Your Key To A Successful Retirement - Part 2 of 2
Last time I promised to give you some ideas on setting-up a more or less worry free retirement program so you can keep ahead of inflation and taxes. And we'll do this using conservative, income-producing investments.
The very first thing to bear in mind when considering any investment for purchase is to always analyze risk first. Always remember that whenever you lose 50% of your money on an investment, you will have to make 100% next time out just in order to get back to even once again. And more likely than not, this probably means that in reality, you have actually made a zero return on your investment over an extended period of time!
Counting on a double-your-money recovery is a long shot at best. So the most important thing for you to do is to be certain that you understand the risks inherent in any investment before you invest. Do your homework, and ask plenty of questions.
The second thing to bear in mind when considering any investment is cutting costs. And you can positively control your costs at the very outset just as you can limit your risk. While it's far more difficult to know what the future return on your investment might be, the cost and the risk you can know with certainty.
If you invest in mutual funds for income, you should stick exclusively with funds that meet these guidelines: (1) they should be no-load funds; (2) they should be funds with no 12-b-1 marketing fees; and (3) they should be funds with low expense ratios. And what is a low expense ratio? Generally, the expense ratio should be at 0.50% (50 basis points) or less.
If you are building a conservative income-oriented retirement portfolio, then the foundation of that portfolio ought to be Treasury securities, which are the safest in the world. And you can purchase U.S. Treasury securities directly from the Treasury Department via your own personal Treasury Direct account. (We have a link for this on our WeBlog.)
Another good choice for a conservatively oriented retirement portfolio is preferred stocks. When you understand the giant yields available with blue-chip preferreds, as well as the investment grade quality of many preferreds, and their great liquidity, you will learn to love preferreds. But once again, let me remind you that you must do your homework and understand how to invest in preferred stocks.
Common stocks are also favored by conservative investors seeking a reasonably high level of current income. If your interest lies with common stocks, and if you are willing to accept the price volatility that is a fact of life with common stocks, then your foundation for common stocks should be constructed as a cash generating machine. Direct your interest in common stocks towards dividends, and not as an investment made with the idea of later selling securities to someone else at a higher price. The comfort level as well as the odds are better by locking in a nice stream of expected total return right from the start. And you will discover that as a company's dividend increases over the years, the purchasing power of your portfolio is maintained. And it also follows that a company that increases its dividend year after year will experience an increase in its share price. So the combination of a steady dividend, regular dividend increases, plus appreciation in the price of the stock, are all very comforting contributions toward any retirement portfolio.
When it comes to bonds, Treasurys make the most sense. You should avoid bond funds because they never mature and you get poor leverage in a bond fund. Also the majority of bond funds are sold with sales loads and 12-b-1 fees. And many bond funds have unacceptable expense ratios. Also you should avoid corporate bonds because they are suited only to institutional investors.
And, there is one fund in the mortgage-fund category that you really should include as part of a conservative retirement portfolio. It is the Vanguard GNMA Fund, and it has ranked #1 in performance for every period under review.
Finally, look upon your core stocks as long-term investments. You want to always keep your focus on the long haul. Invest equally in the stocks you own and don't buy a stock unless you first sell a current position. Force yourself to have discipline. Never allow yourself to be sold an investment by some salesperson. Have confidence in yourself and take your time making up your own mind. Also keep your portfolio turnover to under 10% per year. Portfolio turnover results in costs such as commissions and taxes, and costs are to be kept to a minimum.
* * * * *
The very first thing to bear in mind when considering any investment for purchase is to always analyze risk first. Always remember that whenever you lose 50% of your money on an investment, you will have to make 100% next time out just in order to get back to even once again. And more likely than not, this probably means that in reality, you have actually made a zero return on your investment over an extended period of time!
Counting on a double-your-money recovery is a long shot at best. So the most important thing for you to do is to be certain that you understand the risks inherent in any investment before you invest. Do your homework, and ask plenty of questions.
The second thing to bear in mind when considering any investment is cutting costs. And you can positively control your costs at the very outset just as you can limit your risk. While it's far more difficult to know what the future return on your investment might be, the cost and the risk you can know with certainty.
If you invest in mutual funds for income, you should stick exclusively with funds that meet these guidelines: (1) they should be no-load funds; (2) they should be funds with no 12-b-1 marketing fees; and (3) they should be funds with low expense ratios. And what is a low expense ratio? Generally, the expense ratio should be at 0.50% (50 basis points) or less.
If you are building a conservative income-oriented retirement portfolio, then the foundation of that portfolio ought to be Treasury securities, which are the safest in the world. And you can purchase U.S. Treasury securities directly from the Treasury Department via your own personal Treasury Direct account. (We have a link for this on our WeBlog.)
Another good choice for a conservatively oriented retirement portfolio is preferred stocks. When you understand the giant yields available with blue-chip preferreds, as well as the investment grade quality of many preferreds, and their great liquidity, you will learn to love preferreds. But once again, let me remind you that you must do your homework and understand how to invest in preferred stocks.
Common stocks are also favored by conservative investors seeking a reasonably high level of current income. If your interest lies with common stocks, and if you are willing to accept the price volatility that is a fact of life with common stocks, then your foundation for common stocks should be constructed as a cash generating machine. Direct your interest in common stocks towards dividends, and not as an investment made with the idea of later selling securities to someone else at a higher price. The comfort level as well as the odds are better by locking in a nice stream of expected total return right from the start. And you will discover that as a company's dividend increases over the years, the purchasing power of your portfolio is maintained. And it also follows that a company that increases its dividend year after year will experience an increase in its share price. So the combination of a steady dividend, regular dividend increases, plus appreciation in the price of the stock, are all very comforting contributions toward any retirement portfolio.
When it comes to bonds, Treasurys make the most sense. You should avoid bond funds because they never mature and you get poor leverage in a bond fund. Also the majority of bond funds are sold with sales loads and 12-b-1 fees. And many bond funds have unacceptable expense ratios. Also you should avoid corporate bonds because they are suited only to institutional investors.
And, there is one fund in the mortgage-fund category that you really should include as part of a conservative retirement portfolio. It is the Vanguard GNMA Fund, and it has ranked #1 in performance for every period under review.
Finally, look upon your core stocks as long-term investments. You want to always keep your focus on the long haul. Invest equally in the stocks you own and don't buy a stock unless you first sell a current position. Force yourself to have discipline. Never allow yourself to be sold an investment by some salesperson. Have confidence in yourself and take your time making up your own mind. Also keep your portfolio turnover to under 10% per year. Portfolio turnover results in costs such as commissions and taxes, and costs are to be kept to a minimum.
* * * * *
posted by Bob Moser at
5:48 PM
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