Kimmunications

Mortgage Mess

I am still traveling so this will be short and sweet. I'd like to point out an excellent article by Laura Rowley over on Yahoo Finance. It is titled, "Footing the Bill for the Subprime Fiasco."

And while we are on the topic of messes, you might also have a look at Scott Burns' article on the federal deficit. (Free registration required) According to government figures, the entire deficit problem boils down to unfunded liabilities in the Social Security and Medicare programs. He goes on to point out t"if the federal government confiscated all the land in the United States along with all of its improvements – buildings, highways, plants and equipment, and other durable assets built on it – and sold them at auction to foreign investors, it would still fall more than $20 trillion short in present value of the monies required to satisfy its future budget."

Give these a read and let me know what you think. Gotta go. I have a plane to catch!

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Road to Financial Success Is Well Marked

Do you ever look at people who are more financially successful than you are and wonder how they got there? There are only three ways to become rich: inherit it, marry it, or earn it.

 

Most of us aren't heirs to a fortune and unless your parents are in the minority, they are going to need all they have just to live out their power years. Some may be fortunate enough to marry into wealth but I certainly wouldn't recommend it as a wealth-building strategy. It reminds me of the line in Pretty Woman, "Meet the Olson sisters. They have made marrying well an art form."

 

So that leaves earning it. The good news is the road to financial success is well-travelled and those who have gone before you have left it pretty well marked. The only thing required from you is the discipline to make it happen. Here's how:

 

Forget about appearances. I bet you know someone who makes a lot of money, lives in a fancy house, drives fancy cars, and lives paycheck to paycheck. I know a lot of people like that. But I bet you also know someone who lives in an average house, drives the same paid-for car for ten years, and has a net worth of several million dollars. Thomas Stanley and William Danko call these people "The Millionaire Next Door." If you haven't read the book, get it.

 

Don't buy things you cannot afford. My grandmother is 88 years old. She was ten years old, living on a farm in East Texas in 1929 when the stock market crashed. She grew up, like so many of her generation, believing that you didn't buy something you couldn't pay cash for. When you have the discipline to save for the things you want, it gives you the time to decide if they are really important. If they are, they'll mean more for having saved to buy them.

 

Kick your bad habits. Do you smoke, drink, gamble or live on junk food? Our bad habits rob us in many ways. Let's take the difference between eating breakfast at home or grabbing a McDonalds on your way to work each morning. My breakfast every morning is a bowl of oatmeal and Crystal Light. I am guessing that meal probably costs me about $0.75. Compare that to $3.00 for an Egg McMuffin, hash browns and a soda (I don't drink coffee). Do that five days a week, 52 weeks a year, that's almost $600 a year. $600 compounded at 10% for twenty years is $4000. Do that every year for ten years and you have cost yourself a years worth of living expenses. That doesn't take into consideration the extra cost of insurance and healthcare if you are a high risk.

 

I am not suggesting you have to live in abject poverty or deny yourself a splurge once in awhile. I like a Whataburger as much as anyone. But you have to admit bad habits are expensive. If financial success is a priority for you, then kicking bad habits is one way to get there.

 

Visualize your goals. There is a tendency to become what you imagine yourself as being. So how do you attain your goals in life? By having a goal and knowing what it is! I, for example, have had a goal for almost ten years of owning a polo farm in Aiken, SC. Not a day has gone by that I didn't picture in my mind what the house would look like, how the barns and pastures would be laid out, and me playing polo on my own field. Today, that goal is a reality.

 

It is not enough to say I have a goal. The trick is to imagine exactly what that looks like, in excruciating detail, and hold that thought doggedly in your mind. The one thing we know is that our minds can't stand to have the inside not match the outside. If you are persistent with the visualization, and you have full faith in you ability to achieve your goal, your mind will, over time, make your outside world congruent with your inside world. I don't know why it works that way. I only know that it does.

 

Manage risk. Shit happens. Make sure you have six months of living expenses in a bank account. Insure any risk you cannot afford and update your insurance as your situation changes. The paradox is, the more at risk we are, the more likely we are to skip this step. When money is tight, it is easy to raid the emergency fund or cancel the insurance policy and hope lightening doesn't strike. But Murphy's law says that is just when it will and if it does, the financial setback may be too drastic for you to ever recover from.

 

Abolish get rich quick fantasies. Wealth is built one dollar at a time. I like the quote by Theodore Roosevelt. He said, "The things that will destroy America are prosperity-at-any-price, peace-at-any-price, safety-first instead of duty-first, the love of soft living, and the get-rich-quick theory of life."

