December 5, 2023

Your Money: An Adage Adjustment for Investors at Retirement

Traditionally, retirees have been told to keep a significant slice — about 50 to 60 percent of their portfolio — in these risky assets, and that’s what many people tend to do. Then they hope and pray the stock market doesn’t plummet as it did in 2008 and 2009.

That’s why the results of a new study are so intriguing. It found that holding as little as 20 percent in stocks upon retirement, with the remainder in bonds, would result in a smoother ride during turbulent markets, and the money would last a few years longer.

There is a small catch. Retirees need to gradually buy more stocks over time, but they don’t necessarily end up owning much more than most retirees start out with.

“There are a lot of retirees in serious trouble because they bailed entirely in late 2008 or early 2009 because they couldn’t get comfortable with the volatility of a traditional portfolio,” said Michael Kitces, director of research at the Pinnacle Advisory Group, who wrote the study with Wade Pfau, a professor of retirement income at The American College of Financial Services.

Even though it usually pays to do nothing at all when the stock market dives, it is hard to blame retirees who cannot withstand that sort of gut-wrenching volatility. So they dump their stocks at the worst possible time — either because they’re afraid or because they need the money to live on — and lock in their losses. If a smaller slice of their retirement savings were bouncing around, it might have been easier to remain invested.

The approach outlined in the study is essentially the opposite of the traditional advice, which suggests keeping a steady mix of stock and bond funds throughout retirement or slowly lowering the amount of stocks. In fact, more than half of target-date funds for people nearing or in retirement continue to reduce stock positions over time, according to Morningstar.

Portfolios that started with about 20 to 40 percent in stocks at retirement, and then gradually increased to about 50 or 60 percent, lasted longer than those with static mixes or those that shed stocks over time, according to the study. (The average target-date retirement fund for people in and near retirement holds about 48.3 percent in stocks, according to Morningstar.)

This sort of approach makes logical sense because retirees are most vulnerable in the early years of their retirement. Why? If you experience a bear market shortly after you stop working, you need to make withdrawals when the portfolio is down. You’re selling at the worst possible time.

But if the market performs poorly later, say in the second half of retirement, the damage to the portfolio is far less severe because the money had several decent years first. In other words, the sequence of your returns matters, especially in retirement. “If you have a bad sequence of returns early in retirement, you would have a lower stock allocation when you are most vulnerable to losses,” Mr. Pfau said, referring to their approach.

The second piece of this strategy involves slowly increasing your exposure to stocks. The thinking here goes something like this: If a big crash occurs in the early years after you retired, you will essentially be buying stocks when they’re cheap. So by the time the market recovers, you’ll have a bigger slice of your money in stocks again. “It becomes a ‘heads you win, tails you don’t lose,’ situation,” explained Mr. Kitces.

More specifically, the study looked at how different mixes of stocks and bonds would affect how long a retiree’s money would last if that person initially withdrew 4 percent of total assets each year (and adjusted that amount each year thereafter for inflation). So, for a person with $1 million in retirement assets, that would translate to a $40,000 withdrawal the first year; for someone with $500,000 in savings, the withdrawal would be $20,000, and so forth.

They tested the different stock and bond allocations using a Monte Carlo analysis, which simulates thousands of situations to determine the odds of possible outcomes; they also analyzed how the different mixes would perform with three different sets of market returns after inflation. (They included average historical returns and today’s nonexistent bond yields and a 3.1 percent return for stocks, on average. The third set of returns assumed bonds generated 1.5 percent while stocks produced 3.4 percent.)

Even in a worst case, they found that new retirees who start with 30 percent in stocks and slowly increase that allocation by 1 percentage point a year to 60 or 70 percent in stocks would be able to withdraw 4 percent of their portfolio for about 30 years. Someone who held 60 percent in stocks and 40 percent in bonds over 30 years would run out of money two years earlier, but would also have to endure a bumpier ride, the researchers said. (These results assumes stocks will grow about 6.5 percent a year, on average and after inflation, while bonds will increase 2.4 percent).

Article source:

Rally Continues, Fanned by the Fed

The stock market, which has been marching higher for a week, got extra fuel on Thursday after the chairman of the Federal Reserve said the central bank would keep supporting the economy.

The Dow Jones industrial average and Standard Poor’s 500-stock index surged to nominal highs, and the yield on the 10-year Treasury note continued to decline.

Stocks from companies that benefit most from a continuation of low interest rates, like home builders, recorded some of the biggest gains.

The Fed chairman, Ben S. Bernanke, made the comments in a speech late Wednesday after American markets had closed, saying the economy needed the Fed’s easy-money policy “for the foreseeable future.”

