A pen, some paper, the kitchen table. Those got me here, sure. But this work is truly all about you.
Your retirement goals are a huge part of this enterprise. Your goals are what got us this far: is it time to enjoy the fruits of your labor? It’s why we own the orchard, after all.
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The idea of an orchard is useful in illustrating some of the basic concepts we use in investing and planning. (The metaphor is even among our greatest hits on the blog!) Orchards are long-term endeavors. The payoff from planting trees now arrives years in the future—not unlike retirement contributions.
During our working years, we tend to focus on our account balances—the value of our orchard, so to speak. But in retirement, the key factor is probably the size of the fruit crop, not the value of the orchard. We pay our bills in retirement with monthly cash flow from our accounts, not the statement value.
After all those years of watching the value of the orchard, this is a big shift in thinking. In our working years, the fruit of the orchard goes to plant more trees. When we retire, it is okay to live on the fruit crop.
Further, if we are living on the fruit crop, it doesn’t matter what the neighbor would pay for the orchard, or if the latest offer is higher or lower than the one before. The orchard is not for sale. This is the same way an investment portfolio works. Regular cash flow can come out, even as statement values go up and down.
We were reminded of this story recently, in working with retired clients who are considering a change in lifestyle. Their idea will take a lump sum of capital, plus an increase to their monthly expenses. They wondered whether their financial security would be impaired by the outlays.
The answer for them: the size of the remaining orchard should easily provide a fruit crop large enough to meet expenses. And in retirement, there is no compelling reason to plant more trees every year, to continually reinvest the fruit crop. It is okay to live on the fruit crop—and leave the orchard for the kids.
Clients, if you would like to talk about your orchard, please email us or call.
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Finding potential bargains is one of the hidden joys of stock market disruptions. (And seeking bargains is a core principle for us!) Sometimes, economic setbacks affect the value of enterprises that are actually quite durable, companies that will probably survive and ultimately prosper.
We noted a few months ago that bargains had emerged among those providers of basics—like food, clothing, and shelter—and that we were likely to still need these things in the future.
Now we are noticing another benefit to some of these prospects.
Dividend yields in the 3% range in name brand companies, although not guaranteed, offer the opportunity for actual recurring investment income. You know another one of our core principles is owning the orchard for the fruit crop. Well, a share of ownership in a profitable enterprise, when some of those profits are distributed as dividends to the owners, can be like owning an orchard.
While the value of the orchard (or the ownership share) will fluctuate, the crop (or the dividend) may be a sufficient reason to simply own it.
Why are we mentioning this now? Income-producing investments may be a way to offset the twin Federal Reserve policies of near-zero interest rates combined with the intent to raise the cost of living by 2% per year. (Officials speak of wanting to “hit a 2% inflation target,” but that is just another way to say “increase in the cost of living.”) When savings is earning less than the inflation rate, purchasing power erodes day by day.
Let’s keep our eyes open.
Clients, if you would like to talk about options for your cash or any other portfolio issue, please email us or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
Dividend payments are not guaranteed and may be reduced or eliminated at any time by the company.
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With the tenuous return of baseball this year, we’re thinking about what fandom means for the investing world.
One thing that strikes us is the redundancy of a phrase like “long-term investing.” Investing is already aimed at the long haul, right? You’ve heard it from us before: “Own the orchard for the fruit crop.” We have been explicit that our investment strategies are based on long time horizons.
But we dove a little deeper and came out with an even richer appreciation for this approach.
Turns out the most common notion of “investing”—using what we have to generate income or profit—is a fairly modern one. The phrase popped up in the 17th century and gained traction by the 19th, per the Oxford English Dictionary.
But a few hundred years before that? It was more literal. “Investing” was closer to its Latin root vestire: to dress or clothe, often in symbolic garments.
Even today, when the crowds aren’t allowed in their favorite stadiums, the word “investing” still has us imagining a sea of sports fans, adorned in those special garments of their favorite team. A sea of investors.
They dress in their team’s colors, and win or lose, by golly they’ll put them on next weekend too.
They’re fans for the long haul; they’re invested.
Like a fervent fan, the phrase “long-term investing” is cheering pretty loudly for a proposition we’re already on board with. It doesn’t mean we can’t be disappointed in our investments, nor does it mean the lineup will never change.