 

Manage your own money. Imagine a broker has two mutual funds he can sell you. One is a low cost index fund that will match the market's performance exactly but pays him no commission. The other will under-perform the market two-thirds of the time but will pay him all sorts of money. Which do you think he is going to recommend? The only person who has no conflict of interest when it comes to taking care of your money is you. That makes you uniquely qualified to manage your own financial affairs.

 

Stop chasing the herd. The person who chases the latest hot idea, whether it is internet stocks, real estate, or commodities, is condemned to repeatedly buy high and sell low. The key to wealth is to buy when everyone else is irrationally selling and sell when others are irrationally buying.

 

Think of your money as a tool. Your money is no different than a carpenter's hammer or a truck driver's truck. It is a tool. Every day you put its little coveralls on, hand it its lunch pail and send it off to work. If, at the end of the day, it doesn't come back with four buddies in tow, your money isn't working hard enough. You need to find it a different job.

 

Be the Family CFO. You are your family’s chief financial officer and it is arguably the most important job you will ever hold. The CFO of a company is responsible for that company’s financial health. You are responsible for the financial health of your family. What separates the good CFO’s from the bad is knowledge. A good CFO works to be as educated about financial matters as possible. The more you know, the better you’re able to distinguish between a great investment opportunity and a cleverly disguised sales pitch.

 

	TAKEAWAYS:   1. There are only three ways to become wealthy: inherit it, marry it, or earn it. The last one is the most reliable.   2. Get started today. Tackle the items on this list one at a time. Make a plan for implementing these ideas. Let us know how you are doing.

 

Care to share? Which of these needs to be your highest priority? Leave your thoughts and comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

February 2007 Family CFO Briefing

Investing

 

You gotta love this. In the same vein as the monkey's throwing darts and Rusty, the Longhorn steer that picks stocks by pooping on the stock pages: A subscription web site that provides its subscribers with stock picks for as much as $100 a month invites, in January, 10 Playboy models to participate in an investing contest. When results are tallied toward the end of the year, 40 percent of the bunnies deliver better returns than the S&P 500, compared with just 29 percent of actively managed mutual funds.

 

Investing for Retirement

 

Millions of American women face declining living standards in retirement. Like men, they'll feel the sting of cutbacks on corporate pensions. But women suffer more than men from the high rate of divorce, which can deprive them of savings and income when they need it most. Many also lose benefits and income when they leave work to care for children and they live longer than men. (Los Angeles Times, free registration required)

 

Some brokerage firms make more money on money market spreads than they do on commissions. Most money market sweeps are paying less than 2% in brokerage accounts while money market fund rates are averaging 4.75%. By reinvesting client funds on the open market, brokerage firms are pocketing the difference and making a tidy 2% to 2.5% profit on your money. (Wall Street Journal, subscription required)

 

The Employee Benefit Research Institute (EBRI) reports "IRA Assets Hit Record $3.67 Trillion" fueled by IRA rollovers. Total IRA assets are larger than those in either traditional pension or 401(k) type plans.

 

Another EBRI report, issued in February, reports that 401(k) type plans have become the dominant form of employer sponsored retirement plan. There has been a significant increase in the percentage of family heads with a defined contribution plan (typically a 401(k)-type plan). In 2004, almost 26 percent of family heads who participated in an employment-based retirement plan had a defined benefit (pension) plan only, while 56 percent had a defined contribution (401(k)-type) plan only, while the remaining 18 percent had both a defined benefit and defined contribution plan. This was a significant change from 1992, when 42.3 percent had a defined benefit plan only and 40.8 per-cent had a defined contribution plan only.

 

Big corporations announced 15% more layoffs in January than in December, but the total was down 39% from this time a year ago, according to an unscientific tally of job-cut announcements released Thursday by outplacement firm Challenger Gray & Christmas. (MarketWatch)

 

Congress and government regulators are planning an array of moves to strengthen oversight of 401(k) accounts, which have become the linchpin of retirement savings for millions of Americans but are often burdened by hidden fees that chip away at their value. (Baltimore Sun)

 

MSN Money lists five common blunders people make in their 401(k) plans. (WARNING: shameless self-promotion coming up.) Our new web-based program, How To Turn Your 401(k) Into A Million-Dollar Nest Egg goes much farther than pointing them out. It will tell you step-by-step how to properly manage the many different aspects of your plan so that it can someday provide enough income for you to live comfortably in retirement. Our unique paint-by-numbers approach will tell you exactly which funds available in your plan are the most likely to deliver the best results. It will show you how much to invest and where. We are very proud of this new product because we believe it will help a lot of people who are clueless when it comes to what to do with their 401(k). Stop by our web site for a free preview. (Now back to your regularly scheduled programming.)

