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On the Housing Market:Getting rid of risk is the biggest risk. It seems like every time something bad happens in the economy we decide we need policies to keep it from ever happening again. And sometimes that is wise, say if a bad recession or stock market crash reveals some crazy distortion or externality that needs to be eliminated. But often, we tend to try to eliminate any bad thing.
On "nudging" the workforce into Target Date Funds:Now, the market is weird—sales down, prices up, and frozen in some places. And I think it will be screwy for a while because no one who got a cheap mortgage can afford to move. And the MBS market will be weird because no one will refinance either, so the duration of these securities is totally unpredictable.
and,
the Fed buying the entire MBS market in the middle of a housing boom?! That’s crazy, and it did not eliminate risk—it only created more.
On Nepotism:nudging did have a big impact on investing. Before nudging, people kept their portfolio allocations pretty constant as they aged or kept their money in cash. But automatically enrolling people in target date funds (TDFs) means more people now own stock and move into bonds as they age.
Great. But the problem with TDFs is they don’t help people spend in retirement, and that is the whole point. And while I agree people should move into bonds as they age—because of lifecycle finance, not because a shorter time in markets is riskier—TDFs move people into the wrong kind of bonds. They are mostly in short-duration bonds (less than five years), while the duration of your future spending at retirement is more like 12 years. This leaves people exposed to interest rate, market, and inflation risks.
Nudging is not enough; you need good defaults too. And in a changing-rate, high-inflation environment, we’ll start to see the costs of TDFs’ shortcomings.
Article Link:I meet a lot of people who do some unusual jobs: Sex workers, bounty hunters, mob hitmen, horse inseminators, pensions actuaries—you name it. And the first thing I always ask them is how they got into this line of work. And nine times out of 10, I hear, “My father.”
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It’s also amusing to me she’s fine with the government stepping in to address the “big risks” like a “crazy” stock market crash but seems to take issue with addressing millions of workers problems with retirement savings. Socialism for the rich in the form of a stock market bailout is OK in 2020, but everything else for workers is too much nanny state. Most Americans either have little stock exposure or none at all because they have little left over after they pay their bills. So why should the government bail the stock market out? In general, Main Street not Wall Street needs the bailouts. The two are interconnected to a degree, but not nearly as much in 2022 as they were in 1929.
While I agree defaulting to short term bonds as target funds do when someone retires is overly simplistic, I imagine many workers are thankful they owned the short rather than long-term bonds right now. Also, short term bonds adjust to inflation and interest rate increases more quickly than long.
Preventing workers from “borrowing” against their 401-K during their working years might be a start. Some retire with little if any left invested for growth. Perhaps limiting withdrawals to a set percentage or an amount that rises incrementally during retirement would help. As far as target-date funds go … the jury is still out on whether they’re the best approach as the default option. I know a few persons in their mid-60s who have already exhausted 100% of the money they contributed during 25-30 year careers. Suddenly they see their rent, fuel and food costs rising sharply. It’s really sad to witness. Maybe our politicians could stop throwing brickbats at one another long enough to address problems like this one.
>> I imagine many workers are thankful they owned the short rather than long-term bonds right now. Also, short term bonds adjust to inflation and interest rate increases more quickly than long.
uh
Possibly individual bonds, if they knew what to do.
But if they were in, say, BSV the last 2y/1y/ytd, or even 3y, or had given their money to supposedly smart bond people like the managers of FTBFX, PONAX, and/or DODIX, no, I don't think they are so thankful.
@Bee I know. I was being a bit facetious myself regarding fatherly talks on careers. But I don't like generalizing on these sorts of topics much.
I'll just stay away from the political perspectives on this thread (I doubt you are going to sway me and I doubt I'm going to sway you)...but will say this.
Wouldn't the better way to do this be to in addition to Soc Sec be to implement a kind of forced savings program thru an uncapped "I-Bond" like program and for cripes sake why is there an income cap on SSN? the SSN tax should go all the way up. Even I say that and believe you me, I don't care for all these taxes.
I think Lewis B in the past has stated that there is NO guarantee that on a go forward basis the stonk market will provide the returns many need to retire in resonable comfort.
Also, the guy who runs Standpoint BLNDX stated something on one of his podcasts that the stock market is NOT a utility, it is only there to provide for capital formation/funding to grow companies, it is NOT there to provide you with a smooth 8% a year...he mentioned that commodities are only there to provide a hedge for commercial hedgers. I'm paraphrasing so don't take my interpretation to seriously.
We're all maybe kind of giddy with the double up volume and the bounce....but who knows the whammo could be around the corner, no one knows...it is kind of crazy to put your life savings on the line to a great extent....but to the victors belong the spoils...
Good Luck and Good Health to ALL,
Baseball Fan
The fund has a larger allocation to regular intermediate term bond funds like Vanguard Total Bond Market II Index, which has not faired as well. But if you looked at any target-date fund, I would wager that the short-term bond funds in it have faired better than the intermediate and long-term ones, even if it was more focused on corporate debt than TIPS. That is a natural effect from duration and interest rate risk in a rising rate environment. Investors want that duration to be as short as possible so long as rates are rising. You want to go long once the rate increases are over. But the discussion I'm having is about target date funds specifically.
She may be more famous now for having written a rather panned and seemingly obvious book An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk, which among many other things explains that street whores make way more than whorehouse employees, trading wages for risk reduction.
A Frank Stein wrote [grammar-edited]:
a primer on basic risk and reward analysis in economics. Most concepts, like the diversification of risk, the difference between systematic and idiosyncratic risk, the difference between hedging and insurance, will not be surprising even to those reading regular business news, but the treat here is the little stories Schrager tells to illustrate these ideas.
Schrager shows how brothels pay their women less money, almost 50% less, than those women would earn on the streets, but these women trade off the income for risk reduction. The johns pay more for the safe experience though (up to 300% more, partially because both they and the women are affected by tax rates, which cuts wages and raises prices). She shows how horse-raising encourages high-risk, high-reward studs like War Front, who got $250,000 a mating session, or almost $25 million a year, even though the market leads to many failures and mass inbreeding (almost all thoroughbreds are descended from a single male in the early 1700s, the Darley Arabian. Another stud in the 1980s, Northern Dancer, sired most all of the next generation). She explains why paparazzi like Santiago Baez tried to organize "photogs" in the gold-rush era of the early 2000s, with each taking some percentage of the high-income photographs, but she also explains why incentives led most of these photogs to cheat and why the alliances fell apart. Etc.
Not here in Ecuador, where ladies of the night work the streets when they can't get employment in the clubs. They make less due to both lower rates and fewer clients. Though here, they take their clients to rooms (including panic buttons) provided by their union, so they have a somewhat similar degree of safety. And like all people here, they get free health care, so health risks are reduced as well.
How do I know? A few days ago we paid professionals (including a union officer) for their time. (I never thought I'd use that line so soon.)