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The Cash King Portfolio has been renamed the Rule Maker Portfolio.

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11 Steps:
 1: Philosophy
 2: Mastering Finances
 3: Allocating Savings
 4: Finding Ideas
 5: Getting Information
 6: Cash-King Criteria
 7: QuaVa & Flow
 8: Ownership
 9: Putting It Together
10: Retirement
11: Getting Answers

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CKs for Retirees
The beauty of compounding...

by Phil Weiss
(pweiss@homemail.com)

TOWACO, NJ (Aug. 4, 1998) -- Tonight I'm going to tackle the question of whether or not Cash-King investing is appropriate for retirees or soon-to-be retirees. Most of the time, our investing focus in these reports relates to investing for many years and even decades until retirement. In our opinion Cash-King investing -- with its focus on low account maintenance, low portfolio turnover, low tax cost and high reward in terms of stock appreciation -- is perfectly suited for the Fool that is many years from retirement.

That's because when many of us start investing, we're willing to take on investment-related risk in hopes of seeing our capital appreciate by leaps and bounds. We're in Accumulation Mode. And if we're investing Foolishly, then we're putting money in the market that we don't need to meet ordinary living expenses. We have little interest in receiving ordinary income from our investments in the form of dividends, as dividends require us to pay taxes. Our investment goals are focused on capital appreciation.

But, as we get older, time-frames grow more important. The benefits of 50 years of compounded growth on our savings begin to ring hollow. And then we head toward retirement. We slide over into Preservation Mode.

Yes, once retirement comes, there's naturally at least a slight shift in investment focus. Without the salary earned from a daily job, the retiree needs other sources of current income. An investment portfolio is often a principal source of that income.

When those that owned common stocks during their career stop working, or when it's time for them to start withdrawing the money that they've diligently put away in their 401(k)s or IRAs, they often think that they have to sell all their stocks and replace them with income-producing securities like Treasury Bills, Bonds, Ginnie Maes, Preferred Stocks and Certificates of Deposit. Suddenly, they decide that they can't afford the risk to their principal that comes from investing in common stocks.

Let's see if this is true.

What many fail to realize is that even if you wait until you're in your 60's to retire (this Fool certainly hopes that investing regularly in Cash-King stocks will enable you to retire well before that), there is a reasonable chance that you'll live into your high seventies, eighties or even nineties. That leaves plenty of time to keep at least a portion -- if not the majority -- of your investment dollars in Cash-King stocks. We are talking many years here, even decades.

Now some may wonder why they should own common stocks and take on the related risk to their principal at this point in their lives. Let's work through an example. Warning -- warning -- warning -- warning: There are some numbers oncoming.

Okay, here goes.

Say that at retirement you have $250,000 to invest and that you need to pull out $10,000 per year from this money to meet your living expenses � the rest of your income needs can be met from such sources as your retirement plan at work and social security.

Next, we'll assume that a reasonable rate of return to expect from an income-oriented investment is 7%. If you invest $143,000 in such securities, then you'll get the $10,000 of income that you said you needed. To be conservative though, let's say that you invest $175,000 in such securities.

That still leaves you with $75,000 to invest in Cash-Kings!

The question, though, is what's the advantage of keeping some money in Cash-Kings? After all, if you invest all the money in income-producing investments you'll have more income than you'll need, and your principal will be relatively safe.

The problem is that there could be changes to your original assumptions about your cash requirement. Five years down the line, you could have an unexpected expense that will require the use of some of your original principal. Or your living expenses could just be higher than you anticipated. If this happens just a few times, your principal may no longer be sufficient to meet your income needs.

If, contrarily, you invest your $75,000 in Cash-Kings, two things are likely to happen. The first is that your principal is much more likely to grow over time than it is if you just own income-producing investments. After all, remember that when you hold an income-producing investment to maturity, all that you'll have at the end of the day is the same principal that you invested originally. With the Cash-King Portfolio, we're hoping to generate at least 15% annual growth, with taxes delayed on all aspects of the portfolio except for the Fool Four. The principal grows, and rapidly, over most five-year periods.

And if you have a need for some extra funds, you can always sell some shares of your Cash-King stocks to raise the cash. That way you won't have to touch the funds that you invested in income-producing securities. My guess is that your Cash-King stocks will have increased enough in price that the stock sale will not materially decrease your principal.

There's another reason to invest some of your portfolio in Cash-Kings even at this point in your life. This is a benefit of investing that is normally of little interest to the managers of this portfolio � dividends. Personally, I never spend any of the dividends that are paid on my stocks; I reinvest all of them either directly in additional shares of the same stock or indirectly by using them towards the purchase of another stock.

