Posts Tagged Retirement Planning

LAST WEEK WAS A REALLY DOWN ONE FOR THE STOCK MARKET, ESPECIALLY TECHNOLOGY. TIME TO SELL? PANIC? NO WAY!

The market doesn’t ever go straight up, nor does it go straight down!  Besides, investing should always be considered a long-term vehicle for building you resources to fund education, the new house, retirement, etc.  And certainly, it should not be engaged in for a mere one-to-three years.

The current upward climb in stocks is just a continuation of the sustained economic rally that started during President Obama’s Firm Term.  If the numbers look bigger, keep in mind that, let’s say, a one percent rally, or decline, with the Dow Jones Industrial Average at today’s 23,000, will be significantly more than the Dow declining toward 6,500, which George W. Bush let for Barack Obama.

Lately however, many investors’ euphoria has been based on the assumption that the GOP Tax Scam would jumpstart the market run-up even more.  That sort of thinking should have been quickly dismissed by anyone who looked back at the Republican Party’s recent inability to “Repeal and Replace” Obamacare.  In essence, after ten months, the Trump Regime has produced no meaningful legislation: just photo-ops!

When you see a market decline, there are several key points to consider:  Does it effect the overall stock market?  Just one industrial sector (health care, financials, tech, etc.)?  Or, is it limited to just a few stocks?  And then, try to find out what happened, and does it look temporary, or might the problem(s) be permanent in nature?

Those who jump, either to buy or to sell, without knowing what is going on, and why, often find themselves regretting their quick trigger soon afterward.  And many astute investors often find value when particular stocks or sectors have become oversold!

Over the past decade, several economists have won Nobel Prizes for their research, proving that the markets are irrational.  Before you consider making any changes in your investment portfolio, just think: are acting rationally—or irrationally?

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WITH THE ACCELERATING ADVANCE OF MACHINES INTO THE WORKPLACE, WHAT WILL THE JOB MARKET LOOK LIKE 10 YEARS FROM NOW? TWENTY YEARS?

Full disclosure:  I am neither a scientist nor a technologist; however, I have researched this topic quite extensively, and am also include somer economic, political and sociological considerations, which I believe are relevant to the topic..

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Fifty years ago, ATMs began to appear outside of banks, and “Bar” Codes appeared on most grocery items.  Although they quickened a customer’s ability to withdraw cash, or speed through the supermarket check-out line, those enhancements cost some bank tellers and grocery cashiers their jobs.

Around that same time, Gordon Moore, before he co-founded Intel, suggested that silicon chip capacity would double every two years for the following ten years.  Well, fifty years later, Moore’s “Law” is still on target, ad widely-cited.  Just try to write the number “1,” and double that (compounded) over those 25 time frames.  There would not be enough room on the page to write those numbers toward the end.

To put it another way: the capacity of a recently outdated iPhone 4 has the same computing capability of a Cray 2 super computer, which was the world’s fastest computer in 1985.  Moore’s Law is an important concept to know in order to appreciate the acceleration of the computational speed, and the capacity of today’s machines.

By Machines, I’m including the total range of computers, from: automation; robotics; algorithm-reading machines; artificial intelligence, etc.  Presently, computers are not as “intelligent” as humans; however, as their speed and capacity grow exponentially, they will soon catch up.  Then what happens when their mental capacity surpasses ours, and they are able to re-program themselves to accomplish more and more-advanced chores?

In past transformations—from hunter-gatherers to agriculture, to the Industrial Age, to service industries, then the Digital Age–new jobs and industries arose. and now, to whatever increasing-advanced technology brings our way.  Will the computers of today be subservient, partner with us, or will they take over—making us their slaves?

Let’s just focus on the growing interest in autonomous, or self-driving, cars and trucks.  A few states have approved them for driving on their roads. What will happen to the 3.5 million truck drivers, and their 5.0 million support staff, who might lose their jobs?  And, what about the millions of taxi drivers?

Similarly, as the general population becomes comfortable with self-driving cars, the average ownership per household might drop from 2.1 cars, to 1.2.  Most autos spend 95% of the time sitting in the garage, or on a road somewhere.

