How to invest for falling prices

September 27, 2010
9/27 reuters column Deflation’s Dreamy Opportunities How to Invest for Falling Prices By John F. Wasik Okay, worry warts, you have official permission to be concerned about deflation. This economically trying condition means that prices on goods and services may continue to fall (from 2008 meltdown levels), economic growth will be stagnant and savings yields will stink. If this trend continues, it’s not bullish news for employment and the general economy, duly noted by the Federal Reserve last week. Yet it’s not the worst development for your portfolio, which is easily shored up. Not having some measure of inflation means corporations that sell things or provide services typically can’t raise prices, create jobs or benefit from growing consumer demand. That also conjures up the scary image of Japan, which has been in deflationary mode for more than a decade and has propped up its so-called “zombie banks.” The first tenant of deflation is that cash — as a profitable after-tax investment at least — is not king. Money-market funds, certificates of deposit and other savings vehicles will continue to offer paltry yields. They are still adequate places to harbor your money for emergencies and monthly bills, but that’s about it. To boost your returns, you’ll need to look elsewhere and realize that you will have to take on more risk — if you can afford it. Companies with cash in their treasuries (and not hobbled by debt) are good places to start. Not only are these companies generally well run, they are mature enterprises that are not likely to cancel dividends any time soon (well, BP was a surprise, wasn’t it?). Cash-rich companies can pay dividends. My favorite vehicle for investing in a big basket of them is the Vanguard Dividend Achievers (VIG) exchange-traded funds. Vanguard’s managers select the most consistent dividend payers and hold them. Don’t limit yourself to U.S. stocks, though. The Powershares International Dividend Achievers ETF (PID) looks globally for those companies willing to share their cash horde with you. The least-obvious strategy is not even considered an investment by most: Pay down your personal debt. I know I sound like an infomercial when I say that rates may never be this low again. (If this deflationary mode lasts into next year or we head into a Japanese-type deflationary funk, I might have to eat those words). Refinance any long-term debt you can (cars, boats, etc.). Deflation is a dream for those who need to pay down obligations or reduce interest payments. The money you save goes right back into your pocket. With 30-year mortgage rates hovering around 4.4% and 15-year rates under 4%, it’s a great time to refinance. I advised a friend recently who wanted to pay off his mortgage in a decade to contact a low-cost mortgage broker. He obtained a 10-year note for 3.8% (the shorter the term, generally the lower the rate). His family now has more money on hand to pay for college bills and other expenses. As you think through how deflation could help you, don’t forget that it won’t last forever. Avoid the temptation to jump into long-term bonds just for the slightly higher yield. Unless you are willing to hold them to maturity, you could lose money when rates climb again. One of the best income-paying inflation hedges are still I-bonds or Treasury Inflation-Protected Securities, government bonds that are indexed to the consumer price index. You can buy them commission-free directly from the U.S. Treasury (www.treasurydirect.gov).   And don’t make the mistake thinking that residential real estate is a good short-term investment during deflationary times. It’s not, except in areas of high demand, which are few and far between. Got any perplexing financial concerns? Let me know. johnwasik@gmail.com John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (www.culdesacsyndrome.com).”

Okay, worrywarts, you have official permission to be concerned about deflation.

Who’s really got the money?

September 23, 2010

USA/

I was talking to a billionaire I knew the other day. He didn’t look any different from other folks. No entourage. No manservant. Not even an armor-plated Escalade.

Investing in the under-the-radar recovery

September 20, 2010

Two main theories about the global economy dominate these days: 1) We’re headed for a double-dip recession, and 2) things are getting better at a thick, syrupy pace.

The quickest way to bruise your brand

September 16, 2010

USA-RETAILSALES/

Corporate dollars and political campaigns are like oil and water for well-established retail brands.

