Investment advice

[lauraf13]

One of my retired friends sent this investment advice:

If you had bought $1,000.00 worth of Nortel stock one year ago, it would now be worth $49.00.

With Enron, you would have $16.50 of the original $1,000.00

With Worldcom, you would have less than $5.00 left.

If you had bought $1,000.00 worth of Schlitz (the beer, not the
stock) one year ago, drank all the beer, then sold the aluminum cans for $ .10 a pound , you would have $214.00.

Based on the above, my current investment advice is to drink heavily and recycle.

 

[goinfishin]

Happy Hour Here I come

 

[andrew61]

Funny, I just read the same post today on another forum I frequent (not related to retiring early) but the beer was Bud instead of Schlitz.  

I guess you can substitute your drink of choice (although your individual dollar amounts may vary).

 

[Prometheuss]

I use a similar method for investing in the lottery. I do not buy lottery tickets msyelf, but I do keep an eye out for any winning tickets that someone might have dropped on the ground outside the 7-11 or liquor store.

I figure this only lowers my odds of winning a tiny bit.

Prometheuss

 

[Mr._johngalt]

Regular readers know of my aversion to common stocks
in any form and some of you might recall my visit with
my great aunt in Florida who lost $150,000 in the
market downturn.

I just got back from a 3 day motorcyle adventure.
My partner was a 68 year old small business owner.
(not wealthy). Still works part time. He confided that
he had lost $250,000 over the same period.

Question: Why are these people in comon stocks??
While they were losing big bucks, I was still knocking
down 7% a year with almost no risk. Maybe I could see
someone in their 30s figuring that history will have time
to repeat before they need the money. But if you are
68?? What is that??

My ex-wife said "Your problem is that you think you
are smarter than everyone else!" Maybe she had a point?

 

[Mr._johngalt]

Thought with my zero common stock portfolio, some people might be interested in how I'm diversified.
Here are the categories and per cents at present.
I am quite satisfied with the mix:

Cash, receivables, money markets 25%
Real estate 25%
Bonds and bond funds 25%
Bank CDs 5%
Corporate notes 20%

The money market dollars keep moving around from
bank to bank as I can find one offering promotional
rates far above the norm. If I come to a point where
this no longer works, then the mix will change. So
far, so good.

 

[haha]

John,

Is there an efficient way to monitor different MM rates and CD rates? This would help me as I lift the amount I have in cash over the next few months.

Thanks, Mikey

 

[Woolybully]

Try www.bankrate.com
Under the Search By Product, select Cd/Savings
You'll go to that page automatically.
The on the Right side under the listed rates,
select More Savings / Cd Rates
On that page, select Savings
that will bring you to a page that has about 20 different rates for CD's and MM for different durations.
This might take you there directly:
http://www.bankrate.com/brm/rate/brm_dep_avg.asp

 

[haha]

Thank you Wooly. I'll check that out tomorrow.

Mikey

 

[Mr._johngalt]

Hi Mikey! Woolybooly stole my thunder as I was going
to suggest bankrate.com. I check it regularly.
However, I have had more success with canvassing banks right in my area and watching the newspapers
for attractive rates. Since the rates dropped so
steeply, I have only had to go outside of my general
area (90 miles from Chicago) twice. If we're only
talking a quarter point, I tend to stay local.

 

[Mr._johngalt]

Now this is where it gets tricky. I believe that I could
make it to my demise if I never earned another dime
on my investments. It appears that by following a
budget, drawing down my base, and collecting SS
the money would outlast me. But, maybe I'm wrong
(my Dad is a perky 85 and his father and grandfather
both made it to 100). I do most of my planning on the
back of an envelope. Still, the amount of variables
to be considered is mind boggling. Spreadsheet
projections are fun. I am not sure they are any more
accurate than my system though.

 

[Ed_B]

Well, John, it's like this. Over the years since I started my 401k in 1983 I have contributed about $120k to it from my salary. Before the 2000 meltdown, I was up about 450% on that investment. After the meltdown I am up "only" about 400%. I would cry my little eyes out but they would be crocodile tears. Sure, I have less now than I did 3 years ago but my gains have been so good overall that I can stand some losses. Yes, I have had some big-time volatility but I'm getting paid for it. My 401k balance is like the surf... it rolls in and it rolls back out. While this works while I am still working, I would not advocate this position for anyone in retirement.


Ed_B

 

[Ted]

Considering that the S&P 500 Index is now down about 40% from its peak in 2000, Ed must not have had all of his 401(k) in stocks if it is only off by about 12% since then.

Nevertheless, what he says is right in concept -- that stock returns should be viewed over the long term.  People who focus on how much they "lost" in stocks since the market peak are not viewing the situation very rationally (except possibly in the rare case of a person receiving a large amount of cash and investing all of it in stocks at the market peak).

Conceptually, the "value" of the overall stock market is a sort of illusion, based not on present real value but on expected (hoped for) future real value.  Any individual can sell their stock holdings at any time and use the proceeds to purchase something having real value -- such as a house or a car.  But if too many people who own stocks try to do that at the same time, much of the "value" of the stocks vanishes into thin air.

This is not meant as an argument against owning stocks -- the same thing is possible with practically any financial ("paper") asset.  But it is a good reason to hold stocks on the basis of the probable future purchasing power of future earnings/dividends.  It is also a good reason to hold other assets to cover spending needs in the interim.

 

[ShokWaveRider]

I pulled out of the stock market in March of 2000 totally, and went into MM at 8% at the time (I am now dreaming of those days) Now this was a lot more luck than judgement, and is the reason I am retired today at 49. But I simply could not sleep at night with 60% of my retirement nestegg bouncing up and down like a roller coaster, income or no income. I now know people who are down by as much as 40%. While I am earning 2% right now, I am at least earning it on 40% more capital. Honestly. I (We actually) cannot live comfortably on less than 5%, so we are trading water a little. My wife does work locally and maintains health care and spending money. We have no debt at all.

I am in bit of a quandry as to what to do now, other than tread water. My theory is as lon as we do not go backwards life is good right?

I certainly could use some financial ideas, so I better keep reading.

Our Asset Breakdown is as follows:

35% is the House we live in.

21% is in MM in a 401K

44% is in Cash in a CD with a Credit union in such a way as it is all insured.


No stocks, Bonds or anything.

Ian

 

[haha]

Ian,

If by treading water you mean that you are holding your own, with your wife's job and the investment mix you have, I don't think you should make many changes now. The US market is not a bargain, so one could get hurt by going into that.

Your wife should keep her job. In the interest of family harmony, you perhaps should get a job. There is nothing like wages to help a retirement plan through bad markets.

Greenspan's plan is to trash cash, and force people to spend out of desperation at the paltry fixed income returns available. A job is protection from his manipulation. Really, aside from being very rich, a job or defined benefit pension are the only sure protections.

Mikey

 

[ShokWaveRider]

Mikey:

You comments are appreciated. I am trying to avoid working (for someone else) at all costs. Treading water means We a taking NOTHING from our capital at all in fact we are still saving. As we have no big bills to speak of. We do not want for anything, and I do hobby type work on the side to keep me busy, brings in a little cash (not a lot) which all gets socked away. But fancy vacations and new cars are out for a while. I do not really want to start to depleat our capital for a while.

My impressions on the market are like yours, I am always a day late on the stock market. There has been nice 3 month rally so far, it may go to 10000! and there again it may not.

Ian

 

[Mr._johngalt]

This is for Ian. I see nothing wrong with your asset allocation. The important things are:

Can you live comfortably on what you have?

Can you sleep at night without stress over your money?

Will your money last as long as you do?

I am taking a bit more risk now than you are since I
could not handle getting 2% on my money. It's a
psychological thing. Although I might be able to make
it work at 2%, I just decided to take more risk.
So.................I am now into bonds and notes where
formerly I was almost 100% in MMs and CDs.

 

[Telly]

Hi Ian,

When you and your wife are truly retired, your investments, whatever they may be, will be your biggest source of income. And CD's aren't going to cut it. Look at the spread between the CD rate, and inflation. Fear of the market has forced some people out, and some to never go in. The fear of losing a big chunk. But the slow financial death due to inflation is easily forgotten about, as it occurs over time.

Even my stinkiest tax exempt bond fund in 3 mos. gives more return than what CD's are giving annually today. And you still have to pay taxes on that CD, lowering the effective rate even further.

No one can say what will happen next, but recoiling away from higher-return investments due to a fear of uncertainty will not serve you well.

A person I worked with was ultra-conservative on money matters. Where I had my 401K in stock funds, he had ALL of his in Money Market, always. So now I'm retired, and he will have to work for many many years to get to the same point.

If you put some of your own spreadsheets together, I think you will find that Inflation is the silent killer. And those with fixed Pensions will see that the next time we get inflation like we did in the late 70's

That's my 2 cents, but adjust it downward for inflation first

 

[ShokWaveRider]

Telly:

Thanks for those words. I was in a bond fund for a while and it went up. I pulled out recently because of the interest rates being as low as I thought they could be. For the last 3 months the same bond fund has lost money. I am talking of course about the ones in our 401ks which are of limited availability.

I will have to look around at some Tax Free funds. I was considering going with Vanguard as an investment house. I was with Schwab once but hi costs were expensive unless you chose his preferred funds.

I would be curious about people's prefferences in that area.

Ian

 

[Mr._johngalt]

Here is the key I think to determining how much risk to
take. Using my own situation as an example, I am now
taking about the most risk to my base since I retired.
Although I agree inflation can be the "silent killer", I
can still take a very low return and just reduce my
standard of living if I see inflation causing a problem
in the future. I understand not everyone may have this
as an option, but many do. Bottom line, even though I
think I could survive on a 2 to 3 % return, cutting back
if inflation rears its ugly head, I opted to take on more risk mostly because I find it emotionally hard to sit here and get only 2 or 3 % on my money. Only time will
tell if this was a good move. Of course, it's really all
just a big crap shoot anyway. I'm also thinking that if
I really got in trouble I could bail myself out by signing up for a reverse mortgage and Social Security
simultaneously on turning 62, three years hence.

 

[Ted]

I will have to look around at some Tax Free funds.  I was considering going with Vanguard as an investment house.  I was with Schwab once but hi costs were expensive unless you chose his preferred funds.

Ian

Unless a person is in the 31% or higher federal tax bracket (and most retirees are not) then the return on tax-free municipal bonds is less than the after-tax return on corporate bonds of equivalent maturity.  Regardless of the category of bonds, about the only company that is competitive with Vanguard for low expenses is TIAA-CREF, but Vanguard has a larger selection of funds.

Given the low interest rates on short-term bonds (especially tax-free municipals) and the prospect of negative returns on long-term bonds if and when interest rates rise, a good compromise is TIPs or a mutual fund that holds them.  The interest is free of state income tax, but more importantly, the return will increase if inflation increases, and that protects against a large drop in market value if interest rates rise.  TIPs can temporarily drop in value, but probably won't do so to nearly the same extent as conventional bonds of equal maturity, when inflation increases and long-term interest rates rise.

As a "cash equivalent" investment (other than a checking account), I find it hard to think of a reason to own CD's or money market funds as opposed to a low-cost short-term corporate bond fund like Vanguard's.

 

[ShokWaveRider]

Good insight Ted. The Bulk of my CDs mature next month and all I can get is 2% there depending on FOMC next Thursday of course. I will also have the house equity cash when I sell it. So I will have to make some decisions sooner than later. I do not need the return money YET. But will do when MY wife quits this or next year. My calculation is a follows:

I can live like a king on 8% on my assets. I can live like a Prince on 5 - 6% Like a Knave at 3 - 4% but like a pauper at 1 - 2%.

The advantage about a local credit union is that all the funds can be structured so they are all insured (Up to about $2m anyways), and the service is good with no cost.

Ian

 

[Ted]

I can live like a king on 8% on my assets. I can live like a Prince on 5 - 6%  Like a Knave at 3 - 4% but like a pauper at 1 - 2%.

The advantage about a local credit union is that all the  funds can be structured so they are all insured (Up to about $2m anyways), and the service is good with no cost.

Ian

What I'd be inclined to do is to invest about half of my assets in TIPs to guarantee that I could live like a pauper rather than a corpse, and then invest the rest in a diversified selection of stocks, REITs, and high yield bonds to make it likely that I could live like at least a prince.

Generally, you won't get much of a return from assets like CDs that are "guaranteed." But TIPs are a notable exception, and unlike other assets (except possibly a person's Social Security account) their "guarantee" includes an adjustment for inflation.

Credit Unions, like all other financial institutions, necessarily have administrative costs -- it's just that these are "hidden" in the low interest rates that their financial offerings pay.

 

[ShokWaveRider]

Ted:

I just looked all over the Treasury Direct Site and read about TIPS. But cannot find anywhere on the site that lets you buy them. I Bonds yes, EE Bonds Yes, you can buy them. TIPS are purchasable in April, July and August if memory serves. Do you have to get them from a broker? Plus it looks as if TIPS are fetching 3% I Bonds 4.66 but you can only get 30k per year of the I's.

Also I cannot find anything about TIP cashing options.

Regards,

Ian

 

[Ted]

Ian,  

This relates to the comments that I made in April in the "I-Bonds vs. TIPs" discussion in this forum.

I-Bonds superficially appear to have a higher return than TIPs, but actually have a significantly lower return in exchange for their income being tax-deferred.

In brief, with I-Bonds, the total rate of return for the following six months is declared twice each year.  It consists of (a) the "base" interest rate (which is now about 1.6%*) plus (b) the inflation rate measured during the previous six months.

With TIPs, the interest rate is the rate that is applied to the par value of the bonds each year.  It is determined by market conditions and varies with the maturity of the bonds.  For longer term TIPs, it is currently about 2.2%.  But the par value is "bumped up" every year by the amount of the inflation during that year.  So the total return on TIPs (at least those of longer maturity) tends to be higher than on I-Bonds, but is federally taxable each year (unless held in a qualified account).  

I-Bonds are best for people with high current taxable incomes who expect to be in a lower tax bracket when they redeem the bonds.

TIPs can be purchased in the secondary market through brokers (for relatively low commissions that make brokers reluctant to recommend them) or they can be owned through no-load, low cost mutual funds like Vanguard's or TIAA-CREF's.  I'm not completely familiar with the Treasury's direct purchase program, but it helps to keep brokerage commissions low since brokers have to compete with it.

*Correction -- for I-Bonds issued after May 1, 2003, this rate actually dropped to 1.1%, which tends to make them even less attractive relative to TIPs.