Rss Feed Tweeter button Facebook button


Author Archive

Weekend Investor: Should You Own Just One Investment?

September 15th, 2011 No comments

When it comes to investing, the conventional wisdom says to ‘diversify’ to make money over the long term. Diversification is said to work because it limits your exposure to the ‘big’ loss, as well as offering the ability to make money at any given moment because most investments tend to perform/under perform in cycles.

My thought for this weekend is make the case against diversification to the extreme: owning just one investment. And I don’t mean buying a huge mutual fund such as an S&P500 index fund, or that even bigger total stock market fund that has hundreds of investments in one, the so called total stock market fund. I mean just one individual investment, like a company stock.

What The Fed Chairmen Have Picked

The last two U.S Federal Reserve Chairmen both have inadvertently offered up their wisdom on owning just one investment. The former chair Alan Greenspan only owned investment: U.S Treasury Bonds. He has since changed his investments subsequent to his retirement, but the reason that he offered for owning just Treasuries was to avoid any conflict of interest.

As a practical matter, owning just Treasuries isn’t that easy. Because interest rates are changing over time, it is difficult to generate a consistent income stream off of them. The best option would be to have so many bonds such that you could deal with the variability, in other words, very rich.

The current Fed chairman, Ben Bernacke, listed his only stock investment as Altria (MO), which we own in the Income Portfolio. If you owned this company at the time he made this disclosure (2005), you would now own (3) companies due to a breakup: Kraft (KFT), Altria (MO), and Philip Morris (PM).

This choice as a single investment was previously identified as the best performing S&P500 stock by economist Jeremy Siegel over the past 50 years. So, not that bad of a bet, because even though this is thought to be a mature company, Altria easy beat the stock market over the last 10 years as well.

My Choice For The ‘One Investment’

If I had to pick just one investment, I would want a company that has demonstrated consistently that looking out for the shareholder interest is the first priority. Sure other attributes are important, but given that economic cycles are inevitable, you need to have confidence that the company is looking out for your interests. So, from this point of view, I would pick one of these two companies:

  1. Realty Income (O)
  2. Phillip Morris (PM)

These companies have great management and a proven track record of creating shareholder value.

What would your choice be?

Categories: Investing, Weekend Investor Tags:

Use This Nifty Tool To Calculate Investment Return

September 10th, 2011 No comments

Unfortunately, the tool I discuss in this article, from the Sharebuilder site,  isn’t available anymore. I’ll be on the lookout for a potential replacement.

You would think that calculating investment returns would be easy. It can be as complicated as you want to make it because annual returns are calculated based upon not only by what you make, but also over what time frame you made the money. If you are a dividend or income investor like me, you will have perhaps dozens or more transactions over any given year. So, each one will have its own return and the difference in return for each purchase can be quite large during the year even for the same investment.

I like to keep things simple. The easiest way to calculate return is to use the following formula:

Investment Return (%) = Investment Value / (Initial Investment + Added Money)

This way of calculating return is a very simple cash-in/cash-out percentage that doesn’t consider over what time frame that each transaction occurred. I like this because in the end percentages are OK, but you want to know at a high level how much money you made overall.

For example, lets say you invested $10,000 and added $500 during the year in new money + $500 in dividends or other income from the investments. At the end of the year, you had $15,000. Your investment return is $15,000/($10,000 + $500), or 42%. Anyone way of looking at this is that you made $4,500.

How About A Longer View?

If you listen to journalists and financial pundits, you may get a misguided idea about what your returns are over a longer period of time. For example, you will here repeated often that the S&P500 investor didn’t make any money over the last 10 years because the index value didn’t change.

This assumes that you invested your ‘chunk’ ten years ago, didn’t add to it, and didn’t reinvest dividends. This is unlikely to be true for most people. If you are to be a successful investor, you need to have a good idea about what your returns are over a longer period of time, because you may be making (or not making) what you think you are.

You can’t go wrong with the simple formula above, it measures the cash you put in and the total cash you have now.

This tool available at, ‘What If I’d Invested’ demonstrates that for even an investment that hasn’t appreciated overall, you can still chart impressive gains due to reinvestment and adding money. This is the way to succeed investing, probably more important than raw returns.

As an example, take Coca-Cola (KO) stock, which as of this writing is about the same price it was 10 years ago. However, when I input a $1,000 initial investment that reinvests dividends, I get an overall total return of about 45% over 10 years. Not too bad for an investment that ‘didn’t go anywhere’. See the chart below that is generated from the tool:


Categories: Investing, Make Money Investing Tags:

Understanding Investment Income Tax Equivalence

September 2nd, 2011 No comments

If you have investments that earn income such as savings accounts, dividend stocks, bonds, and investment funds you will never pay more in taxes than what you earn at your job. In many cases you will pay less. This means that you get to keep more of what you earn. Sometimes, it is useful to compare investments based upon how much you actually keep after taxes.

Investments are taxed in different ways depending on what type it is. You might be surprised how much more you get to keep with your investments versus your income.

When it comes to investing, the primary considerations to determine which ones you pick will come down to the quality and attractiveness of them based upon their fundamentals. If you pick the right investments and buy them at attractive prices, you will make money. And then pay taxes. In the grand scheme of things, this is a good problem to have because it demonstrates that your investment strategy is working.

In this article, I talk about what you need to know to compare income investments on their tax equivalent investment yield, which is a calculated yield for comparison to a target investment. This investment yield will help you compare income investments because it takes into account taxes.

We answer the question: What return would a money market fund have to earn to equal the return of other investments after considering taxes?

Read more…

Categories: Investing, Taxes Tags:

How to Use Bing! To Get Lower Airfares

August 25th, 2011 No comments

If you are buying an airfare, there are lots of sites out there to assist you. In practice I find that the majority of these sites merely aggregate the airfares you could get directly on the individual airline sites. While there is some value here, sometimes all that duplication wastes your time.

Plus, the biggest issue about buying is trying to determine when to buy! Fares change every day, so it’s hard to know when to buy and when to wait. Well, there’s help for this problem.

Enter Bing! At the travel section on Bing! is a very useful tool called Price Predictor. Along side the current fares for the airlines is a time line that shows you what the prices for the flight were in the recent past as well as a prediction of the future. Here’s what it looks like:

Using Price Predictor I was able to get this same flight for $371 earlier today. I got this message above last night and waited. As it predicted, the fare went down, then Bing! said to buy because the prediction was another increase. So, Bing! helped me save $60 on this flight.

Try it, if you are like me you will likely use it often before you travel.

Categories: Personal Finance Tags:

A Tax Change Whose Time Has Come

August 20th, 2011 No comments

If you read through the proposal by the bi-partisan commission on deficit reduction there are a few important details that didn’t make the headlines. That’s unfortunate because there’s a lot to like about the entire proposal.

Most beltway politicians either have criticized it or have tried to distance themselves from it (Obama). It’s easy to see why, it addresses many sacred cows or ‘third rail’ issues such as the mortgage interest deduction, investment tax rates and Social Security benefit
and taxes.

What hasn’t been reported widely is that the proposal suggests reducing and simplifying all the income tax rates. The top tax rate in the proposal would only by 23%. How is this possible, if the plan is trying to reduce the deficit? Well, all those sacred cows are slaughtered. By eliminating deductions, there is room to reduce the deficit as well as lower rates.

I’m going to go out on a limb here and call this a Flat Tax. You will never here any politician who is looking to get elected call it that, but that’s what it is.

You see, marginal income tax rates have varied over the years from very low (<10%) to very high (90%). Inevitably, when rates go higher, special interests seek relief which manifests itself as “special treatment”. It’s all that special treatment that’s gotten us into this mess of having such a complicated tax code.

You may have seen past articles that talk about how most taxpayers pay similar overall
tax rates (a fact that Warren Buffet has famously pointed out previously) no matter how much income they make. This is a clear indication that the higher marginal tax brackets aren’t working to get more revenue.

At some tax rate, though, most people will not seek special treatment, especially if
all the various forms of income are treated equally. For example, workers might seek
investment compensation instead of wage income because the rates on each are currently significantly different. Also, the mortgage interest rate deduction distorts the housing market by creating incentives to overbuild home size. If these distortions didn’t exist, this would create more efficiency in the economy as well as raise more revenue.

This is a change whose time has come.

More Information

Categories: Economy, Taxes Tags: