a market downturn by using proceeds from the redemption of I-bonds to fund current consumption rather than disburse funds from a 401(k) plan, which could be temporarily down in value.

The Series I Bond is a riskless asset. Investors with this asset can reduce holdings of traditional bonds and cash and increase investments in equities.

Difference Between Series I Bonds and TIPS:

Treasury Inflation Protection Securities (TIPS also allow investors to protect returns when inflation and interest rates rise.

Key differences between TIPS and a Series I bond as explained here:

The TIPS value can fall in an era of deflation. The Series I bond never falls in value.

The tax on interest from TIPS is paid annually and not deferred to redemption

TIPS bonds can be sold without forfeiture of any interest at any time. The redemption of a Series I bond is not allowed until after a year from the purchase date and sales prior to five years from the purchase date involve a forfeiture of a 3 months of interest.

All TIPS can be counted as a liquid asset. Only Series I older than 5 years from issue should be considered liquid.

Up to $5.0 million in TIPS can be purchased in a single auction. The annual limit on the purchase of Series I Bonds is $15,000.

Thoughts on Series I interest rates:

The current fixed interest rate on a Series I Bond is 0 percent. The current composite fixed + inflation component on bonds purchased prior to May 2022 is 7.12%. A delay in the purchase of a Series I bond until the second half of the year could result in a permanently higher fixed rate. However, investors would lose an annualized return of 7.12% accruing in May.

Bonds purchased years ago in a high interest rate environment have a higher current composite rate because the fixed component is higher. People are currently aware of I-Bonds because of the elevated inflation rate. The purchase of I-bonds also makes sense when inflation is low and interest rates are high because the investor will obtain both a higher fixed rate and increases in interest when inflation returns.

Concluding Thoughts: Investors should purchase a Series I bond every year. Investors who maximize receipt of the employer matching contributions to a 401(k) plan can then divert additional investments to a Roth IRA or a Series I Bond. People without a 401(k) plan that allows matching contributions should contribute to a Roth, invest Roth contributions in equities, and divert some funds to the purchase of Series I bonds.

Financial Tip #2: Maximize use of after-tax Roth IRAs

Tip number 3: Most households use traditional retirement accounts instead of Roth accounts. The Tax Policy Center reports around 23% of taxpayers have a traditional IRA compared to around 12% of taxpayers with a Roth IRA. According to CNBC, in 2016 around 70 percent of firms offered a Roth 401(k), but only 18% of workers used the Roth 401(k) option.

More people should choose a Roth retirement plan over a traditional one. People should use Roth accounts in the following circumstances.

Workers at firms not offering a retirement plan with a marginal tax rate less than 25% should use a Roth IRA instead of a deductible IRA.

Workers at firms offering both a traditional and Roth 401(k) should choose the Roth 401(k) if their marginal tax rate is less than 25%.

Workers with marginal tax rates less than 25% at firms with 401(k) plans without employee matching contributions should select a Roth IRA or Roth 401(k) over a traditional 401(k) plan.

Workers who maximize receipt of employer matching contributions should place additional contributions in a Roth IRA.

Spouses of workers with family AGI below the contribution limit for Roth contributions should contribute to a Roth IRA, if eligible.

Comments:

Gains from 401(k) contributions are relatively small when employers don’t provide a matching contribution and a worker’s marginal tax rate is low.

Workers with Roth accounts are less likely to withdraw and spend all funds prior to retirement than workers with traditional accounts because they can access the amount contributed without penalty or tax prior to age 59 ½.

The tax saving from Roth disbursements in retirement are high both because disbursements after age 59 ½ are not taxed and the Roth disbursement does not increase the amount of Social Security subject to tax.

Workers at a firm that do not match employee contributions, around 49 percent of employers, should contribute to a Roth IRA instead of a 401(k) plan unless the worker has a high marginal tax rate.

One effective contribution strategy is to take full advantage of the employer match and contribute all additional funds to a Roth IRA. Two common 401(k) matching formulas are 50 percent of the dollar amount contributed by the employee up to 6.0 percent of the employee’s salary and 100 percent of contributions up to 3 percent of the employee’s salary.

Most new employees at firms with a vesting requirement, a rule delaying full ownership of 401(k) matches, should contribute to a Roth IRA instead of a 401(k) plan.

Stay-home spouses of workers with income should choose a Roth IRA over a traditional one if they are eligible. In 2021, a single filer with MAGI less than $140,000 and a married joint return filer with MAGI less than $206,000 cannot contribute to a Roth IRA. Workers with income above these contribution limits should contribute to a Roth IRA. Other workers should use a backdoor IRA.

Readers should remember to open their Roth IRA early in life as explained in financial tip number one.

Financial Tip #1: Open and fund a Roth IRA early in your career

Tip #1: Open and fund a Roth IRA and invest funds in a low-cost ETF when you get your first job in high school or college.

People who open a Roth IRA early in life have a long investment horizon. The longer investment horizon allows individuals to invest in equities and accumulate substantial wealth.

A person who invests $1,000 in a Roth at age 17 will have $25,729 at age 65 if the average rate of return was 7.0% per year. The total wealth at age 65 would be $62,585 when rate of return is 9.0% per year. This Nerd Wallet article suggests the average rate of return on stocks is around 10 percent per year.

Firms like Fidelity, Schwab and Vanguard offer exchange traded funds with low fees and no minimum balance. A fund like VOO from Vanguard which covers the entire S&P 500 at low cost could easily earn 7% over long investment horizons.

The wealth estimates presented above assume the person does not tap funds in the Roth IRA prior to age 65. This is not always possible. The owner of the Roth IRA is allowed to disburse the after-tax contribution without penalty or tax at any time. The Roth contributions can be used without penalty or tax for emergencies or to repay debt. The investment returns from inside a Roth are subject to penalty and tax if disbursed prior to age 59 ½.

All funds disbursed from traditional 401(k) plans and deductible IRAs are subject to penalty or tax if disbursed prior to age 59 ½. A young person embarking on her first job with a lifetime of obligations ahead of her should select the Roth over the traditional retirement plan, especially if there is no employer match, which is generally the case on a first job.

Concluding Thoughts: Many employers automatically enroll new employees in a traditional 401(k) plan even though the worker would do much better in a Roth IRA. Too many workers contributing to a traditional 401(k) plan, disburse funds prior to retirement and incur penalty and tax. My view, expressed here and in several future posts, is that the Roth IRA should become the default option.

Do Dividends Affect Firm Value?

The Impact of Dividend on Stock Prices — a Regression Analysis

Question: Do firms that pay dividends have a higher stock price than firms that don’t pay dividend after accounting for earnings per share and sales per share?

Motivation: The issue of whether dividends impact the value of the firm is a central discussion for students of finance. (My Ph.D. dissertation was on this topic.)

Modigliani and Miller found that if capital markets are perfect dividend policy will not impact the value of the firm. More recent work indicates that dividends can influence firm value when capital markets are imperfect and insiders have better information than outsiders.

Dividend payments are unlikely to increase share value for older firms or firms with fewer growth opportunities. By contrast, high fliers like Amazon and Netflix do not pay dividends.

Dividends can be associated with either higher or lower share prices. The results can differ across industries and across samples of firms.

The Data: The analysis is based on a single cross section of 67 firms. The data was collected in mid-September 2018 after the close of market on a weekend. Roughly half of the firms are large-cap growth firms and the other half are large cap value firms.

The data used in the regression analysis is described in the table below.

Description of Data in Regression Model
	Mean	Std. Err.

earnings per share	6.43	1.04
sales per share	160.29	91.41
Positive dividend dummy	0.87	0.04
price of a share	196.51	41.51

The Regression Results:

Regression Results for Share Price Equation
	Coeff.	t-stat
Earnings Per Share	10.5	2.36
Sales Per Share	0.2	3.63
Dividend Dummy	-331.0	-4.27
_cons	385.6	4.92

R²	0.66
N	67.0

Discussion of Regression Results

All three variables – earnings, sales and dividend dummy – are significantly related to price per share.

