"A long memory can drive a man crazy."
-- Brit Bennett, The Vanishing Half

Sunday, June 26, 2011

Buy a Mutual Fund? Are You Kidding!

           Like many people, my problem is that I have a half-decent amount of money that over the years I've saved up for retirement. Now that I'm basically retired, I need to generate some income from that money. I do not have a pension. I still have a couple of years before I get Social Security. And while I do make some money from freelancing, it's not enough to live on.

      So where do you get income in this day and age? Gone are the days when you could put money in a bank and draw 5% interest.

     One friend of mine has almost all her savings in bank CDs. She vowed, in 2009, that as soon as the Dow Jones average got back above 10,000 she was taking her money out of stock mutual funds and and putting it all in something completely safe and secure. She followed through on her promise. But now she's missed the stock market rally of the last year, and is earning somewhere between 1% and 2% interest. After taxes and inflation, she's losing money.

            I don't know how much money she has. But if she's got, say, half a million dollars, it's producing $7000 or $8000 a year. That's $600 or $700 a month, less after taxes. Not much in today's economy ... certainly not if you live anywhere in the Northeast like I do. I need more than that to supplement my meager earnings from the work I'm able to get.

          My brother-in-law fancies himself a day trader. He spends quite a bit of time at it. He has about $50k to play around with, and he tries to use it to make money. He dabbles in Exchange Traded Funds (ETFs) and occasionally gets a hot tip on a technology stock. When I asked him how he does, he responded, "Well, I, uh, actually, I guess I about break even."

          But according to my sister, who keeps a close watch on him, he actually loses about $5000 a year. "That's not so bad," says my sister. "It keeps him out of trouble, and it doesn't cost us any more than a two-week vacation."

          But my brother-in-law has a pension from the military, and my sister is still working. So they don't really have to produce income from their savings.

          Another friend got a settlement when he was laid off a couple of years ago. Instead of squirreling that money away in some bonds or a stock mutual fund, he decided to invest in a vacation condo in Myrtle Beach. He's been able to rent it out about six or seven months a year. But the rental agency takes half his revenue, and the other half goes toward paying his condo fees. Meanwhile, the price of condos in his complex have sagged another ten percent.

So I've been looking into mutual funds. Now I know everyone thinks that the stock market is rigged and it's no place to put money you ever expect to see again in this lifetime. Many of my Baby Boomer friends were spooked by the 2007-09 stock market crash. The value of their IRA and 401k plans swooned just at a time when they were starting to pay attention, when they were in their mid-50s and seeing retirement on the horizon. I myself took a hit in my retirement funds during that period.

But now that everyone is running the other way, just maybe it's time to dip a toe into the stock market. And since mutual funds are considered old and boring and passe, especially compared to sexier ETFs or internet stocks, maybe they are actually the smart way to play it.

If you say mutual funds are a scam, designed to enrich financial institutions, I'll respond: Yeah, tell me something new. There are over 10,000 funds. Most of them by definition are average, charging high fees and producing mediocre returns. But if you do even a little shopping on Schwab, Fidelity, Vanguard or Morningstar, you can find a relatively safe -- or at least a relatively conservative and dependably honest -- place to put your savings, a fund that will produce some half-decent income.

Laura Dogu on forbes.com says buying just three Vanguard index funds will “create a low cost, broadly diversified portfolio that is easy to manage.” That may be true. But these index funds will not produce much income.

          So I'm betting on something else -- Equity Income funds that produce income, that I can buy with no transaction fees and no loads, that are fairly well diversified, and earn four or five stars from the Morningstar rating company.

I'm going with funds like the Parnassus Equity Income (PRBLX), a five-star fund with management fees of 0.99%; the Fidelity Asset Manager Fund (FASIX), a four-star fund with fees of 0.57%; the Vanguard Wellesley Fund (VWINX), another five-star fund with a management fee of just 0.28%; and the Vanguard Wellington Fund (VWELX) a five-star fund with a management fees of 0.30%.

I can’t start recommending funds – these or any others -- I can only tell you that I've owned various mutual funds over the years, some good, some bad. Altogether they haven’t made me rich, but they’ve produced returns that easily beat the 1% you get from your friendly neighborhood bank, or the negative 10% my brother-in-law makes from day trading.

Wish me luck!


Anonymous said...

My condolences. To your money. Bye Bye.

Dr. Kathy McCoy said...

Good luck! These days, it's really hard to know how to generate the best income. Our greatest financial advantage in retirement is being debt free -- no mortgage, no other debt. Otherwise, we've invested carefully in stocks, bonds and mutual funds and so far, so good. But our stash is modest and we are old enough to get Social Security and a small pension, so we aren't as concerned about generating immediate income. We're just trying to make sure our savings continue to grow. I really hope you find just the right investment for your savings!

Bob Lowry said...

Your blog is one I list on my blog so I check it regularly. Todays' post stirs up different feelings. One one hand, you identified the reality of banks that makes billions of dollars with our money but give virtually none of it back.

On the flip side is the risky search for alternatives. Mutual Funds are probably the safest of the choices available to us regular folks. But, as a collective, mutual funds don't do all that well, except for the fund manager and owners.

What's someone to do? The "normal" rules don't work anymore. Real estate? Another sink hole with no bottom in sight.

Best of luck. If you find the right combination I hope you let us know.

Mac n' Janet said...

We do have pensions, but still have money in the market that gives us extra money and a better return than CDs. Did we lose some money in the crash, yes, but we've made it back and more. Is it safe, no, but we can live with a little danger.

schmidleysscribblins.wordpress.com said...

My CDs have a return of 3.5% Reading your post today makes me think I am not doing so badly. David has his nest egg in something with more risk but a similar return...one of those AIG companies. We also have pensions and SS, although who knows what will happen before, on or after August 2, a scary proposition given two of our pensions are government annuities.

Douglas said...

Here's a tip (though it is an ETF)... NLY. It is currently paying 13+% and trading at about $18.65 or so. I would not buy it right now but wait for its next dip down into the $17 range. It pays quarterly. 3000 shares will give you a check for $1950 each quarter. It's a REIT so there is some risk. Then there is FT (Franklin Universal Trust) which is a CEF. It is trading on its high side now at around $6.62, yield is about 8% (.038 cents) paid monthly.

Then there are municipal bond funds but these seem heavily loaded with California bonds and I think they are risky. Still, their dividends are quite good at 7% or so and TAX-FREE.

A broker will tell you to stay away from these suggestions. I will tell you to be very careful about investing any "spare" (is there any such thing these days?) money.

I do, however, recommend Scottrade if you do decide to dabble in stocks or funds. I use it. It's only drawbacks are that it does not do dividend re-investment and you are pretty much on your own.

The stock market is scary for most of us and the ones who aren't afraid are likely to be like your brother-in-law. Fear is a good emotion when investing.

One last thing: My advice is worth what you paid for it.

Nance said...

OMG, I can't believe you've found some things you feel good about! Now, I've got to run 'em by my guy and see what he says. Do you want to know? Do I? He's so scared of my reaction if something he recommends responds poorly in this wonky market, he chiefly recommends that I keep things in cash and cross my fingers for a better day. As you've pointed out, that's not even better than nothing.

Tom said...

Many thanks for all your best wishes, and Bob Lowry, thanks for checking out my blog -- I'll come over to yours for a visit if it's okay.

I dunno where you got a 3.5% CD; it must be a cpl. of years old. I have a 1-year from Chase and it pays me all of 0.75%!

Douglas, I have heard of things like REITs and CEFs, but have not researched then. I just find it hard to believe that a 13% yield is real and sustainable; plus, I know those types of vehicles have complicated tax issues, with partial return of capital, etc. That puts me off, altho' perhaps I'm being too gun-shy about that.

Finally, Morrison, thanks for your condolences, but I hope (fingers crossed, fingers crossed!) that I won't need them! But you know, at some point you have to have a little faith that the system is going to work. Because if the stock market goes down and the economy goes down, then all those contracts involving pensions, retirements, employment, insurance -- they go down too. Let's hope the US is not Greece; and that we muddle through until the next big thing comes along.

Dick Klade said...

We've been getting CD returns over many years averaging about 4 percent. CDs we cashed recently have yielded slightly over 5 percent.

You do that by "laddering," a practice many brokers and advisors don't like to tell folks about. To set up a ladder, for example, take $5M, invest $1M in a five-year CD, $1M in a four, $1M in a three, $1M in a two, and $1M in a one. As each matures, reinvest it in a new five-year CD. Once the ladder is built, all your money is getting a five-year rate.

You'll have perfect safety, reasonable returns, and cash becoming available at intervals, which you can reinvest or use as you choose.

Right now, five-year CDs are only paying 2.8 percent or so. However, if you want to bet that big-time inflation is right around the corner, you can find financial institutions that will sell you a CD with a built-in "bump rate." By taking a quarter percent less than the published rate, you get the right to change the rate once during the CD lifetime to whatever the going rate is.

Laddering CDs probably is advice worth much more than you just paid for it.

Midlife Roadtripper said...

"Equity Income funds that produce income, that I can buy with no transaction fees and no loads,"

Sounds like you have a good handle on it. Best of luck. We don't have a pension either so will need to depend on wise investing.

Robert the Skeptic said...

We invested in real estate, rental homes to be precise. Our rentals and our residence is now paid off. Yes, the "market" values have taken a slide in the recent years, but the rent we collect has not. Rent is inflation proof as it usually rises over time; and we do that, raise the rent a modest amount every two years.

Houses are bargain basement cheap right now. The one thing that is assured is that people have to live somewhere! If it were not for our rental properties, we would NOT have been able to retire AT ALL!

The Accidental Retiree said...

Like Dick Klade, we also started laddering CDs a few years ago and have several that are still earning 4-5% Those will fall off the ladder in 2-3 years years, but maybe by then some better rates will come our way. Those laddered CDs have made us sleep easier at nights here lately, that's for sure.

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