This is from Abby Joseph Cohen as quoted in Barron's.
There are many investors who have dramatically shortened their time horizons. That always happens when volatility picks up, and in some ways it adds to the volatility because these investors look at momentum rather than value.
This is a useful comment about psychology causing people to make bad decisions reacting to moves of the market.
Cohen goes on to use this is a basis for a buying opportunity which is not so clear to me.
Sunday, June 18, 2006
Saturday, June 10, 2006
What To Look For In An Advisor?
First, apologies for not updating this page for a while. The combination of busier at work and fire season in full swing gives me less time.
Before I get into this post let me say this is not a pitch to think about hiring me. This post is in response to something I read. With that, on to the post.
I grabbed the June Kiplinger to look through while I rode the recumbent bike yesterday. There was an article about a couple from Georgia, he is 40 and she is 33, who were looking for a financial advisor.
The article followed their progress and their thought process as they interviewed a father and son team from AG Edwards, a broker from Raymond James and an independent advisor.
The way I read the article the couple had assembled a list of 9 questions to ask an advisor. There was a question about how they assess client needs, one about how they do research and get information, two questions about meeting availability and frequency, two about fees, two about how to complain and one about results of other clients.
While I can't say the questions are unimportant there were some important ones missing. The one that I think is important is how they decide to sell, reduce, get defensive or any other way to describe protecting assets when preservation is more important than growth. I would be surprised if the two wirehouse candidates had a good answer and the independent was a DFA guy so he would probably have a very compelling argument for why taking defensive action is futile, at least the one DFA guy I know says this.
Another line of questioning might be some convincing that the broker himself knows anything about markets and investing. Trust me when I say plenty of folks in the business know very little. If the salesman is the person you will be speaking to I think it would be nice to know that he understands what is going on and furthermore even keeps up with what is going on.
Of course this may not be easy if he has 400 clients and is looking for more.
And speaking of how many clients, if there are 13 weeks in a quarter and the person you hire has 200 clients and is soliciting for more clients, how much time will you get in the quarter?
According to the article the AG Edwards fees would be 1.5%-2.0% and the Raymond James fees would be 1.75% to 2.0%. The brokers need to get paid as do the managers that the brokers select, hence the fees. If you are going to have a manager of some sort ultimately making the decisions why pay for a broker? If you pay a brokerage firm 75 basis points in extra fees on top of the 1% that goes to the manager (I do not know how the fee is split but work with me here) for 20 years on $500,000, well I think that works out to $75,000. That could be a year's worth of living expenses traded in for what kind of extra value?
Another aspect of the article that I wish would have been explored further was that the couple had expectations for annual returns. He wanted to average 12% per year and she would be happy with 9%. This can be tricky. First of all the couple in the article has done a decent job of saving and is committed to saving enough. I do believe that over long periods of time, stock markets will average what they have always averaged. People who save enough money just need to stay close to the market. If they miss 1/3 of the next down 30% stretch they will dramatically beat the market over their investing lifetime.
This is tough to grab onto but the numbers work if you just let them. Too many people get in the way of letting the numbers work for them.
One last thing to touch on is that at one point in the article the husband of the profiled couple questioned whether he would be better off doing it himself with ETFs. Well not having to overcome a 200 basis point bogey every year would help but there was not much said as to how much he knew and how much time he was willing to spend. I am not a fan of relying on just one product but there are people that can learn to do it themselves. The biggest obstacle for these people is their own emotion.
If you are considering doing it yourself you need to have some introspection about your strengths and weaknesses. People that have the wrong emotional make up are absolutely better off paying a fee for help even if the fee seems high.
Before I get into this post let me say this is not a pitch to think about hiring me. This post is in response to something I read. With that, on to the post.
I grabbed the June Kiplinger to look through while I rode the recumbent bike yesterday. There was an article about a couple from Georgia, he is 40 and she is 33, who were looking for a financial advisor.
The article followed their progress and their thought process as they interviewed a father and son team from AG Edwards, a broker from Raymond James and an independent advisor.
The way I read the article the couple had assembled a list of 9 questions to ask an advisor. There was a question about how they assess client needs, one about how they do research and get information, two questions about meeting availability and frequency, two about fees, two about how to complain and one about results of other clients.
While I can't say the questions are unimportant there were some important ones missing. The one that I think is important is how they decide to sell, reduce, get defensive or any other way to describe protecting assets when preservation is more important than growth. I would be surprised if the two wirehouse candidates had a good answer and the independent was a DFA guy so he would probably have a very compelling argument for why taking defensive action is futile, at least the one DFA guy I know says this.
Another line of questioning might be some convincing that the broker himself knows anything about markets and investing. Trust me when I say plenty of folks in the business know very little. If the salesman is the person you will be speaking to I think it would be nice to know that he understands what is going on and furthermore even keeps up with what is going on.
Of course this may not be easy if he has 400 clients and is looking for more.
And speaking of how many clients, if there are 13 weeks in a quarter and the person you hire has 200 clients and is soliciting for more clients, how much time will you get in the quarter?
According to the article the AG Edwards fees would be 1.5%-2.0% and the Raymond James fees would be 1.75% to 2.0%. The brokers need to get paid as do the managers that the brokers select, hence the fees. If you are going to have a manager of some sort ultimately making the decisions why pay for a broker? If you pay a brokerage firm 75 basis points in extra fees on top of the 1% that goes to the manager (I do not know how the fee is split but work with me here) for 20 years on $500,000, well I think that works out to $75,000. That could be a year's worth of living expenses traded in for what kind of extra value?
Another aspect of the article that I wish would have been explored further was that the couple had expectations for annual returns. He wanted to average 12% per year and she would be happy with 9%. This can be tricky. First of all the couple in the article has done a decent job of saving and is committed to saving enough. I do believe that over long periods of time, stock markets will average what they have always averaged. People who save enough money just need to stay close to the market. If they miss 1/3 of the next down 30% stretch they will dramatically beat the market over their investing lifetime.
This is tough to grab onto but the numbers work if you just let them. Too many people get in the way of letting the numbers work for them.
One last thing to touch on is that at one point in the article the husband of the profiled couple questioned whether he would be better off doing it himself with ETFs. Well not having to overcome a 200 basis point bogey every year would help but there was not much said as to how much he knew and how much time he was willing to spend. I am not a fan of relying on just one product but there are people that can learn to do it themselves. The biggest obstacle for these people is their own emotion.
If you are considering doing it yourself you need to have some introspection about your strengths and weaknesses. People that have the wrong emotional make up are absolutely better off paying a fee for help even if the fee seems high.
Saturday, April 29, 2006
Example Of Inflation
The Economic Beat column in Barron's was primarily about the run up in gold, whether it has been justified or not and how far it might go. One point made that is relevant to this blog is that gold, adjusted for inflation would need to go to $2000 to equal its 1980 high of $850.
The point here is not to debate what gold will do or how useful looking at gold adjusted for inflation is.
Think of the $850 as someone's monthly living expenses in 1980. The same lifestyle today would cost $2000. Applying the same inflation rate over the next 26 years would take today's $2000 in expenses up to $4705 per month. A portfolio today would need to be worth $480,000 to meet the $2000 monthly income need. That same portfolio would need to grow to $1,129,200 while paying out the income need along the way.
However much an investor put into bonds 26 years ago is how much he has today. The S&P 500's high water mark in 1980 was 140 and today it is 9.3 times higher at 1310. So in the last 26 years inflation is up 2.35 times and stock prices are up 9.3 times.
This idea is probably not new but it reiterates the point of how important equity exposure is.
It is very possible that the next 26 years will not offer the same returns as the last 26 years. The domestic returns cold be much worse. This creates the potential need for better understanding of foreign stock markets. The starting point of these decisions can be a very simple logic. The numbers are what they are and will be very similar in the future even if you have to go to other countries for those same numbers.
The point here is not to debate what gold will do or how useful looking at gold adjusted for inflation is.
Think of the $850 as someone's monthly living expenses in 1980. The same lifestyle today would cost $2000. Applying the same inflation rate over the next 26 years would take today's $2000 in expenses up to $4705 per month. A portfolio today would need to be worth $480,000 to meet the $2000 monthly income need. That same portfolio would need to grow to $1,129,200 while paying out the income need along the way.
However much an investor put into bonds 26 years ago is how much he has today. The S&P 500's high water mark in 1980 was 140 and today it is 9.3 times higher at 1310. So in the last 26 years inflation is up 2.35 times and stock prices are up 9.3 times.
This idea is probably not new but it reiterates the point of how important equity exposure is.
It is very possible that the next 26 years will not offer the same returns as the last 26 years. The domestic returns cold be much worse. This creates the potential need for better understanding of foreign stock markets. The starting point of these decisions can be a very simple logic. The numbers are what they are and will be very similar in the future even if you have to go to other countries for those same numbers.
Saturday, April 22, 2006
Retirement - New York Times
Business News - Retirement - New York Times
The Times has several articles on this link that I believe tie in with some the things I have been writing about on this site.
You will need to register but it is free.
The Times has several articles on this link that I believe tie in with some the things I have been writing about on this site.
You will need to register but it is free.
Tuesday, April 18, 2006
Longevity
Barron's had an interesting cover story about longevity possibly expanding well beyond what people now think in terms of how long they will live.
On one level longer life seems intuitive in that all technology is advancing at an accelerating pace. Michael Miliken says cancer will be gone by 2015. There will also be advances in how heart disease is managed and treated. There article then talks about nano technology creating little robots that go all through the body fixing things.
A big part of aging is caused by damage that occurs in cells. Science will find more and more ways to prevent or reverse this damage. Some of this will happen within the timeline stated in the article. How much will happen is the variable.
I do not want to turn this into a morality debate. It makes sense to think about living longer from a dollar and cents standpoint.
This could mean (recurring theme alert) planning retirement will have to be done differently. We will have to work longer, we will have to own a lot of equities longer and it will create many stresses on our economy, our social services, natural resources and many other things.
This ties into an idea that the US will need evolve in order to prosper. I believe that it can but this could be serious.
