Financial Frontlines®

A recent article on Bloomberg News highlights the plight of many military homeowners…

Foreclosures in Military Towns Surges to Four Times the National Rate by Kathleen M. Howley (Bloomberg News)

Many military members, lured by the easy credit terms offered a few years ago, are now being hit by the double-whammy of rising mortgage payments as the adjustable-rate mortgages (ARMs) that many of the use start to reset and rapidly falling housing prices.  The biggest mistake many of them are making?  Waiting too long before seeking assistance.

If a servicemember starts getting behind on their bills, they should seek help immediately.  Unit commanders at all levels should keep a sharp eye out for potential money troubles, such as a sudden drop in performance, arguments with co-workers, increasing sick calls and other signs of financial stress.  Immediate intervention and referral to services that can help is imperative.

Sources of assistance for military members in trouble with their homes include:

• National Foreclosure Hotline at (888) 995-467
• Military OneSource at  (800) 342-9647
• USA Cares

In addition, activated National Guard or Reservists should immediately contact their lender and invoke their rights under the Servicemembers Civil Relief Act (SCRA), potentially lowering their mortgage rate to 6 percent during deployment.  Visit HUD Q&A for Reservists, Guardsman and Other Military Personnel for more information.

The bottom line?  Many military families are in trouble with their home loans and this financial stress hurts readiness and unit morale, so leaders need to keep a sharp eye out for potential problems and intervene early!

If you haven’t completed your Free Application for Federal Student Aid (FAFSA) form for the 2007-2008 school year, your deadline is quickly approaching.  Online FAFSA applications must be received by midnight CST on 30 June 2008 to count for this school year.  If you have waited this long to apply, however, you might find the pickings rather slim!

Many forms of student aid – at both the federal and state level - are awarded on a “first come, first served basis”.  Therefore, waiting until this late in the game means that much of the money is likely already allocated.  Your better option is to complete the FAFSA as soon as possible for each academic year. 

The FAFSA opens on January 1st of each year and is critical for receiving any form of federal student aid, including Pell Grants, Stafford Loans, Perkins Loans and Work-Study programs.  In addition, many other forms of student aid provided at the state and individual school level require completion of the FAFSA, so fill it out even if you don’t think your child will qualifty for needs-based aid.

Althought the FAFSA filing deadline usually falls at the end of June or beginning of July each year, many state and school-specific aid programs have filing deadlines that are much earlier, closing out by mid-February to early March of each year.  Consult Student Aid Filing Deadlines for more information.  Remember, college is expensive enough without missing out on potential aid through procrastination…so get your college funding plan in place early and don’t miss any deadlines!

Need some help funding college?  Don’t forget the MOAA Scholarship Program, which provides interest-free loans and grants.  This competetive program is open to the children of all active duty, National Guard, Reserve and retired servicemembers, regardless of rank.  Also, MOAA has partnered with low-cost investment leader Vanguard to offer the MOAA Degrees of Success 529 College Savings Plan.  This market-based college savings plan can be started for as little as $50 per month and is open to all active duty, National Guard, Reserve and retired servicemembers to save for a child, grandchild’s, niece/nephew or other relative’s college needs.

As we all have fun with our barbeques, pool parties and beach trips, let’s pause for a moment to remember the brave men and women who have given this great country their last full measure to provide us wiht the freedoms we enjoy today.  Without them, we would not have the wherewithal to pursue our financial dreams and the opportunity to strive for financial independence.

Your bloggers – as former and retired military officers – also want to recognize the military families; spouses, children, parents, grandparents and siblings who have sacrificed so much along with their servicemembers.

Thank you and have a wonderful Memorial Day!

Part 4 — The Plan Three key points to your strategy

Numero uno (#1) Make regular contributions to your TSP, 401k, or IRA account. Give till it hurts; you know, pay yourself first, live off the remainder. This plan can work to help you live below your means. Plus, the cool thing about this plan is you can spend the remainder guilt free.

#2 Position your portfolio’s allocation to meet your future needs. Huh? Al-lo-ca-tion—how you have your portfolio divided among stock, bond, and cash mutual funds.

If you know nothing about mutual funds, please as a minimum learn which funds are stock funds, bond funds and cash funds. This is essential to managing your portfolio and it’s not difficult. Over the history of the stock market, stocks have returned an average of 9 – 12%; difference is due to the type of stocks i.e. large companies, small companies, international and so forth. So the more you move your allocation towards stocks in general, the closer you get to the 9 – 12%.

Check this out:Average annual returns from 1926 – 2006 (source Ibbotson Associates) Treasury bills: 3.7% Intermediate-term Treasury bonds: 5.4% Large-cap stocks: 10.4% Small-cap stocks: 12.7%

The greater your allocation of stocks, the wilder your ride will be. Yes, stocks are volatile meaning they have greater peaks and valleys. But use this knowledge to your advantage. “What are you talk’n about Willis?” Two things…wild swings allow you more and better buying opportunities when you are riding in the valleys—you’re picking up more shares on the cheap, hint, hint.

And two, look at the average returns above. Your reward for the wild ride is you end up higher on the mountain top at retirement time. You win twice in that you planned for the greatest possible return and socked in the greatest number of shares over your career.

If you get too conservative with bonds or cash investments, you risk not having your money work hard enough to allow you to buy your freedom one day. Yes investors, being too safe or conservative can be more risky than having your money in stock mutual funds.

Think about this.

Unless your income is way beyond your needs, you probably can’t accumulate enough money for your future unless your investments are working harder than you. Time, a solid return, and compounding allow average citizens to compensate for a lack of income and living expenses. If you aren’t earning a return large enough to offset taxes and inflation, you’re backing up. This goes for all you retirees also.

Given these averages, if you don’t have stocks as a good portion of your portfolio, you can’t keep up with the cost of living including taxes. If you are retired, you also have to keep up with what you are withdrawing each year.

Finally #3 Rebalance your portfolio annually. If you determine your allocation is 80% stock funds, 15% bond funds and 5% cash, then make sure it stays that way. Over time it will get out of whack because some funds will grow and some will slump. When you rebalance you are taking profits off the top of the successful funds (selling) and putting the profits into the out-of-favor funds (buying). “Hey, wait a minute, didn’t I just buy low and sell high?!” Why, yes, you did!

Now we have things operating like a well oiled machine. Rebalancing can be done automatically by most fund companies; you don’t have to bust out your calculators to do this yourself.

If you aren’t doing these things now, then get crack’n and implement your plan. “But this plan seems rather…simple.” True. Proper investment management is not exciting or sexy.

Investing shouldn’t cause anxiety, cold sweats, or feelings of incompetence. You aren’t doing it right if managing your investments is time consuming, exciting or nerve racking.

Through these steps, you won’t become the average investor with self-inflicted wounds.

Part 3 — Know Thy Enemy The market took a beating in 2002. Then, as usual, the market zoomed back in 2003, 2004, 2005 and 2006 and most folks were either left at the starting gate or late for the party.
You can’t let those nasty emotions play with your rational thought processes again. Build a plan based on facts. Trying to time-the-market is a plan that spells D-O-O-M. Do you realize that if you were an investor in the S&P 500 index from 1987 to 2006 and you missed just the 17 best months of the S&P 500’s returns during that period, your average annual return was 4.53%. 17 months out of 228—7.5% of the time! Still think you can time the market? You won’t notice the upswing until it’s too late.

By holding the S&P 500 index during that period without missing the 17 best months, your average annual return was 12.46%. Missing the 17 best months meant your average annual return was less than the return for Treasury Bills at 4.76% for the period. How do those differences in returns affect your bottom line? We’re talking big time money in your pocket.

Take $100 over 20 years. At 6% average annual return, you will have $321. At 9%, $560. The 9% in this example is 74.5% better than the 6% return. That’s not chump change. Just the facts. First understand I’m talking about stock mutual funds here. This is the investment vehicle the majority of us will use for our portfolios.

So the facts…

• In the short term the market is a roller coaster; up and down.
• In the long term, the market is always up—it is up 70% of the time. Admit it, if Vegas paid you at 70% odds, you’d live there and gambling would be your profession. Isn’t the “long term” where your future resides? Even for you retirees; how long will you be retired—how many decades?

The roller coaster—expect it, plan for it, and take advantage of it.

If the market is always up over the long haul, then buying when the market is in one of its few down periods is a rare opportunity that must be grabbed when it occurs. These temporary market dips are essential for a better long term returns because they give you the chance to buy cheaply and rake in more shares. When the market is down, funds are “on sale”, a bargain.

You wouldn’t buy a shirt worth $20 for $50 would you? Then why do you buy your $20 investments at $50? (Remember the “C” fund example previously) During the investing or accumulation period of your life, focus on how much you own (shares) not the value of your account. It’s about the shares and how many you own at retirement.

Imagine a fund that paid $1 a share in dividends. Wouldn’t you rather own 10,000 shares than 1000 shares? Same holds true when the fund share price goes up a $1. Concentrate on collecting assets…shares. Buy assets (investments that grow) not liabilities (purchases that decrease in value).

Pop quiz. Which are the assets and which are the liabilities? Car. Long-term stocks. TV. Real Estate. OK, so what’s the plan? Put your investment plan on auto-pilot (as a retired Air Force guy, I had to work in at least one flying reference).

Go To Part 4 – The Plan