My 1% Miracle: How to Avoid Outliving Your Money

Back in 1991 I addressed the most terrifying aspect of saving for retirement that any investor can face, the prospect of outliving your money. I cannot impress upon you enough the importance of saving more than you think you’ll need.

Those of you who have been diligently saving and intelligently diversifying your portfolio through the last nine years of historically low interest rates are surely wondering if your savings will hold up after you retire. Ultra-low interest rates from the Fed have been a direct assault on retirees and savers. But now rates are rising, and you have the opportunity to participate in my 1% miracle.

I wrote the following back in 1991. The numbers for inflation and return don’t coincide with today’s reality, but the principles remain the same. Capturing higher rates of return as interest rates rise can have a big effect on your spendable income. I wrote then:

Do you believe in miracles?

Try this one for size. I call it DICK YOUNG’S 1% MIRACLE, and I think you’ll be stunned.

I want to show you how just a 1% increase in your average annual investment income can increase the annual earnings from your investment portfolio by 40%. “Right Young,” you say, “a 1% increase in income can translate into a 40% increase in earnings? Give me a break.” But hold on, here’s the miracle—along with instruction on how to apply my miracle to your own investment program today. See if you can beat this!

SPENDABLE INCOME ON $1 MILLION IS ONLY $20,000

Let’s assume, for illustration, that you have a $1 million pool of retirement cash. Let’s also assume 5% inflation, an annual 9% return on your capital, and a fair tax bite. Okay, 9% translates into $90,000 gross income on $1 million. With a 5% inflation rate, you must plow back $50,000 to capital to maintain future buying power. Most investors forget all about the inflation cancer that eats away at portfolio buying power. If you do not add back to your capital annually at the inflation rate, you are badly kidding yourself. Now, let’s assume $20,000 in taxes—I’m being kind—on a $90,000 gross income. Don’t worry about the preciseness of this tax figure; it doesn’t matter, as you’ll soon see.

After tucking away $50,000 to maintain purchasing power and paying $20,000 in taxes, your spendable income is only $20,000. That’s it! And yes, that is the maximum I would personally plan to spend today out of $1 million in retirement capital. I know it’s not a lot of money, but if you spend more, you are eating into your capital. Now you see why the financial problems of retirement are much more difficult than explained to you by most fuzzy-thinking financial planners. You cannot consume the host!

Increase Earnings 1%, Increase Spendable Income 40%

Now assume you increase your portfolio income by just 1%, to 10% from 9%. Gross portfolio income now becomes $100,000, up from $90,000. Tuck away the same $50,000 to maintain portfolio purchasing power, and pay taxes of $22,000 instead of $20,000, and what do you get? Instead of $20,000 spendable income, your spendable income becomes $28,000. How does $28,000 relate to $20,000? It’s an increase of 40% in spendable income, just as I promised would be the case. To get this unbelievable 40% increase in income, all that was needed was to improve your portfolio income by an annual 1%.

You, of course, are looking for flaws in my 1% miracle. But there are no flaws. And you are astounded at how little spendable income is available on $1 million at a 5% rate of inflation. You’re not accepting what I’m telling you warmly and happily because the level of spendable income I’m suggesting is so unappealingly low.

Don’t Destroy Your Capital Base

Don’t fall for the tempting argument that $1 million is such a large sum, you can afford to accept a 5% per year decrease in earning power due to inflation—or even to dip into principal. To help you stay on the straight and narrow, ask yourself: “Do I expect to be alive 15 years from now?” Most people will answer yes—and with today’s longer life spans, that’s being realistic. If you retire at age 65, you stand a good chance of reaching 80. And if you retire early at age 55, as so many are doing, you certainly expect to be alive and kicking at 70. You definitely don’t want to find yourself broke at either age 70 or 80.

How can you boost your return by 1% without magnifying risk? Craft a diversified portfolio and eliminate emotionalism from your investment process. That’s easier said than done. If you need help, consider that Vanguard estimates that the potential gain from using an advisor to help manage your portfolio can add as much as 3% per year to your return. Working with an advisor on strategies such as rebalancing your portfolio, appropriate asset allocation, building a spending strategy, and most importantly guidance on what investments to make and which not to make can have a significant positive effect on your returns.

