Ben Stein explains how to enjoy retirement, by making sure you have one!

A Day in the Sun

by Ben Stein

It was a perfect sunny summer day in Malibu. I spent a large part of it gardening (which I’m very bad at but enjoy), some of it filing financial statements, and about two hours of it lying in the sun with my dog while listening to Mozart on my headphones.

If I had to, I could, at 61, retire and live quietly for the rest of my life at my little home in Malibu doing what I did today. I don’t want to, because I travel around preaching retirement readiness, and I love doing that. But I could if I wanted to.

Why can I? Because my parents were thrifty, and good planners. And because they bought low-cost variable annuities that paid off like winning the lottery, and bequeathed them to my sister and me.

Also because I’ve been a saver (although not as good of one as I should’ve been) all my life; because I took the trouble to learn at least the basics of investing and then some; because I have two great financial advisers named Phil DeMuth and Kevin Hanley; and because I’m lucky enough to have had a career that paid the bills.

All of that — and, most of all, the greatest of gifts: being an American — allowed me to enjoy this glorious summer’s day.

Plan, Invest, and Save

Here’s how you can get to a similar place in your life (if you’re not already there):

* See a financial planner that you’ve chosen with a microscope. Tell him or her everything.

* Make a plan, and make sure you understand every word of it.

* Have widely diversified investments.

I recommend devoting one-third to a very diversified international fund; one-third to a total stock market index for the U.S.; and one-third to a highly diversified bond fund that tracks the Lehman bond index.
* Put at least 15 percent of your wages into these investments every month, before you buy a plasma-screen TV or a cruise or even your child’s education.

Keep doing it even when the commentators are telling you that the markets are collapsing and the sky is falling.
* Make and keep habits of thrift. Unless you have an income of $1 million or more a year, don’t spend any money you don’t have to.

* Keep in mind that you’re your future, older self’s only dependable and indispensable friend. You’re your own indispensable counselor, too. So you’re the pillar on which your old self will rest — behave respectfully to that older self.

* Carefully consider variable annuities in addition to your investment portfolio, but only when you understand them and know what each fee is for. In your really advanced years, when you no longer have the strength to keep track of things, that automatic check will be a lifesaver.

Gillette Edmunds quit his job as a tax attorney at the age of 29 and lived the “retired” life, living off his investments. His book,How to Retire Early and Live Well With Less Than a Million Dollars is one of the better ones of I’ve read on the subject.

He makes a good argument for investing in the entire market, or an index fund. Although he doesn’t recomend the usual asset allocation divided between US small cap, US large cap and US bonds because he says they all follow the same basic economy cycle.

Instead he suggest having no more than 30% of your retirement portfolio in the US market. He suggests dividing the rest between

* Foreign stocks
* Emerging market stocks
* Foreign bonds
* US real estate
* US oil and gas

and having atleast 3 non-correlated asset classes and preferrably 5.

Since most people aren’t too savy regarding real estate, he suggests holding REITs. He also thinks that oil and gas investments are a good class thats not correlated to the US stock market and will go up in the future. [the book was written in 1999 and he asually mentions that the stock market may be overvalued!]

Really good advice from someone who’s retired and been living off a $500,000 nest egg for 20 years.

This is a good summary of the book. It isn’t mine, but its pretty darn good, so I thought I’d share. If this is your summary, let me know so I can credit you.

Rich Dad, Poor Dad: What the Rich Teach Their Kids About Money–That the Poor and Middle Class Do Not!
By Robert T. Kiyosaki, Sharon L. Lechter

1. The poor and the middle class work for money. The rich have money work for them.

2. Rich people acquire assets. The poor and the middle class acquire liabilities, but they think they are assets. An asset is something that puts money in your pocket, a liability is something that takes money out of your pocket. The rich buy assets and the poor only have expenses.

3. Poor people buy liabilities to look rich. Rich people buy assets to get richer.

4. The rich get richer because they continue to do things that make them richer. The poor get poorer because they continue to do things that make them poorer.

5. Rich people learn how to manage risk. Poor people are afraid of risk.

6. An intelligent person surrounds himself with people who are more intelligent than he is.

7. Wealth is accurately measured by a person’s ability to survive so many number of days forward without working. Or stated another way: If you stopped working today, how long could you survive? Wealth is determined by Net Worth, NOT by income. You can have a huge income, but still be poor.

