Should You "Bank" on Your Home?

We are just about to close on the selling of our home of 19 years and I was wondering what the appreciation was over the past two decades. This was inspired because my realtor keeps reminding me of how much I paid compared to our selling price. The actual cost can get really complicated (considering home improvements, tax benefits, repairs and maintenance, etc.) but I wanted to keep it simple.

I took our purchase price as the present value and our selling price minus realtor fees and updates to the house for selling as our future value. The 19 years of compounding yields a whopping 2.2% return on our house. I know all of you finance people want to look at my investment (down payment) and calculate the return based on that, with tax advantage on interest, also calculating in home repairs and maintenance, but that gets complicated really fast, and I don't have all of those records (shame on me). But this shows that our house appreciated an average of 2.2% over 19 years or about the average inflation over that period.

My grandfather always told me "you buy a house to live in and not as an investment." The house has served us well as a happy home to raise our three children; But as an investment? -Not so much. We are glad that we sold our house. We hope that the buyers enjoy the house as much as we did and they make it into their happy home (but not bank on it as their happy investment ever-after).  

Who Do You Trust?

Peregrine Financial Group and a missing $200 million? Cedar Falls, Iowa, the Heartland, where corn is tall and people are honest. It's of small towns where people leave their keys in their cars and they don't lock their front doors. Embezzlement of this nature happens in New York, Greece, but not in Iowa.

Peregrine Financial Group was an Iowa-based brokerage firm and the CEO allegedly used $200 million of his clients’ money to keep the business going. He attempted suicide and confessed to embezzling in his suicide note.

If this can happen in Iowa, it can happen in your neighborhood and with you investment counselor. I do not want to imply that all financial advisors are dishonest, but the few bad ones remind us to keep on our toes. A few basic points to keep in mind as you talk to your financial professional:

1. No one is going to be or should be more concerned about your financial wellbeing than you. It is your money and your future. You need to take responsibility for your financial future. This may require you to increase your financial literacy by talking a personal finance class, researching the investment on your own, and being aware of market trends. Don't bury your head in the sand when it comes to financial knowledge - you can learn it, you can do it.

2. If it sounds too good to be true, it probably is. How often have you heard that? If you are making money on your investment and everyone else is losing, it may be time to question your investment broker.

3. Ask questions. If you don't understand an investment or investment strategy, question it. This is a great way to increase your knowledge.

4. Use your BS detector. If an investment doesn't feel right, smell right, and you have an uneasy feeling about it, it may not be the right investment for you.

5. Be aware of the con-artist. The "con" in con-artist stands for confidence. The goal of the con-artist is to get you to trust him or her so he or she can rip you off. Be aware of these phrases: "this is standard language and you don't need to read every detail," "trust me, everyone is doing this." I have a special deal for you that not everyone can have."

Again, it is your money and being knowledgeable about the investment options helps you make wiser investment decisions.

‘Like'-ing IPOs

So you want to buy shares of Facebook with their Initial Public Offering (IPO)? Good luck. An IPO is where a private company or closely held company, like Facebook, offers shares to the general public for the first time and that stock is then traded on a stock exchange. Friday’s ‘All Things Considered’ on National Public Radio did a great job of explaining how IPOs work and why companies go public in their article “Facebook’s IPO and the Average Investor.”

When a company goes public, it works with an investment bank to price shares of its soon-to-be issued stock and to decide how many shares to issue. The initial price is a combination of science and art. The science is calculating the value of the company including potential future income (part art), and the real art is forecasting what investors will pay for the stock.

Investment banks will sell large blocks of stock from the IPO to its best customers. These are usually large institutional investors and their high dollar customers. The average person can only purchase shares when intuitional investors and high dollar customers start trading their shares in a stock exchange. This means we have to wait until after the IPO to purchase shares.

Most companies go public with an IPO to raise money for expansion and growth. The company could also go public to cash in on the company’s value and distribute it to the shareholders. It is estimated that that the valuation of Facebook will be in the neighborhood of $100 billion and according to the Washington Post, expects to raise as much as $5 billion in the IPO. This means that Mark Zuckerberg, founder and CEO of Facebook could hold as much as $28.4 billion of Facebook stock after the IPO.

Facebook is almost forced to go public because of Security and Exchange (SEC) rules on how many stokeholds (500 shareholders of record) a company can have before it has to issue disclosures as a public company. Facebook is at that point where it has to issue these reports and since they have to issue reports, they may as well go public.

What will Facebook do with the $5 billion it raises? Only time will tell- $5 billion is an incredible amount of seed money. We also wonder if Zuckerberg will change his Facebook status from 'Private' to 'Public' at the time of the IPO.

The Stock Market Thriller

“Make sure your seatbelt is securely fastened and keep your hands and feet inside the vehicle at all times.” 

This is what you hear as you get on an amusement park roller coaster. Maybe your stock broker or financial advisor should also say this when you begin to invest in the stock market. In the spirit of full disclosure, should we formally address the stock market by its thrill ride name?

There is Disney’s The Twilight Zone Tower of Terror, Kings Island’s The Beast, Six Flags Great Adventure’s Kingda Ka, the Stratosphere Hotel and Casino in Las Vegas has Insanity, and the king of amusement park roller-coasters, Cedar Point in Sandusky, Ohio has Disaster Transport, Iron Dragon, Maverick, Mean Streak, Millennium Force, Raptor, Top Thrill Dragster and Wicked Twister. Any one of these names fit the gyrations, the ups and downs of the stock market.

