All in Investing

#Retirement Strategies: #Stocks for the Long Run

One of my core tenets of investing success when it comes retirement strategies can be summed up in the title of Jeremy Siegel’s classic book: Stocks for the Long Run. This is a great read for anyone looking to get a good dose of data on why owning a properly allocated basket of diversified equities is often wiser for the long-term investor than, say, owning a portfolio of fixed-income investments.

As with any non-fiction book, all you need to do to get the main substance of the entire book is to flip to the last couple pages. So, I will recite the last couple paragraphs here from Stocks for the Long Run, as I feel these to be the best paragraphs in the book anyways.

Excerpt from pg. 369, Stocks for the Long Run by Jeremy J. Siegel, 2002, 3rd edition: 

Poor investment strategy, whether it is for lack of diversification, pursuing hot stocks, or attempting to time the market, often stems from the belief of investors that it is necessary to beat the market to do well in the market. However, nothing is further from the truth. The principal well-diversified portfolio of common stocks have not only exceeded those of fixed-income assets but also have done so with less risk. Which stocks you own is secondary to whether you own stocks, especially if you maintain a balanced portfolio. Over time, the historical difference between the returns of stocks and the returns of bonds has far exceeded the differences in returns among well-diversified all stock portfolios.

What does all this mean to the reader of this book? Proper investment strategy is as much a psychological as an intellectual challenge. As with other challenges in life, it is often best to seek professional help to structure and maintain a well-diversified portfolio. If you should decide to seek help, be sure to select a professional investment advisor who agrees with the basic principles of diversification and long-term investing that I have espoused in these chapters. It is within the grasp of all investors to avoid the pitfalls of investing and reap the generous rewards that are only available in equities. 

People often ask me what books to read to get a better understanding of the stock market, this is one I recommend. Jeremy goes all the back to the 1800s and on up to the early 2000’s with his historical data. He does a great job of distilling it all down to basic principles like the ones in the paragraphs above.

#AquilaWealthNewsletter -- Home Ownership vs. The Stock Market and An Under Appreciated Way to Save Money - Your Car(s)

In this week's personal financial newsletter installment, I have a couple articles to highlight from my reading -- Home Ownership vs. The Stock Market and An Under Appreciated Way to Save Big Money -- Your Car(s) 


Home Ownership vs. The Stock Market

https://awealthofcommonsense.com/2019/03/real-estate-vs-the-stock-market/

The age old question, "what's a better investment, owning a home or owning stocks?" is addressed in this article. The article writer, Ben Carlson, is more-so writing a response to a research paper put out by the San Francisco Federal Reserve Bank in March entitled The Risk Premium Puzzle. Like many a research paper that attempt to take on a massive data-set in order to draw out a couple of conclusions, there are some glaring issues with this research paper. Namely, the paper shows real returns of the world wide housing market as pretty much keeping pace with stock market returns going back all the way to 1870. Which could then lead people here in the U.S. to believe that owning a home is as good of an investment as owning stocks, aside from the fact that any world wide housing data going all the way back to 1870 would be fraught with all sorts of questionable data gathering methods. Taking world wide data on housing, and using as a basis for owning a home in a very specific part of the world is obviously flawed. Carlson points a couple other very important items to consider when owning a home which this paper didn't consider, "the leverage involved, the cost of borrowing, the length of time in the home, the imputed rent, the psychic income from home ownership and the fact that you have to live somewhere."

Here are a couple opinions from the article I agree with:
"... comparing your home as an investment to the stock market makes little sense."

"Risk can be exponentially higher in housing for the simple fact that it’s also the roof over your head."

"I’m not saying people shouldn’t invest in real estate ... But before you head down that path, no matter what the historical return numbers show, first understand the risks involved in trying to make the roof over your head the biggest part of your nest egg."

 


An Under Appreciated Way to Save Big Money - Your Car(s) 

https://garrettplanningnetwork.com/articles/an-underappreciated-way-to-save-big-money-117

I like this article because it gives some outside-the-box ideas and resources when it come to saving money and counting the cost of car ownership.

First consider the actual cost of your car, including: 

  • Insurance

  • Gas

  • Maintenance

  • Registration fees

  • Taxes

  • Depreciation


Nerdwallet has a helpful tool for finding out the real cost of your car per month: https://www.nerdwallet.com/blog/loans/total-cost-owning-car/

The 3 main points listed in the save money category, from most to least obvious & convenient, include:
1. Buy Used
2. Go Down to One Car
3. Negotiate via Email for your next car

On the negotiating via email front, here's a link to an email template: https://www.moneyunder30.com/get-the-best-deal-on-a-new-car

The Most Profitable Companies in the World #SaudiAramco #AAPL

*Graphic shows 2018 net income of publicly listed companies (in billion U.S. dollars)

Apple has long been known as the world’s most profitable company, but those days are over. By preparing to be publicly listed, Saudi state oil company Saudi Aramco had to disclose company reports and was subsequently rated by Moody’s to have earned US$111.1 billion in 2018, far surpassing competitors. https://www.economist.com/business/2019/04/06/saudi-aramco-made-a-111bn-profit-in-2018

In fact, the Saudi company’s net profit equaled that of Apple, Google parent company Alphabet and Exxon Mobil combined, according to Bloomberg. Previously, Saudi Aramco’s accounts had remained mostly secret since the company was nationalized in the 1970s. 

Since profits are known only for publicly listed companies or those planning to become listed on a stock exchange, the earnings of a large number of companies around the world, especially state companies, remain unknown and are not included on the list. Saudi Aramco’s IPO was originally scheduled to take place in the previous year but has been rescheduled for 2021.

One of the Most Misunderstood Benefits of the #RothIRA

One of the most misunderstood benefits of the Roth IRA, in short, is FLEXIBILITY.

What do I mean by flexibility. Well, in particular, most people either don’t know or are misinformed about when you can take money out of their Roth IRA free of penalties or taxes. Namely, you can take out the contributions you put into your Roth IRA at any time for any reason without penalties or taxes owed.

For example, if you contribute the maximum amount possible into the Roth IRA in 2019, $6,000, you can take that same amount out the next day or the next year, whenever you like, at any age, for any reason, without being penalized or taxed. 

This is from IRS Publication 590-B:

Are Distributions Taxable? You don't include in your gross income qualified distributions or distributions that are a return of your regular contributions from your Roth IRA(s). https://www.irs.gov/publications/p590b#en_US_2018_publink1000231057

Now, the main purposed and benefit of contributing money into the Roth IRA is to leave the funds in there to invest and grow for years to come, but it’s important to know your options. My hope is that by knowing all the benefits of the Roth IRA, you’ll become more inclined and feel less barriers to fully funding your Roth IRA every year. My theory is that if you can get yourself to make it a habit of fully funding your Roth IRA each year, then you’re more likely to keep the funds in there for when you need it most — when work is no longer a desired option or a possibility. 

Highlights: Warren Buffett’s 2018 Letter to Shareholders

Chairman and CEO of Berkshire Hathaway, Warren Buffet, released his annual letter to shareholders on February 23rd, 2019.

While the entire 15-page letter is great reading for all investors, here are a few snippets to incorporate into how you think about investing (and maybe even your life). Here’s the link to the full letter: http://www.berkshirehathaway.com/letters/2018ltr.pdf

Not a Fan of All Generally Accepted Accounting Principles

“Our advice? Focus on operating earnings, paying little attention to gains or losses of any variety. My saying that in no way diminishes the importance of our investments to Berkshire. Over time, Charlie and I expect them to deliver substantial gains, albeit with highly irregular timing.”

Stock Price is a Better Measure of Success

For nearly 30 years, Buffet would open his letter featuring the percentage change in Berkshire’s per-share book value. He wants to stop doing that now because he believes that Berkshire’s stock price will provide the best measure of business performance.

On Share Repurchases

“We very much like that: If Charlie and I think an investee’s stock is underpriced, we rejoice when management employs some of its earnings to increase Berkshire’s ownership percentage.”

