Alternative strategies for a down market
09-10-2008, 05:26 PM
#11
I can def. relate to your situation, b/c I share many similarities. I've always managed my money very well w/o outside help, but lately have done a fair amount of personal finance reading ("The Automatic Millionaire", Money mag, and random books I pick up in the book store). All it shows is that there's no consensus answer, but various opinons provide a good balanced perspective to open my mind.
Just remember that dollar cost averaging is a solid, easy long term investment strategy which doesn't require a crystal ball. You'll buy more units/shares when the market is down, and fewer when it's up.
As for a few other investment choices you're contemplating for an increased mix:
Bonds - interest rates are more likely to go up than down, which will depress bond prices
Foreign stocks - IMO, you should have a certain % for diversification, but remember that if the dollar regains strength, it will hurt your investment returns.
Deferred comp. contributions - this is similar to the Roth vs. trad. IRA investment decision. Yes, you'll pay tax now, but should you defer, you'll be subject to potentially higher tax rates in the future. I'd still defer if happy w/ investment choices, but a Democratic administration could narrow or reverse the long term financial difference.
Advance mortgage pmts. - I was recently heading towards this path (to the point of signing up for, and shortly thereafter cancelling) a bi-weekly payment program. I have a 20 yr. 5.75% mortgage, and I'd love to liquidate it early to become debt-free. I've decided that I'm going to defease it w/ investment savings, and will not pay it off until I can comfortably pay it off w/ non-earmarked (for retirement, 529, etc.) financial assets. What are the benefits to sticking w/ the payment schedule?
- the less equity in your home, the less likely the bank will want to foreclose in the event your finances become strained. Banks want the homes w/ lots of equity, they can sell them easy w/o losing money.
- maximize your tax benefits
- preserve financial flexibility - you can use your "payoff fund" for future strategic investment options, etc. (flipside being that you have to resist the temptation to blow it)
- paying it down early transfers wealth from you to the bank by lowering their financial risk w/o a commensurate reduction in the rate (similar to the bump bonds of a troubled company get when they're acquired by an investment grade company).
The flipside is that absent the above considerations you have to make a risk-free return in excess of 5.5%/(1 - your marginal tax rate) to break even - that would be 7.6% if you're in the 28% bracket!
Sorry I don't have any real answers, but hopefully my comments will provoke some thought re: the pros and cons of your anticipated actions.
As for me, I'm still investing heavily in the market, just trying to be more conscious of maintaining a well-balanced and diversified portfolio. I'd adopted Quickag's philosophy of investing mostly in mutual funds and quit trying so hard to pick individual stocks (I do well at it when I focus on it, but have often fallen in the trap of not paying enough attention and exiting too late).
Just remember that dollar cost averaging is a solid, easy long term investment strategy which doesn't require a crystal ball. You'll buy more units/shares when the market is down, and fewer when it's up.
As for a few other investment choices you're contemplating for an increased mix:
Bonds - interest rates are more likely to go up than down, which will depress bond prices
Foreign stocks - IMO, you should have a certain % for diversification, but remember that if the dollar regains strength, it will hurt your investment returns.
Deferred comp. contributions - this is similar to the Roth vs. trad. IRA investment decision. Yes, you'll pay tax now, but should you defer, you'll be subject to potentially higher tax rates in the future. I'd still defer if happy w/ investment choices, but a Democratic administration could narrow or reverse the long term financial difference.
Advance mortgage pmts. - I was recently heading towards this path (to the point of signing up for, and shortly thereafter cancelling) a bi-weekly payment program. I have a 20 yr. 5.75% mortgage, and I'd love to liquidate it early to become debt-free. I've decided that I'm going to defease it w/ investment savings, and will not pay it off until I can comfortably pay it off w/ non-earmarked (for retirement, 529, etc.) financial assets. What are the benefits to sticking w/ the payment schedule?
- the less equity in your home, the less likely the bank will want to foreclose in the event your finances become strained. Banks want the homes w/ lots of equity, they can sell them easy w/o losing money.
- maximize your tax benefits
- preserve financial flexibility - you can use your "payoff fund" for future strategic investment options, etc. (flipside being that you have to resist the temptation to blow it)
- paying it down early transfers wealth from you to the bank by lowering their financial risk w/o a commensurate reduction in the rate (similar to the bump bonds of a troubled company get when they're acquired by an investment grade company).
