Streetwise for Friday, January 25, 2019
I am going to basically repeat an answer to a question I am asked on an almost daily basis, and one that is particularly applicable to areas such as Sarasota, where many of the residents and visitors are senior citizens.
The question is whether an “elderly” person, say for example over the age of 70, should be investing in stocks, much less have most or all their portfolio in equities.
From my perspective, after 50 years on the Street, the answer is yes on both counts. Prudent equity investments are more likely to enhance your wealth and subdue the effects of inflation than a portfolio consisting of bonds, or worse yet certificates of deposit.
Unfortunately, only 48.6 percent of U.S. households invest in equities and the median (value separating the higher half from the lower half) holding for households that do own stock is only $24,300.
Moreover, there is a substantial portion of the population whose income is perilously close to or below the poverty line.
For those individuals, investing in anything other than food and shelter is simply not an option. For anyone else, not using the equity markets to build wealth places you one step closer to spending some of your golden years working under the golden arches.
Strong words perhaps but said with sincerity. No, a pension plan and Social Security are not enough. Even industrial icons have at times seen their pension programs unable to meet the necessary funding requirements.
Everyone with access to disposable income should be placing a portion of that income in an equity portfolio of individual stocks that he or she manages. Yes, I have intentionally left out mutual funds.
Why would you want to let someone you have never met, and will never meet, invest in securities for you, whose selection decision you did not participate in, the outcome of which you will not learn about for 90 days. And all the while paying large fees for the privilege?
Here is a better idea. Step up to the bar and take responsibility for your financial future.
No, it is not difficult. If you have the wherewithal to be able to write your name and address and can use a telephone or a computer, you are half-way there. The next step is a little more difficult but not much. You need to select a discount brokerage firm. You want to keep your commission costs per transaction to under $5.
So now for the big question; what stocks do you pick? If you limit your selections to large blue-chip companies with a history of both paying and increasing dividends annually for at least 10 years and whose products you are familiar with, you will likely do just fine.
So why do I bring this subject up once again? It is because of my lack of patience with firms claiming to offer you the keys to the investment kingdom, generally with a free meal thrown in so you will not ask too many questions. There were at least 9 this past week that I came across. Unfortunately, my words often fall on deaf ears.
Yet, it is easy to protect yourself from the wolves dressed in fancy suits and suspenders. Anyone capable of reading this column can build a portfolio of quality investments. And the investment world is a cornucopia of opportunities. I know because I have been writing about them for nearly 31 years. So, what should you look for other than dividends?
A second important criterion is earnings growth. Specifically, the initial earnings number and the five-year earnings growth rate that are key.
Simply put, you are looking for “net income,” as defined by what are referred to as “generally accepted accounting principles” or GAAP. All publicly traded corporations must report their earnings in accordance with GAAP requirements. Unfortunately, companies quickly muddy up the waters by deleting non-recurring expenses or one-time charges.
The question is whether you want to look at earnings with, or without, considering incidents that a company says occurred “just once” and are unlikely to reoccur, or more pointedly might make a company look bad.
And always look to see if there are stock buybacks. This is a way to increase earnings per share without earning an extra dime.
Lauren Rudd is a financial writer and columnist. You can write to him at LVERudd@aol.com. Phone calls accepted between 9 AM and 3 PM at (941) 706-3449. For back columns please go to www.RuddReport.com.