My Investing Journey with Passive Income and Stock Market investing

Category: Investment Books

Investment Book Review-Retirement Investing for Income only!

I will start by saying this is one of the best books I’ve ever read on investing. It’s written by Bruce Miller, who is a Certified Financial Planner.

Unlike many investment books, he never gets wordy or uses overly technical jargon. His manner of writing is extremely clear and the order of the layout is well thought out.

The book is geared towards those nearing retirement and perhaps less at the 20 somethings. At the same time, anyone will gain a lot from this book regardless of age, especially if you are a new dividend investor. I consider this book a GREAT INVESTMENT.

The big premise is investing not for total return, but for reliable income. This approach releases the investor from the day to day changes in the stock market. Capital gains are no longer the major concern, whether a company can continue to pay its dividend is.

This book teaches you what to look for when picking dividend stocks and income vehicles. The primary consideration when picking stocks is to investigate the companies CASH FLOW, making sure they’ll be able to continue paying their dividend. That is the main concern and not whether the stock appreciated 30% last year or this year.

He teaches you the parameters to use to find the right dividend-paying stocks for your portfolio. I’ll let you read the book to discover all of that for yourself.

It’s great because it takes away a lot of the headaches of learning so much about stocks, trading, jargon, unnecessary metrics. You don’t concern yourself with beta, risk adjusted returns and some optimized allocation.

I found the sections of REIT’s and Closed-End Funds particularly useful. I had personally never even heard of a ClosedEnd Fund before reading this book. It later led to me purchasing my first CEF.

REIT’s are complicated, at least to me. He devotes a chapter on evaluating REIT’s ability to pay their dividends; it’s not as simple as cash flow or earnings!

By the time you are done with this book you’ll know about all sorts of income producing stocks, bonds, funds; some of which you may have never heard of. Another major plus of the book is he shows you to get information off of sites like Yahoo Finance and download the data into a spreadsheet. Here you can evaluate the companies for yourself, whether they have grown their dividend and so forth. All valuable information, as the old saying goes, He teaches you how to fish instead of giving you fish.

I can see myself returning to this book over and over throughout my lifetime, my copy is already marked considerably with pencil marks, where I’ve made notes about the topics.

Here is the video about the Book as well as the Amazon link. Yes, I am an Amazon Affiliate and do earn a commission on anything purchased using this link.

Risk vs. Reward

Does Risk really equal reward?

We’ve all heard the old saying, “Risk equals reward.” While some level of risk is usually involved in many of life’s rewards, it’s simply not always true that greater risk equals greater rewards. In fact, greater risks can often lead to greater losses.

Sometimes losses aren’t difficult to recuperate from; however, when it comes to our finances, a huge loss may take years to recover from. In particular, those with lower income may find a financial loss particularly devastating. Unfortunately, it’s they who have little that often desperately take on foolish risks, an attempt to create a new world for themselves. I believe an investment choice should begin with a look at Risk vs. Reward.

You can peruse the internet for people that lost tens of thousands of dollars in cryptocurrency bets or visit Wallstreetbets Reddit below if you want to see some entertaining results of stock gambling:

https://www.reddit.com/r/wallstreetbets

You don’t have to go far to see the damage lots of leverage can do when the market turns sour. If the market goes down, you now lose twice as much or how much ever you’re leveraged. The greater the risk (the greater the leverage) the more you lose! Why do people only want to see one side of the equation here?


The idea of greater risk means greater rewards is easily disproved:

Take a lottery ticket, maybe a scratch-off that costs $5.00. Even though it only costs $5.00, you could stand to win tens of thousands. The reward is a lot but the risk is very little. Take your state lotto, now we are up in the millions but you can buy a ticket for $1.00. The reward is huge but once again, the risk here is very low. At the same time, as you buy more and more tickets you don’t suddenly gain more and more rewards. Most likely you end up with greater and greater losses.

The next time you get in your car increase the speed. As you increase the speed, does your reward or risk increase? I think your local police officer would agree that as the risk goes up, the reward goes down.

Now a personal example:

In October of 2018 I bought a Long-term bond fund; there for awhile this fund was beating the market. This bond fund was not a risky proposition or volatile relative to the equities market. In fact, it was less volatile and carried less risk.

If risk equals reward then how do you explain such an investment vehicle outperforming equities? Only as of a few weeks, the market began outperforming my bond fund by a few percentage points since October. However, this could change at any point. If the bull market suddenly turns into a bear market and my bond fund starts outperforming the S&P again, is it simply because it got riskier? Of course not, the idea is ludicrous.


Let’s go further-think about an Adrenalin junkie. The more you exposure yourself to risky behaviors the more likely statistics won’t be on your side. For instance, if you jump out of enough airplanes, rock climb without a rope or bungee jump enough times; sooner or later face meets the ground and you’re now a pancake. Maybe it’s just me but I’d rather not tempt fate.

It’s not hard to imagine countless scenarios where as the level of risk increases, the more dangerous it becomes and the more you stand to lose. Chasing greater beta and risks for some imaginary return is akin to playing with fire and hoping not to get burned.

These are some ideas I had contemplated before not only about investing but life and then I happened on this gem of a book by Eric Falkenstein about risk and low volatility investing. It expands on these ideas and goes further to prove just how ridiculous the notion of risk equals rewards truly is.

