Archive for Stock Market
The Recession’s Here, Let’s Cheer Up and Look at the Bright Side
Posted by: | CommentsEven though they changed the definition of "recession" – the word is out – it’s official – we are in a recession and have been since December 2007.
Understandably, this can be depressing news – especially around the holidays.
Lighten the economic mood in your house with these sunny ideas:
- It’s time to start saving money, again! After years of living beyond their means, many Americans are looking at this recession as an opportunity to tighten their belts and start living within their means! This takes frugality and self-discipline, but it’s a doctrine I’ve been preaching for years. Wouldn’t it be funny if the national savings rate went up during this period when everyone feels they have less?
- We can focus more on people and experiences, and less on things! This is especially true during the holidays. This Christmas, I’m putting a real focus on looking for fun EXPERIENCES, rather than pricey presents. Instead of spending my weekends stuffed into the shopping mall, battling crowds and circling in search of parking, I’m heading out to festive holiday activities.
Here are some ways to enjoy Christmas without spending a lot of money
- Christmas caroling in friendly neighborhoods or at other events that draw people – this is a great one to do with friends.
- Hand-making gifts or baking to share warm feelings with friends and family
- Going out to see the "Christmas Ships" – sailboats that put lights on their masts and sail around Lake Union and Lake Washington, here in Seattle
- Attending or hosting an Advent Dinner, like my Grandmother’s traditional "Second Sunday in Advent" candle-light dinner. She makes a great "candle" salad for dessert… a piece of lettuce on the plate, with a ring of pineapple on it, then a half banana sitting vertically on the pineapple, like a candle. She tops it with a dollop of whipped cream and half a cherry – for the flame.
- Having my son participate (for the first time!) in the church’s Christmas Pageant. If you don’t have kids, go watch someone else’s perform!
- Driving around to see the Christmas lights at night – our newspaper publishes a list of well-decorated neighborhoods to visit.
- Writing people meaningful cards/letters rather than sending gifts
- Remembering our abundance and donating time or money to help those less fortunate – giving gifts to a family in need, helping out at a soup kitchen, etc.
- Giving the gift of time with a gift certificate under the tree from us. We like to give "play dates" in my family – we’ll take you out hiking, invite you over for dinner, rent a kayak and spend a day paddling, or other fun activities, rather than giving a lot of "stuff." We also enjoy getting "coupons" for things like free babysitting, a car wash, pressure washing the driveway, weeding the garden, or other things we don’t enjoy doing ourselves.
- Getting together for movie night! Cider and popcorn are great companions for some classic holiday films!
- Spend time with someone who is alone for the holidays – enjoy A Cup of Christmas Tea!
- Go see the a display of gingerbread houses or make some yourself!
- Listen to some holiday music albums while you decorate your Christmas tree. I like the old-fashioned religious music, not the pop Christmas tunes on the radio.
- I just heard about The Cinnamon Bear – a great old Christmas radio show you can listen to with your kids.
- Nail down great investment opportunities. When everyone is looking the other way (watching out for chunks of sky falling, probably!) you can scoop up great bargains – the stock market and real estate market are where I’m focusing, but there are lots of great deals on cars and computers right now, too.
- Go Green! Even though I’m kind of against the whole environmental movement (I’ll save that for another post… but I’m not convinced a) that there is global climate change, b) if there is change that human’s caused it and c) that we can do anything about it to make it better if we are the culprits, and d) that we can avoid spending WAY too much money on TRYING to fix it…), I am an environmentalist to the extent that I am a frugal waste-not kind of lady. Whether your motives are "Green" for the environment, or for the color of money, tighter budgets are a good reminder to turn down the thermostat when you’re away from home and drive less.
- Some businesses are up — Find Them. There are plenty of people that do well in recessions. Charles Atlas built his fitness empire during the recession. My uncle who is an attorney who works in collections and bankruptcy is doing well. Folks who clean up REO houses before the banks sell them probably have more business. My dad knows a guy who sells an information-product on Bankruptcy… he’s making a killing. (I’m trying to set up an interview with him, so stay tuned for more information…) If you’re concerned about money or your job security, consider what industries may be doing well right now, and decide how you can become a part of them.
