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The Highest Yield Left in the Market

If you’re looking for income these days, your options are a little limited. The S&P 500 yields less than 2%, which is bordering on pitiful, and government bonds aren’t much better.

REITs, as a sector, are reasonably high yielders at 3.9%. But in order to get the yields I like to see, you really have to cherry pick. You’re not paying many bills with a 3.9% payout.

Corporate bonds?

Meh. Investment grade bonds yield 4.4%, and “high-yield” junk bonds yield only slightly better at 5.2%. Sure, that’s better than Treasury yields. But hardly worth the risk. At the first whiff of an economic slowdown, junk bond default rates tend to jump.

Preferred stock still sports a respectable yield, which is why I added exposure last month in my income service Peak Income, as do emerging market bonds for those with the stomach for the volatility.

But frankly, there’s only one asset class right now that sports what I would consider to be a truly impressive yield, and that is oil and gas master limited partnerships (MLPs). The Alerian MLP index, which you can think of as “the S&P 500 of MLPs,” yields over 8%.

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I know of no other sector where those kinds of yields are possible without taking substantially more risk. (Business development companies, or BDCs, offer comparable or higher yields, but I consider them a little riskier at this stage of the business cycle.)

cheap generic cialis online Too Good to Be True?

Call me a cynic, but when I see yields that high compared to virtually everything else, I want to know why. There has to be a catch, right?

Well, there is and there isn’t.

Yields are high in part due to rising payouts over the past few years. But the far bigger reason is the total collapse in MLP share prices since late 2014. After years of gains, the sector hit a rough patch when the price of crude oil started to fall, and before the dust settled the Alerian MLP index has dropped by about 60%.

The story on MLPs had always been that they were largely immune to energy price swings. MLPs own energy infrastructure, such as pipelines, and most of their revenues come from fixed fees.

The problem came down to leverage. Like much of the rest of corporate America, MLPs took advantage of the low interest rates of the past decade to absolutely gorge themselves on cheap debt. And their business model was dependent on it.

MLPs paid out substantially all of their cash flow from operations as distributions to investors. That meant that when they needed capital to expand their businesses, they had to get it from the capital markets via new debt or equity sales.

That model worked fine so long as stock prices were high and bond yields low. But when crude oil prices started tumbling in late 2014, MLPs had a big problem. Even if their business models were only minimally dependent on energy prices, they had no margin of safety.

When share prices started falling, it became harder to sell shares to raise capital, and raising more via debt wasn’t an option because they were already overleveraged.

So, the MLPs raised cash the only way they could: by slashing their distributions.

It’s a case of once bitten twice shy. Investors that saw their payouts slashed back in 2015 and 2016 and lived through a 60% share-price collapse have been reluctant to come back to the sector.

But their timidity is our opportunity. After years of debt reduction and a focus on financing growth projects with retained profits like normal companies, MLPs as a group are in the best financial shape in recent memory. If we have another energy-price rout, they’re in a much better position to ride it out.

2019 should be a good year for MLPs and the other income investments I recommend in Peak Income. I just added two MLPs the model portfolio last week, one that yields close to 10% and another 8%.

A “sweet spot” for income investments tends to be moderate economic growth, benign inflation and a 10-year Treasury yield under the psychologically important level of 3%.

The Fed’s recent reversal of course shows that they’re worried about growth starting to cool, which usually means inflation expectations tend to cool with it. And the 10-year Treasury is hovering around 2.7%.

So, it’s looking good in income land.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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How to Save for Retirement AND Spend on Your Kids

I saw a headline recently that caught my attention:

“Raising Children Increases Risk of a Retirement Shortfall”

Gee, ya think?

Why not tell me that the sky is blue while you’re at it, or that eating at McDonald’s on a daily basis is bad for my health.

Some things are so patently obvious that they don’t really need to be said. Yet Boston College’s Center for Retirement Research decided to prove empirically what we all instinctively know: Raising kids is expensive, and every dollar spent on child rearing is a dollar not available to be allocated to other things, such as your 401k plan.

