Situation: Is the US stock market overpriced? We need to know because Warren Buffett keeps reminding us how important it is to avoid overpaying for a stock. Buffet says: “No matter how successful a company is, don’t overpay for its stock. Wait until Wall Street sours on a company you like and drives the price down into bargain territory. By making a watch list of interesting stocks, and waiting for their prices to drop, you increase the potential for future capital gains.”
The author of this link suggests that none of us “mere mortals” are as smart as Warren Buffett at getting the price right. It’s perhaps better to either dollar-average your investment, or leave it to professionals to do the stock-picking for you. We suggest that there is a third option, which is to use a couple of simple mathematical formulas to guide your stock-picking. Those formulas can be found in the book that Warren Buffett calls “by far the best book on investing every written.” The book is entitled: The Intelligent Investor by Benjamin Graham, Revised Edition, Harper, New York, 1973. There, you will find the value of calculating the 7-year P/E instead of the usual 12-month P/E, and also learn how to calculate the “Graham Number.” The Graham Number is what the stock would sell for if it were priced at 1.5 times Book Value and 15 times trailing 12-month (TTM) earnings. Calculating and using the Graham Number is important because it allows for variation in Book Value and earnings. Multiplying the two values just has to be ~22.5 (15 X 1.5) for the stock to be optimally priced.
Mission: To test both methods on stocks issued by the 30 companies in the Dow Jones Industrial Average (DJIA). See columns X, Y and Z on our Standard Spreadsheet (Table).
Execution: see Table.
Administration: Here’s how to calculate the Graham Number, as shown on p. 349 in the book cited above). [Clicking this link will take you to the Amazon website and the book).] Start by multiplying 1.5 (ideal ratio of Book Value/share) by 15 (ideal ratio of TTM Earnings/share) = 22.5. By multiplying two numbers you have created a Power Function. So, you’ll have to take the Square Root of the Final Number to arrive at the Graham Number. Final Number = 22.5 X actual Book Value/share for the most recent quarter (new) X actual TTM Earnings/share. To access Earnings/share, go to any company’s page at Yahoo Finance, e.g. Apple’s. In the right column find EPS (TTM) of $11.038. To access Book Value/share, click on “statistics” at the top of that page and scroll down the left column to “Balance Sheet.” Book Value/share for the most recent quarter (mrq) is the last entry: $23.74. Graham Number = square root of 22.5 X $11.038 X $23.74 = $76.79. This is the true value (Graham Number) for a single share of Apple stock. If it sells for less, that’s a bargain. Right now, it’s selling for almost 3 times as much. If you own some shares, either think about selling those or think about the company’s ability to scale-up the “Apple ecosystem”. Perhaps you’ll decide that those prospects make holding onto the shares for a while longer a worthwhile risk.
Calculating the 7-Yr P/E (p. 159 in the book cited above). You’ll need a website that provides the past 7 years of TTM earnings, or a library with S&P stock reports. Simply add the most recent 7 years’ earnings and divide by 7 to arrive at the denominator. Look up the current price of the stock (or its 50 Day Moving Average price found in the right column of the statistics page under “Stock Price History”) to arrive at the numerator. Divide numerator by denominator to calculate the 7-Yr P/E, which must be 25 or less to reflect “normative” earnings growth over 7 years for a stock with a 12-month P/E of ~20 during most years. By using the 7-yr P/E you avoid being mislead by a year of blowout earnings or negligible earnings.
Bottom Line: As a group, these 30 stocks are overpriced. Nonetheless, 12 companies have stocks that are priced within reason vs. their Graham Numbers and 7-Yr P/Es (see Columns X-Z in the Table): TRV, DIS, WBA, INTC, VZ, JPM, PFE, PG, GS, UTX, CVX, XOM. But only one company, Goldman Sachs (GS), can be called a bargain with respect to both values (those values being highlighted in green in the Table). Note that Berkshire Hathaway (BRK-B at Line 35 in the Table) is an even better bargain. Perhaps Warren Buffett noticed these markers of high intrinsic value when he recently spent part of Berkshire Hathaway’s cash hoard to buy back the stock.
Risk Rating: 5 where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10
Full Disclosure: I dollar-average into 3 stocks on the “not overpriced list” -- JPM, PG and XOM, and also own shares in two others: INTC and TRV. Additionally, I dollar-average into MSFT, KO, JNJ, WMT, CAT and IBM, and own shares in MCD, MMM and CSCO.
Comment: I focus on Dow Stocks because each is covered by dozens of analysts and business journalists, and its stock options are actively traded on the Chicago Board Options Exchange. The result of this microscopic attention is that price discovery is efficient, and surprise earnings are rare. In addition, all 30 companies have a long record of business experience, and are large enough to have multiple product lines that provide internal lines of support during a crisis. DJIA companies are famously able to weather almost any storm: Seven DJIA companies went through a near death experience during The Great Recession of 2008-2009 (General Electric, Citigroup, General Motors, Pfizer, Home Depot, Caterpillar, and American Express) but only 3 had to be removed in the aftermath of that “Lehman Panic” (General Electric, Citigroup, and General Motors).
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Showing posts with label investment portfolio. Show all posts
Showing posts with label investment portfolio. Show all posts
Sunday, September 30
Sunday, September 16
Week 376 - What Does A Simple IRA Look Like?
Situation: You’re bombarded with advice about how to save for retirement. But unless you’re already rich, the details are simple. Dollar-cost average 60% of your contribution into a stock index fund and 40% into a short or intermediate-term bond index fund. If you know you’ll never be in “the upper middle class”, opt for the short-term bond index fund. But maybe you have a workplace retirement plan, which makes saving for retirement a little more complicated. Either way, you’ll want to contribute the maximum amount each year to your IRA, which is currently $5500/yr until you reach age 50; then it’s $6500/yr.
Here’s our KISS (Keep It Simple, Stupid) suggestion: Make your IRA payments with Vanguard Group by using a Simple IRA (Vanguard terminology) composed only of the Vanguard High Dividend Yield Index ETF or VYM. Then, contribute 2/3rds of that amount into Inflation-protected US Savings Bonds. These are called ISBs and work just like an IRA. No tax is due from ISBs until you spend the money but there’s a penalty for spending the money early (you’ll lose one interest payment if you cash out before 5 years). The annual contribution limit is $10,000/yr. A convenient proxy for ISBs, with similar total returns, is the Vanguard Short-Term Bond Index ETF or BSV.
Mission: Create a Table showing a 60% allocation to VYM and 40% allocation to BSV. Include appropriate benchmarks, to allow the reader to create her own variation on that theme.
Execution: see Table.
Bottom Line: However you juggle the numbers, it looks like you’ll make ~7%/yr overall through your IRA + ISB retirement plan, with no taxes due until you spend the money. In other words, each year’s contribution will double in value every 10 years. The beauty of this plan is that transaction costs are almost zero, and the chance that it will give you headaches is almost zero.
Risk Rating: 4 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Inflation-protected Savings Bonds and the Dow Jones Industrial Average ETF (DIA).
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Here’s our KISS (Keep It Simple, Stupid) suggestion: Make your IRA payments with Vanguard Group by using a Simple IRA (Vanguard terminology) composed only of the Vanguard High Dividend Yield Index ETF or VYM. Then, contribute 2/3rds of that amount into Inflation-protected US Savings Bonds. These are called ISBs and work just like an IRA. No tax is due from ISBs until you spend the money but there’s a penalty for spending the money early (you’ll lose one interest payment if you cash out before 5 years). The annual contribution limit is $10,000/yr. A convenient proxy for ISBs, with similar total returns, is the Vanguard Short-Term Bond Index ETF or BSV.
Mission: Create a Table showing a 60% allocation to VYM and 40% allocation to BSV. Include appropriate benchmarks, to allow the reader to create her own variation on that theme.
Execution: see Table.
Bottom Line: However you juggle the numbers, it looks like you’ll make ~7%/yr overall through your IRA + ISB retirement plan, with no taxes due until you spend the money. In other words, each year’s contribution will double in value every 10 years. The beauty of this plan is that transaction costs are almost zero, and the chance that it will give you headaches is almost zero.
Risk Rating: 4 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into Inflation-protected Savings Bonds and the Dow Jones Industrial Average ETF (DIA).
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Sunday, July 22
Week 368 - Are You A Baby Boomer (54 to 72 years old) With Only $25,000 In Retirement Savings?
Situation: Here in the United States, a third of you have less than $25,000 in Retirement Savings.
Mission: Assess options for a healthy married couple with a household income of $59,000/yr, whose breadwinner will retire when he or she reaches age 66 and the household starts receiving an initial Social Security check of $2,123/mo . Assume that they have $25,000 in retirement savings in an IRA, with an initial payout of $75/mo.
Execution: see Table.
