Weekend Musings: Language and $2 million

Since most of the MacroBusiness crew are under the weather, I thought I’d stick my oar in this weekend with some quiet musings. Two things to consider in this post: the notion of sound economic language, and how would you allocate $2 million for your retirement?

Language is for the Birds
Houses and Holes recently created an MacroBusiness official glossary (although I still wait for a permalinked separate page that we can update!) A recent article by Business Insider, with a great Australian spin by Marcus Padley at Business Day covers the other side – mainstream economic terms – or “standard phrasebook to reach for when you don’t know what’s going on”.

I may be guilty of using some of these terms (e.g “bargain hunters bidding up the market mid way through a correction”, or selling into strength – although this one is my core profit taking strategy when I’m trading) and sometimes I need to say something when I do my “Trading Day” daily stock market reports (although I try to be agnostic).

“Cash on the sidelines” Myth
Alan Kohler recently wrote about the end of QE2 and the inevitable bailout of Greece last week. An interesting article, but his last comment had me scratching my head:

The global bear market is far from over but China is undergoing the greatest industrialisation the world has ever seen. Australia is going to get very rich indeed but the investment markets will underperform.

And then sometime in the next 12 months, Australians will wake up to the greatest buying opportunity they have ever seen because the world will realise what we have, and so will we. The cash that has been on the sidelines for two years will flood back into assets.

Readers not familiar with arithmetic need to know that when a share is bought it requires cash (or margin), and whoever sold the stock gets the same amount of cash in return. Hence, no change in cash. Hence, no cash on sidelines – ever. For a better take on the Cash on Sidelines myth and reasoning behind QE, here’s Mish Shedlock and John Hussman explaining “The Iron Law of Equilibrium”.

Trying to explain what is mainly random forces amongst the irrational behaviour of financial markets with pithy one-liners is the bread and butter of financial media and you’ve probably got so used to hearing them everyday (at least on the nightly news).

So MB readers, if you can recall any other corkers (even from us) we’d like to hear them.

Here’s the Official MacroBusiness Glossary (OMG):

Politico-housing complex The great public/private partnership of the Australian housing quango that has virtually nothing in common with either capitalism or a “market”.

Invisopower! The myterious fog that surrounds the details of Australian banks’ offshore borrowing. A cloak deployed by regulators.

Bullhawk A half housing bull, half interest rate hawk. Examples include Christopher Joye, Adam Carr and Paul Bloxham

Disleveraging The idea that falling credit growth can be sustained forever without ever tipping into outright debt-deflation.

Futureboom! The concept of an ever expanding future mining boom that gets bigger the worse immediate data becomes.

Boganomics The strange nexus between anti-comptitive corporations and gullible but patriotic battlers.

Gittins! The Fairfax commentator with whom I have most in common yet cannot abide owing to an appalling generational gulf.

Business Hysteria My pet name for Business Spectator when it gets righteous in defence of vested interests.

MacroBation: furtive adoption of views expressed at Macrobusiness by MSM (via 3d1k)

And here’s an unofficial list of readers suggestions:

Cashtration (n.): The act of buying a house, which renders the subject financially impotent for an indefinite period of time. (h/t The Nod)
Intaxicaton: Euphoria at getting a tax refund, which lasts until you realise it was your money to start with. (h/t The Nod)
Bubbleblind: A condition where the subject is of sound mind, and with functioning senses, but suffers from a complete inability to make out bubbles in his or her environment. (h/t jousting sticks)
Ruddprime: Transfer of peak housing prices to low LVR first home buyers (h/t Dennis)
Judas-Journo: Acts of deceit and betrayal by a financial non-MB journalist misleading the sheeple towards financial Armageddon. (h/t The Nod)
Sinocism: having a skeptical view of China’s economy. (h/t 3d1k)

$2 million for Retirement
On the back of my Asset Allocation for Superannuation articles (that I’m slowly building up into the definitive “this is how to do it” post, to be published next week), I thought I’d pose a couple interesting questions for you:

Q1: How would you allocate $2 million in your super, given you’ve just retired (at age 65), you don’t want to manage the capital yourself, but you want to have some input? Assume you are married/defacto (whatever the PC term is these days), house is paid off, but no other assets.

Q2: How did I come up with the figure of $2 million (in 2011 dollars)? Is this a likely figure or pie in the sky for most?

Q3: Is this “comfortably” enough for retirement? Have you thought about “what is enough”? Try this calculator and see if it helps.

Give it some thought – I’d like to hear your answers (regardless of your age or situation) and have a good weekend, whilst the MB Team keep up the cold-flu tablets and chicken soup.

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  1. Wouldn’t the cash contributions which pour into super funds each week represent “cash on the sidelines” if the managers don’t actually deploy/invest this money in the market?

  2. You can still have cash on the sidelines in the sense that, fewer market participants would mean that prices were less given to remaining irrationally high. But you’d think that no matter what the participation level, markets would always eventually seek fair value?

    Re : allocation. I have no idea. I’m way too young and inexperienced for that. I guess I’d have a core in phys gold (bought long ago hopefully, or on a significant pullback.). Maybe 20-30%. Conservative stocks, no bonds. And the rest in rolling term deposits. Maybe also a little to actively trade on if I saw opportunities to short, catch bounces etc and I felt equipped to do so. Maybe a position in housing if prices return to fair value too…?

    No idea really to be honest. The markets dont look good whichever way I cut it..

  3. $2 million in a SMSF….only need to draw an income, no tax to pay….fixed interest @ 6%…live on half and roll the balance into the capital…This would provide a roughly stable capital sum and a real income of $60k annually in perpetuity….That would be quite sweet…

    • Hey David ,
      Man,have I got a SMSF..for you..check this out..
      A Lady in my area ,just made $30 million on her investment in this…
      Six-Must-Sum-Five,(SMSF)…Plan A) apparently it’s
      part of the ‘TowerTall’ corporation…I know,this sounds to good to be true,and
      You probably realize that this is a once in a lifetime chance to get returns as large as this …..So,Please send as may $2million deposits by this Friday,… for me to invest…I’ll get the big returns,and also..try and get
      a post-card to ya..
      about that 6%… plan B,
      cheers Mate…JR

  4. Who are you kidding with the two million dollar figure? Doesn’t the average Australian have something like $70 000 in super and nothing much else apart from a very big mortgage they’d be lucky to pay off before retirement? Excuse me if I puke the way I do when I read the money section sob stories in fairfax newspapers.

  5. Here are some variations on a few of the glossary definitions in the base note…

    Chump-priming (v.): Stimulating the economy via FHB grants and stamp duty concessions, thus luring first home buyers into taking on large high-LVR mortgages to buy houses at grossly inflated prices.

    Cloak of spinvisibility (n.): The mysterious fog deployed by regulators to obscure the details of Australian banks’ offshore borrowing.

    KRudditworthiness (n.): The attribute enjoyed by financial institutions that have been able to borrow offshore cheaply, courtesy of the Federal government’s Wholesale Funding Guarantee.

    Spinicism (n.): The ability, unfortunately too rare, to detect and disregard the self-serving propaganda spouted by politicians, businessmen and the media.

  6. Sandgroper Sceptic

    First $2m is a great result. It takes Centrelink out of our calculations for a long time which is always a good thing!

    Is the house owned suitable for long term retirement? I will assume so but this is a key thing that must be addressed. At some point there will be a sale of this residence and the retirees will move to another abode, hopefully cheaper/smaller or perhaps into assisted living. If for example we would free up $300k when moving to a more suitable abode later then that is pretty sizeable sum that should be factored into our plan.

    Also how is our retiree’s health? Again I assume good health no major issues, but if there is a history of early death then that should be considered. No point investing for the long term if the retirees might only have five years to live. Assume healthy and will live to a ripe old age!

    Do the retirees have any desire to set aside funds for future generations/causes? My baby boomer relatives are fond of the idea of leaving us with a bill for their funeral, but many people want to leave something for their loved ones. In the event of a catastrophic event assume that they will give over the balance to any loved ones.

    What are the immediate short term cash needs? New car, big holiday etc. Take any money for this out of our plans now and assume it is already spent.

    My goal would be to give the retirees maximum income/funds whilst they are able to enjoy it after taking into account the factors above.