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Warren Buffett’s Buying Stocks – Maybe We Should, Too
Posted by: | CommentsOne famous quote from Warren Buffett, the renowned billionaire investor and founder of Berkshire Hathaway is: "Be fearful when others are greedy, and be greedy when others are fearful."
After years of sitting by the sidelines with his money in bonds – while the U.S. Stock market rose to unprecedented levels, and the real estate market did the same – Buffet is now primed in a cash-heavy position to be able to get out into the stock market and scoop up bargains, now that a recession is upon us.
According to Buffett’s recent op-ed piece in the New York Times, Buffett recognizes the deflated stock market as a buying opportunity. Although he can’t predict whether the market will go up or down in the next year or so, he knows it’s down now, relative to historic levels… and he’s buying. He anticipates moving 100% into U.S. equities before too long if market trends continue to keep prices attractive.
Likewise, 3 of the 4 indicators on Ben Stein’s website (the website is a follow-on to his book, Yes You Can Time The Market, which I profiled earlier this year) indicate that the stock market is undervalued and the S&P 500 represents a good buying opportunity.
If you’ve been thinking about how to invest in the recession – maybe Warren Buffett is the guy you should be emulating right now.
Be Well and Be Wealthy!
Emily
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What’s Your Biggest Obstacle With Financial Planning For Retirement?
Posted by: | CommentsI was talking with a friend from church last week whose husband works (worked?) for WAMU bank and who told me her husband would find out on Monday whether he still had a job. Here in Seattle it’s big news that Washington Mutual is going to be cutting 3,000 employees – not good news for this locally-headquartered company.
In the course of the conversation, we chatted a bit about what he might do if he were to lose his job (like… get a new job or work as an independent contractor). My friend, who is in her early 60′s, mentioned that she and her husband were "bad with figures" and had outsourced all of their financial planning and retirement planning, so she wasn’t sure what they would need to do – financially – in the event that her husband was forced into an involuntary early retirement by his employer.
Do you know where your retirement plan is now?
It’s a tough situation they’re in, and I hope my friends got good news about his job on Monday. But what I wanted to comment on here is that it struck me as "peculiar" that someone would "outsource" their personal finances and retirement planning to someone else, to the extent that they didn’t have direct control or knowledge of it any more.
Now, in the few days since then I have caught a number of other references to this phenomenon and am beginning to realize just how pervasive this is. Do you do your own financial planning and investing, or have you put your money in the hands of a professional just hoping he knows more about how to get you ready for retirement than you do?
Personally, I’ve been obsessed with retirement planning since I was 8 years old, so complete outsourcing is never something I’ve considered. And I’m willing to bet there are a lot of people out there who are like me – the do-it-yourselfer kind – who are trying to actively manage their investments, watch their monthly expenses, look at their monthly statements and yet, know they don’t have all the information they need to really feel comfortable knowing everything will work out when they leave their jobs one day.
It’s easy to be nervous… your retirement plan is something your life depends on and it’s something that can take years and years to build. When investments fall, like they have in the last year (we’re now officially in a recession that started December 2007, according to the Wall Street Journal (and a new definition of recession)) it’s staggering to see how quickly years of work and planning can be wiped out.
Some folks are unsure of whether we’ll have enough money when we retire and don’t know how to manage their finances when they are finally ready to walk away from the 9-5 job.
Our Relationship With Money Starts At A Young Age
I think one of the reasons retirement planning and stock market investing (and real estate, for that matter) have always been of interest to me, is that they were things that are important to my father and he discussed these topics with me since I was young. I can remember starting my passbook savings account in elementary school, founding a stock investment club in high school, and writing on my college applications that my favorite book was "How I turned $1,000 into $3 Million in Real Estate, In My Spare Time" by William Nickerson.
Parents out there, take note! You do have a strong role in shaping your children’s beliefs about and relationship to money!
On Tuesday I was talking with Dad about money again as we drove across town in my minivan (yes, as a new mom, I am now a mini-van driver, too!) to pick up a new couch he had ordered from Crate and Barrel. He began expounding on some of the stock market moves he was making now that the market is DOWN but still highly volatile and began discussing his retirement spending plan and budget, which he’s in the process of perfecting before he and Mom retire in the next 10 years or so…
As he was talking, my eyes lit up and I looked for a pencil to start taking notes. "This would be perfect for my blog!" I told him.
