Tag Archives: life-insurance

Summary This article will focus on how I allocate to assets within my portfolio and within each asset class. Before worrying what assets to buy, everyone regardless of age should have a cash cushion for emergencies. I add to any asset class when I believe it is cheap compared to its historical norms and can provide better long-term income than any other class. Back to Part I Introduction and Series Overview I decided to write this series based on two events: 1) One reader mentioned that I should write an article about asset allocation (based upon what I wrote about the subject within another article) expanding upon the original concept and drilling down with more detail. 2) My desire to help others to understand what I know now and only wish I had known when I started investing. Part I of the series was meant to be an overview and, based upon what I think as well as the overwhelming response in comments, is a must read for investors who need a plan to guide their investing activities. I was truly touched by several of the supportive comments but the one that stood out to me was: “Great common sense article. Easy to read and understand. The kind of article that I will forward to my own Kids so they can benefit from the Author’s wisdom. Thanks for taking the time to contribute.” Readers have suggested several aspects of developing and managing a portfolio in comments to the previous article. I will continue to write articles in the series as long as there are still topics that readers want addressed. This article and the next will focus on how I allocate to assets within my portfolio and within each asset class. After allocation, because of several requests, I will write an article to explain several factors that cause a flash crash, some of which most investors have probably not considered. I like reading from a lot of different sources and then noodling all I have learned until I connect the dots, so to speak. Connecting the dots leads to better understanding for me and I hope my explanations will help bring understanding to my readers, as well. After that, I will try my best to proceed through the series in an orderly, sensible fashion so that readers can follow along easily and without having to think too hard on their own. I see it as my job to make this as painless as possible. I will not try to impress you with my knowledge of financial jargon. I like to keep things simple to be as inclusive as possible. Asset Allocation from 40,000 Feet: How much of what? Before worrying what assets to buy, everyone regardless of age should have a cash cushion for emergencies. My wife keep at least $50,000 in our accounts at the bank. We earn an annual rate of about 2.5 percent on that amount. Anything more and we earn zip. We also have a few thousand bucks in a safe that we can get to if the banks were to close. That may sound paranoid, but we came close to needed that cash during the 2008 financial crisis. Huge sums were being withdrawn from money market accounts and banks across the nation. The Fed and Treasury officials took notice and immediately raised the insured deposit limit to $250,000 per account. This all transpired within a few hours at most. They did the right thing and the outflows decreased to a very manageable dribble. These things come out of nowhere and being prepared is important. Beyond that, having cash available for when the car or furnace breaks down and needs to be either repaired or replaced. Replacing may use less cash but may not be the right answer for the overall budget. We have lived in our current home for 12 years and have had to replace the HVAC system, refrigerator, microwave, television (twice), phones, washer and dryer. We have also replaced four cars. My daughter and I talked it all over and she decided that she shouldn’t be driving just yet. I commend her for making a mature decision. In several instances we needed cash either at the time of sale or when the credit card bill arrived. Never carry a balance on a credit card or the interest you pay will eat deeply into your savings plan. I do not buy gold or silver for investment purposes. I do, however, have a couple bags of silver coins as a hedge against catastrophe. I never expect to need them, but I sleep better knowing that if inflation were to go wild and currency become worthless, I could still feed my family and buy toilet paper. The answer to the question at the beginning of this section (How much of what?) lies somewhere in the answer to a few other questions: What is my expected holding period? What are my long-term goals and how will each asset help me to achieve those goals And this one is my all-time favorite that very few investors pay much attention to: Which asset presents the best value when I have the cash to invest? I will start with holding period even though I did partially cover that in Part I. Before one decides what to buy one must understand what they will need at the end of their investing horizon to carry them through to the end (however you want to define that; and, before you laugh, it is different for everyone). Some people want to set up a charitable foundation that will give money for a cause eternally. Some just want to retire and enjoy life, travel and relax. Others may want to get their kids off to a good start or help ensure that they have something