Debunkery Book Review
Debunkery
Learn It – Do It – and Profit From It
by Ken Fisher with Laura Hoffmans
Synopsis:
This book dispels 50 stock investing myths that eventually cost investors dearly in the end.
Fisher educates you on how to avoid making common investment mistakes that are based on some of the more widespread untruths, myths and misperceptions most investors fall prey to.
You will learn how to improve your odds and make fewer mistakes investing in the stock market by following Fisher’s research-based advice.
Author’s Credentials:
- Bestselling author of 7 investment books.
- Long-standing columnist of the “Portfolio Strategy” column in Forbes magazine.
- Founder of Fisher Investments, an independent global money management firm.
- Internationally renowned financial writer.
Top Section Take-Aways:
- The section “Basic Bunk to Make You Broke” gives you insight into those myths that are robbing you of your hard-earned capital. Fisher exposes the biggest misperceptions about the very fundamentals of the capital markets.
- In the second section, “Wall Street Wisdom”, the author shows you how the investment industry is set up in a way that it actually helps you fail as an investor.
- The third section about what “Everyone Knows” delves into common rules of thumb that while comforting may actually be harmful to your wealth creation.
- Fisher’s next section on “History Lessons” takes a look at how failing to verify what one believes as being true can be costly. He shows you how a simple scan of the actual historical records can be enlightening.
- The last section addresses the bunk that many people succumb to for not thinking globally and how you can develop your investment edge by doing so.
Possible Shortcomings:
- Geared towards the actively engaged investor wishing to improve upon his or her performance in the markets.
Reviewer’s Opinion:
The author helps you improve your chances of being right more than being wrong when investing in the stock market.
Although this book does not provide you with a how-to system for beating the markets, Fisher will show you how to lower your error rate thereby increasing your probability of becoming a more successful investor.
You will find that the book is peppered with Fisher’s poignant humor that turns a somewhat serious topic, that of investing, into an entertaining and educational read.
Right from the get-go, Fisher provides you with a list of 8 steps that you can take in order to better assess if what you are reading or hearing has any credibility.
The book is laid out in short 3 to 5-page chapters that focus on one of the 50 myths being presented. This lends to making the book easy to read. You can quickly move around the various topics depending on your interest.
I benefited most from the 12 myths that are exposed in the section about Wall Street “Wisdom”. It was refreshing to see how Fisher dispels these misconceptions through his thorough research.
I would highly recommend that any stock investor pick up a copy of this book as a first step to becoming a better informed and empowered investor.
To learn more about how to create wealth in the stock market, check out Debunkery.
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Top 10 Criteria for Finding Growing Dividend Paying Stocks
Using several stock selection criteria is critical to identifying fundamentally sound dividend-paying businesses with upside growth potential.
According to James O’Shaughnessy in his book What Works on Wall Street: The Classic Guide to the Best-Performing Investment Strategies of All Time:
“using several value factors together in a composited value factor offers much better and more consistent returns than using individual value factors on their own.”
What O’Shaughnessy is saying is that a multi-variable screening approach provides the investor with a higher quality list of potential best-of-breed businesses from which to choose.
Here is a list of the top 10 indicators that I like to use for both finding great dividend stocks and assessing their potential. This list is by no means an exhaustive or exclusive list. It has served me well in identifying market leaders who are top-notch businesses.
I have based my list on what several of the top investment experts have used in their selection process. By looking at recent best practices in the stock investment industry, I was able to drill down and create a short list of the most popular criteria for finding wonderful growing businesses for your stock portfolio.
Without further ado, here are the top 10 indicators that many of the top dogs like to use for finding great dividend stocks:
1. Payout ratio being less than 60%.
The payout ratio looks at the percentage of the company’s net earnings that is paid out to the shareholders as dividends. A lower ratio signals a healthier or safer dividend income.
As a general rule of thumb, look for payout ratios around 50 to 60 %. Ratios between 70% and 100% may be unsustainable with the dividend being cut or eliminated as a result.
2. Return on Invested Capital (ROIC) being greater than 10%.
The ROIC is the rate of return a business makes on the cash it invests every year. The ROIC is a measure of how effective a company uses its own and borrowed money invested in its operations.
3. Book Value per Share growth rate (BVPS) of at least 10%.
The BVPS is what a business would be worth if it’s no longer a business. This would be the liquidation value or book value of the company.
The raw number is not important since factory-type businesses can vary immensely with intellectual property businesses. It is the rate of equity growth that is key in comparing businesses.
4. Earnings per Share growth rate (EPS) being greater than 10%.
The EPS indicates how much the business is profiting per share of ownership. The EPS is often found as the last line on the income statement.
5. Revenue or Sales growth rate greater than 10%.
The sales growth rate represents the total dollars the business took in from selling its products and services. It is usually located on the top line of the income statement.
6. Cash Flow growth rate of 10%.
Free cash flow is an indicator as to whether a business is growing its cash with profits or if the profits are only on paper.
Ideally, all of the numbers for the above growth rates should be equal to or greater than 10 percent per year for the last 7, 5, 3 and 1 year. Having these four numbers for each of the growth rates gives you a better sense of how the company is growing over a period of time. Fundamental to all of the numbers is consistency. We want all the numbers going up or at least staying the same.
Self-made stock investment millionaire Phil Town pioneered this approach of using 5 fundamental growth rates to find wonderful businesses at attractive prices. He provides a detailed step-by-step process for assessing the merits of any stock in his books Rule #1 and Payback Time.
7. Debt-to-Equity Ratio (D/E) which should be low, preferably less than 0.5.
The debt-to-equity ratio is a simple measure of how much the company owes in relation to how much it owns. It is calculated by dividing the total liabilities by the net equity. This ratio is easy to find on most financial websites.
A quick check is to see if the long-term debt of the company can be paid off in less than 3 years with the current free cash flow or net earnings. This gives you a margin of safety in assessing the extent of debt on the company’s books.
8. Price-to-Earning-to-Growth ratio (PEG) of less than 1.0.
A helpful indicator when comparing two or more like businesses together is the PEG ratio. The PEG is the Price-to-Earnings Multiple (P/E) divided by its growth rate. It is an indicator of growth at a reasonable price, or what the stock investment industry calls GARP.
The PEG is a great way to identify growth stocks that are still selling at a good price. The lower the PEG the better, since you are getting more earnings growth for every dollar invested. As a rule of thumb, healthy companies have PEG rates less than 1, whereas a PEG rate over 2 is expensive.
9. Price-to-Sales ratio (P/S) which should be low, preferably under 1.0.
The price-to-sales ratio was championed by investment guru Ken Fisher back in the 80’s. Fisher believed that earnings can be more volatile in the traditional P/E ratio as opposed to sales which tend to rarely decline in good companies.
The P/S Ratio is calculated by dividing the stock price per share by the total sales per share. This ratio can help indicate if you are paying too much for the company’s stock based on its sales. This is a useful indicator when assessing retailers.
10. Relative Strength Index (RSI) should be high for momentum plays within a range of 60 to 80.
The RSI measures the velocity and magnitude of directional price movements in a stock. It is most typically used on a 14-day timeframe. The indicator is measured on a scale from 0 to 100, with high and low levels marked at 80 and 20, respectively.
Start your initial screening by looking for stocks that have an RSI above 50 and below 80 on a 100-point scale.
Of note, is James O’Shaughnessy’s important comment in his book What Works on Wall Street: “We find that relative strength is among the only pure growth factors that actually beats the market consistently, by a wide margin.”
Parting Thoughts:
You will notice that I have not included the dividend yield amongst the top 10 selection criteria. Far too often dividend investors screen for the highest yielding dividend stocks only to realize down the road that the payout was either unsustainable and/ or not having a preferential tax status.