I openly weep when I see my credit card bill every month.

It cost me more than $2,000 to send my two sons to ski school for four days earlier this month. I’m embarrassed to put into print what it cost me to take the family to Disney World. And the grocery bills… You would think I was feeding a marauding army.

It’s all worth it, of course. But meeting my retirement goals and raising my kids sometimes requires some financial gymnastics.

If you’re like me – in the prime of your career and playing the balancing act of supporting a family while also saving for retirement – I have a few suggestions, which I first shared with my Peak Income subscribers several weeks ago, to help you.

http://sandcity.org/our-community/our-community-vision/ buy viagra 1. Pay Yourself First

I know this advice is so overused it’s almost cliché, but hear me out.

When the shekels are tight and you’re choosing between funding your retirement account or bankrolling some new request/demand from your kids (Disney trip…sigh…), it’s not selfish to choose to fund your retirement account first.

Think about it. If you’re not prepared for retirement, you’re going to end up being a financial burden to your kids decades from now. You might even have to move in with them.

That’s depressing, and no one wants that. It’s better to skip that expensive family vacation or the umpteenth round of private soccer lessons this year, top up the retirement account, and save yourself and your kids the eventual humiliation of having to move in together.

click here 2. Don’t Be Penny Wise and Pound Foolish

Financial writer David Bach made a career out of telling people to skip their daily trip to Starbucks and invest the savings in an index fund.

Well, that’s not bad advice, I guess. But how many cappuccinos would you have to skip in order to really make a difference?

Your far bigger expenses are your home and your vehicles.

So, rather than skimp on those little luxuries like the occasional trip to Starbucks, try to avoid buying more house than you need. Yes, the urge to keep up with the Joneses can be hard to suppress. But if you can save several hundred dollars per month by living in a more modest home or driving a more modest car, it will go a long way towards helping you meet other expenses.

As recently as the 1960s, it was perfectly normal for a middle-class family of six to live in a, 1,500-square-foot house. Your family of four doesn’t really need 3,500 square feet with two living rooms and vaulted ceilings.

If you’re already in a home that was probably a little too expensive for you, selling it and downsizing may or may not make sense. But at the bare minimum, resist the urge to splurge on a $50,000 kitchen remodeling. It’s rarely worth the money.

3. Quality Time With Your Kids Doesn’t Have to Be Expensive

I’m as guilty as anyone about trying to buy my kids’ affections. It’s normal. Few things are more gratifying that seeing your kids happy, and it’s so temping to just dump money on them.
But this doesn’t mean you need to constantly shower them with expensive gifts, vacation or experiences. You don’t have to take them to the Super Bowl. Simply sitting on the couch with them and watching it is good enough.

Or better, go outside and actually toss a football with them. It costs you nothing, and it will be far more rewarding for both you and the kids.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Make Presidents Day Worth It

I’m not one to complain about a holiday. A day off is a day off, and it’s healthy.

Though I have to say, Presidents Day isn’t one of my favorites.

To start, it’s in February and it’s usually too cold to do a holiday-type thing like firing up the grill. Football season is over, and there’s generally not much to watch on TV. And I don’t know about you, but I’m still worn out from Christmas with the extended family.

So, it usually ends up being a day to binge watch Netflix and get caught up on paperwork and not much else.

But beyond that… Presidents Day?

Before it was rechristened “Presidents Day” we used to celebrate George Washington’s birthday, and I was good with that. Every country needs iconic heroes as part of its founding story, and Washington is our guy.

He was our victorious general in the War of Independence, the only man to be unanimously elected by the Electoral College, and he set the precedent for limited executive power by retiring after two terms.

But do we really need a holiday to celebrate the lives of the other 44 sons of b*tches that have held the post?

There are so many worthwhile Americans whose lives we could celebrate. Generals, pioneers, explorers, astronauts, scientists, entrepreneurs, inventors, writers… even athletes or musicians. Any of these would be more worthy of a public holiday than the parasitic blowhards that have come and gone from the White House.

