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Between the spooky holiday and that even spookier
hurricane, it was almost easy to forget for a moment or two that we citizens
of the "land of the free" have a presidential election coming up in
a matter of days. What sweet respite it was, if only for a few hours. But
with only days left in this advertising blitz, it is about time to start
thinking about the cold realities this political economy will face regardless
of the outcome of the pseudo-choice at the polls on Tuesday.
The implications of the economic storm building up
power off the coast as I write are enormous for us as individuals – the
weight of the global sovereign debt bubble, the continued obscured insolvency
of the big banks, and a sputtering economy with massive (albeit unreported)
underemployment. Will this election change anything? Does the choice of a
flag-pin-wearing donkey or elephant have implications for the stock market?
The long-term picture may be crystal-clear, but in the
short term, there is much to be discussed. The folks over at Mauldin
Economics – particularly concerned with the impact of everything from
the pending capital gains tax increase as a result of the expiring Bush tax
cuts to the massive shift into bonds – have put together an outstanding
faculty for an upcoming seminar to discuss exactly that:
Mohamed El-Erian, CEO and
co-CIO at trillion-dollar bond management firm PIMCO;
Gary Shilling, one of the most recognized market
analysts of our time and publisher of the widely read Insights letter;
and
Barry Ritholtz, market
strategist, author of Bailout Nation, and editor of The Big Picture,
which is among the most widely read economics blogs with market insiders.
And others to be confirmed. That's quite the lineup
John has managed to arrange... but we rarely expect much different from
arguably the best-connected independent analyst we know. I'm certainly
looking forward to watching. If you are too, you
can sign up here.
In today's edition of the Daily Dispatch, we
have Dennis Miller, a lone voice of sanity in preparing your finances for
retirement, weighing in on what's scarier – being all-in in the stock
market or letting inflation eat away your bank accounts and CDs. Then Vedran Vuk touches on some
shoddy research coming out of some major financial institutions. Thanks to
all of you, our dear readers, keeping us honest, Vedran
also offers a minor correction to his recent dividend article and uses the
opportunity to make a few notes on ex-dividend dates and record dates that
will be useful to anyone chasing yield in this low-interest-rate world.
And of course, we have some Friday Funnies for you.
Last, I want to call attention to a fascinating train
of thought from the folks over at Stansberry
Research. Like Doug, Porter Stansberry is among the
most controversial of our peers in the independent research space – his
big-stakes bet with Marin Katusa about the future
price of oil and assertions that America ended already and we're all just now
finding out being not the least among them. This time around, Porter
paints a thought-provoking picture of a new political dynasty. As busy as
I find myself lately, I'm not much for these longish videos, but this one
kept my attention when it landed in my inbox yesterday morning.
Filling big shoes for David and Vedran
this week, I hand you over now to the good stuff,
Alex Daley
Chief Technology Investment Strategist
Casey Research
Damned if I Do, Damned if I Don't
By Dennis Miller, Money Forever
David F., a Miller's Money Forever subscriber, recently sent
me a question that hits close to home for many of us.
David F. wrote:
"I have
looked at a lot of dividend-paying stocks, but I have been reluctant to buy
because my sense is that the market as a whole is overvalued and ready for a
dramatic decline.
Based on past experience, such a decline will affect all stocks, not just the
most overvalued ones. If I buy dividend stocks and there is such a decline, I
could be looking at a 40% loss. Even if I defend with stop losses, I could
expect a 20% hit. What is your strategy for dealing with this
situation?"
Fear of investing is real and understandable. And I can
certainly relate to David's fears. As I approached 60, my wife and I had
decided on a "magic number" – the amount we thought we needed
on top of Social Security to retire comfortably. When we finally hit our
magic number, it was a huge cause for celebration.
But then 9/11 happened. We took a huge hit and dropped
back down well below our magic number.
We were devastated, both financially and emotionally.
The red numbers on our Quicken report sent me into shock. It took such an
emotional toll, I promised my wife that once we got back over that number, I
would never let us fall back into that position again.
Instead of gearing down to retire, we shifted gears and
started working harder than ever.
After a few years, we were back where we needed to be,
and I made good on my promise. I took all of our money out of the market and
built a CD ladder. It averaged around 6%, and I thought we were home free.
