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How to Build “Old School” Wealth

If you’ve read my work, you probably know that my grandfather was my inspiration for getting into this business. He did well in the stock market, and his enthusiasm for investing rubbed off on me.

My grandfather lived by his own homespun version of Peter Lynch’s advice to “buy what you know”; he had a strong preference for the shares of local companies.

Well, as it happened, my grandfather lived in Fort Smith, Arkansas, and there was a certain local company up the road in Bentonville that was shaking up the retail market in the 1970s.

You might have heard of it… goes by the name of Walmart (WMT)!

My grandfather never retired. Working was such an important part of his identity that he continued to go to the office until the very end. But the modest investment he made in Walmart shares ended up paying for my grandmother’s retirement, my college education, my sister’s college education, and my mother’s modest retirement today.

The funny thing is, that was never his plan.

He never expected to hit a home run like that in the stock market. He owned a small warehouse downtown, and he always imagined that, once he was gone, my grandmother’s expenses would be taken care of with the rental income from that property. (He owned that property free and clear of any mortgage, I might add…)

Renting out the warehouse ended up being more trouble than it was worth. My grandmother sold it, and she ended up living on her Walmart dividends, bond interest, and Social Security.

There are some important lessons we can learn here – they are the foundation of what we do in Peak Income.

To start, capital gains are nice, but you can’t assume they’re going to be there when you need them. That’s not something you can control.

As a man who lived through the Great Depression, my grandfather knew that. If you lived through the markets of the 1970s or 2000s, you might have gotten a similar lesson. Between 1968 and 1982 and from 2000 to 2013, the S&P 500 Index went nowhere.

If you’d been counting on capital gains to meet your retirement expenses during those stretches, you might’ve had to move in with your kids.

Second, diversification is critical – and “diversification” doesn’t mean owning five slightly different mutual funds. It means owning assets that don’t rise and fall together.

For my grandfather, this meant tying devoting significant capital to his small businesses and keeping his liquid assets divided roughly evenly among stocks, bonds, and cash.

For me, in today’s market, “diversification” means keeping my assets divided among complementary short-term trading strategies, longer-term income strategies, and income-producing real estate.

For you, the mix might be different. The key is making sure the pieces of your portfolio move independently of one another. It does you no good to save for a lifetime if it all gets flushed down the toilet in a major bear market.

And, finally, make sure you’re getting paid in cold, hard cash. It seems so “old timey” now, but my grandfather carried around a money clip with a big wad of cash in it. I don’t remember ever seeing him use a credit card.

Hey, times have changed. The only people carrying around wads of cash today are drug mules. But that doesn’t mean that cash isn’t king.

Investments that generate regular cash payments allow you to realize gains without having to sell anything. It’s like the old analogy of slaughtering a cow for meat versus keeping it alive for milk. (Remember, my family’s roots are in rural Arkansas…)

With the former, you eat well for a bit… but then it’s gone. With the latter, you can enjoy fresh milk for a lifetime… and you still reserve the right to slaughter the cow for meat later.

Dividend-paying stocks, REITs, MLPs, and other income investments are the same. You enjoy the milk every quarter… and you can still have your steak later if you ever decide to sell.

And, while you’re waiting, that cow just fattens up and produces more milk…

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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As You Finish Up Your Tax Return…

As you might recall, nearly two years ago I wrote that I was having a midlife crisis and dusting off my old Metallica CDs from high school.

Well, the crisis passed. I have since come to grips with being over the hill, even if I curse under my breath every morning from creaky knees and a sore back.

But I got an email this week from our editorial director Dave Dittman that made me laugh. (You might recall that Dave happened to go to the same high school as Metallica’s front man, James Hetfield.)

It was an article from the satire site The Onion with the headline: “Metallica Board Of Directors Debates Whether New Riff Will Have Negative Impact On Shareholder Value.”

This brings up the eternal question of whether art imitates life or life imitates art… or The Onion.

As I mentioned in my midlife crisis article, most of Metallica’s band members were typical ne’er-do-well rock stars with no interest in the actual workings of the business. But drummer Lars Ulrich was known to regularly show up to meetings with spreadsheets and a list of probing questions.

At any rate, I saw another headline this past week that I initially thought was in jest, or was originally published on The Onion, but turned out to be real news: “Americans lost $1.7 billion trading bitcoin in 2018 — and more than half don’t know they can claim a deduction.”

Maybe I’m just a little more ideological about tax avoidance, but I can’t imagine having a legitimate tax deduction available to me and not take taking advantage of it.

But then I got to thinking about it. The tax code is notoriously complicated and intimidating. There are probably quite a few deductions that readers aren’t properly utilizing.

So, today let’s go through a list.

Crypto losses

I’ll start with the subject of the last headline, cryptocurrencies. If you traded bitcoin or other cryptos last year, there is a good chance you lost money. And if so, you can write it off as a capital loss on Schedule D. You’ll need to make sure you kept good records. You’ll need your cost basis, the sale proceeds and the dates of sales and purchase.

Oh, and given the fly-by-night nature of many crypto sites, I’d make sure you print out hard copies or save the statements as PDFs. In the rare chance you get audited, you don’t want to depend on a web-based brokerage or exchange that may very well be out of business by the time the paperwork is useful to you.

Gambling losses

It’s probably a little snarky of me to include gambling losses immediately after crypto losses (aren’t they the same thing?), but this is a legitimate tax write off that a lot of people don’t know about. But if you had gambling losses in 2018 – anything from sports betting to online poker – you can potentially write them off. (Of course, the flipside is also true. If you had gambling winnings, you need to report that as income.)

Gambling losses might be hard to substantiate, particularly since its legal status is a little murky in much of the country. You might think twice about writing off gambling losses if the gambling activity in question was (ahem) of questionable legal status in your state. But if you had gambling losses and kept good records, why not have Uncle Sam subsidize your bad habit? If I could get him to pick up my bar tab, I certainly would.

Alimony

If you blew your nest egg trading cryptos or in smoky backroom poker games, your wife might have left you, leaving you with alimony payments to make.

But in all seriousness, if you paid alimony under the terms of a divorce finalized in 2018 or earlier, you can write it off.

This is changing, however. Under the new tax reforms, alimony will no longer be deductible for divorces finalized in 2019 or later.

Penalties for early IRA or 401k withdrawals

If you had to raid your IRA or 401k early… well, please don’t tell me. It might make me cry. That’s the one cardinal rule of investing you just don’t break.

But let’s say that life intervened and you did it. You took cash out of your retirement plan and got zinged with the 10% penalty. You can write that off!

But please, do not make a habit of this. The penalty still represents a net loss for you, and worse, it reduces the capital you have at your disposal for wealth accumulation.

Entertainment expenses: Not deductible

I’m going to go in reverse here and now list something that used to be deductible but is now, regrettably, not: business entertainment.

This is a tricky area, but under the new rules, business meals are still at least partly deductible. But entertainment expenses – such as a football game, golf tournament, concert, etc. – are not.

Here’s where it gets interesting though: Sponsorships are still deductible. So, while you can’t write off the costs of tickets to an event, if you paid to make your company a sponsor you can definitely write off those expenses.

And finally, this wouldn’t be a proper tax article if I didn’t nag you to max out your retirement plans for the year. It’s too late to contribute to a corporate 401k for 2018, but you can definitely still contribute to an Individual 401k or SEP IRA if you have self-employment income. And a regular, good old-fashioned IRA or Roth IRA might be an option for you as well. For tax year 2018, you can contribute $5,500 to an IRA or Roth IRA or $6,500 if you’re 50 or older.

I also have to remind you that these are basic suggestions. You’re definitely want to do a little more research or, even better, ask your CPA before implementing any of these.

Best of luck this tax season. Don’t be afraid to take deductions so long as you’re being honest and following the rules. There is nothing wrong with doing everything legally possible to lower your tax bill. This is the government, not a charity.

Oh, and if you gave to charity, be sure to write that off too!

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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What Jack Bogle Left Behind

On Wednesday, we lost John “Jack” Bogle, the founder of the Vanguard mutual fund empire and the inventor of the modern index fund. He was 89.

I doubt if there is a stock market in heaven. Something that evil and capable of producing human suffering really belongs in hell. But if there is a stock exchange in the next life, then Mr. Bogle should be its chairman. He did more than probably any single person in history to improve the odds for regular investors like you and me.

I’d argue that if there were a Mount Rushmore of finance, Mr. Bogle’s head should be on it. He was that influential. Before Bogle’s revolution, high management fees, shamefully high sales loads, and extreme tax inefficiency were the norm.

Today, the fees on many index funds are effectively zero. These are vehicles designed to be bought by cost-conscious investors rather than sold by predatory brokers looking to pocket a commission. You can largely thank Bogle for that.

You’ve probably already read plenty of eulogies to Bogle, so I’ll spare you another lengthy one here. Instead, let’s focus on some of the lessons learned from his long career.

No.1: Fees Matter

This is a big one.

Every dollar you spend in fees is a dollar that’s not available to grow and compound. And over an investing lifetime, it makes a big difference.

Let’s play with the math. Let’s say you invest $1,000 in two funds running identical strategies. The only difference is that one charges a fee that is 1% higher than the other. So, after fees, one returns 9% per year and the other returns 10%.

After 20 years, the fund with the after-fee return of 9% per year would grow to $5,604. Not too shabby. But the fund with the after-fee return of 10% would be worth $6,727, more than 20% higher.

This doesn’t mean that fee minimization is the only thing that matters, of course. If you’re getting a unique strategy or tailored advice, a “high” fee might be worth every penny. But to the extent you can eliminate fees, you obviously should because the savings compound over time.

No.2: Buying and Holding (Usually) Makes Sense

Bogle was proud of his invention, the index mutual fund, which he unveiled in 1975. But he was always a little skeptical of ETFs, even though his firm would eventually become a major player in that space.

While ETFs share the low-cost structure of index mutual funds and some of the same tax benefits, they tend to be used very differently. Unlike mutual funds, which can only be traded once per day, ETFs trade instantly throughout the day. This encourages excessive trading and a casino mentality. And that can lead to lousy returns and unnecessary capital gains taxes to pay.

Index investing worked because it was a long-term strategy. When you buy an index fund, you give up on trying to beat the market. You are the market. And over most long-term time horizons, being the market is just fine.

This doesn’t mean that Bogle was a proverbial Dr. Pangloss who always believed everything was hunky-dory and that stocks always shot up to the moon. In recent years, Bogle publicly stated many times that he expected stock returns to be in the ballpark of 4% per year at best over the next decade.

I’m less ideological than Bogle. I agree with him that indexing is a good strategy most of the time. But I’m not willing to completely throw active strategies out the window. At a time when stocks are priced to deliver lousy returns and the Fed is sucking liquidity out of the system, having more of your assets in active strategies (or, in my neck of the woods, high-yield income investments) makes sense. Passive indexing makes more sense when stocks are cheap priced to deliver high returns over the following years.

We’ll get there again. But we’re not there today.

No.3: Be Independent and Stick to Your Guns

When Bogle first proposed his idea for an index fund, most of his colleagues thought he had lost his mind. To them, a manager had to be paid to do something. Passively following an index seemed absurd.

Of course, as history would prove, Bogle was a visionary. He understood that the stock market had become increasingly hard for large for large-cap managers to beat. They couldn’t beat the market because, due to their size and clout, they had effectively become the market.

It should have been obvious, and Bogle wasn’t the only or even the first to notice it. But he was the first to do something about it, launching an index fund and taking on the entire Wall Street establishment in the process. And as a result, we all invest and trade in the new world he helped to create.

Rest in peace, Mr. Bogle. And on behalf of all investors, thank you.

This article first appeared on the Rich Investor.

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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Best Stocks for 2019: LyondellBasell Will Take the Crown

The following is an excerpt from Best Stocks for 2019: LyondellBasell Stock Will Take the Crown. LyondellBasell is my selection in InvestorPlace’s Best Stocks for 2019 Contest.

My pick in Best Stocks for 2019 is LyondellBasell (LYB), one of the largest plastics, chemicals and refining companies in the world. It’s also one of the cheapest stocks in the S&P 500, has strong insider buying, and has a fantastic history of taking care of its shareholders via dividend hikes and well-timed share repurchases.

If you’re not familiar with the company, LYB produces everything from food packaging to water pipes and auto parts. Additionally, the company is one of the largest crude oil refiners in the United States and produces gasoline, diesel fuel, jet fuel and assorted lubricants. The company sells its products in more than 100 countries and made the 2018 list of “Most Admired Companies” by Fortune magazine.

Energy stocks have been beaten up of late due to the falling price of crude oil. With global demand looking suspect and suppliers stronger than ever, the price of crude oil is down by about a third since the beginning of October.

But that’s hardly a bad thing for LyondellBasell. Lower prices for crude oil and natural gas liquids means lower cost of feedstock for the chemicals and refining businesses and thus higher profits.

Not that profits have been in short supply. Over the past five years, LyondellBasell stock has averaged a return on equity of nearly 60%. Net margins fluctuate based on the economic cycle but have averaged in the mid-teens since 2015. Over the trailing 12 months, net margins have held steady at 15.01%.

Despite its financial health, it’s hard to find too many large-cap stocks that are as cheap as LYB stock. The company trades at a trailing price-to-earnings ratio of just 6.02 and a forward P/E of just 8.05. Compare that to the S&P 500’s trailing and forward P/E ratios of 21.98 and 15.1, respectively.

To continues reading, see Best Stocks for 2019: LyondellBasell Stock Will Take the Crown.

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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Friday Humor: What Is Bitcoin?

I know Bitcoin is back to over $10,000, but this is still hilarious.

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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