Archive for March, 2016

Real Estate Markets That are Booming in 2016

Monday, March 28th, 2016

real estate

Investing in real estate is much like making strategic investments in the stock market: Markets must be chosen carefully in order to maximize the long-term value of this investment, taking advantage of short-term and long-term trends. In real estate, there are decidedly some “winners” and some “losers” among major cities and metropolitan areas across the United States. Before investing in real estate, it’s important to understand the markets that are ripe for the biggest growth in home values over the long-term, since this can result in a significant accrual of wealth for smart investors. While the economic recovery’s rising tide continues to lift all boats, these markets are rising quite a bit faster than average and represent the best choice for today’s investors.

1. Austin, TX

Austin TX

Austin has developed a reputation for being “weird,” but there’s more to this city than its cultural diversity. In fact, Texas’ capital city has quite a bit going for it. As the political center of one of the country’s most populous states, Austin has ample opportunities for public servants, lobbyists, and lawyers. As a tech and entertainment hub, Austin also shines in terms of its white-collar job growth. As the home of the University of Texas at Austin, the city is also a major draw for the “eds and meds” that will drive the 21st century economy.

What does this mean for real estate investors? A growing population, rising home values, and long-term growth projections that make for a sound investment. According to industry experts, the Texas city ranks first nationally for investment, second for home building, and fourth overall for real estate investment.

2. Denver, CO

Denver CO

Colorado has become the center of a new progressive political movement as well as high-tech and “green” jobs. The state, notorious most recently in the national press for legalizing marijuana, also has some of the best regulations on the books for tech startups and green businesses. As these two sectors continue to grow their overall representation in the American economy, Colorado’s largest city of Denver continues to grow both its resident population and its home prices. The city was named the second-best investment market to watch for 2016, and the most recent Case-Shiller Index report notes that local home prices are expected to increase by at least percent during the upcoming year. Homes in Denver also sell much faster than the national average, according to Realtor.com, making it an excellent market for sellers and investors alike.

3. Miami, FL

Miami FL

Miami continues to grow and evolve as a major gateway to the Caribbean and South America, giving it a reputation as an international center of finance and investment. The city, which is also a hub of vacation and retirement activity for Americans from all corners of North America, is also an excellent choice for buyers and investors looking to maximize their return on a mortgage or cash payment. The city’s homes are expected to appreciate in value by at least 18.7 percent through the end of 2016. Given Miami’s excellent, beachfront location and its ability to draw top talent from the United States and abroad, this diverse market is a perfect fit for buyers and investors who want a quick, almost guaranteed return on their initial investment.

4. San Jose, CA

San Jose CA

Some of California’s real estate markets have been through tough times in recent years, but that’s not the case in San Jose. This growing technology capital, located just a short distance from San Francisco, has recently been identified for high-tech campuses built by Apple and others. The city continues to grow its overall population, led by software and hardware engineers who are setting foot outside of the more traditional San Francisco tech scene. The city’s homes are expected to appreciate significantly in the year ahead, as well as over the long-term, as companies like Facebook, Apple, Tesla, and Google grow their office space and expand into entirely new communities close to their San Francisco headquarters.

Real estate markets are on the rebound, but some are faring far better than others. In states like California, Texas, and Florida, cities are growing because of their proximity to high-tech jobs, excellent weather, and recreational opportunities that maximize the value of each property bought and sold. These markets are the one to watch as 2016 gets underway and real estate investment season begins anew.

A Simpler Definition of Risk in Investing–This Will Make You a Better Investor

Monday, March 21st, 2016

investor image

When it comes to finance and money, we tend to complicate things. In many ways it is quite understandable. Money is a very emotional subject for almost everyone and we spend all our lives in pursuit of, tending to, and judiciously spending our wealth.

The way we have traditionally thought about risk in investing is counter-productive.

Let me explain.

The Traditional Definition of Risk

A very simple yardstick to measure risk is: do your investments allow you to sleep well at night?

So we end up with situations where we worry a lot when one of the investments we own goes down. We may even get rid of an investment to ease the pain of capital losses.

The volatility and bearish market conditions we have had in the past few months have caused many investors to exit the market, either by selling everything and going into cash, or reallocating to bonds and other safer instruments.

Most investors think of themselves as smart, objective, calm and deliberate and able to make rational decisions in times of market stress. The reality is exactly the opposite. When the markets decline, the investors with emotional fortitude continue to stay in the market and make the right decisions, but only up to a point. As the declines deepen, the investors who have kept the faith start to waver, and eventually there comes a time when they give in and start selling. Sure, this threshold is different for everyone and some great investors are better able to tune off the market madness than most others.

