Author Topic: Just opened my first brokerage account.....help!  (Read 5435 times)

westcl2

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Just opened my first brokerage account.....help!
« on: September 02, 2015, 10:43:20 AM »
As the title says I just opened my first brokerage account and I wanted some advice on my investing strategy.

Background: 
I have a 401k that I max for employer contributions, but very limited control over asset allocation within this fund (basically just index funds for different subgroups).  Additionally I've been putting money in a Roth IRA S&P500 index fund for ~4 years and it's been doing well enough but I wanted to start managing where my money was invested.  My employer offers a pension and assuming it still exists when I retire (~25-30 years) will offer somewhere in the ball park of 30-40k annually.  These are my 3 primary tools I am focusing on for my retirement planning.

Goal:
retire on schedule w/ ~100k+ annual "allowance"

Strategy:

Invest invest invest and don't touch it until I retire.  Refocusing will happen, but no removal of investment from these accounts until it is my primary source of income

Pensions:
not much I can do to adjust this output, except work longer
GOAL ~33K /year

401k:
50/50 roth to traditional this is a huge index fund focusing primarily on stocks, and as I approach retirement i'll phase it over to bonds and more conservative funds.  My thought is that this will serve to diversify my investments as its so broadly invested
Allocation of assets: accounts for ~66% of my total investments
GOAL FOR THIS FUND 5-10% returns, close to 2 million at retirement, 3% rule = 66k

Roth IRA (focus of question)
contributions are comparable to my 401k but no matching so it's smaller.  Initially I would plan on splitting up my current investment (index fund) into ~10 companies I like across the different parts of the market, and gradually increase this every year to somewhere in the 50 holdings range
I really like the idea of living off dividends and not selling off assets.  So my focus has been on high quality companies that regularly put out increasing dividends.  A large number of these are on things like the dividend aristocrats etc (which kind of worries me 25 years is a long time to keep increasing dividends and not hurt the company).  Completely anecdotal evidence but the one stock that I have owned for this past 4 years has outperformed my index fund by some crazy margin like 10% to 50% and the dividends had a pretty large contribution to that increase. My focus is on total return of investment from the companies i'm picking so they're in my opinion undervalued and have room to grow in addition to offering steady dividends .
GOAL FOR THIS FUND: 5-10% return, close to 1 million focused heavily on dividends ~33k (1 million/33 price per share*$1 dividends)

the numbers evaluation of my numbers was a middle of the road approach ~8% return at current rates blah blah blah

Questions:
Am I too early in my investment career to be picking and choosing the way I am?

Is my assumption that "my 401k is diversifying my investments enough to warrant branching off my roth ira in this manner" appropriate?

Should I be scared of the dividend aristocrats?

Any glaring holes in my approach? 

obviously I am new to this whole thing am I just being na´ve thinking that this is how it will all work?

« Last Edit: September 02, 2015, 11:01:25 AM by westcl2 »

mrpercentage

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Re: Just opened my first brokerage account.....help!
« Reply #1 on: September 02, 2015, 06:12:26 PM »
You are in the wrong forum for DGI. You will want to pick up some books on dividend growth investing. My best advice is don't rush into anything. Take some time to learn about it. You are not chasing the latest hot stock. Opportunity will be there tomorrow I promise.

Start small. Maybe a couple of thousand in your favorite "dividend aristocrat". See how it pans out after a year. Focus on its payout not it equity. Its history of dividend increases is important. Its earnings per share vs dividend paid is important unless you are talking about a RIET. The aristocrats are a pretty safe bet. You should still start small, try it out, and make sure it what you want to do first.

Try seeking alphas Dividend and Income section and maybe message an author for source materials. It is a legitimate form of investing but it will require work and patience. Take the time to learn more about it before you jump in with both feet.

johnny847

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Re: Just opened my first brokerage account.....help!
« Reply #2 on: September 02, 2015, 06:22:09 PM »
You're also on the wrong forum for the amount you want to spend in retirement. People around here are spending something like $20-40k (depending on COL, travel, if they wanted to retire a few years earlier, etc.).

You will be hard pressed to find somebody on this forum who wants to build up 2 million + 33k/yr pension to retire on.

Honestly you'll probably get much better advice on the Bogleheads forum, where they don't talk nearly as much about how you spend your money, and talk almost exclusively about how you should invest your money.

MDM

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Re: Just opened my first brokerage account.....help!
« Reply #3 on: September 02, 2015, 10:05:00 PM »
Goal:
retire on schedule w/ ~100k+ annual "allowance"
westcl2,welcome to the forum.  Up to you to decide the value of participating more. ;)

Quote
Strategy:
Invest invest invest and don't touch it until I retire.  Refocusing will happen, but no removal of investment from these accounts until it is my primary source of income
Seems reasonable.

Quote
Pensions:
not much I can do to adjust this output, except work longer
GOAL ~33K /year
If you are going to rely on this, read the Summary Plan Description and put the pension calculation into Excel (or whatever).  Review your calculations with someone in HR to ensure you understand things correctly.

Quote
401k:
50/50 roth to traditional this is a huge index fund focusing primarily on stocks, and as I approach retirement i'll phase it over to bonds and more conservative funds.  My thought is that this will serve to diversify my investments as its so broadly invested
Allocation of assets: accounts for ~66% of my total investments
GOAL FOR THIS FUND 5-10% returns, close to 2 million at retirement, 3% rule = 66k
Fine as far as it goes.  What fund?  Why 3% instead of 4%? 

Quote
Roth IRA (focus of question)
contributions are comparable to my 401k but no matching so it's smaller.
Red flag: one would expect (if you are maximizing investments) that your 401k contributions would be ~3X your IRA contributions.  Why aren't they?

Quote
Initially I would plan on splitting up my current investment (index fund) into ~10 companies I like across the different parts of the market, and gradually increase this every year to somewhere in the 50 holdings range
Why?  Are you prepared to invest the significant amount of time needed to pick 50 individual companies that you expect to outperform some index?

Quote
I really like the idea of living off dividends and not selling off assets.
In other words, you prefer the companies to sell their assets (in the form of dividends) for you - correct?

Quote
So my focus has been on high quality companies that regularly put out increasing dividends.  A large number of these are on things like the dividend aristocrats etc (which kind of worries me 25 years is a long time to keep increasing dividends and not hurt the company).  Completely anecdotal evidence but the one stock that I have owned for this past 4 years has outperformed my index fund by some crazy margin like 10% to 50% and the dividends had a pretty large contribution to that increase. My focus is on total return of investment from the companies i'm picking so they're in my opinion undervalued and have room to grow in addition to offering steady dividends.
GOAL FOR THIS FUND: 5-10% return, close to 1 million focused heavily on dividends ~33k (1 million/33 price per share*$1 dividends)
Probably worth reading http://forum.mrmoneymustache.com/investor-alley/investing-in-the-sp-500-dividend-aristocrat-stocks/ and other pro/con discussions you might find.

Quote
the numbers evaluation of my numbers was a middle of the road approach ~8% return at current rates blah blah blah
That might be close to historical, but is inconsistent with assuming a 3% SWR.  There is a reason 4% was found to be the "safe" withdrawal rate, despite that 8% "average" return....

Quote
Questions:
Am I too early in my investment career to be picking and choosing the way I am?
From what I could tell from the OP, your 401k is an unspecified index fund, as is your IRA, and you own one individual stock that has performed well.  That seems ok.

Quote
Is my assumption that "my 401k is diversifying my investments enough to warrant branching off my roth ira in this manner" appropriate?
I'd say no, but others might have other opinions.

Quote
Should I be scared of the dividend aristocrats?
See the thread referenced above.  Scared? - perhaps not.  Enamored? - also perhaps not.

Quote
Any glaring holes in my approach?
Lack of specifics.  You may have them, but it's not apparent from the OP.  Bogleheads is indeed another good resource.  See
http://www.bogleheads.org/wiki/Category:Getting_started and http://jlcollinsnh.com/stock-series/ if you haven't already.

westcl2

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Re: Just opened my first brokerage account.....help!
« Reply #4 on: September 03, 2015, 06:13:26 AM »
thanks for all the responses and advice.  I guess I didn't think this was limited to the 20-40k range just more the philosophy of living off dividends and not diminishing from the principle investment.

@MDM
I'm sure 4% is reasonable once I've actually accumulated all the money and start to withdrawl, but it was just a way of hedging my bets.  most of my calculations were based on low ball figures and I thought that using 3% would be another way of capturing any poor performance throughout

My employer matches 1:1 up to 5%, then nothing.  100k @5%+match roughly twice I can contribute to IRA.  i'm sure this will change throughout my career but again I assume I invest at exactly the same rate I do now to capture poor performance


johnny847

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Re: Just opened my first brokerage account.....help!
« Reply #5 on: September 03, 2015, 06:34:10 AM »
The principles of saving and living off your investments can be applied at any range, but a lot of the discussion on this forum is how to get your spending down to a level where you can retire substantially earlier than "normal"

Furthermore, there is zero distinction between dividends and principle. That is a fallacy. http://forum.mrmoneymustache.com/investor-alley/total-stock-vs-500-vs-dividend-growth/msg184781/#msg184781

There are some people who believe that dividend paying companies are inherently better companies. I am neither arguing for or against that assertion. I am saying though that there is ZERO distinction between a dividend and "principle".

Scandium

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Re: Just opened my first brokerage account.....help!
« Reply #6 on: September 03, 2015, 06:44:02 AM »
If you make $100k I highly, highly suggest you max out your 401k, with $18,000 this year, before you invest in the Roth or a taxable account. The tax savings will be significant. Of course you should do all three, but max 401k first, especially if you have index funds there!

I also don't recommend the dividend approach, but I'll let someone else deal with that.

westcl2

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Re: Just opened my first brokerage account.....help!
« Reply #7 on: September 03, 2015, 07:29:41 AM »
@Scandium i'm working on it but just had a baby blah blah blah....the hope is that i'll have them all maxed out.  but I don't see why i'd rather contribute to a 401k over the roth?  I guess in my head i'm assuming taxes will go up in the future and if my income gets to the point where I exceed the limit for making contributions to a roth i'll miss out on more by focusing on trad ira(s)?

and about the dividend approach this is where I am coming up w/ blanks.  the majority of arguments I've seen made against it are assuming pulling dividends out as income instead of reinvesting those to purchase more shares all while behind a tax protected account.  I haven't found many threads or articles discussing this approach

@johnny847 i'm not saying there is a difference between dividends and principle.  my focus is on total returns and this bit confuses me
I get that paying a dividend hurts the stock price, and I understand how if your portfolio appreciates at 5% and you sell 3% its grown at 2% hopefully meeting/beating inflation and maintaining its value.  but in the process of selling off that 3% aren't you effectively getting a more focused portfolio in the remaining 97% quantity of your stocks which opens you up to more risk in the fluctuations of the market?  thinking if you have more shares to sell you could sell them more spread out and avoid some of the risk of selling at a bad time.  And the alternative (may be wrong here) is that by reinvesting your dividends and putting more capital in over my career I will have sufficient shares to provide an income that I can live off the dividends, and if at some point I want I can always sell those shares (but that's not the goal)

westcl2

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Re: Just opened my first brokerage account.....help!
« Reply #8 on: September 03, 2015, 07:36:44 AM »
@johnny847 correct me if i'm wrong, but i'm seeing the reinvestment of dividends as compounding interest on the number of stocks.  my thought being that the appreciation of the value of my investment will see growth(hopefully) in the stock price and the number of stocks owned.....is that not right?

Scandium

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Re: Just opened my first brokerage account.....help!
« Reply #9 on: September 03, 2015, 07:49:38 AM »
@Scandium i'm working on it but just had a baby blah blah blah....the hope is that i'll have them all maxed out.  but I don't see why i'd rather contribute to a 401k over the roth?  I guess in my head i'm assuming taxes will go up in the future and if my income gets to the point where I exceed the limit for making contributions to a roth i'll miss out on more by focusing on trad ira(s)?

If money is tight now you can save more per dollar by using the 401k, as to contribute $1 to a Roth you have to earn ~$1.30. With a 401k it's 1 to 1. At least in my thinking I assume I will (hopefully) have more money later in life than I do now, as I also just had a baby etc.

As for taxes; per definition your income can be lower in retirement. If you max your 401k now your income need will be at least $18,000 less for the same lifestyle, and thus your taxes lower. There are also ways to access 401k money totally or almost tax free; see the Roth pipeline. Taxes may go up in the future. But I'm betting mainly on the rich, not the poor and lower middle class, the tax brackets where the majority of your income is if you make $100k. In retirement you can make over $70k and not even make it out of the 10% bracket.

If you make above the limit it's easy to continue to contribute to a Roth through the backdoor method. It took 5 min in my Schwab account.

westcl2

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Re: Just opened my first brokerage account.....help!
« Reply #10 on: September 03, 2015, 08:20:43 AM »
ok I need to read up on retirement tax brackets....my assumption was they are the same as mine but w/ access to all those juicy preferred tax accounts.  is that not the case? 

w/ regards to your 1 to 1.30, I was assuming my taxes would be the same or worse in the future.  in which case it'd be 1 to 1.30+

Gin1984

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Re: Just opened my first brokerage account.....help!
« Reply #11 on: September 03, 2015, 08:25:39 AM »
ok I need to read up on retirement tax brackets....my assumption was they are the same as mine but w/ access to all those juicy preferred tax accounts.  is that not the case? 

w/ regards to your 1 to 1.30, I was assuming my taxes would be the same or worse in the future.  in which case it'd be 1 to 1.30+
Please rewrite this, what do you mean.

Scandium

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Re: Just opened my first brokerage account.....help!
« Reply #12 on: September 03, 2015, 08:30:40 AM »
ok I need to read up on retirement tax brackets....my assumption was they are the same as mine but w/ access to all those juicy preferred tax accounts.  is that not the case? 

w/ regards to your 1 to 1.30, I was assuming my taxes would be the same or worse in the future.  in which case it'd be 1 to 1.30+

The tax brackets are the same, but bot having a set wage but rather choosing your on income based on your needs afford you a lot of flexibility to lower taxes. Your contribution to a 401k comes out of the last dollar, at your top bracket. While in retirement you can use various methods to lower this. Like I said for one thing you're no longer saving for retirement so it (should) be quite a bit lower in the first place (by your savings rate %).

Start with this
http://www.gocurrycracker.com/never-pay-taxes-again/
and this
http://www.madfientist.com/retire-even-earlier/

westcl2

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Re: Just opened my first brokerage account.....help!
« Reply #13 on: September 03, 2015, 08:37:11 AM »
sorry about that

my assumption about the tax code is that it was not dependent on age.  Additionally the only benefit I will have as an elderly person will be that I can make withdrawals from my IRAs/401k/etc without suffering penalties and only incurring the tax associated w/ each account.  so pension reg income, 401k reg income, iras(roth) already paid tax, and normal iras normal income.....so if my goal is to have somewhere in the 100k range my taxes will be close to the same as today(unless they go up, which i'd bet on vice not going  up)

Gin1984

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Re: Just opened my first brokerage account.....help!
« Reply #14 on: September 03, 2015, 11:10:17 AM »
sorry about that

my assumption about the tax code is that it was not dependent on age.  Additionally the only benefit I will have as an elderly person will be that I can make withdrawals from my IRAs/401k/etc without suffering penalties and only incurring the tax associated w/ each account.  so pension reg income, 401k reg income, iras(roth) already paid tax, and normal iras normal income.....so if my goal is to have somewhere in the 100k range my taxes will be close to the same as today(unless they go up, which i'd bet on vice not going  up)
After 65 you have an extra $1000 I believe as an exemption but that is not the point.  Your first X amount will be personal exemption ($4000 now but will increase with inflation) then standard ($6200 for single I think), then the 10% bracket ($9225) then into the 15%.  Whereas the money you put in right now into your 401k would be money taxed at 25-28%.  See how that saves you money?
« Last Edit: September 03, 2015, 12:03:35 PM by Gin1984 »

johnny847

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Re: Just opened my first brokerage account.....help!
« Reply #15 on: September 03, 2015, 11:38:20 AM »
@johnny847 i'm not saying there is a difference between dividends and principle.  my focus is on total returns and this bit confuses me
I get that paying a dividend hurts the stock price, and I understand how if your portfolio appreciates at 5% and you sell 3% its grown at 2% hopefully meeting/beating inflation and maintaining its value.  but in the process of selling off that 3% aren't you effectively getting a more focused portfolio in the remaining 97% quantity of your stocks which opens you up to more risk in the fluctuations of the market?  thinking if you have more shares to sell you could sell them more spread out and avoid some of the risk of selling at a bad time.  And the alternative (may be wrong here) is that by reinvesting your dividends and putting more capital in over my career I will have sufficient shares to provide an income that I can live off the dividends, and if at some point I want I can always sell those shares (but that's not the goal)

This argument doesn't hold water.
 If you chase dividend yields, then yes you will have more shares, but each share will be worth less than that of a hypothetical equivalent company that decided not to issue that dividend instead. How much less is each share worth compared to that hypothetical capital gains only company? Exactly the amount of the dividend.

It doesn't matter if you have 1000 shares worth $10 or 100 shares worth $100. You still have $10,000.


When somebody says they want to live ff dividends it is usually indicative of a fallacious understanding of dividends. If we are disregarding taxes, we shouldn't care how our returns are given to us, whether it's through capital  gains or dividends.
Trying to live off dividends usually means that either one will work many more than necessary, because dividend yields on the total stock market aren't that high (~2%), or one will chase dividend yields (and again, some people contend that companies with solid dividend yields and history are better companies to invest it. I'm not here to argue for or against that. What I am saying is chasing companies with high dividend yield, or a solid dividend history, is reducing the companies you are willing to invest in and reduces diversification).

And your idea of 5% growth, 3% spend, 2% left to never touch the principle sounds good in theory, but the market will always have down years. Say you retire on $2M, and just after you retire, the market crashes 50%. If you never want to touch your principle, what are you going to do then? By your logic, any amount you withdraw from your portfolio this year would "touch your principle"

westcl2

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Re: Just opened my first brokerage account.....help!
« Reply #16 on: September 03, 2015, 12:59:04 PM »
@johnny847

i understand the math of "It doesn't matter if you have 1000 shares worth $10 or 100 shares worth $100. You still have $10,000."  but doesnt having 1000 shares offer the flexibility of liquidating smaller ratios of the total so you have more flexibility?

and your last statement doesnt that lend to the argument that dividends would be better?  if 5-3=2% growth but the risk of down year could lose 50 or whatever that number is....why not take the 2% yield and keep 100% of your stock?   

westcl2

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Re: Just opened my first brokerage account.....help!
« Reply #17 on: September 03, 2015, 01:02:05 PM »
@scandium

i see the savings....but i guess in my head i was seeing roth as a diversification on "what the future tax code will be".... and the conversion from trad to roth tax free seems so sketchy that it has to get fixed right?

MDM

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Re: Just opened my first brokerage account.....help!
« Reply #18 on: September 03, 2015, 02:12:01 PM »
the conversion from trad to roth tax free seems so sketchy that it has to get fixed right?
If anything, one might think the backdoor Roth strategy would be "sketchy" but currently there are no serious (most budget proposals don't count) suggestions to change that.

Regular conversions of trad to Roth used to be subject to restrictions based on MAGI limit.  That was changed to eliminate the MAGI limit by the https://en.wikipedia.org/wiki/Tax_Increase_Prevention_and_Reconciliation_Act_of_2005.

The conversion may be penalty-free, but it is not tax-free - unless your total ordinary income is below the deduction + exemption amount.

johnny847

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Re: Just opened my first brokerage account.....help!
« Reply #19 on: September 04, 2015, 09:18:19 AM »
@johnny847

i understand the math of "It doesn't matter if you have 1000 shares worth $10 or 100 shares worth $100. You still have $10,000."  but doesnt having 1000 shares offer the flexibility of liquidating smaller ratios of the total so you have more flexibility?

Some brokers let you buy fractional stock. Additionally, if you have automatic reinvestment of dividends turned on (note, I'm not opposed to reinvesting dividends, I'm saying dividend yields shouldn't be the goal - total returns should be), then you will have fractional shares to sell. Virtually all brokers that I am aware of let you sell your fractional shares.

and your last statement doesnt that lend to the argument that dividends would be better?  if 5-3=2% growth but the risk of down year could lose 50 or whatever that number is....why not take the 2% yield and keep 100% of your stock?

No it doesn't, because when you take your 2% dividend yield (let's take it to cash for this example) and keep 100% of your stock, your stock is still worth 2% less.
Receiving a dividend of 2% is equivalent to the company not giving you 2%, and you selling 2% of your shares.

TheOldestYoungMan

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Re: Just opened my first brokerage account.....help!
« Reply #20 on: September 04, 2015, 11:12:40 AM »
Well, there's quite a bit of information out there, and congratulations on taking this next step.

By all means, do your research, pick your winners, put your money down, see how it goes.

Many many people have gotten crazy rich doing just this.  Most do not.  I sincerely hope you do well and make bajillions of dollars.  If you remember these well wishes and want to make a donation upon hitting it big, I do accept paypal, checks, and blocks of gold delivered to my door.

Somewhere on this forum someone has a quote that goes like "the best thing that can happen to a noobie stock investor is to suffer a major loss in their first few years."

I hope you never have a big loss, but I also hope that if you do, it comes soon, while you have a chance to shrug it off and figure out something from it.

Don't be afraid to invest and try things out, it is only money.  I have picked a couple stocks too, just in case I'm a stock picking genius.  So far...still gotta go to work every day, but they aren't doing too badly.  I mean, they've lost close to 25% of their value, but I'm still hopeful!

As for the tax advantages of deferred-taxes.  Not all of your income in retirement is going to be subject to tax.  So even if you want to have "100k in income" it won't be anywhere close to 100k in taxable income per the IRS.  Some of it will be long-term capital gains.  Some of it will be dividends...which are taxed like long term capital gains, sometimes?, and there will be years where you are living a little off of principle.

Unless you work a really really long time, and have no savings outside of retirement accounts, and have awesome returns within those retirement accounts, you'll pay less taxes before and after retirement by using the traditional IRA and 401k.  Like 99% of folks are going to be better off going this route.

You need to run the actual numbers yourself for your actual situation, but it will surprise you.

http://www.madfientist.com/traditional-ira-vs-roth-ira/

Your argument is:  I'm going to pay the taxes eventually, so why not pay them now?  That way I have an account that will never be taxed again.

The counter is:  If you're concerned about future tax changes increasing your burden, just know, a tax code change created the Roth IRA, and a tax code change could take it teh fux away.  Also,  Once you pay that money in taxes, it is gone forever.  You might have to pay it in the future.  But you might not also.  And then what others said, you're saving a dollar taxed at 28% for every dollar you contribute.  But the first seventy thousand or so you withdraw every year are taxed at less than 28%.  Some aren't taxed at all.  It is real, tangible, ROI.  As close to a sure thing in investing as you'll ever get.  A 28% ROI+ on even some of your money...no brainer.

Good luck to you!