What is more important is whether the dividend yield is both sustainable and growing over the next couple of years. That is why the list of 10 selection criteria being presented offers you the best opportunity to capitalize on a consistent and growing dividend income stream.
There you have it, 10 factors you can use in your assessment process for finding great dividend stocks.
To your ongoing success as an investor.
Read more posts like this in our Find Potential Businesses Category.
To learn more about finding great stocks, check out these recommended books:
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2. Rule #1 |
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Highly Recommended Stock Analysis Books
Here are two great stock analysis books to check out. Pick up your copies today.
1. Phil Town’s Rule #1.
2. Bruce Greenwald’s Value Investing.
To read more posts about great investing books that will help you become a better investor, check out our Book Reviews Category.
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How to Create a Diverse Stock Portfolio
Diversification means different things to different investors.
Many mutual fund advisers tout that diversification is best achieved by buying an index or basket of 100 or more stocks through some type of fund.
Others in the expert arena, such as Jim Cramer or Phil Town suggest holding a handful of stocks that have been personally selected.
So, how do you create a diverse portfolio of investments that provides both upside potential and downside protection of your wealth?
For the avid stock investor here are seven key factors to integrate into your investment portfolio in order to create an appropriate level of diversification:
1. Diversification Across Asset Classes:
As a lifelong investor, your ideal investment portfolio should contain not only stocks, but also investments from other asset classes.
By investing in other asset classes such as real estate rental property, commodities like oil and gold, systematized businesses that run on their own, or fixed-income investments like bonds, you spread out your risk across various investment markets.
When one market is trending lower another unrelated one may be heading higher.
Investing in various asset classes creates a better balance in preserving your overall capital.
2. Diversification Within the Stock Market:
When you invest in the stock market, your portfolio may benefit from being invested in various groups of stocks that are classified by size or characteristics.
For example, consider spreading your investment capital across such groups as dividend-paying large cap stocks and small or mid cap stocks.
Each group has its own unique characteristics that benefit from certain market or economic conditions.
3. Diversification Across the 10 Economic Sectors:
By allocating no more than 20% of your investment capital to one of the 10 economic sectors provides you with better balance.
As one economic sector goes out of favor with Mr. Market, another will quickly take its place.
Spreading out your capital improves your odds of overall portfolio growth.
4. Diversification Across the Globe:
Although the U.S. has the most vibrant stock markets in the world, you should actively seek out companies that have a global exposure.
This can be done with U.S. based companies that export more than 30% of their goods or services overseas or through ADR’s, foreign companies that trade on U.S. exchanges.
Consider exposing yourself to Canadian companies in the financial sector or base materials. Canada has a commodity based economy and strong financial system.
Also take a look at the BRICS countries, Brazil, Russia, India, China and South Africa, whose growing middle class are buying more and more local products and services, not to mention those of the international players.
5. Diversification Across Time:
By investing on a regular basis, you are able to tap into opportunities as they present themselves.
Having cash on hand to take advantage of miss pricings in the market allows you to buy into positions with a certain margin of safety.
It is the velocity of your money through the stock market from one investment to a better one that accelerates your wealth-building potential.
The old adage of buy, hold and forget no longer works in today’s markets. You may be better served by moving your “dead money” into growth opportunities on a regular basis.
6. Diversification Across Investment Accounts:
Not all investment accounts are created equal. A few allow you to grow your investments tax-free, others defer the tax you pay and some offer better investment choices.
You should try to diversify your holdings across 3 general types of accounts because of the advantages and limitations of each.
Many employed investors are familiar with the 401(k) which creates a tax deduction up front in return for taxable income once money is withdrawn at retirement. When employers are matching your contributions it makes sense to take advantage of the match up to the allowable maximum set up by your employer.
The Roth IRA is a tax-free account in which investment capital that has already been taxed can grow and compound over time to be used tax free at a future date. Self-directed IRA accounts have many more investment choices beyond just a small selection of mutual funds, ETF’s or bonds typically offered in 401(k) accounts.
