By Warren Kaplan
The Stock Option Writer
© Warren Kaplan 2011-2017
November 13, 2017
Everyone is expecting the market to roll over and die. There is a ton of money on the side. Meanwhile, based on the averages, the market continues to climb up making it even more frustrating for the cautious investor sitting on cash. Even Berkshire Hathaway is sitting on nearly $100 billion in cash waiting for a huge tumble in stock prices. So, I am beginning to wonder if doing the opposite of what the “smart” money is doing, it just might be time to seek value under the conditions we have. The biggest problem is that the Federal Reserve has SET their interest rate too low and in an effort to get yield, stocks are a better bet than interest on cash and A rated short term bonds. Everyone, including me, expects the Fed rate to go up by ¼% in December, which will help conservative seniors who need income to survive as well as pension plans, annuities and insurance companies to meet their obligations. Many BDCs (have your broker or financial manager explain what a BDC is) have loaned out money that is subject to rising rates while they have locked in their own borrowing at long term fixed rates and so would benefit by a rise in interest rates. Lenders who have loaned out money at a fixed rate and in turn have borrowed at a variable rate will feel a tiny squeeze on income. Overall mortgage rates will be higher for those who have not locked in a rate. The higher interest rates will benefit the shareholder of bank stocks, CDs, pension plans, insurance companies, annuity providers and in general, seniors who have saved money.
I am now 80 years old. I figure to live to 100 so I only have 19 years + 6 months to live. With science, maybe more. In any case, the thought is why did I make all the money I did? Judy and I started with a little below zero dollars and no financial mentor. We learned how to accumulate money. Now we are multi-millionaires. We are spending money that we have accumulated over the years. Did you know that at age 70.5, the federal government forces you to take out a minimum stated amount from your IRA whether you need it or not? As the money exists the IRA, it is taxed. Here is something you may not know. You can put after-tax money into a Roth IRA and when you take it out, which is whenever you want – not mandatory- the money comes out tax free. The reason? Well in the IRA you can put in before tax money and pay taxes when it exits. In the Roth IRA you can only put in after tax money. There are dollar limits that you can put into IRAs and Roths.
So, what types of stocks should you put in the IRA and the Roth IRA? I use ETFs. That way, I never have to worry that the company that I own shares in going bankrupt. Even big companies can and do go under. Here are some real losers that 30 years ago you would have sworn would grow. GM. K-Mart, Polaroid, Eastman Kodak, Bethlehem Steel. Anyone remember Washington Savings and Loan? How about World Com and Adelphi and Pan-Am and Eastern Airlines? My favorite ETFs are SPY and QQQ and NOBL. I have DGRW and a bunch of ETFs managed by Wisdom Tree. I let the dividends be automatically reinvested (DRIP programs). Some of the ETFs pay monthly while others pay quarterly. Because we are forced to withdraw money every year from our IRAs and due to our Social Security checks, we do not need the dividend income from the ETFs and so we use the reinvestment programs. Judy and I are traveling more (we have been on 97 ocean cruises and have 3 more scheduled for this year and 6 more in 2018-19 and 8 river cruises) I find it comforting to have my stock investments managed without my help. With all of the ETFs are set up as dividend reinvestment programs, the lower the stock prices go, the more shares we accumulate. Here is the whole point of telling you this. You should save some money for your future needs but you should be spending some money to enrich your life now. Stock investing should be looked at as a long-term savings and not worry about the day to day ups and downs. If all you do is save money and have a fear of investing, you die missing the best that life offers. I do get questions of what about my children and my grandchildren. My simple answer is don’t worry about them. I am confident they will inherit more than you did. If you taught then about how and why to save money, they will do financially better than you did. Judy and I not only travel, we travel in style. As to cruises, we take suites and fly business class. We fight hard with travel suppliers as to price but we have learned to not compromise the experience. If you are buying a car, don’t get the lowest priced car. Better cars offer better rides and make the drive more comfortable. Larger tires make the ride smoother, better radio sound makes the music sound better and larger cars are safer to drive. Buying any product is a matter of value not price.
Warren Kaplan has been writing options for 50 years. He has been a stockbroker, investment banker and brokerage owner. He currently owns and operates Kaplan Asset Management, a provider of financial assistance for small to middle market businesses. He has more than a half-century of experience in dealing with financial markets, giving guidance and consulting with management, and assisting in the development of business strategies and solutions. The Company has assisted and consulted many successful companies, such as Natures Bounty (NBTY) and Action Products International (APII), helping them to go public and trade on the NASDAQ stock exchange. His philosophy is to “do something with the profits.” “If you make $100 in the stock market, take 50 percent and invest it back into the market. Then, take the other 50 percent and buy yourself something.”
Additional disclosure: I am not a registered investment adviser and I do not give investment advice. Nothing in this article should be construed as investment advice. Investors are encouraged to do their own research and seek the advice of an investment professional before investing. Writing options is not for everyone. This article was written for informational purposes only.