“Investing for Dummies” During Difficult Markets

Everyone’s financial situation is different. What may be good advice for a 21-year-old likely is not be the best advice for a 65-year-old. Some investors may be willing to accept portfolio risk while others look for safety. While some may be able to muddle through, others may need a professional financial advisor to be their guide.

But there are some basic things every investor should keep in mind:

Diversification – You’ve heard the expression “Don’t put all your eggs in one basket.” The same holds true for investment portfolios. If all your investments are in the same area or category, and that category takes a hit, you’ll likely absorb all of the damage. On the other hand, if your investments are spread out over different categories, then a big hit in one category could have a very little effect on you. For that reason, it makes sense to divide holdings among stocks, bonds, real estate and cash.

Asset allocation – Simply put, this is the strategic approach to diversifying.  Generally, the older you are, the less risk you want to have in your portfolio, since a loss will be harder to make up over time. So those that are older may want more bond holdings in their portfolio, because bonds are considered less risky than stocks, in most markets. On the other hand, younger investors may be willing to assume more risk and allocate a greater percentage to stocks in the holdings in hopes of greater gains over time.

The slightly more savvy go even further, dividing stock holdings between large, mid or small-sized companies or  spreading the risk out to less correlated sectors like healthcare, transportation, technology and energy.

Dollar Cost Averaging – Purchasing investments at regular intervals with a fixed dollar amounts has advantages. This tends to reduce the impact of market volatility in their portfolios.

Let’s assume you have $150/mo to invest.

Month 1 – You buy 6 shares of the stock at $25/share.

Month 2 – You buy 10 shares of the stock at $15/share.

Month 3 – You buy 5 shares of the stock at $30/share.

Over three months, you have 21 shares with a total cost of $450, averaging just over $21/share.

More shares are purchased when the price is low, and fewer are bought when it is high, so the average price per share goes down over time. Although risk does not completely disappear, this strategy reduces volatility risk.

Kicking it Up a Notch – Now for savvy investors, market downturns mean opportunity, a chance to buy stocks with good potential for growth at bargain prices. This is where research and strategy come into play. It also requires learning about more strategies like:

• Understanding the difference between a market order and a stop order.
• Knowing the difference between growth stocks and value.
• Learning what option contracts are – The right to buy or sell a stock at a predetermined price.
• Understanding market metrics like Price to Earnings ration (P/E).

There are many more strategies and theories, from technical chart patterns to option straddles.

If becoming a full time student of the market is not something you can afford the time to do, consider hiring a Registered Investment Advisor (RIA). That is, a professional that manages your investment portfolio for a fee as opposed to a commission. This way there is no underlying agenda to “sell” you something that may not fit your needs. In the end, engaging a professional to handle the investment management of your portfolio can help your assets to grow and give you the piece of mind to sleep soundly at night.

The information contained herein does not constitute tax or legal advice.  Any decisions or actions should not be made without first consulting a financial professional, CPA or attorney.

For more information contact us at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC.  

The views and opinions expressed herein are those of the author and do not necessarily reflect the opinions of Spire Wealth Management LLC, Spire Securities LLC or its affiliates.

Spire Wealth Management, LLC is a Federally Registered Investment Advisory Firm. Securities offered through an affiliate, Spire Securities, LLC. Member FINRA/SIPC.

 

Points to Ponder Before You Refinance

Monthly savings shouldn’t be the only consideration in determining whether to take advantage of today’s low rates.

Mortgage rates seem to keep dropping week over week. How do you know if it makes sense to refinance?  The question might be, how low can they go?

The average rate on a 30-year fixed mortgage is somewhere around 3.6%, according to Freddie Mac, with the 15-year fixed mortgage averaging a previously unheard of low of under 3.0%. Both are down considerably from where they stood just four years ago. So shouldn’t anyone with a mortgage rate above, say, 5% on a 30-year fixed loan look into refinancing? Not necessarily.

Figuring out whether refinancing a mortgage makes sense requires consideration of several important questions. The first and most important is whether you qualify. Homeowners with low credit scores or who owe more on their homes than the property is worth might have trouble finding a lender willing to refinance their mortgage (the federal Home Affordable Refinance Program might be one option). For those who do qualify, ask yourself these questions before you rush off to sign documents

How much will you really be saving?
Finding out how much you’ll save each month by refinancing is as easy as plugging the amount and length of the new loan into any online mortgage calculator and comparing the results with your current monthly payment. But the monthly payment should not be your only consideration. Remember that the bulk of early payments on a new mortgage typically go to pay interest on the loan. So by starting a new loan you’re essentially restarting the process of paying off mostly interest (albeit at a reduced rate) and little principal. Therefore, you may not be building up equity in your home any faster than you did with the previous mortgage.

Failing to look at the big picture is one of the most common mistakes refinancers make. If you’re very deep into your mortgage, with under a dozen years or less remaining, or have a very small mortgage (one worth less than $50,000), you’re not paying that much in interest anymore. Therefore, the benefits of refinancing are slight.

When calculating monthly interest savings, keep in mind that interest on home mortgages is tax-deductible. So by saving, say, $100 a month in interest, you might only be saving about $75 on an after-tax basis (depending on your tax bracket and other factors). Also, by reducing the amount of interest you pay each year, your total itemized deductions could fall below the standard deduction amount, meaning that you can no longer take advantage of other itemized deductions, such as donations to charity.

What will you do with your savings?
If you hope to free up cash to pay down other debts, from a high-interest credit card for example, that’s fine. However, be aware thatchanging your spending habits will go a lot further in keeping your debt load manageable than refinancing will. Or, if you are thinking about pocketing the savings, consider using at least a portion to pay off principal on the loan. Doing so helps pay down the loan faster and could make a refinance plan pay off in circumstances in which it otherwise wouldn’t.

How long do you plan to stay in the home?
Remember that it will take time for the refinanced mortgage to pay for itself. If refinancing saves you $500 in interest per year but costs you $2,000 in points and fees, you’ll have to stay put for at least four years just to break even. Sell the home before that and you’ve lost money by refinancing.

What type of mortgage makes the most sense?
If you plan to stay in your home long term, today’s bargain-basement fixed interest rates are hard to resist. Don’t be seduced by still-lower adjustable-rate mortgages unless you’re reasonably confident you won’t be staying in the home much beyond when the rate adjusts. The last thing you want is to be kicking yourself a decade down the road for not locking in the lowest rates when you had the chance.

Also consider the length of the mortgage. A 15-year mortgage will offer a lower rate and lower overall interest costs than a 30-year mortgage but higher monthly payments. If you’re unsure whether you can afford the higher monthly payments, consider taking out a 30-year mortgage and including extra principal payments each month to pay down the loan faster and save on interest. Taking the 30-year mortgage ultimately might end up costing you more, but it buys you the flexibility to pay a lower amount each month in case you or your spouse loses a job or another emergency arises that requires you to free up some cash.

Do you plan to take cash out?
Refinancing at a higher amount than is owed on your existing mortgage can put money in your pocket, but it’s not free. You’ll still pay interest on the loan, and lenders have become stingier regarding the practice. If the amount of the new mortgage is more than 75%-80% of the value of the property (referred to as loan-to-value or LTV) the lender may raise the rate and/or fees or decline the application altogether.

Are you better off paying points and fees or choosing a “no-cost refi”?
You might think that you end up paying the same amount either way.  Not necessarily.  Rolling refinancing costs into the loan’s interest rate typically adds about half a percentage point, which could make it the more expensive option if the borrower plans to stay in the home for the full term of the loan. In that case, paying points and fees upfront and getting the lower rate will save more over the long haul. But for borrowers who plan to stay in the home for just a few years, the no-cost refi could be the better option, if the additional cost from the higher interest rate is less than the cost of paying the points and fees upfront.

How soon before you have to act?
The good news is today’s low rates aren’t likely to shoot higher anytime soon.  If you do decide to refinance, prepare for a more involved process than if you had done so five years ago. In the wake of the financial crisis, lenders have become much more careful about who gets loans. Make sure you check your credit score before applying to ensure there are no unpleasant surprises when the lender does its credit check. Also be prepared for more paperwork and longer waiting periods to close on a refinance compared with years past, with typical waits of 60-90 days.

Refinancing might be more work than it used to be, but for those who qualify, locking in at today’s low rates could not only save tens of thousands of dollars over the life of the loan, it might offer them the satisfaction of knowing they took advantage of an opportunity that might not come again in their home owning lives.

The information herein contained does not constitute tax or legal advice. Any decisions or actions based on information contained herein should not be made without first consulting a CPA or attorney.

For more information contact Compass Asset Management Group, LLC at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.

Real Estate Investing With Your IRA

While home prices still may not have hit bottom nationally, demand for distressed properties on at the lower end of the market is starting to grow. Large scale investors like hedge funds and private equity firms are rushing in with cash on hand, and that gives them the upper hand in competition for these properties.

So how does an individual investor, without extra cash lying around, get in? Retirement funds.

It may sound risky, but with strong rental demand and relatively little supply of single-family homes, it could be less risky than the stock market. That’s because your gains are largely coming from rental income not home appreciation, which is why this works so well in today’s market.

The catch is that you have to do it through what’s known as a “Self-Directed IRA”. Not a lot of firms offer these structures, but a few names that do are: Guidant Financial, Sterling Trust, IRA Resources and PENSCO. The firms act as custodian of your Self-Directed IRA, holding the property and dealing with all associated expenses.

Section 408 of the Internal Revenue Code permits individuals to use a self-directed IRA to purchase real estate investments such as commercial property, condominiums, residential property, international real estate, mortgages, trust deeds, real estate contracts, private placements, limited partnerships, limited liability company’s (LLC’s), and many other types of investments with retirement funds held in many common forms of IRA’s.

“It’s really an account that provides greater flexibility than what a third party administered 401K, for example, would provide,” says Kelly Rodriques, CEO of PENSCO.  That’s in part because real estate has become a valued investment opportunity area, given the recent downturns.

Imagine purchasing a commercial property or multi-family housing unit and receiving rental income in your IRA for thousands of dollars a month.

This type of IRA does carry restrictions.

• The property must be used purely as an investment, with all the income going directly back into the IRA.
• The owner may not occupy the home or even use it as a vacation property.
• The owner can manage the property, doing maintenance and supervising the renting, or can hire a rental management company which would be paid for out of the IRA.

It is also possible to get a mortgage through the IRA, that is referred to as a non-recourse loan.  “It’s a loan that can only seek the property, the collateral, as its sole recovery, if the property goes into default, so you as an individual can’t sign up to guarantee the loan,” says Rodriques. The IRA is not just purchasing the property, but it is responsible for liabilities and payments.

All this may sound complicated, but for some it may well be worth the extra time and energy. With a rising number of foreclosed properties coming to the market this spring, and banks far more willing to do short sales on troubled loans, opportunities are everywhere.

The information herein contained does not constitute tax or legal advice. Any decisions or actions based on information contained herein should not be made without first consulting a CPA or attorney.

For more information contact Compass Asset Management Group, LLC at 845.563.0537 or Contact@CompassAMG.com

The author of this blog, Steven M DiGregorio is President of Compass Asset Management Group, LLC and an Investment Advisor Representative with Spire Wealth Management, LLC a Federally Registered Investment Advisory Firm. Securities offered through an affiliated company Spire Securities, LLC a Registered Broker/Dealer and member FINRA/SIPC.