A recent reader question is from Alex L, who is a member of my Super Sports Roadster club, a “collaborator-friend,” and big help in getting the Miller’s Money Forever project started:
“Dennis, you started actively managing your portfolio when your CDs got called in and you were sitting on cash. What do you suggest for people who already have a portfolio but might want to rearrange it a bit?”
It’s a good question, and one that I’ve been asked frequently. Let me reinforce one critical point. Do not do what I did and start reading newsletters and buying into investments because they sound like winners. There is a good chance you’ll just compound any problems in your portfolio. (I have an article from my Miller’s Money Weekly service titled “Getting the Most from Your Investment Newsletters” that explains how to use investment research from investment newsletters and make sure it fits into your strategy.)
A major component of my business career was consulting for small businesses. This was usually a three-step endeavor. First, the client recognized they had a problem and usually had a pretty good idea of what they needed to do to solve it. Second, they asked for help because they didn’t know how to implement their solution. And that’s where I stepped in: putting the solution into action.
Alex L’s question presents a nearly identical situation. Many investors are uncomfortable with their portfolio balance, and most realize that the solution is rebalancing things in order to meet their goals, but they need outside help to rebalance.
Before you make any trades, start with the process. Take each and every investment you have and build your personal investment pyramid. The Money Forever portfolio is only a starting point. Each investor has to determine his own personal allocations. After you have done that, you’ll find the holes that need to be filled, and where you’re over-allocated.
There are five criteria which should be looked at for every investment:
1. Is it a solid company or investment vehicle?
2. Does it provide income?
3. Is there a good opportunity for appreciation?
4. Does it protect against inflation?
5. Is it easily reversible?
Look at each investment you currently own and see how it stacks up. Safety is a major concern for two reasons. First, retirees and people approaching retirement cannot afford to take a major portion of their life savings and gamble on a Facebook IPO going through the roof. The risk is simply too high.
Second, there is a grey cloud on the horizon called “inflation.” The Treasury Department reports that on February 28, 2006, our government debt ceiling was $8.2 trillion. On January 31, 2012, Congress approved a debt ceiling of $16.4 trillion, essentially doubling our debt in six years (because you know every time they raise it they just spend up to it again).
We did not double our national debt by selling debt instruments to foreign governments and investors. A major portion of the increase was sold to the Federal Reserve. In essence, the money was printed or created by accounting entry. That’s why combating inflation is vital. (Over the years there’s been a lot of buzz about Treasury Inflation Protected Securities, or TIPS. Many retirees are finding TIPS are not all they’re cracked up to be. Check out my recent article on why TIPS might actually be one worst investments you could make.)
The inflation problem is masked for many investors. In today’s climate, if you have a high-quality bond or CD, collect the interest and then pay the tax on that interest, your net yield could be 1% or less. With the Fed printing plenty of money, a 5% inflation rate is not completely unforeseeable in the near future. In round numbers, over a five-year period, your principal around such an inflation rate would buy 82% of what it did five years earlier when you purchased it.
While I’m approximating to make the point, if you had a $10,000 CD at the end of a five-year period, your $10,000 would buy what $8,200 bought five years before. On the other hand, you would need $12,200 to buy what $10,000 bought five years earlier. Your goal is to keep up with and stay ahead of inflation, not to lose ground along the way.
Using these criteria, look at each investment in your current portfolio and see how they stack up. Hopefully most do very well. If not, you’ll know where you might want to begin to liquidate and rebalance.
Find out more about how to apply these criteria to your investments using my new book, Retirement Reboot; get your copy here.
Stucky says:
First step is to make sure it’s a “solid company”.
Holy fucking majoogala stop the fuckin’ presses and hop aboard the gravy train. That is some Deep Shit thinking right there. I gotta know more … I’m buyin’ that book pronto. Maybe I’ll learn that the way to get the skid marks outta my shorts is to wipe my ass first. jesus christ.
