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12/04/2013

Set Your Goals and Check Your Risk Before Investing.....

You’ve probably heard the saying, “You can’t get to a destination without a map.” While maps have largely been replaced by GPS devices, the point is still the same. You need a plan.
I am struck by how few investors have an investment plan in place. Instead, they are focused on picking stocks and mutual funds and timing the market. This is a classic example of putting the cart before the horse. If you want to invest intelligently and responsibly, here’s a process you should consider:

Stock market graph on a computer monitor with a finger pointing at the graph

Stock market graph on a computer monitor with a finger pointing at the graph

Determine your goals. The goal of having sufficient income in retirement is very different from the goal of saving enough money to buy a home. Over the years, I have noted a wide diversity of goals of my clients. They include providing for a special-needs child, leaving an inheritance to their children, funding their grandchildren’s (or great-grandchildren’s) education and leaving funds to a favorite charity. The investment strategy for each of these goals will be different.
Be realistic about risk. Risk is a double-edged sword. On the positive side, in a properly constructed portfolio, higher risk means higher expected returns. It also means more volatility over shorter periods of time, however. Sometimes investors tell me they want returns but they can’t tolerate any risk. I tell them they don’t need an advisor and they should invest in short-term Treasury bills or an FDIC-insured savings account. Their return will be the “risk-free” rate of return, which is currently very low.
You need to understand your need and willingness to take risk and your ability to do so. These are each different issues.
I once asked an investor with a very significant portfolio why he was so heavily weighted in stocks. He told me he wanted higher returns. I asked him what he would do with the additional money if he achieved them. He had no answer because he couldn’t possibly spend the money he had already accumulated. He had no need to take such a high level of risk. If you are not as fortunate (and most of us aren’t), you probably need to take some risk to achieve your rate-of-return objective. Unless you know this objective, you can’t determine your risk.
Some investors can’t tolerate the gut-wrenching downturns in the market like the one we experienced in the recent Great Recession. If you are one of them, recognize your emotional limitations and construct your portfolio to limit your risk to a level consistent with your tolerance.
A sharp decline in the value of your portfolio may cause you more economic harm than you can tolerate. There is no guarantee your losses would not continue for an extended period of time. Could you deal with those losses by postponing retirement or saving more? If not, you don’t have the ability to take that level of risk, even if you have the willingness to tolerate it.
Only after you have engaged in this thought process should you consider your investment strategy.
Dan Solin is the director of investor advocacy for the BAM Alliance and a wealth advisor with Buckingham Asset Management. He is a New York Times best-selling author of the Smartest series of books. His next book, “The Smartest Sales Book You’ll Ever Read,” will be published March 3, 2014.

How Real Estate Fits Into Your Retirement

You need to consider the benefits of buying real estate along with the risks.

Homeownership used to be considered the American Dream. Most baby boomers grew up with a goal of owning their own home. Now, many members of the younger generation question whether it is a good idea to buy real estate.

No wonder -- having watched the housing market collapse five years ago, combined with a difficult job market, buying a house or condo may not be a wise move anymore. Homeownership has been steadily falling from its high of 69.2 percent in 2004 to a current rate of 65 percent, according to the U.S. Department of Housing and Urban Development.

So, is it a good idea to buy a house or condominium? To be clear, this is a question about purchasing real estate as a residence, not as an investment. When considering whether to buy, there are three major issues to consider: liquidity, return on investment and the personal use value.

Liquidity is the first issue to consider. Buying or selling real estate is timely and costly. It is generally not a good idea to make a purchase unless the property is expected to be owned for a long enough time period to recoup expenses and not result in a fire sale if circumstances require moving.

For example, it may not be a good decision to buy a one-bedroom condominium if you expect to have a child in the next few years or to commit to a house if a pending job change may require you to relocate to another city. Obviously, if there is the possibility of buying a new house without selling the first, the illiquidity of real estate is not a problem. However, most people don't have enough liquid cash reserves to invest in multiple houses and wait out the market for an opportune time to sell.

A second issue is the return on real estate. Real estate has not seen the same capital growth as the stock market over the past quarter century. Nonetheless, real estate provides diversification to a portfolio and returns can be amplified by leveraging the purchase with a mortgage. For example, an individual buying a house for $100,000 with a $20,000 down payment will realize appreciation on the full $100,000 from the date of purchase. Although the rate of return on housing does not change, the gain on the investment is significantly higher.

Finally, it is important to consider the personal-use aspect of housing when making a purchase. This concept can actually work in two directions. When purchased as a residence, houses are providing personal use as well as an investment return. This means a homeowner can live in the house and avoid paying rent while also experiencing gain on the house through appreciation. Yet that appreciation is locked in because the homeowner cannot tap into it without selling the house and losing the place to live.

