Investing 102

[Flash68]

Originally Posted by GregWeld

Having some money does, in deed, buy happiness.

I see what you did there.... even if inadvertently, I like it. I like deeds.

[SSLance]

Originally Posted by AU Doc

Here's a question I've been chewing on for a while, if I put all of my retirement savings in an IRA, if I decide I can retire before 59-1/2 am I going to have to pay an additional 10% penalty every year until that 59-1/2 mark? If so, that's going to HURT!

EDIT: It looks like there is a way to make early withdrawals, but it carries some risk. There is the 72(t) Substantially Equal Periodic Payments (SEPP) option. It would require some planning to get it right, though.

I'm living this quandary for real...we have always been very aggressive with our IRA and 401k contributions (to take tax and matching advantages) and currently sit with about half of our Net Worth in Pre-tax accounts. I'm 50 and the wife is 55 years old.

We are rearranging the post tax assets to try to make them cover living expenses until we can access the pre-tax money without penalty.

But hey, at least we have the pre-tax money there...just in case we do need it.

[GregWeld]

Originally Posted by dhutton

That’s entirely possible. I understand what you are saying. But here’s the way I was looking at it. Suppose I’m retired and my portfolio that cost me $1000000 is now worth $2000000 thanks to your awesome advice. The 5% dividends on the $1000000 cost basis is now yielding 2.5% on the current value of the portfolio. But because I am retired I would really like to see 5% on the current $2000000 value. So would it make sense to move into stocks that are paying 5% on their current value today, assuming I could find any that I understand and trust?

Hope this makes sense.

Thanks,
Don

AH HA!! Yes that's a better question --- but hopefully you've also made certain that you know the real dividend percentage based on your cost.... Many (not always) dividend paying stock appreciate in lockstep with the dividend payout.... but I also totally get what you're asking about. I'm having this very issue with the last apartment complex I invested in!! It was a million dollar investment paying 7%..... so now the apartment is valued at almost double - so my capital appreciated but my payout is static.... thus - if I use your method it's paying me about half what I could try to make if we sold and took the capital gain.

Okay -- gets complicated and try not to trip yourself up!


Example --- you bought Altria (MO) 6 years ago and it's now doubled in value. Let's say you sell half - and create a LONG TERM capital gain. That gain is going to be taxed at 20%.... so you'll have "less than double" than you think you were going to have (can't forget about the tax man).... now let's use 10 grand as an example -- so now you really have 8 grand to re-invest.... and you want to earn that 5% on those "new money" investments.

Let's not forget to calc the current dividend on the actual cost basis.... you might find yourself making 8 or 9% on that holding -- and therefore you're really not going backwards - or earning half what you thought! Don't trip yourself up here! Do the math! Now -- if your investment has doubled in value and you're getting 9% on the actual cost - you're really getting about 4.5% on the current value.

Generally companies that are good investments INCREASE the dividend as they go along.... Just look at some of your current dividend payers and look at the 5 year chart and see if they haven't had nice increased payouts along the way. Those SHOULD continue....

Warren Buffet gets more in annual dividend today than his original investment in COKE (KO)..... think about that -- he gets back the entire investment every single year. Not a bad return....

Should you decide to sell that WINNER --- you're going to find yourself in the below dilemma....


YES YOU SHOULD BE DOING THIS generally as a matter of course..... I always TRIM investments and scoop the cash when they are in that 75 / 80 / 90 or more % growth in capital! That does two things -- it helps you further diversify - and it locks in a gain rather than riding it down at some point. Now - you may ride the new investment down or you may pick another winner and they BOTH double again and if the market goes down - they'll both go down -- but we're trying to be smart about it and get that money working and paying you. This is where investing gets hard!

The other day I sold a large chunk of NetFlex (NFLX) because I was up 107%.... it doesn't pay a dividend - it was a pure speculative growth play.... TAKE SOME GAIN!!! Nobody ever went broke taking gains!! If it still continues to steam ahead -- what's left will ride that train.... will I be sorry I didn't leave it all to ride? That's an individual choice. I like to take outsized gains and live to play another day. I scooped 80 grand.... I'll invest that in something and hope I picked correctly and it will still grow or better yet - I'll get 5% on the 60 grand I'll net. I look at it as FREE MONEY. The stock did exactly what I'd hoped it would do (grow like crazy) - it did - and therefore I should be happy.

I'm writing a book here...... but what I'm really saying is -- "it depends" -- depends on the situation.... if you're living off the dividends now -- and you have great capital gains -- and you've done the math - then SPEAK TO YOUR TAX MAN FIRST -- and make sure you're not doing something stupid tax wise..... then by all means take that gain and reinvest it in another cash cow.

Now --- I've been putting money in AMAZON (AMZN) -- it pays zero dividend... but the growth in capital has been stellar! Way more and way faster than a dividend payer. I have a few of those... this is, again, an individual situation. I earn way more than I spend - so I can "afford" to take a few fliers like that (Netflex - Amazon - Alibaba (just sold all of it) - Google etc)..... If a guy is young - so are these companies - to me they are the IBM and COKES and CHEVRONS of yesteryear..... is the market hot for them -- yes - will they sell off big time at some point? I'd assume so... there is RISK... but I'm not using them to live off of - now - or in the future.... I'm just playing and trying to make my money grow....

[dhutton]

Originally Posted by GregWeld

AH HA!! Yes that's a better question --- but hopefully you've also made certain that you know the real dividend percentage based on your cost.... Many (not always) dividend paying stock appreciate in lockstep with the dividend payout.... but I also totally get what you're asking about. I'm having this very issue with the last apartment complex I invested in!! It was a million dollar investment paying 7%..... so now the apartment is valued at almost double - so my capital appreciated but my payout is static.... thus - if I use your method it's paying me about half what I could try to make if we sold and took the capital gain.

Okay -- gets complicated and try not to trip yourself up!


Example --- you bought Altria (MO) 6 years ago and it's now doubled in value. Let's say you sell half - and create a LONG TERM capital gain. That gain is going to be taxed at 20%.... so you'll have "less than double" than you think you were going to have (can't forget about the tax man).... now let's use 10 grand as an example -- so now you really have 8 grand to re-invest.... and you want to earn that 5% on those "new money" investments.

Let's not forget to calc the current dividend on the actual cost basis.... you might find yourself making 8 or 9% on that holding -- and therefore you're really not going backwards - or earning half what you thought! Don't trip yourself up here! Do the math! Now -- if your investment has doubled in value and you're getting 9% on the actual cost - you're really getting about 4.5% on the current value.

Generally companies that are good investments INCREASE the dividend as they go along.... Just look at some of your current dividend payers and look at the 5 year chart and see if they haven't had nice increased payouts along the way. Those SHOULD continue....

Warren Buffet gets more in annual dividend today than his original investment in COKE (KO)..... think about that -- he gets back the entire investment every single year. Not a bad return....

Should you decide to sell that WINNER --- you're going to find yourself in the below dilemma....


YES YOU SHOULD BE DOING THIS generally as a matter of course..... I always TRIM investments and scoop the cash when they are in that 75 / 80 / 90 or more % growth in capital! That does two things -- it helps you further diversify - and it locks in a gain rather than riding it down at some point. Now - you may ride the new investment down or you may pick another winner and they BOTH double again and if the market goes down - they'll both go down -- but we're trying to be smart about it and get that money working and paying you. This is where investing gets hard!

The other day I sold a large chunk of NetFlex (NFLX) because I was up 107%.... it doesn't pay a dividend - it was a pure speculative growth play.... TAKE SOME GAIN!!! Nobody ever went broke taking gains!! If it still continues to steam ahead -- what's left will ride that train.... will I be sorry I didn't leave it all to ride? That's an individual choice. I like to take outsized gains and live to play another day. I scooped 80 grand.... I'll invest that in something and hope I picked correctly and it will still grow or better yet - I'll get 5% on the 60 grand I'll net. I look at it as FREE MONEY. The stock did exactly what I'd hoped it would do (grow like crazy) - it did - and therefore I should be happy.

I'm writing a book here...... but what I'm really saying is -- "it depends" -- depends on the situation.... if you're living off the dividends now -- and you have great capital gains -- and you've done the math - then SPEAK TO YOUR TAX MAN FIRST -- and make sure you're not doing something stupid tax wise..... then by all means take that gain and reinvest it in another cash cow.

Now --- I've been putting money in AMAZON (AMZN) -- it pays zero dividend... but the growth in capital has been stellar! Way more and way faster than a dividend payer. I have a few of those... this is, again, an individual situation. I earn way more than I spend - so I can "afford" to take a few fliers like that (Netflex - Amazon - Alibaba (just sold all of it) - Google etc)..... If a guy is young - so are these companies - to me they are the IBM and COKES and CHEVRONS of yesteryear..... is the market hot for them -- yes - will they sell off big time at some point? I'd assume so... there is RISK... but I'm not using them to live off of - now - or in the future.... I'm just playing and trying to make my money grow....

Thanks for the excellent detailed response Greg. The stocks are in my IRA so no tax implications when I sell. Most of the stocks I purchased when I started following this thread have more than doubled in value. I’m currently not making any withdrawals and hope not to for another 5 years when I’m 65.

Thanks again, this thread is pure win. It has literally been life changing for my wife and I.

Don

[GregWeld]

Originally Posted by dhutton

Thanks for the excellent detailed response Greg. The stocks are in my IRA so no tax implications when I sell. Most of the stocks I purchased when I started following this thread have more than doubled in value. I’m currently not making any withdrawals and hope not to for another 5 years when I’m 65.

Thanks again, this thread is pure win. It has literally been life changing for my wife and I.

Don

Ah --- yeah --- I forgot to discuss/mention IRA's and ROTH IRA's -- DEFFERED TAXES on the IRA/401K's and ZERO taxes for those lucky enough to qualify for the ROTH IRA....


Huge gains my friend! And good for you!! Damn I love when I see someone having a little success! I just wish we'd have had this discussion going when I first joined Lat G..... OMG! There'd be some pretty good gains to have seen there! Lot of guys would be retiring "early" and building cars with all the spare cash!! LOL


It really does get a little tricky when it comes to gains and earnings power etc.... because if you hold long enough - and the gains keep coming.... and the dividends keep increasing..... pretty soon (years) -- you're looking pretty dang smart with a simple buy and hold strategy..... BUT being somewhat "active" as in MANAGING your money.... you can be even a bigger winner.... but so much of it depends on how good of a manager you are and what you've learned along the way. I've seen it go both ways.

Example --- a long term best friend would ONLY invest in bonds.... dumb bunny was in bonds even though that cash was tied up in tax free munis while the stock market was roaring.... I finally got him to take 100,000 and put it in Microsoft and Intel and Cisco and Dell etc.... back when the stuff was doubling every 6 months.... in less than a year -- he had (with my active involvement) over 300,000 in the market. Sadly - he could never pull the trigger on the SELL SIDE!! But he had learned he could make way better return in the stock market than he could in bonds.... so that was a major milestone for me. Now --- what he also did ---- WRONGLY --- was when he found something he wanted to buy - he'd buy it in his trading (taxable) account -- and he'd buy it in his IRA!! His problem was - he could stretch or reach out and trust himself to be a decent stock picker (the reason he was in bonds - because that's pretty much a no failure pick). So when he put 100K in Ginny Mae (can't remember the symbol now) and they went to ZERO during the housing bust - he lost all of it (the 100K in that investment). Now ---- it didn't hurt him - because he was already a millionaire and his house and everything else he owned was paid for years ago..... but those are tough lessons. He'd forgotten the 5% rule!! And he'd forgotten the DIVERSIFY rule! He chased YIELD and got greedy when it was going well.... but he forgot all about RISK. Capital preservation is every bit as important as all the rest of it.

I do appreciate his thanks every once in awhile - and he's told me many times that it was my pushing him that made a huge difference in his retirement. These days he has a brand new pickup and hauls a large 5th wheel around and spends his winters in warmer climates.... with not a worry in the world. That is the way to retire!

"Active" management does not mean trading.... what it means is vigilance - and not being afraid to take a loss when you know the pick sucks.... it means taking profits when they're "outsized".... it means asking the good questions just exactly like what was asked here.... it means trying to control risk but not being afraid or frozen like a deer in the headlights. It's recognizing that if you have a 40% gain and the stock market goes south 15% -- that YOU still have a sweet gain and those dividends are going to keep paying! Active is just a term for DON'T FORGET all the rules.... 5% per any investment (okay they grow and creep up to 7% - but don't let them be 15 or 20% - that means you forgot to take some of the gain!!).

WOW --- another book written! LOL

[NAPA 68]

You take a very complicated topic and boil it down, so it's not so intimidating. Great advice and thank you Greg!

