What Will $2 Million Get You In Retirement? [View article]
Okay, so to simplify it a bit, we assume a 3.3% yield on the 2m portfolio, assume capital growth of 2.7% (that is, 6% minus the 3.3% yield) and we assume the yield will grow at 7.5% each year. We assume the couple consumes 70k a year (adjusted for inflation), and why not assume a 20% income tax rate (which is about average for high net worth individuals in the US). The couple needs pre-tax dollars equal to $84,000 in the first year, which means they will eat about $35,000 from social security, $50k from portfolio income - leaving about 17k in unspent income the first year that can be re-invested. That leaves portfolio growth, from reinvested income and capital appreciation, of 3.55% in the first year. Each subsequent year, the proportion of retained income will increase since the 70k expenses should grow at a rate of inflation (about 3% let's assume) while the dividend growth will be around 7%. I have not specifically addressed inflation in my analysis because we are beating it by 4% a year. If we throw inflation into the mix, we will be growing the portfolio at higher than the assumed rate of 3.55%. But I like to keep a margin of error built in, so let's just assume the portfolio only grows at 3.55%, barely outperforming inflation.
Even with a tax assumption of 20% figured in, the couple's net worth should equal around $5,700,000 when they die at 95 years of age. Adjusted for inflation, they have $2,400,000 left over when they die. There will be ups and downs in the market, to be sure, but they will never have to sell assets in order to fund living expenses.
I get it about lots of variables - life's complicated, way too complicated for any computer simulation. There are uncertainties and unknown unknowables. But my question is, if it is reasonably likely that the couple will not need to sell assets in order to fund living expenses, and the portfolio will generate more income than the couple needs to spend, why is your software saying there is only an 85% chance they will not outlive their money? Is it the chance of dividend cuts that your software is factoring in? Is it the chance of tax rates above 20%? Is it the chance of living expenses rising faster than the assumed 3% inflation rate? Is it something else? I don't understand how you can live off portfolio income alone, save a bit each year and never touch principal, and yet die broke.
Now that I've factored in taxes and inflation, what else am I missing?
What Will $2 Million Get You In Retirement? [View article]
Thanks for the article, Doug. Question: suppose for argument's sake this hypothetical couple just invested in the 6 stocks you mention in the article, weighing the portfolio equally between each of the 6 companies. The yield on this portfolio would be, roughly, 3.3333%, or nearly $67,000 a year. Combined with their $35,000 social security, couldn't they consume $101,000 (before taxes) each year without ever running out of money? I'm assuming that with the dividends, the couple could live entirely off their portfolio income and never touch their principal - leaving it to grow, uninterrupted, by the 6% figure you assumed as the average annual appreciation rate for stocks. In fact, assuming dividend growth on the portfolio going forward is roughly equal to the average dividend growth for the past five years, the couple would enjoy a 7.17% raise each year - significantly ahead of inflation. And if the couple kept their recurring costs at $70,000 (adjusted each year for inflation) and put the extra income savings into other yield producing assets, they could grow their principal by an additional 1.5% a year on top of the organic 6% growth rate assumed in your model. Instead of talking about running out of money by the time they are 95 years old, the biggest problem this couple will have is paying an estate planner to help them dispose of their $17,500,000 estate (which I compute is the future value of $2,000,000 compounding at 7.5% over 30 years).
What am I missing? I'm coming out with a very different number than your monte carlo simulation seems to suggest. True, nobody in their right mind will invest their entire net worth into just six stocks, but you can throw in plenty of of other assets with good yield growth histories (ETFs like DVY and SDY, some MLP funds, REITs, etc. - putting together a 3.3% yield is not difficult with assets such as those). Is the premise of your thinking that the couple will sell assets periodically to fund their expenses? Doesn't that go out the window if the couple is living entirely off portfolio income?
5 Reasons Why I Am Shorting The Market [View article]
I didn't take Leopardtrader's comment to be "gloating" either. In terms of Jamodit's comment "what exactly do they trade on" - the author lists plenty of good reasons for his trade, but if I were going to follow the author's conclusion, I wouldn't short the market, I'd sell out of my long positions and sit back for a while to see whether my theory panned out. To my mind, this article, and the subsequent market action following the publication of it, demonstrates why shorting a broad index is wildly dangerous - and gets more dangerous the higher your level of conviction behind the trade is.
American Capital Agency: Not A Terrible Q1, But The Dividend Is Still Not Sustainable [View article]
There's no such thing as a sustainable source of cash flow that yields 16% - any more so than geese who lay golden eggs. The fact that AGNC sports a 16% yield today strongly suggests that the market must be pricing in a substantial dividend cut. Seems to me the best support for the author's analysis is the market itself. That said, it's a well managed company, and if they cut the dividend down to a point where the stock offered a yield of, say, 10%, it would still be a very healthy return to compensate shareholders for the high risk of owning assets like AGNC stock.
5 Reasons Why I Am Shorting The Market [View article]
Three weeks later, and we see why shorting the market at a time when central banks are flooding the marketplace with liquidity is pretty much the smartest way to loose all your money. A dumb way to keep your money, and maybe even grow it a little, is to avoid arguing with the market.
Tortoise advisors has a number - TYY and TYG are two I own. These are now wildly overpriced and I wouldn't touch them until they either boost dividends dramatically or come down in price hard. CTR is one I'm looking at. FMO is one I own - they have a good yield and an excellent track record for raising distributions. KED and KYN are great. Good yields, good track for hiking distributions. Problem with these guys is that the way they grow distributions so quickly is by raising new capital every so often with new share issuances, diluting existing shareholders and sending the share prices down 5% in a day. With all the CEFs I follow, they use leverage, which means bankruptcy risk for the fund is very much on the table. They are thinly traded, and the price volatility is not for those who play with a weak hand. All that said, they're good reliable cash generating machines, and a good source for dividend growth focused investors to consider. I am not an investment advisor, though, so you shouldn't rely on anything I say. Talk to a pro about these funds, and others besides. Good luck, and happy investing.
Yeah, the expense ratios are a real bummer with the MLP CEFs. The difference, though, is that AMLP is passive, and many of the CEFs are relatively active. My feeling, though, is that if the CEFs are performing well, I'm okay with paying for the performance. Any MLP CEF that doesn't keep pace with AMLP, though, should get dumped as a matter of principal.
This is another good reason to consider owning MLP interests through a closed end fund. When you sell the fund, it's straight up capital gains equal to your cost basis (reduced by any return of capital distributions). Section 751 does not apply to a shareholder in an MLP fund so long as the fund is a C corporation, and has not elected to be treated as a pass-through investment company. In fact, as long as the fund never sells MLP interest it holds, the recapture rules of 751 could theoretically be postponed indefinitely. There are drawbacks to owning MLPs through a closed end fund - but avoiding 751 at the shareholder level is a very solid tax benefit.
James Altucher: Why The Stock Market Is A Sucker's Game Right Now (And What Stocks I Own) [View article]
Nice to see the author back in the writing game again. My question, though, is whether it makes sense to look at stock prices as a function of supply and demand. Now, hold on, before you spit out your coffee and laugh your head off, just read on for a moment. Imagine a situation now where everyone who wants stocks owns all the stocks they care to own. Demand is zero. And every company that wants to issue stock has already done so - no new supply at all. And nobody wants to sell a single stock either, so the supply of available shares for sale is now zero. It is, in fact, the quietest day in Wall Street history, all the traders sitting around playing cards and listening to crickets. All of a sudden, a guy shows up and he wants to buy one share of, let's say, DIA. Just one share. But he is panicking with greed, he is desperate to pay any price at all, he's just got to own that share. He starts to bid, but nobody on the trading floor is going to be bothered to even look up from their card game. The buyer raises his offer, and keeps raising it, until eventually, one trader thinks, oh well, what the heck, I'll sell him one lousy share of DIA for 10% higher than it was last trading at. What happens then to the market cap of the entire stock market? Does it go up by $14? No, the market cap of the entire Dow Jones Industrial Average jumps up by 10% - rising by around what, maybe a trillion or so. Why? Because market prices are based on whatever the last trade was. And what was that 10% explosion in the stock market caused by? The number of shares relative to the number of buyers? No, it was based on the last buyer's relatively higher level of greed compared to the greed of the last seller. Maybe fewer people going forward will want stocks. Maybe most people are feeling lousy and depressed, and not really excited enough to bid up stock prices. That tells me trading volume could dry up, but says nothing about where the stock market's price level will go. As long as there's at least one maniac bull out there and at least one trader looking to make money, prices can go higher.
That said, I like the notion that trading the market is a sucker's game. I much rather own some companies in good lines of business that pay healthy dividends and have a habit of raising their dividends each year. I don't have to focus much on what the Dow Jones is doing, as long as the portfolio income is increasing by 7% or so each year. It's a super dull way to invest, but it's a pretty reliable way to keep food on the table (certainly more so than trying to generate capital gains by timing the market). Besides, companies like I've just described also tend to grow shareholder equity very well over time.
5 Reasons Why I Am Shorting The Market [View article]
It seems the author is taking on all central banks across the globe, all of which are actively minting currency in an effort to stoke asset value appreciation. The author is badly outgunned, and will end up paying for it if he's not careful.
It had to end this way - with hour long infommercials on how to put your 401(k) entirely into gold coins, with gold vending machines sprouting up at high end hotels, and gold tupper-wear style parties for housewives looking to earn fast, easy, vast sums of wealth.
When the price of gold started to fall, gold investors would scoff at anyone who suggested that the gold bubble was over. Gold bugs were well into the "conviction" stage of investment emotion about a year ago. Then came the denial phase, and as prices drifted 20% lower, the gold bugs would say things like "temporary price consolidation" or words to similar effect.
Now, with the price of gold falling 8% an hour, now comes the anger and panic phase. As prices drop harder and faster, expect long time gold bugs to come onto CNBC looking pale as a sheet and explaining how now is the time to put all the eggs into the gold basket, and how brave gold investors will make a heady sum by going all in right now. Gold investors are raging at the irrational decline of gold prices, blaming Goldman Sachs, blaming perhaps a government conspiracy, blaming anything and anyone.
Once gold prices are down another 30%, the tune will change, and you will hear despair and words of atonement from gold investors, and talk of gold as the new "safe" currency will finally die out. Unfortunately, the price decline will only continue from there, albeit at a slow rate. Ten years from now, after gold prices have been trending steadily lower and nobody cares about the stuff anymore, there might be some argument that gold prices have finally bottomed out. But by the time gold prices bottom, nobody will be paying any attention. At that point, it could make sense to buy a little gold as a diversifier, maybe, or if you just happen to like it for some reason.
I wonder what Wall Street will cook up for it's next big bubble? We've done stocks, housing, gold, cheap credit. Curious to think of what they can inflate now.
Japanese stocks (EWJ) explode higher as the Nikkei (NKY) rises +3.8%, buoyed once again by the BOJ's extraordinary policy announcement. Meanwhile, yields on 10- and 30-year Japanese government bonds plummeted, falling as low as 0.33% and 1.04% respectively. George Soros went on record saying that "what Japan is doing is quite dangerous."[View news story]
In the investment game, earning fake money beats losing real money every time. As long as that remains true, the BOJ can print as much paper as they like. The system is rotten and the game is rigged - the question is whether investors will keep deciding they make more money playing the game than they make fighting the game. Markets can stay irrational for decades at a time, so I'm going with the notion that the BOJ can play with a free hand. For now.
My First 3 Steps Toward Financial Freedom [View article]
The two main topics in this article are closely intertwined. I'm concerned that kids who aren't MIT material may face limited employment options many years from now - as it is, I hear about Harvard Law School kids who can't get jobs, so maybe even winning full scholarships to engineering programs at top schools might not guarantee a bright future for today's children. One thing seems clear enough - those with assets have more and better choices than those without. It's true today, and it's getting more true every year. I don't like it, and in fact, I hate it, but I accept it and am planning for it. Here's how. Like the author, I'm a fan of dividend growth companies, which figures into how I plan to help my kid bridge the opportunities gap between the haves and have nots, which I think will worsen over the next fifty years. Now let's look at McDonalds. In 1993, they paid a dividend of 2.5 cents a share. Twenty years later, that dividend is 77 cents. That's dividend growth of almost 19% a year. Stunning. So today, one share of MCD buys you $ 3.08 of dividends, but fifty years from now, if MCD keeps growing dividends as it has over the last twenty years, that share of stock will be paying annual dividends of $18,445. Now, $18,445 in 50 years is going to be worth a lot less than it is today, so assuming a 3% inflation rate, in fifty years one share of MCD stock will be paying dividends worth about $5,000 a year in today's dollars (again, assuming their average dividend growth rate during the last 20 years). But why be an optimist? Let's assume that their dividend growth rate slows dramatically - down to 10% let's say, after inflation. In that case, one share of McDonalds stock in 50 years will be paying $361 in annual dividends in today's dollars. This is important because it means that today, I can buy my kid 100 shares of MCD, and other similar dividend growers, and be pretty confident that when he or she reaches retirement age fifty years from now, food will always be on the table. If my kid reinvests those dividends every year for 50 years starting today, the results become even more dramatic, because those annual dividend payments will add up to $358,500 in today's dollars. That's just the reinvested income - if the original 100 shares grow in value at a rate equal to the dividend growth rate, a $10,000 investment today will be worth $1,173,000 in today's dollars 50 years from now - again, assuming half MCD's annual dividend growth rate over the past 20 years. The point is, you mix the power of dividend growth stocks with the long investment time frames available to very young investors, you might find a tool to help address the worry about what choices and opportunities our kids will enjoy far off in the future after we're gone. That said, I don't think a bit nest egg is going to answer every problem our kids will face in the coming decades, and may well create additional layers of issues (spend five minutes with a bunch of dis-incentivized, 19 year old trust fund brats and you'll see what I mean). My only point is, this article highlights two important themes that can really be viewed as two sides of the same coin.