    An SMSF is the best option. If they need help then we would hire it.

    Cash $200k. Transaction account and linked online saving account to earn maximum interest. This represents money available at any time. Draw cash out as we need it.

    Term Deposits. $1.2m in TDs. $100,000 in each one and spread across different banks and maturities. I would stagger them so that a TD is roughly maturing every 1-2 months of the year.

    Gold/Precious Metals. $300k. This is our anti-inflation hedge, our disaster fund and also represents another liquid asset.

    Shares. $300k. Whilst this is the risky asset, the franked dividends on offer can help boost our return and if equity markets surprise us then we might get some capital growth. Obviously seeking a range of different industries.

    65-74 – if we take our minimum 5% required of our balance out, $100,000, the fund balance should be flat or growing slightly, depending upon those franked dividends and share price movements.

    75-79 – 6% min drawdowns. Likely our fund would now be below its $2m starting balance.

    80-84 – 7% our house might need to be sold here, so that might provide a little extra cash.

    85+ this is 20 years in the future but we should still have a very sizeable balance of the fund left.

    Every year rebalance the fund as necessary.

    Clearly we could opt for a more aggressive drawdown strategy, it depends upon the retiree’s wishes ultimately.

  7. Sceptic_also_sandgroper

    Great topic. Having a good chuckle over the definitions.

    How about a ‘real life’ scenario.

    Being guilty of ‘analysis paralysis’ we (empty nesters) have SMSF in cash close to $1M + house – debt free. Age 57.

    I need direction, but being a sceptic, who can I trust!!! 🙂

    Oh wise and beneficent MB contributors. HELP ME

  8. ceteris paribus

    Just a wild guess- but 2 million on top of unmortgaged house/no debts probably = top 3-4% households in the land = very select crowd.

    I am sure that there would be net wealth research estimates out there to check.

  9. BBB ratings. Every sell side proposition or arguement must pass through this analytic lense.

    Bullshit Baffles Brains. BBB.

    In 21st Century economics, finance, banking and politics, complexity = BBB.

    Never mind the bollox here’s the BS.

  10. How to invest $2million

    Well the average Bogan would first want to invest in all the latest stuff as they have stopped working and need a few of the essentials
    HSV comma with all the bells and whistles (say $100k)
    invest in the latest Toyota Landcruiser ($100k) plus a gigantic Caravan (another $100k)as long it has a washing machine for the missus
    lots of camping crap including tinny (another $50k)
    so we now have spent $350k on the retirement essentials
    better put some more money into the house, a few renovations ($150k)because we cannot afford it later when we are on the pension
    overseas holidays we need $50k a year for 10 years ($500k)
    $200k in that share that the bloke form the local rsl recommended (cannot lose there)
    now the rest we’ll stick in a term deposit with the local credit union to get the free holiday
    we should be able to spend it all by the time we are 75 and then go on the pension to get all the benefits.
    We paid taxes all of our life, time for the Govt to look after us in our old age!!!

  11. Q1: How would you allocate $2 million in your super

    Outright owning an block of units would definitely be a consideration if the yield was right (prices low). Easily turned into leverage if the market is booming (if that ever happens again).
    It’s appealing in terms of control of the asset, simplicity and consistent returns if nothing else.
    This option becomes less appealing the more you learn about other markets though.. a highly skilled investor would probably not do this. It’s just not liquid enough to maximise returns.

    Q2: How did I come up with the figure of $2 million (in 2011 dollars)? Is this a likely figure or pie in the sky for most?

    Sounds about a bare minimum if you want to earn a “decent” income and maintain your asset base in real terms.

    However, definitely out of reach for most.

    Q3: Is this “comfortably” enough for retirement? Have you thought about “what is enough”? Try this calculator and see if it helps.

    Very subjective but not my idea of comfortable. And Westpac’s is way off the mark – that might as well be the poverty line. I think it’s just important to have as much as possible for retirement – work hard now, relax later. At a minimum 200k for a couple in today’s values, and enough left over to still be investing.

    Have readers considered what happens if very exclusive advanced medical treatments become available? You want a big pot of money for this. For example, would you pay a few million to feel like 60 at 80? Screw the kids, of course you would.