“The Missing Risk Premium:Why low volatility investing works”

This book is not meant for an investing beginner as he gets heavy on the jargon.

Here is a video interview he did that summarizes a few of these points:

Summarizing Eric’s thoughts:

Stocks with high Betas and greater volatility historically don’t outperform the market, they underperform.

What does Eric say a high beta is? A beta of 1.5 is a nice cut-off when it comes to equities. Avoid such risky stocks/funds/bonds, they provide no risk premium.

These risks don’t exist with equities alone. For instance, take your junk bonds versus say an investment grade bond or BBB bond. A junk bond has a poor historic return over an extended period of time in comparison to the investment grade bonds.

His overall theme is that no premium risk factor exists for most investments as previously thought.

Here is my youtube video where I summarized my own thoughts and feelings about this idea:

I am certainly not saying don’t take risks as any investment comes with risks. I am simply saying the risk to reward curve is not linear, at some point it starts to be negatively correlated and you are paying more for extra losses.

Investment Book Review-Bonds: The Unbeaten Path to Secure Investment Growth by Hildy and Stan Richelson

I want to start by saying despite the flaws this is a book worth owning; it’s packed full of information about bonds. Unfortunately, the premise of the book (an all bond portfolio) is simply not supported by the given data. You won’t get far without many of the flaws rearing their heads.

Flaw #1-Cherry picking Times

Within the first two chapters there’s a constant referral to the year 2009. This year is conveniently picked because it comes after the Great Recession, hence when stocks were down bad. It’s a case of picking the data to support your thesis rather than picking multiple data points to prove your thesis. Of course stocks are going to look bad if you pick one of the worst times in history.
In addition, statements like “From 2000 to 2009 yields a flat market” doesn’t prove much, other than it can happen. Once again, it’s easy to cherry pick times and dates to prove almost anything. To prove this thesis of an all bond portfolio then they should have spent more time on a variety of time periods where bonds outperform stocks.
Statements like “1900 to 2000 stocks and bonds returned about the same” doesn’t mean much either. People don’t tend to invest for a 100 years. An interval of say 30 years is a more useful interval for those preparing for retirement. Regardless, I wasn’t able to verify the truth of this statement as no source with data was given.

Flaw #2-Doesn’t understand Withdrawal rates

Withdrawal rate error, specifically found on page 22. In the example given, has Bob withdrawing 10% the first year of retirement and then over 10% the second year. It’s over 10% because you are now using less than a million dollars to arrive at the percentage. Someone needs to inform the authors that people don’t take out over 20% of their retirement in the first two years. More like 8%.

There have been lots of studies on proper withdrawal rates, taking out 10% every year makes no sense. Not to mention that doesn’t show how bonds are going to allow someone to continue withdrawing 10% every year into retirement, never mind the effects of inflation.
He does have a point in that what if the market is down bad and you need to withdraw? That truly is the risk of equities. This is why dividend investing can be a great tactic. This is why a diversified portfolio is recommended. If stocks are down, the bonds can cushion the blow and vice versa.

Flaw #3-Risk of Bad Timing with stocks

Another argument they have against Stocks is the risk of bad timing. They are correct that many investors have poor timing and this does effect returns. On the other hand, most investors are dollar cost averaging these days. They are buying low, in the middle and high. Sure, they may not be getting the max results but they are usually still yielding more than a bond over many years. Dividend/income investing is also a tactic that reduces the risk of market downturns. The dividend investor is not worried about whether the market is down, the income comes regardless. The risk of bad timing can’t be eliminated but it’s greatly reduced with dollar cost averaging or buying in lump sums throughout the year.

Flaw #4-They constantly state they aren’t chasing returns

They constantly make the statement that they aren’t chasing returns but chasing guaranteed, given returns. However, they spend pages trying to prove bonds have just as much or greater return as stocks. Therefore, it’s obvious that returns do matter with investments. Returns are even more important when inflation is brought into the mix. If your bond is only returning 2% and inflation is higher, you are losing purchasing and money power.

Flaw #5-Bond Funds are risky

They are correct in stating that there’s no guaranteed principal on a bond fund, that the prices move up and down. At the same time, bond funds or ETF’s can have a better than average return with very little risk and lots of liquidity. For example one of my bond funds is up over 14% in 8 months, the others are up over 5%. This is a return with very little risk that far outperforms any Treasury bond I could have got. Furthermore, the risk is largely interest rates; this is something that the investor has plenty of time to act on in order to get out of if need be. Bond funds are not particularly volatile.

Positives

I do like the book despite it’s flaws and highly recommend it. There’s so much you can learn from it. I personally think bonds deserve a place in everyone’s portfolio. My bond funds have had a fantastic return this past six months, beating the S&P even. I do believe people make a lot of assumptions about market performance based too much on recent history (incredible bull run). So, I think reading books about bonds and understanding them helps the investor stay balanced. One statement that’s made in the book I agree with-“The longer equities are held the more risk there is for a major correction.” People need to be aware of this, I think it’s a mistake many investors make when they see a one year return of 15%, thinking every year will be like that. I do believe equities hold more risk than many investors believe.


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