A good market panic is like getting a raise that will keep on getting raised for the rest of your life. And I agree with you 100% that markets are not always rational. This is, in fact, one of the only two gifts that the markets give us. These gifts are: (1) herd instinct and mass panic and (2) the widespread use of index investing which has convinced most people that the best way to make money is to overpay for junk stocks and to ignore stock bargains. The key to this game is to be able to USE those two gifts.
What Will $2 Million Get You In Retirement? [View article]
Even with a tax assumption of 20% figured in, the couple's net worth should equal around $5,700,000 when they die at 95 years of age. Adjusted for inflation, they have $2,400,000 left over when they die. There will be ups and downs in the market, to be sure, but they will never have to sell assets in order to fund living expenses.
I get it about lots of variables - life's complicated, way too complicated for any computer simulation. There are uncertainties and unknown unknowables. But my question is, if it is reasonably likely that the couple will not need to sell assets in order to fund living expenses, and the portfolio will generate more income than the couple needs to spend, why is your software saying there is only an 85% chance they will not outlive their money? Is it the chance of dividend cuts that your software is factoring in? Is it the chance of tax rates above 20%? Is it the chance of living expenses rising faster than the assumed 3% inflation rate? Is it something else? I don't understand how you can live off portfolio income alone, save a bit each year and never touch principal, and yet die broke.
Now that I've factored in taxes and inflation, what else am I missing?
What Will $2 Million Get You In Retirement? [View article]
What am I missing? I'm coming out with a very different number than your monte carlo simulation seems to suggest. True, nobody in their right mind will invest their entire net worth into just six stocks, but you can throw in plenty of of other assets with good yield growth histories (ETFs like DVY and SDY, some MLP funds, REITs, etc. - putting together a 3.3% yield is not difficult with assets such as those). Is the premise of your thinking that the couple will sell assets periodically to fund their expenses? Doesn't that go out the window if the couple is living entirely off portfolio income?
5 Reasons Why I Am Shorting The Market [View article]
5 Reasons Why I Am Shorting The Market [View article]
American Capital Agency: Not A Terrible Q1, But The Dividend Is Still Not Sustainable [View article]
5 Reasons Why I Am Shorting The Market [View article]
What Happens When You Sell An MLP? [View article]
CTR is one I'm looking at.
FMO is one I own - they have a good yield and an excellent track record for raising distributions.
KED and KYN are great. Good yields, good track for hiking distributions. Problem with these guys is that the way they grow distributions so quickly is by raising new capital every so often with new share issuances, diluting existing shareholders and sending the share prices down 5% in a day.
With all the CEFs I follow, they use leverage, which means bankruptcy risk for the fund is very much on the table. They are thinly traded, and the price volatility is not for those who play with a weak hand. All that said, they're good reliable cash generating machines, and a good source for dividend growth focused investors to consider.
I am not an investment advisor, though, so you shouldn't rely on anything I say. Talk to a pro about these funds, and others besides.
Good luck, and happy investing.
What Happens When You Sell An MLP? [View article]
What Happens When You Sell An MLP? [View article]
James Altucher: Why The Stock Market Is A Sucker's Game Right Now (And What Stocks I Own) [View article]
All of a sudden, a guy shows up and he wants to buy one share of, let's say, DIA. Just one share. But he is panicking with greed, he is desperate to pay any price at all, he's just got to own that share. He starts to bid, but nobody on the trading floor is going to be bothered to even look up from their card game. The buyer raises his offer, and keeps raising it, until eventually, one trader thinks, oh well, what the heck, I'll sell him one lousy share of DIA for 10% higher than it was last trading at.
What happens then to the market cap of the entire stock market? Does it go up by $14? No, the market cap of the entire Dow Jones Industrial Average jumps up by 10% - rising by around what, maybe a trillion or so. Why? Because market prices are based on whatever the last trade was. And what was that 10% explosion in the stock market caused by? The number of shares relative to the number of buyers? No, it was based on the last buyer's relatively higher level of greed compared to the greed of the last seller.
Maybe fewer people going forward will want stocks. Maybe most people are feeling lousy and depressed, and not really excited enough to bid up stock prices. That tells me trading volume could dry up, but says nothing about where the stock market's price level will go. As long as there's at least one maniac bull out there and at least one trader looking to make money, prices can go higher.