Administration: The options for the couple to receive an income from their $25,000 IRA are unattractive. They’ll need a relatively safe way to come up with an income of 3-4%/yr from that $25,000, a way that grows the principal at least as fast as inflation (historically 3.1%/yr). That growth rate can be predicted from the 5-yr growth rate for the quarterly dividend. To have enough confidence in that stream of income, their only option is to find half a dozen high-quality stocks with low price variance (5-yr Beta less than 0.7) and secure dividends.
They should be able to live reasonably well on $2,198/mo, given that the poverty line for a household of two is $1,372/mo. But let’s break it down: They’ll pay at least $900/mo for housing (rent, tenant’s insurance, and utilities), so they’re left with $1,300/mo to cover the consumer price index categories of food and beverages, apparel, transportation, medical care, recreation, education and communication, and other goods and services. “Other goods and services” include restaurant meals, delivery services, and cigarettes. Food will cost at least $250/mo. Now they’re down to ~$1,050/mo to cover clothing, car expenses, Medicare premium plus deductibles and co-payments, smartphones, meals out, vacations, delivery services, and cigarettes. Owning, maintaining, and operating a used car for 5,000 miles/yr will cost ~$625/mo, which leaves $425/mo for clothing, healthcare, smartphones, meals out, vacations, delivery services, and cigarettes. To avoid selling the car, one of them will need to find a part-time job. New clothes, dining out, and travel will be hard to fund. Out-of-pocket healthcare costs will go up, so they’ll need to save money by avoiding alcohol, tobacco, caffeine, and sweets.
Bottom Line: When a couple is facing a retirement that will be funded only by the average Social Security payout at full retirement age ($25,476/yr), they won’t be living much above the Federal Poverty Level for a household of two ($16,460/yr). It they own a home, they’ll no longer be able to afford to maintain it and pay property taxes. So, they’ll need to sell it and invest the residual equity. Maintaining their car will barely be affordable. Having $25,000 in an IRA will help, but a third of couples in their situation will retire with an even smaller cushion. In our Table for this week, we show how $75/mo is the expected income from an IRA of $25,000 value that has an average dividend yield of 3.6%/yr.
Risk Rating: 4 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NEE, KO, and JNJ.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Mission: Assess options for a healthy married couple with a household income of $59,000/yr, whose breadwinner will retire when he or she reaches age 66 and the household starts receiving an initial Social Security check of $2,123/mo . Assume that they have $25,000 in retirement savings in an IRA, with an initial payout of $75/mo.
Execution: see Table.
Administration: The options for the couple to receive an income from their $25,000 IRA are unattractive. They’ll need a relatively safe way to come up with an income of 3-4%/yr from that $25,000, a way that grows the principal at least as fast as inflation (historically 3.1%/yr). That growth rate can be predicted from the 5-yr growth rate for the quarterly dividend. To have enough confidence in that stream of income, their only option is to find half a dozen high-quality stocks with low price variance (5-yr Beta less than 0.7) and secure dividends.
They should be able to live reasonably well on $2,198/mo, given that the poverty line for a household of two is $1,372/mo. But let’s break it down: They’ll pay at least $900/mo for housing (rent, tenant’s insurance, and utilities), so they’re left with $1,300/mo to cover the consumer price index categories of food and beverages, apparel, transportation, medical care, recreation, education and communication, and other goods and services. “Other goods and services” include restaurant meals, delivery services, and cigarettes. Food will cost at least $250/mo. Now they’re down to ~$1,050/mo to cover clothing, car expenses, Medicare premium plus deductibles and co-payments, smartphones, meals out, vacations, delivery services, and cigarettes. Owning, maintaining, and operating a used car for 5,000 miles/yr will cost ~$625/mo, which leaves $425/mo for clothing, healthcare, smartphones, meals out, vacations, delivery services, and cigarettes. To avoid selling the car, one of them will need to find a part-time job. New clothes, dining out, and travel will be hard to fund. Out-of-pocket healthcare costs will go up, so they’ll need to save money by avoiding alcohol, tobacco, caffeine, and sweets.
Bottom Line: When a couple is facing a retirement that will be funded only by the average Social Security payout at full retirement age ($25,476/yr), they won’t be living much above the Federal Poverty Level for a household of two ($16,460/yr). It they own a home, they’ll no longer be able to afford to maintain it and pay property taxes. So, they’ll need to sell it and invest the residual equity. Maintaining their car will barely be affordable. Having $25,000 in an IRA will help, but a third of couples in their situation will retire with an even smaller cushion. In our Table for this week, we show how $75/mo is the expected income from an IRA of $25,000 value that has an average dividend yield of 3.6%/yr.
Risk Rating: 4 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into NEE, KO, and JNJ.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
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Sunday, July 1
Week 365 - “Dogs of the Dow” (Mid-Year Review)
Situation: The 10 highest-yielding stocks in the Dow Jones Industrial Average are called The Dogs of the Dow (see Week 305 and Week 346). The only time-tested formula for beating an index fund (specifically the Dow Jones Industrial Average) is based on investing equal dollar amounts in each Dog at the start of the year. That would have worked in 6 of the past 8 years. Why? Because those are high quality stocks that have suffered a price decline and are likely to recover within ~2 years, which would lower their dividend yield and release them from the “Dog pen.”
Mission: Predict which Dogs will emerge from the Dog pen by the end of 2018, using our Standard Spreadsheet.
Execution: see Table.
Administration: For various reasons, the 2018 Dogs are unlikely to post greater total returns this year than the Dow Jones Industrial Average (DIA). But we can still try to play the game by predicting which of this year’s Dogs will be missing from next year’s Dog pen. Those will probably come from those posting lower dividend yields at the mid-year point (see Column G in the Table): Coca-Cola (KO), Cisco Systems (CSCO), General Electric (GE), Merck (MRK) and Chevron (CVX).
Bottom Line: Given current trends, Cisco Systems (CSCO) and Chevron (CVX) are likely to be released from the Dog pen at the end of the year.
Risk Rating: 6 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into KO, PG, XOM and IBM, and also own shares of CSCO.
Mission: Predict which Dogs will emerge from the Dog pen by the end of 2018, using our Standard Spreadsheet.
Execution: see Table.
Administration: For various reasons, the 2018 Dogs are unlikely to post greater total returns this year than the Dow Jones Industrial Average (DIA). But we can still try to play the game by predicting which of this year’s Dogs will be missing from next year’s Dog pen. Those will probably come from those posting lower dividend yields at the mid-year point (see Column G in the Table): Coca-Cola (KO), Cisco Systems (CSCO), General Electric (GE), Merck (MRK) and Chevron (CVX).
Bottom Line: Given current trends, Cisco Systems (CSCO) and Chevron (CVX) are likely to be released from the Dog pen at the end of the year.
Risk Rating: 6 (where US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into KO, PG, XOM and IBM, and also own shares of CSCO.
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, June 17
Week 363 - Big Pharma
Situation: There are 11 pharmaceutical companies in the S&P 100 Index, with an average market capitalization of ~$130 Billion. Stocks issued by healthcare companies (including hospital chains, pharmacy benefit managers, medical insurance vendors, and drugstores) are thought to be defensive “risk-off” bets, like stocks issued by utility, communication services, or consumer staples companies. But they’re not. Healthcare consumes almost 20% of GDP but it is a highly fragmented industry, rife with government interference seeking full control. Medical innovation for the entire planet has to take place in the United States because the healthcare industry is socialized elsewhere and large amounts of private capital are needed to conduct clinical trials. That innovation makes US healthcare into an ongoing research enterprise. For biotechnology companies, there is an ever-present risk of being eclipsed by another company’s research team. Stockpickers who have some appreciation for biochemistry can perhaps identify biotechnology groups that are onto a good thing. But Big Pharma companies survive by looking to buy those same startups. Can you really scope-out a “good thing” better than their scientists?
Mission: Run our Standard Spreadsheet for the 11 pharmaceutical companies in the S&P 100 Index.
Execution: see Table.
Bottom Line: This is not a game for the retail investor. All she can do is buy stock in one or two of the 11 “Big Pharma” companies, and hope that its CEO can find small biotechnology groups conducting breakthrough science, then buy at least one a year to throw money at. That’s an iffy business. Why? Because large-scale clinical studies (costing hundreds of million dollars) have to be conducted before the bet pays off. Usually it doesn’t. If you’re a stock-picker new to this industry, start by researching the old standbys that reliably pay good dividends: Johnson & Johnson (JNJ), Merck (MRK), Pfizer (PFE) and Eli Lilly (LLY).
Risk Rating: 7 (where US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into JNJ and also own shares of ABT.
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Mission: Run our Standard Spreadsheet for the 11 pharmaceutical companies in the S&P 100 Index.
Execution: see Table.
Bottom Line: This is not a game for the retail investor. All she can do is buy stock in one or two of the 11 “Big Pharma” companies, and hope that its CEO can find small biotechnology groups conducting breakthrough science, then buy at least one a year to throw money at. That’s an iffy business. Why? Because large-scale clinical studies (costing hundreds of million dollars) have to be conducted before the bet pays off. Usually it doesn’t. If you’re a stock-picker new to this industry, start by researching the old standbys that reliably pay good dividends: Johnson & Johnson (JNJ), Merck (MRK), Pfizer (PFE) and Eli Lilly (LLY).