The dividend coefficient is negative suggesting that dividend payments are associated with lower share prices.

Why are dividend payments reducing share value in this sample?

The sample includes some growth names – Facebook, Amazon, Google, Netflix – which do not pay dividends. The sample also includes some more established firms – GE, IBM, Coke, Pepsi and Bank of America – which are not growing fast but do pay dividends.

In this sample, growth prospects appear to have a larger impact on stock price than the promise of dividends.

Traditionally, firm earnings has been considered the more important determinant of stock price. However, the sales coefficient has a larger t-statistic than the earnings coefficient.

Caveats:

The model is built with cross-sectional data. Cross-sectional models often do not explain the change in stock prices over time.

The dividend variable could be an endogenous variable. A second equation that predicts dividend behavior and the level of dividends could be added.

A larger model might include information on capital expenditures and share buybacks.

Are Dividend Payments Sustainable?

Contingency Tables of Dividend Yields vs Dividend Payout

Issue: Contingency table of dividend yield versus dividend payout for 35 growth stocks and 35 value stocks are used to analyze the sustainability of dividend payouts.

Contingency tables for the two portfolios are presented below.

Contingency Table for Dividend Yields vs Payout Ratios – Growth Firms
	Dividend Yield
Dividend Payout	0	>0 & <=2	>2 & <4	>=4	Total

0	9	0	0	0	9
<=50	0	13	1	0	14
>50 & <=90	0	2	5	0	7
>90 or <0	0	0	4	1	5
Total	9	15	10	1	35

Contingency Table for Dividend Yields vs Payouts – Value Firms
Dividend Payout	0	>0 & <=2	>2 & <4	>=4	Total

0	1	0	0	0	1
<=50	0	5	5	2	12
>50 & <=90	0	2	5	0	7
>90 or <0	0	3	10	2	15
Total	1	10	20	4	35

Comments on the Construction of the Contingency Tables:

The columns of the table are based on the dividend yield defined as annual dividend payments as a percent of the current stock price. The dividend yield measures the generosity of a firm’s dividend.

The dividend yield categories are – yield = 0, yield > 0 &yield <2, yield >=2 and yield <4, and yield >=4.

The rows of the table are based on the dividend payout ratio defined as dividend as a percent of income. The dividend payout ratio measures the ability of a firm to maintain dividends in the future.

A dividend paying firm with negative earnings (or an undefined dividend payout ratio) is not likely to be able to continue paying dividends.

The four dividend payout ratios considered here are payout =0, payout<=50, payout>50 & payout<=90 and payout >90 or payout<0.

Note I have placed firms with negative earning that are currently paying dividends and firms with dividend payout ratios greater than 90 in the same high dividend payout category. This makes sense because firms with high dividend payout ratios and firms paying dividends even though they have negative earnings will have trouble sustaining dividend payments unless earnings grow.

Note also by definition of yield and payout all firms with dividend yield equal to 0 also have dividend payout equal to 0.

Observations about dividend payments and sustainability of payments for growth and value firms:

Growth firms pay less in terms of dividends than value firms. There are 9 of 35 growth firms with a 0% yield compared to 1 of 35 value firm that pays no dividends.

A substantial percent of value firms may not be able to sustain their current dividend level. 15 value firms have a dividend payout over 90 or under 0 compared to only 5 of 35 growth firms.

Concluding Remarks: The tech sector and growth ETFs have led the market upwards over the past couple of years. A lot of analysts believe that the market can continue upwards through a rotation to value stocks.

I don’t see this happening. Over 40 percent of my sample of dividend paying value firms has a payout ratio over 90 or negative earnings. Their current dividend yield while attractive may not be sustainable.

