Author: A.T.

I know some of you think I’m a bit strange from time to time — but what about you? You think you’re all portfolio management and pinstripes? I don’t think so. Witness a random (well, fairly random) slice of a recent evening’s e-mails from this page:

From Tony Spina: "I have it on good authority (the Roswell Aliens) that the Dow will be at 9200 on October 1 this year, and at 4900 by January 1, 1998. How do I invest to make the most money?"

Answer: Write a book about your contact with the aliens.

Alternative answer: In case you’re serious about the question, if not its premise, you’d buy far-out-of-the-money October calls now; sell them September 30 and then put every cent you’ve got into far-out-of-the-money January puts.

Of course, this would be really dumb, because as strong as your hunch might be, no one actually knows where the market is going short-term — least of all a bunch of dummies tethered to parachutes being pushed out of Air Force planes in New Mexico — and options are a less-than-zero-sum game. Steer clear.

Out-of-the-money options, by the way, for those unfamiliar with the jargon, are those whose "strike price" is above (in the case of calls) or below (puts) the price at which the stock itself is trading. As a result, they’re relatively cheap, because they’re a long shot, but provide terrific leverage in case you win. I almost always lose money on options, but still remember the time, decades ago, when I bought way-out-of-the-money Merrill Lynch calls (not from Merrill Lynch, on Merrill Lynch), and watched in greedy awe as the underlying stock price rose to approach my strike price (already pushing up the value of my options), then reached and crossed the strike price — still with months to go to the exercise date — then rose higher and higher and higher. Calls I had bought for 37 cents each ($37.50 for a call on 100 shares) ultimately would have been worth about $20 each ($2,000 per call) had I held on all the way to expiration.

From Sudhindranath Sira: "You wrote on ceres.com dated 06/30/97: ‘… This is undoubtedly true. But bear in mind that long before Perot …’ I request you not use the dreaded B-word! Shall we instead say ‘keep in mind’ from now on? Just kidding! 🙂 — Sira."

Thanks, Sira. You need not worry about the bear word. Only a handful of people have any idea what it means any more.

From Donald Rintala: "The great windmill of our age is the battle between capitalism and collectivism. Anyone who can seduce the masses to fall in love with capitalism deserves a medal. So here’s the plan: you team up with Steve Forbes to form the Compound Interest Party. Your slogan: no more class war between the rich and the poor. Now, we all get rich! I’ll bet the country could work fabulously on a *total* tax take of 15%. Countries like the Bahamas don’t even have an income tax. Ever feel tempted to move there? Somehow, I think we’ve missed it big in the US — betrayed our origins and ended up performing way under our abilities. Only the Compound Interest Party can get it back together! — Don"

Interesting, Don, but I am struck by the fact that the Bahamians, with no income tax, seem largely to be poor, while we visitors from high tax jurisdictions are rich. Must be that we have more air conditioning.

From Roger Simmons: "Were you a third class Midshipman on the cruiser Albany?"

Not even a fourth class midshipman, Roger.

Finally, from Toby Gottfried, reacting to my definition of "millionaire" (anyone with $5 million): "If ‘millionaire’ means ‘really really rich person,’ then in the old days, it was someone who had a million dollars. Now it’s someone who makes a million dollars."

Ah. You couldn’t be more right — except from a billionaire’s point of view.

“Please do not include my name or E-mail. I am 24 years old and have recently started to invest in the 401K. I am putting $45 a week into (Growth Company) and (Growth and Income) with Fidelity. Split 50/50. I have a total of about $2000 in there now. I just received my dividends for one of them and they were barely anything. How is it that I can make any money with these well known funds, when I am not getting big dividends? What if the price is at 45-50 for the next 10 years and then drops to 30 due to a market drop; without the dividends how can I make any money. Please try to help me out on this. I am very confused on how I am going to get ahead. Everyone I seem to ask is confused about it as well. They view the 401K just as a tax break.”

Well, and a good tax break it is, too. But it’s much more than that. While the market, and individual funds, will have their ups and downs, if you just keep plugging away at this with your current employer, and then one way or another with future employers (or via a Keogh Plan or S.E.P. if you should become self-employed), you will have a comfortable retirement.

