Generation Y Investor » Young Investors

Retiring On Investment Dividends & Interest Alone

Stephen Kline — Sat, 31 Oct 2009 00:15:23 +0000

When one reads typical retirement advice, they’re often told that beginning in retirement they should start withdrawing about 4% of their portfolio for living expenses each year. The 4% rule is standard retirement advice that gets cited all the time since it’s considered a safe withdrawal rate for the average retiree. However, the downside of this plan is that the retiree will be funding his or her retirement by spending down their portfolio’s principle.

Now don’t get me wrong, there’s nothing terrible about following this advice. A retiree who adheres to this plan has a great chance their portfolio will last the remainder of their life. But isn’t there a better option? One where the retiree needn’t worry about outliving their nest egg? Luckily, there is a better plan. Instead of drawing down one’s portfolio, a retiree can simply live off the dividends and interest their nest egg produces. Following this method guarantees that one never runs out of money. It is also easy to stick to, and will eventually leave one’s heirs with a tidy inheritance. The one caveat of living off dividends and interest alone is that it usually requires significantly larger retirement savings.

This issue is discussed in further detail here: Retiring on Investment Interest: Can It Be Done?

“A true interest-only strategy can work only for those with excess capital. If you retire with $1 million but only need $55,000 per year of supplemental income, keeping with our 6% assumption, you will need $917,000 to produce your income. That will leave you with $83,000 that could be used for emergencies or irregular expenditures.”

“Be thorough and careful when working out the numbers. Interest-only portfolios can work, but if you assume that one will work for you without working out the details, you may find yourself without adequate retirement funds.”

Due to the larger capital requirements needed for a dividends and interest only plan it may not be feasible for individuals who are
currently nearing retirement. However, I believe this plan is perfectly achievable and a worthy goal for young investors. There is no reason why someone with a long time horizon and a decent career can’t accumulate enough capital to implement this great plan come retirement.

Gen Y Investors View Investing As Fun

Stephen Kline — Thu, 15 Oct 2009 23:32:13 +0000

Apparently the majority of 20-something investors view the process of investing as fun. This is quite an interesting finding seeing as though we just lived through one of the biggest market busts in history.

Kimberly Palmer of the U.S. News & World Report writes: Gen Y: Investing Is Fun, Not Scary

“Online brokerage company Scottrade is out with some surprising findings about 20-something investors: It turns out they consider investing an enjoyable activity. Unlike older generations, they’re more likely to manage their money on their own and to feel confident that they will recover their losses from the recession. In fact, one in three of those surveyed said they invest because it’s fun, an increase from about one in four last year.”

“Other experts and surveys have suggested that the financial crisis has left Generation Y permanently scarred — untrusting of banks and financial institutions, and less likely to invest in the stock market as a result. But this survey suggests 20-somethings aren’t all retreating to their apartments to stuff bills in dark places. At least a significant portion of them are jumping into the stock market, which, given historical patterns about returns following market dips, is probably a good idea.”

I guess the caveat here is that the survey consisted of Gen Yers who are currently investors. As opposed to a random sampling of Generation Y in general. I think if you were to sample a number of random 20-somethings you would definitely find a more cautious stance towards investing.

Nevertheless, it’s great to see that a portion of individuals our age have taken matters into their own hands and started investing for themselves. It’s always been my opinion that people are better off taking the time to learn about investing in order to handle their own financial affairs, rather than handing the matter off to a financial advisor. I’ve said it before, but no one cares as much about your money than you. By starting early, young investors can learn from their mistakes and overcome them so they don’t hamper future financial goals such as retirement.

Do you think of investing as an enjoyable activity? If so, why?

Gen Y Needs To Save

Stephen Kline — Fri, 07 Aug 2009 01:04:53 +0000

Here’s a pretty bogus article from marketwatch that says, “Impatience and financial illiteracy” “Could stunt a good retirement for young adults”.

The article is full of broad-based hogwash such as…

“Almost half — 47% — of Americans born between 1977 and 1994, also known as Generation Y, are below average when it comes to financial literacy, with little understanding of how to budget and save efficiently.”

Another gem is…

“There’s a mindset that is possibly generation-wide that is ‘instant gratification,’ you Twitter just so you can find what someone is doing today. You microwave, you have Easy Pass.”

My main problem with this author’s writing isn’t that her points are inaccurate. In fact, I’d agree with most points that she does make; however, they don’t just apply to Gen Y. You could re-write this whole article and change “Gen Y” to “Baby Boomers” or just “Americans” and it would still be completely accurate.

The bottom line is most Americans in general aren’t financially literate. Gen Y has learned their poor financial skills from their baby boomer parents with poor financial skills. You can’t just single out the young generation without realizing that we’re merely a reflection of the older generations.

The Importance of Dividends

Stephen Kline — Wed, 04 Mar 2009 00:28:55 +0000

In the past I’ve posted a couple of times about the importance of dividends. Here’s an interesting article that illustrates their importance with a great chart. The chart shows total stock returns by decade and then breaks down the returns between capital gains and dividends. The data is clear… ignore dividends at your own risk.

(Please keep in mind the article was written last year so the 2000’s data in the chart is probably not 100% accurate)

The Advantages of E-Filing Your Taxes

Stephen Kline — Tue, 10 Feb 2009 00:59:33 +0000

I’ve spent the past couple days working on my taxes. This is the first time I’ve prepared my own return, and I have to say it went better than expected. I used TurboTax and it really made the whole process quite simple. I especially loved the feature that let me download my investment information from Fidelity and Vanguard. This saved me a lot of time and effort. I highly recommend TurboTax to anyone thinking about preparing their own taxes.

And for those of you who still mail your return to the IRS, here’s a little video about the advantages of e-filing…

New Rangel Rule Bill Would Eliminate IRS Interest and Penalties

Stephen Kline — Sun, 01 Feb 2009 15:28:38 +0000

I found this new bill that was introduced by Congressman John Carter of Texas the other day. I found it amusing considering my recent post on Tim Geithner and him not paying his taxes. Below are the details of the new bill and here’s a link to the Congressman’s webpage. I’d love to actually see this bill become a law.

(WASHINGTON, DC) – All U.S. taxpayers would enjoy the same immunity from IRS penalties and interest as House Ways and Means Chairman Charles Rangel (D-NY) and Obama Administration Treasury Secretary Timothy Geithner, if a bill introduced today by Congressman John Carter (R-TX) becomes law.

Carter, a former longtime Texas judge, today introduced the Rangel Rule Act of 2009, HR 735, which would prohibit the Internal Revenue Service from charging penalties and interest on back taxes against U.S. citizens. Under the proposed law, any taxpayer who wrote “Rangel Rule” on their return when paying back taxes would be immune from penalties and interest.

“We must show the American people that Congress is following the same law, and the same legal process as we expect them to follow,” says Carter. “That has not been done in the ongoing case against Chairman Rangel, nor in the instance of our new Treasury Secretary Timothy Geithner. If we don’t hold our highest elected officials to the same standards as regular working folks, we owe it to our constituents to change those standards so everyone is abiding by the same law. Americans believe in blind justice, which shows no favoritism to the wealthy or powerful.”

Carter also said the tax law change will provide good economic stimulus benefits, as it would free many taxpayers from massive debts to the IRS, restoring those funds to the free market to help create jobs.

Forget The Bad Bank… Create A Good One

Stephen Kline — Fri, 30 Jan 2009 02:21:27 +0000

Over the past week there has be a resurgence in talk about the government creating a so called “bad bank” to help solve the financial crisis. The bad bank would step in and purchase toxic assets that are currently clogging up the balance sheets of U.S. banks. This would free up the bank’s balance sheets, and allow them to lend without having to worry about losses from bad assets. This was pretty much the original intent of the TARP bill.

The problem with the “bad bank” solution is that we really don’t know how much these toxic assets are worth. If the government ends up underpaying for these assets, then the banks may still need capital and they will still be reluctant to lend. On the other hand, if the government overpays for these assets than the taxpayer will suffer at the expense of the banks.

My solution is simple… instead of creating a “bad bank” to buy the toxic assets from the banks that screwed up, why don’t we just create a new bank from the ground up? This bank won’t have to worry about CDO’s, SIV’s and all that mumbo jumbo. Since the new bank wouldn’t have toxic assets on their books, they would be able to lend freely at lower rates than other banks. In theory here’s how it’d work…

*The government would provide $250 Billion to capitalize the creation of a new bank. The bank would be able to leverage this money and have over $2.5 Trillion in lending ability. This will allow the bank to take advantage of the huge spreads that currently exist between their costs to borrow and the rates they can charge to lend. Since the bank wouldn’t have bad assets, they’d be able to offer lower rates than are currently available from other banks. In time, this would force the other banks to lower their rates in order to remain competitive.

*For all intensive purposes the new bank would be a privately run operation. The government would act as a silent owner provided some guidelines are followed. For instance, they could stipulate that all earnings would be retained by the bank and used for expansion. Also, ten years from it’s opening the bank will go public and become a completely shareholder owned corporation with no ties to the government. The government will receive all proceeds from the IPO and hopefully a significant return on its investment.

Obviously I know my plan will never happen, but in theory I think it would work. Believe it or not now is a great time to be a bank, provided you don’t have billions in worthless assets on you books.

P.S. There are some details of my plan that I’m leaving out for simplicities sake. If anyone has any criticisms or critiques then I’ll elaborate further.

Here’s What Insider Trading Looks Like

Stephen Kline — Fri, 23 Jan 2009 01:38:22 +0000

Alright, despite what the SEC or anyone else tells you, insider trading is quite prevalent in today’s financial markets. In fact, if you’re paying attention and know what to look for you can probably spot it yourself.

Yesterday, I was keeping an eye on shares of Energy Transfer Partners (ETP) when I noticed something odd. The whole day ETP had pretty much been trading in lock-step with the oil & gas index. Then all of a sudden at about 3:30 pm, Energy Transfer Partners and the index started trading in the complete opposite direction. As you can see from the chart, ETP went on to finish the day at its lows, while it’s index and the broader markets in general finished the day at their highs. This was strange to say the least…

During the last half hour of trading, (when the sell off occurred) there was also a dramatic spike in volume. If you look at the volume section of the chart below, you’ll see that moments before the final bell rang over 200,000 shares exchanged hands. This is clearly an outlier since nowhere near that many shares had been traded the entire day. It’s important to keep in mind that there was no news release that would have explained the increase in volume and late day sell off.

Now typically these two oddities above wouldn’t necessarily have me up in arms complaining about insider trading. It’s perfectly possible that a mutual fund or hedge fund wanted to sell some shares into the day’s rally. This would perfectly explain the volume spike and sell off.

However, about 12 minutes after the markets closed, ETP issued this press release. The press release states that ETP will be selling about 5 million new shares in order to raise capital. When a company issues new shares it dilutes the value of all the other outstanding shares. This usually causes the stock to sell off. In my opinion, (and I’m no expert) it looks like someone got their hands on this information and either shorted ETP or sold a long position they had been holding. Either way they traded and profited from information that wasn’t yet public… and that my friends is illegal.

I’m fairly certain the SEC will not look into this matter. I personally don’t have much faith in them. All I will say is that it’s pretty sad that a 24 year old with a computer, yahoo finance and no experience can spot possible financial shenanigans like this occurring regularly in the market.

An Interesting Factoid About Credit

Stephen Kline — Wed, 21 Jan 2009 23:58:12 +0000

The word ”credit” is actually derived from the Latin word ”credere”, which means “to believe” or “to entrust”.

As you already know our entire economic system is based on credit, or put in other terms… the belief that contracts will be honored, loans will be repaid and the entire system in general will continue functioning as it should. When the belief and trust in the system is broken that’s when major problems occur. (As if you didn’t already know.)

Apple Needs A Lesson On Corporate Governance

Stephen Kline — Fri, 16 Jan 2009 23:56:26 +0000

As you may have already heard Apple announced the other day that Steve Jobs will be taking a leave of absence from his CEO position while he battles health problems. First and foremost, I feel sorry for Steve Jobs and wish him good luck with his health problems. The man is a great leader and innovator and it’s a shame that he has had to step down on these unfortunate terms. Hopefully Steve will beat his health problems and be back at the helm of Apple in a few months.

The problem I have with this whole situation is the way Apple has handled releasing information on Jobs’ health. Typically, a person has no obligation to release information about his or her health as it is private information. However, Steve Jobs isn’t a typical person. As the CEO of a publicly traded multibillion dollar company, thousands of employees and investors depend on Jobs to lead Apple. Publicly traded companies have a fiduciary obligation to notify shareholders about any “material” information that could affect the business. (This wouldn’t be the case if Apple was a private company)

What irks me about how Apple handled this is the way they went about informing investors about Jobs health problems. When Jobs appeared noticeably thin they said his health was a private matter. Then Jobs appeared on stage and joked about his health conditions claiming, “The rumors of my death are greatly exaggerated”. Last week the company released a letter saying that Jobs had a manageable hormone imbalance and he would remain CEO. Finally on Wednesday Jobs released the letter announcing his leave of absence due to his health problem.

In my opinion Apple should have handled this differently. They should have been more up front with investors from the beginning. Instead they exposed the company to rumors and possible lawsuits by disgruntle shareholders. Now that I’ve got that off my chest, let’s all say a prayer for Steve Jobs.