Money Coach

Help for your mortgage woes

2008-08-06T19:06:00Z

Millions of people took advantage of the many adjustable-rate mortgage options offered a couple years ago. It seemed like a good idea at the time. Housing values were climbing, houses were being flipped at huge profits, and the low initial interest rates meant buyers could get into dream homes they couldn’t otherwise afford.

All that has changed. As thousands of homeowners face resetting interest rates, many find themselves in homes they can no longer afford. It might seem that there’s no way to escape the oncoming apocalypse. They can’t refinance because their “dream homes” aren’t worth what they owe. If they try to sell, they’ll be a part of a housing surplus that extends 17 months into the future. Though ARMs account for only 7% of all mortgages, they make up 42% of all foreclosures.

All those dream homes are morphing into their owners’ foreclosure nightmare.

The first step, of course, is to cut back on your spending, and try to augment your income. No more eating out. Cut the cable. Go back to dial up. Sell a car. Sell your jewelry. Borrow from your 401(k). Yank your kids out of private school. Do whatever it takes to avoid defaulting on your mortgage.

What are the options?

If you’ve already cut your spending to the bone and are still struggling to meet your mortgage payments—or foresee that you will—contact your lender immediately, preferably before you begin missing payments. Because this has become such a widespread problem, most lenders are anxious to avoid their own further financial losses, and will work with you toward a solution other than foreclosure. Options may include:

Forebearance agreement If you’re having a temporary setback—temporary job layoff, illness, expensive family emergency—your lender may agree to temporarily lower you interest rates, or even eliminate your interest. You both need to make sure your situation is temporary, because those interest payments will be capitalized into your loan principal.

Deed-in-lieu What this means is that the lender and the owner agree to cut their losses and avoid foreclosure. The owner gives up the house and any equity on the condition that the balance of the mortgage is forgiven. Generally, deed-in-lieu is an option if the owner has suffered a long-term hardship; efforts to sell the house have been unsuccessful; there are no other mortgages or liens on the house; the house must be in immaculate, turn-key condition.

Short sale Call it negative equity, or an upside down mortgage, even if you owe more on your home than it’s worth, and you can’t make the payments, you might still be able to get out from under it. In a short sale, the lender agrees to the sale of the home, and takes whatever they can get in a depressed real estate market. In return, the gap between mortgage balance and sale price is forgiven.

The most important thing to remember is that you’ve got to work with your lender to find a solution. The longer you delay, the more limited your options become.

As the number of foreclosures continues to climb, more programs are being offered to help strapped homeowners save their homes. See these websites for more information:

Prospective home buyers should wait just a few more months

2008-06-12T16:04:00Z

Most of the news coming out of the housing market is bad. Home values continue to tumble. The first quarter reports show a fourteen percent value loss over the past year. The national median home value is now the same as in 2005.

There’s no doubt about it, it’s a buyer’s market. But, even though homeowners may be singing the busted bubble blues, it’s not quite time for homebuyers to lace up their dancing shoes. If you’re thinking about buying a house, you’d be better off waiting another six to 12 months.

Already more than half of the people who bought houses in 2006 have negative equity -- a gentle way of saying they owe more on their houses than their houses are worth. (In some markets, as many as 90 percent of those buyers put down two percent or less, so there wasn’t much equity to begin with.)

Adding to the gloom is the anticipation of millions of adjustable-rate mortgages scheduled to reset for the first time in 2009. It’s a sure bet that a lot of those homeowners will be anxious to sell prior to their reset dates.

In just a few more months, there are going to be a lot of bargains for those who were squeezed out the market during the real estate bubble. Each additional house on the market pushes the values lower; more houses up for sale mean more choices and lower prices for buyers,

But that doesn’t mean the forecast for buyers is all sunshine, either. In response to the sub-prime mortgage crisis, lenders have tightened up considerably.

It used to be that homebuyers could get into the house they wanted by having good incomes and good credit, even if they didn’t have much of a down payment. For a few years during the real estate bubble, they didn’t even need to have very good credit, much of an income, or a down payment.

The pendulum has swung in the other direction now, and lenders are insisting that buyers have excellent credit, solidly documented income, and a 10 percent down payment.

So spend the next few months getting ready. Use this time to polish your credit rating just a little more. Pay off your credit cards, or at least make sure they’re below 30 percent of their limits. Save for your down payment.

How to salvage your grocery budget

2008-05-06T19:36:00Z

Preparing a budget is tough enough; sticking to it is even harder. And then, to make things worse, the price of groceries has risen like a soufflé. Do you feel like someone just stuck their foot out into the aisle to deliberately trip you up? Here are some suggestions to keep you on track.

If you haven’t already mastered the basics, start with these.

Look at the grocery store circulars for bargains.
Plan a week’s worth of menus based on the best deals you see advertised.
Use the menus to develop your grocery list.
Don’t be too loyal to a single grocery store or brand. Store brands are almost always cheaper than name brands, and sometimes they’re the same product in different packaging.
Always shop with a list and stick to it.
Never shop hungry.

If you’ve mastered the basics but still can’t stay within your budget, don’t be too hard on yourself. Grocery prices have increased significantly over the last two years. Below are some examples from the March 2008 Department of Labor Consumer Price Index, along with some suggestions to help you save.

Bread: up 29.8%

If your bread maker hasn’t been offloaded at a garage sale yet, dig it out and start using it again. This time around, don’t buy the prepared mixes; bake your bread from scratch.

Flour: increased 48.5%

Save the good stuff for special recipes; use standard all purpose flour for regular baking. Conventional wisdom says buy more to save more, but be careful. If you’re throwing away unused flour you’re not saving a cent. Make it last longer by storing it in the freezer.