A previous analysis of PE ratios indicated that many analysts are understating the overvaluation of value firms by ignoring firms with undefined PE ratios.

https://financememos.com/2018/09/12/valuation-of-growth-and-value-stocks-with-pe-ratios/

Valuation of Growth and Value Stocks with PE Ratios

Question: The chart below contains the frequency distribution for trailing and forward PE ratios for 33 growth firms and 31 value firms. The data was collected from the top 35 positions from two ETFs – VUG Vanguard large cap growth and VTV Vanguard large cap Value funds. Two growth stocks and four value stocks were omitted from the analysis because of negative earnings, which leads to an undefined PE ratio.

What can we learn about the relative valuations of growth and value firms from this chart? How did the omission of firms with negative earnings impact our conclusions? How do conclusions based on trailing PE and forward PE ratios differ? What are the economic implications of large differences between trailing and forward PE ratios?

The Data:

Trailing PE Ratios
	Growth Stocks		Value Stocks

	Freq.	Percent	Freq.	Percent

Under 15	5	15.15	6	19.35
15 to 25	10	30.3	11	35.48
Over 25	18	54.55	14	45.16
Total	33	100	31	100

<=75	28	84.85	25	80.65
>75	5	15.15	6	19.35
Total	33	100	31	100
Forward PE Ratios
	Freq.	Percent	Freq.	Percent
	Growth Stocks		Value Stocks
Under 15	5	15.15	25	80.65
15 to 25	19	57.58	6	19.35
Over 25	9	27.27	0	0
Total	33	100	31	100

<=75	31	93.94	31	100
>75	2	6.06	0	0
Total	33	100	31	100

Short Answer: Analysts on television routinely discuss PE ratios when talking about the valuation of the market. Their analysis does not specify how PE ratios are assigned to firms with negative earnings or whether these firms are omitted from the sample. The analyst often fails to state whether his analysis is based on trailing or forward PE ratios. Many analysts routinely present statistics, which understate the extent stocks are overvalued.

Observations about Growth and Value Firm PE Ratios

54 percent of growth firms and 45 percent of value firms report a trailing PE ratio greater than 25.

27 percent of growth firms and 0 percent of value firms report a forward PE ratio greater than 25.

15 percent of growth firms and 19 percent of value firms report a PE ratio greater than 75.

6 percent of value firms and 0 percent of growth firms report a forward PE ratio greater than 75.

Discussion of Growth and Value PE Ratios

I have not reported mean PE ratios because of outliers. The max PE ratio for value firms in our sample was 272 for growth firms and 2352 for value firms.

The exclusion of firms with negative PE ratios makes it very difficult to measure and compare valuations. Many analysts top-code firms with large or negative PE ratios. One way to deal with this issue is to look at the earnings to price ratio (the reciprocal of the PE ratio) or to use techniques mentioned in a previous blog.

https://financememos.com/2017/10/11/two-ways-to-calculate-a-portfolio-pe-ratio/

This analysis substantially understates the current overvaluation of value firms. Why do I say that?

First, more value firms than growth firms have negative earnings and have been excluded from the sample. The excluded negative earnings firms are arguably more overvalued than firms with low positive earnings and a high PE ratio.
Second, as noted the PE outlier is larger for the large cap value sector than the large cap growth firms.

A valuation analysis based on PE ratios does not always result in a larger bias for value firms than growth firm. A comparison of small cap growth to small cap value firms might find more growth firms with negative or astronomic PE ratios than presented here for the comparison of the two large-cap portfolios.

The lower forward portfolio PE ratios are the consequence of an optimistic assumption on earnings growth. As shown in a previous post one estimate of projected earnings growth is 100*(PET/PEF)-1 where PET is trailing PE and PEF is forward PE.

http://www.dailymathproblem.com/2018/09/financial-ratio-math.html

Projected Growth Rate in Earnings from the Comparison of Trailing and Forward PE Ratios
	Growth Stocks	Value Stocks
Min	-45.1	-51.6
Max	1,615.9	16,146.5

The comparison of trailing and forward PE ratios implies substantial dispersion in projected earnings growth.

It is very easy for an optimistic analyst or an analyst who wants to sell stock to juice forward earnings and make valuations seem more reasonable than they are.