The flipside is that absent the above considerations you have to make a risk-free return in excess of 5.5%/(1 - your marginal tax rate) to break even - that would be 7.6% if you're in the 28% bracket!
Sorry I don't have any real answers, but hopefully my comments will provoke some thought re: the pros and cons of your anticipated actions.
As for me, I'm still investing heavily in the market, just trying to be more conscious of maintaining a well-balanced and diversified portfolio. I'd adopted Quickag's philosophy of investing mostly in mutual funds and quit trying so hard to pick individual stocks (I do well at it when I focus on it, but have often fallen in the trap of not paying enough attention and exiting too late).
09-10-2008, 07:21 PM
#12
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Chris, that is an excellent point for homeowners out there. If you are considering putting it in a 3.5-4% high yield account that will net you about 3 flat probably, you should just pay your house off in stead. I take it as a given to pay off debt first because I don't play that game, but for those of you with any debt, this could be an excellent opportunity to earn a "guaranteed" 7-10% due to taxes.
09-11-2008, 06:18 AM
#14
Thread Starter
I understand the defeasance argument on the house. It makes sense historically.
But in practicality there are other arguments in investing. What is you tollerance for risk? I am pretty risk averse. Someone might play futures and another person might buy cd's.
For me, I am 39 and so is the wife. We each keep seperate accounts and want to retire at 55-57. In order to meet that target we feel we each will need about $2m in savings by that time and preferably have the house paid for. We think that will allow us to generate enough income to have a nice retirement, pay for unexpected illness, afford health care and deal with inflation and hopefully not eat into the corpus or even grow it a teensie bit so we can leave it to future children if we are not completely barren at this stage of our reproductive lives. We were staying on target to meet the goal by saving a ton and not living like mack daddies, I have fallen behind this year because of the market, but I have to tell myself that returns in the future will make up for it. To meet the goal I had planned on an average rate of 9% for the next 17 years and stashing away a poopload.
Doing a defeasance account probably makes the most sense since we would use after tax money to pay down the house anyway, but short term, I was hoping to knock down about $20k in principal so if a 5% 15 year came along we could switch and the payment would not be a noticable increase.
If anyone noticed, 30 yr rates fell almost a point over the last week.
So total cash is a goal, but even if some money is sometimes sacrificed in the long run, the peace of mind of being able to lock in a low fixed rate on a shorter term mortgage is really nice. I understand money, accounting degree with minor in finance, just trying to figure out some other strategy if I think the market will lose or stay even for the next year to 18 months.
But in practicality there are other arguments in investing. What is you tollerance for risk? I am pretty risk averse. Someone might play futures and another person might buy cd's.
For me, I am 39 and so is the wife. We each keep seperate accounts and want to retire at 55-57. In order to meet that target we feel we each will need about $2m in savings by that time and preferably have the house paid for. We think that will allow us to generate enough income to have a nice retirement, pay for unexpected illness, afford health care and deal with inflation and hopefully not eat into the corpus or even grow it a teensie bit so we can leave it to future children if we are not completely barren at this stage of our reproductive lives. We were staying on target to meet the goal by saving a ton and not living like mack daddies, I have fallen behind this year because of the market, but I have to tell myself that returns in the future will make up for it. To meet the goal I had planned on an average rate of 9% for the next 17 years and stashing away a poopload.
Doing a defeasance account probably makes the most sense since we would use after tax money to pay down the house anyway, but short term, I was hoping to knock down about $20k in principal so if a 5% 15 year came along we could switch and the payment would not be a noticable increase.
If anyone noticed, 30 yr rates fell almost a point over the last week.
So total cash is a goal, but even if some money is sometimes sacrificed in the long run, the peace of mind of being able to lock in a low fixed rate on a shorter term mortgage is really nice. I understand money, accounting degree with minor in finance, just trying to figure out some other strategy if I think the market will lose or stay even for the next year to 18 months.