Then the first TARP bill was passed, and the banks
called in all our CDs. (You can read the whole story my book, Retirement
Reboot.) We were 100% in cash, and I started over. I must admit I felt
smug because we didn't lose a dime in the market, as many of our friends had.
But what I didn't realize at the time was that I too was putting my money at
considerable risk.
It wasn't until the fall of 2011, when I attended the Casey Summit
in Phoenix, that I realized how dangerous my "all in CDs" approach
really was. There were three speakers there who shared personal stories of
hyperinflation in their home countries. Had we experienced any kind of
hyperinflation when all our money was in CDs, we could have lost everything.
The bottom line was, seniors and savers were wiped
out.
So there we sat. The market had just collapsed; my wife
and I had more cash in our cash account than ever before; and I was scared to
death to put any money at risk in the market. However, since then, I've
taught myself how to manage our life savings differently (and better)
than I had in the past.
Wading Through
the Warnings
People are scared, and that's understandable. There are
plenty of sources out there warning us of the dangers –sometimes with
conflicting points. I read a report indicating that US corporations are
sitting on trillions of dollars in cash, afraid to spend it. When major
companies have cash and are reluctant to invest in their own businesses, it
should concern you.
I've also come across reports warning investors against
investing money they can't afford to lose. Makes sense, but isn't holding it
in cash a risk as well?
Then there are the articles about the government
printing money like never before. Holding on to a currency that's
experiencing high inflation is a sure way to lose money. The Casey Summit
speakers who recounted hyperinflation in their home countries convinced me
that this is a real worry.
Oh yeah! Let's not forget to add that the entire stock
market is a house of cards propped up by the Fed's printing press. Your fear
of money-printing should be double-barreled – it can bring both
inflation as well as an artificial bubble in the market.
So you want safe investments? I just checked my Schwab
account. The best rate they have for a five-year CD is 1.5%. Who'd want to
tie money up for five years for an interest rate below the current inflation
rate? I sure don't! Forget about hyperinflation – today's tame
inflation numbers will still crush your investment.
There are just too many financial warnings for folks to
keep track of: "Don't invest money you can't afford to lose; safe investments
won't keep up with inflation; invest and compound your growth or you'll have
to keep working; enjoy life and sleep well, etc."
We recently completed a subscriber survey, and David's
concern was voiced by many. One comment summed up a lot of fears: "I
would rather have a lesser return and a guaranteed return of my money
than a return on my money."
The real dilemma is how to define a return of our
money. In last Friday's Casey Daily Dispatch, we provided an analysis
of an investor buying a five-year CD at the going rate of 1.5%. If you
believe the government-provided 2% rate of inflation, at the end of five
years the net inflation loss would be $9,400. If you believe the true
inflation is 6%, as I do, then you will lose $25,750. Neither alternative is appealing.
Why would you invest in something that all signs point to losing and the only
difference is a matter of how much? Aren't we really looking for a
"return of our buying power?"
I'd rather invest in something where at least I have a
fighting chance of making a gain. With a CD, I'm almost guaranteed to lose
the purchasing power of my money.
So what is the lesser of the evils? My choice is to
work with our research team to try to find good businesses that will survive in
tough times. Many have dividend yields well above the current rate for CDs
and have the potential to not only have capital gains, but for their dividend
to grow as well. Even when our research team has found good options, I still
recommend modest investments in those picks with only a portion of your
portfolio. With such low yields out there, I feel like we are being forced
into the market. But at the same time, it's doesn't have to be
"all-in" decision. We could put some money in the market and keep
some dry on the sidelines.
The trick is finding the right balance for yourself. It's no wonder a lot of older folks have to take
pills just to sleep at night! I hope David F. understands that he's not
alone; a lot of folks share his concerns.
You Know the
Problem, but What Can You Do?
- The Fundamental Rule. Start with the fundamental rule of investing:
Don't invest money you can't afford to lose.
I have to remind myself that investing in good-quality companies most
likely will not make me lose all my money. While they can take a hit in
bad economic conditions, you really have to be playing with fire to get
completely wiped out.
- Keeping Perspective. The first big lesson I learned during my own
retirement reboot was to put my fears into perspective. You cannot allow
fear to immobilize you.
While I took comfort in not losing a dime in the market in 2008, I
shuddered when I realized my "all-in" CD position was putting
our entire life savings at risk.
All in the market, all in cash, or all in anything is dangerous.