The economy needs help because unemployment is high, Mr. Bernanke said. His remarks seemed to ease investors’ fears that the central bank would pull back on its economic stimulus too quickly.

The Fed is buying $85 billion a month in bonds to keep interest rates low and to encourage spending and hiring.

Stock index futures rose overnight. Stocks surged when the market opened on Thursday and stayed high for the rest of the day.

“It’s back to the old accommodative Fed, so the markets are happy again,” said Randy Frederick, managing director of Active Trading and Derivatives at the Schwab Center for Financial Research.

The market pulled back last month after Mr. Bernanke laid out a timetable for the Fed to wind down its bond-buying program. He said the central bank would most likely ease back on its monthly purchases if the economy strengthened sufficiently.

On Thursday, the S. P. 500 index jumped 22.40 points, or, 1.4 percent, to 1,675.02, surpassing its previous high close of 1,669 from May 21. The index rose for a sixth consecutive day, its longest streak in four months.

The Dow rose 169.26 points, or 1.1 percent, to 15,460.92, above its own previous high of 15,409, set May 28.

The Nasdaq composite rose 57.55 points, or 1.6 percent, to 3,578.30.

In government bond trading, the benchmark 10-year Treasury note increased 27/32 to 92 29/32; its yield fell to 2.57 percent, from 2.67 percent on Wednesday. The yield was as high as 2.74 percent on Friday after the government reported strong hiring in June. Many traders took that report as a signal that the Fed would be more likely to slow its bond purchases sooner rather than later.

The Fed has also said it plans to keep short-term rates at record lows, at least until unemployment falls to 6.5 percent. Mr. Bernanke emphasized on Wednesday that the level of unemployment was a threshold, not a trigger. The central bank might decide to keep its benchmark short-term rate near zero even after unemployment falls that low.

Corporations began reporting earnings this week for the second quarter, which ended 11 days ago. SP Capital IQ forecast that companies in the S. P. 500 would report average earnings growth of 3 percent compared with the second quarter last year.

The price of gold gained for a fourth straight day, climbing $32.70, or 2.6 percent, to $1,280.10 an ounce, after falling close to a three-year low. Gold is rising because the prospect of continued stimulus from the Fed could weaken the dollar and increase the risk of inflation. That, in turn, increases the appeal of gold as an alternative investment.

Article source:

Bucks Blog: What You Don’t Know About Your Portfolio May Help You

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at The BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

Back in 2008, a friend of mine left for a two-week trek in Nepal. While he was gone, the entire financial world exploded.

Merrill Lynch was sold to Bank of America. Lehman Brothers filed for bankruptcy protection. A.I.G. received an $85 billion loan from the Federal Reserve to avoid bankruptcy.

But here’s the interesting part: he didn’t know anything happened because he didn’t have any connection to the outside world. Although recently retired from the investment industry, my friend would have been glued to his computer. But he had no idea what was going on.

Think about that for a minute. I remember those days. I remember waiting up to see how markets opened in Japan. I remember being so worried that I didn’t sleep for days. And I remember another friend who called me from a cruise ship to ask if things were O.K. He said that many other passengers got off at the first port and flew home to deal with what was happening in the market.

My friend in Nepal missed it all, and it didn’t make one bit of difference. He was actually better off.  All my worrying didn’t change one thing.

In fact, my friend said that when he got back and eventually heard the news, something became crystal clear. He knew exactly what was going to happen for the rest of his life: the markets were either going to move up and then down, and then up and down again — and then he would die. Or, they would go down and up and down and up — and then he would die.

In either scenario, he was still dead. And no amount of obsessing over the stock market would change that.

This idea of being unconnected for a few weeks reminded me of Warren Buffett’s statement: “Benign neglect, bordering on sloth, remains the hallmark of our investment process.”

But it’s still so hard to ignore the market because we’re so connected. We seem to be obsessed with economic news. I’m not sure when exactly it happened, but sometime in the 1990s investing became America’s favorite spectator sport. I knew there was a problem while sitting in my dentist’s office and seeing CNBC on the TV in the lobby. It’s only become more difficult to avoid, now that everyone has a smartphone.

But knowing doesn’t help. And much of the time, it actually hurts. Aside from the tendency to trade too much when we’re following every market move, there’s also the issue of our happiness. It doesn’t feel good when our investments go down, even if it’s just for one day.

We have an aversion to loss. In other words, you’re likely to feel the pain of loss far more acutely than the joy of an investment gain. We feel twice as bad losing money as we do making money. And yet, knowing this, we continue to do things that will cause us pain.

Since many of us use the Standard Poor’s 500-stock index as a proxy for the market, let’s take a look at the period from 1950 to 2012 to see how often we’re likely to feel positive, based on how often we check our investments:

  • If you checked daily, it would be positive 52.8 percent of the time.
  • If you checked monthly, it would be positive 63.1 percent of the time.
  • If you checked quarterly, it would be positive 68.7 percent of the time.
  • If you checked annually, it would be positive 77.8 percent of the time.

So here’s the thing to ask yourself. Other than upsetting yourself half of the time, what good is it doing you to look anyway? Maybe we should all invest as if we’re going on a 12-month trek in Nepal!

So along with your do-nothing streak, let’s see how long you can go without looking at your investments (assuming you’re in a low-cost, diversified portfolio, of course). I think you’ll discover that it makes you happier, keeps you from doing something stupid and helps you become a more successful investor.

Article source:

Bucks Blog: Avoiding the Easy Trap of Buying High

Carl Richards is a certified financial planner in Park City, Utah, and is the director of investor education at The BAM Alliance. His book, “The Behavior Gap,” was published this year. His sketches are archived on the Bucks blog.

Just when I thought investors had figured out to behave, I took a look at some of the recent barometers of investor sentiment. And it led me to ask, “Are we really going to do this again?”

“This,” if you’re wondering, requires looking back to 2009. Remember how you felt? Remember being so scared that you couldn’t get out of stocks fast enough? I remember. In fact, I remember that many of us swore that we would never, ever invest in stocks again. But some of the previously burned have apparently been reconverted.

For instance, let’s take a look at the Consensus Index which, as of June 3, reported that 73 percent of investors are feeling “bullish.” Other measures have similarly shown positive feelings about the market (although the AAII Index reading isn’t quite as upbeat).

Stop and think about this change in attitude for a minute. Both the Standard Poor’s 500 Index and the Dow have already gained more than 120 percent since March 2009, and the vast majority of investors are feeling “bullish” about the stock market.

Doesn’t this sound familiar?

Before you accuse me of being being all gloom and doom about the market, remember that I haven’t said anything about what I think the market will do. In fact, I have no idea what the market will do in the future. I am, however, nearly positive that I know what these excited investors are going to do.

By and large, these investors are investing based on emotion — my neighbor is in the market, I have to be in the market, too. But they’re only setting themselves up to repeat the mistakes of the market meltdown in 2008-2009. That’s because at some point (and this doesn’t require a crystal ball) the market is probably going to drop again. So investors who jumps back into the market today are likely to find themselves repeating that same pattern of buying high (now) and selling low (at some point in the future).

To be clear, I am not saying we should get out of the market. I am not saying we can time the market. I am saying that the idea of people feeling “bullish” worries me, especially when I see headlines like this in “USA Today“: “Bull run gets solid footing.”

So if you’ve decided that now is the time to increase your allocation to stocks, please take the necessary steps to avoid eventually selling out of fear once again:

1. Remember how you felt in March 2009.

Perhaps you have a reminder somewhere of how you felt in March 2009. Maybe it’s little note in a journal, or a blog post, that will help you recall that feeling of dread that caused you to sell. If you can’t find a reminder, talk to your spouse, your accountant, your financial adviser or anyone who could remind you of that moment. Try to bring those feelings back for a minute so you can avoid making the same mistake again.

2. Make sure you have a plan.

To be clear, my advice today isn’t about whether it’s a good or bad idea to invest in stocks. But it is foolish to invest without a plan, regardless of where the markets stand. So make sure you have a plan based on your goals. Pay attention to investment fees. Make sure you’re diversified. Then do your best to ignore your investments. For the average investor, that’s really the only way I know to keep your sanity.

3. Figure out how you’re going to avoid quitting next time.

Yes, there will be a next time. At some point, just like the best roller coasters, the market will take a drop, and they don’t ring a bell before it happens. So make sure you’re prepared for that moment. Have you placed some emotional guardrails in place to avoid going over the edge? You will want to sell, but unless it’s a part of a planned rebalancing, you can’t afford to let emotion drive you from the market again.

Ultimately, these investor sentiment surveys aren’t telling us anything we don’t already know. Average investors tend to get really excited about the market when things are going well. But the idea that we’re about to repeat the same cycle we just survived is ridiculous. You owe it to yourself to figure out a plan that gets you through both the ups and the downs of the market.

We know better. We should act like it.

Article source:

Empire State Building Has a Tangled History

Last week, Peter L. Malkin and his son Anthony E. Malkin, who currently control the Empire State Building, drew closer to their goal of bundling the 102-story tower with 19 other properties to create a $5.2 billion company called Empire State Realty Trust that would offer shares to the public.