Risk Rating: 7 (where US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into JNJ and also own shares of ABT.
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Sunday, April 15
Week 354 - Production Agriculture
Situation: Commodity production is quietly starting its next ~20-Yr supercycle. The last one was strong, due to the epic buildout of the Chinese economy. The coming supercycle also will be based in China, which is emerging as a superpower. For a capsule view of what’s happening, look at US soybean exports in 2016. Soybeans mainly become animal feed, and pork is the favorite source of protein for China’s burgeoning middle class. However, raw commodities in general and grains in particular remain underpriced. Why? Because advances in technology and logistics almost guarantee that supplies will outstrip demand:
“In business literature, commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition. Hence, the key effect of commoditization is that the pricing power of the manufacturer or brand owner is weakened: when products become more similar from a buyer's point of view, they will tend to buy the cheapest.”
Farmers worldwide see that their average income tends to fall, as prices paid for their average harvest tends to fall. In most years, they can’t afford to pay as much for inputs to next year’s harvest as the prior year. We’re seeing a wave of consolidation among companies that supply farmers with seeds, insecticides, herbicides, fungicides and fertilizer chemicals. Famous companies like Agrium, duPont, Dow Chemical, Syngenta, Potash Corporation of Saskatchewan, and Smithfield Foods have either merged with a competitor or been acquired.
Mission: Use our Standard Spreadsheet to analyze the few long-established companies that remain active supporters of farm production.
Execution: see Table.
Bottom Line: Production agriculture has become commoditized. (No surprise there.) But investors can still make money in that financial space from vertically integrated meat producers, i.e., the top 4 companies listed the Table. Why do they stand out? Because China is a big country and has gone far toward eliminating poverty. A long-standing love of pork products in particular will continue to track growth of the middle class. That appetite for animal protein resulted in a 8-26% increase in beef, pork and chicken products from the US in 2017 alone, compared to an increase of only 5-6% for confectionary items, fruit, and nuts.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MON, and own stock in Hormel Foods (HRL) and Union Pacific (UNP).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
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“In business literature, commoditization is defined as the process by which goods that have economic value and are distinguishable in terms of attributes (uniqueness or brand) end up becoming simple commodities in the eyes of the market or consumers. It is the movement of a market from differentiated to undifferentiated price competition and from monopolistic to perfect competition. Hence, the key effect of commoditization is that the pricing power of the manufacturer or brand owner is weakened: when products become more similar from a buyer's point of view, they will tend to buy the cheapest.”
Farmers worldwide see that their average income tends to fall, as prices paid for their average harvest tends to fall. In most years, they can’t afford to pay as much for inputs to next year’s harvest as the prior year. We’re seeing a wave of consolidation among companies that supply farmers with seeds, insecticides, herbicides, fungicides and fertilizer chemicals. Famous companies like Agrium, duPont, Dow Chemical, Syngenta, Potash Corporation of Saskatchewan, and Smithfield Foods have either merged with a competitor or been acquired.
Mission: Use our Standard Spreadsheet to analyze the few long-established companies that remain active supporters of farm production.
Execution: see Table.
Bottom Line: Production agriculture has become commoditized. (No surprise there.) But investors can still make money in that financial space from vertically integrated meat producers, i.e., the top 4 companies listed the Table. Why do they stand out? Because China is a big country and has gone far toward eliminating poverty. A long-standing love of pork products in particular will continue to track growth of the middle class. That appetite for animal protein resulted in a 8-26% increase in beef, pork and chicken products from the US in 2017 alone, compared to an increase of only 5-6% for confectionary items, fruit, and nuts.
Risk Rating: 8 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into MON, and own stock in Hormel Foods (HRL) and Union Pacific (UNP).
"The 2 and 8 Club" (CR) 2018 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 5
Week 296 - Testing Our Stock-picking Algorithm
Situation: The “normal” way to invest in stocks is to play the Market as a whole. Typically, that means dollar-cost averaging into index funds such as those offered by Vanguard Group (VFINX, VEXMX, VTSMX, VGTSX) or SPDR State Street Global Advisors (SPY, MDY, DGT). That way, transaction costs are minimized and you can’t miss out on market moves. Or, you can try to beat the Market by building (and managing) a portfolio composed of many stocks representing all 10 S&P Industries. There’s no shortage of books on the subject but one will suffice: “The Four Pillars of Investing: Lessons for Building a Winning Portfolio” by William J. Bernstein, 2002, McGraw-Hill. There you’ll find a mathematical exercise proving that the only logical way to do well from investing in stocks is to focus on dividend growth.
Mission: Lay out an algorithm for stock selection.
Execution: Start with companies that have grown their dividend annually for 10 or more years, i.e., S&P Dividend Achievers. Select the ones that have grown their dividend faster than our benchmark S&P 500 index fund, VFINX, over the past 10 years, which is 6.8%/yr. Narrow that list down to those companies large enough to be on the Barron’s 500 List. Why? Because large companies a) have multiple product lines, and b) their stock has enough activity on the CBOE (Chicago Board Options Exchange) to facilitate price discovery. Remove any companies that don’t have an S&P Bond Rating of at least A- and an S&P Stock Rating of at least A-/M. Remove any companies that don’t have a 16-yr trading record that has been analyzed statistically by the BMW Method. Exclude companies that rely on long-term debt for more than 1/3rd of total capitalization, or couldn't meet dividend payments from free cash flow (FCF) in the two most recent quarters. Also exclude companies that are over-reliant on short-term debt, i.e., have more than 5% negative Tangible Book Value.
Administration: There are 27 companies that pass the above screen. By using the BMW Method, we have separated those into a group of 16 that has no greater chance of loss in a future Bear Market than the S&P 500 Index (see Column M of the Table under “Non-Gambling”), and a group of 11 that has a greater chance of loss (see red highlights in Column M under “Gambling”). If you do choose to invest in one of the Gambling companies, watch price-action because you’ll likely want to SELL at some point. In Columns N-P we provide data on 3 ratios that assess the overall health of Financial Statements.
Bottom Line: The purpose of stock-picking is to Beat the Market. It is very difficult, expensive, and time-consuming to do so over more than one Market Cycle. We have laid out a system for picking stocks, and back-tested it. It has a Failure Rate of 4%. In other words, 25 of the 26 stocks beat the S&P 500 Index over the past 16 years (see Column K in the Table). Just to be clear, we recommend that you dollar-average into index funds (see BENCHMARKS section of Table), and/or Berkshire Hathaway B-shares (where you would be building a position in over 100 large and mid-cap companies).
Of the 16 stocks we designate as non-gambling investments, most carry market multiples (or lower) for EV/EBITDA: GWW, UNP, CNI, WEC, APD, NEE, TRV, WMT, TGT. Those stocks are attractive for purchase if no issues arise from your further research, such as reading the Morningstar evaluation.
Risk Rating is 7 for the stock selection system outlined above. Why is that? Because of Selection Bias (https://en.wikipedia.org/wiki/Selection_bias) and Transaction Costs (http://www.investopedia.com/terms/t/transactioncosts.asp).
Full Disclosure: I dollar-average into UNP, NKE, JNJ, PG, NEE and MSFT, and also own shares of CNI, MMM, WMT, HRL, TRV, MKC, ROST, TJX, GD and CAT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 40 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends collected in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 5-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 45 in the Table. The ETF for that index is MDY at Line 39.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Lay out an algorithm for stock selection.
Execution: Start with companies that have grown their dividend annually for 10 or more years, i.e., S&P Dividend Achievers. Select the ones that have grown their dividend faster than our benchmark S&P 500 index fund, VFINX, over the past 10 years, which is 6.8%/yr. Narrow that list down to those companies large enough to be on the Barron’s 500 List. Why? Because large companies a) have multiple product lines, and b) their stock has enough activity on the CBOE (Chicago Board Options Exchange) to facilitate price discovery. Remove any companies that don’t have an S&P Bond Rating of at least A- and an S&P Stock Rating of at least A-/M. Remove any companies that don’t have a 16-yr trading record that has been analyzed statistically by the BMW Method. Exclude companies that rely on long-term debt for more than 1/3rd of total capitalization, or couldn't meet dividend payments from free cash flow (FCF) in the two most recent quarters. Also exclude companies that are over-reliant on short-term debt, i.e., have more than 5% negative Tangible Book Value.
Administration: There are 27 companies that pass the above screen. By using the BMW Method, we have separated those into a group of 16 that has no greater chance of loss in a future Bear Market than the S&P 500 Index (see Column M of the Table under “Non-Gambling”), and a group of 11 that has a greater chance of loss (see red highlights in Column M under “Gambling”). If you do choose to invest in one of the Gambling companies, watch price-action because you’ll likely want to SELL at some point. In Columns N-P we provide data on 3 ratios that assess the overall health of Financial Statements.
