Growing the Nest Egg? Why this is the wrong metric to look at. February 7, 2010
Posted by shaferfinancial in Finance.Tags: where financial planning went wrong, why you should pay a?ttention to dividend yield
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I have mentioned this before, but thought I should expound on this more directly. Since the 1980s and the constant push for mutual funds, financial experts have zeroed in on the capital appreciation of one’s retirement funds as the most important metric. That type of thinking has coincided with the drop in average dividend yield for the market. It is now down below 2.5%. The pre-1980 average was 5%. What the “how large is your nest egg” question has accomplished, is to bifarct the real question from the investment strategy. The real question is how much annual income your retirement funds can produce. What that creates are the contortions financial planners put their clients through [ie pull out rates ranging from 2% to 5%] as their total portfolio value varies [sometimes dramatically] from year to year. How financial planning can be accomplished with any rigor under this system is highly questionable.
Prior to this push for mutual funds and the corresponding items like risk adjusted rate of returns, asset allocations, average rate of returns, etc., investors kept their eye on the dividend and interest income being produced. This was a much more accurate way to measure retirement income.
So where does all this leave the average investor trying to save for retirement income? The first thing needed is to start thinking of income and not capital growth. The second is to realize that dividend income from corporations comes from free cash flow made by the businesses. This cash flow is then returned to its owners in the form of dividend income. Finally, since you are no longer trying to match the market capital growth returns you can begin to analyze businesses on the basis of their income stream paid out to their owners. Here it gets rich with possibilities because you will find that there are companies that have paid out increasing dividends going back 50-60-even 80 years. You will also find that some companies will sell you their stock directly, even giving you a discount in some cases. This will reduce your expenses. Finally, with just a little work you will learn how to evaluate companies and will be able to keep up with a half a dozen companies with just a little bit of your time.
What I have done is create a spread sheet that produces yields from my investment dollars and total income. It doesn’t get any easier than that. Every month I know how much income my dividends produce and what the yield is on my investing dollar. When the market bears take over, my dividends remain the same [if I have picked wisely] or even rises. And that makes me sleep easier at night!
Magellan Midstream Partners February 5, 2010
Posted by shaferfinancial in Finance.Tags: Magellan Midstream Partners, MMP
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As regular readers know, I regularly post about the stocks I own. One of them, MMP, reported a couple of days ago.
This company is an oil pipeline and storage company. The last quarter of 2009 was their best quarter ever in terms of profitability. This despite, the country still being mired in a recession. They had added a new pipeline earlier in the year by acquisition and it is only ramped up to 15% or potential in the last quarter. So there is an expectation of getting that up to 100% by the end of 2010. There are also some other development projects on board, that will go forward. Since this companies profits depend upon total volume of product moved, not price of product, the most likely prediction is that volumes will increase during the year. However, the company has taken a more conservative position looking forward and assumed volumes will remain the same. 40% of the transported oil products is under the tariffs payment system. On July 1st, there was an increase of over 7% on government dictated price of tariffs. Even with this assumption of no improvement in volumes transported, MMPs management stated they will improve distributable cash 5-10% and likely increase distributions 4-7% in 2010.
The price has dropped over the last few days to the $40 range giving it a current yield of 7%. I think this represents another buying opportunity for this stock and I will be adding on a few shares myself.
Why I changed my investing philosophy 12 years ago? February 1, 2010
Posted by shaferfinancial in Finance, Uncategorized.Tags: What I did to change my financial life?, why change investing philosophy?
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Its worthwhile to tell my personal investing journey as a primer on my overall financial philosophy. So many people I talk to these days are confused about the investing for retirement world and are fearful to make meaningful changes.
A little over twelve years ago, I was investing in a selection of mutual funds for two goals; retirement income and saving for a down payment for a house. I was working as a college professor and had a retirement plan at work that was being funded with mutual funds [variable annuity per Florida law] and also had other mutual funds I had been funding for quite a while. Being pretty good at math, a little voice in the back of my head kept going off that said something was wrong with this plan, it just wasn’t adding up!
So I went up a research trip to find out everything I could about investing and wealth production. I decided early on that the only meaningful data is that from folks who have accumulated wealth successfully. This was a fateful decision as it lead me away from the financial planning industry, mutual fund sales folk, insurance sales folk, financial magazines, etc.
What I found was eye-opening. There was no data that indicated what I was currently doing would be successful. In fact the data demonstrated the exact opposite. About the same time it became apparent to me that I would not receive tenure from a university anytime soon, so that siren call of job security was pulled out from me.
You can imagine my feelings at this point. Well, I made a pledge right there that I would try to emulate the wealth producers as best as I could. Out into the private world of employment I went, including starting my own business.
But this story is really about my change in investing philosophy. I soon realized that I could try to emulate Warren Buffett or I could buy Berkshire stock and learn as much as I could from him going forward. I could emulate the wealthy folks investment philosophies or I could emulate the middle classes investment philosophies.
Well I chose to emulate the wealthy as best as I could. The wealthy own about a quarter of their investments in [mostly income producing] real estate. The wealthy own businesses. The wealthy own large life insurance policies. The wealthy, when they do invest in the stock market do it with individual stocks. The wealthy aren’t afraid to ask for advice.
