Situation: Once you retire, you’ll start to worry about outliving your nest egg, wondering when the next recession will start, and how bad it will be. If a market meltdown happens soon after you retire, and kicks off a long and deep recession, half of your retirement savings could go out the door.
You need to close that door ahead of time by focusing your portfolio on haven assets that you won’t sell under any circumstances. The problem is that haven assets are boring things, like Savings Bonds, 10-Yr US Treasury Notes, and stock in American Electric Power (AEP). On the opposite side of the coin are assets with moxie, like JPMorgan Chase (JPM), which are likely to lose a lot of value in a market crash. Why? Because buyers of moxie assets pile on, while sellers become relatively scarce. Market crashes can happen fast, especially those due to a credit crunch, so prices for moxie assets can fall too far too fast while their investors rush for the exit. “A run on the bank” is the apt analogy. The lesson is not to exclude moxie (i.e., growth stocks) from your retirement portfolio but to be careful not to overpay for those shares. That means you have to buy before the mania sets in. If your shares double in price but then fall 50% in the next market crash, you haven’t lost money. "For the investor, a too-high purchase price for the stock of an excellent company can undo the effects of a subsequent decade of favorable business developments." -- Warren Buffett.
The trick is to know when the shares you own in an “excellent company” are overpriced. Once you’ve made that determination, stop buying more but continue reinvesting dividends. To be clear, haven stocks aren’t just high-yielding stocks or value stocks. Growth stocks can also qualify, if not overpriced. So let’s look at metrics that Benjamin Graham used to determine if a stock is overpriced. Remember, he was Warren Buffett’s favorite professor at Columbia University’s business school. Graham started by calculating what a stock’s price would be if it reflected ideal valuation, meaning a price 1.5 times Book Value and 15 times Earnings per Share (EPS). He called that price the “Graham Number,” and calculated it as follows: multiply Book Value per share for the most recent quarter (mrq) by Earnings Per Share for the trailing twelve months (ttm), then multiply that number by 22.5 (1.5 x 15 = 22.5). Then calculate the square root of that number on your calculator. A stock priced more than twice the Graham Number is overpriced.
Another number he thought helpful is the 7-yr P/E, which is the stock’s current price divided by average EPS for the last 7 years. Graham thought that number should be no more than 25 for a stock to be considered fairly priced. In other words, a company that historically has a P/E of ~20 (which Graham thought to be the upper limit of normal valuation) might grow its EPS for 7 years at a typical rate of 3.2%/yr. That would result in a 7-yr P/E of 25. The “danger zone” for a stock’s current price to be thought of as overpriced is 2.0 to 2.5 times the Graham Number and 26 to 31 times average EPS over the past 7 years. So, if one of those numbers is in the danger zone and the other exceeds the danger zone, don’t even think about buying it for your retirement portfolio (see Column AG in our Tables, where that degree of overpricing is denoted with a “yes”).
Mission: Use our Standard Spreadsheet to analyze stocks likely to survive a deep recession. I’ll do this by referencing companies that are named in both of the most conservative indexes: 1) FTSE High Dividend Yield Index (VYM, the U.S. version marketed by Vanguard Group); 2) iShares Russell Top 200 Value Index (IWX).
Execution: see Table.
Administration: Any company listed in both those indexes that issues debt rated lower than A- by S&P is excluded, as are any that issue common stocks rated lower than B+/M by S&P. Stocks that don’t have a 16+ year trading record are also excluded because the data is insufficient for statistical analysis of their weekly share prices by the BMW Method. Companies with a zero or negative Book Value in the most recent quarter (mrq) are also excluded, as are companies with negative EPS over the trailing 12 months (ttm).
Bottom Line: The idea behind owning Haven Stocks is that you’ll “live to fight another day” after enduring an economic crisis. During a Bull Market, some of those value stocks will lag behind the market’s performance. But during Bear Markets, they’ll fall less in value. If market crashes haven’t become extinct, value stocks will outperform both growth stocks and momentum stocks over the long term. Just remember: When you buy a stock for your retirement portfolio, it needs to pay an above-market dividend because a time will come when you’ll want to stop reinvesting that stream of dividends and start spending it.
Risk Rating: 5 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into PFE, NEE, KO, INTC, PG, WMT, JPM, JNJ, USB, CAT, MMM, IBM, XOM, and also own shares of AMGN, DUK, AFL, SO, PEP, TRV, BLK, WFC.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Showing posts with label retirement. Show all posts
Showing posts with label retirement. Show all posts
Sunday, February 23
Sunday, December 29
Month 102 - A-rated Stocks in Vanguard’s Wellesley Income Fund (VWINX) - December 2019
Situation: For retiree savings accounts, most of the financial advisors that I follow prefer that half be allocated to bonds and the rest to stocks that reliably pay an above-market dividend. There is a convenient, low-cost way to anchor one’s portfolio in that direction, which is to invest in VWINX -- Vanguard’s Wellesley Income Fund. The managers allocate almost 60% to bonds and the rest to stocks that have been selected from the FTSE High Dividend Yield Index. Vanguard markets the U.S. version with the stock ticker of VYM. The ~400 stocks in VYM are selected from the Russell 1000 Index of large-capitalization companies (IWB).
As a prospective retiree, you’ll want a balanced portfolio--one with approximately a 50:50 balance between stocks and bonds. The transaction costs for buying a corporate bond are high so you’ll want a mutual fund with a mix of government bonds and corporates. For stocks, you have the option of picking your own while keeping transaction costs (expense ratio) at ~2%/yr. But the expense ratio is much lower if you leave stock picking to professional managers (or computers) and opt for a mutual fund or Exchange-Traded Fund (ETF). The easy way to start is with VWINX, which has an expense ratio of 0.23%, and a 10-yr total return of 9.7%/yr. That’s 60% bonds, so supplement it with a stock mutual fund, stock ETF, or stocks of your own choosing. The Fidelity Balanced Fund (FBALX) is also weighted 60:40 in favor of bonds, also has a 10-yr total return of 9.7%/yr, but has a higher expense ratio of 0.53%. VWINX lost 9.8% in 2008 while FBALX lost 31.3%. That difference occurs because stock managers at VWINX are required to confine their selections to the ~400 companies in the FTSE High Dividend Yield Index while managers at FBLAX opted for a wide range of stocks typifying the S&P 500 Index. In other words, VWINX lost much less in the 2008 stock market crash because it held bond-like stocks. For a detailed analysis that compares VWINX to other balanced funds, read this Seeking Alpha article.
Mission: Use our Standard Spreadsheet to analyze companies in VWINX that have: 1) an S&P bond rating of A- or better, 2) a S&P stock rating of B+/M or better, 3) the 16+ year trading record needed for quantitative analysis by the BMW Method, and 4) are found in the current list of companies in the Vanguard High Dividend Yield Index.
Execution: see the 26 companies in this week’s Table.
Administration: We have emphasized the safety features inherent in confining stock selections to companies in the S&P 100 Index. The managers of VWINX apparently agree, given that 17 of their 26 selections (see Column AK in the Table) are in that index.
Bottom Line: We offer this view of stocks picked by managers at VWINX because that fund serves as a beacon for retirees. It has had only 5 down years in the past 40, and was down only 9.8% in the Great Recession of 2008. Since inception on 7/1/1970, it has returned 9.7%/yr.
Risk Rating: 4, where 10-year US Treasury Notes = 1; S&P 500 Index = 5; gold bullion = 10.
Full Disclosure: I dollar-average into PFE, NEE, INTC, PG, JPM, JNJ and CAT, and also own shares of CSCO, DUK, KO, PEP, TRV, MMM, BLK and XOM.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
As a prospective retiree, you’ll want a balanced portfolio--one with approximately a 50:50 balance between stocks and bonds. The transaction costs for buying a corporate bond are high so you’ll want a mutual fund with a mix of government bonds and corporates. For stocks, you have the option of picking your own while keeping transaction costs (expense ratio) at ~2%/yr. But the expense ratio is much lower if you leave stock picking to professional managers (or computers) and opt for a mutual fund or Exchange-Traded Fund (ETF). The easy way to start is with VWINX, which has an expense ratio of 0.23%, and a 10-yr total return of 9.7%/yr. That’s 60% bonds, so supplement it with a stock mutual fund, stock ETF, or stocks of your own choosing. The Fidelity Balanced Fund (FBALX) is also weighted 60:40 in favor of bonds, also has a 10-yr total return of 9.7%/yr, but has a higher expense ratio of 0.53%. VWINX lost 9.8% in 2008 while FBALX lost 31.3%. That difference occurs because stock managers at VWINX are required to confine their selections to the ~400 companies in the FTSE High Dividend Yield Index while managers at FBLAX opted for a wide range of stocks typifying the S&P 500 Index. In other words, VWINX lost much less in the 2008 stock market crash because it held bond-like stocks. For a detailed analysis that compares VWINX to other balanced funds, read this Seeking Alpha article.
Mission: Use our Standard Spreadsheet to analyze companies in VWINX that have: 1) an S&P bond rating of A- or better, 2) a S&P stock rating of B+/M or better, 3) the 16+ year trading record needed for quantitative analysis by the BMW Method, and 4) are found in the current list of companies in the Vanguard High Dividend Yield Index.
Execution: see the 26 companies in this week’s Table.
Administration: We have emphasized the safety features inherent in confining stock selections to companies in the S&P 100 Index. The managers of VWINX apparently agree, given that 17 of their 26 selections (see Column AK in the Table) are in that index.
Bottom Line: We offer this view of stocks picked by managers at VWINX because that fund serves as a beacon for retirees. It has had only 5 down years in the past 40, and was down only 9.8% in the Great Recession of 2008. Since inception on 7/1/1970, it has returned 9.7%/yr.
