How Will You Know How and Where to Invest, and Who Will Guide You?
With the stock market having lost nearly half of its peak from a year ago, many people are looking at their retirement plans and wondering how many more years they will now have to work. Worse yet, how will they survive on what they have in their depleted retirement funds once they can retire? What if Social Security fails? How will the astounding growth in medical costs and inflation affect their nest egg?
What might happen to the market if GM or Chrysler were to go bankrupt? What repercutions would there be in other manufacturing sectors closely tied to automobile manufacturing? When will the next Madoff, Enron or Worldcom scandal destroy the value of your mutual fund? What if we are in a bear market for three or four years?
How will the United States government spending trillions of dollars on bail outs, affect the strength of the dollar? Will this uncontrollable deficit spending cause the Moody’s rating of U.S. backed treasury notes and bond be downgraded? If this happens, will China and other foreign investors demand higher interest rates, or stop buying U.S. debt instruments all together? If something like that were to happen, even on a small scale, would our government be able to meet its obligations? Well, the answer to that, historically, has been to print money. Germany did it after World War I, France did it just before the French Revolution, and it leads to very ugly hyperinflation.
Now lets talk about real estate, it too has been extremely volatile in some areas of the country. Arizona, California, Florida, and Nevada all experienced at or above 100% appreciation in the five year period preceding the last quarter of 2007. Since then these markets have experienced 30-40% losses in property value in some cities. With the next bubble of real estate foreclosures expected to hit this fall, as more subprime mortgages default, many experts believe that real estate in many areas may continue to fall for a few more years.
With all of this scary news, it’s easy to get confused and wonder what is safe, and where should you invest to protect your nest egg?
The stock market and real estate are similar in that regardless of what the market as a whole is doing, if you know how to evaluate your investment, there are always good deals to be had. In the stock market, there may be a great company with excellent management, very sound financial statements, and good earnings ratios, and its stock may be priced well below value because the market has taken such a dive. There may even be sectors, such as the energy sector, or pharmaseuticals that may be very strong during even a strong bear market. In real estate, while some areas are bubbles, bursting with loud pops, there are other areas that were depressed during the boom, and that are just now starting to recover. In these markets there may be houses that are in foreclosure or have owners that are desperate to sell for personal reasons. The properties may be in reasonably good conditions and in decent neighborhoods, and they may rent for a very good cash flow. A seasoned investor may buy such a property 30% below value, and with a small down payment acquire an asset that a tenant will pay off for them, and which will return between 20-50% of their down payment within the first year!
So if a seasoned investor can find good deals, regardless of market conditions in the stock market, or in real estate, which should you invest in? Well, that depends on your knowledge, preferences, and management styles. Let’s analyze the two and then you decide. Stocks experience major changes in value, often even daily. Economic information, earnings reports, changes in interest rates the Fed charges, retirement or sickness of a CEO, and many other factors can cause major shifts in value. In addition the stock you buy is a direct capital investment into a company, if the company is poorly managed by a board of directors and CEO that you did not choose, the company may go bankrupt, even though you didn’t choose the management. Even if the company is well managed, market conditions, such as availability of consumer credit to purchase the company’s product may cause the company to take big losses. Unless you work for the company, you can not purchase the stock at wholesale value, you must pay market price. You can’t get leverage and tell your stock broker that you would like to buy $100,000 in stock, but that you only want to put down $20,000. Nobody is going to let you finance the purchase over a 30 year period, and you can’t ask someone to rent your stock purchase and pay the monthly payment on it to cover your cost of ownership. You can write off losses your stock portfolio takes, but get few tax advantages, other than being able to contribute with pretax dollars and not get taxed on your growth until retirement. Worst of all, you have three options as to management, two of which are not attractive, and one of which is not an option for most people. First, you could watch the stock market every day and decide when to buy and when to sell. You would of course have to be an expert on all of the factors mentioned above, so you could try to predict what the market was going to do each day based upon what news would come in. You could put your money into a mutual fund and let someone adjust it once a quarter for you, and let your investment mirror the market, or you could hire an active money manager. Active money management typically reduces losses and leads to better performance, but most firms require at least $100,000 before you can get started. (I do know of two companies that will let you start with only $30,000).
Real estate on the other hand usually appreciates at 3-5% per year, and may in some markets appreciate at 10-20% per year for a short period. When this type of rapid appreciation takes place, a crash will typically take place, but in general this is not the norm, and regardless, an educated investor knows how to get in and when to get out. Additionally, as long as you experienced the 100% appreciation and didn’t pull all of the money out through a refi, even if you loose 40%, you still got 60% appreciation in a 7 year period, plus principal pay down and tax advantages. Most importantly if you bought for cash flow, you have made good income at the same time.
Diversification, Diversification, Diversification, is the mantra that many financial advisors tout, yet most of them only spread your investments across paper assets, because that is the only thing they can make commissions on, and the only thing they understand.
Knowing your market is everything, where should you invest, when should you get in and out, who do you use for your power team, how do you find out whether you are in a good market, whether or not you will get a good return, what about appreciation, how much below market are you buying? How will you protect your assets? Will you have to manage the asset? What will renovations cost, and how will you know whether a good job will be done or not? How long will it take to find a tenant?
Having a mentor, or working with someone who has already found the answers to these questions and can give you access to a proven power team, and the very best properties in a market can make all the difference. Talk to someone with Dartnell Investment Academy today to see how one of our mentors can help you. Also, learn about our real estate buying tours to see how you can get into one of these markets and find great cash flowing properties while also gaining access to the best power teams!
