Category Archives: Financial Planning

Financial Metrics for Evaluating a Stock

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“If you don’t study any companies, you have the same success buying stocks as you do in a poker game if you bet without looking at your cards.” Peter Lynch

Anyone can be successful investing in the stock market. But, it does take thorough research, patience, discipline and resilience. And, it’s important to appreciate that “Behind every stock, there is a company. Find out what it’s doing”, says Peter Lynch, who managed the Fidelity Magellan Fund from 1977 to 1990 and achieved an impressive return which reportedly averaged over 20% per year.

With a long-term view to investing, Lynch would patiently wait for the company to become recognized by Wall Street for its growth, which subsequently unleashed an explosive rise in its stock price as smart money and institutional investors rush to buy stock.

In his book “One Up On Wall Street”, he reveals his principles and metrics for successful investing. Here are 11 financial metrics investors can utilize to evaluate a company’s value:

  1. Market Cap – Shows the current size and scale of the company. “If a picture is worth a thousand words, in business, so is a number.” Peter Lynch
  2. Strong Balance Sheet (Cash on Hand / Long Term Debt to Equity) – Shows how financially sound a business has become and its capacity to withstand an economic downturn. Determine if the company’s cash has been increasing and long term debt has been decreasing?
  3. Sales and Earnings Growth Rates – Shows if the business model works & current growth rate
  4. Free Cash Flow – Shows if company generating or burning through cash
  5. Returns on Capital (ROE / ROIC / ROA)- shows capital efficiency of business
  6. Margins (Gross Profit Margin / Operating Margin / Profit Margin / Net Income) – Shows current profit profile of products, spending rates, & potential for operating leverage
  7. Total Addressable Market – What is market size and long term growth potential for the company.
  8. Long Term (5+ years) Stock Performance vs. market – has the stock created or destroyed value for shareholders. “In the long run, it’s not just how much money you make that will determine your future prosperity. It’s how much of that money you put to work by saving it and investing it.” Petere Lynch
  9. Current Valuation (Price to Sales / Price to Earnings / Price to Book / Price to FCF) – How expensive or inexpensive is the stock price.or is the company reasonably priced. “If you can follow only one bit of data, follow the earnings (assuming the company in question has earnings). I subscribe to the crusty notion that sooner or later earnings make or break an investment in equities. What the stock price does today, tomorrow, or next week is only a distraction.” Peter Lynch
  10. Mission and Vision Statement – Understand why the company exist.  What is it doing. “Behind every stock is a company. Find out what it’s doing.” Peter Lynch
  11. Insider Ownership – Do insiders have skin in the game. SEC Filings. Information available on proxy statement.

Additionally, it is important to figure out:

  1. What is changing
  2. What is not changing
  3. Is there an underappreciation for either. “Your investor’s edge is not something you get from Wall Street experts. It’s something you already have. You can outperform the experts if you use your edge by investing in companies or industries you already understand.” Peter Lynch

Do that well, move on #3, you’re the best investor in the world.

As an investor, unless you understand the underlying business of a company, you will not be able to hold its stock when the price is falling. You could end up selling a great company out of fear – even though its price will recover in the future and give you great returns in the years to come. The ability to hold a good company even when its stock price is falling or undergoing a time correction – will play a crucial role in you becoming a successful investor.

In the long run, the stock price will go up only if the business of the company does well.

In Peter Lynch’s own words “I think you have to learn that there’s a company behind every stock, and that there’s only one real reason why stocks go up. Companies go from doing poorly to doing well or small companies grow to large companies”

If you like a stock, buy small quantity of shares. Study the company in more detail. Buy more shares if you like its business. As your understanding of the business increases, your conviction (confidence) will also increase, this will allow you to give higher allocation in your portfolio.

Categories of Stocks in the Stock Market

Peter Lynch divided different stocks into six categories

Slow Growers – Slow growers are those stocks that have a slow growth rate i.e. a low upward slope of earnings and revenue growth.These slow growers can be characterized by the size and generosity of their dividend. According to Peter Lynch, the only reason to buy these stocks are dividends.

The Stalwarts – The Stalwarts have an average growth rate as that of industry and are usually mid to large companies. They have an earnings growth between the 8-12 percent CAGR range. According to Peter Lynch, investors can get an adequate return from these stocks if they hold these stocks for a long time.