In my opinion successful retirement planning includes staying in touch with new fill in the blank. New will never stop. Staying in touch with new can make retirement planning much easier or perhaps a better way to look at would be that staying in touch with new can stave off hardship.
On one level longer life seems intuitive in that all technology is advancing at an accelerating pace. Michael Miliken says cancer will be gone by 2015. There will also be advances in how heart disease is managed and treated. There article then talks about nano technology creating little robots that go all through the body fixing things.
A big part of aging is caused by damage that occurs in cells. Science will find more and more ways to prevent or reverse this damage. Some of this will happen within the timeline stated in the article. How much will happen is the variable.
I do not want to turn this into a morality debate. It makes sense to think about living longer from a dollar and cents standpoint.
This could mean (recurring theme alert) planning retirement will have to be done differently. We will have to work longer, we will have to own a lot of equities longer and it will create many stresses on our economy, our social services, natural resources and many other things.
This ties into an idea that the US will need evolve in order to prosper. I believe that it can but this could be serious.
In my opinion successful retirement planning includes staying in touch with new fill in the blank. New will never stop. Staying in touch with new can make retirement planning much easier or perhaps a better way to look at would be that staying in touch with new can stave off hardship.
Thursday, April 06, 2006
CD Product
A reader expressed an interest in buying a CD from Millennium Bank that appears to be a very high yielding product.
The reader wonders whether I would buy something like this and then why or why not. While I did not read the fine print, the main page is very clear that there is no getting your money out early. They are not saying if you break the CD you pay a penalty, they are saying you cannot get to the money, period.
As a matter of philosophy I don't like to lock up money in this way. This is not a comment on investing but personal preference and so probably does not offer much value. I prefer to keep options open to me, not just financially.
I can't say that the reader should or should not but the CD I am just saying this is not for me.
The reader wonders whether I would buy something like this and then why or why not. While I did not read the fine print, the main page is very clear that there is no getting your money out early. They are not saying if you break the CD you pay a penalty, they are saying you cannot get to the money, period.
As a matter of philosophy I don't like to lock up money in this way. This is not a comment on investing but personal preference and so probably does not offer much value. I prefer to keep options open to me, not just financially.
I can't say that the reader should or should not but the CD I am just saying this is not for me.
Tuesday, April 04, 2006
Coming Up Short?
This is the general warning from an article in the WSJ. Too many Americans will come up short in their retirement savings. One scary tidbit was that only 25% of Americans over age 55 have $250,000, or more, saved for retirement. The scary part is that people who live to age 90 will need $215,000 for medical expenses. That leaves $35,000 from to draw 5% from. Oops.
The article also talks at length about planning to need 70% of what you make now to live on and questions whether instead of 70% you should target replacing 85% of your income.
Advice like this is too broad. Plenty of people have a mortgage when they are younger. Whether the mortgage is paid off in retirement matters and would be a huge determinant as to how much of your income you need to replace. Some people need to drive a particular type of vehicle when they work, pay for it a particular way and replace it at a specific time interval. No car payment or a lower car payment could also affect income need in retirement.
The bigger point is to not rely on a generic number but to analyze your own situation to determine how much you need. If the number you come up with is too low you might want to reassess.
My wife and I have almost no expenses now. Really, all we pay for is utilities, groceries and various insurance premiums. Layer on top of that two trips per year.
I expect my expenses will increase in retirement due mostly to normal health costs. Also, we currently make no car payments but they way have lived so far we have a car payment about 1/3 of the time, we drive cars until they die, well close to it anyway.
I am often critical of brokers and bankers for trying to label customers as tab A or tab B and then fitting them into slot A or slot B. Don't label yourself in the same way.
The article also talks at length about planning to need 70% of what you make now to live on and questions whether instead of 70% you should target replacing 85% of your income.
Advice like this is too broad. Plenty of people have a mortgage when they are younger. Whether the mortgage is paid off in retirement matters and would be a huge determinant as to how much of your income you need to replace. Some people need to drive a particular type of vehicle when they work, pay for it a particular way and replace it at a specific time interval. No car payment or a lower car payment could also affect income need in retirement.
The bigger point is to not rely on a generic number but to analyze your own situation to determine how much you need. If the number you come up with is too low you might want to reassess.
My wife and I have almost no expenses now. Really, all we pay for is utilities, groceries and various insurance premiums. Layer on top of that two trips per year.
I expect my expenses will increase in retirement due mostly to normal health costs. Also, we currently make no car payments but they way have lived so far we have a car payment about 1/3 of the time, we drive cars until they die, well close to it anyway.
I am often critical of brokers and bankers for trying to label customers as tab A or tab B and then fitting them into slot A or slot B. Don't label yourself in the same way.
Monday, March 27, 2006
The Wall Street Journal On Retirement Planning
The WSJ had an interesting article about retirement planning that you will need a subscription to read.
The article isolates some omissions in process that could be very important. First the article tackles inflation. Many people fail to account for inflation in their planning and the contention in this article is that those that do often figure too low. The standard 3% assumption might be too low. While I am not sure if 3% is too low I do know that if 5% turns out to right and you plan for 3%, a lot of your numbers will be way off.
The idea of rerunning your numbers with a 5% inflation rate to see what happens makes sense. A couple of tweaks could mitigate a chunk of the damage caused by a higher inflation rate.
Next the article touches on spending. People that are in the early years of retirement are likely to spend more on lifestyle (travel and hobbies) than people later in retirement. But older retirees are likely to spend more, a lot more, on medical care than younger retirees. The article doesn't really offer much on this topic.
The article touches on longevity. This is important. Based on medical innovation it is a reasonable bet that today's average 50 year old could live ten years longer than they might otherwise expect.
The article also touches on the withdrawal rate that I have mentioned on this site before and drew so many comments. The article went with 4%. Obviously the number is reasonable, but the lower the better.
I was disappointed that the article did not focus at all on alternative ideas for creating income. It makes sense to me that innovative ideas along these lines will help ensure a successful retirement, financially.
The article isolates some omissions in process that could be very important. First the article tackles inflation. Many people fail to account for inflation in their planning and the contention in this article is that those that do often figure too low. The standard 3% assumption might be too low. While I am not sure if 3% is too low I do know that if 5% turns out to right and you plan for 3%, a lot of your numbers will be way off.
The idea of rerunning your numbers with a 5% inflation rate to see what happens makes sense. A couple of tweaks could mitigate a chunk of the damage caused by a higher inflation rate.
Next the article touches on spending. People that are in the early years of retirement are likely to spend more on lifestyle (travel and hobbies) than people later in retirement. But older retirees are likely to spend more, a lot more, on medical care than younger retirees. The article doesn't really offer much on this topic.
The article touches on longevity. This is important. Based on medical innovation it is a reasonable bet that today's average 50 year old could live ten years longer than they might otherwise expect.
The article also touches on the withdrawal rate that I have mentioned on this site before and drew so many comments. The article went with 4%. Obviously the number is reasonable, but the lower the better.
I was disappointed that the article did not focus at all on alternative ideas for creating income. It makes sense to me that innovative ideas along these lines will help ensure a successful retirement, financially.
Monday, March 20, 2006
Barron's On Retirement Planning
Once or twice a year Barron's devotes an issue to retirement, including planning, products and whatever else strikes their fancy.
You will need a subscription to read the articles. There were two that caught my eye because I think they play into what I have been writing about on this new blog. One article was about moving to another country and the other profiled a fictitious couple and real advice from three different financial planners.
I was encouraged to read more of a shift to thinking outside the box. While I would not suggest that anyone move to Croatia per se, exploring different ideas along these lines can be worthwhile. Most of the destinations in the moving article probably do have a lot to offer in the way of lower cost of living and tax breaks.
Perhaps splitting time between one of those places is an option? Or perhaps living there for a few years until maybe age 70 and then coming back when you are likely to need more medical care could be an idea. I am not an expert on this subject and there are flaws to what little I have in this post but the point is to explore these idea and see if any of them can be applied in some way to your retirement plan.
The planning article also had a little outside the lines thought with consulting during the first few years of post-retirement, monetizing a genealogy hobby and eBaying stuff.
On a somewhat related note a neighbor of mine has a vehicle kind of like this one that he uses to plow the road and people's driveways.
I mentioned him on my Big Picture blog in passing. For some reason he has been plowing me out for free. He could reasonably charge $40-$50 for the 2 minutes it takes to plow me out.
There are easily 50 people that he could plow out and charge for the work. On our mountain we average about five snowstorms per year. Assume only 25 people hire him at $40, it works out to $5000 per winter. That could easily cover one month's expenses for someone with a modest lifestyle.
Two or three things like this to cover expenses for two to three months out of the year can reduce the demands placed on a portfolio.
Buying a snowcat is very capital intensive but buying a big plow blade to put on the front of your pick up or SUV is not.
Again the idea is not for you to plow your neighbor's driveway. My neighbor has a snowcat and can potentially make money from it. His idea is capital intensive and the much cheaper plow blade is an easier spin on the idea.
Focus on process not product.
You will need a subscription to read the articles. There were two that caught my eye because I think they play into what I have been writing about on this new blog. One article was about moving to another country and the other profiled a fictitious couple and real advice from three different financial planners.
I was encouraged to read more of a shift to thinking outside the box. While I would not suggest that anyone move to Croatia per se, exploring different ideas along these lines can be worthwhile. Most of the destinations in the moving article probably do have a lot to offer in the way of lower cost of living and tax breaks.
Perhaps splitting time between one of those places is an option? Or perhaps living there for a few years until maybe age 70 and then coming back when you are likely to need more medical care could be an idea. I am not an expert on this subject and there are flaws to what little I have in this post but the point is to explore these idea and see if any of them can be applied in some way to your retirement plan.
The planning article also had a little outside the lines thought with consulting during the first few years of post-retirement, monetizing a genealogy hobby and eBaying stuff.
On a somewhat related note a neighbor of mine has a vehicle kind of like this one that he uses to plow the road and people's driveways.
I mentioned him on my Big Picture blog in passing. For some reason he has been plowing me out for free. He could reasonably charge $40-$50 for the 2 minutes it takes to plow me out.