But everyone has a pain threshold.

I am painting a grim picture, but the reality is not much different. The reason this happens is that the topic of money and investments trigger the “fight or flight” response in human brain. When this happens, the person is left with only one choice: to act. Rational thought is superseded by the necessity to act. Do something, do anything, just get out of danger.

The computers are no different.

For decades, academics and the Wall Street has defined Risk in terms of volatility. A stock that is highly volatile compared to the market is termed as “risky”. This way, the academic definition of risk mirrors primeval human survivalist definition of risk.

Depending on the trading algorithms, the automated trading software will either try to avoid risk (by leaving a volatile situation), or try to hedge it out (by acquiring another asset that moves in either opposite direction, or is uncorrelated with the risky asset).

When we have a bear market decline, many of these models breakdown and the carefully constructed hedges are no longer functional. Therefore, a wave of selling results to recover that balance.

So What is Wrong With the Traditional Definition of Risk?

In short, it makes you sell when the prices are low and buy when the prices are high.

When the markets are falling, we should be looking to buy suddenly cheaper assets. The volatility here makes us instead try to sell what we do own. When we have a roaring bull market is when we should be afraid. Very few investors are willing to sell stocks when they see it go up every day.

When assets are priced low and at a discount to their intrinsic value, is when they are less risky. When the assets are priced higher than their intrinsic value, is when they are most risky.

Redefining Risk by Separating it from Volatility

It is quite easy to get caught up in situations as they are happening and lose the objectiveness. However, a few key principles can remind us what really matters so we can take a calm breath, step away from that Sell button, and reassess.

  1. Risk is NOT the same as Volatility. In fact, volatility of a stock is in most cases a function of how liquid the stock is. If there are not many shares available to trade (a small company stock, for example), the stock will be volatile.
  2. The academic theories do not prescribe how the market should function. They are an attempt to understand how the market functions. These theories change over time. We are better advised to pay attention to the basic principles of investing and understand that the market is made up of 1000s of thinking feeling humans just like you and me.
  3. The only risk that matters for an investor is the risk of capital loss over the holding period of an investment. Therefore, when you research a stock and decide that it makes sense to hold this stock for 5 years (example), because you can see the business grow to a level in the next 5 years to provide you with an attractive return, what happens tomorrow in the market is irrelevant as long as the business is not impacted.
  4. We tend to think of market as a rational pricing system. It is not in the short term. There is a saying, “In the short term the market is a voting machine. In the long term the market is a weighing machine”. Once you realize that the price variations on a daily basis are a sum total of short term emotions of 1000s of investors and traders that particular day, you will also realize that there is no reason to trust the emotions of these other investors more than you trust your own rational judgment.

Follow the advice on how smart investors should handle the volatility in the stock market. If it is still tough to ride out the volatility, some drastic action is required. Turn the TV off, step away from the computer, and go for a walk. A nice walk almost always gives us a better perspective on whatever we are panicking about.

Shailesh Kumar runs the popular value investing service at ValueStockGuide.com, where he advises clients with long term value investments. Subscribe to his blog here.

References:
Market Volatility Makes Us Fight or Flight, The Telegraph
How Hormones Influence the Stock Market, Newsweek
Is Our Survival Instinct Failing Us, Psychology Today

How to Plan for Retirement as a Business Owner

Monday, March 14th, 2016

401k business

When you’re a small business owner, you must not only think about your profit and payroll. You must always keep your eye on the longer term game, which is providing a comfortable retirement for the future. These are not competing interests, but instead, work together to provide for all of your business needs. Business owners can choose from a number of convenient methods for sheltering money for retirement.

Simple IRA

The Simple IRA can be a good choice for business owners, because it allows the business to provide retirement savings for both the owners and employees in a simplified manner that minimizes administration time and costs. Employees can use paycheck deductions for their retirement, and the owner can either match the funds or not. The tax on the money is deferred until it is distributed at retirement, at generally a lower tax rate. Start-up costs for the Simple IRA are low, and maintenance costs are generally more reasonable than qualified retirement plans. Simplified IRA plans are available to companies with 100 employers or under. Contributions are immediately vested, and any type of employer, such as sole proprietorships, S-corporations, partnerships or non-profits.

