Calling a Super Bubble: Front Row With GMO's Jeremy Grantham
An honest and insightful video interview: Calling A Super Bubble: Front Row with Jeremy Grantham, co-founder and chief investment strategist at investment management firm Grantham, Mayo, & van Otterloo (GMO), headquartered in Boston, MA. This clip is a little over 37 minutes:
If someone offered you a guaranteed 3.5% return for 20 years, you’d probably be tempted either to sign up right away or call the cops to arrest the guy for securities fraud.
But the guy offering this deal is Uncle Sam, and you should neither barge in nor run away screaming. You should look closer, because this offer from the U.S. Treasury is legitimate and highly attractive, although it isn’t right for everyone.
The government guarantees that if you hold Series EE savings bonds for 20 years, you will get back twice the amount of money you put in. That translates to a return averaging a whisker more than 3.5% annually. A 20-year U.S. Treasury bond, meanwhile, yields about 2.1%.
In today’s yield-starved world, a 3.5% return sounds almost like manna from heaven. Is there a catch? Of course there is — several, in fact.
First, and worst, that 3.5% return isn’t protected against inflation. And you will earn that rate only if you hold on for the full 20 years; until then, interest accrues only at the current rate of 0.1% annually.
So the savings bond is comparable to a zero-coupon bond, which pays no current income but distributes all its accrued interest in a lump sum when it matures.
You can redeem, or cash out, only through the U.S. Department of the Treasury’s TreasuryDirect.gov website. You generally can’t redeem savings bonds the first year you own them and, if you cash out within the first five years, you will forfeit the last three months of interest. (That’s not much of a penalty at this point, though, at 0.025%.)
Finally, interest rates could take off between now and 2036, making that 3.5% look a lot less appealing.
You can’t use savings bonds for all your fixed-income needs, because they aren’t liquid or inflation-protected. And you can invest only $10,000 in EE savings bonds per Social Security number each year; if you’re married, you and your spouse together can buy $20,000. For wealthy investors, that is chicken feed.
But savings bonds can still make a powerful addition to a portfolio.
“I think this is one place where a small investor has a big advantage over the institutions,” says Robert Axelrod, a 42-year-old psychiatrist in Longview, Wash., who has been investing in the bonds for the past three years.
To get a 3.5% yield, an institutional investor has to buy bonds that aren’t issued by the U.S. Treasury — and to incur the risk of not getting paid back, the risk of severe loss if interest rates go up, or both.
For an individual, says Dr. Axelrod, the rate on EE savings bonds is “so much better than anything else out there, pretty much risk-free, that it’s unbeatable.”
The savings bonds are “roll-your-own annuities,” says Mel Lindauer, a private investor in Daytona Beach Shores, Fla., who moderates Bogleheads.org, a non-profit website that provides investment education and analysis.
Better yet, they are annuities that come without any worry that the issuer could go bust or that your heirs won’t inherit the money. And after year five, you can redeem without penalty.
David Loeb, a nurse in St. Louis, puts $6,000 annually into EE savings bonds. He knows that will turn into $12,000 two decades later, supplementing his Social Security and the pension he will get from the hospital where he works.
“I like the idea of using it to cover a small portion of my future needs,” he says, “and it helps me stomach the fears elsewhere.”
An ideal use, says Mr. Lindauer, is to help you to defer taking Social Security. A rule of thumb is that each year you delay retirement and the onset of your Social Security payments will increase your benefits by 8%. If you buy a $10,000 savings bond each year starting at age 42, you assure yourself $20,000 in annual income beginning at age 62. That can help tide you over until you reach 70, when Social Security payments max out.
Furthermore, you may use EE savings bonds to pay for higher-education costs, tax-free, if you earn no more than the limits then in force, currently about $92,000 if you’re single and $145,000 if you’re married. Be sure the bond is registered in one or both of the parents’ names, not the child’s name. It can pay for college costs only in the same tax year in which it is redeemed.
You can elect to pay tax on the accrued income as you go, but many investors wait until it’s distributed at maturity 20 years after purchase.
The income is free of state and local income tax, although it is federally taxable at ordinary income rates.
“There ain’t no such thing as a free lunch,” the old saying goes. The 3.5% return on EE savings bonds “might not be a free lunch,” says Mr. Lindauer, “but it’s at least dessert.”
Life Insurance: Do You Really Know What You Need? Term vs. Whole
Some people are plain grumpy. Teaching a night course on Personal Finance at a local college painted my memory full of stupidity from one specific student. My other students were great and as a class we learned a great deal. Even Ms. Grumpy would eventually come around.
It just so happened I was much younger than Ms. Grumpy and this was my first adult teaching experience. I kept my cool and told the class from day one, "We all have something to learn, and if you can save yourself money from this, I have done my job." The big break came in about week 5, when we were on the topic of life insurance. I started class off with a short little introductory lecture on Term Life Insurance vs. Whole Life Insurance.
Each time in your life requires different life insurance strategies; and knowing these strategies will save you money on the policy you purchase.
Term and Whole Life Insurance both cover expenses in case of death.
Whole Life Insurance costs more because it is also a way for you to invest your money.
Term Life Insurance is for a set period of years and with the lower premiums, you can invest your money your way.
Whole life insurance makes insurance companies money, that is why many insurance salesman push Whole Life Insurance. Term life insurance is cheaper and does provide for your dependents in the case of your death.
There were a lot of glossed over faces looking at me, when Ms. Grumpy said,"I have a lot of money, I am divorced, my kids are out of the house, I have Whole Life Insurance, and I know how to invest myself." "So I should get Term Life Insurance." I replied, "If you weigh the price and length of the polices and if you have enough discipline to invest the remaining money, then, yes."
I could tell she was mad, but luckily this time it wasn't at me, but her Insurance company who had been selling here Whole Life Insurance for the last 4 years, when she could have the same protection under a Term Life Insurance Policy. It was a great moment, Ms. Grumpy in her own way had learned something from the new teacher.
Saving money in our budgets adds up in many different ways. Depending on you life situation, re-evaluating your Life Insurance needs could be one way to free up some extra cash for investing or paying down debt, while still giving you the protection for yourself or your family.
I wish the story of Ms. Grumpy would have a happy financial ending, but when we got to the investing unit, finding out she had all her eggs in Corporate Bonds because they paid a 8% interest rate, would not let that happen. She said here is where all my money is and it is safe. That will be for our next story. Life Insurance is a necessary evil. Finding the right coverage can save you money and allow you to invest the way you see fit. Keep in mind, Insurance Companies make a lot of money, but as a consumer you decide how much of yours they will get.
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