RLR – RANDY LEWIS RACING SPECIAL REPORT
My special reports are meant to be “critical thinking” pieces on important stuff. What I am about to talk about is important stuff.
I hope you enjoy the commentary.
It’s not about the money…..it’s about the money. There IS a difference.
Every year I share the results of my financial investments with each person who reads my Trackchaser Reports. Why? It’s simple. It’s fun to share good ideas that have worked over time. The astute reader may find some benefits that will make their life easier and more enjoyable. Remember money is good for just one thing. You can trade it for stuff. If someone benefits from what I share, that’s good for them and good for me because I love to share great ideas.
I try to keep things as simple as I can in this message. To me there are just three elements of a successful financial retirement plan.
1. You don’t have to ever work for money again if you don’t want too.
2. You won’t ever run out of money.
3. You will have fun with the financial security you have.
I see people who didn’t save enough money or plan wisely. They often end up going back to work because they “like to work”. Often times that’s code for “I didn’t plan well”. If going back to work is the #1 thing you want to do with your time out of the ZILLIONS of things you can do then by all means go back to work.
On the other hand I see people who DID plan well and have all the funds they will ever need in retirement. Then they don’t spend their money because they fear item #2 above (running out of money). Others want to give all of their money to their kids. If my children need my money when they’re 55 years old then I failed to get across to them most of the points mentioned in this post. I don’t mean to be harsh. I don’t begrudge anyone going back to work at something they absolutely love. I don’t begrudge folks giving some of their money to their families to help them along. However, if you can’t go to the movies or to the Caribbean a time or two because you “want the kids” to have your money I think you earned and saved your money for the wrong reason.
Wow! That was a long time ago.
I retired in June, 2002. At that point I willingly quit my job to never work “for the man” again. It was at about this time that I really began to increase my rate of trackchasing. Let’s think about that. I retired from my job and then committed to traveling more than 200,000 miles every year for the last fifteen years or more. This was going to cost some money and I didn’t have a job any longer!
That meant that whatever amount of money that I had when I retired was going to have to last me for a very long time….I hoped. I had better know what I was doing in the investment world or I would be headed to the poor house in the not too distant future.
Before I go any further let me make a couple of comments about money. First of all, I don’t think I know anyone who grew up poorer than me. At home we ate mayonnaise sandwiches. Folks, that’s just bread and mayo! I once reached between the sofa cushions looking for lost change. My hand came out of the sofa with a handful of dead baby mice. However, it didn’t matter how poor we might have been. At the time I had no understanding of that at all.
You would think I would have been a prime candidate for “class envy”. What’s that? It’s a feeling that people have toward people wealthier than them. Heck, if I had class envy as a kid I would have been envious of nearly 100% of the people in the country! There’s no point in begrudging the wealth of people. They figured out how to get there. It’s the American way! Money is a lot like golf. In golf there will always be people you can beat and people who can beat you. With money there will always be people who have more than you and people who have less than you. Whatever your financial station in life don’t feel bad towards those with more. If it’s that important to you get a job, save your money and invest it wisely.
As many of you know, I am retired from the Procter & Gamble Distributing Company in 2002. I retired at the tender age of 53. O.K., I submitted my paperwork when I was 52 but you know how it can be with big companies. However, I still work. I just don’t get to work very much. I am not allowed (by my spouse’s preferences) to do any chores whatsoever around the house. Although I could fight that decision, I choose not too.
As I said, my real “work” is severely limited. Actually, I work just two hours each year. That’s about how much time it takes me to rebalance our stock and bond retirement portfolio. The process is almost fully automated, so it might even take a little less than two hours. Every year I rebalance my retirement portfolio. Our fiscal year ends on October 11. That’s the day, every year, that I rebalance everything.
A penny saved probably gets spent. A penny invested probably returns you a nickel.
As a special bonus to my loyal and ardent Randy Lewis Racing Trackchaser Report readers I always like to share my investment philosophies and strategies. There are many ways to be successful in the investment world. Some think a simple “dart board” approach will work. If you’re lucky, it will. However, if you’re the type of person who would like to have more than just luck working for you as you invest your life savings read on.