SEP IRA

The SEP IRA, or Simplified Employee Pension IRA, is structured in a slightly different manner. In this plan, the employer provides contributions for both employees and business owners that are tax deductible for the business. The contributions and the money they earn are not taxed until they are distributed. Each employee or owner must set up his or her own traditional IRA into which the SEP IRA funds are deposited. Employees must be at least 21 years old and must earn at least $550 for the year. The employee must also have worked three out of the last five years for the company. SEP IRAs are immediately 100% vested, and employees may contribute other money to the SEP account. Administration of the plan is simple and inexpensive. Larger contributions are possible for the business owner under the SEP IRA plan.

401K

The 401K is one of the best known of retirement methods. It can often be used to attract and keep good talent for a business, but it can also be the best method for the owner to save for retirement. In this system, the business owner cannot only make contributions as the employee of the company, but also as the owners of the business. If you want to maximize the amount of money you take from the business for your retirement, the 401K may be right for you. However, the 401K method involves greater costs for setup. You will also have to pay a plan administrator to maintain the 401k, and other SDIRA services. Employees can decide how much to contribute to the fund and can take the fund with them when they leave the company. It allows participants to invest in stocks, bonds, funds, savings accounts and other vehicles. Employers can match funds to whatever extent they wish or not match them at all. Contributions are 100% vested. The hiring of a plan administrator helps to limit liability for management of the plan.

The type of retirement plan you choose can depend on a number of factors that can be determined with the help of your accountant or financial planner. Each plan has its own advantages and disadvantages, depending on your business and your individual needs.

Will Your Retirement Stack up Against the $1M Goal?

Monday, March 7th, 2016

will your retirement stack up

We are at the point here in America where the typical American is told they need $1 million saved for retirement to keep living their life in a way that’s similar to pre-retirement, that amount comes from a survey conducted by the Transamerica Center for Retirement Studies.

Just because a million bucks is what the median American estimates they will need in retirement doesn’t necessarily make it true. After all, 53% of respondents to the survey admitted that their retirement number was a guess. And even if the numbers were well informed, you may differ from the typical American in a variety of ways. But let’s go through the numbers and try to figure out whether a million bucks is a reasonably good number to use.

Working the math

Let’s start with some basic assumptions: Using the 4% retirement rule, a commonly used rule of thumb that assumes a retiree should spend 4% of their savings in the first retired year and adjust for inflation after that. We’ll also take the advice of most financial planners and ballpark that the typical retiree needs around 75% of their pre-retirement income to live comfortably in retirement.

The typical American household earns about $60,580 in the years leading up to retirement, so according to expert assumptions that household could live comfortably on 75% of that, or around $45,435 annually. Four percent of a million bucks is $40,000, so in their first year, the household would be short roughly 12% of the annual income it would need for retirement.

Digging deeper

But there’s a bit more to it than that. First off, the maths here doesn’t take into account Social Security payments. The average American retiree receives $1,294.76 in monthly Social Security benefits as of November 2015, the most recent month available. That works out to over $15,000 in annual income. So, suddenly it looks like a million bucks might be even a little more than enough.

On the flip side, potential medical expenses are a big and scary variable in retirement. According to a report compiled by HealthView Services, the typical healthy 65-year-old couple can expect to spend around $394,954 on healthcare in retirement — excluding long-term care expenses. But long-term care can hit your finances with an immediate, substantial shock. According to work done by the good folks over at Genworth, a private nursing home room costs over $90,000 annually. And a home health aid would run the average family $45,760 annually. So it makes sense to have some financial buffer (including, potentially, long-term care insurance) ready for just such a potential issue.

It seems reasonable, but …

Given the pluses and minuses shared, a million bucks seems as if it may be a reasonably good number for the average American family near retirement age.

But the numbers shared here might not be useful for you at all.

After all, you and your spouse might make more (or less) than the typical American household. You might be expecting a different amount from Social Security. You might be in better or worse health — or have a family health history that differs significantly from the average. Because of that, you may need to think differently about your potential healthcare expenses. You may want to spend up in retirement because there you have big plans for vacations, trips, hobbies, or whatever else, so the 75% rule here may not even apply to you.

What you can (and should) do, instead, is take a long, hard look at your potential retirement expenses and figure out what amount of saving makes sense for you, given the issues gone over. Chances are good that you’re a long way away from that number. Fortunately, there are a number of ways to juice your savings. Start with better budgeting, because a small amount of time spent now can help make a huge difference in your retirement, so take the opportunity to get ahead of the game now.