Month: May 2018

Building on The Foundation: Portfolio Building, Part IV A

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part IV A

Sorry everyone. The posting will be a little sparse for the next weeks as I am in the midst of a ten day stretch in the ICU (12-14 hour stretches/day!) and then a short vacation promised to Mrs. PWT for some well deserved R&R.

“Gotta make money to save money” said some financially literate rapper…probably…or at least he should have…

Let’s delve into some alternative retirement portfolios that may interest you for better long term gains.

Here was the original proposed simple retirement portfolio from a prior post.

30% S&P 500 Index Fund

20% Mid Cap (Blended) Fund

20% Small Cap Blended Fund

20% Bonds

10% Cash

Note one thing: There is no large cap fund included in the above for the simple reason that the large cap fund in this case is the S&P 500 index fund. Having both would be a complete overlap of the same companies that would raise your risk of loss, but not necessarily enhance your gains beyond having all of that same money in just the S&P 500 index fund.

Let’s assume that you want higher returns than bonds and either eliminate that 20% completely or at least greatly reduce it (making up a figure here arbitrarily) to 5%.

Now, you have 15-20% extra to deal with.

Woo Hoo!!

The S&P 500, mid cap, and small cap funds have covered the US extremely well, so one way to go forward could be international funds. (Other options will be discussed in future post [s].) Your risk tolerance should be the guide to how much of that 20% (all? 15%, 10%, 5%., 0% AKA America is where I made my money, America is where I’m investing my money) will be invested in international funds.

Let’s discuss what “international” means for a moment. If you’re investing in solely US companies, don’t accept the criticism that you’re a nativist, xenophobic bigot (though you may be for entirely different reasons…I try not to judge…even those of you who had to look those fancy SAT words used earlier in this sentence…like “criticism”…Oh, were you thinking of some other words?).

Let’s consider your S&P 500 fund and think of some of its largest companies.  

Apple

Microsoft

Amazon

Facebook

Google (Sorry, I’m just never going to call it Alphabet)

Visa

Coca-Cola

Disney

McDonald’s

Walmart

These are all definitely US based companies, But, even if you’ve never traveled abroad (please do when you can though), you must realize that each of these companies generate billions upon billions of dollars from international markets. It’s no different than (Royal Dutch) Shell, BP (British Petroleum), or BMW (Bavarian Motor Works) making money in the US. The lines between what is a purely US company and a “foreign” company has been blurred with ongoing globalization. All multi-billion dollar companies throughout the world are truly international now. It makes sense: supply follow demand…and now with countries around the globe with rising incomes and increasing standards of living, goods from all around the world are being sold…uh, all around the world.

So, in summary, if you’re fearful of being invested in “international” stocks/funds, but are still regretful of not taking advantage of the global economy, don’t fret. You’re doing a lot more international investing/commerce/trade than you think are.

However, if you want into jump of the non-US part of the world pool (I’m not so great at metaphors), read on further…in the next post…

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

 

Brick Upon Brick: How to Consider Starting a Portfolio with Stocks in It

 

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

The blessing (for me) and curse (for all of you) is that when I run into  insurmountable obstacles like endless revisions on the alternative funds only portfolios I can just move forward in time to a future post and then jump back in time  (like this guy) once I smooth out issues with what was supposed to be the prior post (Sorry if this makes no sense).

ANYWAY…here’s a discussion on portfolios with stocks…

Portfolio Building, Part V

We talked about various fund only portfolios, but not one with stocks mixed in which is a good way to help increase your returns above what the S&P 500 as long as you understand there is at least a commensurate (nice SAT word, nerd!) increase in risk if not more.

An easy way to set up a retirement portfolio is to do the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks

There it is.

That’s it.

That’s all there it is to do to retire on Easy Street.

That simple.

Well, I guess I should close down the blog now.

 

What?

Wait, you want to know more?

OK then.

Let’s get started.

Let me introduce you to the brilliant David Fish who spent the past decade plus compiling publicly traded companies who kept increasing the dividend yearly for a string of consecutive years while you were learning about the difference between Golgi apparati and mitochondria and the finer points of the brachial plexus. Fish has categorized these companies that have increased their dividends to their shareholders year after year by the number of years that the dividend increases have taken place.

Dividend Challengers: the last consecutive 5-9 years

Dividend Contenders: the last consecutive 10-24 years

Dividend Champions: the last consecutive 25+ years

Then, to add to the confusion, there’s another overlapping category:

Dividend Aristocrats: the last consecutive 25+ years

SR: Umm…that’s the same thing there, Captain.

To explain, the Standard and Poor’s (remember them?) put together the Dividend Aristocrat Index with the principal difference between the David Fish’s Dividend Champions and the S&P’s DIvidend Aristocrats is the latter, not surprisingly, only contains companies in the S&P 500..

SR: The fix is in…

Dr. Scared: This is it!! This is how they screw you!!

PWT: Uuh..yeah..so anyway…

…whereas the Dividend Champions are any publicly traded companies on any index that fulfill the criteria as stated above (ie, increasing their dividend each consecutive for 25 years or greater). Therefore with this difference, there is a sizable difference between the Champions (115) and Aristocrats (53).

This “CCC” list is updated at the end of each month  by David Fish to ensure if a company has not increased their dividend in consecutive years or, even better, if a company has increased its dividend in enough consecutive years to be listed in any of the above categories.

To be able to not just maintain the same dividend, but actually increase it year after year, especially after a quarter of a century or even longer is beyond remarkable, In fact, it’s stunning when you think about it. These companies would have not just survived, but actually thrived, in all sorts of conditions including recessions, wars, new competitors, changing technology, etc.

Let’s take a look at the dividend aristocrats in particular.

These 53 are large companies (multi-billion dollars in market capitalization) that have survived and even thrived through all the gyrations of the market and nation since their respective inceptions. These companies have few opportunities for significant growth because of how massive they are already, but make you lots of money in the long term even if their share price barely budge over the years. (One way to think of it is like this: ideally, the company whose stock you own keeps jacking up their dividend year after year with the stock price barely moving  allowing you to buy more and more stock, and then three months before you retire it triples in value. This would be epic and awesome AKA The Unattainable Dream.)

As noted before, the beauty of dividend investing is getting paid to buy a company’s stock and then be patient to continue to get paid during which time the more stock you buy, the more dividend it generates thus leading to more cash to buy even more stock leading to an upward spiral of stock/dividend/cash which is a beautiful thing to behold.

Here is an example of ten Dividend Champions along with the number of consecutive years that dividends were raised (and placed in descending order of those number of years) :

3M–59

Coca-Cola–55

Johnson & Johnson–55

Colgate Palmolive–54

*Altria (Tobacco company; formerly Phillip Morris)–48

McDonald’s–42

RLI (Insurance Company)–42

Clorox–40

ExxonMobil–35

AT&T–34

*Altria is the one company above that is not in the S&P 500 thus making this a list of DIvidend Champions, not Aristocrats, to be technically correct.

It’s a pretty well diversified group that virtually every American purchases from at one point or another throughout any given year. If most or all of these companies go down, then you don’t have a portfolio problem, you have a national/global economic crisis (see 2008-2009).

So, in a portfolio sense, it would break down as the following:

25% S&P 500 Index Fund

25% Mid cap Fund

25% Small Cap Fund

25% Stocks with each of the ten above stocks receiving 2.5% each (also make sure all dividends in these stocks and even the funds above are set up to automatically be reinvested back into whatever stock or fund they came from)

Just make sure you regularly invest into the above four categories or thirteen discrete securities consistently (ie, monthly or even more frequently, not any less frequently than monthly however—more on the mechanics and logistics of stock/fund purchasing in a later post).

Then just sit back and watch the returns roll in.

Before we finish, it’s time for a little shouting however.

THE DIVIDEND CHAMPIONS I CHOSE ARE PURELY ARBITRARY OTHER THAN BEING WELL KNOWN COMPANIES AND DO NOT AT ALL REFLECT MY CHOICES OF WHAT A GOOD INVESTMENT CONSTITUTE. DO NOT THINK IN ANY WAY, SHAPE, OR FORM THAT I AM PROMOTING ANY ONE OF THESE COMPANIES FOR ANY PERSON TO BUY.

END OF YELLING DISCLAIMER…

Thanks for tolerating my CYA tirade!

We will discuss evaluating individual stocks in a future post however.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

 

Portfolio Building, Part III: More Bricks

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part III

Let’s jump right into it since some of you may have felt robbed last time you checked in. The example we used was following the rule/suggestion of 110-age=% of stocks/funds in your portfolio with you being a forty (Ugh or Yay!) year old. So 70% stocks/funds are what you will need for that age if you are following this suggestion.

If you’re not happy with a steady return that matches the S&P 500 in exchange for a modestly-moderately increased risk of loss, then here is a possible approach.

In danger of quoting myself from even just my last post….

