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Are You On Track For Retirement?

According to the National Institute on Retirement Security, 92% of working households don’t meet the savings target they need to retire at age 67.

Where do you stand?

Look at this chart and let’s figure it out:

If you’re 45 with an annual income of $75,000… you should already have $210,000 set aside

If you’re 50 with an annual income of $100,000… you should be sitting on $450,000 by now

And if you’re 55 and used to living on a salary of $150,000… you should have already passed the million-dollar mark

With that in mind, look at this chart and find your current retirement number – the amount you should have saved as of today.

Then, ask yourself an honest question…

“Am I on track for retirement?”

If the answer is “yes,” then congratulations! You’re officially one of the 8%!

If the answer’s “no,” you’re among the 92% of us who aren’t anywhere close to having enough saved.

But don’t worry. There’s time to catch up. And over the next several weeks, I’m going to show you how.

Charles Sizemore Editor, Peak Income

Read more from Charles here, at Economy & Markets!

The Difference Between Good Inflation and Bad Inflation

It seems that some bad ideas never die.

President Trump rattled the markets last week by unexpectedly announcing his intent to impose a large 25% tariff on imported steel and a 10% tariff on imported aluminum. The market was already trending lower, but the tariff news was enough to make the bottom fall out.

The Dow closed Friday down more than 1,200 points from its highs on the week.

Now, by themselves, I don’t see these two tariffs as being particularly dangerous. Yes, cars and beer cans might get marginally more expensive. But it’s likely that most consumers would never know the difference.

While president, George W. Bush slapped some short-lived tariffs on steel, and Barack Obama did the same with imported Chinese tires.

Most economists agree that both sets of tariffs were mildly negative overall for American employment (jobs gained or saved in the protected industries were lost in other industries due to higher prices) and didn’t really accomplish what they ostensibly set out to accomplish.

The fact that Trump is considering slapping tariffs on steel is a pretty good sign that Bush’s steel tariffs a decade and a half ago did little to revive the domestic industry.

So, it’s not the steel and aluminum tariffs, per se, that caused the market to tank. It’s the fear that something worse is coming: an all-out trade war.

Trump has been known to shoot from the hip, throwing out an extreme idea before eventually reconsidering, backing off, or using it as a negotiating tactic. And based on the market’s action on Monday, it looks like investors are betting that this will be one of those cases. The tariffs may or may not pass, but fears of an all-out trade war seem to be receding.

That’s good. Because contrary to President Trump’s comments, you can never “win” a trade war. There are no winners. Only losers. Trade wars lead to rising prices and lower growth. Or, if you lived through the 1970s, stagflation.

The Fed has been desperate for years to generate a little inflation. The problem is that there are two kinds of inflation… and this is the wrong kind.

Inflation can be “demand-pull” or “cost-push.” Demand-pull is “good” inflation, the kind of inflation the Fed is trying (and mostly failing) to generate. This is inflation that is caused by rising demand. Consider ballooning professional athlete salaries. Stephen Curry makes a staggering $35 million per year playing for the Golden State Warriors because there is high and growing demand to watch him shoot a basketball.

The problem is that tariffs and trade wars don’t create new demand. They simply reduce supply and raise the cost of inputs. This is cost-push inflation, the kind of we had in the 1970s when OPEC restricted energy exports to the West.

A little demand-pull inflation wouldn’t necessarily be bad for the stock market. In fact, it’s the sign of a healthy economy and confident consumers.

But cost-push inflation from trade restriction is a very different animal.

The Dow and S&P 500 lost half their value in the 1973-74 bear market. And the 1930 Smoot-Hawley Tariff – arguably the dumbest financial move in the entire history of the United States of America – turned what might have been a garden variety recession into the Great Depression. The Dow lost 90% of its value before finally bottoming out.

Let’s hope cooler heads prevail and that it doesn’t come to this. I have to believe our leaders aren’t quite stupid enough to go down this particular rabbit hole again. But we should expect higher market volatility to be the norm until there is better visibility here.

In the meantime, you might want to stock up on beer. You know, just in case cans get more expensive.

Charles Sizemore Editor, Peak Income

Read more from Charles at Economy & Markets!

Why You Can Beat the Pros at their Own Game

In his prime, Julian Robertson was considered to be the godfather of the modern hedge fund industry. He started Tiger Management Corp. in 1980 with $8 million in seed capital and built it into a $22 billion hedge fund empire.

For most of the 1980s and 1990s, Robertson’s fund generated annual returns in excess of 30%, putting him in the pantheon of investing gods like George Soros and Warren Buffett.

Alas, the late 1990s tech bubble was his downfall… but not for the reasons you might think.

Robertson believed that technology stocks were in a massive speculative bubble, and he avoided the sector.

He was right, of course. But it didn’t matter. His investors lost patience after he underperformed the indexes for a couple years and jumped ship. Bleeding assets left and right, Robertson ended up closing his fund in 2000 and returned the money to his investors.

Ironically, Robertson closed up shop right as the bubble was starting to burst. The investors that stuck with him would have likely made really good money in the years that followed.

Another investor whose name you might recognize – a certain gentleman from Omaha named Warren Buffett – also massively underperformed the S&P 500 in the late 1990s. But Buffett, unlike Robertson, lived to trade another day, and went on to have a decade of solid outperformance.

So, why did Buffett’s Berkshire Hathaway survive, while Robertson’s Tiger Management die?

There’s really just one reason: Buffett never had to face redemptions.

Robertson faced the same issue most mutual fund managers face. He was required to give his investors their money back on demand. And when your profit model is based on a growing pool of assets under management, that’s a big problem.

If half of your investors leave, you just lost half your management fee. Yet you still have office rent and analyst salaries to pay, not to mention that house in the Hamptons and a country club lifestyle to maintain.

This is one of the reasons that most mutual fund managers are closet indexers… and chronic underperformers.

It’s too risky for them to make large bets on their high-conviction trading ideas. They can be right on a major market call… but off ever so slightly on the timing… and effectively be out of business.

Their investors are fickle and prone to chase whatever (or whoever) is hot. So most fund managers keep their head down, ape the S&P 500, and keep their fingers crossed that they don’t get fired.

Buffett never had this problem because Berkshire Hathaway isn’t a mutual fund or hedge fund. It’s a holding company.

Investors can – and do – fire Buffett all the time by simply selling their shares of Berkshire Hathaway the way they’d sell any other stock. But Mr. Buffett never has to pull out his checkbook to return capital to those leaving the way a mutual fund or hedge fund manager would.

As Buffett wrote in his 2017 annual letter, which was released last week:

Charlie [Munger] and I never will operate Berkshire in a manner that depends on the kindness of strangers – or even that of friends who may be facing liquidity problems of their own… We have intentionally constructed Berkshire in a manner that will allow it to comfortably withstand economic discontinuities, including such extremes as extended market closures.

Buffett has access to permanent capital via Berkshire Hathaway’s massive insurance and other business operations.

You and I don’t have access to that kind of capital. But we do enjoy Buffett’s freedom to maneuver. The capital in your brokerage account, IRA or 401(k) account is yours, and you can afford to be patient with it.

All investors and all strategies – even those that soundly beat the market over time – will also underperform for stretches. But if you know your model works, you can ride out the rough patches without worrying about going out of business.

The millionaire mutual fund manager in a suit might look like he’s sitting pretty, but his position is a precarious one. In Buffett’s words, he depends on the kindness of strangers. That will generally limit his ability to trade the way he wants… and he’ll end up watering down his performance by essentially copying the S&P 500 or some other benchmark index.

You have no such constraints. Use that to your advantage.

Charles Sizemore Editor, Peak Income

Read more from Charles at Economy & Markets!

Remember, You Are Part of the Market

I’m a sci-fi nut… and proud of it!

I’ve attended multiple Star Trek conventions, and I’m not ashamed to admit that I routinely use Spock’s neck pinch to silence my children when they become insolent. Frankly, it works, and who am I to argue with Vulcan logic?

At any rate, I spent the long weekend binge-watching the first season of Travelers, which you can think of as a darker, dystopian version of the 1980s and 90s sci-fi drama Quantum Leap.

In Travelers, what is left of the human race in a post-apocalyptic future travels through time by transmitting their consciousnesses into the bodies of a people living in today’s world. They then use their knowledge of the future to shape history and try to prevent the human race from self-destructing.

Naturally, saving the world requires cash. But being from the future, that’s not a problem. The travelers have knowledge of every recorded horse race in history and can raise cash at will by betting on the horses they know will win.

At least it starts out that way.

The longer the travelers live in the present, the more they alter the timeline. The changes they make – preventing a war here, stopping a disease outbreak there – have unintended and impossible-to-calculate consequences. And suddenly, their “can’t lose” horse picks start losing.

Financial markets work the same way.

Imagine that you invent a time machine today and that you travel back to the decade of your choice. You use your knowledge of market history to bet on the winners… and to avoid or even short the losers. And you can time your purchases to the day.

You’d make a killing… for a while. You’d likely become the richest man in the world within a few short years. But at some point, your exploits would become so legendary that every Tom, Dick and Harry would copy you. Your trading would become a self-fulfilling prophecy, and stocks you bought would soar because you bought them, and stocks you sold would collapse because you sold them.

Eventually, your trading activity would affect the flow of capital to the point that you would change history… and then your knowledge of the future would be all but useless, as that future would no longer exist.

Now, don’t get me wrong. I’d still love to give it a try! But alas, I do not have a time machine at my disposal.

The thing is, you can see the same principles at work in the market even without one.

Warren Buffett’s returns today are respectable, but they are a fraction of the returns he generated back in the 1950s and 60s. Back then, Buffett managed a couple million dollars and was capable of regularly generating 30% to 50% annual returns.

But today, his holding company Berkshire Hathaway is worth half a trillion dollars. Decades ago, Buffett could get in and out of a stock without moving its price. Today, at Buffett’s size, he can’t take a meaningfully large position in a company without instantly becoming one of its largest shareholders.

Plus, given the scrutiny with which Buffett is watched, millions of investors immediately pile into a stock as soon as they know Buffett owns it. Buffett isn’t an impartial observer. He moves the market.

Neither you nor I are time travelers, nor are we running hundreds of billions of dollars in capital like Mr. Buffett. But it’s easier than you might think to fall into the same traps.

Here are a few suggestions on how to avoid them:

To start, be wary of smaller companies or ETFs with limited trading volume. With a thinly-traded stock, it doesn’t take much to move the market. Even a $10,000 position can be hard to unwind in a hurry if you’re trading a penny stock.

Along the same lines, be wary of leverage. It really doesn’t matter how responsible you think you’re being. When leverage is involved, your portfolio is subject to getting wiped out during sudden bouts of volatility.

This is effectively what killed Long-Term Capital Management back in 1998. They effectively got the mother of all margin calls on what would have been, at lower levels of leverage, a sensible and conservative portfolio. It’s also what caused many of the short-volatility funds to blow up earlier this month. Any otherwise safe strategy can be made risky by piling on leverage.

And finally, always remember that, as a trader or investor, you are part of the market that you’re trying to exploit. This is what George Soros called “reflexivity.” Our view of reality (that a stock will go up in value) actually causes that reality to happen.

In other words, a stock rises in value because enough people believed it would rise in value, thus buying it and pushing the price up. True value is an abstract concept and one that doesn’t actually exist in the financial world.

Also, to any of you that might be diligently working on a time machine, please do me one favor. If you’re successfully able to go back in time, please ensure that my beloved TCU Horned Frogs never sign Kenny Hill to be quarterback.

While I understand that tampering with the timeline puts the space-time continuum at risk, you’d be sparing me the pain of watching him lead the Big 12 in interceptions, and that’s clearly worth the risk.

Charles Sizemore Portfolio Manager, Boom & Bust

One of the Last Truly Cheap Pockets of the Market…

2018 is stacking up to be a nasty year for bond investors. The 10-year Treasury yield has jumped from less than 2.5% to just shy of 2.9% in a matter of weeks.

And while that might not sound like a big deal, remember that rising bond yields mean falling bond prices. An investor holding a 10-year Treasury note would have seen the value drop by 3.4% since the start of 2018, which washes out more than a year of bond coupon payments.

Harry has written for months that he expects the 10-year yield to peak at around 3% before rolling over again, and that buying 10- and 30-year Treasurys at these yields represents a safe and profitable “trade of the decade.”

I agree.

But, in the meantime, let’s see what other yields we can find on offer.

Last week’s hiccup in the stock market didn’t have much of an impact on the S&P 500’s dividend yield. The index has yielded less than 2% for years, and prices haven’t fallen enough to materially change that.

Bonds sport almost respectable yields these days.

The 10- and 30-year Treasurys both now yield around 3%, which is close to five-year highs for both. But, keep in mind, the inflation rate sits near 2%… so “real” yield is hovering around 1%. (We see inflation rates falling over the next few years, but we’ll leave that conversation for another day.)

You’re getting a higher yield these days in the utilities sector, at around 3.3%. But dividend growth has been sluggish for years, and the sector faces an ugly competitive environment going forward as solar and other alternative energies make inroads.

Real estate investment trusts (REITs) are a more attractive option, sporting a current yield of more than 4%. The sector faces long-term challenges from the rise of e-commerce, but it’s also evolving to meet those challenges.

All the same, the spread between REIT yields and bond yields is a little lower than what’d I’d ideally like to see, so I’m not exactly backing up the truck to load up on REITs… at least not yet.

The yield picture gets a lot more interesting when you start looking at municipal closed-end bond funds (CEFs) and master limited partnerships (MLPs). You can put together a diversified basket of muni CEFs yielding over 5% – tax free.

To put that in perspective, if you’re in the 32% tax bracket, a 5.4% tax-free yield is the equivalent of a 7.9% taxable yield. That’s not too shabby.

I’m not allocating to muni CEFs just yet, as my risk management system had me leave the sector during the recent bond-market rout. But you can bet the sector is on my watch list.

I am, however, pushing into MLPs… and their 7% yields.

The MLP sector hit a major rough patch in 2015. The sector had become far too dependent on debt financing, and some of the biggest names in the space were forced to slash their dividends in order to pare back their debt to reasonable levels.

Well, three years later, the sector looks a lot healthier, yet investors are still gun shy about returning to it.

That’s good news for us. Their fear is what makes the 7% yields possible. MLPs are one of the last truly cheap pockets of the market, and we have our pick of the litter.

And in the February issue of Peak Income, I’m recommending one of my very favorite MLPs, one that I believe is priced to massively outperform in 2018 and beyond. Click here to find out more.

Charles Sizemore Editor, Peak Income

Read much more from Charles Sizemore right here, at Economy & Markets!

What If Your Gut Is Wrong?

I got an email last week I was hoping I wouldn’t get.

TradeStops, the service I use to keep track of my stop-losses, sent a message telling me that Albemarle Corp. (NYSE: ALB), which I had recommended in Boom & Bust back in 2016, had closed below the stop-loss I’d specified for readers.

I wrote a quick note the next morning to my subscribers recommending they sell their shares of Albemarle and move on.

Albemarle was a good trade for us, and I have nothing to complain about here. Readers walked away with 50% gains in the stock, even after the recent correction. By any measure, the trade was a success.

But it still hurt me to tell the readers to part with the stock because I just knew the recent selloff was a market overreaction. Nevertheless, I told them to sell. Here’s why…

It’s possible (and probably very likely) that my gut was right and Albemarle’s recent selloff was the result of short-term profit-taking that would quickly run its course. The long-term macro trends supporting the stock were still in place and nothing had fundamentally changed.

But what if my gut was wrong?

As a morality tale of why it’s important to be systematic and not simply trust your gut, consider the case of billionaire hedge fund mogul Bill Ackman of Pershing Square Capital Management.

Ackman made the news this month because he laid off nearly 10% of his staff, including – gasp! – his personal chauffeur.

You know times must be tough when even the driver is getting canned. But that’s what happens when you lack basic risk management. You get burned.

Ackman lost $4 billion betting big – and wrong – on Valeant Pharmaceuticals. At one point in time, Ackman had nearly 20% of his portfolio in that single stock. But because he owned so much of it (and because so much of his identity as a manager had become centered on it) he couldn’t sell when things started to turn south.

From peak to trough, Valeant lost 97% of its value… and Ackman rode it all the way down.

To put that $4 billion loss in context, Ackman’s total assets under management have fluctuated between about $11 billion and $20 billion the past couple years. So, needless to say, that $4 billion loss represented a big piece of his investors’ capital.

Ackman’s cardinal sin was his lack of discipline, and it’s likely he’ll never fully recover from this. Let’s play with the numbers.

Gains and losses aren’t symmetric. If a stock drops 10% on you, a 10% gain won’t get you back to breakeven. You have to earn 11%.

If you lose 50%, you have to earn 100% to get back to breakeven.

And if, like Ackman, you lose 97% on a stock, you’d need 3,233% returns just to get back where you started.

I don’t know about you, but not many stocks in my portfolio return 3,233%, or at least not in a timely manner. This is why it’s absolutely critical that you cut your losses early.

If you’re a good stock picker, you can easily recover from a 10% or even a 20% loss by simply making 11% to 25% on the next trade. That’s doable.

But you’re not going to recover from a 97% loss. That money is gone forever.

This brings up two critical risk management factors you need to consider whenever you make an investment:

Position sizing

Where to set the stop-loss

I think we can all agree that Bill Ackman had too much of his portfolio allocated to Valeant Pharmaceuticals. But how much is too much?

There is no hard rule here, but in my most aggressive portfolio I limit my position in any single stock to 10% of the portfolio. And in my less aggressive portfolios, I try to limit my exposure to 5% or less.

The way I look at it, if a 10% position were to go the wrong way on me and drop 20% to 25% before I was able to get out, the loss to the total portfolio would be a modest 2% to 3%. That’s an easily recoverable loss.

If you want to be a little more scientific about it, my friends at TradeStops have developed a sophisticated way to set position sizing based on historical volatility.

You probably know by instinct that something like Bitcoin – which can routinely move 20% or more in a single day – should be a smaller piece of your portfolio that, say, staid, boring ol’ Berkshire Hathaway.

But TradeStops will actually crunch the numbers for you and give you an allocation that’s optimized for current risk.

This brings me to the second consideration, knowing where to set the stop-loss.

Here, you’ll find different opinions, none of which are necessarily “wrong.”

William O’Neil’s Investor’s Business Daily recommends using a hard 7% stop loss on any new position, period. One size fits all. And there’s nothing wrong with that. A lot of investors have done well following O’Neil’s advice over the years.

A lot of newsletter writers recommend using a 20% trailing stop. And again, that’s not an unreasonable rule of thumb. It gives your investments a wide berth while also protecting you from large, devastating losses.

But again, my friends at TradeStops have gone a step further and put hard numbers to it. TradeStops will recommend an optimized stop-loss for each individual stock in your portfolio based on that’s stock historical volatility.

A more conservative stock might have a stop-loss set at less than 10%, whereas something like Bitcoin would have an optimized stop loss of around 50%.

In Boom & Bust and Peak Income, I use TradeStops to help me set my stop-losses. As a general rule, I’ll use TradeStops’ recommended stop-loss level as my baseline, though I may tighten the stops based on my market outlook or based on my specific objectives with that particular stock.

With a systematic approach, I take the emotion out of investing and, knock on wood, I’ve thus far managed to avoid taking any major losses in either newsletter.

If you’re interested in learning more about TradeStops, please click here. Me and Rodney recently sat down to talk with its founder and CEO, Richard Smith.

Charles Sizemore Porfolio Manager, Boom & Bust

Read much more from Charles Sizemore, here at Economy & Markets!

Where to Put Your Money in 2018

It seems I find myself in a bit of a conundrum. I write a newsletter, Peak Income, dedicated to finding profitable income investments at a time when bond yields are rising and income-oriented investments are coming under pressure.

As I write this, the 10-year U.S. Treasury yields just shy of 2.6%. As recently as September, the 10-year yield was touching 2%. That’s a big a move in a very short period of time.

Hey, I get it. Some of this is understandable. The U.S. economy has picked up steam of late, growing at over 3% in each of the past two reported quarters. And this was before the corporate tax reform package, which promises to give at least a mild boost to the economy.

But what does this mean for bond yields? And does investing for income still make sense in a market like this?

What’s Next for Bond Yields?

Inflation – or the expectations for inflation – is the single biggest factor in determining the direction of bond yields.

On this count, I don’t think we have much to worry about. As Harry has written for years, aging populations are deflationary as older consumers tend to borrow and spend than younger and middle-aged consumers. You don’t see a lot of 70-year-old Americans buying expensive new homes or cars. They’re far more likely to be downsizing and adjusting their lifestyles to stay within their retirement budgets.

But there is far more than just demographics at work here. We’re also in the midst of one of the biggest technological shifts in history.

One of the biggest themes of last year was the “Amazon effect,” and I don’t see that slowing down any time soon. Amazon disrupts every industry it touches, lowering prices and forcing new efficiencies into the supply chain.

But it’s not just Amazon. In virtually every consumer-facing industry, kiosks and smartphone apps are replacing human labor. In everything from McDonald’s to your local airport, expensive humans have been replaced by cheaper machines or software. And should we start to see a hint of inflation, that trend will only accelerate.

Even Bitcoin, despite being one of the greatest bubbles in history, is deflationary. The blockchain ledger technology that supports Bitcoin is the future of data, and the blockchain is vastly cheaper to support and requires far less in security outlays.

Sure, we may continue to see inflation in certain pockets of the economy, like healthcare. Because of its dependence on a doctor’s or nurse’s one-on-one time with a patient, healthcare seems to be the one industry that has (thus far) been immune to the deflationary effects of new technology. But, overall, inflation should be very tame going forward.

What does this mean for bond yields?

They may go a little higher in the short term. But a long-term rise in yields such as that of the 1970s isn’t in the cards.

This is a long way of saying that I expect my income recommendations in Peak Income to do just fine in 2018.

Where Are the Best Bargains in 2018?

I feel good about my U.S. income recommendations this year. But that hasn’t stopped me from looking elsewhere for market gains.

Peak Income does more than just invest in bonds or bond funds. In fact, most of the portfolio is invested in high-yielding stock funds that offer competitive capital gains in addition to current income.

But today, U.S. stocks are looking pricey. After more than eight years of uninterrupted bull markets, the S&P 500 today, as measured by the Shiller P/E ratio, is as expensive as it was in late 1997… in the final years of the dot-com mania.

Expensive stocks can always get more expensive. Fed Chairman Alan Greenspan made his famous “irrational exuberance” comments in late 1996, and stocks went on to double in price again before eventually crashing in 2000.