But when we buy in, when we wear the clothes of, this is no fair-weather enterprise; we’re here for the long term. Clients, if you’d like to discuss this or anything else, please write or call.
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual.
All investing involves risk including loss of principal. No strategy assures success or protects against loss.
One of the joys of thinking is that every once in a while, you might come up with a good idea. We are hoping we just did exactly that.
Our buy list, the securities we believe have favorable prospects for the years ahead, provides the building blocks for your portfolios. We rank them in order of timeliness, together with a weighting or percentage each should have. When funds are available in a portfolio, we start at the top of this cascade and fill up each holding to the desired weighting.
In our research and portfolio management, our object has long been to maximize total returns.
The bright idea? We re-ranked the Buy List based on dividend yield, and changed the weightings to reflect an income emphasis. By taking the top twenty dividend payers on the list and putting more weight on the better payers, we come up with a healthy dividend yield in a portfolio that has the potential to grow, too. Income and growth.
Dividend payments could be used to reinvest and compound your income or taken as a monthly payment, your choice.
Is this right for you? Maybe, maybe not. Our traditional “total return” approach is more suitable for many. Both alternatives feature holdings that fluctuate in value. These “income emphasis” portfolios will be more concentrated, although having twenty holdings provides diversification.
If you would like to talk about this, or anything else, please email us 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.
All investing involves risk including loss of principal. No strategy assures success or protects against loss. There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
The payment of dividends is not guaranteed. Companies may reduce or eliminate the payment of dividends at any given time.
Our Fundamental Rule #3 of Investing: own the orchard for the fruit crop. What do we mean?
If the fruit crop is enough to live on, you would not have to care what the neighbor would pay for the orchard – it’s not for sale! Whether the latest bid was higher or lower than the day before makes no difference.
You can think of your long term portfolio the same way. If it produces the cash flow you need, fluctuating values don’t always affect your real life – you buy groceries with the income, not with the statement value. The down years may have no impact on your life or lifestyle. All we need to know is where to find the cash you need, when you need it, to do the things you want and need to do.
This is what we mean when we say “own the orchard for the fruit crop.” It’s important, because enduring volatility is an inherent part of investing for total return.
There are two key points of caution. This approach presumes you keep the faith that downturns in the market end someday, that the economy recovers from whatever ails it—and you do not sell out at low points. Also, it assumes that your short term lump sum cash needs are covered by savings that do not fluctuate.
Clients, this understanding is key to our work. Please call or email us if you would like to talk about it, or anything else.
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 investing involves risk including loss of principal. No strategy assures success or protects against loss.
Readers know we believe there are those financial arrangements that maintain stability and those that may garner long-term investment returns. But anything that promises both stability and high returns is not likely to work out that way.
The uncomfortable truth is, we must live with volatility in order to have a chance at market returns. Short-term market action cannot be reliably forecast, nor profitably traded, in our opinion.
Yet market values can be volatile. Imagine an account of $500,000: a 20% drop would shrink it to $400,000, while a 20% gain would grow it to $600,000. How do people stand it?
First, long-term clients tend to take the long view. If that $500,000 account started as a $200,000 account years ago, the owners remember where they’ve been. That original investment is their anchor: any value above $200,000 represents a gain from that beginning value. (We are talking about the effects of time and compounding, not claiming any unusual investment results.)
Second, the long view helps clients understand that volatility is not risk. Put another way, as we’ve written before, a short-term drop does not necessarily represent a loss. How should we view that $500,000 value dropping to $400,000, in the long view? Relative to the original $200,000, it’s still a gain. Worrying about drops as if they are losses is optional for people who are investing for many years or decades down the road.
Third, even while staying the course over the long haul is important, strategies need to address short-term needs. For those who are living on their capital, knowing where the cash is going to come from is vitally important. With secure cash flow, it is easier to live with the ups and downs in account values. We call this pursuit of opportunity “owning the orchard for the fruit crop.”
This perspective requires a certain confidence that we will stumble through any problems and likely come out of whatever troubles have arisen. Optimism is sound policy, for if we are going back to the Stone Age, it won’t matter what is in your portfolio anyway.
Clients, if you would like to talk about these ideas or any other, please email us 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. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
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.
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