for later in life, too. And still other may want to help grandchildren with college expenses. How about a new sail boat or that travel trailer? Yet other want to do it all and cannot be realistic about the decisions that need to be made to get there. Some have it all covered, some have a good start and some are dreadfully way behind where they need to be. It may be too late for a few, but with good planning, reasonable goals and consistent execution most folks can at least retire comfortably. But the place to start is by determining ones investing horizons. I will start off by explaining mine. I am 66 year of age now, but I still have a long-term view regarding my investments. I do not need the income from investments yet even thought I have been retired since 2002. I expect to live another 20 years or more, my wife will probably outlive me and we both would like to leave something for our two children to make life a little easier for them later in life. So, with that in mind, I need to invest with the idea that my savings need to last well into the retirement years of my children, ages 19 and 23. That gives me three time horizons to consider: First, I need to have adequate funds set aside to meet our living expenses and my final expenses (sorry, but death does not always come cheap). So, I plan to have a draw down from savings in my final years of up to $200,000. That may seem like a lot, but I have been through this with my Dad and Mom and am currently going through it again with my wife’s mother who currently lives with us (she turns 99 in November). Experience tells me that $200,000 could be low if I end up with cancer (I lost a sister to that one) or even if my wife decides she cannot handle me and either brings in outside assistance or ships me off to a nursing/retirement home. There are a lot of variables, but my figure falls somewhere in the middle of the range. My life insurance should help supplement the final expenses even if my planned amount falls a little short as long as I do not outlive the coverage. A portion of the insurance is paid up but will only cover about half. Next, I need to make sure that the funds, after being depleted by my end of life, will be adequate to provide for my wife’s living expenses and her final expenses. Because of inflation, I figure $250,000 for final expenses for her. But that amount will not be enough to provide enough income for her after I am gone. Fortunately, she will still be covered by my health insurance and my remainder pension will cover that cost for the rest of her life. Her life insurance, if she chooses to continue with the premiums after I am gone, should cover her final expenses. If she outlives the term of the coverage the expenses will need to come out of her estate. How much do we want to leave to the kids and how much do we want to give away? Sorry, but those are more personal questions and will be different for each individual reader. Just be aware that I need to plan to provide the funds to make our wishes possible over the remainder of my lifetime. My wife will be lost on the investing front and will err to the side of caution. That is not a bad thing. I will move systematically toward that end over the next 20 years to make the transition easier for her. I think I have fairly well outlined the goals my wife and I have set for ourselves in the preceding discussion about horizons. But I will drill a little deeper to make it easier to apply for those who desire to do so. First off, we have a very comfortable existence living on about $5,000 per month. Our house is not paid off yet, but will likely be before I pass, assuming I live at least half as long as I expect. That will bring the monthly living expenses down to about $3,200 for the two of us. When my wife finds herself living alone, she will probably move herself into a retirement center, if we do not do that together while I am still around. Her expenses will rise significantly under that scenario to at least $6,000 per month. There are a lot of contingencies in this that I will not go into because it just gets to morbid and boring to write about or read. I am including this only because it is part of the deal. If you are not including such things in your plans you are either way ahead of me or living on hope. This brings me to the point I made several times in the previous article about investing for future income rather than appreciation. I have found that if I buy a quality asset that meets my income requirements, now and into the future, the appreciation generally takes care of itself. I used to focus on appreciation potential. That did not always work. Investing for income has worked much better for me. Most asset values are based, to some degree or another, on the level of income that is provided, especially relative to other assets. I will get into the relative valuation of assets later in the series. Now, on to my favorite question, “Which assets present the best value when I have the cash to invest?” This gets to the meat of my investing philosophy because of the implied timing inherent to the question. Usually, when an investor has built up cash, he/she wants to put that cash to work as soon as possible; and they should. But there are two ways to do so (probably many more, but I have my favorites). First, if there are no bargains to be had at the time, I