admin, Author at Financial Literacy - Page 18 of 37

Archive for admin

How the presidential election may affect your finances

presidential-seal

If the last 100 years is any guide, the election won’t have any immediate effect at all. There are cycles to interest rates, stock market ups and downs, recessions, and for the most part – the White House occupant is not the dominant driver in any of those. But is there anything we can predict for certain?

Who knows what he or she will actually accomplish once they are in office, but there are a few big policies they have consistently said they would work toward enacting.

Donald Trump:

  1. Repeal and replace Obamacare. This will likely lower the costs of medicine but also reduce the revenues of those services or products were mandated by Obamacare. If out-of-pocket medical costs are reduced for consumers, this may increase consumer spending to boost the economy.
  2. Enact a 45% tax tariff on Chinese imports. Since the U.S. purchases a tremendous amount of goods from China, this would increase prices for American consumers in the short-term and the long-term, as China would likely respond with their own economic retaliation.
  3. Cut the budgets of the Environmental Protection Agency and the Dept. of Education. If extraneous regulations are reduced, this provides economic benefits across the country.
  4. One potential stock candidate to buy: HCA Holdings that will benefit if Trump allows U.S. Veterans to go to any doctor to get medical treatment.

Hillary Clinton:

  1. Pass the Trans-Pacific Partnership trade deal. This is a special-interest smorgasbord of monopolies and relinquishing sovereignty to corporations. I’d expect these newly minted monopolies to severely reduce economic growth for the many, to benefit a few companies.
  2. Cut red tape and taxes on small businesses. Small businesses have not been hiring under President Obama for these very reasons, this could create a large increase in needed jobs.
  3. Expand Social Security and Medicare to cover more people and increase benefits for some. Since both programs are already heading toward insolvency, this will accelerate the national debt and problems for these programs.
  4. One potential stock candidate to buy: gun manufacturers of either Smith & Wessen or Sturm, Ruger & Co. Anytime a president pushes for gun control laws there is a surge in gun and ammo sales. Firearms manufacturers say President Obama has been the greatest salesman they’ve ever had (when he pushes for gun control), and a Hillary Clinton presidency will likely be similar.

Unless you perform an industry and company-specific comparison for their specific political policies, for most people any election shouldn’t influence your investing strategy that you are holding for the long term. For example, tax policy will be modified by Congress and the Senate and so the final result may not resemble anything that the presidential candidate was trying to accomplish. After every election, political compromises and realities dramatically temper campaign promises, so predicting anything specific, in my opinion, is probably not worth your time until it actually occurs.

Interest-rate sensitive stocks are falling

reit-index

There is an inverse relationship between interest rates and the price of bonds. For example, when interest rates rise, then the price of bonds fall. Along with falling bond prices, stocks that are sensitive to interest rates fall as well. The most common interest-rate sensitive class of stocks are REITS, real-estate investment trusts. These are companies that pass-through their real estate rental income to stockholders. Over the last 8 years, interest rates have been low so that retirees looking to increase their income have been buying REITs for their high dividend payments. Now may be a good time to sell or hedge some of these securities.

Across the globe, interest rates have been rising for the last two months. Correspondingly, government bond prices have been falling in: France, Italy, Germany, Britain, Poland, Denmark, Sweden, Australia, Argentina, Mexico, Philippines, and the U.S. This downdraft of bond prices has also been pulling down the stock prices of REITs (the chart is a REIT index), and other interest-rate sensitive stocks such as: master-limited partnerships, preferred stocks, high-dividend yield stocks, and others.

So while the stock market has been bouncing around price highs for months, these interest-rate sensitive stocks have been falling across the board. Some investors bought these shares when they started to fall a month or two ago, only to see prices continue to fall. With global interest rates being severely low since 2009, interest rates could rise for a very, very long time, putting downward price pressure on all sorts of interest-rate sensitive securities. My advice is to be very cautious with your holdings in: bonds, REITs, preferred stocks, and anything else interest-rate sensitive by watching the direction of bond prices. You can do this by watching the price direction of a bond index on a price chart. While the terrain of interest rate securities varies (government, corporate, emerging market, short term, long term, etc.), the most widely followed interest rate instrument is the 10-year Treasury futures contract. An easier price chart to locate is an ETF (a security that trades like a stock) with similar characteristics which trades by the ticker symbol “IEF.”

 

Avoiding losses from private investments

chart

When you have saved up a little money, it is tempting to get into private placement investments. These are investments that are direct – between you and a business operator. Common examples include real estate deals, business startups, raising cattle, oil wells, gold mines, and private loans. These investments are riskier and more difficult to exit than a regular stock, bond, or mutual fund.

While these investments are very risky, investors are attracted to them for their potential gains. Some of these investments offer high yields, say 8% interest plus the potential for capital gains. This is very enticing when bank CD rates are under 1%.

An acquaintance of mine lost $75,000 in a restaurant investment, 100% of the money he put into one of these private deals. To me, this was a predictable loss because he performed zero due-diligence on the investment before he gave them his money. He did no investigation beforehand, and was dying to get into his first “deal.” Let’s go over what he did wrong so we can learn from his mistakes.

  1. No Education. His investment was made into a restaurant and he knew nothing about the restaurant industry, and made no effort to understand the business before he invested.
  2. No Successful Mentor. Even if he had some education, he did not locate a proven, experienced, and successful mentor willing to help him. A mentor like this can help steer you away from bad investments and toward good investments.
  3. No Independent Research. He made no effort to verify the claims made by the operators. He did not visit the site to see for himself if it was a good location and if their prior restaurant was successful.
  4. Not Knowing the Partners. He made no effort to learn the backgrounds and reputations of the partners in the business making decisions. Do they have a successful track record or have they left a trail of ruin?
  5. Not Understanding Value. The most important aspect of any investment is value. The investment may be great, but if you are paying too much, then it will be a bad investment for you. If it is a poor investment but you get in at a low price, you minimize any potential losses. You MUST know if you’re buying in at a good price or a bad price. You need to have valid reference points to make this evaluation and most investors make no effort to understand this.
  6. No Analysis Experience. If you are unfamiliar with, let’s say investing in restaurants, then you need to examine 100 restaurant deals, in detail, to gain experience. This is how you’ll begin to be able to distinguish between a good investment and a bad investment. If you’re switching to gold mines, then you need to start analyzing 100 gold mining deals.

No matter which type of private investment you are making, these 6 points-of-protection are critical due diligence to make an educated decision. If you fail to thoroughly go through these steps before you make an investment, then I predict you will lose money on this investment. Learn from these hard-won lessons and go through the 6 steps before you hand a hard-won penny to anyone.

California launches a horrible retirement plan

california-card

Under the guise of “helping workers without access to 401(k) plans,” the state of California is creating a new retirement plan. This plan is named the California Secure Choice plan, and in my opinion, this retirement plan will harm both workers and taxpayers. Let’s count a few of the predictable problems with this plan:

 

  1. It is run by a board of politicians and they decided to exempt themselves from any financial regulations.
  2. Administrative costs are expected to be among the highest-fee retirement accounts.
  3. Taxpayers in the state of California are on the hook for the startup costs and any management fees that exceed their 1% cap on fees.
  4. The Board of Directors can direct investments into anything they want; opening the door to corruption and kickbacks.
  5. If the arbitrary “reserve fund” becomes sizable from profits, the state of California is permitted to steal that money for state spending.
  6. The Board can choose whether it wants to make any financial disclosures; this non-transparency can hide conflicts of interest and corruption.
  7. The Board doesn’t want workers to withdraw their money toward self-directed accounts, so the account will “impose cost-saving restrictions;” meaning stiff financial penalties on withdrawals.

To sum up some of the bad ideas put into this plan:

Workers’ money will be put into an unregulated prison, managed by pirates with little transparency, charged high annual fees, plus a large exit fee to rescue their money and get it out. Large investment losses will likely be refunded by California taxpayers and any large gains will be arbitrarily stolen from workers accounts and spent by state politicians. Based on California’s chronic mismanagement of their pensions and budgets, I predict this new plan will dramatically under-perform alternative retirement accounts.

Funding retirement savings is extremely important, but this plan is definitely not one of the solutions. Any worker can open a Roth-IRA, a regular IRA, or plenty of other retirement savings vehicles. California, along with other states, want to auto-enroll workers into the poorest location for retirement savings, such as this California Secure Choice or other 401(k)-similar plans. It is my best advice that no one permits a single penny of their money into any state-run plan.

How secure is your money? Considering cash, bitcoin, and gold?

bitcoin-venezuela

Any location for money has risk. Even cash under your mattress is at risk for theft, flood, fire, or devaluation. Any location outside of your control adds additional risks and costs. Bank accounts are more risky these days with: bank bail-ins, IRS seizures without a warrant, and an inadequately funded FDIC insurance.

When there is high inflation, money melts in value like ice on a hot summer day. So you spend it or transfer it as quickly as possible to maintain your purchasing power. The higher inflation goes, the more worthless the currency becomes and the average person becomes more motivated to exchange it into an alternative currency. Once the inflation rate goes above 25%, exchanging your currency becomes a part-time job for everyone.

In countries experiencing high inflation, residents exchange their weak currency for the largest nearby stable currency; the Euro, the U.S. dollar, the Chinese Yuan, etc. When Zimbabwe’s currency imploded a few years ago, many store owners only accepted gold for payment. Venezuela’s currency has collapsed and as the chart indicates, an unusual currency is skyrocketing in use: Bitcoin. The more the government tries to control an economy, the greater the side-effects become, such as a worthless currency. Residents are forced into black markets and alternative currencies to store their money.

Several large hedge funds and billionaire investors are buying more gold as they expect paper currencies to fall in value; all of the major currencies together – with no safe haven. The latest is Lord Jacob Rothschild, who is also the Chairman of CIT Capital Partners. In his recent letter to shareholders, Rothschild stated that they are reducing their position in U.S. dollars for gold and other currencies.

Some of the smart money is diversifying away from the U.S. dollar. Although the U.S. hasn’t experienced moderate inflation since the early 1980s, it is common for a mismanaged economy to experience high inflation. The U.S. Federal Reserve has certainly been reckless with the U.S. dollar over the last 8 years, printing trillions in extra currency. Do you have any plan to protect your U.S. dollars from deflation or inflation?

Getting notable investment returns

investing-101

Several years ago, a relative invested $42,000 into a new business startup. A few years later, she began receiving dividends. After some more years, the business was sold. When the transaction closed she received a check for $97,000. Pretty good; her investment return is over 18% per year, and qualifies for lower capital-gains taxes.

So how was she able to do this?

She and her husband are steady savers. Since their first jobs, they would add $4 a week to their savings account. As their income increased, their small deposits grew larger in size. The continual and steady addition to savings allowed her to make a down payment on a rental property by the time she was 25. A couple decades later, she is now netting $2,100 a month from this rental. Note that her rental income from one little property is far more than the average social security retirement check! By making a routine of adding to savings, she and her husband have been able to make many similar investments through local networking. By becoming knowledgeable before they invest, these investments are usually profitable.

For example, a friend of theirs was opening a dry cleaners. As they are heavy savers, they were able to put up $17,000 to buy a share of the business. Their annual return, paid in dividends, is higher than private equity funds hope to achieve.

Their three-step plan:

  1. Setup your living expenses so that you have a sustainable savings plan; or you cannot build up savings to get into investments like these.
  2. Educate yourself before investing. Don’t succumb to the old proverb, “A fool and his money are soon parted”
  3. Invest with knowledgeable, trustworthy, and profitable business operators.

Of course, not every investment is a grand slam or even a winner. But by continually employing these three steps, over and over, they have had enough large winners to vastly overcome any losses. This also allowed them to ratchet up their lifestyle spending from investment income, and they have the option of early retirement. So how are your investments growing?