The Fast Growers – The fast growers are generally aggressive companies and they grow at an impressive rate of 15-25% per year. They are fast-growth stocks and grow at a comparatively faster rate compared to the industry average and competitors. However, Peter Lynch advises that one should be open-eyed when they own a fast grower. There is a great likelihood for the fast growers to get hammered if they run out of steam or if their growth is not sustainable.

The Cyclicals – Cyclical are stocks that grow at a very fast pace during their favorable economic cycle. The cyclical companies tend to flourish when coming out of a recession into a vigorous economy. Peter Lynch advises investors to own the cyclical only on the right part of the cycle i.e. when they are expanding. If bought at the wrong phase, it may even take them years before they perform. Timing is everything while investing in cyclical stocks.

The Turnarounds – The turnarounds are characterized as potential fatalities that have been badly hammered by the market for one or more of a variety of reasons but can make up the lost ground under the correct circumstances. Holding turnarounds can be very profitable if the management is able to turn the company as these stocks can be bought at a very low valuation by the investors. However, if the management fails to bring back the company on track, it can be very troublesome for the investors.

Asset Plays – Asset Plays are those stocks whose assets are overlooked by the market and are undervalued. These assets may be properties, equipment, or other real assets that the company is holding but which is not valued by the investors when there has been a general market downturn. The real value may be worth more than the market capitalization of the company. Peter Lynch suggests owning a few of these stocks in your portfolio as they are most likely to add a lot of value to your portfolio. However, the biggest significant factor while picking these stocks is to carefully estimate the right worth of the assets. If you are able to do it, you can pick valuable gems.

“Average investors can become experts in their own field and can pick winning stocks as effectively as Wall Street professionals by doing just a little research.” Peter Lynch

Infinity income – When your income from investments is higher than your expenses, you might be able to live off those returns for 10 years, 30 years, 50 years… or forever!

References:

  1. https://stockinvestingtoday.blog/the-investing-style-of-peter-lynch?
  2. https://www.thebalance.com/peter-lynch-s-secret-formula-for-valuing-a-stock-s-growth-3973486
  3. https://goldenfs.org/wp-content/uploads/2020/12/summary-One-Up-On-Wall-Street-Peter-Lynch-2-scaled.jpg

Proactive Mindset

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Your mindset is the lens through which you see your life, your relationships and your entire world. 

In investing and building wealth, as in life, it’s important to focus and act on those things in life that you can control and influence, instead of what you can’t. Effectively, your financial success and your success in builidng wealth should not be left to chance.  Instead, you can and must take resposibility for your financial success  and the your financial outcome can be distilled down to being proactive.

Being proactive is about taking responsibility for your actions, behavior, results and growth. Proactive people recognize that they are “response-able.”  They know they choose their responses, behavior, actions and thoughts.

One of the most important things you choose is how you think and what you say. Your thoughts and language are a good indicator of how you see yourself. A proactive person has faith in their abilities and uses proactive language–I can, I will, I prefer, etc, when they speak.

Proactive thinking means always thinking about the future, planning and preparing for what lies ahead. It means taking action today to make tomorrow better. the most powerful thing you can do to adopt a more proactive posture is simply to take action. As you take action, you’ll begin to show yourself that you can have an influence on the your llife and your world.

There are 7 attributes that you can focus on that will help you shift toward being more proactive and successful mindset:

  1. Focus on the future. It’s more important to know what lies ahead.
  2. Take personal responsibility for your success. Always focus more on and plan on what you can do to be successful.
  3. Think big picture. It’s important to consider your ultimate goals and not lose track of what you are really trying to accomplish.
  4. Focus on what you can control. Think ahead and focus on factors you can control will cause less stress and enhace your wellbeing.
  5. Prioritize. You can’t do everything. Focusing on a few big goals will lead to better success than focusing minimally on lots of goals.
  6. Think through scenarios. Focus on likely scenarios and create a plan. By considering the most likely scenarios in advance, you will increase your chances of being prepared and remaining a step ahead of your competition.
  7. Make things happen. Don’t sit on the sideline. Take initiative despite uncertain and the unknown even though you may fail, but you will win more.

“The word proactivity … means more than merely taking initiative. It means that as human beings, we are responsible for our own lives. Our behavior is a function of our decisions, not our conditions. We can subordinate feelings to values. We have the initiative and the responsibility to make things happen.” Stephen Covey

Always remember that you are a product of your decisions resulting from your mindset, and not your personal circumstances or environment.

“To achieve financail freedom, focus your time, resources and energy on things you can control!”

