Don't Let 'The Glidepath Illusion' Ruin Your Retirement

Don't Let 'The Glidepath Illusion' Ruin Your Retirement By Dan Ferris, editor, Extreme Value Friday, August 28, 2015

The traditional notion of retirement says you should take bigger risks in the stock market when you're young. You have more time to make up for losses than when you're older. As you age, you should take less and less risk, so you won't lose your retirement money. This strategy is called "Glidepath investing." And it could ruin your retirement. Let me explain… The emotional appeal of Glidepath investing is obvious. Young people feel like they're going to live forever, so it feels better to them to take more risks. Buying more risky stocks and fewer safe bonds feels right.  Older people feel they have more to lose and might not be able to support themselves one day, so they tend to be more risk averse. For them, buying fewer stocks and more bonds feels safer.  There's an army of financial planners and other "helpers" out there selling products designed to get you to retirement with a big, safe nest egg, based on this feel-good notion.  However, research suggests that what feels good isn't necessarily what you should do…  Investor and researcher Rob Arnott of Research Affiliates published a report in September 2012 called, "The Glidepath Illusion." Arnott says Glidepath investing will make you less money because it will lead you to put less money in higher-return investments (stocks).  Arnott studied 141 years of stock and bond returns from 1871 to 2011. From these data, he hypothesized a range of possible outcomes. In general, Arnott found evidence that the range of outcomes from doing the opposite of Glidepath investing was superior to the range of Glidepath-based outcomes.  It's well documented that stocks outperform bonds over the long term.Glidepath investors wind up putting a bigger percentage of their assets in stocks when they're younger and have less to invest. They put a higher percentage into bonds when they're older and have more to invest.  That's the basic error. Investors put fewer dollars into higher-return investments, then interrupt the compounding process to put more dollars into lower-return investments. So they make lower returns than if they had done the opposite of Glidepath investing.  Glidepath investing is a good recipe for feeling good, but a poor one for making as much money as possible in stocks and bonds. Arnott's conclusion is worth quoting and keeping close at hand as a reminder…  Investors who are prepared to save aggressively, spend cautiously, and work a few years longer (because we're living longer), will be fine. Those who do not follow this course are likely to suffer grievous disappointment… No strategy can make up for inadequate savings or premature retirement.  Save aggressively. Spend cautiously. Let your investments compound as long as possible before drawing them down. That's sound advice.  Sadly, it makes perfect sense that the financial services industry is once again doing exactly the wrong thing for clients. Don't trust financial planners and brokers. They're commissioned salespeople. They're incentivized to sell investments, NOT to make you money in stocks and bonds.  For as long as my health holds out, I'll stay productive and hopefully get well compensated for my efforts, saving aggressively and spending cautiously. I recommend you do the same.  Good investing,  Dan Ferris Source: Daily Wealth Follow us on Twitter: @blacklioncm

The One Thing I’m Going to Teach My Kids About Investing

The One Thing I’m Going to Teach My Kids About Investing 
By Porter Stansberry, Editor, Stansberry Alpha

Over the years, I've explained a lot of Wall Street's "secrets"...

I've explained how discounted bonds are sometimes vastly better investments than stocks. I've covered how selling naked puts is almost always safer and more profitable than buying stocks outright.

These concepts (and others) are critical to active investors. They all play a role in giving you the tools you need to increase your returns. You ought to know all about them and be able to use them tactically to take advantage of opportunities in the market.

I've written about these concepts many times over the years. And I've said they're the "most important" thing I could teach you from time to time. I wasn't lying. All of these strategies have their "time in the sun."

Believe me... having this tool bag and knowing when to use these strategies will make you a much better investor. It will allow you to profit from opportunities the market always creates.

But... how can you learn to be patient enough to wait for these opportunities? That's what I'd like to show you with today's essay. I hope you'll print this one out... mark it up... and keep it near your desk.

The Real Secret…
The real secret is in this one...

So what's the most important idea I've discovered in finance? What's the one thing I'm going to teach my kids beyond the obvious stuff about saving, compounding and risk management? What do I believe is the real secret to investment success? 

And... the biggest question of all... How do I invest my own money in securities?

Over the long sweep of your investing lifetime, strategies that only work extremely well in certain market situations are unlikely to play a dominant role. The big secret, therefore, is something you can use all the time, for your entire life, as an investor. And here it is: Some companies are much better than others at compounding capital. Much better.

If your goal as an investor is to compound your savings over time, wouldn't it be easier to simply figure out which companies will compound your capital at an acceptable rate, buy those firms (and only those firms) at reasonable prices and then do something else with the rest of your time?