tend to sit on cash and wait patiently for one or another prospective investment to fall into a range that I consider to offer a good long-term value. Yes. This sounds like value investing and it is, but with a slight twist. The investing style label is generally used to describe a systematic method of investing in stocks. We need to broaden that perception! Because, when we do, it opens up all types of opportunities that mere stock investors completely miss. What do I do with my money while I am waiting? I tend to buy more Vanguard GNMA (MUTF: VFIIX ) fund shares. The reason is simple: During the crash of 2008, VFIIX went up while stocks and most other assets went down in value. In fact, VFIIX has not had a down year (based on total return from January 1 to December 31) as far back as I remember. But I did not start using it until after the dot com crash of 2000-03. VFIIX has not ended any year with a negative total return since 2000. That much I know as it is public record available from Vanguard. Why did it outperform during 2008? Safety and consistency of income. It does not move much from one year to the next. It does not pay much in dividends. But it is probably the safest place I have found outside placing money under my mattress and it does pay me something while I wait. If interest rates rise, the managers of VFIIX will use cash from maturing mortgages to buy new ones with higher yields. The fund has maturities laddered relatively evenly so that each year there are new funds to be reinvested. So, the yield moves up and down with a relatively high correlation to moves in ten-year treasury rates. Here are some examples of identifying bargains: Back in mid-2009 the stock market signaled that the bear was sleeping and that stocks were on sale and good value investors had a plethora of quality companies’ stocks to pick from. But housing values were still falling. Precious metals prices had dropped like rocks (pun intended) only to soar to new extreme highs on the fear of inflation. Municipal bonds fell and provided good value for quality issues well into 2010 (I locked in some A rated issues yielding five percent or more exempt from federal income tax). Treasury bonds gave investors quite a ride up in 2008, then down into early 2009 as the financial crisis unfolded, then back up into 2010 as investors continued to seek safety, only to fall again into January 2011 as the economy stalled temporarily. But from that point until the end of 2015, Treasuries were a great asset class to hold. Each asset class offered great value at one or more points during the crisis and the aftermath. As an investor, I began buying stocks slowly at first because I was not certain at the time regarding inflation (too much of which can kill a bull move in stocks). But I did buy a few rental properties and still own three from that batch. I will tell that story in greater detail in a future article. The cash flow is very positive because I own them all debt free (no mortgages). I was able to pay cash because I bought the properties through tax sales (again, a whole new topic for another article). From the original batch of six I sold two and let the other one go back to the counties for taxes which I decided not to pay because the property had some hidden issues that made holding it very unprofitable. I probably could have sold it to some other unsuspecting investor, but do not believe in being dishonest by passing off my problems to someone else. Being honest to potential buyers would have scared them away. I feel it is better to take the loss and move on. I realized that the all clear sign to buy stock was signaled loud and clear when the Fed announced Operation Twist. That announcement told me that the Fed was not going to quit until it had created a recovery in the U.S. economy. That was also about the time that I figured out that inflation was not the problem, but rather the battle waged by the Fed and central banks around the world would be to ward off deflation. Connecting the dots brought me to the understanding that the Fed and its global brethren would be fighting deflation by trying to create inflation (unsuccessfully) and the result would be rising asset prices. I was a little late to the party but still got some great bargains beginning in 2010. Had I just believed the indicators that I outlined in a comment to the previous article I would have been buying stocks much sooner. Oh, well. Here are the two rules I follow that tell me when stocks have bottomed. This can be used for either an individual stock or for an index. Rule Number 1 If the market exhibits a day of capitulation with a relatively strong reversal at the close, it is often a good sign of a significant bottom. This is really hard to pick correctly because emotions are running wild and there is a fear that things could get even worse. March 6, 2009 was more obvious in retrospect. The S&P 500 index opened at 684, then fell to 667 and closed at 683. The DJIA Index opened on the same day at 6595, then fell to 6470 before closing at 6627. If (and this is a big “if”) I identify this type of price action on an individual stock or the major indexes, I will try to sell to close my hedge positions as soon as possible. I may keep some (less than half) open just in case I am wrong, in which case I will use rule number three to determine when I close