Concluding Remark:

PE ratios are often imprecise measures of firm valuation, especially when earnings are low. Analysts are using forward earnings estimate to obtain a more optimistic picture of the overall market valuation. But are these estimates valid or reasonable?

Are Tech Firms Overvalued

Question: The chart below has information on the trailing PE ratio, the forward PE ratio, the PEG ratio and 2014 and 2017 gross income figures for 9 tech firms.

How do the trailing and forward PE ratios differ for these 9 firms?

What is the implied growth rate in earnings from the trailing PE ratios and the PEG ratio? How do these implied earning growth rates compare to actual earing growth rates?

What is the implied growth rate in earnings based on the forward PE ratio and the PEG ratio? How do these implied earning growth rates compare to actual earing growth rates?

Financial Statistics for Nine Tech Firms
	Trailing PE	Forward PE	PEG	Gross Income December 2017	Gross Income December 2014
AAPL	20.35	16.56	1.46	88.2	70.5
AMZN	159.84	79.55	2.51	65.9	26.2
MSFT	52.8	22.91	2.07	72	60.5
FB	27.73	21.49	1.1	35.2	10.3
NFLX	169.65	85.72	2.19	4.03	1.75
GOOG	53.96	26.03	1.75	65.27	40.69
NVDA	40.83	35.11	2.17	5.82	2.6
EA	52.57	20.61	1.68	3.87	3.09
TXN	26.17	18.41	1.41	9.61	7.43

Analysis:

Below is information on the trailing and forward PE ratios for the 9 tech firms.

Comparing Trailing & Forward PE Ratios
	Trailing PE	Forward PE	Diff.
AAPL	20.35	16.56	3.79
AMZN	159.84	79.55	80.29
MSFT	52.8	22.91	29.89
FB	27.73	21.49	6.24
NFLX	169.65	85.72	83.93
GOOG	53.96	26.03	27.93
NVDA	40.83	35.11	5.72
EA	52.57	20.61	31.96
TXN	26.17	18.41	7.76
Average			30.83
Paired t test			0.018

The trailing PE ratio is larger than the forward PE ratio for all 9 firms.

This occurs because analysts are optimistic that forward earnings will exceed past earnings.

The paired t-test indicates we should reject the null hypothesis that the mean difference between the trailing and forward PE ratio is zero.

Note: The implied earnings growth forecast used in a PEG ratio can be obtained by dividing the PE ratio by the PEG ratio. The definition of a PEG Ratio is PE/G. This means PE/PEG or PE/(PE/G) is equal to G.

The actual annual growth rate of earnings between 2014 and 2017 is ((E17/E15)^(1/3)-1.

Below is the comparison of implied growth rates from reported trailing PE and PEG ratios to actual earnings growth rates.

Implied vs. Actual Growth Rates
	Trailing PE Ratio	PEG Ratio	Implied Growth Rate	Actual Average Annual Rate of Growth in Gross Profits 2014 to 2017
AAPL	20.35	1.46	13.9%	7.8%
AMZN	159.84	2.51	63.7%	36.0%
MSFT	52.8	2.07	25.5%	6.0%
FB	27.73	1.1	25.2%	50.6%
NFLX	169.65	2.19	77.5%	32.1%
GOOG	53.96	1.75	30.8%	17.1%
NVDA	40.83	2.17	18.8%	30.8%
EA	52.57	1.68	31.3%	7.8%
TXN	26.17	1.41	18.6%	9.0%

Implied growth rate based on trailing PE ratios.

For 8 of the 9 companies the implied growth rate from trailing PE ratio and reported PEG is larger than the actual growth rate in gross earnings.

Only NVDA had an implied growth rate lower than its actual growth rate.

