Tuesday, July 29, 2014

A Modest Retirement Proposal (Or Other Savings Account)

First of all, even though what I'm going to say next will seem impossible if you aren't already there yet, keep an open mind.  Nurture and create a saving frame of mind.  If you are not already a "Saver," this will involve embracing change.  If you attack it from a negative, scarcity way of looking at the world, it will seem cumbersome and unfair.  You will be like a dieter watching everyone else eating cupcakes.  So if that is the way you think, you need to change that.  What I did was figure out how much money I had coming in and then kept my frivolous spending above that as low as possible.  I need to point out that, as an adult, there are items that would be "frivolous" spending that once were necessities.  For instance, your clothing allowance.  Many of us enjoy buying a new pair of shoes or a handbag.  Unless you are 20 years old, it is no longer a necessity, but more of a little perk to brighten our day.  I am not a believer in self deprivation.  I believe if you can afford something that will buy you a little bit more happiness, even if that happiness is simply being one of the first to see what whether or not the Imp escaped certain death on The Game of Thrones, you should buy it.  The thing I think most people forget is that they are supposed to be their own best advocate.  When buying tiny bits of happiness for yourself, buy the longer lasting chunks rather than the instant gratification, "I ate Chinese-food and I'm hungry again" variety.  Allow the saved funds to accumulate in your checking account until you have reached your goal amount.  My suggested goal amount is $6500.00.

Think about this.  Let's say you really like Coach handbags.  Were you aware that Coach is a publicly traded stock with the ticker symbol COH?  As I type this, COH is trading at $34.50/share and has a 3.9% dividend.  Really let that sink in.  Let's say you have $3450.00 in your savings account earning less than 1 percent.  You could put that money into COH and earn almost 4%.  Imagine how much fun it would be buying that Coach handbag with earnings from Coach itself.  I know when I'm out with friends and we see evidence of one of the names I am holding, it is great fun to nudge and elbow, point and whisper, "I own them."  Not that I'm suggesting you become obnoxious.  "I own them," does not mean walk up to the sales clerk and bully her because you're a shareholder.  What if you simply embraced your inner John D. Rockefeller or viewed yourself like the drawing of a wealthy man in a game of Monopoly?  What if you had a little fun with your finances and used them to boost your self esteem rather than pigeon hole you as a "have not?"

Have you ever visited a Disney park as a shareholder?  No, Mickey Mouse does not greet you at the gate and likely no one will mention or notice anything different about you, but you can walk around the park feeling just a little bit more like you are a part of the magic.  You can watch all of those other visitors push through the turnstiles knowing that a part of Disney's success will be your success.  (DIS currently trading at $86.54 with a .99% dividend.)

Jonathan Hoenig, porfolio manager at Capitalistpig Hedge Fund LLC and a Fox News contributor, was a Barista at Starbucks when, discouraged at how his paychecks weren't piling up and amassing wealth, he realized he had a better shot at doing that if he bought shares in the company.  (SBUX currently trading at $79.20/share with a 1.33% dividend.)

Think about it.  You could have your electric company pay YOU to pay your bill.  Or your cell service.  Or your favorite restaurant or amusement park.  Need to do some home remodeling?  I do.  How about owning the company that will be selling your contractor his materials?  Consider this list which is just a small portion of the possibilities.

Home Depot - Ticker Symbol HD - currently trading at $81.43 with a dividend of 2.32%
Cedar Fair LP - Ticker Symbol FUN - trading at $52.45 with a dividend of a whopping 5.33%
Six Flags Entertainment Corp - Ticker Symbol SIX - trading at $39.41 with a dividend of 4.81%
Speedway Motorsports Inc - Ticker Symbol TRK - trading at $17.50 with a dividend of 3.45%
Verizon Communications Inc - Ticker Symbol VZ - trading at $52.36 with a dividend of 4.11%
AT&T Inc. - Ticker Symbol T - trading at $36.64 with a dividend of 5.16%
(Keeping it real.  JSYK I am a current shareholder of VZ and TRK.)