Financial nightmares from dream homes

chambord

Anything you can buy that is unaffordable is likely to become a metaphorical financial land mine that blows up your finances. For men, unaffordable spending is commonly cars, boats, and big TVs; for women, this is commonly shoes, clothing, and vacations. But, in my opinion, there is one spending weakness that tops them all – and this is the grand purchase of an unaffordable dream home. Dream-home syndrome is when you ignore financial reality and get yourself into an unaffordable, or barely affordable, dream home that ends up becoming a nightmare.

While dream-home syndrome may strike anyone, I see it most commonly in people in the real-estate professions that are in continual contact with higher-end homes. The more you visit spectacular homes, the more you become convinced that you should have one too. However it comes about, once the words “dream home” enter your vocabulary – watch out. This loaded term permits people to ignore and override affordability because, after all, this is a dream home and therefore no expense should be spared.

If you can easily afford your dream home, this is no problem. But when it comes to real estate, the sky is the limit for the price of the lot and the remodel, which can blow through even the highest budget. Some people want the prestigious zip code, street name, water view, while others just want the spectacular home itself. Dream home syndrome even applies to a small starter home – if you simply cannot afford it and your salary is not leaping upward.

A few nightmare scenarios that I am acquainted:

  • Someone bought their dream home in the upscale part of town and then remodeled most of it. Even though they had no drop in income, they lost the home to foreclosure within four years. A lifetime of savings from frugality went up in smoke.
  • Someone made around $1 million in capital gains by selling their home near New York City. They didn’t plan on it, but ended up spending twice that amount to purchase and remodel their dream home. Only after it was too late, did they realize that the cost to finish the project will push their retirement date back at least 5 more years.
  • A couple, each earning over $250,000, built their huge customized dream home at a cost that was far more than what they could afford. But, before they could move in, they were transferred across the country and had to sell it. There were so many quirky elements to the home (a see-through floor in a hallway?) that they had to take a large loss to sell it. So this couple is in their early 60s with no retirement savings, no money, and are paying for a monstrous debt on a home they never lived in. They have already conceded that they can never retire. And yes, these are financial professionals!

I have many, many more examples, but you get the point. What are some symptoms of dream-home syndrome?

  • House hunting when you don’t have the money or a planned-out budget
  • Continuing to house hunt even though you just bought a home
  • Wanting to mimic a friend’s spectacular new home or fabulous remodel
  • Continue making additions to the list of features for your dream home
  • Failing to consider all of the costs to maintain your dream home

Let me end with a counter example. A friend of mine lives in Nevada. In the real estate boom before 2007, several of his friends and neighbors moved to bigger homes with much larger mortgages. His wife pleaded for them to get a bigger home as well but he refused to upgrade and wouldn’t budge. Five years later, those friends were losing those larger homes to foreclosure, going through bankruptcy, and sometimes divorce. In the meantime, my prudent friend paid off his mortgage and considered buying one of those upscale homes at half the price that his friends bought at the real estate price peak. Everything you purchase must be affordable or, sooner or later, it will be taken from you. The term “Dream Home” should fire off red alarms that your financial life may be in peril if you move forward without a thoughtful and sustainable budget.

How serious is your savings rate?

50-percent

I know a retired school teacher whose annual salary never exceeded $60,000. Yet, when he retired early in his late 50s, he had a portfolio worth nearly $2 million by employing a simple strategy. Both he and his wife worked and they saved 50% of their income. This 50% savings rate was one part of their strategy, the other part was investing the money in conservative stock and bond funds; nothing fancy.

When I first began working out of college, a colleague and her husband also saved 50% of their income. This aided them in buying a home in a short amount of time and prepared themselves for living on only one salary for a while when they expect to have young children. I later learned that another couple I know had the same 50% savings plan as soon as they got jobs out of college. By saving at such a high rate, 18 years later they were able to buy a second home, a lake house with all of the aquatic toys.

I am acquainted with a real estate investor that saved 50% of his day-job income for many years for down payments on single-family homes. Once he had a large portfolio of homes making him income every month, he ratcheted up his purchases to small apartment buildings. In middle-age, he quit his job to manage his growing real estate empire and he now lives in a spectacular home and enjoys a very high standard of living from all of his rental income. But he never reduced his savings rate; he actually increased it and now lives very well but only spends 17% of his income.

  • Can you save 50% of your income? Of course you can.
  • Will you do it? That is a personal choice that is up to you.
  • How about starting with a 25% savings rate to pile up a little money?
  • Or, you could join the average American and only save 5.7% of your income, and live in continual financial stress and struggle.

Reduce your odds of a work layoff

machinsts

Companies tend to downsize from a decrease in revenue or profit, and is common during a recession. So how can you reduce your odds of being one of the people who are downsized?

I was once hired to develop a plan and budget for laying off 80 people at a company. It was an unpleasant but necessary task for a struggling business. Below are some of the decision-making criteria that came up in discussions.

  1. When you’re the most expensive person in the department. If you are a top performer, then you are likely to be safe from being cut. But if you’ve ratcheted your way into becoming overcompensated for your position or tasks, then you are the top target for any layoff plans.
  2. Keep advancing your job skills. Technology changes can disrupt old ways of performing work tasks. If you avoid these changes, certifications, and trainings, then you move to the top of the list when layoffs occur.
  3. Dedication and caring about improving your job performance. There are employees who seek new assignments, initiatives, responsibilities, and tasks; and there are employees who avoid any new assignment. You can guess which group gets axed first.
  4. Attending to the social politics of getting along and making things easy for your supervisor. If you have a prickly personality where you are generally negative, needlessly challenge others, and don’t support co-workers, then you move higher on the layoff list.
  5. Length of employment with the company. When there is no obvious metric for choosing whom to let go, a company can simply use seniority, and let the newest hires go first. If you change jobs frequently, then this is keeping you unnecessarily at the front of the line for the chopping block.

Top performers normally have a spot created for them even when there are layoffs. This is the biggest shield against any unfortunate job disruption. The traits of workers who are most desired include:

  • Work well with others
  • Self motivated
  • Eager to learn
  • Willing to head up new company initiatives
  • Positive work attitude
  • Most certifications and training
  • Willing to help others; fill in gaps; go beyond your job description when needed

Sooner or later, there will be a next economic recession or depression. When this occurs, you will want to be known as a top performer to both keep your job and be a desirable hire to other companies.

Economies move in cycles, not straight lines

recession

Are you prepared for the next economic recession? Can you remember what a recession is?

Looking back a few thousand years, economies and industries move in cycles, seasons, waves – never in a straight line. Psychologists have a term to describe the failure of people to imagine or prepare for a scenario that they haven’t recently experienced: normalcy bias. This is a dangerous trait to apply to your finances because everything economic moves in waves: interest rates, currency rates, commodity prices, unemployment, and the overall economy. The most successful people are those that anticipate, prepare, and are ready to act in advance of economic moves that others do not expect.

When there is a recession, short-term interest rates go up, unemployment goes up, and people spend less because they are unsure of their jobs. These ripple throughout the economy: raises are smaller or non-existent, overtime disappears, layoffs are common, and repossessions by lenders increase because people cannot make payments. Your personal finances must include the possibility of a recession. If you’re living paycheck-to-paycheck when one hits, your lifestyle may be imperiled with a single hiccup in your income.

The average time between recessions in the U.S. is 6 years. However, since the 2008 financial crises, the economy has been growing so slowly that the economy never over-heated (which can turn into a recession). This slowest-ever expansion is now the longest on record. When will the next recession arrive? There are a few recession predictors: federal government tax receipts fall, short-term interest rates rise, new home sales shrinking, falling real estate values, train and shipping cargo shrinking, loan default rate increasing, business inventories increasing, and many more.

What are these recession predictors indicating today? Many of them are pointing to recession. By being aware of economic cycles of expansion and contraction, demographic changes, and anticipating these changes, you can be prepared for these changes instead of getting hit in the chin when they materialize.

Menu Title