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Author: stewartr002 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 76395  
Subject: What To Do With A Large Cash Amount? Date: 9/4/1999 6:54 PM
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My father just received a large cash settlement. He is retired (69 years old) from the military and wants to put most of the money into an investment that produces monthly income but that is also very secure. Can anyone recommend a good fund (maybe an index or mutual fund) which will generate at least a 10% annual return? Open to other conservative ideas also.
Randy
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Author: x4a54 Big red star, 1000 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13664 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/5/1999 1:09 AM
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monthly income but that is also very secure.
Can anyone recommend a good fund (maybe an index or
mutual fund) which will generate at least a 10%
annual return
?


no such thing.

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Author: stewartr002 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13665 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/5/1999 5:07 PM
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Are you saying that if I purchase $250,000 worth of an index fund mutual fund, I can't count on receiving $25,000 in dividends per year with a resonable degree of certainty (realizing some risk)? I thought the average rate of return on index funds was well over 10% during the last 10 years. Maybe I'm confusing growth and return. Is that the case?


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Author: TchrP Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13666 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/5/1999 5:23 PM
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>> Maybe I'm confusing growth and return. Is that the case?
-------------

You may be confusing income and return.

Income from stocks is the amount paid in dividends. It represents a share of the company's profits that the company chose to distribute to the shareholders. Not all companies pay dividends, even if they are making a profit.

Mutual funds must distribute income received from their underlying investments at least once a year.

Mutual funds must also distribute the capital gains that they realized. Gains represent growth in the value of the underlying investments, but they only have to be distributed by the fund when they are "realized," meaning that the fund sold the underlying investment and took the profit.

So a mutual fund will often distribute three kinds of earnings in a year: income, short-term gains, and long-term gains.

Gains that the fund did not yet realize -- that is, where the fund continues to hold the stock -- aren't distributed. Instead, they are included in the net asset value of the shares. If you redeem your shares, the increase in the net asset value is also a capital gain.

All four of these things -- income dividends, distributions of short-term gains, distributions of long-term gains, and unrealized gains -- constitute total return.

Thus, it is entirely possible for a fund to have income dividends of (just as an example) 1% while having annual total return of more than 10%. This is quite different from a bank CD that might pay 5% interest and have absolutely no change in value, with the result that the income yield and the total return would be identical.


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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: 13668 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/5/1999 8:12 PM
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You're in the right place you just need to poke around a bit. Do a "foolish" search looking for "withdrawl rates" or "withdrawl percentages". Also a few months ago in the Foolish Four daily section, Ann C. wrote several articles dealing with leaving off retirement. The one thing I highly stress, is that at age 69, if given a family history of longevity and good health, your father might live another 25 years. His biggest fear/enemy is inflation. He needs a fair amount of money invested in stocks to compensate.

JLC

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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13677 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/5/1999 10:29 PM
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"He is retired (69 years old) from the military and wants to put most of the money into an investment that produces monthly income but that is also very secure. Can anyone recommend a good fund (maybe an index or mutual fund) which will generate at least a 10% annual return? Open to other conservative ideas also."

Investment returns vary according to risk tolerance. Very secure investment such as CD's and Treasury Bills/notes have low returns because they are pretty much risk free. These will run around 4-6% at this time.

In order to get to a 10% return will require accepting more risks. An Index fund does not guarantee any specific return nor does it guarantee no loss in capital.

This is exactly the issue I struggle with in trying to help my retired mother invest her funds. I am at the point of determining what her present funds have been yielding. See if this is sufficient - taking inflation into account for her lifestyle. In order to recommend more aggressive investments, I need to know how much risk my mother is welling to live with.

BGP

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Author: BGPenhollo Two stars, 250 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13678 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/5/1999 10:45 PM
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"Are you saying that if I purchase $250,000 worth of an index fund mutual fund, I can't count on receiving $25,000 in dividends per year with a resonable degree of certainty (realizing some risk)? "

You can assume anything you like but there exist a probablity that it will not happen.

"I thought the average rate of return on index funds was well over 10% during the last 10 years. Maybe I'm confusing growth and return. Is that the case?

The total return for S&P 500 since 1926 through 1993 has been 10.49%. But there was a 10 yr period ending in 1974 where the average total return was 1.2%.

Total return for a stock is the dividends and the price appreciation of the stock. Let's say the Stock costs $10 on Dec 31, 1998. It issues a $0.25 dividend on Dec 31, 1999 and it's price has risen to
$10.50.

The total return is 7.5% which is:

((Div + (End $/sh - Start $/sh))/Start $/sh

(($0.25 + ($10.50 - $10.00))/$10.00 = ($0.25 +$0.50)/$10

$0.75/$10 = 7.5%.

Growth is how much some measurable term gets larger. Margins, Sales, net Income, Returns and etc. can grow, shrink, stay the same.

What I think you may be confusing is that growth investments - meaning investments in companies that are growing will generally have larger total returns than companies or investments that are not growing.

BGP

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Author: stewartr002 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13720 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/6/1999 2:04 AM
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Are you saying that if I purchase $250,000 worth of an index fund mutual fund, I can't count on receiving $25,000 in dividends per year with a resonable degree of certainty (realizing some risk)? "

"You can assume anything you like but there exist a probablity that it will not happen."