 

Housing, Real Estate and Mortgages

 

If you are making accelerated mortgage payments and not contributing the maximum to tax-deferred retirement plans, you are making a big mistake according to a recent paper titled "The Tradeoff Between Mortgage Prepayment and Tax-Deferred Retirement Savings," published by the Federal Reserve Bank of Chicago.

 

In Dallas County, foreclosure postings are up 24 percent. In Tarrant County, they are up 17 percent. Denton County came up 15 percent and in Collin County they are up 61 percent over this time last year. Dallas and Fort Worth are in the top ten in the nation for foreclosures. Dallas ranks number 5 and Fort Worth is number 7. (CBS 11 local coverage)

 

Debt and Savings

 

• Only 17% stick to their New Year’s resolutions!
• 38% said that losing weight was #1 priority for 2007 followed by spending more time with loved ones
• 24% consider getting out of debt their second most important priority for 2007
• 31% answered that they currently have credit card debt of MORE than $8500 while 40% said they have less than $1000
• 60% said that they could live as they do now for less than 3 months or less if they lost their job tomorrow - while 31% said they could live longer than 6 months
• Nearly ½ of all surveyed don’t know their credit score!  (48%)
• 56% consider ‘viewing their online bank balance’ managing their personal finances
• Nearly ½ of all surveyed do NOT have an emergency fund stashed away (49%)

 

(Note: I don't have a link for this one. The information comes from a press release sent to me by Quicken's PR firm looking for interview opportunities. The firm must not have done a very good job because a Google search turns up zilch. Sorry! I'd give you a link if I could find you one!)

 

I found these statements, without attribution, when I was doing research for a project. Since sources weren’t cited, I can't vouch for their validity but they certainly ring true. Judge for yourself:

 

• Americans currently owe nearly $9 trillion in debt -- accumulating nearly 40% of it in the past five years.
• Over the past four years, Americans have borrowed more against their homes than they've invested.
• Forty percent of new-car buyers still owe money on their trade-in.

 

The previous rings especially true given the following: People once again spent everything they made and then some last year, pushing the personal savings rate to the lowest level since the Great Depression more than seven decades ago.

 

And finally, how's this for perspective? New research into the world's personal wealth finds assets of just $2,200 per adult placed a household in the top half of the world's wealthiest. $61,000 puts you in the top 10% and if you have more than $500,000, the United Nations Study says you are among the richest 1% in the world! Here is the terrifying number. Half the world - nearly 3 billion people - live on less than $2 a day. (MSN Money)

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Should You Pay Off Your Mortgage Early?

If you are making accelerated mortgage payments and not contributing the maximum to tax-deferred retirement plans, you may be making a big mistake, according to a recent paper titled "The Tradeoff Between Mortgage Prepayment and Tax-Deferred Retirement Savings," published by the Federal Reserve Bank of Chicago.

 

According to the authors, "a significant number of households can perform a tax arbitrage by cutting back on their additional mortgage payments and increasing their contributions to tax-deferred accounts." The average benefit is about 11 to 17 cents on the dollar over the term of the mortgage, depending on the choice of investments inside the tax-deferred account, they say.

 

It doesn't require a high risk portfolio to get the benefits from this strategy. The authors assumed the additional retirement assets were invested in either U.S. Treasuries or mortgage-backed securities. As long as the pretax returns on the retirement accounts are greater than the after-tax rates on the mortgage, "households are generally better off saving in a TDA [tax-deferred account] instead of prepaying their mortgage."

 

The study found 38% of households that prepay their mortgages could benefit from the proposed arbitrage strategy. It should be noted, for purposes of this study, a short-term mortgage (less than the standard 30 years) is considered the same as making prepayments on a regular mortgage. In both cases, the homeowner is paying down the mortgage faster than they normally would. The study assumes these extra payments could be saved in a retirement account instead.

 

"These misallocated savings are costing U.S. households as much as $1.5 billion per year." That leads to the question, why are we so prone to doing the wrong thing? The authors say this inefficient behavior can be explained by "self-reported debt aversion and risk aversion variables." In plain English, people who pre-pay mortgages don't like any debt.

 

I would suggest, as in all things, a balance is called for. No debt is as bad as too much debt. You have bad debt, which is debt used to buy things that depreciate in value -- and good debt, which is debt used to buy things that appreciate in value. Some good debt may not only be OK, but better than none at all, as long as you don't go overboard.

 

As I have said in previous posts, I have amended my position on this subject in recent months. I used to be a zero-debt advocate. But now I think zero debt can create a diversification and liquidity problem. If I have too much of my net worth tied up in home equity, I am very sensitive to falling real estate prices and I am going to find it very difficult to tap my equity if I need it.

 

The problem with home equity is the more I need the harder it is to get to. Who is going to give me a home equity loan when I have lost my job? What kind of bargaining power do I have in the sale of my home if a loved one is sick and needs huge out-of-pocket medical treatment?

 

On the other hand, I am not an advocate of taking the money you would use to pay off mortgage and investing it in high risk investments. I would not, for example, recommend you play the arbitrage game between mortgage rates and mutual fund returns, as many salesmen are suggesting these days.

 

I also would never recommend taking a loan for the specific purpose of investing it. But my own investment method will borrow very small amounts on margin from time to time to take advantage of some extra leverage.

 

So there is definitely a line. Personally, I am still trying to define exactly where I draw it. It's sort of like pornography. I know it when I see it but have a hard time defining it. Studies like these from the Chicago Fed are very helpful in thinking through all the issues.

 

Thoughts? Where do you draw the line? I'd especially like to hear from anyone who is pre-paying a mortgage but not maxing out their retirement accounts? Does this information cause you to rethink what you are doing? Could you, or would you redirect those payments to your 401(k), 403(b), IRA or maybe a Health Savings Account (HAS)? Leave your comments below.

 

SOURCE:

 

1. Gene Amromin, Jennifer Huang, and Clemens Sialm. "The Tradeoff between Mortgage Prepayments and Tax-Deferred Retirement Savings." Federal Reserve Bank of Chicago August 2006.

http://www.chicagofed.org/publications/workingpapers/wp2006_05.pdf

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

11-17-2006 - Items of Interest to Family CFOs

Taxes

 

Under the tax law, inheriting money in an IRA was better for your heirs than inheriting it while it was in a 401(k). 401(k) money was not subject to the "stretch" provisions like an IRA was. That will change in January, 2007 when the Pension Protection Act of 2006 goes into effect. From now on, beneficiaries will effectively get the same tax treatment with both IRA and 401(k) money. (Financial Advisor)

 

Investing and Retirement

 

Canadian income trusts have been one of the best income investments in recent years. Dividends have ranged from 6% to 9% over the last few years and have been a favorite of in-the-know income investors. These trusts were able to pay such high dividends because of the very favorable tax treatment they received from the Canadian government. No more. In a surprise move, the Canadian government has proposed a tax on distributions that has investors up in arms and sent shares of the income trusts reeling. (London Free Press)

 

Participation rates in retirement plans is down from 2004! Only 55% of 24-64 year olds participate in a retirement plan. The message is not sinking in. I fear it won't either until younger people begin to see the impact of inadequate retirement savings affecting their parents and grand-parents. But by then it will be too late for tens of millions of people. Call me chicken little but I worry how we are going to pay for all these people. (Employee Benefit Research Institute)

 

Great chart courtesy of Barry Ritholtz. Great illustration that experts don't know what is going to happen any more than you do. (The Big Picture)

 

Good commentary by Michael Mauboussin, Chief Investment Strategist at Legg Mason, on why chasing what's hot is a fool's game. (Time)

 

EBRI looks at the data on the increasing level of debt in families with a family head age 55 or older. The long and the short of it is that we are retiring with more debt than ever before. (Employee Benefit Research Institute) The study is available at www.ebri.org .

 

Chuck Jaffe, MarketWatch columnist, gives some ideas about financial gift giving this holiday season. MarketWatch

 

Thoughts on any of these? Feel free to leave your comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Mortgages Causing Financial Planners To Rethink Old Rule of Thumb

Financial planners have long used a rule of thumb that said retirees need retirement cash flow of 70% - 80% of their pre-retirement income in order to maintain a comparable standard of living. But that rule of thumb assumes a paid off mortgage going into retirement.

 

Studies show that is no longer a good assumption. The latest one, published in the September issue of Journal of Financial Planning, found that an increasing number of older Americans are carrying larger first and second mortgages into retirement for longer periods.

 

They found, for example, that 45% of people in their sixties have a first mortgage—up from 34% in 1980. Second mortgages and the percentage of income consumed by mortgages among 60 and 70 year olds is also rising.

 

“This new, increased and continuing debt load may suggest that the traditional rules of thumb for determining appropriate levels of retirement income are outdated,” wrote the authors.

 

Do you expect to carry a mortgage through retirement? Or two? Or will you retire mortgage-free? Was that a conscious decision on your part or did it just work out that way? Can you live comfortably on 70% - 80% of your pre-retirement income? Leave your thoughts and comments below.

 

SOURCE:

 

1. "Frontline News." Financial Advisor October 2006.

http://www.fa-mag.com/past_issues.php?id_content=3&idPastIssue=114&show=fronline

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

10-25-2006 - Items of Interest to Family CFOs

This short paper, "Will Reverse Mortgages Rescue the Baby Boomers?", from the Center for Retirement Research, gives a wonderful explanation of reverse mortgages and how they can be used to tap equity in your home without selling it. It also explains the limitations and the risks. The best part is, the CRR is totally unbiased. They are academics looking at the problem of creating enough cash flow to rescue a generation unprepared for retirement. We are working to get one of the authors on the radio show very soon. (http://www.bc.edu/centers/crr/issues/ib_54.pdf)

 

Barry Ritholtz, offers this from The Big Picture. The chart is originally from the New York Times. Lest we are tempted to forget, in the short run, markets don't always go up. When they go down, they create long periods of dead money for the capital appreciation investors. That is why I chose to invest my money for cash flow in the short run and growth as a secondary objective over the long run.

 

 

 

The average Wall Street employee made close to $300,000 last year. That is about 5X what the average person in this country makes. According to the CNN Money article, top traders and investment bankers are commanding compensation in the tens of millions per year. Wall Street is making more than ever while your portfolio has made little or nothing for the last five years. (See the chart above.) Do you feel they earned what you paid them? http://money.cnn.com/2006/10/17/news/newsmakers/bc.financial.wallstreet.pay.reut/index.htm?section=money_topstories

 

It is impossible to continue indefinitely with your cash outflows exceeding your inflows. There is only so much home equity to be tapped and so much credit to be had. Yahoo columnist Laura Rowley has a good piece on the rising gap between income and expenses in this country. She offers five suggestions for averting the disaster that always comes eventually when you live above your means.

http://finance.yahoo.com/columnist/article/moneyhappy/11094

 

Thoughts on any of these? Feel free to leave your comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Pay It Off

I promised to post the video from NBC5's series entitled, Pay It Off." It took me a little longer than expected. Sorry for the delay.

For those of you in the audience that night at the Frontiers of Flight Museum - "Dahlings, you look mah-velous!"

NOTE: Hover your mouse over the top  left of the video window to see the video player control buttons.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Housing Whammy

I have been trying to fashion a cohesive post about the potential aftermath of the housing bubble and refinancing frenzy. I have played with it for about two days now. So far I have failed. So instead, let me just give you a sampling of the issues and the impact we are already seeing.

 

A January, 2005 report from Dēmos, House of Cards, details the extent to which families have come to depend on credit to finance their life-style, much of it by depleting their home equity with loans that will likely come back to haunt them in the face of rising interest rates and falling home values:

http://www.demos-usa.org/pubs/AHouseofCards.pdf

 

Prices of U.S. homes grew at their slowest pace in six and a half years during the second quarter, the government said Tuesday. Home prices increased at a 4.7% annual rate in the quarter, barely keeping up with the 4.4% inflation rate. (MarketWatch requires free registration)

 

Home prices fell in one-fourth of the major metropolitan areas last quarter. (New York times article - free registration required)

 

Homebuilders are piling on incentives to move their inventory, including selling your old home. (WSJ requires subscription)

 

From MarketWatch.com, consumers with adjustable rate mortgages or option ARMS could soon see their mortgage payments double: Just how much are borrowers with option ARMs going to suffer?

 

A market research piece from Comstock lists facts that illustrate just how big the whammy could be. Among them: 32.6% of new mortgages and home equity loans in 2005 were interest only, up from 0.6% in 2000; 15.2% of 2005 home buyers owe at least 10% more than their home is worth; $2.7 trillion in loans will adjust to higher rates in 2006 and 2007; August foreclosures were up 23% over July and 53% over a year ago.

 

Many people were sold exotic adjustable rate mortgages by boiler room operations.

 

Now add in this fact from a NY Times article: Investors now hold $4.6 trillion in mortgage backed securities. That’s more than the outstanding value of the US Treasuries. (New York times article - free registration required)

 

Seems like déjà vu to me. What do you think? Specifically, what do you think the implications are? How will this affect you, if at all? Leave your thoughts and comments below.

 

TIP OF THE HAT: I found several of these links on Barry Ritholtz's excellent blog, The Big Picture. Thanks Barr.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

The Nest Egg Index

A.G. Edwards measured a dozen statistical factors -- including participation in retirement savings plans, personal debt levels and home ownership -- to compile what it calls the "Nest Egg Index." The Nest Egg Index is designed to highlight "geographic regions where people are succeeding and where they face the greatest difficulty in building and nurturing their nest eggs."

