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Massachusetts 2009 Rules Changes for Investors; Model Portfolios Update

The “crash” in 2008 has brought fundamental changes to the ways our Massachusetts clients see long term investing in their retirement accounts. Notwithstanding the notion that most of our clients remain invested with a long term plan, there is new evidence that a fundamental shift away from equity (stocks) and toward bonds and cash has occurred. And no wonder; in 2008, the safest asset class of all, U.S. Treasury Bonds, outperformed every other category of assets.
The good news is that US investors are saving more. From the post World War II period to the 1980’s, the US savings rate fluctuated between 8%-10%. Then the savings rate fell dramatically to around 1% in 2005. Recent evidence shows that following the 2008 crash, the savings rate is up to over 5% in the second quarter of 2009.

But what is actually happening now?


According to the Capgemini-Merrill Lynch Wealth Survey, the affluent have moved from 13% cash to 20% cash. Where did they move the money from? Essentially, from “alternative” investments, such as commodities.

Is this consistent with the recommendations from the experts? The recently published 2009 Harris Bank Balanced Taxable Portfolio, for example, demonstrates significant changes in the recommended “balance” between cash, equity and other asset classes. For example, the 2005 model had six (6) asset classes, with zero cash, while the 2009 portfolio has nine (9) asset classes, with 8.3% recommended for cash, commodities and “alternatives.”

Another expert, Mohamed El-Erian, the co-chief investment officer of Pimco, the California mutual fund bond giant, and former chief investment officer of Harvard University investment program, recommends 19% in cash and inflection bond. Significantly, he recommends a full 27% of assets in foreign equity.

Regardless of the subtle differences between the Harris Bank’s model and Pimco’s, underscoring it all is the increased savings rate, which just may be the fundamental change conducive to a nation of wealthier investors.