“Your savings rate is…the biggest determinant of how you do financially over time.” Christine Benz, the director of personal finance for investment research firm Morningstar
As the stock markets plunged across the globe in March, a wave of Americans saw an opportunity to start investing. But chasing hot stocks like Apple, Tesla or Amazon, according to financial experts, is akin to making the same old ‘tried and true’ investment mistakes as our forefathers and foremothers.
“Individual stocks are terrible investments for people just starting out,” according to Christine Benz, the director of personal finance for investment research firm Morningstar.
Active investing strategies, such as buying and selling individual stocks on trading platforms like Robinhood, often underperforms over the long-term versus more passive investment strategies, such as investing in low cost index funds that simply follow a stock market index like the S&P 500.
While chasing hot stocks may seem thrilling in the short-term while you’re winning, the keys to financial success and security are incredibly mundane. They include:
Creating and following a financial plan;
Disciplined and deliberate savings;
Investing for the long-term;
Time in the market beats timing the market;
Investing in market index mutual funds and ETFs; and
The U.S. “has both a moral and economic imperative to end these unjust and destructive practices” of institutionalized racism. Raphael Bostic, President and CEO, Federal Reserve Bank of Atlanta
“Over the course of American history, the examples of such institutionalized racism are many, and include slavery, federal law (consider the Three-Fifths Compromise our founding fathers established to determine federal representation), sanctioned intimidation during Reconstruction, Jim Crow laws in southern states, redlining by bankers and brokers, segregation, voter suppression, and racial profiling in policing.”
Dr. Raphael W. Bostic, Federal Reserve Bank of Atlanta
“These institutions hurt not only the African Americans they’ve targeted, but the systemic racism they’ve codified also hurt, and continues to hurt, America and its economy. By limiting economic and educational opportunities for a large number of Americans, institutionalized racism constrains this country’s economic potential. The economic contributions of these Americans, in the form of work product and innovation, will be less than they otherwise could have been. Systemic racism is a yoke that drags on the American economy.”
“To be fair, we have made some progress. Legal reforms have erased many of those historical institutions that caused so much pain and violence, and further reform essential for helping end harmful practices is under way in many places. But the legacies of these institutions remain, and we continue to experience misguided bias and prejudices that stem from these stains on our history. These have manifested in the worst way possible—in the deaths of George Floyd, Breonna Taylor, Ahmaud Arbery, Dana Martin, and, sadly, so many others.”
“It is time for this cycle to stop. It is time for us to collectively embrace the promise of an inclusive America, one where everyone can participate fully. We are each being challenged to rise to this occasion through education and action. All of us, especially our white allies, must learn the history of systemic racism and the ways it continues to manifest in our lives today. Furthermore, we all must reflect on what we can do to effect change at every turn.”
“A commitment to an inclusive society also means a commitment to an inclusive economy.”
Dr. Raphael W. Bostic is president and chief executive officer of the Federal Reserve Bank of Atlanta. He is a participant on the Federal Open Market Committee, the monetary policymaking body of the Federal Reserve System.
“Dividend stocks can provide investors with predictable income as well as long-term growth potential.” Motley Fool
Dividend stocks have faced strong headwinds, including payout cuts and suspensions as efforts to fight the pandemic have hampered corporate cash flows.
Yet, investors who have a moderate risk tolerance should consider pursuing a proven dividend-growth investment strategy for income and return in volatile markets. In volatile markets, protecting current income becomes more important than ever for investors. But you also want to satisfy your need for current income and capital growth.
Dividend-paying stocks tend to provide more defensive protection in adverse market environments and they tend to grow over time and protect your real purchasing power. Dividend-paying stocks also tend to have more of a value orientation.
When dividend stocks go up, you make money. When they don’t go up — you still make money (from the dividend). When a dividend stock goes down in price, it’s not all bad news, because the dividend yield (the absolute dividend amount, divided by the stock price) gets richer the more the stock falls in price.
Historically, stocks with rising dividends greatly outpaced the dividend cutters or non-dividend-paying stocks. Further, if you focused on rising-dividend stocks over non-dividend-paying stocks, you would have increased your investment by an average of 4.3% per year over this nearly 48-year study.
