Back After A Long Trip. After flying to Denver to check on business, I got in my pick-up truck and headed Southwest to Arizona. I had a number of things to take care of such as scattering the cremated remains of my uncle on a mountain in Tucson and visiting my 88 year old father in Mesa. After that, I rode across the desert and back to the woods here in Southeast Texas. I'm glad to be back.
Is An Annuity In Your Future? If you read the financial press, you'll see many negative articles about annuities. Granted, the management/mortality fees are somewhat high and the surrender charges can be excessive if you cash in before the required 5-10 year holding period, Much of these disadvantages are the result of over-zealous sales tactics by some commission-driven sales people. Just like most other financial products, they are useful a number of circumstances and mis-applied in others. For example, I recently ran across a couple with 100% (almost $1 million) of their IRA money in a variable annuity. My opinion is that there are at least two things wrong with this scenario. 1. IRA's are tax advantaged instruments which allow the build up of earnings inside the annuity with no current taxation. Annuities offer the same tax deferred build up. Buying these instruments inside an IRA offers no additional tax advantages and the investor ends up paying excessive fees for services charges inside the annuity. While there might be some reasons for including an annuity in an IRA (I'm being charitable here), you never want to devote 100% of your IRA to an annuity. 2. The other flaw in this scenario is that your investments are limited to those offered within the annuity. While these can be quite broad, they are still a long way from being comprehensive.
What's The Real Benefit Of An Annuity? When I took my financial planning courses, the official definition of an annuity was "systematic liquidation of capital." Sound like a trip to Las Vegas? Translated into English this means that an annuity allows you to draw principal and interest from your investment at a previously agreed upon schedule. Viewed as an insurance, rather than an investment product, the real benefit of an annuity is that it offers a guarantee that you will be able to receive an income stream as long as you live. It insures that you will never outlive your income. For example, consider a 66 year old male with $300,000 in capital. This individual doesn't want to be bothered with managing his investment portfolio and doesn't want to worry about outliving his money. One alternative is to buy an annuity that would pay $2067 a month for life. If he lives until age 90, his total payments would be $570,492. Upon his death, payments cease and there is no money left for heirs. If a spouse is involved, there are other options, one of which is that, in return for a smaller income stream, there is also a guaranteed income for the lifetime of a spouse. In the case of a 63 year old spouse, the income would be $1,773 and the spouse would also be covered for her life. This is an oversimplified approach. I received these numbers from a web site, www.immediateannuity.com. While the site provides a quick estimate of the available benefits, there are other details to consider which are too cumbersome for discussion here.
There Are Obvious Disadvantages To This Approach. If the investor and spouse die in a flu epidemic during the first year, the insurance company gets all the money and the heirs get nothing. In addition, inflation would reduce the purchasing power of this income stream over the years. Theoretically, it is possible to receive this same income from an investment portfolio without forfeiting the principal at death. The main benefit of this approach is stability. You give your money to the insurance company and the game is over. You don't have to worry any more since your income is guaranteed for life. There are also a number of compromises. You could invest part of your money in this instrument and the remainder in other investments. This would enhance the stability of your return while the other investments would allow the possibility of capital appreciation and higher returns. The task is to choose the mixture of higher returns and stability that fits your income needs and risk tolerance.
The Holiday Season Is Upon Us. It is my objective to get one more post in before the holidays. If I don't, I would like to thank you all for your friendship and support over these years. While money is a major part of my life, it means nothing compared to the relationships that have sustained me for almost 70 years.
Saturday, December 15, 2007
Tuesday, November 20, 2007
THE RETIREE PARADOX
Why Do We Put Ourselves Through This? The market is often a brutal place where we watch the value of our assets go up and down for reasons that we could never adequately understand, much less anticipate. Why not stay out of it and let the hedge funds and institutional investors knock themselves out? While this is an option for some of us, most of us need more income than we can squeeze out of a bond portfolio or government insured bank deposits. Herein lies the retiree paradox. We hate the market volatility but we can't derive enough income from so-called "safe investments." Consider the plight of a small businessman who sells a company for a half million in after-tax cash. Assume there is another half million in investment assets outside the company. A million dollars worth of investment assets puts him/her in the top 1% of retirees. Assume employment opportunities for a 60 year old former entrepreneur are limited and that the retiree wishes to stop working and live off social security and investment income. Further, assume that he/she has little tolerance for the ups and downs of the stock market. A "safe" investment will produce income at 5%, yielding $50,000 in before/tax income. When social security income becomes available, the retiree and spouse can get another $20,000-30,000 annual income for a total of $70,000-80,000 per year. It has been my experience that, although retirees in this category often tell me they need $5,000 per month in income, very few actually end up getting by on that amount. "Extras" like travel, home improvements, and helping out the kids often increase that amount by an additional $20,000-30,000 per year. In addition, declining purchasing power from inflation will sooner or later have a negative effect (although not as much as many financial professionals project). So what do we do?
Most of Us are Forced to Take Additional Risk to Obtain Higher Yields. This forces us into real estate or the stock market. The average annual return from the stock market is in the 10% range; however, we have been warned that 8-9% may be more realistic for the future. This would be satisfactory if we received this average return each year; however, a more likely scenario is a 15% return for one year and 3% the next. If the market is up when we need to make a withdrawal, we do well but if it is down we drain our capital so we have a lower investment base to produce income for next year. Studies have shown that retirees who need to withdraw from a down market for the first two years after retirement will have a substantial risk of running out of money during their life span. The main reason I established this blog is to offer people a solution.
Buy Cash Flow, Not Assets. Hence the title of this blog. If you are retired or planning to retire, your best bet is to start planting your "Cash Flow Garden." It doesn't matter how much money you have if you can't convert it to cash flow to fund your living expenses. The name of the game is to have cash flow from a variety of investments. This adds considerable flexibility since you can use the income in both up and down markets. You no longer have to worry about whether you will have to sell assets into a down market or whether your nest egg will last as long as you do. If you leave your nest egg intact and spend only the income, your risk of running out of money is much reduced. The market price of your portfolio can advance or decline but you can stay secure if your income continues.
The Recent Correction Brings us an Opportunity. The hardest hit stocks in this correction are those in the financial sector. We have sold some of our investments in this sector because we thought their income stream was in jeopardy. Others have been hit hard because they have had to reduce the value of their assets because of a rule that forces them to "mark to market" the value of some of their illiquid assets. While their book value has been reduced, their cash flow remains strong. If dividends continue at current levels, the market value will eventually return to previous levels. By searching a data base of these companies and selecting those with a high probability of dividend continuation, you can not only buy a strong dividend income stream that is likely to increase over the years, you will have a high probability of increasing market value in the future. In my end of October post, I listed five stocks that I believe have a high probability of producing a 9% dividend yield in the future. I did this not to recommend these stocks but to give you an example of some of the opportunities out there. My philosophy is similar to that of Dan Reeves, former Denver Bronco head coach. He said "Your offense has to take advantage of the opportunities the defense gives you. Similarly, your investment strategy has to be one of taking advantage of the opportunities the markets give you. This philosophy has served me well in the past and I will continue to use it.
Most of Us are Forced to Take Additional Risk to Obtain Higher Yields. This forces us into real estate or the stock market. The average annual return from the stock market is in the 10% range; however, we have been warned that 8-9% may be more realistic for the future. This would be satisfactory if we received this average return each year; however, a more likely scenario is a 15% return for one year and 3% the next. If the market is up when we need to make a withdrawal, we do well but if it is down we drain our capital so we have a lower investment base to produce income for next year. Studies have shown that retirees who need to withdraw from a down market for the first two years after retirement will have a substantial risk of running out of money during their life span. The main reason I established this blog is to offer people a solution.
Buy Cash Flow, Not Assets. Hence the title of this blog. If you are retired or planning to retire, your best bet is to start planting your "Cash Flow Garden." It doesn't matter how much money you have if you can't convert it to cash flow to fund your living expenses. The name of the game is to have cash flow from a variety of investments. This adds considerable flexibility since you can use the income in both up and down markets. You no longer have to worry about whether you will have to sell assets into a down market or whether your nest egg will last as long as you do. If you leave your nest egg intact and spend only the income, your risk of running out of money is much reduced. The market price of your portfolio can advance or decline but you can stay secure if your income continues.
The Recent Correction Brings us an Opportunity. The hardest hit stocks in this correction are those in the financial sector. We have sold some of our investments in this sector because we thought their income stream was in jeopardy. Others have been hit hard because they have had to reduce the value of their assets because of a rule that forces them to "mark to market" the value of some of their illiquid assets. While their book value has been reduced, their cash flow remains strong. If dividends continue at current levels, the market value will eventually return to previous levels. By searching a data base of these companies and selecting those with a high probability of dividend continuation, you can not only buy a strong dividend income stream that is likely to increase over the years, you will have a high probability of increasing market value in the future. In my end of October post, I listed five stocks that I believe have a high probability of producing a 9% dividend yield in the future. I did this not to recommend these stocks but to give you an example of some of the opportunities out there. My philosophy is similar to that of Dan Reeves, former Denver Bronco head coach. He said "Your offense has to take advantage of the opportunities the defense gives you. Similarly, your investment strategy has to be one of taking advantage of the opportunities the markets give you. This philosophy has served me well in the past and I will continue to use it.
Tuesday, November 13, 2007
AIN'T NOTHIN' YOU CAN DO ABOUT IT.
The Market is Not Treating Us Well. This reminds me of a story I heard recently about a man who was in the process of being tested for a position in the New York City police department. The final step involved an oral interview to get an idea of his overall knowledge of some of the situations he might encounter as a policeman. One question was what are rabies and what can you do about it. His answer was, "Rabies is Jewish priests and there ain't nothin' you can do about it. You might apply that answer to your participation in the stock market. While there is nothing you can do about the overall direction of the market, there are a lot of things you can do about your own investment portfolio. The problem is that many, if not most, of these are wrong. In a study of mutual fund participants, it was determined that very few of the shareholders did as well as the overall performance of the fund over a long period. The problem is that there are powerful forces that prompt us to do the wrong thing at the wrong time. Buying low and selling high is an objective that few investors achieve. Let's face it. Warren Buffet we ain't.
Beware of What You Read in the Newspapers. Even if what we read in the newspapers is mostly true, the papers are reporting history. Making your investment decisions with only his in mind, is like trying to drive your car with the rear view mirror. In the 90's we had a technological revolution in this country as the computer chip and the internet drove huge gains in productivity. It changed the way information is disseminated. Those changes are still taking place. If that is the case why did investors that lost money outnumber those who made money? Instead of the dot com era, why do most people call it the dot bomb era? You may recall that start-up companies with practically no sales and negative earnings became worth as much as Ford or General Motors. You couldn't pick up a newspaper without reading about a bunch of new dot com billionaires. Everyone wanted in on the act and they drove prices of those companies into the stratosphere. If you got in early and got out in time you made money but few people did. Now days you can't read the business section without reading of China, India, and some emerging market countries growing their economies at 8-9%. That was last quarter. What is going to happen next quarter? It isn't so obvious and those of us who think we know, don't know what we don't know.
Oil is Nearing $100 a Barrel. Let's sell our depressed financial stocks like Citicorp and Bank America and run out and buy an oil royalty trust like Prudhoe Bay Trust or San Juan Basin Trust. Before we do that, we might consider that, in addition to supply demand factors, the energy markets are heavily influenced by speculators who buy futures in these markets. Is oil really worth $100 a barrel or is the true value closer to the $60 a barrel level as reported by industry insiders? The point I'm trying to make is that the more publicity an industry segment gets, the more people want to devote capital to it. The result is that more and more investors flock to that segment until they drive prices to unrealistic levels. A sure fire method for sub-standard returns is to sell what is currently unpopular and put the proceeds into one that is currently popular. You might get away with it now and then, but you will make more mistakes than home runs. Remember Warren Buffet's adage. When the majority becomes aggressive, I get fearful but when the majority becomes fearful, I get aggressive.
Playing With the House Money. There is an old saying among Las Vegas gamblers that you are in good shape when you've won enough money to put your own money back in your pocket and play with your winnings (house money). That's what most of our clients are doing. If you've made a good return for several years, you have to expect that you may need to give some of it back when the market corrects. Of course, you can take your money out and wait until the correction is over but it is extremely difficult to know when to put it back in. Studies have shown that if you were out of the market for only a short time during a recovery, you would have lost more than 33% of the gain. The problem is, we don't know when that short time is.
What are We Doing to Manage Risk in Our Portfolios? When we buy stocks, we buy into a business. Part of what we do is look at the underlying business in the companies we own. If the market price is up and we think the business value is down, we sell the asset. If the market price is down and the business is even or better, we try to find reasons for the price to be down. Is it do to an overall correction in the industry? Is the price following that of an industry leader? Are there some expectations of a future reduction in earnings? Does the price reflect a good earnings report that doesn't meet the expectations of analysts? If we can find no reason for the price to be down, we retain the investment but watch closely for reasons to sell at a later date. If, like most investments in our portfolios, cash flow from the investment is satisfactory, we try to place less emphasis on the market price and concentrate on whether or not the cash flow will continue. Sometimes we may sell a part of the investment and hold more cash than normal because we hope to buy some bargains in the future. You may recall that in March of this year, I wrote a post entitled : Awash In Liquidity. I postulated that this might mean "Awash in Stupidity." In other words, the markets are getting overvalued because there is too much liquidity. Since that time, we have been slowly raising the cash allocation in our portfolios. This has protected us somewhat, but not entirely, from major losses. We will continue to watch your money and ours in these turbulent times.
An Interesting Quote on the Aging Process. This one comes from Larry, the Cable Guy. "Inside every old person, is a young person wondering, "What the hell happened." It seems like only a short time ago, I heard better, saw better, and laughed more. What the hell happened?
Beware of What You Read in the Newspapers. Even if what we read in the newspapers is mostly true, the papers are reporting history. Making your investment decisions with only his in mind, is like trying to drive your car with the rear view mirror. In the 90's we had a technological revolution in this country as the computer chip and the internet drove huge gains in productivity. It changed the way information is disseminated. Those changes are still taking place. If that is the case why did investors that lost money outnumber those who made money? Instead of the dot com era, why do most people call it the dot bomb era? You may recall that start-up companies with practically no sales and negative earnings became worth as much as Ford or General Motors. You couldn't pick up a newspaper without reading about a bunch of new dot com billionaires. Everyone wanted in on the act and they drove prices of those companies into the stratosphere. If you got in early and got out in time you made money but few people did. Now days you can't read the business section without reading of China, India, and some emerging market countries growing their economies at 8-9%. That was last quarter. What is going to happen next quarter? It isn't so obvious and those of us who think we know, don't know what we don't know.
Oil is Nearing $100 a Barrel. Let's sell our depressed financial stocks like Citicorp and Bank America and run out and buy an oil royalty trust like Prudhoe Bay Trust or San Juan Basin Trust. Before we do that, we might consider that, in addition to supply demand factors, the energy markets are heavily influenced by speculators who buy futures in these markets. Is oil really worth $100 a barrel or is the true value closer to the $60 a barrel level as reported by industry insiders? The point I'm trying to make is that the more publicity an industry segment gets, the more people want to devote capital to it. The result is that more and more investors flock to that segment until they drive prices to unrealistic levels. A sure fire method for sub-standard returns is to sell what is currently unpopular and put the proceeds into one that is currently popular. You might get away with it now and then, but you will make more mistakes than home runs. Remember Warren Buffet's adage. When the majority becomes aggressive, I get fearful but when the majority becomes fearful, I get aggressive.
