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August, 2009


Would you prefer: 1. a low-risk (essentially 100% guaranteed) 5% annual return on your savings or investments for the rest of your life or 2. a high-risk (50% chance of) 20% annual return, with another big chance (50%) of just a 0% annual return, for any given year, the rest of your life?

For most of us, the answer, everything else being equal, would probably be the first option, a low-risk 5% annual gain on our hard earned money. At various times, such a result has been available from Treasuries, Certificates of Deposit, or short-term no load domestic bond mutual funds. I believe one can still obtain relatively low risk 5% or greater yearly returns through insurance company annuities or charitable gift annuities.

Yet, once inflation has taken its toll on your return, lowering the buying power of the dollars gained, and once taxes, where applicable, and fees have been subtracted, option 1 is likely to only provide around 1.5% in actual after inflation yearly increases in your nest egg.

Option two, when averaged out over a long period, probably would mean gains of roughly 10% a year, though with great volatility. And once these returns are corrected for inflation, taxes, and fees, the probably real increase to one's nest egg may be only in the neighborhood of 6.5% of compound annual return.

Those second choice gains are probably more typical of the results obtainable from a reasonably well managed no load stock mutual fund. I too am put off by that volatility aspect, especially after a period such as we have just gone through, between 9/08 and 3/09!

Nonetheless, over the long haul, there is quite a difference in results at retirement age between the two. The individual who has put $10,000 into option one at age 36, then retires at age 66, thirty years later, and has gained a real annual return of 1.5% after all costs, will end up with $15,631.

Meanwhile his more risk tolerant neighbor who invests $10,000 at age 36 in good no load stock mutual funds may typically end up, after inflation and all costs, with $66,144.

While the figures are just for illustration, one can see that for someone with a longer time horizon and able to weather such financial storms as periodically affect the markets, the second choice goes a lot further toward one's retirement needs. Multiply that $10,000 by 10-20 over the course of a work career and begin even earlier, and the nest egg could, even with real annual gains averaging just 6-7%, grow into a substantial cushion (in the millions) against retirement expenses, in addition to one's Social Security and any employer benefits.

But what if one lacks a long time horizon? Then the risk of having one's liquid assets almost all in stocks or stock mutual funds can become intolerable. In any given 12 month period, one's gains over several years might have been wiped out. This certainly occurred in 2008 through early 2009 for many millions of investors. And even though the market is up around 50% since this past early March, many who remained invested are still down 25% or more from their nest egg levels prior to September of last year. Some have felt so badly burned they may never return to stocks again. Those who got out when the market was at its lowest, afraid they might lose everything they had if they did not sell, probably did not have the forethought or luck to get back into stocks just before it began its tremendous upsurge a few months ago and so are as yet sitting on huge losses that in most cases can not be made up for years by regular employment and savings.

Folks deal with that kind of risk in various ways. Often they allocate funds to a mix of different type assets, for example real estate, stocks, bonds, and cash equivalent assets. This is a tried and true approach that reduces risk but also marketdly drops the average return, and even this approach suffered substantially in the meltdown of 2008, when bonds, stocks, and real estate all fell in value, and the real return of cash equivalents fell to below zero.

I propose another option for at least part of one's liquid resources. It combines some aspects of the low risk choice with some of the higher risk one and may prove to be a happy medium for some. Invest in "Value Line" (a subscription service but available in many libraries) stocks that have only that investment company's highest rating (1) for safety. Limit one's purchases further to only those stocks that have a 3-5 year projected total return of 100% or better. Besides that, pick only companies that offer a dividend. Once a week or once a month, unless none are available at the time, buy the best single stock currently meeting the criteria. These equities are not always obtainable at low enough prices to meet the guidelines, but gradually one will be able to acquire a portfolio of 10 or more. Keep accumulating them until one has a portfolio of at least 10 and up to about 25. After that, one at a time sell the least attractive company stock from the portfolio, but only after it has been kept at least a year and a day or more and when further cash is needed for buying a good new candidate company for the portfolio, one that at least meets the initial purchase criteria and looks more attractive than the one to be sold.

I cannot guarantee the results, but so far the experience with companies bought and sold in this way has been much superior to the usual low risk cash equivalent or short-term bond returns and yet with much lower losses during bear markets than for the average stock. Often the average portfolio stock yield alone is better than one could get from a 10-year government bond. In addition, there is a good possibility of stock price appreciation over time.

If interested in this strategy, here are some companies whose stocks currently meet the indicated guidelines. (Of course, as always we suggest the investor do his or her own due diligence research and/or rely of the advice of a trusted financial advisor.)

Abbott LabsABT$44.163.6%
Automatic Data Proc.ADP$37.383.5%
CVS Caremark Corp.CVS$33.980.9%
Gen'l DynamicsGD$55.382.8%
Lilly (Eli)LLY$32.576.0%
Lockheed MartinLMT$73.553.1%
Medtronic, Inc.MDT$36.902.2%
Oracle Corp.ORCL$21.490.9%
Walgreen Co.WAG$30.721.8%


Larry is not a professional. Don't take him seriously!

Actually, the investment article provided here is for general information only and should not be considered as professional advice, a solicitation to buy or sell any security, or the Word of God. Investors are encouraged to do their own research while considering their personal goals and circumstances, or consult their own professional financial advisors, before making investment decisions. Neither Larry nor LARVALBUG will be liable for any losses sustained by any visitor to this site.

(Disclosure statement: Larry and Val have holdings in some of the suggested assets but do not "make a market" in any of them and do not derive any direct benefit from recommending them, except perhaps for a bit of smug self-satisfaction.)

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