Finally, an individual margin account allows you the greatest investment choice flexibility from stocks to options to commodities plays. This type of account gives you greater control over making money whether the market is heading up or everyone else is panicking in a sell-off.
7. Diversification Across Investment Strategies:
It is well-documented that some investment strategies work better under certain economic conditions than others.
Attempting to use a few time-tested solid performers will help to boost your overall returns.
These strategies can be further explored by checking out the recommended readings at the end of this post.
By taking into consideration these various diversification factors, you will be in a more solid position to protect your downside while generating more consistent returns in the future.
Read more posts like this in our Investment Strategies Category.
To learn more about diversifying across investment strategies, check out these recommended books:
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The Power Curve Book Review
The Power Curve
by Scott Kyle
Synopsis:
This book will show you how to use dividends, options-trading systems and compounding to produce superior returns on your stock holdings.
Kyle shows you why dividends are so important in any investment portfolio and how you can use options-trading techniques to optimize your returns no matter what the market does.
You will learn how to assess the potential of an investment opportunity, as well as how to best construct your investment portfolio.
Author’s Credentials:
- CEO and Chief Investment Officer at Coastwise Capital Group, LLC.
- Creator of the Power 100, an annual list of the top 100 fundamentally strong companies.
- Co- founder of The Active Network Inc., a sports marketing and technology company.
- Holder of an MBA from Harvard.
Top Chapter Take-Aways:
- Explains the importance and power of compounding through dividends and options.
- Guides you through the process of selecting safe growing dividend stocks.
- Gives you insight into fundamental analysis, the valuation of a stock, and other important selection criteria.
- Discusses several option strategies that work well with stock holdings.
- Offers practical tips and guidelines on how to optimize your portfolio returns by using covered calls and puts.
- Shows you how to better control risk, as well as constructing a portfolio of stock and option positions.
- Tells you how to become both a great trader and investor.
- Shares his words of wisdom about focusing your energy on those elements you can control and influence, such as researching and assessing potential investment opportunities.
Possible Shortcomings:
- Geared towards the actively-engaged investor willing to explore the world of options trading.
Reviewer’s Opinion:
This is one of the best stock investment books that actually combines the benefits of owning dividend-paying stocks and creating additional cash flow from options strategies.
The book is targeted towards those individuals wishing to learn more about generating higher returns through the use of sound stock investments coupled with options plays.
The more than 60 charts and diagrams that illustrate the key concepts being presented make this guide easy-to-follow. Many of Kyle’s creative charts bring complex concepts down to a more manageable and easily digestible level.
The book is jam-packed with investment tips and words of wisdom that will shorten your learning curve immensely.
I benefited most from chapter 5 on optimizing your options in which Kyle provides a variety of option tips geared towards boosting your returns.
I am a big fan of Kyle’s approach to making money in the stock market with both stock holdings and options plays. His book comes highly recommended.
To learn more about how to create wealth in the stock market, check out The Power Curve.
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Current Trends in Stock Investing: What Approach is Better Today?
Over the past few years several stock investment themes or approaches have gained in recent popularity, especially with the turmoil in the markets in 2001 and 2008.
These approaches focus on making money in the markets knowing that market volatility has increased over the past decade.
With the advent of computerized trading by the big institutional players and the ease of online investing for the retail investor, more and more transactions are surging through today’s markets.
We are experiencing greater connectivity to global markets not only with investors being able to access these markets, but more importantly with more and more businesses tapping into the global market.
This creates both greater opportunity, for those who know how to make money from the market’s volatility, and fear, for those hoping the market will deliver a steady return over time.
The traditional buy, hold and pray model of investing worked well before the turn of the century. However, if you had continued to use this popular approach to investing during the past decade, you would have probably been disappointed with your overall results.
Unfortunately, the first decade of the 21st century, aptly named “the lost decade” by stock investors, showed no growth for investors using a traditional “buy and hold” portfolio of well diversified equities.
What has transpired in recent years in the investment community is a greater push towards capitalizing on the market’s volatility or mitigating its effects.
Here are three thematic approaches that are gaining ground as the new playing field for stock investing evolves.
1. Buy and Hedge
The basic premise behind the buy and hedge approach to investing is to buy insurance protection for your core holdings through the use of options.
Typically, the buy and hedge investor will purchase stocks or ETF’s that can be protected by buying puts on all or a portion of the holdings. In effect, you are buying some downside protection should there be a major decline in the stock market. Put buying is the most common option strategy used for hedging one’s investments.
With protection comes the unfortunate cost of buying the puts as a form of insurance. This does impact your overall portfolio return. However, you do have a greater peace of mind in knowing that your investments are hedged against any major disaster.
2. Buy High Sell Higher
During bull markets (those markets that are trending upward), the opportunity for generating good returns on your investments increases by buying market leaders.
The buy high sell higher investor is one who focuses on buying those top-notch best-of-breed businesses that are current market leaders. The notion is that by buying those stocks that are in favor with Mr. Market, market momentum due to investor confidence will carry the stock price to higher levels.
Being a momentum investor requires a good understanding of global and seasonal market trends, assessing a business’s key fundamentals for growth and setting both time expectations and limits for one’s investments. The momentum investor is always assessing the impact of dead money, investments that are going nowhere, on the bottom line. In other words, they attempt to maximize winners and minimize losers in their portfolio.
3. Buy for Cash Flow
My favorite approach to investing is to invest for cash flow from multiple sources. Cash flow investing generates cash through a combination of stock purchases and options positions.
Typically high-quality dividend-paying stocks make up the core holdings. The dividends paid out can either be used immediately as a source of income or re-invested and allowed to compound over time.
Coupled with this strategy is the sale of covered calls, where possible, on the dividend-paying stock or another fundamentally sound stock. By “renting” out your stock in return for a premium paid to you, you create another income source from your stocks. This cash flow source can either be used immediately or reinvested.
What I love about this approach is that by layering in cash flowing strategies you are able to accelerate your wealth creation, especially when you allow your cash to compound over time.
This is a great thematic approach that works well in today’s market environment, once you have picked up a couple of conservative options strategies.
There you have it three thematic approaches that offer today’s investor better opportunities for growing and preserving one’s capital than a traditional buy, hold and pray approach.
Read more posts like this in our Investment Strategies Category.
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Highly Recommended Classic Stock Investment Books
Here are two great classic investment books by Benjamin Graham to check out.
Pick up your copies today.
To read more posts about great investing books that will help you become a better investor, check out our Book Reviews Category.
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Becoming a Great Trader and Investor
The line between trading and investing is often blurred.
If I actively move into and out of my stock holdings every 6 to 9 months, am I trading or investing?
And if I passively hold onto an options contract for over a year, am I a trader or investor?
Trading is often associated with risk-taking and gambling with one’s money.
In reality, whether one is gambling or not with one’s money is not a function of being a trader or investor, it is directly related to the amount of financial knowledge and experience one has.
Passive investors who have no knowledge about stock investing are more likely to be gambling with their money by investing in securities that they have virtually no clue about. They run a greater risk of making a myriad of investment errors that could cost them dearly.
On the other hand, experienced options traders who have proven track records of being able to nimbly move into and out of the market and consistently generate double-digit returns are clearly not gambling with their money.
It is all a matter of perspective.
The investor-trader continuum
The investment community often places trading and investing activities on a time continuum, with shorter duration activities falling into the category of being more like trades and longer duration events being investments.
Often the time frame of one year is used to delineate the difference between trading and investing.
In this context, trading may be looked at as being a deployment of ones’ capital within a one-year time frame in order to generate a return.
And investing would have the objective of gaining a return with a time horizon of more than one year.
However, with the increased overall volatility of the markets over the past decade and the speed at which both institutional players as well as retail investors can enter and exit the markets, the one-year time frame has shortened somewhat.
Some investors have found themselves moving into equity positions more frequently simply because better investment opportunities have presented themselves.
They have come to realize that it is the velocity of your money from one opportunity to a better one that creates wealth faster.
So where do you fit into the scheme of things?
As Scott Kyle in his book The Power Curve says: “When you are putting money to work in the market, be disciplined about whether the allocation of capital is intended to be an investment or a trade. You can make money both ways – especially if trading is effectively combined with investing – but only with a disciplined, purposeful, proactive approach, not a reactionary one. The bottom line is that we are both investors and traders. It is just a matter of what end of the spectrum we are on for any capital allocation.”
Layering Increases profitability
As Kyle points out, a knowledgeable investor is able to layer trades onto existing core positions. This is often accomplished by owning shares of stock, which might be held for over a year and then selling covered calls on the stock owned to generate a monthly or bi-monthly income.
By combining the best of both the investing and trading world, one can generate significant double-digit returns over the course of a year.
Great investors focus on building their financial knowledge, developing the skills necessary to both invest and trade effectively in the markets, and more importantly dedicate the time necessary to develop a championship mindset.
The ownership of securities is not the objective of investing or trading. Stocks are just a mean to an end.
Your goal as an investor and trader is to achieve growth and income across short and long time frames so that you have the financial resources to pay for your desired lifestyle.
Thus, the buying and selling of stocks or options is a natural consequence of investing. The question now becomes, when you will do so and how frequently you will need to do so in order to achieve your desired outcomes.
Remember it is the velocity of your money moving from one investment opportunity to a better one that builds wealth the fastest.
Read more posts like this in our Personal Development Category.
To learn more about becoming a better investor and trader, check out these recommended books:
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The Ultimate Dividend Playbook Book Review
The Ultimate Dividend Playbook
by Josh Peters
Synopsis:
This book is not only about how dividends work, but about how dividends can work for you in providing you with a cash stream independent of current market fluctuations.
Peters focuses his attention on three core principles, namely income generation, insight into the business being considered, and independence from fickle market prices and unreliable capital gains.
You will learn how to construct a portfolio of safe dividends to meet your financial needs.
Author’s Credentials:
- Equities strategist for Morningstar, Inc.
- Editor of the Morningstar Dividend Investor monthly newsletter.
- Nationally recognized Certified Financial Advisor.
Top Chapter Take-Aways:
- Makes a case for dividend investing and shows you which fields are the best prospecting grounds.
- Emphasizes the importance of looking at a stock’s current dividend yield plus its future dividend growth potential to assess total return potential.
- Discusses why return on equity influences a corporation’s dividend-paying potential.
- Tells you about the virtues of dividends as a signal about a business’s current performance and future potential.
- Explains why investors should not expect more than 7 to 9 % annual returns from the stock market as a whole in the near future.
- Provides a straightforward process for assessing dividend safety based on earnings being sufficient, stable and durable.
- Outlines how to use his Dividend Drill Return Model to provide an estimate of dividend growth and total return.
- Points out that those stocks whose yields are less than 4% or more than 7% should require higher margins of safety for your purchases.
- Gives you insight into why dividend investing provides you with a psychological advantage when using a long-term, low-turnover, value-oriented strategy.
- Shows you how to build a dividend portfolio based on a target yield.
- Touches on the future of dividend-rich stocks and what to expect.
- Provides a useful checklist of 10 ultimate dividend rules.
- Explains the dividend payment process.
- Addresses dividends and tax implications.
- Offers practical advice for investing in banks, utilities, real estate investment trusts and energy partnerships.
Possible Shortcomings:
- To truly benefit from the concepts presented, the investor should be actively involved in the process; therefore, passive investors may find the overall process too much work.
- Better suited for the buy and hold investor with a long investment time horizon.
Reviewer’s Opinion:
Peters does a great job of explaining his Dividend Drill Return Model, which uses a handful of data inputs in order to arrive at a projected total return for any dividend-paying stock.
The book is laid out with many bite-sized sections within each chapter. The various charts and graphs used throughout his book help to bring greater clarity to the concepts discussed.