There are easily 50 people that he could plow out and charge for the work. On our mountain we average about five snowstorms per year. Assume only 25 people hire him at $40, it works out to $5000 per winter. That could easily cover one month's expenses for someone with a modest lifestyle.
Two or three things like this to cover expenses for two to three months out of the year can reduce the demands placed on a portfolio.
Buying a snowcat is very capital intensive but buying a big plow blade to put on the front of your pick up or SUV is not.
Again the idea is not for you to plow your neighbor's driveway. My neighbor has a snowcat and can potentially make money from it. His idea is capital intensive and the much cheaper plow blade is an easier spin on the idea.
Focus on process not product.
Sunday, March 19, 2006
A Word Of Caution
This may sound hypocritical and fair enough if you think that.
I can tell from the emails I receive in my Street.com account from those readers that a lot people read an article, be it mine or someone else's, that makes intuitive sense and take action without proper study.
This is dumb anyway you cut it. Just about every article is plausible but far from every article turns out to be correct.
If you are going to manage your own portfolio you have to properly understand what you own, why you own and what can go wrong. I doubt that too many people would disagree with this yet many people buy stocks based on articles or based on TV touts.
Trying to make money trading off of TV and print is a path of much resistance. This is the wrong approach for most people yet a lot of people do try to speculate this way. Beware.
I can tell from the emails I receive in my Street.com account from those readers that a lot people read an article, be it mine or someone else's, that makes intuitive sense and take action without proper study.
This is dumb anyway you cut it. Just about every article is plausible but far from every article turns out to be correct.
If you are going to manage your own portfolio you have to properly understand what you own, why you own and what can go wrong. I doubt that too many people would disagree with this yet many people buy stocks based on articles or based on TV touts.
Trying to make money trading off of TV and print is a path of much resistance. This is the wrong approach for most people yet a lot of people do try to speculate this way. Beware.
Friday, March 10, 2006
Should You Hire An Investment Manager?
I think I can be objective about this.
I think the basics of building and maintaining a portfolio can be learned by a lot of people. This can be done without individual stocks and allow an investor to stay close to the market and perhaps manage the risk effectively, for example using a dividend ETF for a portion of large cap exposure.
One of the biggest obstacles for do-it-yourself is emotion. There are studies from various financial institutions that show mutual fund holders lag the funds they hold due to poor timing of purchases and sales. This can be reasonably attributed to buying high and selling low.
I can tell from conversations I have with some clients, neighbors and friends that getting a handle on the emotional aspect of portfolio management is a much tougher skill to learn.
History shows that stock market crashes come at bottoms not tops. I don't know how many times I have said and written that. Yet I know that the next time there is a crash I will get comments left on the blog about selling, clients will also ask about selling. People can process crashes come at bottoms today, when there is no crash. It is tougher to do when a crash comes.
A successful do-it-yourselfer needs to really embrace the history of something like this to be a good money manager. This is just one example there are many others.
If you plan to go it alone, I would urge you to learn as much as you an about stock market history. There are plenty of books that tell the stories of the market and I would also advise getting something like the Stock Trader's Almanac to see the actual numbers. Everyone knows what a terrible stock market we had from 1968 to 1981, right? It was awful!
Well not exactly.
1972 SPX up 15.6%
1975 SPX up 31.5%
1976 SPX up 19.1%
1980 SPX up 25.8%
So during that 14-year period there were four years unambiguously better than the long-term average. There were five other years during that time period that were up slightly. So nine out of 14 years in this "awful" period were actually up.
The remaining years were absolute stinkers.
1969 SPX down 11.4%
1973 SPX down 17.4%
1974 SPX down 29.7%
1977 SPX down 11.5%
1981 SPX down 9.7%
Most of the damage of this time period was done in 1973 and 1974. I would note that the index went below its 200 DMA (my trigger to start getting defensive) in the spring of 1973 only about 10% from the high set in January of 1973. The SPX went back above the 200 DMA early in 1975, about 15% from the bottom.
Being faithful to this exit strategy then would have allowed you miss most, not all, of down a lot. This would have added dramatically to returns for that time period. This will happen again in the future.
This is all about numbers not sentiment. Understanding how numbers have worked in the past can build a foundation for you to begin to assess how numbers might work in the future.
Only you can really know whether you can do this. Coming up with the right answer requires introspection.
I think the basics of building and maintaining a portfolio can be learned by a lot of people. This can be done without individual stocks and allow an investor to stay close to the market and perhaps manage the risk effectively, for example using a dividend ETF for a portion of large cap exposure.
One of the biggest obstacles for do-it-yourself is emotion. There are studies from various financial institutions that show mutual fund holders lag the funds they hold due to poor timing of purchases and sales. This can be reasonably attributed to buying high and selling low.
I can tell from conversations I have with some clients, neighbors and friends that getting a handle on the emotional aspect of portfolio management is a much tougher skill to learn.
History shows that stock market crashes come at bottoms not tops. I don't know how many times I have said and written that. Yet I know that the next time there is a crash I will get comments left on the blog about selling, clients will also ask about selling. People can process crashes come at bottoms today, when there is no crash. It is tougher to do when a crash comes.
A successful do-it-yourselfer needs to really embrace the history of something like this to be a good money manager. This is just one example there are many others.
If you plan to go it alone, I would urge you to learn as much as you an about stock market history. There are plenty of books that tell the stories of the market and I would also advise getting something like the Stock Trader's Almanac to see the actual numbers. Everyone knows what a terrible stock market we had from 1968 to 1981, right? It was awful!
Well not exactly.
1972 SPX up 15.6%
1975 SPX up 31.5%
1976 SPX up 19.1%
1980 SPX up 25.8%
So during that 14-year period there were four years unambiguously better than the long-term average. There were five other years during that time period that were up slightly. So nine out of 14 years in this "awful" period were actually up.
The remaining years were absolute stinkers.
1969 SPX down 11.4%
1973 SPX down 17.4%
1974 SPX down 29.7%
1977 SPX down 11.5%
1981 SPX down 9.7%
Most of the damage of this time period was done in 1973 and 1974. I would note that the index went below its 200 DMA (my trigger to start getting defensive) in the spring of 1973 only about 10% from the high set in January of 1973. The SPX went back above the 200 DMA early in 1975, about 15% from the bottom.
Being faithful to this exit strategy then would have allowed you miss most, not all, of down a lot. This would have added dramatically to returns for that time period. This will happen again in the future.
This is all about numbers not sentiment. Understanding how numbers have worked in the past can build a foundation for you to begin to assess how numbers might work in the future.
Only you can really know whether you can do this. Coming up with the right answer requires introspection.
Monday, March 06, 2006
Ben Stein
Sorry for the infrequent posts, work and life have been busier than normal.
I read an interesting article by Ben Stein on Yahoo that on its surface is quite grim. He is very concerned that the standard of living for baby boomers is going to decline in an ugly fashion because baby boomers are not saving enough for their retirement.
He says you will need 15 times your income need saved to generate enough income to live comfortably. Maybe he is factoring in getting social security but I think it is more like 20 times your income need. If you buy into taking no more than 5% out for income, I think that gets you to 20 times.
A slightly different spin would be the things I have talked about. Whatever dollar amount you have, that's it. You can't take more than 5% out per year. If that 5% is not enough you need to find ways to build the remainder of your paycheck.
That people won't have enough is not new. The thinking behind Mr. Stein's article is the catalyst for this site in the first place. More and more people will need to find innovative strategies to fund retirement. This ties in with an even bigger theme which that the US' economy will have to evolve, as it has always done, to still be a great country. I have no doubt it will but it won't be simple or painless.
The article underscores the importance of having some sort of clear and simple plan in place and a way to monitor your progress vs. the schedule of your plan. For example if your 401k needs to be at $420,000 by age 52 and you only have $310,000 at age 51 you can know this and implement a strategy, with a time table, to catch up.
I read an interesting article by Ben Stein on Yahoo that on its surface is quite grim. He is very concerned that the standard of living for baby boomers is going to decline in an ugly fashion because baby boomers are not saving enough for their retirement.
He says you will need 15 times your income need saved to generate enough income to live comfortably. Maybe he is factoring in getting social security but I think it is more like 20 times your income need. If you buy into taking no more than 5% out for income, I think that gets you to 20 times.
A slightly different spin would be the things I have talked about. Whatever dollar amount you have, that's it. You can't take more than 5% out per year. If that 5% is not enough you need to find ways to build the remainder of your paycheck.
That people won't have enough is not new. The thinking behind Mr. Stein's article is the catalyst for this site in the first place. More and more people will need to find innovative strategies to fund retirement. This ties in with an even bigger theme which that the US' economy will have to evolve, as it has always done, to still be a great country. I have no doubt it will but it won't be simple or painless.
The article underscores the importance of having some sort of clear and simple plan in place and a way to monitor your progress vs. the schedule of your plan. For example if your 401k needs to be at $420,000 by age 52 and you only have $310,000 at age 51 you can know this and implement a strategy, with a time table, to catch up.
Saturday, February 25, 2006
Real Estate Done Simply
Whenever possible, simple is better. I try to keep things in my life as simple as possible. I include my life at home, my job and my work at our fire department.
With fewer moving parts there is less that can go wrong.
This can be applied to real estate. I know various people that have different levels of involvement with real estate. Some of these folks are stretched very thin by the work that is needed to maintain a real estate portfolio. They may own a lot real estate by other people's standards or not, that is subjective but if managing your real estate is a full time job and you don't want it to be, you probably have too much.
The idea coming in this post is not mine nor is it unique but that does not diminish the extent to which it is a good idea. Also keep in mind the primary theme is simplicity, it would be easy for someone knowledgeable in real estate to find better ways to skin this cat.
In the next couple of years my wife and I plan to buy a duplex ( but a three-unit building is not out of the question nor does it increase the hassle factor by much). I'm not sure exactly where we will buy but it will be somewhere where we could enjoy living, as we do now in Walker, maybe Juneau.
The basic idea behind a duplex is you have two renters, which reduces vacancy risk. This is probably not new to anyone. The way we plan to integrate it into our financial plan might be a little different, though.
