Handyman Investing

     I recently went for a walk in my neighborhood and found an antique table discarded on the side of the road. The table had one leg broken-off and another leg shattered. I could not resist bringing it home to repair and refinish it. A few days later, the table looks worthy of my living room. What someone else saw as trash, I saw as treasure (with a little work). Stock investing can work the same way. For each purchase of a stock I make, someone is selling those shares to me. Beauty is in the eye of the beholder in women, goods, and stocks. I like to acquire broken things and either fix them myself or let someone else fix them (like the CEO in the case of stocks). Just like my antique table was very cheap (free), good stocks sometimes get cheap and deserve a second look. Even with the stock market at record highs, there are some stocks that are unloved right now. I recently ran a stock screen for stocks with a PE ratio below 10X and a PEG ratio of 1 or less. There were over 40 such stocks listed. There will always be a reason for a stock to be that cheap, the key is to decide whether the reason is temporary and fixable. One company that I am willing to take a chance on is Gilead Sciences. It is trading at 6 times earnings and has many sell recommendations on it, however, I am confident that they can develop new therapies for some of mans worst diseases. Gilead is guilty of selling drugs that actually cure hepatitis C, losing a customer every time. As usual, I placed a limit order for Gilead because tomorrow they report earnings. If earnings disappoint and the stock falls, I will get it even cheaper. If earnings are above expectations, my order will not be executed. I recently sold some big pharma stocks because their PE's were at nosebleed levels. I am more comfortable with a stock with a very low valuation for several reasons: if there is a market correction, value stocks will probably fall less than growth stocks, and any good news for Gilead could generate a nice pop for the stock. Exploiting the PE ratio would reveal the potential for Gilead. I am not recommending Gilead as an investment for most people because of the risk, I am just using it as an example of how I choose my investments. I need to be patient with this one because new drugs take a long time to develop and become accepted therapies but there is a 3% dividend in it for me while I wait.

Invest Like You Dress

     About a year ago my wife dragged me to Macy's to get outfitted for some new clothes. We were attended by a well groomed salesman who did a great job of selling me some new threads. I asked him what was currently in style and he gave me some timeless advice: "Buy clothes that are age appropriate for you".  Why should I care what the latest style is? I'll let the millennials worry about that. I just don't want to look like a rag-tag bum and be laughed at. As long as I am comfortable and look decent, I am happy. An investment portfolio should also be "Age Appropriate" and as individual as the owner. There is no "one size fits all" in investing. A person needs to be comfortable with their investments and not worry about them at night.  In general, as a person ages, the risk in their investments should be gradually eliminated so they won't be wiped-out by any market corrections. If you were to look at a graph of age vrs risk, where age is the horizontal axis and risk is the vertical axis, the slope would look like a toboggan run with the bottom of the hill in retirement age. Again, this is highly personalized. An example would be the funds that I manage for my mother who is 92 years old. I have lots of stocks, fixed investments like municipal bonds and CD's, and even some Master Limited Partnerships in her portfolio. Why should I take so much risk with my mothers savings? Two reasons: diversification and liquidity. I keep lots of cash on hand to pay her huge monthly costs at the nursing home and her holdings are diverse enough to insulate against any stock market shocks. I wish I could get a good return in federally insured bank accounts so Mom could get some safe income but that is not the case right now. That is why I have her invested in stocks that produce dividends and potential capital gains. The important thing is that I am comfortable with the investments for her situation. Just like wearing the latest fashions, chasing after the hottest stocks at this point in my life for me or my Mom would just not be age appropriate for either of us. We like steady businesses with a record of increasing dividends and below market valuations.

I Hate Rules

     Some rules are necessary in civilized society. You shouldn't steal, you shouldn't kill anyone (in most cases), and you should pay your taxes. However, when it comes to my nest egg, I believe that the fewer rules that I have to follow, the better. Most people have a qualified retirement account of some kind, like an IRA, 401k, 403b and so on, but in my last post I stressed the importance of saving for the future with after-tax money too. Those qualified retirement accounts are constrained by reams of rules about how much you can contribute, when and how much you can withdraw, what you can invest in, and on and on. In exchange for following all the rules, you get to allow your money to accumulate tax deferred until age 59.5, at which time the rules tell you how much you have to pay tax on. At age 70.5 the rules tell you how much you have to withdraw every year as a required minimum distribution (RMD) and pay taxes on.  I don't have a problem following these rules because if there is one thing I hate more than rules, its paying taxes. In my opinion, any time I can defer or eliminate paying taxes, its a good thing.Why am I bringing this up? Well I recently read an article in the local paper by a well known financial guru who thinks any after tax savings should be put in a Roth IRA. I beg to differ. First off, full disclosure: I own a Roth IRA. It's relatively small and accumulates tax free. It also will not be taxed when I decide to withdraw the money. A Roth is a good idea for someone who follows the rules. There is a 5 year rule, order rules for distributions, rollover rules, contribution rules, and even more rules. The older I get, the fewer rules I want to follow. Hell, I might even forget some rules. I could order publication 590a from the IRS to remind me about all the rules for the Roth IRA. It would make great reading before I fall asleep. I could even order publication 590b if I am still awake and need more reading material. Maybe it's just me but I just want to follow enough rules to keep my ass out of jail. That is why I like to have some investments that are not restricted by IRS rules. With my stock portfolio, I buy what I want, when I want, sell what I want when I want and settle with the government at the end of the year. I try to offset my gains with losses to mitigate my tax liability. The dividends are taxed at preferable rates (if qualified dividends).  What really scares me about the rules for the Roth IRA is that the brainiacs in Washington D.C. could change the rules at some point during my lifetime. Then I would have to order more IRS publications to help me fall asleep.

A Note to GenXers

     I just read a chart that identifies the generational differences between GenX, Millennials and Baby Boomers. It stated that the GenX generation is the first generation in US history to be less well-off than their parents. I have written about the reasons for this in past posts, but it doesn't have to be this way. I agree that the work environment is more difficult now that it was 25 years ago, but a little education about finance and proper preparation for the future can mitigate the changing climate. First, about saving for retirement, there are many retirement plans available to workers: 401k, IRA, SEP, HSA, and so on. A google search will reveal all of them. HSA's also can be used like a IRA, you just have to read the rules in an IRS publication like Pub 17. At age 65, (almost) I have a few things to share with the younger generation about retirement: Take advantage of the matching funds that your employer offers you, its free money. Don't fall for the regular (weekly) investments in your company's stock,( I lost my ass in this one). Have an investment or savings program outside of a Qualified Retirement plan. Money saved or invested outside of any retirement plan has already been taxed and does not produce a tax liability during retirement. Only the earnings on these funds are taxed, remember that dividends are taxed at a lower rate than other income. Any redemptions or distributions from a retirement plan are taxed as ordinary income. By owning after tax assets, you can avoid the 1099R that comes from any distributions from retirement accounts. Just like Millennials hate to pay taxes while working, they will really hate the tax burden in retirement. Most of the retirees that I worked with in the past still do not need the money in their 401k's at age 80 because they have other funds to live on. At age 70.5, retirees are required to start taking funds out of retirement accounts, this is callled a RMD (required minimum distribution) and is taxed at ordinary income rates. Many seniors resent this requirement because they don't need the money and don't want the tax burden. The funds in the retirement accounts are used as a safety net in old age. I don't know what will happen to social security or medicare in the future, but that is why saving in a retirement account can produce peace of mind. Bottom line, millennials will only be less well off than their parents if they don't prepare for the future. Not all Boomers are enjoying a comfortable retirement either, just the people who planned for the future can live out their lives on their savings.