The Best Opportunities Arise In Times of Difficulty

Warren Buffett’s prowess as a contrarian investor is well known and well admired, but for most of us it is difficult to act with the same courage of conviction as the Oracle of Omaha. His motto?

“We simply attempt to be fearful when others are greedy, and to be greedy only when others are fearful.”
- Warren Buffett

To be sure there is no lack of fear these days. Fear is what causes the markets to plunge 800 points the day after the government announces a $700 Billion bailout. Fear is what has caused American investors to pull so much money out of the market even as prices dropped to pre-2000 levels – locking in their losses. Fear is why so many people I know have blithely announced they’re “done with the market,” even as they watch their runway to retirement extend well beyond the visible horizon. It’s understandable. The size of the financial debacle is incomprehensible for most of us (though not necessarily unexpected.)

The problem is, as Warren tells us, now is the time for greed. Ok, not the unbridled, no-ethics kind of greed that got us here in the first place. I’m talking about the opportunity to make high quality investments at a great price. The world is on sale – now is the time to buy.You still need to be thoughtful about your investment dollars but the opportunities are endless. There are, however, a few key things to keep in mind even today.

1. Investment horizon:  Make sure your investment objective fits your time horizon.  For most of us our horizon should be relatively long – at least a few years if not longer.  Let’s face it, you’re not a day trader.  Find good, solid assets that will yield for the future, not for a new car next month.  If you have an IRA or a Roth, fund it to the max and grow your wealth tax free.
2. Diversify:  You need to hold a variety of assets and asset types in your portfolio.  Stock and bond mutual funds are fine, but look beyond these categories as well.  My favorite diversification asset (of course!) is still real estate, and there are many ways for the average investor to profit from real estate, even in an IRA or other retirement account.
3. Protect your principal:  Ok, I did say it’s time to be a little greedy, but not to be foolish.  Even in today’s “everything is on sale” environment you still need to make sure your investment capital is protected and you understand the risks you’re taking.

This is a great time wade in to a variety of investment opportunities.  It’s not clear we’ve hit absolute bottom yet – there may be further to fall – but there are some great assets out there and now is the time to accumulate a little for yourself.

PS. For those of you who don’t know or remember who Gordon Gekko is, check this out.  (Then go rent the movie!)

Take The High Ground | Why real estate should be a part of your retirement portfolio

Real estate is in the news a lot lately. For the past few years it seemed you couldn’t open a newspaper without reading about the meteoric rise of real estate values, and now all of a sudden we’re bombarded with news of the imploding credit markets and real estate on the edge of the abyss. With all the talk of impending doom these days I am getting a lot of calls from people asking if now is really a good time to invest in real estate, especially in their retirement accounts. My answer is a resounding YES! It is always a good time to invest in long-term real estate. In fact, real estate is an essential part of any well diversified retirement portfolio and not an “alternative” asset. The real estate-enhanced portfolio will always be safer than the one concentrated entirely in publicly traded equities. Now let’s look at a few of the reasons why.

First, real estate is a non-correlated asset. This means that real estate values are not subject to the wild gyrations of the broad stock market. In fact real estate frequently goes up in value while the stock market is dropping. From 2000 to 2006 the S&P 500 is off almost 300 points while real estate has skyrocketed.

Cycles in the real estate market are long, generally around ten years, and while there are bursts of appreciation any declines in value tend to be short-lived and, more importantly, very local in nature. Take housing for example, which seems to be getting the most attention these days. Since 1979 nominal housing prices across the U.S. have increased every year, without fail! The U.S. housing market has survived inflation, stagnation, recession, double digit interest rates, unemployment, energy crises, war, terrorist attacks, and stock market booms and busts. Of course there are local markets that have suffered but, apart from for a few exceptions, they all rebounded nicely.

Real estate investments are relatively illiquid in nature, and it is this very nature that provides your retirement portfolio an additional margin of safety. Real estate transactions are highly complex, information flows are inefficient, and each real estate asset has unique characteristics that make it extremely hard to compare with others. (For example, no two buildings can occupy the same location, and we all know the old adage; Location, Location, Location.) Unlike stocks, it is not subject to the emotional mood swings of investors. Investors do have their mood swings to be sure, but there is no broad market panic selling or day trading with real estate, and no ticker symbols or analyst reports on every building we see. This country is filled with extremely wealthy real estate investors who made their fortunes owning properties, not flipping them!

Real estate provides additional diversification, safety, and tremendous long-term appreciation potential. When included in your self directed IRA the benefits are even greater.

• Cash flow and appreciation is tax deferred or tax free. (Depending on the type of retirement account it’s held in.)
• Real estate held inside a self directed IRA is generally exempt from creditors’ claims.
• Investments can be leveraged under certain conditions, significantly increasing returns.
• There isn no need to pursue a complicated and risky 1031 exchange.

Of course it is critical that you properly structure and manage the real estate inside your self directed IRA, or you could jeopardize the tax deferred/tax free nature of your entire IRA account. Engaging in a prohibited transaction is a sure way to trigger this very unfortunate result.

One argument I occasionally hear against real estate in a self directed IRA (too often from accountants) is that you lose some tax deductions associated with real estate. Since the retirement account doesn’t pay tax on current income then there is no deduction for mortgage interest, but for the retirement investor this is an erroneous argument. If you’re investing for retirement you want appreciating assets. You’re not paying income tax inside a self directed IRA and are deferring or eliminating capital gains. Under these circumstances I would happily forgo the mortgage interest tax deduction for a 20%+ total annual return.

So yes, real estate should be a part of every well structured retirement portfolio through the use of self directed IRAs. Now the question is what type of real estate to invest in? Rental houses? Office buildings? Land? Trust deeds? In upcoming discussions I will discuss various real estate asset classes and the why, how, and when of investing in each.

The Road Less Traveled | The State of Retirement in America and Why You Need To Change Your Investment Approach.

Retirement planning. I always knew I had to put money away for retirement, and I am pretty consistent about it, but I’ve generally done it thinking more about the current tax deduction rather than getting to a secure retirement.Then one day I woke up in my early forties. I was marveling at how quickly those years had flown by (wasn’t I just graduating from high school?) when it hit me; if the past forty plus years went by this quickly then, with only twenty or so years to go, retirement was just around the corner. Was I on the right track? Was I going to be financially prepared? The answer was as scary as it was revealing; I wasn’t sure!

It may be small solace but I was in good company. For most people retirement seems like a distant notion, but for approximately 78 million baby boomers born between 1946 and 1964, retirement is no longer a far off concept but a looming reality. Yet despite the constant message about the need to plan for retirement, an ever expanding menu of retirement account options, and the massive rise of the mutual fund and retail brokerage industry, it is estimated that over 90% of Americans will not have the financial resources they will need to carry them through their retirement years. Compounding the likelihood of not being financially prepared for retirement are factors such as: Americans are poor savers, health care costs are rising rapidly, people are living longer and retiring earlier (though this latter trend is beginning to reverse itself out of necessity.)

The Fidelity Research Institute calculates that the typical household is on track to retire with just 58% of its pre-retirement income, including social security and pension income. And this assumes that all goes smoothly with their investments and expenses, or they will be left with far less. Even more disturbing is that only 66% of American workers report that they or their spouse have any retirement savings at all. Almost half of all workers saving for retirement report savings and investments of less than $25,000 and the average pre-retirement household (55 and up) is estimated to have about $60,000 total retirement assets. Even assuming retirement at 70, and consistent long-term stock market returns of 10.4%, these retirees will fall far short of a financially secure retirement. (Will your plan carry you through retirement?)

So what do you do to fix this? Lets say you still have ten, fifteen, even twenty or more years before you plan to retire; what should you do to make sure you don’t end up a government statistic?

With savings and investments there are only so many levers to pull. You could plan on living very frugally during retirement, but that’s not such an attractive option for most of us. A common rule of thumb is that you will need 75%-80% of your current income in retirement, but many retirees are finding that rule doesn’t fit their thumb. First, it’s more and more common today to still have a significant mortgage during retirement. (“Among households headed by someone age 65 to 74, over 32% had a mortgage on their primary residence in 2004, up from less than 19% in 1992, according to the Federal Reserve.” WSJ) Add in longer lives, active life styles, and spiraling health care costs and many retirees are finding they need at least as much income as they did during their working years.

Another option is to increase your retirement contributions each year. This is definitely a good idea and I strongly recommend it, but the reality is not so easy for most people. Even if you earn a good income; by the time you pay the mortgage, taxes, car loan, take care of your children and pay for their education, health care costs, food and utilities, and the occasional trip or night out, there isn’t much left for savings. The average household is doing well to save $5000 a year.

That leaves us with increasing the rate of return on your retirement portfolio. Sounds logical enough, and certainly a goal we all have, but how? Depending on the source the average long-term returns on the stock market are between 9% and 11% annually. But this is, of course, an average; and an average based on broad stock market indices, not a portfolio owned by the average investor. Most highly trained professionals are lucky to match the stock market averages; how are individual investors expected to do any better?

The best way to improve your long-term investment returns is to diversify beyond the volatile stock market. The overwhelming majority of wealth in this country is not in the public stock markets but in real estate and private companies. More millionaires made their fortunes in real estate than any other source. In the next installment we’ll discuss how adding real estate to your retirement portfolio can dramatically increase your investment returns and help you achieve the financially secure retirement you’re working so hard for.