Below is the comparison of the implied growth rates from reported forward PE ratios and PEG ratios to actual earnings growth rates

Implied vs Actual Growth Rates
	Forward PE	PEG	Implied Growth Rate	Actual Average Annual Rate of Growth in Gross Profits 2014 to 2017
AAPL	16.56	1.46	11.3%	7.8%
AMZN	79.55	2.51	31.7%	36.0%
MSFT	22.91	2.07	11.1%	6.0%
FB	21.49	1.1	19.5%	50.6%
NFLX	85.72	2.19	39.1%	32.1%
GOOG	26.03	1.75	14.9%	17.1%
NVDIA	35.11	2.17	16.2%	30.8%
EA	20.61	1.68	12.3%	7.8%
TSN	18.41	1.41	13.1%	9.0%

Implied Growth Rate based on forward PE ratios

For 5 of the 9 firms the implied growth rate based on forward PE ratio is larger than the actual growth rate.

The other 4 firms have higher actual growth rates than implied growth rates

Discussion:

Are these tech stocks overvalued?

My view is there is a lot of unjustified optimism about these stocks.

Many of these firms had high actual growth rates 2014 to 2017. This actual growth rate may be unsustainable.

Many of the implied growth rates calculated here are even higher than current unsustainable growth rates.

Perhaps analysts are using the growth rate of net taxes in their PEG estimates but tax cuts result in a one-time shift in earnings growth. Soon the tax cut will define net earnings in the bae year of the earnings growth calculation. This should decrease growth rates and cause the PEG ratio to rise.

Impact of Gender on Annuity Payments

Impact of Gender on Annuity Payments

Introduction Females have longer life expectancy than males in virtually all countries. Gender related differences in life expectancy make it more likely that females will out-live their retirement resources than will males. Females, because of their longer life expectancy, might choose to purchase a longer-term annuity.

Question: A 75-year old person has $100,000 to spend on an annuity., which makes monthly payments for a fixed period. She or he wants to reduce the probability of outliving the annuity to below 10 percent.

What annuity term would accomplish this goal for a male and for a female?

How does the longer life expectancy of the female affect the size of the monthly annuity payment?

Data Source: This analysis is based on the United States Life Tables, 2008 published on September 24, 2012 by the National Center for Health Statistics of the Centers for Disease Control and Prevention

http://www.cdc.gov/nchs/data/nvsr/nvsr61/nvsr61_03.pdf

Table Two of the report has life statistics for males and Table Three of the report has life statistics for females. Both tables can be downloaded directly into an EXCEL Spreadsheet.The data in the Table below is from the CDC life tables.

Age	Total number of females alive at age x	Proportion of 75-year-old females who survive to age X	Total number of Males Alive at age X	Proportion of 75-year Males surviving until age X
75	73,974		61,980
76	71,973	97.3%	59,531	96.0%
77	69,831	94.4%	56,962	91.9%
78	67,539	91.3%	54,268	87.6%
79	65,080	88.0%	51,437	83.0%
80	62,448	84.4%	48,469	78.2%
81	59,647	80.6%	45,390	73.2%
82	56,688	76.6%	42,227	68.1%
83	53,563	72.4%	38,994	62.9%
84	50,253	67.9%	35,694	57.6%
85	46,782	63.2%	32,360	52.2%
86	43,166	58.4%	28,996	46.8%
87	39,414	53.3%	25,650	41.4%
88	35,567	48.1%	22,372	36.1%
89	31,677	42.8%	19,213	31.0%
90	27,805	37.6%	16,223	26.2%
91	24,017	32.5%	13,448	21.7%
92	20,380	27.6%	10,928	17.6%
93	16,962	22.9%	8,691	14.0%
94	13,821	18.7%	6,754	10.9%
95	11,006	14.9%	5,122	8.3%
96	8,549	11.6%	3,783	6.1%
97	6,467	8.7%	2,719	4.4%
98	4,754	6.4%	1,898	3.1%
99	3,392	4.6%	1,286	2.1%
100	2,345	3.2%	844	1.4%

Analysis:

Calculation the Annuity Term:

Based on this cohort of 100,000 females, 73,974 females have survived to page 75. Around 90% of these females are still alive until somewhere between age 95 and 96.

In a cohort of 100,000 men 61,980 are still alive at age 75 and the 90% survival mark for these 75-year olds is reached somewhere between age 94 and 95.