A great feature at the end of each chapter is the “rules and plays” section which summarizes the main concepts discussed into three key points.
Another positive attribute is that Peter’s provides several appendices that provide a wealth of knowledge for investing in areas such as banks, utilities, REIT’s, and energy partnerships.
I enjoyed his discussion about target yield for managing your portfolio. It gave me a better insight into what investor’s should expect from their dividend stocks.
Should you like a book that will provide you with a strong framework for selecting safe dividend-paying stocks, then pick up The Ultimate Dividend Playbook.
Stock Investing vs. Immediate Annuities: What is Better?
Stock investing or immediate annuities, what’s better for an investor approaching retirement?
Many financial planners advocate moving the majority of your investment portfolio into fixed income investments that provide a consistent stream of income.
They generally believe that investing in stocks is too risky as you head towards retirement.
An immediate annuity provides a fixed, guaranteed monthly cash flow for the life of the individual in return for a single payment to the annuity provider, who is usually an insurance company.
Sounds like a pretty good deal.
But is this strategy one that you should be using? So which approach is better – investing in stocks or annuities?
Let’s take a look at the upside and downside potential of each investment vehicle and then draw some conclusions based on this simple analysis.
First off, we should make the following three assumptions so that our comparison is as fair as possible:
- We are talking about an investor who has some working knowledge about basic investment vehicles such as stocks, bonds, and other simple fixed income investments.
- The investor is using a hands-on approach where he or she is capable of managing each investment.
- The investor is approaching a point in time where income generation from one’s investments has now become a priority.
Immediate Annuity
Upside expectations:
- You receive consistent monthly cash flow.
- Payments are made no matter what happens in the stock markets.
- Payments are not affected by changing interest rate movements.
- Minimal time or effort is required on your part to manage this source of cash flow.
- Your payments are fixed for life.
- Part of your monthly payment is not taxable, since you receive a partial return of your initial capital.
Downside expectations:
- Payment amount is based on the size of the investment, your age and current interest rates.
- Low interest rate environments have a negative impact on calculating your monthly payment.
- With traditional immediate annuities, payments stops when you die.
- Family members or heirs typically do not receive any payments upon your death.
- You give up complete control and access to your money.
- Your guarantee of ongoing payments is only as good as the solvency of the annuity provider – bankruptcies do happen.
Stock Investing:
Upside expectations:
- You can generate monthly cash flow from dividends and selling covered calls on stock that you own.
- Income potential from stock investments is vastly superior to fixed income products such as bonds and annuities.
- Your family members and heirs can have easier access to your investment portfolio in the event of your death.
- You have immediate access to your money, since stocks are very liquid by nature.
- Greater control of your money allows you to move your capital into better and better opportunities.
Downside expectations:
- Tax implications could be higher on the cash flow generated, if it is not properly structured in a tax exempt account such as a Roth IRA or Roth 401(k).
- Increased volatility of the stock market can be a challenge for the average investor to work to their advantage in order to be consistently profitable.
- A higher level of commitment is required in order to effectively manage your portfolio and to learn how to make money in the markets whether they are going up or down.
Conclusion:
With current interest rates having been so low over the past several years annuity payments have also been low. Stocks still provide a much higher return when you factor in income coming in from dividends, covered call writing and capital appreciation from the eventual sale of the stock.
Another big disadvantage of traditional immediate annuities is that should you die tomorrow your heirs normally do not receive any payments. In order for your family to benefit from your retirement nest egg, you would have to either structure your annuity with an insurance policy and/or forgo receiving your full payment in return for survivor payments for a fixed period of time. In either case your monthly cash flow will be much lower.
For the actively-engaged stock investor willing to spend the time to learn how to properly manage their stock investment portfolio, the benefits of investing in the stock market far outweigh what current immediate annuities can provide.
Read more posts like this in our General Investing Advice Category.
To learn more about the wonderful world of stock investing, check out these recommended books:
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