Investing 102

[SSLance]

Originally Posted by GregWeld

With a well blended portfolio of dividend paying investments -- a guy should be able to get about 5% dividend (using current rates/investment costs)… which means it takes ONE MILLION DOLLARS -- to make $50,000 (Fifty thousand dollars) per year in "income". That will be taxed at 20% -- so a NET spendable income of $40,000….. not much is it! But here's the kicker -- you should also be almost debt free at retirement - and you should also be collecting Social Security (maybe 2K a month?) AND your capital should appreciate "on average" over time around 8 or 9%.

Again, just being devil's advocate here...but here's a look at this same scenario from my current view. Remember, I have no kids and our siblings have no kids...so no heirs at all to worry about leaving anything to.

Given that, say I take that same million dollars and put it in a CD or likewise investment and pull the same $50,000 a year out of it. That's 20 years minimum of cash flow without taking a single bit of risk. I'll be 67 years old by then, the wife even older and I'll be tired of enjoying my money by then as I've had the last 20 years of freedom with no worries.

BTW, my average ROI for the 15 years I was in the market, 4.5% before taxes. Were there mistakes made, sure...but there were also 3 major corrections during that 15 year period, none of them caused by any actions of mine. And we had plenty of good years as well with well more than 8-9% appreciation. My investment life timing has just sucked.

Like I said in my first post, the investor's lost decade.

I'm an accountant by nature, so I realize that one can make numbers spin just about anyway one wants to given different scenarios. You can make things appear rosier and I can make them appear worse, just by juggling things around. I'm trying to not play that game.

I really am trying to figure out a method by which I can keep up with inflation while incurring minimal risk at the same time. It's almost like I need to look at this as if I was already 67 years old yet I can't pull money out of my IRAs for another 12 years or so without a 10% penalty.

Keep in mind, we have other assets and incomes in place already as well. I'm mainly concerned about the hunk we have in our retirement accounts and taxable investment accounts.

I realize my situation is different and if you'd rather not discuss it in this thread, I understand. I have pretty much exhausted the normal people I would talk to things like this about and welcome a different perspective. I believe that things are different after 2008 and with no signs of QE ending anytime soon, I don't believe anyone knows what is coming around the bend. I do like to talk about it with those that are participating though.

[GregWeld]

Originally Posted by SSLance

Again, just being devil's advocate here...but here's a look at this same scenario from my current view. Remember, I have no kids and our siblings have no kids...so no heirs at all to worry about leaving anything to.

Given that, say I take that same million dollars and put it in a CD or likewise investment and pull the same $50,000 a year out of it. That's 20 years minimum of cash flow without taking a single bit of risk. I'll be 67 years old by then, the wife even older and I'll be tired of enjoying my money by then as I've had the last 20 years of freedom with no worries.

BTW, my average ROI for the 15 years I was in the market, 4.5% before taxes. Were there mistakes made, sure...but there were also 3 major corrections during that 15 year period, none of them caused by any actions of mine. And we had plenty of good years as well with well more than 8-9% appreciation. My investment life timing has just sucked.

Like I said in my first post, the investor's lost decade.

I'm an accountant by nature, so I realize that one can make numbers spin just about anyway one wants to given different scenarios. You can make things appear rosier and I can make them appear worse, just by juggling things around. I'm trying to not play that game.

I really am trying to figure out a method by which I can keep up with inflation while incurring minimal risk at the same time. It's almost like I need to look at this as if I was already 67 years old yet I can't pull money out of my IRAs for another 12 years or so without a 10% penalty.

Keep in mind, we have other assets and incomes in place already as well. I'm mainly concerned about the hunk we have in our retirement accounts and taxable investment accounts.

I realize my situation is different and if you'd rather not discuss it in this thread, I understand. I have pretty much exhausted the normal people I would talk to things like this about and welcome a different perspective. I believe that things are different after 2008 and with no signs of QE ending anytime soon, I don't believe anyone knows what is coming around the bend. I do like to talk about it with those that are participating though.