Tomatoes: up 11.5%

Grow your own. Store bought tomatoes rarely taste as good as you wish they did anyhow, so saving money here brings a bonus in flavor. Even if your backyard is measured in square feet instead of acres, you can put a couple of cherry tomato plants in pots on the patio or balcony. Another option is the local farmers market; the quality is sure to be better, and without high transportation costs, the price may be lower as well.

Coffee: up 18.4%

Check for a lower price on a larger bag. If giving up or cutting back on coffee consumption isn’t an option, brew more at home and fill a travel mug to go. The higher price you see at the supermarket is affecting prices at your local coffee shop, too, so if you haven’t given up your $4 a day latte habit, now’s the time.

Milk: up 19.6%

This is a tough one. After scouring the internet, there seem to be only two ways to save on milk: buy powdered milk, or buy skim and freeze it. The powdered milk advocates swear it tastes like regular milk. Even if you can’t bring yourself to drink it, it’s not a bad idea to keep it on hand for cooking and baking. Some caveats about freezing milk: It has to be skim or the milk solids separate and float around. Pour a glass off before freezing to prevent exploding.

Eggs: up 69.2%

Eggs will last longer in their insulated carton, and are still good at least a week or two beyond the best by date. If they’re getting close to expiration, you can break them, freeze them and use them later. Or, you can make a quiche, frittata, soufflé or omelet for dinner. Though the cholesterol level in eggs is high, an individual serving of quiche or soufflé contains only half an egg, or 106 mg of cholesterol; the National Cholesterol Education Program recommends limiting cholesterol to 200 mg a day.

Your tax rebate is coming early. Now what?

2008-04-25T19:04:00Z

If you’ve been breathlessly awaiting your tax rebate, you can exhale sooner than expected. The first of the direct deposits will be hitting the bank April 28, and by Monday, May 9 the paper checks will be in the mail. All $100 billion of the stimulus payments should be released into the economy by the end of July.

The rebates were originally scheduled to go out starting May 2, with final paper checks mailed out by the end of the summer.

So, now that you nearly have your rebate in your hot little hands, what are your going to do with it? If you’re thinking about a shopping spree, take another deep breath and hold it until sanity prevails. Are you there yet? Here are your real life options for spending your rebate:

Pay off a debt, and if you can’t do that, at least pay on a debt. With gas and food prices what they are, you can’t afford to be carrying any extra debt.
Save it for your 2008 tax debt. These rebates are coming out of the taxes you’ll owe in April 2009, so let’s call them “prebates.” If you usually owe federal taxes, you’d be wise to save or invest your “prebate” and earn a little interest on it before you have to give it back next year. And remember, if you usually receive a refund and use it to pay down debt, you’ll be getting a smaller return next year.
Start a rainy day fund. It’s a law of nature that when you’re already living a little close to the bone, your car will need a $1,200 repair. Rather than put emergency expenses on a credit card, have at least $1,000 set aside. Some experts advise having enough to replace several months of salary in case of serious illness or layoff. This payment can be your starting point.
Compound the rebate’s value by investing in an energy-saving home improvement. Even if you’ll be receiving the minimum $300 payment, that’s a lot of CF light bulbs and weather stripping; you could even insulate your water heater. If you’re half of a married couple receiving the maximum $1,200 plus $300 for each dependant child, consider a solar water heater, bicycles for quick commutes, or new Energy Star appliances.
If you’re one of the rare Americans who has no debt, has money in savings, rides a bike to work and lives off the grid, go ahead and spend the money…but spend it compassionately. Donate it to your favorite cause, and write off the donation on your 2008 taxes. Remember, while some of us have been forced by higher fuel and grocery costs to eat out less frequently, many Americans are turning to non-profit food pantries to help them through the month.

Online Lending

2008-01-24T16:11:00Z

Online lending has revolutionized the entire lending industry. In 2006, roughly 3.5 million people took out online loans, according to the Online Lenders Alliance, which is pretty astounding considering there was no such thing 10 years ago. But, when you consider all of the advantages of online loans, it’s really no big surprise.

If you need a loan, but don’t know where to start, or if you never got past “Go” with the bank or credit union where you have your checking account, it’s time to look at an online loan and all they have to offer.

So much of life is conducted on the internet
Correspondence, travel plans, jobs, job searching, researching, phone numbers, zip codes, bill paying, real estate shopping, Christmas shopping, grocery shopping, pet shopping, date shopping and mate shopping. If you worked in a bank everyday, applying for a loan while you were there would be a no-brainer. If you’re on the internet everyday, it makes sense to apply for a loan on the internet … and you can do it in your pajamas.

Personal relationships with lenders are over
Even if you have accounts in local banks or credit unions, do you ever go inside? Do you ever go beyond the drive thru lane or the ATM? Do you know your lender’s name? Have you ever met him or her face to face?

Bankers’ hours
The expression was minted for a reason. In the bad old days, banks were open from 9 to 4. Credit unions were rare, and there was a thing called a savings and loan. Things haven’t really changed that much – just try to take out a loan without taking off work.

Better rates
Gartner, an independent research corporation, estimates that online loans cost the lending institution 20 to 30 percent less than traditional loans. That means online lenders can give you a better rate. And with a margin like that, online lenders can be far more lenient and generous with their applicants.

Six thousand lenders at your fingertips
If you tried very hard, maybe you could apply for loans with 10 lenders in your hometown in a one month period. There are currently 6,000 lenders online, with a much wider array of products, including car loans, mortgages, student loans, personal loans, home equity loans, home equity lines of credit, payday loans, small business loans, credit cards, secured and unsecured loans. Comparing their offers is a lot easier online. Or, for the ultimate in ease, go to a lender like AmOne and let them find the right lender for you.

Faster turnaround
You don’t need to spend a week biting your nails while you wait for a verdict from a bank. In many cases the acceptability of an online loan application is determined by automatic decisioning (basically, a series of if/then statements). So you can get a response in as little as 15 minutes.

Can you think of any comparable advantages of going to a traditional lender?

Is A Personal Loan Right For You?

2008-01-24T15:56:00Z

Life is good. You finally earn enough money to live where you want to live, drive what you want to drive and, generally, live the lifestyle you want. Your job is good. Your credit’s good.

But what about life’s little extras? The vacation, the new kitchen, the boat … the things you’ve always promised yourself, but don’t really need. Money isn’t really a problem for you anymore, but it would sure be nice to have those extras now.

For those things, you can take out a personal loan. The beauty of personal loans is you can use them for anything you want. They can pay for some of life’s little extras, or they can cover the other things that could blindside you, say, a leaky roof or a family emergency. The third largest purchase most people make in a lifetime, after a home and car, is a funeral, the average cost of which is $6,500 not including burial. Even if you need business money, a personal loan will cover it.

Just like anything else you need to research, the first place you should go when looking for a personal loan is to the internet. Not only are there thousands of websites with basic financial information, there are also thousands of lenders who provide online personal loans.

But with so many to choose from, where do you start? One of the best steps you can take is to let someone else do some of the research for you. Loan consultants have relationships with several different lenders, and can shop your profile around to find the best deal for you. Look closely at these websites, though; some loan consultants specialize in bad credit borrowers, so of course their fees and rates will be higher. With your good credit, you can afford to be choosy about where you get your personal loan.

A big advantage of getting a personal loan online is the fast turnaround. Companies conducting business online take full advantage of the technologies that can put the money in your hands quickly. They understand that once you’ve applied for your personal loan, you want or need the money quickly. For the same reasons, they’re usually equipped to give you good customer service, available 24/7, unlike the brick and mortar banks that keep traditional bankers’ hours.

Personal loans can smooth over life’s little bumps, get your home nice and shiny, give you that sun kissed bronze look in the middle of winter, or help you get a new business up and running. Online personal loans can do all of this for you, and do it quickly.

Win With Ben Stein's Money Plan

2007-11-12T18:33:00Z

Remember the movie "Ferris Bueller's Day Off"?

If you do, then you also remember Ferris' boring economcis teacher, whose monotone delivery of "Bueller . . . Bueller . . . anyone . . . Bueller?" while taking attendance was recently ranked as one of the 50 most famous scenes in American film.

The character actor who played the role is Ben Stein, who has since gone on to prominence not only as an in-demand actor but also as an armchair economicst whose plain, common sense writing style can be found in publications like The New York Times, American Spectator, and others. Stein also was the star of the television series, Win Ben Stein's Money, a gameshow in which Ben Stein's salary was actually put up as prize money for the contestants where Stein competed with guests. He won just about all the time.

Stein's latest gig is as the spokesperson for today's launch of National Retirement Planning Week, sponsored every year by the National Retirement Planning Coalition. As spokesperson, Stein is pushing a new agenda for today's workforce, one that couples physical fitness with financial fitness.

Says the NRPC in a statement, "For too many Americans, particularly the 78 million baby boomers, the process of planning for retirement is about as appealing as doing 40 push-ups – something that is achievable but also easy to put off indefinitely. However, during the sixth National Retirement Planning Week, Stein is committed to breaking the process down into manageable, easy-to-follow steps that can help individuals take their retirement planning efforts from “frail” to “fit” in short order."

“Let’s face it, lots of people make excuses when it comes to the hard work of planning for their futures,” said Stein. “Physical fitness is the perfect analogy for financial fitness. We all know physical fitness is critically important to ensure good health down the road, and yet we find every excuse in the book to procrastinate or brush it aside altogether. This week I want to convince all Americans that a little fiscal effort now can pay off big in the future, and give them some easy-to-remember guidelines to help get their financial retirement health in tip-top shape.”

Here are some tips from Stein so you can get fiscally fit for retirement. I'm not advocating all of them, but he does make some good points, and in a fun, entertaining way. Nothing wrong with that.

Let's take a look at the tips, all from Ben Stein . . .

·         Set goals – As with any exercise program, the first step is determining what you hope to accomplish: lose ten pounds, get toned or develop “washboard abs.” Similarly, a retirement plan starts with setting some basic goals. When would you like to retire? How you do plan on spending your retirement years? Would you like to travel? Where will you live? Will you take up a new hobby?

·         Warm-up – No one starts exercising without adequately preparing first. Likewise, before you jump into retirement planning, it’s important that you stretch your financial muscles to avoid some of the most common retirement “injuries.” For example, start by minimizing credit card debt, curbing excessive discretionary spending and possibly re-thinking some of your current spending priorities.

·         Make a plan – A physical fitness program starts with an individualized plan of action. Will you use free-weights or machines? Will a treadmill or elliptical cross-trainer provide a better cardio workout? Similarly, you need to create a financial retirement plan that matches your individual needs, goals and resources. Begin by thinking about how much income you will need to fund your envisioned retirement lifestyle. Then, determine the combination of savings, investments and insurance you’ll need to get there.

·         Build muscle – Fitness experts know the importance of giving equal attention to multiple muscle areas to get the best results. Sound financial retirement planning requires a similar approach. Make sure that you establish a balanced plan that addresses the key financial retirement muscle groups: savings, guaranteed income, tax-deferred investments, stocks, mutual funds, exchange traded funds, index funds, bonds, annuities, insurance (health, life, long-term care, disability), real estate, and government- and employer-sponsored programs, if available.

·         Don’t forget cardio – Your health and lifestyle have a big impact on the nature and scope of your health fitness plan. Likewise, health-related issues will weigh heavily on how you structure your financial retirement plan. Therefore, when developing your retirement plan be sure to consider how long actuarially you are likely to live in retirement, expected healthcare costs and how active you expect your retirement years to be.

·         Get a coach – Even the fittest athletes often need expert help with their training. Retirement planning can be a complex process, so you should consider finding a qualified financial/retirement planner. Talk to family, friends or associates who can point you to someone who has helped them. Leverage existing relationships with financial professionals – e.g., banker, insurance agent, broker, or accountant – who are qualified to provide retirement planning services or can direct you to the appropriate person.

·         Get on the scale – Remember to monitor your progress regularly. Your retirement goals and financial situation will change over time, as will your spending priorities once in retirement. Therefore, it is important that you review your retirement plan at least once per year and make adjustments, if necessary.

·         Focus on endurance – Retirement planning is not a 100-yard dash – it is a long distance race. It is a methodical, well-orchestrated effort to achieve financial security for the rest of your life. Above all, it’s about ensuring that your retirement income will endure as long as you do.

“I can’t stress enough how important it is for people to get their financial futures in order as soon as possible,” said Ben Stein. “Immediate planning versus indefinite waiting can make the difference between completing the ‘retirement race’ and collapsing just before the finish line – or between comfort and terror in retirement.”

Biotech Stocks Could Be the Way Out of a Down Market

2007-11-11T18:46:00Z

No question about it, investors are in survival mode right now, just trying to hang on in a market that has given away much of this year's gains. Key culprits are the ongoing credit crisis, which has banks and lenders reeling under the weight of billion dollar losses (hello, Wachovia) and from a weak dollar, which crimping overseas investments in the products of U.S. companies.

Consequently, last week was one of the worst in recent memory on Wall Street. Both the Dow Jones Industrial Index and the S&P 500 each fell 2.2%, and the Nasdaq was down a staggering 3.5%. One of the few sectors I like these days -- biotech-- was also down 1.1% based on the benchmark Biotech Index. That's a little better than the rest of the market, but down is down, and it's certainly time to be careful about biotech stocks in particular and most sectors in general.

Still, over the long haul, I think biotech is a good place to be for investors, even in a down market. Late on Friday, the biotech sector staged a mini-rally, after traders figured out that the selloff in biotech stocks was a bit much. That's a telling, if innocuous sign. My thinking is that biotch stocks are being dragged down by the rest of the market and excessively so. Overall, the industry is healthy, plenty of new drugs are in the pipeline, regulatory issues about greenlighting clinical trials and approving new drugs are calming down after some volatility from 20004-2006, and overall fundamentals appear solid.

So, while I understand if investors want to take their money out of the markets and into sidelined cash positions, biotech should be a safe haven if the market continues to deteriorate. The professional traders know that down times are opportunity times. With prices low, this is a great time to get in to a biotech market that should be insulated from any long term investment woes.

Ins and Outs of Carbon Credits

2007-11-01T17:06:00Z

Man-made climate change advocates call them a way to make your green peace with the environment. Skeptics say they’re a sop for wealthy, guilt-ridden greenies at best - - and potentially fraudulent, at worst.

What are they? They’re carbon credits, and no matter what you think, they’re coming to a checkbook near you.

What, exactly, are carbon credits? Sometimes known as carbon “offsets”, carbon credits are financial mechanisms that enable buyers pays a third party to remove a quantity of carbon (in the form of a greenhouse gas) equivalent to what the buyer emits.

Carbon credits are a burgeoning environmental and economic trend, particularly in the business world. In the U.S. carbon offset volumes, as measured by metric tonnage, grew by 100% from 2005 to 2006, and is expected to double again in 2007. In a recent study by the Conference Board, 75% of companies polled said they were ‘actively computing” their carbon footprint. While only 15% of the companies surveyed were actively engaged in carbon trading, another 40% were considering it.

The Carbon Trading Markets

By and large, there are two types of carbon credit markets, one operating overseas and the other an emerging mainstay here in the U.S.

“Cap-and-Trade” – In 1997, the U.S. Senate voted 97-0 to reject the Kyoto Protocol, which sets limits on the amount of greenhouse gases a country could release into the environment. Countries that did pass the Kyoto treaty now have set caps on greenhouse gas emissions. If a country emits less greenhouse gases than the cap calls for, it receives carbon credits they can turn around and sell on worldwide carbon exchanges. If the country exceeds the Kyoto caps, it must buy credits to offset its extra energy use.

Elective Carbon Credits – The U.S. has a voluntary carbon credit market, where (mostly) companies and some individuals buy carbon credits as offsets to the amount of energy they approximately use. Thus, global warming guru Al Gore can offset the use of his gas-guzzling private jet by buying enough carbon credits to cover the environmental cost of the greenhouse gases emitted from his airborne travels.

Pros and Cons of Carbon Credits

The carbon credits market has its cheerleaders and its critics. Let’s take a look what each camp has to say about carbon trading.

The Case for Carbon Credits

Simplicity – By paying a third-party to remove a quantity of carbon from the environment, consumers can, in theory, achieve carbon “neutrality”.

Awareness – The very existence of the carbon offset market, it’s fast rate of growth, and the amount of media attention the market has received has raised the visibility of the climate change issue. In a politically-charged environment, carbon trading is the most prominent agent of change on the global warming landscape. Corporations are leading the charge. Companies like Expedia, Orbitz, HSBC Bank, and Google all have carbon trading programs up and running. Many more are in the pipeline.

It’s Good Business – In the corporate sector, where most of the carbon trading activity is taking place, carbon offsets can be an attractive option, fiscally and socially. Through efforts to better manage their greenhouse gas emissions, corporations can be rewarded by reduced costs through energy efficiency, superior brand positioning and public relations through carbon neutrality, and energized employees who support climate change initiatives.

The Case Against Carbon Credits

No Measurement Benchmarks – One issue that has yet to be resolved in the carbon offset world is benchmarking, i.e. establishing a certification or monitoring process that quantifies the real value of carbon trading programs. International standards bodies like the U.N. and global warming advocacy groups are trying – so far, in vain – to set up a system where carbon credit buyers know that their investments are producing measurable results. For now, there is no uniform way to see that carbon credit companies are doing what they promised.

Distraction -- Or Worse? – On one hand, the increased visibility of climate change as an issue is a boon to carbon credit supporters. On the other, it could also be a serious distraction, even impediment, to fighting global warming. If consumers surmise that they can pollute all they want, and like a papal indulgence, have their polluting ways “forgiven” through carbon offsets, global warming could become a larger problem.

Class Warfare – Carbon trading may make sense for some consumers, but they’d have to be deep-pocketed ones. Currently, most carbon offset programs are skewed to corporate interests and to the wealthy. If a dockworker in Philadelphia wants to plant a tree in Uganda, the paperwork alone runs into the hundreds, if not thousands of dollars. For working families, that’s probably not an option.

Jury Still Out

While experts agree that putting a price on the cost of carbon is good, the need of having consumers trade potentially harmful environmental practices for carbon offsets is debatable.

It’s a debate that shows no sign of abating.

Carbon Credits: Questions to Ask

The environmental group Clean Air Cool Planet has published a Consumer's Guide to Carbon Offsets for Carbon Neutrality. Inside the group lists key questions potential carbon credit buyers should ask of carbon credit groups:

•   Do your offsets result from specific projects?
•   Do you use an objective standard to ensure the additionality and quality of the offsets you sell?
•   How do you demonstrate that the projects in your portfolio would not have happened without the greenhouse gas offset market?
•   Have your offsets been validated against a third-party standard by a credible source?
•   Do you sell offsets that will actually accrue in the future? If so, how long into the future, and can you explain why you need to 'forward sell' the offsets?
•   Can you demonstrate that your offsets are not sold to multiple buyers?
•   What are you doing to educate your buyers about climate change and the need for climate change policy?

END

We All Leave Stock Predictions, But be Careful Out There

2007-10-02T20:11:00Z

On Wall Street there are investors and there are speculators. I'd like to spend this blog explaining the difference. Investors usually take the long view, bring risk calculation into the equation, spread their investments around different sectors to avoid getting hammered in one investment, and don't play around with money they can't afford to lose. For example, it's okay, and actually recommended, to invest some money in higher risk sectors like technology or biotech. Just not all of your money. Not so with Wall Street speculators. These are the guys and gals who chase short-term returns, try to time the market, and have no problem weighing down their portfolio with one or two risky stocks or mutual funds - - you know, the next "sure thing". Full disclosure: I think you can try to gauge future market movement, both long-term and short-term. Heck, I've done it on this blog several times in the last month alone. But even if I did find the next sure thing, I wouldn't throw all my money into it, and I would go out and find supporting research to back up any claims of future investment growth. That's the investor way. So, to illuminate my argument that being an investor is better than being a speculator, I've come up with the following list of tips. In it, you'll find a few rules of thumb to distinguish investors from trading speculators: • Leave the Predictions to Miss Cleo: Nobody on Wall Street has ever gotten rich predicting the future. Instead, as I’ve said, they get rich convincing others they can forecast the future. Stay away from short-term predictions • Don’t Try to Time the Market: Although some hucksters may tell you different, nobody can move your money in and out of the markets at just the right time, again and again and again. Sure, it can happen once in a while, just as a broken clock is right twice a day. But basing an investment strategy on someone’s ability to figure out short term market trends is akin to trying to time every green traffic light on your commute to work. Too many factors interfere with the process. Study by the Boston-based research firm Dalbar Inc. states that a long-term investment-oriented strategy beat the average market timing strategy by more than 3 to 1 over that 10-year period. It adds that the average investor tries to be a market timer (speculator) and almost always fails. People who exit the stock market to avoid a decline are odds-on-favorites to miss the next rally. Remember, for a market timing approach to succeed you have to be correct twice – when to leave the stock market and when to jump back in. Why double your chance of failure? Leave the market timing to the speculators. • Use Your Own Money: Many speculators place bets on the market using money borrowed from their brokerage firms (called “margin” loans after the type of brokerage account the money is placed). But in trying to time the market, margin investors often misplace their bets and have to pay back the margin money they lost in the markets. • Only Speculate with Money You Can Afford to Lose: As I mentioned above, don’t play around with your financial future. If you must speculate, only use money that you won’t kiss that much if you lose it. Keep the bulk of your money in a long-term investment portfolio. • Stay Disciplined: All successful investors share a common trait - -they have discipline. They don’t panic, stay away from making emotional decisions, and don’t let their ego get in the way of portfolio decisions. In short, they’re not as concerned about being ‘right’ as they are about making money. • Stay Flexible – Disciplined investors also know when to change their strategy if presented with solid evidence that there is a better way to run their portfolios. Alluding to his admittedly bearish sentiments during a sell-off in early 1980, financial author Marty Zweig talks about flexibility in his best-selling book Winning on Wall Street: “I was sitting there looking at conditions and being as bearish as I could possibly be – but the market had reversed. Things began to change as the Fed reduced interest rates and eased credit controls. Even though I had preconceived ideas that we were heading toward some sort of 1929 calamity, I responded to changing market conditions. My problem with most people who play the market is that they are not flexible . . . to succeed in the market you must have discipline, flexibility and patience. • Build a Bullet Proof Portfolio: Build an investment portfolio that works now and in the future. Build one that controls losses before they get out of hand. By that I mean a portfolio that is bullet proofed.

Are Technology Stocks Recession Proof?

2007-09-24T19:30:00Z

The Wall Street Journal has an interesting article out this morning touting a new defensiveness among investors -- and what they plan on doing to protect their portfolios against a possible recession. "With the housing downturn, credit crunch, gloomy employment data and a parade of maudlin financial forecasts have been enough to send some investors scrambling for bubble gum and beer," says The Journal. "While economists jawbone about whether the U.S. will sink into recession, investors already are thinking of ways to prepare their stock portfolios for a downturn." The article states that, even if there isn't a full-blown recession -- usually defined as two consecutive quarters of negative economic growth -- many investors and strategists are bracing for a significant slowdown in growth. "It's going to feel a lot like recession," says David Kostin, global investment strategist at Goldman Sachs. The Journal also publishes an index of potential "recession-proof" sectors and companies. On that list, surprisingly (to me, anyway) is the information technology sector, with Microsoft listed as a "safe" recession-proof stock play. The article also includes the telecom sector, but I don't really have a beef with that. People won't turn in their cell phones over a few bad economic quarters. Listed as the best play in telecom is AT&T, which historically has performed well in tough economic times. But technology stocks? When the economy goes south, technology has historically been one of the hardest-hit sectors, with the possible exception of auto and travel industry stocks. Businesses pull back on their IT expenditures in recessionary times. Americans hold off on the purchase of a new computer. Big-ticket items tech items like computers, laser printers, and packaged software like Lotus Notes or Dreamweaver are considered luxuries that people can wait for - - something to be purchased when money is ample and credit a bit more relaxed. I'm not even sure we're going into a recession (technically defined as two straight quarters of negative economic growth, as measured by the Gross National Product (GDP) Index). The Federal Reserve has gone against it's inflation-fighting grain and lowered interest rates for the expressed purpose of keeping us out of a recession. That's a big factor. But even if we did go into a recession, technology stocks are one of the last "save havens" I'd want to seek refuge in. Better to wait for a sunnier day.

Money Guys See Retail Economy as Strong for Remainder of '07

2007-09-10T14:45:00Z

I get a headache trying to figure out the financial media these days. Last week, the business pages were full of gloom-and-doom stories about the bad economy and how the housing mess is greasing the skids for a recession this year. I thought that the banking industry had pretty much contained the sub-prime fallout and, even though a lot of lenders and borrowers would get whacked, the economy would hold together. But one negative jobs report, the one that came out last Friday from the U.S. Labor Department showing a cut in job growth, seems to have given financial journalists a bad case of the vapors. All weekend long I saw headlines on Bloomberg, CNN, and Real Clear Politics.com with the word "recession" in the title. It's almost like they're hoping a recession will happen because so many members of the media hate President Bush. Any news that is bad for the President is good for them, the rest of the country be damned. So you'd think that the financial forecast for the rest of the year, given the grim sentiment from the mainstream media, would be a lousy one. If so, think again. According to a new study by BDO Seidman, LLP, a Chicago-based accounting and consulting organizations, chief financial officers (CFOs) at leading U.S. retailers -- the people who ought to have their fingers on the pulse of the nation's economic climate -- are predicting 5.6 percent retail store sales growth for 2007. That's way ahead the rate of inflation and also way ahead of the sales numbers we've seen so far in 2007. That sounds like good news to me. Of course, not everything is rosy. Close to half (47%) of the CFOs cited high fuels costs as the issue having the greatest impact on consumer confidence in the first half of 2007. However, looking forward to the balance of the year, there was less agreement among the CFOs on the main issue that will impact consumer confidence. High fuel costs (29%) and the weak housing market (25%) were cited by at least one-quarter of these executives, while interest rates (19%) and the sub-prime lending crisis (15%) were also mentioned by a number of CFOs. “When you consider that high fuel prices have been with us for some time now, the shift in concern towards issues such as interest rates and the sub-prime lending crisis seems to indicate a growing anxiety about a potential credit crunch for consumers,” said Al Ferrara, a partner in the Retail and Consumer Products Practice at BDO Seidman. “Given the existing concern with the weak housing market – remember many consumers borrow based on the value of their homes - and the recent volatility in the stock market, discretionary income may dry up and that could have a negative impact on the retail sector as we move into the critical holiday shopping season.” The study covered 140 chief financial officers at leading retailers located throughout the country. The retailers in the study were among the largest in the country, with revenues of more than $100 million, including 23 percent of the top 100 based on annual sales revenue. The survey was conducted in August of 2007. Here are some of the more prominent themes culled from the study: -- Same Store Sales Lag Overall Growth. A slight majority of the retail CFOs (56%) reported an increase in sales revenue over 2006 during the first six months of this year. However, when considering only comparable store sales the percentage of retailers reporting an increase dropped to less than half (45%). Less than a fifth (18%) of the CFOs reported a decrease in revenues in the first half of the year, with 22 percent reporting a drop in comparable store sales. -- Rose Colored Glasses? Looking forward, a majority (71%) of the retailers anticipate total 2007 sales revenue to increase from 2006, with only 11 percent predicting a decrease. Overall, the CFOs estimated average revenue growth of 5.6 percent for 2007. -- Weak Housing Concern of Largest Retailers. Among the financial officers at the top 100 retailers, almost half (45%) pointed to the weak housing market as the primary issue to impact consumer confidence during the remainder of the year, which is more than double the percentage of mentions (21%) among the balance of the retailers surveyed. So yes, there are plenty of areas for concern as we move into the latter stages of 2007. The housing crisis isn't over, and credit is still tougher to get than it has been for both home borrowers and businesses. But, as the CFO study attests, there are plenty of points of optimism, as well. Ultimately, take what the mainstream media says with a big grain of salt.

Checking Out "Credit Optimization"

2007-08-27T21:25:00Z

As a business journalist, I certainly get my fair share of press releases and media pitches on an endless array of products and services. Usually they find their way into the circular file. So when I got a release this morning from a company called CreditXpert touting a new product the company developed that may double your chances of getting a home refinance loan or a new mortgage - - even if your credit is mediocre or worst -- I took a look. In doing so, I think this credit optimization thing may have some merit. What's that about? I'll let CreditXpert explain. "Credit optimization tools offer a viable alternative to crippling subprime mortgage payments. If borrowers facing unwieldy mortgage payments use credit optimization, two thirds of subprime borrowers can potentially refinance at conventional rates, avoiding a major cause of loan defaults. With whole neighborhoods of subprime borrowers likely to face loan workouts or foreclosures in the coming months, this strategy has strong potential for stemming the tide of sub prime mortgage foreclosures." If nothing else, CreditXpert certainly has good timing. With the ongoing credit crunch and the subsequent unwillingness by banks and lenders to loan money to people looking for a new home or to refinance on an existing loan, this credit optimization thing may warrant a closer look. Says CreditXpert: "Credit optimization will also become increasingly critical to new loan applicants. In an effort to reduce defaults, lenders are raising credit requirements. These tougher underwriting standards limit options for even the most creditworthy borrowers and force home buyers to rethink their purchase or refinancing options. Other challenges will hit those on the fringe between prime mortgages and subprime loans. Borrowers with a credit score under 620 are likely to feel the most pressure." According to CreditXpert, credit optimization can help 30 percent of declined applicants gain approval and 50 percent of applicants earn a better mortgage rate when included as part of the origination process. Of course, what the company claims and what it does is open to debate. But that's quite a claim. So how does it work? According to CreditXpert, consumers can use credit optimization technology to legitimately raise their credit scores. Similarly, a mortgage broker or loan officer can use credit optimization technology to help applicants legitimately raise their credit scores. It does so in two primary ways: -- Accuracy: Automatically scrutinize credit report data for potentially incorrect, missing and outdated information that may be hurting the credit score. -- Credit Behavior: Automatically identify the most cost-effective actions to achieve a score increase, such as paying down debt, transferring balances and opening accounts. Credit optimization software also uses credit simulation to test different scenarios (such as paying down a certain credit balance) to see how those actions will affect the credit score. The software also automatically scans every credit report and displays potential score improvement on the cover of the report. This way, the consumer, broker or lender only needs to perform credit optimization on files where there is an opportunity for improvement. I'm not saying go out and pick up the CreditXpert product. All I'm saying is a little research into credit optimization may be worth your while, especially if you can't get a loan in this increasingly tough home lending environment.

One More Thing on the Credit Mess

2007-08-20T18:27:00Z

Allow me one last word on the credit crisis of last week.

I hope by now I've demonstrated that credit and debt aren't the sole domain of green eye-shaded numbers crunchers on Wall Street. As the green-eye shaded numbers cruncher in your own company's finance department can tell you, bad economics effects everybody. So is the crisis over? Hardly. But banks and other lenders should get back to the business of making loans and making sure businesses have all the capital they need to grow and prosper. Some experts even think that there is money to be made from the subprime mess. Stuart Greenbaum, an economist and former dean of the Olin School of Business at Washington University in St. Louis, says that financial institutions, believe it or not, will be at the front of the line of businesses making hay on the crisis crunch. “Banks that don’t have a lot of bad paper in their porfolios are going to see the credit spreads widen out, and they’re going to end up making money as a result,” Greenbaum said. “The situation has created a buying opportunity, and we’re already seeing the reaction in the price of financial stocks, such as banks and insurance.” Greenbaum adds that the subprime loan problem is a bit of toxicity that has entered the food chain. He says that although the toxicity is widespread and expansive at this point, the market is built to absorb a certain amount of default.

The reaction to the subprime loan issue is compounded by several factors: First, the market was at a historically high level; second, interest rates were low; and third, the yield curve was flat and credit spreads have been very narrow, reflecting historically low volatility. “So the market is reacting to a somewhat exaggerated situation to begin with, and it has a particular vulnerability because credit spreads were narrow,” he said. “Volatility has been very low which has been driving the compressed interest margins. As a result, banks have been having trouble making money.”

In plain English, Greenbaum means that banks weren't making enough money to justufy lending more money out to borrowers. But he says that situation should get better, and more money should be freed up and will flow into the economy. Greenbaum also says bank stocks are a great place to begin taking advantage of the credit markets right now. With stock prices low, and interest rates apparently headed lower, banks may soon find themselves in a highly favorable business environment.

You know the old Wall Street saying buy low and sell high. That's not easy to do -- people get too emotional about their money to apply the level of disciplined thinking needed to buy and sell at the right time. But one thing is inarguable. Right now, stock prices are low. Way low. Act accordingly.

Establish a Long-Term Real Estate Financial Plan

2007-08-13T22:51:00Z

Contrary to popular thought, estate planning isn’t a “tomorrow” issue. Actually, estate planning is a guide for today. As business management guru Peter Drucker puts it, “Long-range planning does not deal with future decisions, but with the future of present decisions.” More to the point, in the words of diamond philosopher Yogi Berra, “if you don’t know where you’re going, you could wind up someplace else.” That’s especially true of estate planning. Decisions made – or not made – today will surely impact your loved one’s financial security down the road.

So what’s estate planning? And how does the property you own impact the state planning strategy? Let’s take these issues one at a time.

What is Estate Planning?
Estate planning allows for the transfer of an individual’s estate upon death to that individual’s chosen beneficiaries. By establishing an estate plan ahead of time, you can minimize taxes and estate fees, direct your estate to beneficiaries of your own choice (and not some probate judge in the state you reside), establishes a crystal-clear plan on what happens with your home, your investment portfolio, your insurance policies, your business, or your employee benefits. It also establishes a plan for any properties you own besides your family home.

What Is An Estate?
While estate property laws vary from state to state, by and large, an estate is defined as all of the property an individual owns, be it in the individual’s name, in a partnership, in a joint-ownership pact, or through a trust. A short list of estate planning items would include:

Your family property, including your home and any other buildings (like a barn or guest-house, located on the property)
Any additional properties, like vacation homes, rental homes, commercial buildings, or undeveloped land
Personal property, like investment, insurance, and retirement accounts, cars, furniture, jewelry, collectibles, cash, and pension benefits
Any business interests, such as property owned, ownership shares, and inventory

How Much Can You Owe in Estate Taxes?
In terms of estate taxes and personal property, the more you can shield from Uncle Sam, the better. Congress has helped a bit on that front, passing new estate tax laws that allow you to leave $2 million tax-free to your heirs in 2007 and 2008, and $3.5 million in 2009. Under the law’s “sunset” provision, however, those numbers could be reduced in 2010, when the estate planning tax laws could be repealed. Once you get past the $2 million estate tax allowance, the road gets tougher. For every dollar you leave behind, the Internal Revenue Service will take 45 cents – if you let them (see chart below).

Exclusion Year	Highest Amount	Estate Tax Rate
2006	$2,000,000	46%
2007	$2,000,000	45%
2008	$2,000,000	45%
2009	$3,500,000	45%

Source: Internal Revenue Service

What Does Real Estate Have to Do With Estate Planning?

In a word, plenty. Real estate, in the form of your family home, second home, real estate investments, and real estate investment trusts (REIT’s) and other property-related investments, often comprises the bulk of an individual’s estate. In many cases, the family home is the estate holder’s primary financial asset. As such, it must be protected. Tax issues come into play, as well. While cash and investments can easily be passed down to your heirs, not so with real estate property. There, the I.R.S. has erected multiple tax barriers that can be difficult to pass. So knowing what issues confront you as a property owners is half the battle in erecting an I.R.S.-proof estate planning Some key issues with real estate and estate planning are: Establishing Who Owns What? – The name that appears on the ownership properties has everything to do with your estate planning options. If your real estate assets are titled properly, you can minimize taxes and tee up your heirs for an easier exchange of property after you are gone. How to Title Your Home – By and large, most married couples have both names on their primary home ownership papers. The primary reason for doing so is to ensure that, after your death, your family home will pass directly to your spouse, normally on a tax-free basis. And if your surviving spouse opts to sell the house, he or she will likely be able to do so while avoiding onerous capital gains taxes. Leaving Your Family Home to Your Heirs – There are about half a dozen ways to leave the family home to your heirs, some of them more tax-friendlier than others.

You can:

Sell on the Cheap - Some folks like to sell their homes to their kids at a bargain-basement price. That’s okay – just know that you’ll probably be using up much, if not all, of your annual gift tax exclusion, and there will probably be some taxes left to pay once you get outside the protective cocoon of the gift tax exclusion.
Stay in the Home – If your estate value falls below the magical $2 million mark, this may be your best options. In most cases, the home can be bequeathed to your heirs on a tax-free basis.
Gift the Home – You can move out of the home and “gift” it to your heirs, but know that you may be setting your loved ones up with a hefty tax bill in the process. In most cases, gifting your home to your children is a taxable event, especially if they decide to sell the property. Plus, you’ll be whittling away at your $2 million estate-tax allowance, as that amount is reduced, dollar for dollar, by gifts in excess of the annual exclusion amount.

Benefiting From a Qualified Personal Residence Trust – The best way to make an IRS-approved gift of your home to your heirs is through a qualified personal residence trust (QPRT) - - without having to move out. The QPRT allows the homeowner to place the home in a trust, while continuing to reside in the property. The I.R.S., based on a complex formula involving interest rates, the age of the property owner, and the length of the trust, can knock off up to half the property’s taxable liability, while at the same time paving the way for your heirs to own the house someday.

Managing Rental Properties Through an LLC – Many real estate investors who own property they want to pass on their heirs use limited liability companies to protect their assets from taxes. For federal tax purposes, the single member LLC is considered a "disregarded entity," so there is no separate income tax return for property you own, making it a cost-efficient and convenient estate planning mechanism.

The Takeaway - There is no shortage of strategies to pass along real estate property to you heirs and, at the same time, protect you and your loved ones from high tax bills, prying probate court judges, and expensive attorney fess. In future blogs, I’ll go into greater detail on how some of the property-protection strategies mentioned above can provide peace of mind when it comes your estate planning needs.