As something of a perfectionist and an attorney – I think is middle name is *Disclaimer* – he wasn’t that eager to commit to publishing his ideas right off the bat. He’s the type that likes to dot his I’s, cross his T’s, drink some Earl Grey tea and think about it over night before committing to anything.
But – I am going to see if I can prevail upon him to share more of his ideas – whether through an anonymous guise (hope I didn’t blow the anonymity by writing this…), in a recorded interview, or in my taking notes of his concepts to share with you.
Dad Has a Very Well-Researched Financial Retirement Plan That Is Involved Enough to Work As The Economy Passes Through Cycles, but Clear Enough That He Can Follow It and Keep His Lifestyle Consistent Through His Retirement Years
My Dad is very conservative, very well-read, very up-to-date on the news, and very opinionated. He’s the one who everyone in his inner circle asks for financial and business advice. I’m putting myself on the top of his list so he will start cranking more information out for me and I’ll see if I can capture the details of the plan he’s created in a way everyone can understand, here.
I’m going to start by pumping him for information on a few topics I think will be especially interesting.
Here are some of the questions I’m going to ask him about.
- How will your finances change when you are retired, do you really only need to spend 70% of what you spent when you were employed?
- How do you plan for unforeseen expenses like medical expenses or long term care?
- What retirement account (401K, IRA, Roth IRA, etc.) should I tap into first?
- How much money do I need to have in the bank before I retire?
- What asset allocation should I have? Do I really need to be in bonds? (Emily: I hate bonds!)
- Can I afford to retire early?
- What if I don’t have enough to reach my retirement goals?
- How do I tap into my nest egg so I know I will have enough to support me through a long and healthy retirement?
- What should I be doing before I retire to set myself up for my golden years?
I’d love to add your questions to the list. Maybe we can make some audio recordings or a regular column from Dad here… we’ll see.
Comment below and tell me your questions on retirement planning and financial planning! Thanks for your help with this! I’m looking forward to putting together some really meaty articles.
Emily
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Balancing a Portfolio with Real Estate in it
Posted by: | CommentsA recent caller I heard on The Dave Ramsey radio show had an interesting question about balancing her portfolio when she was investing in both stocks and mutual funds. Her husband loved investing in real estate and liked to be very hands-on with their properties. She was more comfortable with owning stocks and mutual funds because they offered liquidity – she knew she could get her hands on the funds quickly if something terrible happened and she had to cash out her stocks in a day or two.
The call caught my attention because it’s a topic my husband and I have discussed extensively as well.
Here’s What Dave Ramsey Says About How Much Real Estate to Own:
For the record, the "expert" Dave Ramsey said he would recommend somewhere between a 50/50 portfolio split and a 75/25 portfolio split (that’s 75% real estate and 25% stocks). Dave is a big real estate fan and he said his personal portfolio is weighted 75% toward real estate because he doesn’t mind the hassle factor that real estate presents and he thinks it’s worth it to get superior rates of return.
The big BUT here is that Dave Ramsey only buys real estate free and clear. After going bankrupt himself, he does not believe in taking on debt, so he buys properties all cash at a discount, with no loans at any time. Therefore, when he owns $100,000 in real estate, that means one property worth $100,000; not 4 properties with $25,000 equity each and $300,000 in debt in total.
This is an important distinction because debt (also known as leverage) can improve your rate of return on a property, but it can also increase the risk. If you are buying real estate WITH DEBT, as most of us are, I think it makes sense to be a little more cautious.
If You Leverage Your Properties, Grow Your Portfolio Prudently
I’ve talked before about the importance of being able to pay for your properties long term. With a mutual fund investment strategy, if you go through a rough patch – like a job loss – you can stop making contributions to your funds for a few months while you get back on your feet.
With real estate, you don’t have that flexibility. If the property has negative cash flow, goes vacant, or needs repair, you have to keep writing checks to take care of your property, whether it’s convenient or not. (And face it, when is it EVER convenient to feed a property?)
My partners and I own an apartment building that suffered roof damage in a recent storm. It’s needed over $200,000 in repairs which we’ve had to pull together from our personal accounts. It’s been important to have the liquidity to handle that type of emergency to avoid the property being further damaged due to the problem going unresolved.
