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Author: mikethern Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75381  
Subject: Awesome retirement investing tip Date: 2/4/2000 3:40 PM
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I am a 30-year-old fool who is lucky enough to realize the importnace of early investing for retirement early. After trying to decide whether to invest using a 403b or a taxable Rule Breaker portfolio, I now know that the taxable Rule Breaker is the way to go.

I did the math using calcbuilder.com. A taxable rule breaker portfolio will kick the pants off a tax-sheletered tax-deferred stock index fund even after taxes are considered.

Let's say I invest $400 every month into a 403b. Using an index fund, I can expect a return near 11%. In 35 years, I will have amassed $1,971,319. However this amount is taxed when I start withdrawals, making the actual amount near $1,182,791.

On the other hand, if I invest $400 every month into a taxable Rule Breaker portfolio, I am actually investing only $240 month after taxes, and my Rule Breaker annual return needs to be at least 18% to amass $1,233,824 in 35 years (taking into consideration that the gains are taxed annually). Unlike the 403b, this amount is not taxed at withdrawal because it was already taxed during growth.

Thus, as long as the taxable Rule Breaker returns an average of at least 18% during the next 35 years, the taxable account is the smarter way to go. Considering the fact that the Rule Breaker has averaged over 60% since 1994, hoping that it will average over 18% is a risk I am willing to take despite the fact that 1994-2000 is a short time period. Also, if the Rule Breaker portfolio does lousy during the next 35 years, there's a good chance that stock index funds will do lousy as well. Thus, it's all relative. It doesn't matter what the return is as long as it is a few percentage points better than the index.

By the way, on the unlikely chance that the Rule Breaker will return 60% over the next 35 years, my $240 a month will turn into $ 2.8 billion after taxes!

The only disadvantage of having so much money in a taxable account is that if I have kids, I won't be able to get college financial aid for them. Money in 403b on the other hand is not considered when evaluating a family's worthiness for college financial aid. Of course, the other disadvantage is the liquidity of taxable accounts, which means I can spend the money anytime I want instead of waiting until I am 59. Luckily, I have good saving discipline.

An advantage of investing for retirement using a taxable account is that if my net worth becomes gigantic, I can retire anytime instead of waiting until I am 59 1/2 to be allowed to redeem shares.

Keep in mind that this strategy may less valuable if your employer matches investment contributions. I can only suggest that you do the math yourself using calcbuilder.com. No, I am not a calcbuilder employee making a shameless plug!

Knowledge is power! The more knowledge you have, the more powerful your investments will be.
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Author: JABoa Big gold star, 5000 posts Feste Award Nominee! Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18722 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/4/2000 4:02 PM
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mikethern sez (regarding a taxable account): unlike the 403(b), this amount is not taxed at withdrawal...

No Sirree Bob. It is taxed. If you go out and buy Microsoft with after tax dollars, and if you make a profit, then you will pay tax on that profit.

It is possible to argue that it's better to go the taxable route, since you are planning to be rich at retirement and long term gains are better than ordinary rates. This argument is legitimate.

But don't kid yourself. Don't kid yourself on taxed vs. not taxed, don't kid yourself on 60%, and don't kid yourself on 18% either.

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Author: JAFO31 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18723 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/4/2000 4:39 PM
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LONG POST ALERT

mikethern: "I am a 30-year-old fool who is lucky enough to realize the importance of early investing for retirement early."

Good!

"After trying to decide whether to invest using a 403b or a taxable Rule Breaker portfolio, I now know that the taxable Rule Breaker is the way to go."

Really?

"I did the math using calcbuilder.com. A taxable rule breaker portfolio will kick the pants off a tax-sheletered tax-deferred stock index fund even after taxes are considered."

It is always good to do the math. I am not familiar with calcbuilder.com, but I will assume that it calcualtes correctly. So much depends upon the asumptions that you use! And how accurate they turn out to be!

"Let's say I invest $400 every month into a 403b. Using an index fund, I can expect a return near 11%. In 35 years, I will have amassed $1,971,319. However this amount is taxed when I start withdrawals, making the actual amount near $1,182,791.