Some people’s plan is to live off their dead relatives money. I have inherited money just one time. It was back in 1974. My share of the proceeds was $13,000. For the life of me I can’t remember what I spent that money on. Others are counting on the “Red Neck Retirement Plan”. What’s that? Winning the lottery! Did you know your chances of winning the lottery are virtually the same..whether you buy a ticket or not? Of course you can’t win the lottery unless you own your own bowling shoes either. Didn’t know that did you?
Before you retire.
Before one retires, it’s a good idea to get a handle on how much money you expect to spend each year in retirement. Then, you need to save enough money (I don’t mean “save” as in putting money into a bank) so you can live out your last days and years without ever having to work for money again.
Sometimes, on a lazy afternoon, I look out over the ocean and wonder how I was able to accumulate enough funds so that I don’t have to work at all. Despite having some retirement resources I don’t have the big budgets of those Dreaded East Coast Trackchasers. Even in retirement I have never received a company pension of any kind whatsoever.
Nevertheless, we maintain a modest seaside cottage in the sleepy little seaside village of San Clemente, California. We live on our personal savings, investments made over time and funds from our company’s profit sharing program. When I retired from the company, they gave me what was in my profit sharing account and wished me well. I don’t think there is a better company in the WORLD for achieving lifelong financial security than the Procter & Gamble Distributing Company.
More than ten years ago now.
So here I was back on July 1, 2002, a bright eyed and bushy-tailed wet behind the ears (metaphorically speaking) newly minted retiree with a few greenbacks in my back pocket. Now I had to make sure those few dollars would last me, and Carol, through the next 40-50 years of retirement without ever having to go back to work again.
How would I make this happen? First, I looked at Carol’s expenses. That was only fair. I would be flying all over the world seeing new racetracks. That was going to be expensive. We couldn’t BOTH be spending money. Where in our budget could I cut her expenses?
I figured if she had her hair done every two years or so, that would be fine. I looked in her closet. She had plenty of stuff. She could easily wear the same clothes she had from college, unless of course she gained weight. That got me to thinking that maybe I should cut her food budget………..so I did.
You can’t do a thing in financial planning without having a budget.
After figuring out how much more money I would be spending in retirement and how much less money she would be spending, I had our retirement budget. Now I simply had to invest OUR money (yes, California is a community property state) in a way that would generate the funds we would need for a lifetime without ever having to work again.
This may seem like a simple process and it can be. However, for the untrained it is an impossible task. If you fall into the “untrained” category, I highly recommend you get some competent help. There are a million ways to invest your money. I can’t talk about them here and stay within my self-imposed limited of 6,000 (I think I missed that goal on this one) words for each Trackchaser Report. Here’s what I did.
How did I create sustainable retirement fund?
First, I wanted to have a fully diversified investment portfolio. I’m a bit of a risk taker but I didn’t plan on going to Las Vegas with my retirement bankroll. I subscribe to the William Bernstein theory of investing. He is a proponent of low cost index allocations that focus on allocating your money based upon asset classes rather than individual stocks or bonds. He is also anti-market timing. If you would like to learn a bit more about Mr. Bernstein click on this link:
I am surprised by how many of my friends who don’t follow the stock market that closely and who swear they are not market timers……are really market timers. Anybody who feels they know what the market is going to do tomorrow, next week or next year and then changes their investments based upon those feelings is a market timer! Frankly, I think they’re crazy.
I highly recommend the Bernstein book “The Intelligent Asset Allocator”. If you read that, understand it and then implement those strategies you will have a bright financial future.
Please, take my money.
Armed with Mr. Bernstein’s teachings at retirement, I went off to the Vanguard Group and gave them all of our money. Yeah, that’s right. I just wrote ‘em a check. I had them invest it in six stock mutual funds and five bond mutual funds that they recommended. These funds charge extremely low management fees. It’s incredible how little they charge. Now, some 14 years later I still have those same eleven funds I started with.