the remaining positions. There have been some false positives as in 2001 just after September 11th. I took most of my positions off early then, but the market went down further in 2002. Admittedly, I got out over 180 points above the eventual bottom. In 2009, I got out of half of my positions in March but held onto the rest until late June because I was still nervous. I saw the capitulation and sold half but I waited until I was sure the bottom was in before selling the rest. That brings me to… Rule Number 2 This one is straight forward. I will be watching both the major indexes and each stock I own put options on and the sell to close is automatic when the following happens. The price of the underlying stock must rise above the 200-day simple moving average [SMA] and the 50-day SMA must rise above the 200-day SMA. I have found that when that occurs, the bottom for the index and/or stock has usually been made. By employing this rule we will miss some of the potential profit/coverage of the hedge.” While there is no one foolproof method of determining that a bottom has been made, this one has proven to be the best. One could get a false positive reading from a short bear market rally, but only if it lasts long enough (usually more than 2 months). But such rallies rarely last the two months usually required for that to happen. The point of all this is that it is not so much “when you have the cash available” that is as important as it is to “have cash available when an asset class becomes a bargain”. I always try to accumulate cash for when I need it. How I allocate between assets classes comes down to an overall approach of deciding which class of assets is most likely to offer the best long-term value and help me achieve my long-term income goals. I may sell a rental property or two when I think housing prices have gotten out of hand. Those generally lead to long-term capital gains so the taxes are not so bad. But the decision on such sales is made based upon regional valuations, not national, for real estate. The three I have left from the 2009 purchases are in Indiana where housing prices are still lower than the national average and not rising as fast as several of the metro areas on the coasts or in the oil patch states. I am in no hurry to liquidate those properties at this time. My income from real estate rentals should continue to rise over time (or at least remain steady) without much downside risk because of where I own my properties. That has not always been the case over my lifetime. I learned a valuable lesson investing in real estate in Texas during the mid-1980s. I was under water on that one for several years but finally got out with a significant gain in 2001, just before I retired. I did much better in Colorado and Nebraska properties. When I bought those properties was probably more important than any other factor. Bargains! My asset allocation between asset classes varies over time. I add an asset when it appears to meet my criteria for providing a long-term, rising stream of income beginning at a level that I consider a bargain relative to what I paid. It is not so much a matter of holding X% of this asset or Y% of that asset for me. I just want to invest in any asset when, and only when I can get a great value for my money. Otherwise, I will hold onto my cash and just wait until another bargain arises. Summary It should be clear by now that I try not to hold too much of any one asset unless I can hedge against a major loss. Stocks and stock funds are my largest holding, accounting for more about 50 percent of my investments; cash is currently second, accounting for about 22 percent; real estate is third, accounting for about 15 percent; bonds and bond funds account for about 10 percent of my holdings; and precious metals account for about three percent of the total. There is not magic number for me. I add to any asset class when I believe it is cheap compared to its historical norms and can provide better long-term income than any other class. How long have I been doing it this way? I finally figured out that this is what I should be doing shortly after I retired. I had been very fortunate (and probably a lot lucky) to have done fairly well before that without a defined plan. This is where I have to insert that “I wish I had known at 25 what I know now!” All I did prior to that was save as much as I could and invest in what I thought could provide an above average return. I guessed right often enough to make it work, but there were some very painful setbacks. Now I focus on quality and income letting total return take care of itself. I also do my best to avoid significant losses. In the next piece of this series I will explain how I allocate my holdings within each asset class. After that I will write a piece to explain my understanding of how flash crashes happen and the role that ETFs play in that process. If there is some other topic that readers would like me to delve into sooner as opposed to later, please feel free to make suggestions in the comment section to this or any article in this series. As always, I welcome comments and questions from readers. SA is a community unlike any other I have found where we can all benefit from sharing insights and perspectives. Disclosure: I am/we are long VFIIX. (More…) I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.