Risk Rating: 4, where 10-year US Treasury Notes = 1; S&P 500 Index = 5; gold bullion = 10.
Full Disclosure: I dollar-average into PFE, NEE, INTC, PG, JPM, JNJ and CAT, and also own shares of CSCO, DUK, KO, PEP, TRV, MMM, BLK and XOM.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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).
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
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).
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com All rights reserved.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, December 10
Week 336 - Version 3.0 of The Growing Perpetuity Index Reflects “The 2 and 8 Club”
Situation: We started this blog six years ago with the idea to create a Growing Perpetuity Index as a way to save for retirement, by selecting from a workable “watch list” of high-quality stocks (see Week 21). We chose to base the index on companies in the 65-stock Dow Jones Composite Average (^DJA), and ended up selecting 12 from the 14 that had earned S&P’s designation of Dividend Achiever, i.e., companies that had raised their dividend annually for the previous 10 years or longer:
Exxon Mobil
Wal-Mart Stores
Procter & Gamble
Johnson & Johnson
IBM
Chevron
Coca-Cola
McDonald’s
United Technologies
3M
Norfolk Southern
NextEra Energy
Our thought was that investors could select stocks from this index to safely dollar-cost average automatic online contributions into their Dividend Reinvestment Plan (DRIP). That would allow relatively safe and efficient growth in their retirement assets. Version 2.0 (see Week 224) added back the two companies that had been left out, Caterpillar (CAT) and Southern Company (SO), plus two newly qualified companies: Microsoft (MSFT) and CSX (CSX).
Now we’ll apply a lesson learned from running Net Present Value (NPV) calculations, namely that Discounted Cash Flows from good and growing dividends are more likely to predict rewards to the investor than Capital Gains from a history of price appreciation. Accordingly, Version 3.0 re-casts the index to include only those ^DJA companies that are in “The 2 and 8 Club” (see Week 329) of high-quality companies with a dividend yield of at least 2% and a dividend growth rate of at least 8% for the past 5 years. The result is a 13 company Watch List, not all of which are Dividend Achievers. Only 7 are holdovers from Growing Perpetuity Index, v2.0:
NextEra Energy
3M
Exxon Mobil
Coca-Cola
IBM
Microsoft
Caterpillar
Mission: Apply our standard spreadsheet (see Table) to the 13 companies in the 65-company Dow Jones Composite Index that are in “The 2 and 8 Club.”
Execution: see Table.
Bottom Line: The value of picking from among the highest-quality stocks in the Dow Jones Composite Index is not just that it’s the smallest and oldest index, but also that it is continuously vetted by the managing editor of The Wall Street Journal. Companies that don’t stand muster are replaced by companies that do. By adding the several requirements for inclusion in “The 2 and 8 Club” (e.g. S&P bond ratings cannot be lower than A-), you have a good chance of selecting half a dozen stocks that will beat the S&P 500 Index over a 10-Yr Holding Period (see Column Y in the Table). You’ll also be taking on more risk (see Columns D, I, and M in the Table), which you’ll ameliorate by trading new entrants to “The 2 and 8 Club” for those that are leaving.
Risk Rating: 6 (where 10-Yr Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-cost average into MSFT, XOM, NEE, KO, JPM and IBM, and also own shares of TRV, PFE, MMM, and CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Exxon Mobil
Wal-Mart Stores
Procter & Gamble
Johnson & Johnson
IBM
Chevron
Coca-Cola
McDonald’s
United Technologies
3M
Norfolk Southern
NextEra Energy
Our thought was that investors could select stocks from this index to safely dollar-cost average automatic online contributions into their Dividend Reinvestment Plan (DRIP). That would allow relatively safe and efficient growth in their retirement assets. Version 2.0 (see Week 224) added back the two companies that had been left out, Caterpillar (CAT) and Southern Company (SO), plus two newly qualified companies: Microsoft (MSFT) and CSX (CSX).
Now we’ll apply a lesson learned from running Net Present Value (NPV) calculations, namely that Discounted Cash Flows from good and growing dividends are more likely to predict rewards to the investor than Capital Gains from a history of price appreciation. Accordingly, Version 3.0 re-casts the index to include only those ^DJA companies that are in “The 2 and 8 Club” (see Week 329) of high-quality companies with a dividend yield of at least 2% and a dividend growth rate of at least 8% for the past 5 years. The result is a 13 company Watch List, not all of which are Dividend Achievers. Only 7 are holdovers from Growing Perpetuity Index, v2.0:
NextEra Energy
3M
Exxon Mobil
Coca-Cola
IBM
Microsoft
Caterpillar
Mission: Apply our standard spreadsheet (see Table) to the 13 companies in the 65-company Dow Jones Composite Index that are in “The 2 and 8 Club.”
Execution: see Table.
Bottom Line: The value of picking from among the highest-quality stocks in the Dow Jones Composite Index is not just that it’s the smallest and oldest index, but also that it is continuously vetted by the managing editor of The Wall Street Journal. Companies that don’t stand muster are replaced by companies that do. By adding the several requirements for inclusion in “The 2 and 8 Club” (e.g. S&P bond ratings cannot be lower than A-), you have a good chance of selecting half a dozen stocks that will beat the S&P 500 Index over a 10-Yr Holding Period (see Column Y in the Table). You’ll also be taking on more risk (see Columns D, I, and M in the Table), which you’ll ameliorate by trading new entrants to “The 2 and 8 Club” for those that are leaving.
Risk Rating: 6 (where 10-Yr Treasury Note = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-cost average into MSFT, XOM, NEE, KO, JPM and IBM, and also own shares of TRV, PFE, MMM, and CAT.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, November 19
Week 333 - $175/wk For An IRA That Uses DRIPs Backed By Savings Bonds
Situation: If you don’t have a workplace retirement plan, then you most likely have concerns that you won’t have enough savings to support retirement. You should be able to replace at least 85% of your final year’s salary by withdrawing 4%/yr from your retirement savings, which amount is increased in subsequent years to allow for inflation. But the median Social Security payout only replaces 46% of median household income. If you don’t have a workplace retirement plan, you’ll have to set savings goals, eliminate non-mortgage debt, and start cutting costs long before retiring. For example, move to an apartment after your children finish high school.
Most of us don’t think about allocating money to Savings Bonds and an IRA until we’re 50. So, let’s be realistic. How much could you augment your retirement income by contributing the maximum $6500/yr starting at age 50 to an IRA consisting of Dividend ReInvestment Plans (DRIPs) for stocks, and backing that up by contributing $2600/yr to tax-deferred Inflation-protected Savings Bonds (ISBs). You’d be saving $175/wk ($9100/yr), which is 15% of median household income for 2016 ($59,039). This plan is approximately one part Treasury Bonds and 2 parts stocks. Over the past 20 years, the lowest-cost S&P 500 Index fund has returned 7.0%/yr. The lowest-cost intermediate-term investment-grade bond index fund (composed mainly of the same 7-10 year US Treasury Bonds used for ISBs) has returned 5.4%/yr. Overall return for the 2:1 private retirement plan would have been 6.5%/yr, but 2.1%/yr of that would have been lost to inflation.
Starting at age 50, IRA contributions of $6500/yr to stocks in a DRIP IRA, and ISB contributions of $2600/yr, would have built up a private retirement account worth $314,101 by the time you retire at age 67. Spending 4% of that in your first year of retirement would add $1047/mo to the $2260/mo provided by Social Security, if you and your spouse have a the 2016 median household income of $59,039. A complicated formula will determine your exact benefit, so start learning the basics.
Mission: Develop our standard spreadsheet for 6 DRIPs using stocks issued by companies in the FTSE High Dividend Yield Index, specifically those that grow dividends 8% or more per year. In other words, pick stocks from the Extended Version of “The 2 and 8 Club” (see Week 327 and Week 329).
Execution: (see Table).
Administration: To augment your Social Security income by using a private retirement account, you’ll need to build an IRA for stocks that is backed by Inflation-protected Savings Bonds (ISBs). Make sure your accountant declares to the Internal Revenue Service that 6 DRIPs above represent your IRA, noting that annual contributions to those will not exceed $6500/yr unless the US Treasury raises the contribution limit.
We have used high-quality stocks instead of index funds in our example above, given that index funds are now thought to carry the same risks as other derivatives.
Bottom Line: It is practically impossible for you to fund your retirement without contributing at least 15%/yr to a workplace retirement plan for 25+ years. The private retirement plan outlined above envisions contributing the maximum amount allowed for an IRA, supplemented by Savings Bonds, to channel 15% of your income into tax-deferred savings for the 17 years after you turn 50, which is when you can start making the largest annual contributions to your IRA. But if you’d started that plan 17 years ago (when you were 50), you’d now receive ~$1050/mo in your first year of retirement, which is less than half your Social Security check.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold = 10).
Full Disclosure: I dollar-average into all 6 stocks, as well as ISBs.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Most of us don’t think about allocating money to Savings Bonds and an IRA until we’re 50. So, let’s be realistic. How much could you augment your retirement income by contributing the maximum $6500/yr starting at age 50 to an IRA consisting of Dividend ReInvestment Plans (DRIPs) for stocks, and backing that up by contributing $2600/yr to tax-deferred Inflation-protected Savings Bonds (ISBs). You’d be saving $175/wk ($9100/yr), which is 15% of median household income for 2016 ($59,039). This plan is approximately one part Treasury Bonds and 2 parts stocks. Over the past 20 years, the lowest-cost S&P 500 Index fund has returned 7.0%/yr. The lowest-cost intermediate-term investment-grade bond index fund (composed mainly of the same 7-10 year US Treasury Bonds used for ISBs) has returned 5.4%/yr. Overall return for the 2:1 private retirement plan would have been 6.5%/yr, but 2.1%/yr of that would have been lost to inflation.
Starting at age 50, IRA contributions of $6500/yr to stocks in a DRIP IRA, and ISB contributions of $2600/yr, would have built up a private retirement account worth $314,101 by the time you retire at age 67. Spending 4% of that in your first year of retirement would add $1047/mo to the $2260/mo provided by Social Security, if you and your spouse have a the 2016 median household income of $59,039. A complicated formula will determine your exact benefit, so start learning the basics.
Mission: Develop our standard spreadsheet for 6 DRIPs using stocks issued by companies in the FTSE High Dividend Yield Index, specifically those that grow dividends 8% or more per year. In other words, pick stocks from the Extended Version of “The 2 and 8 Club” (see Week 327 and Week 329).
Execution: (see Table).
Administration: To augment your Social Security income by using a private retirement account, you’ll need to build an IRA for stocks that is backed by Inflation-protected Savings Bonds (ISBs). Make sure your accountant declares to the Internal Revenue Service that 6 DRIPs above represent your IRA, noting that annual contributions to those will not exceed $6500/yr unless the US Treasury raises the contribution limit.
We have used high-quality stocks instead of index funds in our example above, given that index funds are now thought to carry the same risks as other derivatives.
Bottom Line: It is practically impossible for you to fund your retirement without contributing at least 15%/yr to a workplace retirement plan for 25+ years. The private retirement plan outlined above envisions contributing the maximum amount allowed for an IRA, supplemented by Savings Bonds, to channel 15% of your income into tax-deferred savings for the 17 years after you turn 50, which is when you can start making the largest annual contributions to your IRA. But if you’d started that plan 17 years ago (when you were 50), you’d now receive ~$1050/mo in your first year of retirement, which is less than half your Social Security check.
Risk Rating: 5 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold = 10).
Full Disclosure: I dollar-average into all 6 stocks, as well as ISBs.
"The 2 and 8 Club" (CR) 2017 Invest Tune Retire.com
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, October 29
Week 330 - $150/wk For An Online Retirement Fund
Situation: You’ve heard a lot about saving for retirement, and you’ve probably heard that Social Security plus your workplace retirement plan probably won’t get you to a comfortable retirement any more. Why? Because people only reduce their spending by 15% after they retire, which means you will need a private savings plan to make up for the lost income. This savings plan can take the form of an IRA, payments into a low-cost annuity, proceeds from the sale of your home (if you move to smaller quarters), or perhaps even gold you’ve hidden away, and other choices. But when retirement is more than 5 years in the future, stocks remain your best bet.
We recommend that you minimize costs by using a stock index fund backed by a bond index fund. The Vanguard Balanced Index Fund (VBINX) provides both in one package, allocated 60% to stocks and 40% to bonds. It is rebalanced daily, so you won’t get burned if a stock market bubble bursts. (Most of those stock gains would already have been converted to bonds as part of daily rebalancing, and bonds typically increase in value when stocks crash.) Or, you can choose a low-cost managed fund that uses an excess of bonds to balance both the inherent risk of stocks and the difficulty managers have of knowing when to move away from stocks and into bonds. The Vanguard Wellesley Income Fund (VWINX) has the best record. It is bond-heavy and therefore has less volatility than VBINX but performs about as well.
The third low-cost option is to study the markets yourself and invest in stocks online through a Dividend ReInvestment Plan (DRIP) at computershare, and in bonds at treasurydirect. This third option allows you to pick only the most stable stocks and bonds.
Mission: Detail one example of a personal online retirement fund (mine). I dollar-cost average $100/mo automatically (online) into 5 stocks: NextEra Energy (NEE), Coca-Cola (KO), JP Morgan Chase (JPM), Microsoft (MSFT), and IBM (IBM), then dollar-cost average $150/mo into ISBs--inflation-protected Savings Bonds (treasurydirect).
Execution: In the Table, note that the iShares 7-10 Year Treasury Bond ETF (IEF) reflects returns from the main asset that the US Treasury uses to back its ISB accounts. Also note that we use red highlights to denote metrics that underperform our benchmark, i.e., the SPDR S&P 500 ETF (SPY). Metrics highlighted in purple indicate issues that accountants will raise with that company’s CFO.
Administration: ISBs are a tax-deferred investment much like an IRA. Contributions from your checking account can be set up for automatic monthly deposits at treasurydirect. You can have your accountant designate the money that you spend to buy stocks online through a DRIP as an IRA. Compare this week’s blog to an earlier blog with the same title (see Week 120).
Bottom Line: Dividend Reinvestment Plans (DRIPs) take time to set up, but are on “automatic pilot” the rest of the time. Savings Bonds are even easier to manage (treasurydirect). So, the key difficulty is deciding exactly which stocks you’d like to own for an extended period.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
We recommend that you minimize costs by using a stock index fund backed by a bond index fund. The Vanguard Balanced Index Fund (VBINX) provides both in one package, allocated 60% to stocks and 40% to bonds. It is rebalanced daily, so you won’t get burned if a stock market bubble bursts. (Most of those stock gains would already have been converted to bonds as part of daily rebalancing, and bonds typically increase in value when stocks crash.) Or, you can choose a low-cost managed fund that uses an excess of bonds to balance both the inherent risk of stocks and the difficulty managers have of knowing when to move away from stocks and into bonds. The Vanguard Wellesley Income Fund (VWINX) has the best record. It is bond-heavy and therefore has less volatility than VBINX but performs about as well.
The third low-cost option is to study the markets yourself and invest in stocks online through a Dividend ReInvestment Plan (DRIP) at computershare, and in bonds at treasurydirect. This third option allows you to pick only the most stable stocks and bonds.
Mission: Detail one example of a personal online retirement fund (mine). I dollar-cost average $100/mo automatically (online) into 5 stocks: NextEra Energy (NEE), Coca-Cola (KO), JP Morgan Chase (JPM), Microsoft (MSFT), and IBM (IBM), then dollar-cost average $150/mo into ISBs--inflation-protected Savings Bonds (treasurydirect).
Execution: In the Table, note that the iShares 7-10 Year Treasury Bond ETF (IEF) reflects returns from the main asset that the US Treasury uses to back its ISB accounts. Also note that we use red highlights to denote metrics that underperform our benchmark, i.e., the SPDR S&P 500 ETF (SPY). Metrics highlighted in purple indicate issues that accountants will raise with that company’s CFO.
Administration: ISBs are a tax-deferred investment much like an IRA. Contributions from your checking account can be set up for automatic monthly deposits at treasurydirect. You can have your accountant designate the money that you spend to buy stocks online through a DRIP as an IRA. Compare this week’s blog to an earlier blog with the same title (see Week 120).
Bottom Line: Dividend Reinvestment Plans (DRIPs) take time to set up, but are on “automatic pilot” the rest of the time. Savings Bonds are even easier to manage (treasurydirect). So, the key difficulty is deciding exactly which stocks you’d like to own for an extended period.
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, gold = 10).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, April 2
Week 300 - $185/week For A Low-cost Online Retirement Fund
Situation: Let’s say you make $64,000/yr but don’t have a workplace Retirement Plan. You still need to put 15% of your income (or $9,600/yr or $185/week) into a Retirement Plan. You can’t expect Social Security checks to replace more than 40% of your salary.The lowest cost self-directed plan would be composed of an IRA for stocks and Inflation-protected US Savings Bonds (ISBs) for bonds. We define costs as a) transaction costs, b) taxes, and c) inflation. The annual IRA contribution limit is $5,500/yr ($6,500/yr if you’re over 50). That doesn’t cover the $9,600/yr you need to shield from taxes, which is where ISBs come in handy. Those have a $10,000/yr contribution limit, work like an IRA to defer taxes, and carry the added benefit of shielding you from inflation.
Mission: Set up our standard spreadsheet (see Table) for $6000/yr of online stock purchases which go into an IRA, and $3600/yr of online bond purchases, which go into ISBs.
Execution: see Table, where the Vanguard Interm-Term Bond Index Fund (VBIIX) is a proxy for ISBs to facilitate comparison with stocks, which are neither inflation-protected nor tax-advantaged.
Administration:
Plan A: You can put $100/mo into each of 5 stocks purchased online through computershare, then have your accountant declare that account at computershare to be your IRA. This assumes you’re over 50 years old when you start this plan.
Plan B: You can put $500/mo into a Total Stock Market Index Fund (VTSMX) IRA marketed by the Vanguard Group. VTSMX carries an expense ratio of only 0.16%/yr vs. 0.58%/yr for stocks purchased through computershare (see Column P in the Table). NOTE: Plan B is the smarter option. Why? a) The expense ratio is lower. b) An index fund eliminates the considerable risk of selection bias.
With either Plan, $300/mo is put into ISBs with automatic online withdrawals from your checking account. Less money is put into bonds than into stocks because Social Security payments are made from a US Treasury Bond Fund. The interest payments on ISBs are based off the interest payments for 10-yr Treasury Notes corrected for the value of the tax deferral benefit and inflation correction benefit. Also, remember that ISBs have zero transaction costs and zero inflation risk; interest accrues biannually and cannot be taxed until the bond is redeemed. To better understand why you should confine your bond investments to 10-yr US Treasury Notes, read the fine print:
Caveat emptor: “The hard part of setting up a Retirement Plan is understanding the role of bonds. Those go up in value when stocks go down, so bonds need to form half of the assets meant to sustain you in retirement. Why do bonds go up in value when stocks go down? Because bankruptcy drops bond prices to the liquidation value of collateral, say 70 cents on the dollar, whereas bankruptcy drops stock prices to zero. The easy part to understand is that the risk that a bond will end up in bankruptcy court is specified by the interest rate: no investor will buy a bond that doesn’t pay enough interest to compensate for the risk being assumed. The zero-risk set point for interest rates everywhere is the 10-yr US Treasury Note. A commercial bond has to pay sufficiently more interest to draw in a buyer. On a risk-adjusted basis, all publicly-traded bonds pay the same rate of interest. Given that Treasuries are obtained online at zero cost, there is no reason to own any other type of fixed-income investment (unless you’re a bond trader).”