As You Buy More Real Estate, Stockpile More Cash
So, how much of a cash reserve do you need if you own real estate that’s leveraged? It’s hard to create a specific formula in the abstract, but here are some issues to take into account:
- How much equity do you have in the property? If you needed to liquidate quickly (within 6 months) would you be able to do so? Would you walk away with cash or would you have to pay out at closing?
- Does the property have negative cash flow or positive cash flow on a regular basis?
- How well diversified are you? (The more different properties you have in different areas of the country, the less likely you would suffer from a "catastrophic" down turn in the market in terms of falling rents or property values.)
- What is the sales and rental market like? If you have a waiting list of buyers or renters there is less risk than if there are relatively few people shopping for what you have to offer.
Personally, I keep a "real estate cash account" separate from my other mutual fund investment accounts or personal funds. In this cash account, I keep about a 3-month reserve to pay for each property’s mortgage if it were to go vacant. (If you have a smaller number of units, this is an appropriate sized reserve, if you have a lot of units, you probably don’t need to keep that much cash on hand. You’re well diversified and chances are not EVERY unit is going to go vacant at the same time.) I also keep funds available for major upcoming repairs and capital expenses.
This account is just good safety/housekeeping for my real estate portfolio, I don’t include this balance in my "investable assets" column. I would not spend these reserve funds on a down payment for a new property, for example. I keep them liquid (and therefore, not "invested") so I can always safely manage the properties I have. Kind of like a trust account or operating account that you might keep with your property manager
Deciding Where To Invest Your Next $25,000
In terms of portfolio balance, right now I would say my net worth is balanced at about 80% equity in real estate and 20% in mutual funds. That’s mostly because I’ve been working full time as a real estate investor for the past several years and acquiring property at a rapid rate, much of it purchased with private funding. So, my real estate portfolio has grown very quickly through my efforts. However, I haven’t been generating lots of CASH to invest in mutual funds. (You still can’t build value in your stock portfolio through sweat-equity work, as far as I know… 
)
At this point, my husband and I still want to continue acquiring real estate, but we are focusing our CASH INVESTMENT efforts into building up our mutual fund portfolio, so that our investments are balanced closer to a 50/50 mix.
Basically, we do this:
- When we get cash – from the sale of a property, from contract or employment income, or as a gift, we first make sure we have enough money on hand to fund our day-to-day expenses and we check to make sure our reserve accounts are topped up. (Outside the real estate reserve fund, we also keep 3-6 months of living expenses available to us in a money market fund. We tend to go for a big "emergency fund" because we consider our investments illiquid. We don’t want to be forced to pull money out of our mutual funds, retirement accounts or real estate.)
- Our second step is to make sure we’re getting the employer match on Ben’s 401(k), fully funding our Roth IRA’s, and then we put additional budgeted amounts into the 401(k). (The tax-exempt annual contribution limit is $15,500 for a 401(k), I believe.)
- Any savings after that get divided up into our investments. Right now we are working on building up our mutual fund account balances so we’ll be closer to a 50/50 split with our net worth divided between real estate and mutual funds.
(Unlike Dave Ramsey, we DO believe in good debt, so we’re just counting property equity, not property value, in that figure.) One conservative way to estimate the value of your real estate’s equity is something my friend Steve Maxwell taught me. Rather than using the "appraised value" to determine your real estate equity, use the "liquidation value." For example, if I had to sell a property and anticipated paying a 6% realtor commission plus 2% in other costs (repair, vacancy, etc.) and I thought I would get about 4% less than appraised value because the market was slow, I would subtract those costs from my appraisal of the property’s value, to estimate how much I would really net if I were to sell the home. In this example, that would mean taking 88% of the appraised value and then subtracting the loan balance to determine my equity.
- Each year my husband and I review our holdings, we re-calculate how much we have in real estate and how much we have in stocks and what our goal is for that year. We might want to acquire one house at 70 cents on the dollar, one commercial property through Grassland Investments, LLC with 100% financing, and put a certain amount into stocks each year. Then we set up an automatic purchase plan to buy the mutual funds at Vanguard and get to work looking at the types of properties we are interested in buying.
