Ground Rule #1: Give Yourself a Raise

Sure everyone would if they could, but an increase in salary is not what I’m talking about here.  What I’m suggesting is the most important thing you can do to build your retirement savings: give your retirement contributions a raise.  Once you get in a 401(k) or 403(b) and establish your contribution, you can go about the rest of your life and not have to think too much about your plan.  Some people think about increasing their contribution, but years can go by before you get to it.  After all, there’s more to life than spending every waking moment thinking about your investments (except for me).

So the raise idea is this: set a date every year to increase your percentage.  It could be your birthday, your anniversary with your employer, maybe Arbor Day.  On that day every year, bump up your contribution by 1%.  If you started with, say, 2%, then in 4 years you will have tripled your rate of savings.  You won’t miss the extra few bucks each year, and your account balance will grow much faster.  It may be the only case where you can give yourself a raise. If you are serious about growing your net worth, don’t ignore this rule.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Ground Rule #2: Percents, Not Dollars!

We have covered the first question for plan participants: How much?  How much should you contribute, how much will keep you comfortable in retirement, how much can you afford today?   If you decide what you can afford and that’s your contribution, it’s a perfectly reasonable approach (but don’t forget this rule when deciding).  But once you have decided that a contribution of $5 or $50 or $500 per paycheck is the right amount, you have an important step to take.

Convert that dollar amount to a percentage.  If your gross pay in an average period is, say, $1000, then a contribution of $50 should be noted as 5%.  There is on the surface no difference, but what about when you get a raise or bonus? What if you work overtime? Your pay rises but your contribution does not, unless you use a percentage. The flip side is also true: if you earn less in a period, a percentage-based contribution will be smaller, so your net pay will not be reduced out of proportion.  But there is also a life issue that might not seem obvious.  You have a life to live, a job, family obligations; stuff to do.  Let’s face it: once you get your 401(k) or 403(b) set up, making changes will just not land very high up on your “to do” list.  Sometimes years can slip by before you get around to a review (that can be good).  But if your income grows and your contribution does not, you’ll fall behind in seeing your account grow to where you need it to be.  So set up your contribution as a percentage and you can get back to enjoying life.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Ground Rule #3: Money in Your Pocket

The first thing you do when signing up for your employer’s 401(k) or 403(b)  is decide how much to put in out of every paycheck.  You don’t need my advice for that, of course; it’s a function of how much you can afford.  But once you decide on the amount, on how much you’re willing to save toward your future, that’s where this bit of advice comes in.

You already know there is a tax savings from contributing to your plan. Here’s how that works: every dollar you contribute is subtracted from your pay before Federal & State withholding taxes are calculated.  Since your contribution escapes income tax, the amount of tax withheld from your pay is less, thus your net pay rises a bit. Put another way, for every dollar you put in your plan, your take-home pay will only drop by 75 or 80 cents.   It really means that you’re putting money in your plan that otherwise would have gone to taxes, but it also means that you need to do a little simple math to grow your savings faster than the average person. 

To keep the math at its simplest do this: settle on how much you can afford to contribute and divide it by .8 to arrive at a slightly larger amount, which is what you should contribute.  If you decide that $25 is what you can afford, dividing that by .8 gives you $31.25.  The effect is to allow you to contribute the $31.25 but see your net pay reduced by only about $25.  The extra six bucks is what would otherwise go for taxes – you are legally keeping the Fed & State share and investing it!  That’s money in your pocket.

The numbers in this example are approximate, always consult your advisor or sharpen your pencil to get a result specific to your circumstances.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Facebook (the company) vs. Facebook (the stock)

So much has been written about the recent Facebook stock offering that I am reluctant to add to the stack (though I did, once), so I’ll keep it short.  After going public at $38/share last Friday and climbing briefly to $45, the stock has reversed, closing Tuesday at $31.11, for a loss of 18% from the offering price.  Most investors on that first day of trading paid more than $38, and over 500 million shares changed hands.

In the weeks before the IPO we (along with most other investment firms) received many calls from clients or would-be clients interested in the killing to be made by investing in Facebook.  And why not? Facebook has nearly a billion  users worldwide (I am one) and has become useful for keeping in touch and generating ad revenues for its parent company.  Something used by 15% of the world’s population is a huge deal – so why hasn’t it been a good investment?

First, it’s only been a few days, and Facebook may ultimately prove to be a fine investment. But inside baseball is a game seldom won by the public, and for the last four years, institutions and hedge funds have been buying Facebook stock at much lower prices than the public paid last week. Shocked? You didn’t really think that Wall Street  - with its big bailed-out brokerages and banks – would really give the little guy a break, did you?  The media didn’t help much, with plenty of ballyhoo (see paragraph 12 for the $50 prediction).