On the other hand, if I invest $400 every month into a taxable Rule Breaker portfolio, I am actually investing only $240 month after taxes, and my Rule Breaker annual return needs to be at least 18% to amass $1,233,824 in 35 years (taking into consideration that the gains are taxed annually). Unlike the 403b, this amount is not taxed at withdrawal because it was already taxed during growth."


It appears that you are assuming a 40% FIT (or possibly 40% combined FIT + SIT). Many people pay no where near that rate. How do your results vary when you vary the assumed tax rate? In addition, you seem to be ignoring LTCG taxes when Rule Breakers are sold.

"Thus, as long as the taxable Rule Breaker returns an average of at least 18% during the next 35 years, the taxable account is the smarter way to go. Considering the fact that the Rule Breaker has averaged over 60% since 1994, hoping that it will average over 18% is a risk I am willing to take despite the fact that 1994-2000 is a short time period."

Making assumptions about long-term return based on the results from a 6 year strong bull market is very, very dangerous, and, IMO, shortsighted.

"Also, if the Rule Breaker portfolio does lousy during the next 35 years, there's a good chance that stock index funds will do lousy as well."

That is also a very weak assumption with little stated support. Is ther any statistical support for this proposition?

"Thus, it's all relative. It doesn't matter what the return is as long as it is a few percentage points better than the index."

I agree that it can be relative, but to simply say "a few percentage points" is simplistic. 18% CAGR is 63% larger than a 11% CAGR in relative terms, and 7% in absolute terms.

"The only disadvantage of having so much money in a taxable account is that if I have kids, I won't be able to get college financial aid for them. Money in 403b on the other hand is not considered when evaluating a family's worthiness for college financial aid. Of course, the other disadvantage is the liquidity of taxable accounts, which means I can spend the money anytime I want instead of waiting until I am 59. Luckily, I have good saving discipline."

If they grow that large, you kids will not NEED financial aid. I agree that discipline is important.

"An advantage of investing for retirement using a taxable account is that if my net worth becomes gigantic, I can retire anytime instead of waiting until I am 59 1/2 to be allowed to redeem shares."

Ever hear of SEPPs? There are wait ti tap retirement accounts without triggering the 10% penalty. I am not conversant with all the details, but you can find wonderful discussions on The Retire Early board here at TMF (Speakers' Corner) and on "intercst"'s Retire Early Home Page: [Sorry - cannot find a handy reference for the URL, but is is listed in the FAQ on the other board].

"Keep in mind that this strategy may less valuable if your employer matches investment contributions. I can only suggest that you do the math yourself using calcbuilder.com. No, I am not a calcbuilder employee making a shameless plug!"

Employer contributions certainly change the numbers. I agree that running the numbers is a very good idea, but the assumptions from which the numbers are derived are important, too; remember, GIGO.

"Knowledge is power! The more knowledge you have, the more powerful your investments will be."

Agree that knowledge is power, but a little knowledge can be a dangerous thing, too.

Wishing you the best with your plans.

Regards, JAFO



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Author: mikethern Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18726 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/4/2000 5:26 PM
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To JABoa: Thanks for replying. True, we are in a bull market and the index has returned near 30% recently. However, if you look at the Rule Breaker stats, their returns have averaged 66% since 1994. Considering that the long term performance of the stock market index has been about 11%, isn't is reasonable to assume that the Rule Brekaer portfolio will return at least 18% long term?

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Author: mikethern Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18727 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/4/2000 5:41 PM
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To JABoa: One more thing, dude. When I calculated gains on a taxable account, I DID take into account the fact that capital gains are taxed each year. Calcbuilder.com has this option on their financial calculators. Go to www.calcbuilder.com, then click "savings", then click "what will my savings be worth".

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18742 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/5/2000 10:39 AM
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You are over looking some important points. Some or most of those Rule Breaker stocks were bought well before they were "popular". Most of their impressive gains were early. Think of buying Amazon or Dell at split adjust cost basis of $0.25 per share. Get one or two of those in a portfolio and you'll generate those kinds of returns.