O.K., just how incredibly low are their fees? We have the biggest percentage of our funds in the Vanguard Total Stock Market Fund. It makes up about 25% of our total portfolio. This fund invests in more than 3,000 stocks representative of the entire U.S. market. The fund’s expense ratio is 0.05%. What does that mean? They charge us $5.00 for every $10,000 we invest with this fund. That’s 95% lower than the average expense ratio of funds with similar holdings. The overall weighted expense ratio for all of our Vanguard investment is just 0.14%. That’s it! That’s how inexpensive it can be to invest in Vanguard mutual funds.
Our six stock funds are mostly index funds. Bernstein recommends index funds for their cost effectiveness. As you probably know, index funds are groups of stocks that mimic indices like the S&P 500 and others. Our stock funds include U.S. based companies, foreign indices, small and large stock groups and value and growth stock groups. You likely also know that the vast majority of actively managed funds do NOT beat index funds.
My five bond index funds include short-term, intermediate-term, long-term and junk bonds. That pretty much covers all bond-investing groups. Bonds won’t return as much as stocks over the long term. However, in bad times for the stock market bonds won’t go down as much as stocks likely would.
I choose to put about 64% of our money in the stock funds and 36% in bond funds. To some that might seem like an aggressive approach for a retiree. I am now 67 years old. The Social Security government life expectancy tables tell me, on average, I will live to be about 84.8 years old. Of course I have a 50% chance of beating that number. That’s REALLY bad news for those Dreaded East Coast Trackchasers! This means that if I were to just live to the AVERAGE life expectancy I would have another 18 years to spend our retirement savings. That’s a long time in the investment world. Heck, it’s a long time in the trackchasing world. Carol might live even longer, especially now that she will be able to maintain a lesser weight because her food budget has been reduced.
Invest for the long term; play in the short term
Over the long run (since about 1930), stocks have earned about 10-12% each year. I have managed money for some friends and family. What they sometimes forget is the fact that just because stocks AVERAGE 10% each year, that does not mean they will go up 10% each and every year. Some years stocks will be up 20-30% and some years they will be down by like amounts. Everyone’s most recent experience during the financial crisis bears this unhappy statistic out. Of course, investors can’t expect the market to go straight up like it has over the last few years either.
Over the last 50 years the 10-year bond rate has averaged 7.12%. The S&P 500 has averaged, over that same period, an annual increase of 11.01%. The 3-month T-bill (cash) has averaged 4.97% during the last half century. Don’t be swayed by the “Theory of recency”. That’s simply the idea of thinking that what has occurred recently will predict the future. Interest rates have been down for a while now. Currently the 10-year bond rate is 1.85%. Did you know that in the early 80s it exceeded 14%! I figure with my allocation of stocks and bonds that my portfolio should average about 7-10% each year. If it does then I will be “golden” as we used to say back on the block.
Now to the present.
Yes, now to the present…….I woke up on Tuesday morning, October 11, 2016 and grabbed a flight from Austin, Texas back home. I knew it was time to “re-balance” my retirement portfolio after 14 years of successful investing. How did I know this? I get messages from multiple people who ask me every year, “It’s about time to re-balance your portfolio isn’t it”. They follow this stuff almost as closely as I do!
Of course, I re-balance every year. My portfolio returns for the past year had been decent. Stocks were up. Bonds didn’t do as well. However, having a third of our funds in bonds protects us from bear markets like we saw in year six.
We’ve only had one negative return year since we retired. I am happy to report with this year’s positive results our year by year investment returns look like this:
Annual return Annualized return
Year 1 22.8% 22.8%
Year 2 10.3% 16.4%
Year 3 9.6% 14.1%
Year 4 11.4% 13.4%
Year 5 15.9% 13.9%
Year 6 -24.1% 6.5%
Year 7 24.6% 8.9%
Year 8 4.1% 8.3%
Year 9 1.3% 7.5%
Year 10 11.0% 7.8%
Year 11 15.3% 8.5%
Year 12 5.0% 8.2%
Year 13 5.7% 8.0%
Year 14 5.5% 7.8%
Year 15 15.4% 8.3%
Ya, I know. Year 6 was a bummer! Yes, investing is a lot like golf. If you didn’t have to count your bad scores you would really do well! As you can see as the time expands the ROI begins to approach what one might expect from “market return averages”. The longer your portfolio is invested the less volatile your annualized ROI results become.