8. You can never be too rich.

9. Rich people buy luxuries last, while the poor and middle class buy them first. Assets buy luxuries.

10. Once a dollar goes into your asset column, never let it out. It becomes your employee. The best thing about money is that it works 24 hours a day.

11. A house is not an asset – it is a liability. It produces no income, only expenses. (Mortgage, Interest, Taxes, Insurance, Maintenance, Utilities, Furnishings). Don’t be “House Rich and Cash Poor”.

12. Building wealth is like planting a tree. You water it for years and then its roots grow deep enough that it takes care of itself. Then it provides you a nice shade to rest under and it takes care of you.

13. A true luxury is a reward for investing in and developing a real asset. Buy yourself nice luxuries but make sure you have earned them and can pay for them first.

14. Rich people invent money.

15. Great opportunities are not seen with your eyes but with your mind.

16. Many people are one skill away from great wealth.

17. Rich people talk about money and learn from other rich people. The poor do not.

18. Don’t let life or people push you around. Don’t quit. Fight!

19. Don’t blindy follow the “conventional wisdom”. Have the courage to “go against the flow”.

20. It’s not what you make that counts, but what you save and invest.

21. Don’t listen to poor or frightened people.

22. Master a formula and learn a new one.

23. Rich people take advantage of economic downturns. Rich people take advantage of opportunities.

24. Rich people don’t make excuses for their financial success or failure.

25. Mind your own business. Think of your household as your own business. Profit vs. Loss and Assets vs. Liabilities. It’s “You, Inc.”.

26. Advice for those of you in debt: If you find that you have dug yourself into a hole, STOP DIGGING!

27. He who has the gold makes the rules. The rich make the rules.

28. Money comes and goes, but if you have the education about how money works, you gain power over it and can begin building wealth. The reason positive thinking alone does not work is because most people went to school but never learned how money works, so they spend their lives working for money instead of having money work for them.

29. Don’t turn yourself into a slave to money and liabilities. Choose power and freedom.

30. You always want to make sure you’ll be cash-flow positive in any prospective real estate investment. Your rents collected should always, at minimum, cover your mortgage and expenses even while you’re building equity.

I also strongly recommend Rich Dad’s Retire Young, Retire Rich by Robert Kyosaki.

According to same bizzare coincidence there seems to be a negative correlation between housing starts and the stocks of pharmaceutical companies.

Could Decline in Housing Help Pharma?
Tuesday September 19, 11:36 am ET
Lower Housing Starts Could Boost Pharmaceutical Stocks, Harris Private Bank Says

NEW YORK (AP) — Here’s a group of stocks you may never have thought could benefit from a housing slowdown: Pharmaceutical companies.

Stocks such as Pfizer Inc., Johnson & Johnson and Merck & Co., are positioned to benefit by a decline in housing starts, Jack A. Ablin, chief investment officer of Harris Private Bank wrote in a research note Tuesday.

He found that over the last 10 years, the relative performance of pharmaceutical companies has had a negative 79 percent correlation to housing starts. The trend of sharply declining housing starts should mean rising pharmaceutical stocks, he wrote.

“Perhaps it’s the defensive nature of the group,” he wrote. “As if on cue, pharmaceutical stocks have already begun their outperformance.”

Calling the pharmaceutical stocks “cheap,” Ablin said Harris expects health care and accelerating pharma stocks to outpace the Standard & Poor’s 500 over the next 12 months.

The pharmaceutical sector has been dragged down over the past year by a series of scandals, lawsuits and management upheaval.

He only goes back 10 years which isn’t enough to draw any reasonable conclusion.

Regardless I just happened to buy some pfiezer in my Roth IRA yesterday. So I hope Albin’s theory is correct! Pfiezer also happens to have a 3.4% dividend which isn’t half bad.

TDAmeritrade offers free trades for 45 days if you open a new account with $2,000 minimum deposit. What better way to start a Roth IRA!

I already have a Roth with Schwab but TDAmeritrade is cheaper to trade and with 45 days of free trading, I can buy my opening stocks for free!

I got email from a real estate agent yesterday outlining the numbers for a 4-plex in Texas. He did a great job of putting the numbers in a spreadsheet and then creating an image, which he then embedded into the email itself. This saved a lot of time and I’m sure resulted in a lot more of his investors actually looking at it right then, as opposed to filing it away for a later viewing only to forget it.

The only problem was the numbers were off. Instead of calculating a 2.5 or 2.75% tax rate, he calculated 1.35% tax rate. There was also no vacancy factored it. When using property management, there is usually a leasing fee, which can range from 50%-100% of the frist months rent. This is above the 8-10% property management fee, which was also conveniently set to 0%. I don’t know if this was deliberate but when you’re running the numbers these sort of errors will throw you off.

After fixing these errors, the $997/mo cashflow became $52/mo and the Cash-on-cash dropped from 37% to 1.97%!!! This kind of mistake will KILL your investment strategy.
If you don’t know how to do this kind of simple calculation, your real estate career will be sort lived!!! [I strongly recommend What Every Real Estate Investor Needs to Know about Cash Flow… And 36 Other Key Financial Measures if you don’t know how to do this]

Trust but verify!

From my previous posts, you can tell I’m losing money being short on a stock that is defying all expectations and has gone up 20% since the day I jumped in. I’ll admit, I’m not too bright and always forget to follow advice which I know to be true. Here’s a strategy that I should try and remember well.

My Strategy for Successful Short Selling
by Jeff Clark

When I first started trading stocks, I did so almost exclusively from the long side… only buying stocks.

Through a series of trials and errors, I developed a three-pronged approach for what constituted a good stock to buy:

1. Ridiculously cheap valuation.
2. High degree of pessimism surrounding the shares.
3. Price action that had just turned up following a long decline.

As simple as this buying strategy might seem, it has produced superior returns… and it’s the strategy we follow in the Big Trend Report .

Logically, then, it makes sense to use a similar three-pronged approach to betting on a stock falling – called shorting.

1. Ridiculously high valuation.
2. High degree of optimism surrounding the shares.
3. Price action that has just turned down following a steady incline or parabolic rise.

Let’s look at each element individually…

1. Ridiculously high valuation.

We all understand that, ultimately, earnings drive stock prices. Consequently, the P/E (price/earnings) ratio is the best gauge with which to measure the ridiculousness of a stock’s valuation.

If you’ve found stock with a P/E ratio 50% higher than the industry average, or more than 50% higher than the company’s historic P/E ratio, then you might have a good short sale on your hands.
2. High degree of optimism surrounding the shares.

If every analyst on Wall Street loves the stock… If the anchors on CNBC seem to be mentioning the stock every hour… If all of your friends are talking about the fortunes to be made by owning the stock… Then it’s probably on my list of short sale candidates.

This concept is easy to understand. If the whole world is in love with a stock, and if everyone who wants to own the stock already does, then who is left to push the price higher? If there’s no one left to buy and to push the stock higher, then it only takes one seller to shift the momentum in the other direction.

3. Price action that has just turned down following a period of steady incline or parabolic rise.

Just as it doesn’t make much sense to jump in front of a moving train, it doesn’t make much sense to short a stock as it’s moving higher.

Rather than trying to pick a top in a stock, it makes far more sense to wait until the price action has turned lower – and in the early stages of a downtrend. For me, that confirmation occurs when the stock trades below its 50-day moving average.

Stocks in which the upside momentum is strong will hold above their 50-day moving average lines. Failing to hold above that line is an excellent early indication the momentum is shifting to the bearish camp.

You see, all of the Wall Street hype, all of the CNBC promotion, and all of the persuasive opinions of friends at cocktail parties creates big opportunities for us to bet against over-hyped stocks.

If you stick with these three guidelines, you’ll have all the tools you need to make money on the short side of the stock market.

Best Regards & Good Trading,
Jeff

WCI failed all three tests, its already dropped signficantly and there’s a tremendous amount of pessimism surrounding the stock. I should’ve stayed away! I’m not cut out to trade, which is why I got into real estate in the first place. Like my friend who’s a financial planner says, “Stick with what you know!”.

I guess times are tough in the Bay Area. Atleast for Pulte Homes who’s giving away $99,000 incentives if you purchase a home and can close before December 24th, 2006.

