Time to Rebalance Your Portfolio Again (2009-09-21)

Time to Rebalance Your Portfolio Again

(2009-09-21) by David John Marotta

The S&P 500 over the past six months is up over 40%. You have had smooth sailing and are beginning to feel comfortable again. Don't. It's time to tack once more and rebalance your accounts.

Studies show that rebalancing your portfolio can boost your returns by as much as 1.6% annually. This rebalancing bonus is measurable but by no means guaranteed. It works best in choppy volatile markets with asset classes that don't move in sync with one another.

It is always a contrarian move, expecting the wind to change. But when it does, rebalancing can fill your sails again. However if the market continues moving in the same direction, there can be a rebalancing penalty. The past year has been a little of both.

During the 12 months ending August 31, 2009, the S&P lost 41.28% for the first 6 months and then gained 40.52% for the last 6 months to end down 18.25%. Remember that when the market loses 41%, it must earn more than that to return to its starting value. During that same time, the Barclays Aggregate Bond Index appreciated 7.70%. Averaging these two returns together gives a return of down 5.28%.

Imagine your portfolio as a catamaran with twin hulls. One pontoon is invested in the S&P 500 and the other in the bond index.

At the end of February at the bottom of the markets, your sailboat was down 19.00% and one pontoon was riding way out of the water. You have 64% invested in bonds and only 36% left in stocks. Without rebalancing, your portfolio has grown more conservative just when a more aggressive stance would be advantageous. By the end of the year your portfolio is only 5.28% underwater, and the imbalance is less pronounced at 57/43.

During the first six months, the markets were dropping precipitously and the stock pontoon was getting lighter by the day. Rebalancing means moving some funds from the relatively heavier bond side to the lighter stock side now riding high out of the water. As long as the stock side continues to lighten, moving more money in hurts returns. Rebalancing also seemed like madness, at least until the end of February when the markets bottomed.

Then after February, the markets began to rise and the bond side became comparatively lighter. Rebalancing in rising markets means you can begin to take some of those profits back off the table. Continually taking money out of equities while they get heavier again dampens returns slightly.

Yet because the markets changed course at least once at the end of February, rebalancing tended to improve returns. Doing so every month boosted them by a meager 0.15%. Had there been more reversals as a mix of positive and negative months, this rebalancing bonus would have been higher.

Monthly rebalancing isn't usually the best strategy. It is better to let the trend continue for a while and rebalance less frequently when the market is making new highs or lows.

If you were brilliant and rebalanced your portfolio after six months just once at the end of February, you only lost 1.08%. This move would have resulted in a 4.20% bonus over the negative 5.28% return of a buy-and-hold strategy.

The worst strategy would have been getting out of the markets near the bottom to cut your losses, the equivalent of dropping your sails and turning into the wind. Getting out of the markets at the end of February would have resulted in locking in a 15.98% loss. Even getting out at the end of November would have meant an 8.98% loss.

Rebalancing requires discipline. You set a target asset allocation for your investments and then periodically buy and sell different investments to stay focused on your objective. Without rebalancing, those categories that do well may continue to grow as a percentage of your portfolio until they significantly underperform the markets. The ones that do the best often bubble and finally burst. Rebalancing avoids this needless anguish.

Portfolio construction begins with the most basic allocation between investments that offer a greater chance of appreciation (stocks) and those that provide portfolio stability (bonds). Decisions made at this level are the most critical in determining the course of your portfolio.

Even if you are creating a very aggressive portfolio, including some fixed-income investments actually increases returns. This strategy can keep your portfolio from capsizing. Stable investments provide some cash on the sidelines to buy stocks after a market correction, which both boosts as well as evens out your investment returns. Thanks to the effect of compounding, smoother returns produce better returns.

Periodic rebalancing is the simplest and most common method. Waiting for an asset category to exceed some threshold and then bringing the allocation back within some tolerances seems to produce slightly better returns and lower volatility. Although different ways of rebalancing can produce somewhat variable results, committing to a regular rebalancing plan is more important than the method you use.

