Making Money Alert
A Stealth Move In Yields
02/01/2007
The major market indices keep making headlines, with the Dow and S&P 500 hitting new multi-year highs. What hasn't been widely reported or talked about yet by the financial elite is what I call the stealth move higher in Treasury yields.
One look at the chart below of the 30-Year Treasury Bond Yield shows a dramatic rise of late in interest rates. Yields now are trading well above their 200-day moving average. This upward trend in long-term rates could start to take its toll on the overall market.
We've already seen a trailing-off of sorts in the S&P 500 index. Save for a big one-day spike last week, which immediately was followed by a big plunge the next day, stocks that comprise this broad-market measure have seen more losing days than winning days lately -- a trend which can be seen clearly in the chart below.
My concern here is that investors are only hearing about the record highs, while they are not aware that the interest rate environment is getting tougher. Sure, the market does well on low interest rates and an accommodative Fed, but all of that could be changing. The risk of this stealth move in long-term interest rates is that we could see a sharp pullback in this already overbought market.
Of course, the logical question to ask here is what can you do to avoid getting caught in a potential market pullback? My feeling is that there are many other opportunities throughout this market to choose from other than the major market indices.
The other bull market trend that we are taking advantage of now is in gold. Whenever you have a lot of uncertainty and potential turmoil in the world economy and on the geopolitical front, it's a good bet that investors will fly to the safety of gold. That winged migration already has taken place to some extent. If things heat up on the political front, oil prices make a marked move higher or tensions between the U.S. and Iran escalate, gold likely will be a good place for your money.
If you want to find out how to take advantage of these sector-specific bull markets while simultaneously protecting yourself from an overdue retrenchment in the major market averages, then you need to check out my Successful Investing advisory service.
There is no excuse for not being prepared to profit. With Successful Investing, you can put the tools and the knowledge backed by nearly three decades of market-beating performance on your side to help you make smart choices with your money.
Click here to learn more about Successful Investing
IS HOME EQUITY AN INVESTMENT?
By Josh Lewis, the "Making Money" Mortgage Expert
Savvy investors know that spending your home equity through repeated cash-out refinancing is a recipe for financial disaster and not the path to building wealth. As a result, they are not the type to use their homes like an ATM. Unfortunately, these same sharp homeowners are often making another mistake that can result in a shortfall of hundreds of thousands of dollars in their retirement accounts.
This mistake is aggressive mortgage prepayment. In effect, mortgage prepayment amounts to investing available assets in home equity versus other alternatives. Unfortunately, home equity produces no rate of return. Investment in home equity is conducted in several ways but the primary culprits are 15-year mortgages, extra principal payments and bi-weekly payment plans. These certainly are not risky gambits in the traditional sense. After all, no one has ever gone broke paying off a mortgage.
The problem is that everyone has a limited amount of income at the end of each month for investing. Mortgage prepayment becomes the investment of choice -- at the expense of maximizing retirement savings.
This past weekend, we had a call to the radio show that is a perfect example of how the conventional wisdom of paying off your loan and owning your home "free and clear" can keep you from building the wealth you deserve. Kate and her husband own a rental home worth more than $500,000, thanks to the real estate boom. Their mortgage is only $150,000. Kate wanted to know what Doug and I thought about using half of their family nest egg of $300,000 to eliminate the mortgage.
Doug and I each answered with an emphatic, "no"! Let's examine our reasoning and what an optimal strategy might be. The property in question generates $2,000 per month in rent to produce an excess of $800 beyond the $1,200 mortgage payment. The couple lives comfortably and does not need this income for current living expenses. The couple does, however, want the loan paid off when they stop working so that they can replace some of their income with this cash flow. Paying off the mortgage would accomplish this goal, but it also would cause several negative outcomes.
Without the mortgage, the couple's taxable income would increase nearly $15,000 per year. So the net benefit of paying off the loan would be $11,250 in increased cash flow. As we previously mentioned, there is a cost to taking invested assets to pay off the loan. That cost is the amount of interest those investments would have generated. Kate confirmed that they were happy with the returns their assets were producing. Assuming that these accounts grow at an 8% annual rate, the $150,000 generates $12,000 per year. At this point, we are at a $750 annual loss on this strategy. Finally, since the $150,000 will continue compounding over time, this gap will expand as time goes by.
Thankfully, there is a third option that represents the optimal strategy. If we assume that the taxes, insurance and maintenance on this property equal 20% of the $2,000 monthly payment, there is a net rental income of $1,600 per month ($2,000 x 80%). With a net rental income of $1,600, the property can support an interest-only mortgage of approximately $295,000 ($1,600 x 12 months ÷ 6.5%), without causing the owners to add any money to the rent each month to make the payment. In this case, we can create an additional $145,000 to add to their nest egg.
Instead of only $300,000 of invested assets (or $150,000 if they paid off the loan), we now have $445,000 -- which is much closer to the $500,000 that Doug recommends for someone 50 years of age. Compounding annually at 8%, the couple would have just shy of a million dollars when they hit their desired retirement date in 10 years. With a 10% return, this figure jumps to nearly $1.3 million. After paying off the mortgage, they would still have more than $700,000 (or $1 million at 10%). When you compare that with the $332,000 they would have with an aggressive prepayment plan, you can see that home equity is not such a wise investment after all.
If you have any questions about mortgages, contact Josh Lewis by phone at 888/944-5674 or by e-mail at Josh@JoshLewis.net.
SECRETS TO VARIABLE ANNUITY SUCCESS
When it comes to variable annuities (VAs), I have what could be described as a classic love-hate relationship. I love VAs because they are a great tool to help you enhance your retirement nest egg and they offer unlimited contributions -- a great feature for those who receive some type of windfall such as an inheritance, a life insurance payout or a big settlement. I hate VAs because, so often, they are used by unscrupulous brokers who charge outrageous commissions to gullible investors who may be unaware of what exactly they are buying.
So, how do you put the love on your side and how do you minimize the hate when it comes to VAs? Well, that's exactly what I cover in my online seminar, The Secrets to Variable Annuity Success. If you want to find out more about these great retirement investing tools, I encourage you to check out my seminar by clicking here.
ASKING THE RIGHT QUESTIONS NOW
No matter what your financial situation, everyone is looking for solutions to their financial issues. But the real key to getting solutions appropriate to your unique circumstance lies in asking the right questions.
All too often, knowing what questions to ask is the hardest part of getting a grip on this whole investing thing. One thing that I think everyone, regardless of financial circumstance, needs to be aware of is how to manage downside risk.
Every investor I know wants to avoid another 30-50% haircut in his or her portfolio when the markets retrench, as they did in the 2000-2002 bear-market nightmare. The starting point to avoiding such devastating losses is to ask yourself, or your advisor, the following questions:
- What is your game plan in the next bear market?
- Under what circumstances will you lower your exposure to equities?
- What type of losses did your mutual fund or stocks experience in the last bear?
- What event would prompt a change in your invested positions?
- When would you sell an under performing position?
If you can't answer these questions with an apt degree of certitude, then you simply aren't prepared to avoid the worst outcome an investor can experience -- losing a boatload of money over a short time period.
If you would like some help answering these questions and gaining the insights from an experienced investment advisor, contact Fabian Financial Services for your free coaching session with my colleague Ed Foster or me.
If you have a minimum portfolio of $250,000, I guarantee you'll benefit from this free coaching session. To find our more, click here.
It's Super Bowl time again. And, like many people around the world, I will be watching the big game with friends and family. One thing I find interesting is that every year about this time you see a rash of head coaching changes among the NFL teams that are not fortunate enough to have made it to the big game.
All the changes that have taken place in the NFL coaching ranks during the past two weeks got me thinking about how investors also should be looking at their advisors this time of year to determine if they are on a path to their own financial Super Bowl.
If you aren't happy with the current game plan in your portfolio or if you don't have a safety net on your serious money, a Fabian Financial coaching change may be just what the doctor ordered.
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MISCALCULATING WISDOM
"War is the unfolding of miscalculations."
—Barbara Tuchman, historian
It could be said that many things in life, not just grand issues such as war, are an unfolding of miscalculations. Despite our best laid plans, reality often takes the shape of something totally unforeseen. When this happens to us in our financial lives, our first tendency is to act rashly. But what actually is needed is an objective, rational analysis of all of our mistakes. When it comes to the battle for greater wealth, don't let yourself be overcome by unfolding miscalculations.
Wisdom about money, investing and life can be found anywhere. If you have a good quote you'd like me to share with your fellow Alert readers, send it to me, along with any comments, questions and suggestions you have about my radio show, newsletters, seminars, or anything else.