At 24, of course, you can’t imagine ever being 60. But 60 isn’t ordinarily the end. By the time you’re 60, 36 years from now, you may well have yet another 36 years beyond that. Right now you may think those years won’t mean anything to you, but of course that’s ridiculous. There are lots of happy senior citizens, lots of unhappy senior citizens — and your being in this $45/week habit in the 36 working years immediately ahead makes it a lot more likely you’ll be one of the happier seniors in the second, leisure 36.

Let’s assume that you have $2,000 now and are contributing $45 a week, as you say. Let’s further assume that your 401(k) investments manage to earn 10% a year, although some years they will do worse, some better. Doesn’t sound like much, I know — $50 a quarter right now on $2,000. Fifty dollars is barely enough for dinner and a movie. Let’s further assume you up that $45 a week by 2% a year as your earning power grows — meaning, for example, that next year you’d up it from $45 to almost $46.

Apart from whatever other assets you wind up accumulating in life, that would put you, 36 years from now $908,159 ahead of the guy next to you who figured it wasn’t worth bothering with a 401(k) and spent the money on beers and a couple of Oasis and Spice Girls CDs each week. He winds up with a gut and some CDs long since rendered obsolete by whatever the prevalent music medium then is (telepathic disks?). You wind up with enough to withdraw a taxable income of $93,000 a year for 36 years (assuming the unwithdrawn portion continues to grow at 10% along the way).

Of course, if we average 3% inflation along the way, that $93,000 will really only be about $32,000 in today’s money at first, and just $11,500 by your final year. Which is why you have to do even more than the 401(k) if you want to build a really nice little fortune.

But it’s not bad for $45 a week. Especially since without the 401(k), a good chunk of that $45 would be whisked away by taxes anyway.

Don’t focus on the quarterly dividends. (And don’t worry about the literal dividends, if that’s what’s got you bugged. The stocks growth mutual funds invest in generally don’t pay dividends. The funds pay out paltry dividends, plus trading profits realized from selling stocks. But to the extent they don’t sell their winners, there’s nothing to distribute, just a higher share price for the fund.) Focus on the distant horizon.

Finally, if your company is like most, it kicks in a little of its own money, typically 25 or 50 cents, for each dollar you put in a 401(k). If that’s the case, then this is truly irresistible. Free money! You must promise me, in that case, you will always contribute every last dollar that qualifies for this matched contribution. The aforementioned $93,000 a year for 36 years would in that case be even 25% or 50% more.

Free money, Jeff! Free money!

CONFLICT OF INTEREST, as recently defined in this space: When you’re earning 5% interest in a money market account and paying 18% interest on a credit card.

"Aahhhhh," responds Glenn Doherty, "but what if I’m only paying 8% on my student loan and I can make 15% on the market, should I only pay the minimum on my loan each month, drawing it out while investing that "saved" money? Or is it still better to do what I do now and that’s pay double the required monthly payment in an attempt to finish off the loan early so that the total interest paid is minimized? The obvious answer is to invest it, but then again what if my picks don’t go up 15%? My gut tells me no debt is good debt, though I’ve also read debt is a good instrument for creating wealth and shouldn’t be feared. Still learning the ropes."

Well, the first thing to say is that there is no one right answer. You have a good gut and should enjoy the satisfaction of getting that debt paid off. As we’ve been saying the last couple of days, not having to pay 8% is as good as earning 8% risk-free and (because student loan interest is not deductible) tax-free. Show me a triple-A municipal bond that pays anywhere near 8%.

What’s more, even if you could earn 15% in the market — which on average over long periods very few people consistently do — it would be less than that after taxes.

So long as you’re not cutting it so close to the bone by making those double payments that you risk running up credit card debt, say, at 18% or 20%, I’d say: keep doing what you’re doing. Another exception would be if, by paying more than you need to, you find yourself without the money for some tool or tuition that could prove a great investment in your own job skills or earning power. If you’re a graphic designer who needs some amazing software program to compete, say, you could earn several hundred percent return on the investment in that software, let alone 8% or 18% or 20%. But you don’t need me to tell you that.

