income investing

Can I Afford to Retire?

canstockphoto3351708

Perhaps the biggest financial issue people try to understand is their own retirement situation. Will you have enough cash flow to live as you would like in retirement? Will you be able to retire at an acceptable age? Are you on track to retire when you want to?

We use a straightforward process to help people answer these questions. It isn’t rocket science, but it does take some thought. Our process has some fine points, but the basics are simple:

First, how much cash coming in every month will it take for you to feel like you have what you need?

Second, what will your sources of monthly income in retirement add up to? We are talking about Social Security or Railroad Retirement, pensions, rent, and other recurring monthly payments. This step does not include money from your portfolios or 401(k) type accounts.

Third, what is the monthly gap between your needs in Step One and your sources from Step Two?

Fourth, multiply that monthly gap from Step Three by twelve to get the annual shortfall. Then multiply that by twenty to understand how much permanent lump sum capital you will need in order to retire. For example, if you are short $18,000 per year, you’ll need $360,000 (which is $18,000 times twenty).

We like to estimate that you can probably earn about 5% of your investment capital each year in income and gains. So if you have capital equal to twenty times your desired income, you can potentially afford to take out 5% (one-twentieth) per year without having to spend down your capital.

About those fine points: we factor in the rising cost of living, we make estimates about future changes in Social Security and other monthly benefits, we make assumptions about rates of return. There are no guarantees on any of these things. But it always pays to take your best shot at it and plan accordingly. As retirement gets closer, your estimates will get better and better.

There are other factors as well. Sometimes spouses do not retire at the same time. Often there are plans to change residences or move. Retirement may trigger a lump sum purchase of a boat, RV, or second home. We strive to understand all the pieces of your puzzle, and plan for your specific objectives.

Clients, if we may help you improve your understanding of your retirement plans and planning, please email us or call. We love to work on this topic.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

No strategy assures success or protects against loss.

This is a hypothetical example and is not representative of any specific situation. Your results will vary. The hypothetical rates of return used do not reflect the deduction of fees and charges inherent to investing.

Investing involves risk, including possible loss of principal.

Safe is the New Dangerous

© Can Stock Photo / onepony

We strive to see the world as it is, and act accordingly. Going by the textbook and implementing conventional wisdom without testing it against actual conditions is not in our playbook. What we see today is nothing short of astonishing—for two reasons.

“Safe” has become the new dangerous. We are astonished at how the investment world appears to be upside down in some respects. And we are astonished that so few of us seem to have noticed.

During the year 2000, the technology-heavy Nasdaq Composite index fell over 39%1. This crushing of technology and growth stocks at the start of the millennium and the financial crisis that arose just seven years later drove fear of the stock market deep into the psyche of some investors. Consequently, we believe there has been a flight to safety that has created some real anomalies.

Yields on long term government bonds and high yield corporate bonds have fallen to near historical lows not seen in over 50 years2. It isn’t just in bonds, either. Supposedly safe stocks appear to be the most expensive part of the market.

Standard & Poors reports that the market average price to earnings (P/E) ratio is about 18. Food companies, shampoo makers, toothpaste sellers, medical supply companies and utilities are priced at a premium because those lines of business are assumed to be recession-proof…you know, safe. In an 18 P/E market, these companies are priced at 22, 25, 30, or 34 times earnings3.

We have owned many of these companies in the past at P/E’s of 10 or 12 or 14. Why anyone would own an electric utility when solar plus battery technology is bound to turn them upside down is beyond us. (We wrote about the coming change here.)

Consequently, we believe that allegedly “safe” stocks have become so expensive they are dangerous. The textbook says utility stocks are safe. We look at the world and say, “Not really.” Safe is the new dangerous.

Meanwhile, there are market sectors and companies priced below the market average P/E, including some with dynamic prospects in the years ahead. We believe the stocks we own are bargains. That’s an opinion, not a guarantee. You know we don’t offer guarantees, except that values will fluctuate.

