Pie Charts Are Your Friend?

Jun 28, 2021 David Kennon

Sometimes I forget that many of you don’t understand some of the basics when it comes to investing.  It is very easy to lose track when, not only have I been managing money for twenty years, but my Dad has a long history of investing as well.  Did you talk about investing in stocks and bonds with your parents?  Probably not.   So let’s break this down to the absolute simplest terms possible.  As I said, I often assume my readers understand certain concepts.  If you don’t, the rest of the information may be hard to understand.   When most people invest money, instead of buying a bunch of individual stocks, they put the money into mutual funds.  Mutual funds consist of hundreds or thousands of holdings within one investment vehicle.   When somebody says “You should have a diversified portfolio,” it simply means you need to spread the money around. Mutual funds are a great way to do this.   I generally recommend against single stocks as they can be quite volatile and unpredictable.  History shows a very predictable pattern of the total stock market, but individual stocks can do anything.   And I don’t care if a company has been around for a long time.  That does not mean it will make money.  For example, GE has been around forever.  It is down 65% over the past couple of years.  Heinz is down 60%.  Remember Texaco?  It was one of the biggest companies in the country at the time. It went to zero.   When you buy a mutual fund, the mutual fund has a ticker symbol.  You need to know the ticker symbol to buy the mutual fund.   Let’s say, you walk into Charles Schab or Fidelity, and you ask them to purchase $100,000 of SPY.  What are you actually investing in?  SPY is a fund that consists of the 500 largest companies in the U.S. all in one neat package.  It means you would put:   $5,800 into Apple $5,490 into Microsoft $4,170 into Amazon $4,070 into Google $2,260 into Facebook $1,480 into Berkshire Hathaway $1,320 into Tesla $1,290 into NVIDIA Corporation $1,290 into JP Morgan Chase $1,210 into Johnson and Johnson $1,100 into Visa $1,050 into United Healthcare $920 into Proctor and Gamble $910 into Home Depot   This list goes on and on until it totals $100,000.  You will own shares in 500 companies.  The bigger the company, the bigger the allotment.   Many of you have 401k funds through your company.  Maybe you have been told that “You need a balanced and diversified portfolio.”  You don’t want to put money only in large U.S. companies.   Besides big American companies, there are other places to invest your money such as:   Small-Sized Companies (there are called “Small Cap”) Medium-Sized Companies (Mid Cap) International Companies (Companies from first world nations) Emerging Market Companies (Companies from developing nations)   You can also invest money in bonds.  If you remember from past articles, a bond is simply a loan. For example, you loan Walmart $10,000 to help them build a store.  They pay you 3% interest for ten years and then pay the loan back to you.   Bonds often do well when stocks are doing poorly.   The types of bonds are:   U.S. Government Bonds (You are loaning money to the U.S. federal government) Municipal Bonds (Loans to municipalities) Corporate Bonds  (Loans to companies) International Bonds (Loans to companies and governments overseas)   So a “diversified and balanced portfolio of stocks and bonds” might look like:   30% Large Cap 10%  Small Cap 10%  Mid Cap 10%  International 10% Emerging Markets 10% U.S. Government Bonds 10% Municipal Bonds 10%  Corporate Bonds   *This is an example portfolio.  I am not giving you advice on how to invest your money.   In addition, different asset classes move in different directions at different times.   In 2007 Emerging Markets made 40% and Small Companies lost 2%. In 2008 U.S Treasury Bonds made 5% and Large Companies lost 37%. In 2013 Small Companies made 39% and Emerging Markets lost 3% In 2014  Large Companies made 14% and International lost 5%. Last year Small Cap was the best with a 20% gain and Bonds were the worst with a 6% gain.   So you can see that it is important to spread your money around.  Nobody knows in any given year which asset classes will thrive and which will do poorly.  Don’t try to chase good returns.   For example: In 2017 Emerging Markets made the most and in 2018 they lost the most. In 2018 Small-Cap was one of the worst and in 2019 it was one of the best.   Even though everyone has opinions on what kinds of asset classes are going to do well, they have no idea what they are talking about.   Be Blessed,   Dave

 

