Investment Fashion - Stocks are In, Real Estate is OUT!
Tom Jandt
April 01, 2006
It is Spring of 2006 already, can you believe it?! It?s amazing how time flies and how quickly our investments can appreciate/depreciate in a blink of an eye. Like fashion trends from Tokyo to New York to L.A to France, sometimes it?s hard to keep up with what?s in style. But making money is easy to track, the bottom line tells the story at the end of each month, quarter and year? and it sure has been a terrific 3 years for real estate and stock market investment returns! So celebrate if you want to, but then you?re going to need to take a moment to fine tune your investment strategy for the next 5 to 7 years. Trends are changing, so I?m here to show you how to find the shifts, adjust your strategy and manage your wealth into the change.
Markets Shift Direction Quickly ? Keep it Nimble
It was exactly 3 short years ago that the stock market reversed its pullback and began a bull market, however, most individual ?do it yourself? investors didn?t even notice. Professional investors sure did though; just look at the recent profits most of the top tier investment firms just reported last quarter. Financial firm profits have been soaring, which usually means that investors are making good profits along with these firms and the stock market, bond market and investment banking market has been performing quite well. If an investment firm?s clients aren?t making money on their investments, then their stockbrokers and advisors aren?t either. This is an industry where performance dictates success for both the advisor/broker, as well as for the client. So, keep an eye on the profit reports of the financial institutions relating to investments in the stock market, mortgage markets, credit markets, real estate markets and homebuilders and you will be able to see shifting trends in investment performance from one sector of the financial industries to another.
Volatility is our Friend
It?s difficult to find the bottom of an investment cycle and even tougher to predict the top, but one fact is certain, whether it?s oil, gold, stock or real estate, all investments rise and fall during different economic periods. It?s always been very interesting to me how one sector may be hitting new lows while another sector is hitting new highs, but what?s most interesting is how I?ve learned to use that knowledge to profit and build wealth. Read on and I?ll share with you some examples of this and how you can profit too.
If you?re a loyal reader of this column, you probably remember me jumping up and down in March of 2003, speaking of all the great reasons to invest in the stock market and that real estate would probably slow down and the stock market would take over as the leading investment sector for top investment performance going forward. Well, as much as I hate to admit it, I was wrong. Although the stock market has come up to 5 year highs and is in the middle of a 3 year ?bull? market, real estate has still been very solid and has continued down the path of prosperity and has appreciated very well to date.
As a homeowner and real estate investor, this is great news and I?m glad to be wrong about the ?decline? in real estate. However, it looks like the second part of my prediction is beginning to come to fruition as real estate sales have slowed down and the pricing has been in favor of the buyer in recent months. Up until recently, the seller was in the driver?s seat. Even with rising rates, home ownership and investment has been strong. Some might be baffled by this, but there is actually a very good reason.
Short Term Rates vs. Long Term Rates
Economically speaking, short term rates have gone up dramatically since the first quarter of 2003; however, long term rates are still really, really low! As a matter of fact, for those with good credit, you can lock in a 30 year fixed rate loan at or near the same rate as a 5 or 10 year loan! In economics, this is called a ?flattening? of the yield curve, which is when short term rates are the same as or very close to those of long term rates. Now, what could occur in the near future could even be an ?inverted? yield curve, which is when long term rates are lower than short term. This is bad though, as it generally indicates a recession is coming or is present.
As our economy continues to steadily grow and with a watchful eye on short term rates from the Fed Chairman Ben Bernanke, we should be able to maintain a steady pace of growth and continue raising rates slowly, allowing the economy and the American consumer to absorb the increased cost of financing and living that comes with inflationary periods.
Make no mistake though?RATES ARE RISING AND MAY CONTINUE TO RISE MUCH MORE THAN THE PRESS HAS STATED! It is imperative to understand the relationship of government, the Fed and their effects on various markets such as, the Dollar, interest rates, stocks, bonds and commodities (oil, precious metals, etc.).
CAUTION:
If interest rates on ?safe? money such as CD?s and Treasuries reach a certain level, such as 8% on CD rates, then the stock market will falter as it will be tough to compete with guaranteed rates at such good returns. Keep in mind, this is why you should have 5-7 year investment goals, rather than traditional ?long term? goals.
Inflation & Rising Interest Rates
When you narrow it down to try to find one simple reason that interest rates are rising and to try to understand what causes inflation, it?s fairly easy to understand what causes interest rates to rise and to predict how long it might continue.
Interest rates rise due to investment demand decreasing at a certain rate levels when the Federal Government issues Treasuries and other government securities to raise cash for funding various projects. Funding a war and providing $200 billion in emergency relief for New Orleans can get a little expensive, especially when the federal budget was already strained with other domestic issues. If our government is going to be able to pay for this, then the interest rates on these short term government securities needs to be attractive to a foreign and/or domestic investor. If the interest rate isn?t attractive to new investors, the rate must be raised in order to attract investors for the new issuance of these government securities.
You must first understand that when the government issues new securities, it is backed by U.S. currency, which must be printed. When this new money is printed and put into circulation, there is now a ?dilution? of the value of all American currency?the Dollar. The dollar now drops in value, creating less buying power for each dollar held. This means that pricing at grocery stores, clothing stores, fuel and all other consumer goods must be increased in order to still get the ?same? value for their goods, services and products. This is ?inflation?. CPI and other indices don?t properly reflect the real cost of inflation; milk and gasoline are better barometers for this. Just take out some 3-5 year old receipts from the grocery store and compare them to today, you?ll see how much prices have increased. There has been a broad increase in prices on most products you buy every day?even my dry cleaner raised their prices! (By the way, this is also why the huge appreciation of housing prices has been able to continue?it takes more dollars now to buy the same house, which has driven the price up even more.)
Watch the Economy for Investment Guidance
That being said, the economy is in great condition, regardless of what you might hear from various ?talking heads? on the television. Americans are creating wealth through the increase in real estate values and the recent surge in the stock market. Just because rates move up and the cost of goods rises a bit, as long as you properly invest, save and manage your credit/debt, you should be able to be more prosperous than ever during periods of inflation. Homes, investments and commodities can appreciate well during these times because much of those new dollars being created are also being poured into the economy, creating jobs and corporate profits. There?s a tightrope to be walked by the Fed and the Government, but all in all it?s nothing to panic about. Just be aware of the trends and put your money into the areas that are recovering from the lows and are just now coming back into favor, like the stock market. If you are fully invested in real estate, you should be moving some of that equity into liquid markets that are performing and should do well over the next 5-7 years?.not the next 20 years. If you look too far out when creating an investment plan, you won?t be able to avoid the huge pitfalls that present themselves in the short term.
However, even though investing in stocks, bonds and mutual funds is a little safer in times like these since they are very liquid and coming off of ?lows?, providing more ?real value?, real estate has an important role in every portfolio and financial plan too. Keep a watchful eye out for undervalued land, foreclosures and rental properties, because as rates rise, foreclosure rates rise too and many people are going to be losing their real estate due to improper financing, as I listed above. Creating wealth isn?t just a function of buying a home and investing in stocks. Rental properties are essential to a great retirement plan, so accumulate rental properties in the same proportionate amount as you accumulate wealth through liquid investments. (i.e. ? If your stock portfolio is $500,000, then your net equity in real estate should be $500,000)
Real Estate Scenarios and Financing Recommendations:
Author?s Note*
If you have any questions about which loan is right for you, you can email me at tom@privateclient.org for any clarification on this and/or to get the list of reasons to finance in various ways. I do seminars and am asked to speak at many events on the topic of ?How to Use Your Mortgage as a Financial Planning Tool?, so I have materials and information that you?re welcome to look at that might help you. I also have relationships with various lenders, real estate agents, credit repair companies and other service related companies that can help you evaluate your current situation and assist you in getting the most out of your real estate portfolio.
Stock Market & Retirement Investing Recommendations:
Author?s Note*
Do not invest or take any recommendation as indicated above, without first evaluating the idea, doing your own due diligence and running it by your own financial advisor. Again, if you have any questions, just email me at tom@privateclient.org . This is a free article and I?m happy to answer any questions, however, any specific investments should be investigated and evaluated by your Financial Advisor, CPA, or Trust Attorney/Estate Planner.
Remember, stay focused on your future, 5-7 years at a time. If you do this, you will be able to ?Achieve Your Goals Ahead of Plan?
Thomas E. Jandt
Wealth Creation & Wealth Management Consultant
The Private Client Group
Securities offered through Integrity Brokerage Services, Inc., Member NASD/SIPC
Markets Shift Direction Quickly ? Keep it Nimble
It was exactly 3 short years ago that the stock market reversed its pullback and began a bull market, however, most individual ?do it yourself? investors didn?t even notice. Professional investors sure did though; just look at the recent profits most of the top tier investment firms just reported last quarter. Financial firm profits have been soaring, which usually means that investors are making good profits along with these firms and the stock market, bond market and investment banking market has been performing quite well. If an investment firm?s clients aren?t making money on their investments, then their stockbrokers and advisors aren?t either. This is an industry where performance dictates success for both the advisor/broker, as well as for the client. So, keep an eye on the profit reports of the financial institutions relating to investments in the stock market, mortgage markets, credit markets, real estate markets and homebuilders and you will be able to see shifting trends in investment performance from one sector of the financial industries to another.