I will probably be 42 when we buy. Our plan is to pay down the mortgage very quickly with rent and by making extra payments from our income. I think we can have it paid off when I am 52.
Here are some numbers to help explain the thought process. Rents where we live are kind of low. If we owned a duplex in Prescott, we could probably charge $650 per unit per month, $1300 total. $1300 free and clear, in today's dollars, covers about half of our total expenses, we live quite modestly. Even if that was only 20% of your monthly expenses it would still be compelling.
If your monthly expenses are high (this calls for introspection), then a duplex could be 20-25% of your retirement income, a stock portfolio could be 25-30% of your income and the rest could be split from some sort of part time work mentioned in previous posts and social security. Four different streams of income is not a bad way to go.
Where I think my thoughts might start to go off the beaten path have to do with people that don't do a good job saving money but can do a good job paying the mortgage.
Someone in this position could sell their home upon retirement (this idea assumes the house is paid off) for $250,000 (in today's dollars), close to the average home price today, and move into one side of the duplex (which, presumably has also been paid off). The proceeds could then be put into a diversified portfolio to comfortably generate $1000 per month.
In this scenario, $650 rent is coming from the other unit, there is no mortgage to pay, $1000 in portfolio income plus the part time job and social security. Also note that I have made the assumption that this person did not save anything during their working lives.
The numbers may seem small but the person that saved nothing is going to have to deal with a very modest lifestyle in retirement. Things look much better with a modest bit of savings accumulated, say $200,000 in an IRA.
There are a couple of logistical issues with any type of rental property. My own preference would be to hire a management company, for my money they are worth their 10-15%. You need to maintain some sort of slush fund to pay for various little fix-its that come up and more importantly to cover any vacancies.
The other issue is negative cash flow on the property when you first buy. Rent usually goes up at the rate of inflation. A small negative cash flow in the first few years is not a big deal to me but this is very subjective and there is no wrong answer. I would add that $1500 in rent versus a $3000 mortgage would be a turnoff for me.
The primary purpose of this post is to start thinking about real estate in a simple manner. One piece of investment property is not an unreasonable burden and regardless of the end game, moving in or selling, some exposure makes sense. A real estate bubble, if there is one, will not hurt investors that are not overleveraged.
With fewer moving parts there is less that can go wrong.
This can be applied to real estate. I know various people that have different levels of involvement with real estate. Some of these folks are stretched very thin by the work that is needed to maintain a real estate portfolio. They may own a lot real estate by other people's standards or not, that is subjective but if managing your real estate is a full time job and you don't want it to be, you probably have too much.
The idea coming in this post is not mine nor is it unique but that does not diminish the extent to which it is a good idea. Also keep in mind the primary theme is simplicity, it would be easy for someone knowledgeable in real estate to find better ways to skin this cat.
In the next couple of years my wife and I plan to buy a duplex ( but a three-unit building is not out of the question nor does it increase the hassle factor by much). I'm not sure exactly where we will buy but it will be somewhere where we could enjoy living, as we do now in Walker, maybe Juneau.
The basic idea behind a duplex is you have two renters, which reduces vacancy risk. This is probably not new to anyone. The way we plan to integrate it into our financial plan might be a little different, though.
I will probably be 42 when we buy. Our plan is to pay down the mortgage very quickly with rent and by making extra payments from our income. I think we can have it paid off when I am 52.
Here are some numbers to help explain the thought process. Rents where we live are kind of low. If we owned a duplex in Prescott, we could probably charge $650 per unit per month, $1300 total. $1300 free and clear, in today's dollars, covers about half of our total expenses, we live quite modestly. Even if that was only 20% of your monthly expenses it would still be compelling.
If your monthly expenses are high (this calls for introspection), then a duplex could be 20-25% of your retirement income, a stock portfolio could be 25-30% of your income and the rest could be split from some sort of part time work mentioned in previous posts and social security. Four different streams of income is not a bad way to go.
Where I think my thoughts might start to go off the beaten path have to do with people that don't do a good job saving money but can do a good job paying the mortgage.
Someone in this position could sell their home upon retirement (this idea assumes the house is paid off) for $250,000 (in today's dollars), close to the average home price today, and move into one side of the duplex (which, presumably has also been paid off). The proceeds could then be put into a diversified portfolio to comfortably generate $1000 per month.
In this scenario, $650 rent is coming from the other unit, there is no mortgage to pay, $1000 in portfolio income plus the part time job and social security. Also note that I have made the assumption that this person did not save anything during their working lives.
The numbers may seem small but the person that saved nothing is going to have to deal with a very modest lifestyle in retirement. Things look much better with a modest bit of savings accumulated, say $200,000 in an IRA.
There are a couple of logistical issues with any type of rental property. My own preference would be to hire a management company, for my money they are worth their 10-15%. You need to maintain some sort of slush fund to pay for various little fix-its that come up and more importantly to cover any vacancies.
The other issue is negative cash flow on the property when you first buy. Rent usually goes up at the rate of inflation. A small negative cash flow in the first few years is not a big deal to me but this is very subjective and there is no wrong answer. I would add that $1500 in rent versus a $3000 mortgage would be a turnoff for me.
The primary purpose of this post is to start thinking about real estate in a simple manner. One piece of investment property is not an unreasonable burden and regardless of the end game, moving in or selling, some exposure makes sense. A real estate bubble, if there is one, will not hurt investors that are not overleveraged.
Wednesday, February 22, 2006
Alaska
A few months ago I wrote a piece for my Big Picture blog about retiring in Alaska which you can read below. A part of the idea was that, in the interest of finding ways to supplement income, a retiree could live in Alaska to take advantage of the Permanent Fund dividend paid to residents out of the energy royalties the state takes in.
Today there is news of a new pipeline that will bring natural gas from Alaska to the lower 48. There are still a couple of obstacles, still a few years until it could be in operation and there was no mention in the WSJ piece about whether the pipeline will contribute to the Permanent Fund.
After a few years of decline in the dividend due in large part to poor stock market management, the dividend has a chance iof increasing substantially due to higher energy prices, this new pipeline and hopefully an improvement in portfolio management up to mediocre.
When I first ran the post, it was linked to in several places with some valid criticisms. One was the weather. To qualify for the dividend you only need to live there for six month out of the year. Although I may not have been clear, I was referring to the Juneau area. In December, January and February the average temperatures are 27.1 degrees, 24.2 degrees and 28.4 degrees respectively, according to CityRating.com. My original article posited that you only live there eight months a year, skipping those three months and either November or March which both average 32 degrees.
The other criticism made was about the cost of living. According to CityRating's cost of living calculator it would be 42% more expensive than in Arizona (where I live). A couple of things mitigate this, there is no state income tax and retirees get property tax breaks.
Intuitively, it is hard for me to imagine that Alaska is really 40% more expensive. If it really is that expensive, there are probably ways to reduce that spread, with a little ingenuity, some but perhaps not enough to make it worthwhile.
The more important thing to take from the following is the exploration of a new idea. Exploration like this can lead to other ideas that you can use, even if the Alaska idea does not make sense.
I have some wild ideas now and then and I write about them every so often because they amuse me.
This latest one I hatched is about way to retire for people that have not been lucky enough to accumulate a large enough nest egg for an ideal retirement. Several assumptions are made with this idea and I realize this.
Last summer my wife and I went to Juneau, Alaska. We loved the scenery, the hiking and the food. Alaska has a social program that I believe is unique. In 1982 the state of Alaska began to pay a dividend to residents out of something called the Permanent Fund. You can click here for details but the basics are the fund is funded with oil money which is then managed in the capital markets. The amount of the dividend can fluctuate. This year's dividend was payable in October and was $845 for qualified residents. The dividend has gone down for the last five years. The all time high payout was $1963 back in 2000. $845 is the lowest dividend since 1988. The reduced dividends of late were attributed to stock market losses.
I think this dividend could be incorporated into retirement planning in the right circumstance. Over the last ten years the average dividend has been $1396 per person. Relative to our fixed monthly expenses (no mortgage or car payments), $1396 in today's dollars is a lot of money. For a retired couple that only has to pay for insurance bills, utilities and groceries it is possible that $1396 could cover the month. Two people, two months covered. Two months out of twelve is significant. Clearly this is only for a modest lifestyle.
I should note that there is no state income tax in Alaska and the first $150,000 of assessed value is exempt from property tax for people 65 and older.
What about the winter someone might ask? Southeast Alaska (the area near Juneau) does not have as much snow or as much darkness (but there is still plenty of both) as the rest of the state. However, as I read the requirements you can be out of state up to 180 days per year. So three or four months in the desert or Florida or somewhere else and you avoid winter's bite.
Here is how some numbers might play out. A quick reminder is that is an idea, as I intended it, for people of modest means who don't spend a lot. Real estate in Alaska is cheaper than most parts of the country. I think it would be realistic to sell a home for $350,000 in many parts of the country, buy a modest house or condo in Alaska for $185,000- $200,000 and a condo in some parts of Florida or the desert with the balance. So maybe eight months in Alaska and four months in some place warmer. There are alternatives to buying a winter condo. For example, in Arizona, there are seasonal jobs in the tourism industry where accommodations are provided. I'm sure there are other similar opportunities too.
I think it might be reasonable to think that the type of person I have in mind for this, long career, decent income, diligent saver, might have $300,000 in a 401k account and maybe $50,000 liquid in a taxable account. These numbers are not run of the mill but they are not impossible either. Invested properly a 5% income need should not deplete an account. So $350,000 might generate $17,500. Of course, not buying a winter condo could leave a portfolio of $500,000 which could generate $25,000 a year.
There is more and more consensus that being retired no longer means not working at all. More and more retirees will work one way or another. There are numerous health and emotional benefits to working part time after traditional retirement. This could involve consulting, writing, eBay (or other internet venture) or just something you love (my wife's uncle was offered a job with the Los Angeles Angels of Anaheim working at the stadium for about $10 an hour which he almost took). It would not take much effort or time to make $500-1000 per month working 10-15 hours per week. If both partners in the couple do this, there is another $10,000-$20,000 per year.
