Joshua-BetancourtArticle By Joshua E. BetancourtPortfolio Manager/Financial Planner

Benjamin Franklin discovered a great financial truth: The Rule of 72. The Rule of 72 states that you simply divide 72 by an interest rate and the result will be the number of years it will take for your money to double. If you apply the rule to recent checking and money market interest rates, it will take approximately 240 years to double your money (72/.3%= 240). Now, while this might be OK with Count Dracula who can live past 240 years, this is not an adequate interest rate for those looking to retire in 15 to 25 years.

CDs offer better rates but you have to live a really long time and postpone your retirement for at least another 72 years:

Current 1-year CD rates are at 100 basis points or 1%. Rule of 72….72/1= 72 years… Ouch!

But wait, it gets worse! Interest income is taxed at your ordinary income tax rates! Thus the calculation for the rule of 72 for a person in the 33% tax bracket is actually 72/1*(1-.33) = 107.5 Years for your money to double when buying CDs.

12 Years to Double Your Retirement Assets?

Perhaps 12 years is a number that you can live with for doubling your funds for retirement. So how do you double your assets in 12 years? By staying invested in the market regardless of how volatile the market may be or how bad losses might be at any given moment. I have personally lived thru 3 economic recessions, 7 market corrections and the Real Estate implosion of 2007 and Financial collapse of 2008. The story is always very similar.

Beginning In the year 2000, the market had a massive correction and posted 3 consecutive years of losses. While many investors were speculating in companies that paid no dividends, I was advising clients to buy quality companies that were paying over 4% in cash dividends. Basically I advised TO GET PAID WHILE YOU WAIT! Unfortunately many did not listen and bailed out of the market and, you guessed it …never reached their long term retirement goals. Those that understood the importance of long term investing stayed in quality dividend payers and some also systematically contributed to their account either quarterly or monthly through market highs and lows. Today, these individuals are on track for retirement even after 3 recessions, the 2007 Real Estate Collapse, the 2008 Financial Crisis and the 2011 market correction.

It’s common knowledge the market does not go up in a straight line nor is it positive every single year. However the market has always produced an average annual return of more than 6% in any given 12 year period going all the way back to 1932. The period from 2000 to 2014 is considered to be one of the worst periods is market history and yet that period still managed to produce an annual rate of return of more than 6% when dividends were reinvested.

Going back to the rule of 72 …72/6= 12 years to double your retirement portfolio during one of the worst 14 year periods in market history. 

Beware, Not Every Retirement Portfolio is the Same!

If your retirement is more than 12 years away, the only practical way to reach your long term goals is to invest in quality dividend paying companies regardless of the current market conditions. Also, from my personal experience it’s best to hold physical stock and use a dividend reinvestment plan (DRIP). Using a DRIP, dividends received are used to buy more shares at lower prices during down market years and buy fewer shares in bull markets. This is what we call Dollar Cost Averaging and it’s a powerful strategy to compound total returns.  After all, Albert Einstein said that compound interest is the MOST powerful force in the universe!

To learn more about the benefits of Dollar Cost Averaging, feel free to read our December 2011 Article entitled How to Finish Rich, Why Dollar Cost Averaging Pays by Clicking Here.

At QCI Inc. we avoid mutual fund fees by investing in individual stocks and ETFs. Also all accounts are set up to reinvest dividends (DRIP Plan) for maximum compounding of returns. We also invest in some of the highest quality dividend paying stocks. Most holdings currently pay over 4% annually in dividends.

Also note that qualified dividends are taxed at a substantially lower rate than CDs and money markets. Qualified dividends are taxed at 15% for someone in the 35% tax bracket and no more than 20% for those in the highest 39% tax bracket. Folks, your getting a huge tax break when you invest in qualified dividend paying stock.

I Can’t Help But Constantly look at The Market and My Account

It’s understandable that people just can’t stop looking at the market and cringe every time the Dow Jones is in the red. Although they know that their investments are long term money, they just cannot fathom having a negative year or 3 negative years even though history shows that a negative year is very common and should be expected. Punching out of the market in bad years and chasing the market is good years is a very poor strategy. Numerous studies show that investor market timing has statistically produced a very undesirable return of less than 2% and in certain cases a negative return. Despite these alarming facts, market timing is still one of the most common investment mistakes people make with their retirement assets simply because they are emotionally invested.

If you feel that you cannot tolerate a negative year or negative 3 years even though your investment horizon in 12 years of more, then you are better off investing in Municipal bonds. At least this option will stop you from making the mistake of trying to time the stock market and subsequently miss buying more stock automatically during dips as with a Dividend Reinvestment Program mentioned earlier.

We already know that Money market rates and CD rates will have you waiting until your 150 plus years of age to retire and that the interest income is taxed at your higher ordinary income tax rates. Clearly, these instruments are not making anybody rich except for the bank’s shareholders. Here at QCI we invest in tax free Investment Grade Municipal Bonds for those that are not willing to accept stock market gyrations. While Tax Free Municipal Bonds have traditionally yielded a lower return than stocks, current yields are still much higher than money market and CD rates and the income is free of Federal Income Taxes and in certain cases free of State Income Taxes.

We recommend a Muni Bond ladder where a portfolio of both long term and short term bonds are purchased so that every year at least 10% of the portfolio is maturing. This amount can be reinvested at current interest rates and thus reducing what is known as interest rate risk. For those that are in a higher tax brackets, Muni bonds offer a great way to reduce your taxable interest rate income by switching from CDs and money markets. As of this writing, our Investment Grade Muni Bond portfolios are generating a Federal Tax Free Annual Yield of 2.9 to 4% across various short and long term maturities. These yields are 10 to 16 times more interest per year than your typical money market or interest bearing savings account. When accounting for Federal Income Taxes, say a person in the 35% tax bracket, the interest difference is actually 14 to 21 times more interest income over checking, savings and money markets.

Going back to the rule of 72 using 4% Munis …..72/4 = 18 years to double your investment with Tax Free Munis versus 107.5 Years to double your money when buying taxable CDs. 

While Munis do have interest rate risk and may fluctuate in price, as long as the bond is held to maturity the interest is paid and the entire bond face value is returned to the purchaser at maturity. Although default risk is also present, A Muni Bond ETF or closed end fund is also a great way to mitigate default risk and thus not likely to affect your portfolio as its diversified over hundreds of bond issues. Munis are one of the most conservative ways to alleviate interest income tax and generate a much more respectable yield than what CDs and money markets currently offer.

If you have any questions, feel free to email or call John Henek at 708-267-0627, and he can set up a call with me or answer your questions directly.

Here’s to your long-term health and wealth.

Joshua E. Betancourt

Chief Portfolio Strategist/Financial Planner

Quantum Capital Investment Inc.


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