The Malkins, whose stake in the new company is valued at $730 million, have spent the last year trying to convince shareholders to approve the consolidation. In what has turned into an ugly public feud, some shareholders have opposed the plan, saying that while it would be a rich deal for the Malkins, it could expose other investors to the ups and downs of the stock market.

But on Tuesday, Justice O. Peter Sherwood in State Supreme Court in Manhattan rejected an investor group’s challenge to the initial public offering. Two days later, he approved a $55 million settlement between a separate group of dissenting shareholders and Malkin Holdings. Stephen Meister, a lawyer for some stakeholders in the Empire State Building, has vowed to appeal both decisions.

So far, more than 75 percent of the 3,000 shareholders in the Empire State Building have voted in favor of the Malkins’ deal; they need 80 percent. If the Malkins succeed, it will cap a long history of struggle to control what was memorably described in film as “the nearest thing we have to heaven in New York.”

Richard Drew/Associated Press

1930 Construction starts, eventually employing 3,400 workers, using 10 million bricks, 57,000 tons of steel, 473 miles of electrical wire and 200,000 cubic feet of Indiana limestone.

1931 The $41 million Empire State Building opens on May 1, with Gov.Franklin D. Roosevelt and former Gov.Alfred E. Smith, president of the Empire State Company, addressing more than 2,000 guests.

1933 King Kong ascends the 102-story tower (at least on film).

1945 On July 28, a B-25 on a routine flight to Newark crashes into the north side of the fog-shrouded skyscraper, leaving a gash between the 78th and 80th floors and killing 14 people.

1951 In a deal valued at $34 million, the estate of John J. Raskob, who owned a controlling interest until his death in 1950, sells his stake to to a group headed by Roger I. Stevens and Col. Henry J. Crown. The group sells the ground, or title, to Prudential Insurance Company for $17 million.

1954 Colonel Crown buys out his partners, becoming the sole owner of the building.

1961Harry B. Helmsley, Lawrence A. Wien and his son-in-law Peter Malkin buy control of the building in a $65 million syndication deal. Mr. Wien raises $33 million from more than 3,000 small investors who paid $10,000 for a single share in Empire State Building Associates; that entity subleases the building to a company controlled by Mr. Helmsley and Mr. Wien. At the same time, the group resells the land, or title, to Prudential Insurance for $29 million.

1991 Prudential sells the building’s title for $42 million to Oliver Grace Jr., who was secretly acting on behalf of Hideki Yokoi, a Japanese hotelier then serving a prison sentence in connection with a deadly fire at one of his hotels.

1995Donald J. Trump, acting in concert with Mr. Yokoi’s daughter, Kiiko Nakahara, sues Empire State Building Associates, contending that Mr. Helmsley and Peter Malkin had turned the landmark tower into a “high-rise slum.” The legal battle would go on for seven years.

1997 Mr. Helmsley dies on Jan. 4. A nine-year struggle for control begins when Peter Malkin and his son Anthony Malkin sue Mr. Helmsley’s widow, Leona, and her husband’s former partners at Helmsley-Spear.

2002 Having failed to break the lease, Mr. Yokoi, Ms. Nakahara and their agent, Mr. Trump, sell the title to the Malkins’ partnership, Empire State Building Associates, for $57.5 million.

2006 The Malkins wrest control of the property from Helmsley-Spear.

2008 The owners embark on a $550 million upgrade of the tower and begin replacing hundreds of small tenants with higher-paying corporate tenants like Skanska, Lufthansa and LinkedIn.

2012 The Malkins file plans to form a $5.2 billion publicly traded real estate investment trust comprising 19 properties in the New York area, with the Empire State Building as the centerpiece. A small group of investors opposes the consolidation.

Article source:

Banks Revive Risky Loans and Mortgages

The banks that created risky amalgams of mortgages and loans during the boom — the kind that went so wrong during the bust — are busily reviving the same types of investments that many thought were gone for good. Once more, arcane-sounding financial products like collateralized debt obligations are being minted on Wall Street.

The revival partly reflects the same investor optimism that has lifted the stock market to new heights. With the real estate market and the economy improving, another financial crisis seems a distant prospect. What’s more, at a time when the Federal Reserve has pushed interest rates close to zero, the safest of these new investments offer interest rates almost double that paid by ultrasafe United States Treasury securities, according to RBS Securities, which was involved in such instruments in the past.

But the revival also underscores how these investments, known as structured financial products, have largely escaped new regulations that were supposed to prevent a repeat of the last financial crisis.

“All of this seems like a fairly quick round trip,” said Manus Clancy, a managing director at Trepp, a research firm that focuses on commercial real estate. “You are seeing a fair number of sins being forgiven.”