 

So where are we succeeding and where are we struggling? Of the 242 major metropolitan markets that made the list, Bridegport-Stamford-Norwalk, CT was the top of the list, followed by San Jose - Sunnyvale - Santa Clara, CA and Minneapolis - St. Paul, MN. The number one community overall, big or small, was Los Alamos, N.M..

 

At the bottom of the list for major metropolitan areas were Riverside-San Bernardino-Ontario, Calif., Miami-Fort Lauderdale-Miami Beach, Fla., Charleston-North Charleston, S.C., and Houston-Baytown-Sugar Land, Texas.

 

An A.G. Edward's press release says communities which ranked high on the list enjoyed strong housing markets and a propensity toward saving and investing, particularly in tax-deferred retirement plans such as IRAs and pension plans.

 

Compared with other countries, the United States is not a nation prone to save. The U.S. Department of Commerce reported that America’s 2005 personal savings rate was a negative 0.5 percent, the lowest in the industrialized world. By comparison, 2005 household net savings rates were 11.6 percent in France, 10.6 percent in Germany, 6.7 percent in Japan, 6.0 percent in the Netherlands and 5.3 percent in Korea, according to the Organization of Economic Co-operation and Development.

 

We know many Americans are not adequately preparing for retirement. According to the Nest Egg Survey, only 66 percent of Americans have a retirement plan in place. In addition, in a study released in November 2005, Hewitt Associates found that among employers offering a defined contribution plan, such as a 401(k), nearly a third of eligible employees do not participate.

 

Even as Americans underestimate their need for retirement funding, they are retiring earlier and living longer, increasing the need for a long-term source of income. Less than 20% of men aged 65 or older are in the U.S. labor force, compared with the year 1950, when 46 percent of men that age were working, according to the U.S. Census Bureau. At the same time, life spans have increased, with American men living an average 74.1 years in 2000, compared with 68.2 years in 1950, while women live to an average 79.5 years, compared with 71.1 years in 1950.

 

What do you think it will take to get Americans to start saving? Leave your thoughts and comments below.

 

SOURCES:

 

1. "Invest In Your Future: Savings Statistics" A.G. Edwards Nest Egg Index Media Kit; 14 Sept 2006.

http://www.agedwards.com/public/content/sc/invedu/nest_egg_savings/media_kit.html

 

2. "Nest Egg Index Results" A.G. Edwards Nest Egg Index Media Kit; 14 Sept 2006.

http://www.agedwards.com/public/content/sc/invedu/nest_egg_savings/media_kit.html

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

 

Conversion Risk of Real Estate Equity

Have you ever experienced a time where you had a deeply held belief and then, suddenly, exposure to a new idea caused you to question that belief? It happened to me, (again!) last night, at a Snider Investment Method™ information session in Scottsdale, AZ.

 

I believe that borrowing money to invest is a bad idea. There are, of course, exceptions. But I am just saying - as a general rule - I think it’s a bad idea. But then, one of my guests, Bob Kennedy, said something that put the idea in a totally different context, and suddenly I am thinking differently about the topic.

 

I talk a lot about what I call conversion risk. In fact, it was part of my program last night. Conversion risk refers to the idea that if your strategy is to hold an asset over the long term and you suddenly need money, because of some unanticipated event, and the market value of the asset is depressed (think 2003), you're screwed. When you HAVE to HAVE that money, you are in a weak position. You have no choice but to sell at the current market price. The value that is lost - is lost permanently. You no longer own the asset so there is no way to get it back.

 

We know from studies that financially disruptive events occur far more frequently than most people are aware. I haven't seen any studies that speak to rate of change specifically but I have to believe the frequency of financially disruptive events is increasing, not decreasing. Which means conversion risk is increasing.

 

So here is the Aha! from last night. Studies tell us, what little net worth Americans have, is tied up in the equity in their homes. It certainly isn't in the bank or their brokerage accounts. According to this year's Retirement Confidence Survey, done annually be EBRI, 52% of workers saving for retirement report total savings and investments, not including the value of their primary residence or any defined benefit plans, of less than $50,000. The large majority of workers who have not put money aside for retirement have little in savings at all: 75% of these workers say their assets total less than $10,000.

 

So let's give ourselves the benefit of the doubt and assume that there is some amount of equity tied up in our homes. Isn't there a conversion risk there as well? And isn't it even greater because there is less liquidity?

 

What if there is some catastrophic medical issue and the equity in your house is the only money you have? That is not the time to be trying to get a home equity loan! Who is going to give it to you? It certainly isn't the time to try to sell your house.

