Investing Curiouscatblog

Category: Investing

  • Does a Declining Stock Market Worry You?

    The USA stock market has not been doing so well recently (the S&P 500 index is down over 9% so far this year). And I own S&P 500 indexes in my retirement account (in addition to other index funds). So I am losing money on those investments but I am not worried. It is possible the market will do very poorly over the next few months, year… if the economy struggles (and with the huge credit card like spending Washington much of the last 30 years and huge increases in gas prices that is certainly possible). But I am not worried.

    I don’t plan on using that money for decades. Therefore the short term declines really have no impact on my life. Sure if I was able to move all that money into a money market fund for the decline and then move it back into stock funds for the increase that would be wonderful. But I can’t and no-one has proven to be able to time the market effectively over the long term. It is unlikely you or I will be the ones that do it right. I wouldn’t be surprised if the market was lower at the end of the year, but I wouldn’t be surprised if it was higher either.

    Dollar cost averaging is the best long term strategy (not trying to time the market). And using that strategy, if you assume stocks reach whatever level they do say 20 years from now, I am actually better off will prices falling now – so I can buy more shares now that will reach that final price. You actually are better off with wild swings in stock prices, when you dollar cost average, than if they just went up .8% every single month (if both ended with stocks at the same price 20 years later). Really the wilder the better (the limit is essentially the limit at which the economy was harmed by the wild swings (people deciding they didn’t want to take risk, make investments…) to the point that the final value 20 years later is deflated.
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  • Foreclosure Filings Continue to Rise

    Foreclosure Filings Continue to Rise

    Foreclosure filings last month were up nearly 50 percent compared with a year earlier, according to one company’s count released yesterday. Nationwide, 261,255 homeowners received at least one foreclosure-related filing in May, up 48 percent from the same month last year, and up 7 percent from April, foreclosure listing service RealtyTrac said.
    …
    last week the Mortgage Bankers Association reported that about 2.47 percent of home mortgages were in foreclosure during the first quarter of the year, almost double the 1.28 percent rate of a year earlier, and the highest point since the group began compiling such figures in 1979. A Credit Suisse report this spring predicted that 6.5 million loans will fall into foreclosure over the next five years, reaching more than 8 percent of all U.S. homes.

    There numbers really are astounding. How lame were the decisions of banks and mortgagees that nearly 1 in 40 mortgages are in default (and that number likely increasing in the next year to much more?

    Related: Homes Entering Foreclosure at Record (Sep 2007) – Homes Entering Foreclosure at Record – Ignorance of Many Mortgage Holders

  • New Graduates Should Live Frugally

    Graduates should put off living large after college

    Good habits are important to start early,” said Laura Tarbox, founder of Tarbox Group, a financial planning firm in Newport Beach. “Take your finances as seriously as you do your relationship and career decisions, and you’ll end up way ahead of everybody else. But you’ve got to do it now. If you start even five years later, it just doesn’t work.”

    The key, experts say, is a simple one: Live like a poor college student for a couple more years. While you’re doing that, you can pay off your debt, start a savings plan and embrace healthy habits that will serve you well for life.

    This is exactly what I did. Outside of paying for college, extra living expenses in college were small. Just retaining the spending habit of college gets your personal finances off on a good start.

    Sallie Smart, 22, economizes like crazy in her first years after school so that she can save $500 a month in her 401(k), and she keeps that pace up indefinitely. Her employer matches 50%, pitching in $250 a month. If she earns a 9% annual return on her investments, when she wants to retire at age 65 she’ll have $4.1 million in her nest egg.

    Patty Procrastinator lives a little better when she first gets out of college and doesn’t start saving in the 401(k) until she’s 32. From that point, she also saves $500 a month, her employer adds $250 a month, and she earns a 9% return — just like Sallie. But at age 65, Patty will have only $1.7 million. That decade of delay will cost Patty $2.4 million.

    Incidentally, Sallie contributes from her own money just $60,000 more than Patty does. The rest of the difference comes from employer contributions and investment returns.

    By immediately starting to save for retirement and other needs you create a great foundation for your finances. Start saving for a house, a new car, create an emergency fund… Then you can create a situation where the only loans you need to take are for a house and maybe a new car – avoiding credit card debt or other personal loans.

    Related: Personal Finance Basics: Health Insurance – Initial Retirement Account Allocations – Why Americans Are Going Broke

  • 12 Stocks for 10 Years Update – June 2008

    I originally setup the 10 stocks for 10 years portfolio in April of 2005.