One last exception, because you are young: If you do not already have the habit of sending some small chunk of dough every month to a no-load, low-expense mutual fund or two (or to buy shares in a couple of closed-end mutual funds selling at discounts), it’s worth getting into that habit right away — and maintaining that discipline for the next half century (only raising the size of the chunk as your fortunes allow). To my mind, the market is high here, but that’s fine if you’re just getting started: if it goes down at some point, even if it should go down at some point severely, you’ll just be able to get stocks "on sale." Over fifty years of steady investing, you should do very well. So if it means easing up on your student-loan prepayments, even if the numbers don’t necessarily work out to your advantage right away, it’s worth it just to get into the habit. Long after your student loan is history, this habit will be worth a fortune to you.

Yesterday I answered a question from Pieter Lessing about stop-loss orders. If you don’t know what they are, check it out. Today, the rest of Lessing on losses:

Could you comment on STOP LOSS ORDERS AS PART OF AN OVERALL INVESTMENT STRATEGY? I have stop loss orders on most of my equity positions (approximately 20% below the current trading price) for the following reasons:

1. To lock in a profit, once I have one. I finally decided that buying a stock at $18, see it zoom to $40, then down to $7 in less than a year is dumb, not to mention painful. To have sold at $32 ($40 minus 20%) would have been just fine. It would have worked in this case, because the climb up to $40 never had dips as big as 20% along the way.

2. Protect against catastrophe. I travel internationally, and am out of touch w/ quotes & brokers for weeks at a time. If the big one hits while I don’t have access to my account, I have a theoretical limit to my loss. (I realize that I may lose more than 20% if the dive is REAL fast, but since I’ve made quite a bit more than that in most of my positions, I’m willing to accept that.) If the Dow zips down to 2,000 in an hour, I figure we have bigger problems to face anyway. However, if it takes a few days to get down to 2,000, I would be in an all cash situation, buying like crazy!

2. Set the limit of loss when buying a new highly speculative stock. (Sure, it may triple after first going down 20%, but it can also keep on going down.) Preservation of capital.

PS: Just like any other investment strategy (or Vegas gambling system), the above does have its weaker points (tax implications, commissions, etc.).

PPS: I prefer the above to selling calls (or buying puts) — lower maintenance.

Pieter goes on to say that he’s not dogmatic about that 20% number. He may set his stops looser, allowing for even more of a dip, if he thinks the stock is very volatile and/or if he has a really big profit in it.

So what do I think? I think, mainly, that for Pieter this is a good strategy. It gives him peace of mind. Indeed, for anyone lucky enough to have gotten into this market in the last few years and doubled or tripled his or her money, it’s something to consider. The benefits, as Pieter has listed them, are clear. (But for the record, the Dow can’t drop to 2000 in a day, for two reasons. First, as I’m sure Pieter knows, there are “circuit breakers” that kick in at various stages to keep the market from falling off a cliff. Second, at least two Dow components, Coke and GE, only go up.)

But the negatives of this strategy keep me personally from using stops very often.

If you’re speculating in stocks because they may go up, this is a strategy to consider. If you’re buying them to get a stake — perhaps at what you consider a bargain price — in a company you want to own, whose profits you want to share, and in whose growth you want to participate, then this is not such a good strategy. It means that you will frequently find yourself selling stocks you thought were worth owning at one price for no reason other than they are now 20% cheaper (if you set your stop at a 20% loss).

When a sale is triggered, you have that 20-plus percent loss (plus, because it’s not unlikely that, as the stock is dropping, your sell order will fetch a still lower price). You incur a brokerage commission (happily, this has become all but trivial). You eat the “spread” between bid and asked prices (not so trivial on some stocks). And, if it’s a stock in which you have a profit in a taxable account, you give up a chunk to Uncle Sam.

