Millennials and Boomers Shape the Economy

If you review the 2009 to 2014 timeframe, the financial experts suggest a simple investment strategy. Find the stocks that performed horribly, lagging far behind the market leaders.

Stock Market Performance
“You want to buy stocks of the companies where that extra income is going to be spent. That could make technology, for one, a big beneficiary, as well as healthcare and entertainment.”

An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.

Part Three in a 3-Part Series.

Part One: Tomorrow

Part Two: What Lies Ahead?

Please remember.  Check in with your financial planner as the following trends and opinions change and may have before you read this.

Rules of Thumb

Is there a rule of thumb you can count on going forward?

You know like “buy low, sell high.”

As they say in my family, it’s all relative.

 

If stocks earn 4% a year, but cash in the bank earns just 1%, stocks still win by a long shot.

  • So Baby Boomers will have to stay in the stock market for a portion of their portfolio.
  • For Millennials who invest on a regular basis in an IRA or 401(k) plan, and who won’t need to tap into their funds for two decades or longer, just buy and hold.
  • Unlike the Baby Boomers who fear a significant loss over the next five years, don’t fret about bad financial news.

In fact, root for falling stocks, because you’ll be getting more shares for your money.

If you review the 2009 to 2014 timeframe, the financial experts suggest a simple investment strategy.

Find the stocks that performed horribly, lagging far behind the market leaders.

Tracking Winners and Losers

While the market leaders run out of steam, the laggards will probably …

beat U.S. returns over the next five years by buying low to  eventually sell high. But psychologically, it’s hard to buy losers.

 

Losers like:

  • Foreign stocks and bonds.
  • Emerging-market stock funds .

They’ve lost 5.8% a year.

“We’re expecting to raise our positions there in the back half of 2016.”

Understand the risks, though.

In a world where a stronger dollar and weaker currencies depress the returns for American investors in foreign markets it may be time to nibble here and there.

Bears vs. the Bulls

“It will never be obvious when the markets, or their currencies, have hit bottom. next five years.” 

  • In a reversal, financial advisors and economists expect China’s share of global growth to fall to 21%.
  • But, they expect emerging economies’ share to climb to 34%.
  • And, previously out of favor European and Japanese stocks will continue to benefit from their central bank policies aimed at keeping interest rates at rock bottom to support growth.

But there’s no getting around the fact that …

“the world will face a financial crisis rooted in mammoth debt levels.”

  • In 2016 a pivot in pay increases will be welcome news in the U.S. households.
  • But, maybe not for stockholders as promotions and bonuses usually come at the expense of corporate profit margins.

And, the grass is greener.

Getting Ready for Musical Chairs

The percentage of talented employees voluntarily quitting their jobs for better opportunities is the highest since early in the Great Recession.

Typically though …

“It takes a long time for people to realize they’re in a better bargaining position.”

That can change quickly thanks to the Internet and social media.

Once trading places begins, Millennials and savvy Gen Xs can take advantage of a powerful means to discover which companies are good ones to work for and which to avoid.

Consumer Behavior Influencing Stock Performance

It won’t take long for workers who feel under appreciated to make the jump.

And, that’s great, right?

“In a perfect world, rising wages would spark a ‘virtuous circle’ where workers would boost spending, driving up demand for goods and services. That would lift business sales and earnings, in turn allowing companies to continue raising wages.”

 

A virtuous circle takes time to develop in a less than perfect world like the one you and I live in.

But, here’s another simple rule of thumb.

Changing Tech Leaders
  • Where the real economy may influence the stock market.
  • Where consumer spending by Millennials and Baby Boomers may figure into gains in your portfolio.

As one expert put it.

“You want to buy stocks of the companies where that extra income is going to be spent. That could make technology, for one, a big beneficiary, as well as healthcare and entertainment.”

 

Steps:

(6) Anticipate changing circumstances and economic cycles.

(7) Persist and pivot to navigate external threats and opportunities.

(17) Sketch out your trajectory in 5-year time frames.  Will we fall into another recession?  Absolutely.  Will you be ready this time with future-proofed strategies?

