It’s interesting to note that the benchmark S&P 500 gained 5% in January.  Historically, this is the 20^th time that the S&P has posted gains of 4% or more in January since 1950.  On the 19 prior occasions, the S&P posted an average gain of 14% over the next 11 months, February through December.  The only time it failed to gain ground after a 4% plus January was back in 1987.    18 out of 19That’s not a bad record.

While we do not pretend to know what the future holds, we do believe strongly in the facts that history reveal:  Investors are paid for taking risk in the markets. By staying out, we often miss opportunities that are not evident “in the moment”.  Despite history being on our side, the markets very well could continue on a downward trend.  Either way, our clients will benefit in the long run – through opportunities or gains.

As always, please call us if you’d like to discuss how we can help!

In December 2011, Barron’s told investors to “buckle up.” The consensus prediction of its panel of ten stock market strategists and investment managers was for the S&P 500 to end 2012 some 11.5% higher, at about 1,360.¹  “That sounds like a big gain, but a lot of things have to go right for the market to make such impressive headway,” the writer said. “Even the most bullish of these Street seers fears stocks could be more wobbly in the next six months than in the six months past.”  In hindsight, it was a lucky consensus, but with an unnecessary peppering of fear.

There was so much for forecasters to get right—the negotiation of the euro zone crisis, uncertainties over the growth of earnings, the roadblock of the US presidential election, and the challenge for emerging economies to sustain high economic growth rates.  Twelve months later, markets are still grappling with many of the same issues, though from different angles. Much of Europe is either in recession or growing only modestly, unemployment is high, and a number of countries that use the euro are unable to pay their debts. The US presidential election gave way to worries over the “fiscal cliff,” while Chinese exports have been hit by the slowdown elsewhere. Let’s look at a typical example of the “mainstream” predictions liberally issued each year. Forbes, in a December 22, 2011 publication offered these five predictions for 2012 (our commentary is in italics after each prediction):

1. S&P will rise at least 10%.  Correct (sort of).  They almost nailed this one, however, the prediction was predicated with a lot of “fear of volatility”.  In fact, we had a below normal year in terms of volatility.
2. Greece will start to negotiate out of the Euro so it’s wise to underweight (sell) Foreign & Emerging holdings. Wrong. Greece is staying and in 2012 the foreign markets were some of the world’s strongest performers.
3. Obama will win reelection.  Correct, but this was in my opinion, relatively easy to predict given the economic recovery.  Furthermore, it inevitably comes to a 50/50 guess at worst, so this prediction was really just added to buffer their “correct vs. wrong” ratio. It also added no value in terms of your investment portfolio.
4. China will ease their currency and the Yuan will rise by 8%.  Wrong. They did not really ease anything. Even investing in the individual stock and fund picks recommended within this prediction would have produced a lower return than simply holding the S&P 500.
5. Commodities will resume their bullish run.  Wrong. Not only did the individual picks in this prediction produce inferior returns than the S&P 500 as well as some bonds, they were also much more volatile. Commodities will end the year up about 4%. 

Two out of five…that’s an F in any book.  Furthermore, from the two correct predictions, only one could have been used to profit from any personal gains.  Implementing this set of predictions in an actual portfolio would have produced inferior results with higher than necessary volatility – the worst of both outcomes hoped for.  Predictions like this are absolutely ubiquitous and inescapable in today’s financial media.

In the meantime, however, there have been solid gains in many equity markets, including parts of Europe and Asia, as well as North America. That Barron’s panel forecast of the S&P 500 reaching 1,360, which the magazine said was ambitious, now looks conservative. The index was 4% above that level by mid-December. What’s more, some of the strongest performances have been in emerging and frontier markets – where the public was strongly encouraged to avoid!

The table below shows performances for 2012 (through November 30) and annualized returns for the past three years for twenty developed and twenty emerging markets, using MSCI country indices. Returns are ranked on a year-to-date basis and expressed in US dollars.

TOP PERFORMERS IN 2012

Source: MSCI country indices through November 30, 2012.

Among developed markets, three members of the seventeen-nation euro zone—Belgium, Germany, and Austria—were among the top ten best-performing equity markets this year. Leading the way among emerging markets was Turkey, which regained its investment grade ranking from agency Fitch in November.