Clients, if you would like a longer conversation about this upside down situation or any other topic, please email us or call.

1Nasdaq, Inc.

2Federal Reserve Economic Data, Federal Reserve Bank of St. Louis

3Standard & Poor’s, Inc.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

Floating rate bank loans are loans issues by below investment grade companies for short term funding purposes with higher yield than short term debt and involve risk.

High yield/junk bonds (grade BB or below) are not investment grade securities, and are subject to higher interest rate, credit, and liquidity risks than those graded BBB and above. They generally should be part of a diversified portfolio for sophisticated investors.

Government bonds are guaranteed by the US government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value.

Case Study: Home Sweet Home

© Can Stock Photo / irina88w

Quite a few clients are reaching the twentieth anniversary of starting in business with us. So the sixty year olds then are eighty now. A lot can happen in those twenty years!

Mr. and Mrs. Q retired successfully a few years into our relationship, a major transition that ended up well. Then they surprised themselves and me when they decided to build a home in a suburban community and leave their city home of more than forty years.

After thoughtfully considering what they wanted, the Q’s built a beautiful new home and never looked back. It was a great move for them.

A dozen years later, the home may not make the most sense for them. Senior living apartments with some services and meals may be a better option in the near future.

In every transition, we look at four kinds of numbers: lump sums coming in, lump sums going out, recurring monthly income, recurring monthly outgo. And we do the arithmetic to sort out how much invested capital will be available after the transition. Then we can figure out the size of ‘the fruit crop from the orchard.’ (By which we mean the cash flow from invested capital, of course.)

We have gone through this process three times for Mr. and Mrs. Q. First they needed to determine if they could afford to retire. Later, the home-building idea had to be framed up so they could make a good decision. Now, we are working on the next move.

One of the interesting parts of our work is that we never make decisions for you. Usually, the key part of a major decision is feelings, not arithmetic. We strongly believe in doing all the arithmetic that can be done. But no computer can decide where you want to wake up every day, or if you sense that maintaining a home has become too great of an effort.

Just as we never forget whose money it is, we never forget whose life it is, either. We will never kid anybody about the arithmetic, nor kid ourselves by thinking we can make better life decisions than you.

Clients, if you face a transition and want to begin framing up a better understanding of it, please email or call us.


Securities offered through LPL Financial, Member FINRA/SIPC.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Case Study: The Life of Mr. S, and Working to 92

© Can Stock Photo / Leaf

Long ago, I met a man in his late forties. He had just resigned one position and accepted another. Needing a place for a 401(k) rollover, he agreed to do business with me. Our methods and access to investments were quite limited then (I was still in my twenties!), but I did the best I could.

Through the years his life evolved and changed; like all of us, he had his share of joy and pain. His wife began to suffer a chronic illness. His industry consolidated which caused some moves from town to town. But his children all ended up in successful marriages and careers, and grandchildren came. I advised him on wealth management throughout, helping him manage challenges from family health expenses and other things.

At sixty-six he retired, fearing he had not saved enough. The size of the fruit crop he needed each year seemed too large for the orchard he had grown, so to speak. We devised a plan that gave him a chance for things to work, although without any guarantees.

Of course, through these years, our knowledge and experience and confidence and capabilities flourished. We grew together.

Mr. S is pushing eighty-one years old now; poor Mrs. S had her disease go from chronic to acute and she succumbed a short while back. Mr. S stays busy helping with grandchildren and keeping up his home.

His retirement finances have worked out well, although this is not evidence of anything to anyone else. Good fortune played a role, past performance is no guarantee of future results, and all that. But I still want to tell you what happened so far.

Over fifteen years, Mr. S has withdrawn more than he retired with—and he also still has a current account balance that is larger than when he started. He tells us it is like the endless coffee refills they have at the café.

I call Mr. S when I need a pick-me-up; his gratitude is boundless. This, friends, is why I want to work to age 92.

That gives us a little more than thirty years to help many more of you get to eighty with more confidence than you ever thought possible. If you are fifty or older now, we will do our best between now and then to earn your gratitude when you turn age eighty. Clients, if you would like to talk about this or anything else, please email or call us.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

This is a hypothetical example and is not representative of any specific investment. Your results may vary.

Alternative Facts, Alternative Investments

canstockphoto7544055

Over the past few months, there has been a lot of hay made in the press about “alternative facts.” The term is a sarcastic euphemism; when something is labeled an alternative fact, the clear implication is that it is not a fact at all.

There is a certain class of investments which are collectively called “alternative investments.” This term is unrelated to the term “alternative fact”, but the similarities are undeniable.

Traditional investments are based on the notion of putting your money to work in order to generate more money. When you invest in a company’s stock, you are buying a piece of a going concern that generates revenue. When you invest in bonds, you are buying a debt obligation that bears interest. Even if you are just holding cash reserves, when you leave your cash with a bank, they are paying you interest to hold onto your money. In today’s interest rate environment you are probably earning close to nothing, but at least in theory there is some return on cash.

This is not to say that traditional investments are not without risks. You are not guaranteed to break even, let alone make money—companies may go broke, leaving stocks and bonds at a fraction of their former value. But you still have the hope that your money can grow into more money over time.

“Alternative investments” is a very large category which encompasses a wide range of assets. The only common element is that they do not fall into traditional investment categories such as stocks and bonds, and in many cases, arguably do not qualify as investments in the traditional sense at all.

Commodities are one form of alternative investment. These are gold, silver, oil, corn, and so on—actual, physical products, not the companies that produce them. If you buy a bar of gold, all you will ever have is a bar of gold. It will never turn into two bars of gold. If you are lucky, maybe you can sell it to someone for more than you paid for it. But that is speculation, not investment.

Derivatives contracts are another type of alternative investment. A derivative’s value is based on (“derived from”) the value of another asset, such as a stock or commodity. When you buy options to purchase a company’s stock, you are making a bet that the company will be successful, just like owning stock. However, stock options tend to have a very short time horizon. You are speculating on short term price fluctuations, not really investing in a company’s long term growth.

Undoubtedly some people make good money speculating on alternative investments. As a result, some portfolio managers believe in buying small slices of alternative investments for everyone in case they happen to outperform traditional investments. Our response: nuts! We want to build an orchard big enough to live off the fruit crop. We have no interest in owning a smaller orchard and trying to make up the difference buying and selling fruit with other fruit speculators.

Clients, if you want to talk about your portfolio, please call or email. But if someone is trying to sell you “alternative investments”, you should perhaps treat them with the same skepticism you’d give to someone pitching “alternative facts.”


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Alternative investments may not be suitable for all investors and involve special risks such as leveraging the investment, potential adverse market forces, regulatory changes and potentially illiquidity. The strategies employed in the management of alternative investments may accelerate the velocity of potential losses.

Stock investing involves risk including loss of principal.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Crab Claws, Sustainability, and Your Money

© Can Stock Photo / connect

Perhaps the most sustainable crop in the world is the stone crab claw, a seasonal Florida delicacy. You see, stone crabs are caught in live traps, a claw is removed, and the crab is returned to the water. The claw regenerates, usually growing back larger than before—an ability they evolved to escape predators, which now supplies Florida fisheries with a sustainable catch.

We have come a long way since 1883, when a keynote speaker at the International Fisheries Exposition in London proclaimed that “all the great sea fisheries are inexhaustible.” We later learned to our chagrin that it is, in fact, entirely possible to harvest anything to the point of extinction.

Fortunately we also figured out how to nurture fisheries to produce more fish, and to limit harvest to sustainable levels. You can take out the entire population of fish just once…but you may be able to harvest some fraction of the population, year after year, until the end of time.

A pertinent comparison may be made to your stock of wealth in retirement. Like a fishery, a portfolio can be over-harvested until it inevitably declines and disappears. But with sustainable management, it may produce a recurring crop. This is the endowment principle in action. A dollar may be spent one time only—but if invested, the income from it may be spent every year, in perpetuity.

Decades ago, our life expectancies did not extend long past retirement age. Planning for a short retirement, one could aim at a target sum and figure that it would be spent down over a few years, then there would be a funeral. But with many life expectancies extending decades past retirement, the arithmetic of planning has changed completely. Not every financial planner has kept up with the change.

Sustainable fisheries assure the world that it will not run out of fish. Sustainable portfolios reduce the chance that you will run out of money in retirement. One of our objects is to help you understand what part of your resources may be considered permanent capital, to be invested on a sustainable basis.

This is a process that has some nuances; each of you has a different situation and specific goals. Clients, if you would like to talk about your situation, please write or call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk, including possible loss of principal.

Annual Market Forecast

© Can Stock Photo Inc. / ShutterM

It is that time of year. Prognosticators and pundits issue their forecasts for the year ahead. Wouldn’t it be nice to know what the future holds! Some forecasts are hedged, and don’t really say much. Our prediction is quite specific.

Many of those who have visited our offices know that we actually do have a crystal ball. It forecasts the direction of the stock market for the coming year. It does not say how far the market will go, but it always predicts the direction.

If you knew which way the stock market was going to go, could you make money investing?

Here’s the catch: our crystal ball has only been 76% accurate. So perhaps the question should be, if you knew which way the stock market was going to go 76% of the time, could you make money investing?

Without further ado, here is what my crystal ball says about the direction of the stock market for the year beginning January 1: it will go up.

Long-time observers will not be surprised. The crystal ball always says the market is going up. It has never predicted a down year. And checking back over the past hundred years, according to Standard & Poor’s, it has been right 76% of the time.

We don’t know how well its track record will hold up, but we believe this presents a favorable backdrop to buy bargains, avoid stampedes in the markets, and seek to own the orchard for the fruit crop. In other words, to keep on keeping on, following our plans and strategies.

It is tempting to include a discussion of the economy, the strengths we perceive, and the faint possibility of recession. We’ll leave that to people with more time on their hands. If your plans or planning will be evolving in the new year and require our attention, please call.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

Investing involves risk including loss of principal. No strategy assures success or protects against loss.

The Hidden Risk of Bonds

© Can Stock Photo / alexskopje

If I were to tell you that you could buy a bond that would pay out interest of 5% or more per year for the next 30 years, that might sound like a great deal. It’s certainly a great price in today’s interest rate environment—nearly double what 30-year U.S. Treasury bonds pay—and best of all, it lasts for 30 years. Other income may come and go, leaving you scrambling to find replacement investments that may or may not have the same yield, but this hypothetical bond will (one hopes) be around paying you the same rate for three decades. Sounds like a lead pipe cinch, right?

Wrong.

There is a catch. A 5% yield that will not go down for 30 years sounds great in today’s interest rate environment—but it is also guaranteed not to go up for the next 30 years. If interest rates rise and yields go up, your 5% bond will inevitably be left behind. If you try to hold onto your bond, your returns will look pretty pitiful compared to newer bonds that pay more interest and inflation will eat away at your purchasing power. If you try to sell your bond to hop on board higher yield issues, you’ll have to sell at a deep loss—no one will want to pay full price for your 5% bond if they can go out and buy 8% bonds instead. Either way, the damage would be considerable.

In investment terminology, this feature of bonds is known as interest-rate risk. The longer the bond maturity, the higher the risk (which is why longer term bonds pay higher interest.) Not only is it more likely that interest rates will rise at some point during the holding period, the damage will go on for longer before you get your money back at maturity.

We have many reasons to be nervous about holding on to long term bonds, even ones that have performed exceptionally well. For the past eight years, the Federal Reserve’s near-zero interest rate policy has been distorting the bond market, which is why overall bond performance looks so good in retrospect. But we believe that if it is impossible for something to continue, it won’t. Sooner or later the Fed will have to return to a sane interest rate policy, and when it does, long-term bonds are going to suffer badly.

We’ve been in this low interest bubble for so long we’ve forgotten what a realistic bond market looks like. If you find yourself scratching your head at the idea of selling off bonds that seem like a good bet, realize that what looks like a good deal now may not turn out to be so good in a few years. If you have any questions about your holdings, give us a call or email us to talk.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rates rise and bonds are subject to availability and change in price.

The Beauty of Simplicity

© Can Stock Photo Inc. / renatas76

The high priests of investing preach in a strange language, filled with jargon and confusing acronyms. But some of the people who have actually made the most money investing speak in plain language. Nearly anyone can understand Warren Buffett and Charlie Munger, for instance.

In a recent Wall Street Journal interview, Munger said “There isn’t one novel thought in all of how Berkshire is run. It’s all about… exploiting unrecognized simplicities.” This elegant idea may be at the heart of the difference between effective investors and those who try to play one in real life, the high priests.

Simple ideas have been central to things that have been good for us. Before we cite examples with which you may be familiar, it is only fair to note that there is a yawning gap between “simple” and “easy.” What we do—what you put up with—is not easy.

Historically, the stock market has tended to gradually rise over time. Simple. But what would they talk about all day on CNBC if they didn’t act like the next sneeze or burp from the Federal Reserve (or whatever) would either doom us or make us rich?

Buy low, sell high. Simple. Many if not most investors end up doing the opposite, following trends, jumping on bandwagons, joining stampedes. We know how doing the opposite works out, buying at high prices and selling at low prices. Not pretty.

Own the orchard for the fruit crop. Simple. Yet only rarely does one hear this wisdom from the high priests. They talk about volatility as if it were risk, when the truth is, if the fruit crop is big enough for you to live on, you do not have to worry what your neighbor would pay for the orchard, or if his offer is higher or lower than the day before.

We’ve always believed that what we do is simple. Sure, there are a lot of fine points and nuances. We invest a lot of time and resources to find and learn the pertinent information. But in the end, we ought to be able to explain it to you. This is our goal. If we have missed, or you would like help interpreting something else you do not yet understand, call or write.


The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss.

Sooner or Later…

© Can Stock Photo Inc. / SmallTownStudio

When I was a young man, my father told me that the mortality rate is 100 percent. I apologize for speaking so plainly, but sooner or later there is a funeral in store for every one of us.

This sad fact weighs on many of the financial decisions we make later in our lives. The issue is that we never get to know ahead of time when our funeral is going to be. A new retiree might live another forty years, or they might not live to see their next birthday. Plans that make sense for one scenario may not make sense for the other, and we do not get to know which scenario we will face.

When possible, we prefer to invest for retirement on a sustainable endowment-style basis, aiming to generate portfolio income to live on rather than spending down principal: “owning the orchard for the fruit crop.” The longer you can maintain your principal, the less likely it is that you will outlive your money. This approach also has the advantage of leaving a legacy intact to pass down to your heirs, if that is a priority for you.

But not all of us are fortunate enough to be able to comfortably retire on portfolio income alone. And not everyone is content to lock away a lifetime of earnings without getting the enjoyment of spending it themselves. Spending your principal is also an option if you want to live more luxuriously, although this increases the risk of outliving your money—you may wind up merely trading future comfort for present pleasures. The decision you make at 65 may haunt you at 85.

None of us knows the future, life has a way of getting in the way of our best laid plans. Our preference is to plan for a long, healthy life: we believe it is better to have money and not get to spend it than it is to need money and no longer have it. But ultimately, the choices you make about retirement are a matter of which risks you’re comfortable with. Figuring out your priorities is your job. Once you know what you want to do, talk to us and we’ll see if we can help you try to do it.