The standard avenues in the realm of stocks/funds for returns better than the S&P 500 (drumroll please) are the following:

  1. Small cap funds
  2. Mid cap funds
  3. International funds
  4. Stocks

What proportion you want of each will depend again on your risk tolerance, but let’s have the facts laid out first before you decide anything.

Small caps have historically beaten the S&P 500 over the past century on average and in five of the past eight decades by a wide margin whereas the three decades where they underperformed relative to the S&P 500, they barely lost out to the S&P 500.

There are value and growth companies/stocks at each market capitalization level. (To make simple examples by companies that everyone should have heard of, think of Amazon or Netflix as growth stocks and Johnson & Johnson or ExxonMobil as value stocks.)

There are value or growth funds at each level. To make things more confusing, there are also “blended” funds at each market cap level. They may be labeled as blended or just have the market cap level noted without any further designation such as “Blah blah blah Small Cap Fund” (with “Blah blah blah” standing in for the name of the company’s name such as Fidelity or Vanguard as example of two well known ones—sorry to lose you in my technical jargon). If you want a simple approach where there is as few moving parts as possible, you could do the following:

30% S&P 500 Index Fund

20% Mid Cap (Blended) Fund

20% Small Cap Blended Fund

20% Bonds

10% Cash

This ensures what should be a decent return above the S&P 500, but with only a modestly higher risk of loss above the S&P 500.

International funds may increase your return, but will invariably increase your risk of loss as well. They are impossible to give you a historical return on given that there are multitudes of international funds (eg, All World, Europe, Asia, Middle East, Latin America, etc.), multiple companies (Fidelity, Vanguard, T. Rowe Price, etc.), and different investing styles/types (eg, passive, active, growth, value, mid cap, small cap, large cap). For international funds, you’ll have to find the exact one you’re thinking of and look up its historical performance data to see how it’s done over the past years or decades even.

Better yet, a financial advisor will do all of the footwork for you and advise you what to put it in. Just check how it has done for the past year, five years, ten years, and “life of the fund” (ie, however long it has been around whether 7 years or 70 years) and ask why this specific region/country (read up on the area if you know nothing about it) or why this certain investing style (value instead of growth or vice versa, small cap instead of large cap), and as ALWAYS, check the expense ratio of the fund and make sure you understand what the true returns of said fund only after you subtract out the expense ratio.

As you can see it takes a bit of work or money (the fees you pay your financial advisor) to make sure you’re putting money into the “right” (whatever that means) funds.

But, think of it this way: you work (among many other reasons) to make money or spend cash to invest in other things you value (eg, car, house, TV, phone, etc) that bring back to you enjoyment or value of many other kinds.

This work or deployed capital is exactly the same: you’re working to make money or spending money to get something in value (and, even better, something that will hopefully increase in value and not depreciate like most everything else you will buy).  

Personally, I’m an investing/personal finance nerd and enjoy finding great value in excellent funds at a good price. I don’t expect anyone else to be, but it’s important. This is your and your family’s financial future. Precious few things will be more important.

This little extra work is definitely worth it when you consider that the difference between a great company and a good company over the next 20-30 years would be enormous. Besides, it’s not supposed to be fun; after all, it’s called work for a reason. Moreover, it’s likely far easier than what you do in your day-to-day job and will pay far more years or even decades from now than a few hours of work.   

Let’s talk about several other fund only portfolios in the future.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Portfolio Building, Part II: Brick by Brick

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building, Part II

Last time, we discussed a rule of thumb for what some have suggested is a good guide to adjusting your portfolio as you age.

110-age=% of your portfolio that should be in stocks+funds combined

Let me be clear what we are discussing here—this is all in regards to your personal investment portfolio, not your workplace retirement account (401K, 403B, 457B, etc—-much more on this in a later post).

That’s all well and good or arguable or even ultimately utter rubbish. (I think it’s a perfectly fine guide personally. For some, it may seem too aggressive in their older, post-retirement age though my counterargument is that you will likely live very long after retirement if you retire in your sixties.

What I want to focus on instead is what to do in terms of stocks and funds in your retirement portfolio regardless of what percentage they may hold.

For some of you, you already have your favorite funds or even stocks that have performed well and are way ahead of the game (or at least you hope). For others, you may not know at all and would then rely on a financial advisor to help get you into the right securities. There may be others in between that aren’t sure if they want a financial advisor (more about that in a future post), aren’t sure if what they are in via their financial advisor is best suited for them, or simply aren’t sure what their money should be in.  

One piece of advice…

The non-funds part of your investment portfolio should be held in bonds and cash. (Some cash should ALWAYS (note the absolutism employed here which is exceedingly rare for me, but is appropriate in this case) be held back for any time great investing opportunities come up such as when there is a dip in the market leading to a price of a stock or fund that is great, not just good. The bonds should be just that: bonds.

