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Arnold Landy
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Arnold Landy is a registered investment advisor, managing clients' funds since January, 2006. His previous careers include: small business owner, analyst for "The Value line Investment Survey," urban planner/analyst for State of New Jersey, school teacher in Jersey City, carny at state... More
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    I.  Estimate your annual need for investment income
          A.   Add up how much you spent over the past twelve months.  Get this from your checkbook or your bank statements.  
                  1.  Subtract unusual huge purchases, such as an outlay for a new car. 
                  2.  Subtract monthly items that will disappear, due to lifestyle changes, like if you sell your house, stop commuting to work, or if Medicare will reduce your health insurance bills.
                  3.  Add any large future things you want to budget for, like an increased budget for travel.    
                  4.  Subtract expected income from non-investment sources 
                         a.  Social Security
                         b.  Property rental income
                         c   Allowance from rich uncle
                   5.  Divide your "annual need for investment income" by twelve to determine your monthly need, which you will withdraw from your investment account each month.
    II.  Set aside enough money in risk-free investments that will provide five years of income during stock market meltdowns
          A.   Multiply your "annual need for investment income" (calculated earlier) by five to tell you how much money to set aside to cover you for five years, if needed. 
          B.   Invest your risk-free money in either bank CDs (with at least 1/5 of the money accessible each year) or a money market fund or TIPS (U.S. Treasury Inflation-Protected Securities).

    III.  Invest the balance of your investment money in a diversified portfolio of stocks or index funds, with no one stock initially accounting for more than 5% of the total.
         A.  Your monthly income depends on how much you arrange to be sent to you. 
           B.  Your monthly income does NOT depend on how much in dividends or interest you receive.  It depends on your total return, which includes dividends, interest and capital gains.
           C.  Total return from stocks has averaged 9 - 10% over the past 50 years and past 100 years.  Use this growth to fund your monthly income during the good years.
           D.  Avoid all high-fee mutual funds and closed-end funds.  Avoid all leveraged funds.  All funds, if any,  should be low-fee funds or low-fee ETFs.


    IV.  Start monthly withdrawals for retirement income.  Withdraw from stocks when stocks are dear, but not when stocks are cheap, like in 2008.
          A.  Withdraw all monthly income from stocks when in normal times or in good times. 
                    1)  Calculate the trailing ten-year average earnings for the S & P 500, adding an adjustment for inflation, and compare to the current level of the S & P 500.  Calculate quarterly.
                    2) If the P/E calculated above is twelve or higher, make all monthly withdrawals from the stock portfolio.  In 2009,  the S&P must stay above 900 for this P/E to remain above twelve.
            B.   Withdraw all monthly income from your risk-free reserve fund when the S & P  P/E (based on ten year average earnings, adjusted for inflation) goes below twelve. Review quarterly. In this way you avoid selling stocks when they are low.

    V.  Income tax considerations should be kept in mind
          A.  Maximize holdings of stocks in taxable accounts to take advantage of maximum 15% tax rate on dividends and long-term capital gains.
          B.  Fixed income investments should be directed to tax sheltered  IRAs, 403Bs (teachers' annuities), and 401Ks, as much as possible.
                1.  Interest from fixed income investments is taxed fully, whether in a taxable account or when withdrawn from a sheltered retirement account.
                2.  Stock gains and dividends also are taxed fully when withdrawn from a sheltered retirement account and you miss out on the 15% maximum tax rate.            


    V.  Confront Inflation
           A.  Avoid investments in long-term bonds, except for TIPS.
           B.  Fixed income investments recommended above will not be hurt by inflation
           C.  Stock investments will not be hurt by inflation, in the long run, as costs, selling prices, dividends, stock prices, and the value of assets owned by the companies you invest in will all rise with inflation.
            D.  Adjust your monthly  investment income need once a year, based upon expected inflation, your past twelve month's spending and your future plans. 