 

If a loved one is sick and dying and the only way to pay the bills is to sell the house, what kind of price are you going to have to accept to dump it? Finally, real estate is an asset with fluctuating market values just like paper assets. What if the price is down when you need to tap that equity?

 

So the question Bob got me to thinking about last night is, "Doesn't prudent planning REQUIRE you to separate the equity in your house somehow, probably through the strategic use of mortgage products, so that you can better manage the conversion risk? Hmmm.

 

It kind of casts my old thinking about never borrowing money to invest in a whole new light. I had always thought of the question, probably because it was the way it had always been posed, as a speculative strategy. Can I borrow from my equity in my house, invest it, and hopefully make more than I pay in interest?

 

But Bob turned it around as a risk management question. Don't I have to separate the equity in order to manage the risk? Wow! I love it when that happens: instant insight just from having a conversation with someone who has thought about something differently than I have!

 

Clearly, I am going to have to do some more research and thinking to wrap my brain around this idea. I think you should too. In the meantime, any thoughts you might have are welcome. Leave them below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Spend less than you earn

The U.S. Savings rate has gone to zero for the first time since the Great Depression. Studies say people are counting on equity in their homes or inheritances to fund their retirement. They are relying on things outside of their control instead of things totally within their control. How scary - at least to a control freak like me!

 

The minimum amount that can be invested using the Snider Investment Method ™ is $25,000. The number of people who don't have $25,000 in liquid investable assets is staggering. The 15th Annual Retirement Confidence Survey by the Employee Benefits Research Institute and Matthew Greenwald & Associates finds that over half of workers have less than $25,000 saved! Only 11% say they have saved more than $250K. The 2001 Survey of Consumer Finances done by the U.S. Census Bureau finds that even including the value of our houses the median level of household assets is $136,010!

 

I know this is basic but in this day and age of unbridled consumption I think it bears repeating. You can't earn anything on money you haven't saved. The harsh truth that no one wants to acknowledge is that failure to plan adequately for the risk of financially disruptive events and 30 years of retirement income will ultimately lead to a loss of lifestyle, followed by independence, followed by dignity and that is the fate awaiting the vast majority of baby boomers if they do not take drastic measures to cut spending, actively manage risk and lock in a consistent income to replace their W-2 income.

 

Come to think of it - maybe I am being too hasty. There is one other alternative - hope that you can work forever or die in your sleep at an early age. Leave your thoughts and comments below.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.

Financial Advisor Symposium: Investing for Retirement in a Low-Return Era

Investing for Retirement in a Low-Return Era

2nd Annual Financial Advisor Symposium - Las Vegas, NV

Rob Arnott, Research Affiliates - April 27, 2006

 

The Arithmetic of Returns

 

Any investment has three components of return

Yield

Real growth in earnings

Multiple expansion

 

Real rate of return on stocks will be3% (the return over and above inflation) over the next five years

Real rate of return on bonds will be 2% over the next five years

TIPS will have 3% real rate of return

REITS will have 2.5% real rate of return

 

No place to hide! No major markets are priced to deliver the 5% or higher returns we all seek

You can't earn an investment return on money you haven't saved

Hope is not a strategy

 

Is this the end of the storm or the eye of the storm for equities?

 

• Earnings Quality Far Lower Than Investors Believe
  • Non-expensed stock options
  • Unrealistic pension return expectations
• Valuation Still High by Historical Standards
• Equity Risk Premium - still not far from zero
• Demographics - Require Lower future returns

 

Arnott believes these factors point to early stages of a secular bear market. "It is very dangerous for us to invest our clients money in a fashion that this scenario leads to ruin. We must invest their money so that they can weather this sort of scenario."

 

Historically, secular bear markets have lasted fifteen to twenty years. Doesn't mean you prepare your clients to prosper in a twenty year bear market but instead you prepare them so they survive a twenty year bear market. You prepare them so that they are going to be OK either way, meaning you have to give up some of the upside if the bear market doesn't materialize. That is not the case in an equity-centric model like the one we have adhered to historically.

 

Demographics - People Are Living Longer

 

We have gone from a life expectancy of 43 years at the beginning of the century to 78 at the end of the century

 

We have gone from a world in which most people didn't make it to retirement to one in which most do, it is expected to last fifteen to twenty years, and there are more of us than ever.

 

The big pension story of the first quarter century will be the abrogation of the pension promise. America cannot afford for people to retire at 65. People are living longer, they are healthier and therefore will have to work longer. What will make us work longer, as a generation, is that our assets will not last long enough to allow us retire at 65.

 

What Do We Do To Improve Returns

 

Stocks and bonds are not the only choices

Unconventional assets can be priced to offer better returns

Seek alpha - find managers who can beat their markets

Avoiding losses is just as important, if not more, than beating the market

Include alternatives in the asset mix

 

"Markets do not reward you for being comfortable." Move some money to areas which are out of favor or not mainstream. They are usually priced more attractively to reward you for moving away from the herd.

 

Which Risk Do You Want To Control?

 

"It's not assets that define wealth. It is what spending stream or standard of living those assets can support."

 

2001-2005 was only a bear market for those with an equity-centric portfolio

 

High risk strategies are on the tails. Risk is a double edged sword. In order to get return, you have to be willing to take some risk, but contrary to popular belief, risk does not guarantee you a higher return. It often creates a lower one, with potentially big negatives.

 

"The essence of investment management is the management or risk, not the management of returns" ~Benjamin Graham

 

"Investing is a "loser's game" in which the winner is often the investor who makes the fewest errors." ~Charley Ellis

 

Beating Andre Agassi at tennis very is easy. All you have to do is keep the ball in play and not make any mistakes. You have to ask yourself, "Who is on the other side of the trade and why are they willing to lose so that I can win?" Few people approach investing from this perspective. Instead they analyze markets, companies, news, fundamentals, etc. In other words, I don't have to outrun the bear. I only have to outrun you.

 

Rob Arnott and Anne Casscells; "Will we retire later and poorer?" Journal of Investing; Summer, 2004

 

Retirees don't actually consume money. They consume goods and services. As we save for retirement, we are saving assets in hopes they can eventually provide goods and services.

 

The way society will impose a stable support ratio is simple supply and demand. Asset prices will move to a price where the average 65 year old will look at their assets and say, "We don't have enough. We have to work a little longer."

 

When companies retain most of their earnings, 10 year earnings growth is negative. When companies retain a little, earnings growth is positive. The idea that today's low dividend rates are going to help us out with earnings growth in the future is not borne out by the data.

 

What if we took your liquid investable assets and divide it by your life expectancy? That is how much they have to spend. Anything you spend beyond that is speculation that future return will be greater than 0%.

 

If plan spending that way, your customer will never run out of money. It is also not what a customer wants to hear.

 

Going back to the idea of "Who is on the other side of your trade?", those that have the greatest confidence that they can pick stocks and pick stocks well are those that are probably the worst stock pickers. Those that have the least confidence are probably the best.

 

Commodities have a modest place in an investors portfolio as an insurance policy only - with no expectation for profit. If Saudi Arabian oil was wiped out by a dirty bomb for two years - 20% of the world's oil went offline - what would happen to commodities and what would happen to stock prices? Commodities are a hedge because they are non-correlated but should not be bought as speculative.

 

BIOGRAPHY:

 

Robert Arnott is chairman of Research Affiliates, LLC, and editor of Financial Analysts Journal. Recently, he introduced the concept of Fundamental Indexation, built on a theoretical foundation that challenges some of the core assumptions of modern finance. Previously, Mr. Arnott joined forces with PIMCO, serving as a sub-advisor, to offer the first global asset allocation product to make active use of alternative markets, beyond conventional stocks, bonds, and cash. Prior to this, he developed quantitative asset management products and teams as chairman of First Quadrant, LP, global equity strategist at Salomon (now part of Citigroup), president of TSA Capital Management (now part of Analytic), and vice president at The Boston Company (now PanAgora). Mr. Arnott has received five Graham and Dodd Scrolls/Awards, awarded annually by the CFA Institute, and two Bernstein-Fabozzi/Jacobs-Levy awards, awarded by the Journal of Portfolio Management and Institutional Investor, for the best articles of the year. He has authored over 70 refereed articles for journals such as the Financial Analysts Journal, the Journal of Portfolio Management, and the Harvard Business Review. Mr. Arnott has also served as a visiting professor of finance at UCLA, on the editorial board of the Journal of Portfolio Management and two other journals, and on the product advisory board of the Chicago Board Options Exchange and two other exchanges.

 

Kim Snider, Kim Snider Financial Communications, Chronim Investments and/or Snider Advisors make no representation that the information and opinions expressed are accurate, complete or current. The opinions expressed should not be construed as financial, legal, tax, or other advice and are provided for informational purposes only. Call 866-952-0100 to request the Snider Investment Method™ Owner's Manual, which includes a description of the Snider Investment Method, investment objectives, risks, suitability and other information. Please read and consider carefully before investing. All investments are subject to risk including possible loss of principal.