Bottom Line: The purpose of stock-picking is to Beat the Market. It is very difficult, expensive, and time-consuming to do so over more than one Market Cycle. We have laid out a system for picking stocks, and back-tested it. It has a Failure Rate of 4%. In other words, 25 of the 26 stocks beat the S&P 500 Index over the past 16 years (see Column K in the Table). Just to be clear, we recommend that you dollar-average into index funds (see BENCHMARKS section of Table), and/or Berkshire Hathaway B-shares (where you would be building a position in over 100 large and mid-cap companies).
Of the 16 stocks we designate as non-gambling investments, most carry market multiples (or lower) for EV/EBITDA: GWW, UNP, CNI, WEC, APD, NEE, TRV, WMT, TGT. Those stocks are attractive for purchase if no issues arise from your further research, such as reading the Morningstar evaluation.
Risk Rating is 7 for the stock selection system outlined above. Why is that? Because of Selection Bias (https://en.wikipedia.org/wiki/Selection_bias) and Transaction Costs (http://www.investopedia.com/terms/t/transactioncosts.asp).
Full Disclosure: I dollar-average into UNP, NKE, JNJ, PG, NEE and MSFT, and also own shares of CNI, MMM, WMT, HRL, TRV, MKC, ROST, TJX, GD and CAT.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 40 in the Table. Purple highlights denote Balance Sheet issues and shortfalls. Net Present Value (NPV) inputs are described and justified in the Appendix to Week 256: Briefly, Discount Rate = 9%, Holding Period = 10 years (no dividends collected in 10th year), Initial Cost = average stock price over the past 50 days (corrected for transaction costs of 2.5% when buying ~$5000 worth of shares). Dividend Growth Rate is the 5-Yr CAGR found at Column H. Price Growth Rate is the 16-Yr CAGR found at Column K (http://invest.kleinnet.com/bmw1/). Price Return (from selling all shares in the 10th year) is corrected for transaction costs of 2.5%. The Discount Rate of 9% approximates Total Returns/yr from a stock index of similar risk to owning a small number of large-cap stocks, where risk due to “selection bias” is paramount. That stock index is the S&P MidCap 400 Index at Line 45 in the Table. The ETF for that index is MDY at Line 39.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 1
Week 252 - Barron’s 500 AgriBusiness Companies
Situation: We follow companies that support grain production closely because they’re “withering on the vine.” Farmers can’t afford to purchase supplies and replace worn-out equipment because grain prices have collapsed due to overproduction. Mainly, the weather is responsible. El Nino, with warm water collecting in the Eastern Pacific Ocean, means there is almost enough rainfall worldwide. But El Nino will soon be followed by La Nina; then there will be droughts and the price of grain will rise. Should that happen, many farmers will have higher incomes and be able to buy new equipment from companies like Deere (DE).
Mission: Develop a spreadsheet that includes all the major US and Canadian AgriBusiness companies, i.e., those that meet the agronomy, equipment, and distribution needs of farmers. To identify companies with the highest revenue, we’ll confine our attention to those that appear on the 2015 Barron’s 500 List.
Execution: There are 13 companies that have at least a 15-yr trading record. Six are chemical and seed companies that address agronomy needs; 4 are equipment companies that supply tractors, harvesters, and support for those; 3 are distribution and marketing companies for the raw commodity (wheat, soybeans, corn, rice, and sorghum).
Bottom Line: These 13 companies are not doing well (see Table). Total returns/yr for the past 5 yrs are negative for the average company but have become worse over the past two years. Perhaps Dow Chemical (DOW) and duPont (DD) are managing better than the rest, but even they have suffered so much that they’re planning to merge operations.
Risk Rating: 8
Full Disclosure: I dollar-average into MON, and also own shares of DD, ADM, and DE.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. the Vanguard Balanced Index Fund (VBINX).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Develop a spreadsheet that includes all the major US and Canadian AgriBusiness companies, i.e., those that meet the agronomy, equipment, and distribution needs of farmers. To identify companies with the highest revenue, we’ll confine our attention to those that appear on the 2015 Barron’s 500 List.
Execution: There are 13 companies that have at least a 15-yr trading record. Six are chemical and seed companies that address agronomy needs; 4 are equipment companies that supply tractors, harvesters, and support for those; 3 are distribution and marketing companies for the raw commodity (wheat, soybeans, corn, rice, and sorghum).
Bottom Line: These 13 companies are not doing well (see Table). Total returns/yr for the past 5 yrs are negative for the average company but have become worse over the past two years. Perhaps Dow Chemical (DOW) and duPont (DD) are managing better than the rest, but even they have suffered so much that they’re planning to merge operations.
Risk Rating: 8
Full Disclosure: I dollar-average into MON, and also own shares of DD, ADM, and DE.
NOTE: Metrics in the Table are current for the Sunday of publication; metrics highlighted in red denote underperformance vs. the Vanguard Balanced Index Fund (VBINX).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, November 15
Week 228 - Barron’s 500 Stocks with 5-16 Yrs of Below-Market Volatility and Above-Market Returns
Situation: You don’t want to lose sleep worrying about your stock portfolio, but you also don’t want to depend entirely on index funds for retirement planning. Most readers of this blog have decided to supplement their retirement income with dividend checks that grow 2-5 times faster than inflation. The stockpicker’s goal is to get risk-adjusted returns that meet or beat S&P 500 Index returns. That takes a lot of time and requires understanding how markets work, meaning a steep learning curve extending over 10 or more years. And, it is almost impossible to find stocks that will perform for you at the high level over the long term (as this week’s blog makes clear). To get that result you would need to become a short-term trader of stocks that are not widely followed by analysts (Google “Peter Lynch” to see what I mean). If you’re not willing to become that kind of trader, then a better choice is to invest in the lowest-cost S&P 500 Index fund, the Vanguard 500 Index Fund (VFINX), or its bond-hedged version, the Vanguard Balanced Index Fund (VBINX). Or, accept that fact that few of your long-term stock picks are going to have total returns that out-perform the S&P 500 Index on a risk-adjusted basis over 2-3 market cycles.
Mission: Find stocks that have better risk-adjusted returns than the S&P 500 Index over 2-3 market cycles. Start by looking at the largest companies in the US and Canada using the Barron’s 500 List to gain information about key fundamentals. Specifically, we want to find those that have had below-market volatility over the past 5 and 16 years and returns that have beat the S&P 500 Index over the past 5 and 16 years. Eliminate any stocks that have S&P bond ratings lower than BBB+ or S&P stock ratings lower than B+/M.
Execution: We have been able to identify only 6 stocks that satisfy our criteria (see Table). If you have been reading our blog regularly, you’ll know that we call such stocks unicorns. Four of these 6 unicorn stocks pay an above-market dividend, and the other one (Nike) increases its dividend more by than 20% a year. Our list has turned up “bond substitutes” of high quality but all bond substitutes are in great demand. Why? Because the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has eliminated the ability of banks to trade bonds for their own account. In other words, the principal market for bonds has dried up. It is going to be a long time before bonds again become a place where you can park money in anticipation of interest payments that more than compensate for inflation.
And now, a word about the method we use to find unicorns in the Barron’s 500 List. To find companies with Below-market volatility over the past 5 yrs, we use 5-yr Beta, and at 16 yrs we use the predicted loss that would be incurred if the stock’s price dropped 2 Standard Deviations below trendline, per the BMW Method. To find companies with above-market returns at 5-yrs, and since the S&P 500 Index peaked on 9/1/00, we use the Buyupside total return stock calculator. To assess the past 16 years of price appreciation, we use the BMW Method. All comparisons are to either the S&P 500 Index or the lowest-cost stock mutual fund that mimics that index (VFINX).
Bottom Line: We’re looking for “unicorn” stocks and found 6 (see Table). The method we use will probably never turn up more than 10 stocks, given that outperformance is almost always accompanied by greater volatility. The problem for you, the reader, is that we’ve used historical data. In other words, there’s no way of knowing whether these 6 stocks will continue to outperform while exhibiting below-market volatility.
Risk Rating: 4
Full Disclosure: I dollar-average into NKE, UNP and NEE.
Note: Metrics highlighted in red denote underperformance vs. our key benchmark (VBINX). Metrics are current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Find stocks that have better risk-adjusted returns than the S&P 500 Index over 2-3 market cycles. Start by looking at the largest companies in the US and Canada using the Barron’s 500 List to gain information about key fundamentals. Specifically, we want to find those that have had below-market volatility over the past 5 and 16 years and returns that have beat the S&P 500 Index over the past 5 and 16 years. Eliminate any stocks that have S&P bond ratings lower than BBB+ or S&P stock ratings lower than B+/M.
Execution: We have been able to identify only 6 stocks that satisfy our criteria (see Table). If you have been reading our blog regularly, you’ll know that we call such stocks unicorns. Four of these 6 unicorn stocks pay an above-market dividend, and the other one (Nike) increases its dividend more by than 20% a year. Our list has turned up “bond substitutes” of high quality but all bond substitutes are in great demand. Why? Because the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 has eliminated the ability of banks to trade bonds for their own account. In other words, the principal market for bonds has dried up. It is going to be a long time before bonds again become a place where you can park money in anticipation of interest payments that more than compensate for inflation.
