Saturday, March 23, 2013

Should #Retirees Buy Stocks (part 1)?

Retirees generally tend to migrate to ‘lower risk’ investment options e.g. bonds, certified deposit- and/or ‘high-yield’ savings accounts.

Money in the bank is probably the worst investment choice, even worse than the much higher risk of e.g. investing in that same bank’s stock.  Instead of putting your money into the bank’s savings account… you should rather consider buying the bank’s stock!

By way of an example, the Bank of America ($BAC) Platinum Money Market Savings Account offers an annual percentage yield (interest rate earned) of 0.12% on balances of between $20,000-30,000.  It would be unfair for me to simply state that $30,000 invested in $BAC stock for one year (2012), would have been worth $60,000 today…  2012 was an extraordinary year, delivering 100% returns for $BAC shareholders.

Also unfair would be for me to offset gains in $BAC above, with losses suffered in 2008/9 – the stock had lost ~90% of its value during that period, from $30 down to $3 (not nice, especially for a retiree!).

But $BAC was an outlier, so I’ll pick another bank… a ‘more stable one’, J.P. Morgan Chase ($JPM), America’s largest bank:

Currently, Chase Plus Savings offers a 0.20% on balances between $25,000 and $50,000.  However in the early 2000’s the savings account rates were higher, so – for the sake of this example – I will average the savings account interest rate at 1%.

$30,000 invested at 1% over 10 years compounded (meaning you earn interest also on your interest, every year), would be worth $33,138, for a gain (return on investment) of $3,138.

According to YCharts, 10 years ago (March 21 2003), JP Morgan stock was valued at $18.56/share.  $30,000 would have allowed you to snag about 1,616 shares (+ approximately $10 for brokerage commission).

Today (March 22 2013) JP Morgan stock closed at $48.78, meaning that 1,616 shares would be worth $78,000 (with reinvested dividends) – i.e. more than double the original investment.

But you may ask “What if I had picked $BAC instead of $JPM? I may have lost money”. Yes, that would be possible… and yes, you could pick ‘the wrong’ stock, much like you could pick the wrong mutual fund, bond, or leave your money in a savings account!

A better solution would have been to diversify and pick e.g. 3 banks, like ‘uber conservative’ Wells Fargo, ‘middle of the conservative range’ J.P. Morgan, and ‘flying too close to sun’ Bank of America.

Even better may have been to diversify even further and select a couple of blue-chip heavyweights (see part 2) that have traditionally delivered a good return.  That way one could complement the bank stocks above with e.g. General Electric, Pfizer and Chevron.

Still nervous?  Add three more, across different industries once more, like Caterpillar, Home Depot and Wal-Mart.  For good measure (and further risk mitigation), add a tenth one, e.g. 3M Co., and you would have successfully built your own ‘bulletproof’ index of 10 Dow Jones Industrial Index (“Dow”) stocks. 

Together, these should provide enough risk mitigation, and reasonable returns, allowing you to top the rate on a savings account by >5% annually, without burdening yourself with too much stress.  Just don’t panic and start selling your stocks when they go down a little!

Also read “Should Retirees Buy Stocks (part 2)?” for a short analysis and an example that may help retirees select a Dow stock for investment.  When you read the information provided, do not fret too much if I have used financial terms that you don’t understand – the Dow only includes 30 stocks, so selecting 10 for your own portfolio wouldn’t be too much of a challenge.

Note that all the companies mentioned in this post are Dow stocks.  This index of 30 stocks is regarded as a leading market indicator, referred to on a daily basis as ‘the market’ (“the market was up/down 20 points today” actually means the Dow was up/down 20 points).  Multi-billion dollar, American blue-chip companies that have stood the test of time… quite often, much better so than your local bank, that may not even still be in existence today.

The Dow index has historically returned, on average, about 6.8% annually for over 100 years.  There will always be outliers (like Bank of America and H.P.)* included in any index, but as long as you pick e.g. 8 others, you should always be able to easily outperform any savings account offer from your local bank - where do you think the bank invests your money, in order to pay you 1% interest on your savings deposits?

* Last year’s Dow loser was H.P., but this company happens to be this year’s Dow leader in terms of return on investment.  Conversely, Bank of America was last year’s leader, although it’s performance is looking decidedly more ordinary this year.