Focus on the Forest – Forget the Trees

Buffett knows that Berkshire followers often focus on the many businesses they own – at last count there were 66 operating companies and another 47 investments in other companies – and he calls these companies “trees.”

But then he groups Berkshire’s trees into 5 different groves “of major importance, each of which can be appraised, with reasonable accuracy, in its entirety.”

With respect to each of his trees, he suggests that each is vastly different “ranging from twigs to redwoods.”

Buffet further suggests that a “few of our trees are diseased and unlikely to be around a decade from now.”

Then he adds that “many others, though, are destined to grow in size and beauty.”

Words to Live (Invest) By

Here are some of Buffett’s most thought-provoking quotes, taken directly from his shareholder letter – the words in bold are not Buffett’s but rather just category titles.

True Value Investor. “Abraham Lincoln once posed the question: ‘If you call a dog’s tail a leg, how many legs does it have?’ and then answered his own query: ‘Four, because calling a tail a leg doesn’t make it one.’ Abe would have felt lonely on Wall Street.

I will never risk getting caught short of cash.

My expectation of more stock purchases is not a market call. Charlie and I have no idea as to how stocks will behave next week or next year. Predictions of that sort have never been a part of our activities. Our thinking, rather, is focused on calculating whether a portion of an attractive business is worth more than its market price.

It would be foolish for us to sell any of our wonderful companies even if no tax would be payable on its sale. Truly good businesses are exceptionally hard to find. Selling any you are lucky enough to own makes no sense at all.

At Berkshire, the whole is greater – considerably greater – than the sum of the parts.”

Shareholders First. “For 54 years our managerial decisions at Berkshire have been made from the viewpoint of the shareholders who are staying, not those who are leaving. Consequently, Charlie and I have never focused on current-quarter results.

At Berkshire, our audience is neither analysts nor commentators: Charlie and I are working for our shareholder-partners. The numbers that flow up to us will be the ones we send on to you.”

The American Tailwind. “Remember, earlier in this letter, how I described retained earnings as having been the key to Berkshire’s prosperity? So it has been with America. In the nation’s accounting, the comparable item is labeled ‘savings.’ And save we have. If our forefathers had instead consumed all they produced, there would have been no investment, no productivity gains and no leap in living standards.

Charlie and I happily acknowledge that much of Berkshire’s success has simply been a product of what I think should be called The American Tailwind. It is beyond arrogance for American businesses or individuals to boast that they have ‘done it alone.’ The tidy rows of simple white crosses at Normandy should shame those who make such claims.

There are also many other countries around the world that have bright futures. About that, we should rejoice: Americans will be both more prosperous and safer if all nations thrive. At Berkshire, we hope to invest significant sums across borders.

Over the next 77 years, however, the major source of our gains will almost certainly be provided by The American Tailwind. We are lucky – gloriously lucky – to have that force at our back.”

Love What You Do. “We continue, nevertheless, to hope for an elephant-sized acquisition. Even at our ages of 88 and 95 – I’m the young one – that prospect is what causes my heart and Charlie’s to beat faster. (Just writing about the possibility of a huge purchase has caused my pulse rate to soar.)

On March 11th, it will be 77 years since I first invested in an American business. The year was 1942, I was 11, and I went all in, investing $114.75 I had begun accumulating at age six. What I bought was three shares of Cities Service preferred stock. I had become a capitalist, and it felt good.

For 54 years, Charlie and I have loved our jobs. Daily, we do what we find interesting, working with people we like and trust.”

Tax Planning for Retirement – Roth Benefits

After years of saving and planning for their golden years, many people nearing retirement fail to consider the tax burden they may face on income they receive after they stop working. While you may see a reduction in the amount of taxes you owe after the age of 65, you still need to plan ahead if you want to minimize your tax bill from the IRS.  

Social Security Benefits

Depending upon your total income and marital status, a portion of your Social Security benefits may be taxable. For a rough estimate of your potential tax liability, add half of your Social Security benefits to your projected income from all other sources. This figure is your adjusted gross income (AGI), plus any tax-free interest income from municipal bonds or foreign-earned income. Up to half of Social Security benefits are taxable if this sum, which is called your provisional income, exceeds $25,000 for singles or $32,000 for married couples filing jointly. However, up to 85% of Social Security benefits are taxable if your provisional income is above $34,000 for single filers or $44,000 for married couples filing jointly.

Use the Social Security Benefits Worksheet in the instructions for IRS Form 1040 to calculate the exact amount of taxes owed. Rather than writing a large check once a year, you can arrange to have taxes withheld from your Social Security benefits checks by completing Form W-4V and filing it with the Social Security Administration.

Other Income Sources

In addition to collecting Social Security benefits, most retirees receive their income from a variety of sources, including distributions from 401(k) accounts and individual retirement accounts (IRAs); payouts from company pensions and annuities; and earnings from investments.

Contributions and earnings growth are tax deferred on 401(k)s and traditional IRAs; however, distributions from these accounts are fully taxable, but have no penalties if withdrawals are made after age 59½. If you have savings in 401(k) accounts or traditional IRAs, you must begin making withdrawals from these accounts—and paying taxes on the distributions—by April 1 of the year following the year in which you reach age 70½. If you are at least 59½ years old and have owned a Roth IRA or Roth 401(k) for at least five years, withdrawals are completely tax free. There are no minimum distribution requirements for Roth accounts.

Strategies to Minimize Taxes

Most retirees with nest eggs or pension income of any size will pay at least some taxes on their retirement income, but there are strategies to reduce the amount owed. While it usually makes sense to delay taking taxable distributions from retirement accounts until the funds are needed, or until distributions are required, you may want to withdraw more funds in tax years when claiming a large number of deductions temporarily lowers your tax rate. You may, for example, choose to take advantage of itemized deductions, such as the breaks for medical expenses or charitable gifts, in certain years, while taking the standard deduction in other years.

A desire to leave a portion of your assets to your family may also influence how you handle withdrawals from tax-deferred accounts. Keep in mind that, if you leave behind funds in a traditional IRA, the rules for inheritance can be complex. To avoid these issues and make it easier to pass on your estate to family members, consider converting traditional IRAs to Roth IRAs. While you will have to pay taxes on the funds converted, moving to a Roth IRA eliminates future tax liabilities, regardless of whether you use the funds in retirement or pass the money on to your heirs.

Time IN the Market > TimING the Market

The belief that you, or a particularly talented financial manager, can foresee the direction of the stock market is a seductive one. Some investors are confident that, with proper research, they can make money by snapping up equities when prices are low, and shifting their investments into cash or bonds when the market hits its peak. Even worse, they believe they can pay someone else can do it for them. But longitudinal studies have shown time and time again that no one can consistently predict the direction of the market in the short run.

However, many armchair investors persist in the belief that, by carefully following business news and trusting their “gut” instincts, they will be able to beat the market. Some study the stock tips in personal finance magazines, others hope to glean additional insight from analysts’ reports and specialized investment newsletters, and still others attempt to mine all the available data, crafting complex simulations of how the market is likely to behave in the future.

But if financial professionals struggle to keep ahead of trends, private investors are even less likely to outfox the indexes. As soon as a piece of business or economic news hits the airwaves and the Internet, analysts and brokers react immediately to the information. Because these financial professionals act so rapidly, the stock market almost always reflects all the known information at any given moment in time. And even if an individual investor were able to develop an analytic model with some real predictive value, unexpected events—such as a terrorist attack or a natural disaster, or even a political scandal—could lead to sudden and dramatic market fluctuations that no model based on historical data could have anticipated.

It is only natural that investors would want to find some way to sit out bear markets and get back just in time for the next bull run. It is useful to keep in mind, however, that even the slowest equity markets have some bright spots. A diversified portfolio will help you protect against loss and capture whatever gains might occur in a market downturn.

Investors run a big risk by selling when they believe stocks have reached their peak. They may turn a profit when cashing in their equity holdings, but they could also miss out on some of the market’s best cycles. Being absent from the market for only a few of the days or weeks with the highest percentage gains can decimate a portfolio’s returns over time. Market timers who sell frequently also lose money to transaction costs and taxes, and miss out to a large extent on the compounding effect that benefits investors who remain in the market consistently. Instead of trying to time the market, investing in a properly allocated diversified portfolio driven by a goals-based financial plan is a much better strategy.