Banks are turning out some types of structured products as fast or faster than they did before the bottom fell out. So far this year, for instance, banks have issued $33.5 billion in bonds backed by commercial mortgages, slightly more than they did in early 2005, when the real estate market was flying high, according to data from Thomson Reuters.

Banks have won over investors by taking steps to make this generation of structured products safer than the last one. But with demand for these products on the rise, credit ratings agencies and regulators are warning that the additional protections are already dwindling, allowing some of the old excesses to creep back into the market.

“The players in the business are generally the same as they were before,” said Tad Phillips, a commercial real estate analyst at Moody’s rating agency. “Because it’s the old players, they know how to push the boundaries.”

Whatever the risks, the basic principle behind the products remains the same. A pool of loans — whether home mortgages or corporate loans — are mixed together into bonds, ranked by varying levels of risk. If the underlying loans go bad, the bonds at the bottom of the pecking order suffer losses first, followed by the next lowest, and so on up the chain. It is only after enormous losses that the top-ranked AAA bonds lose money.

Bundling many loans into one investment, a process known as securitization, provides an efficient way to channel money to borrowers who might not otherwise get funds. But securitization proved dangerous during the last real estate boom because it encouraged banks to give loans to people with weak credit and then pass on those risky loans to the buyers of the structured products. When the real estate market dropped in value, it inflicted unexpected losses on those investors and led to chaos in the financial system. Many investors complained that the complexity of the instruments obscured their risks.

The Dodd-Frank regulatory overhaul is forcing banks to take extra steps in the process of bundling loans, but it does not change the basic approach.

For a glimpse into this process, both before and after the crisis, consider the mortgage taken out by the Hard Rock Hotel in downtown Chicago. In mid-2007, just as the real estate market was coming unhinged, the hotel — like many ordinary home buyers — took out a risky mortgage on which it paid only interest. JPMorgan Chase mixed this loan and others into a commercial mortgage-backed security. Credit ratings agencies gave a large portion of the resulting bonds a AAA rating.

After the recession, the hotel struggled to keep up with its payments, edging it toward foreclosure. It was one of several bad loans that caused losses for holders of the old bonds. But late last year, with the market for structured finance coming back to life, the hotel’s owners were able to refinance the old mortgage. In February, that refinanced loan turned up in a new bond, which again received a AAA rating.

Article source:

The Trade: Efforts to Revive the Economy Lead to Worries of a Bubble

Ben S. Bernanke, the chairman of the Federal Reserve.Everett Kennedy Brown/European Pressphoto AgencyBen S. Bernanke, the chairman of the Federal Reserve.

Are we moving from the crash to the bubble, dispensing with that pesky economic recovery thing altogether?

The Federal Reserve is well into its third round of “quantitative easing,” in which it buys longer-term assets to bring down long-term lending rates. We are about five and a half years into the Fed’s extraordinary monetary policies (its out-of-the-box lending programs began before the crash, in late 2007).

The effect the central bank hopes to produce hasn’t materialized. Despite modest growth, the economy remains a wellspring of misery, with mass unemployment, wage stagnation and factories going unused. In March, a smaller percentage of working-age people were actually working than at any other time since 1979.

Through its unconventional policies, the Fed is trying to ease the crisis. It has succeeded in driving down lending rates. Ben S. Bernanke and company would also like to kindle inflation expectations, spurring people to buy and companies to invest today instead of waiting until tomorrow. Supposedly, all of this will drive a self-sustaining economic recovery.

The Trade
View all posts

Related Links

Instead, the Fed has kindled speculation. Investors are desperate for yield and are paying up for riskier assets. In areas like real estate, structured finance and equities, the markets are ahead of the fundamentals. It doesn’t look to me like a bubble yet. But I would call it the Dysplasia Stage, abnormal growth that looks precancerous.

It’s not just an economic or financial issue, it’s cultural and psychological. We seem to have unlearned what real growth is and simply substituted speculative bubbles. Policy makers are either paralyzed or barrel forward because this is all they know how to do.

Let’s first take the stock market. On the standard measures of looking at estimated earnings, the Standard Poor’s 500-stock index isn’t particularly high. But that’s misleading. Corporate earnings are extremely high as a percentage of the gross domestic product. Margins are high. Is that sustainable?

There are more reliable measures of stock market value, and they look frothy. One gauge, the price of stocks based on the past decade of earnings, is named after the Yale economist Robert J. Shiller. Using that, stocks are too expensive by 65 percent. Alternatively, many investors look at something called the Q, devised by the economist James Tobin, which compares stock prices with corporate net worth. The nonfinancial companies are overpriced by 57 percent. The stock market is not at 1999 or 1929 levels, but it has reached other previous peaks of 1906, 1936 and 1968, according to Smithers Company, a London-based research shop.