    Nov 13 11:33 AM | Link | Comment!
    Investment portfolios should contain a minimum of twenty stocks, with no single industry accounting for more than 15% of the total value at the time that the portfolio is constructed. Even with such diversification, a portfolio of stocks is vulnerable to the risk of at least a 60% loss from peak to trough (there have been several 50 - 60 %  stock market declines in my lifetime, but feel free to pick any number between 60% and 99%, depending on how nervous you are about investing in stocks). I hope to avoid major market declines by pulling out when I correctly foresee a recession, but even successful economic forecasting does not protect against all  bear markets.  Some  investment pros advocate limiting a portfolio's loss to say, 20%, at which point one liquidates and walks away.  But this method is effective only if one never goes back into stocks.  For example, a 20%  trigger point would have produced a 20% loss in 2008. But if one re-entered the market in, say, January, 2009, one would have liquidated by March, 2009 with another 20 % loss. Indeed, one potentially could string together a whole series of 20% losses.  All that does is spread the loss over a longer time period, without limiting the total loss. And during the periods between liquidation and re-entry the investor remains on the sidelines with no chance of recovery.

       Another problem with liquidating upon some predetermined loss percentage is that it fails to protect against a rapid market meltdown.  During the  1987 crash, stock prices dropped about 5% one day (a Friday), then another 23% the next day that the market opened.  The total decline from the peak was about 1/3.  If one's portfolio is already down by, say, 10%, another 23% decline in one day puts you well below a 20% loss threshold in a flash.  Indeed in the 2007-2009 bear market, there were several days when the market opened 5% or more below the closing prices from the night before, so there was no chance to liquidate at points in between. In 1987, stocks rose to new highs by the end of the year. So any investors who liquidated after the crash and stayed away from stocks would have missed out on the recovery. Likewise, most who liquidated after the drop in early 2009 likely missed out on the recent 50% rise to new highs for the year. In both cases, liquidating to prevent further loses had the unwanted effect of making impossible the recovery of the investors’ assets.
         Corporate and government bonds are also subject to considerations regarding risk.  Corporate bonds are subject to the risk of default (like if one owned  Lehman Bros. or Six Flags bonds). Both corporate and government bonds are subject to the risk that their value will decline if interest rates rise or bond ratings decline.  The most serious risk of all, however, is that inflation will erode the purchasing power of the fixed interest payments each year and will decimate the purchasing power of the principal upon maturity. 
       The best risk management method is to place some assets into Treasury Inflation-Protected Securities (OTC:TIPS). These are U.S. Government bonds that pay a low rate of interest, but the interest payments and the principal are both guaranteed to increase with the rate of inflation.  Both the interest received and the increased principal value that accrues each year are taxable income.   In  IRA and other tax-deferred accounts, tax is not payable until the money is withdrawn.  These bonds can be purchased directly from the U.S. Treasury or through a bank or broker.  Also, there are mutual funds that invest in TIPS and exchange traded funds (ETFs) that invest in TIPS.
       Risk management in stock investing cannot be achieved simply by selling as stock prices decline.   Nor can risk management be enhanced by sticking to stocks of safe companies. (Define “safe”: Citigroup (NYSE:C)?  General Electric (NYSE:GE)?  Fannie Mae (FNM)?  Freddie Mac (FRE)?  AIG Insurance Co. (NYSE:AIG)?  Polaroid?  General Motors (OTC:MTLQQ)?)  The bottom line is that the best risk management program for stock investing is found outside the stock market: in the government securities market through the purchase of TIPS.  For funds not needed over the next few years, the lowly stock market, after getting beaten up over the past decade, remains a good bet to resume its long-term (100 year) pattern of providing a 9.5 % rate of return.  And, even after their recent run-up, stocks remain on sale at prices 1/3 below the highs of two years ago.

    Disclosure:  No positions in any of the companies mentioned in this article.
    Aug 29 6:12 PM | Link | Comment!
    Today's employment report shows added strength in the data for Average Weekly Hours Worked in Manufacturing.  Here is the recent  monthly trend: May: 39.4 hrs., June: 39.5 hrs., July: 39.8 hrs.  The figures including overtime are 42.2, 42.4, and 42.7 hrs., respectively.  Employers typically increase hours before hiring additional workers.  Average Weekly Hours Worked in Manufacturing is one of the two labor force trends that The Conference Board uses to calculate its Leading Economic Index (NYSEMKT:LEI), which foretells turning points in the U. S. economy.  The other labor force figure that is included in the LEI is Initial Claims for Unemployment Insurance, which has been improving steadily since April.  While nonfarm payrolls are still declining, the moderation of those declines along with the continued improvement in the employment elements of the LEI indicate that job growth is likely before the end of this year.
    Aug 07 9:08 AM | Link | Comment!
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