Granted, if you’re holding a stock at $150 a share for which you paid $28, it’s not too terrible a prospect. You may think of this as play money to begin with. (You know how magnanimous you get at Monopoly when you have hotels every place and there’s no way you won’t win? How when your cash is piling up and you land on someone else’s pathetic little property, with $23 rent, you flip them a hundred and tell them to keep the change? That’s what’s going on here.)

And then there’s the conundrum of just how tight to set your stops. The tighter you set them, the less you’ll lose on any given position — but the more you may lose in the long run, as you are whipsawed out of stocks that are basically headed up, but dip occasionally by enough to trigger the stop.

A final conundrum is whether to place a straight “stop” or a “stop limit” order. With a stop, when your stock trades at $25 (or wherever you set your stop), your broker will automatically enter a market order to sell your shares. In a thinly-traded stock dropping fast (in part because you are not the only guy who’s been setting stops), that could mean getting your order filled not at $25 or $24-3/4 but $16. Literally. It can happen.

To protect against this, you can enter a “stop limit” order — to sell if the stock trades at $25, but only if you can get at least $24, say.

That way, you know for sure the worst price you’ll get is $24, which is a big plus . . . except that it also may defeat the whole purpose of the stop in the first place. Because if this is the next Bre-X and you want out at any price, there you will likely sit with the stock at $2, wishing you had set no limit and gotten “just” $16.

There’s no free lunch.

On balance, and though it will vary tremendously from investor to investor, stops probably cost stock-market investors more than they save them. But that is simply the price you pay for peace of mind.

#

Where stops do make lots of sense is in commodities speculation, where you can actually lose more than your entire stake, and where your reason for buying coffee futures wasn’t that you actually wanted to own a few tons of coffee, just that you thought the price might go up. Commodities speculation is an idiotic enterprise for lay investors like you or me, but downright suicidal without stops. (And I am so sick of all the innuendo and misinformation about Hillary Clinton’s commodities adventure, I’d like to stop your snickering right now. The full story is laid out in great detail in Jim Stewart’s Blood Sport, and it turns out that — other than handling the public relations aspects of the episode very badly — she did nothing wrong. I’ll bet not one American in 100 knows that.)

Writes Pieter Lessing: “Fidelity does not allow stop-loss orders on NASDAQ stock, and could not give me a good reason why. So, to protect my profits in MSFT et al., I moved them to an online broker that does offer that type of order — and I saved a bit of money to boot. Question: help me understand why so many (discount) brokers do not allow stop-loss orders on NASDAQ?”

First, for those unfamiliar with them, stop-loss orders are a special kind of “good-til-canceled” order you can place with your broker and then more or less forget about. Say you buy 100 shares of CryoLaserComics (ICE), a highly speculative outfit trying to perfect the process by which comic book characters can be frozen and then brought back to life with lasers. It is a hot but volatile issue, as each new press release — POW! WHAM! OOF! — emerges from the lab. (Not to say this is a company whose lab develops press releases, only that they do try to keep the investment community closely informed.) So, figuring if it’s shot up from $10 to $26 there must be something good about it, you buy shares at $26. But having been told by people like me that you’re insane to do so — that you almost surely missed the speculative boat in this one, and who wants to revivify old comic book characters anyway? (other than Marvel, perhaps) — you figure you’ll play it safe and limit your possible losses. You could just make a mental note to keep your eye on the stock and sell if it ever dips below $24 or $25. But unless you have one of those things in your pocket that vibrates when one of your stocks moves, and even then, you could easily not notice the first screams as blocks of ICE stock fall out the window. So instead you do it the easy way. “And put in a stop at $25,” you tell your broker when you buy the shares, meaning that if they ever trade at $25, you want him to sell your shares immediately “at the market,” even if he winds up getting you less than $25 at that point. This is called a “tight stop,” because you’re not allowing ICE much room to fall — just a buck — before you kick it out. If ICE never dips on its way to 43, say (nevva happen!), you might then call your broker and raise the stop — to $37, perhaps — hoping to lock in much of your profit . . . but not setting the stop too tight, giving ICE room to dip without triggering a sale.

So that’s what a stop-loss order is. Tomorrow, I’ll tell you more about them. But today, let me just answer Pieter’s question.

Whether brokers accept stop-loss orders depends on the way they execute trades. Over-the-counter orders will frequently be sent to third-party market makers, several of whom do not accept stop-loss orders. This explains why some brokers will accept stop orders on New York and American Stock Exchange-traded stocks but not NASDAQ stocks, routed through different market makers.

(As always stated in the fine print below, I do not specifically endorse Ceres — any more than they endorse me — but in this context I did think I should check into their policy with regard to stops. “The market makers Ceres uses all accept stop-loss orders,” a Ceres spokesman told me, “so we can accept stops and stop-limits on all our orders.”)

* *

It’s a cliché, to be sure, but it’s still worth remembering as often as possible: these are the good old days. Booming stock markets, low unemployment, almost no one in foxholes or gulags, live photos from the surface of Mars — it doesn’t get much better than this.

But it does, of course, or at least we expect it will, and that’s the other thing that’s truly astonishing. For 99.9% of human existence, people couldn’t assume things would be better tomorrow than today. They could hope for a better kill when they went hunting, hope for a good rain to grow the crops, hope to have a child who’d survive and grow strong and protect them as they aged. But things improved so slowly as, I should think, to be imperceptible most of the time. And there must have been vast stretches of time when nothing improved at all. Even vast stretches of recorded history.

Only very recently have we gained some measure of control over events and begun to point them in a generally positive direction. We can reasonably expect our lives to be longer and more comfortable with each passing year.

Ho-hum. But in fact this is an astonishing thing that applies to only one of the millions of species on the planet, and that has applied, in the main, only in the last few moments of Time.

Philosophers will argue whether this has made us any happier. But I think it clearly has decreased the proportion of time we’re unhappy, which amounts to much the same thing. Air conditioning and aspirin, not to mention Prozac or running hot and cold water, are simple examples of recent developments that have taken huge bites out of the collective discomfort. So while our highs may be no more high than they ever were, our lows are fewer and less persistent.

Can you imagine a summer without ice? This describes 99.9% of all the summers humans have ever experienced. Now many of us have ice-in-the-door. ‘Nuff said. Enjoy.

Dave C. writes: "Re margin interest — or is it marginal interest? — is it DEDUCTIBLE interest? THAT is my question???? If one should make purchase of securities (aka stock), using money borrowed on margin, can one deduct the interest thereto from any capital gains realized when the securities so purchased are sold?? Gadzooks!"

I like a man who says Gadzooks. My older brother is actually alleged to have said it at age six or so, spontaneously, from something he’d read — which is when my parents knew he was bound for Harvard. ("Gadzooks," his competitive little brother would exclaim years later upon learning that his older brother had just graduated Harvard summa cum laude.)

In any event, the answer is, first, that, yes, it’s called "margin" interest, paid when you buy stocks "on margin," which currently can’t be for more than 50% of their purchase price, but I have a hunch — no one else seems to think this — that one day if the market keeps climbing briskly, Alan Greenspan will bump that requirement up to, say, 55% or 60%. It’s an all-but-forgotten Fed tool, but it could be a good one, as it wouldn’t raise interest rates and directly stunt the economy (no need: inflation is in check) . . . yet it could help provide a "soft landing" to the rocketing stock market.

"We are not suggesting that stock prices are irrationally exuberant," Greenspan could obfuscate. (It is his job to obfuscate, to nudge psychology ever so slightly through obfuscation, not send it over a cliff with clear, bold talk. We should be happy we’re not sure what he means.) "No, we have taken this modest action simply because we see quite a few investors coming into the market for the first time, and feel that for them to do so too heavily on margin could, in certain circumstances, prove, or perhaps not prove, depending on events not yet foreseen or discounted, possibly less than optimally prudent."

In other words, he could tap the brakes lightly a couple of times, slowing the market without necessarily sending it into a skid.

Anyway, it’s margin interest. And while it is not deductible directly against your capital gain, it is deductible — if you itemize your deductions — against ordinary income, so long as you meet certain conditions, which it sounds as if you do. (I’m not your tax adviser, but the main condition is that you not deduct more in investment interest paid than you have earned in investment income.)