A combination of stocks and bonds in the ratios I use should return 7-10% over time. After the good years, I might beat that average and after the poor return years I will likely lag the overall average. If I can get long-term average market returns I will be more than happy.
Remember, I’m not trying to get a 15% return each year. If I was I would likely end up with more MINUS 15% returns in too many of my golden years. That would make sleeping at night more difficult. I’m not even trying to beat the market. I will be happy with matching the market over the long run. If that happens I will continue to sleep well. Give me a solid 8%-9% plus or minus a point, like the market has done over time, and I’m going to be happy.
Let me talk about inflation for a moment. There hasn’t been much lately. That doesn’t mean there won’t be in the future. As recently as 1980 (actually that WAS 36 years ago!) inflation came in at 13.5%. I don’t give much thought to inflation for several reasons. First, I’m only expected to live 18 more years. Secondly, and probably the most important, our major household expenses are protected against inflation.
Our house payment is locked in for the long-term. Our real estate taxes can only go up by 2% each year by law. Our cars are paid for and won’t need to be replaced for ten years or so. Our electric bill (normally $400-$500/month) is now zero because we have solar. All of these expenses would normally be well over 50% of our household budget. Let’s say they account for 60% of our expenses. That means that 60% of our expenses are capped at a less than 1% increase for the long term.
However, inflation is likely to occur over the next 18 years and even longer for our other expenses. Let’s say the average Marriott or Hilton hotel goes for $150 per night now. If inflation were to average 4% a year for ten years then those hotels would cost $222 per night. How would that affect us? There would be several ways to fight inflation like that.
If our investments were doing well (better than the 4% inflation rate) we would have more money than we had when hotels were charging just $150/night. We could always go on the same trip but stay in a Holiday Inn or something below the quality of a Marriott hotel. I currently travel about 175 nights each year. Yes, you read that right. I HAVE averaged about 175 nights of travel for every year since I’ve been retired. If inflation was too strong we could simply travel a little less. It might be expected that we will cut down on our travel as we age anyway. Of course, I use Priceline.com today. I often get Marriott hotels for just $50 U.S. per night with them. Priceline could be a great inflation fighter in the future as it is today.
“Fighting” inflation can be done in other expense categories as well such as cars, clothing, services etc. The consumer can get a new car every six years rather than five. They can buy a less expensive model. They can have their house cleaned one less time per month. You get the point. At my age inflation isn’t even on my radar screen.
We have chosen to “self-insure” for our long-term care needs. Yes, long-term care as in nursing homes and the like is expensive and getting more expensive by the day. However, the majority of people never need long-term care of the nursing home type variety before they die. For those people who do need these services they often don’t need them for that long. Of course, this choice is a gamble of sorts. We won’t know until the game is late in the fourth quarter if we made the right call.
I’ve heard it said that poor people don’t need long-term care insurance because the government will cover their needs. Wealthier people don’t need it either because they can afford to pay for long-term care if the need arises. It’s the folks in the middle who have too much that the government won’t pay for them and not enough that they can cover the expenses themselves. We feel we can afford long-term health care on our own if we need it and if we don’t need it for twenty years!
I’m a firm believer that people, over fifty or sixty years of age SHOULD have a mortgage on their home. This is especially true if they have a significant portion of their net worth tied up in their home equity. Too many people can’t enjoy their golden years because too much of their money is in home equity and not readily available to them.
We have an “interest only” mortgage. The very LAST thing I want to do financially is move money from my investment accounts into more home equity. If one had a fully amortized loan, requiring the payment of principle and interest, taking money from investments to put into home equity would be exactly what would happen. Far too many people have far too much of their net worth tied up in home equity. Home equity is not that easy to get at inexpensively. I’ll be posting a more detailed explanation on this subject in the near future.
The bottom line.
Through October, 2016 our annualized ROI now stands at 7.8%. We didn’t panic and sell everything when the market went down big time during the financial crisis. We didn’t panic and begin buying after the market has come back up more than 50% since the 2008 bottoms. We just gritted our teeth and held on. That takes some discipline, but I follow the Bernstein theories. Those theories are not rocket science. They are not science fiction. They are just good common sense investing theories that have proven their worth over a very long investment time frame.