I currently have about 20% of my wealth in real estate spread around the country. I own three stocks, Berkshire Hathaway, Health Care REIT, and Magellon Midstream Partners. My business has had its ups and downs, but has generally produced decent income. I have a large equity indexed life insurance policy. I bought a home in 2000. And I talk to people all over the US about investing.
Along the way I have started a family, seen my wealth grow, and matured in ways I never thought possible. It all started with a decision to look to successful people for my clues on finance, instead of looking toward the financial services industry. Ironically, I now derive some of my income from this same financial service industry. I have certainly made mistakes along the way. But it has been a great trip so far!
Consider this a plea for folks to really look at who they get their advice from. Want investing advice, look to people who have made billions doing it like Warren Buffett. Not necessarily what they quip to reporters, but what they actually have done.
Good Luck on the trail of life!
Musings on the market…. January 29, 2010
Posted by shaferfinancial in Finance, Uncategorized.Tags: Berkshire Hathaway, HCN, MMP, Real Estate Values
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Real estate values in my part of Florida has been level since March of 2009. Foreclosures over the last couple of months have decreased [hopefully this is a trend]. Fairly remarkable since we have over 12% unemployment at this time! Nationally, real estate has some more pain to go through.
The stock market is running out of steam. Would not be surprised with a 10% drop. However, corporate profits are coming in strong this earning season which should keep the market from a major drop at this time. However, as I have often pointed out, the market runs on emotion so any short term predictions made should be taken as guesses only.
Berkshire is in the middle of a major run up. The catalyst is the inclusion in the S & P 500 index. But every major analyst [including Warren himself] has stated that this stock is seriously undervalued. Most feel the intrinsic value is somewhere between $125,000 and $140,000 for the “A”s. Looks like the latest quarter will be another improved one with lots of cash flow. The annual report will not be out for about a month; looking forward to reading it!
HCN and MMP have settled in the $42-45 range which is about right given their current dividend. If they report better results and there appears room to increase dividends again then we might see some run up.
Have a great weekend!
Are you sure you want to continue your buy and hold strategies? January 19, 2010
Posted by shaferfinancial in Finance.Tags: 30 year returns for the stock market, sobering analysis of historic market returns
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Check out these sobering charts from Doug Short.
The actual historic market returns has much variability. For a twenty year return it ranged from -.06% to 13.6%. The most recent 20 year return for the S & P is 5.38%. If you do a 30 year span then the variability decreases to between 1.91% and 11.9%, but that is hardly comforting. Think about the possibility of investing for 30 years in the market and only getting an average of 1.91%! Put 2% in a retirement calculator and see how long it takes for you to build enough wealth to retire on!
What is really scary is to look and see how often the return would be around 5%. In fact the truth is that is the most likely result. Now, one can continue to hope that they receive a return that is toward the high side of the variability [really pray for those results] or you can begin to question the strategy and the people pushing this strategy at you. I mean if the mutual fund industry would tell you that after 30 years of investing you are going to receive somewhere between 2% and 12% average return and the most like return is around 5%-6%, would you be so excited about investing in that strategy? Would you consider other strategies if you could see how unlikely it is to really save your way into a comfortable retirement?
Which would you rather be? Joe or John January 15, 2010
Posted by shaferfinancial in Finance, Uncategorized.Tags: 401K or other retirement strategies?, retirement strategies
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Joe and John are twin brothers. Both financially astute. Both made identical money in the same industry. However, at age 45 Joe made some different decisions than John.
They are now 67 years old and in good health.
Joe’s retirement looks like this:
5 paid for rental homes with a total of $5K in net monthly rental income. At the peak of RE values these houses were worth $1.5M, but now are worth $900K.
$1.5M of cash value in an EIUL.
Dividend producing stock that once had a value of $600,000 but now is worth $450,000 but produces $2K/month in dividends.
Social Security: $1500/month
John’s retirement looks like this:
A 401k with a current value of $2M but was once worth $2.8M. Inside the 401K is a well balanced group of mutual funds. He always maxed out his 401K inputs.
Social Security: $1500/month
So which one do you prefer?
Let’s look at income.
Joe’s annual income looks like this:
$60K from real estate rental income partially offset by depreciation allowances that allows a net income after taxes of $55K
He is currently taking $100K from his EIUL tax free
$24K from dividends on his stock which is $20,600 after the 15% tax.
$18K from social security which is about $16K after taxes
For a total of $191,600
John retirement income looks like this:
He is using the 4% withdrawal rule for his 401K so this year he currently took $80,000 but had to pay the income tax rate of 25% so his net was$60,000
Net social security after taxes of $13,500
John’s retirement income was $73,500 this year.
Again, whose retirement would you rather have?
Net Inflows to Equity Mutual Funds January 10, 2010
Posted by shaferfinancial in Finance, Uncategorized.Tags: EIUL, Human Psychology, Mutual Funds seeing increasing inputs
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It happens consistently. The data points out why it is so damaging. People’s psychology does not change. Yes, people are getting back into equity mutual funds for the last couple months. They got out earlier in the year, at the lows, and are now getting back in 40-60% higher.
