One of the best ways to think about an investment is to see it as a vehicle that gets you from home to work. Now, a lot of people simply think, “Okay, which investment is going to get me there the fastest without crashing?” Right? In other words, is it going to yield a pretty good return, or is it going go to zero?
That’s a very simplistic way of thinking about any investment. But if you think about this analogy in terms of risk and return, your ability to get to work and earn an income is the return, and the risk is having an accident. Your aim isn’t just to make it to work once in the shortest time possible; you want to make it to work consistently. So you analyze not only the car itself, but how it moves in traffic, so you can have the best odds of getting to work safely every time.
To take this analogy further, if you think about stocks, individual stocks are like—well, let’s say they’re your personal car. And let’s say Uber is the new exchange-traded fund; it’s a new way of getting somewhere. But you also have the light rail, right? You have the BART system, which is kind of like a mutual fund or an index fund. So there are various ways to get where you’re going.
Now, you can beat an index, you can beat the traffic, but you’re going to have to take risks to do so. And that, to me, sometimes isn’t worth the trouble. You want to get there as consistently as possible, broadly speaking. And, of course, you always want to align these with your goals, such as, what time do you need to be there, and what time do you have to get ready, so you can take into fact that there are other things going on, on the road
Regardless of the vehicle, you should think about these concepts. You just always want to try to determine how confident you can be about investment X performing consistently and helping you achieve what you want. But like a car in traffic, performance is always relative to all the other things in your portfolio.
Daily family life means the mortgage gets paid…clothes and groceries are bought…and summer vacations are taken with family and friends. All this is part of what many of us take for granted every day of the week. However, there are two important financial factors that have a great impact on today’s family life. First, in order to provide everything we want, many families find that both spouses must work. Second, if only one spouse works, the spouse who stays home raising the children is making a “non-cash” contribution. The total worth of this contribution is often impossible to ascertain. So, what happens when one income suddenly no longer exists? Or, you now need cash to pay for what was “free” yesterday?
Because life may throw us a “curveball,”—for instance, the tragic death of a spouse—the impact on a family’s finances can be overwhelming. This is where life insurance can be of great value. The proper insurance can help replace the income of a spouse or provide additional income so your children will continue to be cared for and family life will continue to run on course.
To underscore the point, look at the income in real dollars if both you and your spouse work. What would the extent of that lost income cost your family? The other side of the problem is how much cash would it take to replace all that the “non-working” spouse contributes to your family?
Things become even more complicated if you have a child with special needs. If your non-working spouse is providing care for that child, who will handle those duties in the event of your spouse’s death? Insurance will help ensure the child continues receiving the proper care.
It’s easy to conclude that the wonderful lifestyle you and your spouse provide your family could become unraveled. Funds that have been set aside for other uses such as college, a child’s marriage, or your retirement may now need to be reallocated and used to pay monthly bills. Other complications arise if you have children from a previous marriage who are relying on you for help now and in the future. However, all of these situations can be addressed ahead of time, and successfully so, when life insurance is in place.
We all take a good deal of what we have for granted—it may be human nature. But, life surprises us in so many ways. Be proactive, provide your spouse (and yourself) with the comfort of knowing that the needs of your family will be addressed. You can do this by insuring each other so your family will continue even after the loss of a spouse. There are many types of life insurance, most of which are subject to application and underwriting approval. Consult with your insurance professional for more information.
In previous generations, husband’s traditionally handled the family finances. While this arrangement may have worked well during the husband’s lifetime, the consequences of the wife’s lack of involvement in the family’s finances often became clear after her spouse died. Today, more women are actively directing the outcome of their personal finances, and for good reason.
Women need to plan for a time when they may be on their own. Through divorce, widowhood, or personal choice, the odds are high that a woman will be independent at some point in her lifetime. Financial planning is essential for women throughout life, but it becomes especially important in the event of remarriage, as financial arrangements may need to be made for ex-spouses and children.
If you are in a second marriage or about to remarry, you may want to consider the following important points about managing your personal finances:
Bank Accounts. Should married couples combine their bank accounts or keep them separate? Or, perhaps combine certain accounts and keep others separate? There is no right or wrong choice—this is a personal decision. An open and honest discussion may reveal whether or not you and your spouse are financially compatible regarding spending habits, saving, investing, debt, etc. If there is a marked difference in the way you both handle money, then separating your finances may be a better plan.
Prior Debt. Will each spouse be responsible for the other’s prior debt, and if so, to what extent? Keeping the indebted spouse’s prior debt separate may help ensure that the other spouse’s property remains out of reach from creditors.
Property Acquired before Remarriage. Owning previously acquired property in your own name can prevent the risk of losing personal property to your spouse’s potential creditors. Also, doing so may have estate tax benefits. Keeping your property in your own name can help to minimize estate taxes while providing an inheritance for children from a previous marriage.
Home Ownership. Many married couples choose to title property jointly as tenants by entirety. When one spouse dies, the home passes to the surviving spouse tax-free. However, there may be estate tax consequences when the surviving spouse dies. Be sure to consult with a qualified tax professional beforehand.
Retirement. Saving for retirement is one of the major financial goals for married couples. Women, in particular, have unique concerns when planning for retirement. First, women typically live longer than men, so their retirement income needs to last longer. In addition, women often spend more time out of the workforce than men as a result of caregiving responsibilities, and therefore are less likely to have pensions and full Social Security benefits. According to the U.S. Department of Labor in 2013, when women work, they typically earn 82 cents for every dollar earned by their male counterparts. Consequently, the gap between gender incomes makes it especially important for women to prepare for retirement.
Insurance. Disability income insurance can help replace a portion of your income in the event you are unable to work due to sustaining an injury or illness. This type of insurance provides funds that can be used for bills and expenses. Similarly, life insurance provides a death benefit that can be used by your family. Proceeds can help ensure that children from a prior or current marriage can attend college, the mortgage can be paid, and the surviving spouse has some replacement income.
Estate Planning. It is important for blended families to plan for the final disposition of assets. Trusts can be a valuable tool to minimize estate taxes and to help ensure that your assets are distributed to heirs according to your wishes. For example, at your death, your assets can pass to a trust, from which your surviving spouse will receive income without direct access to the assets. At the death of the surviving spouse, the assets can then pass to children from your current or previous marriage. This provides ongoing income for your surviving spouse and an inheritance for your children, as well. In addition, if the surviving spouse later remarries, the trust can be designed to preclude your assets from their marital or community property.
Every woman who remarries needs to balance her financial past with her financial future. By addressing the management of your personal finances as soon as possible, you can avoid disputes and build financial independence for your extended and blended families.
Over time, mortgage rates fluctuate.
Depending on where rates currently stand, now may or may not be a good time for homeowners to consider refinancing their mortgage. How can you determine whether it makes sense at any given point to refinance your mortgage?
In the past, if the current interest rate was 2% lower than the rate you were paying on your existing mortgage, it made sense to refinance. That general rule may still apply in some cases. However, even if the rate were less than 2% lower than your existing rate, refinancing may still be an appropriate choice.
In addition to taking advantage of favorable interest rates, you might want to seriously consider refinancing to do the following:
Move from an adjustable rate to a fixed rate mortgage. Many first-time homebuyers must go with an adjustable rate mortgage (ARM) because they do not qualify for a fixed rate loan. If this was true for you, perhaps the rate for your ARM is about to go up. If so, you may be able to “lock in” a lower rate by refinancing with a fixed rate mortgage.
Build equity at a faster rate. Perhaps you would like to pay off your mortgage in less than the traditional 30 years. A drop in interest rates may allow you to refinance your 30-year mortgage and replace it with a 20- or 15-year mortgage at a monthly payment that may be close to what you have been paying. This option may be especially attractive to homeowners who are nearing retirement and would like to pay off their mortgages before they retire.
Replace a jumbo mortgage with a conventional loan. In most states, any mortgage over $417,000 is considered a jumbo mortgage (that amount is higher in expensive housing markets, such as Alaska, Hawaii, the U.S. Virgin Islands, and much of California). Jumbo mortgages have higher interest rates than do conventional loans. The difference between the rate for a jumbo mortgage and a conventional mortgage depends on the current market price of risk: and it can be significant—usually between 0.25% and 0.5%. If you have a jumbo mortgage, you may be able to refinance and pay down enough to qualify for a conventional mortgage, to get the lowest possible interest rate.
Take advantage of a lower interest rate. The most common reason for refinancing is that the current interest rate is significantly lower than the rate you are paying on your existing fixed rate mortgage. You will also need to consider variables such as refinancing costs, points, and how long you plan to stay in your home. It is always wise to shop around to ensure you are getting the lowest rate possible and paying the lowest cost.
Eliminate private mortgage insurance (PMI). PMI, which is required by most lenders if your original down payment was less than 20%, is tacked on to your monthly payment. If the value of your home has increased since you bought it, you may be able to have the PMI removed just by having your house appraised. Or you can eliminate the PMI when you refinance if you have more than 20% equity in your home.
Tap into your home’s equity. If you have other debt or are anticipating new expenses, such as college tuition bills, you may want to refinance for a larger mortgage at a lower interest rate and use the extra cash to pay off the debt or forthcoming tuition bills.
Deciding when to refinance depends on the current rates, your personal financial situation, and your plans for the future. You may want to do some number crunching in advance to determine how much rates would need to drop for refinancing to make sense for you. Then you will be ready to make your move.
The Gentle Practice of Reiki
Reiki is a gentle, therapeutic modality that originated in Japan to promote stress reduction and relaxation for the natural healing of the body. Reiki is a technique centered on the placing of hands on or above certain areas of the body to release blocked energy, which creates the body’s own healing response. It is based on the concept of a life force energy flowing through the body. While this has not been proven scientifically, Reiki practitioners believe that if the life force energy gets blocked, then an individual is more likely to experience higher stress levels or get sick.
Dr. Mikao Usui, the founder of the original Reiki system of natural healing, made the mind-body connection early on, which became the core philosophy behind the practice. He recommended that in order to stay physically healthy, an individual should adopt the following five simple, ethical ideals that are universally acknowledged across all cultures for inner peace and harmony:
1. Avoid anger.
2. Be kind to others.
3. Express gratitude.
4. Work hard.
5. Don’t take life too seriously.
Reiki is an alternative therapy that aims to treat the whole person—physical, emotional, and mental. A series of Reiki sessions may help to facilitate deep relaxation, stress relief, and an overall feeling of wellbeing. It is a generally safe, non-invasive method of healing that may also be used in coordination with more conventional medical treatments.
Be sure to consult your health care provider for a medical condition or health concern that you may be experiencing before undertaking Reiki or other complementary and alternative medicine therapies.
How Trusts Can Benefit You and Your Family
Many people perceive trusts as a complex subject better left to their attorney. As a matter of fact, they often think trusts are available only to the wealthy. However, when stripped of all the “bells and whistles,” a trust can be viewed as simply a written contract between one individual, the trustee (or grantor), and another individual called a beneficiary(ies). The trustee’s job is to see that the terms of the trust are faithfully carried out according to the grantor’s wishes. The word “grantor” is another term for the person who sets up the trust and decides (with the help of his or her attorney) what the terms of the trust are going to be.
Once you progress past these fundamental trust “building blocks,” you begin to see that trusts are very powerful tools designed to help individuals handle a variety of family and tax-related issues. The following list describes a few types of trusts that can be put to work for you, if your situation so warrants.
“A/B” Marital Trusts: Marital trusts are often one of the first steps recommended by estate planners because they may potentially save a great deal of money in estate taxes. A marital trust is utilized when a surviving spouse may be incapable of making investment decisions in the future. Marital trusts work by integrating the marital deduction on the “A” side of the trust with what is known as the unified credit on the “B” side of the trust. The “B” trust enables you to take advantage of your estate tax credit while removing investment decisions from your spouse and children (or other beneficiaries). The bottom line—If you have a significant estate that you wish to pass to your family, ask your attorney whether an A/B marital trust will work for you.