The personal use of a house is very important. An initial comparison between renting and buying might compare rent to combined costs of mortgage, maintenance, insurance and taxes. However, this does not take into consideration particular attributes of mortgage payments, which is that they are fixed and finite. The principal and interest portion of a fixed mortgage will remain the same over time (although taxes and insurance might rise) whereas rental costs will increase. In addition, the mortgage should eventually be paid off, providing the homeowner with a rent-free place to live. This can be a great planning technique for retirement -- if the mortgage is paid off at the time of retirement, there will be a reduction in expenses at the same time income falls.

Although the personal-use aspect of a house brings benefits to the homeowner, this also means the investment return is difficult to access for other uses. If a family downsizes its house as children leave home and less space is needed, then cash can be pulled out. Other ways cash can be taken out come from using a home equity loan or a reverse mortgage. However, many people are reluctant to use reverse mortgages to tap into the investment value of their house. Reasons for this hesitation include high closing costs, reduced inheritance left to family, continued responsibility for maintenance, tax and insurance and the need to pay off the loan if the house is sold.

The bottom line is that owning your residence can be a good decision financially, provided it does not cause liquidity problems and provided there are separate sources of retirement income. However, each individual or family is unique and will have to evaluate their options based on their specific circumstances.

Ann G. Schnorrenberg, Ph.D., is a financial planning associate at Monument Wealth Management, a financial advisory firm located just outside Washington, D.C., in Alexandria, Va. Follow Ann and the rest of Monument Wealth Management on Facebook, Twitter, LinkedIn, YouTube, Google Plus and on their "Off the Wall" blog, which can be found on their company website.

Investment advice offered through Monument Advisory Group LLC, a registered investment adviser. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendation for individual. To determine which investment is appropriate, please consult your financial adviser prior to investing. All performance referenced is historical and is not a guarantee of future results. All indexes are unmanaged and may not be invested into directly.

Real estate values drop in New London revaluation

Last assessment done in 2008; decreases range to 35 percent

New London - New property assessments in the city have been completed and show up to 35 percent decreases in real estate values.
Mayor Daryl Justin Finizio told the City Council Tuesday night that the current tax rate would have to increase by 17 percent to adjust for the loss.
"But this is not a 17 percent tax increase," Finizio said, speaking to the newly elected City Council that was sworn in on Monday. "Most New London residents will make out OK."
The new assessments, which are preliminary, do not apply to the current tax rate. The tax rate based on the updated assessments will be determined as part of the 2014-15 budget process.
The last revaluation in the city was completed Oct. 1, 2008. State law requires municipalities to conduct revaluations every five years.
The types of properties seeing the largest reductions are multifamily houses.
According to a memo to the mayor from the assessor's office, single-family homes lost about 23 percent value. The median decrease for residential vacant land is 18 percent, 25 percent for condominiums and 36 percent for two- to four-family houses.
Buildings with five or more apartments decreased overall by 2 percent, and industrial property went down overall by 10 percent.
Commercial real estate went down by 34 percent.
The updated assessments were mailed out to residents Tuesday, and informal hearings will start Friday and continue through December. Those wishing to discuss changes can schedule an appointment with Vision Government Solutions, the company that conducted the 2013 revaluation.
During the hearing, property owners can ask about the process, request a review of property data and bring in recent appraisals or real estate listings for consideration. Copies of documentation should be provided to the staff for review.
All new valuation and assessment data will be available on the VGSI website with the links shown on the individual notices.
At the conclusion of the hearings, a second notice will be mailed to property owners who appealed, listing the results.
Individuals who still wish to contest their assessments may appeal to the Board of Assessment Appeals by Feb. 20.
The assessments will not be finalized until after the hearing process and after all changes have been reviewed and processed.
k.edgecomb@theday.com
TO SCHEDULE A HEARING
Appointments can be made by calling (888) 844-4300 between 9 a.m. and 4 p.m. Monday through Friday. All hearings, which must be scheduled by Dec. 16, will be held by appointment only in Council Chambers at City Hall. Appointment can also be made online at www.vgsi.com/schedules.

Online auctions for real estate opens in Dubai

Real estate auctions have taken the leap to the online world. (Image credit: Shutterstock)

The Land Department is releasing 17 real estate properties for online auction, a first for the department according to Gulf News.
Potential buyers can browse through the auctions using eMart, a new portal developed by the department, which can be accessed through the Land Department’s official website.
The portal provides many real estate services, including the auction, sale, purchase and rental of real estate through Ejari, an electronic registration service for tenancy contracts.
Traders will be able to complete purchases of properties easily and pay through Noqodi, an online wallet available to registered traders.
Both residential and commercial properties are listed for auction.
Each listing includes detailed list of the property, including a map.
Sultan Bin Mejren, director-general of the Dubai Land Department, told Gulf News that the new portal will increase the number of daily transactions for the department.
“The new portal is required to cope with the ongoing growth in the real estate sector and facilitate all procedures for real estate sector operators and stakeholders.”

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