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Peninsula People
Chaussee’s insight - Peninsula People, September 2009
Dividends are an Investor's Best Friend
The stock market has recovered a bit more than one-third of the losses it incurred from the peak of October 2007 to the trough in March 2009. Yet, investors remain wary and despite the recent price reversal in many stocks, are still reluctant to risk hard-earned savings in a market that has treated them poorly for most of this decade. Indeed, the stock market, when measured by the S&P 500, remains approximately 33% below the previous high this decade set in March 2000.
Still, most professionals continue to advise investors, including those in retirement, to keep a hefty amount of savings in stocks. Recent surveys show most brokerage firms suggest investors allocate 60% to 65% in stocks. If you heed this advice you need to decide how to invest, actively managed mutual funds, index funds, exchange-traded funds or individual stocks.
Most investors are aware that dividends (a stream of income paid to shareholders, usually on a quarterly basis) have historically accounted for 40% of the stock market’s total return. So, it seems logical that you would want to make dividend stocks the focus of your equity portfolio. After all, why give up 40% of your potential return by owning stocks that don’t pay dividends? One can also argue that dividends provide a cushion in a crummy market, and by doing so, help reduce risk.
There are many different mutual funds that focus on dividend stocks - you can find one in almost every fund family. Some focus on the highest yielding stocks while others target both high yielders and those with growing dividends. I prefer the latter, as companies that have consistently raised their dividends usually have strong balance sheets and predictable earnings. Dividends are typically paid out of earnings, so if a company doesn’t have enough earnings to cover its dividend, it may have to be reduced or eliminated entirely. If a company has enough cash on hand to sustain its dividend, it can usually wait for earnings to recover from a slowdown, without having to cut the dividend. But, if a company’s earnings do not improve soon after a down period, it’ll be forced to cut or completely eliminate its dividend.
If you buy stocks simply by looking for those with the highest current yields, you run the risk of owning companies with poor balance sheets and unsustainable dividends. The recent bear market proved this to be the case as many high dividend-paying financial stocks not only saw share prices collapse, but dividends slashed too. It makes a lot more sense to own companies that have decent dividend yields AND a history of raising the dividend by showing consistent earnings growth.
If you are a do-it-yourself investor with plenty of time on your hands, you could research the universe of publicly-traded companies to find those that qualify as good dividend payers with a history of rising dividends. If you don’t have the inclination or the time to do the work, there is an excellent investment alternative out there for you, Vanguard’s Dividend Appreciation ETF (exchange-traded fund).
The Vanguard Dividend Appreciation ETF (symbol is VIG) is basically a basket of dividend-paying stocks that can be purchased with one order (just like buying any stock). It can be purchased throughout the trading day. This ETF employs a passive approach and is considered an indexed investment, designed to track the Dividend Achievers Select Index, which is a subset of the Broad Dividend Achievers Index. It is administered exclusively for Vanguard by Mergent, Inc. The ETF version of this index attempts to mirror the performance of the target index by holding each stock in approximately the same proportion as its weighting in the index.
Mergent, Inc. has been identifying strong dividend-paying companies for more than 25 years and Dividend Achievers are companies that have increased their dividends for at least the past 10 consecutive years. They are typically companies with strong cash reserves, solid balance sheets and a proven record of earnings growth – just what you should want from your stock investments.
The Vanguard Dividend Appreciation ETF is a terrific way to participate in the stock market, provide decent cash flow to your portfolio (current yield is approximately 2.3%), and this ETF can also provide enough diversification to qualify as the only holding in your entire stock portfolio. Crazy? Not really. There are some 186 stocks in this ETF so it is widely diversified. In addition, the holdings are spread among many different sectors of the market, similar to a broad index fund like the S&P 500 or the Wilshire 5000.
Here are the ten largest holdings of the Vanguard Dividend Appreciation ETF (VIG):
Wells Fargo (WFC)
IBM (IBM)
Coca-Cola (KO)
PepsiCo (PEP)
Johnson & Johnson (JNJ)
Wal-Mart Stores (WMT)
Procter & Gamble (PG)
Chevron (CVX)
McDonald’s (MCD)
ExxonMobil (XOM)
The performance of Mergent’s Broad Dividend Achievers (again, the Vanguard Dividend Appreciation ETF is a subset of this index) has been impressive going back some 20 years. Statistics provided by Mergent show its annualized return to be 9.73% vs. 8.43% for the S&P 500. Furthermore, the Mergent index has achieved its outperformance with less volatility, about 20% less than the S&P 500. This should appeal to investors not only looking for good long-term performance, but also less volatility.
One other important factor that should not be overlooked is that the expense ratio of the Vanguard Dividend Appreciation ETF is incredibly low. It clocks in at 0.24% annually. Given the fact that the average equity mutual fund charges close to 1.4% annually in management fees, Vanguard’s offering will save you a lot of money with its reduced fees.
Vanguard’s Dividend Appreciation ETF is a solid long-term equity investment, and, if history is a guide, can outperform the market with less volatility. There aren’t many mutual funds that have similar bragging rights.
At the time of publication, Stuart Chaussee and/or his clients held positions in VIG, IBM, KO, JNJ, WMT, PG, CVX, MCD and XOM. Holdings can change at any time. Under no circumstances does the information in this column represent investment advice or a recommendation to buy or sell securities. Pen
Chaussee’s insight - Peninsula People, August 2009
A Silver Lining: Bear Markets Create Opportunities
Despite the recent upturn in the stock market, it’s not too late to take advantage of the latest bear market in stocks and real estate. Here are some financial planning tips to consider:
Tax-Loss Selling: Tax-loss selling or harvesting, as it is sometimes referred, is a smart tax strategy. Bear markets present most investors with unrealized losses and you should use that to your advantage and realize losses for tax purposes. Actually, most investors only take losses at the end of the year, but the smarter strategy is to harvest them throughout the year. Losses can be valuable. Not only can you deduct up to $3,000 of net losses each year against ordinary income and use losses to offset realized capital gains, but any excess can also be carried forward into future tax years. Furthermore, realized losses can be used for your lifetime to offset capital gains and a portion of your ordinary income each year. In other words, if you stockpile losses now, you can potentially use that capital-loss carryover for the rest of your life.
Tax Swaps: In addition to tax-loss harvesting, you should consider realizing your losses and swap back into a “similar but not substantially identical” security immediately. If you want to purchase the same security you will have to wait 31 days to avoid the wash-sale period (which would disallow the loss for tax purposes), but if you purchase a different security you can do so immediately and still use the loss for tax purposes. For example, let’s say you have a loss in a mutual fund that specializes in financial stocks. You could sell that fund for a loss and purchase another fund that also invests in financials, to keep your exposure the same, hoping for a recovery in price. So, you “bank” the loss but keep your same exposure to the market. You can also do the same with individual stocks (swap Coke for Pepsi or vice versa?) or exchange-traded funds and index funds too. Tax swaps allow you to take a loss for tax purposes (to be used to offset ordinary income or future capital gains), but still maintain exposure to the market to hopefully recoup money whenever the market recovers. So, you’ve basically created a tax credit with the swap.
Roth IRA Conversions: Roth IRAs can grow tax deferred and withdrawals distributed tax-free. The best time for a Roth conversion is when your account value is down. The conversion will create taxable income, but you would prefer to convert during a bear market in order to pay lower taxes (given the lower prices). Since stock prices were mauled in 2007-2008, you may have some positions that have greatly depreciated. Consider converting now. Be aware of income limits that prevent conversion and be sure to check with your tax advisor beforehand.
Portfolio Rebalancing: If your target portfolio allocations are out of whack due to the recent bear market then it might be a good time to rebalance. Let’s say your target allocation is typically 50% stocks and 50% bonds and that’s where you stood in mid 2007. Now, a couple years later, your stocks have been hit hard but your bonds have appreciated. Use this time to rebalance back to your original target allocation (buy low and sell high). Assuming your financial situation and objectives haven’t changed, bring your stock allocation back up to 50% by either reducing your bond allocation and/or using idle cash to purchase stocks.
Reduce Concentrated Holdings: If you have a large position in a security that represents 10% or more of your investable assets you may want to take advantage of the depressed price and divest. Yes, this may sound strange, why would you want to sell at a depressed price? Well, my best guess tells me that in the past, if the position showed a gain, you might have been hesitant to sell because you didn’t want to pay capital gains tax. If this is the case, and you want to reduce your exposure to this stock (diversify), the time to do so is when the price is depressed. Obviously, this assumes you invest the proceeds in another security that will perform as well as the one you are selling in the future. The idea is that the bear market has given you a chance to diversify at a lower tax cost, or none at all.
Estate Planning: Bear markets in stocks and real estate can create estate planning opportunities too. While it is impossible to predict whether or not an individual’s investments are at their lowest value, it’s likely your stocks and real estate investments are depressed in value. You can use this to your advantage (assuming the size of your estate warrants gifting) by gifting assets now to remove future price appreciation from your estate. You can gift up to $1 million free of gift tax in your lifetime and effectively remove the future growth of that asset from your estate to potentially reduce estate taxes. Sure, you’re using up part of your overall lifetime exemption (currently at $3.5 million per person), but you and your heirs will benefit if you think the asset you are gifting will appreciate a lot in the coming years---you can get that future growth out of your estate now. If your estate is valued beyond the current exemption levels, consider using your gift tax exemption now, while asset prices are low. If you’re going to give, now is an ideal time to gift assets that have been beaten down, but offer significant price appreciation in the future.
Bear markets can create attractive tax, investment and estate planning opportunities. You can indeed win by losing.
At the time of publication, Stuart Chaussee and/or his clients either held positions in or have open limit orders on KO and PEP. Holdings can change at any time. Under no circumstances does the information in this column represent investment, tax or estate planning advice, or a recommendation to buy or sell securities. Pen
Chaussee’s insight - Peninsula People, July 2009
Here’s a glimpse of how some well-known smart-money investors are positioned right now. I’ll offer my opinion on each and whether or not it might make sense for you to follow their lead.
John Bogle
Mr. Bogle is the founder of the Vanguard Group of mutual funds. Mr. Bogle has long believed in indexing his stock portfolio, which is a passive approach that seeks to mimic the returns of the market itself rather than try to outperform. The strategy, over many decades, has served investors well, since most actively managed mutual funds underperform the market, largely because of the higher expenses associated with active management.
Mr. Bogle is presently invested at 75% fixed income and 25% stock index funds. His favorite equity holding is Vanguard’s Total Stock Market Index Fund (VTSMX). He suggests investors hold the same percentage in bonds as their age. His allocation at the start of this decade was 65% bonds and 35% stocks. Since 2000, his stock portfolio has been clobbered, but his bond allocation did well, posting a 50% return that made up for his stock losses. As a result, he now has an allocation in bonds that is close to his age (80). Opinion: Bogle’s low-cost, passive approach will serve most investors well. What bothers me is that he simply keeps his stock allocation the same regardless of valuations. In hindsight, I imagine Mr. Bogle would have liked to have lowered his stock allocation at the height of the stock market bubble in 2000 and 2007 too. But, his passive strategy meant he did nothing, which certainly cost him a lot of money.
Warren Buffett
Mr. Buffett needs no introduction. He made a fortune for himself and early shareholders in Berkshire Hathaway. He has created wealth by buying large stakes in companies he viewed as great value plays. Recently, Mr. Buffett’s returns have suffered, big time. Berkshire (BRK-A) is down roughly 40% since late 2007. Mr. Buffett has owned up to his mistakes that have cost shareholders billions. His biggest blunder was significantly adding to his ConocoPhillips (COP) position in the fall of last year, when oil hit its peak. The move cost Berkshire close to $4 billion. Berkshire’s biggest holdings are Coca-Cola (KO), Wells Fargo (WFC), Burlington Northern (BNI), Procter & Gamble (PG) and Kraft Foods (KFT).
