Seven (or so) year itch

[intent]

Help me, please.

I have this nagging feeling that this might be an opportune time to make some moves that could serve me well in 7-1x years or so. Problem is, I'm not sure what, if anything, I should do about it.

Again, I'm fairly new to the forum, though I've been reading for quite awhile. My wife and I are in our early 40s, late 30s. We LBYM, have relatively secure jobs, and earn enough that we have some spending options.

This is mainly directed to those who are retired already (I posted in this forum, however, because I thought it a question of interest to other YDs), but I'm interested in everyone's thoughts.

Assuming you are in an accumulation phase right now and had some financial flexibility to take advantage of deals you see in the marketplace, where would you put your money in hopes of seeing significant gains in the next 7-1x years?

* Equities?
* Bonds?
* Buy up to a larger home?
* Make improvements to your current home and/or pay off your current home quicker?
* Bury all extra cash in the back yard?
* Go out to eat every night and purchase lots of items you don't need so as to help the economy?
* Other?
* All of the above?

Or, am I way off track in seeing the current situation as a potential opportunity?

 

[crazy connie]

That depends on current available funds.

1. Buy up if you need/want/plan to (and take no more than 15 year mtg) and rent out current if you have the stomach to landlord for 5 years and area can support it.
2. Index into commodities

No you are not off track at all, this may be your best opportunity for investing in your lifetime. Just make sure you keep a substantial emergency fund in case of employment meltdown or other gotchas.

 

[MasterBlaster]

Of course no one can know the future so nobody can really tell you what the best option is.

Perhaps the best way to look at it is via a risk normalized return.

with CD's you are certain to get your (nominal) money back plus a little.

with other investments you may do considerably better or you could (possibly) lose your shirt.

How do YOU feel about those outcomes. What's the best place for YOU to put the money.

 

[intent]

Of course no one can know the future so nobody can really tell you what the best option is.

Perhaps the best way to look at it is via a risk normalized return.

with CD's you are certain to get your (nominal) money back plus a little.

with other investments you may do considerably better or you could (possibly) lose your shirt.

How do YOU feel about those outcomes. What's the best place for YOU to put the money.

Good points, and appreciated.

To clarify, while I am looking for input, I'm not expecting anyone to tell me what to do. I'm mainly just curious to hear how others (and in this case, others who have successfully retired early) would approach the situation if they found themselves where I find myself now.

I expect not everyone will agree on one "correct" approach, but it sure would be interesting to hear the reasoning behind the various choices people on this forum would make.

 

[REWahoo]

I'd suggest some combination of 1, 2, 4 and 5...

 

[ziggy29]

Do you have any debt other than the mortgage? What's your mortgage rate? Do you have an adequate emergency fund? Are you capturing the full company match (if any) in a 401K plan? I think all of these (and a few more things) need to be considered before a responsible answer could be provided.

 

[dex]

* Equities? - yes in balanced portfolio - heavy weight on foreign
* Bonds? - Yes - High yield corp. in tax deferred acct.
* Buy up to a larger home? - Home not an investment
* Make improvements to your current home and/or pay off your current home quicker? - both if it fits in - pay off 30 yr mtg on 10 or 15year plan
* Bury all extra cash in the back yard?
* Go out to eat every night and purchase lots of items you don't need so as to help the economy? Enjoy life - you never know when your time is up
* Other? - Think about what will make you happy when you ER
* All of the above?

 

[unclemick]

Do not have a clue. However hindsite wise - Mr Market took a tumble 73/74 and the 70's were a tad chewy - lost my shirt playing REIT's and warrants with hobby money.

- bought a duplex and lived in half before buying a really cheap fish camp in a vacation area.
- end of 76, The first index 500 became availible in my 401k - put in the max.
- transferred to New Orleans from Denver - Space shuttle contract. Never let an opportunity to party- aka Food and festivals including Mardi Gras - plus fishing, sailing, water activities. You are only young once - we took sensible cruises, Europe once, Mexico, etc plus 28 foot camper got plenty of use.
- had a side(taxible) get rich portfolio with multi asset classes(slice and dice) - foreign stock, bonds, US stock,bonds, gold and PM, Timberland, Money market.

Was layed off 1993 - the 401k index 500 and selling eating the duplex worked. The other stuff was fun and or interesting.

I think I made every investment mistake and paid a fairly high education tab - except commodities.

heh heh heh - no advice except Warren Buffett's -do not save sex for old age.

 

[Rambler]

* Bury all extra cash in the back yard?

Well, not all of it, and not in the backyard (unless you encase it in plastic with plenty of desicant packets and then put it in a water/moisture proof box, and then remembered exactly where you put it). A little bit in a well hidden and bolted/locked down safe might be good as an alternative. Oh, and make it in relatively small bills, if you do it.

R

 

[honydonk]

Real Estate

Hi,

If you want to have passive income and have the cash right now I would suggest real estate. I am seeing some unbelievable deals right now where you can pay cash down and have positive cash flow the very first day.

There is a deflationary concern right and in that kind of enviornment the one investment which is positive is hard assets.

I wish I had a job more stable than IT in this enviornment and if I did then I would definitely be scooping up 3-4 properties in this market.

At the same time the time to buy real estate is sometime this year -- the fun is yet to start and I am embracing for a chill that will change the landscape of economics for a long time in the US.

 

[intent]

Do you have any debt other than the mortgage? What's your mortgage rate? Do you have an adequate emergency fund? Are you capturing the full company match (if any) in a 401K plan? I think all of these (and a few more things) need to be considered before a responsible answer could be provided.

* No debt other than the mortgage. Mortgage rate is 6.5% and if we pay extra we should have our 30-year mortgage paid off in another 5 years (total of 14 years all in).

