Long Term: Buy and Hold

[Quips]

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Most financial planners do NOT count the equity in one's principle residence as savings. Um, I look at it this way: how many people that you know of are willing to draw on that equity and invest the proceeds in the stock market?

There is a line between speculating and investing; and maybe the difference is a matter of one's expertise and temperment. However, Bob Brinker is one who differenciates between "house" money and money for savings/investment.

Is it prudent to take out 50% of one's home equity and put it in the stock market?

How about even 10%?

LOL However,it is hardly conservativeto leverageone's principle residence for any other investment -- maybe other than for its own improvement -- much less for frivilous purposes. Butsomecan see others pushing the envelope with the interpretation of that as well.

 

[cowboy]

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Mike wrote

I think I have concluded that equity should be counted as deferred savings - it's there, but you don't benefit from it until you sell the property.

Cowboy says, "Biggest mistake everyone makes!! " I seen more people go broke thinking this than you can imagine. It is paper and that is all it is.

On the insurance thing. Too many big shots want the little man to carry insurance. truth o the matter is; The little man only has so much money and insurance is just a drag on liveable income, so most of us hillbillies just take this approach, either we buy insurance and be broke or we don't and live our lives to the fullest while we can and let the health care system be damned. Government is supporting the health and insurancesystem too much and needs to cut costs and let the system start to function on their own in my opinion.

 

[Mike]

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Borrowing against your equity to reinvest is a complicated issue. You'd have to assess the following:

What is your interest rate?
What is your best/worst case scenario for market return?
How long will you have this money in the market?
How has your home value changed over the past 10 years or so?
How much would it change if you simply pumped the money back into the home via remodeling/upgrading?

If I owned a house last year and had a lot of equity, I probably would've borrowed against some of that and moved itinto the market. Given the interest rate cycle and how the housing market responds to it combined with the very low interest rates last year, it would've made a lot of sense to do this. A 10% return (achievable with a well-diversified account) funded by a ~5.5% loan is certainly worth a look, particularly with evidence starting to mount that the housing market was starting to plateau.

It all comes back to one's risk tolerance, though. Doing something like that certainly isn't for everyone.

Rokid - MN is a relatively high income state, and yes, the government generally funds its priorities in a rather healthy fashion. There's also that "upper midwest value system" I guess.

 

[cowboy]

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Always pay off your mortgage on your house if at all possible prior to investing in anything else. Having equity in your home is the best thing u can do for yourself period! The falsehood of theAmerican public is the idea that interest is a tax deduction which is what all capitalists will sell you. You canonly save so much in taxes if youare spendingon interest. It is way better to pay off the loans and pay that extra tax then to use it at a highrisk.I am not saying it is not beneficial in certain situations, such as being put into a higher tax bracket.

Investment people that are selling you something will tell you, you will need so much money more when u retire but if you have your big ticket items paid for entering retirement this is not so.When it comes to sellingyour home there is no income tax on it so build your equity there.

If you talk to a bank for money when interest was low very few of them would give you a fixed rate they know the law average lays with them. If they did they want 2% more than the going rate to do so. Plus there the possiblility anyone can lose there job and or have health problems. Stocks go down just as easy as up remember that!

 

[Mike]

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Every situation is different.

If I'm healthy and have at least 30 years to retirement, I can shoulder the risk. I wouldn't recommend any of this to my parents, for example.

Most businesses are started with borrowed money. Gotta stomach some risk to make the real bucks. Same can be said for people borrowing to the hilt just to get through college (I had to do that).

I'm sure a few would call me nuts to willingly walk into a $40,000 hole just to get a bachelor's degree, but who's laughing now? That debt is about 2/3 wiped out now, and I'm well on my way... :^

Yes, ladies, I'm financially solvent. :l

 

[grandma]

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cowboy wrote:

If you talk to a bank for money when interest was low very few of them would give you a fixed rate they know the law average lays with them. If they did they want 2% more than the going rate to do so.