The Dow Will Be at 60,000 by 2030

Jun 21, 2021 David Kennon

If you’ve been reading my articles each week, by now, you know that I believe in the incredible power of the stock market. I’ve spoken, at length, about how investing in the stock market is essential to your long-term financial well-being.   I’ve also spoken about how no one knows what the markets are going to do. No one. Anyone you see on TV or any article you read on the internet is pure conjecture. They are guessing. They might as well be using a crystal ball. In the short term, no one has ever had the ability to diagnose the markets. Don’t let them derail you.   I can’t believe I am doing this but…..   Now I am going to make a big prediction.   Are you ready?   The markets will double during this decade.   Have I completely lost my mind? Are you sitting at the screen, staring in disbelief? It’s ok. I understand. But let me make a very logical argument why this prediction has a good chance of coming true.   I like to think of myself as somewhat of an economic historian. So let’s take a look at the past century.   From 1920 to 1930 the Dow Jones rose from 107 to 244 points. You may notice that the points more than doubled. They actually increased by 128%. So my prediction would have come true.   Let’s look at all the other decades.   1930’s, the Dow went down from 244 points to 151 (or a 38% loss) 1940’s, the Dow went up from 151 points to 198 (a 31% gain)   1950’s, the Dow went up from 198 points to 679 (a 242% gain) 1960’s, the Dow went up from 679 points to 809 (a 19% gain) 1970’s, the Dow went up from 809 points to 824 (a 2% gain) 1980’s, the Dow went up from 824 points to 2801 (a 239% gain) 1990’s, the Dow went up from 2801 points to 11,357 (a 305% gain) 2000’s, the Dow went down from 11,357 points to 10,583 (a 7% loss) 2010’s, the Dow went up from 10,583 points to 28,868 (a 172% gain)   “But Dave,” you may be saying to yourself, “there are a lot of decades where the markets did not go up by 100%. How can you say my money would double in a single decade?”   I have two words for you: dividends and compounding interest. Actually, I guess that’s four words.   You see, when you look at the S&P 500 and Dow Jones the percentage changes do not include the dividends.   Let’s take a look at the 1940s. At first glance it is not particularly exciting. A 32% increase over an entire decade is only 3.2% per year.   But those stocks were also paying out dividends which are not included in the point increase.   In the 1940’s the average dividend across all the companies in the Dow was 4.7%. That is a very big deal. The actual amount of money an investor would have made was: 3.2% stock price growth plus 4.7% dividend per year is 7.7% per year.   Then we come to compounding interest. There is an often-told story that when Albert Einstein was once asked what mankind’s greatest invention was, he replied: “Compound interest.”   Compounding interest is the idea that your money makes money on the money that it made.   Let’s say:   Year 1: 10% investment return on $100 is $110. Year 2: 10% investment return on $110 is $121. Year 3: 10% investment return on $121 is $133…..you get the idea.   In the 1940s, 7.7% compounding over 10 years is a 110% increase. Your money would have doubled.   If you include dividends and compounding interest, the only decades where your money would have not doubled were the 1930’s and the 1970’s and the 2000’s.   So you would have doubled your money in seven of the last ten decades.   You would have only lost money during the 1930’s (The Great Depression).   So will my prediction come true? Will your money double in this decade? It certainly isn’t a guarantee but I still like my chances. (I’m also taking advantage of the fact that the markets are up 29% since January 1st, 2020- not including dividends or compounding interest).   Be Blessed,   Dave

 