Entrepreneurs would offer some sort of an annual contract that enables customers to call for a ride using an App.  Savings on the cost of the car, insurance, and maintenance could be significant.  But, just think of the many people in the auto industry, as dealerships close, millions more could lose their jobs—auto manufacturers, parts suppliers, dealerships, salespersons, mechanics, insurance companies, etc?

There have been various studies, which have projected which positions might be the first to succumb to the machines, and which might be among the last.  So, what is America’s game plan? The world at large?

Politicians and other leaders need to address this oncoming situation; but, no one seems willing to tackle it, since they don’t seem to think for the long-term.  But, it’s not really a long-term problem, and we should be planning for it immediately!

Even many scientists and engineers who are working within the technology industry seem to believe that, after a short disruption, new jobs and industries will magically appear.  But, what if that doesn’t happen?  Workers need assistance in learning new skills, even while they are still working on their old jobs.  Students need to be directed toward the jobs skills that will keep them employed in the years to come.  But, someone needs to provide that guidance!

In years past, job disruption generally arose within one major corporation or industry, and many people found that they could just take their skills to another company, or a similar industry.  This time, however, the machines will be everywhere.  And, don’t expect to take an interim job in a minimum wage job; because, even burger flipping now can be performed by robots.

Also, the technological impact of the machines that can perform many of the routine tasks that, fir instance, an associate attorney does.  In fact, machines have also shown that they can read medical charts more accurately, and faster, than most radiologists.

Every time a hurricane heads toward Florida, the locals stock-up on water, flashlight batteries, canned food, and prepare their homes, boarding-up windows, trimming hanging tree limbs.  So, why shouldn’t we prepare for whatever the Technological Age brings our way?

Community leaders—politicians, business, labor, educators, academics, economists and sociologists—should be called together to study the situation and recommend the various possible outcomes.  The local population of the various job classifications is most important.  Actuaries and financial analysts can than project the range of work force disruption—from worst case to best—with a probability for each.

Additionally, a greater awareness, and understanding, of Artificial Intelligence must eventually become pervasive throughout our society, at least to a basic extent.  Otherwise, we would be back to “square one”!  For instance: when computers were first introduced into elementary schools, many teachers didn’t know how to use them.  And, how can government, school administrators, business and labor leaders, have an appreciation of the potential impact of AI, if they do not understand labor force disruption?

This study should be performed over a period of months, and be assigned a reasonably high priority.

Over the past decade or two, educators have recommended that students focus on the STEM subjects.  That approach, however, would not be the magic salvation, since it would make workers more like the machines.  By adding some Arts and Humanities—shifting to STEAM—the worker would exhibit such skills as: creativity; intuition; relationship building; flexibility; coping; an ability to work comfortably with change, etc.

No one has all of the answers; but, if we devise a wide-ranging plan to deal with the potential impact of work force disruption, we will have alternative options already in our Game Plan!

NOTE:  For additional information, I have listed several books on the Books That I Recommend Tab. The two New Additions and the two listed under Technology, toward the bottom.

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SINCE PEOPLE LIVE LONGER TODAY THAN IN PREVIOUS GENERATIONS, OUR MONEY WILL NEED MORE GROWTH IN ORDER TO LAST AS LONG! (Part Two)

This is the second part of yesterday’s discussion.  Since life expectancy has gradually lengthened over the past decades, retirees, or those soon to be, should not be too conservative with their investments. Forty years ago, the rule of thumb was that the bond portion of your portfolio should approximate your age. But, that’s no longer the case;  because, people live longer, and they must retain their purchasing power.

Today, if a person lives to be 65 years old, thy have a reasonable chance of living past 80, on average.  That means that you will have to stretch the money you have set aside, to supplement Social Security and pension, if any, over a greater length of time.  Also, as all seniors know, Health Care Inflation is a good bit higher than the normal Consumer Price Index.  Besides investing more in stocks, consider those industries where the growth has been more consistent.

As you can see in the Break-down of the S & P. Index by industry, the three largest “industrial sectors” are: Information Technology; Financials and Health Care.  Also, as noted in Part One, five of the ten largest companies in the index are in the IT/Technology Industry, with only two—Apple and Microsoft—being just over 40 years old.  All the others are much younger.