So lets see where this couple stands now in relation to their expenses;
$2792 Permanent fund dividend
$17500 Portfolio Income
$15000 Income from part time work
$35392 Total
One other element might be social security. I don't think it makes sense to rely on social security as we now know it. I do not think it will ever disappear either, more likely might be a reduced benefit. Instead of each spouse getting $1000 per month perhaps it makes sense to think about $500 per month per spouse. That adds another $12000 annually which takes the income up to $47392. While the $1400 in monthly expense seems silly to me, $2500 (in today's dollars) plus a little money for traveling may not be. $30,000 in expenses compared to $47000 income seems comfortable to me.
In this example the Permanent Fund contribute close to 10% of a reasonable income need. It makes sense to me that the dividend could increase in the future because of higher oil prices and less volatility in the stock market.
There are some flaws here to be sure. The permanent fund could pay out more or less at any time. The fund could theoretically go bust. You'd have to love the great outdoors of Alaska which is not for most people. While we love it up there a friend recently visited Alaska and while he and his family had fun it was not the be all end all destination.
The point here is not that everyone should move to Alaska. The big picture here is that many of us may need to use some ingenuity to have a financially stable retirement. If stock market returns are below normal and social security is compromised and health costs go way up there will be less people able retire to the country club.
I do not think people can rely on planners or other professionals to think outside the lines on this sort of thing. This ties into one of the themes of this blog which is do-it-yourselfers being more empowered to make better decisions about investing and planning thanks to new investment products and access to different types of information thanks to the internet.
While you may or may not think this idea is insane, as the title to this post implies, it is outside the lines to be sure. If you have a unique idea along these lines I'd love to hear about it.
Today there is news of a new pipeline that will bring natural gas from Alaska to the lower 48. There are still a couple of obstacles, still a few years until it could be in operation and there was no mention in the WSJ piece about whether the pipeline will contribute to the Permanent Fund.
After a few years of decline in the dividend due in large part to poor stock market management, the dividend has a chance iof increasing substantially due to higher energy prices, this new pipeline and hopefully an improvement in portfolio management up to mediocre.
When I first ran the post, it was linked to in several places with some valid criticisms. One was the weather. To qualify for the dividend you only need to live there for six month out of the year. Although I may not have been clear, I was referring to the Juneau area. In December, January and February the average temperatures are 27.1 degrees, 24.2 degrees and 28.4 degrees respectively, according to CityRating.com. My original article posited that you only live there eight months a year, skipping those three months and either November or March which both average 32 degrees.
The other criticism made was about the cost of living. According to CityRating's cost of living calculator it would be 42% more expensive than in Arizona (where I live). A couple of things mitigate this, there is no state income tax and retirees get property tax breaks.
Intuitively, it is hard for me to imagine that Alaska is really 40% more expensive. If it really is that expensive, there are probably ways to reduce that spread, with a little ingenuity, some but perhaps not enough to make it worthwhile.
The more important thing to take from the following is the exploration of a new idea. Exploration like this can lead to other ideas that you can use, even if the Alaska idea does not make sense.
I have some wild ideas now and then and I write about them every so often because they amuse me.
This latest one I hatched is about way to retire for people that have not been lucky enough to accumulate a large enough nest egg for an ideal retirement. Several assumptions are made with this idea and I realize this.
Last summer my wife and I went to Juneau, Alaska. We loved the scenery, the hiking and the food. Alaska has a social program that I believe is unique. In 1982 the state of Alaska began to pay a dividend to residents out of something called the Permanent Fund. You can click here for details but the basics are the fund is funded with oil money which is then managed in the capital markets. The amount of the dividend can fluctuate. This year's dividend was payable in October and was $845 for qualified residents. The dividend has gone down for the last five years. The all time high payout was $1963 back in 2000. $845 is the lowest dividend since 1988. The reduced dividends of late were attributed to stock market losses.
I think this dividend could be incorporated into retirement planning in the right circumstance. Over the last ten years the average dividend has been $1396 per person. Relative to our fixed monthly expenses (no mortgage or car payments), $1396 in today's dollars is a lot of money. For a retired couple that only has to pay for insurance bills, utilities and groceries it is possible that $1396 could cover the month. Two people, two months covered. Two months out of twelve is significant. Clearly this is only for a modest lifestyle.
I should note that there is no state income tax in Alaska and the first $150,000 of assessed value is exempt from property tax for people 65 and older.
What about the winter someone might ask? Southeast Alaska (the area near Juneau) does not have as much snow or as much darkness (but there is still plenty of both) as the rest of the state. However, as I read the requirements you can be out of state up to 180 days per year. So three or four months in the desert or Florida or somewhere else and you avoid winter's bite.
Here is how some numbers might play out. A quick reminder is that is an idea, as I intended it, for people of modest means who don't spend a lot. Real estate in Alaska is cheaper than most parts of the country. I think it would be realistic to sell a home for $350,000 in many parts of the country, buy a modest house or condo in Alaska for $185,000- $200,000 and a condo in some parts of Florida or the desert with the balance. So maybe eight months in Alaska and four months in some place warmer. There are alternatives to buying a winter condo. For example, in Arizona, there are seasonal jobs in the tourism industry where accommodations are provided. I'm sure there are other similar opportunities too.
I think it might be reasonable to think that the type of person I have in mind for this, long career, decent income, diligent saver, might have $300,000 in a 401k account and maybe $50,000 liquid in a taxable account. These numbers are not run of the mill but they are not impossible either. Invested properly a 5% income need should not deplete an account. So $350,000 might generate $17,500. Of course, not buying a winter condo could leave a portfolio of $500,000 which could generate $25,000 a year.
There is more and more consensus that being retired no longer means not working at all. More and more retirees will work one way or another. There are numerous health and emotional benefits to working part time after traditional retirement. This could involve consulting, writing, eBay (or other internet venture) or just something you love (my wife's uncle was offered a job with the Los Angeles Angels of Anaheim working at the stadium for about $10 an hour which he almost took). It would not take much effort or time to make $500-1000 per month working 10-15 hours per week. If both partners in the couple do this, there is another $10,000-$20,000 per year.
So lets see where this couple stands now in relation to their expenses;
$2792 Permanent fund dividend
$17500 Portfolio Income
$15000 Income from part time work
$35392 Total
One other element might be social security. I don't think it makes sense to rely on social security as we now know it. I do not think it will ever disappear either, more likely might be a reduced benefit. Instead of each spouse getting $1000 per month perhaps it makes sense to think about $500 per month per spouse. That adds another $12000 annually which takes the income up to $47392. While the $1400 in monthly expense seems silly to me, $2500 (in today's dollars) plus a little money for traveling may not be. $30,000 in expenses compared to $47000 income seems comfortable to me.
In this example the Permanent Fund contribute close to 10% of a reasonable income need. It makes sense to me that the dividend could increase in the future because of higher oil prices and less volatility in the stock market.
There are some flaws here to be sure. The permanent fund could pay out more or less at any time. The fund could theoretically go bust. You'd have to love the great outdoors of Alaska which is not for most people. While we love it up there a friend recently visited Alaska and while he and his family had fun it was not the be all end all destination.
The point here is not that everyone should move to Alaska. The big picture here is that many of us may need to use some ingenuity to have a financially stable retirement. If stock market returns are below normal and social security is compromised and health costs go way up there will be less people able retire to the country club.
I do not think people can rely on planners or other professionals to think outside the lines on this sort of thing. This ties into one of the themes of this blog which is do-it-yourselfers being more empowered to make better decisions about investing and planning thanks to new investment products and access to different types of information thanks to the internet.
While you may or may not think this idea is insane, as the title to this post implies, it is outside the lines to be sure. If you have a unique idea along these lines I'd love to hear about it.
Sunday, February 19, 2006
Multiple Assets
A few days ago I was visiting with a neighbor and we were talking about investing. He mentioned, something I already knew, that he and his wife have zero exposure to stocks and bonds. They have their money in real estate.
I am a big fan of real estate for reasons I will get into in subsequent posts. I am also a big fan, no surprise, of the capital markets. No matter how much you think something is a great type of asset, having all your eggs in that one asset class is a bad idea.
This philosophy is more of a you never know what might happen way of looking at things. Real estate has never gone down a lot and stayed down on a national scale. Some sort of unprecedented decline is always possible. Hey I don't expect that either but anything is possible and if something completely unexpected happens at precisely the wrong time for you, you could be in real trouble, trouble that could have been prevented.
If you are so fortunate as to have a large enough net worth to accommodate stocks, real estate, bonds, commodities, cash and maybe a couple of other things I may be forgetting, you should take advantage of the potential diversification.
Creating one income stream from real estate is great but have other streams of income not tied to real estate could matter at some point in your lifetime.
I am a big fan of real estate for reasons I will get into in subsequent posts. I am also a big fan, no surprise, of the capital markets. No matter how much you think something is a great type of asset, having all your eggs in that one asset class is a bad idea.
This philosophy is more of a you never know what might happen way of looking at things. Real estate has never gone down a lot and stayed down on a national scale. Some sort of unprecedented decline is always possible. Hey I don't expect that either but anything is possible and if something completely unexpected happens at precisely the wrong time for you, you could be in real trouble, trouble that could have been prevented.
If you are so fortunate as to have a large enough net worth to accommodate stocks, real estate, bonds, commodities, cash and maybe a couple of other things I may be forgetting, you should take advantage of the potential diversification.
Creating one income stream from real estate is great but have other streams of income not tied to real estate could matter at some point in your lifetime.
Saturday, February 11, 2006
How Not To Structure Your Portfolio
While I try not to alienate anyone that reads my content I run the risk of doing that to a recent emailer.
He told me that he is 48 years old, has 18% of his portfolio in Berkshire Hathaway and he wanted to know what I thought about that weighting and that stock.
For purposes of this article all I'll say about the stock is that I have never had any interest in buying it.
Hopefully one source of income for you in retirement will come from a portfolio invested in some combination of stocks and bonds.
Managing this portfolio can be as simple or as complex as you want to make it. A do-it-yourselfer that, presumably, does not want to work full time on their portfolio is better off favoring simple.