So far, the IPO has been a fiasco for investors. That’s because more than just a share of stock, Facebook buyers bought something else – something we try to caution investors against buying: hype.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Ground Rule #4: Cash is Trash

In most 401(k) and 403(b) plans, money market and short-term bond funds are among the most popular investment choices.  That is especially true recently, when fear and panic among investors sent many scrambling for something more stable than the stock market. With the smoke cleared from last year’s financial crisis, retirement plan investors are noticing something they always knew but had not cared about last year: you will make nothing (or close to nothing) on money market and short-term bond funds.

Are those funds really safer? That depends on how you measure safety.  If having too little money to live on in retirement would make you feel uneasy, then you should be uneasy about having a money market fund in your retirement plan.  With rates close to zero, you’ll never see your account grow to the point where it will give you a comfortable retirement. 

There is a cost to everything in life; you get what you pay for.  With a money market fund, what are your getting?  You’re getting stability and liquidity – you can pull your money out whenever you wish.  And what does it cost? You get little or no return – and that cumulative “cost” over time can be enormous.  Unless you’re on the edge of retirement, you’re not going to be drawing money out of your 401(k), so accepting the cost of a low return means you’re paying for something – liquidity – that you are not getting.

Keep your eyes on the prize: a healthy account balance in retirement.  You’ll only get there if you have robust investment returns. And when it comes to returns over time, cash is trash. 

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp. The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Ground Rule #5: Stay Away

Back when I started contributing to a 401(k), first class postage cost 20 cents.  It was the year Apple introduced the Macintosh.  Ronald Reagan was re-elected, and the LA Raiders won Super Bowl XVIII.  Hair was big back then.  The internet did not exist, and you could check the value of your account 4 times a year when your statement arrived.  If you wondered how you were doing between statements, some, not many, plans offered telephone access to your accounts.

In those bygone days we didn’t make many changes. But by the turn of the 21^st century web access became common.  Also common is that many people check their accounts frequently – some folks multiple times daily.  I know that because I get reports from the plan recordkeepers with whom we do business and one of the metrics is frequency of web access. Some people seem to believe that by checking regularly they can monitor, adjust, and improve their performance. I have one suggestion about that:

Don’t.

Don’t look at your account so often, don’t make frequent changes to your fund mix, don’t drive yourself crazy.  Looking at your account every day is like driving while looking out your side window.  Don’t constantly lift the lid to check the soup. Select your ingredients carefully and let them simmer.  If you have a crystal ball then check your accounts all the time. If not – stay away.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

The Methadone Economy

A methadone clinic is a medical facility that heroin or other opiate addicts go to break the cycle of addiction.  I’ve never been to one but I’ve seen the Hollywood portrayal and it isn’t something to aspire to.  But if someone is to find themselves in such a situation the clinic is apparently a far safer way to break the deadly physical addiction. 

 “Why, pray tell Brennan, are you sharing this strange information with me?” – Astute Brighton Securities’ Blog reader.

 For pecuniary reasons my dear reader.  Abused debt is quite similar to a drug.  Debt to a spender is as drugs are to an addict, enabling something that could not otherwise be.  In that way it could be argued that our Congress has been addicted for generations.  But the sounds of the Pied Pipers’ bugle can be heard across the developed world.  Here too the size of our national debt and its growth trajectory cannot last forever.  If something cannot go on forever then it will not go on forever.  Either we proactively do something about it or, like Greece, eventually the bugle will turn to us and call our children’s prosperous future away.  We do have more time than some of our European brethren.  (Ironically, the Pied Piper is German folk lore and the Germans are probably the role model here.)

 The Faustian bargain of debt for consumption has not worked to create prosperous economic conditions.  Indeed it has begun to turn in on itself by sapping the confidence of businesses large and small who are justifiably nervous that this situation will end badly.  The importance of such confidence cannot be understated in a free market economy.  It is the glue that keeps the entire system together.  The national debt is effectively a giant storm cloud that keeps our ships at bay and our economic growth anemic.  Our debt alone will reach 100% of GDP this year, a situation where economic studies show begins to tax GDP growth rates to the tune of 1% per year.  And it is growing north of $1,000,000,000,000.00 annually. 

 There must be a plausible end to this debt spiral of death.  Like a methadone clinic offers an avenue to independence from opiates, we need to find a way to eliminate our dependence on debt. 

Brennan R. Redmond, CFA
Vice President
Brighton Securities

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities)

Ground Rule #6: Borrow Sensibly, If You Must

My version of the Rapunzel story has my very pregnant wife unable to bear the August heat and yearning for a little cool breeze. Fortunately our baby didn’t get locked up in a tower by a witch. I borrowed from my 401(k) and installed air conditioning. Everyone needs a little cash from time to time – a loan from your 401(k) or 403(b) can be a source.

A loan provision is a critical element in enticing young people to do something good for their own future: save.  The average newly minted college graduate has plenty of things to spend money on between picking up her diploma and retiring: buying a car or house, vacations, marriage, school loans.  It is easy to put off saving by thinking of your need for cash.  But if you must borrow, consider a few important things:

1. Borrowing results in a withdrawal of cash from your account. You are borrowing your own money, so it is liquidated from your plan balance and paid to you. You will not earn any return on that money until it is paid back, so if markets rise you will miss out. But if markets fall, you’ll look like a genius. You’ll never know what the market will do so don’t sweat it.
2. It may be your money, but you must pay yourself back. If you stop making payments for any reason (you lose your job, for example) then your loan is in default and while there’s no need to send yourself dunning notices, the IRS considers default a taxable event and you will pay income tax and a 10% penalty on the unpaid amount. Ouch.
3. You can borrow half of your account balance up to $50,000 maximum and must pay it back over no more than 5 years (longer if your loan is for a home purchase).  Make sure the monthly payments won’t sap your paycheck.
4. Be sensible: borrowing to pay off credit card can be wise, but don’t do it unless you have the discipline not to run those card balances back up.

A loan against your retirement savings is convenient and inexpensive, but think of it like any other debt – avoid if possible and be sensible if you must borrow.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

FACEBOOK

Well there certainly seems to be an awful lot of chatter about the pending IPO (initial public offering) of Facebook’s stock.  First and foremost please know that as of the writing of this post the IPO has not even occurred.  The IPO is scheduled for the week of May 14^th.

 Currently the offering price talk is $28- $35 per share.  It has been reported to be “over-subscribed” which simply means there are plenty of folks, institutions and individuals,  who would love to buy the stock at the offering price.  Trust me everyone who wants to buy it at the offering price will not get it.  I suspect that if you are one of the lucky folks to get it at the offering price you stand a better than average chance of turning a profit.  For everyone else here is my advice:

 Just wait and see how this company and its stock do after it starts trading for a few days or weeks.  Based on its current earnings estimates the offering price is about 99 times its earnings.  Which in financial jargon means it has a P/E ratio (price to earnings) of 99x.  Historically not cheap.  Apparently from the analysis that I have read Facebook’s profit growth is slowing not accelerating, not good for a company with a 99x multiple.  I am not bashing Facebook here, many companies have shown the ability to adapt their business model and Facebook may well be able to do just that. 

 My approach here is to remain cautiously optimistic and if the stock presents an agreeable entry point then perhaps an investment can be made, but it strikes me that at this offering price you are not getting a great bargain and if the stock does rise after the offering it’s even less of a bargain.  I just do not see the need to rush in and buy anything, ever, Facebook included.

Doug Hendee, CFP^®

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).

Ground Rule # 7: Do the Opposite

Working my way up we have touched on my rules #10, #9, and #8, all of which are very basic “starter” rules for getting involved with your 401(k) or 403(b) plan at work. Today’s rule assumes you are a plan participant and have been contributing for a while. At some point you start to think about what if any adjustments you should make to the investments in their plan. After all, you get your statement or go online, you see the performance of your funds and of all of the available choices and there is a temptation to move some money into the funds that have done best over the last quarter or year. We see funds flow into growth funds during strong bull markets and into cash in bear markets. It’ human nature – you see a fund with a great quarter or even better, a great year or two. Maybe one (or more) of the funds you’re in isn’t doing so well. So you switch.

Eight times out of ten you will have been better off not making that switch. The hot fund has turned cold (in some cases stone cold). So should you never make a change? My rule #8, Better Than a Crystal Ball, suggests using just 4 funds in your plan. Once you have the 4, simply manage them by rebalancing once a year. Bring all of the percentages back in line, swapping a little out of the fund or funds that have done the best and into the laggards so that you are back to 25% each. But wait – no one wants to put money into the laggard. Everyone wants to put more in the best performer. By doing as I suggest you will be going against the flow, being counterintuitive, contrarian. You don’t make money in the financial markets by following the herd. You make it by doing the opposite.

GTC

(This article contains the current opinions of the author but not necessarily those of Brighton Securities Corp.  The author’s opinions are subject to change without notice. This blog post is for informational purposes only. Forecasts, estimates, and certain information contained herein should not be considered as investment advice or a recommendation of any particular security, strategy or investment product. References to specific securities and their issuers are for illustrative purposes only and are not intended and should not be interpreted as recommendations to purchase or sell such securities).