Revocable “Living” Trust: A living trust is another estate planning trust that permits you to retain control over your property during your lifetime and avoid probate when you die. Many individuals with firsthand experience of the probate process have sworn to never let their estate pass through probate. A revocable living trust allows you to avoid the expense, delay, and publicity of probate and can be combined with an estate tax-saving A/B marital trust.
Irrevocable Life Insurance Trust (ILIT): This is a specialized type of estate planning trust that helps your executor pay your estate tax bill without having to sell estate assets. A life insurance trust is a method of making sure your family receives your assets when you die.
Charitable Remainder Trust (CRT): Charitable remainder trusts may be one of the best-kept “secrets” in the financial world. When structured properly, contributions of cash or property to the trust allow you to: 1) take up-front income tax deductions on your 1040 tax form for the remainder that will ultimately pass to the charity of your choice; 2) receive a current tax-free income stream from the trust; and 3) have all of the property in the trust bypass your estate for estate tax purposes.
Using a trust can be an excellent method of accomplishing your long-term goals for your family and loved ones. I would be happy to coordinate some of these details with your legal professional. Using the team approach can help simplify the process, and provide even more benefits to you and your family.
Does an “ARM” Have a Leg to Stand On?
For home buyers, and for homeowners who are considering refinancing, trying to decide whether to seek a fixed or an adjustable rate mortgage (ARM) can be a bit puzzling.
The main attraction of ARMs is that they typically start off with a lower interest rate than most fixed-rate mortgages. However, one of the dangers of an ARM is that if interest rates rise, your ARM would also rise (i.e., the rate adjusts). If this should occur, an ARM may cost you more over an extended period of time than a fixed-rate mortgage because the low introductory rate associated with many ARMs may be for a limited period of time. After the introductory rate expires, the rates can increase or decrease according to changes in the underlying rate to which the ARM is pegged (e.g., prime interest rate, 1 year Treasury Bill rate).
To protect the borrower from the possibility of rate adjustments getting out of control, ARMs may carry rate “caps.” A typical rate cap might be a maximum 2 percent increase (or decrease) in the rate annually, up to a maximum 6 percent change over the life of the loan.
In effect, an ARM makes the borrower vulnerable to rising interest rates, while a fixed-rate mortgage makes the lender vulnerable to the risk of rising rates. However, many ARMs do provide the option for converting to a fixed-rate mortgage at any time, without closing costs (but with a non-tax-deductible conversion fee).
The Bottom Line
If you are planning to apply for, or refinance, a mortgage consider the following important factors:
1. Compare interest rates both long-and short-term.
2. Determine the affordability. It may be more difficult to qualify for a fixed-rate mortgage than for an ARM.
3. After comparing the rates and affordability requirements of both mortgages, if you feel an ARM is best for you, be sure to include the option to convert to a fixed-rate mortgage at a future time.
ARMs have the potential to save you money, but they come with a twist–if rates rise steeply, you could wind up paying more than you would have with a fixed-rate mortgage. In determining whether an ARM has a leg to stand on, make sure you weigh the advantages and disadvantages of all your options.
Should I Be Tempted to Invest in Bitcoin?
If you’ve been watching bitcoin prices lately, you already know they’ve made a record-setting run. As of the end of November 2017, a single bitcoin was valued at over $11,000, which is more than 8x the price of an ounce of gold. And as of December 7 th, bitcoin was steaming toward $16,000 ($15,869 at 11:30 EST). To put things in perspective, bitcoin values were in the $300 — $400 range for much of 2015.
Those who invested in bitcoins years ago are likely rejoicing. But, should you join them? Continue reading to learn more about bitcoin, how the currency works, and why this investment might be one to skip despite its high returns.
What is Bitcoin?
Generally speaking, bitcoin is a crypto-currency used by online firms and big businesses worldwide. One of the biggest advantages of bitcoins is that the currency can cross borders easily — facilitating international trade. For the purposes of investing, bitcoins are similar to any other currency (or commodity) investment. This means, when it comes to your investment return, bitcoins face the same uphill battle as investing in:
- Agricultural Products
- Fine Art
In other words, at any given time, bitcoins are worth whatever the market says they’re worth.