I talked to the mortgage co, banks recently about a home improvement loan based on my equity.(80% of mortgage is paid off.) The banks wanted it to be `on signature' with 8-10% interest, the mortgager wanted it to be 2nd mortgage or else re-finance at a higher interest than paying now, and `probably no propertyre-assesssment.' The insurance/tsa co will do it for 5.5% over 5 years max. When I figure out amt needed, I will undoubtedly go with the tsa fund.

 

[cowboy]

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If you did not have 80% equity in your property than u would not be able to do what u are doing as they would not loan you the money. Just ask them.If I was close to retirement I would not do this as I would still want my home paid off! The idea that you have 80% equity now and still have it in 5 years is too short term. There will always be clauses in a contract that is what keeps lawyers happy.

 

[Wimpy]

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Why should home equity NOT be counted as savings?

1. There are always exceptions, but by and large most people are tapping their home equity lines of credit for ‘consumption’ and are upside down in their mortgages. Where is the data? I don’t have to look any further than my own family trying to keep up with the spending habits of their neighbors and I also overhear telephone conversations at work where people are moving money out of their HELOC account into their checking’s account to put a down payment on that new boat or car or pay for an exotic vacation or cruise. As unwise as these HELOC consumerist purchases are, they are still better than common equity purchases, in my opinion.

My own son is upside down in his mortgage and teetering on the verge of bankruptcy. He thought he was a market whiz kid (he had a broker’s license). He took out a second on his over valued house and dumped that money into commodities…ON MARGIN. When he got margin calls on the commodity futures that turned south, instead of selling enough commodities to cover the call, he got cash advances (100k plus) from credit cards to cover the margin and to meet daily expenses. Part of the income from his ‘day’ job, factored into his debt load threshold, was OVERTIME. Guess what? The OVERTIME went poof! The housing market is now flattening where he is and he can’t sell the house for enough to cover his outstanding debts. Will his Dad bail him out? NO WAY! Besides that, he’s got enough integrity not to ask since I warned him repeatedly about margined commodity accounts and over valued real estate. He had margin (2[suP]nd[/suP] on house) stacked on margin (leveraged commodities) stacked on margin (credit cards). His actions had my stomach in a knot from day 1 of his little adventure and that knot turned into a perpetualwanna puke feeling knowing what the inevitable outcome would be.

What is doing him in and the generation he belongs to is ‘instant gratification’. He wanted TODAY what it took his parents 30 years to achieve. Will he recover? I’m sure of it, but he won’t have any wind at his back. He will be pedaling uphill into a head windall the way to the end.

2. There are always exceptions, but by and large most people are not willing to sell their homes when markets are topping and rent when it makes more economical sense or move to an area where property prices are more down to earth and redeploy their capital there.

By and large, the location where most people live and work is an accident of birth and they fail to take advantage of regional economic inequalities and distortions by MOVING.

3. There are always exceptions, but by and large most people feel wealthier when home values are rising and SPEND more. Some call it the ‘wealth effect’, but I call it an illusion. So, even if one doesn’t draw down on their HELOCs, the inclination is still to spend more as home values rise thereby off-setting negatively what unrealized paper gains they see in their equity.

4. There are always exceptions, but by and large most people experiencing the initial[/i] effects of an economic downturn, SPEND more. Egos won’t allow them, in the beginning of a downturn,to lose face in front of their neighbors. In the end, however, due to paralysis, they lose not only face, but they lose their shirts, pants, shoes, and socks...and they sometimes lose their spouses.
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Mikesummed it up best when hesaid:

“In a roundabout way,I think I have concluded that equity should be counted as deferred savings - it's there, but you don't benefit from it until you sell the property.[/b]” (Emphasis mine – bolded/underlined portion)[/i]


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Basically, an unrealized gain is a ‘Paper Tiger’, whether we are talking real estate or equities. To borrow against either position is what they call a MARGINED position. In equities, where MARGIN is exercised, you will get a MARGIN CALL when prices retreat below standard reserve requirements. In real estate, although there are no MARGIN CALLS per say, but there are BANKRUPTIES (forced sales) which is kind of the same thing.

I don’t know how many times I’ve heard people say on this board, “We made some bucks today”, but when you look at their allocations, they haven’t changed. If an investor or trader doesn’t sell into those gains, they haven’t made anything at all. Same thing goes for the flip side. People say, “We lost a bunch today”, but you look at their allocations and they haven’t changed. If an investor doesn’t sell into those losses, they haven’t lost anything at all.

Taking too much stock in counting unrealized paper profits or losses can negatively affect the emotions...and is not the best position from which to be making good investment or trading decisions.

Mike, I truly hope you are the exception to the rule. You are a pleasure to discuss things with, even though we don’t agree, because you have such a cool head.

 

[Mike]

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Wimpy wrote:

"Where is the data? I don’t have to look any further than my own family trying to keep up with the spending habits of their neighbors and I also overhear telephone conversations at work where people are moving money out of their HELOC account into their checking’s account to put a down payment on that new boat or car or pay for an exotic vacation or cruise."

That is called 'anecdotal evidence' - which while significant to the person providing it has little statistical validity. I want to see a large sampling / survey ofhow manyare getting these HELOCs / 2nd mortgages, what the average amount is, and what they are using them for... I'd think that somebody keeps track of this. The government tracks darn near every other statistic imaginable, so why not one that has some serious potential consequences to the future of the American economy (particularly given the fact that the bankruptcy laws were altered a bit... :shock. While your examples apply to the consumer-gone-nuts part of the population, mine apply to the more common sense "I just want to remodel my house" approach. Which is more prevalent? There is no way of knowing unless it's being tracked by someone - either the government or an industry group.

"By and large, the location where most people live and work is an accident of birth and they fail to take advantage of regional economic inequalities and distortions by MOVING."

I feel privileged to have been born in this state (generally highly educated population, fairly low crime rate, decent air/water quality). I also live in the most lucrative part of it (sadly also the highest cost of living part, but I can't win 'em all), and I'm near the top nationally in earnings for my field - so as long as I wish to do what I currently do, there's no sense doing it anywhere else. As for other people who stay in a cruddy area, they might be tied down by family or something else. It's pretty easy to move around while you're young and single, but it becomes exponentially more difficult if you're married and/or have kids.

My deferred savings comment is somewhat tied to TSP (tax deferred). What the numbers are really don't matter unless you cash out. I try to keep my emotions in check when dealing with it, since I'm just trying to monitor percentages. As long as I average about 7% per year or so, I'll be fine. It's similar when talking about real estate - your house may be worth $200,000, but that isn't important unless you are actually attempting to sell it and have people making offers in that ballpark. If 30 year rates climb closer to 8%, you aren't likely to find too many buyers out there.

As for me, no need to worry. I don't have any "leveraged" positions, so my potential loss is always limited to whatever is invested, and very little of that is ever in a purely speculative area. I probably save / invest more than 99% of the people in my age group (eyes glaze over and jaws drop when I talk about any of this with my peers). Re: housing, something will be mentioned about that next week. Stay tuned. :^

 

[Quips]

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Mike wrote:

If I owned a house last year and had a lot of equity, I probably would've borrowed against some of that and moved itinto the market. Given the interest rate cycle and how the housing market responds to it combined with the very low interest rates last year, it would've made a lot of sense to do this. A 10% return (achievable with a well-diversified account) funded by a ~5.5% loan is certainly worth a look, particularly with evidence starting to mount that the housing market was starting to plateau.

It all comes back to one's risk tolerance, though. Doing something like that certainly isn't for everyone.

Mike, that is what is called leverage. Most hard money people would roll their eyes over the comments you made. And comments like that would make a stock broker drool like a coyote around achicken coop.

By the way, how much home equity-- costing 5.5% upfront -- would you stake on that hypothetical 10% return? How much of that home equity, either in dollars or as a percentage--would you feel comfortable risking in the stock market?

The only positive thing I can think of about that scenario is that there are mutual funds out there that have really high "load" fees ... some as high as 5.5 - 5.75%.

Can you image borrowing at 5.5% and investing in a mutual fund with a "load" of 5.75%? There goes 11.25% already! :s

Or maybe someone feels froggy about a sector equity fund ... like oil. Lets say the average "load" on such a fund is 3%. Then the hypothetical investor is now only starting 8.5% in the hole.

Or better yet, shorting an oil sector fund now with money from a home equity loan.

Come on man, that isn't b@lls, that's crazy or desparate. Sure, the reward is fantastic if it turns out well,and maybe the only thing to lose is sleep over it. But I am skeptical about such things.

 

[Mike]

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Warning! I'm about to start babbling.

Quips wrote:

"Mike, that is what is called leverage. Most hard money people would roll their eyes over the comments you made. And comments like that would make a stock broker drool like a coyote around achicken coop."

Given the expectation of interest rate hikes and the accompanying run up in mortgage rates which is certain to put a lid on housing prices, would it not make sense to move your capital elsewhere to achieve a positive return? Sadly, this environment took shape when I was too young (and repaying student loans) to take advantage of it. This won't be the case the next time around (if there is a next time - I have a hard time believing rates will drop all the way to 5% again - if our national debt picture doesn't improve soon, the real rates will be pushed higher and stay higher to sustain the funding of the debt). A nice alternative to going the HELOC route would simply be to sell the house in the high price / low interest rate environment and buy a cheaper place. Depending on the equity, this could mean a tiny mortgage or none at all, plus money to spare to invest elsewhere as the slow-growth/no-growth housing price climate hits with a vengeance. Given my aversion regarding taking on extra debt, this is the option I would most likely take. While I enjoy speculating about potential maneuvers, I typically end up doing what makes the most sense / is the most reasonable. It's a sickening personality trait.

What am I willing to risk in the stock market? The answer to that is a complicated one. What is my time horizon? By the time I achieve the equity necessary to seriously consider any of this, I'm probably pushing 40 years of age. My life situation could be vastly different then, and depending on market performance over the next 13 years, my confidence in the market could also shift. Point is, weare likely tobe in a vastly different world in 2018. As for the present time, given my horizon is over 30 years, I wouldn't hesitate to throw $30k into the market and let it ride 'til 2035. Problem is, my budget wouldn't allow such a loan, so it's really a moot point. My choice of investment vehicle would be the ETF model that has low emissions (read: low fees/expenses). That would allow nice diversification and flexibility at low cost.


"Come on man, that isn't b@lls, that's crazy or desparate. Sure, the reward is fantastic if it turns out well,and maybe the only thing to lose is sleep over it. But I am skeptical about such things."

My day-to-day rule is don't risk what you can't afford to lose. Ifmy TSP dropped to zero tomorrow, I'd certainly be angry as heck about it, but it wouldn't be the end of life as I know it. Same goes for my brokerage and Roth accounts. If I have to work into my 70s, that isn't the end of the world, either. For the most part, I like working. Few other things in life make me feel as alive and vital as working does - and quite frankly, I think I'd get bored if I had nothing but leisure time on my hands. Maybe I should blame my upbringing, but I think that being active and productive is one of the keys to a happy life. Working is my preferred way of accomplishing that. Will I need this money late in life? Probably not. I can be a bit of a tightwad and tend to live well below my means. I have no trouble eating things like mac n cheese even thoughpeople making what I do in a year probably eat steak and the like more than once a month.They probably also take more than one vacation a year, and it probably costs them more than a few hundred bucks.

I'm not exactly sure where I'm going with all this, but I'll say this: there's no need to worry about what I'm doing (unless it's with women but we won't go there :shock. My credit is in goodshape, my debt is being paid down aggressively (even though it's @5-6%), and I have a stable job that pays well. Life could be far worse than this. :^

 

[Quips]

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Vanguard has its own version of "L" funds. I thought the follow stats were interesting:

For those set to retire this year, 2005, their asset allocation is 31% equities, 69% bonds; over the past year the return was 4.44%. The fund itself has assets of $676 million.

Interesting because the rate of return in that fund just about covers the rate of inflation (I do not believe inflation for those over age 60 is about 2%, e.g. the I savings bond will pay 6.73% for the next six months.

