Reverse Mortgages Are Good!

Reverse Mortgages developed a bad reputation when they started out 25 years ago, mostly because their fees and rates were high and they weren’t very flexible. However, over the past 10 years, a number of changes have occurred due to increased regulation and FHA control which have made reverse mortgages much more pro-borrower and user-friendly. If you are age 62 or older (the minimum age to qualify for a reverse mortgage), I highly recommend that you at least consider converting your existing standard mortgage into a reverse mortgage. If you are lucky enough to have paid off your mortgage, I recommend you think about getting a reverse mortgage, even if you don’t borrow anything on it.

HECM

A Reverse Mortgage is now known as a HECM, or a Home Equity Conversion Mortgage. Although you obtain a HECM through a private-sector lender, HECM’s are highly regulated through the FHA. Here are some general provisions for a HECM:

  • You do not have to make monthly interest payments. Any unpaid interest is accrued to the loan balance.
  • You can elect to draw on the loan in a lump sum, over a period of time such as every month, or not at all. It is your option. You can use it like a line of credit if you want.
  • Any money you draw from your HECM is tax-free to you, because all you are doing is converting one asset you have (home equity) into another type of asset (cash).
  • As long as you pay your property taxes and insurance, there is no event of default that will cause you to lose your home.
  • The maximum loan amount is currently $726,525.
  • It is a non-recourse loan. That means if the unpaid balance exceeds the value of your home, the lender cannot come after you or your heirs to make whole on the loan amount after you pass away or sell your house. Any unpaid balance is covered by the FHA’s insurance fund. This is one of the best attributes of a HECM.

Fees and Rates

Currently, the maximum fee for a HECM is $6,000, which may seem high, but is lower than it used to be. Interest rates are in the high 4%-range for either a fixed or an adjustable rate HECM.

Why I Like a HECM

If you own a home and have home equity built up, meaning you have lived in your home for a while, I like using a HECM as a type of insurance policy for things that may go wrong after you turn 62. HECM lenders advertise the HECM as a way of converting your home equity to cash, and that’s true, but not necessarily as a way to pay yourself income on a monthly basis, although that is one option. For instance, if you are in your 50’s and don’t already have loads of long-term care insurance, it is unlikely that you will be able to get the insurance you will need someday because insurers have clamped down on LTC insurance. Moreover, any insurance you obtain is unlikely to cover the costs of long-term care you will have to pay. Solution: Get a HECM, and if you need to pay for long-term care, either inside your home or at a facility, then draw down on your HECM. What if you draw down more than your house is worth? No problem, the lender cannot come back at your estate for the difference, and the FHA will pay any unpaid balance.

How Can I Get a HECM?

If you are age 62 or close to it and are interested in a HECM, go ahead and Google HECM Lenders In Your Area, and see what comes up. Not all HECM lenders are licensed to do business in every state or area, so you can do some digging. Alternatively, contact me and I can help you find a lender.

IMO

I view a reverse mortgage or a HECM as an important financial planning tool. Though you can us a HECM in its traditional sense of paying yourself some amount of monthly tax-free income, if you have sufficient home equity built up, I view its better use as a type of insurance line of credit that you can draw down on if and when you need it. Rather than deplete your cash savings when you need help, you can tap into your home’s equity, and otherwise keep to your plans with your other expenses. Questions? Google HECM, or contact me.

No Prenup

As you may have learned, Amazon’s Jeff Bezos and his wife MacKenzie are getting a divorce. It appears they did not have a Prenuptial Agreement. Because they live in Washington, which is a community property state, absent any other agreement, they will split their $140 Billion +/- fortune down the middle. Big money divorce! Big potential haul for the divorce lawyers. It is likely there will be an agreement at a number that is not 50/50.

Jeff and MacKenzie Bezos

Startup Marriage vs. Acquisition Marriage

Jeff and MacKenzie met before Jeff started Amazon. They were both in their 20’s when they got married. This is an example of a Startup marriage: Both parties are young with minimal difference in assets between them and no major asset to protect through a prenup. Thus, though it sounds like a gross miscalculation on Jeff’s part not to have had a prenup, it makes sense given where the couple was when they got married. There are no thoughts of a prenup when you are basically in the same place financially and there is nothing to protect.