While this isn’t a problem in itself, investing in bitcoins does pose some specific challenges. As sexy as investing in bitcoins sounds — and despite the recent run-up in price — there are at least two fundamental problems with investing in bitcoins right now:
Problem #1: You lose money after inflation (Negative Real Returns)
When you invest in bitcoins (or gold, or oil, or other commodities, or any other currency, or fine art), you are betting the farm on price appreciation alone. Or rather, you’re betting that the price of bitcoins will go up compared with the U.S. dollar. What this means is, bitcoins are different from more conventional investments like stocks, bonds and real estate. That’s because conventional investments offer the chance to generate cash.
As an example, stocks are a slice of business ownership. Businesses exist to earn a profit. As an owner of that business, you are entitled to a slice of that profit.
That profit can either be re-invested into the business (to increase the value of the business) or paid to investors as dividends. Either way, a stock generates cash — ultimately enriching those who own shares.
The same is true for bonds. Bonds spit out cash (usually twice a year). With a bond, you (usually) get back your original investment, plus interest.
The same applies to real estate. Rental property can appreciate (or depreciate) in price. But, either way, rental property exists with the goal of generating cash for the investors — cash above and beyond the costs to maintain the property.
Unfortunately, that’s not the case for bitcoins, gold, “Forex,” commodities or fine art. These sorts of investments do not generate cash. Instead, investors can only hope they rise in value with the price of inflation.
Despite their volatility, commodities do not outpace inflation. And that’s before fees!
Unfortunately, you are likely looking at a negative real return after expenses with an investment like bitcoins. Why? Because it costs money to get into bitcoins. You must “buy” them, and you won’t be able to buy bitcoins at their value. You’ll have to pay a little extra; otherwise, the person selling you the bitcoins (or gold, etc.) has no incentive to do so.
Not only must your investment appreciate at the rate of inflation, but it must also go above and beyond inflation to make up for the transaction costs. Trust me when I say this is rarely the case. Most commodities increase at the rate of inflation. Further, currency doesn’t increase in value at all — because that’s exactly what inflation is — a decrease in the value of currency!
In short, bitcoins and similar investments are at a big disadvantage when it comes to generating an investment return. Bitcoins don’t generate cash like stocks, bonds and rental real estate do — and they have the added challenge of never even being able to keep up with inflation!
Problem #2: Mean Reversion
Mean reversion is a fancy way of saying: What goes up, must come down — and vice versa.
All investments are subject to mean reversion, and bitcoins are no exception. Mean reversion itself isn’t a bad thing, but it’s still worth noting when it comes to investing in bitcoins, specifically.
Remember, commodities often provide an investment return at just about the rate of inflation — before fees. Moreover, commodities depend upon price appreciation alone to provide an investment return. This is because commodities do not generate cash.
So, if you are going to get an investment return from bitcoins, you don’t want to be buying at a market top. However, recent run-ups in price suggest that it’s possible we are at the top of the bitcoin market — or, at least on the way.
“With investments like bitcoin, you really have to get the timing right. The problem is that most people can’t even do that with stocks — getting the timing right,” says Jon Luskin, MBA, CFP, of UncleDMoney.com. “Commodities can see even larger swings in value than stocks — making successful investing in bitcoin almost impossible.”
Pro Tip: Invest Only as Much Money as You Can Stand to Lose
Try thinking of investing in bitcoins as you would buying a lottery ticket. It only costs a dollar, but you could win big. However, as historically shown with commodities, the odds are good that you’re going to lose money compared with a low-cost, diversified investment.
Most of the time, you’ll be a lot better off if you choose a long-term investment strategy that isn’t quite so volatile. You should also diversify as much as you can; this way, you won’t lose your shirt if one particular investment falls apart.
If you choose to throw your money into bitcoins in spite of this advice, just know you’re doing so at your peril. The best thing you can do is limit your investment to an amount you can afford to lose, then brace yourself for a long and bumpy ride.
Beyond the “For Sale” Sign
Selling Your Own Home
Have you ever thought of putting your home on the market and selling it without a real estate broker? Selling your own home may sound simple–put up a sign, then wait for buyers to call. Putting up a sign, however, is only one of many actions you must take.
Experts say sellers, who are emotionally tied to their homes, often price them too high. Do a comparative study and match your home against comparable homes, or “comps,” in your neighborhood or town. If houses are not selling quickly, you may have to set the price a few thousand dollars lower than normal. For a unique property, consider hiring an appraiser to get an idea of an appropriate selling price.
All too often, owners skimp on advertising. In addition to the “For Sale” sign in your front yard, post others where legally allowed. Include a telephone number and show your property by appointment only. Compile a brochure or fact sheet listing the asking price, lot size, individual rooms and dimensions, heating and cooling systems (with monthly utility bills for the last year), appliances or other fixtures included, present financing, taxes, and unusual features.
You should screen potential buyers. If they seem interested, ask how much of a down payment they can make. If you’re getting close to a deal, ask the buyer to fill out a financial statement, which you can obtain from a bank, mortgage lender or an office supply store. A serious buyer won’t resist providing the information requested. Ask buyers if they have applied for a mortgage and have they been “preapproved.”
Now, if this sounds like considerable work, it is and that’s why professional real estate agents get paid. If you need assistance, “homeowner’s service agencies” may prove a lower-priced alternative to traditional full commission brokers. These companies generally charge a flat fee based on the asking price of the house to screen prospective buyers, arrange appointments, suggest a price and negotiate with buyers. Showing the house is the owner’s job, the theory being nobody knows the house like the owner.
If you decide to sell your home on your own, remember the following tips:
1. Price it Fairly. Compare your house to others in the neighborhood that have recently sold, and factor in any improvements or unusual assets.
2. Advertise. Use more than just a “For Sale” sign on your lawn. Circulate brochures, run ads in the local newspapers, and put notices on bulletin boards.
3. Screen Buyers. Before accepting an offer, ask the buyer to fill out a financial statement or get mortgage preapproval.
When should you decide not to continue selling the home on your own? Assuming the house is properly priced
in a reasonably active market, a homeowner attempting to sell without professional assistance should allow six to eight weeks without a written offer. With help from a service agency, give it four months. After that call a professional real estate broker.
Selling a home on your own can be a great deal of work. The rationale is to save many thousands of dollars that would normally be “lost” to real estate commissions. While the prospect of improving one’s financial position is tantalizing, the task may be too time consuming or beyond your expertise. Professional real estate assistance, whether from a service or a broker/agent, may “save” you more than you realize as you set out to sell your own home.
What the Government Shutdown Means
A historical perspective for investors
In the three weeks leading up to the U.S. government shutdown, many economists suggested that the markets had already priced in such a scenario, but others were not so sure. And it’s really hard to tell because the S&P 500 leapt 2.6% in the first week, followed by a jump of 1.6% in the second and a skip of 0.9% in the third week. On the other hand, the prospect of a shut-down did help further drive down the U.S. dollar and cause Treasuries to rise.
So, what impact might this shutdown have on the stock market and could the shutdown be what finally cools this almost 9-year bull market? History suggests otherwise.
Since 1976, the U.S. government has shut down a crazy 18 times. And the impact on the stock markets – on average – has been to push the market down a little bit. On average those 18 shutdowns lasted seven days and market fell 0.6%. Further:
- Half the time the markets were up and half the time they were down;
- The largest decline was 4.4% in 1979;
- The biggest gain was 3.1% in 2013;
- The longest was at 21 days in 1995; and
- The shortest was a single day.
In recent years, the stock market has shown a remarkable ability to pay little heed to natural disasters, global political concerns and terrorist attacks, so few people expect this shutdown to be any different.
Economists will suggest that for every week of a government shutdown, GDP growth could shrink by 0.1% – 0.2%, but that is likely to be regained shortly after a shutdown is over. Other economists suggest that a shutdown could continue to drive the U.S. dollar down or push some commodities to rise. Time will tell.
An Advisor’s Biggest Worry
The biggest worry that few people are talking about is this: there will be an immediate impact on the 2.8 million civil servants and their families that won’t receive a paycheck because of this political brinkmanship. That is a very big worry and one that we should all think about and do whatever we can to help.