Financial Frontlines®

I ran across this article on the CNBC web site. I found it insightful but I think the story between the lines, the one that’s not told, would be more helpful to investors. The article explains investor fears in the stock market and how this fear has steered more investors to conservative accounts. It goes on to state why this investor behavior may be a mistake. Agree. However…

A quoted investor states she took her money out of stocks in the summer of 2008. The investor had been in and out of the stock market before and now has no intention of getting back in. She states, “It makes me nuts when I get out early and there is more money to be made, or I get out late when I could have made more if I’d gotten out early. The stock market’s not an investment, it’s gambling.”

And there we have it friends, the crux of the problem…people behaving like this have no idea how to invest.

Blaming the stock market as the problem diverts your attention from the real problem which is the lack of an effective investment strategy on the part of the investor. The action described in the quote above guarantees failure. It fails because the action of buying and selling is based on guessing. To add insult to injury, it’s our emotions driving the guesses. Hunches and emotions aren’t a strategy and we ultimately lose.

The stock market goes up and down. This is no secret and it’s no surprise. It is the very nature of any market…stocks, bonds, commodities, currency, business cycles, you name it. No one knows when it goes up or down, no one. And yet people, with no plan or knowledge, think they can guess when it goes up or down and base their future financial success on their guesses? Does that max out the ridiculous meter for you as much as it does for me? Folks use this guess work every day thinking that’s how the investment game is played. It’s not a game, it’s the quality of your life in the future and that requires serious plan.

No one will ever guess correctly. We aren’t wired to guess correctly.

We don’t think to invest in markets until they go up. Even then, we don’t invest until stocks have gone up enough to ensure our psyches that it is “safe” to dive in. Positive talk on the street = time to invest. By then it’s too late; the upward cycle is coming to an end. When we feel greedy or we feel we are missing an opportunity that everyone else has jumped on already, we take the plunge. Want to buy gold any one? Here’s a tip to follow, when the people who know nothing about investments or investing start to talk up an investment, RUN AWAY from the investment. The great unwashed masses are always the last to jump on an investment before it pops. By the time it pops, the knowledgeable investors have harvested their profits and left the masses holding the bag. Then the masses blame the market and prosperous people instead of looking in a mirror.

We dump out of the market when things go down. Even then, we don’t dump until it’s gone waaaayyyy down because we aren’t sure at first if it’s just a blip and may go back up. We invested at a high point and we’ve lost value so we are emotionally attached to the investment until we regain some of our value. When value isn’t regained but goes down some more, eventually we can’t take it anymore so we sell.

We invest high and sell low, just the opposite of what we are suppose to do. This rips the guts out of our returns. Then we blame the market. To succeed, you must have a plan that forces you to buy low and stops mindless trading.

For those of us who continue to work and invest through our employer plans and IRAs, I believe strongly in the philosophies and strategies we have shared on the pages of this blog and in our presentations. You can be successful if:

• You understand some of the history of our country and our economy.
• You take the emotion out of your investment plan.
• You use strategies that take advantage of known market conditions.
• Strategies: 1) Average down, 2) Proper Allocation, 3) Re-balance

If you want to learn more about the details of the bullets topics above, see these posts:

The Average Investor Parts 1, Part 2, Part 3, Part 4

Before You Pull the Trigger

We’ve had 401ks and IRAs for over 30 years now. These investment plans shifted the burden of planning for your comfortable retirement from companies with pension plans to you overnight. Your comfortable retirement completely rides on your shoulders. You would think, given the unconditional necessity that we be successful with our investments, we would put more time and effort into learning how to ensure a satisfying future. Instead like the person quoted in the article, folks have no clue, put no effort into learning, and manage by the seat of the pants. They base their actions on false assumptions: that markets will continue to go up and that they can buy and sell their way to prosperity. They couldn’t be more wrong. It’s possible we could all be successful if we took the task more seriously and planned soundly.