Ordinarily I wouldn't say this -- but I have to be honest -- mostly because other people read this stuff and are trying to learn from this thread…

Some folks just plan to fail. I think I have a good understanding of why your investment plan hasn't worked out well for you.

[GregWeld]

Lance --


You'd do well by starting at page #1 --- and take a few pages per night --- and try to absorb some of the "info" that's been posted here. This entire thread is about how to THINK - What kinds of questions you should ask about your personal requirements etc…. it's never been about "Dear Abby - what should I personally do with my money". It's not about what stock to buy, despite many stocks used for examples. It's a beginners thread about "investing" in general. And while there are specific questions which require some discussion… Nobody can tell anyone else what's the right way or thing for them to invest in. Todd likes housing - another guy loves Tech - somebody else is young - and someone else is 5 years from retiring. What you will learn is that there are just some fundamentals here. Real basic stuff - that works "in general" - in good markets and bad.

Investing isn't about QE ending today or tomorrow - it isn't about what's going to happen in the future that nobody can predict…. that's why it's about a long term strategy that over time will have people INVEST in great companies - that pay them dividends - that buys more shares - that pays them ever more dividends and builds their nest egg with compounding. There are different strategies discussed for taxable vs non taxable accounts… again depending on the availability etc to the individual.

For investing principals in general - there should be no distinction between accounts or types of accounts --- a person's financial health and retirement depends on ALL OF THEIR RESOURCES…. combined. There's no separation when you're trying to figure out if you have enough to retire… there's just some basic principals about what types of investments are appropriate for a taxable account vs a non-taxable (or rather, tax deferred account - i.e., muni bonds shouldn't be inside an IRA/ROTH etc).

I think that for the people who have read and actually followed this thread and acted on their accounts… that it has for the most part - been productive for them. People are eager to learn and discuss investing "in general" and then act as they see fit for themselves. It's just not a Dear Abbey please help me thread and I'm not going to engage in that type of discussion.

[GregWeld]

Lance ---


Here's one more "lesson"… about long term "stock market" returns. Note that you said you went to cash in 2011… that means you missed 10% return in 2012. The compounding is done in spikes… up 10 -- down 5 -- up 6 -- down 4 -- down 3 -- up 9. If you're out in the up markets -- then you've completely missed the "total" return for the period. That's why market timing doesn't work. It only works to make you feel good when you can walk around saying "I got out of the market before "X"…. The problem is that you'll also miss out on the next leg up. Investing is about feeling CONFIDENT that over time you're doing what you should be doing. That means then that you have to be invested in stuff that you can be confident in. Whatever that is. If you're not a good stock picker - most are not - then the least a guy should do is go with the best name in a category and trust that they're well run and will be around when you need them. It's not rocket science. A guy doesn't even have to be very smart. It's enough just to know the names of the best run companies and let time do it's thing. It's when people try to out smart the market that they get crushed.





Average Stock Market Return per year: Last 5, 10, 20 ... Years
The long-term, more than 100-year performance: Since 1900 (end-of-year 1899), through 2012, I estimate the average total return/year of the DJIA (Dow Jones Industrial Average) was approximately 9.4% -- 4.8% in price appreciation, plus approx 4.6% in dividends. (Some numbers may not add up due to rounding.)
Since 1929 (year-end 1928 -- i.e., before the crash), through 2012, the return was 8.8% (4.6%, plus 4.2%) [note: see The 1929 Stock Market Crash]
Since end-of-year 1932 (i.e., after the crash): 11.1% (7.0%, plus 4.2%)
The average annual stock market return for the past twenty-five calendar years (since 1987) was 10.6% (7.9%, plus 2.7%) The market was up over 40% before the October 19, "Black Monday," crash. After a significant recovery, the Dow actually closed up 6% for the year.
Stock market returns for the last 20 years (since 1992): 9.6% (7.1%, plus 2.4%) In the middle of one of the longest bull markets in history. [see below for additional 20-year periods]
Returns since 1999 (13 years) -- the dot-com bubble year-end peak: 3.4% (1.0%, plus 2.4%).
Returns for the last 10 years (since 2002): 7.2% (4.6%, plus 2.6%) Year-end trough after the dot-com bubble. [see below for additional 10-year periods]
For the last 5 years (since 2007), 2.6% (-0.2%, plus 2.8%) Year-end peak of housing bubble.
Since 2008 year-end trough after the housing bubble: 13.4% (10.5%, plus 2.9%)
For 2012 the stock market (Dow/DJIA) total return was 10.1% (7.3% plus 2.9%)
2012 year-end dividend yield was 2.7%