Simple probably means some combo of ETFs and OEFs for the vast majority of your equity portfolio. I am saying most not all of your portfolio. A few individual stocks here and there is not really an unreasonable burden.
Simple also pertains to risk taken. Staying reasonably close to the market should get diligent savers to where they need to be. Taking outsized risk that is unnecessary makes no sense. This takes the conversation back to 18% in Berkshire. The strategy may or may not work, the emailer may never have to face the consequence of the risk he is taking but that does not mean the risk doesn't exist. The very fact that he emailed me at all reveals that he already knows the answer.
We have learned that any stock can go to zero. Very few do but there is no way to know that a company is lying. Lies equal a deathblow.
If you have 18% in a company that happens to go to zero it will take several years to get back to where you were. If you have 3% in a stock that goes to zero you might make a quarter of that back just in dividends in a couple of weeks.
The emailer's position creates another problem. Only 82% of the portfolio is left to invest. He will very likely miss out on something else that might do well at some point. For example, China and gold, as investment themes, have provided tremendous returns in the last few months. I have had exposure to both for several years. Before the last run up for both they had been kind of dead money for a while. Then out of the blue they both went up a lot which helped the overall portfolio.
The idea was that at some point they would have a good run. Just being patient was the skill deployed, not stock selection. If I did not have room for these two themes, the portfolio would have been impacted. Next quarter, leadership will probably come from somewhere else. If you are properly diversified, you will not have to figure out what will lead.
But you need to have room.
He told me that he is 48 years old, has 18% of his portfolio in Berkshire Hathaway and he wanted to know what I thought about that weighting and that stock.
For purposes of this article all I'll say about the stock is that I have never had any interest in buying it.
Hopefully one source of income for you in retirement will come from a portfolio invested in some combination of stocks and bonds.
Managing this portfolio can be as simple or as complex as you want to make it. A do-it-yourselfer that, presumably, does not want to work full time on their portfolio is better off favoring simple.
Simple probably means some combo of ETFs and OEFs for the vast majority of your equity portfolio. I am saying most not all of your portfolio. A few individual stocks here and there is not really an unreasonable burden.
Simple also pertains to risk taken. Staying reasonably close to the market should get diligent savers to where they need to be. Taking outsized risk that is unnecessary makes no sense. This takes the conversation back to 18% in Berkshire. The strategy may or may not work, the emailer may never have to face the consequence of the risk he is taking but that does not mean the risk doesn't exist. The very fact that he emailed me at all reveals that he already knows the answer.
We have learned that any stock can go to zero. Very few do but there is no way to know that a company is lying. Lies equal a deathblow.
If you have 18% in a company that happens to go to zero it will take several years to get back to where you were. If you have 3% in a stock that goes to zero you might make a quarter of that back just in dividends in a couple of weeks.
The emailer's position creates another problem. Only 82% of the portfolio is left to invest. He will very likely miss out on something else that might do well at some point. For example, China and gold, as investment themes, have provided tremendous returns in the last few months. I have had exposure to both for several years. Before the last run up for both they had been kind of dead money for a while. Then out of the blue they both went up a lot which helped the overall portfolio.
The idea was that at some point they would have a good run. Just being patient was the skill deployed, not stock selection. If I did not have room for these two themes, the portfolio would have been impacted. Next quarter, leadership will probably come from somewhere else. If you are properly diversified, you will not have to figure out what will lead.
But you need to have room.
Tuesday, February 07, 2006
Monetize A Hobby Part II
I wanted to give a couple of other examples to what I talked about in the last post. Last time I wrote about the potential to monetize my firefighting hobby.
My in-laws are collectors. They don't collect anything in particular, but they just buy whatever they can find. They really enjoy going from garage sale to garage sale trying to fund stuff on the cheap. They have accumulated two houses full of stuff. A lot of it has some value, more than they paid for it. They do a good job of finding things that cost very little money.
Just recently they started to rent a booth in a consignment shop in Phoenix. They have to pay $175 per month in rent and can work the rent off in the store at $7 an hour if they want to. The other day they were dropping off a hutch they had just bought that morning for $50. A shopper at the store bought it from them in the parking lot for $175. They do this all the time.
They have invested a lot of their time in this because they love buying stuff which is why they can have success. Fortunately, my wife does not share this passion but chances are that one day she will need to help with reducing the inventory.
Their hobby easily covers a big portion of their expsenses.
A neighbor of ours is a retired policeman in his 70s. I'm sure he gets a pension but I do not know any of those details. A long time ago he bought a backhoe to help with the site prep for building his house and because he thought it would be fun to have. He is now on his second backhoe after upgrading to a Cat a few years ago. He charges $60 an hour and can have as much work as he wants. How much would just ten hours a week at $60 an hour, playing on a toy, supplement your income?
Both examples require some capital and some time but both activities are fun for these people. There are more ideas like this out there. Hopefully these posts will get you to think along these lines.
If you buy into your retirement paycheck coming from several different sources then this type of fun income should be considered. One last point is that having a job, of sorts, in retirement, whether it pays or not, makes for healthier aging physically and mentally.
My in-laws are collectors. They don't collect anything in particular, but they just buy whatever they can find. They really enjoy going from garage sale to garage sale trying to fund stuff on the cheap. They have accumulated two houses full of stuff. A lot of it has some value, more than they paid for it. They do a good job of finding things that cost very little money.
Just recently they started to rent a booth in a consignment shop in Phoenix. They have to pay $175 per month in rent and can work the rent off in the store at $7 an hour if they want to. The other day they were dropping off a hutch they had just bought that morning for $50. A shopper at the store bought it from them in the parking lot for $175. They do this all the time.
They have invested a lot of their time in this because they love buying stuff which is why they can have success. Fortunately, my wife does not share this passion but chances are that one day she will need to help with reducing the inventory.
Their hobby easily covers a big portion of their expsenses.
A neighbor of ours is a retired policeman in his 70s. I'm sure he gets a pension but I do not know any of those details. A long time ago he bought a backhoe to help with the site prep for building his house and because he thought it would be fun to have. He is now on his second backhoe after upgrading to a Cat a few years ago. He charges $60 an hour and can have as much work as he wants. How much would just ten hours a week at $60 an hour, playing on a toy, supplement your income?
Both examples require some capital and some time but both activities are fun for these people. There are more ideas like this out there. Hopefully these posts will get you to think along these lines.
If you buy into your retirement paycheck coming from several different sources then this type of fun income should be considered. One last point is that having a job, of sorts, in retirement, whether it pays or not, makes for healthier aging physically and mentally.
Friday, February 03, 2006
Monetize A Hobby?
There will be plenty of time to talk about investing in capital markets but I wanted to take a diversion with this post so that not every thing I write here is the same as the other site.
Long time readers will know about my involvement with the local fire department. We moved to our cabin full time in 2002. The area has a danger of wildfires and so my wife and I, knowing nothing at all about it, wanted to join in order to help out. We both found it very interesting, fun and completely different from anything else we had ever done.
It quickly grew into something I absolutely love doing because it is a physical challenge, a mental challenge, it keeps me involved, it helps the community and something I can stay involved with for many years. Some of the guys are in their 60's and one is 74 and is perhaps the fittest of us all.
In a very short time I have already become co-assistant fire chief. There is visibility that I will be chief or co-chief for many years.
A little over a year ago I became aware of an interesting little tidbit about our involvement as fire fighters. We are eligible for small pensions for our service. The number for me is small, and would be a little less for my wife because she is not as involved as I am. This might work out to $250 per month in today's dollars, based on what I've learned.
The number is not as small as it seems. $250 is about 15% of our fixed monthly expenses (no mortgage or car payments). This creates a little more wiggle room for whatever my portfolio might become in the future. Realistically I am hoping that this means I will have less of an income need from my portfolio.
Reducing an income need from 5% down to 4% could be huge over a 30-year time period. It would allow for riding out poor return environments with less stress.
In addition to the pension, there is a potential income to be made volunteering as a fire fighter. During bad fire seasons we participate in inter-agency patrols for which we get paid as a department for our truck and our personnel. The season for this can be two to three months long and can be several days a week of work. We have guys doing this that are retired. The income potential is small, $86-$114 per day, depending on your pay grade. It would be easy to make a few hundred dollars per month during the summer which could help pay some bills for a portion of the year.
If we actually have a fire, I have fought about 14 fires in my time, we get paid for that as well. Earning one months's worth of fixed expenses doing a hobby can provide a little more relief to the work you portfolio needs to do.
No one is too old to start this type of volunteerism. We have had guys start in the 50's and 60's. Based on some good genetics and what I see other people doing, this is an activity that I will be able to do for a long time. I would be doing what I am doing even if there was no monetary benefit, I enjoy it immensely. That I could finance that much of our future income need from this is just a bonus.
The point here is not that you should be a firefighter. The point is I found an activity that I love doing and it turns out it can be monetized. I have to think that there are other activities along these lines that can also be monetized.
If you have some sort of extracurricular activity in your life, you may be able to monetize it. In this post I detailed something I know a little about, firefighting. I would urge you to explore if this could apply to something you do now or something you would like to get involved with.
Bigger picture, I think this is an important concept. We may see below average stock market returns and social security might be compromised one way or another at some point. Supplementing the traditional sources of income with ideas like this an easy way to relieve potential portfolio stress.
I have more ideas along these lines that I will share in future posts. I hope readers will share their ideas along these lines like maybe writing, tutoring, grant writing, antiquing and so on.
Long time readers will know about my involvement with the local fire department. We moved to our cabin full time in 2002. The area has a danger of wildfires and so my wife and I, knowing nothing at all about it, wanted to join in order to help out. We both found it very interesting, fun and completely different from anything else we had ever done.
It quickly grew into something I absolutely love doing because it is a physical challenge, a mental challenge, it keeps me involved, it helps the community and something I can stay involved with for many years. Some of the guys are in their 60's and one is 74 and is perhaps the fittest of us all.
In a very short time I have already become co-assistant fire chief. There is visibility that I will be chief or co-chief for many years.
