BUCKETS Of $ Jim Quinn (Student Investor) December 7, 2013

Transcription

1 BUCKETS Of $ Jim Quinn (Student Investor) December 7, 2013

2 DISCLAIMER The content of this discussion is provided as general information only and should not be taken as investment advice. All discussion content shall not be construed as a recommendation to buy or sell any security or financial product, or to participate in any particular trading or investment strategy.

3 DISCLAIMER (CONT) The ideas expressed in this discussion are solely the opinions of the author(s). The author(s) may or may not have a position in any security referenced herein. Any action that you take as a result of information or analysis provided in this discussion is ultimately your responsibility. Consult your investment adviser before making any investment decisions.

4 My Philosophy Preserve Capital Earn Best risk-adjusted Return Not a day trader, I am looking for weekly systems or longer I look for systems which meet these requirements Focus on ETFs and Mutual Funds rather than stocks to reduce risk

5 My Philosophy (Cont) I Look for trends Visuals (ie charts) are Very Important I am not necessarily a Buy & Hold investor, but would like to be

6 Todays Objectives Section I Define & Discuss Bucket Theory Section II Discuss Bucket Investments Section III Discuss How to Get a Feel of the Market HopeFully Stimulate Your Thoughts Process Can Be VERY Useful With Respect to Proper Use of Your Assets Leave You With a Handout Which is the Text of This Presentation

7 Bucket Theory Considerations Another Investing Approach Not Necessarily For Everyone Has MANY Many Variations May be for Some Investors Process May HELP Many Investors

8 Simple Bucket Theory Definition A Bucket is a Percentage of Your Assets to be Invested in a Certain Manner Over a Specific Period of Time NOTE: This Example Does NOT Include Inflation for Simplicity s Sake In this theory, you try to define your future income needs, ID all your investible assets, and then divide your assets into Buckets which are Time/Asset combinations needed to produce future income

9 Simple Definition (Cont) Suppose you NEED $25K Extra Income Per Year to Live, Thus For the Next 5 Years You Need $125K to Live. This Can Be Bucket #1. Bucket #2 Can Also be $125K and Will be Used to Provide Income for Years 6-10 in the Future Any remaining investible assets go into Bucket #3 etc. Thus you have now allocated the total of your assets with $250K in Buckets numbers 1 and 2. Now the question is how do you INVEST those resources; especially the amounts in #1 and #2.

10 Section I - Bucket Theory Learned about it 8-10 years Fidelity MUCH Info on the Web Starting to become popular Again in the last 2-3 years Benz (MorningStar) talked about a 2012? AAII MTG and also in 10/13 AAII Mag. Her slides are no longer on AAII Site Mentioned in Kiplingers 10/13 Issue

11 Definition / Purpose Separates Assets into buckets Puts assets into Buckets; Income Producing vs Potential Market Exposure Mainly for Seniors but applies to all Ages Focuses on $ Needed to Pay Your Bills

12 Benefits For Seniors Can tell you Exactly where you stand With Respect to Income NEEDS Can help to Define an Asset Plan; i.e. Need to Sell Assets / Move etc Adds Structure to Retirement Plan Potentially Forces Definition of a PLAN Very Important for Seniors Who Have Restricted Income Sources

13 Buckets for Younger Set Younger Set should Have at Least a 6 Month CASH Emergency Bucket Other Savings Should go into Market But need to Consider Drawdowns Strategy Depends on Years to RETIREMENT

14 Bucket Process ID & VALUE ALL of Your Assets Including Home, other Real Estate, Personal Assets ID Potential Assets i.e. Insurance, Possible Inheirtances; But be Careful ID TOTAL Assets Calculate TRUE Actual Expenses ID Potential Expenses (Medical, Travel, College, Parents etc) ID Income Sources; Including Potentials Develop APPROPRIATE Investing Plan

15 Income Producing Assets ID Pensions, Social Security, Annunities, RE Income, PartTime Work, Job, Etc. Basically Guaranteed Income Sources NOTE: Given Present Low Interest Rates, Now is Probably NOT the time to buy an Annuity

16 Defining Expenses BY FAR the MOST Important area Must be Done Honestly Various Ways to Calculate These Your Future Expenses Probably WILL Change and MUST be Thought Out; i.e. Less Travel, More Medical as you Age N.B. No Ostrich Approach (Stick Head in Sand). Good Way to get Your Tush Blown Off!!! Calculation Methods to Follow

17 Calculating True Expenses I Pay Everything by Check, Cash Or Credit Card Calc. Monthly Totals for All Check Items, Monthly Cash Outlays and Monthly CC Totals and Average Out Monthly Values Over the Space of a Year You Should Catch Just About Every Expense My Main Credit Card (CitiBank) has a Yearly Expense Statement Divided into Different Areas (Med, Restaurants, etc)

18 Assessment of Income Situation Let A Equal Present Monthly Income Let B Equal Present Monthly Expenses Calculate A Minus B Equals C; Required Monthly Income If C>= 0 You Are in Very Good Shape If C is Negative Can Need Buckets Can Automate This Info in an Excel SpreadSheet

19 WithDrawal Rules MUST MINIMIZE INCOME WITHDRAWALS FROM ANY $ INVESTED IN MARKET TRY to Keep Percentage Of TOTAL Assets WithDrawn to Less Than 4% per year More Recent Numbers Favor a Percentage of 2.5% to 3% Ideally Live Off Income and Preserve Nest Egg for Heirs (Or Dr Don G!!!!)