* Emergency fund is more than adequate at the moment. Would cover us for approx. 8-10 months if both wife and I lost our jobs. In fact, was thinking this might be extreme and some of this cash should be used in a different way, but not sure.

* Both of us max our 401K contribs. Unfortunately, my small company doesn't allow contribs over 20% of income, so I'm not able to max up to $15,000/year.

It seems to me that LBYM has set us up relatively well to weather this downturn, and for that I'm grateful. We have some extra money every month, which we're currently putting toward extra payments on the house (hard to beat a 6.5% return at the moment), and we have some extra money in our emergency fund, though I'm less likely to take that out. Bearing all of this in mind, and considering Buffet's advice to be fearful when others are greedy, and greedy when others are fearful, it seems like now might be the time to be greedy.

I'm looking for ideas on how to be greedy in the most advantageous way

 

[Hobo]

I agree with honydonk. In fact, I made most of my retirement money in rental real estate. If you read the book "Rich Dad, Poor Dad" you can see how someone else did it, ie, buying houses out of a foreclosure sale. But even if you are not that ambitious, real estate (in most areas) is at historic lows (adjusted for inflation). You can get good rents, and the number of people in the rental market is sure to grow.

The best kind of house to buy is a newer house (>5 years old) so you won't have maintenance problems. Buy in an area where the other houses are home owner occupied and nicely kept up. You want to make sure you will be getting quality tenants - and good tenants want nicer houses. Smaller houses are much better than larger houses - they are cheaper and rent quicker. No extras - like a jacuzzi or anything that requires maintenance; you just want the basic house.

Read a book about tenant's rights - so you know what trap not to fall into when you are a landlord. Also read a book about how to write a good lease/rental agreement - I found the "canned" leases have many quasi-legal clauses, and a knowledgeable tenant can cost you money if he knows the law and you don't.

Keep up with rent increase, but keep them reasonable. A rental house that sits vacant for two months will cost you a lot more money than pinching the last penny out of the renter.

It is always smart to keep the house as long as you can. If your rental mortgage is paid off, then the rental income is money in your pocket when you are sipping margaritas with the grand kids. Selling a house is an EXPENSIVE thing to do - both commission and capital gains taxes. If you must sell a rental house, make sure it is only one per year - and do it when your income tax bracket as low as possible.

Before I retired, I had 5 rental houses. I slowly sold them for a very nice profit. But late in life, they become more of a hassle than they are worth. But for someone young like you - well, I love real estate.

 

[Grep]

That Rich Dad book is the WORST "investment" advice in the world, and the guy is an idiot and a sham, in my oh-so humble opinion. Please don't waste your money or time reading that garbage.

Real estate worked well for folks that got out before the crash. Going forward? No one knows. But why buy assets which require that much work and require paying such high carrying costs (taxes, fees, insurance, maintenance...) when alternatives like stocks and bonds (or REITs for that matter) are at end-of-the world level fire-sale prices and can be bought with extreme efficiency? Start here, for example:

Main Page - Bogleheads

 

[Hobo]

Grep, you are partially right - real estate is not for everybody. However, it is the one place where you are in close touch with your investment. Equities, bonds, etc., are all controlled by actions that are made behind closed doors (ie, the Board of Directors), or the psychology of professional investors and mob mentality of the uninformed public.

At least with real estate I can see what is happening to my investment, and understand when I will have problems. Remember, lots of people (including me) were predicting the housing bubble back in 2006. It was very easy to see that the price of housing was way too high for most people to afford. This chart tells it all in advance Graphs of inflation-adjusted, historical housing prices..

At the same time, one of the best Wall Street brains and the former head of Goldman-Sacks, Henry Paulson couldn't see the problem affecting the Stock Market :Kwaves Federal Reserve Monetary Stimulus 2008

2007 March 13th, 2007 – Henry Paulson: “the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."
April 20th, 2007 – Paulson: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained." , "All the signs I look at" show "the housing market is at or near the bottom,"
June 20th, 2007 – Bernanke: (the subprime fallout) ``will not affect the economy overall.''

July 12th, 2007 – Paulson: "This is far and away the strongest global economy I've seen in my business lifetime."

August 1st, 2007 – Paulson: "I see the underlying economy as being very healthy,"


The optimism continued into mid-2008:


July 20th, 2008 – Paulson: "it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation."


For me personally, I have always felt in control when my money was in real estate. Conversely, I could never figure out what the stock market was going to do. And I still can't.

 

[Grep]

Hobo,

First, I think owning your own home is great. It's still a lynch-pin of financial security and success (if not overly-leveraged, as we found).

Of course, I could present just as many and dramatic examples of over-optimism in the real estate market. But I agree that investment properties can be great for a certain type of person who, as you say, can watch over things personally and deal with it in a hands-on way, and even enjoy it (I'd hate it). There are plenty of uncertainties in real estate, but if you are smart and lucky and work at it, one can do well.

If the O.P. was a contractor that is out of work anyway, and has a pile of cash, and wants to start buying bank-owned properties, fixing them up and renting while waiting for the market to improve, then I'd say now is a moment of absolute golden opportunity. Otherwise, I still don't see it as the way to go for a "young dreamer" with little capital, a busy job and a life, except in the purchase of their primary residence.

As we have all seen, there are dramatic uncertainties in both housing and the stock market. And no one can figure out what the stock market is going to do (nor the housing market). But the stock (and bond) market is not just about fraudulent machinations of CEO's, etc. It's very much an investment in the productivity of people, our nation and the world. If you believe the country and the world is going to heck in a handbasket, there are few safe havens. But if you believe the outlook for the country is solid in the long term, and you are willing to put time on your side (just as you commit to when buying property), then the stock and bond markets are arguably the best and easiest ways to invest. Despite the present fears (actually, because of them!), now is a moment of golden opportunity for that, too.