You’ve Heard It Before: Slow and Steady Wins The Race
One thing that I learned from acquiring a lot of houses in quick succession earlier in my career is that you don’t want to just buy as many houses as possible. You want to buy the best houses, and make sure that for each one you buy, you’re keeping a certain amount of money liquid, too, so that you can afford to take care of the house after you’ve purchased it. A big mistake that a lot of investors make is buying a ton of houses with leverage, only to have the house of cards come tumbling down once they hit a down swing in the economy had have several extended vacancies, lowered rents, or expensive repairs. It’s much better to grow your portfolio in a sustainable way.
Holla’ Back
So, now you know what I do, and what Dave Ramsey recommends. I’m curious to hear how you handle this issue. How much of your portfolio is in real estate versus the stock market? Do you have any other investment categories that you allocate a significant portion of your investable assets to? Comment below!
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Advice to a 29-Year-Old Wealth Builder
Posted by: | CommentsOne great way to get free advice is to ask for it!
Last month, we got an email from one of our newsletter subscribers who had been in touch off-and-on and following our work for a while. Both my partner Rob Powell and I took the time to respond to his very polite questions. (Of course, it helped that he had been on our teleseminar and bought one of our products recently!)
I found the exercise fun and inspirational. Read along with "Mr. J" and see if you can relate to what he is going through.
Hey Emily and Rob,
You mentioned a few things on the call that may or may not be covered in Steve’s Book (I did purchase this, but obviously have not read through it yet!), but I was wondering if you can point me in the right direction or maybe even give some advise on a few things?
A little background on me real quick since I trust you guys – I’m 29 yrs old and married for 3 years and have a 7 month old baby. My wife does not work and I bring in about $64,000 per year right now. We don’t have any credit card debt at the time (we pay it off at the end of the month) and just paid off one of our cars (our other car will be paid off in 4.5 months, but I am making double payments to do this now that we finished our other car note), we have purchased a fixer upper house, but more on that below. We also have student loan debt.
Robert Powell Says: This is great. Good position to be in. That student loan is something you may want to pay off once you pay off the car. Your goal now should be getting out of the rat race. (Have you read Rich Dad, Poor Dad?)
Emily Cressey Says: Congrats on your lovely wife and your baby – this sounds very similar to my situation! How much is the student loan debt and what is the interest rate on it? I agree that it probably makes sense to address (pay off) your student loan debt next as fast as possible, but you may or may not want to delay your savings/retirement investing to do this, depending on your interest rates and how long it would take.
Questions:
1. RETIREMENT ACCOUNT
I have about $16,000- $17,000 in a 401(k) from my previous job and am looking at moving it into a self directed fund – Same question as the gentleman on the call, but maybe less money!
I was getting my money matched while I was working so investing in this was a no-brainer for me, but at this point I am not investing anything into the account. I have to figure out my cash flow, but should I continue putting money in this? Should I move it? Should I look at investing it into a higher yielding investment? I’m trying to turn myself into a learner, so education is a big one I know! Right now I know just about ZERO
Robert Powell: Good question. Moving to a self directed IRA is important and a good move. Should you continue putting money in? This all depends on you and the timing. If you are just going to spend the money on things that are not going to get you to your goal/dream…. then yes…continue to save it. Putting it in your IRA is a good way to do that. But…if you are going to invest that money ….then start using the money that you would be stashing away and invest in yourself by educating yourself. If your ultimate goal is to have your own business, build asset wealth, etc…then invest in yourself and get educated. If you can do both…at the same time then do so.
Emily Cressey: I would roll over the 401K into something that you can control more directly (where you aren’t limited to employers investment options). When my husband left his last job we decided to roll his 401K into an IRA. We have ours at Vanguard which is a low-cost mutual fund company. I like mutual funds and the long-term return on these is usually 11% a year. They also have stocks, money market funds, etc.
My concern with the self-directed accounts that allow you to invest in real estate, notes and other non-traditional asset classes, is that when you have a relatively small amount of money to invest, they have higher administrative fees (I think it’s like $200/year) that can eat up your savings. Also, if you don’t have an investment to place the funds with, you’d be holding the cash in a low-interest account while you are waiting to find an investment. So, depending on when and how you plan to invest this money, it may or may not make sense to use a "non-traditional" self-directed custodian. You can look at Pensco and Equity Trust for more information on those types of investment options.