While not one of the top performers, the US market still delivered positive returns in what many observers judged as a highly uncertain economic and political climate. And, while much of the media focus has been on the so-called BRIC emerging economies of Brazil, Russia, India, and China, the real stars in the emerging market space the past three years have been the Southeast Asian markets of the Philippines, Thailand, and Indonesia.

There are several lessons here:

First, while the ongoing news headlines can be worrying for many people, it’s important to remember that markets are forward-looking and absorb information very quickly. By the time you read about it in the newspaper, the markets have usually gone on to worrying about something else.

Second, the economy and the “market” are different things. Bad or good economic news is important to stock prices only if it is different from the information that the market has already priced in.

Third, if you are going to invest via forecasts, you need to realize that it is not just about predicting what will happen around the globe, but it is also about predicting correctly how markets will react to those events. That’s a tough challenge even for the best of us with vast amounts of staff and resources at our disposal.

Fourth, you can see there is variation in the market performance of different countries (Austria down 8% vs. Philippines up 25%). That’s not surprising given the differences in each market in sector-type composition, economic influences, and market dynamics. That variation provides the rationale for diversification—spreading your risk to smooth the performance of your portfolio.

So, it’s fine to take an interest in what is happening in the world. But care needs to be taken in extrapolating the headlines into your investment choices. It’s far better to let the market do the worrying for you and diversify around risks you are willing to take.

In the meantime, many happy returns!

1. Vito J. Racanelli, “Buckle Up,” Barron’s, December 19, 2011.

Here are ten of these excuses we hear quite frequently:

1) “I just want to wait till things become clearer.” It’s understandable to feel unnerved by volatile markets. But waiting for volatility to “clear” before investing often results in missing the return that can accompany the risk.

2) “I just can’t take the risk anymore.”  By focusing exclusively on the risk of losing money and paying a premium for safety, we can end up with insufficient funds for retirement. Avoiding risk can also mean missing an upside.

3) “I want to live today. Tomorrow can look after itself.” Often used to justify a reckless purchase, it’s not either-or. You can live today and mind your savings. You just need to keep to your budget.

4) “I don’t care about capital gain. I just need the income.” Income is fine. But making income your sole focus can lead you down a dangerous road. Just ask anyone who recently invested in collateralized debt obligations.

5) “I want to get some of those losses back.” It’s human nature to be emotionally attached to past bets, even losing ones. But, as the song says, you have to know when to fold ‘em.

6) “But this stock/fund/strategy has been good to me.”  We all have a tendency to hold on to winners too long. But without disciplined rebalancing, your portfolio can end up carrying much more risk than you bargained for.

7) “But the newspaper said…”  Investing by the headlines is like dressing based on yesterday’s weather report. The news might be accurate, but the market usually has reacted already and moved on to worrying about something else.

8) “The guy at the bar/my uncle/my boss told me…”  The world is full of experts, many who recycle stuff they’ve heard elsewhere. But even if their tips are right, this kind of advice rarely takes your circumstances into account.

9) “I just want certainty.”  Wanting confidence in your investments is fine. But certainty? You can spend a lot of money trying to insure yourself against every possible outcome. While it cannot guard against every risk or possible outcome, it’s cheaper to diversify your investments.

10) “I’m too busy to think about this.”  We often try to control things we can’t change—like market and media noise—and neglect areas where our actions can make a difference—like the costs of investments. That’s worth the effort.

Given how easy it is to pull the wool over our own eyes, it can pay to seek independent advice from someone who understands your needs and circumstances and who holds you to the promises you made to yourself in your most lucid moments.

Call it the “no more excuses” strategy.

If these excuses fit any of your friends or family that may want to chat with us, please don’t hesitate to refer us.

• 0% financing through July 2013 (an eight month period)
• 4% fee for all balance transfers (this is added onto the balance and charged 0% as well)
• after promotional period is up, ~20% interest for all balances remaining from transfer.

A part of me was tempted to accept the deal without spending time testing it first.  But, upon further examination we saw that the 4% upfront fee cost more than the savings I could gain from a 0% rate over the same 8 month period.

Example an action:

• my current balance to transfer: $15,000, currently being charged 9%
• fee for transferring this $15,000: $600 (keep in mind this is a cost I’d be paying back)
• new balance would be $15,600 – charged 0% for eight months

Now, the real question is: if I were to pay off this loan within the eight months in order to take advantage of the 0% interest rate, is it worth $600 in upfront fees I’d be paying?

The answer is surprisingly no.  If you pay off a 9%, $15,000 loan in eight months, you pay approximately $568 in interest.  You must also pay $1730 per month to achieve this.  So, the total cost of the loan even at 9% is $15,568.

However, the 0% promotional loan will cost $15,600 at a minimum.  If I took this promotion I would be paying $32 more – not in interest, but instead as an upfront fee to the credit card company – but it’s irrelevant.

Unfortunately, the story doesn’t end there.  Credit card issuers are very smart.  They know quite well that most people engaging in their “promotional offerings” will not pay off the balance at the end of the promotional period.  Which is just a very nice 20% icing on the cake. Multiply this over tens of thousands of promotional acceptances and you have a nice little boost in profits.

What to Do?

The breakeven point seems to be 9% for this deal.  That is, if you are paying 9% or less, paying a 4% upfront fee dosen’t make sense.  If your current interest rate were 18%, you’d be paying about $615 less if you took the promotion.  But, by simply calling your credit card issuer and requesting (more like demanding) that they knock down the interest rate to below 9%, you can easily beat them at their own game.  In this low-interest rate environment, it’s easy to do, and they always want to keep your business…so just make the 5 minute call please!

A deferred annuity puts off taking withdrawals, whereas with an immediate annuity you can take withdrawals right away. A fixed annuity has a preset withdrawal amount that does not adjust for inflation. A variable annuity is tied to the performance of some investment choices.

The entire selling point of the annuity is a lower return in exchange for a guarantee. But when analyzed, the purchase price is a loss you can never recover from.

Commission-based advisors with insurance licenses sell you whatever form of annuity would have performed well over the past decade. They say they are fee-based, at least partly to sound more like fee-only financial planners. If you are confused by these distinctions, then 93% of the financial services world who can’t call themselves fee-only are doing their jobs well. You do well when you remember that fee-based is not the same as fee-only.

Let’s review the math behind an immediate fixed annuity. This type of annuity receives a fair amount of seemingly scholarly press trying to justify including this product as part of a balanced portfolio.  Imagine that Thomas and Martha Jefferson, ages 64 and 62, respectively, purchase an immediate annuity that will pay them a guaranteed 6% annual return. If they have $500,000, they would receive $30,000 every year for the rest of their lives. This income, added to their Social Security, would comprise the spending for their lifestyle.

This scenario sounds fair. After all, who wouldn’t want to have earned 6% over the last 10 years during these mixed markets? Earning 6% guaranteed feels like a good exchange for the uncertainty of the markets. But it is not. Here’s why:  First, the S&P 500′s return over the past 10 years was 6.34%. So even in some of the worst markets in recent history, the return of the S&P 500 was better than the perceived return of this guaranteed annuity.

Second, the annuity does not have a 6% return, even if the Jeffersons lived forever. Buying an annuity begins with the immediate loss of 100% of your original investment. So for the first 15 years, the annuity company is simply giving you back your original purchase price. The way most salespeople describe thinking about the annuity discourages investors from realizing that their original money is gone forever. They do this by referring to it as an investment. I would not call it an investment because after you purchase an annuity, your principal no longer has any value.  The entire selling point of the annuity is a lower return in exchange for a guarantee. But when analyzed, the purchase price is a loss you can never recover from. We can analyze this annuity purchase like an investment and calculate an internal rate of return (IRR). For the first 15 years, the IRR is 0% because the annuity company simply hands you back your own money. If Thomas and Martha die after 16 years, the IRR would be 0.92%. If they live to age 85, after 23 years the IRR will finally have risen to 3.47%. If they both live to be 100, the IRR would still only be 5.57%. Even if the Jeffersons lived forever, the IRR couldn’t exceed 6% because they lost their original $500,000.

Third, immediate annuities are not indexed for inflation. Part of their appeal is having at least some stream of guaranteed spendable income, but guaranteed to buy what? This annuity quote is for a fixed payment of $30,000. The payment is fixed in dollars whose buying power diminishes by inflation every year.  According to the government consumer price index (CPI), $5,081 in 1970 had the same buying power as $30,000 today. Imagine thinking you had your future retirement needs guaranteed in 1970 by buying an immediate annuity paying $5,081. An annuity is supposed to be longevity insurance. But now at 104 years old, you are trying to live off a sixth of what you needed when you began your retirement.

The only real guarantee of an annuity is a diminishing lifestyle because of inflation. When we do financial planning for clients, we often use 4.5% as an average inflation rate. By the time Martha is 85 years old, inflation will have reduced the buying power of the annuity from $30,000 to less than $11,000.

Annuities offer too much income to spend early in retirement only to keep that number constant and offer too little later in life. This math error is part of their mistaken appeal to the public. We would suggest that the safe spending rate for a couple with $500,000 is only 4.17% at age 62. This would limit their annual safe spending to $20,850.  But, with an appropriate asset allocation and this rate of spending, the Jeffersons would have a good chance most years to enjoy an increase in their spending allowance greater than inflation as their assets appreciated. And any unused assets could be left as an inheritance for their heirs.

Finally, I’ve used the example of a 6% or $30,000 annuity, but the best quote I’ve seen lately for my sample couple was $27,569. And the quote for an annuity tied to the urban consumer version of the CPI index was for $15,814!

We don’t recommend an allocation to annuities for any portion of your portfolio. We believe an age-appropriate allocation to bonds provides a similar boost to the likelihood you will have sufficient assets in retirement. We suggest allocating five to seven years of safe spending in stable investments with the remainder in appreciating assets.

Coupled with staying within an age-appropriate safe spending rate, this strategy provides the best balance between sleeping well tonight and eating well in 10 years.

Please contact us if you would like to discuss this article or any other financial planning matter.

Mr. Nocera also stands out for his willingness to discuss the sorry state of his personal finances, a startling admission for a world-class financial journalist. With his sixtieth birthday approaching, he recently revealed to readers that his 401(k) is “in tatters.” Some of the culprits are familiar: A concentrated strategy during the technology boom put a big dent in his portfolio, and a divorce several years later inflicted similar damage. A third source of difficulty is harder to fathom—the decision to raid his 401(k) to fund a home remodeling project. Such behavior strikes us as the sort of short-term thinking journalists are so quick to condemn in the executive suite. Mr. Nocera acknowledges that good financial advisors provide sound advice regarding discipline and diversification, but he doesn’t appear to have consulted one.

Mr. Nocera found a sympathetic ear in Teresa Ghilarducci, a behavioral economist at The New School. She was not the least bit surprised by his experience—most humans, in her view, have neither the skill nor the emotional stability to be successful investors.  She finds the entire concept of a participant-driven 401(k) a “failed experiment.”  Mrs. Ghilarducci isn’t alone in her opinion.  As I write this, legislation is in the works (SB 1234) to be voted on that would enact a 3% elective tax (you can opt out) on private sector employee’s pay to fund a California state-managed pension fund.  In theory, this will help augment Social Security retirement benefits people.  This tale of woe also encouraged an investment manager at our mutual fund advisory firm, Dimensional Fund Advisors to write the following:

 I dug out twenty-three years’ worth of 401(k) statements and surveyed the results for the first time. As a thirty-nine-year-old research director at LPL Financial, I was late to the starting line for the retirement race. I filled out the enrollment forms and devoted about three minutes to the task of selecting my retirement plan vehicles. When I opened my first 401(k) statement in March 1990, it showed a whopping balance of $195.26 from investments in three Putnam Equity mutual funds—two US and one global. (Mr. Nocera says he began putting retirement money away in the late 1970s, so he had at least a ten-year head start.)

After joining Dimensional in early 1995, I liquidated the Putnam funds and placed the rollover balance in Dimensional’s 401(k). I don’t recall what my thinking was at the time, but with seven equity funds in my account rather than three, it seems plausible that I devoted more than three minutes to the portfolio construction decision. Maybe six.

Over the last twenty-three years I have occasionally been tempted to fiddle with the allocation scheme, usually after some big move in the markets up or down. But I am skeptical of my capacity for self-discipline. What if a tactical decision to underweight small stocks or overweight emerging markets turned out to be right? Would I be tempted to make an even bigger bet the next time? I could find myself on a slippery slope leading to a one-fund portfolio. My preferred strategy, as a result, is to do nothing. Some might argue I have taken this slothful approach to an extreme, having never added a new fund to the lineup (no Emerging Markets Value?!), never tweaked the portfolio weights, and never rebalanced. Call it the Rip Van Winkle strategy—when you get the urge to do something, take a nap.

