Advice to young investors.
Create multiple spigots of income for your retirement.
The end is the beginning.
When you retire you are at the end of your earning career but at the
beginning of your investment career.
Some large corporations provide investment assistance for a period after
retirement, but in the end, whether you worked for a big corporation or ran
your own beauty salon, you will need to manage your finances during most of
your retirement.
Wealth Managers
High net worth people often times use a wealth manager and
pay a fee. Their holdings can be complex
with both tax and estate factors that make paying a fee for multidisciplinary
investment help worth the expense.
Believe me, the client who turns over all of their money with both discretion
and custody to a wealth manager is taking on enormous risk. Look at what happened to Bernie Madoff’s
clients. (See notes 1 and 2 for
definitions of discretion and custody.)
In my blog I have written about one investment manager that
is public and shares with you the money they make from managing other people’s
money through a dividend. That stock is Westwood
Holdings symbol WHG.
http://www.themoneymadam.com/2011/05/westwood-holdings-group-symbol-whg.html
http://www.themoneymadam.com/2015/12/westwood-holding-group-2015-dividend.html
http://www.themoneymadam.com/2011/05/westwood-holdings-group-symbol-whg.html
http://www.themoneymadam.com/2015/12/westwood-holding-group-2015-dividend.html
Ordinary Investors
Ordinary investors who start saving for retirement in their mid-thirties
and get really interested in creating wealth in their 40’s are my target for
this article. If you invest with the
goal of creating income later in life, you will be a very successful and happy
retiree.
Multiple Spigots of Income
My best advice to young investors is to execute a plan
designed to develop multiple spigots of income.
Do not depend on any one source be it social security, your teacher’s
pension, your defined benefit plan, your stock option, the lottery or Uncle
Henry’s promised bequest. Don’t depend
on any one, but use them all.
The easiest example to understand the concept of multiple
spigots of income available to ordinary investors is to think about the
investor who spent time in a government career. The government allows people in its employ to
serve enough time to create a government pension yet leave the government at a
time of life when they are still productive.
Government law enforcement employees like those with the USPS actually
must retire at age 55 when they could and should pursue a second career. 10 years in the private sector provides this
person with social security benefits as well as the opportunity to contribute
to a qualified retirement plan. I know
more than one of these talented, resourceful, energetic people who went on to
teach at the university level creating yet another spigot of income.
Every successful investor needs to invest with the purpose
of creating multiple spigots of income using whatever resources are at your
disposal. Be creative in determining the
resources at your disposal.
Use Real Estate
Real Estate is a frustrating but very rewarding spigot of
income to cultivate. It is not easy but
the tax advantages and the potential for future income is undeniable.
The riskiest but most rewarding real estate investments are
done privately. I personally have been involved with winners and losers. You have to cultivate relationships with
proven real estate investors and hope you have saved enough money to invest
with them.
Leverage is a necessary part of real estate. For the average
investor, it takes too long to save up enough money to buy an income property
outright. You have to use
leverage. For instance: you buy a one
hundred thousand dollar rental property using only 10% down or $10,000. Your tenant covers the cost of the leverage,
better known as a mortgage, and the ongoing expense through the rent you charge
and then you sell the property for two hundred thousand dollars. After paying off the $90,000 of leverage you
just turned $10,000 into $110,000. Turn
that $110,000 into income through more real estate or take your gains and move
into another asset class like stocks.
Personally I think, if you are successful enough to have created this
capital gain and you did cover your expenses from rentals, you will find a
property that will turn $110,000 into $1,000,000.
Most ordinary investors who create multiple spigots of
income have some real estate income. It
may be a condo bought for income, it may be in partnership with others to buy
something bigger than a single condo. It
may be in a real estate investment trust.
For investors who do not know how to manage a rental condo
or who do not know a reputable general partner for a private real estate deal,
you can consider a REIT (real estate investment trust.) REIT’s can be a good
vehicle to create a spigot of income for retirement. Your income and your gains may not be as
grand, but a well selected REIT can deliver a good spigot of income. Taxes are little complicated but not
something your accountant cannot handle.
See Note 3 for an Investopedia explanation of REIT taxation. The best REIT performer of my M* portfolios
has been a health care REIT, National Health symbol NHI. http://www.themoneymadam.com/2013/07/top-health-care-reit-for-your.html
Build your own Business
Build equity in a business and use your success to leverage
the purchase of the real estate your business runs out of. Now you own two
assets. One is the ongoing business and
if you sell it and help the purchaser of that business be successful you may
end up with a capital gain and a long term tenet providing another source of
income.
Use every retirement vehicle available
Work your personal budget so that you can fully fund or
match every 401K, 403B, pension plan, IRA, Roth IRA possible. I like to see young people devote no less
than 10% of their gross income into retirement vehicles. If 10% of your gross income is greater than
you are allowed to contribute by law to qualified retirement or pension plans, then consider tax advantaged savings such
as municipal bonds, annuities, or a foundation.
But if you have so much income that a foundation is one of your options,
hire a wealth manager.
Costs can eat up savings which is why I do not like
annuities; they are too expensive.
Corporate pension plans provide mostly mutual funds and you have no
choice but to pick one or more of those funds and suffer the costs. But for the self-directed money you have
saved, I recommend using ETF’s. My
favorites are SDY and SPY and I have been looking at VIG as good sources of
steady, and rising income.
I find that few young people, especially those
raising children, have enough time to execute a disciplined investment plan by
themselves. ETF’s are low cost
investments that concentrate on both growth and income. It is always nice to have income while you
wait for growth. ETF’s are the best
alternative, in my opinion, to managing your stock portfolio yourself.
Diversify, Diversity, Diversify
Be as diversified as your experience and your contacts allow
you to be. If you have tried and you
just cannot manage your investments, then your alternatives are ETF’s or mutual
funds. If you have success with real
estate or second trust deeds, then go with those investments. Learn while you invest. If you know other people who invest money
cultivate contacts that could help you invest in private real estate.
Diversity in a portfolio means you have investments in multiple
asset classes, some in stocks some in bond or trust deeds, some in real estate,
some in your small business or stock in your corporate employer. Diversity also means to have diversity
within each asset class. Don’t count on
one very expensive property to deliver the income and growth you’ll need in the
future. It is better to have multiple
smaller properties that cover more than one geographic area.
Use stocks and bonds and covered calls
Have a game plan for stocks. Use ETF’s until about five
years before you quit working then merge into individual stock holdings. Learn
how to sell covered calls. Covered calls are relatively easy to learn. Do not mistake learning how to sell covered calls
with an options trading strategy.
Options trading is a completely different animal that is a hobby not an
investment plan. http://www.themoneymadam.com/2012/11/instructions-on-using-my-covered-call.html
Never, ever use a bond fund. Bond funds pool their bonds and you are not
guaranteed return of principal as you are with an individual bond. This is why I am not a fan of target date
funds. Target date funds move the
client between and stocks and bonds based on their age but the bond holdings
are pooled. This is not a good way to
invest the bond portion of a well diversified portfolio.
When interest rates are more favorable than they are now,
invest in individual bonds that you buy at no more than par and possibly at a
discount. Ladder your bonds by maturity. Every major brokerage house, I use Schwab and
Co., has a bond desk that will help you create a laddered portfolio but you
must set the guidelines for them and you need to understand the concept of bond
ownership and laddering maturities.
Principle value will vary but a bond held to maturity will
give you back your money. Never, ever
use a mutual or ETF to build your bond portfolio.
When investing in stocks, stick with US companies and to get
global exposure go with the big cap companies. Mc Donald’s symbol MCD or Johnson and Johnson
symbol JNJ or Pepsi symbol PEP, I can go on and on, are the kind of stocks you
want to buy. Learn enough about the
fundamentals of a stock to make a reasonable choice. Make a list and buy these good companies
when it appears there is opportunity.
Opportunity moves around the universe of stocks. Commodities stink right now but they have
been good several times in my lifetime.
Energy is weak but has delivered a lot of good income to investors who
already retired. Research suggests 20
well diversified stocks will be enough to create a good portfolio. (Note 4) Gradually leave the world of ETF’s and begin
to develop your portfolio about five years before you retire. The market will be volatile enough that you
can pick from your wish list and add stocks when you see opportunity then
reinvest the dividend until you need it
When you do this in a qualified retirement account the results are
stunning due to the fact you are not taxed on the growth or the income until
you take the money out.
Use Patience
Be patient as asset classes will go up and down in
value. Be patient as specific holdings
within asset classes will go up and down.
Don’t be afraid to make a mistake; correct it as soon as you can but be
sure to consult your plan so that you are not making emotional rather than
disciplined decisions about your assets.
Good luck and good investing.
M* TheMoneyMadam
Note 2 Custody by investment advisers means holding
client funds or securities, directly or indirectly, or having the authority to obtain possession of them. https://investor.gov/news-alerts/investor-bulletins/investor-bulletin-custody-your-investment-assets