Playing With the House Money. There is an old saying among Las Vegas gamblers that you are in good shape when you've won enough money to put your own money back in your pocket and play with your winnings (house money). That's what most of our clients are doing. If you've made a good return for several years, you have to expect that you may need to give some of it back when the market corrects. Of course, you can take your money out and wait until the correction is over but it is extremely difficult to know when to put it back in. Studies have shown that if you were out of the market for only a short time during a recovery, you would have lost more than 33% of the gain. The problem is, we don't know when that short time is.
What are We Doing to Manage Risk in Our Portfolios? When we buy stocks, we buy into a business. Part of what we do is look at the underlying business in the companies we own. If the market price is up and we think the business value is down, we sell the asset. If the market price is down and the business is even or better, we try to find reasons for the price to be down. Is it do to an overall correction in the industry? Is the price following that of an industry leader? Are there some expectations of a future reduction in earnings? Does the price reflect a good earnings report that doesn't meet the expectations of analysts? If we can find no reason for the price to be down, we retain the investment but watch closely for reasons to sell at a later date. If, like most investments in our portfolios, cash flow from the investment is satisfactory, we try to place less emphasis on the market price and concentrate on whether or not the cash flow will continue. Sometimes we may sell a part of the investment and hold more cash than normal because we hope to buy some bargains in the future. You may recall that in March of this year, I wrote a post entitled : Awash In Liquidity. I postulated that this might mean "Awash in Stupidity." In other words, the markets are getting overvalued because there is too much liquidity. Since that time, we have been slowly raising the cash allocation in our portfolios. This has protected us somewhat, but not entirely, from major losses. We will continue to watch your money and ours in these turbulent times.
An Interesting Quote on the Aging Process. This one comes from Larry, the Cable Guy. "Inside every old person, is a young person wondering, "What the hell happened." It seems like only a short time ago, I heard better, saw better, and laughed more. What the hell happened?
Saturday, October 27, 2007
FIVE STOCKS FOR INCOME
Got Cash? If you have some cash that you don't know what to do with, you may have more options than you think. Of course, you can always leave it in the bank but you will be lucky to get 5%. You can invest in the stock market but you will vulnerable to a major correction which could happen at any time. My strategy in these circumstances is to invest in stocks that produce an income stream. Don't need income to buy groceries, gasoline, etc? How about income to re-invest in the event of a market correction? During the major correction that occurred in the early 2000's, many saw their portfolios decimated as stocks that were overpriced returned to more realistic levels. There were bargains to be had at these levels but most investors had little capital to re-invest. Our income portfolios may have been down but the income stream continued and we had cash flow to re-invest in these bargains.
A Sample $45,000 Income Portfolio. The following is a sample portfolio of some stocks that I think are realistically, if not bargain, priced in the current market. These are higher income stocks which were punished during the recent credit crunch. While some companies in this category were corrected because the market thought they had little chance of continuing their dividend, my opinion is that the companies listed here have a good chance of continuing to pay their dividend. One caveat before I list these stocks: This is a sample portfolio and not necessarily one I would recommend for everyone. I would never advise your grandmother to put 100% of her savings into this. We are playing the probabilities here and those who can't afford the possibility of a major disruption should not take the chance. I should also call your attention to the fact that I did not do a comprehensive screen of all dividend stocks to pick out the best ones. Although, I do like these companies as evidenced by the fact that I either own some of them at present or have owned some in the past there may well be better ones out there. Do your own screen and due diligence before deciding you want to own this portfolio. Here is the sample portfolio:
1. 500 shares of Capital Source (CSE) @17.25. Cost is $8,625. Annual Income $1,200
2. 200 Sh. Am. Capital Strategies (ACAS) @41.4. Cost $8,280. Income $736.
3. 200 Sh. Bank of America (BAC) @47.48. Cost $9,496. Income $512.
4. 500 Sh. Permian Basin Trust (PBT) @ 15.69. Cost $7,845. Income $885.
5. 200 Sh. Kinder Morgan (KMP) @51.65. Cost $10,330. Income $704.
The total cost of this portfolio is $44,576. The annual income is $4037 or a yield of 9.06%. This is almost double what you can get in a money fund. Advantages are: 1. Reasonable diversification since the portfolio contains shares of the second largest bank on the country, business development companies, oil and natural gas royalty companies, and energy pipeline companies. 2. All these companies have a strong dividend payment history including a track record of increasing the dividend at least annually. 3. Growth in share prices.
Why Not Put All Your Money in This Portfolio? No matter how strong the company appears, you never know when the economy will throw you a curve like it did with Enron, Kmart, or American Home Mortgage. You need a bank account and other kinds of investments to make sure that under-performance of any company in this mix won't put you in the poorhouse.
It's Been a Busy Summer. Everything from personal illness to deaths in the family have kept me from accomplishing everything on my list this summer. We plan to leave this coming Wednesday for our winter home but we will be available by phone, fax, or e-mail. In addition, I am planning several trips back during the year. If you have issues that you think might need my attention, don't hesitate to call.
A Sample $45,000 Income Portfolio. The following is a sample portfolio of some stocks that I think are realistically, if not bargain, priced in the current market. These are higher income stocks which were punished during the recent credit crunch. While some companies in this category were corrected because the market thought they had little chance of continuing their dividend, my opinion is that the companies listed here have a good chance of continuing to pay their dividend. One caveat before I list these stocks: This is a sample portfolio and not necessarily one I would recommend for everyone. I would never advise your grandmother to put 100% of her savings into this. We are playing the probabilities here and those who can't afford the possibility of a major disruption should not take the chance. I should also call your attention to the fact that I did not do a comprehensive screen of all dividend stocks to pick out the best ones. Although, I do like these companies as evidenced by the fact that I either own some of them at present or have owned some in the past there may well be better ones out there. Do your own screen and due diligence before deciding you want to own this portfolio. Here is the sample portfolio:
1. 500 shares of Capital Source (CSE) @17.25. Cost is $8,625. Annual Income $1,200
2. 200 Sh. Am. Capital Strategies (ACAS) @41.4. Cost $8,280. Income $736.
3. 200 Sh. Bank of America (BAC) @47.48. Cost $9,496. Income $512.
4. 500 Sh. Permian Basin Trust (PBT) @ 15.69. Cost $7,845. Income $885.
5. 200 Sh. Kinder Morgan (KMP) @51.65. Cost $10,330. Income $704.
The total cost of this portfolio is $44,576. The annual income is $4037 or a yield of 9.06%. This is almost double what you can get in a money fund. Advantages are: 1. Reasonable diversification since the portfolio contains shares of the second largest bank on the country, business development companies, oil and natural gas royalty companies, and energy pipeline companies. 2. All these companies have a strong dividend payment history including a track record of increasing the dividend at least annually. 3. Growth in share prices.
Why Not Put All Your Money in This Portfolio? No matter how strong the company appears, you never know when the economy will throw you a curve like it did with Enron, Kmart, or American Home Mortgage. You need a bank account and other kinds of investments to make sure that under-performance of any company in this mix won't put you in the poorhouse.
It's Been a Busy Summer. Everything from personal illness to deaths in the family have kept me from accomplishing everything on my list this summer. We plan to leave this coming Wednesday for our winter home but we will be available by phone, fax, or e-mail. In addition, I am planning several trips back during the year. If you have issues that you think might need my attention, don't hesitate to call.
Sunday, October 07, 2007
FED TO THE RESCUE.???
What Do the Federal Funds Rate Cuts Mean to You? Unless you were in some other country, you have to know that the Federal Reserve cut the federal funds rate by half a point at their most recent meeting. How will this cut affect you? As usual, the answer will depend on your financial goals and where you stand in your quest for financial independence.
Looking for a New Fixed Rate Mortgage? As I've said dozens of times, the Fed only controls short term rates. Long term rates can go up or down with a Fed rate cut depending on whether or not the market perceives the cut as inflationary. The immediate result of the rate cut was that long-term fixed rates increased slightly because of fears that the additional liquidity might help perpetuate some of the excesses of the past as consumers continued to borrow to buy stuff they really didn't need. Don't expect these rate cuts to help you get a lower fixed-rate mortgage.
Will The Cut Make Your ARM Loan More Manageable? Several financial columnists have written that these rate cuts won't help lower the foreclosure rate. The fact is they might make a difference in some cases. ARM loans usually adjust based on some margin over the one-year treasury. This is a short-term index and should drop when the Fed cuts rates. The standard one year ARM adjusts at 2.5-2.75% over the index. This means that your next adjustment should leave you in the 6.5 to 7% range. Hardly a disaster. If you have one of the sub-prime ARMs, the margin can be as much as double that. Even though your adjustment may be a half point lower than before the cut, the margin is so large that it will still cause a major trauma to most borrowers.
Got a Home Equity Line of Credit? Most of these are based on the prime rate which should decrease dollar for dollar with a Fed cut. If your loan was at prime, or 8.25%, it will drop to 7.75%. This means that a borrower with a $100,000 loan should see a payment reduction of about $500 per year. Funny, how it seems that many borrowers hardly notice a reduction of that magnitude but scream like they were shot when rates increase that much.
Going to Open a Savings Account or Buy a CD? In general, you will find it difficult to locate decent rates on your cash accounts. Banks will quickly lower what they are willing to pay for funds after a Fed rate cut. This is at a time when the average rate on bank money funds is less than 1% and demand savings accounts often pay 1-2%. If you shop diligently and are willing to do business at a bank not necessarily located in your town, you will be able to beat these averages but even aggressive banks will gradually lower rates on funds they have on deposit. Brokerage money accounts will also pay lower rates as a result of the Fed cut and we need to remember that these funds are not insured like bank funds. Although no one has ever lost money in these funds, its not impossible, particularly when we have a credit crunch like the one we recently experienced.
Looking to Buy Stocks? The effect of the Fed cut on the market was immediate with the Dow rising more than three hundred points the day of the cut. At this point, the market is near an all time high as the cost of leverage decreased and liquidity levels increased. Good news for those who are in the market? Remember my recent post about liquidity breeding stupidity. Lower rates encourage bad behavior as consumers borrow to buy items they don't really need, home buyers are willing to bid up the price of homes because monthly payments are low, and investors chase higher yields with little regard for risk. Now is the time for conservative investing. One opportunity appears to be high-dividend stocks which have taken a disproportionate hit in the recent correction. This will require considerable due-diligence since some stocks dropped for a reason. High dividends are never attained without risk. A portfolio of high dividend stocks must be carefully managed to avoid those stocks where the risk outweighs the return.
Is The Recent Cut Good or Bad? While investors obviously thought the cut was good, I question the wisdom of adding more of what caused the problem in the first place. Cheap money isn't always cheap in the long run. The strongest advice that I can give anyone is to borrow only when necessary. It's not a bad time to reduce your overall debt level. Be careful not to over spend your income. Another severe correction is not out of the question.
Looking for a New Fixed Rate Mortgage? As I've said dozens of times, the Fed only controls short term rates. Long term rates can go up or down with a Fed rate cut depending on whether or not the market perceives the cut as inflationary. The immediate result of the rate cut was that long-term fixed rates increased slightly because of fears that the additional liquidity might help perpetuate some of the excesses of the past as consumers continued to borrow to buy stuff they really didn't need. Don't expect these rate cuts to help you get a lower fixed-rate mortgage.
Will The Cut Make Your ARM Loan More Manageable? Several financial columnists have written that these rate cuts won't help lower the foreclosure rate. The fact is they might make a difference in some cases. ARM loans usually adjust based on some margin over the one-year treasury. This is a short-term index and should drop when the Fed cuts rates. The standard one year ARM adjusts at 2.5-2.75% over the index. This means that your next adjustment should leave you in the 6.5 to 7% range. Hardly a disaster. If you have one of the sub-prime ARMs, the margin can be as much as double that. Even though your adjustment may be a half point lower than before the cut, the margin is so large that it will still cause a major trauma to most borrowers.
Got a Home Equity Line of Credit? Most of these are based on the prime rate which should decrease dollar for dollar with a Fed cut. If your loan was at prime, or 8.25%, it will drop to 7.75%. This means that a borrower with a $100,000 loan should see a payment reduction of about $500 per year. Funny, how it seems that many borrowers hardly notice a reduction of that magnitude but scream like they were shot when rates increase that much.
Going to Open a Savings Account or Buy a CD? In general, you will find it difficult to locate decent rates on your cash accounts. Banks will quickly lower what they are willing to pay for funds after a Fed rate cut. This is at a time when the average rate on bank money funds is less than 1% and demand savings accounts often pay 1-2%. If you shop diligently and are willing to do business at a bank not necessarily located in your town, you will be able to beat these averages but even aggressive banks will gradually lower rates on funds they have on deposit. Brokerage money accounts will also pay lower rates as a result of the Fed cut and we need to remember that these funds are not insured like bank funds. Although no one has ever lost money in these funds, its not impossible, particularly when we have a credit crunch like the one we recently experienced.
Looking to Buy Stocks? The effect of the Fed cut on the market was immediate with the Dow rising more than three hundred points the day of the cut. At this point, the market is near an all time high as the cost of leverage decreased and liquidity levels increased. Good news for those who are in the market? Remember my recent post about liquidity breeding stupidity. Lower rates encourage bad behavior as consumers borrow to buy items they don't really need, home buyers are willing to bid up the price of homes because monthly payments are low, and investors chase higher yields with little regard for risk. Now is the time for conservative investing. One opportunity appears to be high-dividend stocks which have taken a disproportionate hit in the recent correction. This will require considerable due-diligence since some stocks dropped for a reason. High dividends are never attained without risk. A portfolio of high dividend stocks must be carefully managed to avoid those stocks where the risk outweighs the return.
Is The Recent Cut Good or Bad? While investors obviously thought the cut was good, I question the wisdom of adding more of what caused the problem in the first place. Cheap money isn't always cheap in the long run. The strongest advice that I can give anyone is to borrow only when necessary. It's not a bad time to reduce your overall debt level. Be careful not to over spend your income. Another severe correction is not out of the question.
Thursday, September 27, 2007
A FEW QUICK COMMENTS
I'm not posting as often as I would like. So many times I've heard retirees say that they don't know how they ever found time to work. I'm not exactly a retiree but I now understand that comment. I used to go to the office every day. I attended to day-to-day affairs and had numerous meetings with clients and potential clients. I don't do that any more. I don't know where the time goes except that I am certainly more diligent with health issues and exercise schedules. Of course, I still meet with clients and occasionally potential clients but I no longer actively market my services or that of the company. Anyway, I plan to post more often in the future by just speaking my mind and not being so critical of what comes out.
I Attended the Exchanger Meeting Yesterday. I also had lunch with several old-timers who have observed many market cycles in this town. Now is not a good time for a real estate agent that spends most of his or her time collecting residential listings and trying to market the same. We all agreed on that. But we disagreed somewhat on the signals that indicate we are in a good market for investors. As I mentioned in my last post, we are evaluating some residential investments here and there. The signs I look at are the rental market and the amount of inventory for sale. These are somewhat positive in that vacancy rates are low, indicating high tenant demand relative to the supply of rental units. Inventory levels are still high which means that buyers have a lot of choices. Foreclosures are high which means that there are numerous properties that have to be sold (although many lenders haven't figured that out yet). You can sometimes cut a good deal on pre-foreclosure property by convincing the lender to take a short pay off to save the hassle of foreclosure. The trick there is to find some one in the lender's office who can make a decision. I guess I still think your best bet is to find a foreclosure property already listed with an agent so you have someone who already has a contact with the proper representatives in the lender's office. According to one of the old timers at yesterday's breakfast, another quick measure of whether or not the market is nearing a bottom is monthly rental rates near 1% of the purchase price. This means a $120,000 property that rents for $1,200 a month. The average isn't quite there yet but careful screening can locate a property here and there. We are going to continue researching these markets. More on this soon,
I Attended the Exchanger Meeting Yesterday. I also had lunch with several old-timers who have observed many market cycles in this town. Now is not a good time for a real estate agent that spends most of his or her time collecting residential listings and trying to market the same. We all agreed on that. But we disagreed somewhat on the signals that indicate we are in a good market for investors. As I mentioned in my last post, we are evaluating some residential investments here and there. The signs I look at are the rental market and the amount of inventory for sale. These are somewhat positive in that vacancy rates are low, indicating high tenant demand relative to the supply of rental units. Inventory levels are still high which means that buyers have a lot of choices. Foreclosures are high which means that there are numerous properties that have to be sold (although many lenders haven't figured that out yet). You can sometimes cut a good deal on pre-foreclosure property by convincing the lender to take a short pay off to save the hassle of foreclosure. The trick there is to find some one in the lender's office who can make a decision. I guess I still think your best bet is to find a foreclosure property already listed with an agent so you have someone who already has a contact with the proper representatives in the lender's office. According to one of the old timers at yesterday's breakfast, another quick measure of whether or not the market is nearing a bottom is monthly rental rates near 1% of the purchase price. This means a $120,000 property that rents for $1,200 a month. The average isn't quite there yet but careful screening can locate a property here and there. We are going to continue researching these markets. More on this soon,
Monday, September 03, 2007
TIME TO BUY AN INVESTMENT PROPERTY???
Let's Think About A Real Estate Investment. Is it time to buy something? If you are looking for a definite answer, you won't get it here. It depends on where you are in your quest for financial independence, what other kinds of investments you own, your cash flow needs, your stress and risk tolerance, and the current market conditions. Since all my readers are different, I will confine this column to the pros and cons of current market conditions in Denver, Colorado.
We Have Ample Inventory. There are many properties available and you have many choices. There are numerous motivated sellers who stretched themselves too thin in an attempt to buy all the house they could afford. Some are investors, some are lenders, some are owners who need to move for business or personal reasons. As the mouse pleaded, "Forget the Cheese, just let me out of the trap." If you are going to buy, you will need to sift through a number of deals to find one that will offer you an opportunity for profit.
There are Fewer Investors. Up until the last year or so, investors looking to diversify their portfolio and take advantage of the strong demand for housing were lining up to buy properties that they could remodel and sell for a profit. It was possible to borrow 100% on an investment property at very low initial interest rates. Investor demand has slowed as both neophyte and experienced investors found they could no longer count on selling remodeled properties for a quick profit. The financial press devotes headlines to "The Real Estate Bubble" and touts Denver as "The Foreclosure Capital of the Nation." If you are looking for a good deal today, you will no longer find a multitude of investors driving up prices.
Rates are Still Low and May Well Go Lower. You may not find lenders lined up to offer you 100% investor financing but long-term fixed rates are still low and likely to go lower. If you are willing to put 20-25% of your own money into a deal, you will still find a host of lenders willing to offer you rates that are only slightly above recent historic lows.
Rental Demand Continues to Improve. This is the most important factor in long-term investment success. Last year when we made a commitment to increase our property management, we entered a market where virtually anyone could borrow 100% of the purchase price of a new home. This meant more buyers and fewer renters. The few renters left had horrible credit and were virtually guaranteed to give you an unfavorable landlord experience. That situation has improved as vacancy rates have fallen and rents have gradually begun to increase. As an investor, your risk is highest in markets where tenant demand is low and investor demand is high. Under those circumstances, you will likely find it almost impossible to get a good deal on a property and, after your purchase, you will find it difficult to get a competent tenant to provide income to pay operating expense and debt service. We are just emerging from such a market and your odds for success are definitely improved.
So What's Not To Like? We can buy properties at below replacement cost, finance at low rates, get tenants to pay holding costs, and we have a high probability of increased rents in the future. Why aren't we encouraging our clients to get out there and buy? The answer is that we may not have turned the corner. The unfavorable supply/demand balance and future foreclosure risk is such that things may continue to worsen before they start to improve. In the 1987-1991 cycle, those who bought too soon found their properties continued to depreciate for some time before the real turnaround. Our position is that we should begin to look for some good deals and buy when we are able to locate opportunities. During the next few weeks, we will evaluate some potential purchases and contact those buyers on our list when we find a deal worth making. If you want to be on our list, give us a call. In the meantime, keep an eye on this blog for reports on some of the deals we are locating.
We Have Ample Inventory. There are many properties available and you have many choices. There are numerous motivated sellers who stretched themselves too thin in an attempt to buy all the house they could afford. Some are investors, some are lenders, some are owners who need to move for business or personal reasons. As the mouse pleaded, "Forget the Cheese, just let me out of the trap." If you are going to buy, you will need to sift through a number of deals to find one that will offer you an opportunity for profit.
There are Fewer Investors. Up until the last year or so, investors looking to diversify their portfolio and take advantage of the strong demand for housing were lining up to buy properties that they could remodel and sell for a profit. It was possible to borrow 100% on an investment property at very low initial interest rates. Investor demand has slowed as both neophyte and experienced investors found they could no longer count on selling remodeled properties for a quick profit. The financial press devotes headlines to "The Real Estate Bubble" and touts Denver as "The Foreclosure Capital of the Nation." If you are looking for a good deal today, you will no longer find a multitude of investors driving up prices.
Rates are Still Low and May Well Go Lower. You may not find lenders lined up to offer you 100% investor financing but long-term fixed rates are still low and likely to go lower. If you are willing to put 20-25% of your own money into a deal, you will still find a host of lenders willing to offer you rates that are only slightly above recent historic lows.
Rental Demand Continues to Improve. This is the most important factor in long-term investment success. Last year when we made a commitment to increase our property management, we entered a market where virtually anyone could borrow 100% of the purchase price of a new home. This meant more buyers and fewer renters. The few renters left had horrible credit and were virtually guaranteed to give you an unfavorable landlord experience. That situation has improved as vacancy rates have fallen and rents have gradually begun to increase. As an investor, your risk is highest in markets where tenant demand is low and investor demand is high. Under those circumstances, you will likely find it almost impossible to get a good deal on a property and, after your purchase, you will find it difficult to get a competent tenant to provide income to pay operating expense and debt service. We are just emerging from such a market and your odds for success are definitely improved.
So What's Not To Like? We can buy properties at below replacement cost, finance at low rates, get tenants to pay holding costs, and we have a high probability of increased rents in the future. Why aren't we encouraging our clients to get out there and buy? The answer is that we may not have turned the corner. The unfavorable supply/demand balance and future foreclosure risk is such that things may continue to worsen before they start to improve. In the 1987-1991 cycle, those who bought too soon found their properties continued to depreciate for some time before the real turnaround. Our position is that we should begin to look for some good deals and buy when we are able to locate opportunities. During the next few weeks, we will evaluate some potential purchases and contact those buyers on our list when we find a deal worth making. If you want to be on our list, give us a call. In the meantime, keep an eye on this blog for reports on some of the deals we are locating.
Monday, August 20, 2007
SLUGGING IT OUT.
Sometimes You're The Windshield, Sometimes You're The Bug. I've been the bug lately. The markets have been difficult with exceptional gains one day followed by exceptional losses another. In general, the trend has been down especially in some of the high dividend issues we've emphasized. The main culprit has been fear in the sub-prime mortgage market. While this is only a relatively small segment of the mortgage market, the overall market is so large that problems in even a small segment can run over into other sectors like banking, real estate, and construction. Delinquencies among borrowers who obtained these sub-prime loans have been running around 10%. As I posted last March, this is a prime example of stupid lenders and stupid borrowers with greed being a prime motivator. Its hard to identify the main culprit in this fiasco. Investment bankers were driven by greed as they earned huge fees by packaging these loans and selling them to investors willing to take risks they didn't understand in order to get above market yields. Most of these investors should have known better. Borrowers bought houses which were outside their affordability range because they could borrow almost all the purchase price at initial interest rates below market. When these rates increase to the true market rate, the natural consequence is delinquency. Neither the borrower nor the lender has a clue as to how to deal with the consequences.
A typical example is a transaction I participated in three years ago. The borrower received a loan of 101% of the $290K purchase price. After occupying the property less than a year, the borrower stopped paying and moved out after 3-4 more months of free occupancy. The lender did nothing for several more months and then filed foreclosure proceedings. After finally gaining title to the property in a foreclosure sale, the lender did nothing for several more months before finally putting the property on the market and selling it for $40,000 below the loan balance. The lender suffered a large loss made even larger by delaying action recover possession and locate a buyer to mitigate the loss. Anyone who has tried to contact a lender in an attempt to purchase a foreclosure property knows how inefficient they can be.
The Fed Comes To The Rescue? The market reacted well to the Fed's lowering of the discount rate from 6.25 to 5.75% last Friday. Does that mean the crisis is over. Not exactly. For one thing, not a lot of money is borrowed through the discount window. Although it is sometimes the most visible to the public, the most utilized rate controlled by the fed is called "the fed funds rate." For now that rate remains steady at 5.25%. The Fed will probably lower that in September but they may decide to hold it where it is depending on the reaction of the markets between now and then. My opinion is that the Fed needs to be exceptionally cautious since the liquidity they poured into the system over the past 2-3 years is at least partially to blame for the situation we find ourselves in at present.
Where Do We Go From Here? Despite the fact that we have been managing our portfolios cautiously this year, many of our high dividend portfolios have been hit harder than the rest of the market. We are concerned about this but we hardly ever sell stocks because the market opinion of value changes. We are the first to bail out when we see a fundamental change that makes a stock less valuable but reacting to market hysteria is seldom conducive to sound wealth management. The good news is that September and October should see some substantial dividend payments. We can either hold this cash is a hedge against volatile markets or invest in some of those issues that we think have been adversely affected by the current correction. It is my opinion that the current correction has been healthy and not unexpected. Much of the selling has been due to aggressive investors who were heavily leveraged and forced to sell to meet margin calls. My advice is to keep a bit more cash and look for bargains that almost always exist after a correction such as the one we've just experienced.
A typical example is a transaction I participated in three years ago. The borrower received a loan of 101% of the $290K purchase price. After occupying the property less than a year, the borrower stopped paying and moved out after 3-4 more months of free occupancy. The lender did nothing for several more months and then filed foreclosure proceedings. After finally gaining title to the property in a foreclosure sale, the lender did nothing for several more months before finally putting the property on the market and selling it for $40,000 below the loan balance. The lender suffered a large loss made even larger by delaying action recover possession and locate a buyer to mitigate the loss. Anyone who has tried to contact a lender in an attempt to purchase a foreclosure property knows how inefficient they can be.
The Fed Comes To The Rescue? The market reacted well to the Fed's lowering of the discount rate from 6.25 to 5.75% last Friday. Does that mean the crisis is over. Not exactly. For one thing, not a lot of money is borrowed through the discount window. Although it is sometimes the most visible to the public, the most utilized rate controlled by the fed is called "the fed funds rate." For now that rate remains steady at 5.25%. The Fed will probably lower that in September but they may decide to hold it where it is depending on the reaction of the markets between now and then. My opinion is that the Fed needs to be exceptionally cautious since the liquidity they poured into the system over the past 2-3 years is at least partially to blame for the situation we find ourselves in at present.
Where Do We Go From Here? Despite the fact that we have been managing our portfolios cautiously this year, many of our high dividend portfolios have been hit harder than the rest of the market. We are concerned about this but we hardly ever sell stocks because the market opinion of value changes. We are the first to bail out when we see a fundamental change that makes a stock less valuable but reacting to market hysteria is seldom conducive to sound wealth management. The good news is that September and October should see some substantial dividend payments. We can either hold this cash is a hedge against volatile markets or invest in some of those issues that we think have been adversely affected by the current correction. It is my opinion that the current correction has been healthy and not unexpected. Much of the selling has been due to aggressive investors who were heavily leveraged and forced to sell to meet margin calls. My advice is to keep a bit more cash and look for bargains that almost always exist after a correction such as the one we've just experienced.
Sunday, July 29, 2007
BRUTAL MARKETS.
Liquidity Breeds Stupidity? Just a few weeks ago I quoted a so-called expert who said that the current attitude that says "the markets are awash in liquidity" should really be changed to "The markets are awash in stupidity". As of the past week or so, you could eliminate the awash in liquidity statement. Investors are leaving the real estate and stock markets and the result is a large price drop in many sectors. In my post of May 15, entitled "Beware the Receding Tide", I warned that markets do not increase forever and we should be prepared for a correction of some sort. While we followed our own advice, we were unable to avoid experiencing a reduction in many, if not most of our accounts. In fact, some of our income generating accounts dropped more than the others because of the panic in the higher yielding real estate and business development companies. One of my favorite companies, American Capital Strategies, dropped from the high 40's to the high 30's, a drop of about 20%. That's the bad news. The good news is that the dividend appears to be stable and likely to increase over the next few months. It is not the company that's changed in value, it's the markets perception of the value of the income stream produced by the stock. My plan is to re-invest the next dividend in the purchase of more shares. At the current price the dividend rate is almost 10%. I will keep some cash in case better opportunities arise in the future. I am somewhat pleased that we had this correction. Too much liquidity in the market actually breeds stupidity as investors, unhappy with the yield on cash equivalents, scramble to find higher yields and over-pay for risky investments to improve their yield. It will be an interesting time on the markets these next few weeks. We will watch closely and try to get some idea of the next good opportunity.
Real Estate Close to the Bottom. In my May post, I also mentioned how difficult it has been to find good real estate investments. I promised to study some of the market statistics and try to give you some idea of when we might expect a turnaround. The statistic that has interested me most is the number of building permits being issued, particularly in the condo/townhouse market. The condo and townhouse markets usually fall first and further than single family markets. One reason for this is that homeowner associations can rapidly become insolvent when foreclosures are high. Owners in foreclosure, become delinquent in their dues and lenders who gain title to the property after foreclosures, more often than not, do not pay dues either. This forces an increase in dues for, even minimal, maintenance. This results in more foreclosures and the cycle continues. There may be some investment opportunities here but investors who jump in too early may find that the cycle doesn't end as soon as they anticipated. One statistic I try to watch closely is the number of new building permits being issued. When new construction is insufficient to keep up with an increasing population, the oversupply of inventory begins to diminish and prices can stop declining and begin to increase. This brings me to a discussion of the trend of building permits over the past few years. Single-family permits increased slightly in most of the years since 2001. Condos and townhouses dropped drastically from 18000+ in 2001 to 5700 in 2004 and 2005. Front range statistics for the first four months of 2007 shows a reduction in single-family permits of 45%. Attached housing decreased by 15%. The overall population is increasing by 1.4% per year or about 66,000, Net in-migration is steady at about 27,000 per year statewide. Sooner or later, population increases will force a turnaround in the market. I don't claim to know exactly when that may be, but I do know that now is a better time to buy a residential real estate investment than in 2005. We will continue to watch the statistics and try to determine when to enter these markets.
One of My Heroes Died Last Week. My Uncle John passed away quietly during the night. He was a gunner on a B-24 during WWII and survived 30 bombing missions. Over half of the planes in his unit were lost during these missions. He received the Air Medal and the Distinguished Flying Cross. We were buddies since I first met him 62 years ago. We hunted and fished together until he became too old to tramp the fields and Alzheimer's took away virtually all his mental abilities. We are losing those WWII vets at a rapid pace. As far as I'm concerned those who are left are a national treasure.
Real Estate Close to the Bottom. In my May post, I also mentioned how difficult it has been to find good real estate investments. I promised to study some of the market statistics and try to give you some idea of when we might expect a turnaround. The statistic that has interested me most is the number of building permits being issued, particularly in the condo/townhouse market. The condo and townhouse markets usually fall first and further than single family markets. One reason for this is that homeowner associations can rapidly become insolvent when foreclosures are high. Owners in foreclosure, become delinquent in their dues and lenders who gain title to the property after foreclosures, more often than not, do not pay dues either. This forces an increase in dues for, even minimal, maintenance. This results in more foreclosures and the cycle continues. There may be some investment opportunities here but investors who jump in too early may find that the cycle doesn't end as soon as they anticipated. One statistic I try to watch closely is the number of new building permits being issued. When new construction is insufficient to keep up with an increasing population, the oversupply of inventory begins to diminish and prices can stop declining and begin to increase. This brings me to a discussion of the trend of building permits over the past few years. Single-family permits increased slightly in most of the years since 2001. Condos and townhouses dropped drastically from 18000+ in 2001 to 5700 in 2004 and 2005. Front range statistics for the first four months of 2007 shows a reduction in single-family permits of 45%. Attached housing decreased by 15%. The overall population is increasing by 1.4% per year or about 66,000, Net in-migration is steady at about 27,000 per year statewide. Sooner or later, population increases will force a turnaround in the market. I don't claim to know exactly when that may be, but I do know that now is a better time to buy a residential real estate investment than in 2005. We will continue to watch the statistics and try to determine when to enter these markets.
One of My Heroes Died Last Week. My Uncle John passed away quietly during the night. He was a gunner on a B-24 during WWII and survived 30 bombing missions. Over half of the planes in his unit were lost during these missions. He received the Air Medal and the Distinguished Flying Cross. We were buddies since I first met him 62 years ago. We hunted and fished together until he became too old to tramp the fields and Alzheimer's took away virtually all his mental abilities. We are losing those WWII vets at a rapid pace. As far as I'm concerned those who are left are a national treasure.
Wednesday, July 11, 2007
BACK IN COLORADO
We Made It. Two relatively easy days of driving and we're back in Colorado. I have a to-do list as long as my arm but I'll be taking it one day at a time. Anyone needing an appointment can call the office and talk to Susan at 720-449-0200. If you want to try to reach me directly, the best number is 303-693-9610.
This will be a relatively short post since it is 11:15 PM. I am still trying to get a feel for this market. It appears that interest rate sensitive stocks are not doing well. Probably because a lot of folks are waiting for more rate increases on short-term bank deposits. I've been seeing some four to five per cent money market accounts advertised on the internet. Some of them from Banks. One such ad was from Capital One Bank with a 4.75% money market account. No minimum deposit was required and you were allowed 3 checks a month in the minimum amount of $250. I stopped by the Beaumont Texas branch to make a deposit but they told me that rate was an internet special and they were only offering 1.5%. Might as well keep the money under the mattress.
I've been watching a number of friends hit age milestones. My oldest grandson just turned 20. One of my best clients just turned 60, and my brother-in-law is turning 60 in September. I keep remembering that I turn 70 in January. One bit of encouraging news comes from an e-mail newsletter by Steve Goodier at lifesupportsystem.com. He reminded me that Churchill wrote a four volume masterpiece entitled The History of English Speaking People at the age of 82. Tolstoy and Goethe also finished major works at that age. Steve says you are too old when you have nothing left to give. Thanks, Steve I needed that.
This will be a relatively short post since it is 11:15 PM. I am still trying to get a feel for this market. It appears that interest rate sensitive stocks are not doing well. Probably because a lot of folks are waiting for more rate increases on short-term bank deposits. I've been seeing some four to five per cent money market accounts advertised on the internet. Some of them from Banks. One such ad was from Capital One Bank with a 4.75% money market account. No minimum deposit was required and you were allowed 3 checks a month in the minimum amount of $250. I stopped by the Beaumont Texas branch to make a deposit but they told me that rate was an internet special and they were only offering 1.5%. Might as well keep the money under the mattress.
I've been watching a number of friends hit age milestones. My oldest grandson just turned 20. One of my best clients just turned 60, and my brother-in-law is turning 60 in September. I keep remembering that I turn 70 in January. One bit of encouraging news comes from an e-mail newsletter by Steve Goodier at lifesupportsystem.com. He reminded me that Churchill wrote a four volume masterpiece entitled The History of English Speaking People at the age of 82. Tolstoy and Goethe also finished major works at that age. Steve says you are too old when you have nothing left to give. Thanks, Steve I needed that.
Monday, July 02, 2007
HEADING TO COLORADO
Time To Leave This Place. We have been in Texas since mid October and I have not been able to spend much time in Colorado. The remodel of our townhouse is pretty well finished and things should be back to normal soon. I am anxious to catch up with clients and friends that I have spent little time with during the past year. I plan to stay in Colorado until I see everyone who wants to see me. Call our office or send me an e-mail if you need to contact me.
The Markets Have Done Better than I Have Expected. While this is a true statement, it hasn't applied as much to many of the things we are putting our money into. This is because most investors have decided that the FED will not lower rates any time soon. Short term rates have risen to more appropriate levels and long term rates have followed. Many of our investments are geared towards producing cash flow and these have dropped slightly because investors can now get more respectable yields on short term bank CD's and money market funds. Our investments continue to produce better cash flow than these short-term instruments but the market perception of the value of this cash flow has diminished. In reality, I believe these cash flow investments are now more realistically priced. While I thought they were over-priced in the past, I did not try to sell at the high point with the objective of buying back later at a lower price. While this is theoretically possible, I don't believe you can add much to your return by trying to micro-manage and outguess the market. My philosophy is to purchase cash flow and pay less attention to the market price than the stability of the income stream. Occasionally, when the price seems more than the intrinsic value, it may be appropriate to take some profits and re-invest in areas that appear to be less over-valued. The key is not to bet the farm on any one sector. At this point, it is probably wise to buy stocks in some of the banks like US Bancorp, Wachovia, and Bank of America. These pay dividends in excess of 3.5 to 4,5% and have a track record of dividend increases. It appears that there are some opportunities for capital gains there. Incredible as it may sound, it appears that the markets may have under-estimated the potential for some of the energy stocks like Texaco and Exxon. Because the perception was that current high levels of oil and natural gas would probably not hold, investors have been paying less for a dollar of earnings than the potential for future profits justify. I am moving more capital into these issues.
Are We Placing Too Much Emphasis on Cash Flow? A recent article,by a well-respected financial writer states that we should be paying less attention to dividends. His point is that, while dividends are nice, it's total return that really matters. In other words, you can get by with low, or even no, dividends as long as the value of your portfolio continues to increase. From the point of view of wealth building, this is true; however, the characteristics of the individual investor are of paramount importance. I am sure many of you are tired of hearing me say this, but if you need a check to fund your living expenses next month, you don't want to be depending on selling appreciated shares to obtain your funds. While dividend checks are by no means guaranteed, they are several orders of magnitude more reliable than capital gains. Younger investors with good job stability, high incomes, and high tax brackets may be well served by zero dividend portfolios but those of us who utilize our portfolios to fund our living expenses, can ill afford to be at the mercy of market fluctuations. I am not totally against selling shares now and then to obtain income but it is much more convenient to own stocks that provide dividend income. An additional benefit to high income portfolios is that we have income to re-invest when the market suffers a down turn. The main point to remember here is that both cash flow and capital gains are important and neither is more important than the other. The ideal portfolio is one that fits the needs of the individual investor. There is no one-size-fits all solution.
The Age Thing Getting You Down? It some times bothers me that I am turning 70 soon and have less time left than I have already used. My best friend from grade school through college was recently ordained as a priest in the Episcopal Church. A major accomplishment for a person less than one year from a 70th birthday. He didn't sit around and worry about getting old. He went out and did what he wanted to do. I think that's a valuable lesson for all of us.
The Markets Have Done Better than I Have Expected. While this is a true statement, it hasn't applied as much to many of the things we are putting our money into. This is because most investors have decided that the FED will not lower rates any time soon. Short term rates have risen to more appropriate levels and long term rates have followed. Many of our investments are geared towards producing cash flow and these have dropped slightly because investors can now get more respectable yields on short term bank CD's and money market funds. Our investments continue to produce better cash flow than these short-term instruments but the market perception of the value of this cash flow has diminished. In reality, I believe these cash flow investments are now more realistically priced. While I thought they were over-priced in the past, I did not try to sell at the high point with the objective of buying back later at a lower price. While this is theoretically possible, I don't believe you can add much to your return by trying to micro-manage and outguess the market. My philosophy is to purchase cash flow and pay less attention to the market price than the stability of the income stream. Occasionally, when the price seems more than the intrinsic value, it may be appropriate to take some profits and re-invest in areas that appear to be less over-valued. The key is not to bet the farm on any one sector. At this point, it is probably wise to buy stocks in some of the banks like US Bancorp, Wachovia, and Bank of America. These pay dividends in excess of 3.5 to 4,5% and have a track record of dividend increases. It appears that there are some opportunities for capital gains there. Incredible as it may sound, it appears that the markets may have under-estimated the potential for some of the energy stocks like Texaco and Exxon. Because the perception was that current high levels of oil and natural gas would probably not hold, investors have been paying less for a dollar of earnings than the potential for future profits justify. I am moving more capital into these issues.
Are We Placing Too Much Emphasis on Cash Flow? A recent article,by a well-respected financial writer states that we should be paying less attention to dividends. His point is that, while dividends are nice, it's total return that really matters. In other words, you can get by with low, or even no, dividends as long as the value of your portfolio continues to increase. From the point of view of wealth building, this is true; however, the characteristics of the individual investor are of paramount importance. I am sure many of you are tired of hearing me say this, but if you need a check to fund your living expenses next month, you don't want to be depending on selling appreciated shares to obtain your funds. While dividend checks are by no means guaranteed, they are several orders of magnitude more reliable than capital gains. Younger investors with good job stability, high incomes, and high tax brackets may be well served by zero dividend portfolios but those of us who utilize our portfolios to fund our living expenses, can ill afford to be at the mercy of market fluctuations. I am not totally against selling shares now and then to obtain income but it is much more convenient to own stocks that provide dividend income. An additional benefit to high income portfolios is that we have income to re-invest when the market suffers a down turn. The main point to remember here is that both cash flow and capital gains are important and neither is more important than the other. The ideal portfolio is one that fits the needs of the individual investor. There is no one-size-fits all solution.
The Age Thing Getting You Down? It some times bothers me that I am turning 70 soon and have less time left than I have already used. My best friend from grade school through college was recently ordained as a priest in the Episcopal Church. A major accomplishment for a person less than one year from a 70th birthday. He didn't sit around and worry about getting old. He went out and did what he wanted to do. I think that's a valuable lesson for all of us.
Sunday, June 17, 2007
THINGS I'VE LEARNED.
From My Dad. It's Father's Day. All the kids and grandkids have either been over here or called me. I received numerous cards, most quite humorous. I am lucky to have such a devoted family, more important to me now than ever as I approach my 70th birthday in a few months. But the main thing that comes into my mind on this day is my own father and the things he taught me. There is no legacy of material goods that can compare with the value of the things he taught me.
1. When You Make a Mistake, Admit It And Do What You Can to Correct It ASAP.
Before I was born, my mom and dad moved to Kentucky so my mom could be with her mother when I was born. My Dad found himself working in the dark misery of a coal mine. Kentucky was rainy and damp and there was little work to be had besides in the coal mines. When I was six weeks old, they made their way back to Colorado where our entire family was better off.
2. There Is Always A Way. Until I was seven years old, we lived in a series of run-down rental properties. Every thing from converted barns to tool sheds. Mom and Dad had no money to buy a home and not enough income to make mortgage payments. When the Mile High Poultry Farm closed down, the company practically gave away their old chicken coops to anyone who would tear them down. Dad acquired several of them and tore them apart piece by piece. We then removed the nails and used the lumber to build the house I grew up in. I followed him around from start to finish. I had a little crow bar (which I still have) and I did what little I could to help. My mother and I removed nails and stacked lumber while Dad worked on the house. That was almost 60 years ago and the house is still being lived in today.
3. How Much You Earn Is Not Important. My Dad became financially independent on very little income. I still can't figure out how he did it. He was frugal but not stingy. He knew the world didn't owe him anything and he went out and worked for everything he got.
4. Being Poor Is a State Of Mind. When I was 12 years old, I used to cross the road in front of our house and lay in the cool green grass under the apple trees. In the fall there were apples every where and I ate all I could but most of them rotted on the ground. One day I got this great idea and I ran home to tell my Mom we should pick up all those apples and give them to poor people. Mom's reply was "Son, we are poor people." Nobody ever told me. There was always an attitude of "we'll get what ever we need." And we did.
5. Teach Your Children to Take Care of Themselves. I have many clients who sacrifice much of their wealth to care for children who are old enough to take care of themselves. I don't know how he taught me this, but from the age of 13, my pride wouldn't let me to ask my Dad for money. I saw how hard he worked for what we had. I knew I was expected to do the same thing. I did my best to earn my keep. I wasn't always able to do this but I never stopped trying.
I guess this is about the best I can do to pay tribute to my Father on this day. In case you think I am referring to a memory, let me tell you the best part. As I approach my 70th birthday, my father is still here. Not just in spirit but in the flesh. He doesn't walk quite as fast and he gets out of his chair slowly but he is still teaching me. He is showing me how to grow old with dignity and pride. As my brother says, "He'll live to throw dirt on both of us." I hope he does.
1. When You Make a Mistake, Admit It And Do What You Can to Correct It ASAP.
Before I was born, my mom and dad moved to Kentucky so my mom could be with her mother when I was born. My Dad found himself working in the dark misery of a coal mine. Kentucky was rainy and damp and there was little work to be had besides in the coal mines. When I was six weeks old, they made their way back to Colorado where our entire family was better off.
2. There Is Always A Way. Until I was seven years old, we lived in a series of run-down rental properties. Every thing from converted barns to tool sheds. Mom and Dad had no money to buy a home and not enough income to make mortgage payments. When the Mile High Poultry Farm closed down, the company practically gave away their old chicken coops to anyone who would tear them down. Dad acquired several of them and tore them apart piece by piece. We then removed the nails and used the lumber to build the house I grew up in. I followed him around from start to finish. I had a little crow bar (which I still have) and I did what little I could to help. My mother and I removed nails and stacked lumber while Dad worked on the house. That was almost 60 years ago and the house is still being lived in today.
3. How Much You Earn Is Not Important. My Dad became financially independent on very little income. I still can't figure out how he did it. He was frugal but not stingy. He knew the world didn't owe him anything and he went out and worked for everything he got.
4. Being Poor Is a State Of Mind. When I was 12 years old, I used to cross the road in front of our house and lay in the cool green grass under the apple trees. In the fall there were apples every where and I ate all I could but most of them rotted on the ground. One day I got this great idea and I ran home to tell my Mom we should pick up all those apples and give them to poor people. Mom's reply was "Son, we are poor people." Nobody ever told me. There was always an attitude of "we'll get what ever we need." And we did.
5. Teach Your Children to Take Care of Themselves. I have many clients who sacrifice much of their wealth to care for children who are old enough to take care of themselves. I don't know how he taught me this, but from the age of 13, my pride wouldn't let me to ask my Dad for money. I saw how hard he worked for what we had. I knew I was expected to do the same thing. I did my best to earn my keep. I wasn't always able to do this but I never stopped trying.
I guess this is about the best I can do to pay tribute to my Father on this day. In case you think I am referring to a memory, let me tell you the best part. As I approach my 70th birthday, my father is still here. Not just in spirit but in the flesh. He doesn't walk quite as fast and he gets out of his chair slowly but he is still teaching me. He is showing me how to grow old with dignity and pride. As my brother says, "He'll live to throw dirt on both of us." I hope he does.
Thursday, June 07, 2007
AWASH IN LIQUIDITY??
Many Experienced Market Analysts Attribute Recent Market Rises to Liquidity. There are many investors with capital that they are looking to deploy. It has to go somewhere and there are risks everywhere. I recently had someone re-state the "Awash in liquidity" statement to "Awash in stupidity." Investors have been willing to pay more and more for a dollar of stock market earnings or net operating income from real estate. All this appears to be nearing the point where it is becoming extremely difficult to find a worthwhile investment. The stock market appears to have entered a period of pessimism with the Dow dropping in excess of 300 points over the past 3 days. Residential real estate is falling nationwide, including Denver where virtually all the condo/townhouse prices are lower, some drastically. The same is true of single-family properties in certain areas. So what is a good strategy to follow in this market?
Cash is Important. If you have followed our advice of the past 4-5 years and acquired investments that produce cash flow, don't be in a big hurry to reinvest that cash. Get the best yield you can on a money market account by shopping among banks and mutual fund companies. You should be able to get 4-5%. Your main risk is that you will be out of the market when it rises but the downside risk is more than the upside potential at this point.
Buy Stocks Selectively. Look for value when you invest in the market. It doesn't appear that index funds based on the broad market will do as well as carefully placed funds. Certain sectors such as energy, oil service stocks, and refiners still appear to be attractively priced considering the world-wide demand. Business development companies appear to offer attractive dividends at current prices. Certain bank stocks pay decent, tax advantaged dividends with reasonable expectations for price stability. The main principle here is don't bet the farm on any sector. Things could get worse.
Cut Back in Some Areas. If you invested in real estate investment trusts when we were recommending them in the late 90's, you received attractive dividends along with considerable price appreciation. Now is the time to take a look at cutting back. Some of these are paying dividends of 6% based on current prices. These are not tax advantaged and the premium over lower risk investments is not high enough to justify a major commitment to this sector.
Don't Be In a Big Hurry to Unload Your Real Estate. If you have well-located real estate, don't be in a big hurry to sell into this market. The number of properties being offered for sale is beginning to decline which is always an early sign of a market recovery. The Denver economy is growing stronger and residential vacancy rates are down from two years ago. We may be nearing the point where we can see moderate rent increases. That said, it may still be worthwhile to take advantage of sale opportunities, particularly in areas where prospects for future appreciation are limited. In any event, your cash flow from real estate will likely increase over the next few years. It may even be a good time to buy selectively in areas of higher rent demand. If you do have to sell a property, a good strategy is to make sure it is in top condition. The market will always pay for quality.
Take Every Thing You've Read Here With a Grain of Salt. Remember, what I am offering you is an overall strategy, any aspect of which may prove to be wrong at a later date, requiring a change in our outlook. No one, is capable of accurately predicting the direction of the markets with a high degree of certainty. We can only set a strategy and be ready to correct it if conditions change.
We Plan to be Back In Colorado Soon. Sitting in my air conditioned office looking out at the lush, green woods is gratifying. There is a magnolia tree with a 12-inch white blossom about eye level. That's the good news. The bad news is that you can drown in your own perspiration if you spend an hour outside working in the heat and humidity. Its time to get back to Colorado. Hopefully, I can spend some time with those of you I didn't get to visit on my last trip.
Cash is Important. If you have followed our advice of the past 4-5 years and acquired investments that produce cash flow, don't be in a big hurry to reinvest that cash. Get the best yield you can on a money market account by shopping among banks and mutual fund companies. You should be able to get 4-5%. Your main risk is that you will be out of the market when it rises but the downside risk is more than the upside potential at this point.
Buy Stocks Selectively. Look for value when you invest in the market. It doesn't appear that index funds based on the broad market will do as well as carefully placed funds. Certain sectors such as energy, oil service stocks, and refiners still appear to be attractively priced considering the world-wide demand. Business development companies appear to offer attractive dividends at current prices. Certain bank stocks pay decent, tax advantaged dividends with reasonable expectations for price stability. The main principle here is don't bet the farm on any sector. Things could get worse.
Cut Back in Some Areas. If you invested in real estate investment trusts when we were recommending them in the late 90's, you received attractive dividends along with considerable price appreciation. Now is the time to take a look at cutting back. Some of these are paying dividends of 6% based on current prices. These are not tax advantaged and the premium over lower risk investments is not high enough to justify a major commitment to this sector.
Don't Be In a Big Hurry to Unload Your Real Estate. If you have well-located real estate, don't be in a big hurry to sell into this market. The number of properties being offered for sale is beginning to decline which is always an early sign of a market recovery. The Denver economy is growing stronger and residential vacancy rates are down from two years ago. We may be nearing the point where we can see moderate rent increases. That said, it may still be worthwhile to take advantage of sale opportunities, particularly in areas where prospects for future appreciation are limited. In any event, your cash flow from real estate will likely increase over the next few years. It may even be a good time to buy selectively in areas of higher rent demand. If you do have to sell a property, a good strategy is to make sure it is in top condition. The market will always pay for quality.
Take Every Thing You've Read Here With a Grain of Salt. Remember, what I am offering you is an overall strategy, any aspect of which may prove to be wrong at a later date, requiring a change in our outlook. No one, is capable of accurately predicting the direction of the markets with a high degree of certainty. We can only set a strategy and be ready to correct it if conditions change.
We Plan to be Back In Colorado Soon. Sitting in my air conditioned office looking out at the lush, green woods is gratifying. There is a magnolia tree with a 12-inch white blossom about eye level. That's the good news. The bad news is that you can drown in your own perspiration if you spend an hour outside working in the heat and humidity. Its time to get back to Colorado. Hopefully, I can spend some time with those of you I didn't get to visit on my last trip.
Tuesday, May 15, 2007
BEWARE THE RECEDING TIDE
Just a Note to Inform You That I will be in Denver for two weeks starting tomorrow. I look forward to meeting with several of my clients. Writing on this blog has been somewhat sparse lately. I have had numerous visits from friends and family. My writing has been secondary to enjoying those visits. Those who wish to meet during the next two weeks can call Susan to arrange a time. The number is 720 449-0200. One other thing I would like to call your attention to is that I will be filling in on Real Money, a radio show with my old friend and colleague, Ray Benton. The time is 12 noon this coming Saturday at 1600 on your radio dial. Listen if you can and feel free to call with questions if you have any.
The Tide Has Been Rising. Remember the old adage that "A rising tide lifts all boats." This has been true of our stock market lately. It has been hard not to make money in this market. Even if you did a poor job of stock selection, chances are the rising market made you look good. I must say the same thing goes for our money management clients. I would like to claim it is our brilliance that produced this result but I call your attention to another adage: "It is only when the tide goes out that we find out who has been swimming naked." In other words, we may not be as brilliant as we think we are when the inevitable correction takes place. Its time to ask ourselves whether our gains are real or illusionary. The answer is we don't really know. When we buy a stock, we buy into a business. If the price doubles the next day, has the value of that business really doubled? I say that it hasn't. It is the investors' perception of the value that has doubled. That perception could change tomorrow and all those gains could disappear. In other words, you don't reap the benefits of the market's perception of the value increase unless you sell. Before you run out and liquidate all your investments, remember that the market perception of value could, and often does, continue to increase. This is why we usually recommend that our clients construct investment portfolios that emphasize cash flow. It is only that cash that we find in our hands which we can use for funding our lifestyle. I almost never recommend selling a company just because the price has gone up or down. It is only when my perception of the company's prospects has changed that I recommend selling and I fully admit that my perception could be incorrect. The best recommendation I can offer at this time is to look at stocks in your portfolio and ask yourself if your opinion of the company's prospects have changed. If so it may be time to take some or all of your money from that investment.
The Tide Has Gone Out In The Real Estate Market. Some folks have been caught swimming naked and face foreclosure or even bankruptcy. This Saturday, I will be talking about the Denver real estate market on the radio show. I am analyzing some of the market statistics in order to decide whether or not this is a good time to re-inter that market. My next post will contain some of these observations and our conclusions.
The Tide Has Been Rising. Remember the old adage that "A rising tide lifts all boats." This has been true of our stock market lately. It has been hard not to make money in this market. Even if you did a poor job of stock selection, chances are the rising market made you look good. I must say the same thing goes for our money management clients. I would like to claim it is our brilliance that produced this result but I call your attention to another adage: "It is only when the tide goes out that we find out who has been swimming naked." In other words, we may not be as brilliant as we think we are when the inevitable correction takes place. Its time to ask ourselves whether our gains are real or illusionary. The answer is we don't really know. When we buy a stock, we buy into a business. If the price doubles the next day, has the value of that business really doubled? I say that it hasn't. It is the investors' perception of the value that has doubled. That perception could change tomorrow and all those gains could disappear. In other words, you don't reap the benefits of the market's perception of the value increase unless you sell. Before you run out and liquidate all your investments, remember that the market perception of value could, and often does, continue to increase. This is why we usually recommend that our clients construct investment portfolios that emphasize cash flow. It is only that cash that we find in our hands which we can use for funding our lifestyle. I almost never recommend selling a company just because the price has gone up or down. It is only when my perception of the company's prospects has changed that I recommend selling and I fully admit that my perception could be incorrect. The best recommendation I can offer at this time is to look at stocks in your portfolio and ask yourself if your opinion of the company's prospects have changed. If so it may be time to take some or all of your money from that investment.
The Tide Has Gone Out In The Real Estate Market. Some folks have been caught swimming naked and face foreclosure or even bankruptcy. This Saturday, I will be talking about the Denver real estate market on the radio show. I am analyzing some of the market statistics in order to decide whether or not this is a good time to re-inter that market. My next post will contain some of these observations and our conclusions.
Tuesday, May 01, 2007
THINGS I'VE LEARNED
About Borrowing Money. There are a lot of misconceptions where borrowing money is concerned. Common sense wisdom may not apply in all cases. Here are some of the things I've learned in almost 50 years of borrowing money and 25 years of helping others acquire financing.
1. There Is No Such Thing As A Bad Loan. I can imagine the majority of my readers will disagree with this statement but it is never the loan that is bad, its the way its used. Bet you still disagree. Think about it. How can a 36% interest rate ever be a good loan? The answer is when you have to have the money and there is no other loan available. I recall getting such a loan many years ago to buy two new tires. One of the old tires was totally ruined and the other not far behind. I drove 20 miles to work each day and had to have those tires. No one else wanted to loan me the money so I got it from a consumer finance company at 36%. Best deal I ever made. If you are considering that same loan to buy a new couch, you are probably better off getting a used one from goodwill and waiting until you can save enough money to pay cash for a new one.
2. Borrowing Will Not Provide More Discretionary Income. If you have five thousand in discretionary income per year, borrowing another five thousand will give you additional income for the year you borrow the funds but it will cut your income for subsequent years when you are paying it back. If you have to pay interest on the money, the reduction in discretionary funds will be permanent by the amount of interest paid.
3. The Interest Rate Isn't Always Of Paramount Importance. Too often people shop hard to find the lowest interest rate when other loan terms may be more important. For example, if you are borrowing to buy a $100,000 property that offers a 20% return, you are better off passing up a $50,000 loan at 4% interest in favor of a $75,000 loan at 8% interest if you can buy two of these properties with your $50,000 in equity. This assumes that the rest of the terms are similar. It also assumes that you have adequate tools to manage the risk of the higher leverage.
4, All Borrowing Adds Risk to Your Life. In case you didn't quite understand the meaning of that last statement, I would emphasize that even though buying two investments with a 15% return with 8% money will give you a higher return than buying one 15% return with 4% money, the risk is higher with the larger loan. This is because you have to make those loan payments whether or not the investment performs as anticipated. If one of those properties becomes worthless (possible but not probable), you will owe $150,000 and only own one property worth $100,000. If the result is foreclosure, your dream of success using OPM (other people's money) turns into a nightmare.
5. There is No Free Lunch. Some people advertise zero closing cost loans. Other's advertise rock bottom interest rates. In the absence of outright fraud, there is no way they can offer both in the same loan. When you do business with a mortgage company they have to make a profit. In order to do so, they can charge you fees or a higher interest rate that can be sold for a premium in the market place. In most cases, they get their profits with a combination of the two. In my opinion, the most ethical companies explain the trade offs and allow the borrower to choose the financing that fits his or her needs the best.
6. Be Careful What You Ask For. I recently counseled a real estate investor who was about to lose a property to foreclosure. She told her loan officer that she wanted the lowest payment available. The loan officer got her a loan with an interest rate of 1.5%.........for the first month. At the end of this time the rate escalated but her payment stayed the same. How did that occur? They simply added the unpaid interest to the loan amount. Over the time that she owned the property, her entire equity was consumed. While this loan may be a good one for some circumstances, it was not a good one for her, mainly because she didn't understand how to use it. In this case, I doubt the loan officer did either or he would have explained it more thoroughly.
It Is Not Only Dishonest Men Who Are The Most Dangerous. It can be the honest man who doesn't know what he is doing. Unfortunately, there are a lot of those in the mortgage business. If you need advice on a mortgage loan call Susan at Westmont (720-449-0200). She can arrange a telephone or personal appointment with me. Again, I want to remind everyone that I will be available for appointments in Colorado from May 16-31.
Tuesday, April 24, 2007
SAVING TOO MUCH MONEY?
Are We Saving Too Much Money for Retirement? This topic has been the subject of several magazine articles and internet sites recently. Some of these have been downright hostile to the financial community. The premise is that brokerage houses, insurance companies, and financial planners have shown that the average person will need assets of one to two million to retire comfortably. As I have said before, the calculations are mathematically correct and are based on the average inflation rate, life expectancy, and average returns from various asset classes. The devil is in the details. Small changes in assumptions we make can have a huge effect on the final sum needed for a comfortable retirement. The final result can be off by large amounts and are usually biased on the high side because many clients instruct those making the calculations to use somewhat pessimistic assumptions. So why is the financial services industry telling us that we need to save too much. Their detractors say that it's so we can make more money selling financial products. I don't agree with this hypothesis. Many of those who make these calculations actually believe the results. I don't.
Maybe We Aren't Saving Too Much, Just Worrying Too Much. Several years ago, a financial planner made a big issue out of saying that the College For Financial Planning taught students to use a method for calculating retirement needs that under estimated the amount of assets needed by $15,000. If we could come that close every time I would be forever thankful. In my opinion, these calculations are an exercise in futility. In the future, our retirement will be a much more dynamic situation with frequent adjustments necessary to stay on track. We may need to work periodically, change our residence, use reverse mortgages, and change our spending habits.
Our Health is Probably The Most Critical Variables. The high cost of health care can deplete a good sized retirement nest egg in a hurry. We can use long-term care insurance to offset some of this risk but the most reliable risk management tool is to stay healthy. If you are retiring, you will need to budget some of your time and money for maintaining a healthy lifestyle. I don't claim to be an expert in this area but you had better become one regarding your own health. Not only can poor health deplete your finances, it can also damage your ability to enjoy life regardless of how much money you have.
My Posts Have Been Less Frequent Lately. I have been busy with the business of life. Enjoying beautiful spring weather, planting flowers, and catching and releasing numerous bass. I particularly enjoyed a visit from my old friends and business partners, Larry and Helga Davis. Maybe some of you other folks would like to come by. Give me a call and lets make some plans.
Maybe We Aren't Saving Too Much, Just Worrying Too Much. Several years ago, a financial planner made a big issue out of saying that the College For Financial Planning taught students to use a method for calculating retirement needs that under estimated the amount of assets needed by $15,000. If we could come that close every time I would be forever thankful. In my opinion, these calculations are an exercise in futility. In the future, our retirement will be a much more dynamic situation with frequent adjustments necessary to stay on track. We may need to work periodically, change our residence, use reverse mortgages, and change our spending habits.
Our Health is Probably The Most Critical Variables. The high cost of health care can deplete a good sized retirement nest egg in a hurry. We can use long-term care insurance to offset some of this risk but the most reliable risk management tool is to stay healthy. If you are retiring, you will need to budget some of your time and money for maintaining a healthy lifestyle. I don't claim to be an expert in this area but you had better become one regarding your own health. Not only can poor health deplete your finances, it can also damage your ability to enjoy life regardless of how much money you have.
My Posts Have Been Less Frequent Lately. I have been busy with the business of life. Enjoying beautiful spring weather, planting flowers, and catching and releasing numerous bass. I particularly enjoyed a visit from my old friends and business partners, Larry and Helga Davis. Maybe some of you other folks would like to come by. Give me a call and lets make some plans.
Tuesday, April 10, 2007
A FEW MORE FACTS ABOUT GLOBAL WARMING
If We Are Going To Comment About Global Warming We Need To Be Informed. News people love to talk about global warming. Many don't know what they are talking about.I have researched a few facts that I think we should be aware of before we get too deeply into supporting one side or another.
1. The rise in the Earth's temperature is correlated with the increase in carbon dioxide levels in the atmosphere. While this is a true statement, even an amateur statistician will tell you that the fact that two things are correlated only means that an increase in one variable is usually followed by in change in the other. This does not mean that one change caused the other. In many cases both are related to a third variable which causes both to change.
2. Carbon dioxide is an unavoidable consequence of burning virtually everything we use for energy. With a few exceptions like nuclear and hydrogen, everything burned for energy produces carbon dioxide. Man first began to produce carbon dioxide when he discovered fire. Even if we learn to produce totally efficient clean burning fuels, as long as we are burning carbon containing materials we will produce carbon dioxide. The bottom line here is that, the only way to produce less carbon dioxide is to burn less carbon containing fuel. Ethanol produces less carbon dioxide than gasoline; however, the processes by which ethanol is produced at this time (fermentation), produces carbon dioxide before the end product produces the first unit of energy. In the final analysis, smaller cars and houses along with less consumption of manufactured products is the only thing we can do to burn less fuel. I wonder how many of us are willing to take that step. Before we get too anxious to blame the oil companies manufacturing industries, and the government, we need to look in the mirror to see the real culprits.
3. We should also ask ourselves if we are sure that carbon dioxide is the real culprit. It is undoubtedly true that carbon dioxide levels are currently 26% higher than the average of the past several hundred years. In absolute terms, the best estimate of this average is 280 parts per million. To get an idea of how much this is, consider that if you took $100 to the bank and converted it to pennies, you would have 10,000 pennies. If all were Lincoln pennies except three indian heads, this would be the same as the historic level of carbon dioxide. If we added a fourth penny, this would be equal to the increase of CO2 levels produced by recent history. This doesn't mean that CO2 isn't responsible for at least some global warming but it does cast some doubt on the issue. It also gives you an idea of how much we are going to have to sacrifice to have some effect on the situation. As the biggest consumer of petroleum based fuels in the world, the US has been criticised for refusing to sign the Kyoto accords. We must remember that China and India are exempt from these and their rapidly growing economies are slated to produce one coal fired energy plant per week over the next few years. If we do elect to participate in this treaty, we had all better be ready for a totally different economy and the transfer of wealth from our economy to those countries that are exempt.
4. We may discover that decreasing our consumption of petroleum products won't be a choice in the future. While it is true that there are ample reserves of petroleum, natural gas, and coal, it is also true that the cheaply accessed reserves are rapidly being depleted. We can get more oil by shale, Canadian tar sands, and deep water drilling; however it will be increasingly more expensive. In the future, it may well be that our concern may turn from how can we burn less to how can we find more at a price we can afford to pay.
5. I predict that learning to cope with climate change will replace trying to figure out how to stop it. In my opinion, regardless of the treaties we sign, rants from environmentalists, and efforts to manage these climate changes, we won't be able to stop the current trends. Learning to cope may well be the only viable strategy.
The next generation will face multiple challenges from the aging of the population to the huge obligations of the federal government. Undoubtedly, we will have to manage our finances, protect our environment, and find ways to manage global conflicts. We may well have to choose our battles more wisely and select those which we have higher probabilities of winning and learn to cope with those where the probabilities of success are lower.
1. The rise in the Earth's temperature is correlated with the increase in carbon dioxide levels in the atmosphere. While this is a true statement, even an amateur statistician will tell you that the fact that two things are correlated only means that an increase in one variable is usually followed by in change in the other. This does not mean that one change caused the other. In many cases both are related to a third variable which causes both to change.
2. Carbon dioxide is an unavoidable consequence of burning virtually everything we use for energy. With a few exceptions like nuclear and hydrogen, everything burned for energy produces carbon dioxide. Man first began to produce carbon dioxide when he discovered fire. Even if we learn to produce totally efficient clean burning fuels, as long as we are burning carbon containing materials we will produce carbon dioxide. The bottom line here is that, the only way to produce less carbon dioxide is to burn less carbon containing fuel. Ethanol produces less carbon dioxide than gasoline; however, the processes by which ethanol is produced at this time (fermentation), produces carbon dioxide before the end product produces the first unit of energy. In the final analysis, smaller cars and houses along with less consumption of manufactured products is the only thing we can do to burn less fuel. I wonder how many of us are willing to take that step. Before we get too anxious to blame the oil companies manufacturing industries, and the government, we need to look in the mirror to see the real culprits.
3. We should also ask ourselves if we are sure that carbon dioxide is the real culprit. It is undoubtedly true that carbon dioxide levels are currently 26% higher than the average of the past several hundred years. In absolute terms, the best estimate of this average is 280 parts per million. To get an idea of how much this is, consider that if you took $100 to the bank and converted it to pennies, you would have 10,000 pennies. If all were Lincoln pennies except three indian heads, this would be the same as the historic level of carbon dioxide. If we added a fourth penny, this would be equal to the increase of CO2 levels produced by recent history. This doesn't mean that CO2 isn't responsible for at least some global warming but it does cast some doubt on the issue. It also gives you an idea of how much we are going to have to sacrifice to have some effect on the situation. As the biggest consumer of petroleum based fuels in the world, the US has been criticised for refusing to sign the Kyoto accords. We must remember that China and India are exempt from these and their rapidly growing economies are slated to produce one coal fired energy plant per week over the next few years. If we do elect to participate in this treaty, we had all better be ready for a totally different economy and the transfer of wealth from our economy to those countries that are exempt.
4. We may discover that decreasing our consumption of petroleum products won't be a choice in the future. While it is true that there are ample reserves of petroleum, natural gas, and coal, it is also true that the cheaply accessed reserves are rapidly being depleted. We can get more oil by shale, Canadian tar sands, and deep water drilling; however it will be increasingly more expensive. In the future, it may well be that our concern may turn from how can we burn less to how can we find more at a price we can afford to pay.
5. I predict that learning to cope with climate change will replace trying to figure out how to stop it. In my opinion, regardless of the treaties we sign, rants from environmentalists, and efforts to manage these climate changes, we won't be able to stop the current trends. Learning to cope may well be the only viable strategy.
The next generation will face multiple challenges from the aging of the population to the huge obligations of the federal government. Undoubtedly, we will have to manage our finances, protect our environment, and find ways to manage global conflicts. We may well have to choose our battles more wisely and select those which we have higher probabilities of winning and learn to cope with those where the probabilities of success are lower.
Wednesday, April 04, 2007
PRE-RETIREMENT CHECKLIST.
Everyone Needs a "To Do" List. My wife and sister-in-law are the two most compulsive list makers I have ever seen. I would be seriously worried if I ever saw either of them without a list. I tease them about their compulsiveness but I secretly admire how much they accomplish by staying focused on a list.
I Don't Live By A List. But I freely admit that I might get more of the right things done if I did. One place where a list is particularly valuable is before you retire or decide to devote less energy to the world of work. Ideally, the list should be started at least a year before the event. The following list may not be totally comprehensive but it contains a number of things that you need to think about before you leave your job.
1. How Much Income Do You Need? It's surprising but a lot of people hate the exercise of putting together a budget or spending plan. Still, it's very important that you determine how much income you need to replace the income you are earning from work. I have clients tell me they need $5,000 a month only to find that the average from the past six months is $8,000. If they need only $5,000 a month what happened to the extra $3,000 they brought home every month. Now is the time to be realistic in estimating expenses. Of course, this is not to say that you can't identify areas where expenses can be cut but you might also add expenses for travel, recreation, etc. While I don't want to belabor the issue, the more through you are in this step, the more secure your retirement will be.
2. How Much Income Will You Have? In this exercise consider only those sources of income that you will have that are relatively secure such as a company pension, social security, or income from high grade government or corporate bonds. If the result of this step is equal to or greater than from step 1, you should have a relatively worry free retirement. If not, you are going to have to figure out how to make up for the shortfall.
3. The Most Secure Means of Meeting the Shortfall is Cutting Expense. Many retirees just accept the fact that they will always have a car payment and that a few dollars in credit card payments are acceptable. In fact, they usually aren't. Automotive and credit card interest is not deductible and it is quite difficult to achieve an after-tax return on investment equal to the interest paid on cars and consumer debt. Becoming debt free, with the possible exception of mortgage debt is a worthwhile objective.
4. Pay Particular Attention to Your Mortgage. Often, the best means of improving your post retirement cash flow situation is retiring or re-structuring mortgage debt. In order to do this, you sometimes have to think "outside the box". If you think your low interest mortgage with 10 years remaining is worth holding, think again. Often, it is the high principal payment, not interest, that is hurting your cash flow. Sacrificing cash flow today for a paid for house when you are 75 is a poor choice for many retirees. Of course, you can pay it off if you have funds available to do so but be very careful making these choices. A wrong decision here can have a profound effect on your retirement security for years to come.
5. Pay Attention to Social Security. In the 70's and early 80's the standard advice was to take your social security at age 62 because you will draw more than enough during the next three years to make up for the difference between the benefit now and that of age 65. Now that interest rates are lower and life expectancies are higher, this might not be the case. The most important factor is whether or not you might work part or full time after retirement. If you retire at age 62 and are forced to return to work because of boredom or financial pressures, you will be severely penalized for every dollar you earn over a set limit. (Somewhere around $12,000). You might be forced to pass up an attractive employment opportunity or pay that penalty if you receive your benefits early.
6. Don't Neglect Your Health Care. Many retirees have become accustomed employer- provided health care benefits at little or no cost while they were working. They are often shocked at how much they will have to spend to take over this responsibility themselves. The most critical time is the gap between retirement and medicare eligibility. Even after medicare takes over there can be problems such as the shrinking number of physicians accepting medicare or the high cost of drug benefits. You have six month after becoming eligible for medicare and electing to pay for medicare part B which covers doctor benefits. You have the same six months to decide a on supplemental policy. After the six month period you will pay a penalty for medicare part B and you may not be able to get a supplemental policy if you are in poor health. Medicare also has a drug benefit for little cost but you may still have to pay more than you are accustomed for prescriptions.
I didn't expect to devote so much space to this post. Obviously, I am leaving a lot out. I will cover some more in subsequent posts.
I Don't Live By A List. But I freely admit that I might get more of the right things done if I did. One place where a list is particularly valuable is before you retire or decide to devote less energy to the world of work. Ideally, the list should be started at least a year before the event. The following list may not be totally comprehensive but it contains a number of things that you need to think about before you leave your job.
1. How Much Income Do You Need? It's surprising but a lot of people hate the exercise of putting together a budget or spending plan. Still, it's very important that you determine how much income you need to replace the income you are earning from work. I have clients tell me they need $5,000 a month only to find that the average from the past six months is $8,000. If they need only $5,000 a month what happened to the extra $3,000 they brought home every month. Now is the time to be realistic in estimating expenses. Of course, this is not to say that you can't identify areas where expenses can be cut but you might also add expenses for travel, recreation, etc. While I don't want to belabor the issue, the more through you are in this step, the more secure your retirement will be.
2. How Much Income Will You Have? In this exercise consider only those sources of income that you will have that are relatively secure such as a company pension, social security, or income from high grade government or corporate bonds. If the result of this step is equal to or greater than from step 1, you should have a relatively worry free retirement. If not, you are going to have to figure out how to make up for the shortfall.
3. The Most Secure Means of Meeting the Shortfall is Cutting Expense. Many retirees just accept the fact that they will always have a car payment and that a few dollars in credit card payments are acceptable. In fact, they usually aren't. Automotive and credit card interest is not deductible and it is quite difficult to achieve an after-tax return on investment equal to the interest paid on cars and consumer debt. Becoming debt free, with the possible exception of mortgage debt is a worthwhile objective.
4. Pay Particular Attention to Your Mortgage. Often, the best means of improving your post retirement cash flow situation is retiring or re-structuring mortgage debt. In order to do this, you sometimes have to think "outside the box". If you think your low interest mortgage with 10 years remaining is worth holding, think again. Often, it is the high principal payment, not interest, that is hurting your cash flow. Sacrificing cash flow today for a paid for house when you are 75 is a poor choice for many retirees. Of course, you can pay it off if you have funds available to do so but be very careful making these choices. A wrong decision here can have a profound effect on your retirement security for years to come.
5. Pay Attention to Social Security. In the 70's and early 80's the standard advice was to take your social security at age 62 because you will draw more than enough during the next three years to make up for the difference between the benefit now and that of age 65. Now that interest rates are lower and life expectancies are higher, this might not be the case. The most important factor is whether or not you might work part or full time after retirement. If you retire at age 62 and are forced to return to work because of boredom or financial pressures, you will be severely penalized for every dollar you earn over a set limit. (Somewhere around $12,000). You might be forced to pass up an attractive employment opportunity or pay that penalty if you receive your benefits early.
6. Don't Neglect Your Health Care. Many retirees have become accustomed employer- provided health care benefits at little or no cost while they were working. They are often shocked at how much they will have to spend to take over this responsibility themselves. The most critical time is the gap between retirement and medicare eligibility. Even after medicare takes over there can be problems such as the shrinking number of physicians accepting medicare or the high cost of drug benefits. You have six month after becoming eligible for medicare and electing to pay for medicare part B which covers doctor benefits. You have the same six months to decide a on supplemental policy. After the six month period you will pay a penalty for medicare part B and you may not be able to get a supplemental policy if you are in poor health. Medicare also has a drug benefit for little cost but you may still have to pay more than you are accustomed for prescriptions.
I didn't expect to devote so much space to this post. Obviously, I am leaving a lot out. I will cover some more in subsequent posts.
Tuesday, March 27, 2007
MARKET IN THE DOLDRUMS
What Can We Say About This Stock Market? Going no where fast comes to mind. As of today's date, March 26, the market is less than 1% above where it began on the first trading day of 2007. It looked like we were in for a good year for awhile. The market was up 3% by February 20, only to fall back to the current level, over the next month. None of us really know the reason why the market reversed course but the current hot topic is the sub-prime mortgage market.
The Sub-Prime Mortgage Market Is a Great Example of Stupid Lenders and Stupid Consumers. Years ago, a number of lenders decided that it was more profitable to make loans to non-creditworthy borrowers at high rates, construct a diversified loan portfolio, and be willing to accept a higher foreclosure rate than it was to compete for borrowers with good credit histories who had numerous sources for rock-bottom interest rates. This worked well for awhile as suppliers of sub-prime mortgages were protected by higher down payments and rising home prices. Life was good. There were plenty of home buyers with credit problems anxious to be homeowners and plenty of investors hungry for higher yields willing to buy sub-prime paper. Real estate prices escalated as more people were able to buy homes now that they had the financing to do so. It even reached the point where increasing numbers of families were no longer satisfied with one residence, they had to own two. They weren't happy with 900 square foot homes like the average 1950's home, they had to own houses two and a half times that size, the average house size today. So where did it all go wrong.
Success Breeds Competition. There is an old economic axiom that says when one provider of goods and services begins to do very well, others will enter the marketplace and provide similar products which compete with the original provider. As more lenders entered the marketplace to compete for the existing borrowers, it became harder to originate enough loans to satisfy the investors, eager for higher yields. In other words, too much money chasing too few deals. To keep from lowering rates to attract more borrowers, lenders lowered their standards to the point that, instead of offering sub-prime loans, they were offering sub-sub-sub prime loans to borrowers who couldn't possibly afford the home they were buying. As home prices leveled off, these borrowers were trapped in homes they could no longer afford and couldn't sell. Delinquencies rose and the resulting increase in foreclosures were the natural consequence.
You Hate To Say That They Deserved It. Some lenders certainly did. Many borrowers, have the excuse of being financially unsophisticated. Lenders may not be all that sophisticated either since many loan officers entered the business with no experience in personal finance and no ability to advise borrowers of the risks of these loans. No one trained these loan officers to explain risk because their job was to sell loans not counsel borrowers. If they didn't sell loans they didn't get paid. In a sense, the entire industry was one in which there was a lack of business ethics and the consequences they are experiencing today were entirely predictable. A number of medium and relatively large sized sub-prime lenders are no longer economically viable and bankruptcy is only a matter of time. Shareholders in public companies have already seen most of their investment evaporate and the rest will soon follow.
It Will Take Awhile to Work Our Way Out of This Mess. A lot of homeowners are hanging onto homes hoping for some miracle to allow them to continue. Most will fail. This will keep a lid on prices, especially in areas where markets overheated. Areas like Denver, while not all that healthy, may not do as badly because they began to deal with these problems several months ago. Overall, the markets will probably weather these effects; however, tax increases being considered the newly elected majority in congress could add to the problems created in the housing market.
I am Reminded of How Little All This Matters. This week-end a local real estate investor accidentally killed himself while trying to fix a jammed firearm. No longer will he be bothered by leaky faucets, complaining tenants, and fluctuating real estate prices and mortgage rates. He was only 41. As I attempted to find words to console his grieving family members, I was again reminded of similar situations where I spent hours trying to help clients solve what we thought were serious problems only to find out they weren't serious at all compared to what happened next. Each day is a gift. Appreciate it.
The Sub-Prime Mortgage Market Is a Great Example of Stupid Lenders and Stupid Consumers. Years ago, a number of lenders decided that it was more profitable to make loans to non-creditworthy borrowers at high rates, construct a diversified loan portfolio, and be willing to accept a higher foreclosure rate than it was to compete for borrowers with good credit histories who had numerous sources for rock-bottom interest rates. This worked well for awhile as suppliers of sub-prime mortgages were protected by higher down payments and rising home prices. Life was good. There were plenty of home buyers with credit problems anxious to be homeowners and plenty of investors hungry for higher yields willing to buy sub-prime paper. Real estate prices escalated as more people were able to buy homes now that they had the financing to do so. It even reached the point where increasing numbers of families were no longer satisfied with one residence, they had to own two. They weren't happy with 900 square foot homes like the average 1950's home, they had to own houses two and a half times that size, the average house size today. So where did it all go wrong.
Success Breeds Competition. There is an old economic axiom that says when one provider of goods and services begins to do very well, others will enter the marketplace and provide similar products which compete with the original provider. As more lenders entered the marketplace to compete for the existing borrowers, it became harder to originate enough loans to satisfy the investors, eager for higher yields. In other words, too much money chasing too few deals. To keep from lowering rates to attract more borrowers, lenders lowered their standards to the point that, instead of offering sub-prime loans, they were offering sub-sub-sub prime loans to borrowers who couldn't possibly afford the home they were buying. As home prices leveled off, these borrowers were trapped in homes they could no longer afford and couldn't sell. Delinquencies rose and the resulting increase in foreclosures were the natural consequence.
You Hate To Say That They Deserved It. Some lenders certainly did. Many borrowers, have the excuse of being financially unsophisticated. Lenders may not be all that sophisticated either since many loan officers entered the business with no experience in personal finance and no ability to advise borrowers of the risks of these loans. No one trained these loan officers to explain risk because their job was to sell loans not counsel borrowers. If they didn't sell loans they didn't get paid. In a sense, the entire industry was one in which there was a lack of business ethics and the consequences they are experiencing today were entirely predictable. A number of medium and relatively large sized sub-prime lenders are no longer economically viable and bankruptcy is only a matter of time. Shareholders in public companies have already seen most of their investment evaporate and the rest will soon follow.
It Will Take Awhile to Work Our Way Out of This Mess. A lot of homeowners are hanging onto homes hoping for some miracle to allow them to continue. Most will fail. This will keep a lid on prices, especially in areas where markets overheated. Areas like Denver, while not all that healthy, may not do as badly because they began to deal with these problems several months ago. Overall, the markets will probably weather these effects; however, tax increases being considered the newly elected majority in congress could add to the problems created in the housing market.
I am Reminded of How Little All This Matters. This week-end a local real estate investor accidentally killed himself while trying to fix a jammed firearm. No longer will he be bothered by leaky faucets, complaining tenants, and fluctuating real estate prices and mortgage rates. He was only 41. As I attempted to find words to console his grieving family members, I was again reminded of similar situations where I spent hours trying to help clients solve what we thought were serious problems only to find out they weren't serious at all compared to what happened next. Each day is a gift. Appreciate it.
Saturday, March 17, 2007
THINGS I'VE LEARNED.
About Long Term Care. Like most people, I had an outmoded opinion about nursing homes. I have met few, if any seniors who would choose to live in one. Over the past few years, I have had a number of experiences that have taught me a great deal about modern long care options.
1. Sometimes It Is The Only Choice. I have even had clients who have a clause in their will to dis-inherit any of the heirs who "put them in a nursing home". I have also observed situations where there is no family member capable of providing a satisfactory level of care and the lifestyle of the elderly relative becomes intolorable.
2. Even If Lonf Term Care Is Necessary, Not all Facilities Are The Same. Fifty years ago, the choices were very limited and it seemed as if none were places you would want to live in. Now there are several different levels of care from almost independent living facilities to skilled nursing care with several options in between. If you want to have influence on where you might live, don't wait until its too late and you are incapable of making a decision on your own.
3. Most Long-Term Care Policies Cover Little Of the Cost of A First Class Facility. People who think they can buy a $4,000 per month benefit and have little to worry about may be in for a big surprise First-class care is expensive. The bill for my Uncle's care for the past two months was $23,000. Granted, there were some extra costs because of a fall he incurred but these things happen more than you might want to think and the magnitude of the excess cost is surprising. In very few months have I paid the amount quoted when we signed up.
4. Goverment Paid Care Comes at a Huge Sacrifice in Quality. Medicaid will pay for nursing home care but many of the nicer facilities won't take medicare. If at all possible, you need to avoid having to depend on medicaid.
5. Staff is More Important Than Furnishings. We often feel like we have done our job when we walk through a facility and see fancy dining areas, hot tubs, swimming pools, exercise facilities, and well-tended gardens. These amenities may be more for our benefit more than for the patient. They assuage our guilt while the patient may lack the awareness to appreciate these benefits. Ask questions about personnel selection policies, average turnover, and employee satisfaction levels. If possible, talk to some of the lower level employees to get an idea of how they like their jobs.
6. Visit, Visit, Visit. This is very important. If your relative has dementia, he or she may not recognize you, but your visits will let staff know know it is important for you to make sure you care that your relative is being cared for. Show your appreciation by an occasional card or small gift for staff members. Often pay is at the low end of the scale and recognition that some one appreciates their dedication is important. Of course, you have to make sure that they can accept small tokens of appreciation without violating company policy.
Back in Texas. I spent a week in Denver and didn't have enough time to visit everyone I wanted. I also got home with a lung infection that has kept me down for a few days. This emphasizes my point that taking care of yourself is of increasing importance as we get older.
1. Sometimes It Is The Only Choice. I have even had clients who have a clause in their will to dis-inherit any of the heirs who "put them in a nursing home". I have also observed situations where there is no family member capable of providing a satisfactory level of care and the lifestyle of the elderly relative becomes intolorable.
2. Even If Lonf Term Care Is Necessary, Not all Facilities Are The Same. Fifty years ago, the choices were very limited and it seemed as if none were places you would want to live in. Now there are several different levels of care from almost independent living facilities to skilled nursing care with several options in between. If you want to have influence on where you might live, don't wait until its too late and you are incapable of making a decision on your own.
3. Most Long-Term Care Policies Cover Little Of the Cost of A First Class Facility. People who think they can buy a $4,000 per month benefit and have little to worry about may be in for a big surprise First-class care is expensive. The bill for my Uncle's care for the past two months was $23,000. Granted, there were some extra costs because of a fall he incurred but these things happen more than you might want to think and the magnitude of the excess cost is surprising. In very few months have I paid the amount quoted when we signed up.
4. Goverment Paid Care Comes at a Huge Sacrifice in Quality. Medicaid will pay for nursing home care but many of the nicer facilities won't take medicare. If at all possible, you need to avoid having to depend on medicaid.
5. Staff is More Important Than Furnishings. We often feel like we have done our job when we walk through a facility and see fancy dining areas, hot tubs, swimming pools, exercise facilities, and well-tended gardens. These amenities may be more for our benefit more than for the patient. They assuage our guilt while the patient may lack the awareness to appreciate these benefits. Ask questions about personnel selection policies, average turnover, and employee satisfaction levels. If possible, talk to some of the lower level employees to get an idea of how they like their jobs.
6. Visit, Visit, Visit. This is very important. If your relative has dementia, he or she may not recognize you, but your visits will let staff know know it is important for you to make sure you care that your relative is being cared for. Show your appreciation by an occasional card or small gift for staff members. Often pay is at the low end of the scale and recognition that some one appreciates their dedication is important. Of course, you have to make sure that they can accept small tokens of appreciation without violating company policy.
Back in Texas. I spent a week in Denver and didn't have enough time to visit everyone I wanted. I also got home with a lung infection that has kept me down for a few days. This emphasizes my point that taking care of yourself is of increasing importance as we get older.
Wednesday, February 28, 2007
MARKET MELTDOWN, WHY IT HAPPENED
What a Brutal Day in the Market! Virtually all our accounts took a hit. Including mine. Fortunately, I know exactly why the market went down. Because it went up. This answer may seem a bit trite but its as good as any of the very complex theories I have heard about China, the deficit, or the stand off in Iraq. Fact 1. Markets are cyclical. 2. Fact 2. Timing those cycles are impossible. Fact 3. There is no foolproof strategy. The good news is that you still own the same companies now that you owned before the correction and the changes in what the markets think they are worth have little or nothing to do with the viability of those enterprises.
My Philosophy For Most Clients Remains The Same. Construct portfolios from which the major component of our expected return on investment is cash flow. Most of these will be dividend paying stocks. Even though the value of most of the stocks went down along with the rest of the market, the cash flow produced from those portfolios showed no change. This morning, I received several e-mails from the brokerage firm I use telling me that I can expect numerous dividend checks in the next 30 days. This gives me money to fund living expenses if I need it or, more importantly, money to reinvest in new opportunities that may arise. One thing I noticed about the so-called "tech wreck" early this decade, was that those who took a huge hit on those non-dividend paying stocks, had no money to re-invest in the bargains that emerged.
Common Stocks Are The Majority of Our Investment Portfolios. Since stocks historically show I higher returns than bonds and other financial assets, most of our portfolios are in common stocks. This means that the cash flow produced is in the form of dividends. Besides providing income to fund living expenses, there are several other advantages to dividend-paying stocks. 1. History shows that dividend paying stocks are not as vulnerable to market downturns. 2. Most dividends are favorably taxed. 3. Our aging population favors stocks that produce income. The bottom line is that, instead of worrying about this market correction, we are looking forward to our next dividend check.
I Am Looking Forward To A Trip To Denver. I made reservations to fly to Denver on March 7. I will only be there a week but if you need to contact me, call our office and speak to Susan about an appointment. Please put in an order for some decent weather. An old snow bird has a tough time with the cold.
My Philosophy For Most Clients Remains The Same. Construct portfolios from which the major component of our expected return on investment is cash flow. Most of these will be dividend paying stocks. Even though the value of most of the stocks went down along with the rest of the market, the cash flow produced from those portfolios showed no change. This morning, I received several e-mails from the brokerage firm I use telling me that I can expect numerous dividend checks in the next 30 days. This gives me money to fund living expenses if I need it or, more importantly, money to reinvest in new opportunities that may arise. One thing I noticed about the so-called "tech wreck" early this decade, was that those who took a huge hit on those non-dividend paying stocks, had no money to re-invest in the bargains that emerged.
Common Stocks Are The Majority of Our Investment Portfolios. Since stocks historically show I higher returns than bonds and other financial assets, most of our portfolios are in common stocks. This means that the cash flow produced is in the form of dividends. Besides providing income to fund living expenses, there are several other advantages to dividend-paying stocks. 1. History shows that dividend paying stocks are not as vulnerable to market downturns. 2. Most dividends are favorably taxed. 3. Our aging population favors stocks that produce income. The bottom line is that, instead of worrying about this market correction, we are looking forward to our next dividend check.
I Am Looking Forward To A Trip To Denver. I made reservations to fly to Denver on March 7. I will only be there a week but if you need to contact me, call our office and speak to Susan about an appointment. Please put in an order for some decent weather. An old snow bird has a tough time with the cold.
Sunday, February 18, 2007
SHOULD YOU PAY OFF YOUR MORTGAGE?
The Answer to This Question is just Like Virtually All Others in Financial Planning. It depends. I have heard individuals say, "absolutely not! It's the only write off still available to the average person. This is probably the worst argument for keeping a mortgage since, even if you are in a high bracket, you are are spending a dollar to save 35 or so cents. I have heard others say, "Pay it off. You will always be able to keep your house no matter what happens." Sounds good, but probably not true in all cases since there are other expenses such as property tax, insurance and maintenance that can make a home unaffordable even if paid for.
The Right Decision Will Depend on the Answer to Several Questions.
1. Do You Have Sufficient Liquid Assets To Pay Off The Mortgage? By liquid assets, I mean assets that you can conveniently convert to cash. Bank Deposits and CD's come to mind. Selling stocks, bonds, or mutual funds, is another possibility providing you don't incur huge tax obligations. If your tax bracket is around 30%, you will have to withdraw $285,000 from your IRA to get enough funds to repay a $200,000 mortgage. probably not a good deal.
2. Will you Have Sufficient Liquidity After Paying off Your Mortgage? Even if you are only earning a pittance on your savings, it is best not to draw it down too low in order to pay off your mortgage. This may leave you with no funds for major purchases such as car repair, etc. Cars can be a major expense and it makes no sense to pay off your deductible interest home mortgage only to run up additional non-deductible debt to repair or purchase an automobile. I have recommended home equity lines of credit for liquidity purposes when paying off a mortgage. These sometimes work well; however, the major drawback is that these lines are often over used. Again, it does no good to repay your fixed-rate first mortgage debt and then replace it with variable rate home equity lines.
3. What Are You Earning On Your Savings/Investments? One of the most important questions to ask yourself is what you are earning on your investment accounts. If you are confining your investments to insured savings instruments, then it is highly unlikely that you will ever earn enough on those to justify holding a mortgage. After all, one of the major arguments for having a mortgage is that you can earn more on your investments than you pay on your mortgage. There are market conditions in which it is possible to earn more on your investments than the interest on home mortgages but it is rarely, if ever possible, to do so with anything approaching the same risk.
4. Storms Rule: Pay off Soon After Retirement or Not at All. What I mean by this is that, even if your loan has a short time left, you get little benefit from high principal payments towards the end of your life. Look at the following example: A 65 year old couple has a $95,000 mortgage with 14 years remaining. The Interest rate is a reasonable 6% and payments are $837 per month. Paying off the loan now will have big benefits in that it adds an additional $847 per month. If you can repay it now, that's fine but if you can't, it makes no sense to hold it, or even worse, add $150 per month in extra principal. The extra principal payment cuts the loan down to 11 years from 14. Big deal, you will be 76 years old when your home is paid off and you have sacrificed $987 per month during the most enjoyable years of your retirement to do so. You may think this recommendation is crazy but, if you can't get the benefit of the extra cash flow by paying it off soon, a better option is to refinance the mortgage to a 30-year term even if you have to pay 6.25% on your new loan compared to 6% on the old one. Payments on the new loan are $584 per month, a savings of $252 over the old loan. Over a years time, the extra $3000 will pay for a nice vacation at a time when you are young enough to enjoy it.
Mortgage Decisions are Complex. Too often, people make decisions based on rules of thumb or "common sense". Making the wrong decision can have huge implications on your retirement comfort and security. Make sure you understand all the implications before you make a major move. Your best friend in making these decisions is a financial calculator, not some rule of thumb offered by a financial writer who knows nothing about your particular situation.
The Right Decision Will Depend on the Answer to Several Questions.
1. Do You Have Sufficient Liquid Assets To Pay Off The Mortgage? By liquid assets, I mean assets that you can conveniently convert to cash. Bank Deposits and CD's come to mind. Selling stocks, bonds, or mutual funds, is another possibility providing you don't incur huge tax obligations. If your tax bracket is around 30%, you will have to withdraw $285,000 from your IRA to get enough funds to repay a $200,000 mortgage. probably not a good deal.
2. Will you Have Sufficient Liquidity After Paying off Your Mortgage? Even if you are only earning a pittance on your savings, it is best not to draw it down too low in order to pay off your mortgage. This may leave you with no funds for major purchases such as car repair, etc. Cars can be a major expense and it makes no sense to pay off your deductible interest home mortgage only to run up additional non-deductible debt to repair or purchase an automobile. I have recommended home equity lines of credit for liquidity purposes when paying off a mortgage. These sometimes work well; however, the major drawback is that these lines are often over used. Again, it does no good to repay your fixed-rate first mortgage debt and then replace it with variable rate home equity lines.
3. What Are You Earning On Your Savings/Investments? One of the most important questions to ask yourself is what you are earning on your investment accounts. If you are confining your investments to insured savings instruments, then it is highly unlikely that you will ever earn enough on those to justify holding a mortgage. After all, one of the major arguments for having a mortgage is that you can earn more on your investments than you pay on your mortgage. There are market conditions in which it is possible to earn more on your investments than the interest on home mortgages but it is rarely, if ever possible, to do so with anything approaching the same risk.
4. Storms Rule: Pay off Soon After Retirement or Not at All. What I mean by this is that, even if your loan has a short time left, you get little benefit from high principal payments towards the end of your life. Look at the following example: A 65 year old couple has a $95,000 mortgage with 14 years remaining. The Interest rate is a reasonable 6% and payments are $837 per month. Paying off the loan now will have big benefits in that it adds an additional $847 per month. If you can repay it now, that's fine but if you can't, it makes no sense to hold it, or even worse, add $150 per month in extra principal. The extra principal payment cuts the loan down to 11 years from 14. Big deal, you will be 76 years old when your home is paid off and you have sacrificed $987 per month during the most enjoyable years of your retirement to do so. You may think this recommendation is crazy but, if you can't get the benefit of the extra cash flow by paying it off soon, a better option is to refinance the mortgage to a 30-year term even if you have to pay 6.25% on your new loan compared to 6% on the old one. Payments on the new loan are $584 per month, a savings of $252 over the old loan. Over a years time, the extra $3000 will pay for a nice vacation at a time when you are young enough to enjoy it.
Mortgage Decisions are Complex. Too often, people make decisions based on rules of thumb or "common sense". Making the wrong decision can have huge implications on your retirement comfort and security. Make sure you understand all the implications before you make a major move. Your best friend in making these decisions is a financial calculator, not some rule of thumb offered by a financial writer who knows nothing about your particular situation.
Tuesday, February 13, 2007
REVERSE MORTGAGES ENHANCE YOUR CASH FLOW
Reverse Mortgages Are An Under-Utilized Resource. What is the best kind of loan to get? One that you don't have to repay until you die. Perhaps that is not totally true of reverse mortgages but it comes close if your plan is to live out the rest of your life in your present home. Of course plans can change. In the event of the death of a spouse, you can stay in your home if you desire; however, if you decide to move the loan is due and payable. If you are forced to move to a skilled nursing facility for health reasons, the loan is due and payable when you or your spouse no longer occupy the home as your primary residence.
Use your Home Equity for Income. If an income stream is what you want, your home must be free, or nearly free, of encumbrances. You can get an idea of how the income option works at www.maarp.com/estimates.asp. As an example, suppose you own a free and clear $200,000 home in my Texas zip code of 77663. Suppose your date of birth is January of 1938 and your spouse birth date is August of 1941. Using the above website, I determined that my spouse and I could get an income stream of $617 per month for life, or as long one of us lives, or until we decide to move out of the house. When this occurs, the mortgage must be repaid from other assets or sale of the property. You don't give up the benefits of ownership and any appreciation in value belongs to you or your heirs, providing there is sufficient equity to repay the mortgage. In the unlikely event that the mortgage is more than the value of the house, the loss belongs to the mortgage lender and not your estate. Since this income is borrowed money, you don't have to pay income tax on the funds received.
Use A Reverse Mortgage to Repay your Standard Mortgage. Many of the next generation of retirees will go into retirement with a mortgage on their residence. If you are one of these, you can use the reverse mortgage to repay that mortgage and you no longer have to make monthly payments. Suppose the couple in the previous example, owe $90,000 on their home. Suppose the loan is $90,000 with an interest rate of 6.5% and 10 years remaining. Payments on that loan are approximately $1022 per month. You can use a reverse mortgage to pay the loan and have an extra $1,022 to spend each month. Is this advisable? Each case is different depending on your life situation. If you took out a mortgage at a low interest rate with interest only payments for 5 years and you are facing huge increase in payments, the reverse mortgage can be a viable alternative. If the mortgage is too large to be repaid by the reverse mortgage, you might want to add cash. The freedom of no payments for as long as you live in the home may well be worth the cash expenditure.
Use A Reverse Mortgage When You Buy Your Home. Suppose you sold a free and clear $150,000 home and you have your heart set on a townhouse in a retirement community with considerable amenities. The only problem is that this home is $240,000. You can't tolerate the idea of making payments again and you can't get your hands on another $90,000 without having to access your IRA with considerable tax consequences or sell stock and incur huge capital gains. Further, suppose you have less than perfect credit and are not sure you can qualify for a conventional mortgage. You can borrow $90,000 on a reverse mortgage and move into your desired home with no payments. Poor credit is not a barrier to obtaining a reverse mortgage.
Reverse Mortgage Amounts Vary. A reverse mortgage is a complex product. The amount of money you can get depends on your age, the appraised value of your home, and the interest rate at the time of funding. In the current environment with higher short-term rates and falling appraisals, you may not be able to receive the benefits you could have obtained a couple of years ago. In general, the higher your appraisal and the lower the rates on one year treasuries, the more benefits you can obtain. Another barrier to the viability of reverse mortgages is the presence of a large first mortgage on the property. Since a lot of home owners pulled cash out of their residences during the recent low mortgage rate environment, many future retirees may be carrying larger mortgages into retirement. If the maximum reverse mortgage amount isn't sufficient to retire the current mortgage and the home owner doesn't have cash required to pay down the mortgage, a reverse mortgage won't be a viable option. If you are planning retirement in the near future, it may be to your advantage to look at your reverse mortgage options now and making a plan as to how you might use this option.
Disadvantages of Reverse Mortgages. There are many benefits to reverse mortgages however, there are some disadvantages. One of these is relatively high closing costs. Since these are paid with borrowed money, they become less significant over longer time frames; however, if you plan to move within two or three years, you probably don't want to incur a reverse mortgage. If your home has considerable sentimental value to family members, you may not want to incur a reverse mortgage, especially if there are few other assets in the estate to repay the mortgage should your family members want to keep it. One caveat is that there are occasional abuses of these mortgages. Some of these allow a lender to share in the appreciation of the property at the time of repayment. These are often accompanied by artificially low appraisals which make it appear as the home has appreciated more than it really has. Be extremely careful of who you do business with. You can obtain a lot of information from the web link cited above. Better yet, have a well informed advisor to help guide you through the process. Call or e-mail me if you would like me to be that advisor.
Use your Home Equity for Income. If an income stream is what you want, your home must be free, or nearly free, of encumbrances. You can get an idea of how the income option works at www.maarp.com/estimates.asp. As an example, suppose you own a free and clear $200,000 home in my Texas zip code of 77663. Suppose your date of birth is January of 1938 and your spouse birth date is August of 1941. Using the above website, I determined that my spouse and I could get an income stream of $617 per month for life, or as long one of us lives, or until we decide to move out of the house. When this occurs, the mortgage must be repaid from other assets or sale of the property. You don't give up the benefits of ownership and any appreciation in value belongs to you or your heirs, providing there is sufficient equity to repay the mortgage. In the unlikely event that the mortgage is more than the value of the house, the loss belongs to the mortgage lender and not your estate. Since this income is borrowed money, you don't have to pay income tax on the funds received.
Use A Reverse Mortgage to Repay your Standard Mortgage. Many of the next generation of retirees will go into retirement with a mortgage on their residence. If you are one of these, you can use the reverse mortgage to repay that mortgage and you no longer have to make monthly payments. Suppose the couple in the previous example, owe $90,000 on their home. Suppose the loan is $90,000 with an interest rate of 6.5% and 10 years remaining. Payments on that loan are approximately $1022 per month. You can use a reverse mortgage to pay the loan and have an extra $1,022 to spend each month. Is this advisable? Each case is different depending on your life situation. If you took out a mortgage at a low interest rate with interest only payments for 5 years and you are facing huge increase in payments, the reverse mortgage can be a viable alternative. If the mortgage is too large to be repaid by the reverse mortgage, you might want to add cash. The freedom of no payments for as long as you live in the home may well be worth the cash expenditure.
Use A Reverse Mortgage When You Buy Your Home. Suppose you sold a free and clear $150,000 home and you have your heart set on a townhouse in a retirement community with considerable amenities. The only problem is that this home is $240,000. You can't tolerate the idea of making payments again and you can't get your hands on another $90,000 without having to access your IRA with considerable tax consequences or sell stock and incur huge capital gains. Further, suppose you have less than perfect credit and are not sure you can qualify for a conventional mortgage. You can borrow $90,000 on a reverse mortgage and move into your desired home with no payments. Poor credit is not a barrier to obtaining a reverse mortgage.
Reverse Mortgage Amounts Vary. A reverse mortgage is a complex product. The amount of money you can get depends on your age, the appraised value of your home, and the interest rate at the time of funding. In the current environment with higher short-term rates and falling appraisals, you may not be able to receive the benefits you could have obtained a couple of years ago. In general, the higher your appraisal and the lower the rates on one year treasuries, the more benefits you can obtain. Another barrier to the viability of reverse mortgages is the presence of a large first mortgage on the property. Since a lot of home owners pulled cash out of their residences during the recent low mortgage rate environment, many future retirees may be carrying larger mortgages into retirement. If the maximum reverse mortgage amount isn't sufficient to retire the current mortgage and the home owner doesn't have cash required to pay down the mortgage, a reverse mortgage won't be a viable option. If you are planning retirement in the near future, it may be to your advantage to look at your reverse mortgage options now and making a plan as to how you might use this option.
Disadvantages of Reverse Mortgages. There are many benefits to reverse mortgages however, there are some disadvantages. One of these is relatively high closing costs. Since these are paid with borrowed money, they become less significant over longer time frames; however, if you plan to move within two or three years, you probably don't want to incur a reverse mortgage. If your home has considerable sentimental value to family members, you may not want to incur a reverse mortgage, especially if there are few other assets in the estate to repay the mortgage should your family members want to keep it. One caveat is that there are occasional abuses of these mortgages. Some of these allow a lender to share in the appreciation of the property at the time of repayment. These are often accompanied by artificially low appraisals which make it appear as the home has appreciated more than it really has. Be extremely careful of who you do business with. You can obtain a lot of information from the web link cited above. Better yet, have a well informed advisor to help guide you through the process. Call or e-mail me if you would like me to be that advisor.
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