References:

  1. https://www.franklincovey.com/habit-1/
  2. https://becomingbetter.org/the-most-important-mindset/
  3. Covey, Stephen R. The 7 Habits of Highly Effective People: Powerful Lessons in Personal Change. Fireside, 1990.
  4. https://www.inc.com/david-van-rooy/7-ways-to-adopt-a-proactive-mindset.html

Four Secret to Investing Outperformance – Motley Foolo

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“The average investor’s portfolio lags the performance of the S&P 500 by nearly 4 percentage points.”

The average retail investor’s portfolio lags the performance of the S&P 500 by nearly 4 percentage points, a DALBAR study shows. The lag is a result of bad behaviors by investors because investors jumped into funds when they were already at a high mark—with lower returns in their future—and dumped funds when they were on the way down, without waiting for a rebound.

The returns received by investors vs. returns earned by funds based on Morningstar data

There are four secrets to outperformance, according to Motley Fool, and the secrets are simpler than you might expect.

  • You take market returns – According to a 2020 study by financial research company Dalbar, average investors earned about 5% annual growth in their accounts over the last 30 years. That’s roughly half the average growth rate of the S&P 500 in the same time frame. You can avoid lagging the S&P 500 index by 4% to 5%. If you invest in S&P 500 index funds, you should see performance that’s only a fraction below the index.
  • You stay calm – The Dalbar report finds that 70% of the average investors’ underperformance occurred in volatile markets. Specifically, most of the investors who performed the worst sold their securities when the market was in crisis. Had they held on to those investments, they would have ultimately fared better. The takeaway here is it’s usually best to stay calm and stay invested.
  • Selectively, you do the opposite of the crowd – When everyone else is selling, it’s often a good time to buy. By following best practices such as not investing in a downturn unless your finances are in order; not expecting a quick return; and investing in a “quality” stock of an established company with low or manageable debt, experienced leadership, and consistent cash flows and profits.
  • You buy and hold  – The Dalbar report also concludes that a buy-and-hold strategy with the S&P 500 would have returned more than the average investor’s portfolio. Buy-and-hold investing is the practice of investing in stocks and funds that you intend to keep for years or decades. To implement this approach, pick quality stocks or funds and hold them indefinitely. You might sell if the company changes in some fundamental way, but you won’t sell because the market’s having a temporary crisis.

Hopefully, these four secrets to beating the average investor sound easy. They are, as long as you can resist making emotional decisions.

The average investor can get anxious about market volatility, and that’s often when shortsighted decisions are made. Even investors who can tune out market noise sometimes find it hard to avoid tinkering with a portfolio that doesn’t seem to be growing as anticipated.

When it comes to investing, patience is a virtue.

References:

  1. https://investor.vanguard.com/investing/portfolio-management/performance-overview
  2. https://www.fool.com/investing/2021/07/22/4-secrets-to-beating-the-average-investor/

Investing Behavior

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“Sometimes investors can be their own worst enemy.”

When it comes to investing, we have met the enemy, and it’s us, according to Forbes. Excited by profit and terrified of loss, investors let their emotions and minds trick them into making terrible investing decisions. “As humans, we’re wired to act opposite to our interests,” says Sunit Bhalla, a certified financial planner. “We should be selling high and buying low, but our mind is telling us to buy when things are high and sell when they’re going down. It’s the classic fear-versus- greed fight we have in our brains.”

Understandably, successful investing is challenging, but it doesn’t require genius or years of deliberate study. However, it does require rare investing qualities of faith, self-discipline, patience, and the ability to identify and overcome one’s own psychological and behaviorial weaknesses. Charlie Munger, Vice Chairman, Berkshire-Hathaway, said it best, “You don’t make money when you buy and you don’t make money when you sell. You make money when you wait.” In short, every investor wants to invest well, but the reality is that most investors vastly under perform the market, according to a 2021 Dalbar study of investor behavior.

The study found that individual fund investors consistently underperformed the market over the 20 years ending December 31, 2020, generating a 5.96% average annualized return compared with 7.43% for the S&P 500 and 8.29% for the Global Equity Index 100. The DALBAR Ratio, referred to as the “Behavior Gap”, demonstrates that what investors actually earns from their investments is not the officially listed returns on a financial fund prospectus.

“Success in investing doesn’t correlate with I.Q. once you’re above the level of 25. Once you have ordinary intelligence, what you need is the temperament to control the urges that get other people into trouble in investing.” Warren Buffett

When the market is melting up, investors are more eager to jump into the frenzy and participate. When the market is melting down, investors are more eager to flee to the exits and sit it out on the sidelines. Generally, this causes investors to “buy high, sell low” their stocks, ETF and mutual funds.