A little over a year ago I became aware of an interesting little tidbit about our involvement as fire fighters. We are eligible for small pensions for our service. The number for me is small, and would be a little less for my wife because she is not as involved as I am. This might work out to $250 per month in today's dollars, based on what I've learned.
The number is not as small as it seems. $250 is about 15% of our fixed monthly expenses (no mortgage or car payments). This creates a little more wiggle room for whatever my portfolio might become in the future. Realistically I am hoping that this means I will have less of an income need from my portfolio.
Reducing an income need from 5% down to 4% could be huge over a 30-year time period. It would allow for riding out poor return environments with less stress.
In addition to the pension, there is a potential income to be made volunteering as a fire fighter. During bad fire seasons we participate in inter-agency patrols for which we get paid as a department for our truck and our personnel. The season for this can be two to three months long and can be several days a week of work. We have guys doing this that are retired. The income potential is small, $86-$114 per day, depending on your pay grade. It would be easy to make a few hundred dollars per month during the summer which could help pay some bills for a portion of the year.
If we actually have a fire, I have fought about 14 fires in my time, we get paid for that as well. Earning one months's worth of fixed expenses doing a hobby can provide a little more relief to the work you portfolio needs to do.
No one is too old to start this type of volunteerism. We have had guys start in the 50's and 60's. Based on some good genetics and what I see other people doing, this is an activity that I will be able to do for a long time. I would be doing what I am doing even if there was no monetary benefit, I enjoy it immensely. That I could finance that much of our future income need from this is just a bonus.
The point here is not that you should be a firefighter. The point is I found an activity that I love doing and it turns out it can be monetized. I have to think that there are other activities along these lines that can also be monetized.
If you have some sort of extracurricular activity in your life, you may be able to monetize it. In this post I detailed something I know a little about, firefighting. I would urge you to explore if this could apply to something you do now or something you would like to get involved with.
Bigger picture, I think this is an important concept. We may see below average stock market returns and social security might be compromised one way or another at some point. Supplementing the traditional sources of income with ideas like this an easy way to relieve potential portfolio stress.
I have more ideas along these lines that I will share in future posts. I hope readers will share their ideas along these lines like maybe writing, tutoring, grant writing, antiquing and so on.
Tuesday, January 31, 2006
Stock Market Basics
Any retirement plan is very likely going to involve stock market exposure. Stock market exposure can be as simple or as complex as you want to make it. This post will just have a simplistic introduction to the numbers.
I think that the back drop to your thinking about stocks is that the stock market averages about 10% per year through all sorts of feast and famine. It is unrealistic to think you will do much better than that. If you do end up with better than 10% per year, great, but don’t expect it.
If that is the average over long periods of time, and it is, you could pick some sort of allocation that is very broad and not change the target for years. For example, take an allocation of 55% in domestic stocks, 25% in foreign stocks and 20% in fixed income. If and when those numbers grow out of balance you could buy and sell to get back into balance.
A 50 year old with that allocation with 15 years to go until retirement starts, might change the 55/25/20 mix in eight years or ten years to 50% domestic stocks, 20% foreign and 30% fixed income.
With that, or any, mix there will be years where your portfolio beats the S+P 500 and years where your portfolio lags. Just as a function of how markets work, a reasonable growth target and a long time horizon can be met with a very simple set it and forget it.
I don’t advocate doing this but the point is that if you don’t care about beating the market and more importantly don’t care about volatility it can be this simple to keep reasonably close, either way, with the market over long periods of time.
Most people cannot, emotionally, watch the market cut in half without selling even though the numbers say they can. To point out what I mean, every crash before the tech bubble took back the old highs after some period of time. The current all time high has not been taken back yet but at some point the S+P 500 will print above 1500 again and then at some point it will see 1600 and then 2000 at some point in the future.
I don’t know when that will be. I might guess correctly when, but probably not. Same goes for you. But think about the last ten years, with all of the greed and misery people have suffered. It has been a full ten years.
On January 31, 1996, the S+P 500 closed at 636. Despite all of the intensity in the last ten years you have a double just by gritting your teeth and watching. Not only do you have a double, you could have gotten that double without being right about anything. Importantly, that 100% is much more than what inflation has been in that time which is why people own stocks, to beat inflation.
I think investors give themselves a chance for better numbers, just a chance not a guarantee, with a little bit of study and trying to get a couple more themes right than they get wrong. If you have no confidence in yourself to get anything right, which is OK, then train yourself to invest like an emotionless robot. I am not joking. If you don’t want to spend the time or don’t think you can succeed at analyzing big themes, focus on having no emotion whatsoever. I think this can be achieved by studying stock market history over and over.
This post was not meant to be all encompassing. The idea is to begin to understand how the numbers work and that the stock market can work for you without much effort on your part. I don’t mean to trivialize the difficulty of removing emotion from your thinking but a thorough understanding of the numbers and unyielding faith that markets work a certain way gives a chance for success to anyone who is not that bright. Personally, I take the under on my intelligence and my ability to get things right, admittedly I do this against more moving parts than what I have outlined in this article but I think the idea holds up.
I will have more about equites in subsequent posts.
I think that the back drop to your thinking about stocks is that the stock market averages about 10% per year through all sorts of feast and famine. It is unrealistic to think you will do much better than that. If you do end up with better than 10% per year, great, but don’t expect it.
If that is the average over long periods of time, and it is, you could pick some sort of allocation that is very broad and not change the target for years. For example, take an allocation of 55% in domestic stocks, 25% in foreign stocks and 20% in fixed income. If and when those numbers grow out of balance you could buy and sell to get back into balance.
A 50 year old with that allocation with 15 years to go until retirement starts, might change the 55/25/20 mix in eight years or ten years to 50% domestic stocks, 20% foreign and 30% fixed income.
With that, or any, mix there will be years where your portfolio beats the S+P 500 and years where your portfolio lags. Just as a function of how markets work, a reasonable growth target and a long time horizon can be met with a very simple set it and forget it.
I don’t advocate doing this but the point is that if you don’t care about beating the market and more importantly don’t care about volatility it can be this simple to keep reasonably close, either way, with the market over long periods of time.
Most people cannot, emotionally, watch the market cut in half without selling even though the numbers say they can. To point out what I mean, every crash before the tech bubble took back the old highs after some period of time. The current all time high has not been taken back yet but at some point the S+P 500 will print above 1500 again and then at some point it will see 1600 and then 2000 at some point in the future.
I don’t know when that will be. I might guess correctly when, but probably not. Same goes for you. But think about the last ten years, with all of the greed and misery people have suffered. It has been a full ten years.
On January 31, 1996, the S+P 500 closed at 636. Despite all of the intensity in the last ten years you have a double just by gritting your teeth and watching. Not only do you have a double, you could have gotten that double without being right about anything. Importantly, that 100% is much more than what inflation has been in that time which is why people own stocks, to beat inflation.
I think investors give themselves a chance for better numbers, just a chance not a guarantee, with a little bit of study and trying to get a couple more themes right than they get wrong. If you have no confidence in yourself to get anything right, which is OK, then train yourself to invest like an emotionless robot. I am not joking. If you don’t want to spend the time or don’t think you can succeed at analyzing big themes, focus on having no emotion whatsoever. I think this can be achieved by studying stock market history over and over.
This post was not meant to be all encompassing. The idea is to begin to understand how the numbers work and that the stock market can work for you without much effort on your part. I don’t mean to trivialize the difficulty of removing emotion from your thinking but a thorough understanding of the numbers and unyielding faith that markets work a certain way gives a chance for success to anyone who is not that bright. Personally, I take the under on my intelligence and my ability to get things right, admittedly I do this against more moving parts than what I have outlined in this article but I think the idea holds up.
I will have more about equites in subsequent posts.
Friday, January 27, 2006
Mitigation
A comment was left on the blog about being your own boss. This is important on several levels whether you actually are self-employed or not. I think part of successful retirement planning requires an entrepreneurial sense of ownership as far as managing the saving and investing aspect of it and the manner in which you create your pay check when you retire.
My thought here is that being a successful entrepreneur requires innovative planning and trying to look at things differently than most folks.
Here is an example of what I mean from my time at Schwab. In 2000 there was a series of events that I knew marked the beginning of the end, and that I knew meant layoffs for some employees. While I don’t remember the exact time line, in a very short time period, then co-CEO Dave Pottruck left a memorable company wide voicemail gushing over the stock reaching $100 per share. Around the same time the company paid a half a billion dollars for some trading software and they opened a call center in Austin, TX that was not yet (and as it turned out never was) needed.
You don’t have to be that bright to see the writing on the wall. Starting in mid-2000, I started planning for a layoff. The way I planned was to stop contributing to my 401k and save the money where I could access it without penalty if needed. I also stopped taking vacation. Due to my seniority I was accumulating a lot of vacation time that the company would have to pay me for if I got laid off.
Sure enough I got laid off on September 26, 2001 (nice timing). Between the severance package and the accrued vacation I had my full salary covered for a little over a year. Keep in mind from my last post that by living below my means, I calculated that I could have made it last for about two years if I had trouble finding work.
The example here is taking ownership of my situation as best as possible. Layoffs can be dreadfully frightening if you are not prepared. Having your retirement plan fail would be worse.
No matter what stage of life you are in, things take turns you do not expect. Some turns can be mitigated, like being laid off or having some large expense come along that will be difficult to pay for. Take some time to analyze your job, your portfolio and whatever else is relevant to this topic and try to explore what might go wrong.
I live in the woods where there is a high fire danger. That is tough to mitigate but we maintain a fire line around our property. This gives us a shot to protect against a slow creeping fire. If we ever have a fire storm, we’ll be out of luck. Similarly, you can mitigate a 10% drop in the stock market coming at a bad time but you will be out of luck if there is a fire storm in the stock market at exactly the wrong time. I think the analogy holds up.
I have no idea if strategically what I have done along these lines is the most efficient way but it allowed me to get laid off and take other risks along the way with no financial fear. And I can tell you that was very empowering.
Empowerment is big part of all of this.
My thought here is that being a successful entrepreneur requires innovative planning and trying to look at things differently than most folks.