And now, a word about the method we use to find unicorns in the Barron’s 500 List. To find companies with Below-market volatility over the past 5 yrs, we use 5-yr Beta, and at 16 yrs we use the predicted loss that would be incurred if the stock’s price dropped 2 Standard Deviations below trendline, per the BMW Method. To find companies with above-market returns at 5-yrs, and since the S&P 500 Index peaked on 9/1/00, we use the Buyupside total return stock calculator. To assess the past 16 years of price appreciation, we use the BMW Method. All comparisons are to either the S&P 500 Index or the lowest-cost stock mutual fund that mimics that index (VFINX).
Bottom Line: We’re looking for “unicorn” stocks and found 6 (see Table). The method we use will probably never turn up more than 10 stocks, given that outperformance is almost always accompanied by greater volatility. The problem for you, the reader, is that we’ve used historical data. In other words, there’s no way of knowing whether these 6 stocks will continue to outperform while exhibiting below-market volatility.
Risk Rating: 4
Full Disclosure: I dollar-average into NKE, UNP and NEE.
Note: Metrics highlighted in red denote underperformance vs. our key benchmark (VBINX). Metrics are current for the Sunday of publication.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 6
Week 144 - An All-stock Savings Plan with no Transaction Costs after Initial Set-up
Situation: Here at ITR, we recommend that you plan for retirement by using workplace savings plans supplemented with an IRA composed of online dividend reinvestment plans (DRIPs), i.e., stock in companies that reliably grow their dividends. (Your accountant needs to declare to the IRS that those DRIPs are IRA investments, and you need to stay within the annual limits for IRA investments.) The reasons behind using DRIPs are to minimize cost and risk, since those are the factors that most often trip up investors by eating up returns. This week’s blog takes that idea to its logical conclusion by presenting DRIPs that have no ongoing costs after initial set-up. In other words, the company is paying all of the transaction costs as a way to retain your loyalty. But you might ask, “How does that help me reduce the inherent risk of owning stocks?” That’s the compelling part of the story, because the few companies that are willing to cover your expenses happen to be some of the same companies that we routinely highlight for reducing investor risk over the decades.
What’s not to like? Well, there are very few such companies. We’re aware of only eight (see Table). The DRIPs for all but 3 of those are serviced by computershare with the 3 exceptions being Hormel Foods (HRL), 3M (MMM), and General Mills (GIS), which are serviced by Wells Fargo. Navigating those websites to discover the option that saves you from paying ongoing costs can be a little tricky. For example, it costs a dollar a month to purchase JNJ shares automatically by having the investment dollars taken from your checking account, but if you go into the website to make a purchase each month, it’s free.
You’ll notice that 3 of the 8 companies are from the “consumer staples” industry (HRL, GIS, PG). For this reason, we have added an exchange-traded fund (ETF) for that industry to our BENCHMARKS for comparison: VDC. Why do companies in the consumer staples industry do so well? After all, these mature companies have long produced boring products that offer little opportunity for innovation. Where have you heard this before? Oh, yeah! That’s the kind of company Warren Buffett likes. In other words, companies that sell "essential goods" don’t have much to worry about during a recession, and quickly recover from their small losses when the recession ends.
Bottom Line: Company CEOs tend to overlook costs during a bull market but then find they have to rigorously control costs in order to survive a bad recession. Many more of their employees will have to be laid off than would have been the case if those CEOs had rigorously controlled costs during good times. It’s a problem of human nature, not capitalism. We all feel expansive when our savings grow expansively, viewing costs as a small fraction of our gains. But as investors, costs are the only expense we can control (we certainly do not control inflation or taxes). Why not minimize transaction costs and management fees to the extent possible? After all, the average investor gives up over 2% of the net asset value of her holdings each year to those charges. Let’s take a hypothetical example: You’re 70 yrs old now and at age 20 you invested $5,000. If your assets were under management, those assets were documented to have had an average growth rate of 7%/yr over the next 50 yrs. Accordingly, you should have $150,000 to spend. But wait, there’s only $58,500 in that account because you paid an average of 2%/yr for each of those 50 yrs in transaction costs and management fees. Inflation averaged 4.1%/yr, so now you’re left with only 0.9%/yr in real gains (7 - 2 - 4.1 = 0.9). And that isn’t even accounting for taxes. Instead, we suggest that you try online DRIPs that have no ongoing transaction costs or management fees, and charge minimal fees for initial set-up and final sale.
Risk Rating: 5, unless investment in each of the riskier items (XOM and MMM) is offset with an equal investment in inflation-protected Treasury Notes or Savings Bonds at treasurydirect, which brings the risk rating down to 3.
Full disclosure of my current investment activity as related to companies in the Table: monthly additions to DRIPs in XOM, PG, JNJ, ABT, and NEE.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
What’s not to like? Well, there are very few such companies. We’re aware of only eight (see Table). The DRIPs for all but 3 of those are serviced by computershare with the 3 exceptions being Hormel Foods (HRL), 3M (MMM), and General Mills (GIS), which are serviced by Wells Fargo. Navigating those websites to discover the option that saves you from paying ongoing costs can be a little tricky. For example, it costs a dollar a month to purchase JNJ shares automatically by having the investment dollars taken from your checking account, but if you go into the website to make a purchase each month, it’s free.
You’ll notice that 3 of the 8 companies are from the “consumer staples” industry (HRL, GIS, PG). For this reason, we have added an exchange-traded fund (ETF) for that industry to our BENCHMARKS for comparison: VDC. Why do companies in the consumer staples industry do so well? After all, these mature companies have long produced boring products that offer little opportunity for innovation. Where have you heard this before? Oh, yeah! That’s the kind of company Warren Buffett likes. In other words, companies that sell "essential goods" don’t have much to worry about during a recession, and quickly recover from their small losses when the recession ends.
Bottom Line: Company CEOs tend to overlook costs during a bull market but then find they have to rigorously control costs in order to survive a bad recession. Many more of their employees will have to be laid off than would have been the case if those CEOs had rigorously controlled costs during good times. It’s a problem of human nature, not capitalism. We all feel expansive when our savings grow expansively, viewing costs as a small fraction of our gains. But as investors, costs are the only expense we can control (we certainly do not control inflation or taxes). Why not minimize transaction costs and management fees to the extent possible? After all, the average investor gives up over 2% of the net asset value of her holdings each year to those charges. Let’s take a hypothetical example: You’re 70 yrs old now and at age 20 you invested $5,000. If your assets were under management, those assets were documented to have had an average growth rate of 7%/yr over the next 50 yrs. Accordingly, you should have $150,000 to spend. But wait, there’s only $58,500 in that account because you paid an average of 2%/yr for each of those 50 yrs in transaction costs and management fees. Inflation averaged 4.1%/yr, so now you’re left with only 0.9%/yr in real gains (7 - 2 - 4.1 = 0.9). And that isn’t even accounting for taxes. Instead, we suggest that you try online DRIPs that have no ongoing transaction costs or management fees, and charge minimal fees for initial set-up and final sale.
Risk Rating: 5, unless investment in each of the riskier items (XOM and MMM) is offset with an equal investment in inflation-protected Treasury Notes or Savings Bonds at treasurydirect, which brings the risk rating down to 3.
Full disclosure of my current investment activity as related to companies in the Table: monthly additions to DRIPs in XOM, PG, JNJ, ABT, and NEE.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, February 16
Week 137 - Be Careful! Retirement Options Can Change Drastically After Divorce
Situation: There was a great discussion related to divorce after the age of 50 on NPR (here’s the link if you’d like to read it). There is even a new term coined! It’s called “Gray Divorce.” The reason we remember this NPR show is due to one particular statistic. In 2009, one in four persons who divorced was over the age of 50. Why is this information showing up in a blog about investing? Because if you are among the Gray Divorced, and you live in a state where marital assets are divided 50:50 in property settlement agreements, then your retirement savings just took a direct hit with a 50% loss. If you’ve been following this blog for very long, you also know that recovering from such a loss when you are beyond the age of 50 is going to be impossible for most people. Today’s blog is going to be a case study on managing divorce after age 50 and calls for focused attention on personal finances, so that you’ll have at least some resources available after the age of 70.
In our case example, we will discuss the circumstances of a wife who was a homemaker and caregiver for almost 30 years. She quite probably has at least some college, maybe even a degree, but in all likelihood her job skills are out-of-date. When her divorce property settlement was determined, she found out that there were some retirement monies saved but there were also bills and lawyers fees that had to be paid. If her husband was making $80,000/yr, she could receive $40,000/yr of alimony for let’s say 5 yrs but that money may not go very far after monthly bills are paid. Let’s see, if you estimate 20% in taxes, then $40,000/yr becomes about $2,700/mo to live on and pay bills. Frequently, a family home will be sold to pay debts and divide the equity but in the past few years many mortgages have been underwater, creating even more financial nightmares. Quite probably our Gray Divorcee is now living in an apartment and will have to find a job.
Most of us understand already that 50 is a watershed year for retirement plans. By reading information on the internet related to retirement planning, one quickly realizes that to remain on target, by age 50 one should already have four times her salary stashed away in retirement plans. And, even though the kids are on their own, many will face financial needs, including help with a down payment for a home or paying college bills.
The task is daunting at best and overwhelming at worst. How to get started? Let’s begin by writing down a plan. First of all, look at yourself as a complete and whole person. Examine your personal relationships, identify those that are fulfilling and energizing, and find ways to be more involved with your neighbors and community. Secondly, build and strengthen your spiritual practices. Thirdly, get fit, eat healthy, sleep soundly, and keep your medical appointments.
The next area to examine will be finding a job, brushing up on your job skills, perhaps even taking a college course two evenings a week. While jobs in retail can be relatively easy to turn up, and can be a way to start back to work, there are a number of reasons why those jobs are not your best long term option. Those reasons include poor or no benefits, as well as unfavorable scheduled hours. Better jobs are to be found in healthcare, education, or industry. Use your acquired people skills, maturity, and work ethic as selling points. You can turn your community, school, and church organizational activities into a job reference by having an upstanding member of the community write you a letter of reference. And keep knocking on doors! Don’t take “no” for an answer!
Now we are at the heart of this blog’s discussion: what about my financial situation? How do I pay bills and pull off retirement savings at the same time? We strongly recommend keeping two separate savings plans, each with a different function. Firstly, set up a “slush fund” that is to be used for emergencies. Secondly, develop a separate fund that is for retirement. The slush fund will probably see several withdrawals occur over the next few years so having it based in a savings account at your bank makes sense. “How much money do I set aside for the slush fund?” We recommend that you start by creating a budget. Make a list of everything you spend money on for one month then categorize and add up the amounts. Monies left-over at the end of the month, or monies spent on non-essentials, are candidate dollars for savings. Later, when the account builds some value, there are better options to consider than a savings account, and those involve learning some rudimentary investing skills (see Week 15, Week 33).
Now on the subject of the retirement plan, we suggest putting in place two particular practices. The first is that of secrecy. Shhh! Don’t talk about it, and just forget that the money even exists. The nest egg you are creating is for the future, when you are fully retired. By forgetting that it exists now, you avoid the temptation to spend it. Emergencies are why the slush fund was created. And this ties in to the second practice we recommend adopting, that of discipline. It will require discipline to set aside retirement money and not spend it. It will also require discipline to add a monthly amount to the slush fund for use in emergencies.
There are a variety of forms that your retirement plan can take (see Table). The simplest discipline is to put $50/mo in your fund as an automatic deposit from your checking account. We recommend that you use one of the lowest-cost and lowest-risk “balanced” mutual funds: Vanguard Balanced Index Fund (VBINX) or Vanguard Wellesley Income Fund (VWINX). Those are safe and well-managed funds but a potential drawback is that Vanguard requires you to open your account with a $3,000 initial deposit. If you can’t swing the initial deposit, an even easier way is to buy stock in a AAA-rated corporation and set up a dividend reinvestment plan (DRIP), with zero ongoing costs at computershare.com. The companies we suggest you look at first are Johnson & Johnson (JNJ) and Exxon Mobil (XOM), and you can open your account for no more than the $250 initial investment followed by monthly $50 withdrawals from your checking account in the case of XOM. With JNJ, that automatic feature costs $1.00/mo but you can do it yourself at no cost by entering the website and making a $50 purchase each month.
Never heard of a DRIP before? It stands for Dividend Re-Investment Plan. It automatically reinvests quarterly dividends by purchasing more of the same stock automatically (and typically at no cost to you). The reason why we recommend you use a DRIP is because 40% of the total returns from stock purchases come from reinvesting the dividends. More importantly, the companies we highlight in our blog grow their dividends approximately 10%/yr, regardless of economic conditions. As a retiree, you won’t be reinvesting dividends; instead, you’ll opt to receive the quarterly checks in the mail. In other words, YOUR PAY will be growing around 7%/yr faster than inflation.
Even though you start your Personal Retirement Plan at $50/mo, we strongly encourage you to constantly re-evaluate your spending and try to keep bumping the $50 upwards. What would $50/mo going to JNJ over the next 20 years give you, assuming 3% inflation and 15% taxes on the quarterly dividend payments that you re-invest? In other words, where does 5%/yr of real profit leave you in today’s dollars? The answer is $20,857, and by then you’d be receiving about $600/yr in dividends (which is the same amount you would have been putting in each year) that will grow faster than inflation. Looked at a different way, if you’d started investing $100/mo in JNJ 11.7 yrs ago (Table), you would now have a nest egg of $26,560.
As you become more comfortable with your savings plan, you will eventually want to add a DRIP for the highest-quality electric utility: NextEra Energy (NEE). A savings plan made up of those 3 stocks, XOM, JNJ, NEE, will give you a profit (after inflation and taxes on dividends) of 6%/yr over time. Another sound practice is to have some retirement money in 10-yr US Treasury Notes. Those won’t leave you with any profit (after taxes on interest and inflation) but that asset class does increase in value during a recession. Recessions are a tricky time, particularly for those of you who are getting close to retirement age. Why? Because that’s when it is easy to get caught short of cash. You might be laid off, your kids might be in a bind, etc.. You don’t want to sell stocks to raise cash, because the stock market goes down an average of 31% in recessions. So sell your Treasury Notes.
Bottom Line: Life after divorce requires that you manage your money properly, and becoming a Gray Divorcee after age 50 doubly requires you to pay attention to retirement savings.
Risk Rating: 3
Full Disclosure: I purchase 10-yr Treasury Notes quarterly and contribute monthly to DRIPs in XOM, NEE, and JNJ.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
In our case example, we will discuss the circumstances of a wife who was a homemaker and caregiver for almost 30 years. She quite probably has at least some college, maybe even a degree, but in all likelihood her job skills are out-of-date. When her divorce property settlement was determined, she found out that there were some retirement monies saved but there were also bills and lawyers fees that had to be paid. If her husband was making $80,000/yr, she could receive $40,000/yr of alimony for let’s say 5 yrs but that money may not go very far after monthly bills are paid. Let’s see, if you estimate 20% in taxes, then $40,000/yr becomes about $2,700/mo to live on and pay bills. Frequently, a family home will be sold to pay debts and divide the equity but in the past few years many mortgages have been underwater, creating even more financial nightmares. Quite probably our Gray Divorcee is now living in an apartment and will have to find a job.
Most of us understand already that 50 is a watershed year for retirement plans. By reading information on the internet related to retirement planning, one quickly realizes that to remain on target, by age 50 one should already have four times her salary stashed away in retirement plans. And, even though the kids are on their own, many will face financial needs, including help with a down payment for a home or paying college bills.
The task is daunting at best and overwhelming at worst. How to get started? Let’s begin by writing down a plan. First of all, look at yourself as a complete and whole person. Examine your personal relationships, identify those that are fulfilling and energizing, and find ways to be more involved with your neighbors and community. Secondly, build and strengthen your spiritual practices. Thirdly, get fit, eat healthy, sleep soundly, and keep your medical appointments.
The next area to examine will be finding a job, brushing up on your job skills, perhaps even taking a college course two evenings a week. While jobs in retail can be relatively easy to turn up, and can be a way to start back to work, there are a number of reasons why those jobs are not your best long term option. Those reasons include poor or no benefits, as well as unfavorable scheduled hours. Better jobs are to be found in healthcare, education, or industry. Use your acquired people skills, maturity, and work ethic as selling points. You can turn your community, school, and church organizational activities into a job reference by having an upstanding member of the community write you a letter of reference. And keep knocking on doors! Don’t take “no” for an answer!
Now we are at the heart of this blog’s discussion: what about my financial situation? How do I pay bills and pull off retirement savings at the same time? We strongly recommend keeping two separate savings plans, each with a different function. Firstly, set up a “slush fund” that is to be used for emergencies. Secondly, develop a separate fund that is for retirement. The slush fund will probably see several withdrawals occur over the next few years so having it based in a savings account at your bank makes sense. “How much money do I set aside for the slush fund?” We recommend that you start by creating a budget. Make a list of everything you spend money on for one month then categorize and add up the amounts. Monies left-over at the end of the month, or monies spent on non-essentials, are candidate dollars for savings. Later, when the account builds some value, there are better options to consider than a savings account, and those involve learning some rudimentary investing skills (see Week 15, Week 33).
Now on the subject of the retirement plan, we suggest putting in place two particular practices. The first is that of secrecy. Shhh! Don’t talk about it, and just forget that the money even exists. The nest egg you are creating is for the future, when you are fully retired. By forgetting that it exists now, you avoid the temptation to spend it. Emergencies are why the slush fund was created. And this ties in to the second practice we recommend adopting, that of discipline. It will require discipline to set aside retirement money and not spend it. It will also require discipline to add a monthly amount to the slush fund for use in emergencies.