Tim

[GregWeld]

Let's use ALTRIA (MO) as a perfect example for what we've been discussing.... i.e., when do you trim gains and reinvest in something else so your dividend PERCENTAGE stays up with your "needs"....



On December 21st, 2012 -- MO traded at 33.16 per share - it paid .44 cents per quarter a share then. So it paid 5.3% dividend


.44 X 4 = $1.76 ANNUALLY ---- divide the 1.76 by the price per share (33.16) and you'll see .053075995 Move the decimal point and you have 5.3%

Today MO trades at $65.26 a share -- BUT -- it's now paying .66 cents per quarter.


.66 X 4 = 2.64 ANNUALLY --- but your cost stayed at 33.16 per share! So what's it paying YOU? 7.96% on your cost basis not today's quoted rate of 4.05% which is based on today's price per share.


Now -- let's say this has been a pretty good investment -- you have almost a double in 5 years (2012 to 2017) and you're getting almost 8% dividend on YOUR cost basis. Not a bad "ho hummer huh?" LOL

But you now have twice the money you invested to begin with.... so if you sold HALF - you'd still be making the 8% on those shares remaining --- and you could reinvest in something else and, say, you found something that's paying 5%. You're net cash income would go up and that is what DHUTTON was asking about.


Hope that makes sense to everyone.

[glassman]

Originally Posted by Vegas69

The value of anything is the life you must exchange for it.

I didn't think of debt or obligations this way until recently in my life. My good buddy had a truck that was paid for or close to it. It was serving him just fine. He went out and bought a brand new truck because he's 51 and just wants to LIVE. (He tends to be a paycheck to paycheck guy) My perspective is now he must work to pay for the truck every month. Debt is really the antithesis of freedom.

I've spent the last 5 years of my life going the opposite way. I've worked continually on putting more margin in my finances and obligations. I've done that by reducing my liabilities(Currently have zero debts) and increasing my income.(Over doubled) I've hired better staff that reduces my work load and figured out what's of greatest importance daily. I say NO more than I ever have.

Focus is the art of figuring out what to say NO to.

The most successful say NO to almost everything. -Warren Buffett

Wealth is a pretty simple formula. The distance between your liabilities and income need to grow. The farther you can live below your means, the faster you will obtain wealth. After all, you must have the capital to take advantage.

I agree with Greg. I used to look at a recession or downturn in a very negative light. Now, I would see it as another opportunity to take advantage of a Spring. BUT, you have to be prepared for a rainy period and that happens over time, not days.

The most money is made with the market is MOST PESSIMISTIC. When the news, your friends, and coworkers are talking about how bad it is, that's your key to start looking for opportunities.

Now, I do still believe in leveraging some real estate with debt. The numbers on an investment property just need to make sense for the long term after counting all the costs.

Man i Love this Todd. SOOOO true, although, i must admit, i do fall from it from time to time. But def ain't living paycheck to paycheck.

I've got two great things i've learned here over the last few years: How divi's really work (absolutely never even heard of that before) AND in a down turn things "are on sale", I can seriously thank Greg for that, maybe even both.

Working on paying off the house (which is worth 1.1 at the moment, but i think its a 400k house at best lol). But hey, i have three places to leave a sh_t (you don't take one, you leave one) and running water. Perspective.

cheers, mike

[glassman]

Originally Posted by GregWeld

I have never been a fan of gambling with investment dollars. There's so many reasons for this I could write a book -- but #1 being - this (gambling vs investing) is the number one way to shake a newbie out of the game forever....

Is there money to be made taking on something like a Bitcoin? Oh sure there is! Is there money to be made shorting a stock you're sure is headed south? Heck yeah! But this is investing 102... it's about getting started and learning A strategy that will get you in the game and hopefully keep you in the game long term -- and with some success.

Ask yourself --- at what point you'd have put money in Bitcoin only to wake up to a 30 or 40% down move... and tell me straight up you wouldn't have panicked and blown out of the position with a startling loss... Check out this chart -- this is the THIRD time this year already for this stuff. Yeah - just no thanks for this cowboy.


https://lateral-g.net/forums/attachme...1&d=1510581308

Is what you meant by "cowboy", riding the bull? up and down and thrown off...

[GregWeld]

Originally Posted by NAPA 68

You take a very complicated topic and boil it down, so it's not so intimidating. Great advice and thank you Greg!

Tim

That's my sole goal..... just making it all make sense. Thanks!