Here is an example of what I mean from my time at Schwab. In 2000 there was a series of events that I knew marked the beginning of the end, and that I knew meant layoffs for some employees. While I don’t remember the exact time line, in a very short time period, then co-CEO Dave Pottruck left a memorable company wide voicemail gushing over the stock reaching $100 per share. Around the same time the company paid a half a billion dollars for some trading software and they opened a call center in Austin, TX that was not yet (and as it turned out never was) needed.
You don’t have to be that bright to see the writing on the wall. Starting in mid-2000, I started planning for a layoff. The way I planned was to stop contributing to my 401k and save the money where I could access it without penalty if needed. I also stopped taking vacation. Due to my seniority I was accumulating a lot of vacation time that the company would have to pay me for if I got laid off.
Sure enough I got laid off on September 26, 2001 (nice timing). Between the severance package and the accrued vacation I had my full salary covered for a little over a year. Keep in mind from my last post that by living below my means, I calculated that I could have made it last for about two years if I had trouble finding work.
The example here is taking ownership of my situation as best as possible. Layoffs can be dreadfully frightening if you are not prepared. Having your retirement plan fail would be worse.
No matter what stage of life you are in, things take turns you do not expect. Some turns can be mitigated, like being laid off or having some large expense come along that will be difficult to pay for. Take some time to analyze your job, your portfolio and whatever else is relevant to this topic and try to explore what might go wrong.
I live in the woods where there is a high fire danger. That is tough to mitigate but we maintain a fire line around our property. This gives us a shot to protect against a slow creeping fire. If we ever have a fire storm, we’ll be out of luck. Similarly, you can mitigate a 10% drop in the stock market coming at a bad time but you will be out of luck if there is a fire storm in the stock market at exactly the wrong time. I think the analogy holds up.
I have no idea if strategically what I have done along these lines is the most efficient way but it allowed me to get laid off and take other risks along the way with no financial fear. And I can tell you that was very empowering.
Empowerment is big part of all of this.
Tuesday, January 24, 2006
Living Below Your Means
I forget where I read this but "who is wealthier the man who makes $100,000 but lives like he makes $200,000 or the man who makes $20,000 and lives like he makes $10,000."
This is really a philosophy more than anything else, one that I embrace. My wife and I have lived below our means the entire time we have been together which has allowed me to take several financial chances that turned out to be gateways to much better things.
When we got married we bought a little house with a huge yard. Soon there after we could have afforded a bigger, newer house but we loved the house we owned. By sticking with our $700 mortgage instead of taking on a $2000 mortgage we left ourselves able to save more and better withstand any sort of financial shock. This is not to say you should stay in a house you don't like but we loved the house and it was very inexpensive. The reward for this came quickly.
In 1998 we bought our cabin (where we now live full time). The mortgage for the cabin was $600 (large down payment). Had we upgraded our primary residence a second home would have been out of the question at that time. For $1300 a month we had two houses that we loved and were still comfortable, financially.
The same idea can be applied to automobiles. How much simpler would your life be with no car payments? No payments ever is probably unlikely. But if you buy a brand new car on a five year loan, but drive that car for ten or twelve years you can go five to seven years with no payment. Money Magazine or Smart Money have had articles about saving huge sums of money over your lifetime by driving a car for ten years. I don't know if those exact numbers stand up but the benefit to this is big.
For the record we have a 1996 Jeep that we bought eleven years ago and for how little we drive it, it should last a while longer. Our other car is 2000 Forerunner that we bought used in 2002. Hopefully it will last until 2012.
The last item I think is relevant to this is credit cards. I have no idea what the statistics are about people that have ruined themselves financially with credit cards, including a couple of my family members, but all I can say is pay them off, keep one or two for an emergency and throw the rest away. I can not remember the last time I had a balance on a card rollover to a second month. This, more than the others, is about discipline.
To repeat, all of these points are more a matter of philosophy than anything else. In living this way we are not wanting for anything. Our cars are very reliable, we live in a beautiful cabin in the woods and we take some spectacular trips. We are giving up a $50,000 SUV for a $20,000 (back in 2002) SUV. I do not have a Rolex or Tag like so many people in my field do. I only need to wear a suit a couple of times a year so I haven't spent money on a closet full of them.
Some people would view this as large sacrifices. For people that can overcome that mindset they will have more money saved when they retire and will spend less in retirement. The benefit of taking less from a portfolio during retirement should be clear to anyone.
This first, real, post is a starting point to build on. By watching your spending you can save more now. This can mean your portfolio will not have to work as hard in retirement as it might otherwise have to do. The difference between a 7% income need from your portfolio and a 4% income need could make the difference between running out of money and not.
This is really a philosophy more than anything else, one that I embrace. My wife and I have lived below our means the entire time we have been together which has allowed me to take several financial chances that turned out to be gateways to much better things.
When we got married we bought a little house with a huge yard. Soon there after we could have afforded a bigger, newer house but we loved the house we owned. By sticking with our $700 mortgage instead of taking on a $2000 mortgage we left ourselves able to save more and better withstand any sort of financial shock. This is not to say you should stay in a house you don't like but we loved the house and it was very inexpensive. The reward for this came quickly.
In 1998 we bought our cabin (where we now live full time). The mortgage for the cabin was $600 (large down payment). Had we upgraded our primary residence a second home would have been out of the question at that time. For $1300 a month we had two houses that we loved and were still comfortable, financially.
The same idea can be applied to automobiles. How much simpler would your life be with no car payments? No payments ever is probably unlikely. But if you buy a brand new car on a five year loan, but drive that car for ten or twelve years you can go five to seven years with no payment. Money Magazine or Smart Money have had articles about saving huge sums of money over your lifetime by driving a car for ten years. I don't know if those exact numbers stand up but the benefit to this is big.
For the record we have a 1996 Jeep that we bought eleven years ago and for how little we drive it, it should last a while longer. Our other car is 2000 Forerunner that we bought used in 2002. Hopefully it will last until 2012.
The last item I think is relevant to this is credit cards. I have no idea what the statistics are about people that have ruined themselves financially with credit cards, including a couple of my family members, but all I can say is pay them off, keep one or two for an emergency and throw the rest away. I can not remember the last time I had a balance on a card rollover to a second month. This, more than the others, is about discipline.
To repeat, all of these points are more a matter of philosophy than anything else. In living this way we are not wanting for anything. Our cars are very reliable, we live in a beautiful cabin in the woods and we take some spectacular trips. We are giving up a $50,000 SUV for a $20,000 (back in 2002) SUV. I do not have a Rolex or Tag like so many people in my field do. I only need to wear a suit a couple of times a year so I haven't spent money on a closet full of them.
Some people would view this as large sacrifices. For people that can overcome that mindset they will have more money saved when they retire and will spend less in retirement. The benefit of taking less from a portfolio during retirement should be clear to anyone.
This first, real, post is a starting point to build on. By watching your spending you can save more now. This can mean your portfolio will not have to work as hard in retirement as it might otherwise have to do. The difference between a 7% income need from your portfolio and a 4% income need could make the difference between running out of money and not.
Saturday, January 21, 2006
A New Blog From Random Roger
My name is Roger Nusbaum. Chances are that if you found this page you know a little bit about me and what I do. My primary work is as a portfolio manager for Your Source Financial in Phoenix, AZ, you can find all the necessary disclaimers in the side bar of this page.
In addition to managing separate accounts for clients I also write a lot about the stock market and other topics related to navigating the capital markets on my blog, Random Roger's Big Picture. I also am a contributing writer to TheStreet.com and RealMoney.com.
Random Roger's Retirement Planning will be much different from my Big Picture blog. I doubt I will be posting several times a day here, more likely a couple of times a week. The focus of this page will be my thoughts on all aspects of retirement planning; saving for it, creating a paycheck during it and some other random thoughts that I think are relevant.
This site will not be about financial planning. That is an entirely different vocation. You may or may not need financial planning help from a professional but you do need a financial plan. My focus here is the retirement part of your plan.
There are a couple of catalysts moving me to start this page. One is that I have very specific ideas about how to reach retirement goals. Modesty aside, I am well on the way to where I want to be financially and even if you find my thoughts to be completely upside down, it will still be useful to see planning and discipline playing out.
Another motivation for me is my steadfast belief that successful retirement will look very different in the coming years than it looks today. Success will require thinking outside the lines in many different ways about every aspect of retirement. I don't think this gets enough attention in the main stream media.
I hope this will be useful and entertaining and I hope I can reach a lot of people. More to come.
In addition to managing separate accounts for clients I also write a lot about the stock market and other topics related to navigating the capital markets on my blog, Random Roger's Big Picture. I also am a contributing writer to TheStreet.com and RealMoney.com.
Random Roger's Retirement Planning will be much different from my Big Picture blog. I doubt I will be posting several times a day here, more likely a couple of times a week. The focus of this page will be my thoughts on all aspects of retirement planning; saving for it, creating a paycheck during it and some other random thoughts that I think are relevant.
This site will not be about financial planning. That is an entirely different vocation. You may or may not need financial planning help from a professional but you do need a financial plan. My focus here is the retirement part of your plan.
There are a couple of catalysts moving me to start this page. One is that I have very specific ideas about how to reach retirement goals. Modesty aside, I am well on the way to where I want to be financially and even if you find my thoughts to be completely upside down, it will still be useful to see planning and discipline playing out.
Another motivation for me is my steadfast belief that successful retirement will look very different in the coming years than it looks today. Success will require thinking outside the lines in many different ways about every aspect of retirement. I don't think this gets enough attention in the main stream media.
I hope this will be useful and entertaining and I hope I can reach a lot of people. More to come.
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Is There A Secret To Beating The Market?
Blending together assets/strategies with different attributes, correlations and expected behaviors plays a huge role in how I construct port...
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Yahoo has an article up about FIRE proponents going back to work because of rough market conditions and the recent increases in price infla...
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Seeking Alpha has an article up noting the struggles this year of the Schwab US Dividend Equity ETF (SCHD). The article was more about an op...
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The idea of building an All-Weather portfolio of course has its appeal. The basic idea is to be much less volatile than the broad market or ...