Let’s see…hmmm…what home buying tips should every military member know before buying a house?

1) Be careful of buying a house right outside the back gate.
2) Think twice before buying a house on a 10-month school assignment.
3) ….

What? Not the kind of tips you’re searching for? Okay, I’ll stop kidding and offer something more beneficial for you constantly moving military types.

For a little background, I write this as a person wearing three hats; a financial guy, a retired military member and a multiple house owner. I bought homes at most of our assignments to include North Dakota! What was I thinking? I made money on one house—a whopping $10k. Looking back, I could have put a lot more money in my IRAs or other investments had I not been pouring money into houses over the years. I never kept any of my houses as investment properties.  Thing is, I knew plenty of people who were selling with profits and that kept me in the game.  It’s a poor reason for buying a home on a limited time line.

So as you can imagine, I’m generally not for military members buying homes. Too bad I didn’t come to this conclusion until the end of my career. Now before you stop reading because you see yourself as a future home owner, give me a chance. If you are going to buy, at least glean a few ideas from my experiences (and the experiences of others I talk to) so that you’ll be a savvier consumer.

First I’ll cover some of the considerations before you decide to purchase. Afterwards I’ll provide some tips for you buyers. If I sound a bit harsh, please understand I mean well because my remarks are steeped in love for my military family. If you’re going to buy, best you go into a deal with your eyes wide open based on harsh realities and not a candy coated version of the situation.

The considerations.

The responsibility. The purchase of a home and all the associated issues are on you, only you. There won’t be anyone to help if you find yourself in a crack when the PCS orders roll around. Think that Housing Assistance Program you heard about will be around? Think again. That was a onetime good deal due to political pressure to help folks during the height of the housing crisis. That program probably did more harm to peoples’ financial psyches than good because now people think they’ll be bailed out from their bad financial decisions. Save the emotional appeal that someone owes you because you serve your country. I’ve been told by people that it’s not their fault they lost money on their home purchase. They didn’t choose to move when they had a loss on their house. Based on these types of comments I find myself explaining something I thought I would never have to explain. No one orders us to buy a house. Military members live within the context and rules of the military. We volunteer one time at enlistment or commissioning and as a result we are volunteers for every subsequent action. We have to make all our life decisions based on this fact and our unpredictable futures.

The risk. Unless you are going to keep the home for decades, buying a home for a few years is like betting the farm on the ponies at the Kentucky Derby. If you buy a home, you better have a back-up plan in case it cost you a bundle to get out of the house when the time comes. No one knows what your home market will be when it comes time to sell. Sure we know that now with the housing slump but that’s the way it’s always been. Homes are bought because of the misconception that real estate always goes up. It doesn’t. Home markets vary based on cities and regions of the country. To help paint a picture of the risk you assume, imagine you are within 3 years of retirement and you’ll need all your TSP investment value to generate additional retirement income. Would you invest 100% of your retirement account in stocks at that point? What makes buying a house on a 3-year assignment much different? Ask any member currently trying to sell a home where their home value is less than their mortgage. I’ve talked to folks $100k underwater. Buyers all have one thing in common. They all count on making a profit. No one figures to lose on the deal. Profit 100% of the time; how realistic is that?

The loss of freedom. A home restricts your freedom during PCS transitions. Owning a house is a ball and chain around your leg. PCS moves in your life are foreseeable and unforgiving. You’re told when to move in and when to move out. A house doesn’t care about your deadlines. No one in your chain of command cares that you have a house to sell. You can’t stay behind to sell a home, you have to go. So who stays behind? Kids in school? Got money to pay for two homes until the old one’s sold? What if it costs you big bucks to get out of your old house? That house will feel like concrete shoes as you’re dropped in the drink.

The emotions. I preach that emotion should never drive any investment decision because emotional investors typically lose. A short-term investment for the chance to strike it big is based on greed. There’s also that Norman Rockwell feeling we get about home ownership. Buying a home is the largest single investment we make. Sure you can win big if things go your way since a home is a leveraged investment. Leveraged investments are among the riskiest investments a person can make because leveraged investments can also bankrupt you. Heard of buying stocks “on margin”? Same principle. There is no room for greed in a huge financial transaction like this as the financial world is a cold blooded, unemotional creature. Intellect must trump emotion. As for that warm fuzzy home owner feeling we get…read the first tip for home buyers coming up next.

As promised, here are the tips for you buyers.

It’s not a “home.” It’s a short-term investment in a shelter for your family. Keep this thought firmly planted in your mind as you shop around; you are buying to sell. A home is where you put pencil marks on the wall to chart your kid’s growth over their life. You on the other hand will be a seller before you know it. You have to be more focused on selling the house, as you are buying it, than liking it for yourself and creating a “home.”

Your assignment can restrict your ability to maintain a house. Numerous deployments or long work weeks hinder efforts to mow, trim hedges, clean the gutters, rake the leaves and paint. If your free time is precious you probably won’t want to do chores in those rare moments. Maybe a condo with maintenance covered by the management better suits your lifestyle.

You want a house close to the best schools. No family wants their kids going to substandard schools. This is a primary consideration for pin pointing the location of your purchase in an unknown city. Can the kids walk to school?

Find the best neighborhood you can afford within the great school district. Drive through it slowly. Are the homes well maintained? Are there lots of renters (not usually a good thing) especially if a college is nearby? Are there families with kids the ages of your kids? Does the neighborhood have pools, parks, close by shopping, and easy access to public transportation? Are the local areas of interest within a convenient drive? Are you on a street used to get in and out of the neighborhood? Commuting time? Does the house have to be updated? Can you sell this house in the near future?

Check out your credit rating. Take action to improve it before you consider purchasing. Check into whether VA eligibility will be a benefit worth using. Compare rates and loan processes with military affiliated financial firms before shopping other financial institutions.

Buy the lesser house among the better homes in the neighborhood. You don’t want the best house among the lesser homes. The nicer homes will hold your home’s value better than if you have the better home in a lesser neighborhood.

Consider the turnover in the city or area. You want to buy a home in an area that has a lot of turnover each and every year. Granted this is a double edged sword because the more homes that sell each year mean you face more competition. But the other side of the sword is there’s no one buying when you need to sell. Better to compete for buyers than have no buyers. You can control how well your house competes. You can’t generate buyers from thin air.

Keeping a house as an investment property or because you may come back to the area someday could be a good reason to buy. However, have a solid financial plan in place for the worse case scenarios. Considerations…you can’t find a renter, renters damage the house, legal costs associated with bad renters and contracts, deductibles, property management cost, types of insurance (flood?), regular upkeep and upgrades, the neighborhood goes down the tubes, the master building plans for your area according to the county (new parkway anyone?), you have to sell the home unexpectedly.

“Investments” are long-term vehicles. Short-term is for “savers.” Investors understand their investment and the market. They take advantage of history and data as they do their analysis. They look for solid, well ran investments where the probability of growth over the long haul is the greatest. The point is they maximize the probability for success and minimize the chance for loss. Time is a crucial factor for success.

Short-term “investors” are speculators. Speculation is all about market timing and investment selection. Speculators guess wrong on market swings and their selections most of the time and that’s when they are able to control the timing and selection! How much do we hear about day traders anymore? There’s quite a bit of greed in this strategy and what did I say about emotions? Military home buyers are betting they can buy low and sell high in the housing market when they have no control over the timing or location (city/state/region). Talk about fighting with both hands tied behind your back. If a military member profits on a PCS house purchase, it’s all luck of the draw—right place, right time. Greed and luck—what a combination and terrible investment strategy.

You got a story to tell? Add your comments. Please keep it professional since we all have opinions based on our experiences and knowledge. We want to be helpful.