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.

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.

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.

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.

Opening Day!

And the Sweet Sixteen! What a great day for sports fans. The Padres game started when the stock market closed and finished in time to start ...