Dear Quentin,
My brother is a combat veteran who struggles with complex post-traumatic stress disorder (C-PTSD). He has a 100% permanent disability rating, and receives a monthly payment from the government. He also received a modest amount of back pay, but spent most of it getting caught up on rent and bills.
At this point there are only a few thousand dollars left. The monthly stipend is enough to live on, but just barely, and is unlikely to keep pace with the cost of living in our expensive city. Leaving is not an option, as there is a nearby VA hospital as well as our large (and wonderfully helpful) family.
“‘He shares a home with a relative, but this is not sustainable long-term so he has asked me to help him invest what remains from his back pay.’”
He shares a home with a relative, but this is not sustainable long-term so he has asked me to help him invest what remains from his back pay. I have done reasonably well investing for myself so I agreed to help him, but I am concerned that my experience is too limited. He needs both income and appreciation, but also low risk.
To that end, I selected a variety of dividend kings with as much of a ladder as I could manage so there would be something paying out nearly every month, and also selected a closed-end fund (CLM) that pays a high dividend and pays it out monthly.
The total is well below the lowest tier to make it worthwhile for most advisers to manage, and the CFP he spoke to some time ago just recommended index funds. Index funds didn’t provide much income. What resources would you recommend?
Nervous Investor
Dear Nervous,
Establish how much income your brother needs to live on, explore housing-assistance programs for combat veterans, and decide the purpose of your investments — to create capital (a nest egg for your brother) or to increase his income in order to help him have a more stable financial life, and give him more peace of mind. In other words, put together a long-term financial plan that takes into account all of these moving parts.
Don’t be put off by the relatively modest amounts you have to invest. LetsMakeAPlan.org, a consumer education website launched by the CFPB Board more than a decade ago, is a useful search engine for certified financial planners, and there is a section dedicated to helping veterans, citing special financial benefits include health-care services, no or low down-payment mortgages, GI Bill educational benefits, special legal protections, low-cost investing opportunities, extra savings plans and cheaper life insurance.
Last month, President Biden signed into law the Veterans Compensation Cost-of-Living Adjustment (COLA) Act. This directed the Department of Veterans Affairs to provide a cost-of-living adjustment for veterans benefits in 2024 equal to the cost-of-living increase applied to Social Security benefits, as outlined by the Social Security Administration. It’s an annual measure that passed with bi-partisan support from both Houses of Congress.
“‘While looking at dividend paying stocks, look for companies that also have long-term appreciation potential, this will help in off-setting long-term inflationary pressures.”’”
“I agree that a passive index investment strategy is not a prudent approach for recreating a monthly paycheck,” says Bryson Roof, CFP at Fort Pitt Capital Group based in Harrisburg, Penn. “It will be important to continue to focus on dividends and laddering fixed-income positions. While looking at dividend paying stocks, look for companies that also have long-term appreciation potential, this will help in off-setting long-term inflationary pressures.” (“Laddering” involves buying several fixed-income products from the same category that mature at different times.)
High-yield online savings accounts and certificates of deposit (CDs) are a low-risk option, and the timing is good. We are in an unprecedented time of rising interest rates,” High-yield online savings accounts are averaging 3.3% annual percentage yields,” says Cary Carbonaro, senior vice president and director of women and wealth at Advisors Capital Management. “Clients of ours are locking in 5%-6% CDs, Treasury Bills and Bonds for 5 years right now.”
She is not a big fan of closed-end funds. “Closed-end funds often trade at premiums or discounts to their net asset value (NAV), which means investors may pay more or receive less than the actual value of the fund’s assets,” she says. “Unlike open-end mutual funds, closed-end funds trade on stock exchanges and can experience limited liquidity, which may result in wider bid-ask spreads and potential difficulty in buying or selling shares.”
Closed-end funds can use leverage to enhance returns and while borrowing may not be a red flag to many investors, it can increase the volatility of the fund, and your brother’s investment risk, Carbonaro adds. “Closed-end funds generally have higher expense ratios compared to other investment options such as exchange-traded funds (ETFs) or index funds, which can reduce overall returns over time,” she adds.
Dan Herron, a Pismo Beach, Calif.-based CPA, is supportive of your overall strategy. In addition to high-yield savings accounts, he has other suggestions: Some fixed-income index funds or ETFs pay monthly dividends, dividend growth or high-yield exchange-traded funds would allow you stock exposure with an emphasis on dividend income.
Many balanced funds or income funds provide a mixture of fixed income and potential capital appreciation, Herron says. Ultimately, he adds, you could choose a mixture of these options: Bucket 1: “A high-yield savings account — this provides easy access to money yet earns a decent return on his money.” Bucket 2: “Investment in a mixture of the investments above, and focus on getting monthly/quarterly income. The distributions could then be automatically deposited into his checking or high-yield account.”
You’re on the right track. Investing in individual stocks is a game of chance, not for the fainthearted. Those who bought Tesla
TSLA,
or Apple
AAPL,
shares 10 or 20 years ago should not be used as a template for your own investment plant. Easy money always looks easier in the rearview mirror. Those retail investors who made a lot of money on individual stock got very, very lucky and made the investment with a long-term plan in mind.
Caution and judiciousness are good qualities for an investor such as yourself to have. And I assume that’s where the nervousness of your sobriquet comes from.
And, most importantly of all, please thank your brother for his service.
‘Caution and judiciousness are good qualities for an investor such as yourself to have.’
Getty Images/iStockphoto
Readers write to me with all sorts of dilemmas.
By emailing your questions, you agree to have them published anonymously on MarketWatch. By submitting your story to Dow Jones & Co., the publisher of MarketWatch, you understand and agree that we may use your story, or versions of it, in all media and platforms, including via third parties.
The Moneyist regrets he cannot reply to questions individually.
More from Quentin Fottrell: