Executive Wealth Planning Partners
John spent 28 years as a financial adviser at a major wire house before leaving to start his own advisory firm, Executive Wealth Planning Partners (affiliated with First Financial Equity Corp.) specializes in providing consulting and asset management services to public companies, their employees and qualified retirement plans. Through a series of strategic partnerships John's team offers stock plan administration, corporate cash management, 401(k) plan administration services and individual asset management.
John is also the founder of the National Association of Stock Plan Professionals (NASPP) Rocky Mountain Chapter. He currently serves as Chapter President. This organization is devoted to the promotion of professionalism in the design, administration of and advice to equity compensation plans and their participants at the nation’s publicly traded companies. He is a member of the Global Equity Organization (GEO), the National Center for Employee Ownership (NCEO) and the Financial Planning Association (FPA).
John is an advisory board member and contributing editor at the financial advice web site myStockOptions.com. His popular “Stockbroker Secrets” articles found there are a common-sense guide to managing employee stock options wisely.
John has also assisted in the development of employee stock option analysis software published by Net Worth Strategies in Bend, Oregon which financial and tax advisors nationwide use to model employee stock ownership and stock option exercise strategies.
BA, Economics, University of Colorado-Boulder
Assets Under Management:
Executive Wealth Planning Partners is a marketing entity affiliated with First Financial Equity Corporation for the purposes of providing brokerage securities and investment advisory services. Brokerage Securities and Insurance products are offered through First Financial Equity Corporation. Executive Wealth Planning Partners, First Financial Equity Corporation and it’s advisors do not give tax or legal advice. This material was not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed on the taxpayer under U.S. federal tax laws. Please consult your tax advisor or attorney for tax and legal advice. The opinions expressed and materials provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. First Financial Equity Corporation is Member FINRA/SIPC.
Introduction and Investment Approach - John Barringer');
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The Rule of 72 is a quick way of estimating the rate at which a stated rate of return will double the value of an investment. The number 72 is divisible by 2, 3, 4, 6, 8,9, and 12 so it's a simple way to do the calculation that most people (even those with limited arithmetic skills) can do. An 8% return will double your investment in nine years. [ 72 / 8 = 9 ]. So in your example, you should have $400,000.
You don't say how old you are, what type of account the proposed investments would be made in or anything about your tolerance for risk so there is no "Rule of Thumb" that would be appropriate to apply. In spite of all that, there are some characteristics of dividend-paying stocks (which may or may not qualify as "value" stocks) and of growth stocks.
Historically, dividend paying stocks, as a group, have had a very dependable track record of capital appreciation. This does not mean that all dividend payers are created equal. Those with very high earnings to payout ratios can be volatile. Large, established, "name brand" companies with decades-long histories of dividend payments and dividend increases are among the best total return investments, rivaling even many growth stocks, over the long run. Among these are General Mills (GIS), Johnson & Johnson (JNJ), Kimberly Clark (KMB), Coca Cola (KO) and Procter & Gamble (PG). A portfolio of dividend payers should be carefully watched because even huge companies can fall on hard times, decline dramatically in price and cut or eliminate their dividend. This happened to CitiBank (C) in the late 1980s after paying a dependable dividend for 200 years!
Growth stocks are attractive, as a group, because some fraction of the universe of growth stocks will have spectacular performance. Think about Intel (INTC) and Motorola (MOT) in the 1990s or Amazon (AMZN) last year. Many stocks that may fall into the growth category will rise and fall dramatically. For instance, Cisco Systems (CSCO) lost 75% of its value in 2000-2001. Successful growth companies will someday become mature dividend payers like Microsoft (MSFT) has. Because a portfolio of growth stocks can have more losers than winners, it should be managed with an eye toward stopping losses.
The mix between dividend paying stocks and growth stocks is a choice that should be made on the basis of an investor's willing to take risk. Generally speaking, growth stock investing will incur more risk and volatility than will dividend investing. Even when a dividend payer drops in price, the dividend, if it’s not at risk for the same reason the stock is falling, continues. If a growth stock falls, it may never get back up and nobody is paying you to wait and see.
Dividend paying stocks have, for some investors, become a substitute for bonds because of low interest rates. Not only do many stocks pay a dividend higher than you can get from a high quality bond but, if the company's earnings continue to rise dependably, as is the case with many consumer products, health care, energy and utility company stocks, and the dividend will too. A portfolio with a rising dividend income stream is a good hedge against rising prices. It also helps that, under current tax law, investors receive favorable tax treatment on qualified dividends.
Investing in a cash account is considered safer. It certainly is more simple. If you invest $10,000 and your holdings rise to $13,000, you've made 30%. [ $3000 / $10000 = 30% ] If you invest on margin, you're borrowing up to half of the funds you're using to make the investment. So, you can buy the same $10,000 of investments with $5,000. If you get 30% appreciation, your return on cash is 60% [$3000 / $5000 = 60% ] minus the cost of borrowing (currently between 4% and 8% at most brokers)
This demonstrates the power of leverage but there is a risk...let's say the investments you choose don't work out as you hoped and instead of appreciating by 30%, they fall by 40%. In that scenario, you lose 40% on the cash investment but the margin investment loses in two ways: First, you must maintain a minimum collateral balance for your account. If your investment falls below $6250, your broker will ask you for more money (a margin call) just to keep the investments from being liquidated to pay back the $5000 you borrowed. Or secondly, if you sell, when the investment is worth only $6000, after you've paid back the $5000 loan, you'll only have $1000 (minus any interest you paid) of your original investment left...that's at least an 80% loss.
Margin can be used wisely. If you invest with all cash and, over time receive a decent return, you may be reluctant to sell, even if you need some of your investment funds for some other purpose. The capital gains taxes may not be appealing to you, you may feel the investments can still appreciate or you may enjoy receiving the dividend the portfolio provides. In this case, you might choose to margin your investments in order to take out cash. If your original cash $10,000 investment has risen to $25,000 over a period of years, you could borrow up to 12,500 against your holdings from your broker without the tax consequences of a sale.
You may want to choose the margin feature of your brokerage account but plan to initially invest with all cash. The agreement does not obligate you to borrow. Good luck!
It's important to understand the difference between an index Mutual "fund" and exchange-traded index "fund" (ETF). Although they look a lot alike, they are actually quite different.
A mutual fund starts as a pool of cash that can be created by the fund sponsor from its own capital or by offering shares to the public in an initial offering at a fixed price. Either way, the money is used to buy the securities that will closely mimic the index the fund seeks to emulate. In a traditional mutual fund, new money causes the fund to grow while share liquidations cause it to shrink. The value of all the securities and cash held by the fund, divided by the number of shares determines the Net Asset Value (NAV) which is set once a day at the close. Purchases and sales are made at this price, also at the end of the day. Net new money will be used by the fund to proportionally purchase more securities of in the fund's comparative index and create new shares. Net liquidations would prompt the fund to deplete cash and/or sell shares to pay shareholders who sell. Due to the open-ended nature of traditional mutual funds, a popular fund can grow to be billions of dollars in value if purchases outweigh sales for an extended period. The shares of a mutual fund trade at NAV on the books of the sponsoring fund company.
An ETF is created by major sponsoring institutions who control millions of shares. They use some of the shares they collectively own to form a pool of holdings that approximates the index they are attempting to mimic. They deposited the shares with a custodian and receive creation units in return. These units represent a huge block that is then divided up into individual shares that trade on the open market. In the short run, the number of shares of an ETF is fixed but more units can be created if demand warrants. The shares trade like a stock on a public exchange. Purchasers buy from sellers.The price movements of the underlying shares causes the market price to move during the trading day as does demand for the purchase of shares or supply created by selling. On most days, supply and demand are roughly equal so the index fund doesn't vary much from the arithmetic calculation of the published index. Occasionally, when markets are very volatile, ETFs will move dramatically in price and away from an accurate reflection of the value of the securities of which they are comprised.
Your purchase price is as of the trade (executed) date, as shown on the confirmation sent to you by your broker. The settlement date is the date on which the transaction must be paid (settled).