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.

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.

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.

SO LONG QUALCOM

I Should Have Picked A Different Example. It turns out that Qualcom wasn't a good example to use to illustrate the process of selling naked put options. In the best case scenario, the price of the stock holds steady or increases slightly. In the worst case, it drops like a rock and you have to either buy the option back or resign yourself to owning a stock at considerably below the current market price. In this case, it did neither. The stock gradually dropped from the original $38.87 to yesterday's price of $37.55.

The Price of the Put Option Also Dropped Slightly. As of yesterday, the price of a put option was $.50. Remember, we want the price of the option to drop since this gives us a chance to buy it back for less than we sold it for. I had a number of alternatives at that point. I could have held on and hoped that the price of the stock would either hold steady or increase slightly. I could have also bought back the option and either written a new one for March and pocketed another $600 as either a profit or a hedge for when I eventually had to buy the stock at $37.50. There were other alternatives which I won't discuss at this point.


I Got Boring Of It. That bit of unusual grammar came from my grandson when he was four years old and decided to abandon a book he was reading. For several reasons, I made the decision to exit the position. I didn't like the fact that the stock didn't appear to be following increasing market trends and I didn't want to own another 1000 shares. (I didn't mention that I own 1000 shares of qualcom in another account.) So I bought back the stock for a measly $300 profit. While this is a long way from a home run, 300 bucks will buy my next airplane ticket to Denver and it was created with virtually no capital expenditure. In case you think that brokerage commissions will take all my profit, let me explain that I use a low cost on-line brokerage and I paid $15 when I sold the option and another $15 when I bought it back so my overall gain is $270 and I am off to make another trade.

I Am Not Sure This Exercise Was Valuable to My Readers. I'm not sure I dd a good job of explaining the dynamics of this type of trading strategy. It is easy to become bored with so much rhetoric to explain a process that sounds so simple but contains a number of decision points. Perhaps this is a better topic for a seminar with charts, etc than it is for a written description. I will think about this before offering additional examples.

The Weather Here is Beautiful. Temperatures are in the 70's and I can see numerous premature azalea blossoms out my office window. The camellias are in full bloom outside the living room window. Its far too beautiful to spend a lot of time inside trading options. I'll try to dream up something more interesting for my next post.

ME AND MR NOLAN.

Is 69 Years Old Too Old To Need a Mentor? At this age, you would think I would be a mentor instead of needing one. I do serve in that role for a number of family members and some clients but every now and then I need someone to show me the way as well. I am reminded of a movie that I saw a number of years ago about a man who went "middle age crazy" after the death of his father. One statement from that movie sticks in my mind: "I don't wanna be the daddy." Being the "daddy" carries numerous responsibilities that occasionally seem burdensome. Not that I am complaining. I enjoy my role but sometimes I just feel like sneaking away from it and doing something stupid now and then. Fortunately, I still have my dad who is 88 years old, immensely successful, and full of good old common sense wisdom. He is indeed my mentor. But I still miss another mentor who passed away in July of 2000. He was my wife's father, Mr. Nolan Boyd. Another outstanding individual.

Mr. Nolan Was Born On A Farm In Texas in 1913. He was no stranger to manual labor. There was cotton to be picked, grain to be harvested, and stock to be tended. As a teenager, he worked hard in school, read virtually all the books in the small, local library and had aspirations of achieving a college education. Despite his father's objections, he left Texas at 16 and went to Kansas to pursue his dream. He later transferred to North Texas State University in Denton and completed his education. He was obviously a rarity at that time when very few individuals were able to obtain a college degree in the middle of a depression. He taught school at the age of 19. He left teaching and went to work as a retail manager shortly before the start of WWII. He returned to the same job after the war, stayed there the rest of his career, worked hard every day, and raised three children, all of whom were well educated.

The Outstanding Thing About Mr. Nolan was his devotion To His Community. He did everything from selling brooms for the Lions Club to serving on the local school board. He was an elder in his church and taught Sunday School for virtually his entire adult life. At a time when racism was rampant in the south, he was adamant that no one in his family could make derogatory remarks about any ethnic group. He had a very strong set of values and he lived them every day.

I Spent a Lot of Time With Mr. Nolan. He loved the fact that I was his opposite politically and could discuss issues with him for hours without ever getting mad. We spent hours fishing on the dock in back of my house. He taught me a lot by his example. When he died almost 7 years ago, I missed him right away. Over the past few years, I have often wished I could have his counsel on a number of matters.

Ten Years of Journals Have Been Helpful. Mr. Nolan did leave a legacy that has been invaluable to me. He kept a daily journal for almost 10 years. He was a good writer and wrote faithfully almost every day. Last spring, I decided I would read all those journals from beginning to end. I felt I owed it to him but but the main beneficiary turned out to be me. I learned a lot from that first hand account of how he lived his life, made decisions, and decided what was important and what was not. Those journals turned out to be an amazing legacy which can benefit future generations who take the time to read them.

Anna Quindlen Wrote A Recent Newsweek Article About Journals. "Wouldn't all of us love to have a journal , a memoir, a letter, from those we have loved and lost? Shouldn't all of us leave a bit of that behind?" Following Mr. Nolan's example, I started keeping a journal in 1995. I have volumes of dusty old journals in my Colorado townhouse. They have helped me manage my life and make decisions as I decide what's worth writing about each day. They also help me by providing a resource to check back years ago to see what my life was like and how I felt about important issues a long time ago. I hope they will be of value to future family members as they wonder how things were before they were born.

Most Of Us Want to Leave a Legacy For Our Family. All too often we think only of the physical and financial legacy we will leave. Perhaps we should think of the intangibles that often prove to be more valuable than anything else we could leave behind.

Vision and Action.

Want A Different Life In The Future, Start With A Vision. Four years ago I decided it was time to change my life. I had just turned 65 and I wanted more freedom. A life less tied to going into my office every day. A life with less stress. So what was my first step. I bought a spiral notebook. On the first page, I started a little exercise in which I imagined it was five years in the future. Then I wrote a little more than a page describing what my life was like. Where I lived, what my daily activities were, what my hobbies were, how I was deriving the income necessary to fund my lifestyle, and what I was doing to help my family. I put the notebook down and picked it up a few days later. I re-read it carefully several times, made a few changes and re-wrote the final version. I call the process I just described as developing a vision statement. The more you develop a detailed and comprehensive vision statement, the more likely you are to get to where you want to be.

Why aren't you living that life now? Ask yourself what is keep you from living that vision right now. Take an inventory. What are your strengths and weaknesses? What needs to be changed to get you to where you want to be? Do you need more investment assets? Do you need to improve your relationships with your family and friends? Do you need to change your spending habits? Abandon an addiction? Improve your Health? These are but a few things that come to mind. Everyone's questions and answers will be different. Write all this down in your spiral notebook and refer to it from time to time as you work towards achieving your vision.

What Steps Can You Take To Remove Obstacles? Write down some steps you can take right now. Keep writing, revising, and re-writing until you have a clear plan to get where you want to be.

Put Your Plan Into Action. Start working on the steps you have identified. Refer to your notebook at least once a week and make notes as to your progress, obstacles removed, and obstacles remaining. You might even uncover some new obstacles you have to deal with. One thing is clear to me after 4 years of working with my spiral notebook. It works. Much of what I learned in my financial planning training is of little use here. I can remember putting together long computer print outs projecting a client's financial situation far into the future. It was boring and it did little more than collect dust. A five dollar spiral notebook and a few hours thinking an reflecting have proven much more valuable to me than 200 pages of computer printouts.

A Few Final Words. A wise man once said, "Vision without action is merely a dream. Action without vision just passes the time. Vision with action can change the world." I've never wanted to change the world. Just my little corner of it.