There are a variety of forms that your retirement plan can take (see Table). The simplest discipline is to put $50/mo in your fund as an automatic deposit from your checking account. We recommend that you use one of the lowest-cost and lowest-risk “balanced” mutual funds: Vanguard Balanced Index Fund (VBINX) or Vanguard Wellesley Income Fund (VWINX). Those are safe and well-managed funds but a potential drawback is that Vanguard requires you to open your account with a $3,000 initial deposit. If you can’t swing the initial deposit, an even easier way is to buy stock in a AAA-rated corporation and set up a dividend reinvestment plan (DRIP), with zero ongoing costs at computershare.com. The companies we suggest you look at first are Johnson & Johnson (JNJ) and Exxon Mobil (XOM), and you can open your account for no more than the $250 initial investment followed by monthly $50 withdrawals from your checking account in the case of XOM. With JNJ, that automatic feature costs $1.00/mo but you can do it yourself at no cost by entering the website and making a $50 purchase each month.
Never heard of a DRIP before? It stands for Dividend Re-Investment Plan. It automatically reinvests quarterly dividends by purchasing more of the same stock automatically (and typically at no cost to you). The reason why we recommend you use a DRIP is because 40% of the total returns from stock purchases come from reinvesting the dividends. More importantly, the companies we highlight in our blog grow their dividends approximately 10%/yr, regardless of economic conditions. As a retiree, you won’t be reinvesting dividends; instead, you’ll opt to receive the quarterly checks in the mail. In other words, YOUR PAY will be growing around 7%/yr faster than inflation.
Even though you start your Personal Retirement Plan at $50/mo, we strongly encourage you to constantly re-evaluate your spending and try to keep bumping the $50 upwards. What would $50/mo going to JNJ over the next 20 years give you, assuming 3% inflation and 15% taxes on the quarterly dividend payments that you re-invest? In other words, where does 5%/yr of real profit leave you in today’s dollars? The answer is $20,857, and by then you’d be receiving about $600/yr in dividends (which is the same amount you would have been putting in each year) that will grow faster than inflation. Looked at a different way, if you’d started investing $100/mo in JNJ 11.7 yrs ago (Table), you would now have a nest egg of $26,560.
As you become more comfortable with your savings plan, you will eventually want to add a DRIP for the highest-quality electric utility: NextEra Energy (NEE). A savings plan made up of those 3 stocks, XOM, JNJ, NEE, will give you a profit (after inflation and taxes on dividends) of 6%/yr over time. Another sound practice is to have some retirement money in 10-yr US Treasury Notes. Those won’t leave you with any profit (after taxes on interest and inflation) but that asset class does increase in value during a recession. Recessions are a tricky time, particularly for those of you who are getting close to retirement age. Why? Because that’s when it is easy to get caught short of cash. You might be laid off, your kids might be in a bind, etc.. You don’t want to sell stocks to raise cash, because the stock market goes down an average of 31% in recessions. So sell your Treasury Notes.
Bottom Line: Life after divorce requires that you manage your money properly, and becoming a Gray Divorcee after age 50 doubly requires you to pay attention to retirement savings.
Risk Rating: 3
Full Disclosure: I purchase 10-yr Treasury Notes quarterly and contribute monthly to DRIPs in XOM, NEE, and JNJ.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, May 12
Week 97 - Capitalization-weighted Index of 11 High-quality Dividend Achievers
Situation: What is a high-quality stock? Here at ITR, we advocate a “buy and hold” strategy of stock selection, our goal being to set up a dividend reinvestment plan (DRIP) for each selection. We advocate that you start small and add a little each month, by having that amount withdrawn electronically from your checking account. That means you've got a lot at stake if you change your mind about a stock and liquidate your DRIP. Before starting down that path, you need to have a definition of “quality” (there are many to choose from) that will let you get into a stock and stay invested for the long term.
We’ve offered some tips in previous blogs (see Week 3, Week 50, Week 72, Week 87 and Week 93):
a) plan to have at least 4 DRIPs;
b) avoid companies with long-term debt that is worth more than the stock;
c) avoid stocks that have a 5-yr Beta higher than the S&P 500 Index's (1.00);
d) favor companies that have positive free cash flow (FCF).
a) plan to have at least 4 DRIPs;
b) avoid companies with long-term debt that is worth more than the stock;
c) avoid stocks that have a 5-yr Beta higher than the S&P 500 Index's (1.00);
d) favor companies that have positive free cash flow (FCF).
Recently, we’ve seen that a number of fine companies with positive FCF don’t have enough FCF to pay their dividend. That means they’ll have no Retained Earnings (RE) with which to fund next year’s growth, and the company has to raise more cash (sell more stock, issue more bonds, or lobby government officials to make more tax expenditures). Companies get caught in this bind for 3 reasons: 1) The economy is still in the Intensive Care Unit (so to speak): Revenues can’t generate enough FCF to afford the dividend policy that the company has trained its investors to expect (e.g. annual raises sufficient to cover inflation). 2) That dividend policy needs to remain stable when there is a slack economy, since it is an effective way to keep investors in the stock market given the paltry income they get from bonds. 3) Foreign earnings are difficult to repatriate because 20-25% will have to be turned over to the Internal Revenue Service (i.e., the difference between low tax rates in developing countries and high tax rates in the United States). For that reason, most companies reinvest earnings in the same country that produced the earnings.
Here at ITR, "High quality” means simply that the company has Retained Earnings at the end of the year. That's the essence of capitalism. Rational investors favor investment-grade bonds, since return of their original investment is guaranteed. There are no guarantees that a stock will retain value. Remember, the Central Thought of business isn’t to make money . . . it's to redistribute the risk of losing money. A stock investor holds out hope that her chosen company will grow in value by deploying Retained Earnings. Most companies don’t have Retained Earnings; they have to expand by issuing stocks or bonds which costs at least 8%/yr.
The accompanying Table was constructed from a list (see invescopowershares) of 201 Dividend Achievers, i.e., companies that have increased their dividends annually for the past 10 or more yrs. Those companies were screened as follows:
1) Any company’s stock that had a total return during the Lehman Panic period (10/07 thru 3/09) worse than -30% (vs. -46.5% the lowest cost S&P 500 Index fund--VFINX) was discarded .
2) Any stock that has a history of growing dividends less rapidly than 5%/yr, which is the dividend growth rate for VFINX, was discarded.
3) Companies with a dividend yield less than 1% were discarded.
4) Companies that don’t have an S&P stock rating of at least A-, and an S&P bond rating of at least BBB+ were discarded.
The remaining companies were checked against the Buyupside website for performance vs. VFINX over the past two market cycles, beginning with the peak that occurred on March 24, 2000. Since then, VFINX has grown at a rate of 2.3%/yr through the reinvestment of dividends--price performance has only been 0.3%/yr. None of the companies that remained after applying the above screens performed as badly as VFINX, so none had to be discarded.
Then we used The WSJ to collect data on FCF, LT debt, ROIC, ROE and RE. Any company that didn’t have Retained Earnings in 2012 was discarded, as was any company that didn’t have an ROIC sufficient to pay ongoing costs of capitalization (at least 8%/yr). Companies where LT debt accounted for more than 50% of total capitalization were also discarded.
We ended up with 11 companies remaining that were ranked by the market value of their stock. Appropriate multiples ($1-11) were used to arrive at a capitalization-weighted index that has paid 9.3%/yr over the past two market cycles (vs. 2.3%/yr for VFINX).
Bottom Line: Consider having your key DRIPs in the very few large companies that remain able to grow by reinvesting their Retained Earnings, namely, WMT, IBM, XOM and ABT. Add DRIPs for smaller companies when you’re able to do so without going into debt, neglecting your health, avoiding exercise, or skipping vacations.
Risk Rating: 4.
Full Disclosure: I have DRIPs in WMT, IBM, XOM, and ABT. Automatic monthly additions for XOM and ABT carry no charges; there is a $1.05 charge for WMT and a $1.00 charge for IBM. I invest $280/mo in these 4 DRIPs, for an initial expense ratio of 0.73% ($2.05/$280).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, February 24
Week 86 - Low-risk Dividend Achievers vs. a Balanced Index Fund
Situation: The stocks we are calling “The Dividend Achievers” in the accompanying Table look like they can mint money. But for how many years will any one of these 26 “internally hedged” companies continue to have the pricing power and good management that make such outperformance possible? Pricing power comes from having a competitive advantage AND a product that is in demand but a tad short in supply. As an example, let’s take food products in the US. These stocks are expected to show price inflation that is 1% greater than the the overall Consumer Price Index for the next 2-3 yrs. Why is that? Because worldwide demand is growing while supply is constrained due to unpredictable events such as soil erosion, a dwindling availability of water, and an increase in temperatures to a range that is suboptimal for grain. The point is that there is always a reason for outperformance, and pricing power is usually the key to finding it. Pricing power is fungible . . . it won’t last.
Where should a recent college graduate invest to secure her retirement 40 yrs from now? Readers of our blog know we favor defensive industries (consumer staples like food and housewares, utilities, health care) because people keep spending for those goods and services even during a recession. For example, look at this week's Table: 18 out of the 26 companies are in defensive sectors.
Using our previously defined criteria (see Week 76), these 18 companies are internally hedged. By this we mean that their stock a) fell less than 65% as far as the S&P 500 Index during the Lehman Panic, b) has a 5-yr Beta less than 0.65 (meaning it will do as well in the next panic), and c) beat Vanguard's S&P 500 Index fund (VFINX) for the past 20 yrs. All of our best stock picks are on that list. Those paying a miniscule dividend now are likely to pay more in the future. None need to be backed 1:1 by an inflation-protected US Savings Bond or similar AAA credit.
But the tricky part is choosing which 5 or 6 of those stocks you want for your dividend reinvestment plans (DRIPs). If you're a "one-stop shopper", you won't take the time. In that case, we recommend the Vanguard Wellesley Income Fund (VWINX).
For the rest of us, how should we pick stocks from this list of low-risk Dividend Achievers? These companies have a long history of annually increasing their payout so you can project future cash flows from that rate of increase. Simply add the current dividend yield (Column F, Table) to the historical rate of dividend increases (Column G) found on the Buyupside website. This produces the number in Column H, which is your projected rate of total return: 5.7% in the case of VWINX. Vanguard Wellesley Fund has done better than that over the past 20 yrs (Column I) because of capital gains realized upon the sale of bonds. How does that explain the outperformance? It happens because interest rates have steadily declined over the past 30 yrs, therefore, the bonds gained in value and a capital gain was realized when the bonds were sold. That also explains why utility stocks have outperformed (NEE, SO, WTR, UGI, SJI), since utilities are often capitalized with the help of bonds backed by a state government. When interest rates are low, cheap financing translates into a high return on invested capital (ROIC) to provide handsome annual increases in dividend payouts. To learn more about the rationale behind the above-method for arriving at the net present value of a stock, read The Four Pillars of Investing by William Bernstein (McGraw Hill, New York, 2002, ISBN 0-07-138529-0), the only book you need to read as a part-time investor.
For stocks other than utilities, deviations of the 20-yr total returns (Column J) from the discounted cash flow model (Column I) have more complex explanations. Here at ITR, we like to see agreement between predicted and actual returns. Good examples of this include the S&P 500 Index (VFINX), the average of 26 "hedge" stocks (Line 28, Table), Ross Stores (ROST), Family Dollar Stores (FDO), Hormel Foods (HRL), Chubb (CB), Abbott Laboratories (ABT), IBM and Procter & Gamble (PG). Predictable returns denote a stable competitive advantage. To gradually build a position in such stocks is sound investing, not gambling.
But all of these investment choices carry the risk of “pilot error", however small. We humans aren’t always rational allocators of capital but computers can be programmed to do an acceptable job. If you have $10 Million and take it to Goldman Sachs for them to invest on your behalf, they'll probably turn the task over to a computer. On June 20, 1996 Vanguard set up a Balanced Index Fund (VBINX) that has had an annualized total return since then of 7.2%/yr vs. 6.9%/yr for VFINX. The VBINX computer allocates 60% of your money to a total US stock market index and 40% to Barclay’s Capital US Float Adjusted Bond Index. The expense ratio is very low (0.25%), and there are no loads or other costs apart from requiring you to start your account with a check for $3000. Turnover is relatively low, even though the computer rebalances the 60/40 allocation daily.
So what is the point to this? The point is that once programmed, computers have less pilot error in decision making. Why a 60/40 split? Because that's what was in vogue when the fund was launched. Here at ITR, we prefer a 50/50 split but with a computer doing the stock picking and rebalancing it’s reasonable to take the extra risk of carrying more stocks. After all, we break our 50/50 rule whenever we can find an internally hedged stock. The Table lists all 26 hedge stocks we know of that are A-rated, have 10+ yrs of dividend growth, and have been publically traded for 20+ yrs.
Bottom Line: 40 yrs is a long time to save for retirement and a lot can change. Let's assume that you are not interested in making an avocation of investing but want to keep your money somewhat insulated from human error and management fees. And, you also want it to grow with the economy. Then maybe a balanced index fund is your best choice. For a very long investment horizon, such as a Roth IRA that will keep paying tax-free returns long after you die, a balanced index fund is arguably the only choice.
Risk Rating: 2.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Where should a recent college graduate invest to secure her retirement 40 yrs from now? Readers of our blog know we favor defensive industries (consumer staples like food and housewares, utilities, health care) because people keep spending for those goods and services even during a recession. For example, look at this week's Table: 18 out of the 26 companies are in defensive sectors.
Using our previously defined criteria (see Week 76), these 18 companies are internally hedged. By this we mean that their stock a) fell less than 65% as far as the S&P 500 Index during the Lehman Panic, b) has a 5-yr Beta less than 0.65 (meaning it will do as well in the next panic), and c) beat Vanguard's S&P 500 Index fund (VFINX) for the past 20 yrs. All of our best stock picks are on that list. Those paying a miniscule dividend now are likely to pay more in the future. None need to be backed 1:1 by an inflation-protected US Savings Bond or similar AAA credit.
But the tricky part is choosing which 5 or 6 of those stocks you want for your dividend reinvestment plans (DRIPs). If you're a "one-stop shopper", you won't take the time. In that case, we recommend the Vanguard Wellesley Income Fund (VWINX).
For the rest of us, how should we pick stocks from this list of low-risk Dividend Achievers? These companies have a long history of annually increasing their payout so you can project future cash flows from that rate of increase. Simply add the current dividend yield (Column F, Table) to the historical rate of dividend increases (Column G) found on the Buyupside website. This produces the number in Column H, which is your projected rate of total return: 5.7% in the case of VWINX. Vanguard Wellesley Fund has done better than that over the past 20 yrs (Column I) because of capital gains realized upon the sale of bonds. How does that explain the outperformance? It happens because interest rates have steadily declined over the past 30 yrs, therefore, the bonds gained in value and a capital gain was realized when the bonds were sold. That also explains why utility stocks have outperformed (NEE, SO, WTR, UGI, SJI), since utilities are often capitalized with the help of bonds backed by a state government. When interest rates are low, cheap financing translates into a high return on invested capital (ROIC) to provide handsome annual increases in dividend payouts. To learn more about the rationale behind the above-method for arriving at the net present value of a stock, read The Four Pillars of Investing by William Bernstein (McGraw Hill, New York, 2002, ISBN 0-07-138529-0), the only book you need to read as a part-time investor.
For stocks other than utilities, deviations of the 20-yr total returns (Column J) from the discounted cash flow model (Column I) have more complex explanations. Here at ITR, we like to see agreement between predicted and actual returns. Good examples of this include the S&P 500 Index (VFINX), the average of 26 "hedge" stocks (Line 28, Table), Ross Stores (ROST), Family Dollar Stores (FDO), Hormel Foods (HRL), Chubb (CB), Abbott Laboratories (ABT), IBM and Procter & Gamble (PG). Predictable returns denote a stable competitive advantage. To gradually build a position in such stocks is sound investing, not gambling.
But all of these investment choices carry the risk of “pilot error", however small. We humans aren’t always rational allocators of capital but computers can be programmed to do an acceptable job. If you have $10 Million and take it to Goldman Sachs for them to invest on your behalf, they'll probably turn the task over to a computer. On June 20, 1996 Vanguard set up a Balanced Index Fund (VBINX) that has had an annualized total return since then of 7.2%/yr vs. 6.9%/yr for VFINX. The VBINX computer allocates 60% of your money to a total US stock market index and 40% to Barclay’s Capital US Float Adjusted Bond Index. The expense ratio is very low (0.25%), and there are no loads or other costs apart from requiring you to start your account with a check for $3000. Turnover is relatively low, even though the computer rebalances the 60/40 allocation daily.
So what is the point to this? The point is that once programmed, computers have less pilot error in decision making. Why a 60/40 split? Because that's what was in vogue when the fund was launched. Here at ITR, we prefer a 50/50 split but with a computer doing the stock picking and rebalancing it’s reasonable to take the extra risk of carrying more stocks. After all, we break our 50/50 rule whenever we can find an internally hedged stock. The Table lists all 26 hedge stocks we know of that are A-rated, have 10+ yrs of dividend growth, and have been publically traded for 20+ yrs.
Bottom Line: 40 yrs is a long time to save for retirement and a lot can change. Let's assume that you are not interested in making an avocation of investing but want to keep your money somewhat insulated from human error and management fees. And, you also want it to grow with the economy. Then maybe a balanced index fund is your best choice. For a very long investment horizon, such as a Roth IRA that will keep paying tax-free returns long after you die, a balanced index fund is arguably the only choice.
Risk Rating: 2.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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