Why Wait?

I was asked the other day, “what is the best advice you’d give someone with regards to investing?”  My first thought was to say something that sounded intelligent and would make a good impression.  After a second, I thought better of that and answered simply, “Start.”  They were taken aback and replied, “Start?  That’s it, just start?”

Yes:  start.

Let’s consider two scenarios:

Client 1 is 25 years old, just beginning his career.  Over the next ten years, he invests $5,000 each year.  If we assume an annual return of 7.5% (not unreasonable in a growth-based mutual fund), by age 35, Client 1 has $70,735 in his account.  At this point, he stops saving, but leaves his account alone to let it grow to age 65.

Client 2 is 45 years old and decides that if he wants to retire anytime soon, it’s time to start saving.  Over the next 20 years, he saves $10,000 each year.  Assuming the same 7.5% annual return, at age 65 his account value grows to $433,046.  Not bad!

Now, let us compare.

		Client 1	Client 2
Age started saving		25	45
Amount saved per year		$5,000	$10,000
Saving period		10 years	20 years
Total investment		$50,000	$200,000
Growth Rate		7.5%	7.5%
Account Value at age 65		$619,281	$433,046

Client 2 saved four times as much as Client 1, and for twice as long.  You’d think Client 2 would be the winner in this scenario, but the numbers don’t lie.

When is the time to start?

Chuck Wade

(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).

Playing the Powerball Odds?

Driving to work this morning, the fine folks on 1180 WHAM were sharing their thoughts on what they would do with the estimated jackpot of $500 million should their numbers be called.  It got me thinking.  Did you know that that you have a better chance of picking a perfect NCAA tournament bracket or becoming President than winning the jackpot?   Let’s say you do win.  After the cash payout and taxes, your sum has been more than cut in half, but with some $200,000,000 in your pocket, you’re still a happy camper, even though studies have shown that you may not be as happy as you think.

Enough fun, here’s my point:  Instead of taking a shot at something that is less than likely to happen, why not replace that hope with tax-free income when you’re ready to retire?  Here’s how:

Funding a Roth IRA allows you that benefit, and you don’t need to win Powerball to start one.  Many mutual funds will allow you to start a Roth for as little as $50 each month.  That’s $600 over the course of a year.  Not a huge amount by any means, but consider:  if you started today with $50 each month, and continued for each month over the next 30 years, you will have invested $18,000 over that period.  If you earn 5% over that time, 30 years from now your investment will have grown to $41,856 – a return on your original investment of 132%.  And if you should need access to your cash in the meantime, your contributions come back to you tax-free, as do your earnings, if you wait until you’re 59½.

Something to think about if you find yourself with a little extra time while waiting to pick up a Powerball ticket.

Chuck Wade

(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 # 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).

Ground Rule #8: Better Than a Crystal Ball

I don’t have a crystal ball.  And if I did I’m not sure I would know how to use it.  It seems like having a crystal ball would come in handy to figure out what investments to choose in your 401(k) or 403(b).  You look at a list of funds or go online and see a bunch of choices, maybe read about a few, look at the numbers, make your choice.  Some folks ask for advice in choosing and we are always happy to consult. I frequently meet with clients seeking my advice and find that their account balance is invested like this: 5% This Fund, 20% That Fund, 15% Other Fund, 40% Big Fund, 20% Obscure Fund.  Many investment gurus will use their crystal ball to tell you what percent to put in any given fund.  Unless no one really has a crystal ball. How then do the gurus come up with their percentages?  Beats me.  Since there is no way to know which fund will do best, why fuss over 11% here and 23% there? 

Think about this: when you get your statement what’s the main thing you want to know? It’s this: How am I doing? That’s what everyone wants to know.  When your assets are split into many odd pieces, how can you figure it out? And do you really want to spend the time trying?  My advice: keep it simple. When investing in your retirement plan choose just 4 funds and put 25% in each.  Then whenever you get a statement you will know how you’re doing. You’ll know which of your funds is the best, which is the worst, and by how much. Decision making will be much easier – no calculator needed, no guessing whether you should have 17% in this or 42% in that. You can rebalance once a year, getting the 25% each back in line.  Meanwhile, if you can get a crystal ball, go ahead and use it.  But for my money, a fixed percentage is better than a crystal ball.

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).

U.S. Treasury and The Fed

I recently read an article that pointed out that in 2011 the Federal Reserve purchased 61% of U.S. Treasury bond issuance.  In the markets there is a lot of speculation about another round of quantitative easing (which is sometimes called QE3).  Such speculation has kept the equity markets afloat, rising and retreating on QE3’s prospects.  However, with such massive purchases it seems that the Fed never actually backed off their last quantitative easing scheme.  Meanwhile, non-Fed buyers of our bonds (foreign purchasers, banks, mutual funds, etc.) are buying at much lower levels than at any point since the “Great Recession”.  And that’s not because borrowing is down.

I wonder if the Fed is creating a bubble in government debt.  Or, assuming the bubble has been created, if the Fed may be trapped into buying all these bonds.  An affirmative answer to either one of those questions could make the 2008 crisis look like child’s play.

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).

Apple As An Income Stock

Yesterday, Apple held its annual shareholder meeting. One of the hot topics discussed in this meeting was Apple’s massive, almost $100 billion, cash reserve. Chief Executive Officer Tim Cook reiterated that the tech giant is still exploring its options for putting this cash to work and that paying a regular dividend is not out of the question.

Apple hasn’t paid a dividend since 1995 when Steve Jobs returned to the company and transformed it into one of the largest companies in the world. Jobs was adamant about retaining profits rather than returning them to shareholders in the form of a cash dividend. Cook, however, is not opposed to the idea, though no decision has been made as of yet.

The implications of an Apple dividend are substantial. The change would attract private investors who typically accumulate shares in dividend paying companies. An even larger implication is the effect it would have on mutual fund managers. Most mutual fund managers operate under a stringent investment policy. While they may find Apple to be an attractive investment, they may not be allowed to hold it within their fund if, for instance, the fund’s goal is to invest in income generating stocks. The inclusion of a dividend could cause a very large amount of accumulation as certain fund managers might finally be able to put Apple on their allowable list.    

Sam DiNorma

 (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).