You may also want to consider rolling over the IRA into a ROTH IRA. You’ll have to pay tax on it now, but you will be able to withdraw the profits tax free when you are 65. It’s like this – you’ll pay tax on $17K of income now, and then not have to pay tax on your millions down the road. Might want to run some numbers on that to see if it makes sense for you, but generally I think it does make sense for young people who will be growing their retirement fund nest egg and have a lot of wealth and high tax bracket down the road.
Also, if you are looking to ADD to your retirement savings, I would open and fund a ROTH IRA right away, rather than a regular IRA. You can put in up to $5K per year for you and I think $5K per year for your wife – if she’s not making any money outside the home, I think she can co-qualify with you if you file taxes jointly. Not sure on the details, but I think you can both have one.
2. PERSONAL HOME AS AN INVESTMENT
We purchased a home 1.5 years ago and got a pretty good deal and financed it 100% because of this (we also had no money at the time for a down payment our interest rate is 6.875). This is my primary residence, but also an investment in the fact that we are going to fix it up before we move. We are looking at moving in 1-2 years if everything lines up.
My question, with interest rates dropping, how is the best way to pull money out to finish fixing our house up? Maybe the better question to ask is where to learn about this, because I don’t have a lot of knowledge about the difference between taking out an equity loan, or re-financing but taking out a larger line of credit to use for repairs or even other investments?
I purchase my house for $48,500 ($6,000 of that was for membership fees at the golf community we live in) and it has appraised for around $78,500 with the property value (I have just under $50,000 on my mortgage).
Robert Powell: You are in a great position. If you absolutely need to do the rehab and you are treating your home as an investment…then you can get great deals on a HELOC (Home Equity Line of Credit). Right now…Compass bank is doing 4.25% HELOCs with no closing cost, no…nothing. Having ready cash in a check book form is a great way.
Emily Cressey: What kind of repairs and what are the cost of the repairs? If you can do the repairs yourself over time, I would consider that. If you have to hire them out, I would wait to do them until you are ready to sell the home. Otherwise they will depreciate in value (the new floor will get scuffed, the paint will get dirty) as you live in the home, and you won’t realize the full return on your improvements. Also, you will increase your house payment while you are living in the home. This is a "lifestyle" expense rather than an "investment" expense because you pay more to live in the home if you take out a loan for the improvements.
3. CASH BUILD UP AND INVESTMENT STRATEGY
So, with Rob’s comment on the phone call about this being a great time to be liquid I’m just wondering what to do in these two situations? At this point we do not have a substantial amount of money in savings either for a "just in case" fund.
Emily Cressey: It’s a great time to be liquid if you are looking to move into stocks or real estate in the next few years while the market is still low but starting to turn around. I wouldn’t be in a rush to sell your house and increase your cost of living unless the house is really no longer acceptable. Remember that paying more for your residence is more a cost of living item. It’s great if you can make money on your home, but don’t fool yourself into thinking it’s a great investment and use that as an excuse to pay more than you can afford or stretch yourself too thin.
If you have a good cash reserve of 3-5 months of savings, and you feel like your employment income is stable (I would have a larger reserve than you might otherwise, given that only 1 spouse is employed) then I would consider starting to invest. Remember, when you invest money in stocks or real estate, you should plan to have it tied up for at least 5 years. If you think you’ll need it before then, find a more liquid place to hold your cash (e.g. Money Market fund making as high an interest rate as you can) or use it to pay down debt.
I would consider looking at short term/low cash demand investments (start a business, rehab houses, etc.) before getting into potentially more cash-intensive investments like real estate. Based on your numbers, it sounds like you could hold and cash flow rental real estate in your area, but be careful that the cash flow can get eaten up by repairs, vacancy, etc. and you may have to feed your properties from time to time, which can be tough if you’re illiquid because all your cash is invested elsewhere.
Good luck to you and your family. Keep us posted on your progress – Emily
I hope this has been a helpful "look over the shoulder" of our advice to someone who may be a little like you! If you would like to have your questions answered, let us know and maybe we’ll be discussing your situation here soon!
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