Portfolios naturally grow out of balance as the wind and waves buffet your investments. Doing nothing risks keeling too much as one pontoon grows inordinately heavy and the other light. This hands-off stance risks capsizing an otherwise brilliant investment strategy. So given everything that has occurred in the markets, now is a good time to rebalance your portfolio.

from http://www.emarotta.com/article.php?ID=355

The Case Against Centralized Health Care (2009-09-14)

The Case Against Centralized Health Care

(2009-09-14) by David John Marotta

Many Americans think centralized planning could fix U.S. health care. They believe industry greed and profits are at the root of the problems. And they believe that altruistic commonsense reforms would result in lower costs, better management, less waste and universal coverage. They are dangerously wrong.

Imagine you are appointed the czar of a nationalized health-care plan and given absolute authority. You, being you, are idealistic and unselfish. Your only goal is to solve this political conundrum and have history laud you as a great servant of the people. Instead, you are doomed to be remembered as one of the worst of America's leaders.

Simply by taking on the job you are accepting responsibility for 17% of the country's gross domestic product. You must make decisions for the widely divergent ideals and values of every person living in the United States.

One of your first edicts might be to make health insurance mandatory. But a mandate forces your subjects to buy a specific set of services they may not want. It requires them to do so by law with full penalties for not complying.

Those conscripted to buy health-care insurance will do so but with great resentment. Nearly all of them will pay more than the benefit they receive. They will be poorer for having submitted. That's how insurance works.

Additionally, compliance won't be 100%. The more comprehensive the coverage you demand, the greater incentive you give to insubordination. Many will revolt. They will avoid agencies that might ask to see their papers. You will need to punish some harshly or the insurrection will spread. You jail a few rebels for health insurance evasion to deter resistance.

Inconceivably, some low-income families won't register for coverage even though it's free. They won't or can't fill out the required paperwork. Other renegades will evade notice until they have a serious illness. When they are caught needing coverage, you will have to decide if you will show mercy.

The inconsistency of harshly punishing those who refused coverage they did not need and then coddling those who presume the state's leniency will provoke a cynical rallying cry against your regime.

Nicholas the Bloody is off to a bad start, and you haven't even defined what insurance meets your mandate. A token million-dollar deductible is the lightest burden of tribute but hardly worth levying. Your palace will be surrounded by torches and pitchforks, each allied with a different disease or treatment. The rallying cries will be deafening. Sycophants will mob you.

Those who suffer from a disease are obvious poster children. But specialists too will seek to affirm their disciplines. Manufacturers will sell testing equipment. Pharmaceutical companies will prescribe regimens. Being included will be worth millions. Court intrigue and petty politics will surround each decision from the throne.

You will have to determine whether the peasants suffering with mental illness or substance abuse are most worthy of care. And once you ascertain your priorities, you cannot permit any exceptions. Essential resources cannot be diverted. Those whose illness isn't included will simply have to pay into the system for others to benefit.

Advocates of abortion, nutritional counseling, dentistry, orthodontics, chiropractic, psychotherapy, the manufacturer of Viagra--each is asking for your blessing.

Tens of thousands can be served for only pennies a day. And as your dynasty tries to insure all of public life, the realm of your control spreads to all aspects of life. The serfs lose their freedom to support the rising prices. Discontent spreads.

But as health czar you are all-powerful and will not tolerate skyrocketing prices. So you order price controls. Instead of psychotherapists being free to charge $150 per hour, for example, you cap their pay at $69. But short of coercion, how will you maintain such an ironclad grip on prices?

You could make people pay out of pocket for costs over $69. But if such stingy reimbursement solved the problem, why not simply set it at $29? Limiting reimbursement only means you have failed to provide sufficient coverage. You can't let coverage escape to the highest bidder. Therefore you must make it illegal to pay more than the reimbursement rate of $69 an hour.

Of course, sovereigns can no more change supply and demand than they can alter gravity. Demand at $150 an hour kept every counselor employed. When you cap their pay, two things happen. First, more patients are willing to pay $69 than $150 an hour, especially when the $69 is fully covered by their insurance. Demand soars.

Second, fewer people than before are willing to work as a counselor at $69 an hour. So the supply of effective therapists dwindles sharply. Fewer professionals are trying to service more patients. You institute rationing. You decide who gets counseling and who does not. Some are denied even if they are willing to pay 10 times the insurance reimbursement. Your draconian authoritarianism is seen as evil, heartless tyranny.

Fortunately, economic gravity meets you halfway. The free market also works to determine the quality of service affordable at $69 an hour. Green cards are given to foreign-born counselors. Video links provide counselor-in-a-box services in India to handle the demand at a reduced quality and cost. A black market develops in cash for counseling.