But please let’s not lose sight of the real question here: what are you doing buying stocks on margin in the first place? With the market at these levels, that’s awfully dangerous unless you really know what you’re doing — and I would respectfully submit that you don’t, since you don’t know whether margin interest is deductible. Are you sure this is wise? Have you checked your local white pages for Gamblers Anonymous?

I got the following “chain” sort of thing recently — you may well have gotten it too. I’m a guy who actually wrote his MBA thesis on the subject of chain letters, and how ridiculous they are, so you won’t be getting many from me. But because some of you apparently read this comment with your morning coffee, and because — fortunately — you are sitting too far from the computer screen right now for me to see you rolling your eyes at the corniness of it all, I pass it on. Yes, it’s corny. But . . .

ATTITUDE IS EVERYTHING
By Francie Baltazar-Schwartz

Jerry was the kind of guy you love to hate. He was always in a good mood and always had something positive to say. When someone would ask him how he was doing, he would reply, “If I were any better, I would be twins!”

He was a unique manager because he had several waiters who had followed him around from restaurant to restaurant. The reason the waiters followed Jerry was because of his attitude. He was a natural motivator. If an employee was having a bad day, Jerry was there telling the employee how to look on the positive side of the situation.

Seeing this style really made me curious, so one day I went up to Jerry and asked him, “I don’t get it! You can’t be a positive person all of the time. How do you do it?” Jerry replied, “Each morning I wake up and say to myself, Jerry, you have two choices today. You can choose to be in a good mood or you can choose to be in a bad mood. I choose to be in a good mood. Each time something bad happens, I can choose to be a victim or I can choose to learn from it. I choose to learn from it. Every time someone comes to me complaining, I can choose to accept their complaining or I can point out the positive side of life. I choose the positive side of life.”

“Yeah, right, it’s not that easy,” I protested. “Yes it is,” Jerry said, “Life is all about choices. When you cut away all the junk, every situation is a choice. You choose how you react to situations. You choose how people will affect your mood. You choose to be in a good or bad mood. The bottom line: It’s your choice how you live life.”

I reflected on what Jerry said. Soon thereafter, I left the restaurant industry to start my own business. We lost touch, but I often thought about him when I made a choice about life instead of reacting to it.

Several years later, I heard that Jerry did something you are never supposed to do in a restaurant business: he left the back door open one morning and was held up at gunpoint by three armed robbers. While trying to open the safe, his hand, shaking from nervousness, slipped off the combination. The robbers panicked and shot him. Luckily, Jerry was found relatively quickly and rushed to the local trauma center.

After 18 hours of surgery and weeks of intensive care, Jerry was released from the hospital with fragments of the bullets still in his body. I saw Jerry about six months after the accident. When I asked him how he was, he replied, “If I were any better, I’d be twins. Wanna see my scars?”

I declined to see his wounds, but did ask him what had gone through his mind as the robbery took place. “The first thing that went through my mind was that I should have locked the back door,” Jerry replied. “Then, as I lay on the floor, I remembered that I had two choices: I could choose to live, or I could choose to die. I chose to live.”

“Weren’t you scared? Did you lose consciousness?” I asked. Jerry continued, “The paramedics were great. They kept telling me I was going to be fine. But when they wheeled me into the emergency room and I saw the expressions on the faces of the doctors and nurses, I got really scared. In their eyes, I read, ‘He’s a dead man.’ I knew I needed to take action.”

“What did you do?” I asked.

“Well, there was a big, burly nurse shouting questions at me,” said Jerry, “She asked if I was allergic to anything. ‘Yes,’ I replied. The doctors and nurses stopped working as they waited for my reply. I took a deep breath and yelled, ‘Bullets!’ Over their laughter, I told them, ‘I am choosing to live. Operate on me as if I am alive, not dead.”

Jerry lived thanks to the skill of his doctors, but also because of his amazing attitude. I learned from him that every day we have the choice to live fully.

Attitude, after all, is everything.