How to get a good deal on closing costs

September 13, 2010
Getting a Good Deal on Closing Costs Reading the Fine Print is Essential By John F. Wasik Although you can get a great deal on mortgage rates, you can easily pay too much on closing costs. The necessary expenses of appraisals, title insurance, credit checks and other fees can add up to thousands of dollars. You can reduce those costs by getting multiple quotes and negotiating. With 30-year loan rates averaging around 4.3 percent and 15-year rates at 3.8 percent nationally, according to Freddie Mac, now’s a great time to refinance or buy. Shopping multiple sources pays off. With closing costs up 37% — that’s an average $3,741 on a $200,000 loan according to bankrate.com, you can put a lot more money in your pocket while getting some of the best rates in a generation. When I refinanced late last year, I started the process knowing that getting a decent rate was only part of my mission. I wanted to get closing costs under $2,000, which was challenging considering I was seeing most quotes above $3,000. Not only are closing costs numerous, they can get onerous. In addition to making money on the loan, many lenders will slap on “junk” fees like processing or underwriting. You can avoid these fees by going to another lender or negotiating. The best financing strategy involves first detailing the fees and your total cost. “Are you getting the best rate possible for the lowest fees,” says Sam Tamkin, Chicago-based attorney who handles real estate closings. “And if you’re getting an adjustable-rate loan, do you understand how they adjust?” It’s not unusual for buyers and refinancers to pay from 3% to 5% of the total cost of the home in closing costs. The total expenses are largely a factor of where you live. Large metropolitan areas tend to be most expensive. Here’s a strategy that will help you reduce costs: • Always sample a variety of lenders and brokers. Consider Internet services, local banks and credit unions. You may be able to apply online for basic quotes, but make sure you get a good faith estimate of all costs. You may need to make some phone calls to get closing estimates. • Compare all fees. Some lenders charge underwriting and processing while others don’t. If you find a lender with a desirable rate — and their fees are high relative to other lenders — ask them to trim their closing costs. Do this before you sign up for a credit check and send in your Social Security number. • Title Insurance is costly, yet required. It can range in price from $150 to $1,000 or more. Some states regulate the price. A good mortgage broker may be able to get you the best price. • Read your HUD-1 statement carefully. This is the form that lists all closing costs before you close and is available at least one day prior to closing. Keep in mind that you can walk away if previously undisclosed fees were added. While I’ve found that the best rates are often obtained through mortgage brokers — they do the searching for you — there is no such thing as a “no cost loan.” They make their money through a “yield spread premium.” So their profit would be charging you 4.4% on a 4.3% loan — a “spread” of 1 percentage point — for example. Although there have been several efforts to streamline the closing process, it still can be confusing and you will need to review a mountain of forms. Fully understand what you are signing. Got any perplexing financial concerns? Let me know. johnwasik@gmail.com John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (www.culdesacsyndrome.com).”

Although you can get a great deal on mortgage rates, you can easily pay too much on closing costs.

How to cut property tax with an appeal

September 8, 2010
This may sound crazy, but you need to lower your home’s value. I’m not suggesting you damage it in any way. Just challenge what your local assessor is saying it’s worth so that you might be able to lower your property taxes. I try and do this every year with some success. With property values still down across the board in most places, now is the best time to appeal your home’s value. We’re entering the season in which assessors release valuations of how much your home is worth for tax purposes. Their assessed valuation is one part of the basis for your property tax bill. The valuation times local tax rates (for schools, fire protection, etc.) equals your real-estate bill after exemptions and other local factors are applied. Most counties give you a limited window in which to appeal your valuation — typically about a month. After that, you’ll have to wait until next year to do an appeal. Don’t wait. You’ll need to do a lot of homework to win a successful appeal. Since only 30% of all homeowners appeal their assessment, you have a good chance of getting a hearing on how to lower your valuation. You will be appealing last’s year valuation — not this year’s — since property taxes apply only to the previous year. So what’s happening in your market now isn’t relevant to your assessor. Also don’t confuse an assessed valuation with a market value. They are not the same thing. A market value goes through a real estate appraisal process for purposes of selling a home. Your local assessor makes a much more basic calculation based on your neighborhood, type of home and improvements. Here’s what you need to know:  Is Your Property Record Correct? It’s public information as to how many bedrooms and bathrooms you and your neighbors have. Check your assessment record. If they have you incorrectly listed for an extra bath or finished basement, go right to the assessor to fix that. It could easily lower your tax bill.  Are comparable homes valued less than yours? Assessors are concerned about consistent valuations. Compare your home with similar houses of equal footage, improvements, lot size and other characteristics. If you file an appeal, you will need “comparable” home examples. Present recent professional appraisals.  Is your home new? You will need a sales contract to show what you paid. If it declined in value, then make a case with recent sales figures. Any factor that may have caused your home to drop in price should be presented. Most simple errors can be corrected with your assessor. If that doesn’t work, you can appeal on the county and state levels with real estate boards of appeals. Keep in mind that most appeals fail because homeowners don’t present the facts logically and succinctly. Most county appeals hearings only give you a few minutes to state your case. If you’re emotional and try to argue based on your gut feeling, you will lose. You can hire lawyers and appraisers to help in your appeal. If you take them on, make sure you pay them based on contingency or a flat fee. Lawyers will take one-third of your tax savings. Avoid those who bill on an hourly basis. If you win your appeal, you could save from a few hundred to a thousand dollars on your tax bill. To most homeowners, lower tax bills are much more alluring than granite counter tops. Your homework is worth the effort, won’t impact your market value and will make your home more appealing when you go to sell. Got any perplexing financial concerns? Let me know. johnwasik@gmail.com John F. Wasik is author of “The Cul-de-Sac Syndrome: Turning Around the Unsustainable American Dream (www.culdesacsyndrome.com).”

This may sound crazy, but you need to lower your home’s value.

How to conquer the retirement worry gap

September 1, 2010
/Could you read another report that shows how little Americans have saved for retirement in these troubled times? I know it’s difficult, so I came up with a simple formula for figuring out how much you need. Pencil in how much money it would take for you to live comfortably for 25 years. Include items that are not covered by insurance – deductibles, travel, home maintenance, taxes. Then project how much Social Security and retirement income you will have by the age in which you cast that not-so-longing last glance at your office door. The difference between your comfort zone amount and your retirement kitty is the worry gap. That’s the amount you need to make up by working longer, saving aggressively or downsizing your lifestyle. For millions, the worry gap is a pretty deep crevasse. It’s hard to fill it up with money when your 401(k) is underfunded and the bills keep arriving. In a job-losing, no-raise economy, it looks like a bottomless pit. A recent survey – one that I always take note of – showed that some two-thirds of those polled in the two lowest pre-retirement income levels will be running short only 10 years into retirement. These folks, as monitored by the annual Employee Benefit Research Institute’s (www.ebri.org) “Retirement Readiness” study, are saving the least for retirement. Yet even those in the highest-income groups are still going to be facing problems paying for basic expenses and uninsured medical bills. Remember that Medicare has co-pays for hospital and medical services and is in severe fiscal trouble. The EBRI study also broke down who was most at risk. “Early” boomers (those aged 56-62) had a 47 percent chance of running out of retirement funds. Their younger peers (ages 46-55) and “Generation Xers” (ages 36-45) are about 44 percent at risk. Where do you stand? If you are going to come up short, there are myriad ways of conquering the worry gap. Here are some options: • Downsize. Do you expect to live in the same space when you’re older? Can you live in half the square footage? A smaller home or apartment lowers your living costs. A move from a single-family home to a condo, co-op or townhouse can mean lower property taxes, maintenance and financing costs. This makes most sense for empty nesters. The key theme is that the American Dream shouldn’t be tied into the size of your shelter — it should revolve around what you can afford and how much you save. • Rethink Retirement. For many, completely retreating from the workforce completely is a bad idea. It may lead to poorer health, early death and annoying one’s spouse/partner full time. Being in the workforce longer means continued benefits and the ability to save. You may also get a free match in an employer savings plan. If you suffer from a disabling condition or chronic illness, this is not an option, so look at how you will cover medical expenses. • Automate Savings. If you’re in a 401(k), sign up for automatic enrollment and increases. If you don’t have to think about contributions, you’ll save more. Even if you don’t have an employer plan, you can set up auto-debits into Individual Retirement Accounts. • Fund Your Roth. Roth IRAs and 401(k)s are looking good right now. While your contributions are taxed, your withdrawals are not (subject to a few rules). Most retirement plan withdrawals are taxed at full marginal rates. I think income taxes are going up to cover Medicare’s shortfalls, so Roths rule. The best thing you can do is survey yourself, your family/spouse/partner and take a hard look at your comfort zone. You may have to throw out some preconceptions about retirement, but don’t ignore the possibility that some adjustments may be needed.

Could you read another report that shows how little Americans have saved for retirement in these troubled times? I know it’s difficult, so I came up with a simple formula for figuring out how much you need.