    At this time the stocks in the sleep well portfolio in order of returns:

    Stock Current Return % of sleep well portfolio now % of the portfolio if I were buying today
    Google – GOOG 163% 17% 14%
    Amazon – AMZN 124% 7% 7%
    PetroChina – PTR 114% 7% 7%
    Templeton Dragon Fund – TDF 90% 10% 10%
    Templeton Emerging Market Fund – EMF 47% 4% 4%
    Cisco – CSCO 42% 7% 8%
    Toyota – TM 38% 10% 11%
    Tesco – TSCDY 9% 0% 10%
    Intel – INTC 3% 5% 6%
    Danaher – DHR 1% 5% 8%
    Pfizer – PFE -29% 4% 6%
    Dell -30% 7% 6%

    At this point I am most positive on Google, Toyota, Templeton Dragon Fund and Tesco. I am wary of Dell – they seem to be moving in the wrong direction, but I am willing to give them longer to improve. I am even more wary of Prizer but again willing to stick with them for the long term. I will be looking for a suitable replacement.

    In order to track performance I setup a marketocracy portfolio but had to make some minor adjustments. The current marketocracy calculated annualized rate or return (which excludes Tesco) is 9.8% (the S&P 500 annualized return for the period is 7.9%) – marketocracy subtracts the equivalent of 2% of assets annually to simulate management fees – as though the portfolio were a mutual fund – so without that the return is about 10.8%). View the current marketocracy Sleep Well portfolio page.

    Related: 12 Stocks for 10 Years Update (Feb 2008) – Retirement Account Allocations for Someone Under 40 – Lazy Portfolio Results

  • Inflation is a Real Threat

    Inflation is a real threat. I guess it is good the Federal Reserve finally seems to be taking the risk somewhat seriously. They can’t be taking it very seriously with the fed funds rate at 2%. Inflation can create havoc in the economy once it gets started and it may already be too late to try and address it. There could be some real problems ahead. An economy can’t exist forever by printing money (the government’s huge debts) and consumers financing extravagant living by borrowing from foreigners. Pretty much the textbook on what will happen if this is done is bad inflation.

    For more than a decade other countries have continued to finance the excess spending by the USA which delayed the inflation (they were more concerned with growing trade than anything else). That has changed as they are now interested in consuming themselves and sensibly growing concerned about the inflation risk of investing in dollar assets (especially bonds). There are now numerous risks to the economy (high gas prices, credit crisis, housing crisis, huge federal debt, huge consumer debt…). Still it is amazing how well the economy is doing. Hopefully that can continue but the risks are serious.

  • How Much Further Will Housing Prices Fall?

    Map of misery

    As of the fourth quarter of 2007, the S&P/Case-Shiller national index was down 10% from its peak, and an index of ten large cities had fallen by almost 16% by February. Although the Case-Shiller figures are not perfect—they miss many rural areas—they are a better gauge of price declines in big cities.

    Assessing how much further house prices are likely to fall gets even trickier. One route is to look at market expectations: investors expect a further 20% drop, judging by the prices of futures contracts linked to the Case-Shiller 10 city index. But the futures market is small and illiquid and may overstate the possible declines.
    …
    Using a model that ties house prices to disposable incomes and long-term interest rates, analysts at Goldman Sachs reckon that the correction in national house prices is only halfway through. They expect an 18-20% correction overall, or another 11-13% decline from today’s levels. But their models suggest that six states – Arizona, Florida, Virginia, Maryland, California and New Jersey, could see further price declines of 25% or more.

    Optimists dispute this gloomy assessment, pointing out that some measures of housing affordability have dramatically improved. According to NAR figures, monthly payments on a typical house with a 30-year mortgage and 20% downpayment were 18.5% of the median family’s income in February, down from almost 26% at the peak – and close to the historical average. But this measure of affordability is misleading, not least because credit standards have tightened so much.
    …
    Given the typical pace of rental growth, Mr Feroli reckons house prices (as measured by the Case-Shiller index) need to fall by 10-15% over the next year and a half for the rent/price yield to return to its historical average.

    Actually predicting the where the declines will stop is very difficult. But this articles provides some very good thoughts on what the future holds. While things may not go as those quoted guess their guesses seem pretty reasonable and the explanations make sense.

    Related: Home Values and Rental Rates – Housing Prices Post Record Declines – Housing Inventory Glut – mortgage terms

  • Fed Funds Rate Changes Don’t Indicate Mortgage Rate Changes

    The recent drastic reductions again emphasize (once again) that changes in the federal funds rate are not correlated with changes in the 30 year fixed mortgage rate. In the last 4 months the discount rate has been reduced nearly 200 basis points, while 30 year fixed mortgage rates have fallen 18 basis points.

    I have update my article showing the historical comparison of 30 year fixed mortgage rates and the federal funds rate. The chart shows the federal funds rate and the 30 year fixed rate mortgage rate from January 2000 through April 2008 (for more details see the article).

    30 year fixed mortgage rates and the federal funds rate 200-2007

    There is not a significant correlation between moves in federal funds rate and 30 year mortgage rates that can be used for those looking to determine short term (over a few days, weeks or months) moves in the 30 year fixed mortgage rates. For example if 30 year rates are at 6% and the federal reserve drops the federal funds rate 50 basis points that tells you little about what the 30 year rate will do. No matter how often those that should know better repeat the belief that there is such a correlation you can look at the actual data in the graph above to see that it is not the case.