#

Now, you have two choices [read the e-mail I got]:

1. save and delete this mail from your mail box.
2. forward this to another person (and, hopefully, enrich his life)

#

Does anyone remember EST? The 1970s Werner Erhard weekend break-you-down-build-you-up, which even came with its own little lingo? I never took “the training,” but as best I could figure from my many friends who did, the essence of it was what you have just read. Congratulations: You saved the fee, the weekend, the shouting — and you were allowed unlimited trips to the bathroom. Pass it on.

From Mike Gordon in the back office of the Pittsburgh Pirates (“Check out our official site at www.pirateball.com“): “I haven’t seen you write about homeowner’s insurance and, since I just signed a sales agreement, I thought I’d be selfish and recommend it as a subject for a column (perhaps real soon so that I may benefit from the advice!).”

1. Shop around (including GEICO and State Farm and at least one independent agent). Check with whoever insures your car. (Or once you find a homeowner’s policy you like, ask them to give you a quote on your auto insurance.) There may be a price break for putting both pieces of business in the same place.

2. Take the highest deductible you can reasonably afford, both to cut the premium and because it’s a lot less hassle to self-insure than to file claims.

3. Be sure to understand the difference between “replacement” and “actual cash value” coverage — you probably want to pay a little extra for the former.

4. Check to be sure that items of value in your home will all be covered. For example, if you use your computer primarily for work, you may need to “schedule” it or insure it separately. Valuable collections and jewelry require special attention as well. (The best insurance for jewelry, if you ask me, is to get the fake stuff that’s indistinguishable from the real. Then sell the real stuff and use the proceeds to pay many years of homeowner’s premiums.)

5. If you live in New York State, consider letting the Percy-Hoek agency help you (516-589-4100). Over the past dozen years, I’ve been blown away by their level of service and expertise.

Mike writes:

Your response to Alan from Iowa really posed the question “How much money do I need to have saved up in order to be able to live off it for the rest of my life, and what return do I need?” I think I’ve stumbled on a simple way to figure this out. You just start out with an adequate nest egg and make sure that your investments return at least double the rate of inflation that you’ll experience over the remainder of your retirement life. That way you can use half the return on your investments to live on, and re-invest the other half, in order to keep your investment funds growing at the same rate as inflation.

It works like this: Suppose you want to live on an annual income of $50,000 for the rest of your life, adjusted for inflation, and you think inflation will average 4% over your lifetime. To determine the initial nest egg you’ll need, divide 100% by 4%, which gives you 25. Multiply that by the $50,000 you want to live on — your starting nest egg must be $1,250,000. If your starting nest egg yields double the rate of inflation, that is, 8%, it would give you $100,000 the first year. You would live off half and re-invest the other half, which would increase your investment “pot” so that it would keep up with inflation.

One can argue about whether inflation will grow on an average of 3%, 5% 7%, or heaven forbid, more. But as long as your investments return double the average rate of inflation, you’ll never outlive your money before you die.

Where’s the flaw in this picture?

Well, it’s a little like the advice for becoming a millionaire. (“Step 1: Get a million dollars.”) As long as you can earn, after-tax, double the rate of inflation, you’ve got the makings of a nice retirement.

But your formula is unlikely to win a Nobel. Say you expected 2% inflation. You’d then need twice as much to retire (dividing 100% by 2% gives you 50, multiplied by $50,000 equals $2.5 million), when in fact lower inflation should make it easier, not harder, to retire comfortably. (If you expected 1% inflation, you’d need $5 million. At zero inflation, you’d need all the money in the universe.)

The higher the inflation rate you assume, the lower the nest egg your formula tells you you need — and the higher after-tax return it tells you you must earn. Yet in a high inflation environment, it’s often not possible even to match inflation, after tax, let alone double it. So your formula is sort of backwards.

The biggest flaw the Nobel judges will flag, of course, is that none of us can predict long-term inflation rates.

But on one fundamental point you are right for sure: You can’t spend all your investment income and still expect it to keep up with inflation. Unless you have a date with a comet and know exactly when you’re going to pass from this earth to a higher place, “live beneath your means” applies at least as strongly after you’ve retired as before.