Although you can't control the black market, you do have complete control over the costs of coverage. The insurance companies can only charge more for insurance on the elderly if you allow it. You will have to decide if you will authorize actuarial underwriting. If you permit health-care insurance to be sold based on the actual cost for a demographic group, what criteria will you use?

It is often said that requiring young healthy people to get health insurance will lower the costs for the rest of us, but only if we don't allow actuarial underwriting. If those who are young and healthy pay based on their youth and health, then including them in the pool won't change the costs for the elderly. Only if you gouge the young and healthy can you reduce costs for those who are older and more infirm.

Once again the AARP and other lobbies whose support props up your regime will be subsidized, this time at the expense of overcharging the young and healthy who have less discretionary income.

After the criterion of age, will you charge more for those who are promiscuous? Smokers? Obese? Addicted to drugs? In their childbearing years?

To whatever extent you don't allow actuarial underwriting, the market will self-select, endangering some insurance companies or coverage. Forcing insurance companies to underwrite everyone in a geographic region at the same price punishes those with healthy lifestyles. This technique of requiring level premiums within a given geographic area causes a host of side effects, especially in the case where physically moving their residence could save a young healthy family thousands of dollars.

My series on the economics of health care has garnered some very negative responses. Simply allowing people as much free choice as possible is characterized as evil. Moral outrage has justified despotic edicts masquerading as good intentions. Such divine anointing has no place in a free America.

"Of all tyrannies a tyranny sincerely exercised for the good of its victim may be the most oppressive," wrote C.S. Lewis. "Those who torment us for our own good will torment us without end for they do so with the approval of their own conscience."

Only with free-market capitalism do individuals have the liberty to manage their own affairs free from the barricades and threats of the state. No decision is forced. In contrast, every law regarding health care that Congress passes will cordon off possible exchanges of value that would benefit both parties. Good intentions may delude you to equate collectivism with ethical outcomes. But sometimes simply wielding centralized power and forcing people against their desires is in itself immoral. We don't need a repressive health-care regime in America. We need to govern less.

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See also:

1. Health Care: Avoiding a Civil War over Health Care
   
   

2. Health Care: More Profitable Health Care Is the Solution
   
   

3. Health Care: A Compromise to Achieve Universal Coverage
   
   

4. Health Care: The Case Against Centralized Health Care

from http://www.emarotta.com/article.php?ID=354

A Compromise to Achieve Universal Coverage (2009-09-07)

A Compromise to Achieve Universal Coverage

(2009-09-07) by David John Marotta

Many people support the ideal of universal health care insurance coverage. The utopian heart beats strong and steady. But once the incision is made, there is no turning back. And without a clear understanding of economics, our experimental treatment may kill Uncle Sam.

The knee-jerk reaction of liberals to the rubber hammer of health care is the simplistic mantra "Everyone should be covered" or "The government should pay for everyone." Whether 46 million are uninsured or just one individual, anything less than universal coverage is simply unacceptable to them.

Conservatives, in contrast, whittle the number down. About 6.4 million people are on Medicaid or SCHIP (State Children's Health Insurance Program) but tell the census taker they are uninsured. Another 4.3 million are eligible and would be automatically enrolled after visiting a clinic or emergency room. Both groups are protected from risk and do not need more coverage.

Another 9.3 million are not American citizens. The law currently covers them for emergency care while they are in the United States. Debate is ongoing whether they should qualify for full medical insurance even if they are undocumented and pay no taxes.

Another 10.1 million have incomes more than triple the federal poverty level. Even people at the poverty level live better than the average American did in 1960 and more comfortably than 90% of the world today. For a family of four, three times the poverty level is $66,150.

About 5 million are healthy adults with no dependent children between 18 and 34. They have ruled out health insurance coverage as too expensive. The current proposals limit how much insurers can set their premiums based on age. The limit is two times, which discriminates against younger adults. Nothing makes sense about charging a 19-year-old half as much as a 91-year-old. Well-intentioned statism steals from struggling young people and lines the coffers of the wealthy AARP lobby.

So we are left with 10.6 million uninsured U.S. citizens with children who live three times below the poverty level—for example, a family of four earning less than $66,150 a year.

These are the heart-wrenching stories. Imagine a young middle-class family without health insurance whose child suddenly needs tens or even hundreds of thousands of dollars of medical care. They can't qualify for assistance, but their son or daughter's future depends on getting expensive treatments immediately. That's the poster child for universal coverage.

The compromise for conservatives is to agree as a society that we can afford to make catastrophic coverage mandatory. Americans are generally compassionate and will try to pay after the fact. But if America's generosity insulates people from this risk, they won't feel the need to buy insurance. So in fairness everyone must be required to buy coverage ahead of time.

The compromise for liberals is to agree that we are not going to provide an entitlement program for the first aspirin purchased. We are building a safety net, not a hammock.

Insurance only makes sense for extremely expensive and unlikely scenarios. It is never advisable for everyday events.

Here is the perfect analogy: compare insurance that tries to cover the first dollar of health care to the idea of grocery store insurance.

Imagine the average family of four spends $100 a week on groceries, $25 per person. Now think about implementing universal grocery insurance for everyone.

There is no way weekly premiums would be less than $25 per person. They would have to cover the cost of insurance administration and reimbursement. At checkout you would be obliged to show your card and have your insurance numbers recorded. Each item would need to be coded to qualify for reimbursement. Shaving cream would be disallowed. Organic vegetables would only be reimbursed at the generic rate. A dietician would have to certify the tuna is for human, not feline consumption.

Coverage for a week's worth of groceries would quickly rise from $100 to $200 a week. Then $300. Then $500. Soon many people couldn't afford grocery coverage and would drop out of the system. They would have to grow their own vegetables and raise chickens. Those who paid in cash would subsidize the collection costs of those with insurance.

Pressure would increase to lower grocery costs. The government would implement price controls. But you can't reduce costs simply by refusing to pay. Shortages and rationing would ensue.

Those who regularly ate steak would be denied. Families who normally made do with hamburger would start eating the maximum reimbursable amount of filet mignon. Vegetarians would get the meat anyway and trade it for organic food on the black market. Parents of children with allergies would demand expensive gluten-free options. Grocery fraud would be rampant.

Grocery stores would no longer be able to price items. "It depends," clerks would answer. "Ask your insurance company." Shoppers wouldn't care as long as lobster was covered once a quarter.

Older women who ate sparingly would subsidize teenage boys. The obese would take advantage of items that were unlimited allowances. All of the restraint imposed by economic forces would be lost.

Clearly, insurance never works for frequent events with moderate costs. But unfortunately it typifies the style of government-imposed health insurance on the industry. Hundreds of regular expenses are required by law. Each one comes with a nominal copayment that fails to deter its use.

Insurance should be used to limit catastrophic risk, not to pool everyday expenses. Affordable medical insurance should have a high deductible. Then out-of-pocket expenses below the deductible would provide sufficient negative feedback to prevent skyrocketing insurance costs. We have just such an economic trial right now that appears very promising.

If you support universal coverage, consider Health Savings Accounts (HSAs). Thus far, the results of HSAs are surprising and may actually be a miracle cure for America's health-care crisis.

As long as funds are saved and spent on qualified medical expenses, all contributions, capital gains and withdrawals related to an HSA remain untaxed. And HSAs come complete with debit cards and checks.

To protect you against catastrophic medical expenses, HSAs are coupled with a High Deductible Health Plan (HDHP), a minimum of $1,150 for individuals and $2,300 for families. Once the deductible is met, HSA-eligible HDHP plans cover 100% of most medical expenses.

Of course, these deductibles are significant. The minimum deductible for a family is $2,300; the maximum is $11,600. That's a lot of money for a struggling family, but it isn't crippling. People hemorrhaging hundreds of thousands of dollars won't mind losing a few pints of blood instead. They will consider themselves blessed.

Utopian liberals are willing to sacrifice the negative feedback of the first dollar coming out of pocket to fund that dollar for the truly needy. This is madness. Don't break the system for the 80% of Americans who can afford to self-insure the deductible.

Utopians also suggest that automatically paying for routine health maintenance reduces the costs of health care. But annual checkups still cost more than they save. And if they are cost effective, let the insurance companies offer discounts on the cost of the HDHP if patients pay out of pocket for annual checkups. The less government tries to make those decisions, the better.

The good news is that HSA-eligible HDHP premiums are considerably less expensive than the cost of a traditional medical insurance plan. If you want universal coverage, demand Health Savings Accounts with high deductibles. Let's agree we can solve the problem without a grand government takeover of health care.

from http://www.emarotta.com/article.php?ID=353