(19) Anticipate the growing shifts in life and business. Nobody wants to swim upstream if the current is moving everything in the opposite direction. Clue your fans in.

What Lies Ahead?

So, the forecast remains turbulent with plenty of volatility

Market Cycles
Harry Dent years before even predicted the “Mother of all Depressions” lasting well into the decade beginning in 2010 and lasting until 2020.

An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.

Part Two in a 3-Part Series.

Part One: Tomorrow

Please remember.  Check in with your financial planner as the following trends and opinions change and may have before you read this.

What about the 25 year old Millennials?

Many, if not most of the college educated are burdened by student loans and high rents that eat up a huge share of income.

Good news for landlords, probably not so much for the starter home demand, yet.

But, for those who successfully found good employment with a fresh start on a career path, even if their pay rises they’re reluctant to  spend — or take a chance on a new job — so, don’t count on a broad positive impact on the economy just yet.

Their risk aversion may be one of the biggest overhangs from the Great Recession.

Look, they witnessed the financial woes their parents or friends endured after the 2008 crash.

While the demographic trends probably aren’t as negative for growth, you should account for them and prepare to adjust in any long-term scenarios you construct.

Obviously they’re the early adopters for companies including Airbnb and Uber..

And as another expert cautioned …

It’s impossible to know in advance how many business ideas will spring up to disrupt or even replace existing industries.

The period after the 2008 financial crash turned out to be pretty decent for the U.S. economy.

Many economists and financial news channel pundits peddled dire forecasts in 2009 and 2010.

Harry Dent years before even predicted the “Mother of all Depressions” lasting well into the decade beginning in 2010 and lasting until 2020.

Instead, by the end of 2015 …

  • The official unemployment rate is back to 5%. 
  • Corporate earnings reached record highs. 
  • And a venture capital boom has funded thousands of promising start-up companies.

But, what lies ahead?

Have we celebrated too soon?

  • The contrarian message appears more reasonable.
  • The economy and markets face challenges that could make the next five years very different.

Like what?

  • Don’t expect more than “low single digit returns on stocks and bonds.”
  • The annualized investment returns will be lousy as the January 2016 steep plunge foreshadowed.
  • Were talking 4% to 4.5% roughly half of what wealth managers plan for their clients.

And, that’s through the end of the decade

So, the forecast remains turbulent with plenty of volatility.

News at 11.

Will we ever return to tried and true savings vehicles for the Baby Boomers hitting retirements like their parents swore by?

One economist says don’t hold your breath,

“As for bonds, with yields so low it’s mathematically impossible for fixed-income securities to earn high returns.” 

How is that possible?

Five years ago a 10-year U.S. Treasury note was paying 3.5% in annual interest. 

Now, new notes pay 2.11%. The drop in yields means older, higher-yielding bonds have risen in value, boosting their “total return” — interest plus principal change.

Yeah, so?

But with the Federal Reserve’s decision in December to begin raising short-term interest rates from near zero, it becomes more difficult to imagine longer-term rates declining significantly, barring a new recession or global shock. 

Here’s what hurts my brain when wrapping my head around bonds.

  • If longer-term rates stay where they are, all you earn is the interest. 
  • And if market rates rise, older bonds will fall in value, offsetting some or all of your interest earnings.

Steps:

(6) Anticipate changing circumstances and economic cycles.

(7) Persist and pivot to navigate external threats and opportunities.

(17) Sketch out your trajectory in 5-year time frames.  Will we fall into another recession?  Absolutely.  Will you be ready this time with future-proofed strategies?

(19) Anticipate the growing shifts in life and business. Nobody wants to swim upstream if the current is moving everything in the opposite direction. Clue your fans in.

Manage Operations and a Marketing Campaign

Now that you’ve purchased your property and continued to add properties as a business, you need to manage operations profitably.

 

Upgrade and Manage Costs
Keep your business records in a format according to the IRS Schedule E. You’ll want to be mindful of all the tax write-offs and considerations.

An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.

Part Five in a 5-Part Series: Is An Investment in Real Estate Right for You?