Disclaimer: The author holds positions in several Dow stocks as part of a longer-term investment strategy.  The information above does not constitute investment advice.  Consult with your financial planner to determine an investment strategy that best meets your personal situation, and desired investment returns.

Should #Retirees Buy Stocks (part 2)?

Retirees typically invest in low returning investment choices based on the advice of their financial planner, or simply because they may perceive bonds and guaranteed/certified deposit accounts as more safe and secure. 

They often invest in these investment vehicles while unfortunately watching the value of their investment portfolios decline faster than their life expectancy.  The question begs… where will seniors be able to derive more income from their investments, while at the same time, mitigate the risk of investment losses?

I suppose, if the question were “should I buy stocks”, the underlying question becomes “how do I choose a stock to invest in?”

For the purposes of this summary, I’ve elected to use Travelers ($TRV) as an example of a Dow stock that may be suitable for inclusion in a retiree’s portfolio.

At a high level, and without getting overly technical, retirees can consider these 5 factors when deciding whether to invest:
  1. Size: Ideally, there is safety in relative size and retirees should not be taking chances with new or unproven businesses.  TRV is a Dow-Index listed company with a 150-year history as a leading U.S. insurance corporation.  The corporation has a market value (or capitalization) of about $31.6 billion, and employs more than 30,000 employees.  While large companies may not grow as fast as small companies, large companies offer far greater security than new ‘upstarts’.
  2. Dividends: Retirees would generally want to earn income via dividends.  In addition to healthy payouts now, they should also look for dividend growth over time.  TRV offers a current dividend yield of 2.2% (vs. an industry average of 1.23%), a 5-year dividend growth of nearly 10% and 8 consecutive years of dividend increases.  Not the greatest, but very good. 
  3. Valuation:  For publicly traded corporations, we typically look for a ‘normalized’ Price/Earnings ratio (P/E = the share price divided by the earnings per share) of <18.  On March 22, 2013 TRV’s P/E was 13.32
  4. Stock Stability: This may be a little too technical, but it’s worth sharing anyway for those who are interested.  To measure stability, we determine beta, defined as the measure of the risk or volatility of TRV vs. the market as a whole.  Financial advisors may be looking for a beta of less than 1.  A beta of 1 indicates that the security's price will move with the market.  Less than 1 means that the security will be less volatile than the market.  And greater than 1 indicates that the security's price will be more volatile than the market.  For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market.  Currently, TRV offers a beta = 0.67, meaning that TRV is less volatile than the market as a whole.  In addition, investors don’t like stocks that have experienced losses of greater then e.g. 20% at any time, during the past five years.  TRV lost 5.9% in 2008/9 when the stock market ‘crashed’, faring far better than most other companies.
  5. Consistency:  Here we should look at revenue growth – after all, we don’t want to invest in a declining company – and specifically at the revenue growth over a period, e.g. 5 years.  TRV has generated positive revenue growth for the last 4, and this is acceptable. Another way to analyze consistency would be to explore TRV’s free cash flow growth, once again looking for positive growth over a period of e.g. 5 years.  TRV has only managed growth in free cash flow for 2 of the past five years, but as an insurance company, TRV took some heavy body blows as a result of natural disasters, like hurricanes Irene and Sandy.  Not the greatest in generating free cash flow growth, but respectable. Losses were more as a result of uncontrollable business events caused by natural disasters (the large insurance payouts), than poor management decisions.
An analysis like the one above is meant to provide highlights of company performance to assist small investors with investment decisions.  Your financial advisor would obviously be more in tune with your unique, personal financial situation and investment return requirements.

As I write this article, the Dow has returned just more than 10% YTD (March 22, 2013).  This performance is slightly better than the historical performance, generating around 7% annually, for the past 100 years.    

If you – as a retiree – have most of your wealth invested in a portfolio of relatively poor performing, ‘low risk’ investment vehicles, speak to your wealth manager to discuss your investment returns achieved.  Ensure that you are not invested in a real declining asset portfolio, especially when adjusted for annual inflation!

Friday, March 22, 2013

Understanding #Austerity?

Understanding spending versus not spending? (simplified)

The meaning of austerity in government, is implementing policy to reduce its deficit.  Austerity measures are used when deficit (amount owed) becomes unsustainable and a government is unable to borrow, in order to finance and/or pay for further spending.  

Austerity is a combination of tax increases and spending cuts.  Often, welfare costs also need to be cut.  This includes cutting the ever-increasing burden of social service programs, a proverbial money pit.  Budget objectives that include cutting social programs are often viewed as being politically unpopular, by many liberal people.

When is your country’s debt your responsibility?

Fiscally conservative advocates would argue that government should always run a balanced budget (and have a surplus to pay down any outstanding debt).  They may also add that deficit spending is always bad policy.  When one looks at a plan to cut spending, no one wants to feel the pain.  

In the U.S. it seems there are many people who feel okay with the idea of paying more tax, but so far the government has made no attempt to cut back on spending.  Therefore, tax payers may feel there is no obvious effort to adjust to what some may refer to as reality, aka uninhibited spending.  So why give more of your hard-earned cash to the government - for continued spending - without any measures in place, to reduce this uninhibited spending?

A balanced budget?

I read this extract in an article via
Fresh from passing the 2013 wrap-up measure, the Senate was turning to a plan by new Budget Committee Chairman Patty Murray, D-Wash., that would add nearly $1 trillion in new taxes over the coming decade in an attempt to stabilize the $16 trillion-plus national debt.
But Murray's plan would actually increase government spending after the $1.2 trillion cost of repealing the automatic cuts, called a sequester in Washington-speak. That means the net cuts to the deficit would amount to just a few hundred billion dollars in a federal budget estimated at $46 trillion or so over the coming decade."We need to tackle our deficit and debt fairly and responsibly,"
Murray said. "We need to keep the promises we've made as a nation to our seniors, our families and our communities." 
Patty Murray says the people voted for the president, and therefore people don’t want any cuts. 

No cuts? 

Only a tax burden that continually increases for loyal taxpaying citizens? What do you think?

I am ‘hopeful’ that the people managing the business of America will decide to think, and begin to work to create a ‘balanced budget’, with the appropriate adjustments needed in order for us to arrive at a more optimistic future. 

Perhaps they could begin by trying to eliminate all the populist emotion around this topic.  A good idea may be to review and ensure that the U.S. does not emulate France.  Politicians require vision and strength to help the U.S. regain its status as the land of the free, where the American Dream can be achieved once more... a status that other nations have traditionally aspired to match!

Tuesday, March 19, 2013

#Retirement Savings - Laughably Insufficient

For those who have been following BesterInvestor, you may have noticed that most of the postings are about retirement, investment, savings, overspending, spending and related topics. 

If you were to click on some popular topics, the motherhood theme of the blog’s intent would be obvious, e.g.:

Then today, someone tweeted a link to the article below.  I sent Hamilton an email to ask whether it would be okay for me to paste an excerpt on BesterInvestor.  He kindly agreed.  Here is his article:

Your Retirement Savings Are Laughably Insufficient
By Hamilton Nolan (, March 19, 2013)

When we say, as we often do, "You will never retire," while pointing directly at you and waving a fistful of dollar bills and burning an American flag, it is not meant to be taken as a jeer; rather, it is our way of soberly guiding your attention to the distressing probability that you, personally, have little chance of attaining the type of comfortable retirement afforded to earlier generations, and will probably spend your "golden years" desperately trying to live off your meager backyard garden, until you grow too decrepit to work it, at which point you will, in all likelihood, simply starve.

Lest you accuse us of alarmism, may we gently take your hand and sit you down and instruct you to read this WSJ story today about an annual survey of Americans and their retirement prospects:

Fifty-seven percent of U.S. workers surveyed reported less than $25,000 in total household savings and investments excluding their homes, according to a report to be released Tuesday by the Employee Benefit Research Institute. Only 49% reported having so little money saved in 2008. The survey also found that 28% of Americans have no confidence they will have enough money to retire comfortably-the highest level in the study's 23-year history.

Americans are an optimistic bunch. If 57% of working households have less than $25K in savings, then one would think that the level of those who have no confidence they will have enough money to retire would be... at least 57%. 

Of course, you can't rule out all those people who expect to have their retirement needs provided for by large inheritances, blockbuster novels, and/ or winning lottery tickets. It could happen. That would be the "plus" column, subtitled "Possibilities." Over in the "minus" column, subtitled "Absolute Certainties," we would put the death of pensions and of the American Dream

And also the fact that people are living longer now, which will – O! Bitter irony! – only extend the non-earning portion of your lifespan, stretching your meager-to-nonexistent savings even farther. 

Masses of Americans will no doubt respond to their nigh-hopeless situation by flocking into the stock market, helping to inflate the next bubble, which will crash and burn just in time for the planned retirement date of millions of temporarily embarrassed millionaires.

This is a good topic about which to laugh, to keep from crying.
Hamilton Nolan can be followed on Twitter

Monday, March 18, 2013

It’s Your Wedding, Not Theirs!

So you’re engaged!?

You may be thinking of booking a date for the wedding day and creating a budget accordingly.

Today many couples don’t have the luxury of asking their parents to fund an extravagant wedding celebration or ceremony, and many will need to pay for the event out of their own savings.

Emotion can control decisions, so it is best to think through the process and plan together!

The first step required is for the couple to apply for a marriage license at their local town or county clerk office.  When notified that the marriage license is ready for pickup (usually valid for approximately 90 days depending on where you reside), the couple should then proceed to make an appointment with the local Registrar/Recorder/County Clerk office for the purposes of conducting a civil ceremony, in front of witnesses.  If preferred, the couple could arrange for a judge, county clerk, priest, minister or other officiant to perform a ceremony instead, or in addition.  

Now, let us go back to the budget and choices of wedding ceremonies and celebrations.

As mentioned, if the couple were to consider paying for the wedding ceremony themselves, they will need to determine and decide up front, how their money will be spent on their special day.

According to a recent article on Reuters, the average cost of a wedding in New York is $65,824! It is – probably by far – the most expensive city in the United States to get married in!  However, many couples spend approximately $27,000 – still a huge amount of money for a party – and this would obviously not include the proposed cost of a honeymoon.  Do not get caught paying off debt – you know where I’m going with this – “long after the honeymoon is over!”

One could ask… is $27,000 a lot of money?  Well, I think it is, but for others this amount may seem affordable.  After all, expensive may be considered a relative concept, subject e.g. to your personal financial standing, the cost of living where you reside, etc.  How much to spend, and whether it is affordable, are decisions that are really up to you!  Make an intelligent and well-informed choice, and then decide how your savings will be spent.

Here are just a few ideas for a budget friendly wedding that may be considered as mentioned on the website budget savvy weddings:  
  • $599 budget: may include an officiant, a wedding ceremony on the beach, chairs, flowers, a certificate keepsake and amazing photographs, etc. 
  • $2,000 budget: may include $50 invitations; $150 rental for a bridal gown; $50 for alterations; $130 tux rental (J.C. Penney online sale); $800 for food, buffet style; a $150 reception venue; $30 for a wedding cake $30; $16 for her shoes e.g. via eBay; $20 for his shoes e.g. at Kohls; a free gift of photography; $200 for decorations; $50 bridal table, punch bowl rentals, etc.; $20 for a guest book (for 100 guests to write wishes), etc.
  • $27,000 budget: may include $5,000 for a ‘fancy venue’; $250 for miscellaneous rental costs; $750 for décor; a $600 wedding cake; $1,000 for alcohol/beverages; $2,000 for a photographer; $1,100 for a professional DJ; $2,250 for a professional wedding planner; and $400 for a unique website & wedding invitations; $900 for flowers; $750 for other decorations; $500 for hair & makeup; $9,000 for full-service catering for 120 guests at a club (or similar); $200 for tips and gratuities for the staff, etc.
Just keep in mind that – as previously shared via BesterInvestor blog post, “New Positions for Married Couples”, $25,000 invested in boring Dow stocks at an average 10% annually (including reinvested dividends) would be worth almost $200,000 in just 15 years! 

Investing may make more sense than spending on a 4-hour wedding reception, but – as mentioned above – sometimes emotion overrides common sense!

Hopefully – once you consider the ideas above – it will become easier for you to plan that special day, and ensure that you don’t start your wedded bliss with additional, unaffordable debt, allowing you to save for a future… for just the TWO of you!