This is the important part.
Re-balancing is important. The purpose of a “rebalance” is to sell what has done well recently and buy what has done “less well” recently. It might seem somewhat counter-intuitive but it’s not. This meant, that during my rebalance in 2016, I would be selling stocks and moving money into bonds. There is a statistical concept called “reversion to the mean”. In non-technical language it means that if your local baseball team wins about 60% of its games and they have just finished winning 80% of their last 30 games, they are likely to “revert to the mean” and begin losing enough to get them back to their historical 60% success rate. Re-balancing is important.
Let’s recap if you’re with me so far. I won’t be looking at the market on a day-by-day basis. I probably won’t look at it on a weekly or maybe even monthly basis. My friends know that I have some knowledge of investing. The guys down at the golf club will sometimes ask me what I thought of a particular move (up or down) in the market. They seem astonished when I tell them I don’t know what they’re talking about! This daily viewing is a waste of time. It’s a good idea to keep an eye on those “Dreaded East Coast Trackchasers” on a daily basis but not the stock market. Watching the market too much will only serve to increase the wrinkles on your face and then you’re facing a huge Botox expense. I won’t think much about the market over the next year. I definitely won’t buy or sell anything (other than to cover living expenses) for another full year.
Remember the prudent choice is to maintain an asset allocation of broadly diversified, low cost investments regardless of the market environment…..or you could go to Vegas!
What will YOU do?
Now what will you do with all of this information? Will you simply say, “That was a cute way of presenting the information”. Or, “Randy didn’t seem that smart when I knew him”. Will you look at your spouse’s budget and cut like crazy? Will you discuss this with your spouse or investment advisor? Will you buy a William Bernstein investment book? On the other hand, will you simply do nothing? Remember when you do nothing you are really doing SOMETHING.
If you’re in your 20s or 30s you need to act NOW. The power of compounding returns over time is your very best friend. If you’re in your 40s and 50s you are late to the party. You will have to step on the gas and keep the petal to the metal hard until you submit your retirement papers. If you’re in you’re 60s or more….just give up! You’re too late! The party is over for you if you haven’t started planning for your golden years a long time ago. If you are in your 60s or more is there ANYTHING you can do? Yes, there is. Send a link from this post to your kids!
It’s your call. I wish you the best. I hope that everyone reading this can retire early if he or she wants. I hope they can live to an age that surpasses their Social Security life expectancy. I hope they have enough money to buy a butterscotch sundae if they choose and still have enough left over to provide for their family and/or give to a charity if that’s what they want to do.
For many people talking about money in public and even in private is taboo. That is not the case for me. I don’t know where I acquired this habit, my parents or grandparents never talked about money. However, we frequently talked about money with our children and still do today. They all say that has helped them.
There will always be people who have more money than I do and people who have less. It doesn’t matter to me how much money I have relative to others. I simply want to have enough money to do what I want to do without ever having to work “for the man/woman” again.
To me, talking about money is no different than explaining to someone what I had for breakfast this morning. I will say this. When you hear money advice, or any advice for that matter, I recommend only taking advice from people who are doing better than you are in the area where the advice is being given. When I go to a golf pro to take a lesson I listen and act on their advice. Why in the world would I do that? Because the golf pro can play golf better than I can!!
One last thing.
One last thing. You might want to share the above with your spouse or significant other. If you don’t, how else will they understand why their food portions seem a little smaller!
O.K., this IS the last thing.
I’m not above frequently asking myself, what if everything went wrong. Yes, it could. I could get hit by a bus. The stock market could crumble and stay down for a long time. The value of our modest seaside cottage in the sleepy little seaside village of San Clemente could plummet if folks decide they like Minnesota winters more than they like ocean view properties. Lots of bad things can happen. Remember, nobody gets out of this thing alive. However, if bad things don’t happen for at least a while we are going to live very comfortably until they do.
2017 Update – Metaphorically Speaking
The Warren Buffet of San Clemente?