Bottom Line: Investment-grade bond and total stock market indexes have approximately the same inflation-adjusted total returns over multi-decade periods of ~3%/yr (e.g. see Lines 21 and 22 in the Table). Those returns remain roughly equivalent, otherwise investors would accumulate less money in one in order to favor the other.
Instead of using stock & bond indexes, you can have professionals pick stocks and bonds for you. This is tempting, since most stock and bonds make unattractive investments (because most companies have Balance Sheet problems or a weak Brand). That’s why an actively managed & balanced mutual fund like Vanguard Wellesley Income Fund (VWINX) outperforms a 50:50 mix of stock and bond index funds (compare Line 13 to Line 23 in the Table).
Or you can pick conservative bonds and stocks for yourself and keep transaction costs low by investing online (compare Line 10 to Lines 13 and 23 in the Table). NOTE: transaction costs in Column AB, which come to 0.58%/yr ($56/$9600).
Risk Rating: 4 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into UNP, KO, IBM, JNJ, NEE, and ISBs.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Set up our standard spreadsheet (see Table) for $6000/yr of online stock purchases which go into an IRA, and $3600/yr of online bond purchases, which go into ISBs.
Execution: see Table, where the Vanguard Interm-Term Bond Index Fund (VBIIX) is a proxy for ISBs to facilitate comparison with stocks, which are neither inflation-protected nor tax-advantaged.
Administration:
Plan A: You can put $100/mo into each of 5 stocks purchased online through computershare, then have your accountant declare that account at computershare to be your IRA. This assumes you’re over 50 years old when you start this plan.
Plan B: You can put $500/mo into a Total Stock Market Index Fund (VTSMX) IRA marketed by the Vanguard Group. VTSMX carries an expense ratio of only 0.16%/yr vs. 0.58%/yr for stocks purchased through computershare (see Column P in the Table). NOTE: Plan B is the smarter option. Why? a) The expense ratio is lower. b) An index fund eliminates the considerable risk of selection bias.
With either Plan, $300/mo is put into ISBs with automatic online withdrawals from your checking account. Less money is put into bonds than into stocks because Social Security payments are made from a US Treasury Bond Fund. The interest payments on ISBs are based off the interest payments for 10-yr Treasury Notes corrected for the value of the tax deferral benefit and inflation correction benefit. Also, remember that ISBs have zero transaction costs and zero inflation risk; interest accrues biannually and cannot be taxed until the bond is redeemed. To better understand why you should confine your bond investments to 10-yr US Treasury Notes, read the fine print:
Caveat emptor: “The hard part of setting up a Retirement Plan is understanding the role of bonds. Those go up in value when stocks go down, so bonds need to form half of the assets meant to sustain you in retirement. Why do bonds go up in value when stocks go down? Because bankruptcy drops bond prices to the liquidation value of collateral, say 70 cents on the dollar, whereas bankruptcy drops stock prices to zero. The easy part to understand is that the risk that a bond will end up in bankruptcy court is specified by the interest rate: no investor will buy a bond that doesn’t pay enough interest to compensate for the risk being assumed. The zero-risk set point for interest rates everywhere is the 10-yr US Treasury Note. A commercial bond has to pay sufficiently more interest to draw in a buyer. On a risk-adjusted basis, all publicly-traded bonds pay the same rate of interest. Given that Treasuries are obtained online at zero cost, there is no reason to own any other type of fixed-income investment (unless you’re a bond trader).”
Bottom Line: Investment-grade bond and total stock market indexes have approximately the same inflation-adjusted total returns over multi-decade periods of ~3%/yr (e.g. see Lines 21 and 22 in the Table). Those returns remain roughly equivalent, otherwise investors would accumulate less money in one in order to favor the other.
Instead of using stock & bond indexes, you can have professionals pick stocks and bonds for you. This is tempting, since most stock and bonds make unattractive investments (because most companies have Balance Sheet problems or a weak Brand). That’s why an actively managed & balanced mutual fund like Vanguard Wellesley Income Fund (VWINX) outperforms a 50:50 mix of stock and bond index funds (compare Line 13 to Line 23 in the Table).
Or you can pick conservative bonds and stocks for yourself and keep transaction costs low by investing online (compare Line 10 to Lines 13 and 23 in the Table). NOTE: transaction costs in Column AB, which come to 0.58%/yr ($56/$9600).
Risk Rating: 4 (where 10-yr Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I dollar-average into UNP, KO, IBM, JNJ, NEE, and ISBs.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 26
Week 299 - “Basic Materials” And “Energy” Companies That Are Dividend Achievers
Situation: A Retirement Portfolio may benefit from some exposure to commodity-related Energy and Basic Materials companies. Yes, I know. During the 4.5 year Housing Crisis (from April 2007 to October 2011), stocks in the Basic Materials index fund (XLB) lost more than the S&P 500 Index, and stocks in the Energy index fund (XLE) didn’t do much better (see Column D in the Table). So let’s confine our attention to companies that kept increasing their dividend throughout that crisis, i.e., companies that S&P calls Dividend Achievers.
Mission: Apply our standard spreadsheet analysis to Basic Materials and Energy companies in the 2016 Barron’s 500 List that are a) Dividend Achievers, b) have traded long enough to appear on the 16-yr BMW Method List, and c) have an investment-grade rating on their bonds from Standard & Poor’s. Only 9 companies meet those 4 requirements, if we include a Canadian energy company (Enbridge) that has grown its dividend annually for the past 10+ yrs. (Canadian companies are not surveyed by S&P for inclusion on the Dividend Achievers list.)
Execution: see Table.
Administration: During the 4.5 year Housing Crisis, all 9 companies outperformed the S&P 500 Index (see Column D in the Table). However, 5 of these companies are projected to lose more than that index in the next Bear Market (see Column M in the Table), as determined by statistical analysis conducted by the BMW Method. NOTE: stocks from this sector can’t balance out the effect of cyclical forces on your portfolio because they’re at the mercy of the multi-decade Commodities Supercycle: “A commodities supercycle is an approximately 10-35 year trend of rising commodity prices. The commodities super-cycle is based on the assumption that population growth and the expansion of infrastructure in emerging market nations drive long-term demand and higher prices for industrial and agricultural commodities.” It now appears that a new supercycle is beginning, in that the Dow Jones Commodity Index (^DJC) of 22 futures contracts in 7 sectors has “bounced off” its 1999 low and is heading upward.
Bottom Line: These companies issue stocks that represent high-risk/high-reward investments (see Columns I and M in the Table). The Net Present Value calculations are highest for ENB and SHW (see Column Y in the Table). When evaluating commodity-related companies, recall that copper prices set the trend for commodity prices. High grade copper prices fell 14%/yr from 2011 through 2015 but have risen 30% over the past year.
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into MON and own shares of ENB.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 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 accrue 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 10-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 is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 18.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Apply our standard spreadsheet analysis to Basic Materials and Energy companies in the 2016 Barron’s 500 List that are a) Dividend Achievers, b) have traded long enough to appear on the 16-yr BMW Method List, and c) have an investment-grade rating on their bonds from Standard & Poor’s. Only 9 companies meet those 4 requirements, if we include a Canadian energy company (Enbridge) that has grown its dividend annually for the past 10+ yrs. (Canadian companies are not surveyed by S&P for inclusion on the Dividend Achievers list.)
Execution: see Table.
Administration: During the 4.5 year Housing Crisis, all 9 companies outperformed the S&P 500 Index (see Column D in the Table). However, 5 of these companies are projected to lose more than that index in the next Bear Market (see Column M in the Table), as determined by statistical analysis conducted by the BMW Method. NOTE: stocks from this sector can’t balance out the effect of cyclical forces on your portfolio because they’re at the mercy of the multi-decade Commodities Supercycle: “A commodities supercycle is an approximately 10-35 year trend of rising commodity prices. The commodities super-cycle is based on the assumption that population growth and the expansion of infrastructure in emerging market nations drive long-term demand and higher prices for industrial and agricultural commodities.” It now appears that a new supercycle is beginning, in that the Dow Jones Commodity Index (^DJC) of 22 futures contracts in 7 sectors has “bounced off” its 1999 low and is heading upward.
Bottom Line: These companies issue stocks that represent high-risk/high-reward investments (see Columns I and M in the Table). The Net Present Value calculations are highest for ENB and SHW (see Column Y in the Table). When evaluating commodity-related companies, recall that copper prices set the trend for commodity prices. High grade copper prices fell 14%/yr from 2011 through 2015 but have risen 30% over the past year.
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I dollar-average into MON and own shares of ENB.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 19 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 accrue 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 10-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 is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 26 in the Table. The ETF for that index is MDY at Line 18.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, March 19
Week 298 - Barron’s 500 “Financial Services” Companies That Are Dividend Achievers
Situation: Even a Retirement Portfolio needs some exposure to Financial Services companies. Yes, I know. During the 4.5 year Housing Crisis (from April 2007 to October 2011), stocks in the Financial Services index fund (XLF) lost 20%/yr vs. 3%/yr for the S&P 500 Index (see Column D in the Table). So, let’s confine our attention to companies that kept increasing their dividend throughout that crisis, i.e., companies S&P calls Dividend Achievers.
Mission: Apply our standard spreadsheet analysis to financial services Dividend Achievers on the 2016 Barron’s 500 List, specifically those that have traded their stock long enough for it to appear on the 16-Yr BMW Method List, and have an investment-grade bond rating from Standard & Poor's. Only 5 companies meet our requirements, but all of those have clean balance sheets (see Columns P-R).
Execution: see Table.