Despite the many challenges, there are several important takeaways for investors to better understand why they tend to make financial decisions that are contrary to their own best interests and continue to get them into trouble, such as:

  • Checking Portfolios Too Often – The problem is that people are generally loss-averse. They experience negative feelings from a loss that are stronger than the positive feelings they get from a gain. Measuring performance on a daily basis seems certain to drive the risk premium even higher, costing investors considerably return.
  • Trading Too Often – Over-trading is what gets most investors in trouble. When markets get drops, investors tend to bail out of the market. “It’s only natural–literally, our brains are wired this way. “Trading is hazardous to your wealth.”
  • Getting Distracted by Shiny Objects – Invesors are bombarded with stock ideas and some decide that the latest hot stock is a better idea than a stock they own, and they make a trade. Unfortunately, the stock comes to the public’s attention because of its strong previous performance. When this is followed by a reversion to the mean, new investors get burned.

In a nutshell, it is somewhat obvious that investor’s behavior is the biggest factor that drives long-term success. Yet, investors do hold the keys to their own long-term success through regular, consistent, disciplined investing.

Many individual investors hurt themselves by making too many trades for too many dubious reasons. You can be a much better investor when you learn to research and select stocks carefully, to be patient and wait, and to learn to block out the incessant financial news media noise. The takeaway should be that behavior is clearly the single most important variable in the long-term performance results of investor and that you should focus on how not to be your own worst enemy.

References:

  1. https://www.forbes.com/sites/brianportnoy/2016/06/13/a-good-example-of-some-bad-decisions/
  2. https://www.morningstar.com/articles/100594/investors-can-be-their-own-worst-enemy
  3. https://www.kiplinger.com/investing/603153/the-psychology-behind-your-worst-investment-decisions
  4. https://www.forbes.com/sites/johnjennings/2021/07/28/five-ways-to-be-a-terrible-investor/
  5. https://www.dalbar.com/Portals/dalbar/Cache/News/PressReleases/2021QAIB-VAPressRelease.pdf

Loss of Purchasing Power: Is $1 million enough for retirement?

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“One million dollars doesn’t buy as many Cadillac Escalades as it used to.”

Today, $1 million no longer buys as many McDonald’s Big Mac sandwiches or Rolex Submariner watches or Ford F150 trucks as it once did thirty years ago.  There’s a good reason for that called ‘loss of purchasing power’ which is a byproduct of inflation. That’s because $1 million of purchasing power in 1970 was the equivalent of nearly seven million dollars today, according to Motley Fool. And as recently as 1990, a million dollars has lost half its buying power since then, meaning you’d need two million today to have the same buying power as you did in 1990.

As a result of normal inflation and loss of purchasing power, $1 million retirement nest egg today definitely will not offer you as comfortable a retirement lifestyle as it did a few years ago or a few decades ago.

Retirement is not an age, but a number

Financial preparedness is more important than reaching a certain retirement age. And, to answer the question of whether $1 million or any amount of money is enough for retirement, the answer depends on what you want your retirement to look like.

It’s important to ensure you have enough savings and income to sustain your spending and lifestyle in retirement. If you don’t have enough money set aside to pay for your retirement, then you may have to delay retiring. And no matter where you are on your retirement journey, you can make your financial number. No matter how little you have or how much time you have left until you want to retire, you can always improve your financial situation. Getting started and creating a retirement plan can carry you a long way.

A 2018 Northwestern Mutual study found that one in three Americans has less than $5,000 saved up for retirement, and 21% of Americans have no retirement savings at all. Overall, Americans are feeling underprepared and less confident regarding the financial realities of retirement, according to the data.

Despite these findings regarding the woeful retirement savings rate by Americans, it’s still not too late to enjoy the kind of life you’ve worked so hard for… and the retirement you deserve.

One of the most important goals for Ameriocans facing retirement is knowing that they can sustain their desired level of spending and lifestyle throughout their lives, with a sense of financial peace of mind and without the fear of running out of money.  For our purposes, financial peace of mind is the knowledge that, no matter your level of savings or degree of market volatility, you are confident that you are unlikely to run out of money during retirement to support your level of spending and  lifestyle.