It is a different story in an “Acquisition” marriage. This is typically where the parties are older and have accumulated significant assets prior to meeting and/or marrying the other party. Often, this could be not the first marriage for one or even both of the parties, and children from the prior marriages are involved. Though it can be a delicate subject to discuss when both parties believe they are on the road to bliss, it can be a smart and very important financial planning move to protect your assets through a prenuptial agreement.

First, Get a Financial Planner

If you are, say, 35 or older and have stars in your eyes for someone else, don’t fly without a net. Protect yourself first by working with a financial planner develop a plan for your assets prior to jumping into the marriage. Developing such a plan would be your brain ruling. Smart, rational thinking. Not the other. Do you have kids from a prior marriage, and you want them to get your assets when you pass and not your new spouse’s prior kids? Work with a financial planner, who will probably bring in an attorney, and get yourself a prenup and a will. While you are at it, make sure you have a Medical Power of Attorney agreement. Do you want your new spouse calling the shots on when to pull the plug, or do you want your prior kids making that horrible call? That all needs to be spelled out before you are unable to do so. Getting a Financial Planner is the important first step that will save a lot of pain later on.

IMO

Everyone thinks they are going to stay married forever, but everyone also is aware of the statistics, and so while a Prenup may be the Head getting in the way of the Heart, it is very important to get all of your ducks in a row before get married and mix too many metaphors. I will be glad to discuss any of this with any of you, so contact me if you see the need.

Automated: Trading and Driving

I read this article in the Investor’s Business Daily from December 27 about the current situation with Waymo, which is Google’s automated car division, and it made me think about where we are with automated cars vs. where we are with automated stock trading. There are parallels.

A Waymo Automated Car

Cars

Many of you may not have yet seen an automated car on the road. They are being tested only in a certain few cities. Tested is the key word. When you see one, you know it is an automated car. Their appearance is unique. They don’t just go around driverless – they are not that advanced yet. There is a driver ready to take control as necessary. The gist of the IBD article I cite is that the cars still require drivers and that we are still several years away from being able to be fully autonomous. When you are talking about cars speeding down the road, lives are at stake, and so the whole business of automated driving is highly regulated, probably correctly so. You wouldn’t want to go out and drive among a road full of untested, unproven autonomous vehicles not knowing consistently which way they are going to turn next, would you?

Trading

Well, in a way, that’s what we are doing now in the stock market. We are trading in a market world where it is estimated that over 80% of trades are automated. Any of us who make trades are trading against these trading robots. By robots, I mean full autonomous – no driver behind the wheel when it is making trades. Yes, there is a “mechanic” who put together the robot, and the trading robot can go back to the shop if it is leaking oil, but the robot trades on its own without human intervention. In this sense, automated trading is ahead of automated driving. Because only money is at stake, not lives, there is little regulation. Nor should there be.
Automated trading is one of the primary reasons why we have increased volatility in the recent past. Unfortunately, if you are waiting for roads with less traffic, automated trading, algorithmic trading, is here to stay, and will only increase, in my opinion.

What To Do?

Here’s the good news, for non-robot human traders: There are ways you can still make money in the stock market. As with driving, you have to know the rules of the road. With most automated trading, and most of the volume related to automated trading, the objective is to capture fractions of a penny in profit. Trade millions of dollars at a time, but make only small fractions because these fractions are “sure things” for these types of traders. If you, Mr. or Mrs. Human Person, wants to make a trade, don’t do so to try to skim pennies. Don’t trade in the same league as the robots. Instead, have as your objective a fundamental or technical understanding of what you are buying and intend to hold it for a longer period of time. That way, your “slippage”, or the the fraction that you might pay that is higher than the listed price, won’t matter as much. You are looking for profits larger than $0.0001 or something like that, so your entry price isn’t that important. It might irritate you that some robot out there might get a slightly better price than you on a trade, but then again it might irritate you when some automated car cuts you off on the road. What do you do in both cases? Be upset for a fraction of a second, but then carry on to your destination.