To make stocks correctly priced, “either earnings have to explode heavenward for 10 years or else stock prices have to come in a lot,” said Scott Frew, who runs Rockingham Capital Partners, a small hedge fund. He expects earnings to fall.

It’s not just stocks. Investors are bidding up junk bonds, commercial mortgage-backed securities and bundles of corporate loans called collateralized loan obligations. Last month, investors were paying more for such loans than at any time in the last five years. They are snapping up billions of dollars in securities made up of subprime auto loans.

And the housing market isn’t just rising, but roaring back so fast you can feel the G-force coming off the reports. Home prices in Phoenix went up 23 percent over the last year, according to the latest Standard Poor’s Case-Shiller index. More than one in four homes in Phoenix was purchased by an investor who bought more than five homes, up from 16 percent a year earlier.

“I am now starting to become less skeptical” about the worries over a new housing bubble, said Christopher J. Mayer, a real estate economist at Columbia University. When local money is on the sidelines and outside buyers come in to snap up real estate, that typically ends badly, he added.

So what’s going on?

The Fed is engaged in “trickle-down monetary policy,” said Daniel Alpert, managing partner of Westwood Capital, an investment bank. “This type of monetary policy is making the wealthy wealthier and hoping that it trickles down to the shop floor.”

But “trickle down has never worked,” he said. “The wealthy don’t need to consume. And when there is oversupply of capacity, the wealthy don’t need to invest in new capacity.”

Has the Federal Reserve monetary policy reached the average American? To a certain degree, yes. Many Americans have been able to refinance their homes. Those auto loans may be helping people get to and from work.

But the economic effects are modest for the size and scope of the effort. Investors glory in the asset inflation. The most pronounced effect of low mortgage rates has been to allow people with good credit and low debt to refinance multiple times over the last few years. Stock ownership is concentrated among the wealthy; junk bonds and collateralized loan obligations only more so.

Mr. Alpert says the first round of quantitative easing was necessary to ease the liquidity problem in the markets — the unwillingness of investors to conquer their fears and buy up assets. But the third round is “unnecessary,” he said.

Others disagree. Dean Baker, an economist from the liberal-leaning Center for Economic and Policy Research who warned about the housing bubble much earlier than most, doesn’t see a bubble yet. He advocates continuing quantitative easing.

Mr. Baker adds a note of caution, however. Regulators should move to high alert; Federal Reserve officials should start speaking out to signal that they are paying attention to the abnormalities. Eric S. Rosengren, the president of the Federal Reserve Bank of Boston, gave a recent speech raising areas of concern, only to dismiss them as not overly worrisome yet.

At least he was thinking about the issue. As with cancer, the key is to intervene early.

Article source:

Your Money: Your Money: Rental Investment May Seem Safer Than It Really Is

The idea of buying a house and renting it out may seem especially attractive now, with home prices still reasonable, though rising, in many places, and interest rates at levels practically begging you to borrow. And if you’re thinking about retirement, the income can serve as an inflation-adjusted annuity of sorts, since rents are likely to rise over time.

But our perceptions can be deceiving. “There is a lot of idiosyncratic risk associated with rental income,” said Christopher J. Mayer, professor of real estate, finance and economics at Columbia Business School. “That is the word that economists use for when a lot of things can go wrong, even if on average they don’t go wrong very often.”

Tom and Ana Vogel, a retired couple in their early 70s, are seasoned landlords. So they’re aware of the risks, having dealt with problematic tenants in the past. Still, with a sizable piece of their retirement savings tied up in certificates of deposit earning less than 1 percent, they thought they could do better by buying a house and renting it out. They recently bought a five-bedroom house in their hometown, Germantown, Md., for $350,000, and they expected about a 6 percent return on their investment, as well as some tax benefits.

“It is high risk, you just have to be careful,” said Mr. Vogel, who worked as a geodesist and information technology manager for what was the Defense Mapping Agency. “You have no control over the stock market,” he added, explaining that they didn’t have the stomach for the volatility after losing half of the $100,000 they had invested in mutual funds during the market downturn in 2000.

With a pension accounting for half of their retirement income, the couple may have more room for error than other retirees. They also paid for the property in cash — the C.D. money covered half, and they used a home equity loan on their primary home to cover the remainder.

If you’re thinking about testing these waters, you can expect to compete with cash buyers like the Vogels — they represented 32.3 percent of home sales in February, according to the Campbell/Inside Mortgage Finance HousingPulse Tracking Survey. But a lot of those investors have much deeper pockets. In certain spots across the Sunbelt, in particular, the homeowner next door may actually be a faceless private equity firm. The Blackstone Group and other Wall Street investors are gobbling up properties in places like the Tampa Bay area of Florida by the thousands. And their exit strategy could affect yours.