Copying the Rule Breaker now, while giving you respectabel returns, probably won't give you the eye-popping 60% you've calculated on.

While I use some of the mechanical screens on this board, for my long term projections, I only count on beating the S&P by about 4%. The dreaming part is fun however.

JLC

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Author: mikethern Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18780 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/5/2000 5:19 PM
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To JLC: Hi JLC. Actually, the Rule Breakers are stocks that are believed to to great in the future no matter how well they've done in the past. In fact, past performance is not even considered. The moment any of the Rule Breaker stocks are believed to have a mediocre future, they are sold.
By the way, in my original post, I did not say that I believe the Rule Breakers will return 60% long-term. I was just giving an example. I am hoping the return will be at least 18% long-term. It may not be likely, but at age 30, I am in the position to be risky.

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Author: mphipps Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18808 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/6/2000 10:49 PM
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Congras to you have discovered why 401ks suck.
Thus, as long as the taxable Rule Breaker returns an average of at least 18% during the next 35 years, the taxable account is the smarter way to go. Considering the fact that the Rule Breaker has averaged over 60% since 1994, hoping that it will average over 18% is a risk I am willing to take despite the fact that 1994-2000 is a short time period.


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Author: mikethern Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18813 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/7/2000 8:40 AM
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To mphipps: Thanks for responding to my post. Please be advised that 401k's are awesome if your employer matches your contributions. I have a 403b that does not match contributions and thus I have decided to be risky and use a taxable account instead of my 403b because I think the Rule Breaker stocks will significantly beat the mutual funds that are offered by my 403b.

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Author: mphipps Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18820 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/7/2000 1:14 PM
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mikethem writes:Please be advised that 401k's are awesome if your employer matches your
contributions.

mphipps replies: Tolerable but not awesome. In one of my IRAs that I transfer from 401k.
Dec 1998 NAV 8800
Dec 1999 NAV 20789
No contribution were made to that IRA. The most I can contribute to 401k is 16000. 6000 of it coming from company. Its only the deferred tax advantage and the company contribution that even make the 401k thinkable.
The sooner we all understand that we are getting railroaded on 401ks, thinking they are awesome, the better.
Awesome would be employee tell employer where you want you 401k contributions put. You know we all can set up direct deposits to mutual funds at work. But we can't set the same thing up with 401ks Why? What is the difference? Nothing.



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Author: pmccrudden One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18826 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/7/2000 2:39 PM
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Just a few comments,

It is unfortunate that you don't get any sort of match on your 403(b). I had one for two years when my employer made my contributions. That is right, I didn't put any money in and they put in something like 10% of my salary. When I left that job, I kept the money in the same account until they changed the tax rules. At that point, I rolled it into an IRA and then converted to a ROTH. So, this gave me the money that they had contributed in a tax free account (of course, had to pay taxes on the rollover) that I can do with as I like. So, I could do a RB or whatever. My point is that at 30, you might change jobs at some time in your career and that could change your calculations.

I think that other people have made the point about high returns. My own opinion is that even an idiot could have made a lot of money in the market in the 90's. There are many examples of this (including myself). I have even seen a monkey that "picked" internet stocks by throwing a ball at targets. Of course, the monkey was beating the socks off the experts.

Good luck in averaging more than a 10% in the years to come (much less 18%!). In the event you are able to do this, you can always write a book about what you did to get the great returns and this will help you retire even earlier. :)


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Author: Wiggy4 One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18831 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/7/2000 5:32 PM
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What about a self directed 401(k) that allows stock trading? Does it exist? The best of all worlds. You get to use pre-tax dollars and invest in the RM/RB.

Just my two cents...

John

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Author: mikethern Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18842 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/7/2000 8:36 PM
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To wiggy4: Yes, that would be awesome. A month ago, I asked my 403b company, Tiaa-Cref, if they allow 403b investors to trade individual stocks. They said no. I can only speculate that retirement investment administrators want to keep investors in mutual funds because they are less-risky and they don't want investors to be risky with funds that are crucial after retirement. Personally, I think we should be able to invest as we please. In a perfect world, the awesome investment is a 401k with employer matching contributions that allow trading of individual securities!

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Author: tmackfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18843 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/7/2000 8:42 PM
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mikethern wrote:
To wiggy4: Yes, that would be awesome. A month ago, I asked my 403b company, Tiaa-Cref, if they allow 403b investors to trade individual stocks. They said no. I can only speculate that retirement investment administrators want to keep investors in mutual funds because they are less-risky and they don't want investors to be risky with funds that are crucial after retirement. Personally, I think we should be able to invest as we please. In a perfect world, the awesome investment is a 401k with employer matching contributions that allow trading of individual securities!



Federal law allows 403b accounts to only invest in mutual funds or annuities. It is federal law that does not allow individual equities. The administrators at TIAA-CREF (or any other 403b provider) cannot, by law, allow you to invest in individual equities.

Just FYI.

Taylor

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Author: mikethern Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18844 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/7/2000 8:51 PM
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To pmccrudden: I have no doubt believing that I can make an annual return of 11% during the next 35 years. All I would have to do is invest in a low-expense-ratio stock index fund like Vanguard's Index 500 Fund.
Since I am only 30, I am trying to invest very aggressively using the Rule Breaker stocks. Are you aware that there is no mutual fund on earth that beat the Rule Breaker portfolio over the past 5 years? (source: www.morningstar.com) The Rule Breakers have returned 66%. Plus at $8 a trade, there is no expense ratio involved as is the case with mutual funds.
I very much realize that we are in a bull market and that a recession is inevitable, but at age 30, I don't care if the stock market crashes tomorrow, because I have plenty of time for my portfolio to recover. When I am 55, I will start switching to bonds. By the way, a full-blown stock market crash similar to the one in the 1920's is extremely unlikely because the market was uninsured and reckless at that time. Recessions on the other hand are like earthquakes. They are bound to happen.
However, even in a recession, some stocks still do well. Hopefully, the Rule Breaker portfolio will include some of these stocks. Again, I point out that once a Rule Breaker stock looks worrysome long term, it is sold.

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Author: mikethern Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18845 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/7/2000 8:55 PM
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To tmackfool: Thanks for the info. Do you know why the government forbids trading of individual stocks in a 401k? Are they afraid of us getting too rich? Are they afraid of us losing all our money? In either case, doesn't it suck that the goverment is telling us what we can and can't do with our money?

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Author: tmackfool Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18850 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/7/2000 9:38 PM
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To tmackfool: Thanks for the info. Do you know why the government forbids trading of individual stocks in a 401k? Are they afraid of us getting too rich? Are they afraid of us losing all our money? In either case, doesn't it suck that the goverment is telling us what we can and can't do with our money?


I know nothing about the history of decisions in the laws regarding 403b's, but I'm guessing that the government is not afraid of us making money (after all, this is only tax-defered, not tax-free!). Possibly they wanted to prevent non-Foolish investors from saving for ten to twenty years and then throwing it all on some stock they got a hot tip about from their brother-in-law. My guess is that the government is worried about people doing something real stupid (penny stocks, for example!) and losing all their money - then people would complain that the government wasn't protecting them!

403b's cannot be invested in individual equaties, only mutual funds and annuities, which you mentioned you have with TIAA-CREF. In the message I'm replying to you are talking about 401k's. I believe that 401k's do allow equity trading, if your company's plan allows it. But better double check with others on 401k's and equities. I don't have one, so I don't know. The rules for 403b's and 401k's are different in some important aspects. Why are they different? Who knows, but Congress seems to have a knack for writing quirky laws.

Taylor

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Author: pmccrudden One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18897 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/9/2000 11:24 AM
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mikethern: Past performance does not guarantee future results. 10%, 11%, 12%...those are reasonable for a 35 year time frame. 18% is not. I am also about 30, but when I try to figure out when I'll be able to retire I use 10%. What happens if I make 18% or 35% or 66%? I can retire earlier. If you plan on making 18% and only make 12% or maybe even 6% or 8%...does that mean you will have to work for another 10 years?

