15 October 2005

"Investing 100" and Greybeard University

At the start, let me emphasize........
I'm NO financial planner.
(And no, I don't play one on TV either.)

There are probably several folks reading this post that know a boatload more than I do about investing.
I know just enough, maybe, to be dangerous.
But for some reason, my meager knowledge has sort of made me the "go to" guy
at my company when co-workers have questions about their retirement plans.
I titled this post "Investing 100", because what I'm about to convey is "bonehead" information, intended to incite some of you "foot draggers"
to do some homework yourself, and then ACT on it!

In 1968,
Ole Prairie Dog and I were learning to fly helicopters in Savannah, GA..
(Horrible duty, by the way.)
At the end of each flying day we'd come back to the company area to find a kindly looking retired Lt. Colonel loitering around,
chatting with our classmates.
He sold Mutual Funds from a Fund Family called "Keystone"

We were all facing a year of flying in Viet Nam,
and all I wanted to do with my money was have a good time.
Investing was pretty low on my priority list.

But he tweaked my curiosity.......
what the heck was a Mutual Fund?
How did they work?

I did some research and bought my first shares of a Mutual Fund in 1970.

I was a licensed broker and sold Mutual Funds from 1974 to '76.

When our "Big Bubba" turned 20,
I challenged him to get started investing.
With my guidance, (and his money), he put $2,000 in a
Roth IRA using Vanguard's "S&P 500 Index Fund".
(I like the Vanguard Family because of their low fees.)

He has continued to invest $2,000 per year in that Fund.
If he continues to invest at that rate,
and the stock market continues to perform as it has historically,
he'll be able to retire when he is still a VERY young man.
I'm proud of him for having the
discipline I didn't have at his age.

Let me share two interesting investing stories:

Identical twins, Uno and Dos, celebrate their 20th birthday.

Uno starts a Roth IRA.
He puts $2,000 a year in a Mutual Fund that has historically grown 8% annually.

Brother Dos says, "Nah, I want to buy a new Harley,
and next year I want a new bass boat.
I'm young, and there's plenty of time to invest later."

Uno continues to squirrel away $2,000 per year for 10 years.
At that point, Uno STOPS putting money in his IRA.

Now, at age 30, Brother Dos decides
it's time to get serious about investing.
He opens an IRA account with the same Fund as his twin.
Assuming he continues adding $2,000 per year, and the Fund continues to earn 8% annually,
at what point will his account value exceed that of his brother's?

My second illustration, similar to the first, will help answer that question.......
Find a Fund or other investment that averages 8% per year interest.
Add $50 a month to that Fund for 10 years.
At that point, stop your monthly deposit,
and start withdrawing $50 per month.
At what point will the Fund be totally depleted?

The answer to both questions?


In the first example, Uno's investment is earning considerably more than $2,000 per year when Dos begins to add $2,000 per year to his new IRA.
Dos can add 2-Grand a year for infinity, and he will NEVER catch up!

In the second illustration, after 10 years the Fund will be earning,
by my quick calculations, $87.63 per month in interest,
so withdrawing $50 a month will allow the principal in the Fund to continue
to grow at a pretty healthy rate.

Historical returns for the overall Stock Market
are above 8% per year.

Do your homework.
Find an investment you can be comfortable with.
Get started now!

(If you have access to a company 403(b), 401(k), or 457,
it makes NO SENSE to not AT LEAST contribute to those accounts at the minimum contribution necessary to take advantage of company matching funds........a 100% per year return on that money!!!)

And as both my illustrations show, time is critical.......
sooner is MUCH better than later!

If all this is still confusing, let me recommend the book:
"The Wealthy Barber" by David Chilton.
It's a quick, easy, enjoyable read,
and will answer most of your investing questions.

(I wish someone had shared this with me when I was 20!)

Update: 23 October

Wow, this got out of hand in a flash!

Read the comments.
My intent was to provide some VERY basic investing examples and prod some slackers into doing a little study on their own before setting cautiously off on a journey to improve their lives.
I started the post with the "I'm no expert" disclaimer.
Notice also the investment I have started my son in: An S&P 500 Fund that does virtually no stirring, and therefore has extremely low fees.
For that reason, most all of Big Bubba's money stays at work.
That's the path I will continue to take until I see a better way.

Infgtr has extraordinary credentials.
What I glean from his comments is that if you aren't gonna retire shortly,
you'd better be looking for ways to hide your money, and invest it in more complicated vehicles than I recommended.
If that is true, I'm more out of touch than I could have imagined.
I'm fearful of a scenario where you have to be an attorney to be sure you have efficiently hidden your money from Big Brother and other meanies.

Has it really come to that?


Infinitegtr said...

Nope, you are just wrong as hell this one time.

After Enron, WorldCom, and all their siblings, no one should invest a dime unless they know what an 8K is, or if they don't know where to find SEC filings. If a person doesnt understand what is happening when spin-off proceeds are being used to retire intracompany obligations or senior [insider] debts, they ought not invest. If a person hasnt read the Google prospectus/manifesto, and if they don't understand why it was such a big middle finger in the face of Wall Street and the big banks, stay away! Peligrosa!