Administration: During the 4.5 year Housing Crisis, 3 of the 5 companies outperformed the lowest-cost S&P 500 Index Fund, VFINX at Column D in the Table. But read the fine print:
Caveat emptor: You’ll want to know exactly why it’s a good idea to add Financial Services companies to your retirement portfolio. Relatively safe stocks, i.e., dividend-growing stocks issued by companies in one of the 4 “defensive” S&P Industries (Utilities, HealthCare, Consumer Staples, Communication Services), are what you buy to reduce Risk. Unfortunately, there are so many “savers” who seek to reduce risk that those stocks are almost always overvalued. You can’t get them at a fair price, so you have to break a key Warren Buffett rule to build a sizable position over time. You can only make real money if you sell those stocks when savers are desperate to buy them. But there’s another side to that coin: growth stocks. Those are issued by companies in the Financial Services, Information Technology, Industrial, and Consumer Discretionary industries. Buy them when they have a bad smell due to the powerful aversion training (think Pavlov’s dog) that we all experience from untoward events like the Housing Crisis. That calamity had such a negative effect on the value of Financial Services companies that their Return on Invested Capital (ROIC) didn’t rise above their Weighted Average Cost of Capital (WACC) until last year. You had a 7-yr opportunity to buy stock in fundamentally sound companies at absurdly low prices. Now, it’s too late to make real money on that trade. Almost any flavor of Financial Services stock is speculative: you need to know when to buy and when to sell. You sell when ROICs are twice as high as WACCs, and stock brokers start recommending Financial Services stocks to financially naive people. I’m afraid we’ve already reached that point, with respect to Money Center banks (see Columns AB and AC at Line 16).
Bottom Line: These companies represent high-risk/high-reward investments (see Columns D, I, and M in the Table). Four of the 5 sell insurance products. The exception is Franklin Resources (BEN), which sells mutual funds to institutions and wealthy individuals. Standard & Poor’s has A-ratings for stocks and bonds issued by Travelers (TRV) and Aflac (AFL), so consider buying one of those through an online dollar-averaging program. The Net Present Value calculation is higher for TRV (see Column Y in the Table).
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I own shares in TRV.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 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 accrue 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 10-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 is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 21 in the Table. The ETF for that index is MDY at Line 12.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Mission: Apply our standard spreadsheet analysis to financial services Dividend Achievers on the 2016 Barron’s 500 List, specifically those that have traded their stock long enough for it to appear on the 16-Yr BMW Method List, and have an investment-grade bond rating from Standard & Poor's. Only 5 companies meet our requirements, but all of those have clean balance sheets (see Columns P-R).
Execution: see Table.
Administration: During the 4.5 year Housing Crisis, 3 of the 5 companies outperformed the lowest-cost S&P 500 Index Fund, VFINX at Column D in the Table. But read the fine print:
Caveat emptor: You’ll want to know exactly why it’s a good idea to add Financial Services companies to your retirement portfolio. Relatively safe stocks, i.e., dividend-growing stocks issued by companies in one of the 4 “defensive” S&P Industries (Utilities, HealthCare, Consumer Staples, Communication Services), are what you buy to reduce Risk. Unfortunately, there are so many “savers” who seek to reduce risk that those stocks are almost always overvalued. You can’t get them at a fair price, so you have to break a key Warren Buffett rule to build a sizable position over time. You can only make real money if you sell those stocks when savers are desperate to buy them. But there’s another side to that coin: growth stocks. Those are issued by companies in the Financial Services, Information Technology, Industrial, and Consumer Discretionary industries. Buy them when they have a bad smell due to the powerful aversion training (think Pavlov’s dog) that we all experience from untoward events like the Housing Crisis. That calamity had such a negative effect on the value of Financial Services companies that their Return on Invested Capital (ROIC) didn’t rise above their Weighted Average Cost of Capital (WACC) until last year. You had a 7-yr opportunity to buy stock in fundamentally sound companies at absurdly low prices. Now, it’s too late to make real money on that trade. Almost any flavor of Financial Services stock is speculative: you need to know when to buy and when to sell. You sell when ROICs are twice as high as WACCs, and stock brokers start recommending Financial Services stocks to financially naive people. I’m afraid we’ve already reached that point, with respect to Money Center banks (see Columns AB and AC at Line 16).
Bottom Line: These companies represent high-risk/high-reward investments (see Columns D, I, and M in the Table). Four of the 5 sell insurance products. The exception is Franklin Resources (BEN), which sells mutual funds to institutions and wealthy individuals. Standard & Poor’s has A-ratings for stocks and bonds issued by Travelers (TRV) and Aflac (AFL), so consider buying one of those through an online dollar-averaging program. The Net Present Value calculation is higher for TRV (see Column Y in the Table).
Risk Rating: 8 (where 10-Yr Treasury Notes = 1, S&P 500 Index = 5, gold bullion = 10)
Full Disclosure: I own shares in TRV.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 13 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 accrue 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 10-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 is mainly due to “selection bias.” That stock index is the S&P MidCap 400 Index at Line 21 in the Table. The ETF for that index is MDY at Line 12.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, February 19
Week 294 - Don’t Leave Money On Table: Invest Online
Situation: Let’s use a hypothetical situation to make our case. You’ve retired and sold your house to pay off debts. For many people that would mean that you are now living in a rental that fits your needs and income. In addition, you may have a lot of money left over from the sale of your home and would like to invest it in a prudent manner. But cash is fungible. It can disappear into anything that someone thinks has an equivalent value. (Your minister might think tithing is equivalent, even though you’ve already paid tithing on the income that created your retirement plan.)
As a retiree, you need to develop a budget that will cut your living costs and execute on that plan. Aside from spending money, as directed by your budget, what kind of expenses are going to deplete your nest egg? The main factors to consider are inflation, taxes and transaction costs. There’s little you can do about inflation, other than to stay 50% invested in stocks and 50% in inflation-protected bonds, e.g. inflation-protected 10-Yr Treasury Notes, ISB Savings Bonds and inflation-protected bond funds like Vanguard Inflation-Protected Securities (VIPSX). There’s little you can do about taxes, other than own Treasury Bonds and Savings Bonds (because those pay interest that cannot be taxed by the state where you live). Also, you can avoid both Federal and state taxes by owning municipal bonds issued in the state where you live. But that is risky unless you happen to live in one of the 7 states that offer a AAA bond with investor-friendly covenants. You might also consider a low-cost, state-specific municipal bond fund if you live in a populous state that is in good fiscal condition and has a AAA credit rating, but Florida is the only state that fits that description.
Now we’re left to talk about transaction costs. You’ll like doing business with the US Treasury over the internet because there are no transaction costs. But with stocks, it gets more complicated. To reduce transaction costs, there are two routes you can take: 1) Invest in low-cost mutual funds. Vanguard Group has the best deals. Avoid Exchange-Traded Funds unless you want to throw a little business to your stock-broker in return for the research materials she’s been providing. 2) Make low-cost investments online, monthly and automatically. You can do this with any of the Vanguard mutual funds but also with individual stocks. There are 3 main websites: Computershare, Wells Fargo, and American Stock Transfer & Trust.
Mission: Set up a spreadsheet (see Table) with metrics for a sample of stocks that are available for dollar-cost averaging (monthly and online using automatic withdrawals from your checking account). Pick examples from a single source (Computershare) and list the annual transaction cost for investing $100/mo. Balance stocks with 10-Yr Treasury Notes obtained through TreasuryDirect. Inflation-protected versions of those Notes are available, as are IRA-like versions called ISBs (Inflation-Protected Savings Bonds). Those fixed-income assets need to represent 1/3rd of your monthly investment, stocks from each of the 4 S&P Defensive Industries 1/3rd, and stocks from each of the 4 S&P Growth Industries 1/3rd.
In the BENCHMARKS section, include low-cost mutual funds referencing a Standard Retirement Plan. NOTE: The 4 S&P Defensive Industries are Utilities, HealthCare, Communication Services and Consumer Staples. The 4 S&P Growth Industries are Financials, Information Technology, Industrials and Consumer Discretionary. The two commodity-related Industries (Basic Materials and Energy) are omitted. Why? Because even the few A-rated stocks have excess volatility. As a retiree, investing in those Industries would amount to gambling with your “nest egg.”
Execution: see Table.
Bottom Line: Transaction costs consume 2.5%/yr of most investor’s savings. But the internet allows you to reduce transaction costs to less than 1%/yr. Over a 10 yr holding period, that 1.5% difference would increase your return on a $10,000 investment by $1,600. In Column U of this week’s Table, we show that if you pick a dozen high-quality stocks and bonds from the main internet sources, and automatically invest $100/mo in each, your annual expenses would come to ~$135 for that investment of $12,000 (0.94%). But read the fine print first:
Caveat emptor: Owning individual stocks is a gamble unless a) you own at least 30 stocks, and b) your picks reflect the impact of each S&P Industry on the economy. Otherwise, you’ll lose money at some point because of selection bias. To avoid that risk altogether, invest in stock index funds that cover the entire economy, e.g. the Vanguard 500 Index Fund (VFINX), the Vanguard Total Stock Market Index Fund (VTSMX), and the SPDR S&P MidCap 400 ETF (MDY).
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: In dollar-average into UNP, JNJ, T, NKE and KO, as well as ISBs (Inflation-Protected Savings Bonds).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 21 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, 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 shares in 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 31 in the Table. The ETF for that index is MDY at Line 20.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
As a retiree, you need to develop a budget that will cut your living costs and execute on that plan. Aside from spending money, as directed by your budget, what kind of expenses are going to deplete your nest egg? The main factors to consider are inflation, taxes and transaction costs. There’s little you can do about inflation, other than to stay 50% invested in stocks and 50% in inflation-protected bonds, e.g. inflation-protected 10-Yr Treasury Notes, ISB Savings Bonds and inflation-protected bond funds like Vanguard Inflation-Protected Securities (VIPSX). There’s little you can do about taxes, other than own Treasury Bonds and Savings Bonds (because those pay interest that cannot be taxed by the state where you live). Also, you can avoid both Federal and state taxes by owning municipal bonds issued in the state where you live. But that is risky unless you happen to live in one of the 7 states that offer a AAA bond with investor-friendly covenants. You might also consider a low-cost, state-specific municipal bond fund if you live in a populous state that is in good fiscal condition and has a AAA credit rating, but Florida is the only state that fits that description.
Now we’re left to talk about transaction costs. You’ll like doing business with the US Treasury over the internet because there are no transaction costs. But with stocks, it gets more complicated. To reduce transaction costs, there are two routes you can take: 1) Invest in low-cost mutual funds. Vanguard Group has the best deals. Avoid Exchange-Traded Funds unless you want to throw a little business to your stock-broker in return for the research materials she’s been providing. 2) Make low-cost investments online, monthly and automatically. You can do this with any of the Vanguard mutual funds but also with individual stocks. There are 3 main websites: Computershare, Wells Fargo, and American Stock Transfer & Trust.
Mission: Set up a spreadsheet (see Table) with metrics for a sample of stocks that are available for dollar-cost averaging (monthly and online using automatic withdrawals from your checking account). Pick examples from a single source (Computershare) and list the annual transaction cost for investing $100/mo. Balance stocks with 10-Yr Treasury Notes obtained through TreasuryDirect. Inflation-protected versions of those Notes are available, as are IRA-like versions called ISBs (Inflation-Protected Savings Bonds). Those fixed-income assets need to represent 1/3rd of your monthly investment, stocks from each of the 4 S&P Defensive Industries 1/3rd, and stocks from each of the 4 S&P Growth Industries 1/3rd.
In the BENCHMARKS section, include low-cost mutual funds referencing a Standard Retirement Plan. NOTE: The 4 S&P Defensive Industries are Utilities, HealthCare, Communication Services and Consumer Staples. The 4 S&P Growth Industries are Financials, Information Technology, Industrials and Consumer Discretionary. The two commodity-related Industries (Basic Materials and Energy) are omitted. Why? Because even the few A-rated stocks have excess volatility. As a retiree, investing in those Industries would amount to gambling with your “nest egg.”
Execution: see Table.
Bottom Line: Transaction costs consume 2.5%/yr of most investor’s savings. But the internet allows you to reduce transaction costs to less than 1%/yr. Over a 10 yr holding period, that 1.5% difference would increase your return on a $10,000 investment by $1,600. In Column U of this week’s Table, we show that if you pick a dozen high-quality stocks and bonds from the main internet sources, and automatically invest $100/mo in each, your annual expenses would come to ~$135 for that investment of $12,000 (0.94%). But read the fine print first:
Caveat emptor: Owning individual stocks is a gamble unless a) you own at least 30 stocks, and b) your picks reflect the impact of each S&P Industry on the economy. Otherwise, you’ll lose money at some point because of selection bias. To avoid that risk altogether, invest in stock index funds that cover the entire economy, e.g. the Vanguard 500 Index Fund (VFINX), the Vanguard Total Stock Market Index Fund (VTSMX), and the SPDR S&P MidCap 400 ETF (MDY).
Risk Rating: 6 (where 10-Yr US Treasury Notes = 1, S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: In dollar-average into UNP, JNJ, T, NKE and KO, as well as ISBs (Inflation-Protected Savings Bonds).
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 21 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, 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 shares in 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 31 in the Table. The ETF for that index is MDY at Line 20.
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, January 15
Week 289 - Don't Leave Federal "Tax Expenditures" On The Table
Situation: There are 5 Federal government programs that can reduce your cost of living in retirement. You need to learn about these and take advantage of them whenever you are likely to benefit.
Program #1: The Social Security Act of 1935: You need to decide when to retire, because each year you delay results in an 8% larger Social Security check. You also need to brush up on other aspects of The Social Security Act that apply to you or your family. If you and your husband are divorced, and you’ve never remarried, you may still be eligible for some additional benefits. Check out the SSA website for answers to questions, and visit your nearest SSA office to get the help that you might need.
Program #2: Social Security Act Amendments of 1965 (Medicare): When you enroll in Medicare at age 65, you’ll have the option of taking out private “MediGap” insurance, which is supervised by your state government, or enrolling in Part C, which is a private “Medicare Advantage” plan that is a Federally-managed and “capped” supplement encompassing Parts A and B of Medicare.
Program #3: The Housing and Community Development Act of 1987 provides insurance for FHA Home Equity Conversion Mortgages (HECM), known as “reverse mortgages”. More than 3/4ths of the average retirees’ net worth is tied up in home equity, with other sources averaging ~$45,000 for Americans in the 65 to 69 year age group. By following the 4% Rule, the average American can only spend $150/mo of that “nest egg” to supplement her income from Social Security. To keep up with the myriad expenses of home ownership, she’ll have to decide whether to get a part-time job, sell her house, rent out part of it, or enter into a reverse mortgage. “Reverse mortgages are increasing in popularity with seniors who have equity in their homes and want to supplement their income. The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender.” But there is evidence that the average American is preparing better for retirement: As of 2015, those between the ages of 55 and 64 had saved an average of $104,000 according to the Government Accountability Office, which means $217/mo could be spent without eliminating that nest egg.
Program #4: The Cigar Excise Tax Extension Act of 1960 provides the legal framework for Real Estate Investment Trusts or REITs. This law does not create a tax expenditure (subsidy). Instead, it raises more revenue by creating an incentive for investors to move their money into real estate. That indirectly helps to reduce your cost of living at an extended care facility, when you can no longer live independently. Unless you are well off, you won’t be able to afford private long-term care insurance, and Federally subsidized long-term care insurance is only available to retired Federal employees. REITs are a partial solution, because they free real estate companies from paying Federal taxes, leaving investors with the obligation to pay that tax. REITs are similar to mutual funds except that they’re required to pay at least 90% of their income to investors, as dividends. Those dividends are attractive enough that REITs now have a large following among investors. Many “nursing homes” and extended care facilities are REITs. Retirees benefit from the capitalization structure of healthcare REITs, but investors who can tolerate a “roller-coaster ride” also come out ahead.
Program #5: The Food Stamp Act of 1964: Your next decision is whether or not to apply for food stamps. If you have no other source of income than Social Security, you are definitely eligible.
Mission: Set up a spreadsheet of ways an investor might invest in some of the public-private partnerships listed above, including health insurance companies that offer MediGap and Medicare Advantage plans. Pay particular attention to healthcare REITs.
Execution: see Table.
Bottom Line: Once you retire, your annual income will not keep up with inflation. With each passing year, you’ll become a little more watchful of spending and a little more likely to search out discounts. You’ll start to inquire about Federal programs that are particularly helpful to retirees, e.g. Food Stamps. We’ve listed 5 Federal programs that benefit retirees; you should become conversant in these before you retire. We have also listed 6 companies in the Table; 3 are healthcare REITs and 3 are large insurance companies with MediGap or Medicare Advantage plans. All 6 are high-risk high-reward businesses.
Risk Rating: 7 (where US Treasuries = 10, the S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I don’t own shares in any of the 6 companies listed in the Table, but am looking to buy shares in the only “blue chip” (Dow Jones Industrial Average company): UnitedHealth Group (UNH).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Program #1: The Social Security Act of 1935: You need to decide when to retire, because each year you delay results in an 8% larger Social Security check. You also need to brush up on other aspects of The Social Security Act that apply to you or your family. If you and your husband are divorced, and you’ve never remarried, you may still be eligible for some additional benefits. Check out the SSA website for answers to questions, and visit your nearest SSA office to get the help that you might need.
Program #2: Social Security Act Amendments of 1965 (Medicare): When you enroll in Medicare at age 65, you’ll have the option of taking out private “MediGap” insurance, which is supervised by your state government, or enrolling in Part C, which is a private “Medicare Advantage” plan that is a Federally-managed and “capped” supplement encompassing Parts A and B of Medicare.
Program #3: The Housing and Community Development Act of 1987 provides insurance for FHA Home Equity Conversion Mortgages (HECM), known as “reverse mortgages”. More than 3/4ths of the average retirees’ net worth is tied up in home equity, with other sources averaging ~$45,000 for Americans in the 65 to 69 year age group. By following the 4% Rule, the average American can only spend $150/mo of that “nest egg” to supplement her income from Social Security. To keep up with the myriad expenses of home ownership, she’ll have to decide whether to get a part-time job, sell her house, rent out part of it, or enter into a reverse mortgage. “Reverse mortgages are increasing in popularity with seniors who have equity in their homes and want to supplement their income. The only reverse mortgage insured by the U.S. Federal Government is called a Home Equity Conversion Mortgage or HECM, and is only available through an FHA approved lender.” But there is evidence that the average American is preparing better for retirement: As of 2015, those between the ages of 55 and 64 had saved an average of $104,000 according to the Government Accountability Office, which means $217/mo could be spent without eliminating that nest egg.
Program #4: The Cigar Excise Tax Extension Act of 1960 provides the legal framework for Real Estate Investment Trusts or REITs. This law does not create a tax expenditure (subsidy). Instead, it raises more revenue by creating an incentive for investors to move their money into real estate. That indirectly helps to reduce your cost of living at an extended care facility, when you can no longer live independently. Unless you are well off, you won’t be able to afford private long-term care insurance, and Federally subsidized long-term care insurance is only available to retired Federal employees. REITs are a partial solution, because they free real estate companies from paying Federal taxes, leaving investors with the obligation to pay that tax. REITs are similar to mutual funds except that they’re required to pay at least 90% of their income to investors, as dividends. Those dividends are attractive enough that REITs now have a large following among investors. Many “nursing homes” and extended care facilities are REITs. Retirees benefit from the capitalization structure of healthcare REITs, but investors who can tolerate a “roller-coaster ride” also come out ahead.
Program #5: The Food Stamp Act of 1964: Your next decision is whether or not to apply for food stamps. If you have no other source of income than Social Security, you are definitely eligible.
Mission: Set up a spreadsheet of ways an investor might invest in some of the public-private partnerships listed above, including health insurance companies that offer MediGap and Medicare Advantage plans. Pay particular attention to healthcare REITs.
Execution: see Table.
Bottom Line: Once you retire, your annual income will not keep up with inflation. With each passing year, you’ll become a little more watchful of spending and a little more likely to search out discounts. You’ll start to inquire about Federal programs that are particularly helpful to retirees, e.g. Food Stamps. We’ve listed 5 Federal programs that benefit retirees; you should become conversant in these before you retire. We have also listed 6 companies in the Table; 3 are healthcare REITs and 3 are large insurance companies with MediGap or Medicare Advantage plans. All 6 are high-risk high-reward businesses.
Risk Rating: 7 (where US Treasuries = 10, the S&P 500 Index = 5, and gold bullion = 10)
Full Disclosure: I don’t own shares in any of the 6 companies listed in the Table, but am looking to buy shares in the only “blue chip” (Dow Jones Industrial Average company): UnitedHealth Group (UNH).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Sunday, July 31
Week 265 - How Do We Create Quality Time in Our Sunset Years?
“For last year's words belong to last year's language
And next year's words await another voice.
And to make an end is to make a beginning."
Little Gidding, by T.S. Eliot
Situation: After your career of gainful employment ends, you’ll need to make a new beginning. New beginnings are comparatively rare over the course of our lives, and frequently the changes made amount to nothing more than defenses thrown up to improve our situational control. Retirement is an excellent opportunity to examine such habits, as some may no longer have utility. But beware. People who have looked at personality adjustments in retirement suggest that whatever little monster lives inside us won't remain so little after we retire and dial back those defenses. Academic studies, however, reveal no universal trends. There’s just a complex tableau of effects. That said, we all know that our working life frequently required us to whittle ourselves into a machine of a person. That’s what we’ve been doing. And now we’re going to un-whittle, whether we want to or not. Prepare for that day by investing in yourself. Drop the job-related defenses without losing sight of the need we all have for routine and purpose. Build new routines that have a new purpose.
Mission: Retirement, like marriage, purports to be about quality-of-life. Both are influenced by two important factors: our health and our ability to pay. Opportunity becomes a function of maintaining our body and our balance sheet.
Step #1 is to craft a retirement identity, now that your Facebook Page isn’t being monitored by your employer. Each of us needs to understand that there will be a new twist to the way we answer key questions: “Deep down, who am I? How do I get a life?” There will be moments of grieving over the loss of friends, particularly the loss of your best friend (yourself). Elisabeth Kubler-Ross has taught us that grieving happens in identifiable stages: denial, anger, bargaining, depression, and acceptance. These steps “can occur in any order.” From my decades employed as a doctor (neurosurgeon), I think that 95% of us will exhibit Kubler-Ross symptoms during retirement. Often, the trigger is not the loss of livelihood but the loss of personhood, which was gained through the roles and missions of our job. But psychotherapists say that explanation is too simplistic. They suggest instead that the vacuity of our interpersonal relationships away from work brings on a sense of loss that can no longer be covered up by work.
Step #2 is to take care of our bodies. This is a two-part problem because the things we do to damage our health often function to allay our feelings of stress: smoking, drinking, and continuing to eat after our appetite has been satisfied. And, stress is a contributing cause of most illnesses. Almost all of us have found ways to de-stress as often as necessary. (Prohibition failed for a reason.) Psychologists say the healthy way to do this is to take frequent 3 or 4 day vacations instead of the annual multi-week expedition. Of course, psychologists who say this are “arguing against interest” because part of their business comes from people overwhelmed by relationships that blew up during Christmas and annual vacations.
Step #3 is to fund your retirement. The trick here is not to gamble. Gambling mainly comes in two forms. Borrowing money is most common way people gamble. So don’t borrow money for anything other than a mortgage on your principal residence. The other form is to make risky investments. What is risk? Taking a risk is to bet on an uncertain outcome. In finance, “risk-on” means to have confidence in a future stream of earnings growth (for a stock) or the full repayment of principal on time (for a bond). “Risk-off” means confidence has evaporated; the investor will usually want to close out her position, perhaps at a loss. We caution you to make bond-like investments that are highly rated by S&P. With a highly-rated bond, the borrower almost always returns the original investment to the lender on time. With a highly-rated stock, bond-like features, such as good and growing dividends or a low debt/equity ratio, will often prevent the stock’s price from falling in a recession. Start your career as a stock-picker with the list of Dividend Achievers. For those of us who don’t have time to make a hobby of stock-picking, the way to avoid gambling is to invest in either a bond-heavy mutual fund like Vanguard Wellesley Income Fund (VWINX), or a stock-heavy index fund like Vanguard Balanced Index Fund (VBINX).
In this week’s Table (Columns N-P), we introduce a third way to avoid gambling on stocks: avoid those that don’t exhibit reversion to the mean. In other words, confine your selections to stocks that are priced close to their 30-yr trendline. To demonstrate, we’ve picked 10 Dividend Achievers at the BMW Method 30-yr website, using Coca-Cola (KO) as the limit for risk of loss (Column P in the Table) and extent of leverage (Columns AC and AD in the Table), and the S&P 500 Index (^GSPC) as the limit for loss during the correction of 2011 (Column D in the Table). Companies with a Return on Invested Capital (ROIC) that is less than the Weighted Average Cost of Capital (WACC) are excluded (Columns AA-AB), as are companies with a negative book value, which makes it impossible to calculate the Graham Number (Column U).
Execution: How might one craft a retirement identity? Start by coming up with a plan for preventing or minimizing Kubler-Ross symptoms. Or better yet, how about just facing them? The plan has to separately address distinct parts of your being, i.e., mental health, physical health, renewal through travel and recreation, and substitution. Why substitution? Because you’ll need to substitute for your work persona through the gradual and planned development of your natural personality, untethered to the habits necessitated by your working life. While it is impossible to detach entirely from ingrained habits, we all know that many of our co-workers (40% of all workers in one large study) report to work simply to make money and have health insurance. They were not there to either sustain or nourish their personality. Karl Marx was right about “alienation.” If you spent your working years as one of those unfortunates, retirement is a chance to recover, dial back your stress level and grow a little. But if you identified strongly with your workplace persona, you’ll need to remain somewhat tethered, perhaps by becoming “historian” of your trade association.
How might one improve health? Given that many of our poor health habits exist because of work-related stress, experiment with dialing back unhealthy habits.
How might one plus-up retirement savings without gambling? We all know you can’t retire while you have debts. If that’s you, make sure you can migrate to a part-time job soon after retiring from your full-time job. Once your debts have been paid off, do the math and see if you can maintain your lifestyle by using income from Social Security, pensions & annuities, and your retirement portfolio. If there’s still not enough, you’ll have to continue with part-time work or dial back your lifestyle. But behavior is hard to change, so you’ll be tempted instead to borrow money, gamble, or borrow money to gamble. Don’t. There are no short-cuts. It’s too late in the game for you to invest in anything with an uncertain payoff. The only investments that can help you now are to be found at treasurydirect. You’ll have to keep working, dial back your lifestyle, or sponge off friends and relatives. If you are disabled, apply to the appropriate government agency for assistance.
Administration:
Mental Health: Here you’ll need to reach out. Start by paying closer attention to your network of friends and relatives. Technology also helps by providing vicarious relationships through your laptop: Facebook, movies, and feature presentations viewable with 360 degree “virtual reality” headsets. And remember, New York museums and Broadway plays are popular with tourists for a reason. Find a way to avail yourself of live theater or a museum visit at least once a year.
Physical Health: The trick here is 30 minutes of exercise a day (e.g. brisk walking), and eating a balanced diet that includes green vegetables, fruit, nuts and coffee (or some other antioxidant). If you live alone, there’s a good chance you’re not getting enough protein and Vitamin D. So, take a supplement like “Ensure Enlive” (Abbott Laboratories) each day. Finally, the need for extra sleep is easily forgotten. It may be hard to understand the importance of sleeping each night until rested, but “you’ll know it when you see it”.
Travel and Recreation: “Get a life!” That’s what we say to boring people who appear to have no excitement in their lives. But many senior citizens lack the wherewithal to travel, or even take up a renewing pastime. Fortunately, the internet makes it easy to find affinity groups and charitable organizations that will help you avoid becoming a “shut-in.”
Substitution: learn routines for a new purpose in life, one that suits you. Here you’ll need a little professional help from someone who knows how to select and evaluate a psychological test that addresses someone like you. You’d best do this at least 3 yrs before you retire, since you may need to reacquire lost skills or encourage new skills.
Bottom Line: Half of us will need to continue working in our sunset years. During the run-up to retirement, we’ll have to learn a new career/vocation/hobby, one that is less stressful and time-consuming. Those of us who don’t fear outliving our retirement assets will have a similar task, but will also have the luxury of free associating a plan for new routines that match a new purpose in life. Both groups soon realize they’ll have to pay a lot more attention to physical health than anticipated. That will lead to paying closer attention to mental health, which creates a positive feedback loop that stabilizes physical health. For example, we continue to eat after our appetite has been satisfied mainly because it decreases stress. By learning more about the sources of stress in our lives, and taking remedial action, we’ll find that losing weight is not so difficult. So, the key part of our makeover is to de-stress, which is most easily accomplished through frequent 3-4 day periods of Travel and Recreation. Academic studies also suggest that to de-stress we’ll need to nurture more friendships.
Risk Rating: 5 (US Treasuries = 1; gold = 10)
Full Disclosure: I dollar-average into NKE, JNJ, and T, and also own shares of ROST and KO.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 16 in the Table. NPV inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for price over the past 50 days (corrected for transaction costs of 2.5%), Dividend Growth Rate is Dividend CAGR for the past 16 years, Price Growth Rate is Price CAGR for the past 30 years, and Price Return in the 10th year is corrected for transaction costs of 2.5%. The calculation template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
And next year's words await another voice.
And to make an end is to make a beginning."
Little Gidding, by T.S. Eliot
Situation: After your career of gainful employment ends, you’ll need to make a new beginning. New beginnings are comparatively rare over the course of our lives, and frequently the changes made amount to nothing more than defenses thrown up to improve our situational control. Retirement is an excellent opportunity to examine such habits, as some may no longer have utility. But beware. People who have looked at personality adjustments in retirement suggest that whatever little monster lives inside us won't remain so little after we retire and dial back those defenses. Academic studies, however, reveal no universal trends. There’s just a complex tableau of effects. That said, we all know that our working life frequently required us to whittle ourselves into a machine of a person. That’s what we’ve been doing. And now we’re going to un-whittle, whether we want to or not. Prepare for that day by investing in yourself. Drop the job-related defenses without losing sight of the need we all have for routine and purpose. Build new routines that have a new purpose.
Mission: Retirement, like marriage, purports to be about quality-of-life. Both are influenced by two important factors: our health and our ability to pay. Opportunity becomes a function of maintaining our body and our balance sheet.
Step #1 is to craft a retirement identity, now that your Facebook Page isn’t being monitored by your employer. Each of us needs to understand that there will be a new twist to the way we answer key questions: “Deep down, who am I? How do I get a life?” There will be moments of grieving over the loss of friends, particularly the loss of your best friend (yourself). Elisabeth Kubler-Ross has taught us that grieving happens in identifiable stages: denial, anger, bargaining, depression, and acceptance. These steps “can occur in any order.” From my decades employed as a doctor (neurosurgeon), I think that 95% of us will exhibit Kubler-Ross symptoms during retirement. Often, the trigger is not the loss of livelihood but the loss of personhood, which was gained through the roles and missions of our job. But psychotherapists say that explanation is too simplistic. They suggest instead that the vacuity of our interpersonal relationships away from work brings on a sense of loss that can no longer be covered up by work.
Step #2 is to take care of our bodies. This is a two-part problem because the things we do to damage our health often function to allay our feelings of stress: smoking, drinking, and continuing to eat after our appetite has been satisfied. And, stress is a contributing cause of most illnesses. Almost all of us have found ways to de-stress as often as necessary. (Prohibition failed for a reason.) Psychologists say the healthy way to do this is to take frequent 3 or 4 day vacations instead of the annual multi-week expedition. Of course, psychologists who say this are “arguing against interest” because part of their business comes from people overwhelmed by relationships that blew up during Christmas and annual vacations.
Step #3 is to fund your retirement. The trick here is not to gamble. Gambling mainly comes in two forms. Borrowing money is most common way people gamble. So don’t borrow money for anything other than a mortgage on your principal residence. The other form is to make risky investments. What is risk? Taking a risk is to bet on an uncertain outcome. In finance, “risk-on” means to have confidence in a future stream of earnings growth (for a stock) or the full repayment of principal on time (for a bond). “Risk-off” means confidence has evaporated; the investor will usually want to close out her position, perhaps at a loss. We caution you to make bond-like investments that are highly rated by S&P. With a highly-rated bond, the borrower almost always returns the original investment to the lender on time. With a highly-rated stock, bond-like features, such as good and growing dividends or a low debt/equity ratio, will often prevent the stock’s price from falling in a recession. Start your career as a stock-picker with the list of Dividend Achievers. For those of us who don’t have time to make a hobby of stock-picking, the way to avoid gambling is to invest in either a bond-heavy mutual fund like Vanguard Wellesley Income Fund (VWINX), or a stock-heavy index fund like Vanguard Balanced Index Fund (VBINX).
In this week’s Table (Columns N-P), we introduce a third way to avoid gambling on stocks: avoid those that don’t exhibit reversion to the mean. In other words, confine your selections to stocks that are priced close to their 30-yr trendline. To demonstrate, we’ve picked 10 Dividend Achievers at the BMW Method 30-yr website, using Coca-Cola (KO) as the limit for risk of loss (Column P in the Table) and extent of leverage (Columns AC and AD in the Table), and the S&P 500 Index (^GSPC) as the limit for loss during the correction of 2011 (Column D in the Table). Companies with a Return on Invested Capital (ROIC) that is less than the Weighted Average Cost of Capital (WACC) are excluded (Columns AA-AB), as are companies with a negative book value, which makes it impossible to calculate the Graham Number (Column U).
Execution: How might one craft a retirement identity? Start by coming up with a plan for preventing or minimizing Kubler-Ross symptoms. Or better yet, how about just facing them? The plan has to separately address distinct parts of your being, i.e., mental health, physical health, renewal through travel and recreation, and substitution. Why substitution? Because you’ll need to substitute for your work persona through the gradual and planned development of your natural personality, untethered to the habits necessitated by your working life. While it is impossible to detach entirely from ingrained habits, we all know that many of our co-workers (40% of all workers in one large study) report to work simply to make money and have health insurance. They were not there to either sustain or nourish their personality. Karl Marx was right about “alienation.” If you spent your working years as one of those unfortunates, retirement is a chance to recover, dial back your stress level and grow a little. But if you identified strongly with your workplace persona, you’ll need to remain somewhat tethered, perhaps by becoming “historian” of your trade association.
How might one improve health? Given that many of our poor health habits exist because of work-related stress, experiment with dialing back unhealthy habits.
How might one plus-up retirement savings without gambling? We all know you can’t retire while you have debts. If that’s you, make sure you can migrate to a part-time job soon after retiring from your full-time job. Once your debts have been paid off, do the math and see if you can maintain your lifestyle by using income from Social Security, pensions & annuities, and your retirement portfolio. If there’s still not enough, you’ll have to continue with part-time work or dial back your lifestyle. But behavior is hard to change, so you’ll be tempted instead to borrow money, gamble, or borrow money to gamble. Don’t. There are no short-cuts. It’s too late in the game for you to invest in anything with an uncertain payoff. The only investments that can help you now are to be found at treasurydirect. You’ll have to keep working, dial back your lifestyle, or sponge off friends and relatives. If you are disabled, apply to the appropriate government agency for assistance.
Administration:
Mental Health: Here you’ll need to reach out. Start by paying closer attention to your network of friends and relatives. Technology also helps by providing vicarious relationships through your laptop: Facebook, movies, and feature presentations viewable with 360 degree “virtual reality” headsets. And remember, New York museums and Broadway plays are popular with tourists for a reason. Find a way to avail yourself of live theater or a museum visit at least once a year.
Physical Health: The trick here is 30 minutes of exercise a day (e.g. brisk walking), and eating a balanced diet that includes green vegetables, fruit, nuts and coffee (or some other antioxidant). If you live alone, there’s a good chance you’re not getting enough protein and Vitamin D. So, take a supplement like “Ensure Enlive” (Abbott Laboratories) each day. Finally, the need for extra sleep is easily forgotten. It may be hard to understand the importance of sleeping each night until rested, but “you’ll know it when you see it”.
Travel and Recreation: “Get a life!” That’s what we say to boring people who appear to have no excitement in their lives. But many senior citizens lack the wherewithal to travel, or even take up a renewing pastime. Fortunately, the internet makes it easy to find affinity groups and charitable organizations that will help you avoid becoming a “shut-in.”
Substitution: learn routines for a new purpose in life, one that suits you. Here you’ll need a little professional help from someone who knows how to select and evaluate a psychological test that addresses someone like you. You’d best do this at least 3 yrs before you retire, since you may need to reacquire lost skills or encourage new skills.
Bottom Line: Half of us will need to continue working in our sunset years. During the run-up to retirement, we’ll have to learn a new career/vocation/hobby, one that is less stressful and time-consuming. Those of us who don’t fear outliving our retirement assets will have a similar task, but will also have the luxury of free associating a plan for new routines that match a new purpose in life. Both groups soon realize they’ll have to pay a lot more attention to physical health than anticipated. That will lead to paying closer attention to mental health, which creates a positive feedback loop that stabilizes physical health. For example, we continue to eat after our appetite has been satisfied mainly because it decreases stress. By learning more about the sources of stress in our lives, and taking remedial action, we’ll find that losing weight is not so difficult. So, the key part of our makeover is to de-stress, which is most easily accomplished through frequent 3-4 day periods of Travel and Recreation. Academic studies also suggest that to de-stress we’ll need to nurture more friendships.
Risk Rating: 5 (US Treasuries = 1; gold = 10)
Full Disclosure: I dollar-average into NKE, JNJ, and T, and also own shares of ROST and KO.
NOTE: Metrics are current for the Sunday of publication. Red highlights denote underperformance vs. VBINX at Line 16 in the Table. NPV inputs are described and justified in the Appendix to Week 256. Briefly, Discount Rate = 9%, Holding Period = 10 years, Initial Cost = the moving average for price over the past 50 days (corrected for transaction costs of 2.5%), Dividend Growth Rate is Dividend CAGR for the past 16 years, Price Growth Rate is Price CAGR for the past 30 years, and Price Return in the 10th year is corrected for transaction costs of 2.5%. The calculation template is found at (http://www.investopedia.com/calculator/netpresentvalue.aspx).
Post questions and comments in the box below or send email to: irv.mcquarrie@InvestTuneRetire.com
Subscribe to:
Comments (Atom)