So, a $10,000 investment in non-dividend-paying stocks made at the beginning of this study, growing at an average annual return of 8.57%, would be worth over $500,000 today.
However, the same $10,000 investment in dividend growers over the same period at a 12.87% average annual return would be worth an incredible $3.24 million!
That’s not the only benefit. Returns from dividends have also exhibited a lower standard deviation, or variability, over time. Since the overall volatility of a stock’s total return is typically dominated by its price movements, dividends contribute a component of stability to that total return.
Looking for good dividend-paying stocks
Despite challenging economic times, certain companies have grown their dividends during previous downturns; there may be precedent for their willingness and ability to grow their dividends again. While much remains uncertain, the highest-quality companies have proven their ability to grow their dividends over time. They have demonstrated an ability to survive through a range of market environments, even raising dividends during and after previous recessions.
These companies prioritize sustaining dividends in challenging times. They are dividend-paying royalty. However, it’s advised to avoid stocks with very high yields since they could be prone to dividend cuts or suspensions. Seek dividend stocks with a fortress balance sheet providing solid cash flow, reasonable dividend payout yield, above average earnings growth and little to no debt. Avoid companies with heavier debt loads, as measured by net debt (debt minus cash) to earnings-before-interest-taxes-deprecation-and amortization (EBITDA) ratios.
Investors seeking dividend sustainability need look no further than the Dividend Aristocrats: a list of companies within the S&P 500 index that have increased their dividend payouts consecutively for 25 years or more. The 64 S&P 500 Dividend Aristocrats have raised their dividends in an era that spans the Iraq wars, the Sept. 11 terrorist attacks, the Great Recession, and now the novel coronavirus pandemic.
But while the Dividend Aristocrats list is a great place to start for identifying dividend stalwarts, you are advised to avoid the highest-yielding stocks—some of which can be value traps or worse. It is okay to look for companies that are paying a decent amount of their earnings back in the form of income, but if the price moves too high and their dividend yield drops, then you’ll sell the stock and capture the gains.
Additionally, under the recently passed 2020 CARES Act, “companies that borrow money from the federal government may not repurchase stock, pay a dividend, or make any other capital distributions until 12 months after the loan is repaid in full,” according to Goldman Sachs.
Investors should always consider their investment objectives, their comfort level and risk tolerance before investing. And, they should keep in the forefront of their mindset that investment plans do not need to change in periods of high volatility since they should be based on five years or longer time horizon.
To Get Better at Something, Ask Yourself These Two Questions
Anyone can get better and improve at anything, including personal finance, with the right mindset and deliberate action. That includes getting better at saving by paying yourself first, investing for the long-term and accumulating wealth.
But in order to get better, individuals need to honestly answer “yes” to two very basic questions. Those two questions are:
Do you want to do or get better?
Are you willing to feel the discomfort of putting in more effort and trying new things that will feel weird and different and won’t work right away? To fail?
If the answer is “no” to either question, then it would be foolish for an individual to believe they can improve and get better by doing things the way they’ve always done it or thinking the same way they’ve always thought. Additionally, it would prove a waste of time and effort for any coach to undertake a client or player to improve their skills who do not answer yes to both questions.
Essentially, getting better, especially at saving and investing, is about wanting to get better by embracing a positive mindset and is about having a willingness to experience discomfort. It is important to know that you can become better at anything if your willing to do what is necessary.
But you will not get better if 1) you don’t believe you can and 2) you aren’t willing to accept the discomfort of doing things differently and do whatever it takes to get better.
Learning anything new means moments of feeling uncomfortable. You will need to act in ways that are unfamiliar and take risks that are new. Try things that, in many cases, will be initially frustrating because they won’t work the first time.
You are guaranteed to feel awkward and possibly experience failure for the first time. You will make mistakes. You may be embarrassed or even feel shame, especially if you are accustomed to succeeding.
The key take-away is that answering these two questions yes are a prerequisite to growth and achieving financial success.
“People have the potential to live longer than any other time in history. This gift of extra time requires that we fundamentally redefine retirement and our life journeys leading up to it.” What is “Retirement’? Transamerica Center for Retirement Studies
Financial Life Planning connects the dots between our financial realities, our values and the lives we long to live. It helps both pre-retirees and retirees identify their core values and connect them with their financial decisions and life goals. It is an financial planning and investing approach which helps people manage their portfolio.
Financial life plan focuses on the human side of financial planning, including people’s anxiety, habits, behaviors and other emotions (e.g., fear and greed) tied to investing money and accumulating wealth. People struggling with retirement and other finances really need a plan that helps them manage their attitudes, habits, goals and resources.
George Kinder, known to most as the “father” of the life planning, is the founder of Kinder Institute. He views life planning as “a way of holistically delivering financial planning that focuses on delving into people’s real goals, beyond just their financial concerns, in an effort to help them use their money to deliver freedom into their lives”.
Financial Life Planning combines personal finance and wellness. It spends time to discussing life planning and to building an intentional life. There is more to living a life of freedom and purpose than money and wealth. To live a life of freedom and purpose, people are encouraged to consider George Kinder’s famous Three Questions, which are:
Question 1: Design Your Life
“I want you to imagine that you are financially secure, that you have enough money to take care of your needs, now and in the future. The question is, how would you live your life? What would you do with the money? Would you change anything? Let yourself go. Don’t hold back your dreams. Describe a life that is complete, that is richly yours.”
Question 2: You have less time
“This time, you visit your doctor who tells you that you have five to ten years left to live. The good part is that you won’t ever feel sick. The bad news is that you will have no notice of the moment of your death. What will you do in the time you have remaining to live? Will you change your life, and how will you do it?”
Question 3: Today’s the day
“This time, your doctor shocks you with the news that you have only one day left to live. Notice what feelings arise as you confront your very real mortality. Ask yourself: What dreams will be left unfulfilled? What do I wish I had finished or had been? What do I wish I had done? ”
Society tends to attribute personal and professional success to the acquisition of material things and the accumulation of wealth. Most of us find ourselves inextricably caught in a cycle of earning, spending, and investing often induced by societal and peer pressures to fit into a perceived definition of success.
And in spite of this, how many times have we heard from even well-to-do friends, acquaintances and relatives that they are not exactly happy with how their lives have shaped up, how they don’t enjoy what they are doing, how they are drowning in debt or living paycheck to paycheck, or how they don’t have any time to pursue their dreams and interests?
If you look closely, there is a common undercurrent running across all these statements that we find ourselves ‘enslaved’ to a script or lifestyle broadcast by social media which was not exactly aligned to our values and innermost dreams.
No one ever wanted to spend more time in the office
“No one ever said on their deathbed ‘I wish I’d spent more time at the office.’ ” Harold Kushner
Having read many anecdotal reports regarding end of life issues, it is important what truly matters to most people in the end. Typically, people do not say that they wish they had earned more money, spent more time at work, or had one more side hustle.
Most often instead, they wish they had spent more time with family and friends. They had more experiences with those that they love. They had taken better care of their health and bodies over the decades. They had saved more and planned better for their retirement. And finally, they wanted to make sure that those they left behind would be taken care of once they were gone.
Everyone can grow life-changing wealth and have strong investment results over the long term.
Investing in stocks is one of the most important financial skills you need to master. History has shown that the earlier you start and the longer you stay invested in the market the better your investments will be. On average, stocks have given an annualized return of around 10%. At that rate, your investments would double every 7.2 years.
Let’s say you start with $10,000. After a 40 year career, that turns into at least $320K from doubling 5 times. That’s from a single $10,000 investment.
And, it is important to understand that you can’t accumulate wealth off just your salary. Savings and bonds won’t do it either, the return isn’t high enough to make an impact during your lifetime.
But, you should not invest in stocks in a vacuum. It is important to develop a financial road map to help you invest to meet a goal, whether this means sending the kids to college, retire well, buy a house, get that BMW or some marvelous combination thereof.
When you have a financial plan, you have a road map to guide your investing to help you reach your financial goals. The important thing is that you keep your investments on track in order to reach your financial goals.
Nick Murray may have said it best when he said,
“All financial success comes from acting on a plan. A lot of financial failures come from reacting to the market.”
