Tuesday, October 27, 2009

Slow and Steady ALWAYS Wins the Race

The Case-Schiller Real Estate Index data for August was revealed today showing that for the third straight month, real estate values across the country rose. Those in Minneapolis can rejoice with a 3.3% rise in prices while on average, prices across a 20 city range rose just 1.2%. One must also keep in perspective the level of supply held by banks that has yet to reach the marketplace and first time buyers were helped along with a potential $8,000 tax incentive.

While I remain skeptical on the numbers, it is clear that real estate has outperformed the stock market by a large amount over the past ten years. While I was in California as a financial planning director for a large organization, real estate was an integral component of our financial planning advice. Clearly, accumulating wealth in California required a component in real estate, not only for the nearly 7% average annual gain the market was achieving there but also for the tax breaks that clients were able to take advantage of.

Can you imagine the advice of cutting back on your 401(k) investment to buy a bigger piece of real estate? Well, it made sense. If you think through things logically, while you do get some level of tax reduction from contributions to your 401(k), you also get tax breaks from mortgage interest and real estate taxes when you invest in a home. When you retire, for many of us, the kids are now gone and we don't need so much house. What a great time to downsize. The good news is that when you sell your principle residence and achieve a gain, up to $500,000 of the gain can be tax-exempt!!!! Try taking $500K out of your 401(k) and get the same results. You will be taxed to the max!

As the chart shows, real estate, even with the huge downdraft it has experienced, has still outperformed stocks across the country over the past 10 years! For those who have constantly claimed that real estate was a bubble and too risky, they have failed to see the overall bubble in stocks as well. Again, who is selling what and to whose advantage????

It's clear from the chart above that real estate has been the better investment over the long term and if you plan carefully, probably can help you in your financial dreams if used appropriately and with the proper planning.


It's unfortunate though that those who have been saving regularly and following their financial adviser's advice could be down significantly over the past 10 years. $100,000 invested ten years ago (not counting dividends, reallocations, etc) would be worth only $77,296 now where as the average real estate investment of $100,000 would now be worth some $162,300. What a difference, no? Those who did purchase homes and had stocks as well can find some comfort in the overall diversification they held. Those who chose to rent and invest the savings lost!!!


But what if someone had a good understanding of all of the tools available in the marketplace and designed their portfolios to achieve an 8%, after-tax, annual return? Holy Mole!!!, One would have more than $220,000 now with just an 8% annual, after-tax return!!!!


I remember in 2002, so many begged me, Gary, can you get me 5% a year? I would be so happy with this kind of return. Sure, they had experienced account devasting 30% annual losses in 2001 and 2002. How quickly they forgot!!! Markets went crazy again, spurred on by goverment and Federal Reserve policies which cause people to think that they deserve 30% annual gains (at a minimum) or else they just aren't playing the game right. It's incredible how many people I talk to in the course of a month and when I ask them, what kind of stock market return would you expect me to achieve for you? I've not heard less than 25% expectations since 2002!

Yet, if you look at mutual funds or other accounts that experience a lot of year-to-year volatility, you will find that they just don't do as well as Slow-And-Steady. A consistent 8%-10% return is not only obtainable with the right strategies, but will enable you to achieve your goals!! If you are in your 50s or 60s and focusing on retiring soon, can you afford to leave your fate to the whims of institutional investors who gyrate the markets? Can you compete now with the billions of shares traded daily, pushing the market to and fro? Billions go in, billions come out at the mere rumor of news. In the end, we are supposed to ignore the day-to-day fluctuations, but I propose that this is no longer true. YOU MUST BE ACCOUNTABLE and not allow yourself to be at the mercy of a conventional money manager who will allocate you 50-70 percent stocks, 30-40 percent bonds. They are all going to crash as they are all at bubble levels! Real estate too. While it has done well in comparison to stocks, the next downdraft WILL WIPE YOU OUT! if you don't use all of the tools available in the marketplace now.


No offense to the guy or girl who is recommending the research-proven techniques of asset allocation and diversification. But take it from me. I have been in the market about 35 years now and no system or idea lasts. You must use all of the tools available now. You must at least diversify with real estate and even managed futures if you can but more so, you must use the risk-management derivative tools available in the REGULATED marketplace today to manage your risk. People shy away from derivatives because THEY DON'T UNDERSTAND THEM! Or their friends who might have dabbled in it lost everything!! Derivatives are RISK MANAGEMENT TOOLS!!!! They REDUCE YOUR RISK if used appropriately. They lay off the risk THAT YOU DON"T WANT to those who are more willing to take on high risk.

I propose that it's so easy to make a required rate of return each year that will allow you to achieve your goals. You know, corporatations have a minimum required rate of return that must be expected to achieve in every investment they take on. They pay big bucks for finance managers to understand this stuff and they don't enter into investments without having a good idea that #1, they will achieve their required rate of return, and #2, have a good idea of what other outcomes might occur should they be wrong. I have an MBA from Northwestern in this very specialty so I know how it's supposed to work. Yet when individuals try to manage their financial lives, they fall far short, they have no idea of what they need to achieve, leaving their fate to the whims of the marketplace.


You too can achieve your financial goals just as the corporations do. Doesn't matter how well you are doing in the moment. I know a lot of us are struggling. But what is worse is that most don't even know what they need to be doing. They don't have a clue!!! You know the old cliche, if you were going to take a vacation, how much planning would you do? You research where you want to go and either get a map if you are driving or get plane tickets, etc. You get the hotel, you do all of the planning. But how many people spend even this much time in planning out their end game?

How much money do you need to be earning each year? How much do you need to save? And most importantly, how much do you need to be earning on your assets to achieve your goals? If you are just pouring money into your 401(k) and thinking that you are going to be OK, forget it, you are going to lose. Taxes are going to kill you in the end. You've got to plan it all out and focus on knowing what you need and focusing on your annual rate of return in your investments to get where you need to be.

Who cares if the market is up 30% in the moment. Did you get WHAT YOU NEEDED? What happens if the market drops 50% by the end of the year, did you retain what you needed? All through my blog, I have been comparing the market to Las Vegas. If you are just playing the game, you are going to go home busted and be at the mercy of Social Security (if it even exists down the road). You had better wake up and take responsibility for your financial future. If you think you can do it on your own, best of luck to you. Hate to tell you but this is a big game, just like Texas Hold'em. The players want ALL OF YOUR MONEY. They won't be happy until they have it all. Do you understand the game? Can you compete? Can you keep up with it and also have a full time job? If you can, you are a better person than I. Probably you are in the wrong business and you should be making the 10s of millions a year like some others I know.

But if you are the normal person, you had better focus on your work and your income and leave this other stuff to people who know it well. Not only do the professional FINANCIAL PLANNERS have the ability to find ways for you to reduce fees and taxes as well as improve your budgeting, some of us who know the range of risk management tools can help you not only develop your plan but help you achieve it.


Our focused stock accounts gained 15% by June and now hold just a 1050 SP December call short that will provide us with a 20% annual gain should the SP be below 1050 at the end of December. It's 1067 right now. Our managed interest rate accounts gained 30% by the beginning of June. We are done until January. You too can achieve your required rate of return but do you even know what it is? If you are moving forward without having a comprehensive financial plan that covers your financial position (budget, cash flow, net worth, debt, ..), income taxes, insurance coverage, investments and other areas; chances are high that you are going to fail. Start right, manage your budget, establish a budget. Even if you are a do-it-yourselfer, take the right steps. I will guide you on this path. Those who want to receive the Homework Package to start doing their own financial planning (FOR FREE), be sure to contact me.

I will give it all to you for free if I must. Otherwise, the big bankers and investment houses are going to take it all away from you. You have nothing to lose and more than 30 years of my experience to gain. I invite you to write if you wish. Otherwise, the homework package to you is free and I will deliver it to you if you are on my list.

All the best and good luck for the end of the year. If you want to achieve your goals, be sure to write and I will show you how you can do it!

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