From a humble beginning, my account has grown to a generous sum over the past twenty-three years, although it hasn’t always been smooth sailing. Using quarterly data, the overall value fell 12.8% during the technology stock meltdown (March 31, 2000–September 30, 2002) and suffered a thumping loss of 46.8% during the financial crisis (September 30, 2007–March 31, 2009), despite a stream of fresh contributions. But the recovery was dramatic as well—up 77.5% for the twelve months ending March 2010 and up another 23.5% for the subsequent year. The current balance exceeds the 2007 high water mark by a comfortable margin. This is not an exercise in self-congratulation, just an example of what anyone could have done by harnessing the forces of competitive markets.

Perhaps the 401(k), in its current form, is indeed a “failed experiment” for a substantial fraction of the workforce. Another interpretation is that the 401(k) was never intended as a centerpiece for retirement funding, and the enrollment process cries out for improvement. Participant outcomes might be greatly enhanced if choices were presented in a way that acknowledges persistent behavioral traits leading to poor decisions.

And when it comes to charting one’s financial future, it appears even journalists skillful enough to unravel complicated financial puzzles can benefit from an objective second opinion.

If lawmakers act now, they could bring the system into actuarial balance by: 1) increasing the combined payroll tax rate 2.61 percentage points, from 12.40% to 15.01% (note: transfers from the general Treasury make up this year’s temporary 2% reduction in the payroll tax); or 2) reducing scheduled benefits by 16.2%. The trustees generally state their reform suggestions as mathematical, actuarial solutions rather than the more comprehensive proposals that have been put forth by various lawmakers.

The trustees this year were a bit more forceful in saying that the system needs to be reformed sooner rather than later: “If lawmakers do not take substantial action for several years, then changes necessary to maintain Social Security solvency will be concentrated on fewer years and fewer generations. Lawmakers will have to make large and sudden changes if they defer action until the combined trust funds become exhausted in 2033.”

SSA Commissioner Michael Astrue warned the media prior to the report’s release about sensationalizing the results. He reminded reporters that the exhaustion of the trust fund does not mean Social Security benefits will stop. Payroll taxes will continue to be collected and will be sufficient to pay 75% of promised benefits. But alas, many in the media didn’t listen. Here’s how some news outlets reported the release of the Trustees Report:

• Social Security Fund: Cash Gone in 2033
• Social Security is Slipping Closer to Insolvency
• Social Security Trust Fund to Run Dry Sooner Than Anticipated
• Social Security’s Financial Health Worsens
• More Bad News on Social Security and Medicare Trust Funds
• Social Security: Time to Panic, No. Time to Act, Yes.
• Is Social Security really “exhausted?” Not at all

I have long maintained that Social Security’s finances should not influence clients’ claiming decisions. The trust fund will remain intact for many more years, and after it’s exhausted, payroll taxes will continue to be collected. Benefits for baby boomers are not in jeopardy.
Given the recent politicization of our government and the paralysis we’ve seen over budget negotiations, expiring tax provisions, and other important items Congress has failed to act on, I’m wondering if we should assume that no action will ever be taken on Social Security reform. Sometimes in financial planning we work with what we have rather than speculate on how tax and other laws might change in the future. I wonder if we should do that here. If so, you can expect full, promised benefits until 2033, but after that, benefits will decline by 25%.

So the question becomes this: When is the best time to claim Social Security if you know your benefits are going to drop by 25% in 2033? Just for fun, I ran this through our Social Security Benefits Calculator for a hypothetical 62-year-old maximum earner who has the option of claiming a reduced benefit of $1,880 now, or a delayed-enhanced benefit with COLAs of $4,127 at age 70. As it turns out, the breakeven age occurs in the year 2028 —when our hypothetical client is 78. After 2028 the later claiming scenario gains a greater edge. So the argument that it’s better to claim early because of Social Security’s deteriorating financial condition doesn’t hold water. Today’s 62-year-olds will be better off delaying benefits to age 70 if they think that they—or their surviving spouses—will live past age 78. That hasn’t changed.

I’ve heard some people say that they plan to claim at 62 in order to be “grandfathered.” While I wouldn’t put anything past Congress, especially if the situation becomes dire due to their extended inaction, I am quite sure any “grandfathering” would be based on age, not on whether or not a person had already started benefits. In the end, a client who claims early benefits based on this kind of speculation is running the risk that he will be stuck with a permanently reduced benefit. It’s our job to keep the discussion rational, to help you understand all options, and to help understand the long-term impact of their Social Security claiming decisions.

Hybrids have been around a long time, but there are particular influences on both the supply and demand fronts that are driving a renewed interest in these securities.

From a demand perspective, the volatility in equity markets and a lack of substantial capital gains in recent years have heightened the appetite among many investors, particularly the elderly, for what they see as steady, reliable income.

From the supply side, regulators have responded to the global financial crisis by imposing tougher requirements on the bonds that banks can count toward their regulatory capital. That is leading to an explosion of new types of hybrids in which investors carry greater risk than in the past.

In Australia alone in the space of a few days recently, hybrids totaling around $2 billion were announced by major financial firms, including Westpac, Colonial First State, and ANZ Banking Group. Also pushing out hybrids in recent months have been household names outside the banks like retailer Woolworths and gaming group Tabcorp.

In Asia, the Financial Times reports a surge in issuance of so-called contingent convertible bonds or “CoCos” by European banks. These are complex instruments that convert into shares when capital drops below a pre-defined level.

Now, hybrid securities are a perfectly legitimate way for companies to borrow money from investors. They combine features of debt and shares and often are able to be traded on a secondary market. They are also a legitimate source of returns for investors—provided they are aware of the risks they are taking.

The problem is that the complexity of hybrids is growing at a time when investors are seeking and valuing greater transparency, a point made by Australia’s corporate regulator in a recent warning to investors.

The Australian Securities and Investments Commission (ASIC) advised those retail investors contemplating hybrids and unsecured notes to compare offers, read and understand prospectuses, and pay particular attention to the risks.

“Retail investors may be attracted by the interest rates offered by household name companies and trusted brands, but hybrid securities should not be confused with government bonds or ‘vanilla’ corporate debt,” ASIC chairman Greg Medcraft said. “In some cases, investors are taking on equity-like risks but only receiving bond-like returns.”

In particular, Medcraft said, investors need to pay attention to terms and conditions that allow the issuer to exit the deal or suspend interest payments. As well, the regulator warned that in some cases hybrids are offering long-term maturity dates of several decades that may expire after the individual investor has died.

While plain-vanilla corporate bonds have set maturity dates, hybrids can have “call” dates—meaning repayment is at the issuer’s discretion. Many hybrid investors are still feeling the pain of that discovery after the events of 2008–09, when banks declined to redeem issues because they needed the capital to bolster their balance sheets.

So, ultimately, investors can find themselves with equity-like risk and bond-like returns. For those aware of those risks and clear about the conditions involved, that may still be OK. But for those who place a high priority on steady, predictable returns and/or capital security, hybrids can be a poor choice.

“The retail market buys the yield and doesn’t always have the ability to fully understand the risk,” one analyst told Bloomberg recently.

Interest rate offers of 7 or 8%—as we are seeing in Australia now—may look attractive. As always, though, investors would do better to keep their focus on cash flow rather than income. Making the latter requirement the key in choosing one asset over another means they can end up taking on more risk than they bargained for.

It’s an old story, but a familiar one.

Yet, the central bank confounded market expectations and kept rates on hold. The market reaction was dramatic. The Australian dollar took off like a rocket, hitting its highest levels in six months against the US dollar and rising on the cross rates. Shares eased and bond yields rose.

At this point, the very same economists who had carefully parsed the RBA’s language going into its decision proceeded to analyze in great detail the wording of the statement announcing that rates would stay where they were for another month.  Actually, there really wasn’t that much remarkable about what the RBA said.  Essentially, it had decided that, with economic growth close to its long-term trend and inflation on target, the RBA could afford to wait another month to see how events in Europe and elsewhere panned out.  Local bank economists immediately pushed out their expectations for the next policy easing to March.  Some had second thoughts altogether and decided the central bank might be done on interest rates for the foreseeable future.

For everyday investors, there are a few lessons out of this episode. The first is that there is very little evidence market professionals—including the ones closest to policymakers—are any better than anyone else in forecasting the prices of securities, commodities, interest rates, or currencies.  Last August, for instance, a global bond fund manager admitted he felt like “crying in his beer” over his call in March 2011 to dump almost all of his flagship fund’s US government bond holdings because interest rates were unsustainably low.

The second lesson is that trying to time markets—picking the turn in performance of bonds versus equities or government bonds versus corporate bonds or value stocks versus growth stocks—is a pretty tough job.  In fact, few (if any) people – even companies in existence only this very reason (forecasting) – seem to get it consistently right.  So many studies have shown that this is simply unsustainable, that it could fill a warehouse.

The third takeout is that it really doesn’t matter how strong you think the fundamental case is for an interest rate change or a lower currency or a higher stock price; events have a distinctive and unerring way of messing up your impeccable logic.  An example: In the US in February this year, strategists at some of the world’s biggest investment banks capitulated (sold stocks in order to not risk losing value) on their bearish forecasts after global stocks registered their best start to a year since 1994. In a summary of recent research, Bloomberg quoted strategists at several banks as admitting they had gotten their timing badly wrong.

The final message is that you don’t really need any of this fundamental analysis to build long-term wealth. Markets are unpredictable because news is unpredictable.  This means the best approach is to structure a diversified portfolio that is built according to your own investment goals and risk appetite, both across and within asset classes. Occasional rebalancing of the portfolio ensures you maintain an asset allocation consistent with your risk profile. The rest is all about discipline.

This may not be a particularly exciting investment story. But it’s one that works. And it doesn’t require you to make forecasts about interest rates, currencies, stock prices, or economies. As we have seen, there are some serious cracks in the crystal ball.

Modern Greece has traditionally been supported by three pillars. First is shipping. As a culture that is mostly coastal it makes sense they would be very good at sailing; however, in the age of modern transport and super container ships, Greece simply can’t compete, and most of its ship building industry has long ago left for greener pastures in places such as Norway, China or Korea. The second pillar is tourism and this continues to be an option, but tourism by itself cannot support a modern state. The final option and the one that the Greeks have gotten the most mileage out of is leveraging Greece’s position. Typically to allow some external power a means of battling somebody in Greece’s neighborhood. When Greece achieved independence in the early 1800’s that external power was the United Kingdom who used Greece as a foil against the Turks. Later, the Americans played a similar role supporting Greece against the Soviets. In both cases massive volumes of capital came in to support Greece. However, in the post-Cold War era Turkey is a member of NATO, and while the Greeks might not get along with the Turks, nobody is looking to use Greece as a military foil against them. Greece no longer has a regional foe that it shares with anyone else. The closest might be the Turks again, but only if the Turks miscalculate their ongoing relationship with Israel or Cyprus and miscalculate very very badly.

Bottom-line, the various supports that have allow the Greek state to exist since the 1820’s simply aren’t there anymore and so the path forward goes like this: Greece is not salvageable. Greece simply can’t compete unless it is being given a constant, steady supply of capital from abroad that it doesn’t necessarily have to pay back. And even if that could be restarted, Greece can not emerge from its own debt load. It is simply too large. Greece has to be kicked out of the eurozone if the euro is to survive, but between here and there, first, a firebreak fund. The EFSF expansion has to happen because if you cannot sequester the 280 billion euro of Greek government debt that exists outside of Greece, then you’re going to trigger a massive financial catastrophe that the eurozone simply can’t survive. And so to prepare for a Greek ejection, you have to prepare a fund that can handle three things more or less simultaneously. First, you need about 400 billion euro to firebreak Greece off from the rest of eurozone. Second, you need about 800 billion euro in order to prevent a wide-scale banking meltdown, because the day that Greece defaults on that debt, the day that it’s ejected from eurozone, there will be catastrophic banking collapses in Portugal, Italy, Spain and France, probably in that order.

Third, the markets will go wild and the state that is in the most danger of falling after Greece is Italy. Using the bailouts that have happened to date as a template, any bailout of Italy would have to provide enough financing to cover all Italian needs for three years. That comes out to about another 800 billion euro. So until the Europeans have 2 trillion euro in funding stashed away, they can’t kick Greece out of the system.