09-11-2008, 07:03 AM
#15
Thread Starter
Originally Posted by SD_S2K,Sep 11 2008, 12:33 AM
Frankly I think your house swapping idea is bone head dumb, especially for someone that said earlier in a post he is "risk adverse" .. explain how your house idea is anywhere near being risk adverse
Its easier when you have done something like that before. It was also easy to do in the ridiculous market of the past several years. But I was able to turn a $3,800 downpayment on a townhome into $200k of home equity in seven years and three houses for the same as I would have spent month to month just renting an apartment. You need to be smart and patient about these things and willing to pack up and move all your junk every few years, but even in this crappy market there are lots of great opportunities if you know where to look.
Maybe its my bias, but I see certain deal in real estate as less risky than stocks. I am not Donald Trump when it comes to real estate, but it is one of the easiest ways for the average joe to pocket $50 grand than was ever invented. People will not always need an apple computer or a general motors car, but they will always need a place to live and pay handsomely for it.
09-11-2008, 08:07 AM
#16
Vader, you seem to have mixed perspectives on real estate investing.
On one side of the coin, you want to pay down your mortgage and reduce your financial leverage.
But...getting rich in real estate usually requires leveraging other peoples' money, the downside being that you get hammered if your bet on value trends doesn't pan out.
The business press, TV shows, etc. all like to talk about people who made fortunes in real estate, but how often do you see coverage of the millions who have (and still are) losing their shirts?
I could afford a much more expensive home, but when you look at the total picture (increased taxes/maintenance/energy bills/interest, less diversification, risk of losing it if unemployed, low liquidity, etc.), I'm more comfortable for now investing in securities markets.
On one side of the coin, you want to pay down your mortgage and reduce your financial leverage.
But...getting rich in real estate usually requires leveraging other peoples' money, the downside being that you get hammered if your bet on value trends doesn't pan out.
The business press, TV shows, etc. all like to talk about people who made fortunes in real estate, but how often do you see coverage of the millions who have (and still are) losing their shirts?
I could afford a much more expensive home, but when you look at the total picture (increased taxes/maintenance/energy bills/interest, less diversification, risk of losing it if unemployed, low liquidity, etc.), I'm more comfortable for now investing in securities markets.
09-11-2008, 08:42 AM
#17
Thread Starter
Originally Posted by Chris S,Sep 11 2008, 10:07 AM
Vader, you seem to have mixed perspectives on real estate investing.
I don't think this is the road I am seriously looking at, but think the notion that it would be stupid to look at the possibility is ridiculous. Its not an area I am afraid of, but would rather tinker when its more of a sure thing like three or four years ago because you can get in and out quick.
I don't plan on getting rich of it, just am considering if it is something that can earn a better return over say the next couple years than the market will, but again, its far less liquid. And I know people making money off the housing market right now as investors, but they have better access to certain things than I do.
The getting into the shorter term mortgage is just for peace of mind. I can just cross out that goal of having it paid off by retirement off the list and not worry about it. Even if there is an opportunity cost to putting money there.
The point of the thread was to see if anyone was doing something different than pouring cash into the market, what and why, but it seems everyone is just continuing to pour money into the market.
But since I think a tough economy is still in the cards for the next 18 months or so, my question is has the danger of this already been priced into the market, or does it have farther to fall? If its the latter, then a savings account at 1% is a better place to put money because I don't have the time or expertise to pick individual stocks in a declining market.
09-11-2008, 01:35 PM
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Originally Posted by vader1,Sep 11 2008, 08:42 AM
Yeah I am torn. The bigger house I toyed with the idea and lean against it because, I like my house now and don't want to pay the extra property tax and utilities even if I know there would be profit down the road. I am not into the whole scheme of buying and selling several properties, just that you can choose one that you will live in that may have a better rate of appreciation over the next several years than the one you are currently in. Basically, making the place you live in do the most work for your monthly payment.
I don't think this is the road I am seriously looking at, but think the notion that it would be stupid to look at the possibility is ridiculous. Its not an area I am afraid of, but would rather tinker when its more of a sure thing like three or four years ago because you can get in and out quick.
I don't plan on getting rich of it, just am considering if it is something that can earn a better return over say the next couple years than the market will, but again, its far less liquid. And I know people making money off the housing market right now as investors, but they have better access to certain things than I do.