What is the propensity to sell low and buy high all about? Basic human psychology. Fear is a driving force in most people’s financial lives. Instead of having a plan and sticking to it, they allow their fears to drive their decision making. When the blood was in the street, they got scared and sold. Now that the market has gone through a major upside correction they are fearful about being left out [they already have been!].
I have been a huge critic of mutual funds, for many reasons. But, this is the main reason. Most people aren’t prepared, by having a plan or emotional stability, to successfully play the buy mutual funds and hold strategy.
Fact is, most of these people would be much happier and more successful getting into an equity indexed universal life insurance policy, which doesn’t go negative, for their retirement income strategy. The proof is in the pudding, returns [after expenses and fees] inside the top EIULs have beaten the major indexes looking back 20 years. It is an even more dramatic difference looking back 5 to 10 years!
If your choice is a passive strategy, one you can live with, then EIUL is a better choice. Add in the tax benefits and the choice becomes even clearer. Human psychology isn’t likely to change. Isn’t it time you accept the facts?
Never argue with a “true believer!” January 7, 2010
Posted by shaferfinancial in Finance.Tags: mutual fund investing, psychological methods of propaganda
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On the radio this morning I heard a commercial that started with this: “Mortgages ought to be illegal.” With an opening line like that it caught my attention. The commercial went on to describe the thousands of dollars that banks make on the typical mortgage and mentioned $250K in interest paid on a 30 year $200K mortgage [sounds like a pretty high interest rate on that one]. You were instructed to call for their DVD which would describe how to “turn debt into wealth” and pay off your mortgage in a short period of time. Another voice came on and stated he WAS going to pay off his 30 year mortgage in 2 1/2 years. Of course you did need to make any more money than you do now to accomplish this miraculous feat, just sign up for their program.
Psychologically, this advertisement was pretty tight. If you agreed with the three main premises:
Banks are ripping you off by charging interest;
Debt is bad; and
There is a secret strategy that banks don’t want you to know about to eliminate debt.
The psychological trick is this. You make a series [usually three] of obviously true statements [doesn't matter if they are true or not, only that the receiver of this communication believes them to be true], and the logical/conscious part of your brain drops its guard to the point it allows whatever comes next to flow through to the unconscious as true too. Then you ask people to act upon the last statement, which is this case was that you can eliminate your mortgage debt in 2 and 1/2 years if you call for the free DVD. Once a person believes [in the unconscious] that you can eliminate debt rapidly without increasing your income, then they are ripe for selling them your program.
This method of psychologically attuned sales/marketing is of interest to us all because we often see it used. And the great thing about this strategy is that once it is set, the part of the brain where emotions sit holds on to the item in the face of all logical attempts to prove it false. This is where you see folks hanging onto ideas despite their obvious failure.
Let me try this one for you:
Math has proven that stocks give you the best long term performance, you can increase your return by purchasing monthly, and saving/investing a small amount monthly will turn you into a millionaire in the future;
No one can pick individual stocks and beat the market over a long period of time; and
Financial companies are ripping you off with the fees and transactions costs.
Your best strategy is to buy indexed mutual funds from Vanguard with their low expenses based on mathematically derived asset allocation strategy.
Now if you believe those three statements are true [and they are not totally true], then given the opportunity you would institute a strategy of dollar cost averaging into low cost indexed mutual funds, right. And if someone were to point out that the strategy has failed over the last 20 years you would most probably not believe them. And further if people pointed out the problems with the three statements, you argue with them till the cows come home, wouldn’t you? But if you don’t take those three statements as undeniably true, then you might be open to other strategies!
Those Bogle books [Common Sense on Mutual Funds, etc.] were nice pieces of psychological based propaganda! Very astutely written and tightly attuned to the psychological rules we now understand with the ultimate goal in getting people to buy Vanguard Mutual Funds. Of course Vanguard is the second largest mutual fund company now as a result.
Now you understand how it works. And why arguing with “true believers” is usually a futile act!
Year Re-cap; General Thoughts December 31, 2009
Posted by shaferfinancial in Uncategorized.1 comment so far
Well it’s been an interesting year, hasn’t it? From a personal financial standpoint it has been a crazy up and down year. My gig mainly has me dealing with people’s psychology, and a year like this leaves one drained. Emotional roller coasters and all, I am thankful for the opportunities I receive. My equity investments are close to even for the year, while my real estate investments remain clouded and significantly lower than last year.
Perhaps the lessons of the year for folks are either go with a passive strategy of minimizing losses or [and I think this is the better idea] take the lessons of the last year and use them for your benefit ongoing. I spent some time [between skiing] watching financial television shows and what I found was the usual attempts at predictions [they never stop trying do they?], and business as usual hawking the hot stocks of the moment. Value investors have to dig deep to find those gems at this point, but they are there if you look for them. Berkshire has got to be on many people’s value list with the book value coming so close to what it is trading for.
Well it is my anniversary, so I need to keep this short. January will bring a new set of posts on psychology and investing, but meanwhile have a great New Year!