What I am suggesting is that you plan for the worst and hope for the best.

I do think RB has bought some great stocks in the past (AOL, AMZN certainly!!) Will they continue to perform this well for the next 35 years?!?! Who knows? I'm just not betting my retirement on it. Some of my portfolio, yes, all of it, no thanks.




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Author: mikethern Two stars, 250 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18901 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/9/2000 12:33 PM
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To pmccrudden: I know that past performance does not guarantee future results. If I didn't know that, I would be telling you that the Rule Breakers will continue an annual return of 66% during the next 35 years. Rather, I hoping that it returns at least 18%.
Nonetheless, perhaps my hoping for 18% is pushing it. What do you think the Rule Breakers will return over the next 35 years?

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Author: jimmei One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18904 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/9/2000 1:39 PM
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Nonetheless, perhaps my hoping for 18% is pushing it. What do you think the Rule Breakers will return over the next 35 years?

Hoping for 18% is fine. Counting on 18%, so that you invest a smaller amount than if you counted on 11%, is, in my opinion, small-f foolish.

My answer to your question is: I have no idea, but would not count on over 11%.

Jim

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Author: pmccrudden One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18909 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/9/2000 3:22 PM
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I guess one question I have is how do you figure it will be 18%? Why not 33%? or 22%?

What do you think the Rule Breakers will return over the next 35 years? 12%

2005: 15%
2010: 10%
2020: 8%
2035: 12%

Do I have a basis for this? Nope. I just don't think it will be in the high upper teens over the long run. Do I hope that they do have those high returns? It certainly would be fun!!

(from a post on the IBM board):
http://boards.fool.com/Message.asp?id=1140104000886000&sort=postdate

There has only been one company in the history of the stock market that has grown more than 20 percent sales for as many as 15 consecutive years. Not even Microsoft has been able to grow 20 percent for 15 consecutive years. That kind of growth -- 20 percent year-over-year -- is pretty damn good and only IBM has been able to do it for 15 years (and) that was in the heyday of the mainframe.

Cisco is now in its tenth year as a public company, and it has put up 30 percent growth essentially since it began. I just want to put that in perspective -- they have been an extraordinary company, but even extraordinary companies do, at times, run into patches of slower growth. I would just keep that in mind.


In other words, I think RB needs to prove that it can transition to companies with this kind of growth over time. They have a great record of picking right now, but over how many years can they keep it up? How long do you ride AOL? How long do you ride AMZN? Tough question! Months? Years? Decades? Who knows!!

Regardless, I'm saving enough that 10% returns will allow me to retire before I am too old to enjoy it.


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Author: Goofyhoofy Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 19373 of 75381
Subject: Re: Awesome retirement investing tip Date: 2/21/2000 4:39 PM
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{{Considering the fact that the Rule Breaker has averaged over 60% since 1994, hoping that it will average over 18% is a risk I am willing to take despite the fact that 1994-2000 is a short time period.}}

It's 1965. "Wow, the stock market has doubled in the past 5 years. It's tripled in the past 10! The DOW is at 1000! I'm putting everything in stocks!"

Result: The DOW stays under 1000 until 1982, giving 1965 investors no return for 17 years.

It's 1973. "Wow, those Nifty Fifty stocks are a can't miss! Most of them are up 20 to 25% year over year, some have doubled and tripled and even quadrupled in the past 5 years! I'm putting all my money into them!"

Result: The Nifty Fifty, aka (the high P/E growth stocks) crashed. Walt Disney went from $57 to $4 per share. The other 49 did only marginally better. Some, like Avon and Polaroid have never come back.

It's 1979. "Wow, inflation has been over 10% for the past 5 years, and it keeps increasing! It's at 17% and climbing! I'm putting all my money into short-term CD's, and rolling them into even higher paying instruments with every redemption!"

Result: Inflation crashes during the recession of 1980. Today it's at 2%.

It's 2000. "Wow, those RuleBreaker stocks have gone up 66% a year for the past 6 years. I'm putting all my money into them.!

Result: ???

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