But I digress.

One nice aspect of Presidents Day is that it gives us a breather early in the year to think about our financial goals. We’re a month and a half into 2019, but we still have more than 10 months of the year left to go.

So, if your work, like the market, is closed today, here’s a to-do list of some smart financial moves you can make at home.

Revisit your 401k and IRA beneficiary form

I know this sounds about as exciting as watching paint dry, but this is important and you can knock it out in five minutes.

Most people don’t know this, but your IRA and 401k beneficiary forms are generally more important than your will and testament. Apart from perhaps your home equity, it’s likely that your retirement accounts are the most valuable thing you own. And the beneficiary designations you made when you opened the accounts take precedent over your will.

Let me explain. Let’s say you’ve been at your current job for 10 years and that you were married when you started the job. But two years in, life intervened. You got divorced and then found yourself remarried again a few years later but you forgot to update your 401k beneficiary form.

If you were to get hit by a bus today, your ex-spouse would inherit your 401k, regardless of what your will and testament says, leaving your new spouse with nothing. And there’s not a thing they could do about it. The law is very clear that the beneficiary forms associated with the retirement plan trump whatever your will says.

So… take a few minutes today to make sure your beneficiary designations are in good order. Your heirs will thank you.

Revisit your contribution levels

You didn’t think you were going to escape a financial planning article from me without my customary nagging to save more, did you?

As you might know, the 401k contribution limits were raised this year from $18,500 to $19,000 or from $24,500 to $25,000 if you’re 50 or older.

Really try to hit those numbers, or at least get as close as you reasonably can even if it means pushing yourself and forgoing a few small luxuries. Every dollar you stuff in the 401k is a dollar that is safe from the tax man, potentially for decades.

I eat my own cooking here. I maxed out my 401k last year, and I’m on pace to contribute the full $19,000 by September of this year.

Make this a priority. You’ll never miss whatever it was you were going to fritter your money away on.

Turn off your phone

I’m a workaholic, which, if I am to be honest, is no less unhealthy than any other addiction.

But I make a real effort to carve out time to spend with my kids and just be present, undistracted by work, the stock market or whatever else was on my mind that day.

For me, this usually means getting home around 5:30 p.m., spending a good two or three hours talking, playing and just generally being around my kids. Once they go to bed, I usually work for a few more hours before calling it a night. But the important thing is that the phone and computer get turned off during family time.

So, be respectful to your family and turn off your phone when you’re around them. No, don’t just turn the volume down. Turn it off, and preferably put it in another room. Remove the temptation to compulsively look at it.

Let’s be honest, whatever you were doing on your phone probably wasn’t important. But your family relationships are.

This Presidents Day is going to be a little different for my family. My oldest son is playing in a competitive international soccer tournament in Orlando. Win or lose, it should be a fantastic experience for him. But naturally, it’s a lot more fun to win, so wish him luck!

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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401k Not Enough For You? Add This.

Before I get started, it’s time for my customary beginning-of-the-year nag.

By the time you read this, you will have likely received your first paycheck of 2019. Take a minute to see how much of it you’ve diverted into your 401k plan. Are you on track to contribute the $19,000 for the year? (Or $25,000 if you’re 50 or older?)

If not, take a minute today to log in and increase your contribution levels. The longer you wait, the harder it will be to catch up. So, get it done now, before your next paycheck.

It’s OK if you’re worried about the stock market taking another spill. No one says you have to allocate your 401k to stocks. A money market or stable value fund is a perfectly fine option for now.

It’s simply to get your cash into the account to take advantage of the tax break and any employer matching. The actual investing can happen later.

All right, I got my annual January nag out of my system.

Now, let’s move on to the good stuff.

While the 401k is the backbone of most Americans’ financial plan, if you’re self-employed or a partner in a small business, you have even better options at your disposal. In addition to defined-contribution 401k plan, you can also build yourself a good, old-fashioned defined-benefit pension plan.