Now, let’s assume that your current portfolio is nicely balanced, between stocks and bonds, and the percentage invested in the various industries matches the S & P reasonably well.  Now, consider how your life has changed from some years ago: less trips to the bank, since you use an ATM at the supermarket and on-line banking; keep up with friends and family by Email; order prescriptions and other things on-line; changed a doctor’s appointment on their web site; greater use of cable network or shows on-demand, etc.  In that sentence, I specifically cited IT/Technology and Health Care products.  And, that’s just the beginning!

Medical science and the overall Health Care industry have made strides in developing new medicines, hospital equipment and other health care needs.  Sure, they’re expensive, and Congress hasn’t been helping with the cost; but, so what if it keeps you around longer?  Do you have any other options?

IT/Technology and Health Care seem to have been consistently good performers over the years. (I will show you an interactive chart on this.)  The Financial Industry, the second largest industry, has not been as consistent. Besides being somewhat volatile, it has to deal with the booms and busts of both the domestic and global marketplace, and it rightfully must he heavily regulated.  And, don’t forget its role in The Great Recession (4Q07-1Q09).

A certain portion of the other seven industries do belong in your portfolio, and how much depends upon your risk tolerance.  Consumer discretionary, and the like (retail), are being sucked dry by Amazon.  Boeing comes out with a new jumbo jet every fifteen years, or so.  Coke and Kellogg’s haven’t transformed, other than new marketing jingles.  And the last four display their relative importance to the economy by their place at the bottom of the list.

Index Break-down by Industry Size
Information Technology 22.26%
Financials 14.55

Health Care 14.49
Consumer Discretionary 12.27
Industrials 10.27
Consumer Staples 9.05
Energy 6.04
Utilities 3.15
Real Estate 2.91
Materials 2.84

Now, suppose that you wanted to enliven your portfolio—adding a bit more growth to match your longevity—exchange-traded funds (ETFs) are securities that duplicate a particular stock or bond index.  Sector SPDRs are the oldest brand of ETFs, and the company offers one that would only:  include those companies in the S & P 500 Index, or those that are in any of the individual industries.  For instance, add a slice of IT/Technology (SYMBOL: XLK) and/or Health Care (XLV). Or, someone else might prefer Financials (XLF), or one or more of the others.

On the Sector Tracker interactive site, you can check the performance of the various Sector SPDRs over various time frames (small white boxes toward the top).  On the Sector SPDR web site, you can select any of the sectors by just clicking on the blue box, in the upper left. From there, you can down load the Prospectus, the Fact Sheet—which I find quite helpful—and other literature on each ETF.  I have attached Fact Sheets for the IT/Technology and Health Care SPDRs.

Be sure to do your homework, consult with whomever you generally ask for investment advice, and give some serious consideration before adding these, or other, ETFs, and by how much.  Leave a Comment if I can be of any help.  Check your portfolio regularly, if you can, to monitor whether it still meets you needs, as structured!

NOTE:  This recent article, from the NY Times, provides more information on ETFs; however, the focus is on the BlackRock Funds’ iShares (ETFs).  BlackRock is the world’s  largest money manager.

 

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SINCE PEOPLE LIVE LONGER TODAY THAN IN PREVIOUS GENERATIONS, OUR MONEY WILL NEED MORE GROWTH IN ORDER TO LAST AS LONG! (Part One)

Traditionally, people have been advised to have a balance, between stocks and bonds, in their retirement funds, with the bond component gradually increasing over time.  And that hasn’t changed; but, the rate at which bonds increase should be somewhat slower today.  Over the past decade, inflation has been virtually nonexistent; however, it will return at some point and, as most senior citizens know, health care inflation never really went away!

This post is intended to lay the groundwork for my next one, which will offer some ideas as to how to include a more growth-oriented component to your portfolio.  It is not meant to offer investment advice, per se, but to provide some ideas as to a forward-thinking way of adding to the growth in your portfolio.

These ideas are primarily intended for the hands-on, fairly open-minded investor.  Before you act upon them: study them; confer with whomever you see investment advice from and, if you do act, perhaps do so gradually!

Let me explain the stock market through the Standard and Poor’s 500 Index, which is composed of 500 large company stocks.  Since there are 4,333 publicly traded stocks in the U. S.—between the exchanges and the rarely traded “Pink Sheets”—the 500 stocks in the     S & P, at 11.5% of the total, is a substantial statistical sample. The stocks represent ten different industries, as cited below:

Index Break-down by Industry Size

Information Technology 22.26%
Financials 14.55                                                                   Health Care 14.49
Consumer Discretionary 12.27
Industrials 10.27
Consumer Staples 9.05
Energy 6.04
Utilities 3.15
Real Estate 2.91
Materials 2.84

The stocks represented in most indices are weighted, according to their “equity capitalization,” or relative market value.  Please note that the ten largest companies, in the  S & P 500, represent 18.85% of the whole Index, and five of the top ten are in Technology:

Ten Largest 10 Companies:Apple Inc. 3.61%
Microsoft Corporation 2.56
Amazon.com Inc. 1.85
Facebook Inc. Class A 1.72
Johnson & Johnson 1.72
Exxon Mobil Corporation 1.65
JPMorgan Chase & Co. 1.56
Berkshire Hathaway Inc. Class B 1.55
Alphabet Inc. Class A 1.33
Alphabet Inc. Class C 1.30

Total for Top 10 Holdings 18.85%

Over the years, most investment advisors have shown clients the Break-Down by Industry and, perhaps, suggested a little more (“overweighting”) or a little less (“underweighting”) in several of the industries.  Those incremental changes, never more than a percent or two, were mostly to show that the advisor added value; but, in the long run, the recommended strategy was pretty much to maintain the status quo!

Let me emphasize the preponderance of Technology in the S & P 500 Index of the largest companies in the nation, and keep in mind that only Apple and Microsoft are over 40 years old, and just barely–while the rest are much newer companies.  And, while Amazon is considered a Retail company, it owns a robotics company, and it is also the largest source of cloud computing—two of the hottest areas within the technology sector.

The Technology and Health Care industries have consistently been two of the best performers in the Index. The Financial industry is the second largest; however, it has to deal with: the ups and downs of the domestic economy, it must rightfully be heavily regulated, it also has to function within the overall global marketplace and, for the most part, the financial sector adds very little to the overall economy!

In my next post, I will suggest why the investor, who is willing to take-on moderate risk, should consider adding more Health Care and Technology to their investment portfolios.

NOTE:  Noted Wall Street analyst, Dick Bove, warns that bank stocks are merely trading on momentum–sort of a follow-the-leader–rather than any really sustenance.

 

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NO TRUMP BUMP IN THE STOCK MARKET

Following last Tuesday night’s State-of-the-Union Address,  Donald Trump just reiterated most  of the usual things—Jobs, “Obamacare”, Dodd-Frank, Immigration, Terrorism, Regulations, Trade and Tariffs, Education, etc—which he has been talking about throughout his very short political career.   But, after 40 days in office, he has accomplished absolutely nothing, except to infuriate a majority of Americans.

If any of the promises he has made were based on non-practical ideas, Trump would have had people working on his proposals and, perhaps, even submitted legislation to Congress on a few.  For instance, if President Obama’s Affordable Health Care were really so “awful”, we would have seen a draft of TrumpCare by now.  And, if Dodd-Frank, which reined-in the banks, after they took the nation to the edge of the Financial Abyss in 2008, was so terribly bad,  wouldn’t Donald have presented an alternative plan by now?

But so far, Donald Trump seems to be spending his time:  talking and tweeting; holding Command Performance meetings at the White House with people who seemingly would rather be anywhere else; and having his photo-ops boarding and leaving Air Force One, and always with Ivanka and the grandchildren in tow.  I wonder if Trump spends more time at Mar-a-Lago now, since taxpayers are paying for it, than he did before he took office?

Market professionals, who had been expecting a Market Boom; because, Donald Trump vowed to: put people back to work; re-build the crumbling infrastructure; cut the tax rates for everyone; de-regulate all industries; and put more discretionary income in consumers’ pockets.  But now, those investors are beginning to wonder how much of Donald Trump’s agenda is smoke, and how much is mirrors?  They are also wondering if he can even get any of his plans through a Republican-Majority Congress?