Part One: FOMO

Part Two: Real Estate Investment Types

Part Three: Building Your Rental Business

Part Four: Find Experts for Sophisticated Financial Strategies

On a day-to-day basis in the beginning you’ll have to deal with all the headaches associated with rundown properties.

You’ll want to develop a trusted relationship with the contractors who will be upgrading units within the budget you set.

Like the stars of HDTV, you’ll need to trust you instincts when you first assess the future value of the property, despite the current poor appearances.

Costs for Upgrades

You’ll want to select and develop a trusted relationship with a real estate attorney as well.

What if you had overlooked rent control laws, for instance?

Obviously, those laws would have a severe impact the profitability of your rental property.

  • Can you raise rents on vacated properties?
  • Can you raise rents on the renovated apartments as they are finished?
  • Is there a right to new considerations when you want to raise rents?
  • Should you enter into limited partnerships to develop affordable rental housing while qualifying for tax credits?
Swim with the Sharks on Your Side

How do you pick an attorney who will work closely with you when you need him or her?

You may need to interview several before settling on the best fit for you.

Briefly you’ll want to compare their answers to the following questions.

  • Do you do any real estate deals?
  • Are you a specialist in any type
  • Residential
  • Commercial
  • Industrial
  • Raw Land
  • How many real estate closings did you do last year?
  • What are your normal fees for a person like myself who wants to buy income real estate?
  • Do you have any contacts in real estate who can help me build my holdings?
  • Will you protect me from making silly mistakes when I come across a lucrative property?

Now that you’ve purchased your property and continued to add properties as a business, you need to manage operations profitably.

Overlooked Rental Resource

First of all you’ll need to optimize rental prices and manage your vacancy rate.

  • Often local papers carry ads for free until a rental occurs.  
  • Don’t overlook religious congregations to get the word out.  
  • Government agencies frequently look for rental units — local offices of federal departments (HUD) and state agencies typically with “Housing” in their name.  

Of course, don’t overlook local rental agents to determine price and rental relationships at a reasonable cost.

And, on an ongoing basis you need to manage your expenses.

For example:

  • Use automatic controls for fuel and electric services
  • Contact local tax collector to aggressively reduce real estate taxes
  • Get bids for trash disposal
  • Use police and fire department personnel for maintenance at 33% rates (in their off hours)

Operating your rental investment as a business, you’ll want to brainstorm ideas to generate more cash.

Consider these to get you started.

  • Charge the maximum rent for each unit:  index to inflation
  • Keep upgrading your class of tenants
  • Market your property every day
  • Earn interest
  • Find licensed part-timers
Outsource or Manage Your Own Properties?

Hack away at fixed expenses

  • Refinance to lower monthly payments at a rate 2% lower than current
  • Transfer rent security deposits to a lender if it well help secure a loan
  • Refinance when you build 25% to 50% cash out
  • Set up automatic rent collection, have tenants pay utilities, find low maintenance and labor properties.

One last tip from the pros.

Keep your business records in a format according to the IRS Schedule E.

Organize Your Expenses

You’ll want to be mindful of all the tax write-offs and considerations.

What to do (and not to do) will impact the profitability of your business.

Consult a tax expert.

For how to account for issues like active participation, joint ownership, personal and rental use for vacation homes and more.

Don’t solely rely on this discussion.

Income in the form of rents and royalties

1. Sources

a. Rents

b. Laundry machines

c. Telephone(s)

d. Other services (cleaning apts.)

e. Interest on rent security deposits

2. Forms

a. 1099

b. K-1 Worksheets

Expenses

1. Advertising

2. Auto

a. Travel

3. Cleaning and maintenance

4. Commissions

5. Insurance

a. Fire, liability, structural

6. Legal and other professional fees

7. Management fees

a. Maintenance, cleaning, supervision

8. Mortgage interest qualified

a. Mortgage interest other

9. Other interest

10. Repairs

11. Supplies

12. Real Estate taxes

a. Other taxes

13. Utilities

a. Trash removal

b. Water

c. Electric

14. Other expenses

a.

b.

c.

d.

e. Indirect operating expense

f. Operating expense carryover

g. Vehicle rental

h. Amortization

15. Depreciation

a. Depletion

b. Depreciation carryover

16. Total expenses

17. Income or (loss)

18. Deductible rental real estate loss

Steps:

(22) Selectively evaluate the best quality-of-life communities to live in and weigh the tradeoffs of risk and rewards for accruing real estate appreciation along a progression of rural and small towns that meet what your pocket books can afford.

(34) On your visits look for any newer developments that may trigger changes in neighborhood patterns. New construction in or around the neighborhood? Major regional economic adjustments? Transition from households with children to ones that are empty nests? Rezoning, and dramatically rising/falling land values?

Wireless Resorter or High Country Eagle?

The impact on rural and remote quality-of-life counties will be unevenly felt across the landscape posing different demands for local goods and services.

Enjoying Pristine Moments
The Southwest, Rocky Mountains, and Northwest (in that order) will have the highest population growth and the greatest potential real estate appreciation in the nation.

Final installment in a 4-Part Series evaluating real estate and consumer predictions as generations transition throughout successive life stages.

Part Three :  Who’s Free to Move About the Country?

Part Two: Demographic Lifestyles and Buying Power

Part One: Determinism

Here’s the case for leaving California, which many people already know.

California’s high cost of living and strict environmental standards discourage many businesses from locating there.

As a result, all of the states around California are experiencing explosive population growth.

Here’s the case for staying put in California for the Golden State’s residents.

Love Affair with California

Great weather, abundant recreational opportunities, and an innovative social and technological environment all contribute to this fact.

But, where will you find growth and equity appreciation?

The Southwest, Rocky Mountains, and Northwest (in that order) will have the highest population growth and the greatest potential real estate appreciation in the nation.

Southwest Region from Wikitravel

Like most North Americans, according to Dent, I prefer to live as near as I can to the coast.

Because of the vast natural beauty

Businesses have also benefited from access to shipping ports, he says.

This, in turn, means that coastal areas were the first to become congested and expensive.  

Santa Barbara, Los Angeles and San Diego are close to merging into one metropolis, as have Monterey, Santa Cruz, San Francisco and Santa Rosa in northern California. 

Metropolitan Encroachment

Fortunately, the Central Coastal area between Santa Barbara County and Carmel in Monterey County doesn’t lend itself to mega development.

Big Sur in California’s Central Coast

In fact, those  coastal areas that still had underdeveloped land suitable for building have grown the fastest. 

These areas include Vancouver, Seattle and Portland in the Northwest. 

Pacific Northwest from Wikitravel

But areas in the Northwest – Vancouver and Seattle- are quickly approaching population saturation.

They are becoming increasingly expensive, which leaves only Portland to develop strongly in the coming decade.

As a result of the congestion and expense along the coastal areas, it is inevitable that people and businesses will begin looking at inland areas to find attractive towns and cities.

So it’s not just out-of-state migration from California contributing to Dent’s trend.

Rocky Mountain Region from Wikitravel

That’s why we’re seeing such remarkable growth in the southerly portions of the Rocky Mountain area and in desert states including Arizona, NewMexico, Utah and Nevada. 

As the Great Recession’s lingering effects dramatically decrease non employment-driven decisions to relocate can significantly play a greater role.

What’s the impact driven by a segment of our population not driven by employment-related criteria?

Employment drivers for 60-64 year olds is 25% as strong as that for 30-34 year olds.

Concentrations of 55-75 year olds in rural and small-town population of 55-75 year olds will increase two-thirds from 8.6 Million to 14.2 million between 2000 and 2020.

Back Road Magic

The impact on rural and remote quality-of-life counties will be unevenly felt across the landscape posing different demands for local goods and services.

Empty nesters will no longer need the living space they once enjoyed.

Especially after the last of the live-at-home 20-29 year old Millennials strike out on their own.

Some empty lifers with champagne tastes on “Budweiser” budgets are attracted to High Country Eagle communities filled mostly with

  • Rustic Eagles,
  • Rural Cowboys,
  • Small Town Borders, and
  • Satellite City-zens.

And, to those Wireless Resorters with resort amenities for their second homes:

  • Distant Exurbans,
  • Resort Suburbans,
  • Maturing Resorts, and
  • Premier Resorts.
Festive Resort Living

If you couple changing housing needs with the early retirement options available to the more affluent empty nesters, then you have newer early retirement options.

What both categories of empty nesters, the 45+ and 55+ age groups, have in common is that stage of life where they are no longer raising their children in their homes.

Steps:

(19) Anticipate the growing shifts in life and business. Nobody wants to swim upstream if the current is moving everything in the opposite direction. Clue your fans in.

An excerpt from Book Five in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Sierra Mountain resorts.

Two Ways to Stay Home

Part Four in a 4-part series weighing the pros and cons of investing in real estate over the course of a life time.

Peace of Mind that Home Equity Affords
Pulling the trigger on any major decision like this one with consequences (intended or unintended) will significantly impact the rest of your life.

Back in February of 2007 I read a FidelityReport published by Fidelity Research Institute that compared unlocking equity for investments to risks and relative returns of stocks, bonds and cash.

NOTE: Don’t take what follows as financial advice. If you haven’t consulted professionals, well, what are you waiting for? Do so at once!

Part One

Part Two

Part Three

DOUBLE AND TRIPLE CHECK YOUR SCENARIOS WITH A FINANCIAL PLANNER WHOSE FIDUCIARY DUTY IS TO YOU!

Option Four – Stay in your home, invest your equity

Two Tactics.

Reverse Mortgage or

Home Equity Line Of Credit (HELOC)

HELOC scenarios:

HELOC rate is 8.0%; this is based on a loan for 80% of the home’s value and is .25% below prime (Source: Countrywide).

Assume that there is one refinance after 10 years.

HELOC mortgage interest deduction is limited to the interest on the first $100,000 of the loan.

Assumes home is sold off to pay the loan; if another mortgage is taken out, transaction costs could be lower. 

Pros: 

  • Allows both couples to live in their home.

    Enjoying the Fruits of their Labor
  • Works well when the home continues to appreciate in value.
  • The HELOC debt is covered by the increase in value.
  • After paying off the credit line heirs receive substantial legacies

Remember both couples could deduct the mortgage interest by itemizing on Federal taxes attributable to the first $100,000 of the loan.

HELOC transaction costs are also quite low at about 1% of the loan and the credit line offers flexibility in timing any drawdown.

Cons: 

  • The costs and responsibility of home maintenance.
  • As cost of living expenses increase both couples may be tempted to spend down more than the initial 80% debt value ceiling.
  • Or, as their home value increases they may  continually ramp up their debt.

    Risk of Foreclosure

Of course, they will need to make regular monthly payments on their HELOC or face the risk of foreclosure.

Reverse Mortgage scenarios:

Assumes that proposed legislation is enacted that would change housing limits to a national limit of $417,000.

Limit increases at 4% annually.

Assume current interest rate of 7% – includes the 6.5% interest rate and the .5% insurance premium.

Monthly servicing fee of $30/month is added annually.

This scenario assumes that interest rates stay fairly constant.

Reverse mortgage interest deduction is limited to the interest on the first $100,000 of the loan; accrued interest is deductible by the heirs in the year that it is paid. 

Leaving a Legacy for Heirs

It is assumed that the heirs will be able to deduct the mortgage interest in the year that it is paid, and that the heirs will be able to utilize $100,000 of that interest deduction. 

The utility of the deduction will depend on the individual tax situation of the heirs.

Assume home is sold to pay off loan; if another mortgage is taken out, transaction costs could be different.

Reverse mortgages

Enable these couples to receive regular payments (actually loans) secured against the value of their homes and be assured that they can remain in those homes for life. 

Pros: 

  • Homeowners live in their homes and tap into their substantial amount of equity.
  • Depending on their age.
  • Home value.
  • Prevailing interest rates.
  • As long as they live in their home, life is good.

No payments need to be made on the reverse mortgage (though they must, of course, cover the home’s routine expenses and maintain it). 

Better still, loan payments to the borrower may feel — and function — like ordinary income, but they are not taxable income. 

Under current law, payments received by a reverse mortgage borrower don’t count towards Medicaid resource limits provided they are spent each month and not accumulated. 

Here’s the bonus while you live in your home.

They don’t count toward the income threshold for determining whether regular Social Security payments are subject to federal income tax. 

Social Security Income and Taxes

Also, reverse mortgages do not count toward the $500,000 – $750,000 home equity test for nursing/long-term care assistance under Medicaid. 

Here’s the bonus for your kids.

Heirs to a home carrying reverse mortgage debt do sell, they should be able to deduct the mortgage interest (subject to any applicable limitations).

Cons: 

During 2007 Fidelity cautioned.

  • Because the reverse mortgage market is still emerging, upfront costs are much higher than a HELOC — up to several percent of the loan value. 
  • The product is complex and the amount available for lending is inversely correlated to interest rates — which are difficult to predict and impossible to control.

Are these five options the only scenarios for both couples?

It is possible to combine these strategies in various ways. 

Both couples could choose to combine the first scenario, 

Sell Home and Buy a Less Expensive Home, with either a HELOC or a Reverse Mortgage on the new home. 

Why would this be in their best interests?

They could generate incremental cash flow. 

Heirs would benefit from the new home.

Equity could be extracted for their comfort or future investments

But, here’s the kicker.

  • Time to age 94.

    How Long Before Age 94?
  • One couple’s planning horizon is 32 years while the other is just 19 years.

What’s yours?

You need to take into account the difference in possible home values, cash flows and other variables.

Think of it this way — if these couples chose one of these options in the (year 2016) — the results we project would be realized for the Walkers (by 2035)… the Smiths would not see the results the table suggests until (2048 )— the last year of their 32-year planning horizon. 

Since this age and timeframe difference is so substantial, the only meaningful comparisons to make are among each couple’s own options. 

Takeaways?

Remember, don’t rely solely on your home equity as a significant retirement funding source.

  • Recurring cyclical downturns in real estate can inflict severe damage.
  • Investment returns on residential real estate have been lower historically than
    Nest Egg

    on stocks and bonds.

  • If you pour all your funds into your home you’ll have nothing left to invest for higher marginal returns.

Don’t count out the emotional components of owning a home.

The emotional aspects of homeownership can also present significant barriers to the use of home equity for retirees.

Whatever the financial case, the emotional investment involved can make it hard to sell, rent or float debt on a home after a lifetime of paying off mortgages — even if that strategy makes sense financially.

The comfort of living in a familiar home as one ages or the desire to leave the home’s full value to heirs compound many retirees reluctance to tap their home equity by either sale or leverage.

If you’ve planned well and acquired significant equity when reaching retirement age you’ve got multiple options for mobilizing it.

Decisions on precisely how to tap home equity require careful analysis and he financial and emotional trade-offs change as retirees age.

Non-financial personal preferences may quite reasonably trump sheer financial or cash flow benefits.

Peace of mind, convenience, familiarity are all real, if hard-to-quantify values.

Reverse mortgages do offer many advantages for retirees —

… notably, regular cash flows that do not count as taxable income. 

But this market needs to mature.

High initial costs of reverse mortgages scare off many retirees.

Many fear losing their homes to the lender, even though there is no such risk.

The reverse mortgage market will likely grow substantially once upfront costs drop, securitization takes hold, and customer awareness of potential advantages grows.

With your financial planner double-check all of the

Feel free to use this image, just link to www.SeniorLiving.Org
  • assumptions,
  • scenarios,
  • tradeoffs,
  • pros,
  • cons and
  • your spreadsheet calculations.

If the calculated risks are baked in, then go ahead with your eyes wide open.

Like all carpenters know, measure twice and cut one.

Pulling the trigger on any major decision like this one with consequences (intended or unintended) will significantly impact the rest of your life.

An excerpt from Book Four in “The Knowledge Path Series” dedicated to helping you find the place of your dreams in the Rocky Mountain State.