Taking the financial road less traveled

Conventional wisdom recommend that older Americans should reduce their stock allocation in retirement and move into more safe investments such as bonds and cash.  Although this may seem the less risky road to take in your retirement years, a few experts do not agree.  If you expect to maintain your purchasing power into future, you must stay invested in stocks.

“The idea that a 60-year-old retiree should be investing primarily in conservative investments is an antiquated way of approaching personal finance”, says Jake Loescher, financial advisor, at Savant Capital Management in a 2017 U.S. News article. “Historically, the rule of thumb stated that an individual should take the number 100, subtract their age, which will define the amount of stocks someone should have in their portfolio. For a 60-year-old, this obviously would mean 40 percent stocks is an appropriate amount of risk.”

“A better approach would be to perform a risk assessment and consider first how much risk an individual needs to take based on their personal circumstances,” Loescher says.

According to the article, there are five circumstances when retirees should eskew conventionl wisdom:

  1. The likelihood you’ll live into your 90s or beyond. Since life expectancy is much longer these days and in today’s low-interest environment, you face an increase risk of your nest egg not keeping up with inflation over the long haul.
  2. If you don’t have enough cash for retirement. If you didn’t accumulate enough retirement assets to sustain an expected lifestyle, it becomes essential to decide how much capital in a retirement portfolio you’re willing to risk for the potential upside appreciation.
  3. When interest rates are low. Low interest rates makes the capital risk seem greater than the value bonds might provide due to a loss of purchasing power.  Taking a total-return approach, using low volatility, dividend-paying stocks to replace part of our typical bond component seems the best approach.
  4. If you have estate planning needs. If you don’t depend totally on your investments for income, then your money may be providing a bequest for charity or an inheritance for children.
  5. For historical purposes. The stock market has outperformed all other asset classes over the last century.

In retrospect, retirees will need to allocate a certain portion of their assets to higher-return equity investments to achieve long-term retirement objectives – be it longevity of assets, a desired level of sustainable income, the ability to leave a legacy, etc.

Essentially, the stock market has outperformed all other asset classes over the last century. And studies continue to show that unless you are within three years of retirement, the average variability of stocks relative to their returns is superior to that of Treasurys, municipal and corporate bonds.  Thus, the right course of action is for older Americans to stay invested in the stock market past age 60 which will provide you at least 20 years, on average, to ride out the long-term volatility inherent in equities.

References:

  1. https://www.fool.com/ext-content/is-1-million-enough-for-retirement/
  2. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/worried-about-retirement-pimcos-plan-to-help-retirement-savings-last-a-lifetime
  3. https://money.usnews.com/investing/articles/2017-07-24/5-reasons-to-stay-in-the-stock-market-in-your-60s
  4. https://www.pimco.com/en-us/insights/investment-strategies/featured-solutions/income-to-outcome-pimcos-retirement-framework
  5. https://money.usnews.com/money/blogs/on-retirement/2011/03/22/why-retirement-is-not-an-age

Advantages to Taking Social Security Benefits at Age 62

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“Social Security’s trust funds will become unable to pay full benefits starting in 2034, one year earlier than estimated last year.” Social Security Administration Trustee Report

Social Security has two programs, one for retirees and another that provides disability benefits. The Old-Age and Survivors Insurance Trust Fund will become unable to pay full benefits starting in 2033, a year earlier than projected in 2020, while the Disability Insurance Trust Fund will become depleted in 2057, or 8 years earlier, according to Social Security Administration.

The U.S. economic recession caused by COVID-19 led to a drop in U.S. employment and a resulting decrease in payroll tax revenue, which accelerates the depletion of Social Security’s reserves.

When to claim benefits

You can start receiving your Social Security retirement benefits as early as age 62. And, there are advantages and disadvantages to taking your benefit before your full retirement age.  Matter of fact, 31% of women and 27% of men claim their Social Security benefits as soon as they qualify at age 62 in 2018.

  • The primary advantage is that you collect benefits for a longer period of time.
  • The primary disadvantage is your benefit will be reduced. Each person’s situation is different.

The earliest you can apply for Social Security benefits is four months before the month you want your benefits to start, and the earliest your benefits can start is your first full month as a 62-year-old. For example, if you turn 62 in June, your benefits can begin in July, and you can apply as early as March. And, Social Security Benefits are actually paid one month in arrears in August.

There is an exception: If you were born on the first or second day of a month, you can begin collecting your benefits in that month.

You may need your Social Security Benefits as a source of guaranteed income to help pay bills, or if you anticipate not living long enough to reap the rewards of delaying.

