Public Pensions and the 8% Myth

City and State governments and  the unions representing their employees pretty much agree: on average, pension fund investments ought to earn close to 8 percent a year. The reality? Returns are closer to 5 percent – even lower for pension funds that go for broke with hedge funds, private equity or real estate.

Why don't plan sponsors set realistic investment targets? Because hard-pressed taxpayers then would be required to contribute more money to the plans. Why don't employee unions insist on realism? Because they fear benefits would be cut to avoid a taxpayer rebellion.

We bring up this impasse for two reasons. First, it's an excuse to quote New York City's mayor:

The actuary [for the city's five pension funds] is supposedly going to lower the assumed reinvestment rate from an absolutely hysterical, laughable 8 percent to a totally indefensible 7 or 7.5 percent. If I can give you one piece of financial advice: If somebody offers you a guaranteed 7 percent on your money for the rest of your life, you take it and just make sure the guy’s name is not Madoff.

Second, now and then every investor needs a reminder that wanting a stated rate of return bears no relation whatsoever to getting that rate of return. "If wishes were horses," as my mother used to tell me, "beggars would ride."

Jackie O's Charitable Lead Trust

Merrill Anderson's trust marketing publications covered Jackie O's charitable lead trust in some detail when the news of it broke.   We called it an astute strategy for disinheriting the IRS.  However, the trust was never funded, and I never heard the rest of the story.

According to Conrad Teitell, as reported in Trust & Estates, the trust was a fallback provision.  Most of the wealth was already in a revocable living trust, whose remaindermen were Carolyn and John, Mrs. Onassis' children.  The property would have passed to the the CLAT only in the event that the children disclaimed. They decided against that, based upon the facts and family circumstances at her death.

When Private Investors Met the Space Age

On May 26 astronauts at the International Space Station unloaded cargo from the Dragon capsule, a privately-owned spaceship. Here's a timely ad from the brokerage firm Francis I. duPont. It appeared in the July 16, 1966, issue of The New Yorker.

"Spaceology is the name of the game today," duPont proclaims. With the onset of commercial space flights, brokers are probably thinking the same way this year, although the term spaceology has not caught on.

In 1966 few realized how communications satellites would transform how people lived and worked. Live television from distant lands was the first electronic marvel. In 1969 a Foreign Affairs article observed

Only seven years [after the first transatlantic television broadcast] nearly half the land mass of the world was interlaced with communications facilities that made it possible for virtually all television viewers everywhere to watch live pictures from the surface of the moon. We have progressed to the point where a worldwide communications system is in full operation….

Foreign Affairs  also foresaw the first seeds of the next marvel: "data transmission, from computer to computer." As this 1961 City (Citi) Bank ad indicates, well-to-do travelers used to be a natural market for trustworthy investment help. Investors needed someone back home to keep an eye on their wealth.

These days, all they need is an iPhone.

Even so, a trustworthy investment adviser is a most desirable luxury. How can substantial investors enjoy traipsing around the Pacific Rim if they also have to worry about restructuring their portfolios to withstand a financial meltdown in Europe?

The other side of the JPMorgan trade

The NYTimes seems unaware that this very interesting article makes a compelling case for relying upon the free market for regulating big banks instead of those folks at the SEC, who did, after all, completely miss the Madoff fiasco. 

The better course, in my humble opinion, would be a return to the division between investment and commercial banking of the Glass-Steagall days.  That way, taxpayers don't provide implicit guarantees for investment bank gambles.

Investing Is Like Gardening

Gardeners have to learn patience to wait out long winters. They must prune deadwood to promote new growth. And the sooner one starts  gardening or investing, the sooner one sees worthwhile results. Those are lessons from the Chelsea Flower Show, illustrated with pretty photos by The Telegraph.

Photo©John Glover

Hoare's Bank, a Family Business Since 1672

This article in Barron's Penta features what must be one of the world's oldest family-owned banks, C. Hoare & Co.

…the tiny bank is still 100% owned and run by the Hoare family, with the 11th generation of family managers consisting of seven Hoare cousins sitting on the partners' board, each "enjoying" unlimited personal liability, which means they are personally on the hook, right down to their cufflinks. Samuel Pepys, Jane Austen, and Lord Byron once kept their guineas at the bank; in more recent decades, it's been the likes of Agatha Christie and, according to the British media, the current Chancellor of the Exchequer, George Osborne.

Online, Hoare & Co. just published Through the Years, Tales from the Hoare's Bank Archive. Fascinating! A letter written by a women who saw the Statue of Liberty in Paris … the probate inventory of an Elizabethan gentleman's estate … an 1800 income-tax return. And this stock certificate from the time of the South Sea Bubble. (Please, no wisecracks relating to Facebook's IPO!)

The Almighty 1960s Dollar

For a couple of decades after World War II, foreign travel offered Americans bargains too good to pass up. In this 1966 ad, Denmark makes an offer ($12 a day, meals included!) within the budget of almost any employee at Sterling Cooper, the Mad Men's ad agency.

Retirees who took advantage of the almighty dollar to travel abroad didn't have to lose touch with their investments. In 1966 Merrill Lynch proudly offered them "160 offices around the world."

Are “Death Puts” an Estate-Tax Hazard?