For a glimpse at how my family run investment counsel service helps clients implement those strategies, signup for the monthly client letter (free even for non-clients) from Richard C. Young & Co., Ltd.

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Put the Odds on Your Side

Near the end of 1993, Debbie and I were hunkered down at The Dorset Inn in Vermont. Its wide pine board floors, restored tap room, gourmet dining room and antique-outfitted guest rooms make the small inn a special place to get away from the constant din of markets and politics. The events of that fall were oddly connected to this very moment in American history.

In November of that year President Bill Clinton told the world that North Korea must never be allowed to develop a nuclear weapon. And in December, Clinton signed NAFTA into law. Projections made in 1993 on how the Korean situation and NAFTA would turn out look poor in hindsight. Attempting to divine the future is a fool’s game, and as I wrote back then, in investing you must “invest in what you know to be true today, not in what you think will be true tomorrow.”

I wanted you to focus then on the value of putting the odds on your side, and I still do. I wrote:

OK, given that there is a lot of similarity among long-term results and that different styles of investing, as well as managers, come in and out of style, what’s the best strategy for successful mutual fund investing? How can you be a consistent winner with confidence?

At the top, invest in what you know to be true today, not in what you think will be true tomorrow. Insist on putting the odds on your side. Take full advantage of the tools of the mathematician. For example, here’s a little mathematical shortcut you can use to determine compound interest. How long does it take for money to double at a predetermined rate of interest? Use the Rule of 72. Simply divide the rate in question into 72. If your interest rate is 9%, money will double in eight years (72 ÷ 9 = 8). That’s all there is to it. Compound interest should be your most trusted investor ally (aside from Dick Young, of course), and the Rule of 72 can help you understand the value of compound interest.

Putting the odds on your side—such as understanding the power of compound interest—will make you a winner. That is most certainly your first rule for successful long-term investing.

Don’t let unsure expectations of what will happen in the future cloud your investing judgement. You must instead seek to minimize risk, investing in dependable streams of income, and harden your portfolio against uncertainty.

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When Investing, It’s Better to be a Leper than a Lemming

During my five decades of investing, I have more often than not been arguing against the going wisdom of the markets. To call me a contrarian would be accurate. Leper investor also fits.

In December of 2001, I explained what I called “Leper Investing,” to my readers.

Leper Investing

In order to invest successfully over your lifetime, you need to act counterintuitively; that is, against the prevailing Wall Street wisdom. You want to buy contrary-opinion names—those stocks loathed, despised, and shunned by the institutional magnets. Your caches of lepers will generate above-average returns for you when you exercise patience. You must be ahead of the curve to invest this way. You must have vision and patience and be able to look over the horizon. Most often, you will want dividend-payers.

Later I went on:

I’ve suggested that conservative investors buy only dividend-paying stocks. I can’t emphasize this rule strongly enough for you. My Retirement Compounders program is built 100% on dividend-paying equities. Ben Graham, the father of value investing, said, “One of the most persuasive tests of high quality is an uninterrupted record of dividend payments.” Burton Malkiel, Vanguard trustee, Princeton economics professor, and author of A Random Walk Down Wall Street, one of the best books ever written on investing, wrote in his book, “Historically, high-dividend yields have meant better returns…looking for above-average yield is itself a contrarian strategy. Investing in high-dividend stocks therefore is likely to lead you to attractive issues.”

I continue to encourage investors to seek out unloved, forlorn and out-of-favor stocks with a focus on those paying dividends, and with a history of increasing those dividends each year.

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Does Your Portfolio Pass My Three Step Test for Balance?

Back in 1993 I explained my three-step test for balancing your investment portfolio between bonds and stocks. At the time I was recommending Treasuries, but you can use this advice no matter what kind of bonds you’re buying. Use your age and my three-step test as a starting point for how you plan to allocate your portfolio. I wrote:

I want you to keep your investment portfolio well balanced. But just how much of your portfolio should be invested in equities and how much should be in Treasuries? Here’s a basic strategy that is based on your age. The percentage of your portfolio that is in Treasuries should not exceed your age. For example, if you are 60, you will want a maximum 60% Treasuries component. That’s your starting point. Now take these tests to see if you need to reduce that percentage. If any of these statements fits you, knock 10 percentage points off your age number. But you will only knock off a maximum of 20 percentage points in total.