Jack McCabe, a real estate consultant in Deerfield Beach, Fla., said he had never seen large investors purchase so many homes in one fell swoop, giving them such great sway over pricing in the market. “A lot of the price increase is not due to a market that is getting healthy, but is due to the influx of hedge funds, and a high percentage of homes are selling at artificially inflated values,” Mr. McCabe said.

Should you decide to follow the Vogels’ lead, there are a variety of calculations you should make, and concerns and questions you should have ahead of time, several of which are sketched out below.

DO I NEED FINANCING? Taking out a mortgage obviously increases your financial risk, even if you believe there is a healthy spread between what you can charge in rent and what you owe on the mortgage (and other expenses). In fact, what you’re really doing is borrowing to expand the size of your investment portfolio, explained Professor Mayer, which can be particularly risky for retirees who are no longer working. “They can turn their $500,000 portfolio into $600,000 by borrowing, but if you told them you were going to borrow money to buy a REIT, people would say, ‘Gee, that’s really risky,’ “ he said. “Well, then why is it less risky to do that with a rental property?”

We don’t have to look back too far to remember what can happen if home values fall. “If stuff goes down in value, that leaves you much more exposed,” Professor Mayer said. “Borrowing money to earn a higher return involves risk.”

CAN I GET A MORTGAGE? Not only is getting a mortgage on an investment property more difficult than getting a loan on your primary home, it also tends to be more expensive. Mortgages on investment properties tend to carry slightly higher interest rates — anywhere from 0.25 of a percentage point to a full percentage point — and may require higher down payments, according to Keith Gumbinger of, a mortgage data firm. “Things can also get more complicated where the income from the property is needed to support the loan,” he added. “The purchaser may need to provide a rental history for the property, if any exists, or they may need to have a rental market analysis conducted.”

AM I DIVERSIFIED ENOUGH? If you have a $600,000 portfolio, putting $300,000 into one asset is a highly concentrated bet. “People tend to mentally compartmentalize their investments, but really, you should be looking at them together,” Professor Mayer added.

Article source:

Shares Push Higher as Fed Maintains Stimulus Program

Fear of a revived debt crisis in Europe faded from the stock market on Wednesday, freeing the Dow Jones industrial average to touch another milestone.

After falling Monday on concerns that Cyprus would become the latest European nation to stir fiscal chaos, the Dow posted its second consecutive day of gains.

Stocks traded steadily higher for most of the day and spiked after the Federal Reserve said it would continue with aggressive measures to support the economy. The Federal Reserve chairman, Ben S. Bernanke, said the crisis in Cyprus posed no major risk to the United States economy.

The Dow was up 44 points shortly before the Fed announcement. It rose as much as 91 points shortly after the Fed released its policy statement at 2 p.m., reaching a milestone of 14,546 at 2:25 p.m.

The Fed said the nation’s economy had strengthened after pausing late last year, but still needed support from the central bank. The Fed plans to continue buying $85 billion in bonds a month indefinitely to keep long-term borrowing costs down and encourage investment. It also said it would keep short-term interest rates at record lows, at least until unemployment falls to 6.5 percent.

Interest rates were higher. The Treasury’s benchmark 10-year note fell 16/32, to 100 12/32, and the yield rose to 1.96 percent from 1.90 percent late Tuesday.

Unemployment fell last month to 7.7 percent, the lowest level in four years. The Fed does not expect the rate to reach its target until 2015.

The Dow closed up 55.91 points Wednesday, or 0.4 percent, at 14,511.73.

Stock markets were little changed on Tuesday despite rising uncertainty in Cyprus. Anyone watching “would conclude that the market decided Cyprus is overblown as an issue,” said Brian Gendreau, a strategist at the Cetera Financial Group.

Mr. Gendreau said traders had been concerned about what precedent might be set by Cyprus’s efforts to avoid a crisis. A plan to seize money from bank savings accounts was met with outrage, and the nation’s Parliament rejected the proposal on Tuesday.

The nation’s unusual status as an international financial haven makes it an unlikely road map for future rescue efforts.

“I think the market’s going to start looking at other things,” he said.

Cyprus was negotiating with international lenders, seeking support for its ailing financial system. Without a bailout deal, Cyprus’s banks could collapse, devastating the country’s economy and potentially forcing it to exit the euro currency group. That could roil global financial markets.

Attention returned to Europe this week after several months’ respite, during which traders focused on the strengthening economy in the United States and drove stocks to multiyear highs.