20 Market History

21 Market Concerns Just to Put Things In Perspective; Especially With Respect to Drawdowns VIP!!! Slope is Positive (55% to 45%); BUTTTTTT Many Severe Drawdowns & Many LONG Flat Periods MUST Avoid Severe DrawDowns; Especially in Senior Years The ONLY Real Advantage We, as Individuals Have, is to STAY Nimble and Respond to Market Conditions

22 Bucket Options & Timeframes Buckets are Used to Define Amounts of NEEDED Income-Producing Assets in a Given Period of Time My Initial Exposure Used 5Yr Buckets If Previous Value of C was $50K per Year Needed Income; Then a 5Yr Bucket Would be $50K X 5 = $250K This Would be Bucket #1 and Would Provide Income For the NEXT 5 Yrs

23 Option & TimeFrames (Cont) REMEMBER: C is the Amount of ADDED Monthly Income Needed to Meet Your Monthly Expenses Bucket #2 Would Also be $250K and Would Provide Income for the Next 6-10 Years So You Have Now Set Aside $500K to Provide the NEEDED XTRA Income for the NEXT 10 Years of Your Life Any Additional $ Can go Into Bucket(s) #3 and Beyond

24 Options & TimeFrames (Cont) NOTE: Buckets Can Actually be ANY Number of Years or Months in Length NOTE: In Reality, the Previous Example Might be the IDEAL Example since It Requires at Least $1M in Investable Assets and a Value of C = $50K Which Might be Light But Lets Continue With This Example

25 Bucket Rotations Note that After 5 Years, Bucket #1 will be used up Bucket #2 Now Becomes Bucket #1 Now must Pull $250K from Bucket #3 to Replenish Bucket #2 and Start the 5 Year Process Again This Process Will be Repeated Every 5 Years This is Why #3 MUST be in Higher Earing Investments

26 Ideal Bucket Investing Rules NOTE : VIP RULES!!!!! Bucket #1 Resources Should be Invested VERY VERY Conservatively; CDs, Money Markets, Etc Bucket #2 Resources Should Also be Invested SOMEWHAT Conservatively, But NOT as Conservatively As in #1; i.e. Balanced Mutual Funds, Bond Funds KEY Question is Do You have Enough Resources (More than $500K) to Fill a Bucket 3 and Beyond

27 Bucket Investing Rules (Cont) NOTE: Bucket #3 $ Can & Should??? Be Invested in the Market Since We Are Talking about $ NOT NEEDED for 10 Yrs Note Also that Bucket Investing DOES Allow Buy & Hold Your Strategy Can Depend on Your TOTAL Assets, Your Needs (which can change) and Your Risk Tolerance

28 Consider Insufficient $ Suppose Your Assets Can ONLY Fund a Portion of Your Future Income Needs; i.e. Total Investible Assets = $300K; Therefore Only 6 Yrs of Income if C = $50K Can You Sell Some Assets to Provide More Investable $ Can You Reduce Your Standard of Living; i.e. Sell Home and Move, Etc, Etc You Also May be FORCED to Invest in More RISKY Assets to Get a Potentially Higher Return

29 A More Realistic Case Actually This Might be a MORE Realistic Situation Since the Previous Example Requires at Least $1M of Investable $ and a Required Cash Flow of $50K per Year In This Case You Could Have at Least $25K (6 months of Required Income) in Bucket #1, Maybe $100K (2 Years) in Bucket #2 and the Remainder of Your Assets in Bucket #3.

30 Recent Bucket Investing Examples Christine Benz (MorningStar) Talk at AAII in 2012?; Slides No Longer on Our Website Benz Article in Oct 2013 AAII Magazine Fidelity is Now Using an Income Bucket in Their Assessment of Your Financial Situation

31 Other Bucket Considerations A Life Expectancy Look I am 72 and I am using the IRS LE Charts I am Expected to Live for Another 15.5 Years At C = 50K, This Implies That I need AT LEAST $775K of Investable $ (WITHOUT INFLATION CONSIDERATIONS)!!