Some of the incentives include
* Rolled back pricing
* 100% financing
* Free pool
* No payments for 6 months
* No closing costs
* Free backyard landscaping
* Free window coverings
* Below market interest rates
* No HOA dues for 2 years
* Free Upgrades

& a Free vacation [includes airfair and & 7 night stay] for 2!

Someone sounds desperate to me.

Pity WCI isn’t showing similar weakness. The stock is up 20% from when I bought the puts. Just like I said, all the negative information pushed the stock up. Their cash is 94% less than it was last year and they’ve announced a share buy-back program! Sounds bogus to me. Anyway I bought more puts today.

Here’s a very interesting article on the builders at Rebalancing.blogspot.com

On the worst end you have WCI, with a rapid deterioration of their cash position (93% lower than a year ago), a 461% increase in Q2 borrowings (to $217.8 million) and $43,580,000 spent on share repurchases last quarter. They face huge problems with about half of their revenues historically coming from Florida condo sales and the story is being told in their cash flow statements. Perhaps they are repurchasing shares because they are dumb enough to think their stock is a bargain right now. Perhaps they just want to prop up the share price long enough for insiders to cash out before the collapse.

Here’s a must read article from BusinessWeek on Nightmare Loans.

Jennifer and Eric Hinz of Somerset, Wis., are feeling the squeeze. They refinanced out of a 5.25% fixed-rate, 30-year loan in June, 2005, and into an option ARM with a 1% teaser rate from Indymac Bank. The $1,483 payment for their original mortgage dropped to as low as $747 with the new option ARM. They say they had no idea when they signed up, however, that the low payment adds $600 in deferred interest to their balance every month. Worse, they thought the 1% would last three years, but they’re already paying 7.68%. “What reasonable human being would ever knowingly give up a 5.25% fixed-rate for what we’re getting now?” says Eric, 36, who works in commercial construction. Refinancing is out because they can’t afford the $15,000 or so in fees. “I’m paying more, and the interest is just going up and up and up,” says Jennifer, 34, a stay-at-home mom. “I feel like we got totally screwed.” They say their mortgage broker has stopped returning their phone calls. Indymac declined to comment on the loan’s specifics.

The problem, of course, is that many brokers care more about commissions than customers. They use aggressive sales tactics, harping on the minimum payment on an option ARM and neglecting to mention the future implications. Some even imply verbally that temporary teaser rates of 1% to 2% are permanent, even though the fine print says otherwise. It’s easy to confuse borrowers with option ARM numbers. A recent Federal Reserve study showed that one in four homeowners is mystified by basic adjustable-rate loans. Add multiple payment options into the mix, and the mortgage game can be utterly baffling.

Billy and Carolyn Shaw are among the growing ranks of borrowers who have taken out loans they say they didn’t understand. The retired couple from the Salinas (Calif.) area needed to tap about $50,000 in equity from their $385,000 home to cover mounting expenses. Billy, 66, a retired mechanic, has diabetes. Carolyn, 61, has been caring for her grandchildren, 10-year-old twins, since her daughter’s death in 2000. The Shaws have a fixed income of $3,000 a month that will fall by about $1,000 in November after Billy’s disability benefits run out. Their new loan’s minimum payment of about $1,413 is manageable so far, but the fully amortized amount of about $3,329 is out of the question. In a little over a year, they’ve added some $8,500 to their loan balance and now face a big reset if they continue to pay only the minimum. “We didn’t totally understand what was taking place,” says Carolyn. “You have to pay attention. We didn’t, and we’re really stuck here.” The Shaws’ lender, Golden West, says it routinely calls customers to ask them if they are happy and understand their mortgage loan.

No one will care for your finances like you do. If you don’t understand the loan process and how ARMs work, you owe it to yourself to find out. Ignorance is a sure path to finacial distress.

Came across this website called Forecast.org.

They have a 6 month forecast[into the future] for all financial data including stock market indices, currency conversion rates, interest rates, commodity prices, etc.

I don’t expect them to be very accurate [coz if they were they’d trade their data on the futures option market and make billions, instead of selling the data].

Here’s their prediction of the AUD vs the USD.

Looks like I’m going to be losing money as the USD suddenly strengthens right after I buy the AUD!!!