But that’s not a game I want to play. Rather than trying to squeeze out a little more profit from the late innings of a long bull market, I’m hunting for real value. And across Europe and most emerging markets, stock valuations are cheaper by 30% to 50%.

A cheaper price doesn’t guarantee higher returns. But it certainly puts the odds in our favor.

In the last issue of Peak Income, I recommended a closed-end fund with exposure to China, Taiwan and Hong Kong. It trades at a deep discount to net asset value and yields a fat 8% yield.

An emerging market play like this is not without risks, of course. But in 2018 I see this as our best opportunity to make outsized profits while also collecting a nice stream of income. Click here to learn more about how we’ll do it.

Charles Sizemore Editor, Peak Income

Get more advice on how to navigate the 2018 financial landscape from Charles Sizemore, here at Economy & Markets.

Only Start a College Fund If…

Nothing – and I mean nothing – will change your life as dramatically as the birth of your first child. It’s a wonderful moment and one that I hope everyone gets to experience. But it will turn your life upside down.

That chic apartment downtown no longer makes sense… nor does that sporty two-seater car. And enjoying that cappuccino on your patio after sleeping in late on Saturday? Yeah, maybe you can do that again in 18 years.

My wife and I decided to move to Peru, where she’s originally from, for the birth of our first son. And, let me tell you, being a Peruvian dad is great. It’s like being an American dad circa 1950. For the first three months of my son’s life, I wasn’t even aware that babies could smell bad. He was always perfectly clean and presented to me like a trophy.

My, how it all went downhill when we moved back to Texas, had no more nannies, and my wife actually expected me to get off my lazy butt and help. It suddenly wasn’t “acceptable” for me to lounge around smoking cigars, chatting it up all day with the neighbors. Oh, well… it was great while it lasted.

An Open-Checkbook Kind of Thing

Perhaps more than anything, starting a family changes your financial priorities. You have expenses you never knew existed… and that massive looming liability of college education.

I routinely get questions about financial priorities following the birth of a child, but without a doubt this is the most common:

Should I start a college fund?

Absolutely, you should start a college fund.

But only after you have already maxed out any 401(k) or IRA contributions for the year.

You ordinarily might look to Educational Savings Accounts (ESAs) and state 529 plans to put some of your income away for your child’s future. These are fantastic ways to save for college.

With them, your dividends, interest and capital gains grow tax-free, so long as you eventually use them for college expenses.

But unlike a traditional IRA or 401(k) plan, you get no tax break for the contribution itself.

Then there’s this dirty little secret: IRA funds can be withdrawn penalty-free to pay for the educational expenses of a child, though you may still owe taxes. If it is a traditional IRA, you would have to pay taxes on any withdrawals. And with a Roth IRA, you would only owe taxes on the part of the withdrawal that was considered “earnings.” In either case, there are no penalties.

Avoiding the Tax Man

As for your 401(k), these funds cannot be withdrawn penalty-free for educational expenses (unless you are age 59.5 or older). But you can roll your 401(k) balance into a Rollover IRA and then use those funds, penalty-free, for your kids’ college expenses. And while I don’t generally recommend borrowing against your retirement plans, the option is there, and it would have the added bonus of not incurring any taxes.

But if ESA and 529 balances can be used tax-free, isn’t that still better than using IRA money?

Based on taxes alone, yes. But there are other factors to consider.

To start, you know you need money for retirement. This is an absolute certainty… as certain as death and taxes. But your son or daughter may or may not need money for college.

They may get a scholarship…

Or may choose to forgo college and start their own business…

Or join the military…

Or, for all you know, join a roving carnival circus!

Besides, at the rate things are changing, who knows if going to college will make economic sense 18 years from now. Or if, as is the case in most of the rest of the developed world, a university education becomes “free,” in the same sense that public high schools are free today. (OK, “free” means funded by the taxpayers – you and me – but you get my point.)

The fact is, there are a lot of unknowns when it comes to educational expenses, so it makes sense to prioritize your savings in your retirement plan first. And you also want to make sure you’re allocating those savings to the right funds. I run a service called Dent 401k Advisor designed to help you position your retirement funds, as well as Peak Income, where I recommend low-risk investments in undervalued parts of the market in order to generate consistent monthly income.

Once you’ve maxed out your 401(k) plan for the year ($18,500 in salary deferral in 2018) and taken advantage of any employer matching, save that next marginal dollar in an ESA or 529 plan. Both are fine savings vehicles. But again, they only make sense once you’ve exhausted your tax-advantaged retirement options.

Charles Sizemore Editor, Peak Income

P.S. IRA distributions are considered “income” and thus may affect your kids’ eligibility for financial aid. So, make sure you consider that when the time comes.

Get more info from Charles Sizemore and the rest of the Dent Research team, here at Economy & Markets

How to Plan for Retirement in 2018

It’s a new year… which means a new set of retirement savings deadlines. So it’s time to do my obligatory beginning-of-the-year nagging.

Think of it as a New Year’s resolution for your 401(k) plan.

If you’re self-employed, you have until April 17 to make your 2017 contribution to your Individual (Solo) 401(k) or SEP IRA. And all taxpayers, whether regular W2 employees or self-employed, have until April 17 to top off their Traditional or Roth IRAs for the 2017 tax year.

But for the rest of us investing in a good, old-fashioned corporate 401(k) plan, January 1 represents the start of a new savings year.

Now is the time to figure out your budget for the year. The IRS raised the contribution limit on 401(k), 403(b) and 457 plans to $18,500, or $24,500 for employees 50 or older.

And remember, these are just the funds you can defer from your annual salary. Any employer matching or profit sharing is additional.

So…

You likely have 26 paychecks this year. If you want to max out your 401(k) plan and take full advantage of the tax break, you’ll want to set aside $712 per paycheck (or $942 if you’re looking to max out $24,500).

That should be doable. But if you feel you can’t realistically get by on a reduced paycheck, you might have some other options. Many companies pay out bonuses in the first quarter. If you think you’ll be getting a bonus, ask your HR department to pay it into your 401(k) plan.

Really make an effort to make these changes this week. The longer you wait, the harder it becomes to meet your savings goals for the year…

Contribution limits for IRAs and Roth IRAs remains unchanged at $5,500 per year, but the eligibility rules have gotten better.

If you or your spouse have access to a 401(k) or other retirement plan at work, you can still deduct a contribution to a Traditional IRA if your income is less than $63,000 (or $101,000 for a married couple filing jointly).

At incomes higher than $63,000 or $101,000, your ability to deduct starts to get phased out until it is eliminated altogether at $73,000 and $121,000, respectively. In 2017, the phase out ranges were $62,000 to $72,000 and $99,000 to $119,000 for single and married taxpayers, respectively.

The rules for Roth IRAs have gotten better, too. In 2018, you can make a full $5,500 Roth IRA contribution if your income is less than $120,000 ($189,000 if married filing jointly).

The amount you can contribute starts to phase out after those amounts and is eliminated completely at $135,000 for single taxpayers and $199,000 for married taxpayers filing jointly.

So, bottom line, the IRS is letting you keep a little more of your money in 2018. But in order to take advantage of it, you’ll probably need to adjust your contribution levels by logging into your plan’s website or letting your boss or human resources contact know.

How Much Is Enough

I wrote a little bit about this recently, but it’s worth reiterating here as we look ahead to 2018.

If you’re a Baby Boomer, it’s very likely that you have retirement on your mind. Even if you love your job and have no immediate plans to stop working, there is a certain peace of mind in knowing you can walk away when the time comes.

If you’ve regularly maxed out your 401(k) plan (or have even gotten close), you may have hundreds of thousands or even a couple million dollars sitting in your account. But with the cost of living what it is these days, can you be sure it’s enough?

Go get a pen and a pad of paper, and let’s do a little exercise. First, write down a realistic figure of what you expect your retirement expenses to be.

The old rule of thumb used by financial planners is that you’ll need an income stream of around 70% to 80% of your pre-retirement income to fund your retirement.

But if you ask me, that number is completely arbitrary.

What if your home mortgage will be paid off by then? What if your current income is artificially lowered by large contributions to your 401(k)? What if you intend to move to a lower-cost area once retired?

A better way to do this is to take an average of your credit card bills, utilities and other identifiable expenses over the past couple of years.

If you expect that your house will be paid for by the time you retire, you can subtract your mortgage payment from the calculation, but be sure to leave an allowance for property taxes and insurance. Even once the mortgage is paid off, you never really “own” your house.

Once you have that estimate, pad it by at least another 20% to 25%. You likely forgot a few expenses, and it’s better to give yourself a little wiggle room.

Now that you have an estimate for your annual expenses, subtract any guaranteed payments, such as Social Security, a fixed annuity or a private defined-benefit pension plan.

So let’s say you estimate your expenses will be $100,000 per year in retirement and that Social Security and a pension from an old job will cover $40,000. Your retirement savings will need to cover the remaining $60,000. Assuming a 4% withdrawal rate, you’d need a nest egg of $1.5 million ($60,000 / 4% = $1.5 million). And to play it safe, I would want my nest egg to be at least 20% higher than what this estimate would suggest to allow for the possibility of a bear market.

Do the math for yourself. If your retirement savings make the cut, congratulations. You can retire stress-free.

But if your nest egg is falling short, you might need to rethink a few things. Perhaps you’ll need to work longer or downsize your home.

As a better alternative, I recommend you give my income newsletter Peak Income a read. The investments yield between 5% and 10% and we have strict risk management to limit losses. If you’re looking for investment to fill an income gap, click here to learn more.

If changes are needed, you’ll be better off acting sooner rather than later.

Charles Sizemore Editor, Peak Income

Hear more retirement planning advice from Charles Sizemore and the rest of the Dent Research team, here at Economy & Markets

How to Prepare for Higher Rates

It was already a busy month just two weeks into November when we released the latest issue of Peak Income to subscribers.

Before embarking on a trip to Asia, President Trump had nominated Jerome Powell to replace Janet Yellen as Chair of the Federal Reserve, and not long after Republicans in the House of Representatives introduced a tax reform bill that could, well, change a lot of things. The Senate has since followed suit with its own proposal.

For our purposes in Peak Income, both bits of news are positive for our income-generating approach, as I detail in the issue. While tax reform is still very much a fluid situation, I want to share with you today about why the Fed news is particularly well suited for us.

Tapping Powell as Fed Chair is seen as more of the status quo. He’s a member of the Fed’s Board of Governors and was widely viewed as the safe choice and the pick that Wall Street wanted. That’s good for us. We’ve done just fine under Yellen, and I expect more of the same under Powell.

John Taylor, the other Fed Chair finalist and a respected economics professor at Stanford University, was seen as a lot more dogmatic about raising rates at this point in the business cycle.

He suggested that rates should be three times higher than they are today (3.75% versus 1.25%). Had Trump nominated Taylor over Powell, things would likely have gotten dicey in the bond market. But we don’t have to worry about that.

I think Powell will likely continue Yellen’s slow, gradual approach to normalizing monetary policy.

But the market is expecting Yellen to give us one more rate hike on her way out the door.

And I’m betting that Powell will want to prove his bona fides by giving us at least one rate hike immediately after taking office in February.

No Fed chair wants to start the job looking weak, so a quick hike will allow Powell to establish authority.

We should expect short-term rates to go higher for a while.

Yet, rather than rise in anticipation of this, floating-rate funds have spent virtually all of 2017 drifting lower.

This creates a nice opportunity to capture a high current yield today while getting the potential upside of floating rates essentially for free.

We already have a little exposure to floating-rate securities via a fund that we’re up about 14%, and I expect more gains to come.

But this subsector is attractive enough to warrant the addition of another position, and I’m recommending one of the largest and most liquid funds in this space.

The great thing about this floating-rate fund is that it’s a nice addition to a fixed-income portfolio because they tend to have minimal correlation to the broader bond market.

Consider the past year.

Most bond prices tanked after last year’s election, as the market expected the incoming administration’s policies to be inflationary. But, within months of Trump taking office, bond prices started to firm up again, as it became more and more obvious that the wheels of government would continue to turn slowly.

For most of 2017, bonds have performed exceptionally well, taking a lot of investors by surprise. (Though not us, I can proudly say; I’ve consistently written over the past year that the post-election bond rout would be a blip and nothing more.)

Yet floating-rate securities have experienced precisely the opposite. Prices surged after the election in anticipation of the higher rates that would follow imminent inflation. When inflation failed to materialize, money started to leak out of the sector.

Today, a year after the election, the fund I’m recommending to my subscribers is right back where it started. It’s a great value that I expect to return anywhere from 17% to 27% and give you consistent income, a bedrock of anyone’s retirement plans.

You can think of this floating-rate investment like a free bonus option. If rates stay more or less unchanged, the “option” expires worthless. That’s OK, as we didn’t exactly pay up for it at today’s prices.

If the Fed pushes short-term rates significantly higher, great! Our “option” kicks in.

In one case, we win… and in the other, we don’t lose. Those are odds I’m happy to take.

Click here to learn more.

Charles Sizemore Editor, Peak Investor

Read much more from Charles and the rest of the Dent Research team, here at Economy & Markets!

How to Keep Your Retirement Years Golden

I got a nice reminder of why I do what I do a few weeks ago when I met my dad for dinner.

As we sat down to eat, I could tell there was something he wanted to tell me, but he didn’t want to just blurt it out. But, after a few minutes, he couldn’t wait any longer.

“I spoke to your sister earlier today, so she’s already gotten the news. I’ve decided it’s finally time,” he said. “I’m going to retire at the end of this year.”

This news didn’t come as a total surprise. He’s talked about hanging up his hat for a couple years now, and he’s definitely an appropriate age for retirement. But I could tell that he really struggled with the decision. This was not something he chose to do on a whim.

I could also tell that he was apprehensive about it.

He’s in a good spot financially. He lives modestly. He’s paid off his house, he’s already drawing Social Security, and he’s accumulated a decent nest egg over a lifetime of work.

But walking away can be psychologically difficult, particularly for men, who tend to base their identity and sense of self-worth around their careers. When they quit working, they often have a hard time figuring out what to do next.

It’s a major step into the unknown… and it’s scary.

When you’ve been gainfully employed for nearly 50 years, it’s jarring to suddenly have your primary source of income dry up. And this isn’t the 1970s.

Very few Americans enjoy the security of a traditional pension. They’re on their own at a time when the yields on bonds, CDs, and most dividend stocks are near all-time lows.

So, again, this is why I do what I do: analyzing, thinking, and writing about the markets. There are tens of millions of Baby Boomers approaching that same fork in the road that my father just reached. If I can make that transition into retirement a little easier (and a little more comfortable), then I’ve done my job.

I write Peak Income, my income-based investment newsletter, under the assumption that you could put your entire retirement nest egg in the plan.

I try to manage the risk in such a way that, were you to invest your total portfolio in Peak Income’srecommendations, you wouldn’t be at risk of taking major losses. And indeed, right now, 20 of our 23 positions show positive returns.

But I would never recommend you put your entire portfolio in any single strategy, no matter how much I like it, because I’ve been doing this long enough to know better.

Even investing gods like Warren Buffett and George Soros are humble enough to spread their bets among different strategies. It would be reckless not to.

So, with that said, where does Peak Income fit into the mix?

My rule of thumb is 20% to 25%. I recommend limiting your exposure to one single strategy to no more than about 20% to 25% of your portfolio. This isn’t a hard, scientific number. But it is a level I consider prudent.

The investments I recommend in Peak Income are generally quite safe, particularly given how tight I keep our stop-losses. Chances are good that we’ll never take a large loss.

But, like anything that trades on the stock market, they’re prone to occasional bouts of volatility. And, as we saw in 2008, no matter how much research you do, there can always be some new risk that comes out of the blue.

So, again, this is why it makes sense to diversify, and not just among stocks or funds within a portfolio. You should also diversify among strategies.

Speaking of that, I’m hoping to have some good news to report within the next few months.

I’ve already hinted a few times that I’m working on a new project for my readers, coding out a new model that combines the best of value investing with the best of momentum investing.

Early results look very promising, and I hope to have an announcement soon.

Charles Sizemore Editor, Peak Income

Read more from Charles and the rest of the Dent Research team here, at Economy & Markets!

The Market is Irrational, and I’m OK With That

John Maynard Keynes is widely considered one of the most influential economists of the 20th century and the founder of modern macroeconomics theory – but I don’t agree with a lot of his body of work.

After all, virtually every government in the world uses Keynes’ theories to justify perpetual budget deficits in the name of fiscal stimulus. (I suppose in Keynes’ defense, he also advocated that governments run budget surpluses when the economy is strong so as to balance the budget over a full economic cycle. Someone might need to remind Congress of that…)

But while I have my differences with Keynes as a policy wonk, I actually tend to agree with him when it comes specifically to the markets.

After losing his shirt in a currency bet gone wrong, Keynes famously commented, “The market can remain irrational longer than you can remain solvent.”

I’m reminded of those words when I look at today’s stock market.

According to FactSet, S&P 500 earnings grew 2.1% last quarter, and revenues grew 5%. Those aren’t exactly numbers that make you want to light your cigar with a burning $100 bill.

Now, Hurricanes Harvey and Irma clearly had an impact last quarter, but earnings and revenue growth for full-year 2017 are only expected to be 9.1% and 5.8%, respectively. Those aren’t terrible numbers, but they’re hardly enough to justify today’s valuations. The 12-month forward P/E ratio just hit 18 – its highest level in 15 years.

But if you’re thinking about betting against this market, I would tread very carefully. This is starting to feel a little like the 1990s again…

Do you remember when former Fed chairman Alan Greenspan warned of “irrational exuberance” in the stock market? Contrary to popular belief, it actually wasn’t near the top of the dot-com bubble. He uttered those words in December of 1996… more than three full years before the bubble finally burst.

Greenspan was right, of course. The market already looked frothy in 1996. But it got a lot more frothy before the whole thing crashed and burned. Had you shorted the market at the time of Greenspan’s quote, you would have been wiped out. The S&P 500 nearly doubled between then and the eventual peak.

I’m the first to admit that I don’t know when the music stops. But I’m also perfectly fine with that because my colleagues and I are prepared whether the market goes up, down or sideways.

As a case in point, Adam O’Dell has used intermediate trend following strategies to make money for his Cycle 9 readers since 2011. And his newest offering – 10X Profits – has generated fantastic profits trading volatility itself. Whether the S&P 500 doubles from here or crashes tomorrow, Adam’s algorithmic trading models should keep trucking along, doing what they do best.

I could make the same claim for Rodney Johnson and Lance Gaitan’s trading services. Rodney’s Triple Play Strategy runs a concentrated stock portfolio based on momentum indicators. It rides hot stocks higher and avoids the laggards. And Lance routinely generates triple-digit gains trading options on bonds. Neither of these strategies depends on the market going higher from here.

And then there’s me. My beat is generating dividends, and the recommendations in my Peak Income letter sport an average dividend yield of 7%.

Of course, a nasty bear market can erase many years’ worth dividends, so I’m very strict about setting and raising stop-losses to protect our gains along the way. Should the bear start to growl tomorrow, my readers would walk away with minimal damage to their nest eggs.

Harry’s research suggests that the market could head south before the end of 2017. (To hear more about that in Harry’s own words, sign up here for free to catch his special presentation on Wednesday.)

If it does, I say bring it. We’re ready.

But if that irrational market just keeps getting more irrational, I’m perfectly fine with that as well.

We’ve already booked solid returns this year. So long as the market keeps throwing fastballs down the middle, I’m happy to keep swinging.

Charles Sizemore Editor, Peak Income

Read more from Charles Sizemore, Harry Dent and the rest of the Dent Research team, here at Economy & Markets!

What If It’s the 1990s All Over Again?

The 1990s were fun.

The internet was new, as was high-end coffee for most Americans.

You can say what you want about Starbucks, but do you even remember what pre-1990s canned Folgers tasted like? They wouldn’t serve that to prisoners on death row today. It would be inhumane!

The Cold War had just ended, gasoline was dirt cheap, and rock music was in the midst of its most creative decade since the 1960s.

The federal budget was balanced for the first (and last) time in decades. And, best of all, we had the turn of the millennium to look forward to.

So, yes, the 1990s were fun…

But the most fun of all was to be had in the stock market. It was the biggest stock bubble since the Roaring 1920s, and cheap online brokers made the market accessible to the masses. A lot of people got rich in the 1990s…

Let’s flash forward to today. After eight years of nearly uninterrupted bull market, it’s starting to feel a little like the late 1990s again.

To show you what I mean, let’s take a look at the Cyclically-Adjusted Price/Earnings Ratio (CAPE), or the Shiller P/E, named after Yale professor and economist Robert Shiller. The CAPE compares current S&P 500 stock prices to a 10-year average of companies’ earnings.

Today, the S&P 500 sits at a CAPE of just over 30, putting it at the level of 1929… right before the Great Crash. The CAPE has only been more expensive one time in the entire history of the stock market: the 1990s tech bubble, when it topped out at 44.

To put that in perspective, today’s CAPE is 83% higher than the long-term average…

Of course, before the CAPE hit 44 at the end of 1999, it had to pass through 30. That happened in mid-1997. So, for nearly two and a half more years, the market went from being “crazy expensive” to “even crazier expensive.”

I written for over two years now (see “Flat Returns for the Next 8 Years?”) that stocks are not priced to deliver good returns over the next decade. In fact, if history is any guide, they’re priced to lose money.

But that doesn’t mean they can’t go higher first.

So, what if…

What if we have a repeat of the 1990s and stocks just keep getting more expensive for another couple of years?

Sure, it would be irrational. But it was irrational back in the ‘90s too, and yet it still happened. And it would be just like Mr. Market to do what no one expects him to.

So, again… what if?

Should we just throw all caution to the wind, and buy and hold on for dear life?

Well, you could do that, but I wouldn’t recommend it. After all, we all know how the 1990s bubble ended. The tech bubble burst, and in the ensuing bear market the S&P 500 lost more than half its value.

My recommendation is to ride the market higher but keep your stops relatively tight. That’s the approach I’m taking in both Boom & Bust and Peak Income, and it’s working.

As I write, four positions in the former are sitting on double-digit gains, including one with over a 70% profit. In the latter four of our 22 income-generating positions have gained more than 19%, with six others in double-digits.

I’m talking about total returns, which include dividends, rather than just price returns. Whether the market goes up, down, or sideways from here, getting paid a regular stream of dividend income can help smooth out your returns.

And, perhaps most importantly in these market conditions, try taking a more nimble approach to your trading.

Adopt a strategy that can make money whether the market goes up, down or sideways, and gives you an opportunity to profit from any sudden changes. That’s where my friend Lance comes into play.

He’s got a solution to my “What if?” scenario, whether I’m right and it’s the 1990s all over again, or even if I’m wrong. Click here to sign up for his special event next week where he’ll explain all the details.

Charles Sizemore Editor, Peak Income

Get much more from Charles and the rest of the Dent Research team, right here at Economy & Markets!

Why It’s Time to Think Like a Roman

Years ago, when I was earning my master’s degree from the London School of Economics, I was known to skip out of lectures a little early on Fridays, throw on a backpack, and do some exploring on the weekends.

With just about anywhere in the U.K. or Europe accessible within a few hours, my decision on where to go was usually made by price. (I was, after all, on a grad student’s budget.)

Train tickets to northern England were cheap, so one September weekend I decided to hike along Hadrian’s Wall, the ancient boundary between Roman Britain and the barbarian north.

The wall stretches for 73 miles, mostly through sparsely inhabited farmland. It’s beautiful – in a harsh, rugged sort of way.

“Why here?” I asked myself as I hiked the Hadrian’s Wall Path.

There were other sites that could’ve worked as a defensive fortification. The island is thinner and a wall would be easier to defend further north in the Scottish lowlands. Or why not simply forget the wall, push northward, and conquer all of Scotland too?

No one really knows why the Romans built the wall exactly where they built it, but I have my own theories.

It came down to an analysis of risk versus reward.

Any military excursion puts lives and treasure at risk. But the added return of pushing into modern-day Scotland was minimal. (And the Scots wouldn’t invent golf or Scotch whiskey for another thousand years.)

Financing a war where the only spoils would be sheep and a craggy, windswept land inhabited by barbarians made little sense. The Romans were far better off drawing lines and consolidating what they already had.

That’s basically how I feel about the high-yield corners of the stock market right now.

It’s not that I think a crash is necessarily imminent; if I did, I’d recommend to my Peak Income readers that we lighten up on our existing income-producing positions, and I am distinctly not doing that…

This is more a feeling that, at current prices, the potential upside of adding new positions might not be worth the potential downside, particularly now that we’re in one of the market’s most dangerous seasonal periods.

Major corrections can come at any time of year, of course, but they tend to happen around September and October.

And, furthermore, we now have 22 open positions in the portfolio, many of which are recent additions. Before I added anything new this month, I thought it reasonable, and smart, to let what we have season a little.

So, in this month’s issue – in a more detailed and comprehensive way than I ever have before – I go through our existing portfolio recommendation by recommendation, to review why we own what we own and what our game plan should be going forward.

If you aren’t already a subscriber, it’s a perfect time to try Peak Income. If you missed it, I give “buy” or “hold” signals for all 22 positions in our model portfolio, and I re-recommend one of my earliest picks, laying out all the reasons for all the moves.

What I also really tried to drive home in the September issue is why bond yields are extremely important to what we do. All income-focused securities tend to react similarly to market conditions, which makes sense. They’re subject to the same buying and selling pressures from investors.

Lower bond yields mean higher bond prices… and higher prices for anything tied to bonds. A lot of our success so far in Peak Income – we currently have three positions with greater than 20% gains, seven others in double-digits, and only one showing a loss – has come from being willing to buy what I call “private income funds” at times when other investors panicked about falling bond prices.

Their overreaction was our opportunity.

Today bond yields are higher than they were two weeks ago, but the trend throughout 2017 has been one of falling yields.

I’m always looking out for catalysts that might cause yields to spike. And, at the moment, our biggest risk, oddly enough, is a functional government.

One of the reasons bond yields have slumped is that Mr. Market is losing faith that the pro-growth Trump agenda, including tax cuts, will pass. Slower growth means lower inflation, which, in turn, means lower bond yields and higher bond prices.

So a do-nothing government actually works in our favor.

I’m not going to suggest we sell everything and run for hills if Congress and President Trump suddenly discover how to work together. But I’d definitely be on high alert for a yield spike and would likely keep our stop-losses even tighter than usual.

That, too, is risk versus reward thinking, and it’s why I sometimes need to remind myself to do as the Romans did.

Charles Sizemore Editor, Peak Income

Much more from Charles Sizemore and the rest of the Dent Research team at Economy & Markets

The Right Value for an Overheated Market

“Private equity” can conjure entertaining mental images. I’ve often asked friends to describe what comes to mind for them when I mention the phrase.

Here’s a sampling of what they’ve said: An older man in a fancy suit enjoying a single-malt scotch in a private New England club… who takes perverse pleasure in looting a company of its assets before firing all the employees and selling whatever’s left for spare parts. (It’s the old “buy, strip, and flip” routine.)

Or, perhaps that same guy is enjoying a Churchill cigar while playing a round of golf and casually plotting the same fate for some honest manufacturing plant in the Midwest.

Hey, stereotypes are stereotypes for a reason, and, it’s true, successful private equity fund managers, the people who run companies like Blackstone or KKR, tend to make good money. But they’re generally not the cynical villains they’re made out to be.

In fact, private equity firms fill a critical void in the markets, providing growth capital to companies that would have a hard time getting it otherwise. But more than just growth capital, they also often provide management expertise to the companies they fund, regularly taking an active, strategic and tactical role.

Think of it like this: When you buy a stock, you’re a passive owner. You take no active role in running the business.

Well, that’s not at all how a private equity manager operates. When they plow money into a company, they’re in the trenches with management.

In a nutshell, private equity firms invest in non-public (i.e., not traded on the stock market) companies. The typical investment is a multi-year deal in what you might think of as a “middle market” company, larger than a startup but generally much smaller than your typical public company.

Perhaps the highest-profile company in the world that still depends on private equity funding is the ride-hailing service Uber. But Facebook, Twitter, Snapchat, and a host of other companies you might use on a daily basis all depended on private equity financing earlier in their lives.

I don’t regularly read The Wall Street Journal. Nothing against the venerable old rag, but I don’t find it to be particularly helpful for how I invest.

I’m a value investor, and I enjoy digging through company financial statements for gems. I’m unlikely to find them by reading a recap of yesterday evening’s earnings announcements or a generic analysis of the most recent jobs report.

But I do occasionally skim the Journal’s headlines. This recent one really got my attention:

Investors Pile into Private Equity at Greatest Clip Since 2013

It’s interesting and telling that, as the U.S. stock market hits all-time highs on a nearly daily basis, a lot of smart money is pulling out of the stock market and piling into private equity.

I get it. I’ve said for months that stock-market bargains are getting harder to come by. Things are just overvalued in the U.S., which is why I recommended investing in Europe earlier in the year and why you see guys like Adam recommending recent trades in places like China, Canada, and Mexico.

And while I’m certainly not selling yet, I’m keeping my stop-losses tighter than usual to lock in profits and avoid a potential bear-market mauling.

It’s also worth noting that, with the stock market shrinking (yes, you read that right), private equity is increasingly taking the place of traditional stock market equity.

In the past 20 years the number of companies traded on the stock market has dropped by 37%. Increased regulation following the 2000-to-2002 and 2007-to-2009 bear markets has made it more of a hassle to go public, and many companies are choosing to avoid the game and stay private.

The thing is, very few mom-and-pop investors have access to private equity. But, as I shared with my Peak Income readers earlier this month, rather than recommend they invest in a typical private equity fund – which could involve a minimum investment of tens of millions of dollars and a total lack of liquidity and transparency – I’ve got an alternative.

It’s designed for regular, everyday investors, and gives you access to investing in middle-market American companies. Think Main Street, U.S.A., instead of Wall Street.

What’s more, even if these companies run into trouble, you’ll be protected and still enjoy a constant revenue stream, with an attractive 7% dividend, and special tax breaks to boot.

And from what I’ve seen from this private equity fund, you might even get a couple pleasant surprises to boost your returns too. Its disciplined management team likes to reward its shareholders steadily and responsibly.

That’s hard to beat.

I detail how and why we’re taking advantage of the value in the August issue of Peak Income. If you’re not already a member, subscribe today.

Charles Sizemore Editor, Peak Income

Read more from Charles and the rest of the Dent Research team at Economy & Markets!

The Simple Reasons Why Amazon is Not a Monopoly

There’s a Much Bigger Problem for Retail

I recently Google searched the term “Amazon monopoly.” It returned over 4 million results.

Now, a couple of those hits were links to the Amazon.com product page for the Monopoly board game we all grew up playing as kids.

(I was delighted to see there’s a Game of Thrones edition, complete with a direwolf token and King’s Landing as Boardwalk.)

But the majority of the search results were articles about Amazon’s growing dominance of retail, and its potential threat to competition as a monopoly.

Amazon is big, and it’s getting bigger every day.

But it’s not a monopoly. Not even close.

Let’s play with the numbers a little.

Over the trailing 12 months, Amazon has racked up $150 billion in sales. And not all of those revenue dollars are from its online retail business.

Amazon’s AWS cloud services business accounted for about 10% of its sales, meaning that Amazon’s retail business brought in closer to $135 billion.

That’s a big number. But total U.S. retail and food services sales last year were over $5.5 trillion. Amazon’s $135 billion accounted for a measly 2% of that.

OK, Amazon doesn’t sell cars or operate restaurants (at least not yet). Stripping out auto, auto parts, and food services sales, annual retail revenue in the U.S. is still $3.7 trillion. But even then, Amazon makes up just 3.6% of the total.

Amazon isn’t even the largest retailer in the U.S. That distinction still belongs to Walmart, which brought in just shy of half a trillion dollars last year, 3.5-times larger than Amazon’s annual sales…

My numbers didn’t include sales for Whole Foods Markets, which Amazon recently agreed to acquire. But Whole Foods’ $16 billion in annual sales doesn’t move the needle much.

Amazon is growing like a weed, of course. At its current rate, it will surpass Walmart in size within the next five to 10 years, and maybe sooner. But it’s clearly not a monopoly based on its current market share.

Furthermore, monopoly pricing is associated with higher prices and less competition. It’s really hard to argue that’s the case today.

If anything, Amazon is contributing to the deflationary forces that have haunted the economy for the better part of the last decade. (I wrote about this in a recent issue of Boom & Bust.)

Amazon is changing retail, for sure. We all shop differently today because of Amazon’s innovations over the past 20 years. Those retailers that have embraced technology or found a specialized niche have done well. Those that haven’t, haven’t.

But this isn’t the first time the world, or America, has seen this.

The Problem Isn’t With Amazon…

As ridiculous as this sounds today, Sears was once a model of innovation. Its paper catalogue turned a fragmented local shopping culture into a national consumer market.

Decades later, suburban shopping malls and big-box stores killed traditional Main Street retail.

And now, internet retailers like Amazon are disrupting shopping malls and big-box stores.

It’s competitive capitalism, and it’s the reason we live in a wealthy country today.

That said, the retail economy does have major problem. It’s not Amazon; it’s demographics.

Americans tend to hit their peak spending years in their late 40s and very early 50s, when their kids are still eating them out of house and home.

After your early 50s, you still have another decade before your earnings peak. But you spend less and save more in anticipation of retirement.

Well, the Baby Boomers – the largest and wealthiest generation in history – are now well past their peak spending years. They’re now desperately trying to save for a retirement that, for many, is coming sooner than they’d like.

At the same time, the next big generation – the Millennials – is getting a late start.

Between the setback of the 2008 crisis and its aftermath, higher student loans balances, and lower starting salaries, they’re not able to pick up the slack left by their parents… and they won’t be capable for several more years.

The retail economy will recover… eventually. We expect the 2020s to generally be a good decade for consumer spending.

But, in the meantime, you’re likely to see even more consolidation, as stronger competitors like Amazon fill the void left by those in retreat, like J.C. Penney or Sears.

Just don’t call it a monopoly!

Charles Sizemore Portfolio Manager, Boom & Bust

Check out much more from Charles Sizemore and the rest of the Dent Research team, right here at Economy & Markets!

I’m Surprised These Are Still Legal

Most of our readers are regular W-2 employees working for a paycheck, and most of my recommendations in the Dent 401k Advisor, which we released to subscribers last week, are focused toward helping them.

But for you self-employed types out there – or if you know one and want to pass along the word – there’s a much bigger world of retirement options at your disposal.

We all know that the traditional pension plan is dead.

Unless your job is unionized or you work for the government, it’s extremely unlikely that you have a traditional, guaranteed pension to take care of you in your golden years.

Well, if you’re self-employed, I have good news.

You can actually create your own traditional, defined-benefit pension… and use it to shield a shocking amount of your income from taxes.

If you work for yourself and have no employees other than your spouse, you can start with an individual 401(k) plan. You can defer $18,000-$24,000 in an individual 401(k) plan, just as you can with a traditional employer-sponsored plan.

But here’s where it gets fun…

You can combine that one-man 401(k) with a cash-balance pension plan and potentially defer another $100,000-$200,000, or possibly more, depending on your age and income level.

Cash-Balance Pension Plan

For those unfamiliar with them, a cash-balance pension plan is a little different than what you would think of as a traditional pension plan.

To start, each participant has their own separate account; the participants aren’t pooled.

Investment options in cash-balance plans are often somewhat limited, but that’s by design. As ridiculous as this sounds, the pension obligation you owe to yourself is a real liability.

So if you invested the pension plan in something risky and lost money, you would owe yourself money… and you’d actually have to pay up.

Once you retire, you can generally roll the pension into an IRA, after which point you can invest in virtually anything.

If you’re self-employed, over 40, and in the 35% marginal tax bracket or above, then the individual 401(k) and cash-balance pension plan might be perfect for you.

I’ve seen this arrangement work particularly well for doctors and freelance consultants, but it’s generally a great option for any high-income earner who’s self-employed.

At the higher tax brackets, the tax savings can amount to hundreds of thousands or even millions of dollars over time.

At Dent Research, we’re known to eat our own cooking (legally, of course; we can’t and don’t invest in specific recommendations, but certainly believe in our broader approaches.).

My colleague John Del Vecchio, who writes the Forensic Investor and Hidden Profits newsletters, does the bulk of his retirement savings via a cash-balance pension plan.

As you might expect from a professional short seller, John is extremely thorough and does his research. The fact that he uses this strategy for himself is a major endorsement.

I actually told a few folks in the office the other day: I’m surprised these plans are still legal. It’s like an IRA you can put $100,000 into every year.

You’ll definitely want to hire a professional for this, as screwing it up can create enormous liabilities for you.

As with all pension plans, there are actuarial assumptions that must be made and other arcane administrative headaches that are best left to specialists.

This is just part of what I talk about in the latest issue of the quarterly Dent 401k Advisor.

I align our 401(k) model portfolio allocations and aggressiveness with Harry’s latest outlook from the July issue of Boom & Bust. (We’re getting a little bit more aggressive – for now.)

And I also detail exactly, right down to the percentages, how you should be allocating where, self-employed or not.

We’ve just moved passed Fourth of July, which means we’re in the start of the second half of the year. This mark is a perfect time to make sure you’re on your way to maxing out your retirement plans.

So I also explain a simple, helpful exercise to make sure you are. If you’ve followed my work before, you know I believe the tax-saving benefits alone are worth it.

Click here to learn how to subscribe to Dent 401k Advisor today.

Charles Sizemore Portfolio Manager, Boom & Bust Investor

Read more from Charles Sizemore and the rest of the Dent Research team, here at Economy & Markets!

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