Last night I was sitting in my living room while my wife was preparing dinner. I yelled into the kitchen, “I think I may be the Warren Buffett of San Clemente.” She yelled back, “What do you think you’re going to want to drink with dinner“? I said, a little louder this time, “I think I may be the Warren Buffett of San Clemente.” She peered out of the kitchen and looked at me over her reading glasses. It was that more than skeptical look that I’ve grown to love after more than 44 years of marriage.
You see my thinking all came about when I was rebalancing my retirement portfolio last night. I rebalance everything once a year just like William Bernstein tells folks to do.
This past year was a very good financial year for my well diversified by asset class basket of 11 stock and bond mutual funds. Most of those funds are index funds.
My 2016/17 fiscal year showed a 15.4% rate of return. Over the past 15 years that I’ve been retired my annualized ROI is 8.3%. Of course, I use the modified Dietz method to calculate returns. Who wouldn’t right?
In the financial world the phrase, “A rising tide floats all boats” comes to mind. Yes, over the past 15 years the stock and bond markets have done well. With my focus on index funds I’m really only trying to match what the market does. Over the years the returns the market have generated have been good enough for me. I don’t need to beat the market. I’ll be happy just to get the market.
I told my wife that I had been imagining myself on the metaphorical sea where all kinds of boats were floating past. This brought an even more skeptical look as she passed the breadsticks.
As I looked out over that sea I noticed that some people had bigger boats than me and some smaller. At least I had a boat! Just 10% of the people in America own 80% of the stocks and bonds and therefore most of the wealth. That’s right. Not everyone owns a boat.
When I retired would I have signed on for an 8.3% annualized return for the next 15 years? You Betcha.
I have managed 100% of my retirement portfolio since I retired. Of course I had the good sense to read all about stuff from William Bernstein. I then invested my money with Vanguard. They manage money for people at extremely low costs.
The overall weighted expense ratio for my entire Vanguard portfolio comes in at 0.136%. That means for every one million dollars that I have invested Vanguard charges me $1,364 to manage it each year. If I had a $5MM portfolio, and I’m not saying I do or don’t, then Vanguard would charge me a little bit less than seven grand to manage it annually.
I’m going to guess that with my broadly diversified portfolio of primarily index funds that I have pretty much matched the market for the last 15 years. Remember index funds ARE the market.
How many mutual funds or financial advisors do you think have “BEATEN” the market over that time frame? I’ll bet the number is pretty close to zero! Let’s say they didn’t beat the market and they charge quite a bit more than $7,000 a year for a $5MM portfolio. An advisor that charges just 1% of a $5MM portfolio’s balance would be costing you $50,000/year….not less than $7,000. Over a 15-year time frame that’s a pretty wide number. Was that a good deal for the people who followed their advice?
It would seem, although who really knows, that the investment world is richly valued at this point. That might mean that if the market is going to “revert to the mean” near term future returns will be less than the historical average. That’s a nice way of saying there’s a good chance the market will correct sooner rather than later. I would expect that.
I’m a buy-and-hold investor. I didn’t take a dollar out of my stock and bond mutual funds when the financial crisis happened. When the market tanks in the next year or three years or 10 years or whenever I still won’t get out of the market. I might ride the plane into the ground but you won’t see me selling when prices go down.
Since 1950 the market has corrected by 10% or more 35 times. In every one of those instances the point where the correction began was exceeded in weeks, months or sometimes years. It’s difficult to go against a batter that has hit safely 35 times in 35 at bats.
It’s going to be impossible for anyone else to compare his or her results with mine. Don’t waste your time. No one else has my investments over my timeframe with my fiscal year.
I would just say it this way. If you or your investment advisor has beaten the market over a period of 15 years then maybe you and/or your investment advisor are the Warren Buffet of your little town. It’s more likely that people don’t know what their rates of return have been let alone whether they beat the market or not. I won’t even touch on the risk that one portfolio might have compared to the next.
My wife and I were in the midst of dinner now. We had gotten past the idea of my being the Warren Buffett of San Clemente. We agreed I wasn’t. We had now moved onto the topic of her ne’er-do-well brother. Yes, a rising tide does float all boats. But when it comes to my brother-in-law the conversational waters can get a little choppy.
San Clemente, California