While you are accumulating the savings to start investing, choose an internet site to track stocks.  Both Google and Yahoo have good ones.  Which one is better depends only on how comfortable you are at the site and whether or not you can and will use it.  Don't approach buying stocks like buying a new tube of toothpaste or floss.  Make it exciting.  Think of it like building your Fantasy Football dream team of stocks or your special "Dream Future" shopping list.

There are some fundamentals you do want to have in your peripheral awareness.  You don't need to obsess or worry about them, just keep them in mind.

First, in a traditional savings account, the amount you have deposited will fluctuate very little.  It will increase or decrease when you deposit or withdraw from it.  It will decrease a little when your bank applies fees against it.  It will increase a little when your bank deposits interest into it.  Money in a stock portfolio account viewed as "my savings" will fluctuate daily.  Actually it will fluctuate every second of an active trading day.  (The US Stock Market hours are 9:30am to 4pm EST.  It is closed most holidays and in some cases, the day before a holiday.)  You will want to find a way to increase your likelihood that the amount you have in a stock is as much as you paid into it or more.  The way to do that is to learn how to buy stocks when they are on sale.  This will involve another instance where you will probably have to change your way of thinking, but I will outline a simplistic way of beginning to do that in a future blog entry.  For now, simply save and make your wish list.

Second, although dividend returns are an easy way to compare owning stocks with your savings account, not all stocks have good dividends and not all stocks with dividends are good buys.  Momentum names earn you money by the changes in the stock price.  They move quickly and can earn a lot fast.  Or lose a lot fast.  What if the number one name on your dream team is DIS?  Did you notice the dividend percentage I listed for it above?  .99%  That is no better than you are earning in a savings account.  So how do you make money owning DIS?  You will need to buy it when it's on sale.

Third, how do you buy stocks when they are on sale?  In the words of Warren Buffett, "You pay a very high price in the stock market for a cheery consensus." You are embracing the philosophical focus of a Contrarian investor.  Rather than chasing a momentum name, you are choosing to try and do the opposite of the crowd.  That is a very scary thing for most people to do.  It is going to require belief in yourself, belief in your theory of operating and a lot of patience because you are almost always going to pick that dream team while they are hot.  You will need to resist buying until the stock hits a price range that is acceptable to your needs.  Rather than thinking of yourself as treading water until you can do something, how about thinking of yourself as a cheetah in a tree, watching your prey until the perfect moment to pounce.  This is part of the reason you want an entire shopping list rather than just one pet name you would like to buy.  Different stocks will hit your zone at different times, but between world crises moving the market or simple accidental earnings misses, every stock will eventually hit an acceptable buying level at some time.  What you need to do is accumulate funds, make your shopping list and educate yourself as to how to know when those names are in your range.  Really you are looking at the very essence of Louis Pasteur's saying, "Fortune favors the prepared mind."

Fourth, if you want to begin building this stock portfolio in a retirement account, you will need to open either an IRA account or a Roth IRA account at the brokerage you choose.  There are limitations to how much you can contribute to an IRA each year.  For 2014, the limitation is $5500.00 with a catch up contribution limit adjustment of $1000.00 for a total of $6500.00.  The main difference between a Roth IRA and a regular IRA is the tax benefits.  On a Roth IRA, the taxes are removed now so that when you eventually withdraw those funds, during a time when you may not have much other income, you will not need to pay income taxes on that money.  On a regular IRA, you deduct the contribution on your taxes the same year you make it.  Perhaps you have seen that line on your tax form?  That can change your tax return somewhat and maybe even change the amount you owe or you are refunded.

Maybe just those four items have scared you.  You think there is just too much involved and don't believe you could ever do it.  Think of it like anything else you have needed to learn.  You crawl before you walk.  You swim with waders in the baby pool before you jump off the high dive.  From working a computer to simply learning how to read, remember how tough it was at first, keeping track of which letter made what sound or knowing which function key to hit?  Have you ever had to teach someone else how to do something you can perform routinely?  Isn't it amazing how completely you had forgotten your original difficulties?  This can be that way too.

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