Saturday, December 12, 2015

My philosophy on saving for retirement

Due to an (unexpected, involuntary) change of employment about 6 years ago, I found myself with a 401K account that I was required to rollover into an IRA, and so I became a more active participant in my retirement planning.

Anyone who, like me, got started in trying to manage his own retirement account at the start of 2010 surely thinks of himself as the greatest investment analyst in the history of the world, when the actual fact is that I simply got in on the best 5 years (2010-2014) that the market ever had, or ever is likely to have.

During that time, I bought and held a small number of Amazon shares. I also got lucky enough to buy Netflix stock when it took a BIG dip, and then held some of those shares through its 7-way split. And I lucked into buying Hawaiian Airlines at a time when all the airline stocks were in the tank due to the Great Recession.

So pretty much all my gains during those 5 years were in those three stocks, and they were all lucky choices to which I committed relatively small investments.

In each case, when they started to race up I sold some of my shares, enough to cover my initial investment, and let the rest ride.

I'm a HUGE fan of what they call "dollar cost averaging", which is basically: don't invest all at once; don't sell all at once. Instead, invest gradually over a period of time, splitting your purchase into separate smaller purchases, or splitting your sale into separate smaller sales. That way, if you have the bad luck to pick a bad day for one of your orders, the probabilities are that the luck will even out on the other ones.

And, I ALWAYS ALWAYS ALWAYS use limit orders, for both buying and selling, never market orders. For buying, I pick a target price which is slightly (1-3%) lower than the current price, and let the computers monitor it and execute on a price dip. And for selling I do the same thing.

So the computers do the hard work.

Since my IRA company has a per-trade commission, I need to be careful not to execute too many orders. But in practice I only issue about 1-2 orders a month, so I'm not spending much on commissions.

Even though Amazon and Netflix are incredibly volatile and incredibly pricey, they are also extremely-well-run companies with huge potential ahead of them. I think this is also true of Microsoft, Intel, and Google.

Tesla is also a fascinating company, but I don't own it.

The majority of my portfolio is, and has been, in "consumer staples": I own Clorox, Johnson & Johnson, Procter & Gamble, Church & Dwight, Campbell's, Kimberly Clark, VF Corp, Wal-Mart, etc. Over almost any period of time (1 year, 5 years, 25 years, 70 years), these companies have been steadily growing at a slow rate.

AND, they pay dividends!

Microsoft and Intel also pay dividends. I like companies that pay dividends. Amazon and Netflix stand out as exceptions; pretty much all my other investments are in dividend-paying companies.

I have some other investments in other companies, but much of that is a motley mess.

I don't spend a lot of time on my portfolio. I tend to check it once a week or so. It's really important not to watch my portfolio, because many of my holdings are quite volatile and my account routinely goes down and up by significant amounts in a single day, so if I watched it every day I'd die from the emotional roller-coaster of it.

So I just let the various dividends accumulate in my "cash bucket" in my account, and, every so often, enough has accumulated that I re-invest those dividends by buying some more of one of the stocks I already own (or, VERY rarely, initiating a position in a new company that I like). The re-investment decision is probably really important, but I don't spend much time on it; I just pick a company that I "want" to own some more of, and enter a buy order for the cash that I've got available to invest.

So I stay mostly fully invested.

I have about 12% of my portfolio in bonds, which has been a complete disaster, since the last 7 years have been a disaster for bonds. Now, since I'm just talking about my IRA here, and I also have a 401K at my company which is 100% invested in stock funds, the actual overall percentage of my retirement savings is even more tilted to stocks than bonds, so I'm really only holding like 8% of my portfolio in bonds.

But then, I'm still (relatively) young, and am hoping to go at least 10 more years before I start to draw on this money, so staying fully in stocks for now is a good strategy. When I get to my mid-60's I'll probably start moving some of that money over to bonds, though I still love those consumer staples and their dividend rate remains better than any bond fund I've seen out there.

I really don't do much with stock screeners, research, etc., other than reading the business pages once in a while. Every so often I hear about a company that I'd like to own, and then I expand my portfolio, but really I have enough separate investments right now that I don't really want any more things to look at.

In fact, basically every company or mutual fund that I bought after spending lots of time doing screens and research was a failure for me. I did much better just picking companies I like and investing in them gradually over time.

The one and only financial website I recommend is

Pretty much everything Barry Ritholtz has on his site is superb and I read that site (and the things he links to) regularly.

I am a long-term investor: the bulk of my new investment is in my 401K at my company, which unfortunately is a very poorly run investment operation (small fund selection, high fund fees, high administration fees), but it is highly tax-advantaged so that's what I'm doing. And my company does a small regular contribution to my plan. So, overall, the bulk of my new investments are going there, and my IRA is just sitting there gathering dividends and slowly increasing its holdings of my existing companies.

I'm hoping that, in 10-12 years when I retire, I'll have enough. But I'm not really sure that I will.

But I don't think there's much I can really do about that worry, other than to keep on with the current plan.

My back-of-the-envelope math says that my continued 401K contributions, combined with what I've already saved, and the paltry amount of Social Security that I'll qualify for when I turn 70, will be adequate.

So I try to mostly not think about this stuff, because it's depressing and I have many other things to do.

But somebody asked, so I replied.

And I figured I'd put it on my blog, because maybe somebody will tell me that I've totally overlooked something.

1 comment:

  1. For the retirement investor who doesn't want to invest in individual stocks, I would not hesitate to recommend the robo investor approaches that have been added in the last few years. I've had a good experience w/ Betterment into which I rolled over a portion of my IRA from Wells Fargo (that came from AmberPoint's 401k). The fees are low and you can tailor your risk level. I would also recommend using low-cost index funds such as Vanguard when dealing w/ 401K funds, if available, or other passively managed funds. Active managed funds are a high-cost, low-return rip-off geared to the benefit of the 401K providers and fund managers. As you suggest, if you want active management, do it yourself via your methodology. Dollar cost averaging is key to long-term investing. I've never - repeat never - lost money taking this approach no matter how volatile the stock or fund. The only time I've ever gotten burned is by trying to time the market for an individual stock.
    Also, listen to your gut: if something sounds too good to be true, it is. Do not find yourself in the position of being the last person to buy into a pyramid scheme... see the housing-driven stock market circa 2006/2007. Simple math would have told most that the structure was not sustainable, but very few listened. Instead, full speed ahead was the mantra and many got burned.
    I remember riding back to New York City w/ my sister and brother-in-law on the weekend of September 15th, 2008. We got a call from a family friend who worked at Lehman. He told us that almost 30 years of work savings for retirement had simply disappeared that week. All this was due to the fact that Lehman allowed and/or required employees to keep their retirement funds in company stock. NEVER, EVER do this, no matter how great the company is doing today.
    If there is a key word for retirement investing it is "diversification". No matter what your strategy, a little bit here,and little bit there, means that no matter what happens, there will be something. I had an experience in 2010 in which I invested some IRA money in 2 different funds. The first was an S&P 500 Index Fund, the other was an Emerging Market Basket of Currencies. The boring S&P 500 Index Fund is up over 50%. The sexy Emerging Market basket is totally flat. However, in total I'm doing fine in regards to those 2 funds. Sure, I wish I'd put all the money in the S&P fund, but I'm still doing fine... saved by diversifying.
    This is a conversation that needs to happen more frequently among working people since managing money is a 100% pain in the butt, but it can be done in ways that are not complicated and ultimately rewarding. I have a figure in mind of what it will take for me to have a comfortable retirement and, if I stay disciplined over the next 10+ years, I think I can get there. It doesn't involve anything tricky or complicated, just methodical, rational investing.