With the exception of a rare handful of funds (such as the Royce funds), most are too diversified, and the fees are too well hidden.

Factor on top of that the high divorce rate, and the fact that bankruptcy just became an ugly minefield for the unwashed...

bullets and gold coins...

Greybeard said...

Ahh, a differing opinion!
Doncha love a civil discourse?

Global Crossing
All happened right under the noses of analyst/experts that know far more than you and I, and were studying ALL the financials!
I'll agree with you that things can be easily hidden in the fine print.

But I'm presently on the third owner/management iteration with my EMS job. Involved in an ESOP, a profit sharing plan, a 403(b) and now on my second 401(k), all this after purchasing my own Mutual Funds for a traditonal and then a Roth IRA, I find myself owning some 20 different funds.

I'm sure I owned some Enron, Worldcom, etc., in some of those funds.
The net result........negligible damage, because of the evil diversification you mention.

Remember the old joke, where the old Jewish man prays to win the lottery because he has been a good and devout Jew......after praying three times and not winning, the Lord finally says, "Abe, give me a little help here......buy a ticket!"

I hope my post will motivate people to "buy a ticket".

I like Mutual Funds, particularly those that keep their fees low, because I don't have the time to devote to doing the homework on individual stocks. But that keeps me from being ruined by an Enron or Global Crossing, too.

I bought Gold years ago.
Held it ten years.
Investment results?.......NADA.
I dumped it, but wouldn't argue about owning some gold coins for barter if the world as we know it comes to an end.

You'll find 22, 22mag, 32, 357, 44mag, and 45ACP close at hand.
Inserted into the right tool....
a good investment!

Infinitegtr said...

The problem is, with some glaring exceptions early on with Enron, the information was right in front of the analysts' noses. The problem is, since 2000, banks have embarked on a power play that has consolidated the fields of finance, analysis and marketing into one big cozy tangle of rattle snakes. Some of those same banks are the reason I have been traipsing all over the country this year...

One of the great fads over the last two decades is project financing, where corporate party puts in 20%, operates the hard assets, and the banks and investors pony up the other 80%. Banks and investors get theirs back from operating revenue of the hard assets.

The banks had to sell the long term value of the assets to investors, because no revenue means no one gets repaid. In the midst of being a "partner" the banks are working fees on both ends of the transaction.

Meanwhile, the Enrons of the world work over the analysts at S&P, Fitch, etc. Analysts arent rock stars, but Enron turned them into rock stars...

Stockholders of today want growth. Enron provided that growth through voodoo economics at its finest known as mark-to-market accounting, which the SEC was complicit in allowing them to do. This accounting allowed them to, well, to make a wild ass guess about the value of a new deal over the life of the entire contract, which might have been a 20 or 30 year contract. ALL of the revenue was booked the day the contract was signed, which was how meteoric growth was sold to investors.

Meanwhile, the banks continue to hand out money like a crack dealer on Amarillo Boulevard. Not because the hard assets are worth a damn, but because the banks get fees, again on both ends of the deal.

At least a year before the end came for Enron, everything was hidden in the open, in SEC filings.

Last month I fired the company that was supposed to be managing my retirement account. Every day, there were at least 40-50 transactions in and out of the different funds professionaly identified for me. Most transactions were made at a loss to me. Yeah, I know, it is a down market, but if my positions are being bought by someone, someone else thinks they have value...

Yesterday, ironically, I started looking at where everything was frozen, how future investments are supposed to be made. My proprietary "investment profile" which I made sure was tilted towards aggressive growth-moderate to high risk, was 24% money market account, and 2% spread across the board. The most ludicrous I have found so far is this... there are two fund families that are targeted to certain government bonds. Same investment approach, same bonds, I am equally invested in both (which means I am paying two sets of fees for the same equity position).

It took at least a year after Enron for the government to slap wrists of mutual funds for their misdeeds. Between individual companies, banks or mutual funds, I am still convinced it is easier for mutual funds to hide their misdeeds than any of the other bunch.

It is a bigger pain in the ass, and more upfront expense, but the future of true rags to riches personal growth (I still remember with great pride the day we moved up from single wide mobile home to double wide...) is formation of own C-corp, owned largely by wife's self-directed IRA, which might also employ a 412(i) [i think] pension plan. Unless current boss is paying health insurance for everyone in the household, might as well shift over to HSA now, because we will all have it forced on us in next 10 years anyway.

Finally, you are right about gold as an investment. I have been in and out of gold for 15 years. But there is a huge generational difference I think, in that the 30 somethings have to learn jsut how to keep what they get, before they can try to make it grow. My age cohort is already addicted to interest only loans, and for some reason no one seems to want a house that lists less than $225,000.

Banks, debt collectors, and ex-wives attorneys have sharper fangs today then ever before. People think their cash is safe in a bank, but that is because they dont understand how garnishment really works until it is too late. Especially for my generation, people have to understand that holding on to liquid, anonymous assets is a matter of pure survival. Damn right you are hiding stuff, you are hiding your stuff. Because the banks, analysts, and the folks previously hired to manage my retirment account are making their pile, by taking form my pile...