The Risk Pendulum of Globalization

Here are a few facts I thought worth sharing with regard to globalization's continued march through all corners of the world despite the crisis:

• 2008 marked the first time that the "developing" world consumed more energy than the developed world.
• The United States, Canada, & Europe will combine for less than half of global economic output in 2009 [according to the Centre for Economics and Business Research].
• One wealth manager notes that the "developing" world has larger foreign reserves & less indebtedness. (1)
• Additionally, he notes that many of the emerging countries have better GDP per capita growth & superior savings rates. (1)
• Does this change the perception of risk usually associated with the emerging world?
  (e.g., "Have Asian banks been more or less risky than American & European ones?", "Are countries with greater debt more or less risky?" (2)

These trends may continue to redefine asset class risk in the near term, and therefore skew people's general association of risk with asset allocation. As globalization continues to redefine the world economy, changing our ideas of risk association also becomes important.


(1): "Of Inhuman Bondage" by Tim Price, June 15, 2009, PFP Wealth Management, http://www.pfpg.co.uk/site/newsroom/publications

(2): "Comment of the Day" by David Fuller, June 16, 2009, Fullermoney, http://www.fullermoney.com/x/default.html

At the movies

My wife and I recently arrived at the cinema early to catch one of the summer's box office hits, and as we waited for the film to start I was not surprised that the theater was not very corwded. But, as the time crept closer to start time, I was pleasantly surprised by how the theater started to fill in. By the time the lights dimmed, it was almost a full house.

Despite the recession, one of California's industry sectors was humming along at full speed through the first quarter of 2009. According to the New York Times, ticket sales were up 17.5 percent and attendance was up nearly 16 percent. If that pace continues through the year, it would amount to the biggest box office surge in at least two decades. Hooray for Hollywood!

3 Macro Trends Redux Revisited

A few years ago, I was asked to research and revisit the macro-economic trends that were influencing the world of personal finance when I first entered this business over 10 years ago. The result of the research was a white paper titled 3 Macro Trends Redux. I thought it may be interesting to reflect on the original trends, mention the findings of the research, and comment on the development since the crisis of '08. The trends in discussion are:

Aging of the Baby-boomers

• Back When--The trend originated 10 years ago as the boomers edged over the age-50 threshold--that magic age when people give keen focus to retirement planning.
  
• Then--Age 60 was now in the sights of the boomers. Pensions first slowly, and then quickly disappeared or became a much smaller portion of people's retirement plans in the last several years.
  
• Now--Chances are the retirement plans of the boomers are in need of major adjustment after the freefall in the stock market last fall. The boomer generation has openly embraced investment in equity-type investments, though I am not sure that planning and monitoring have played a large enough role.
  

Largest Transference of Wealth in History

• Back When--The aging of the "greatest generation" and their general inclination toward saving has set up the potential largest transference of wealth from one generation to the next as the older generation begins to pass on.
  
• Then--The pervasiveness of estate planning has solved many of the issues of this wealth transference, though under current estate law, planning for wealth transference continues to be a moving target. The thresholds for estate exemption have continued to grow and are set to expire next year. This constant expansion makes it difficult to plan for wealth transference.
  
• Now--Because estate law is a legislative hot topic, expect the laws to change once again. There has recently been lively debate in Congress about this issue. The most recent proposal raises the estate tax exemption, lowers the actual tax, and unifies the credits allowed between husband and wife. Whatever is decided upon, it looks as though simple wills and living trust estate planning will solve many of the estate considerations for the mass affluent.
  

Democratization of the World/Expansion of Capital Markets

• Back When--Hopes were high as former eastern bloc nations were thawed to democracy and opened up as new potential capital markets. Eastern Europe was flooded with venture capital and these economies were set for a boom.
  
• Then--Questions arose based upon how the developed world would respond to global terrorism. Would the wars in Iraq and Afghanistan encourage democracy across the Middle East? The rise of the Chinese and Indian economies have led the emerging markets of Asia
  
• Now--China and India (as well as Brasil) have made emerging market a viable alternative to hedge risk brought on by the developed world. These economies have not been hit as hard as the US and Europe in the crisis, and have bounced back quicker as well. Russia (the last of the BRIC nations to be mentioned) has turned politically beligerent in the past few years. This has thrown economic questions up in the air for that region, as the price of oil continues to be the main economic driver for Moscow.

I believe that these macro-economic trends will continue to influence the response of investors from a financial planning perspective. Monitoring the development of these and other factors in relation to your unique plan is important.

Build Your Own Stool

The three-legged stool analogy for retirement planning is in need of termite-reinforcement now more than ever. This theory of retirement planning has long held that people should think of retirement funding as the balance provided by a three-legged stool: Leg one being Social Security; leg two as employer-sponsored pensions; and leg three consisting of personal savings. Over the last 10 to 20 years the message from government and business could not be clearer. Most responsibility for retirement funding has been shifted to us. Social Security is a broken system, and higher income people are increasingly penalized. Most companies have phased-out the more traditional defined contribution/pension plans. So we are left with trying to balance on one leg...

The good news is that there are better and better methods being introduced to help. The option of partnering with an insurance company can allow individuals to leverage their savings by helping to guarantee future streams of income. People should be careful in building these "personal pensions," as annuities can be highly complex and varied. If not planned properly, you could be subject to higher insurance fees, or lose complete control of your asset.

Annuities can replace that disappearing leg of the stool and reinforce some guaranteed income for retirement. Balancing guaranteed income with personal retirement savings from managed retirement accounts is the constant challenge for people as they approach & cross into retirement. These income plans can provide a great hedge against variable investment returns, but need careful implementation and monitoring.