Here's a simple but powerful example...

Well-run insurance companies can produce what's called an "underwriting profit." They are literally paid money in advance to manage your capital. And they get to keep not only the investment profits, but profits from the premiums, too. 

That's like paying the bank to keep and use your money. No other business can compound capital so consistently.

Insurance companies have other fantastic advantages, too. They're able to legally defer most of their taxes. They're nearly immune to economic factors. They're scalable. I could go on...

They're a focus for us because well-run insurance companies are legendary compounders of capital. Buy them at reasonable prices, and it's impossible not to do well.


Natural Wealth Compounders
In the March 2012 issue of my Stansberry Investment Advisory, we explained that insurance stocks had rarely been cheaper. We recommended several through the year. Since then, stocks of all stripes have exploded higher... but they haven't outpaced insurance companies. 

Insurance stocks as a whole – as measured by the SPDR S&P Insurance Fund (KIE) – have far outpaced the S&P 500.



It's not an accident that the greatest investor in history, Warren Buffett, has long focused on insurance stocks and other companies that are highly capital efficient. That is, companies that are natural wealth-compounders.

Starting with his 1972 investment in See's Candies, Buffett gradually over the years shifted the bulk of his wealth into a simple, long-term compounding strategy...

While Buffett didn't abandon all other forms of investing, his largest allocations since 1972 have all used this compounding strategy. That famously includes his 1988 purchase of Coca-Cola... when Buffett put roughly 25% of Berkshire's capital into a single stock! 

And it wasn't a cheap stock, either. At the time, Coke was trading for 16 times its annual earnings. Buffett had figured out the one real secret of finance... the one secret to "rule them all." 

Three Important Questions
To use a long-term compounding strategy effectively, you really only have to answer three questions:

•		First, is the company in question able to produce very high returns on its assets? In other words, is it a great business?
•		Second, are these unusually high returns very likely to continue for decades, without requiring large and ongoing capital investments?
•		Third, can the management of the company be trusted? Will bankruptcy never be even a remote possibility?

If the answer to these questions is "yes," then all you have to do is simply not pay too much when you buy the stock. Most of the companies that fit these criteria are branded consumer-products companies – stocks like McDonald's, Coke, Heinz and Hershey.

Long-Term Earnings Power
Buffett explained in his 1983 shareholder letter how he thinks about these companies. The secret to their long-term earnings power is very simple: It's their brand and the relatively unchanging nature of their products. 

These companies' products are so well known (and adored) by customers that these firms can constantly raise prices to keep pace with inflation.

Meanwhile, the brands – while requiring some advertising – aren't like factories, gold mines or drugs...

They don't require massive investments of new capital. There's no new gold mine to find and build. There's no patent that's going to expire. And there's not even any new product that must be created: Coke's fans went crazy with anger when the company tried to change its product in a small way back in 1985.

All these firms have to do is continue to deliver the same thing, year after year. And that means they can afford to return huge amounts of capital to shareholders.

Merely buying and holding any of the stocks I mentioned above would have made you 15% a year if you'd just reinvested the dividends for the last 30 years. 

Even if all you did was invest $10,000 and then nothing else – not a penny more – you'd still end up with $575,000 at the end of 30 years. If you invested $10,000 annually, you'd end up with $4.3 million.

And the best part? This approach can be used by anyone.

Simple Math
The math is simple. And is it really that hard to realize that Heinz is the best sauce company... that Coke is the leading soft-drink business... or that McDonald's makes the best hamburgers for kids? 

The No. 1 objection I get from readers when I talk about this strategy is: "That's great, Porter. Wish I'd known about that when I was 25. But it's too late for me now. I don't have 30 years."

That's nonsense. Think about it this way... Buffett was born in 1930. He didn't buy Coke until 1987. He was 57 years old. It has been one of the greatest investments of his life – bar none.

If that doesn't convince you, just think about it this way. How often do you make more than 15% on your portfolio in a year? Whether you've got three decades to invest or only one, you should aim to produce the highest possible annual return without putting your capital at undue risk.

There's no safer investment approach than this one, as your returns are being manufactured by great businesses. You don't need a "greater fool" to pay too much for your shares to make a profit. In fact... the biggest risk you face is selling at all because that will trigger taxes (in most accounts).

It's this seemingly invisible power that allows these companies to return massive amounts of capital to shareholders – a factor that sets them apart and greatly reduces investor reliance on capital gains. This is incredibly important over the long term.