If you start taking Social Security at age 62, rather than waiting until your full retirement age (FRA), you can expect up to a 30% reduction in monthly benefits with lesser reductions as you approach FRA.

Delaying can boost monthly payments compare to claiming early. Colleen, single at age 62 would receive $1,450. At 66 1/2 $2,000. At 70, $2,560. Waiting until age 70 would increase Colleen's montly benefits by more than 765 and her lifetime benefits by at least 24%

Social Security replaces a percentage of your pre-retirement income based on their lifetime earnings. The portion of your pre-retirement wages that Social Security replaces is based on your highest 35 years of earnings and varies depending on how much you earn and when you choose to start benefits.

When you work, you pay taxes into Social Security and the Social Security Administration uses the tax money to pay benefits to:

  • People who have already retired.
  • People who are disabled.
  • Survivors of workers who have died.
  • Dependents of beneficiaries.

The money you pay in taxes isn’t held in a personal account for you to use when you get benefits. We use your taxes to pay people who are getting benefits right now. Any unused money goes to the Social Security trust fund that pays monthly benefits to you and your family when you start receiving retirement benefits.

Living in retirement

You’re officially retired and have worked hard to build up your retirement nest egg. As you transition your mindset from saving to spending, you’ll want to now change your focus: Protect what you have, don’t run out of money, develop a housing strategy for where you’ll live over the next 20–30 years, and hopefully, enjoy life as much as you can with your friends and family.

Claiming Social Security at 62 makes sense in several scenarios. Below are four reasons to consider filing as early as possible.

  1. You’re out of work against non-voluntary – Many people are forced out of a job before they’re ready to retire. If you’ve been downsized and can’t find a new job, Social Security could help replace of your regular paycheck. Furthermore, the coronavirus pandemic has forced a lot of seniors out of the workforce, whether due to layoffs or health concerns. If you’re able to compensate for not working by claiming benefits early, do so since it’s a better bet than racking up debt.
  2. You’re out of work temporarily and need money – Maybe you’re not working right now to address a health issue or lay low until the pandemic is over, but you’re confident you can get back out there in six months. In that case, claiming Social Security at 62 could be a smart move because you can actually use that money as a loan of sorts. One lesser-known Social Security rule is that you’re allowed to undo your filing once in your lifetime. If you claim benefits at 62 but are working again in a few months, you can withdraw your application, repay the SSA the benefits it paid you, and then file again at a later age so you don’t slash your benefits in the process. The only catch is that you must undo your claim and repay your benefits within 12 months. But if you can pull that off, you can collect Social Security on a temporary basis without locking yourself into a lower monthly benefit forever.
  3. You’re tired of working and can get by on your Social Security paycheck – Maybe you have the option to work, but at this point in life, you’re tired of doing it. If your expenses are such that you can get by on your Social Security income, or a combination of Social Security and other income sources, then there comes a point when you should let yourself off the hook after a lifetime of hard work. If you’re going to claim Social Security early for this reason, you should make sure to have a healthy retirement savings balance to compensate for a lower monthly benefit.
  4. You Have Minor or Disabled Children at Home – If you have children, eligible grandchildren, or even a spouse providing care for these children at home, these family members may be eligible for a benefit. There’s a rule that states that before benefits can be paid to anyone off of your work record, you have to be receiving benefits. That means filing early could make more sense than waiting. When combined with your benefits, the benefits to children and your eligible spouse can be up to 180% of your full retirement age benefit. If you have children at home that meet the criteria for eligibility, that’s an obvious reason to consider filing early.

It might seem like it makes sense to wait to file until full retirement age, then, when you’d receive $2,000 (versus filing at 62, when you’d only get $1,500 per month).

If you lived until 90, you’d receive an additional $70,000 in benefits for delaying filing until 66 instead of filing at 62. But this calculation doesn’t take into account the benefits paid to your children. While your children would be eligible for benefits based upon your retirement, the kids cannot get benefits until you file. That means your family would able to collect thousands of dollars more in lifetime benefits if you file early and turn on the benefits for your kids.

For every good reason to claim Social Security at 62, there’s an equally good reason to wait. On average, retirement beneficiaries receive 40% of their pre-retirement income from Social Security.

References:

  1. https://www.marketwatch.com/story/social-security-to-become-unable-to-pay-full-benefits-sooner-than-previously-estimated-11630436444
  2. https://www.ssa.gov/benefits/retirement/learn.html
  3. https://www.aarp.org/retirement/social-security/questions-answers/social-security-start-at-62.html
  4. https://www.fidelity.com/viewpoints/retirement/social-security-at-62
  5. https://www.fool.com/retirement/2021/04/05/3-great-reasons-to-take-social-security-benefits-a/
  6. https://communications.fidelity.com/pi/calculators/social-security/#sectionAge
  7. https://www.ssa.gov/OACT/quickcalc/early_late.html
  8. https://www.socialsecurityintelligence.com/5-smart-reasons-to-consider-filing-for-social-security-at-62/

Lifestyle Creep

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“Lifestyle creep is one of the biggest and often most overlooked barrier for Americans to building long-term wealth.”

Lifestyle creep, sometimes called lifestyle inflation, is when living expenses and non-essential expenditures grow with income. Essentially, it’s your lifestyle and standard of living creeping up to levels you wouldn’t have been able to maintain earlier in your life. This unnecessary spending might mean joining a beach club, installing a backyard swimming pool or eating out more frequently. Or, it could mean buying a second home or a new car.

And, “when your expenses continuously increase in lockstep with your income,” that when lifestyle creep can set in, said Nilay Gandhi, a CFP and senior wealth adviser with Vanguard.

Some examples of lifestyle creep, according to Investopedia, include:

  • Spending several dollars per day on coffee
  • Flying premium economy rather than coach
  • Eating out frequently and more expensively
  • Purchasing expensive clothing and jewelry (and more of it)
  • Paying for housekeeping and lawn care
  • Buying or renting more house than you need (or a second home)
  • A third car, a boat, or replacing a car sooner than you need to

On the one hand, it’s only natural to increase your spending as your income rises. After all, you work hard to buy and do the things you love to do in life. “It’s when that higher spending happens mindlessly, rather than intentionally, that it becomes problematic”, says Mary Lyons, an investment adviser and founder of the Benchmark Income Group in Dallas.

Lifestyle creep can happen to anyone, no matter your income. Even when high salary earners are asked to name their top financial challenge, nearly half stated an inability to save enough.This highlights an important fact: There’s no outearning lifestyle creep.

Lifestyle creep is most visible among high earners. Living within your means can seem straightforward when your means are small. You can tell yourself that, after your next raise or bonus, you’ll simply save more money and keep everything else the same. Yet, “The number one culprit of lifestyle creep is spending on your credit card and paying it off every month,” says Katie Waters, certified financial planner at Stable Waters Financial. “Just as work expands to the time allotted, expenses will expand to the credit limit.

One of the most detrimental side effects of lifestyle creep is that spending more inevitably means saving and investing less. Lifestyle creep can also lead to additional life stresses, says Ami Shah, a certified financial planner in Washington, D.C., and CEO of Steward, a financial planning software tool. For example, if your lifestyle becomes dependent on a certain level of income, what happens if you want to switch jobs or careers?

The best means to manage and prevent lifestyle creep is to create a financial plan and a budget, and stick with both. And many financial experts contend that the first line of defense is not overspending on housing, often someone’s highest expense. Generally, you should keep monthly housing costs below 25% of your net income. And, if the amount you’re saving and investing falls below 20% of your net income, that could be an indication of lifestyle creep.

Financial experts suggests paying yourself a weekly allowance to remain intentional about your spending, no matter how much money you make.

Spend below your means

“People get rich by earning money; they stay rich by spending less than they earn. ”

If you’re able to live on only 70% to 80% of your income, you’ll have enough left over to save and invest. To do that, focus on spending very intentionally and reducing or eliminating high-interest debt.

Spending intentionally doesn’t require pinching every penny, but you should know and track where those pennies are going and ensure that spending is something you value, whether that’s travel or other desirable experiences.

References:

  1. https://www.marketwatch.com/story/this-is-one-of-the-biggest-barriers-to-building-long-term-wealthis-it-happening-to-you-11630079820
  2. https://www.investopedia.com/terms/l/lifestyle-creep.asp
  3. https://www.realsimple.com/work-life/money/money-planning/lifestyle-creep
  4. https://www.nerdwallet.com/article/investing/how-to-get-rich

Beware of American Depositary Receipts (ADRs)

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ADRs are a form of equity security that was created specifically to simplify foreign investing for American investors.

American Depository Receipts (ADRs) offer US investors a means to gain investment exposure to non-US stocks without the complexities of dealing in foreign stock markets.