[GregWeld]

As long as I'm on a roll….. Some folks think real estate is a "sure fired" investment…. so let's compare the ups and downs of the stock market vs the housing market!!





Stock market last 100 years…. Oh to be certain there are periods of not much growth -- thus the dividend!!! Get paid to wait!!












And then the sure fired long term investment in housing….. the last 100 years…

[GregWeld]

And not to be left out -- the 100 year chart of BOND yields vs the yield on equities….


BONDS YIELDS IN BLUE…. EQUITIES IN RED. 56 years of equities beating the bonds and 56 years of bonds beating equities. The difference will be is GROWTH in capital - which this chart does not attempt to show.

[GregWeld]

Now let's do the MOST REVEALING comparison….. REMEMBER that this is a comparison of what just one hundred dollars would be worth…. a lousy 100 bucks…



LOOK AT THE COMPOUNDED RETURN COLUMN!!!! That's where there is a serious ass kicking being done ---


Not to count out the AVERAGES shown by dated periods at the bottom of the page.


Sorry - I could not paste this page as a picture - so you'll just have to click the link!




http://pages.stern.nyu.edu/~%20adamo...histretSP.html

[GregWeld]

For those unwilling to look at the above link…. what it showed was that $100 stinky dollars (a lot of money in 1928) invested in the S&P 500 (a basket of stocks you can now buy - traded as the SPY) - netted you $193,219 in 2012

$100 invested over the same period in Treasury Bills -- netted you a whopping $1971.

$100 invested over the same period in 10 year Treasury bonds netted a whopping $6926

Those are COMPOUNDED VALUES !!!

EVER HEAR ME SAY -- BONDS SUCK??? LOL

Here's the AVERAGE RATE OF RETURN of the S&P 500 over three different periods of time all ending in 2012

1928-2012 11.26%

1962-2012 11.10%

2002-2012 8.71%


Was there historical blow ups during these periods? Hell yes! And you got killed if you sold in those down markets! But if you rode it out - you were richly rewarded compared to the other "SAFE" investments weren't you… and that's my point. The market doesn't go up like an elevator - well actually it does because elevators can stop along the way and so does the market…

The reason I love DIVIDEND stocks is because you can still live during those down periods - because the stocks are still spinning off income! In retirement you're not supposed to draw down your capital… you should be able to live off the income produced. Who knows how long you're going to live in retirement? Who can predict this? If you plan to live 20 years (85 years old?) and you planned to be out of money by then -- well -- dude! You suck! Because it's going to be a pretty nasty time for you when you're 86 and you're out of money!

Anybody here tell me what a car cost 20 years ago? What your property taxes where 20 years ago? What clothes cost back then?

I don't know what they were - but I can tell you for certain that they cost far less then than they do today. So your plan better be for income GROWTH -- or each year you're falling further behind.

My little buddy Pierre is 78 years old -- he just bought a new hot rod project and had a new shop built… so I wouldn't be so quick to say -- "Well - I probably won't be doing much by then". BS!!! I was parked next to a guy at Thunderhill that was 79 years old and he was out there on the track with his Mustang track car!

Again -- my point is -- better plan for success… and plan to live decently… and plan to live and enjoy life FAR LONGER than you may live… because I'd rather go out of this world on the big end than the short end.

Go back to that Chevron dividend just used as an example… they used to pay 36.5 cents per quarter -- now they're paying $1.00 per quarter. I'd say that goes a long ways towards helping me pay my bills in the future because their payout (in this example) is growing.

Now -- a guy can do all kinds of math --- and just using Chevron (a name I just picked for zero reason what so ever) as an example might show that inflation is more than the payout growth of their dividend… OKAY… I'm just trying to make some Investing 102 points here - again - about the way we all need to THINK about our futures - and our investments - and the length of time we're going to have for our investments to do "okay". It's not "I bought X company yesterday and they're down .50 a share today - so I suck as an investor"…. Okay -- maybe you're timing is HORRIBLE… but give those picks some time… And if you've followed along here and bought GREAT COMPANIES… not the ones the store clerk told you was the hot stock of the day… my bet is that 7 of the 10 names you bought will be ahead -- a couple of them WAY ahead - a couple of them just "okay" and a couple will suck. But you will be ahead overall -- nicely -- and your dividend payouts will be more than they were when you bought.

END OF STORY : > )

[toy71camaro]

Just wanted to chime in here and thank Lance and Greg for their recent posts. The explanations on the two sides helps understand the different ways of thought process.

Thanks Fella's.

[GregWeld]

A question was asked of me about "when do I sell"….


That's a swirling bowl of confusion and never can be answered because it all "depends". It depends on whether or not you think the fundamentals of the company have changed - and not to your liking. Therefore - you're no longer CONFIDENT in owning the shares. That would be a sell signal for me.

If you own INTEREST RATE SENSITIVE shares - such as JNK - HYG - NLY…. and you think or see interest rates are going UP -- then that would be a sell signal for those shares that would be taken to the woodshed in that environment.

I don't do --- "I'm down 5% so I should sell". I don't do "the market is down so I'm going to sell everything and get out". I would do that if I thought the world was going to hell in a hand basket… but I don't think that way. To me - that would be akin to saying -- Oh! The Democrats have control of congress so the USofA is down the tubes… or vice versa. The USofA has withstood the test of time.. and will do "fine" over time regardless of who or who isn't running things.

Ditto with the market…. I've just put up charts that show real numbers over long periods of time - to PROVE that over time your investments are going to do just fine.

If you buy weird stuff - and if you don't know what you're doing and just randomly take someones advice to buy such and such because of blah blah blah --- then you'll take what they give you - because you don't know why you own it - and you won't really be connected to the stock in any way other than you bought it. I've never preached that. Conversely what I've said would help you make a buying decision is to buy companies you're familiar with - where you shop - or in an industry you're involved with etc.

Then I've always said to do the chart comparison after you've thought about your choice --- look at the top 3 or 4 names in the same industry and compare their TOTAL RETURN charts -- and their dividends etc. You can pick the loser in the top 5!! If you don't look and do a bit of research. Choosing SEARS just because it's a name you know - will probably not do your portfolio any good. Now -- if you want to bet that they'll make a comeback -- okay that's a different issue. It's not where I'd choose to invest but my point is - everyone needs to know why and what they're buying ---- and if the "bet" doesn't work out - then you also need to be able to sell and move on.

NOBODY is going to get it 100% right! EVER! It doesn't happen. I've never been able to make it happen! And you'll find that the "winners" and "losers" rotate! Your big winner this year may be a drag next year… that doesn't mean you just sell it… you "revisit" it and see why you own it - and how it fits your current portfolio - and is it the same company now as it was then etc. Go back to the charts and compare it's performance against like businesses. Sometimes they march in lock step - sometimes they don't - groups go in and out of favor -- That's why you diversify within your investments! Cars can be hot and housing could be hot this year - or for 2 years -- and then flat line for 3 or 5 years… and something else goes gangbusters.

One thing I try to ask myself is "if I sold this" what else would I be SURE of that is going to be better… sometimes I have that answer and sometimes I don't -- if I don't then I usually tend to just let it ride. Same thing with taking some gains off the table --- if I have a big winner -- then sometimes I'll just trim off some of the gain and reinvest it in something else… There's no hard and fast rule to tell you what to do.