The real power of dividends comes from owning a stock over a long period of time. Say that you purchase a Cash-King that currently has a dividend yield of 1.5%. If the dividend is increased by 12% per year, then it will double every 6 years. This means that in 12 years, the dividend return on the original investment will be 6%, almost the same as the yield on the bond fund we talked about above.

Better yet, if you go out another 6 years (for a total of 18), then the dividend yield on the original investment will be 12%. This is just a different way to look at the power of compounding. Now, you see that the income from your original investment in this Cash-King is yielding a better return than you could get from the income-producing investments we talked about above. Plus, you're expecting some capital appreciation. And again, if you have need for some extra cash along the way, you can sell some of your Cash-King shares and likely still have more principal than you did when you started.

I've seen Rob state in the Cash-King folder that his goal is to be able to live off his dividends when he retires. Believe it or not, if you start investing in Cash-Kings early enough, this could happen -- quite likely, in fact. If you take my example out for a total of 30 years, then you'll end up with a 48% return on your original investment per year. With those kinds of dividends coming your way, there may be no reason to sell your Cash-King stocks to earn additional income.

Ah, but that last paragraph is really a story for a different day. The message for tonight is that Cash-King investing can work for those that have just started investing and work as well as for those that are either approaching or in their retirement years.

The layout of the entire portfolio may change a bit, but exposure to the equities markets should always be a part of any person's plan (once they've rid themselves of, ugh, credit-card debt). Foolishly, we believe we have one of the best ways to gain that exposure: rock solid, enormously profitable, well managed, name-brand consumer franchies with staying power.

Can anyone forward this report to the AARP mailing list?

I'll be back tomorrow to talk about whether or not Cash-Kings are good investments for children.

Fool on!

Phil Weiss


08/04/98 Close
Stock  Change    Bid 
 ---------------- 
 AXP   -3 5/16  106.44 
 CHV   -2 13/16 78.31 
 CSCO  -3 5/16  93.13 
 KO    -3 1/4   78.88 
 GPS   -2 5/16  58.50 
 EK    -  9/16  81.06 
 XON   -1 7/16  67.06 
 GM    -1 5/8   69.50 
 INTC  -2 15/16 81.88 
 MSFT  -3 15/16 104.44 
 PFE   -5 1/16  104.63 
 TROW  -2 1/8   33.88 
 

                  Day   Month    Year  History 
         C-K      -3.50%  -3.64%  11.36%  11.36% 
         S&P:     -3.62%  -4.33%   7.07%   7.07% 
         NASDAQ:  -3.53%  -4.63%   8.03%   8.03% 
  
 Cash-King Stocks 
  
     Rec'd    #  Security     In At       Now    Change 
     2/3/98   24 Microsoft     78.27    104.44    33.43% 
     2/3/98   22 Pfizer        82.30    104.63    27.13% 
     5/1/98   37 Gap Inc.      51.09     58.50    14.50% 
    2/27/98   27 Coca-Cola     69.11     78.88    14.13% 
    6/23/98   23 Cisco Syst    86.35     93.13     7.85% 
    5/26/98   18 American E   104.07    106.44     2.28% 
     2/6/98   56 T. Rowe Pr    33.67     33.88     0.60% 
    2/13/98   22 Intel         84.67     81.88    -3.31% 
  
 Foolish Four Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko    63.15     81.06    28.37% 
    3/12/98   20 Exxon         64.34     67.06     4.24% 
    3/12/98   17 General Mo    72.41     69.50    -4.01% 
    3/12/98   15 Chevron       83.34     78.31    -6.04% 
  
 Cash-King Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
     2/3/98   24 Microsoft   1878.45   2506.50   $628.05 
     2/3/98   22 Pfizer      1810.58   2301.75   $491.17 
     5/1/98   37 Gap Inc.    1890.33   2164.50   $274.17 
    2/27/98   27 Coca-Cola   1865.89   2129.63   $263.74 
    6/23/98   23 Cisco Syst  1985.95   2141.88   $155.93 
    5/26/98   18 American E  1873.20   1915.88    $42.68 
     2/6/98   56 T. Rowe Pr  1885.70   1897.00    $11.30 
    2/13/98   22 Intel       1862.83   1801.25   -$61.58 
  
 Foolish Four Stocks 
  
     Rec'd    #  Security     In At     Value    Change 
    3/12/98   20 Eastman Ko  1262.95   1621.25   $358.30 
    3/12/98   20 Exxon       1286.70   1341.25    $54.55 
    3/12/98   17 General Mo  1230.89   1181.50   -$49.39 
    3/12/98   15 Chevron     1250.14   1174.69   -$75.45 
  
                               CASH     $94.76 
                              TOTAL  $22271.82 
  
   
 *The year for the S&P and Nasdaq will be as of 02/03/98 
       

</THE CASH-KING PORTFOLIO>

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