ADRs are a form of equity security that was created specifically to simplify foreign investing for American investors. An ADR is issued by an American bank or broker. It represents indirect ownership of one or more shares of foreign-company stock that isn’t directly traded on U.S. exchanges and held by that bank in the home stock market of the foreign company.

The ratio of foreign shares to one ADR will vary from company to company, but each ADR for any one company will represent the same number of shares. ADRs may be listed on a major exchange such as the New York Stock Exchange or may be traded over the counter (OTC). Those that are listed can be traded, settled, and held as if they were ordinary shares of US-based companies.

Because ADRs are issued by non-US companies, they entail special risks and drawbacks inherent to all foreign investments. These include:

  • Exchange rate risk—the risk that the currency in the issuing company’s country will drop relative to the US dollar
  • Political risk—the risk that politics or regime changes in the issuing company’s country will undermine exchange rates or destabilize the company and its earnings
  • Inflation risk—the risk that inflation in the issuing company’s country will erode the value of that currency
  • Liquidity: Plenty of companies have ADR programs available, but some may be very thinly traded.
  • Higer Fees—ADRs can carry higher fees than traditional stocks.
  • Transparency—investors also may not have access to the amount of information available on domestic companies.

ADRs have a number of unique differences relative to foreign stocks or traditional U.S. stocks that are equally important to consider.

For instance, there is a significant difference in the way that taxes are charged on dividends. As with U.S. stocks, dividends are taxable in the U.S. Unlike U.S. stocks, the dividends may also be subject to tax by the company’s home country. However, they’re usually automatically withheld by the sponsor. Investors may choose to apply a credit to their U.S. taxes or apply for a refund abroad to avoid double taxation.

References:

  1. https://www.fidelity.com/learning-center/investment-products/stocks/understanding-american-depositary-receipts
  2. https://www.thebalance.com/about-adrs-understanding-american-depositary-receipts-1979192

The American Wealth Gap

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The wealth gap, measured by net worth, between average Americans and the wealthy is the widest and most extreme in recorded history.

The average American has personal wealth, measured by net worth, consisting of about $393,000 in assets minus liabilities, according to the World Inequality Database. Yet, someone with that kind of net worth is not “wealthy,” relative to the country’s wealthiest elites. 

Below is the chart created using data from the World Inequality Database and Bloomberg’s Billionaires Index. The bubbles represent the relative wealth of the average American — just one pixel wide in the chart below — compared to the average wealth of the top 1% of people in the US. Also, there are bubbles to represent multibillionaires Marc Benioff and Charles Koch, as well as Elon Musk, the richest person in the world.

The chart shows just how far ahead billionaires are from everyone else. The dot representing the average American’s wealth is so small that chart designers had to draw a circle around it. It depicts that Elon Musk’s bubble stands 488,000 times as large as the average American’s comparable infinitesimal bubble.

Even the average wealth in America of the top 1%, approximately $13.7 million, is dwarfed by the billionaires. The top one percent of household net worth threshold starts at $11.1 million in 2019, according to finance and investing website ‘Don’t Quit Your Day Job’.

HENRYs — “high earner, not rich yet”

In the world of finance, HENRY is an acronym that stands for “high earner, not rich yet”. HENRYs make six figure incomes but still live basically paycheck to paycheck. These individuals earn a sizeable disposable income and tend to spend that income to facilitate a standard of living at or beyond their financial means. It’s also important to note that HENRYs typically live above their means, they constantly utilize credit and work to pay off their accumulated debts.

Because of their considerable disposable income and being on the path to establishing future wealth, luxury brands target HENRYs with their marketing. The 3 Key Characteristics of a HENRY, according to Corporate Financial Institute, are:

  1. Feeling of/belief that they have little to no wealth
  2. A substantially greater-than-average yearly income
  3. Limited or non-existent savings

Though HENRY’s are in a much better position financially than many Americans to pay their monthly mortgage, buy a car, or take a vacation, compared to billionaires like Musk or Benioff, they don’t make the cut for the wealthiest.

The US has 650 billionaires according to an analysis by Americans for Tax Fairness and the Institute for Policy Studies Project on Inequality,

References:

  1. http://static5.businessinsider.com/chart-wealth-top-1-percent-billionaires-average-american-family-worth-2021-8
  2. https://wid.world/country/usa/
  3. https://dqydj.com/average-median-top-net-worth-percentiles-by-age/
  4. https://corporatefinanceinstitute.com/resources/careers/compensation/high-earners-not-rich-yet-henrys/
  5. https://dqydj.com/top-one-percent-united-states/