The getting into the shorter term mortgage is just for peace of mind. I can just cross out that goal of having it paid off by retirement off the list and not worry about it. Even if there is an opportunity cost to putting money there.
The point of the thread was to see if anyone was doing something different than pouring cash into the market, what and why, but it seems everyone is just continuing to pour money into the market.
But since I think a tough economy is still in the cards for the next 18 months or so, my question is has the danger of this already been priced into the market, or does it have farther to fall? If its the latter, then a savings account at 1% is a better place to put money because I don't have the time or expertise to pick individual stocks in a declining market.
I don't think this is the road I am seriously looking at, but think the notion that it would be stupid to look at the possibility is ridiculous. Its not an area I am afraid of, but would rather tinker when its more of a sure thing like three or four years ago because you can get in and out quick.
I don't plan on getting rich of it, just am considering if it is something that can earn a better return over say the next couple years than the market will, but again, its far less liquid. And I know people making money off the housing market right now as investors, but they have better access to certain things than I do.
The getting into the shorter term mortgage is just for peace of mind. I can just cross out that goal of having it paid off by retirement off the list and not worry about it. Even if there is an opportunity cost to putting money there.
The point of the thread was to see if anyone was doing something different than pouring cash into the market, what and why, but it seems everyone is just continuing to pour money into the market.
But since I think a tough economy is still in the cards for the next 18 months or so, my question is has the danger of this already been priced into the market, or does it have farther to fall? If its the latter, then a savings account at 1% is a better place to put money because I don't have the time or expertise to pick individual stocks in a declining market.
You should not have any money in Mutual Fund, ETF or stocks, if you don't have any risk tolerance to lose money at all in the market.
When you said your down 25K as right now. You also got to remember how much money you had started before losing 25K. For example. If you started with 500k and your down 25K, it isn't a lot of money because your down only 5% but if you started with 50k and your down 25K then it is a lot of money.
09-11-2008, 01:52 PM
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If the majority of people all made their riches in a particular fashion that doesn't mean it's what you should do. In fact, it is probably the exact opposite. The millions of americans that bought near the top in 2004-2006 were all told "it's a sure thing, everyone you know has made $$$$$, every rich guy you know did it through real estate", and many have been obliterated. What do you think their original risk vs reward was? Here we know we can lose money, and lots of it. How many people went in even fathoming of losing 30-50% the value of their homes vs increasing 10% a year "like it was supposed to"? Very few of those people are going to go out of their way to share that story.
When everyone is bailing out of the market, that's when you can just buy the SPY and relax.
When everyone is bailing out of the market, that's when you can just buy the SPY and relax.
09-11-2008, 11:20 PM
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vader you are using a bunch of big, interesting, and sometimes grammatically incorrect words, but bottom line is real estate investing IS NOT RISK AVERSE
http://www.investorwords.com/4295/risk_averse.html
Definition 1
Investing conservatively.
End of story.
For every 5 guys "you know made a fortune" in real estate, there are 50 more that declared bankruptcy, foreclosure, etc etc etc. As sahtt said, just because guys did it in the past few years or few decades, does not mean the same will ring true for the next few years and few decades. If you know investing like you said you do, then you know one of the principal sayings - past performance is not a guarantee of future returns. And do some research on Trump - some of his money has been made in direct real estate deals, but most of it has been him lending or selling his name to other peoples deals or projects. Just like the Apprentice - it showcases Trump and his name and his minions and his company, but that is a Mark Burnett created show. Again like Chris S said, that is leverage.
http://www.investorwords.com/4295/risk_averse.html
Definition 1
Investing conservatively.
End of story.
For every 5 guys "you know made a fortune" in real estate, there are 50 more that declared bankruptcy, foreclosure, etc etc etc. As sahtt said, just because guys did it in the past few years or few decades, does not mean the same will ring true for the next few years and few decades. If you know investing like you said you do, then you know one of the principal sayings - past performance is not a guarantee of future returns. And do some research on Trump - some of his money has been made in direct real estate deals, but most of it has been him lending or selling his name to other peoples deals or projects. Just like the Apprentice - it showcases Trump and his name and his minions and his company, but that is a Mark Burnett created show. Again like Chris S said, that is leverage.