Whether in real estate, stocks or even owning a business, you will never be able to achieve financial freedom without investing in assets and benefiting from the magic of compounding interest.
Few people will be able to save enough for a secure retirement without investing.
“The lessons they taught us about money—about not spending more than we have, saving what we can, and splurging occasionally and mindfully”
Three (3) lasting lessons from my frugal parent
Frugal living can help separate the important financial expenses from the not so important. Learn helpful lessons and ideas on frugal living here.
BY JEANNE THOMPSON FROM FIDELITY – 06/07/2019
I’ll never forget my first “real” vacation.
Most of our family vacations were camping trips where we slept together in a tent or a pop-up trailer and my mom cooked for my 4 siblings and me at the campsite. But the summer after fifth grade, my father decided to take me, my mom, and my 2 older sisters with him on a business trip to California.
That trip really stood out. I remember relaxing by the pool in sunny San Diego, sipping Shirley Temples with my sisters. We were fascinated by the elevators in our big hotel and rode them up and down until we were sternly told to stop. Simply put, it was paradise.
This trip was an unusual extravagance for my parents, too. You can’t raise 5 children on a limited income without being very frugal. And my parents, who were both first-generation Americans, were used to getting by on very little. Excess was not an option. At Christmas, my mom would save nice wrapping paper and reuse it; boxes were also recycled for many holidays to come. Folding a little piece of wrapping paper in half, writing a note inside, and taping it to a gift worked just as well as buying a greeting card. She reused everything from tin foil to plastic baggies. Her approach to money and possessions was pretty consistent: “Make do with what you have.”
These habits and quirks used to make us laugh. Today, I appreciate the example my parents set. I resist spending money on big-ticket items. My car, for instance, is a 2010 model and has 150,000 miles on it. And most of the furniture in our house is at least a decade old (if not a few decades). I’m not about spending a lot on furniture —with a teenage son, our couch becomes a dumping ground for lacrosse equipment more often than not. I even save nice wrapping paper from time to time, much to the amusement of my kids. And because of the warm memories from that long-ago California trip, I’d much rather spend money on experiences my family can enjoy, like vacations, than on stuff.
Maybe it’s wishful thinking, but I like to believe that my parents’ mindful approach to spending lives on in my kids, who seem to appreciate the value of a dollar on some days at least. My college-age daughter takes pride in her 5-star rating on a ride-hailing app because it entitles her to discounts and coupons. My son, a high school senior, is already savvy about mutual funds and 401(k)s—thanks to conversations he tunes into at home and an intro to business class he takes at school. Both kids know that they need to budget for indulgences beyond the basics and that they’ll have to pay for them with money earned from their jobs.
Both of my parents are gone now, but their frugal approach to working diligently and saving money allowed them to raise kids. And not only that: They put enough away to build a nest egg that funded some retirement travel to Europe, Russia, and Alaska in their golden years. By then my father came around to reasoning: “You can’t take it with you.”
They still managed to leave something behind. The lessons they taught us about money—about not spending more than we have, saving what we can, and splurging occasionally and mindfully—are with all of us. And those occasional splurges they encouraged us to enjoy are as sweet as those long-ago Shirley Temples under the warm California sun.
Make the most of your money and that means investing.
For many Americans, investing can appear to be a frightening gamble. Memories of the 2008 financial crisis devastated investment accounts with paper losses more than ten years ago create the reluctance among many to invest.
However, in order to beat inflation and ensure that your savings will work for you long term, it’s crucial to invest in growth-oriented investments such as the stock market. Whether through an employer-sponsored 401(k) plan, a traditional or Roth IRA, an individual brokerage account or somewhere else, to build wealth and financial security, individuals must invest in the equity stock market. And, it is important to start investing as early as you can to give your money as much time as possible to grow.
Valuation matters, and it matters a lot.
Value investing rarely performs well in the short run. This is especially true during strong bull markets. Popular non-GARP (growth at a reasonable price) stocks are likely to be overvalued whereas unpopular value stocks will be where the best bargains can be found.
Consequently, being a value investor means being a patient investor and implies that an investor have a long-term mindset. Value investing rarely produces short-term results, because value investing usually also implies investing in out of favor stocks. This unpopularity is often why they have become bargains.