IMO

The stock trading world has new rules of the road due to automated traders. You can still be successful with your investing if you understand how the new roads work. Keep your cool, and don’t be distracted.

Growth vs. Value

Financial advisers often counsel clients to have a mix of Growth and Value stocks in their portfolios. It makes sense – Growth stocks do well during bull markets and Value stocks outperform during sketchy markets. Morningstar famously characterizes the mutual funds that it analyzes as either Growth, Value, or a blend of both.

Growth, Value, or a Blend?

Different Shopping Styles

If you think about it, the Growth investor and the Value investor employ very different strategies and methodologies. If they were shopping in a department store, the Value investor would head straight to the Sale rack and see what bargains they can find from the racks of clothes there, or they would read through the store flyers or coupons and buy what is on sale. The Growth investor, on the other hand, sees what is trendy or “in” and buys that item. Price is a concern for the Growth shopper/investor but not as big a concern as is being on the cutting edge. The Growth shopper reads the fashion mags and wants to look like the photos. The Value shopper could care less about what the models are wearing; they just want to look decent and not pay full price. Both are valid ways to shop and dress.

Two Different Skills

If you are a Sale-Rack shopper, to carry the analogy further, or you know or are married to someone who is, then you know that there is a certain mentality that goes with being a good Sale-Rack shopper. They wouldn’t be caught dead buying the latest in fashion because it is not worth it to them to do so. Conversely, the trend-setter shopper would be loathe to stoop to shopping in the sale rack. No chance of getting Instagram followers by wearing last year’s fashions.

Same Way in Investing

It is the same way in investing. Investors who are successful at finding good values are probably not the best at finding cutting-edge stocks that will lead the bull market upward. So, if you feel like you are good at finding bargain stocks, you probably should let someone else do the picking when it comes to Growth stocks. That means letting a Growth Fund do the picking for you. Go to Morningstar and find a Growth Fund that you like and buy that fund. Likewise, if you are good at spotting trends and know how to monetize your skill, then you probably aren’t as skilled at finding bargains, so you should use a Value Fund to do your Value investing. Always remember that it is good to have a mixture of Growth and Value in your portfolio in order to capture the upside (Growth) and to find undervalued deals out there (Value).

Need Help? Ask Me

If you don’t know whether you are good at either Value or Growth investing, or if you don’t know if you are particularly good at any type of investing, then you should get help with your portfolio construction before doing anything. Contact a CERTIFIED FINANCIAL PLANNER™, such as me, or through the cfp.net website. When it comes to your own money, it is very important to get it right, and the money you spend to work with a CFP® you could earn back fairly quickly if they help you get it right.

GE – Time to Buy?

I don’t own GE directly but I have been fascinated watching GE’s downfall. My mother worked at GE back in the day and I grew up near Schenectady, so I have some connection to GE. GE’s recent history and troubles were well-reported in this article in the Wall Street Journal on December 14, 2018.

Time To Buy?

As I write this on 1/2/19, GE is trading at $8.10, up from a low of $6.66 in late December. That means some bottom-fishers are buying GE. But is it really a great buying opportunity? It is certainly an example of “catching a falling knife”, which is not a recommended strategy.

If you buy GE now, you do so because you believe in the new CEO, Larry Culp, and his ability to be a turnaround wizard. Because Culp turned around Danaher, he can turn around GE. However, GE is a much different animal than was Danaher – much larger, more bureaucratic, more internal vested interests. Moreover, it appears that GE’s power division, in particular, has issues that will take a long time to resolve, even with Culp in control. Also, you think at $8.10 there is little downside? What if it goes to $4? That’s a 50% drop. There is still plenty of downside, even at $8.10. So, as you might surmise, I don’t see GE as a great buying opportunity, even at $8.10, because there are so many huge obstacles to overcome even if they do have the right skipper at the helm.

Ackowledgement

On the other hand, it appears that GE’s management is at least in the Acknowledgement phase – they know they have a big problem and they are seeking to fix it. That’s not always true with companies that need fixing – some companies deny there is a hole in the boat even as the boat is sinking. GE over the years has hired some of the best and brightest people. That doesn’t mean they all know what they should do now but it does mean they are able to spot a problem when there is one. If GE as a whole is on board with fixing their own problem, that bodes well for the future of the company. Culp may or may not be the right guy to right the ship but, as an outsider not having grown up within GE, he is the right type of leader for its current situation.

