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Your Roadmap to Becoming a Multi-Millionaire

Becoming a multi-millionaire is a realistic goal, especially for recent college graduates. In fact, they only need to do one thing – save. If 20-somethings save consistently, start saving early and invest it in the markets, there is a good chance that by the time they retire they will have over a million dollars.

Maybe you got a late start in saving for retirement. It can still be a realistic goal to achieve.

What you need is a roadmap and a savings plan.

The following article on the Motley Fool has that road map all set for you – using your age and a hypothetical rate of return, you can see how much you need to save and invest each month to retire with $2 million.

Class of 2016, Here’s How You Can Become a Multi-Millionaire

If you’re stuck, send us a note and we can help.

Is Fair Value Obsolete?

The Fair Value concept holds that stocks, and the market in aggregate, have a value based on past, current, and future estimates of earnings. To oversimplify, when you buy a stock, you buy a piece of a business. The questions to ask when buying a stock are what has the business earned, and what is the business expected to earn in the future? The stock’s fair value is then determined by the current and expected earnings. This is measured by the Price/Earnings (P/E) ratio.

For the S&P 500, which consists mostly of the country’s 500 largest corporations, the average historic P/E ratio has been about 15 times its GAAP (see previous entry) earnings. But in the last 20 years or so, the P/E ratio has started to vary wildly, reaching extremes in 2000 and 2007. Today it is 24 times its GAAP earnings. The S&P 500’s price is overvalued compared to what Fair Value would suggest.

Is the concept of Fair Value obsolete? Why is the market’s P/E ratio significantly higher than the historic average? Is it that our government now has a policy of supporting the stock and bond markets? Is it that the introduction of new computerized trading programs by hedge funds has raised the level of Fair Value?

To return to Fair Value’s historic average either stock prices must retreat or corporate earnings must rise. Currently, the market is up while our economy has not yet delivered strong corporate earnings. Hopefully, earnings will rise rather than stock prices dropping because over the long run, I suggest Fair Value will ultimately prevail.

Forced Retirement Savings Coming to Connecticut

Connecticut is becoming the second state in the country to mandate retirement savings. The controversial bill will force most employers (not currently offering a retirement plan) to offer automatic enrollment for employees in a state sponsored plan. Details and specifics are still emerging. If you’re interested in reading more, here are three articles that cover the topic:

Hartford Courant
CT News Junkie
CT Mirror

2015, Just The Numbers

Earnings for the 500  largest U.S. companies; the S&P 500 are reported in two ways. First is reported or GAAP (Generally Accepted Accounting Principles) earnings. This number is what is reported to the SEC. The second is operating or non-GAAP earnings.  Companies often report both operating or non-GAAP earnings along with required GAAP earnings.  The non-GAAP earnings are what analysts follow because it adjusts for one-time events and is said to more actually reflect their business.

Reported or GAAP earning for 2015 were about $87 (the total of all 500 companies in the index), depending on how and when they were measured. This compares to about $102 for 2014, and about $100 for 2013.

Operating or non-GAAP earning for 2015 were about $100, depending on how and when they were measured. This compares to about $113  for 2014, and about $107 for 2013.

In 2015, the major  U.S. corporations earned substantially less. Much, but not all, of this was due to the decline in the price of oil hurting the energy companies.

The S&P 500 started the year at 2,059 and closed at 2,044 paying out an approximate 2.15% dividend for a total return of about 1.4%.

Negative Interest Rates: A Grand Experiment

Frustrated by the fact that your savings account isn’t paying you any interest? It could be worse. Imagine putting $10,000 into your savings account, getting no interest and you have to pay the bank $60 per year in addition to any bank fees. No longer does the bank pay you, rather you pay the bank for the privilege of lending them your money.

It’s called negative interest rates and the concept is catching on in other parts of the world as an extreme attempt to grow their economy. Over 7 trillion dollars worth of government bonds have been sold worldwide with yields below zero. This is a new tool for central banks to shore up their struggling economy. The problem is that it’s unproven. There aren’t many, if any, cases of negative interest rates being used by world economies up until now. No one knows what the unintended consequences will be from using this kind of policy. At $7 trillion, this is one giant global experiment!

These aren’t small emerging markets experimenting with this policy. Denmark, Switzerland, Sweden, and Japan currently have negative interest rates. So does the European Central Bank. Janet Yellen, the US Fed Chair, has not ruled out the use of negative interest rates in the future and several other countries are in the process of making interest rates negative.

So what’s the appeal? Imagine being paid to borrow money. Would you rather pay $10,000 upfront for a new roof or pay $9,500 for a new roof spread over several years? If you thought 0% loans to buy a new car was enticing, imagine how many cars would be sold if it became cheaper to take out a loan than to pay upfront. The purpose is to punish savers and encourage spending and investing, by both consumers and businesses

A grand and global experiment is occurring right now, one that every economist in the world is trying to understand.