Unexpected Retirement Expenses

Jun 14, 2021 David Kennon

Unexpected retirement expenses are one of the biggest, baddest boogeymen of financial retirement planning. Settle in, because I’m going to tell you a story about two brave retirees who faced this terrible, retirement ogre.   Joey and Jane Charmin, ages 65, retired after over 40 years of work and toil at a toilet paper factory. While their social security and investment income would more than cover their monthly expenses, they still felt financial anxiety.   “What happens if there is a big expense we weren’t considering?” Jane lamented. “You never know what might happen. Who knows? I read a frightening article on the internet explaining how many seniors are hit with unexpected expenses.”   Joey agreed. “Well, I guess we should try to live on a strict budget. That way we can save as much as possible… just in case. I guess we won’t get to live out some of our dreams in retirement. We will probably have to watch our friends travel, dine, and spoil their grandkids. But it’s Spaghetti-Os and Spam for us.”   Joey and Jane’s fears came true, in a sense. They ran into nearly every big “unexpected” expense a retiree could face.   Dental care. Joey never listened to his Mom as a kid and didn’t brush and floss every day. At age 74, he needed a root canal and crown, and again at age 82.   Medicare doesn’t cover dental care.  Believe it or not, I would say teeth are just about the largest unexpected expense retirees face.  No wonder dentists are so rich.   $3000 for a crown?  Seriously?   Hearing Aids. Joey also required a hearing aid at age 74, which is generally not covered by Medicare. The average price of a pair of digital hearing aids is about $1,500, according to the National Institutes of Health. High-end devices can be as much as $5,000.   Major Health Event. At age 83, Jane needed complex surgery to remove some melanomas from her back. The bill they received in the mail totaled nearly $80,000.   Luckily, as long as you receive Medicare and have purchased a supplement, the maximum out-of-pocket expense in any given year is $6,500. “That was a close one,” sighed Jane. “I didn’t realize how much Medicare actually covers.”   Prescriptions. Jane developed rheumatoid arthritis at age 68. The injections she received each month were extremely expensive. But, considering Jane was enrolled in both Medicare and an appropriate Medicare supplement, she was only liable for a maximum of $5,100 a year out-of-pocket.   There are also a myriad of options lower-income retirees can utilize to receive deeply discounted medications. Surprisingly, in my experience, prescription costs are lower in retirement than most expect.   Car Repairs. Joey and Jane, like most retirees, purchased cars far less often, and put on less miles (after a couple road trips around this beautiful country). Considering the warranties only lasted five years, Joey was upset when his transmission blew at age 78. While the $2,500+ bill wasn’t welcomed, it did not upset their financial lives.   Home Repair. The Florida weather took a toll on Joey and Jane’s home. During their retired years they needed to replace the air conditioner twice and get a new roof. The air conditioners cost them $4,000 a piece, and the roof set them back almost $15,000. This is one of the most common one-time expenses I see.   Helping Kids and Grandkids. Joey and Jane’s third child, Jessica, had a messy divorce, leaving her and their two cherished grandkids in a tough spot. “Joey,” pleaded Jane, “We need to help them. Maybe we can set aside $1,000 a month to keep them on their feet. Maybe they can even move in for a while, until things settle.”   While not common, in my professional experience, this can be the most expensive “problem” once retired. But it’s no reason to skimp and live small now. If it happens, it happens, and you adjust.   Some of you may disagree with my prices, as you may have a bigger roof or really bad teeth. But I’m trying to make a point here. Hopefully as I lay out all the normal “unexpected” expenses, you realize that there are fewer unknowns than you thought.   Beyond this list I haven’t seen much in the way of surprise costs. I’ve consulted with many retirees, and these represent the vast majority of expenses.   The solution? I always recommend my clients keep $10,000 to $30,000 in an emergency fund. Keep the money in the bank and maybe utilize a short-term CD or a money market. This will allow you to absorb these kinds of expenses. In addition to your portfolio of stocks and bonds, it makes sense to have a bit of a cushion.   The other option is to finance these expenses as they come, and simply add the payments into your monthly budget. While not ideal, as long as your monthly spending plan has room, you’re still in the clear.   Be Blessed,   Dave

 

Waiting for Your Parents to Die

Jun 8, 2021 David Kennon

How much money is going to pass to heirs in the next 30 years? According to Time magazine, the number could reach over $30 trillion. Yes, that is $30,000,000,000,000.   Today I am going to offer an alternative to leaving money to your kids.   Whenever I create long-term spending plans for my clients, I often hear, “But Dave, I understand you want us to start spending some money as soon as we retire, but we don’t need the money. We don’t even know what to do with it. We’ve learned to live frugally over the past forty years. We really don’t need anything else.”   “It’s awesome that you’ve built up those habits,” I’ll usually reply, “That is a big part of why you are in the position that you are in. But if you don’t use your money, someone else will—maybe the government, maybe your heirs—but you need to seriously think about what this money is FOR.”   No one will ever be as good a steward of your savings as you. Let me say that again for maximum impact: No one will ever be as good a steward of your savings as you.   You’ve worked for it, you’ve earned it, you appreciate it. You have a more intimate connection to your money than anyone else ever could.   You hear about it all the time. Kids inherit their parent’s money and it causes discord. They waste it. They fight with their siblings. They don’t treat it with the same care and respect as their parents did.   Athletes sign huge contracts, oftentimes straight out of school. They blow through the money because they weren’t prepared for it.   Many lottery winners say that winning the jackpot was one of the worst things that has ever happened to them. They don’t know how to steward the money because they didn’t earn it.   Of course, you need to do the appropriate planning to ensure you don’t outspend your savings, but once you make sure you are not mortgaging your future, you get to start determining how you want to spend the money—right now.   I want to be very clear. I am not asking you to become materialistic. I am merely suggesting that you start living your life with a renewed sense of opportunity.   Which brings me back to your kids. As opposed to leaving them a large lump sum of money at your death, I think there’s a better way.   Give them a little bit each month now. Or, put another way, dole out their inheritance a little bit at a time for the next 20 or 30 years.   Of course, we don’t want to enable our children; you will have to make that determination.   Members of the Retirement Revolution already know that they are going to spend 5 percent of their retirement savings each year, starting the first year of their retirement. Some of that money could go to your kids now.   The benefits are numerous.   Benefit #1: Your kids are in their twenties, thirties, and forties which are the most complicated and difficult times in somebody’s financial life. They are having children. They are buying homes. They are starting careers. This is when they need the money. By the time you’re gone, your kids could be in their sixties and seventies.   Benefit #2: You are able to see your kids actually use and appreciate the money. You get to attend your granddaughter’s piano recital (you paid for the lessons). You get to see the relief on your son’s face when he realizes they are able to replace the car that keeps breaking down.   Benefit #3: You are able to see how your kids treat the money. Are they acting responsibly? Are they making good financial decisions? Better yet, you can mentor and guide them on how to better manage their assets. And if they blow your cash? Well, it’s certainly better you know now.   Benefit #4: It is tax efficient. Taking out a little money from your retirement accounts each month stretches out the tax liability. It is much better to take a little bit of money out each month versus large lump sums here and there.   While heirs are able to utilize a “stretch IRA,” which can spread out their tax liability over several years, I often see IRAs cashed out completely. A $500,000 IRA is cashed out by your heir could result in over $150,000 in taxation.   (Mega) Benefit #5: You are teaching your kids an incredible lesson about generosity. Your kids get to see, first hand, that Mom and Dad are not materialistic, nor are Mom and Dad overly stingy. Mom and Dad place value on what really IS valuable. Relationships. Family. Love and kindness. If your kids see your generosity, they will grow to be generous themselves. Your legacy will last for generations.   As an aside, I’ve found giving cash isn’t always the best way.  It often works better if you give them something material, such as a car, a down payment on a house, or an all-expenses-paid family vacation.   Be Blessed,   Dave