32 Dr Don s Going Broke Slide

33 Bucket Approach Benefits Starts the Retirement Income Thought Process Can Be used AS IS if You Have Sufficient $, But Can Also Start You Thinking in a Useful Approach Best if Done EARLY in Your Retirement Preparation, Even For 40 SomeThings May or May NOT Make Sense For Sophisticated Investors Can Be Used Selectively or in Pieces

34 Section II - Bucket Investing Considerations Given the Previous Defs of Buckets #1 thru #3, It is IMPERATIVE that We Find Good Conservative Methods of Investing Remainder of This Presentation Will be Focused on Various Thoughts About Bucket Investing & Market Considerations

35 Future Income Considerations The Investing Rules for Buckets 1 & 2: MUST be Conservative & Highly Safe DrawDowns MUST be Minimal NOTE: When Rates Increase (As They Eventually Will) and STABILIZE, CDs, Money Market Funds, Bond Funds, Etc Will AGAIN Become More Viable Alternatives for Buckets #1 & #2

36 Specific Investing Examples This Slide Shows a FEW POTENTIAL Areas of Conservative Investing Sierra Funds: Goal is to Make 10% and Lose LESS Than 4% Delta Investing AAII Presentation Oct 21; Might have Potential As a Sierra -Like Stock Investing Method Sector Surfer SAFETY Examples in Their Hall of Fame Area Successful Bond Funds

37 Examples Continued Dave McMillin s Ultra FS Examples Results from a Presentation By Churchill Management on SkirBall

38 Past Sierra Returns vs S&P

39 Delta Returns

40 More Delta Returns

41 Delta Returns (Cont) This is Cited ONLY as an Example of a POSSIBLE Investment It MUST be Properly Vetted

42 Safety Sector Surfer Returns Strategy 10 yr Ret Sharpe Ratio Max DD #1 33.7% % #2 31.4% % #3 33.6% % #4 33.6% % #5 25% % #6 12.5% % #7 21.3% % #8 18.1% % #9 12.1% %

43 Successful Bond Funds Now Two KipLinger Bond Funds: MMCRX 3.9% OSTIX 7.1% Barrons Bond Article Recently about New Breed of Bond funds which can go AnyWhere

44 RY SS Returns

45 Ry Sector Surfer Returns Strategy 10 yr Ret Sharpe Ratio Max DD Faber % % SPY 11.5% % GURU 18.6%* % VG Inc. 12.2% % JNK & VXF 16.7%* % MDY 13.8% % VXF 14.3% % * Returns are for 6+ Yrs NOT 10 Yrs

46 RY Faber 4

47 Sector Surfer Power

48 RY GURU Etc

49 RY VANG. INCOME

50 RY JNK & VXF

51 RY MDY

52 RY VXF

53 Flexible Investing Rothblut Approach Think OutSide The Box BUTTTT Must Vet Any Idea (Like Recent JPL Sector Surfer Presentation), Which Was Tested for 5 Months BEFORE Real Implementation

54 Section III - The Market

55 Importance of Market Feel The Next 12 Slides Discuss the IMPORTANCE of Understanding As Best As Possible What The Market (i.e. S&P 500) is Doing at any Given Time Presently We are in a Bull Market VIP: You MUST be IN During Bull Runs

56 Income vs Wealth

57 Early vs Late MKT Returns

58 What Is A Bull Run UpTrending Market; Higher Highs and Higher Lows Consensus is QE Will Lead Market Higher Per Ian Woodward: Follow Best Stocks Groups JIRM Index Canaries

59 Bull Market Example

60 Exiting a Bull DownWard Break thru the Channel Bulls Last About 5 Years; Thus 2009 thru 2013; Could Happen Next Year Bears happen more Often in 2 nd Presidential Year (2014); See Chart Bears Happen SLOWLY; YRS, Thus Plenty of Time to React Bears Also Happen When Markets Diverge; i.e. Dow Up but A/D Down

61 2 nd Year of Presidential Cycle

62 Avoiding DrawDowns Use 300/75 DMA Moving Averages 4%/8% Rules Protective Puts to Protect PortFolio

63 Ian Woodward S&P 8% Rule

64 Ian Woodward Nasd. 8% Rule

65 A ReLook At Richard Young s Results The Next slide shows his returns from 2007 thru Please note that although the 2012 results were less than the S&P, the results of the previous years far outdistanced the S&P and should be considered if the market tanks again like in 2008; AS IT WILL!!!

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67 RY Market Transition Point

68 A Transition Point?? Note That Although RY s Results Were Better than the S&P 500 for ALL of 2011; the S&P Started to Produce Better Results than RY Starting in October of 2011 This Result ALSO Matches the Bull Market Chart Previously shown Very Important Point!!!!; But I do NOT know Exactly What Caused This.

69 A ReLook at Richard Youngs (cont) The next 2 slides were done by a friend of mine looking at the performance of the rotation of various ETF portfolios from 2008 thru 2013 My point here is that like Richards work, the green curve in the upper righthand corner of the first slide did very well until mid 2011 and then started to fade; as did Richards work.

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72 Investing is a Constant Battle Very FEW (If Any) Methods Have Worked Long Term You Are ALWAYS Battling the Big Boys with all Their Talent & RESOURCES Must ALWAYS be Aware of Market Status MUST Be Nimble & Creative ALWAYS Look for New Approaches

73 Net-Net for Bucket Discussion Try to PRESERVE CAPITAL Try To Keep It Simple (KISS) Don t WithDraw $ For Monthly Expenses From Volatile Investments If Possible AVOID MAJOR DRAWDOWNS Don t Just Sit Thru a 2008; DO SOMETHING