Reply: Thanks, I'm hearing that an index fund is probably not the right vehicle for what I'm looking for...regular income at higher than bank account rates for invested funds.

"I thought the average rate of return on index funds was well over 10% during the last 10 years. Maybe I'm confusing growth and return. Is that the case?

"The total return for S&P 500 since 1926 through 1993 has been 10.49%. But there was a 10 yr period ending in 1974 where the average total return was 1.2%.

Total return for a stock is the dividends and the price appreciation of the stock. Let's say the Stock costs $10 on Dec 31, 1998. It issues a $0.25 dividend on Dec 31, 1999 and it's price has risen to
$10.50."

Reply: Thanks again. I'm getting educated.
Randy


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Author: stewartr002 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13721 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/6/1999 2:29 AM
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Do a "foolish" search looking for "withdrawl rates" or "withdrawl percentages".

Reply: Thanks for the info but couldn't find anything after multiple searches using several different variations.

"His biggest fear/enemy is inflation. He needs a fair amount of money invested in stocks to compensate."

Reply: What do you recommend that would produce income which can be withdrawn on a regular basis (sounds like the $64,000 question I know)? From what I'm hearing, CD's may be the way to go for security. What about non-taxable municipal or utility bonds? How do they rate security wise? Lower than index funds...higher? Appreciate the advice.
Randy

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Author: Crosenfield Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13732 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/6/1999 10:15 AM
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Municipal bonds will give about 5% tax-free income at the present time.
Don't rule out an index fund. He needs growth, and to have part of his money in the stock market is the way to get it. It is reasonable to sell some of the shares from time to time to produce cash flow. Since the S&P 500 doesn't change that much during a year, the fund doesn't realize much profit--just the share price increases, so such a fund is quite tax-efficient.
After a few years he might have fewer shares, but each share worth significantly more and actually have more money than he started with.
If he buys bonds, he will know how much money he has and how much income. Over time, inflation will eat him up. If he buys stocks, over a 20 year period the market will go up. Short term it will fluctuate. We have had several years of excellent markets; maybe next year will be bad (though presidential election years historically are good, as the party in power tries to make the economy look good). We have historically high valuations and many think the bubble will burst. Not possible to predict. But if at 69 he is in good health and wants this windfall to last a lifetime, he needs some stocks. An index fund helps avoid the stockpicking.
Good luck! Chris

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Author: WilliamLipp Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13733 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/6/1999 10:35 AM
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stewartr002 Date: 9/6/99 2:29 AM Number: 13721
Do a "foolish" search looking for "withdrawl rates" or "withdrawl percentages".

Reply: Thanks for the info but couldn't find anything after multiple searches using several different variations.


In the "Board" field below this message, put "Reire Early Home Page" and click find. Scan the last 100 messages on that board. This will lead you to excellent information about strategies that invest in stocks and pull a small fraction out of the stocks every year. I believe this is the best method to balance risks of inflation and need for income, and participate in income growth. Two problems I see.
1. This won't support anywhere near the 10% you hope for unless you accept a substantial probability of losing all the money. Neither will anything else, though.
2. Personal experience with people that grew up in the depression is that no numbers will convince them to buy stocks.

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Author: stewartr002 Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 13741 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/6/1999 3:45 PM
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Chris Wrote: Municipal bonds will give about 5% tax-free income at the present time.
Don't rule out an index fund. He needs growth, and to have part of his money in the stock market is the way to get it. It is reasonable to sell some of the shares from time to time to produce cash flow. Since the S&P 500 doesn't change that much during a year, the fund doesn't realize much profit--just the share price increases, so such a fund is quite tax-efficient.
After a few years he might have fewer shares, but each share worth significantly more and actually have more money than he started with.
If he buys bonds, he will know how much money he has and how much income. Over time, inflation will eat him up. If he buys stocks, over a 20 year period the market will go up. Short term it will fluctuate. We have had several years of excellent markets; maybe next year will be bad (though presidential election years historically are good, as the party in power tries to make the economy look good). We have historically high valuations and many think the bubble will burst. Not possible to predict. But if at 69 he is in good health and wants this windfall to last a lifetime, he needs some stocks. An index fund helps avoid the stockpicking.
Good luck! Chris

Reply: Excellent input Chris. Thanks very much.
Randy

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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: 13746 of 76395
Subject: Re: What To Do With A Large Cash Amount? Date: 9/6/1999 5:37 PM
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<<"His biggest fear/enemy is inflation. He needs a fair amount of money invested in stocks to compensate."

Reply: What do you recommend that would produce income which can be withdrawn on a regular basis (sounds like the $64,000 question I know)? From what I'm hearing, CD's may be the way to go for security. What about non-taxable municipal or utility bonds? How do they rate security wise? Lower than index funds...higher? Appreciate the advice.
Randy >>

Bonds or bond funds can be just as volital as stocks, just watch what happens the next time Greenspan talks about raising interest rates. The only caviat is if you hold them (individual bonds) until maturity. But then you still might get caught in a money squeeze and have to sell them at an inopurtune time, therefore, the extra % points over a CD is not worth it to me.

For me personally, I'd hold 2-3 years worth of living expenses in CDs and the rest in stocks.

JLC

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