When people look at the Trump Regime nowadays, the question most frequently asked is:  Who’s in charge?  Donald Trump has demonstrated that he is certainly not a detail man, whether that means understanding the most important questions facing the nation today, or in directing his staff in carrying out those most important responsibilities.  Trump himself seems to be out more often than he is in, and most of his Cabinet and other key officers seem to be kept out of sight, and few deputies are on-board.  With forty days in, and nothing accomplished: that’s despicable!

The financial markets do not function well with uncertainty.  In fact, Steve Bannon seems to be the only key advisor in the office, and working.   And, that’s like having the fox guarding the chicken coop.  Reports from the West Wing suggest a spirit of: disorganization; disruption, incompetence and disbelief.  Even Reince Priebus, Trump’s Chief-of-Staff, appears to be lost, both in-space and in-time.  Will he be ousted soon?

I believe that this sorry picture of our Nation’s Leadership—without experience, without leadership and without a clue—is why the stock market has paused, and backed-off from the blindly upward track that it had been on for the past couple of months.  There has been more, and more, talk of a stock market pull-back; however, now it might take a “correction”, a ten percent drop, in order to adequately pass some of the false Trump euphoria out off the market.

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WITH TRUMP’S BLESSING, WALL STREET APPEARS TO BE WRITING THE SCRIPT TO DE-REGULATE ITSELF!

Wall Street seems to have gotten its fingerprints all over Donald Trump’s plans to Repeal Dodd-Frank, and just eliminate the Department of Labor’s “Fiduciary Rule” outright.  “Dodd” was passed to rein-in the Banks following The Great Recession (4Q07 to 1Q09).  The Fiduciary Rule, on the other hand, applies specifically to Qualified Retirement Plans (IRAs, 401(k)s, 403(b)s, etc), and it requires financial professionals to place the clients’ interests ahead of the firm’s, and their own.  Shouldn’t that rule apply to all securities accounts?

Back in November, I wrote about giving our combined personal investment portfolio its first major overhaul ever, because: I have on-going concerns about what havoc Donald Trump might wreck on our Economy; and I wish to simplify our portfolio, in the event that my wife and daughter might have to take over managing it at some point.  And given Trump’s continued irrational behavior, these concerns still seem as relevant as ever.

Yale Economics Professor Joseph Shiller won the Nobel Prize, in 2013, for his empirical analysis of asset prices.  Shiller concluded that the market is inefficient, and he has suggested that passive index funds can do just as well as actively-managed ones, but without the higher management fees.  Warren Buffett, in his Letter to Berkshire Hathaway Shareholders, concurred, suggesting that an S & P 500 index fund, possibly with other stock exchange-traded funds, plus individual bonds or a bond ETF, would perform better in the absence of the management fees.  John Boggle, founder of Vanguard Funds, agrees.

In May of 2012, I wrote a post, comparing mutual funds and ETFs.  It provided a brief, but general comparison between actively-traded mutual funds and ETFs.  Given what is happening now; however, I believe that the Advantage has certainly shifted in favor of ETFs.

Here are some sources for learning more about ETFs:

The CNBC (financial channel) web site provides news, plus market statistics.   On the “Markets” drop-down box, the various global markets can be checked in real-time.  At the bottom of the drop-down, go to “ETFs” for a list, prices, performance, and trading volume of the most popular ETFs, with the Sector SPDRs just below them.

Then go to the State Street web page for SPY, and that company also distributes the Sector SPDRs.  On the SPY page, a Fact Sheet can be viewed, as well as other literature.

On the Sector SPDR page, there are Fact Sheets for each of the sector ETFs, performance and a list of all of the stocks, within each of the sectors of the S & P 500. There also is a Sector Tracker, which provides historical performance, for each sector, across various time-frames.

iShares provides a range of mostly overseas ETF, either globally, by region and for many individual countries. Some of the iShares ETFs that I used, when I wanted to put money into various overseas markets, are as follows: EFA for the EAFE (Europe, Australia and there Far East) Index of industrialized markets, EEM, for Diversified Emerging Markets, or EPP for Asia-Pacific, excluding Japan), among others.
Lastly, check the Stock-Encyclopedia ETF Guide to research any ETF, to include Fast Sheet and other research material,

There are hundreds of ETFs on the market.  If your advisor suggests one, be sure to have him/her explain why that (those) particular one(s) would be suitable for your needs.  I would suggest shying away from ETFs that invest in commodities and foreign exchange, because those markets are more oriented toward institutional investors.  Similarly, be aware that ETFs that double or triple the upside of an index, will similarly increase the risk on the downside.

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HOW MIGHT YOU BETTER UNDERSTAND YOUR STOCK PORTFOLIO?

Psychologists suggest that a good way to understand a somewhat complex idea—especially for those over 50—is with charts and graphs.  For stocks, however, there is a three-dimensional object that surely you have seen—probably threw it down, like me!  The Rubik’s Cube!  Now, I’m not suggesting that you solve it; rather, just picture it!  But, the six-sided cube, with three smaller blocks on each edge, meets our needs perfectly.

Consider the green (or any color) face of the cube.  Large, Medium and Small companies are represented by the top, second and third rows across, respectively.  You will undoubtedly see the term “Cap” after one of those sizes, from time-to-time, which refers to the amount of capital that the various companies have to work with.

The left-hand column includes “Value” stocks, which are generally more mature and somewhat more stable.  “Growth” stocks are represented by the right-hand column, and are normally newer, and more volatile, but not necessarily to any dangerous extent.  “Blend” companies, listed down the middle, have some of the characteristics of both value and growth.  So, a large-cap value company would be represented by the upper left-hand block in our visualization, and a small-cap blend would be in the middle block on the bottom row.

For the investor who wishes to keep things simple, and doesn’t want to invest in individual stocks or bonds, Exchange-Traded Funds are a good option.  ETFs tend to replicate all of the securities in a particular index, for instance:  the Standard and Poor’s 500; stocks of one industry; foreign securities, etc.  Most securities firms offer a wide range of ETFs for you to choose from.  I have found two companies especially helpful:  Sector SPDRs, for adding greater weight by replicating just the component securities of a particular industrial sector of the    S & P 500; and iShares for a wide range of Foreign securities, on a Regional, Country or Global basis.  ETF Tracker, although not a distributor of ETFs, is a good source of information.

Investors shouldn’t place all of their money in companies of just one type—large or small, value or growth.  Similarly, it can be risky to bet it all in one Industrial Sector, such as: Energy; Health Care; Technology or Utilities.  In fact, a good way to suffer a big loss is to invest only in: industries that did well last year, figuring that that trend will continue; industries that suffered last year, expecting a turn-around; or industries that you know well.  And never, ever go whole hog, by investing heavily in the industry that you earn your living in!

Remember that the Rubik’s Cube is three-dimensional. But, let’s extend that third dimension—the depth, perhaps—out to include, say, nine or ten blocks.  That would compare to the approximate number of basic industries in our Economy.  Diversify among, at least a range of sectors, but you don’t have to invest in every one, in order to diversify. If you prefer. you need not invest in individual stocks.

I would also suggest considering a fourth dimension, which you may or may not feel comfortable in doing–Overseas Securities.  Research material is in short supply for many individual Global (U. S. and Foreign) or just Foreign Securities.  Besides Mutual Funds, Exchange-Traded Funds might be a good alternative–both for Domestic and Foreign Securities–for the investor who wants to keep things simple.

Whether you are interested in investing in individual securities, mutual funds or ETFs, be sure to check the web site(s) of securities firm(s) you deal with, or with particular mutual fund companies.  It’s important, when you consider investing in mutual funds that you know the details:  how they have ranked in their respective categories; what their investment goals are; big mutual funds often become more of an index fund, but with much higher prices;  and how long the investment manager has been working on that fund.

The Bond Market is quite difficult to explain, at least in a scatter-shot approach, such as a blog post.  And, unfortunately, most brokers don’t understand the bond market, since it doesn’t have the pizzazz that the stock market does.  Over the years, however, I have written a number of blog posts on the Fixed Income market, which you can read by clicking on the “Investing” Tag, at the right.

NOTE:  As always, if you don’t find what you’re looking for, send a Comment, which I will try to respond to.

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