I basically retired at age 64 (ten years ago) and I am pleased to report that I still have as much in my retirement IRA & savings as I had when I first retired. How can this be? Well, first of all, I put myself on a tight budget that I have followed as if it were Holy Scripture. Secondly, when I retired I did it when I was totally free of debt; including long years of paying a mortgage on my home and my propensity for buying very fast Mercedes Benz sports cars, and traveling to exotic vacation destinations around the world.
So, where did I get the extra money to do all of this and still have a zero change in my savings? Part of my goal setting process was to establish an inviolate rule: I must make enough to indulge my extravagant behavior and compensate for the reduction of my savings. The magic number was 5% of my total funds saved for retirement. I figured this would be sufficient in an economic environment where the banks might collapse any day, and the prospect for raging inflation was subdued for the foreseeable future. Obviously this ‘rule’ is a variable and can only be referred to in terms of the moment.
Nonetheless, this regimen seems to have worked okay so far.
So, what did I do to accomplish this objective? I taught myself to be a greedy and opportunistic stock trader, and took all of my funds away from the brokerage provided IRA investment vehicles of the companies I worked for. I consolidated all of my savings into a single self-directed IRA and put on my green card dealer’s eye shade. I rolled over 75% of my savings into an on-line IRA trading account with a major on-line brokerage, and kept the rest in CD’s at my credit union in another IRA. The first thing I learned is that the big mutual funds are not your friend when you invest your hard-earned money with them. They do your thinking for you and line their pockets first by taking hefty fees for handling your savings. They also act on information about market conditions (real or imagined) ahead of everyone else and engage in trading through ‘Dark Pools’ during the hours when the markets are not formally open to individuals who want to buy and sell stocks. Even with these advantages, you usually net less profit on your savings than you would get from simply investing in an index fund. I won’t go though all of the bloody details of my on-the-fly financial education, but here is the distillation of my experience so far, and I recommend that you consider my investing criteria when you set off on your own to control your financial future. The technique is to simply calculate and therefore know the intrinsic value of the common stocks you hold or are considering buying. The most accomplished investors are able to recognize the difference between intrinsic value and market price. This knowledge is especially valuable during times when stock markets are inefficiently valuing stocks. When you have a clear understanding of the true worth of any business or asset that you own, you are protected from allowing anyone to take advantage of you.
So, buy good stocks that you have researched thoroughly. Do not trust any published investing advice. The author(s) always have their own investments to protect and their own agenda for guiding your investment choices. While ETFs (exchange-traded funds that target specific sectors) are good and Index funds are better, they can only guarantee average returns (and losses) in a stable market that is not beset with dramatic events and hysteria. Secondly, use the proper criteria for choosing a security to invest in. Bonds are not the best or safest investment right now, so focus on owning a part of a growing, financially successful company. Make sure that the sector(s) it is in has good prospects for the future in spite of social conditions and calamities that you can foresee as being problematic for the safety of your securities. Then, apply this acid test to the companies you are considering:
2% minimum divided yield (valuation)
150% maximum of five-year median forward PE ratio (valuation)
5% minimum annualized revenue-per-share growth for the past three years (growth)
5% minimum annualized earnings-per-share growth for the past three years (growth)
5% minimum annualized dividend-per-share growth for the past three years (growth)
10% minimum return on capital (safety)
10% maximum decline in next year’s projected earnings over the past three months (safety)
35% maximum total debt to capital ratio (safety)
10-year minimum history of dividend payments (safety)
67% maximum payout of earnings (safety)
Lastly, review these criteria constantly for your investments with an eye for any troubling changes. Rent stocks, don’t just buy them. Bail out at the first sign of trouble (check the ex-dividend date for the stock you are buying/selling to collect this extra payment if timing and conditions warrant). And, as you are valued readers of this blog, the best of luck to you!
Action Central for my stock trading