Even with your seat belt securely fastened, it is a good time to reassess your risk tolerance and which investment options best fit your personal goals and ‘ride’ tolerance. Monday’s Wall Street Journal (11.7.11) has an entire section titled Investing In Funds which examines mutual fund investing and different opportunities. How to Rest Easy in a Crazy Market provides seven tips to help you “enjoy” the ride and make sure your portfolio stays on the tracks. Here are the seven points:

1. Get real about your tolerance for pain. We have all heard “the higher the risk, the higher the potential return” but we don’t hear “the higher the potential for loss.” Risk involves the ups and downs, and if we are in risky investments, we better be prepared for the downs and possible total loss of our investments.

2. Favor funds that cast a wider net. Spread your risk out by being diversified in your holdings or in funds that are more diversified. In other words, don’t put all your eggs in one basket, but diversify in different baskets composed of different eggs.

3. Hire a pilot who charts a smoother ride. All of the funds are going to have their ups and downs, but look at funds managers who reduce volatility to smooth out the ups and downs. Unless you like the ups and downs, make sure you have on your shoulder belts and HANS devise.

4. Don’t try to wager on where stocks are headed. Face it, you can’t time the market for peaks and valleys. Be a continuous investor, putting money in the market monthly where you don’t have to worry about the highs and lows and trying to time the market. Also rebalance your portfolio periodically to make sure you stay on track.

5. Fine-tune your cash stash to your family’s needs. With any investment, you need to think about when you will need to convert it to cash. Would you need to cash in your investments if you were to lose a job, buy a car, down payment for a house or pay for college? Everyone’s circumstances are different, but money that you will need with a short time horizon should not be in volatile investments.

6. Don’t assume that a stock-free portfolio is risk-free. Bonds, precious metals, commodities, houses, pork bellies as investments all carry risk. Know the risk of the investment and your investment objective before investing, not after the investment has declined in value and it is too late.

7. Don’t be ashamed to seek help. Investments are complicated and if you need help, there are personal finance classes offered at your local colleges and universities as well as financial advisers and planners that can help you determine and reach your financial goals. This is not to say that you don’t need to be concerned with your investments. No one is going to be more concerned about your investments and wellbeing than you. Be financially knowledgeable, financially literate, and monitor your progress towards achieving your goal.

You have the decision whether you are on one of the top 10 thrill masters or want to go for an easy ride in the park. Be knowledgeable, make wise decisions, go for your goals and enjoy the ride.

What is your favorite roller coaster name to best describe the stock market? We invite you to post your response in the comments.

Where to Invest in Turbulent Times

The Dow Jones industrials dropped 634 points Monday. Gold is at a record high. Farm land prices are high. There is uncertainty in the housing markets, stock markets, bond markets, international government debt, and the world-wide economy. The big question--where to invest? When the markets are so volatile, let it ride out and instead turn to make investments in what you can control: your time.

Now is the time to invest in yourself and time with your family and friends. It is time to reassess your skills, abilities, and how you spend your time. It is time to become more self-sufficient. Some ideas of self-investing in turbulent times:

• Grow a garden or visit farmer markets; can or freeze fresh vegetables for the winter months. Nothing tastes better than corn chowder or lasagna on a winter day made with fresh frozen sweet corn or tomatoes that you grew.

• Cut firewood. If you have a wood burning fireplace or wood stove, cut and stock up on wood for the winter. This can be a family event and as they say, the wood will heat you when you cut it, split it, stack it, and finally burn it! This can also cut down on your winter heating bills and provide hours of family time watching the fire burn.

• Take a class to improve your skills or learn a trade. The more you know the further you will go. Maybe you want to learn about auto repairs, plumbing or other trade. This can help you save money by doing your own repairs. Perhaps you need to improve your computer skills, cooking skills, or writing skills, take a class at your local college or community center. This can make you more marketable and you may unleash one of your passions.

• Invest in your family and relationships. Nothing has a higher return and lasting benefit than great relationships. Invite family or friends to join you on the above adventures. Turn off the television, computer, and phones and have a night of playing cards or board games. Join or start a book club. Engage in conversation, really get to know other people, and build lasting relationships.

The markets will go up and down. Money will come and go. Your true happiness will be determined by the friends and relationship you have and the difference you make in the lives of those around you. So in these turbulent times, invest in you, your community, and in family and friends.

Alphabet Soup of Financial Planners

Our assumptions are that no one cares more about your financial future than you. So if you need and/or want help in making wise financial decisions, who can you trust with your money and your financial welfare? Most of us pick a financial advisor by asking a friend or relative. We might also stop in our bank, talk to our insurance agent, or hear about financial advisors that advertise in print, radio, television, or social networks. Many financial advisors will have letters behind their name to signify a specialty or that they have passed specific test and accreditation. Here is just a sample of the most common certifications you will see associated with financial advisors:

AEP - Accredited Estate Planner

CDFA - Certified Divorce Financial Analyst

CFA - Chartered Financial Analyst

CFP - Certified Financial Planner

ChFC - Chartered Financial Consultant

CLU - Chartered Life Underwriter

CMFC - Certified Mutual Fund Counselor

CPA - Certified Public Accountant

CRC - Certified Retirement Counselor

CRPS - Chartered Retirement Plans Specialist

NAPFA – National Association of Personal Financial Advisor

PFS - Personal Financial Specialist

RIA - Registered Investment Advisor

Just because a financial advisor has letters behind their name does not make them an honest person. The April 29th edition of the USA Today stated that in 2010 there were 87,222 Securities and Exchange (SEC) complaints/questions and 1,310 Financial Industry Regulatory Authority (FIRA) new disciplinary actions filed. To help you find a financial advisor that you can trust, research their certifications and accreditations and check out BrightScope Advisor Pages.  BrightScope post information on advisors such as their employment history, qualifications, amount of assets under management and complaints filed. Do your homework when selecting a financial advisor. You do not want to trust your financial well-being to the next Bernie Madoff.