 

Don’t Read This If You Already Know It

Jun 1, 2021 David Kennon

This week, let’s get back to the basics.   Question: What is a stock and why do you make money when you invest in one?   Let’s say your friend, Suzy, owns a car wash. The business is pretty successful. The cost of running the car wash is $10,000 a year, and the business brings in $12,000 a year. Suzy gets to pocket the $2,000 profit.   Suzy also has a gambling problem. She believes she has a fool-proof way of betting on sports, but, as it turns out, she doesn’t.   Suzy needs money, and fast. She approaches you and says, “I will sell you part of my business. For $5,000 I will sell you a 50% stake.”   Another way of saying this is: “You will own 50% of the stock in my business.”   The next year love bugs are much worse than usual. Desperate citizens flock to the carwash. At the end of the year, the business shows a profit of $4,000. As a 50% shareholder, you receive $2,000.   If you invest in Apple you may own .00001% of the shares. So, you are eligible for .00001% of the profit. It is the exact same concept. The more Apple grows, the more you make.   That’s it. That’s a stock.   Question: What is a bond and how do you make money when you invest in one?   Bonds are actually much easier to understand. A bond is a loan. You know when you put your money into a savings account and receive .01% interest? What does the bank do with your money?   They loan it out at much higher rates and pocket the difference. Banks are unbelievably profitable. That’s why there is a bank on every corner.   So if you own a bond, in a sense, you are the bank. Let’s say Sarasota Memorial Hospital is constructing a new building and they need money. They could issue a bond that basically says: “If you give us $10,000, we will give you one bond on which we will pay you 3% interest. At the end of ten years we will repay the loan back to you. You will get your $10,000 back.”   You see? You are the bank.   I often wonder why people put money into savings accounts. You can skip the bank and just invest directly where the bank invests their money. But that is a topic for a future article.   Bonds are more stable than stocks, but stocks, historically, have returned far more. Risk equals reward.   Let’s take a look at economic history. I want to extinguish the idea that these vehicles can lose a bunch of money.   What we are about to look at is the 5-year average return for indexes.   Question: What is an index?   The S&P 500 index is a composite of the 500 biggest companies in the U.S. The Bond index is a composite of thousands of bonds (loans).   I’m trying to make the point that while, yes, there are bad years here and there, it doesn’t really matter.   Get ready to have your mind blown.   Let’s start with bonds. The Bond Index has been tracked since 1975. . The Worst Five Year Period:  An average return was 2.1% between 2012-2017.   The Best Five Year Period: An average of 18.42% from 1981-1986 (this was during a time of hyperinflation. Bond returns and interest rates are closely related).   Since interest rates are so low, it is reasonable to assume low returns going forward, but still far higher than a CD. Was there ever a five-year return that averaged a negative number? No. In fact, there has never been a two-year span where the average was negative for bonds.   Next up are U.S. stocks. The S&P Index has been tracked since 1945.   The Worst Five Year Period for U.S. stocks   The markets returned an average of -2.3% from 2000-2005. The markets returned -2.3% on average from 1969-1974. That’s it. Seriously, those are the only two times.   I really want this to sink in.   In modern economic history, there are two instances where the five-year average was negative and even those are low single digits.   Why are you worrying? Be confident that five years from now your account will be worth more than now.   Please stop looking at your account every day. It. Doesn’t. Matter.   I want you to help your friends too. Next time you see them tell them the fact that:   Over any ten-year period, in economic history, the stock market has gone up.    Be Blessed,   Dave