I know what your thinking. Words like “defined benefit” or “defined contribution” are enough to make your eyes glaze over. They might even be enough for you to consider the virtues of jabbing an icepick into your temples.

It’s boring. I know.

But hear me out, because if you play your cards right, you can potentially shield hundreds of thousands or dollars from the tax man… every year.

Paying Yourself First

Very few companies offer traditional pension plans today. They’re expensive to administer, they can be a legal minefield, and at the end of the day, no one wants the responsibility of caring for retired workers decades after they’ve quit working.

This is why most companies moved to defined-contribution plans like 401ks. There’s no real risk. Managing the portfolio is the responsibility of the worker, not the company. And if the nest egg doesn’t grow large enough to support the retiree in their golden years… well, that’s their problem.

Hey, I get it. If I were running a large enterprise, I wouldn’t want the open-ended liability of managing a traditional pension for my workers.

But my own retirement? That’s a different story. I don’t mind dealing with the hassle if I’m the one that gets the benefit.

So, with that as an introduction, let me introduce the cash-balance plan.

A cash-balance plan is a traditional defined-benefit pension plan designed for one-man shops or small businesses with a handful of partners. The formula for contribution limits is complex and depends on your age, income and the current value of your plan, among other things. So, it’s probably easiest to explain with examples.

If you’re 40 years old and make $250,000 per year in self-employment income, you can contribute around $106,000 to a cash-balance plan, saving tens of thousands of dollars in taxes. If you’re 50 years old and making $250,000 per year, the amount you can potentially contribute jumps up to over $180,000. And if you’re 55, the number gets close to $220,000.

Sheltering $220,000 per year from the tax man sounds a lot better than sheltering $19,000 to $25,000.

But here’s where it really gets fun. It doesn’t have to be an either/or decision. You can actually do both!

So, playing with examples again, let’s say you’re 50 years old and earn over $250,000. You can dump the first $25,000 into your 401k plan, pay yourself an extra 6% in matching or profit sharing, which would work out to another $15,000, and then top it off with a massive $180,000 contribution to your cash-balance plan.

That’s such a phenomenally good tax break, I can hardly believe it’s legal!

There are a few catches, of course. You need a professional to set up the plan and do the annual actuarial calculations, which will cost you several hundred or even a couple thousand dollars per year. You do not want to get cheap here and try to do it yourself, as making any mistakes can subject you to penalties and a potential tax nightmare.

You also have to invest the cash-balance plan conservatively. Just as is the case with an old-school traditional pension, any portfolio losses have to be made up with higher future contributions. It doesn’t matter if you’re the only participant in the plan and you’re effectively “paying yourself.” You face the same risk that General Motors or Ford do when their pension assets fall short of liabilities.

So, you’d want to make sure your cash-balance plan was invested primarily in bonds, CDs or other low-risk investments.

Once you’ve retired or reached the lifetime maximum contribution of around $2.6 million, you don’t have to worry about dealing with the administration of the cash-balance plan anymore. You can simply roll the balance into an IRA and manage it the same way you would with any other retirement account.

Regardless, if you’re looking to turbocharge your retirement savings, you should definitely look into cash-balance plans. There’s simply nothing else out there that can offer the same tax-deferred growth.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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Don’t Expect Mean Reversion to Boost Your Returns

My poor groin…

As I wrote a few months ago, I managed to pull my right groin muscle playing soccer with some of the hypercompetitive South American fathers from my son’s team.

Well, with a little rest, it healed. Or so I thought.

But while skiing with the family in Breckinridge, I took a turn too fast, wiped out… and felt my poor groin pop.

I’m able to walk… with a limp. But I won’t be doing anything remotely athletic for at least a few weeks.

Maybe it’s my physical discomfort… or maybe it’s the fact that I’m sitting alone at the lodge while my wife and kids enjoy a nice day on the slopes… but something I read in this week’s Barron’s really put me in a foul mood.

