My Buck Blog

It is a good question. It depends on what lifestyle do you live. For me, I would like to live the same way I live today during my retirement. For example, if I make $100K a year and were to retire today, my investment better generate $100K for me each year.

Remember, there is something called inflation. The price of things goes up every year. The average inflation rate for the past few decades is about 3-4% a year. In order to maintain the same quality of life, my investment needs to keeps up with inflation after taking $100K each year.

So, how exactly should I do it? Based on historical data, stock and bond returns 10-11% and 5-6% per year respectively over long term. If I were retired today and keep everything in bond, the net gain after inflation is only 1-2%. And therefore, I need to have at least $5-10 million in my bank, which is quite difficult to accumulate.

If I keep everything in stock, the net gain after inflation is about 7-8% and I need only $1.25-1.5 million to retire. That makes me feel better.

Of course, it is very risky to have an all-stock portfolio during retirement. To add some buffer, probably $2 million is a good goal to aim for.

After you graduated from school, you think that there is no more testing or exams? Wrong! Whether you are at work, in the mall or on a vacation, you are always being assessed.

Why do I say so? Well… there is one thing called “FICO” score. What the hell is it?

It is a credit score and FICO is the acronym for “Fair Isaac Corporation”, a publicly-traded corporation. ( )

FICO score is derived from a credit score model created by Fair Isaac Corporation and is widely used by banks and lenders. FICO scores are intended to show the likelihood that a borrower will default on a loan. They range from 300-850. The higher is better and therefore lower interest rates.

Just did a study on how FICO score affects my personal finance. According to MyFICO.com, for a 30 Year fixed mortgage with a loan amount of $300,000, here is the monthly payment

There is a $900 difference ($2676 vs $1779) on the monthly payment depends on the credit score. Over 30 years, a person with poor credit score pays $324000 more than the one with excellent credit score.

I have poor credit score… what should I do? According to WikiPedia , here is the approximate weighted contribution to FICO score:

35% - Punctuality of payment in the past: Tip: make payment on time.

30% - amount of debt: Tip: reduce your debt (e.g. credit card balance, student loan, etc)

15% - length of credit history: Tip: if you have too many new credit card or new debt, it is good to eliminate the new ones and keep your oldest credit card.

10% - type of credit used (e.g. installment, revolving, consumer finance)… not very clear how this is calculated

10% - recent search for credit and/or amount of credit obtained recently: Tip: when going to mall, don’t get a store credit card just to get some discount. It may cost you more when you want to apply for a mortgage.

Credit score reporting is handled by 3 agencies (Equifax, Experian, and TransUnion). Whenever your applied for a loan or delinquent on a payment, these agencies are notified. Banks, lenders and even landlords obtain your credit score from one of these agencies to help their decision on loans and leases. Sometimes, there maybe inaccuracies in your credit profile, it is a good idea to check your credit report or get automatic alerts ( )

So, you are responsible for your behavior. Be frugal. Live within your means.

64 = 65

hmmm… how does that happen?

Several years ago, I heard of “the rule of 72″. If you haven’t heard about it, you are probably not a great investor.

Basically, it is a method for estimating the time it takes for an investment to double. For example,

if your investment appreciate 6% a year, it takes approximately 12 years to double in value. If it returns 9% a year, it doubles in about 8 years. You may see the relationship here…

Annual return * number of years = 72

Of course, it is just an approximation. However, it is simple enough to remember. Why is it important?

Well… if you want to be rich, you better keep this formula in mind when you are making any financial decisions. For example, if you have $10,000 to invest and you keep it in saving account and assume it yields 2 percent a year. And 36 years later, you find that it is worth $20,000 only.

On the other hand, if you put it in stock, mutual fund or ETF, over long time, it is possible that it yields 10-12% a year. According to the rule of 72, it doubles every 6 or 7 years. And 36 years later, you find that your investment becomes $320,000. It makes a huge difference.

Yeah… your may lose money in short term if you invest in stock, mutual or ETF. You may think that it is risky. However, if you investment horizon is long enough, these investment tends to give you positive return.

It’s a ‘dog eat dog’ world. Competition is keen. In order to win, people tends to take a lot of risk.

However, greed clouds people’s mind. They may take on too much risk and at the end lose every thing.

In my early years of investing, I don’t know how to control risk and lost quite a bit in stock market during Dot Com Bust.

The following video shows how someone bets small in the beginning. However, she doesn’t know that she is not a good player and keep on betting (more and more). She loses everything, including her clothes and became naked.

This applies to investing too. Know your strength. Know when to cut lost. If you don’t do that, you know the result and shame on you.

Several days ago, i wrote about screening for stock using the following criteria:

1. Price/Book ratio < 1.0
2. Return on equity > 10%
3. EPS growth for next 5 years > 10%
4. Debt to capital ratio < 25%
5. Market cap > 2 billion

Someone asked my how do I come up with these…

Price/Book ratio: this compares the stock price and the book value per share. If this ratio is below 1, the stock worth more than the price. We all want to get bargains, right?

Return on equity:This measure how effective and profitable the company is. If ROE is > 10%, for every dollar the company is worth, it generates at least 10 cents.

EPS growth: Some companies stock price drops because they don’t have bright future. When we search for stocks to buy, we better bet on companies with consistent growth.

Debt to capital ratio: Borrowing is a way for company to get the capital to grow. However, excessive borrowing could be problematic. High debt may be ok during good times, however, it could destroy a company during bad times. One recent example is American Home Mortgage. It was the biggest mortgage lender. However, when subprime mortgage crisis surfaces, they didn’t get the necessary financing and it has very large debt to capital ratio. It ultimately declared bankruptcy and caused severe loss for shareholders.

Market cap: I personally prefer established companies because they usually have longer history and more analyst covering. In addition, there are more buyers and sellers and their shares are more liquid.

These 5 tips gives us some stocks that have low price, effective management, good growth and are less likely be wiped out during down market. Of course, picking a winning stock requires much more these. One needs to take a closer look at their balance sheet and business to understand if it is really a ‘value stock’ or a ‘value trap’.