Let’s interpolate to get an exact number of months for our annuity formula.

For females we get 96-75 (21) years plus (11.6-10)/(11.6-8.7) x 12 or (7) months. The 75-year old female must buy an annuity of 259 months to reduce the probability that she will outlive the annuity to 10 percent.

For males we get 94-75 (19) years plus (10.9-10)/(10.9-8.3) x 12 or 5 months (I am rounding up to fulfill the contract.) The 75-year old male must buy an annuity of 233 months to reduce the probability that he will outlive the annuity to 10 percent.

Calculating the Impact on Annity Payments:

So now we calculate the annuity payments for the female and the male with the PMT function. The only input that differs is the duration of the contract – 259 months for females and 233 months for males.

The annuity payment calculations were obtained from the PMT function in Excel.

	Female	Male
Rate 0%	0	0
Rate 3%	0.03	0.03
Rate 6%	0.06	0.06
NPER	259	233
PV	$100,000	$100,000
Type	1	1	DIFFERENCE	% DIFFERENCE WITH FEMALE AS BASE
PMT rate=0	$386.10	$429.18	($43.08)	-11.2%
PMT rate =3%	$524.96	$566.77	($41.81)	-8.0%
PMT rate=6%	$689.45	$727.62	($38.17)	-5.5%

Conclusions: Females must buy a longer-term annuity to obtain the same reduction in longevity risk as a male. This reduces their monthly annuity payment.

This annuity calculator on the web confirms that females receive lower annuity payments and or pay higher prices for a comparable annuity. I am not familiar with the specific formulas used by this calculator or the product that it pertains to. My sole interest here is to provide some insight on how gender determines longevity risk.

http://www.annuityfyi.com/immediate-annuities/

Survivor Bias and Stock Market Risk

Issue:

Shortly after the large stock price decline of Facebook on July 26,2018, CNBC posted an article with a chart of other large market-cap declines of U.S. stocks. Every single company in the chart still exists as an ongoing company. It appears as the chart was compiled from a database that only contain companies that are still listed.

What no longer actively traded companies might have made a list of the largest declines in equity value for large-cap companies?

Why does the exclusion of these companies from the chart create a misleading picture of the risk of investing in equity?

The chart lists three companies with large cap declines in 2018? Why is the occurrence of so many recent large declines in big-cap equity a concern?

The article:

https://www.cnbc.com/2018/07/26/facebook-on-pace-for-biggest-one-day-loss-in-value-for-any-company-sin.html

The Chart: Market Cap Losses in Big Cap Stock
Company	Date	Decrease In Equity ($B)
Facebook	Jul 26 2018	$114.50
Intel	sep 22 2000	-90.7
Microsoft	Apr 3 2000	-80
Apple	Jan 24 2016	-59.6
Exxon Mobile	Oct 15 2008	-52.6
General Electric	Apr 11 2008	-46.9
Alphabet	Feb 2 2018	-41
Bank of America	Oct 7 2008	-38.4
Amazon	Apr 2,2018	-36.5
Wells Fargo	Feb 5 2018	-28.9
Citigroup	Jul 23 2002	-25.9
JP Morgan Chase	Sep 29 2008	-24.9

Discussion

What no longer actively traded companies might have made a list of the largest declines in equity value for large-cap companies?

Companies no longer actively traded, which experienced large one-day drops in equity value include — Enron, Worldcom, the old General Motors, Lehman Brothers, Bear Stearns, and Merill Lynch. There are probably many more.

Why does the exclusion of these companies from the chart create a misleading picture of the risk of investing in equity?

First, this list suggests large drops in equity values occur less frequently than a chart composed from all firms that ever existed.

Second, a list of large declines composed of stocks that survived understates the potential loss of wealth from buying and holding stocks after a large decline. In fact, all the stocks on the CNBC list have recovered nicely.

Third, an anaysis of risk, which includes bankrupt firms would encourage investors to seek greater diversification in terms of number of equity holdings, sector, and asset classes.

The chart lists three companies with large cap declines in 2018? Why is the occurrence of so many recent large declines in big-cap equity a concern?

Facebook, Alphabet, and Amazon all had their large declines in 2018. These are three of the four FANG stocks. The smallest FANG company also has had a recent large percentage decline.

The most popular trendy sector of the stock market is now realizing extremely large one-day changes. This appears to be happening with greater frequency.

The disproportionate number of 2018 large-cap declines in this chart convinces me that people who have made a lot of money in FANG and in other high-tech stocks need to take some money off the table when the stock prices reach new highs.

Of course, in the case of Facebook this advise was more valuable prior to July 26.

The volatility of FANG names and other Tech stocks does not mean this is a good time to buy value stocks because the pending increase in interest rates might hurt value stocks more than growth stocks

I would be alarmed by the large number of 2018 events even if the chart contained firms that were no longer actively traded.

Holdings of Ten Emerging Market Funds

Holdings of Ten Emerging Market Funds

This post started with a list of emerging market funds found at the site below.

http://etfdb.com/etfdb-category/emerging-markets-equities/

I examine and describe the holding and recent returns on the 10 largest of these funds.

I comment on the holdings of these funds, the risk of these funds and the risk of some of the holdings.

List of Funds, Discussion of Geographic Diversifications, and YTD returns:

Some Information on Ten Emerging Market Funds
Symbol	Fund	Geographic Concentration	YTD Returns
VWO	Vangarud FTSE Emerging Market	7 of top ten holdings are in China	-7.32%
IEMG	I Shares Core MSCI Emerging Market	7 of top ten holdings are in China	-6.95%
EEM	I Shares MSCI Fund	7 of top ten holdings are in China	-7.44%
SCHE	Schwab Emerging Markets Fund	6 of top ten holdings are in China	-7.34%
FNDE	Schwab Fundamental Large Firm Emerging Market Index	Largest holding is from Korea and second and third largest holding are Russian. Top 10 holdings also include companies from China, Brazil and Taiwan	-6.71%
DEM	Wisdom Tree Emerging Markets Equity Income Fund	Top two holdings are Russian. Most other top ten holdings are form China or Taiwan.	-4.54%
RSX	Van Eck Vectors Russia ETF	All holdings appear to be in Russia.	4.36%
GEM	Goldman Sachs ActiveBeta Emerging Markets Equity ETF	7 of top ten holdings are in China	-6.75%
SPEM	SPDR Portfolio Emerging Markets ETF	6 of top 10 holdings are in China	-6.54%
DGS	Wisdom Tree Emerging Markets Small Cap ETF	Top 10 holdings are less than 9 percent of all holdings. Highly diversified, smaller companies.	-7.34%

Some Observations:

Many of the funds have a very large share of their funds in China. In fact, some of the emerging market funds could accurately be called China plays.

Three of the funds have substantial issues in Russia. Also, most but not all, of the Russian holdings are in the oil and gas sector. Important to research holding If concerns about corruptions and sanctions would deter you from investing in Russia. Energy funds that are not in Russia may be preferable to Russian energy plays.

Nine of the Ten funds have negative YTD returns. The fund that exclusively invests in Russia has a +4.36% return. This fund performed really poorly in prior years. The YTD return on U.S. large cap stocks is around 6.0%, largely because the market has been up for the past week or so.

Can investments in emerging market ETFs provide insurance against a major downturn in the U.S. market?

Short answer is probably not: The downturn in emerging markets in the 2007 to 2009 crisis was larger than the downturn in large-cap U.S. stocks.

Go here for discussion of emerging market funds during the financial crisis

http://financememos.com/2018/07/23/emerging-markets-during-the-financial-crisis/

Thoughts on specific holding of emerging market funds:

Emerging market funds have some well know reputable holding and some firms with dubious reputations, and some firms with little name recognition.

The most successful holdings of the funds in this sector include: (1) Alibaba, (2) Tencent and (3) Baidu Inc.

Investors who want a taste of advanced emerging markets or China may be better off directly investing a small fraction of their wealth in these companies.