2013 Trends

a worth reading article from washington post. pay attention to item 8 in red.

10 trends to watch in

finance for 2013

By Barry Ritholtz, Published: January 13

It’s a winter ritual: Seers, prognosticators and other gurus tell us which stocks to buy for the year ahead, where they think the Dow will close in December and which momentous events will take place.

History teaches us that the majority of these charlatans will be wrong, and the ones who get it right are mostly lucky. If you have been reading my column for any length of time, you know to ignore them. (See 2011’s Forecaster Folly.)

When it comes to predictions, I do the following: Note down the forecasts made this month and look back at them in a year. Repeat every year. I use my desktop calendar and an e-mail Web service called Followupthen.com to keep me on track. I started doing this almost a decade ago, and I found it terribly liberating. It will be always be instructive, and, as with the class of 2008 forecasters, occasionally hilarious.

Doing this taught me to ignore the forecasts I see or read, as well as to keep the piehole in the middle of my face closed whenever anyone asks me for a forecast. I defer, saying, “I have no idea. No one does.” It is fun to watch the TV anchors’ heads spin like Linda Blair’s in “The Exorcist.”

A better use of your time? Discern what’s happening here and now. It’s been my experience that investors spend so much time worrying about what might come next that they miss what just happened.

To that end, let’s look at what’s driving the world of finance. Major shifts have already taken place, and if you understand what they are, it will help your financial planning. From my perspective, these are the more significant trends that will probably continue into 2013:

1. ETFs are eating everything.

The revenge of John Bogle continues apace. As investors figure out that they are not good at stock-picking or managing trades, they have also learned that most professionals are not much better. Paying high mutual fund expenses to a manager who underperforms a benchmark makes little sense.

This realization has led to the rise of inexpensive exchange-traded funds and indices. This “ETFication” has obvious advantages: low costs, transparency, one-click decision-making.

ETFs are accessible through the stock market for easier execution, with no minimum investment required. Even bond giant Pimco recognized this trend and created an ETF version of Bill Gross’s flagship vehicle, the Total Return Fund. Pimco actually charged more for the ETF than its mutual fund to prevent an exodus of investors from the world’s largest bond fund. This will eventually shift.

Note that Bloomberg, Yahoo Finance and Morningstar all have robust ETF sites that are free (Morningstar charges for some data).

2. The financial sector continues to shrink; advisers continue to leave large firms for independents.

Since the financial crisis, Wall Street has shrunk considerably. According to the Bureau of Labor Statistics, there were about 7.76 million people employed in finance and insurance as of November. That’s down almost 10 percent from the pre-crisis 2007 peak of about 8.4 million workers.

Its more than the crisis: Technology and productivity gains make it easier to operate with fewer

workers. My office is a perfect example: Twenty years ago, it would have taken a huge staff to manage the assets we run, handle all the administrative functions, take care of the monthly reporting and manage compliance. What would have taken two dozen people in the 1980s is easily managed by five people today. Oh, and everyone in the office is required to do research or publish commentary. That would have been impossible 30 years ago.

Over the past 40 years, the financial sector over-expanded. Much of what is happening on Wall

Street now reflects the process of reversing that excess capacity.

3. Increased pressure on fees and commissions.

This trend predates ETFs and Wall Street shrinkage; highly paid people are being replaced with cheap software and online services. This is likely to continue for the foreseeable future.

This is a very good thing for investors: Academic studies have shown that fees are a drag on returns, and lowering these costs is a risk-free way to improve your returns.

4. Hedge fund troubles.

This was not a stellar year for the hedge fund industry. First, there was the issue of underperformance, with the hedgies getting stomped — they underperformed markets by 15 percent. Although being beaten by the market is part of the business, it must be tough explaining to clients why an $8 ETF outperformed a service for which they were being charged 2 percent plus 20 percent of the profit. Then there were the legal troubles and insidertrading indictments. A few high-profile closings also hurt the industry’s reputation.

What the industry has going for it is human nature (also known as “greed”). At the first sign of outperformance, the formerly skittish client base will come stampeding back.

5. Dispersal of financial news.

As the finance industry gets smaller, the media that covers it is also shrinking. If investors are moving away from stock-picking, there is less of a need for the chattering classes to tell you all about it. That is reflected in a variety of ways: Cable television channel CNBC’s ratings plummeted, and Dow Jones shuttered the 20-year-old magazine SmartMoney.

At the same time, alternative sources of news are rising. Blogs continue to be a source of intelligent analysis and commentary; Twitter has become the new tape/newswire. And start-ups such as StockTwits allow traders and investors to share ideas in real time. (Disclosure: I am an investor in StockTwits.)

6. Demographics are a huge driver.

I am not in the camp that believes demographics are the be-all-end-all, but one should not underestimate how significant a factor they are. The aging of the baby boomers is affecting housing (they are downsizing), job creation (they are working longer), investment planning (they have been heavy bond buyers) and generational wealth transfer (it’s a-comin’).

The pig is still moving through the python, and the ramifications will be felt for years.

7. The death of buy-and-hold has been greatly exaggerated.

Investors have a tendency to take the wrong lesson from recent experiences, and this one is no different.

Buy-and-hold investors don’t have a lot to show since the market peak — 2000 or 2007 — but that is more about valuation than anything else.

Since the punditocracy declared the end of buy-and-hold investing, something interesting has happened: Ten-year buy-and-hold returns became half-decent. Time has moved today’s 10-year-return start date near the post-2003 dot-com bust lows (March 2003). And three-year returns have outperformed both tactical portfolios and global macro as an investment style.

The lesson here is not that buy-and-hold is dead. Rather, it’s that when you begin investing and the valuation you pay matter a great deal to your returns.

8. What hyperinflation?

The deficit scolds have been warning for years that hyperinflation is imminent. I have been hearing these ominous warnings my entire adult life. “This is unsustainable! Inflation is about to explode!” But inflation has been rather tame, and we are not experiencing anything remotely like hyperinflation.

They keep using that word “unsustainable,” but with all due respect to Inigo Montoya, I do not think that word means what they think it means.

9. The bond bull market has ended/interest rates are spiking.

Similar to what we keep hearing about hyperinflation, we have also been told that the bond market’s bull run is over and that rates are about to go much higher. Indeed, we have been hearing this for nearly a decade.

If you make the same prediction annually, you will eventually be right. Of course, that prediction will be of absolutely no value to anyone. I hereby declare that after three years of the same wrong forecast, you lose your pundit’s license. After five years, you must shut it — forever.

10. The Fed still holds the system together.

This is the one trend that rules them all: The Fed has held the system together with a combination of ultra-low rates and massive liquidity injections known as QE, or quantitative easing.

Without this extraordinary intervention, the United States would probably be in a deep recession, home foreclosures would be considerably higher and major money-center banks would either be begging for another bailout or declaring bankruptcy.

The announcement of QE4 means that this trend is likely to continue for the foreseeable future — and perhaps even further.

You may not have thought all that deeply about these trends, if at all. But I can assure you that understanding these forces is much more productive than reading someone else’s guesses as to what may or may not be true one year from now.

Ritholtz is chief executive of FusionIQ, a quantitative research firm. He is the author of “Bailout Nation” and runs a finance blog, the Big Picture. On Twitter: @Ritholtz.

After Housing And The Stock Market, Is Higher Education The Next Bubble To Burst?

much earlier in this blog, there are discussions about how much worth is a degree these days and i am not a fond fan of higher education anymore unless in very specific profession.

now there are further evidence that a lot of the grads cannot even payoff their own college related debt based on their earnings - almost life long though if at age 60,

an article from forbes.

 

Few industries today have a worse business model than higher learning institutions.
Simply put, colleges are slowly pricing themselves out of existence. Tuition has consistently increased faster than inflation and household income, to the point that it is now four times more expensive to attend college than it was a generation ago. The result is that the average college senior carries $25,000 in student loans at graduations. The debt can follow students around for years, sometimes to the end of time, literally: $36 billion in loan debt is held by people over 60-years old!
Colleges are now faced with the challenge to the long held belief that a degree is worth the student loan burden because it leads to a lifetime of good paying jobs. However, the recession and the tepid recovery made make this belief more questionable as new evidence points to a much lower lifetime earnings. As a result, last year a whopping 41% of all colleges saw their enrollment fall.
Faced with declining enrollment, many colleges across the country assume that they have a marketing problem and are hiring CMOs to build their brands. However, the lack of branding or coordinating the admissions offices’ sales pitch is not the reason for a shrinking student body. While whitewashing substantive and largely self-inflicted problems with advertising campaigns may be an appealing quick fix, transforming the business model itself would be a better approach – better for the colleges, for students, for the nation as a whole in the long run.
Schools suffer from an administrative bloat, as they are expanding their bureaucracies significantly faster than the numbers of instructors and researchers.
While higher education institutions benefit from hundreds of billions in budget increases every year, most of it goes toward benefiting administrators, not educators. Since the early 1990’s,  spending on administration per student increased by 66%, while instructional spending per student rose by 39%.
A big reason that colleges get away with an inefficient model that favors administrators over faculty is that students pay only a fraction of the expense of running a school, despite the oversized increases in tuition. The lion’s share of university resources comes from the federal and state governments, as well as private gifts. These subsidies for higher education fuel the expansion of bureaucracy because the college model lacks transparency.
In fact, the 2010 Goldwater Institute study stated, “universities have in recent years vastly expanded their administrative bureaucracies, while in some cases actually shrinking the numbers of professors.” Less than 40% of students are actually taught by tenured professors, while the majority is taught by assistants, instructors, and adjuncts,  directly contradicting the core mission of any university.
With the federal government and states looking for ways to trim their budgets, appropriations to colleges and universities are likely to be scaled back as students and institutions sort through what they want from a university education and how much is it worth. The higher education bubble has been inflating for decades, propagating the myth that heavy student debt burden is justified by high paying jobs. But costs can’t outpace household income forever, and the debt based model is not sustainable as long as administration cost grows exponentially.
Higher education institutions now face pressures similar to those that reshaped other inefficient industries, like the car industry or the airline. Soon it will be colleges day of reckoning  as they have to balance the reality of high costs, debt burden and lower degree value.

Rich managers, poor clients

why you should be careful choosing hedge funds to invest.

an article from economist.

THE masters of the universe have been humbled. Over the past ten years, hedge-fund managers have underperformed not just the stockmarket, but inflation as well. After fees, investors in the average hedge fund have received a return of just 17% (see article). Where should investors now look for zippier returns?

The mediocrity of the hedgies’ recent performance is in part the result of the industry’s massive growth. Whereas in the past it was plausible that hotshots like George Soros could spot market anomalies, several thousand managers in an industry with $2 trillion of assets under management are very unlikely all to be able to earn spectacular returns. There will always be a few managers who do well, of course, but there is no reliable way of identifying them in advance, and past performance is a poor guide to future returns. John Paulson, the manager who made a fortune out of the subprime-mortgage crisis, has performed dismally since the start of 2011.

But these vehicles pose a more fundamental problem for investors. Managers of hedge funds charge a lot more than those who run conventional mutual funds, and many times more than those who offer funds that track stockmarket indices. Hedge-fund fees are usually 2% every year, plus 20% of all returns over a set level. It is, as a result, easy to think of people who have become billionaires by managing hedge funds; it is far harder to think of any of their clients who have got as rich. Fund management has become like films or professional sport: a much more lucrative business for the insiders than for those who stump up the cash to pay them.

The lowdown

No one can know for certain what future investment returns will be. If the writers at The Economist were sure of the answer, they would be lounging about on their luxury yachts instead of sweating over split infinitives. But the signs are that returns are likely to be decidedly modest. The best estimate for the future return on cash and government bonds is the current yield and, in most developed markets, that yield is at, or close to, an all-time low.

Equities might well perform rather better than bonds over the coming decade, but caution is in order there too. The reason that rates and bond yields are so low is that central banks remain extremely worried about the economic outlook. If the regulators are right to be troubled, then it will be hard for corporate profits to grow in coming years, especially in countries (such as America) where profit margins are already at multi-decade highs. And if central banks’ worries are misplaced, that means they have got monetary policy wrong, so there will be other problems for companies, such as inflation.

Perversely, it has been the poor performance of equities and bonds over the past decade that has maintained the allure of hedge funds for institutional investors such as pension funds. Investors have been hoping that the industry will act as a deus ex machina and help them reduce the stubborn deficits in many pension funds. It has not—and probably will not.

If the outlook for returns in both equities and bonds is subdued, investors should concentrate on the one factor they can control: costs. When hedge funds were returning 10-30% a year in the 1990s, their fees made less of a dent in clients’ returns than they do now. If they are the investment equivalent of Harrods, investors now need to shop in the likes of Walmart or Lidl: exchange-traded funds (ETFs) and index-trackers.

Even these come with a health warning. Some cheap funds are cheaper than others: in Britain, for example, HSBC’s equity tracker fund has an expense ratio of 0.27% a year, whereas Virgin’s equivalent fund charges a full percentage point. Some ETFs do not invest in the securities they claim to track, but in derivatives contracts with a bank counterparty. That adds an extra layer of risk.

The best way for investors to play the odds is to choose low-cost ETFs or trackers and diversify geographically and across asset classes. It is not an exciting strategy. It will not bring anything to brag about at dinner parties. But it will mean that more of their money stays in their own pockets, and less goes to buy other people’s mansions in Mayfair and the Hamptons.