Trying to pinpoint the right time to invest in the stock market is an exercise in futility. If you have a longer period to save, owning equities provides the most effective hedge against inflation and taxation available. Since it is impossible to know where the market might go from here, it makes sense to start investing now and continue investing on a regular basis, regardless of market conditions. Remember: long-term investment success is achieved not by timing the market, but by time in the market.

Why Should You Diversify?

As 2019 approaches, and with US stocks outperforming non-US stocks in recent years, some investors have again turned their attention towards the role that global diversification plays in their portfolios. For the five-year period ending October 31, 2018, the S&P 500 Index had an annualized return of 11.34% while the MSCI World ex USA Index returned 1.86%, and the MSCI Emerging Markets Index returned 0.78%. As US stocks have outperformed international and emerging markets stocks over the last several years, some investors might be reconsidering the benefits of investing outside the US.

While there are many reasons why a US-based investor may prefer a degree of home bias in their equity allocation, using return differences over a relatively short period as the sole input into this decision may result in missing opportunities that the global markets offer. While international and emerging markets stocks have delivered disappointing returns relative to the US over the last few years, it is important to remember that:

1.  Non-US stocks help provide valuable diversification benefits.

2.  Recent performance is not a reliable indicator of future returns.

Over long periods, investors may benefit from consistent exposure to both US and non‑US equities.

THE LOST DECADE

We can examine the potential opportunity cost associated with failing to diversify globally by reflecting on the period in global markets from 2000–2009. During this period, often called the “lost decade” by US investors, the S&P 500 Index recorded its worst ever 10-year performance with a total cumulative return of –9.1%. However, looking beyond US large cap equities, conditions were more favorable for global equity investors as most equity asset classes outside the US generated positive returns over the course of the decade. (See Exhibit 2.) Expanding beyond this period and looking at performance for each of the 11 decades starting in 1900 and ending in 2010, the US market outperformed the world market in five decades and underperformed in the other six.[2] This further reinforces why an investor pursuing the equity premium should consider a global allocation. By holding a globally diversified portfolio, investors are positioned to capture returns wherever they occur.

[2]. Source: Annual country index return data from the Dimson-Marsh-Staunton (DMS) Global Returns Data, provided by Morningstar, Inc.

PICK A COUNTRY?

Are there systematic ways to identify which countries will outperform others in advance? Exhibit 3 illustrates the randomness in country equity market rankings (from highest to lowest) for 22 different developed market countries over the past 20 years. This graphic conveys how difficult it would be to execute a strategy that relies on picking the best country and the resulting importance of diversification.

In addition, concentrating a portfolio in any one country can expose investors to large variations in returns. The difference between the best- and worst‑performing countries can be significant. For example, since 1998, the average return of the best‑performing developed market country was approximately 44%, while the average return of the worst-performing country was approximately –16%. Diversification means an investor’s portfolio is unlikely to be the best or worst performing relative to any individual country, but diversification also provides a means to achieve a more consistent outcome and more importantly helps reduce and manage catastrophic losses that can be associated with investing in just a small number of stocks or a single country.

A DIVERSIFIED APPROACH

Over long periods of time, investors may benefit from consistent exposure in their portfolios to both US and non‑US equities. While both asset classes offer the potential to earn positive expected returns in the long run, they may perform quite differently over short periods. While the performance of different countries and asset classes will vary over time, there is no reliable evidence that this performance can be predicted in advance. An approach to equity investing that uses the global opportunity set available to investors can provide diversification benefits as well as potentially higher expected returns

Video: A Look at Recent Market Volatility

What should you make of recent ups and downs in the stock market? Here’s helpful context on volatility and expected returns.

While market volatility can be nerve-racking for investors, reacting emotionally and changing long-term investment strategies in response to short-term declines could prove more harmful than helpful. By adhering to a well-thoughtout investment plan, ideally agreed upon in advance of periods of volatility, investors may be better able to remain calm during periods of short-term uncertainty.