Financial Planning 101

PART I: INTRODUCTION

There are lies, damn lies and then there are statistics!

- Mark Twain -

Have you noticed that what you pay at the pump or the check-out counter seems to have little correlation with government inflation figures? Does it seem that prices for daily necessities are going up at a rate far greater than 4%/year? Well, the following will attempt to explain why your experience is far different than what the government is telling us. Over the past 20 plus years, the government has made several “adjustments” to the primary measurement of inflation known as the Consumer Price Index (CPI). In this article, I will explain what those adjustments are and why they have resulted in the significant understatement of the CPI. If I were a lawyer (which I’m not) and if I were prosecuting the government, the first steps I would need to take is to establish that the government and more specifically the Bureau of Labor Statistics (BLS) has both the means and motive to manipulate inflation statistics.

By proceeding, I acknowledge that I have read and understood the Disclaimer and Copyright Statements .

By proceeding, I acknowledge that I have read and understood the Disclaimer and Copyright Statements .

[Not too long ago, I met with a prospective client who was considering investing a rather sizable chunk of his retirement into an equity indexed annuity. I wrote the following summary for him and I thought I'd share with others who might be considering the same.] I took this post down so that i could submit the article to an on-line magazine where it would get disseminated to more people. I'll provide a link to the article once it is up.

By proceeding, I acknowledge that I have read and understood the Disclaimer and Copyright Statements . (This is a long one, but well worth it.) For quite some time, I have argued that the stock market is relatively expensive by historical standards and will therefore experience below average returns for the next decade. Recently, I developed a new and very simplistic means of calculating expected stock market returns in light of valuation. I’ll refer to it as The Bizarro Rule of 72. I’m assuming that you know of the Rule of 72. If not, it goes like this. If you want know how long it will take for you to achieve a 100% return on your capital given a specific interest rate, simply divide 72 by the interest rate. It’s real easy. Say you have a bond that pays 8%. Divide 72 by 8 and you get 9, therefore, you’ll receive interest equal to your original principal in a span of 9 years. At an interest rate of 12%, it will take you 6 years and so on. For whatever reason, people in my profession love to quote the Rule of 72 but to be honest, I find it mundane. So, rather than be conventional, I’d like to examine the inverse of the Rule of 72. In honor of Seinfeld, I’ll refer to it as The Bizarro Rule of 72. Rather than starting with an assumed rate of return for stocks to figure out when I’ll get all my money back, I’m going to figure out when I’ll get all my money back to calculate an assumed rate of return for the market. You follow?

[Not too long ago, I met with a prospective client who was considering investing a rather sizable chunk of his retirement into an equity indexed annuity. I wrote the following summary for him and I thought I'd share with others who might be considering the same.] There are a lot of really dumb things you can do with your money and at the top of the list is buying an equity indexed annuity. Notice how I didn’t say “invest” in an equity indexed annuity.