IMO

So, if you do want to jump in, feel free, but don’t go all-in just yet. I think the argument to wait and see is stronger than the argument to buy GE now, but there are good reasons to buy now, especially if it is your “fun” money. I am skeptical that Culp will be the savior because of all of the entrenched interests at GE, but if those interests truly want to change then, with their help, Culp can work. Culp can’t do it on his own – he needs total cooperation from within. A difficult but not impossible task.

3 New Year’s Resolutions

Happy 2019, everyone! I hope 2019 brings you hope, happiness and peace. The New Year is a time for resolutions, so let’s jump on that bandwagon. Losing weight is always a good one, perhaps a cliche but in reality good for your health. However, I am recommending 3 resolutions that relate to your personal finances. Check these out:

Don’t Look At Your Account Balance Every Day

It is highly likely that the increased market volatility that we have seen through 2018 will continue in 2019. The sources of the volatility are still in place:

  • The Federal Reserve’s Quantitative Tightening policies of raising interest rates and culling its $4 Trillion + bond portfolio.
  • Program stock trading that takes any trend and magnifies it to the n’th degree, likely thereby creating an over-impression of the strength of any directional move.
  • An upending in the world trade order and the threat of higher tariffs and therefore higher prices on imported goods.
  • President Trump’s leadership style. Like him or not, his style does not present a sense of calm.

When there is higher volatility in the markets, it is easy to get caught up in it and worry about your own account. Don’t! Instead, rise above the morass and take control of your own emotions. Remain calm yourself and act rationally with minimal emotion brought on by daily gyrations. One way to do that is not to look at your account balance on a daily basis. Studies show that it is best to look at your account balance on a weekly or even less frequent basis, specifically because one tends to be more rational when you look at it less frequently. If you are truly addicted and can’t help yourself, at least discipline yourself only to make decisions on your account on only one day per week, such as every Tuesday. There is a reason why your broker sends you an Account Statement only every month: It is because it is healthier to look at your account every month rather than every day.

Turn Off TV News

By this I mean national 24 hour news stations as well as the likes of CNBC, Bloomberg TV and Fox Business News. Live in a state of blissful ignorance. Instead of TV, find a trusted newspaper (old school) or website (21st Century) and read about what is happening. You may get the same news reporting, but the volume and hysteria are toned down if you read about it rather than watch it on TV. The Millennial Generation is criticized because they “cut the cord” and watch only streaming shows on Netflix and the like and eschew news about the world around them. Criticize them if you want, but there is a lot to be said for choosing not to get upset by the news of the day.

Read Fiction

Develop your financial plan, own the assets you want to own, and let things play out. Take a look at it every week, 2 weeks, or month; make adjustments as necessary; and otherwise live your life. Concentrate your efforts on your family, your job, and your community rather than on your personal finances. Read fiction rather than watch TV. Fiction is a wonderful escape from the vagaries of everyday life. Books cost too much? Go to your Public Library. If your Local doesn’t have the book you want, chances are your Local is part of a regional system and can get the book you want quickly. You like to read on your tablet instead of a heavy book? The Library loans out books to download. You may have to wait for it (I don’t understand why, but that is the case), but you can download books to your tablet for free through your local Public Library. Don’t know what to read? There’s always the Classics, but if you want a more modern book, first go to Amazon and read the best-seller lists and the reviews of the best-sellers to see what you might like, and then go to the Library and get it. If your book is not in stock, then put a hold on it and you will get it when it is your turn. Spending your time by reading fiction instead of fretting about the financial markets is good for your mental health and is also probably good for the performance of your portfolio.

Bed and Breakfasting

It’s year end 2018, and this is my last posting for calendar 2018.  If you have invested in the stock market during the past year, there is a high likelihood that you have positions that are losing money.  If so, perhaps you are thinking of selling those positions, or maybe you already have sold those losing positions, during the last few days of 2018 so that your loss can offset gains that you may have earned on the remainder of your portfolio.  It’s fine and even a good idea to sell loser positions, but you have to remember one thing:  If you buy back your loser security within 30 days of selling it, any loss you take will be disallowed by the IRS.  This includes selling losers at the end of one tax year and buying the position back right after the new year.  Can’t do it!