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3rd January 2013 at 4:09 pm
Pirate Jo says:
“While I’m approximating to make the point, if you had a $10,000 CD at the end of a five-year period, your $10,000 would buy what $8,200 bought five years before. On the other hand, you would need $12,200 to buy what $10,000 bought five years earlier. Your goal is to keep up with and stay ahead of inflation, not to lose ground along the way.”
NO SHIT SHERLOCK!!! How does this brilliant observation help me to be any less screwed? I’m with you, Stucky. His book probably contains other breathtaking nuggets such as, “Spend less than you earn.” HALLELUJAH!!
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3rd January 2013 at 4:15 pm
ThePessimisticChemist says:
“His book probably contains other breathtaking nuggets such as, “Spend less than you earn.”
Shit you just gave away the ending of the book.
Ass.
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3rd January 2013 at 4:25 pm
Eddie says:
Unfortunately, even the most solid companies eat shit in a deflationary collapse.
Easily reversible…not sure that’s a good thing for most of us. By “easily reversible” I take that to mean liquid. Too liquid means too easy to cash out and spend the money. One reason I still like real estate is that it requires you to commit to a plan and stay the course.
Income yes.Cash flow is still king in my book. Appreciation potential? What’s that?
5% inflation in the foreseeable future? Hell, its that now. Soon to be higher…
.
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3rd January 2013 at 5:06 pm
majormocambo says:
OK, serious question here. I’m one hundred percent on board with stucky here. So many assholes with empty advise. Lets assume you know someone with over a million in a single IRA. The only goal of the IRA is to get it tied to guaranteed return. The last thing we want for this hypothetical person is to invest the IRA in the stock market and lose money. CD rates would be fine. How do you do it? Can you break the IRA up across different institutions (CD at wells fargo, CD at BOA, …). Any other options? Assume the person is your mama, and the last thing you want to do is lose your mamas money.
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3rd January 2013 at 5:59 pm
Eddie says:
If I wanted CDs I’d use one or more reputable, large, local credit unions. jmho fwiw. I would not put it in Wells Fargo or BoA.
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3rd January 2013 at 7:26 pm
Mikey says:
Hey guys, before you get all narky about this post, remember that TBP readers are not the audience that Miller’s targeting with this post that Jim has reposted.
He’s targeting the smarter than average retiree or soon-to-be retiree that has been focusing on their career, rather than on finance. Most of us “X”ers and younger don’t realise just how massively and fundamentally the rules have changed in the past 10-20 years. The exact same things that have consistently brought safety, security, and wealth for the past 2 generations, will get you seriously fucked up financially today – let alone what they’ll do to you in the next 10 years when unprocessed fertiliser meets the rotary air impeller.
He’s trying to be friendly and explain the harsh lessons of inflation and trusting institutions with your future to people that may have never really thought about them before.
All of his better stuff is behind Casey’s pay-walls.
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3rd January 2013 at 9:23 pm
Bill says:
Gold.
1. Is it solid…? YES
2. Does it provide income? If you sell some, YES
3. Is there a good possibility for appreciation? YES!!
4. Does it protect against inflation? YES
5. Is it easily reversible? YES
Don’t buy the book.
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3rd January 2013 at 10:44 pm
Makati1 says:
Invest? Why, playing Russian Roulette is better odds than making a real profit today. If you own a super computer that can make buys and sells in mini-microseconds, you might brake even. But even then, you are betting that the currency will be worth anything at the end of the day.
I never ‘Invested’ in any stocks/bonds/MFs/401ks/etc. I did buy homes and doubled my money in the 80s, and by doing the renovation work myself, made a nice profit on the other two homes I owned. I wouldn’t borrow to buy a dog house today. I am debt free and plan to stay that way.
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3rd January 2013 at 11:59 pm
OF says:
Buy low, sell high. I should write a book.
If there´s any book needed on this planet now (besides some good spiritiual literature) it´s Admin´s essays in an anthology.
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3rd January 2013 at 2:35 am