Returning to the market was scary. It took a long time for me to regain
confidence in myself as an investor.
Having money in the market is like working on high-power lines. While
you may have confidence in what you are doing, you'd better take all the
necessary steps to protect your safety. We have all been burned.
- Dividend-Paying Stocks. David F.'s question was a response to my article Twelve Tips for Buying Dividend-Paying Stocks.
While I'm not going to repeat all twelve steps, I want to elaborate on a
few points.
I am a strong believer in using stop losses, especially trailing stop
losses. They usually work best with heavily traded companies, with
millions of shares traded. Also, when I refer to "dividend-paying
stocks," I mean stocks bought for the dividend income, not
speculative stocks that might happen to pay a dividend.
- Limit Risk. There are ways to limit risk and still play the
game. If you don't put more than 5% of your portfolio into any one
investment with a 20% stop loss, the most you could lose is 1% of your
entire portfolio.
In David F.'s letter, he mentioned losing 40%. If you limit your
investment to no more than 5% of your portfolio and then get stopped out
at 40%, your portfolio won't drop more than 2%. I have had more than one
friend say to me they wish they'd had 20% stop losses in place before
the 2008 crash. They would have saved a lot of money and would have a
lot more confidence in themselves today.
- Worldwide Presence. Buy companies which have a worldwide presence,
dominate their market, and have a history of paying and regularly
increasing their dividends. If you buy the right stocks, their dividends
continue to grow, and it won't be long before your return can be close
to double digits. When there is a drop in the market, you should ask
questions like: Do they still have the ability to pay dividends
regularly? Can I get a similar or better yield elsewhere with the same
or less risk?
- Keep Enough Cash. If you're being conservative, you should have
about 33% of your portfolio in cash. There may be buying opportunities
during a market downturn; if you have the cash, you're in a better
position to take advantage of them.
- Go International. International diversification may be right for
you; it's an important option to consider. There are many domestic
companies that are diversified internationally, and there are also many
foreign company stocks (or ADRs) you can buy here in the United States.
Shell, a Dutch Company, and Nestlé, based in Switzerland, are
both good examples, although I'm not recommending them.
While all world markets are interrelated and could crash at the same
time, diversifying internationally will take some risk off the table, as
some countries will always do better than others.
The Value of
Doing Your Own Homework
Vedran Vuk, our senior research
analyst, has taught me the real value of doing your homework. Vedran was behind the wheel for our upcoming special
report Money Every Month, which is targeted for a November 27 release.
It's an in-depth analysis of the top-yielding dividend stocks – a
virtual encyclopedia of when they pay, how much they pay, and other important
parameters. (Vedran and I also work together to
produce Miller's Money Forever, a monthly advisory that will help
you build an inflation-proof retirement portfolio. Our subscribers will get
the Money Every Month special report along with their regular
subscription.)
When you find a company you're interested in, go to
your online brokerage account, click on the "research" tab, and
read up on the company using some of the guidelines I mentioned earlier, such
as the 12 tips for dividend-paying stocks.
If you subscribe to paid services, take a really look
at the model portfolios. Don't just read the newsletter's in-depth investment
write-ups a single time. Go back every once in a while and check to see how
companies have done since they were originally added. Are they still growing
and paying (and increasing) regular dividends? Are they meeting the goals
originally set in the recommendation?
After reading stock write-ups, I usually know a heck of
a lot about the company. Many times I ask myself if I would like to be a part
owner of the company I'm reading about. Until you can imagine yourself being
a happy (and well-paid) part owner, keep researching and looking at other
candidates.
And when you find what you're looking for, remember to
buy in moderation.
The Risk of
Doing Nothing
Do not minimize the risk of doing nothing. The biggest
financial risk I have ever taken was holding our life savings entirely in
CDs. Honestly, my parents had done that, and it worked well for them. I was
under the illusion that our money was safe. And it was safe – if the
bank defaulted.
But I realize now that it was at huge risk if we
experienced any kind of high inflation. I was 68 when the banks called in our
CDs. A "do-over" at 60 – when I had totally left the market
after 9/11 – was difficult, but I was still working. Starting over now
would be a real disaster. While inflation might not seem like a big deal now,
it's something almost guaranteed to be a problem with the rate of today's
money-printing. Being all in CDs now is about as smart as being all in stocks
in 2008. You've got to find the right balance between the allocations to
protect yourself.
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