Tulip bulbs or bubblegum?

It may be a decent time to recall Tulip Bulb Mania from Dutch history of the 1600’s. When the tulip contract market became primary to the overall Dutch tulip industry, limitless differentiations such as coloration, size and supposed rarity began to dictate price variations in tulip bulb contract purchases. While growing popularity and demand were contributing factors to increasing prices, “flippers” drove reasonable prices to skyrocketing levels. By the time tulip prices peaked in February, 1637, one single tulip bulb demanded ten times a normal worker’s annual income.

As more and more people insisted on participating in rising prices, tulip contracts even began to be traded on the London Stock Exchange and in Paris, too.  Eventually, defaults on contracts began the bursting of the bubble and markets plunged, resulting in an economic depression that lasted years for the Dutch.  A few people made a lot of money during the rise of tulip prices. But, like any other subsequent bubble-mania, the last-ones-in experienced financial losses that impacted the rest of their lives.

American history books record a couple of eras not unlike Dutch Tulip mania: the 1929 stock market mania-crash and the Dot.com bubble of the late 1990’s. Human behavior is the driving force of manias like these. Hopes of financial profits or locking in prices before inflation erodes purchasing power are both good reasons to pay over-market prices for a product. However, greed sometimes overcomes reason and causes people to pay unreasonable prices for some goods.  Just as fear of further loss may cause a person to sell a product at a less than reasonable price, greed may cause the converse behavior.

The truth is that no one can predict the size of a bubble before it explodes. Only AFTER it bursts are we able to see that it had grown too large. All of us can remember the aftermath of sticky bubblegum on our faces after we had pushed just one more breath of air into the magnificent bubble on our lips. The consequence was messy…ick!  And after every burst bubble,  we promised  to stop just a breath short of the explosion the next time.

Today’s drinking fountain discussions include these subjects: seemingly endless supply of new global investors, companies-countries whose growth appears limitless, impossible-to-comprehend computer trading activities, far above-average recent portfolio gains, apparent impossibility of normal market corrections, inconceivable size of financial product universe. …

Is it possible to be satisfied BEFORE the last breath is blown into our next bubblegum bubble?

Today, you need to be a TWENTYmillionaire!

I spent most of my life dreaming of being a millionaire. When I was a boy,  everyone my age was mesmerized by the television show, the MILLIONAIRE. A rich guy walked to the door of a financially struggling family and, POOF! That person was now a millionaire. None of us were foolish enough to believe that could ever actually happen, but many of us did spend the next 50+ years trying to become one.

In the last few decades, I wore out many hand-held calculators by building future value computations that resulted in my becoming a millionaire. In quiet conversations with my colleagues and best friends, we discussed the value of that million dollars and we all fantasized about the security it would provide us in our retirement. In the mid-1980’s, a million dollars would provide ample income if invested in a risk-free treasury bond. Furthermore, a person did not need to go very far out with maturities to get a reasonable yield. Let’s review the 30 year history of the 2 year Treasury Note yields and subsequent income on a ~$1,000,000 investment.

                1984:  ~12%        $120,000 @ year income

                2007: ~4.5%          $45,000 @ year income

                2013: ~0.22%           $2,200 @ year income

It becomes more mind-boggling when you do some simple reverse math and calculate the amount necessary to invest today in a two year treasury note in order to produce the same income as a one million dollar two year treasury note yielded in 1984: >~$54,545,545! We could include inflation as a factor included in establishing the value of $120,000 of income today as compared to 30 years ago.  If we assumed an average annual inflation of 4% for the past 30 years, our calculations would reveal that it would be necessary to have ~$3,500,000 spinning off 12% income to provide similar purchasing power as the same $1,000,000 did in 1984.

But, ladies & gentlemen, this is NOT $54 million. What happened? Today, a meager millionaire  investing  $1,000,000 invested in a two year treasury note is required to “step out of the box” and do something entirely different with his-her money to be able to expect a reasonable retirement income. Looking back just a few years, at 2007, we can see that a person could still get ~$45,000 annual income from a two year riskless treasury note. Again using reverse math…today, a person needs ~$20,000,000 invested in an identical two year treasury note to provide the same $45,000 annual income.

Differences in riskless rates of return that are this magnificent are producing at least four behavior choices for retirees and persons nearing retirement: (1) continue to use riskless investments  and consequently spend additional principle each year to maintain the same life style. (2) continue to use riskless investments, but protect principle by reducing life style costs, (3) continue to use riskless investments, but working longer or returning to the work force to provide additional monies for retirement costs, or (4) change investment philosophy and now utilize investments that have market risk in order to provide retirement income for now or later.

Decide what your risk tolerance is BEFORE changing your investment philosophy. Make sure to understand that systemic (market) risk of vehicles like common equities not only have the benefit of rising in value, but they may also decrease in value for reasons unimaginable today…terrorist bombs, CEO fraud, geological or meteorological event, legislative or regulatory changes, etc. Know that providing for a riskless retirement is a lot more difficult today than it was just a few years ago.

And good luck becoming a TWENTYmillionaire!