Moreover, value stocks are typically inexpensive for good reasons. Therefore, we need to ascertain whether the discounted stock price is justified or perhaps an overreaction by investors. These judgments can help us determine the level of risk we are facing and if we are being adequately compensated for taking it by the low valuations or not.
Additionally, in the long run value stocks often dramatically outperform and very often do so by taking on significantly less risk than other strategies such as momentum, or in many cases even growth. This is attributed to the fact that the risk is being mitigated by low valuation (price) and margin of safety.
As a result, the key benefit of value investing is the valuation risk mitigation element. Research demonstrates that stocks that are properly valued, or undervalued, are more defensive in a volatile or bear market.
Margin of Safety
Margin of safety is the difference between the intrinsic value of a stock against its prevailing market price. Intrinsic value is the actual worth of a company’s asset, or the present value of an asset when adding up the total discounted future income generated:
Deep value investing – buying stocks in seriously undervalued businesses. The main goal is to search for significant mismatches between current stock prices and the intrinsic value of these stocks. This kind of investing requires a large amount of margin to invest with and takes lots of guts, as it is risky.
Growth at reasonable price investing – choosing companies that have positive growth trading rates which are somehow below the intrinsic value.
Margin of safety serves as a cushion against errors in calculation. Since fair value is difficult to accurately predict, safety margins protect investors from poor decisions and downturns in the market.
Adding up all the money coming in and going out is called cash flow analysis, and it looks at all income from investments, properties, work, or anywhere else. And it looks at spending.
When it comes to cash flow, there are no hard and fast rules about what is good—it depends on personal goals and values. But there are some general guidelines to be consider.
Try to start early and save at least 15% of income for retirement—and any employer matching counts toward this goal.
Retirees should try to limit withdrawals from their savings to about 4% of their account balance in the year they entered retirement, though they can increase that for inflation each year.
Limit your monthly essential bills and housing costs to 50% of your monthly income.
Save about 5% of your income for short-term expenses.
Look to keep your total monthly debt bills below 36% of your monthly income.
Consider a growth portfolio consisting of (70% stocks, 25% bonds, and 5% cash) that would have allowed a retiree to withdraw more than 7% each year over 25 years of retirement—over 25% more than a conservative portfolio (20% stocks, 50% bonds, and 30% cash) with a sustainable withdrawal rate of 5.7%.3
Cash flow analysis may also show some opportunities for tax savings and other ways to make the most of one’s money.
Source: Financial health: Know your vital signs, FIDELITY VIEWPOINTS, 09/30/2019
3. The chart, “More stocks may mean higher anticipated withdrawal rates, but with less certainty,” was created based on simulations that relied on historical market data. The historical range analyzed was January 1926 to July 2018. These simulations take into account the volatility that a variety of asset allocations might experience under different market conditions. The illustration compares 3 different hypothetical portfolios—conservative, with 20% stocks, 50% bonds, and 30% cash; balanced, with 50% stocks, 40% bonds, and 10% cash; and growth, with 70% stocks, 25% bonds, and 5% cash. For each of the hypothetical portfolios, the maximum withdrawal rate was calculated such that the portfolios do not run out of money in 99%, 90%, and 50%, respectively, of the hypothetical scenarios. See footnote 4 for more information on asset classes and historical returns.
Humans either think that they’re in charge of what happens in their life, or they believe that life happens to them. Those who believe they’re in control of their life and its outcomes have an internal locus of control.
Having an internal locus of control tend to be associated with higher wealth, and because these people are more likely to take responsibility for the outcomes in their life. Additionally, the top one-percenters are also more likely to believe in their own abilities to solve problems and achieve goals, make better investment decisions and react more calmly when volatility strikes.
Having an external locus, however, is associated with self-destructive financial behaviors.
Financial advisors can help clients move to a more centered approach by asking thoughtful questions about past financial decisions, and can assist in determining where a client’s locus of control lies.
Financial life plan focuses on the human side of financial planning, including people’s anxiety, habits, behaviors and other emotions (e.g., fear and greed) tied to investing money and accumulating wealth. People struggling with retirement and other finances really need a plan that helps them manage their attitudes, habits, goals and resources.
