How Much Should I Save for Retirement?

Periodically, I'm asked this question, and after much thought, I've settled on this answer: Ten percent. But I have some caveats if your goal is to retire comfortably.

First, you need to save this from the start of your career and you cannot make any withdrawals until you are retired. If you haven't saved for years or if you have made withdrawals, you should increase this amount.

Second, this assumes you are debt free when you retire. No credit card debt. No mortgage. No car loans. No student loans that you are liable for. No home equity loans. No boat payments. If you have significant debt responsibilities when you retire, your 10% savings probably isn't enough.

Third, you need to invest this well. And that mostly means low-cost equities that you hold steadfastly to until you're at least half way to retirement.

Here's the simply math for long-term investing. After inflation, equities return about 4%. That is, after inflation they double in less than 20 years, or quadruple over a career. Bonds return about 1%. That is, very little. Cash is the worst of all. If you're paying a 2% fee for some high-flying financial boondoggle, your returns are probably cut in half.

If you try to time your investments, like most market timers you will probably be buying into equities when they are high and then selling them when they are low. That is, you will wipe out most of your returns. If you make many of these errors, such as owning a money market fund when you're under 40, your 10% savings probably will not give you what you need for retirement.

I see calculators and complex investment formulas where you are expected to estimate your income and expense thirty years out. They they tell you something like you need to save 150% of your money or you will be destitute. OK, they aren't quite that bad, but the notion that you can know these things decades out when you're struggling to budget a vacation is ludicrous. So much of the future is unknowable, including whether you will even be alive.

But there are multiple things that you can do to reasonably prepare yourself for that time when you are not able to work and care for yourself as you could when you were younger.

You can stop the terrible habit of borrowing from the future to meet your wants today. You can systematically save a reasonable amount that is moved off the table, untouchable until you are much older. You can invest both rationally and with significant upside to your investments without being risky. And that is because your money will be working for decades, not years.

And always make sure that you are saving at least the minimum that your employer is matching.

So why not 9% or 12%? Because 10 is easy to remember, easy to calculate, and with the tax deferral, is something most workers can reasonably do, especially if your employer provides matching.

Finally, accept that Social Security and Medicare will be there to cover a significant portion of your critical needs. I agree that retirement on these government programs alone is not an easy life. But it can be the floor from which you build.

With Social Security, Medicare and your 401(k) all taking a portion of your salary, the combination of these payments that are based on your past earnings can safely be assumed to keep you living into your retirement at a level that you are already accustomed.

Ten Years of Owning Stocks

I'm an apostle of the no-frills, low-cost indexing investment plan. Unless you have a desire to get very involved with your investments, put your long-term money in some mix of a US stock indexed fund, an international equity indexed fund and an indexed bond fund. Decide on an allocation and then reallocate back to your original plan every year or two. The best results come by putting anything you don't need for the next ten years into equities. If you can't handle the swings, allocate more into fixed income until you can sleep at night. And yes, you may need to talk to someone once in a while but proceed here with caution.

That's mostly it. With a little emotional control, an average person can retire with a lot of money just reaping the wonders of modern capitalism.

If you seek some additional adventure with your investments, indexes provide a lot of options. In general, riskier investments pay off more so buying into emerging markets, small caps and higher risk bonds, such as corporate and international can all help you improve your returns and sometimes stabilize your portfolio. It all takes additional work, though, and it is rarely worth the cost of a high-priced advisor.

The only warning is to stay away from actively managed funds. They are a black hole of costs, losses and frustrations. You have a better chance of picking an outperforming stock than an outperforming fund. Their fee and turn headwinds are just too much for even brilliant people to overcome.

For me, though, I've never been able to get past one fundamental problem with indexed funds. In order to keep turn and costs low, they own equities by their capitalization. It is good logic, but it also means they are buying disproportionately more into overpriced equities (however that is defined) and disproportionately less into underpriced equities. Buy low, sell high would tell me to do the opposite of what indexes do by their nature. I have maintained that with a good dose of emotional control and a clear look at some companies, it is not that difficult to identify miss-priced stocks and outperform the indexes.

So over ten years ago, I started buying individual stocks. I still keep the majority of my equities in indexed ETFs but I have a significant investment in numerous companies in both the US and around the world. I assumed that with some work and following some key metrics, I could easily beat the market.

Here's what happened. For the first several years, my individual stocks (including internationals), beat the S&P 500 quite significantly and I felt pretty justified (all figures include dividends). But then the horrible years of overseas returns arrived and most of my gains were wiped out. And now after ten years, I have realized that it is not easy to outperform the indexes over the long haul. I have spent considerable time trying to analyze my stock returns and quite bluntly, I do not know if I am beating the S&P 500. For starters, Quicken gives me enough conflicting reporting information to question anything. Although I crushed the S&P 500 last year, it is true that over the past ten years, I would have done better in an S&P 500 fund. But that also comes after a stunning US bull market, a trend that will hardly continue indefinitely.

Charles Schwab, where I have most of my money, has some performance analysis tools. They suggest that all of my investments (stocks, bonds and funds) may somewhat outperform their benchmarks but at an outsized risk.

I have been able to see some great opportunities. I bought Ford at $2.71 and sold it less than two years later for six times that. But I also lost everything I spent on Peabody Coal, one of my "no-brainer" purchases.

Research suggests that individuals can't succeed picking stocks because most of gains come from just a few stocks. But my look at over 100 stocks that I have owned does not support this thesis. If I ignore the extremes, the middle stocks do about the same as the total. That is, the good and bad is widely spread.

If I look at the averages of annual returns over ten years, all of my equities (including stocks and funds) have lagged the S&P 500 by about two percentage points, largely because of my heavy foreign investments. My stocks have done slightly better than my funds but not as well as the S&P 500. One not surprising find is that the standard deviation of annual returns is considerably higher for my stocks than for the S&P 500.

Over these years, I've separately tracked the stocks I've sold to see how they went on to do after I left them. Some went bankrupt but many did outstandingly well, including Advanced Energy Industries (AEIS) that has gone up eight times since I sold it. There is not strong evidence that my sales were good calls.

So I'm back where I started. Your safest, easiest and smoothest route to retirement is with low-cost indexes broadly invested. But for those who seek some adventure and the real possibility of a significant windfall, you can purchase individual stocks and with some work, you are in no more danger than many other investment venues. If you buy individual stocks, here are my tips.

First, realize that this is work. Do not invest in anything - stock, bond, fund, property - that you do not understand. For stocks, that means an ability to follow the basic financials of a company and to have some familiarity with their business. The easiest way to get this is from their SEC reports (usually 10-K). I stay close with their numbers. For me, losses, poor cash flow, high debt, no dividend and high prices are troubling signs. And don't be afraid to look at many equities. The broader your search, the better chance you have of finding a win.

Recognize that humans are terrible forecasters, including you, advisors and other experts. Do not rely on your gut feelings and other emotions, company marketing materials, IPOs, hot tips, buy/sell recommendations or forward earnings. Develop some sort of rational process for selecting one stock over another using a broad set of facts, and then stick with it. Review your stocks occasionally to see if your original logic holds, and if it does not, consider selling it. Do not respond to the ongoing market noise or swings in prices. And remember that a lot of money is lost both holding a dying stock too long and selling a rising stock too early. My crime with Peabody was to buy into it two more times on its way into bankruptcy.

Spread your equities across market capitalizations, sectors and even countries. Establish some limits to keep yourself from overexposure to an individual stock or sector. This will help stabilize a portfolio.

Finally, only buy a stock because you financially value it as an organization. Do not day trade or buy stocks (or funds) because of market timing or technical analysis. These are zero sum games that will probably be losing bets. Buy a stock only as an investment that you may keep for years.

I plan to continue owning individual stocks. Today, I'm uncomfortable with the US market and expect internationals to continue to outperform the US. I'm especially bothered by the indexed US funds because a few large firms seem to be overpriced. But, my concerns aside, I know that I'm a terrible forecaster and market timing is a bad policy. So I will sit and watch. For another ten years.

A Wild Ride

I grew up in the Upper Peninsula of Michigan on the Marquette Iron Range, the smaller of two active iron ranges in the Lake Superior basin. My grandparents immigrated here from Finland over a hundred years ago, seeking a better life in one of the most formidable climates in the world. The mines have run continuously since 1847, owned by Cliffs Natural Resources since 1890. My grandfather, father, several uncles and many neighbors worked in the mines. Then it was called Cleveland-Cliffs Iron Company, abbreviated CCI. The workers said they "live and die for CCI."

Two years ago, Cliffs caught my eye. It seemed to be doing well crawling out of the Great Recession. As I always do when considering a stock to buy, I went through their financials, which looked good: Low PE and price/book, strong cash flow and a solid dividend. I've maintained that the world, especially developing countries, is growing fast and will continue to use more iron, copper and other commodities as they join modern life.

So I purchased Cliffs and watched as it lost 92% of its value over a year, bottoming out at $1.32 on January 12, 2015. I then watched again as it went up 12 times. And today, as I did years ago, I went through their financials and decided that it does not meet my requirements for a healthy company. So I sold it, just barely recovering nearly all of money. Meanwhile, Seeking Alpha says Cliffs is "ready to rumble." We'll see.

What did I learn from this whirlwind ride? Reviewing their SEC filings from when I purchased them, I can see now that some of their financials looked too good to be true. So a lesson might be to be careful adding up the numbers. It is helpful to also have a sense of where the company and industry are headed. Of course, a Monday morning quarterback is always right.

 

Otherwise, I didn't learn a lot. Mining is a capital intensive industry but like every sector, it has its strengths and challenges, which I would assume are accounted for in its price. Should I have sold after it lost half of its value? Well, that would have been costly. I'm especially glad I didn't sell it at its bottom, but I wonder if I would have considered buying Cliffs at less than $2/share when I wouldn't consider selling it.

Buying individuals stocks is a risky business. My theory is that stocks don't force me into overbuying into overpriced equities, as indexes do. But the downside is losing - and possibly gaining - a lot of money. Which is why most of my equity purchases are in indexes.

How Not to Apply for a Job

This past week, as I have done for years, I looked closely at several applicants for positions we are trying to fill in the tech industry. All have some valid skills that may appeal to us. However, I am slightly shocked at the basic errors made by applicants. If you're looking for new work in any field, here are some thoughts.

The most obvious problems come in the resume itself. Usually, it starts with too much information. I just read a resume that lists forty different skills, about thirty more than I can process. Applicants seem to forget that few will study their resumes - we scan through them in tens of seconds. They regularly go beyond two pages, which is usually too long. The resumes are often unclear on where and when they have worked or attended college. Resumes should contain plenty of concise, concrete information that can later be expounded on, but not a lot more. A related problem is the over architected resume that is wonderful to look at but often lacking in critical information.

A major miss from applicants is their LinkedIn page, or lack of. A LinkedIn page is Step One in any modern job search. Open a free account, complete the profile and be sure to include a picture. List all education and professional jobs. Provide dates for the past ten years and account for any blanks. List organizations, interests and personal data. And while you're at it, join a couple of groups. LinkedIn walks you through this rather easy process. Finally, get 50-100 connections before you send out a single application. It's not hard to do. And then "follow" the organization you are applying to. Again, I'm amazed by applications that do not provide a LinkedIn profile, and if they do, obviously threw it together in thirty minutes.

So what to do with problems, such as a bad GPA? Try to avoid highlighting negatives but be ready for an explanation when asked. Don't lie or hide - you will only dig yourself a bigger hole. But remember that everyone has a problem with their resume and still over two hundred thousand people were hired last week.

In the end, though, don't lose sight that your resume or LinkedIn page will never get your hired. It's your skills and experience that get you a job.

Christmas 2016

The big news for 2016 is David's college graduation. We've paid our last education bill and the kids all have degrees and jobs. David and Ben now share an apartment in San Francisco, both working for Thumbtack.

David graduated with a double major in mathematics and computer science. While in college, he took four years of classical piano. In his junior year, he started Russian and now reads, writes and speaks it quite well. He spent his last quarter of college with fellow students at Moscow State University. Ann, Ben and I met up with him in Russia when he finished in June and spent a week touring Moscow and St. Petersburg, and then another week in Finland. The trip was wonderful. David was our personal guide and translator, bringing us to great restaurants and endless sites. Russia is this northern land, in many ways similar to northern Minnesota, a land that time forgot. The Orthodox churches are simply amazing. The history is at once horrifying and inspiring, and sent me off on a Russian reading campaign. No, Putin and I aren't Facebook friends, but I've gained a new appreciation for their situation. But regardless of politics, the story of one of the most consequential countries of the past two hundred years is riveting.

With kids in Texas and California, holidays have become a bit more complicated. For Thanksgiving, Ann and I spent over a week in SF at an historic hotel a block from Ben and David. Ann and David made Thanksgiving dinner in their apartment, including homemade apple pie. Our hotel suite was roomier than some apartments, so hanging out there was fine. We took a short road trip down the coast. Ann and I become comfortable walking and taking the bus around most of SF. We found a Starbucks nearby that opened by 5am (haha) – and sold the New York Times. I might retire in that hotel.

For Christmas, everyone is coming home for up to ten days. We’ll spend a couple of days at our place in Lutsen, MN. The kids are then all flying out together to SF for another week together.

Ann and I have done well at home. I’ve joined Ann working our gardens. I had forgotten how much I like yard work. I remember as a kid so enjoying our yard and our land in Michigamme. We landscaped our gardens (including deer proof fences) and now have raspberry and asparagus patches. We also grow beets, tomatoes, peas, lettuce, beans, hot peppers, squash and herbs. The peas sometimes grow taller than me. We also planted plum, cherry and apple trees in the yard.

Ann is now the state rep for northern Minnesota for Celebrate Recovery. She stays in touch with the couple of dozen other CR's in her region, plus travels to short and long summits around the region and country. I usually travel with her. I continue to run the music with the help of over twenty musicians. I returned to playing my now twice reconditioned guitar I bought in college. It has new electronics and a series of pedals. I'm also the primary vocalist, which is new territory for me. Ann and I lead groups at our weekly meetings. We also have after hours closed groups that spend a year walking people through an intense 12-Step recovery program. It includes a series of workbooks that can move almost anyone closer to a personal objective that improves their lives.

After talking about it for over ten years and after sending out over seven thousand Tweets (@JonJosephA), I set up my blog, Confessions of an Investor (InvestorConfessions.com). I'm actually getting a little activity on it. I've made connections with people overseas and was even interviewed by some guy from Bloomberg News. It’s a start.

Merry Christmas and Blessings to You,

Ann and Jon