Given that with the recommended withdrawl rate of 5%, well, we can see the principle of that account being depleted by about 7% a year

hmmmm ... it begins to add up, doesn't it?

Vanguard's 2015 retirement fund has assets of $1.9 billion and its asset allocation is about 53% equities and 47% bonds for an average yearly return of 6.39% That just about covers the I bond's rate (of inflation) for the next 6 months. If that asset allocation were used for CURRENT retiree's, a draw down rate of 5% a year would help one's retirement assets last longer, but it would last about 20 years at that pace.

hmmmm ... still kind of tight, huh?

Vanguard also has "L" type funds for those retiring later as well ... just like TSP. A 5% withdrawl rate is relative to the amount in the fund of course and whether all of that amount is spent. And if it is in a Roth account, well, there is no manditory distribution requirement. But there are manditory living expenses to be paid in retirement, lol.

So, the larger the equity allocation, the more short-term volitility.

Vanguard's 2025 retirement fund has assets of $2.1 billion with a 58/42 allocation and a return rate of 7.25% over the past year.

Its 2035 retirement fund has assets of $1.1 billion, a 76/24 allocation and a return rate of 9.58% over the past year.

While we work and contribute to our retirement funds NOW, volitility is usually disconcerting for most, but dollar cost averaging is of some consolation. However, when those contributions cease, that volitility will be more disconcerting for most. If those withdraws are made on a monthly basis, e.g. less than 0.5% a month, that would be similar to dollar cost averaging a withdrawl rate of 5% over a year's time. Monthly checks would fluctuate in cash amounts ... some months more than others; some months less. However, if there is a protrated downturn ala Jan. 2000 to April 2003, it will makea life cyclemore difficult to ride out.

Vanguard's asset allocation for potential 2045 retirees is 88/12; the fund has assets of $500 million. Its return over the past year has been 10.76%.

Now given all of that, will expenses decrease for most in retirement? Well, hopefully the primary residence is paid off, but medical expenses (premiums, co-pays, deductables) for mostbecome realduring that time. For some it isn't a matter of whether they are will to work part or full time in retirement to help defray expenses, but are they physically able.

Then there are reoccuring expenses: health insurance premiums, home and car expenses/maintanence/insurance. Inflation too.

 

[bkrownd]

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Mike wrote:

Wimpy wrote:

"I feel privileged to have been born in this state (generally highly educated population, fairly low crime rate, decent air/water quality)."

Ain't that the truth? However, I hear things have been changing over the last 20 years as more outsiders have moved in, and MSP is slowly becoming a bit more like any other overcrowded big city in the US. The curse of success, I guess. Glad Iwent toschool in MN when the schools were good, and the taxpayers were generous. Used to be an honest, hard working, liberal minded sort of place.

 

[Quips]

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It is times like these when rational people wonder where the disconnect is between Wall Street and reports about GDP.

Last quarter the numbers indicate the rate of growth was over 4.25% So, if a rising tide raises all ships, how come the equity markets still indicate mundane returns thus far this year?

So, where is the problem? One problem is gold at $500 an ounce. There is a lot of people and banks buying it for the price to climb like that. No doubt the buyers are taking advantage of recent "strength" in the dollar and are dumping them to buy gold.

Not good.

Some measurements for billion are:

A billion seconds ago, it was 1959.

A billions minutes ago, Jesus Christ was walking the earth.

The US government spends $1 billion in less than 9 minutes.

 

[Wimpy]

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Quips wrote:

So, where is the problem? One problem is gold at $500 an ounce. There is a lot of people and banks buying it for the price to climb like that. No doubt the buyers are taking advantage of recent "strength" in the dollar and are dumping them to buy gold.

Not good.

Gold at $500 and ounceis not a problem...unless a person doesn't have any

GoldIS a barometer measuring world confidence in paper currencies, world leaders, and corporate/government ethics.Goldat $500 an ounce is a vote of no confidence in all these areas.

It will be interesting watching the effects of the ECB 25 basis point rateincrease on the dollar and gold chartstoday.