Source: Bonner and Partners

Follow us on Twitter: @blacklioncm

The Only Investments I Hope My Kids Ever Make

The Only Investments I Hope My Kids Ever Make By Porter Stansberry Friday, July 11, 2014

I have a very simple question for you… If you were going to limit all of your investments to only one sector of the economy – only one type of business or one kind of stock – what would you buy? We've come to believe that, for outside and passive investors (common shareholders), there are very few sectors that offer truly extraordinary rates of return and that don't require taking any material risk. Let me be clear about what I mean. There are only a few sectors of the economy where companies can establish and maintain a truly lasting competitive advantage and outside investors can identify attractive values. As I teach my children about investing, I will focus almost entirely on examples from these sectors. And truly… I will spend most of my time explaining only one business to my children. If they come to understand this business thoroughly, I know, with a reasonable amount of saving discipline, they will be financially secure by the time they are 30 years old… and wealthy long before they reach 50. In today's essay, I'm going to explain what we see in this sector of the stock market. I want to show you why the investment returns are so incredibly good over the long term. I want you to know how to think about these businesses… how they work… and know a few simple keys to making great investments in this sector. I promise… this is all far easier than you're imagining right now. And I'm sure you'll want to print this essay, put it in a binder, and refer to it from time to time. Let's start with this chart…  --------------------------------- This chart shows four of the best-managed insurance companies in the United States. Company No. 1 got its start insuring contact lenses and now it mostly insures things that other companies won't touch, like oil rigs and summer camps. It's a pretty small public company, worth about $2 billion.  Company No. 2 was founded by a Harvard graduate just out of college about 40 years ago. It is still mostly a family business (even though it has public shareholders and is worth $6 billion). It insures almost anything commercial, from yachts to elevators.  Company No. 3 is one of the world's largest insurance companies. It insures everything – homes, cars, boats, weddings (yes, weddings), etc. It is worth $33 billion.  And Company No. 4 is a major global company that (again) insures virtually anything and is worth $22 billion.  You might think, outside of being in the insurance industry, these companies have almost nothing in common. Some are very small and insure essentially niche items. Others are huge, operate globally, and insure virtually anything. Yet to us, these companies look nearly the same: They are among the very best underwriters in the world.  That means these insurance companies almost always demand more in insurance premiums than they will end up spending on insurance claims. As you will soon learn, there's probably nothing more valuable in the financial world than having the skill and the discipline to underwrite insurance profitably.  Over the long term, all of these companies have generated returns that are more than double the S&P 500. They did so without taking any risk – something I'll explain more fully below. And… here's the best part… their success was both inevitable and repeatable. These are not "lucky guesses" or fad-driven product sales.  One of our overriding goals at Stansberry & Associates Investment Research is to give you the knowledge we'd want to have if our roles were reversed. Knowing what I know now about finance, I wouldn't have gotten into the investment newsletter business. I would have gotten into insurance.  There is nothing more valuable we can teach you than understanding how to invest in good insurance companies. And with the legwork we do in our Insurance Value Monitor (a part of our Stansberry Data service), it's as easy as pointing and clicking. If a company passes our tests and you can buy it at the right price… you can be next to 100% sure that the investment will produce outstanding returns. It's like painting by numbers. Only it will make you rich.  Let me say it one more time… I believe if individuals would limit themselves to only investing in insurance companies – and no other sector – they would greatly increase their average annual returns. We don't believe that's true of any other sector of the market.  There's a simple reason for this. If you'll think about it for a minute, it should become intuitive. Here's why insurance is the world's best business: Insurance is the only business in the world that enjoys a positive cost of capital.  In every other business, companies must pay for capital. They borrow through loans. They raise equity (and must pay dividends). They pay depositors. Everywhere else you look, in every other sector, in every other type of business, the cost of capital is one of the primary business considerations. Often, it's the dominant consideration. But a well-run insurance company will routinely not only get all the capital it needs for free, it will actually be paid to accept it.  I want to make sure you understand this point. All of the people who make their living providing financial services – banks, brokers, hedge-fund managers, etc. – all of them pay for the capital they use to earn a living. Banks borrow from depositors, investors who buy CDs, and other banks. They have to pay interest for that capital. Likewise, virtually every actor in the financial-services food chain must pay for the right to use capital. Everyone, that is, except insurance companies.  Now just follow me here for a second… Insurance companies take the premiums they've collected and they invest that capital in a range of financial assets. Assume, just for the sake of argument, that they earn 10% each year on their premiums. (That is, they make 10% on their underwriting.) And assume they invest only in the S&P 500… What do you think the average return on their assets will be each year? In this hypothetical example, their return would be 10% plus whatever the S&P 500 returned.  