Bed and Breakfasting

In the extreme case, you sell your position in the last minutes of December 31 trading and buy the same position back when the bell rings on January 2.  This is called “Bed and Breakfasting” especially in the UK because you are only out for such a short period.

Wash Sale

In the US, it is called a Wash Sale when you buy a substantially alike security within 30 days of selling at a loss.  This could mean selling the S&P 500 Index ETF (the SPY) at a loss and then turn around and buy the Vanguard S&P 500 ETF (the VOO) within 30 days.  Not exactly the same but substantially so.  This is a Wash Sale and any loss on the sale of the SPY would be disallowed by the IRS.  Wait 31 days and then buy it back?  That’s ok, and your loss on the sale would be allowed.

IMO

The IRS reports that they are so understaffed that they are substantially reducing the number of audits they conduct.  In related news, capital punishment has become less and less frequent.  Nevertheless, the same logic should apply:  Just because bad stuff is less likely to happen to you doesn’t mean you should be more incented to try to get away with the bad act.  Don’t commit capital harm to another person, and don’t try to outsmart the IRS by selling now at the end of the year and buy back the same position right after the 1st of the new year.  If you do, you are waving the red flag in front of the bull.  You are asking to be audited.  Luckily, I have never been audited and hope that remains the case.  One of the ways I do so is to make sure I don’t buy the same position back again for 30 days after selling it at a loss.  

Christmas and Sharing

The whole concept behind giving Christmas gifts is that you are sharing your joy of Jesus’ birth by giving gifts to others.  Usually this means your immediate family but you should take it a step further if you don’t already and share your gifts with total strangers.  Don’t know any total strangers?  No problem!  Give through your church or place of worship, through your City, or through established gift-giving organizations such as Salvation Army or Toys for Tots, which you can typically access through your fire department.

Giving and Financial Planning

This is a blog about investing and financial planning, and so giving money away doesn’t sound like it should be part of a financial plan, but it is.  For 2018, the Standard Deduction for Married Filing Jointly jumped to $24,000, which means that those who earn and therefore give small amounts are unlikely to benefit by charitable giving because they are less likely to itemize their deductions because there itemized expenditures are less likely to be higher than their standard deduction.  Therefore, most giving that you do will be out of the kindness of your heart, which is, if you think about it, the way most giving is done anyhow.  If you give your kids or grandchildren or others a small gift, you probably aren’t thinking about tax consequences.  Instead, your gift says you are joyful with the recipient and you want to share your joy.

Why Do You Earn Money?

Other than to earn enough money to feed, clothe, and house yourself, why else do you go to work every day to earn money?  What better reason is there than to have enough to share with others?  The motivation to have enough to share with others is a very important reason why we work and earn money.  If you are motivated by a cause such as giving to others that is greater than yourself, you will be more likely to want to get out of bed every morning and drag yourself to your job.  That is why Christmas and Sharing is a very important part of someone’s financial plan.  Achieving the plan in and of itself is a good motivator, but helping others is better.

  

Eat Your Vegetables

I joke that my job as a CERTIFIED FINANCIAL PLANNER™ is to tell people to eat their vegetables.  Meaning, I tell people to do something or things that they know is good for them and that they already know they should be doing.  Not spending as much as you take home is like eating your vegetables:  You know you should do it but sometimes it’s tough to stomach and you want to do something else.

Harry says, “Eat Your Vegetables!!!”

Really:  Eat Your Vegetables

In today’s posting, I am suggesting that you literally Eat Your Vegetables as part of your financial plan.  Why?  Because eating your vegetables is good for you, which means you will likely be more healthy, which means you are less likely to need expensive doctor and specialist visits and hospital stays when you are older, which means you won’t need to spend as much money on medical care.  Staying healthy is a great financial plan with a lot of other added benefits.  

Obesity

What prompted me to write this is this report of the United Health Foundation’s 2018 America’s Health Rankings by state.  This is the 29th annual ranking.  Despite the emphasis on obesity, the problem is getting worse.  Hawaii and several New England states rank the best and Louisiana, Mississippi and Alabama (SEC states all) rank the worst.  Hawaii surprises me – Having been to Hawaii a few times, I have seen some really fat Hawaiians, but I guess it averages out.  For all of the yoga and exercise some of us (collectively) do, it sounds like more of us needs to do some more.

Vegetables Are Cheap

The other good thing about vegetables is that they are cheap.  At least, they are much cheaper than fast food.  I am fortunate enough to live where there are a lot of farmers’ markets as well as a permanent farmer’s market store, and good vegetables can be had very cheaply there.  Eat healthier and save money while you are doing so – what could be a better financial plan than that?

Arguments Against

I know there will always be arguments against healthy eating.  George H.W. Bush hated broccoli and he lived until 94.  Thin people can get Alzheimer’s just as well as fat people.  All true, but these are the exceptions to the rule.  If you look to hope in the exceptions, you are lying to yourself and making excuses for your own poor habits.

IMO

I’m not advocating going Vegan.  I am just saying that you eat your vegetables.  Direct consumption of vegetables appears to be a far more effective way of supplying your body with needed vitamins and nutrients than taking vitamin supplements, studies have shown.  You know you should save some of your take home pay each month, and you know you should eat your vegetables, so go and do so!

China: The News of Today

If you watch CNBC, Fox Business, or Bloomberg TV, or if you follow the financial markets regularly, does it seem to you that the markets focus in on one geopolitical event and trade up or down based almost solely on that news?  And, if you see this, do you think markets are overreacting to said news of the day?  Currently, it seems that the markets are trading substantially on news about trade and China, including the arrest in Canada of the CFO of Huawei.  Before, it was interest rates.  Before that, it was the murder of Khashoggi.  Now, I agree that issues with China and trade are newsworthy and may have an impact on aspects of the US economy and US companies, but should these issues provide the sole impetus for the direction of all stocks, with the effect of minimizing other issues such as corporate profits?

US – China Trade War!  Oh No!

Overbaked

My point, if you haven’t yet figured it out, is that financial news outlets try to condense the news into small memes or soundbites.  Investors and even institutional traders pick up on these news and try to trade and profit on their perception of investor sentiment based on these news memes.  Then, if markets move too much in one direction, algorithmic trading programs kick in and exacerbate the issue.  I don’t think there is much fundamental about it; what you have (or can have) is a bunch of memes spread end-to-end on one another, with the meme spreaders perhaps forgetting from day to day what yesterday’s meme was.  “It looks bad today, but yesterday it looked good, so is today worse than yesterday was good?  Should I sell today even though I bought yesterday?”  It can get very confusing.

Take a Step Back

As with all other forms of news, if you want to move forward with your sanity intact, sometimes you have to take a step back, take a breath of fresh air, and turn off the financial news.  Financial news is addicting, but like other forms of addiction, it can and probably will do you harm at some point during the process.  Instead of letting the financial news control you, you need to take control of your own financial news.  Buy in when you see a good opportunity, and maybe think about dollar-cost-averaging your position so that you spread out your basis and therefore buy at a reasonable average price over time.  Don’t get sucked in by the financial media.  Today’s China Trade story will morph into a different story tomorrow, whether it is interest rates, the unemployment rate, or the next election cycle.  Imagine the hugest supertanker in the world, times 100:  This is the US economy, which is about 24% of the world economy.  It doesn’t turn on a dime and it continues to churn in a certain direction despite the hits it takes from the outside.  You should invest and financial plan based on the pace of that supertanker, not based on the little insects that might run into it from time to time.

IMO

The China Trade story is significant but what we are seeing now is just a bunch of posturing or negotiating tactics by both sides.  Both the US and China’s best interest is in keeping a lid on any escalating trade battles.  Despite what you may read and feel, both countries are acting rationally, if a little overdone.  Remember that US corporate earnings are strong and are projected to remain strong for the next year, if not perhaps as strong as they have been in the past year.  Earnings, more than headlines, will drive stock performance, and the future with earnings looks rosy.