Volatility is our Friend
It?s difficult to find the bottom of an investment cycle and even tougher to predict the top, but one fact is certain, whether it?s oil, gold, stock or real estate, all investments rise and fall during different economic periods. It?s always been very interesting to me how one sector may be hitting new lows while another sector is hitting new highs, but what?s most interesting is how I?ve learned to use that knowledge to profit and build wealth. Read on and I?ll share with you some examples of this and how you can profit too.
If you?re a loyal reader of this column, you probably remember me jumping up and down in March of 2003, speaking of all the great reasons to invest in the stock market and that real estate would probably slow down and the stock market would take over as the leading investment sector for top investment performance going forward. Well, as much as I hate to admit it, I was wrong. Although the stock market has come up to 5 year highs and is in the middle of a 3 year ?bull? market, real estate has still been very solid and has continued down the path of prosperity and has appreciated very well to date.
As a homeowner and real estate investor, this is great news and I?m glad to be wrong about the ?decline? in real estate. However, it looks like the second part of my prediction is beginning to come to fruition as real estate sales have slowed down and the pricing has been in favor of the buyer in recent months. Up until recently, the seller was in the driver?s seat. Even with rising rates, home ownership and investment has been strong. Some might be baffled by this, but there is actually a very good reason.
Short Term Rates vs. Long Term Rates
Economically speaking, short term rates have gone up dramatically since the first quarter of 2003; however, long term rates are still really, really low! As a matter of fact, for those with good credit, you can lock in a 30 year fixed rate loan at or near the same rate as a 5 or 10 year loan! In economics, this is called a ?flattening? of the yield curve, which is when short term rates are the same as or very close to those of long term rates. Now, what could occur in the near future could even be an ?inverted? yield curve, which is when long term rates are lower than short term. This is bad though, as it generally indicates a recession is coming or is present.
As our economy continues to steadily grow and with a watchful eye on short term rates from the Fed Chairman Ben Bernanke, we should be able to maintain a steady pace of growth and continue raising rates slowly, allowing the economy and the American consumer to absorb the increased cost of financing and living that comes with inflationary periods.
Make no mistake though?RATES ARE RISING AND MAY CONTINUE TO RISE MUCH MORE THAN THE PRESS HAS STATED! It is imperative to understand the relationship of government, the Fed and their effects on various markets such as, the Dollar, interest rates, stocks, bonds and commodities (oil, precious metals, etc.).
CAUTION:
If interest rates on ?safe? money such as CD?s and Treasuries reach a certain level, such as 8% on CD rates, then the stock market will falter as it will be tough to compete with guaranteed rates at such good returns. Keep in mind, this is why you should have 5-7 year investment goals, rather than traditional ?long term? goals.
Inflation & Rising Interest Rates
When you narrow it down to try to find one simple reason that interest rates are rising and to try to understand what causes inflation, it?s fairly easy to understand what causes interest rates to rise and to predict how long it might continue.
Interest rates rise due to investment demand decreasing at a certain rate levels when the Federal Government issues Treasuries and other government securities to raise cash for funding various projects. Funding a war and providing $200 billion in emergency relief for New Orleans can get a little expensive, especially when the federal budget was already strained with other domestic issues. If our government is going to be able to pay for this, then the interest rates on these short term government securities needs to be attractive to a foreign and/or domestic investor. If the interest rate isn?t attractive to new investors, the rate must be raised in order to attract investors for the new issuance of these government securities.
You must first understand that when the government issues new securities, it is backed by U.S. currency, which must be printed. When this new money is printed and put into circulation, there is now a ?dilution? of the value of all American currency?the Dollar. The dollar now drops in value, creating less buying power for each dollar held. This means that pricing at grocery stores, clothing stores, fuel and all other consumer goods must be increased in order to still get the ?same? value for their goods, services and products. This is ?inflation?. CPI and other indices don?t properly reflect the real cost of inflation; milk and gasoline are better barometers for this. Just take out some 3-5 year old receipts from the grocery store and compare them to today, you?ll see how much prices have increased. There has been a broad increase in prices on most products you buy every day?even my dry cleaner raised their prices! (By the way, this is also why the huge appreciation of housing prices has been able to continue?it takes more dollars now to buy the same house, which has driven the price up even more.)
Watch the Economy for Investment Guidance
That being said, the economy is in great condition, regardless of what you might hear from various ?talking heads? on the television. Americans are creating wealth through the increase in real estate values and the recent surge in the stock market. Just because rates move up and the cost of goods rises a bit, as long as you properly invest, save and manage your credit/debt, you should be able to be more prosperous than ever during periods of inflation. Homes, investments and commodities can appreciate well during these times because much of those new dollars being created are also being poured into the economy, creating jobs and corporate profits. There?s a tightrope to be walked by the Fed and the Government, but all in all it?s nothing to panic about. Just be aware of the trends and put your money into the areas that are recovering from the lows and are just now coming back into favor, like the stock market. If you are fully invested in real estate, you should be moving some of that equity into liquid markets that are performing and should do well over the next 5-7 years?.not the next 20 years. If you look too far out when creating an investment plan, you won?t be able to avoid the huge pitfalls that present themselves in the short term.
However, even though investing in stocks, bonds and mutual funds is a little safer in times like these since they are very liquid and coming off of ?lows?, providing more ?real value?, real estate has an important role in every portfolio and financial plan too. Keep a watchful eye out for undervalued land, foreclosures and rental properties, because as rates rise, foreclosure rates rise too and many people are going to be losing their real estate due to improper financing, as I listed above. Creating wealth isn?t just a function of buying a home and investing in stocks. Rental properties are essential to a great retirement plan, so accumulate rental properties in the same proportionate amount as you accumulate wealth through liquid investments. (i.e. ? If your stock portfolio is $500,000, then your net equity in real estate should be $500,000)
Real Estate Scenarios and Financing Recommendations:
- If you own a home that you plan on living in for the long term, you should be locking in a 30 year fixed rate loan IMMEDIATELY.
- If you own a home and only plan on living in it short term, then you should be in an Adjustable Rate Mortgage paying the minimum payment,
while investing the monthly savings in the stock market.
- If you own rental property, but plan on holding it for the long term, you should be in a 30 Year Fixed loan, or a Hybrid loan that combines the
Cash flow savings of an ARM, but allows for a 30 Year Fixed Payment.
- Sell ALL rental properties that aren?t cash flow positive, these properties
Could decline in value in the near term, causing you to be foreclosed on
If you?re unable to maintain the payments.
- Buy or Keep rental properties that ARE cash flow positive. Again, if you have a low mortgage amount and can be cash flow positive on a 30 Yr. Fixed Loan, then lock it in. Otherwise, use an ARM or a Hybrid loan that
Enables you to convert into a 30 year from an ARM without refinancing, if needed due to rate increases.
Author?s Note*
If you have any questions about which loan is right for you, you can email me at tom@privateclient.org for any clarification on this and/or to get the list of reasons to finance in various ways. I do seminars and am asked to speak at many events on the topic of ?How to Use Your Mortgage as a Financial Planning Tool?, so I have materials and information that you?re welcome to look at that might help you. I also have relationships with various lenders, real estate agents, credit repair companies and other service related companies that can help you evaluate your current situation and assist you in getting the most out of your real estate portfolio.
Stock Market & Retirement Investing Recommendations:
- #1 Key to success is, invest a minimum of 10% of your monthly gross income every month into a stock, mutual fund or index fund. You won?t miss this money and since stocks are liquid, you can get to it in an emergency. Learning to do this every month, however, will teach you a great habit of fiscal discipline and this is the best way to create wealth over time.
- Buy Oil & Gas Stocks, Funds & EFTs on any dips. NOT NOW?prices are too high, but keep an eye out for any time oil prices drop below $60 and if oil prices ever get below $50, load up.
- Buy Financial Stocks & Insurance Stocks, relating to investment. DO NOT BUY Credit Card Companies or any credit, mortgage or related businesses.
- Buy HDTV related stocks and other technology stocks that have a good long term future.
- Sell all large cap stocks and just buy mutual funds if you?re a conservative investor. Large Caps are too risky with too little upside?many of these are priced at high end of value range and it is very difficult to see any real growth from ?large cap? stocks since it is difficult to grow a $5 billion business into a $10 Billion business?
- Buy Small to Mid-Cap stocks if you?re comfortable taking risk. It is much more feasible for a $200 million company to grow into a $400 million company; therefore, better returns are possible in this investment area.
- Don?t buy Bonds! Get out of Fixed Income Bond Funds right away. If rates keep rising, you?ll only end up with a low fixed rate of return until your bond is called or is repaid. Also, if you must pull your money early,
you might lose substantial principle due to the ?PAR? value of the bond depreciating with rising rates.
Author?s Note*
Do not invest or take any recommendation as indicated above, without first evaluating the idea, doing your own due diligence and running it by your own financial advisor. Again, if you have any questions, just email me at tom@privateclient.org . This is a free article and I?m happy to answer any questions, however, any specific investments should be investigated and evaluated by your Financial Advisor, CPA, or Trust Attorney/Estate Planner.
Remember, stay focused on your future, 5-7 years at a time. If you do this, you will be able to ?Achieve Your Goals Ahead of Plan?
Thomas E. Jandt
Wealth Creation & Wealth Management Consultant
The Private Client Group
Securities offered through Integrity Brokerage Services, Inc., Member NASD/SIPC