    Related: real estate articles – Affect of Fed Funds Rates Changes on Mortgage Rates – How Not to Convert Equity – more posts on financial literacy
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  • Berkshire Hathaway Annual Meeting 2008

    Every year at the Berkshire Hathaway Warren Buffett and Charlie Munger provide great insights on investing and the economy. Here are some thought from today – Buffett to investors: Think small

    “We would be very happy if we earned 10%, pre-tax” on the additions to Berkshire’s equity portfolio, said Buffett. “Anyone that expects us to come close to replicating the past should sell their stock; it isn’t going to happen. We’ll get decent results over time, but not indecent results.” Added Munger: “You can take what Warren said to the bank. We are very happy at making money at a rate in the future that’s much less than the past… and I suggest that you adopt the same attitude.”
    …
    “Overall I think that the U.S. continues to follow policies that will make the dollar weaken against other major currencies
    …
    Asked what’s in store for the economy, Buffett said he doesn’t have a clue and doesn’t care. “I haven’t the faintest idea,” he said. “We never talk about it, it never comes up in our board meetings or other discussions. We’re not in that business [of economic forecasting], we don’t know how to be in that business. If we knew where the economy was going, we’d do nothing but play the S&P futures market.”
    …
    In terms of the [chief] investment officer, the board has four names, any one or all of whom would be good at my job. They all are happy where they are now [working outside of Berkshire], but any would be here tomorrow if I died tonight, they all are reasonably young, and compensation would not be a big factor…. There will be no gap after my death in terms of having someone manage the money.

    Related: Live From Omaha 2007 – Buffett’s 2008 Letter to Shareholders – 2005 annual meeting with Buffett and Munger – Why Investing is Safer Overseas
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  • Housing Prices Post Record Declines

    Housing prices posted large declines over the last year. One important thing to keep in mind when looking at the recent results is how rare significant declines in housing prices have been. In general housing prices decline very little (less than 10% drops and normally less than 5%). Normally the turnover just decreases dramatically as people refuse to sell at lower prices and just stay in their house until prices recover. Housing Prices Post Record Declines:

    The S&P Case/Shiller Home Price Index, which tracks 20 of the largest housing markets, showed prices plummeting by 12.7% in the 12 months ending February. That’s the biggest fall since the index began tracking prices in 2000.

    Of those 20 metro areas, 17 posted their largest year-over-year declines ever. Ten of the 20 cities posted double-digit dips. The 10-city Case/Shiller index is down 13.6% year-over-year, the biggest drop since its launch in 1987
    …
    Prices in the Las Vegas metro area have plunged more than any other city, down 22.8% over the 12 months through February. Miami prices plummeted 21.7%. In Phoenix, they’ve fallen 20.8%. Of the 20 cities Case/Shiller tracks, only Charlotte, N.C. showed higher prices, up 1.5% over the 12-month period.

    Other metro areas recorded only modest price declines, including Portland, Ore., down 2.0%, Seattle, off 2.7% and Dallas, 4.1%. In the nation’s largest city, New York, metro area prices dropped a modest 6.6%.

    Related: Home Price Declines Exceeding 10% Seen for 20% of Housing Markets (Sep 2007) – How Not to Convert Equity – Housing Inventory Glut (Aug 2007) – Mortgage Defaults: Latest Woe for Housing (Feb 2007)

  • Longer Commutes Translate to Larger Housing Price Declines

    Home Prices Drop Most in Areas with Long Commute by Kathleen Schalch

    Economists say home prices are nowhere near hitting bottom. But even in regions that have taken a beating, some neighborhoods remain practically unscathed. And a pattern is emerging as to which neighborhoods those are. The ones with short commutes are faring better than places with long drives into the city. Some analysts see a pause in what has long been inexorable — urban sprawl.

    The Washington, D.C., metropolitan area has been hit hard. Prices tumbled an average of 11 percent in the past year. That’s the big picture. But a look at Ashburn, Va., about 40 miles from the center of town, finds a steeper fall.
    …
    Jonathan Hill, vice president of Metropolitan Regional Information Systems, which tracks home sales, sat in his office recently, clicking through page after page of price data sorted by ZIP code. There were a lot of negative numbers, but not in places that are close in or near public transit.
    …
    David Stiff, chief economist for the company that produces the Case-Shiller Home Price Index, saw the trend in other cities, as well – including Los Angeles, San Francisco, New York, San Diego, Miami and Boston. Stiff recently matched home resale values against commute times and found that in most of these major metropolitan areas, the trend is the same. The longer the commute, the steeper the drop in prices.

    Related: Urban Planning – How Walkable is Your Prospective Neighborhood – Exurbs Hardest Hit in Recent Housing Slump (Feb 2007)