That said, I like the notion that trading the market is a sucker's game. I much rather own some companies in good lines of business that pay healthy dividends and have a habit of raising their dividends each year. I don't have to focus much on what the Dow Jones is doing, as long as the portfolio income is increasing by 7% or so each year. It's a super dull way to invest, but it's a pretty reliable way to keep food on the table (certainly more so than trying to generate capital gains by timing the market). Besides, companies like I've just described also tend to grow shareholder equity very well over time.
5 Reasons Why I Am Shorting The Market [View article]
Is Gold Useless - Part III [View article]
When the price of gold started to fall, gold investors would scoff at anyone who suggested that the gold bubble was over. Gold bugs were well into the "conviction" stage of investment emotion about a year ago. Then came the denial phase, and as prices drifted 20% lower, the gold bugs would say things like "temporary price consolidation" or words to similar effect.
Now, with the price of gold falling 8% an hour, now comes the anger and panic phase. As prices drop harder and faster, expect long time gold bugs to come onto CNBC looking pale as a sheet and explaining how now is the time to put all the eggs into the gold basket, and how brave gold investors will make a heady sum by going all in right now. Gold investors are raging at the irrational decline of gold prices, blaming Goldman Sachs, blaming perhaps a government conspiracy, blaming anything and anyone.
Once gold prices are down another 30%, the tune will change, and you will hear despair and words of atonement from gold investors, and talk of gold as the new "safe" currency will finally die out. Unfortunately, the price decline will only continue from there, albeit at a slow rate. Ten years from now, after gold prices have been trending steadily lower and nobody cares about the stuff anymore, there might be some argument that gold prices have finally bottomed out. But by the time gold prices bottom, nobody will be paying any attention. At that point, it could make sense to buy a little gold as a diversifier, maybe, or if you just happen to like it for some reason.
I wonder what Wall Street will cook up for it's next big bubble? We've done stocks, housing, gold, cheap credit. Curious to think of what they can inflate now.
Japanese stocks (EWJ) explode higher as the Nikkei (NKY) rises +3.8%, buoyed once again by the BOJ's extraordinary policy announcement. Meanwhile, yields on 10- and 30-year Japanese government bonds plummeted, falling as low as 0.33% and 1.04% respectively. George Soros went on record saying that "what Japan is doing is quite dangerous." [View news story]
My First 3 Steps Toward Financial Freedom [View article]
Like the author, I'm a fan of dividend growth companies, which figures into how I plan to help my kid bridge the opportunities gap between the haves and have nots, which I think will worsen over the next fifty years. Now let's look at McDonalds. In 1993, they paid a dividend of 2.5 cents a share. Twenty years later, that dividend is 77 cents. That's dividend growth of almost 19% a year. Stunning. So today, one share of MCD buys you $ 3.08 of dividends, but fifty years from now, if MCD keeps growing dividends as it has over the last twenty years, that share of stock will be paying annual dividends of $18,445. Now, $18,445 in 50 years is going to be worth a lot less than it is today, so assuming a 3% inflation rate, in fifty years one share of MCD stock will be paying dividends worth about $5,000 a year in today's dollars (again, assuming their average dividend growth rate during the last 20 years). But why be an optimist? Let's assume that their dividend growth rate slows dramatically - down to 10% let's say, after inflation. In that case, one share of McDonalds stock in 50 years will be paying $361 in annual dividends in today's dollars.
This is important because it means that today, I can buy my kid 100 shares of MCD, and other similar dividend growers, and be pretty confident that when he or she reaches retirement age fifty years from now, food will always be on the table. If my kid reinvests those dividends every year for 50 years starting today, the results become even more dramatic, because those annual dividend payments will add up to $358,500 in today's dollars. That's just the reinvested income - if the original 100 shares grow in value at a rate equal to the dividend growth rate, a $10,000 investment today will be worth $1,173,000 in today's dollars 50 years from now - again, assuming half MCD's annual dividend growth rate over the past 20 years.
The point is, you mix the power of dividend growth stocks with the long investment time frames available to very young investors, you might find a tool to help address the worry about what choices and opportunities our kids will enjoy far off in the future after we're gone. That said, I don't think a bit nest egg is going to answer every problem our kids will face in the coming decades, and may well create additional layers of issues (spend five minutes with a bunch of dis-incentivized, 19 year old trust fund brats and you'll see what I mean). My only point is, this article highlights two important themes that can really be viewed as two sides of the same coin.
Why Accomplished Dividend Growth Investors Can Ignore Price Volatility [View article]
I will have to check out OHI.