Where can retirees find higher income yields? Long-term corporate bonds. The catch? In five or ten years, when we're experiencing boom and inflation, the market value of today's 30-year bonds will plunge.

The solution? This WSJ Journal article (subscription) spotlights "death puts:"

Death puts guarantee that when the owner of the bond or CD dies, the heirs can redeem it at face value, meaning they get back all the money that originally was invested.

Investors in their 70s or 80s may find death puts – more properly called "estate-feature" puts – worth the cost, the WSJ suggests. But what about estate tax?

Say I buy a 30-year bond at 100 and it's worth 85 when the return of high inflation kills me off. My heirs will receive a bond eventually worth 100 at an estate-tax discount because the tax will be levied on 85, not 100. With a death put, wouldn't the full 100 be taxed? If so, do my heirs really benefit in the long run?

Easing the (Tax) Burden of (Facebook) Wealth

H/T to Law Blog for calling attention to WSJ's Laura Saunders' article on Facebook GRATs. The trusts are designed to ease the tax burden for Facebook's founders and other insiders. When the GRATs terminate, writes Saunders, the assets typically pass to other trusts.

Does that mean dynasty trusts? In Zuckerberg's case, no members of his dynasty have yet been born.

For Facebook co-founder Eduardo Saverin, the potential tax burden triggered more drastic action. He renounced his U. S. citizenship.

How the Judge Lost His House

From Ann Margaret Carrozza, a cautionary tale: Don't Let Bad Estate Planning Make You Homeless!

Why is it that people sincerely want to be rich until somebody mentions probate costs and estate taxes? Then they decide they really want to be poor.

Too often, it seems, somebody helps them achieve their goal.

My Excellent $1 Investment (Or, Culture For Mad Men)

The sign on the bin read, "USED PAPERBACKS $1 – BENEFIT CHILDREN'S HOSPITAL" On top of the pile sat a thinnish, letter-size, hard-bound volume. The December, 1965 issue of American Heritage!

The 'Sixties offered more than an ashtray on every table and a liquor cabinet in every executive office. In its heyday American Heritage magazine was a widely-admired cross between a magazine and a lavishly illustrated coffee-table book. No advertising – that's how Mad Men knew it was high class. Subscribers paid full price for the production of a periodical that made their households look cultured.

An American's View of Canada

My December 1965 issue features Canada, beginning with a whimsical map, "An American's View of Canada." The detail shows French explorers on their way to discovering General Motors. After a beautifully illustrated series of articles on our neighbor to the north, the issue moves on to cover parlor pianos, an ante-bellum U.S. Navy steamer, Burma Shave signs, and more.

Toward the back of the issue, a real treasure – a portfolio of well-reproduced prints from Clarence P. Hornung's "Gallery of the American Automobile." If I matted up half a dozen and sold them online, I could turn a handsome profit on my $1 investment.

1899 Columbia electric, made in Hartford, Connecticut

Surviving without advertising wasn't easy. In later years American Heritage lost its coffee-table production values. Forbes acquired the magazine and kept it on life support until 2007. Then it pulled the plug.

Sic Transit Gloria History

Fortunately, Edwin S. Grosvenor stepped in. The resuscitated American Heritage publishes quarterly. Online it maintains a complete archive of articles, but not the lavish illustrations.

For writers on matters financial, the archives are a welcome resource. Need a backgrounder on income inequality? See the discussion of Social Darwinism here. Preparing for Taxmageddon? See John Steele Gordon's concise history of U.S. taxation.

Writing in 1996, Gordon declared that the Internal Revenue Code "violates every single principle of sound taxation developed over the more than five thousand years in which taxes have been collected." Not much has happened since that would change his opinion.

Leave Children Equal Inheritances

Jane Bryant Quinn in her AARP column:

Are you planning to leave one of your adult children less (or more) money in your will? Bad idea, was the consensus of 49 financial planners who offered me their thoughts on this delicate and emotional issue.

If leaving unequal amounts to the children seems unavoidable, Quinn advises, the parent should at least explain the reasons. If the disparity comes as a surprise when the will is read, what seemed fair to the will maker almost certainly won't be seen that way by the disfavored child.

“The Scream” Sets Auction Record

The only version of Edvard Munch's "The Scream" not yet in a museum sold at Sotheby's for $119.9 million. That's by far the highest price ever paid for a painting at auction.

A Picasso held the previous record, $106.5 million.

Why does anyone pay so much for a work of art? On the CBS Evening News I heard an auction-house sales pitch that may help explain it:

You can remake your money, but you can't remake a painting.

Interesting, though, that The Washington Post filed this story under Business, not Arts.

“Wealth” on the Move

Robert Frank, whose blog we mentioned recently, is leaving The Wall Street Journal  to work at CNBC.

A May Day By Any Other Name . . .

Today a few still dance around the May-pole, while many around the world observe International Workers Day. Let's hope OWS demonstrations do not make New York look as it did on May Day, 1856. The New York Public Library posted this Harper's magazine depiction:

May 1 is also Loyalty Day, declared by Congress in 1958, and Law Day, proclaimed that same year by President Eisenhower. During the 1970's, I would have spent the last week cranking out ads saluting lawyers on the occasion of Law Day.

If a sizable number of today's protesters end up needing legal counsel, Law Day 2012 may prove to be another good one for lawyers