Over the previous two years, concerns about a breakup of the euro currency often dominated trading of United States stocks. The jitters receded after central banks provided enough extra cash to help prop up Europe’s commercial banks.

Among stocks making big news was FedEx. The company reported sharply lower quarterly earnings and said it would cut capacity to Asia. FedEx sank $7.33, or 6.9 percent, to $99.13.

Adobe soared after reporting strong first-quarter earnings. The company, which makes Adobe Reader and Photoshop, said it had picked up more subscriptions to online versions of its software products. The stock rose $1.71, or 4.2 percent, to $42.46.

In other trading, the Standard Poor’s 500-stock index rose 10.37 points, or 0.7 percent, to 1,558.71. The Nasdaq composite index rose 25.09, or 0.8 percent, to 3,254.19.

The S. P. 500 is just six points below its milestone of 1,565, reached in October 2007. It is up 9.3 percent so far this year.

The Dow is up 10.7 percent for the year. From March 1 through March 14, the index had a 10-day winning streak — its longest since 1996. The Dow rose 484 points, to 14,539, during that period. After a two-day dip on Friday and Monday, the Dow has added 60 points to 14,511.

Article source:

Wealth Matters: Investment Advice in Real Estate and Technology Industries

But the ways that these people become wealthy — and lose everything — are not that far apart. In both fields, after all, the money comes from a potentially volatile asset in a cyclical industry.

I spoke this week to financial advisers for both groups to learn how the executives in these fields think about risk, plan for the fallow periods and make sure that their good fortune lasts.

This is the second of three columns about what we can learn from the investment behaviors, good and bad, of people in a variety of well-paid industries. Last week, I took a look at the highfliers in sports and the oil and gas business, and next week, I plan to look at doctors and lawyers, the slow but steady earners.

Here are some lessons from executives in the high-tech and real estate worlds.

IT ALWAYS LOOKS GREAT ON PAPER Mike PeQueen, a managing director at HighTower Las Vegas, a wealth management firm, is a Las Vegas native who resisted the city’s long, strong property boom. He preferred stocks but felt, at times, as if he were the only one of his friends to believe in diversification.

Only now is the magnitude of their real estate losses sinking in for people who once talked about owning private jets. “Because of the long-term nature in real estate compared to the short cycle in the stock market, they don’t understand cycles exist,” Mr. PeQueen said. “For 25 years, Las Vegas real estate went up, and then it went down. They thought it would be a one-year down market. It’s been five or six years, which is normal.”

Mr. PeQueen said his clients and friends were, in the gambling parlance of the city, letting it all ride on real estate. Not only did they use properties to buy more properties, but they rarely thought of buying property elsewhere.

“Five real estate investments in Vegas is not diversification,” he said. “Any thought that they could buy rental houses in Phoenix seemed absurd. That location bias was very strong.”

Yet this strategy did not affect all investors equally. Owners who did not take on a lot of debt have been able to hang on. But Mr. PeQueen said that many real estate investors misunderstood or ignored the concept of total return.

“They thought the rent was their return, and not the rent plus the continued decline in the house’s value,” he said. “They can’t imagine that they made a fortune and lost it.”

Still, concentrated investments are how most real estate investors have made their money. In New York, for example, where the value of a single office building can reach $1 billion or more, even the wealthiest families own only a handful.

“They have concentrated risk, but they derive comfort in that they know it so well,” said Maureen K. Clancy, a managing director at Barclays Wealth. “There is a certain security that comes from that hands-on involvement.”

Ms. Clancy’s strategy for preserving wealth is to persuade real estate owners to put some of their money in safe investments that have nothing to do with real estate and to work with them on their level of debt.

“Many people would assume real estate means aggressive,” she said. “The underpinning of their wealth is based on this shared belief that conservative leverage gives you incredible staying power.”

Downturns, of course, are the best time to buy properties inexpensively. And Ms. Clancy’s clients, with lower leverage, have been able to undercut competitors who are struggling under greater debt.

LEARN FROM THE PAST Many of the people in the social media world who have gotten wealthy in recent years seem to have acquired their money in the opposite way: with only a tenuous link between time spent at a company and the size of their reward. But the ones who got truly wealthy spent years wondering if their idea was going to pan out.

Now that they have the money, they are acting more cautiously and diversifying their company stock in a way that technology developers did not in the 1990s boom.

“In the ’90s, the theme was companies didn’t want their employees to sell a single share of stock,” said Mark T. Curtis, a managing director at Morgan Stanley in Palo Alto, Calif. “Now, I’d say among our corporate relationships, they want us to help their employees with financial education. They say, ‘We’ve given them equity to reward them for the success of the company but help them not take all of this risk.’ ”

Article source: