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Author: BuildMWell Big gold star, 5000 posts Feste Award Nominee! Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76391  
Subject: Re: Need Help With the Parent's IRA! Date: 9/2/2003 12:52 PM
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"If your father has $650,000 in his IRA even after the last 3 years, I'd say the broker has done a pretty good job. Without doing the math I'd say that's a heck of a return on IRA contributions spread over 22 years." - billjam

I agree wholeheartedly! As the saying goes, "He who lives by the sword dies by the sword."

Your Dad got where is is today with the Wachovia broker and the stockmarket, why change just because we had a downturn? The market will come back and someday your Dad will have more than the million bucks where the account "peaked" several years ago.

Here is how I look at it. Over the long haul, the stockmarket will yield about 8 to 10% in growth plus a dividend on many of the the shares. Bonds have yielded between 2% and 16% over the past forty years. The 16% was a one-time anomaly, I pray. 2% to 7% is a far more realistic range. But, it is almost always going to be several percentgae points below the stock market yields.

Now I know that the recommendation is to have a percentage in stocks and bonds with the bond percent going up with one's age. However, I have never bought into this concept. I base my bond versus stock exposure totally on the bond yield. Today I have zero bond exposure and 80% in stocks...I live off of the 20% cash or look for more great stocks to buy.

When Treasury bond yields exceed 6%, I will tip-toe back into bonds. Above 7% I get real excited about Treasury bonds. Otherwise, I like stocks only because I trust the long-term yield to be there at 8 to 10% plus some dividends. On a market downturn, I just ride it out like your Dad has done. Unless you sell your position, you do not lose money except on paper...what you own is a stake in great companies. People pay way too much attention to the dollar value that wall street places on their stocks instead of understanding the real value of the stocks they have purchased.

But, here is the bottom line to me. The business of America hires all wage earners who pay almost all taxes which pay for the bond interest. Thus, if business falters, the government's ability to pay for the bonds will falter also. I believe on betting on the bottom line. I go where the money is. How can the government ever get any money without great businesses keeping America's industrial/commercial machine rolling? I see this as a real problem for bonds.

If your Dad does not understand how to figure the real value of what he owns...he needs to rely on that broker of his and gladly pay the 1% per year for the guidance. It sounds to me as if that broker has done a great job so far. Plus, at present bond yields, I would avoid diversifying to bonds right now. There is a huge risk there.

If your Dad gets into bonds at 3 to 4% today and rates increase to 6% over the next several years, his value will decline just like the value of his stocks did. Bonds are risky too. They just guarantee your money at maturity plus a yield. But, if you need the money before maturity, you could take a huge hit on the principle amount.

Why own bonds at 4% when you can own great stocks that have a dividend yield of 6% or more? There are many sound utilities that have yields that far exceed the yields of bonds and the shares may appreciate over time. The high yield almost guarantees the stock price since a drop in price will drive the yield even higher thus attracting more buyers. Plus, if you have some cash on the sidelines and the price does drop, you can buy even more shares at the higher yield. Conversely, if the shares double in price over time and the yield drops to 3%, your Dad can sell the shares in the IRA tax free and lock up some more cash to live on for several more years. Maybe by then Treasury bonds will be yielding 6% and your father can get into them then.

The key is to "demand" the best yield on your investment dollar. Lower stock prices are a blessing...not a curse! The lower prices give you an opportunity to buy more great stocks at even higher yields.

Back in 2000 when the Fed was raising rates at every opportunity to slow the run-away stockmarket, your Dad might have lightened up some on stocks and taken his nice gains. He could have bought some zero coupon bonds at 6-3/4% up to 7-1/4%. Then as the market retreated in 2001 and 2002, he could sell the zero coupons at a 75% to 100% profit and buy back great stocks. Maybe his advisor should have guided him in that direction, but who knew then that the NASDAQ would collapse as it did or that bond yields would not continue upward? It is all clearer in hindsight. I find the safest thing is to be in great stocks all the time. When the retreats come...it is healthy. I live by the sword. Luckily, investors do not have to die by the sword...we just suffer some pain.

Anyway, that is what I do. So far, it is working just fine for me. I just save the 1% fee by doing it for myself. That way, I have no one but me to blame if I do the wrong thing. I like it that way. Some folks feel better if they have a broker to blame. Unfortunately, it is not his money that is at stake. We can blame the broker but, in the end, it is our money that is being invested. Who will ever care as much about our money as we do ourselves?

I hope this helps.


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