Test #1: You do not require current income from your portfolio to live on. If that sounds like you, knock off 10 points. Test #2: You consider yourself to be a sophisticated, patient, seasoned investor. Answer yes to all three descriptions without a wince or snicker, and knock off 10 points from your age percentage number. Test #3: You are financially secure, if not wealthy. If you have what you believe is a solid store of financial wealth, knock off 10 points from your age percentage figure. If you qualify with two or three tests, you can knock off the maximum allowed, 20 percentage points, but no more.

A fixed income component to balance out your equity portfolio is a vital necessity for any serious investor focused on income generation and capital preservation.

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An Investor’s Meanest Foe

For the over five decades that I have counseled individual investors like you, I have consistently advised the ruthless elimination of emotionalism from one’s financial affairs. Emotionalism is an investor’s meanest foe.

How do you eliminate emotionalism from your investment decisions? There are many facets to emotionalism, but as I wrote to my investment strategy report subscribers twenty years ago, one simple way to defeat emotionalism is to take a more hands-off approach.

Events of the moment should never be part of the investment mix. I price my portfolio once a year at tax season (because I must). Beyond this tax-related housekeeping chore, I pay little attention to prices. Most of what I own, I have owned for a long time. I know how things are going month to month and find it counterproductive to rustle through my holdings regularly. You’ll be amazed at how comfortable you can become with a hands-off approach. You sure as heck will pay a lot less in commissions and taxes. And you will defeat what is every investor’s meanest foe—emotionalism.

Some may scoff, but for many, the seemingly innocent act of tracking daily portfolio fluctuations can trigger the type of emotionally charged investment decisions that sabotage portfolio performance.

I have learned that through decades of in the trenches work with investors, but academic studies also show that the more often an investor reviews his holdings, the less likely he is to craft a return-maximizing portfolio.

A hands-off approach remains the mandate today.

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Bull and Bear Portfolio Update: 5.18.18

Model Guidance: Close Your Positions

I want you to close out your longs and shorts in the short-term Bull-Bear Portfolio model. Through last night’s close, the model is up 2.80% (total return)  compared to a gain of 1.30% for the Dow (assumes $60K in capital)—a strong return for a portfolio that takes 40% less stock market risk than the Dow as a whole. And a nice boost to a balanced portfolio that may be feeling some temporary drag from rising interest rates.

With a nice profit in the bank, it is time to move on from this round of the short-term bull-bear portfolio and come back when conditions are more favorable.

I will have more on bull-bear investing and many more compelling enhancements to Young’s World Money Forecast over coming weeks and months.

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Bull and Bear Portfolio Update 5.11.18

Model Guidance: No Changes for the Week

My short-term Bull & Bear Portfolio consists of 10 equally-weighted long positions and 5 equally-weighted short positions. Both the long and short stocks are selected from the Dow Jones Industrial Average. If the Dow advances over the period in which my 15-Dow stock portfolio is open, the model will make money with the stocks that advance and will lose money with the stocks that decline. And the opposite will prevail for the short stocks. Each week, I will review the model portfolio for potential changes. If no changes are required, I’ll simply post no changes for the week. You can read more about my Bull & Bear Portfolio here.

Featured Company: Verizon Communications Inc. (NYSE: VZ)

Like all telephone companies in America, Verizon’s history starts back in July of 1877 when Alexander Graham Bell formed the Bell Telephone Company. Soon Bell telephone systems were popping up in all the major cities in America, which were linked by Bell’s long distance calling operation. By 1910 the federal government stepped in to regulate what was fast becoming a monopoly on long-distance telephone services.

By 1944 the Bell system of telephone companies, controlled by parent company AT&T, owned all the local phone companies in every major city in America. In 1974, the monopoly’s power would spark a fight between AT&T and the Department of Justice, eventually forcing the parent company to sell the 22 local phone companies in the Bell system. In 1996 the FCC deregulated local markets, allowing competition and setting the stage for what would become Verizon.

Two of the previously regulated Bell system companies, Nynex and Bell Atlantic, merged in 1999, and then joined with Vodafone in 2000 to create a wireless telephone service they named Verizon Wireless. Only months later, Bell Atlantic merged with GTE Corp, expanding its wireless footprint across the country. The merged companies took on the name Verizon, creating the major telecommunications business that survives today.