Vito Racanelli writes,

There’s one number that explains a lot of things: 5.52%. Over the 20 years ended 2018, that’s been the nominal compound annual growth rate (CAGR) of the S&P 500.

It might not feel like it after a decade-long bull market, “but we are coming off 20 of the worst years for compounded returns since the Great Depression,” says Nicholas Colas, co-founder of DataTrek Research. The average trailing 20-year market CAGR since 1928 is 10.7%. Blame the two negative-35%-plus bear markets since 2000.

Ouch.

Over the past 20 years, the market has returned barely half its long-term average annual gains. And I’m willing to bet that most investors saw returns even lower than that. (Most investors tend to sell near bottoms and miss out on the most explosive early years of a bull market.)

But this is where I start to get grouchy. Colas goes on to suggest that, since we’re coming off a lousy 20-year stretch in the market, the next 20 years should be a lot better due to mean reversion.

In other words, in order for the market’s long-term returns of 10.7% to hold, we have to see annual returns well above 10.7% in order to make up for the past 20 years of just 5.52% returns.

This may be the stupidest argument I’ve ever heard. And trust me, I’ve heard some ludicrous arguments over the years.

Let’s start with valuations.

A big reason for the market’s lackluster performance over the past 20 years is that we started the period in 1998… smack dab in the middle of the largest stock bubble in U.S. history.  At the beginning of 1998, the S&P 500 traded at a P/E ratio of 24, well above the long-term average.

The returns you earn are a product of the price you pay. If you overpay, your returns are going to be lousy. Anyone buying in 1998 paid too much for their stocks and then had to accept lower returns over the next 20 years. It’s really that simple.

Now, let’s compare this to the preceding 20-year period, 1978 to 1998. Over that period, the S&P 500 returned about 14% per year, well above the long-term market average.

Why?

Again, it’s simple. In 1978, after a decade of stagflation, the market was cheap.  The S&P 500 traded at a P/E ratio of just 8. Anyone buying in 1978 was buying at a bargain-basement price and thus enjoyed a fantastic 20 years of returns.

So, where are we today?

Unfortunately, it’s looking a lot more like 1998 than 1978. The S&P 500 trades for about 20 times earnings.

Now, we can split hairs as to whether the P/E ratio is the best metric to use here. But other metrics, such as the cyclically-adjusted price/earnings ratio (“CAPE”) or the price/sales ratio tell a very similar story. Stocks are not cheap today. And thus it’s not realistic to expect returns over the next 20 years to be much better than over the last 20.

I could end my rant here, but I’m just warming up.

This is bordering on market heresy, but I also take issue with the notion that stocks “have” to return around 10.7% per year.

In 1928, the stock market was still the wild, wild west. It wasn’t really regulated, and it was essentially a casino for rich people. There were no 401ks, and the average American had no access or exposure to stocks. The market didn’t really become accessible to the average American until the 1950s, when mutual funds became popular. And even then, few Americans were investors. I’d argue that investing didn’t really go mainstream until the late 1980s.

Furthermore, up until arguably the 1940s, the United States was still an “emerging market.”

Compare that to today. Virtually every middle-class American has at least indirect exposure to the stock market via their company 401k plan or pension, and the capital markets are tightly regulated by an alphabet soup of government agencies.

All else equal, a highly-regulated and developed market should produce returns that are lower than those of a loosely regulated emerging market. The returns have to be higher in a wild emerging market in order to justify the risk.

I’d argue that the 5.52% returns of the past 20 years are the better example of what we should expect going forward than the 10% of decades past. This is the “new normal” for a developed market with broad participation trading at premium prices. And in order to get that 5.52% annual return, you’re going to have to stomach a lot of volatility.

I don’t know about you, but that sounds like a lousy deal to me.

I don’t want to buy, hold, and pray for 5.52% annual returns. The good news is that I don’t have to. In my Peak Income newsletter, I look for attractive income opportunities that are off the beaten path. It’s not at all uncommon for me to find stocks or closed-end funds paying 8% or more in dividends alone, not including any capital gains.


Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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