Do not confuse bonds with bond funds.

Bond funds are what they sound like—funds composed of bonds with different interest rates and maturity dates where payouts are streaming in as more purchases are made to keep profits and payouts going. Bond funds have expenses attached to them that you pay for which will lower your returns as well as the fact that bond funds can actually drop in value (often when interest rates rise since interest rates and bond prices/value are inversely related) just like mutual funds or stocks.

If you want bond funds (and, personally, I detest them as they are lower performing securities with all the disadvantages of funds [have to pay fees and can lose both your gains and even your original investment] with all the low returns of bonds), then ensure they are a component of the funds portion of your investment portfolio, not the non-funds portion, because that’s exactly what they are.   

So, let’s say you’re forty, which means you’re earning good money, possibly married, possibly with kids, and now having an investment portfolio with 70% stocks/funds, 20% bonds (which you decided to put into triple tax free municipal bonds—all of which will be local to you which would mean that specific ones cannot even be named), and 10% cash for that great deal that may be lurking around the next quarter.

So what is that 70% stocks/funds portion actually made of?

Well, that goes back to your risk tolerance and how satisfied (or unhappy) you are with matching or keeping up with the returns of the S&P 500.

If you’re really happy with just what the S&P 500 is doing, then put all 70% in a S&P 500 index fund. The key is to pick the cheapest one possible, so that fees don’t destroy your returns over the next quarter of a century (remember, for better or for worse, in this example, you’re forty years old–lot of working years ahead of you which is good as you’re at the height of your medical career and have both plenty of expenses ahead of you and plenty of time and opportunities to hit your Magic Number).

If you’re seeking bigger/better returns than the S&P 500 provides, there are a few avenues available to you as long as you realize that necessarily this increases risk of losing gains made elsewhere or even your original investment.  

The standard avenues in the realm of stocks/funds for returns better than the S&P 500 (drumroll please) are the following:

  1. Small cap funds
  2. Mid cap funds
  3. International funds
  4. Stocks

SR: WHy the hell would I want to invest in ball cap companies? I don’t even like wearing them.

PWT: Oh boy…

You’ll see all publicly traded companies characterized by what is known as market capitalization. Market capitalization in a publicly traded company is calculated by multiplying the number of shares available for trading/sale (ie, the outstanding shares) times the share price of the stock. Since the stock price varies from day to day, obviously the market capitalization of any company varies daily as well (even hour to hour or by the minute). (Market capitalization isn’t a great way to value a company for multiple reasons including the fact that it doesn’t take into account the debt the company carries at any given time, but more on this at a later post).

Small market capitalization companies (ie, small caps)=<$2 billion

And two lesser used company terms:

Nano caps<$50 million

Micro caps=$50 million-$2 billion

Mid caps=$2 billion-$10 billion

Large caps>$10 billion

Mega caps>$200-$300 billion (it’s arguable on the cutoff especially since it’s a newer term that holds no real value in terms of funds, etc being set up to follow just these companies since there is no growth in these companies given how big they already are)

SR: I guess a million dollars isn’t what it used to be…

PWT: Yeah. Tell me about it.N

Now that we have reached a climax, let me disappoint you all and we will conclude building a market beating portfolio (or, at least, we hope) next post.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…

Building Towards Your Magic Number Brick by Brick

Sorry everyone, between conference week and family commitments (some expected, some…less expected),  I haven’t posted at all in the past 2-3 weeks.

My apologies for that.

I hope you can forgive me

Anyway…here we go…once again…

Never forget these two axioms:

Money frees us, but its pursuit may enslave us.

It’s not how much you have at the end; it’s how much you could have made.

Portfolio Building

As we continue moving forward, we will eventually explore how to evaluate individual stocks and funds which suit your needs/fit your goals.

First, however, we will think larger and discuss how an entire portfolio would/should be constructed before detailing its individual components.

A key element—possibly THE key element—of your investment portfolio is knowing what your goals are. How much money do you want/need and by what time do you want/need it coupled with what your risk tolerance will allow for. Unfortunately, sometimes, these factors are contrary to one another and thus require calibration of one of these three variables: money, time, or risk tolerance.

You cannot reliably construct an investment portfolio until you answer these questions frankly and honestly.

In other words, your portfolio is built from starting at the end and then working backwards to the present day.

If you’re not thinking of it that way, you’re doing this all wrong.    

If you have a financial advisor, he or she should be sitting you and/or your family down to understand your income level, how big your family is, how big it might become, what your hopes and goals are, do you hope for an extra car or a vacation home or any other luxury item, etc. And once that initial interview is done, it needs updated—ideally yearly and on a PRN basis if circumstances about your job, family, etc change significantly. If your financial advisor is not doing that, then you need another financial advisor.

Let’s assume that you’re married or will be with 1-3 children that will go to college which you will pay for (Oh, great), own one house without any second ones (vacation or otherwise), and no significant luxury items (boats, high end cars [Bentleys, Maseratis, not Mercedes or BMWs], etc).The last assumption to be made (dangerous I know) is that you/your spouse have a moderately high risk tolerance (ie, willing to take short term losses for better long term gains in your younger days and middle age, but then increasingly conservative as you get older/closer to retirement).  

This profile would put you and/or family in the vast majority of people saving for retirement. (Obviously, the more different your profile is, the more impact it may have on your investment style and portfolio.)

So, let’s get started with the standard portfolio for the “average” person/family.

There’s a rule of thumb floating around out there on how you should be adjusting your portfolio over time as you age.

110-age=% of your portfolio that should be in stocks+funds combined

The remainder is supposed to be in bonds.

SR: Here we go with the math again…

So, even at age 50, you’d have 60% of your portfolio in stocks with 40% of your portfolio in bonds.

SR: This kid is pretty quick with the math!

And, then, assuming (there’s that word again) this portfolio will continue to morph with advancing age to the point where at age 70 there will still be 40% stocks/funds, Some would argue that it’s too aggressive at such an age. The counterargument is that it balances out a too conservative approach in your 40’s-60’s ( at least for some like myself, but as I have stated before I am an aggressive investor with a very high risk tolerance which is not at all advisable for everyone and shouldn’t be followed as a template) and also ensures some good ongoing returns as you age since you really don’t know how long your retirement nest egg will need to last even starting at age 70.

A piece of advice:

Make sure your money last between 90-95 years old. If it lasts that long, then you’re set. If you…gulp…die before your money runs out (AKA the Dream scenario), then you can set up that the remaining money passes on to your children, grandchildren, or even favorite charity—or some combination thereof. You won’t regret it; you will have regrets if you do run out of money. Living off your kids for basics like food and shelter in your advanced age is not a good look and will only cause conflict (if not hell on Earth) for your…and especially your spouse…which is far worse than for you.

BACK TO THE PORTFOLIO…

There will be costs to you re-calibrating your investment portfolio yearly in terms of capital gains (hopefully!) especially, so reconfiguring it only every five-ten years makes far more sense than it does to do it annually. Of course, it may not involve selling one security to buy another, but rather re-allocating the proportion of new purchases to tilt your portfolio the way it is supposed to go. If you’re really lucky, this may be difficult if your stocks/funds with dividends are accumulating value so quickly or so highly that you will have a higher proportion of stocks/funds that you intended to have.

As my grandfather used to say, this is a first class problem.

If you have this all mapped out with your financial advisor, then it will be done for you in what should be the most tax efficient way possible. But, please, please, whatever you do—don’t put it into auto pilot. You need to meet with your financial advisor AT LEAST yearly—ideally, quarterly—to review how your portfolio is doing and that the plan you set forth years (decades?) ago still makes sense.

Another option is Target Date Funds.

It’s a fund that has a mix of stocks, mutual funds, and bonds that will go from little bonds to much bonds with stocks/funds decreasing in parallel. There is a year in the title of the fund that should signal to you as an investor that the stated year (Vanguard Target Retirement 2045 for example) is the year you are retiring. All the work and re-calibration is done for you for a small (hopefully) expense ratio.

Target date funds definitely underperform the S&P 500, but they should given that they have some bonds in them (as well as funds with their own expense ratios that can drag performance as well). That’s the whole point. Unspectacular, but solid is the goal with target date funds here. These funds are supposed to bring solid returns over decades to give you a comfortable retirement.

Baseball analogy for target date funds: Singles and doubles, not home runs (which will always inevitably bring about a higher strikeout rate with it as well)

If you want higher returns than say 6.8% over the past decade, (don’t forget subtracting the expense ratio from the returns over that past decade for all of you who clicked on the link and said, this loser doesn’t know what’s up and underestimated returns) then you’ll have to go a different route…or…a hybrid method.

But, that’s a different story for a different post.

I’d love to hear from any and all of you about your thoughts, so we can all learn from one another.

Please spread the word about this blog to your friends (real and virtual), family, and colleagues. Talk to you soon.

Until next time…