Since then, Verizon introduced America’s first 3G network in 2002, started building a fiber optic internet system known as FiOS in 2004, deployed America’s first large scale 4G LTE network in 2010, became the first service provider to deploy 100Gbps technology to parts of its network in 2011, and then quickly doubled that in 2013 with the rollout of 200G speeds.

In 2014 Verizon made what may have been its most important acquisition ever by buying Vodafone’s 45% interest in Verizon Wireless. With Vodafone out of the joint venture, Verizon gained full control of America’s largest wireless company.

Today Verizon is continuing to work on its network by rolling out 5G wireless technology. Verizon describes the benefits of the 5G system as “about 50 times the throughput of current 4G LTE, latency in the single milliseconds, and the ability to handle exponentially more Internet-connected devices to accommodate the expected explosion of the Internet of Everything.” The 5G systems will be so fast it won’t just connect smartphones to the Internet, it will even compete with cable-based home broadband systems to connect TVs, desktop computers, streaming devices and all other connected machines. In 2018, Verizon plans on rolling out residential broadband services using 5G in three to five markets in America.

Verizon and its predecessors have paid investors dividends each year since 1984. The company is also a Mergent dividend achiever that has been raising its dividend each year for 12 consecutive years. Verizon shares yield 4.85% today.

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Bull and Bear Portfolio Update 5.4.2018

Model Guidance: No Changes for the Week

My short-term Bull & Bear Portfolio consists of 10 equally-weighted long positions and 5 equally-weighted short positions. Both the long and short stocks are selected from the Dow Jones Industrial Average. If the Dow advances over the period in which my 15-Dow stock portfolio is open, the model will make money with the stocks that advance and will lose money with the stocks that decline. And the opposite will prevail for the short stocks. Each week, I will review the model portfolio for potential changes. If no changes are required, I’ll simply post no changes for the week. You can read more about my Bull & Bear Portfolio here.

Featured Company:Walmart (NYSE: WMT)

In July of 1962, Sam Walton opened the first Walmart in Rogers, Arkansas. After growing rapidly through the 1960s, Walmart went public in 1970, and Walton took his strategy of “the lowest prices anytime, anywhere,” national. In 1980, Walmart reached $1 billion in annual sales for the first time, faster than any company before it. By that time, the store had 276 locations and employed 21,000 associates. In 1983 the company opened its first Sam’s Club location in Midwest City, Oklahoma. In 1988, Walmart opened its first “Supercenter,” combining a full-scale supermarket with its general merchandise store for shopper convenience.

In the 1990s Walmart began its quest to go global. The first step was opening a Sam’s Club in Mexico City via a joint venture with the Mexican retail company Cifra. By 1993, only 23 years after its first $1 billion year, Walmart recorded its first $1-billion-week of sales. Walmart would continue to expand globally in the 90s, opening stores near and abroad in places like Canada and China.

By 2000, Walmart had 3,989 stores and had created its first online shopping experience, Walmart.com. In 2002 Walmart topped the Fortune 500 for the first time. By 2009 Walmart had reached $400 billion in annual sales.

Over the last eight years Walmart has made large expansions in India, South Africa and online. In China, Walmart purchased all of Yihaodian, an e-commerce business it had partially owned. During 2016, Walmart bought Jet.com, an American e-commerce website. Walmart also created a strategic alliance with JD.com, one of China’s largest e-commerce retailers. Recent news reports have said Walmart is attempting to buy India’s largest e-commerce business, Flipkart. The retailer’s directors have agreed to the deal, but it hasn’t been fully approved yet. Successful completion of the deal would give Walmart an advantage in the Indian market.

Today Walmart employs 2.3 million people in 28 countries. The company runs more than 11,700 stores and serves nearly 270 million customers each week. A recent initiative has expanded online grocery pickup to over 1,100 stores in the U.S., and will add another 1,000 in 2018, as well as locations in Canada, Mexico, and China. To better compete with online retailer Amazon.com, Walmart has also added free 2-day shipping to Walmart.com. Walmart has been paying its shareholders a dividend every year since 1973, and has been increasing those dividends every year for 41 years. Over the last ten years the average dividend growth rate at Walmart has been 11.56%. Shares yield 2.37% today.

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Bull and Bear Portfolio Update 4.27.2018

Model Guidance: No Changes for the Week

My short-term Bull & Bear Portfolio consists of 10 equally-weighted long positions and 5 equally-weighted short positions. Both the long and short stocks are selected from the Dow Jones Industrial Average. If the Dow advances over the period in which my 15-Dow stock portfolio is open, the model will make money with the stocks that advance and will lose money with the stocks that decline. And the opposite will prevail for the short stocks. Each week, I will review the model portfolio for potential changes. If no changes are required, I’ll simply post no changes for the week. You can read more about my Bull & Bear Portfolio here.

Featured Company: Intel Corporation (NASDAQ:INTC)

In 1968, the year 2001: A Space Odyssey was released, mankind was looking to the stars and the future of technology. The Apollo space program was heating up in preparation for the moon landing the year after. Computers were being made smaller and more powerful in order to the meet the demands of the space program and other advanced technological undertakings.

That same year, two men named Bob Noyce and Gordon Moore founded Intel. The company’s first product would be produced in 1969. It was the 3101 Schottky bipolar random access memory (RAM). The team would also break ground by introducing the world’s first metal oxide semiconductor static RAM, the 1101. By 1970 Intel had upended the entire industry by introducing the 1103 DRAM, a new standard in computer memory technology.

Intel’s hits would keep on coming. In 1974 the company introduced the first general-purpose microprocessor. In 1975 Intel processors were shipped on one of the first PCs, the Altair 8800. In 1981, computing giant IBM would select Intel’s processors for its line of PCs. In 1992 Intel became the world’s largest semiconductor supplier. Through the 1990s Intel would introduce and continuously improve its Pentium line of processors. In 2006 Intel introduced the world to the first quad-core processor for desktop computers.

Today Intel is transforming its business from a focus on PCs to a focus on the cloud and smart devices. Patrick Moorhead summarized Intel’s new strategy well at Forbes, writing:

Intel has been on the move for the past few years driving an incredible amount of change. Once focused exclusively on X86 processors for PCs and servers five years ago, the company has branched out into what it calls “data-centric” which takes datacenter and adds automotive via a MobilEye acquisition, FPGAs via an Altera acquisition, machine learning training via a Nervana and Movidius acquisition and diving head-first into 5G and networking. With that, the company has embraced heterogeneous computing where it is more agnostic about what compute unit does a specific workload, be it CPU, GPU, FPGA, programmable and non-programmable ASIC. Lots of change.

Now, after a strong first quarter Intel has raised its revenue target for 2018 by $2.5 billion. Intel’s data-centric businesses accounted for 49% of the company’s revenue, an all-time high. Intel CFO Bob Swan explained “Compared to the first-quarter expectations we set in January, revenue was higher, operating margins were stronger and EPS was better. Our data-centric strategy is accelerating Intel’s transformation, and we’re raising our earnings and cash flow expectations for the year.”

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Short-term Bull-Bear Model: Round II

I am introducing a second round of my Short-term Bull Bear Model this week. The first version of my Short-term Bull-Bear portfolio ran for about six weeks from mid-September until the end of November. The portfolio performed well. You can check out the archives here. And if you are not familiar with the strategy, go here to learn more.

Round II of my Short-term bull-bear portfolio will include 10 long positions and 5 short positions. I am advising a 60% net long portfolio, so by example you will want to buy $10,000 worth of each of the long positions and sell short $8,000 of each of the shorts. Both the long and short stocks are selected from the Dow Jones Industrial Average. If the Dow advances over the period in which my 15-Dow stock portfolio is open, the model will make money with the stocks that advance and will lose money with the stocks that decline. And the opposite will prevail for the short stocks. Each week, I will review the model portfolio for potential changes. If no changes are required, I’ll simply post no changes for the week.

Keep in mind, short-term is the operative word in the strategy. Long and short positions may be counter to a long-term value-based investment program. Holding periods are shorter and turnover will likely be higher than for a long-term strategy. There is also a need to offset market and sector risk with short positions and long positions.

The 10 names I want you to take long positions in include:

  1. Apple
  2. Cisco
  3. Home Depot
  4. Intel
  5. JP Morgan
  6. Travelers
  7. United Health
  8. United Technologies
  9. WalMart
  10. Verizon

The five shorts are:

  1. Coca-Cola
  2. Chevron
  3. DowDupont
  4. Merck
  5. IBM
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