Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I tend to invest in the same way as I live my life: simple yet effective.
As I near retirement from my first career as an engineer at the company where I started working right after college graduation, and as I look forward to an encore career and life, I have found that my simple investment approach, consisting of, for the most part, a "buy and hold" philosophy has worked well for me.
I have never tried to time the market or made decisions based upon the latest proclamation from a major Wall Street player or an invited expert on CNBC. I have never day traded, sold short or used options. While I keep abreast of the latest economic news, I don't base investment decisions solely on the latest economic reports. If I did that I probably would never buy another stock or mutual fund again. I have read articles and books by such notables as Warren Buffet and Burton Malkiel (of A Random Walk Down Wall Street fame).
So here are some details of my approach that may be of some interest to other investors:
Before starting to invest I ensured that I had enough emergency funds stashed away. I was patient and it took me awhile to accumulate six months of living expenses which I put into an insured bank account. I still maintain at least that same six month stash today. I also ensured that I never carried a lot of debt, especially on credit cards, over the years.
I started investing in the 401k plan offered by my employer. I had a modest 6% of my gross salary deducted every pay period. The company matched 60% of the deduction so the effective savings rate was 9.6%. It was relatively painless. I learned to live on 94%. I currently put the maximum amount possible into my 401k and the rest of my savings goes into a taxable brokerage account and a money market account at my credit union. All of the actions that I have taken were very simple and easily executed (today it can be performed within a few minutes online).
The composition of my 401k account has always consisted of a S&P500 index fund, my employer's stock and a stable value fund. The S&P 500 index fund has returned about 9% per year on average and has low management fees. The stock of my employer, United Technologies Corp.(NYSE: UTX) has returned about 10% a year on average. I invested in UTX due to the fact that I knew it to be a very well managed company, all of its segments are either #1 or #2 in their industries and the industries were growing. Note that the primary industries were (and remain today) in aerospace equipment and building systems, both which are growing rapidly on a worldwide basis. Back in the 1980’s the core business was growing at a double digit rate. Recent data indicates that the aerospace market that UTC participates in will double between the years 2010 and 2020. The stable value fund has returned 6.7% a year on average for the last ten years and currently pays 3.7%. It also has very low management fees. Overall I estimate I have averaged about a 7% to 8% return per year within my 401k and I didn’t have to spend a lot of time managing my investments there. Note that I have not made any major changes to my 401k account, except for periodic rebalancing to ensure my employer’s stock has not dominated (think Enron), over the last 30 years.
A few years ago I started the detailed planning for my encore life and I realized that I was going to need additional sources of income in the early part of my retirement besides my pension, withdrawals that I make from my brokerage and money market accounts and any income from a second career path. My Social Security benefits will not begin until age 62 at the earliest and I cannot withdrawal from my 401k until age 59 1/2. Therefore, I began investing (with the same intent to "buy and hold" as I have done within my 401k account) in high quality, dividend paying stocks in my brokerage account with a goal to build up to a level where 10% of my anticipated yearly income in retirement will be coming from dividends. Right now dividends would provide an equivalent of about 3% of my income if I didn't reinvest them. The approach I took was to look for large-cap, high quality companies in different sectors for diversification and that have been paying and increasing dividends for many years. Using this theme, my current holdings include long-time dividend payers Johnson and Johnson(NYSE: JNJ), Procter and Gamble(NYSE: PG), and Coca-Cola (NYSE: KO). For example, P&G currently pays a $0.56 per share dividend, began paying a dividend 122 years ago and has increased it for 56 consecutive years. Although currently going through a period of lackluster growth, I still believe that over the long haul it will continue to be a winner. The Motley Fool CAPS network also thinks so and rates it a 5-star stock. J&J is in the same vein as P&G but in a different industry so it adds a little diversification. It pays $0.61 a share and yields 3.6%. Coke has one of the world’s best known brands and from the research I performed using services offered by my broker the future growth prospects and company fundamentals looked strong. It pays a $0.51 per share dividend and yields 2.6%.
Although another of my holdings, Apple (NASDAQ: AAPL), is not currently paying a dividend, it intends to do so shortly. I bought Apple stock because I use Apple products on a daily basis and like them a lot. I know that it is a great product innovator (Mac to iPod to iPhone to iPad) and has a fanatical following. I greatly admired Steve Jobs as a business leader. I did some research into the fundamentals using services from my broker and also found that Apple was hiring many new employees and obtaining new buildings to house them. I equated all of what I learned with strong future sales and earnings growth potential. I have been rewarded with a tremendous upside over the last few years.
In conclusion, I believe my simple investment philosophy using a “buy and hold over the long haul” strategy and including stocks of dividend paying companies with high growth potential and strong fundamentals in different sectors will allow me to meet my financial goals as I transition to my encore career and life.
I hope that you also have success with simple investing over the long haul.
Mark Morelli owns shares of Apple, United Technologies, Johnson & Johnson, The Procter & Gamble Company, and The Coca-Cola Company. The Motley Fool owns shares of Apple, Johnson & Johnson, The Coca-Cola Company, and The Procter & Gamble Company. Motley Fool newsletter services recommend Apple, Johnson & Johnson, The Coca-Cola Company, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.