The One Stock to Own for the Next 25 Years

While I was barbecuing chicken for dinner last night, I was reading my Twitter feed. I came across a post where a few financial advisors were responding to a question….what one stock would you recommend to buy and hold for the next 25 years?

To clarify, we do not recommend owning only one stock and would not consider this to be an investment strategy. We are firm believers in holding a globally diversified portfolio of many stocks across all industries, sectors and geographic regions.

But for this hypothetical question, I thought it would be interesting to consider.

I first thought about what stocks I would NOT recommend and why. The key concept that kept surfacing was innovation and change and what industries or companies would be most affected by significant change over the next 25 year period. And what kept occurring to me was that nearly every company or industry I thought of, change could or would be a huge factor.

Looking at industry categories, I ruled out energy companies, as traditional oil companies obviously face threats from alternative energies. The retail and consumer sectors are under huge pressure from Amazon and online competition, so while there will be successes, I cannot predict which ones they will be.

Healthcare providers will make money, but insurance and reimbursement pressures will limit or impact their futures. Some drug companies have been hugely profitable and successful over the long term, but they must constantly innovate, spend millions or billions to come up with their “next” huge drug and again, there is no way to predict which company will be able to develop the drugs of the future.

Industrials, manufacturers and utilities will also have winners and losers, but none of these areas had a company that excited me for the next 25 years, with the possible exception of Boeing.

Technology and related areas was an obvious choice to consider. The key issue was whether the successes of today will be the leaders over the next two plus decades. AOL and Yahoo were stock market darlings in the late 1990s, then both flamed out. Just because a company has been successful recently does not mean it will do great over the next 25 years. This is called the recency effect.

I did not consider very small companies or companies like bio-techs for this pick. To do that would be more like buying a lottery ticket or a crapshoot selection….it may either do incredibly well or bust completely. I viewed this as finding a company today whose stock will be very successful over the next 25 years.

Amazon is dominant in two major areas, at least, Amazon Web Services (AWS) and their retail sales business. My concern with Amazon is that since AWS is so profitable, the natural tendency in business is that very profitable areas lead other companies to enter that sector, which eventually drives down profitability. That is occurring now, as AWS is increasingly being challenged by Microsoft, Google, IBM and many others, both in the US and globally.

Apple is a strong contender. Today, they seem unstoppable in selling iPhones and this product has changed how we live, communicate and shop. In reality though, they only have 12% of the worldwide smartphone market share. Their customers are highly loyal and Apple will continue to generate revenue from customers through app purchases and other sources in the future. However, as with all technology, will they be replaced in the future? Will they be able to continue to innovate and develop new products and revenue sources? The biggest threat is that the product life cycle can be short. Will they continue to succeed or become a future Nokia, Motorola or Blackberry?

My other choices are financially related. JPMorgan Chase is the dominant US bank and a leader in credit cards. As more and more spending is done with credit cards, they will capture more of these fees every day. However, banks run into problems when the economy has a downturn, which inevitably will occur over 25 years. They have broadly diversified sources of revenue, from everyday consumers, wealthy individuals and corporations throughout the world.

Likewise, Visa is the worldwide leader in credit cards, with a 56% market share. It will be difficult for another company to replace them, but technological change could lead to other ways we pay for goods and services, which could reduce Visa’s business, as well as potentially force their fees down over time.

My last consideration is Berkshire Hathaway, but not because of Warren Buffett. He is near the end of his work life, unfortunately. He will leave a legacy of a strongly diversified company with businesses in insurance, utilities, railroads, industrials and many other companies and products, along with billions of holdings in other stocks. Berkshire will likely do well, but as it is already large and getting even larger, it may have a harder time outpacing the broad market, due to the law of large numbers. Also, it generates most of its revenue in the US, so is not as globally diversified.

So what is my choice and what are the lessons from this exercise?

It’s not a glamorous choice, but I would hold JPMorgan Chase for the next 25 years. Chase is already quite large and successful, and does not face some of the other technological challenges that the others do. As we can’t predict the future, my thinking is that banking, lending, credit cards and related services will continue to be needed. If they are able to innovate and deal with change, Chase can continue to be quite profitable.

It is quite likely that one of the other companies mentioned here will outperform it, but each of the others seem to face greater potential risks, at least conceptually, than Chase does. I would not be surprised if Apple and Amazon stock’s outperform Chase, as they have much greater opportunities.

Thinking through this question has only made me more comfortable with our investment philosophy of not trying to pick individual stocks, but rather hold a globally diversified portfolio of stocks. 

If we tried to pick individual stocks for you for your future, essentially this is the exercise that we would have to do for every stock choice. And it’s impossible!!

This lesson was quite vividly reinforced as I finished this essay Thursday morning, as Facebook lost about 18% of their stock value today, due to concerns about their future profitability and user growth. This again is why we are broadly diversified and don’t just recommend holding 20-30 stocks.

From a pure performance standpoint, the only thing I’m pretty sure of is that the best performing stock of the next 25 years may not even be a public company today…..or may not even exist. However, we would eventually own some of it in your portfolio in the future, within our diversified holdings.

If you have thoughts on this post and your hypothetical pick, please email me at bwasserman@wassermanwealth.com. We will see what happens in the future.

Guidance for a Key Social Security Decision

Social Security benefits are more significant than many people realize. The amount you collect from Social Security could be $15-30,000+ per year, depending on your earnings history. As life expectancies increase significantly, Social Security benefits for a couple may be more than $1 million.

Social Security income is not subject to fluctuations and volatility like the stock market, which is a great source of stability in determining your financial future.

One key decision surrounding Social Security is when to start receiving benefits. This is the main topic of this post. For more information on other aspects of Social Security, please see our prior post, Social Security Basics: What you Should Know.

The earliest you can begin receiving Social Security retirement benefits is at least age 62. You must have earned at least 40 work credits during your lifetime, meaning you earned at least $4,800 per year for 10 years.

Your monthly Social Security benefits are based on “Full Retirement Age,” or FRA. This is the age when you can receive 100% of your Social Security retirement benefits.

  • Historically, this was age 65, but it is now gradually increasing to age 67.
  • For those born before 1943, FRA is before age 66.
  • For those born between 1943-1954, Full Retirement Age is age 66.
  • For those born between 1955-1959, FRA is 66 plus additional months.
  • If you were born in 1960 or later, your Full Retirement Age will be 67.

The age that you begin collecting Social Security determines the initial amount of benefits that you will receive for the rest of your life.  It is that important.

If you begin collecting before your Full Retirement Age (FRA), your benefits are permanently reduced. If you wait until after your FRA, your benefits will be greater.

  • If you file for early retirement payments at age 62, your monthly benefits will be permanently reduced to approximately 75% of the FRA benefit amount.
  • If you wait to receive benefits until after FRA, your benefits will increase by 8% per year, for each year after your FRA year, until age 70.
  • If you were born between 1943-54, delaying your benefits until age 70 will increase your monthly benefit to 132% of your FRA benefit amount.

Given the above information, why wouldn’t everyone just wait until age 70 and receive the maximum amount possible, based on their wage history? This is where financial planning and our advice can be so valuable.

We feel that this decision should be based on each person’s or family’s specific situation, and clearly not everyone should wait until age 70. We actually recommend that most people begin collecting Social Security well before age 70.

Though many articles encourage people to delay starting to receive Social Security for as long as possible, so many other variables should be considered that “one size fits all” advice should not be followed for this decision.

We recommend a comprehensive review of your full financial situation, as well as other non-financial factors. Key factors are when you want to retire, work part-time and your quality of life. If receiving your benefits earlier enables you to retire and that is a priority, then waiting years to receive Social Security does not make sense.

If you have any significant health issues or your family does not have a history of longevity, then you should not delay beginning to receive Social Security. As a rule of thumb, if you begin collecting around age 62 (or your earliest eligible age), you need to live longer than 82-83 for that decision to have been a “negative” one in terms of total lifetime benefits.

Even with longer life expectancy, no one can know if they will live until their early 80s. Thus, we feel that collecting early is a good and rational decision for many clients.As Social Security is a given, at least for decades, collecting your benefits could delay the need to withdraw/spend some of your other investable assets, if your Social Security benefits replace what you would have withdrawn from other sources.

We work with clients to evaluate both the financial and non-financial aspects of when to begin collecting Social Security. This is part of long term financial planning, which can be done many years before you reach your 60s. Along with the Social Security Administration’s projections, we have financial software to assist in planning for decisions like this. We would incorporate Social Security, along with your other assets and financial goals, to help you make this very personal and critical decision.

We remind you that there are many technical details regarding Social Security, including when you retire and your lifetime earnings. We recommend that you review our earlier blog post, as well as consult with a financial professional regarding your specific situation, in making this decision.

 

How a credit card can save lots on trip insurance costs

My wife and I just booked a trip to Spain for September. As this will be my first trip to Europe, it has been quite a learning experience already.

While this blog generally focuses on investing and financial topics, we know that our clients love to travel. We hope you find this informative and helpful.

I’ve learned that many travel experts (as well as my parents!!) highly recommend trip insurance, and significant medical evacuation coverage in particular.

Medical evacuation coverage is recommended in case you are seriously injured while traveling and need to be taken by ambulance, plane, helicopter or other form of transportation to a medical facility, if you then later need to be transported to a better hospital or eventually to a hospital back in the US. Coverage is recommended for $500,000.

I have a premium credit card, which unbeknownst to me, provides very good, but not optimal travel insurance coverage. As I’ll explain, my costly credit card actually saved me more than $1,100 on the travel insurance. If I was older, the savings would have been even greater!

Comprehensive trip insurance for our trip purchased as a separate insurance policy would have cost about $1,200. This would cover trip interruption and cancellation (which would have reimbursed us for the non-refundable tour costs if we couldn’t go because of a medical emergency between the time we booked the tour and the departure date). This would apply to an emergency to me, my wife, any of our immediate family members, such as parents, children or siblings, and even a broader range of relatives. The policy also provides up to $500,000 of medical evacuation costs and other coverages. The policy cost is based on your age and cost of your trip.

My Chase Sapphire Reserve credit card costs $450 per year, but gives $300 in travel credits annually, so the net cost is really only $150. One of the card’s features is a range of trip insurance coverages, including up to $20,000 of trip interruption coverage, similar to what I described in the preceding paragraph. However, they only provide $100,000 of emergency medical evacuation coverage, which is considered inadequate.

Thus, the credit card’s trip insurance coverage was good, but I still needed another policy for emergency medical evacuation.

Through my travel agent for this trip, I contacted an insurance company that provides a range of trip insurance policies. The trip insurance company is a subsidiary of Berkshire Hathaway, which I viewed as quite positive. For only $92, we were able to purchase a policy that has very minimal coverages in most areas, but has $500,000 of medical evacuation coverage and $50,000 of medical benefits. This policy will be the primary insurance and the credit card coverage will be supplemental on top of these benefits.

I recommend that you review your credit cards if you are planning a major trip in the future, especially a cruise, pre-paid tour or trip outside of the US, where your costs are paid up-front and usually non-refundable.

You may find that it is advantageous to obtain a premium credit card with travel insurance coverages and use that credit card to pay for such a trip. That is key, as you must charge the respective trip’s cost on that credit card for their insurance coverage to apply. Even though you may have a hard time paying a $400+ annual credit card fee, it may actually save you many times that amount versus the cost of obtaining full, comprehensive trip insurance on its own. Plus, these premium credit cards have many other benefits, depending on your traveling and other features. See my prior blog post on credit card and travel benefits, 12 Travel and Credit Card Tips for Greater Value and Enjoyment Part 1 and Part 2.

While I’m not advocating any specific credit cards, it appears that the Citi Prestige and Chase Sapphire Reserve credit cards provide broad trip insurance benefits. There may be others as well. Surprisingly, American Express’ Platinum card does not offer trip insurance coverage for interruption, cancellation or medical emergencies, such as medical evacuations.

Please view this as general advice, as trip insurance policies have many details and conditions. You need to pay for the trip/tour/cruise on the card that provides the insurance benefits. You should review your own personal situation, as well as the details of any insurance policy provided via a credit card benefit or a stand-alone trip insurance policy.

If you purchase a separate trip insurance policy, whether for comprehensive coverage or specifically to get evacuation coverage for a trip outside of the US, it needs to be purchased promptly after you book/pay for the travel. In my case, the insurance policy needed to be obtained within 21 days of my initial trip deposit or payment.

For the insurance coverage provided as a credit card benefit, you don’t need to do anything at the time of booking. You only need to contact them when you have an issue that would warrant an insurance claim.

I would also recommend that you bring copies of any of these policies and the respective contact information with you on the trip, as you would need to contact them in case of an issue. It would also be advisable to give the information to a close family member who is not traveling with you. For the medical evacuation coverage, the company needs to be informed immediately and they must approve most expenses in advance.

Now that I’ve learned about this, I will soon be purchasing an additional set of supplemental trip insurance policies, as I’m planning to take my two sons to Greece around Thanksgiving to visit my daughter, who will be studying abroad this fall as part of her junior year in college.

As we often tell our clients, it is important to save and invest, but it is also important to have great experiences and be able to travel while you are healthy and able to do it. I’m thankful and looking forward to be able to go on both of these trips.

Hopefully none of these insurance policies will be needed, but I do feel more secure knowing that I will have them.

We can’t control the future. But we can help you plan to minimize your risks and help you feel more secure.

Investing with trade tariff concerns

During recent months, world wide stock markets have declined from their high points, mostly due to trade tariff rhetoric and related actions.

This has mostly affected large US and International company stocks, as well as emerging markets. US small company stocks have performed better, as they are perceived to not be as affected by trade war discussions.

How do the trade tariff threats and potential actions impact our recommended stock market strategy?

The discussions between countries, as well as pronouncements and reactions by various leaders, causes greater uncertainty for the financial markets. It is hard to know which products, companies or industries, both domestically and Internationally, will be affected in the short or long term.

As we have discussed many times before, uncertainty is inherent in investing, particularly with stock investments.

We would not recommend taking specific actions in reaction to the trade tariff developments. We would not recommend changing your portfolio’s asset allocation due to these talks and threats.

It is too difficult to determine who the winners and losers will be. It is uncertain how the rhetoric will eventually play out and which companies or sectors will benefit or be hurt, either in the US or elsewhere.

To make short term moves in response to trade war concerns is really a form of market timing, trying to make guesses or predictions about something that cannot be accurately forecasted in advance.

Last week I participated in a webinar with Dimensional Fund Advisor’s Co-Chief Executive Officer and Chief Executive Officer, Gerard O’Reilly. In response to a question about the level of stocks and these trade tariff issues, he succinctly stated that “market timing is not a good way to manage risk.”

O’Reilly then explained that a better way to manage risk is through a well-thought out asset allocation plan. We completely agree with this advice.

Rather than trying to react to current events and news with concern or constantly wanting to change your portfolio, it is much better in the long run to set a stock to fixed income balance that you are comfortable with (your personal asset allocation plan), regardless of what the financial markets may do.

We work with clients to develop this type of asset allocation plan, which is dependent on your personal situation. Your asset allocation is determined based on your financial needs, such as how much you need your assets to grow over time to match your financial and life goals. It is also based on your ability to handle risk and market volatility.

In essence, by focusing on setting your asset allocation, we are focusing on factors we can control. We cannot control or predict what markets or world leaders will do in the future. To base your financial strategy on trying to predict what may occur is not an investment philosophy we recommend.

While we share your concerns about the trade talks and the potential for near term market volatility, it is important to remember that volatility can be up and down, not just down. Markets can react to news very quickly, either positively or negatively.

While we do not know what will happen in the short term, we are confident that the financial markets will be rewarding over the long term. We are not going to risk missing out on the long term financial rewards of stocks by temporarily moving out of certain asset asset classes or sectors in the short-term, as that entails potentially missing out on sudden, quick positive moves in those same asset classes or sectors.

Having a consistent investment philosophy like this has been rewarding and comforting for our clients during the 15 years we have been financial advisors.

And we continue to believe this is the most optimal and rational investment strategy.

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