In reality, of course, few insurance companies can make such a large underwriting return. And few insurance companies invest a large percentage of their portfolio in stocks. Most stick to fixed income to make sure they can always pay claims. But the point remains valid. By compounding underwriting profits over time, year after year, into the financial markets, insurance companies can produce very high returns.  And here's the best part: Insurance companies don't really own most of the money they're investing. They invest the "float" they hold on behalf of their policyholders. Float is the money they've received in premiums, but haven't paid out yet. Underwritten appropriately, this is a risk-free way to leverage their investments and can result in astronomical returns on equity over time.  Just look at insurance company No. 1 in the chart above. It has produced eight times the S&P 500's long-term return. Can you think of any investor, anywhere, who has done anything like that? There isn't one. That kind of performance was only possible because, using a small equity base, the firm has invested profitably underwritten float into solid investments, year after year.  Do you like paying taxes? Well, you won't like insurance stocks, then. They have huge tax advantages. Insurance is, far and away, the most tax-privileged industry in the world. Many of their investment products are totally protected from taxes. And their earnings are sheltered, too. Insurance companies don't have to pay taxes on the cash flow they receive through premiums because, on paper, they haven't technically earned any of that money. It's not until all of the possible claims on the capital have expired that the money is "earned."  So unlike most companies that have to pay taxes on revenue and profits before investing capital, insurance companies get to invest all of the money first. This is a stupendous advantage. It's like being able to invest all of the money in your paycheck – without any taxes coming out – and then paying your tax bill 10 years from now.  I realize that I can't make you (or anyone else) actually invest in insurance stocks. And I know that no matter what I say, most of you – probably more than 90% – never will. It's a tough industry to understand, filled with financial concepts and tons of jargon. But there are two reasons the smartest guys in finance wind up in insurance, one way or another…  First, it pays the best. And second, it takes real genius to understand. But… my goal is to make it so easy to understand and follow that any reasonably diligent subscriber can do so. I'd urge you to read the March 2012 issue of my Investment Advisory newsletter for more details about how we analyze insurance stocks.  In the meantime, I want to simply show you the one number you've got to know to invest safely and successfully.  Normal measures of valuation don't apply to insurance companies. Why not? Because regular accounting considers the "float" an insurance company holds as a liability. And technically, of course, it is. Sooner or later, most (but not all) of that float will go out the door to cover claims. But because more premiums are always coming in the door, float tends to grow over time, not shrink. So in this way, in real life, float can be an important asset – by far the most valuable thing an insurance company owns. But there's one important catch…  Float is only valuable if the company can produce an underwriting profit. If it can't, float can turn into a very expensive liability.  That's why the ability to consistently underwrite at a profit is the key – the whole key – to understanding which insurance stocks to own. Outside of underwriting discipline, almost nothing differentiates insurance companies. And they have no other way to gain a competitive advantage. Warren Buffett – who built his fortune at Berkshire Hathaway largely on the backs of profitable insurance companies – explained this in his 1977 shareholder letter:  Insurance companies offer standardized policies, which can be copied by anyone. Their only products are promises. It is not difficult to be licensed, and rates are an open book. There are no important advantages from trademarks, patents, location, corporate longevity, raw material sources, etc., and very little consumer differentiation to produce insulation from competition. Thus, the basis of competition between insurance companies is underwriting. That is… to be successful, insurance companies must develop the ability to accurately forecast and price risk. And they must maintain their underwriting discipline even during "soft" periods in the insurance market when premiums fall.  In our Insurance Value Monitor, we track nearly every major property and casualty insurance company in the U.S. and in Bermuda (where many operate to avoid U.S. corporate taxes completely). We rank every firm by long-term underwriting discipline. We've done the legwork for you. All you have to do is know what price to pay. So if normal accounting doesn't apply for insurance stocks, how do you value them? Again, we went to the master, Warren Buffett, to see what he was willing to pay for very well-run insurance companies.  Bryan Beach, our lead insurance analyst, found data on three of Buffett's biggest insurance purchases. In 1998, he bought General Re for $21 billion, which added $15.2 billion to Berkshire's float and $8 billion in additional book value. So Buffett paid $0.94 for every dollar of float and book value.  Before that, in 1995, Buffett bought 49% of GEICO for $2.3 billion, which added $3 billion to Berkshire's float and $750 million in additional book value. So Buffett paid $0.61 for every dollar of float and book value.  And way back in 1967, Buffett paid $9 million for $17 million worth of National Indemnity float. That's $0.51 for every dollar of float. Looking at these numbers, we expect to pay something between $0.75 and $1 for every dollar of float and book value.  In short, there are two fundamental rules to investing in insurance stocks. Rule No. 1: Make sure the company earns an underwriting profit almost every year, no exceptions. And Rule No. 2: Never pay more than 75% of book value plus float.  If you follow these simple rules, there's no reason you can't make large, consistent gains in the stock market… while taking little risk.  Regards,  Porter Stansberry  Source: Daily Wealth Follow us on Twitter: @blacklioncm

The Most Important Aspect of Any Investment

The Most Important Aspect of Any Investment

From the S&A Interview Series

Wednesday, June 4, 2014 If you want to be successful in stocks, there's one simple thing you have to do – focus on the price you pay. Buy at bargain prices.  It sounds simple. But most people can't bring themselves to do it.  Below, Stansberry & Associates Editor in Chief Brian Hunt explains this vital idea… and how you can use it to make winning investments. Stansberry & Associates: Brian, at Stansberry & Associates, we urge people to focus on the price they pay for investments. Could you explain why this is so important?  Brian Hunt: Sure.  This whole idea comes down to treating your investments like you treat almost anything else you buy. The idea is that you should focus on finding good values… and not overpaying for things.  When you buy a pair of shoes, you want to pay a good price. When you buy a computer, you want to pay a good price. When you buy a house, you want to pay a good price. You don't want to overpay. You don't want to embarrass yourself by getting ripped off.  Yet… when people invest, the idea of paying a good price is often cast aside. They get excited about a story they read in a magazine… or how much their brother-in-law is making in a stock, and they just buy it. They don't pay any attention to the price they're paying… or the value they're getting for their investment dollar.  Warren Buffett often repeats a valuable quote from investment legend Ben Graham: "Price is what you pay, value is what you get."  I think that's a great way to put it.  S&A: How about an example of how this works?  Hunt: Like many investment concepts, it's helpful to think of it in terms of real estate…  Let's say there's a great house in your neighborhood. It's an attractive house with solid, modern construction and new appliances. It could bring in $30,000 per year in rent. This is the "gross" rental income… or the income you have before subtracting expenses.  If you could buy this house for just $120,000, it would be a good deal. Since $30,000 goes into $120,000 four times, you could get back your purchase price in gross rental income in just four years. In this example, we'd say you're paying "four times gross rental income."  Now… let's say you pay $600,000 for that house. Since $30,000 goes into $600,000 20 times, you would get back your purchase price in gross rental income in 20 years. In this example, we'd say you're paying "20 times gross rental income." Paying $600,000 is obviously not as good a deal as paying just $120,000.  Remember, in this example, we're talking about buying the same house. We're talking about the same amount of rental income.  In one case, you're paying a good price. You're getting a good deal. You'll recoup your investment in gross rental income in just four years.  In the other case, you're paying a lot more. You're not getting a good deal. It will take you 20 years just to recoup your investment. And it's all a factor of the price you pay.  S&A: Let's move on to a stock market example.  Hunt: Sure. It works the same way.  Let's say Company ABC generated $1 million in annual profit last year.  If you buy ABC at a market value of $6 million, you're paying six times earnings. If you buy ABC at a market value of $20 million, you're paying 20 times earnings. If you buy ABC for a market value of $50 million, you're paying 50 times earnings.  The market is made up of people. And people tend to act crazy from time to time. One month, the market might set the price of ABC at $6 million. The next month, it might set the price of ABC at $8 million or $10 million.  I know that sounds like a wide range of prices, but you see these ranges in the stock market all the time. People are willing to pay different prices for different businesses at different times.  The amount people are willing to pay for a company's earnings is often called the "price-to-earnings multiple," or simply "the multiple."  In this example, it's a much, much better deal to buy shares of ABC when the market is valuing it at $6 million – or at a price-to-earnings multiple of six – instead of buying shares when it is valued at $50 million – or a price-to-earnings multiple of 50. You get more value for your investment dollar. You're buying shares in a cash-producing enterprise for a lot less.  The job of the investor is to make sure to buy assets at reasonable prices… and avoid buying assets at bloated, expensive prices.  S&A: If you're buying a great business, does it really matter if you pay too much?  Hunt: It's vitally important to know that buying shares in a great business can turn out to be a terrible investment if you pay the wrong price.  Let's go back to ABC. Let's say it's a great company. It has a good brand and good profit margins. It's steadily growing. And remember, it does $1 million in annual profit.  If you purchase ABC shares at a market value of $100 million, that's paying 100 times earnings for ABC. This is an extremely expensive price. Your only shot at making money in this example is if someone else comes along and is willing to pay an even crazier price than you did.  While this "waiting for a greater fool" can work occasionally, it's generally a losing strategy. The regular investor will never be able to make it work.  What often happens is that the company keeps doing well, but the multiple people are willing to pay returns to more normal levels. In a case like this, the company can keep increasing its profits, but the share price will plummet. It can fall 50% or 75%.  I know this sounds extreme, but it's exactly what happened during and after the 1999 and 2000 market peak.  Back then, good companies with solid future prospects – like Wal-Mart and Microsoft – traded for 50, 60, even 90 times earnings. People who purchased shares back then paid stupid prices. They had speculative fever. They didn't focus on getting good value for their investment dollars.  Because many stocks with good business models were so overvalued, their share prices crashed and went nowhere for many years.  Keep in mind, the underlying businesses were still very sound. Those businesses were still growing. But the stock prices got so out of whack that investors who overpaid suffered horribly. It took a long time for the stocks to "work off" their extremely overvalued state.  For example, in 1999, Wal-Mart traded for more than 50 times earnings. It spent more than a decade working off that overvaluation. Folks who bought Wal-Mart back in 1999 didn't make any money for more than a decade. The company did fine… but shareholders who bought the stock at stupid prices suffered for a long time.  If you can buy a great business for 10 times earnings, it's a good deal. But if you pay 30 or 50 times earnings for it, you're bound to be disappointed.  I have to state it again: If you overpay, you can make a horrible investment in a great company.  S&A: One the other hand, you can make money in a poor business if you pay a bargain price, right?  Hunt: Yes. Let's look at another example…  Let's say Company XYZ is barely profitable with a market value of $2 million. It makes just $250,000 a year. And a competitor is doing a better job of serving customers… so sales are declining.  But let's also say that the company sits on a valuable piece of real estate, which it owns free and clear. You know the piece of property could easily sell for $3 million… maybe even $4 million.  You could buy up shares, knowing full well the business is in decline and could even stop being a profitable enterprise. But if you buy shares while the market values the company at $2 million, you could make a great profit if they close the business and sell the assets for at least $3 million.  In this example, you could make money in a bad business… by paying a bargain price. Again, it all comes down to the price you pay.  S&A: What if you're buying a stock to collect dividends? How do you know what a good price is?  Hunt: The price you pay for a dividend-producing stock is a huge deal.  Let's say Company ABC is a great business that pays a very stable dividend. It has raised its dividend every year for 29 consecutive years. Its current annual dividend is $1 per share.  If you bought ABC at $20 per share, your dividend yield would be 5%. If you bought ABC at $30 per share, your dividend yield would be 3.3%. If you bought ABC at $36 per share, your dividend yield would be 2.8%. If you bought ABC at $100 per share, your dividend yield would be just 1%.  As the price you pay goes up, the yield on your original investment goes down.  Obviously, you want to pay lower prices and earn higher yields.  It's a similar story with bonds. Bonds pay fixed-income payments. But like stocks, the price of bonds can fluctuate.  For example, let's say we have a bond that is issued at a price of $1,000. Let's say it pays a 5% interest rate. That's $50 in annual interest.  If investors lose faith in the company that issues the bond, the bond price could fall to $700. But the annual interest payment would remain $50.  In this case, the buyer of the bond who pays $700 would earn about 7% in annual interest. The difference in how much income you earn is all a function of the price you pay.  S&A: Any parting thoughts?  Hunt: The big takeaway here is that investors need to view their stock, bond, real estate, and commodity purchases just like they would view buying a house or a car or a phone or their groceries. Don't be a sucker and overpay. Make sure you get good value for your investment dollar. Hunt for bargains.  You wouldn't pay $50 for a gallon of milk, would you? So why would you pay absurd prices for stocks?  Before you buy an asset, study its valuation history. See what levels represent "good prices" and see what levels represent "stupid" prices. These prices vary from stock to stock and asset class to asset class. Make sure you buy at levels that represent historical bargains.  S&A: Great points. Thank you.  Hunt: You're welcome.  Summary: Investors need to view their stock, bond, real estate, and commodities purchases just like they would view buying a house, car, phone, or groceries – don't overpay. Even buying a great company at a "stupid" price can make for a terrible investment. Make sure you're getting a good value for your investment dollar by buying an asset at a good historical valuation. Source: Daily Wealth Follow us on Twitter: @blacklioncm

How to Become Financially Independent in 7 Years or Less

How to Become Financially Independent in 7 Years or Less By Mark Ford, wealth coach, The Palm Beach Letter Wednesday, March 19, 2014

You are middle-aged. Your net worth is meager. Your income is barely sufficient to meet expenses… and those expenses are going up. The Great Recession is looming. Economists are predicting things will get worse. What can you do? Should you give up your dream of retiring comfortably one day? Should you accept a future of increasingly meager existence? Should you grow bitter and curse the powers that be for putting you in this situation? Or should you take responsibility for your situation and make changes? That last question was rhetorical, of course. But sometimes, I wonder if people really do understand their options. There are things that happen in life that we can't control. But we can control the way we respond to them… I understand that when you are halfway through your life and are barely making ends meet, it seems like the only chance to become financially successful is to win the lottery (either an actual lottery or the stock market equivalent of one). So it may be frustrating to hear some rich guy from Palm Beach telling you that you can't quickly turn $25,000 into $1 million by investing in stocks.  But I believe – no, I am certain – that anyone who has modest intelligence and a positive attitude can become financially independent in seven years or less if he or she is willing to work enormously hard.  You do not have to give up on your dream of being wealthy. You always have the ability to change your financial life. It will take a bit of time and patience. And it will require that you change some of the thoughts and feelings you have about wealth and your relationship to wealth.  The first thing you must do is accept the fact that you are solely and completely responsible for your current financial situation. Before you react defensively, read that sentence again… I didn't say you are the cause of your situation. I said you are responsible for it.  By taking responsibility for your current condition, you also assume responsibility for your future. Nobody can change your fortune but you. And nobody else will. The sooner you accept that reality, the sooner you will shed the anger and blame and begin to feel financially powerful.  I'm not giving you a pep talk. I'm telling you the truth. I've done it myself, and I've coached dozens of people to do it, too. It is a simple adjustment of your thinking, but it is extremely powerful. It works instantaneously. Without it, you cannot move forward, even by a single inch.  The next thing you must do is set realistic expectations. I've had people tell me that they don't want to make 10% or 15% per year on their money. They think returns like that are "ho-hum." They want some incredible stock tip or some secret get-rich-quick technique. But when I hear people say that, I think, "This person will never become wealthy."  Realize that 10%-15% is a high rate of return. Warren Buffett – the most successful investor of all time and the third-richest person on the planet – has averaged 19% on his investments over his entire career.  And realize that the journey to millions of dollars is earned $100 at a time. You must be willing to accept this fact to move your financial life forward. Your financial life is like a train that has stalled. And right now, you want to be driving it at 100 miles an hour. But it can't go from zero to 100 miles an hour in no time flat. Inertia is against you. Be happy with 10 miles an hour now… and then 20… and then 30. This is how wealth accumulates – gradually at first, but eventually at lightning speed.  The third thing you must do is thoroughly understand the difference between spending, saving, and investing. With every paycheck you get, cover your necessary expenses first (bills, mortgage, etc.). Then put some money toward saving. And then put some money toward investing. Then and only then – after you have "paid yourself" – should you add to your "spending" account.  The fourth thing you must do is recognize that your net investible income (the amount of cash you have after spending and saving) is the single most important factor in determining how quickly you will become wealthy.  Commit to adding to your income with a second income. Make an honest count of the number of hours each month you devote to television and other non-productive activities. Devote them to wealth-building instead. Cast aside the comfortable shoes of victimization. Put on the working boots of a financial hero.  It's not fun to realize, in the midst of your life, that you haven't acquired the wealth you want. But the good news is your past doesn't have to be a prologue… unless you allow it to be. You can change your fortunes today by doing the four things I've just told you to do.  You are only 47, not 87. You have plenty of time to increase your income and grow your net worth. Why do you assume all is lost? As any 87-year-old will tell you – you have a whole wonderful life ahead of you… a life that can be rich in 100 ways.  Regards,  Mark Ford Source: Daily Wealth Follow us on Twitter: @blacklioncm

The Easiest Place to Start Investing

The Easiest Place to Start Investing By Dr. David Eifrig, editor, Retirement Millionaire Wednesday, January 15, 2014

It's one of the most maligned and misunderstood investing vehicles in the market… Ironically, it's also one of the most accessible and easy to use. And when you understand its benefits, it's an ideal way to quickly diversify your portfolio and begin compounding your capital. But why is it so misunderstood? And why is it so useful? Let me explain… Most people reach a point where they ask the question: "How can I get started investing?" The answer is…  The simplest way to start investing is through something called a "mutual fund."  A mutual fund is a security that pools the assets of multiple investors and – with the help of a manager – invests the money. The large pool of money makes it easier to invest in several stocks, keeping the portfolio diversified so no one position takes up too much of the capital.  For a simple example, 100 people could invest $1,000 each… leaving the fund with $100,000 in assets. The fund manager could then buy a large basket of stocks. If the manager placed no more than 5% of the portfolio into an individual stock, then $100,000 would be enough to buy 20 or so stocks.  So instead of an individual needing $100,000 on his own to invest, he can pool his resources and invest in an array of securities resources with only 1% of that.  For people who don't want to pick individual securities or want easy and instant diversification, mutual funds are great places to start. The buying power of pooled money also means better prices on the securities than if you were to try to buy all the individual securities by yourself, having to pay commissions and fees on each transaction.  There are two types of funds – closed-end and open-end funds.  We've discussed closed-end funds before, mostly when buying municipal bonds and making other fixed-income investments. Closed-end funds issue a limited number of shares. So the share price can fluctuate based on investor demand. This means that a closed-end fund can trade above or below the value of the fund's assets – called the net asset value (NAV).  That fluctuation gives us easy opportunities to make money when the price of the shares moves closer to the NAV. Buying closed-end funds for less than NAV is one of my favorite secrets for making money in the markets.  Most mutual funds are open-end funds. This type of fund can issue as many shares as investors want to buy. Because your money is almost immediately invested, open-end funds always trade at their NAV.  Funds invest in just about anything… Others focus on specific strategies or types of investments. For example, some funds hold only blue-chip stocks, some invest in emerging markets, and others specialize in bonds.  Each fund has a charter that it must adhere to. That means a fund can only invest in what's mentioned in its charter.  Some investors look down on mutual funds. They view them as simplistic options for "little league" investors. I urge you to put aside these prejudices.  Other people say when you invest in mutual funds, your returns are undermined by the fees they charge. This is a legitimate concern… but one you can manage.  When it comes to fees… you need to know the difference between "load" and "no load" funds.  "Load" funds are essentially charging you commission fees. And the charge can range from 3% to 9%. It means that for every $100 you want to invest, the fund takes up to $9 and you're only investing the other $91. You'd have to make 10% on your investment just to be breakeven.  Don't ever buy a load mutual fund.  The no-load funds don't sap your principal this way. Also, research shows that both types of funds have equal returns on your assets, so why start from behind with a load fund?  But you also need to watch annual management advisory fees, which both load and no-load funds charge. When you're looking for a no-load fund to invest in, stick with ones whose management fees are less than 1%.  The fees also raise another caution about mutual funds… They are not for trading. Mutual funds are designed for investors who intend to hold for a long period of time. If you plan to hold for less than three years, mutual funds aren't for you.  One problem that often overwhelms folks venturing into mutual funds is the seemingly endless universe of funds. The mutual-fund industry is immense. In the U.S. alone, it totals $13 trillion in assets managed.  Here is the first thing to know that will help you sort through the options… There are "families of funds" – financial firms that specialize in offering investors a variety of funds for investment… Some common names you may have heard include Vanguard, BlackRock, Fidelity, and Invesco. They all offer many different types of funds…  Let's take a look at Fidelity's funds… (All of the funds I'll describe are no-load with low management fees.)  Fidelity manages more than 200 funds: stock funds, bond funds, index funds (which follow a specific index, like the S&P 500), "target" funds (which balance the allocation in the fund based on your age), and many others.  When you buy shares of a fund, a manager uses your money to invest across a wide spectrum of investments depending on the fund's charter. Fidelity's website lists the funds depending on your needs.  The simplest way to start is to invest in a so-called balanced fund. Fidelity calls them "asset allocation" funds. The goal of these funds is to be a one-stop shop for investors who want instant access to a diversified portfolio.  This type of fund is comprised of several types of investments, including stocks (from small- to large-cap), bonds, interest-paying money-market accounts, and international investments.  Two simple examples of balanced funds Fidelity offers are the Fidelity Asset Manager 60% Fund (FSANX) and the Fidelity Asset Manager 85% Fund (FAMRX).  You'll need at least $2,000 to invest in either of them…  But what if you're starting with something smaller? Say, a small bonus at work, or socking away $25-$50 each month…  In tomorrow's essay, I'll explain how to build your own low-cost mutual fund combining the two most important concepts for investing success.  I'll even share some examples that you can use right now to get started…  Here's to our health, wealth, and a great retirement,  Dr. David Eifrig Source: Daily Wealth Follow us on Twitter: @blacklioncm