On October 17, 2008 Mr. Buffett wrote an Op-Ed piece in the New York Times titled “Buy American. I am.” On that day, the Dow Jones Industrials hit a high of 9,200. In his article, he made it clear that he had been loading up on stocks. His reason was simple “Be fearful when others are greedy, and be greedy when others are fearful.” He wrote “if prices keep looking attractive, my non-Berkshire net worth will soon be 100% in United States equities.” Well, prices have weakened since then, so I imagine he is fully invested in stocks. Opinion: Mr. Buffett has made some questionable moves of late. His fully-invested position in the fall, with stocks nowhere near the valuation levels we’ve seen in previous bear markets (1973-1974 and 1981-1982), has also been criticized by other “deep-value” investors. I suspect Mr. Buffett’s heavy stock allocation will eventually reward shareholders, but for now they are hurting.
Jeremy Grantham
Mr. Grantham is a highly-respected money manager for GMO, LLC. He’s managed money for decades, mostly for pension funds and other institutional investors. In March 2009, with the Dow Jones Industrials under 7,000, Mr. Grantham urged investors to step up and buy stocks and “reinvest when terrified.” His firm made a major investment in the fall of 2008 and another in the first quarter of 2009. In his recent quarterly newsletter he writes that he is now only “very slightly underweight”--- so basically, he’s fully invested. Mr. Grantham thinks the market could trend higher until the end of this year, but he thinks the next decade will be very difficult for stock investors. Opinion: Mr. Grantham pegs fair value on the S&P 500 at 880, so we are at fair value right now. Investors who follow his advice would have at least a portion of their wealth in stocks now and look to add more on weakness. Given his outlook, he’ll probably suggest taking profits if the S&P pushes toward the 1,100 level, which would mean a gain of 25% from here.
John Hussman
Mr. Hussman is a fund manager who runs nearly $5 billion in the Hussman Strategic Growth Fund (HSGFX). His style seeks to protect wealth during unfavorable market conditions with the goal of beating the market over a complete bull-bear cycle. His strategy has been successful, posting average annual returns of 8.8% since inception in 2000.
Mr. Hussman’s fund is presently fully hedged, or neutral. He holds about 20% in a mix of foreign currencies and precious metals with small exposure to utility shares. He views the overall market as having “slightly unfavorable valuations,” which has kept him hedged throughout 2009. Opinion: John Hussman is a terrific manager and his fund offers investors a way to participate in the market knowing he will also do his best to protect wealth in tough times (quite the opposite of John Bogle’s passive approach). If the market moves strongly ahead from here, Mr. Hussman will underperform, but if there is more weakness ahead he will do a good job of preserving capital.
Robert Shiller
Mr. Shiller is the well-known Yale economist who correctly predicted the stock market bubble in 2000 AND the real estate bubble in 2004. He doesn’t manage money, but many wish he did. From recent interviews, it appears Mr. Shiller doesn’t think stocks represent deep value at these levels, but he suggests he would be a buyer if valuations got to single-digit P/Es on the major averages. In addition, Mr. Shiller has been cautious on real estate for at least five years, however, he has recently suggested that there is no longer a bubble in real estate and prices are attractive in many regions of the country. Still, he cautions that bubbles of historic proportions often overshoot to the downside, and the housing market could “languish for many years.” Opinion: Mr. Shiller’s prescient market calls have earned him a following and his studies of investor behavior have helped him recognize asset-class bubbles as they are forming, not afterwards.
At the time of publication, Stuart Chaussee and/or his clients either held positions in or have open limit orders on BRK-B, COP, KO, BNI, PG and KFT. Holdings can change at any time. Under no circumstances does the information in this column represent investment advice or a recommendation to buy or sell securities. Pen
Chaussee’s insight - Peninsula People, June 2009
Overcoming investing paralysis
It’s extremely difficult (seemingly impossible) to buy stocks when they are plunging. Investors are emotional, so stepping up and buying as prices decline is psychologically very tough to do. Indeed, statistics show quite clearly that investors tend to do the opposite, since the highest percentage of stock mutual fund redemptions occur at or near the bottom of bear markets. Yet, time and time again, history has proven, the opposite behavior is the appropriate one.
In periods like the last 18 months, since the Dow Jones Industrials peaked at over 14,000 in October 2007, and nearly every asset class fell off a cliff, it’s been particularly difficult parting with beloved cash positions. Cash has been king and those who sat on a big stash have slept well and felt brilliant as others got clobbered in the roughest market in decades. But, those with a ton of cash now will no doubt miss a very large chunk of any market recovery….especially if they have no reinvestment plan.
Let’s say your portfolio is presently underweight stocks and you are sitting on a lot of cash equivalents (i.e. CDs, T-bills, money market assets). Your plan is not to stay in cash indefinitely (heck, it’s paying next to nothing) and your target stock allocation is 50% of your investable assets. Still, since you probably sold some stocks in the past year or so, and since your remaining stocks have lost value, your stock allocation may now total only 25% or less of your entire portfolio. Your plan is to bring your allocation up to 50%. But, how are you going to get there and how are you going to overcome your paralysis (fear) and actually make purchases?
Stair-Step Approach
There is only one cure for this ailment and that is to have a battle plan and stick to it. Your plan may entail an all-at-once approach (if the market drops to “x” you’re going all in), or you may prefer a more prudent, stair-step approach. The stair-step plan would make you invest part of your cash stash, perhaps one-third at a time, on weakness. For example, if the Dow Jones hits 8,000 again you begin your allocation, perhaps investing one-third of your target allocation for stocks at that point, and you continue to allocate more on the way down. Your plan could be to become fully invested if the market drops to 7,000, or whatever level you choose.
The particular trigger points you choose for various stocks, or the market averages as a whole, aren’t as important as simply having a disciplined plan. Why? Because it’s very hard to invest when the market is declining--- you not only think you can buy stocks cheaper tomorrow, but you also wonder why in the world you even want to own them at all when they seem to be in a freefall. Without a clear plan, you are likely to remain on the sidelines and do nothing…and perhaps miss some healthy gains when the market improves.
How To Catch A Falling Knife
My preference for investing cash that is earmarked for stocks is to enter buy-limit orders in the market, through your brokerage or bank account, at various levels, and stay the course. This means that if stocks drop, you will automatically buy them at predetermined levels. When a buy-limit price is reached, the order will be executed at the limit price or better. This is also a useful strategy if you want to buy stocks, but don’t intend to be chained to your computer monitor for fear of missing an opportunity. Simply enter the limit orders in the market, good-until-canceled (whatever date you choose), and see if the market’s volatility can work in your favor by allowing you to pick up stocks at lower levels, automatically.
One obvious problem for putting cash to work with a buy-limit approach, is if the market simply moves higher from here…basically straight up. This is possible, but unlikely in my opinion. Still, if you are anxious to put money to work, and you are presently underweight equities in your portfolio, you could certainly consider investing one-third (or whatever percentage you choose) of your target stock allocation right now and put limit orders in the market for the remainder. You can be creative and tweak your strategy to meet your personal objectives and stay within your risk-tolerance boundaries.
Tough Decade Ahead
Jeremy Grantham, the well-known institutional fund manager who oversees more than $78 billion for GMO, LLC, wrote in his Q1 2009 newsletter, that he sees a “50/50 chance of crossing 600 on the S&P 500.” That’s a long way down from present levels, but those are pretty high odds that stocks could move a lot lower again. More recently, given the market’s strong move off the March lows, Grantham sees about a one in three chance of the market heading back to the old lows. Regardless, he sees a difficult market ahead in the next decade. He thinks the recent run could push the S&P above 1,000 or 1,100 and then give us crummy returns for many years, trading within a frustrating tight range and unable to move to new highs for a decade or longer. Still, Grantham believes that if you’re able to invest on weakness (below fair value, which he pegs at 880 on the S&P 500), you are more than likely going to earn attractive average annual returns over the coming years.
For what it’s worth, I believe stocks are fairly valued close to present levels. The S&P 500 in the 900 to 950 range would indicate average returns going out over the next decade, perhaps 6% to 7% averaged annually, given forward earnings projections and historical valuations. The further stocks drop over the short term, for whatever reasons, and assuming an eventual rebound in earnings (although I highly doubt to the peak levels seen in 2007), would make future returns that much more attractive---obviously if you buy at even lower levels.
Despite the recent rally in stocks, the market is still down nearly 40% from the highs recorded in 2007. If you have cash that is earmarked for stocks, but you’re having trouble finding the courage to buy, consider using buy-limit orders and a stair-step approach to investing. It’s a good way to keep the process disciplined and unemotional.
At the time of publication, Stuart Chaussee and/or his clients either held positions in or have open limit orders on the Dow Jones Industrials (DIA). Holdings can change at any time. Under no circumstances does the information in this column represent investment advice or a recommendation to buy or sell securities. Pen
Chaussee’s insight - Peninsula People, May 2009
Real Estate Outlook
Down….Then….Flat
By Stuart Chaussee
I checked in with Chartered Financial Analyst and Palos Verdes Estates resident Joe Gagnon for his take on local real estate. Other than being an astute investor, Joe is one of few who accurately called the Internet/tech bubble back in 2000 and also the housing bubble a few years back. I remember quite clearly speaking with Joe at a cocktail party in 1999. We were listening to a few guys gloat about how much money they had made in Cisco Systems and Oracle. Joe turned to me and said that this tech bubble was going to end badly and these guys were “delusional.” It wasn’t long before tech collapsed to the tune of about minus 80 percent. Joe’s been bearish on real estate for about five years and even went so far as to sell his home in Palos Verdes Estates in 2004, uproot his family, and leave California. He returned a couple years ago to a depressed market…just as he was hoping. Joe tells me that after renting for a while, he and his wife Kristen (a teacher at Silver Spur Elementary School) have just purchased a home again in PVE. I must admit I was surprised.
Joe reasons it this way. “Affordability has come down enough and mortgage rates too.” He adds that “the after-tax cost of owning is fairly close to rents for the first time in years.” Joe qualifies this, saying “I’ve probably bought too soon, but prices are much more reasonable now and weighing the cost of renting and the fact that I think mortgage rates are probably headed higher, it made sense for us to buy now.”
On a relative basis, residential real estate has held up well in the South Bay and certainly in “wealthier” neighborhoods where million dollar plus homes are the norm. We’ve certainly seen declines, but nothing like the areas that have been hit hard by foreclosures. My guess is that most residential real estate in the South Bay is off 20 percent from the highs we hit a few years ago -- perhaps a bit more on very high-end properties. We’ve been spared, relatively speaking, and homeowners should be thankful….at least for now.
Have we hit bottom?
I’m afraid we’re in for more pain on the housing front, both locally and nationally, before we begin the healing process. But, there will be healing. One of the problems for the near term is that when we consider the magnitude of the housing/debt bubble we just went through (monstrous on any scale), and the amount of wealth that has been destroyed in real estate (and stock prices), one would expect the market to overshoot to the downside. That is typically how an asset class will behave in the aftermath of a bubble. My best guess is that we will probably drop another 10 percent to 20 percent nationwide, and probably the same percentage decline in Southern California, before we find a more solid foundation on which to rebuild.
Housing Futures
You don’t have to take anyone’s word on what real estate prices will do going forward…simply look at the futures market to see what they’re predicting about home prices. That’s right, investors can now make bets on home prices by purchasing housing futures contracts, just like they can do with stocks, interest rates, wheat, oil, corn etc. You name it, there’s a market out there to place a bet.
Housing futures are a relatively new innovation. They were launched in 2006 and are still considered quite obscure with a miniscule following. The Case-Shiller Home Price Indices for Futures and Options are covered by the Chicago Mercantile Exchange Globex trading platform. Yale economist, Robert Shiller, along with his colleague Karl Case (Wellesley College), developed the indices for home prices in major cities in the U.S. If you’re curious about what traders are betting prices will do in a particular city, simply check out www.housingrdc.cmegroup.comand take a look for yourself.
Right now, Los Angeles County housing futures indicate that prices will more than likely bottom out in mid 2010, probably about 12 percent to 15 percent below today’s prices. The futures predict the market will then stabilize. Unfortunately, the 2013 futures aren’t indicating much price appreciation. In fact, futures show prices basically staying flat into 2013. Still, that’s good news for those of you who are looking to buy a house and possibly comforting for those of you who are worried that price declines aren’t going to end for many years.
Robert Shiller, the prescient economist from Yale, was one of few to accurately predict the bursting of the Internet/tech bubble of the late 1990s and the housing bubble of the mid-2000s. (He got a bit more exposure for his accurate call than Joe Gagnon). Shiller and Case created housing futures with the idea that homeowners could essentially make a bet on future prices, and, protect themselves by hedging, if they had put all their savings into one risky asset -- property. Homeowners could essentially protect against a price decline in their area by entering into a “short” contract, which is a bet that the market will drop. If he or she was correct, the gains in the short contract would help offset losses in the value of one’s home, at least in theory.
Unfortunately the housing futures market didn’t really catch on, and, as a result, I can’t imagine hedging has helped many homeowners offset their home equity losses. Still, I think they are a terrific idea, and, at a minimum, if you are considering buying or selling a home, you might want to check out the futures market.
Sell now or wait it out?
If you are a retiree, this scenario might sound familiar to you. You’ve tried for more than a decade to make money in stocks and the best case is you’ve probably broken even. Perhaps you had a balanced portfolio and your bonds did okay, but still didn’t come close to making up for your stock losses. During the past decade, while your overall portfolio was dropping or moving sideways, you continued your “normal” spending ways (it is expensive to live here, no doubt) and your investable assets (i.e. stocks, bonds, cash) may now be insufficient to see you through another 20 years of retirement. That is a big problem….we’re living longer, which means, some of us run the risk of outliving our money.
Your house, on the other hand (unlike stocks), has been a terrific investment. Heck, anyone who purchased a home out here, probably earlier than 2003, should still be sitting on a handsome profit. So, here’s your dilemma, your investable assets are declining, with every withdrawal you make for your living expenses and with every month that passes that stocks don’t recover (assuming you still own some). Bonds offer decent income, but perhaps not enough to really allow you to have the lifestyle you want. So, you’ve got a shortfall because the market’s treated you poorly and you’ve been withdrawing too much money over the years. So, should you sell your home now, to downsize or rent, in order to replenish your investable assets so that you can continue to maintain or even improve your lifestyle?
Retired or not, if you’re dipping into principal to meet your spending needs, and your income is less than your expenses, you should consider your options now. If house prices don’t recover as soon as hoped, or if they drop further than even the futures markets predict (and you continue to spend at your present pace), what would your situation look like a few years from now? Would you be forced to sell into possibly an even more depressed real estate market?
The fact that housing has held up pretty well where we live, and assuming you still have a lot of equity in your home, means you are very fortunate. Take a look at your situation and determine your priorities. Bottom line, don’t bank on house prices recovering fast to save you. Maybe they will, but consider all your options and be thankful you’ve still got a ton of home equity.
Stuart Chaussee is a Palos Verdes-based fee-onlyRegistered Investment Advisor. He is the author of three financial books, including the award-winning, Advanced Portfolio Management; Strategies for the Affluent. He is also a former contributing writer for TheStreet.com. Stuart welcomesyour feedback and can be reached through www.preservingwealth.com or e-mail him directly at stuartchaussee@msn.com
Under no circumstances does the information in this column represent investment advice or a recommendation to buy or sell securities. Pen
Chaussee’s insight - Peninsula People, April 2009
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