Monthly Archive for May, 2009

Financial Wellness and Home Ownership

Published by JS Wolff on May 31, 2009 in Economy and Financial Wellness. 0 Comments Tags: , .

There’s a difference between reading about the national housing crisis in the newspaper and actually seeing one of your neighbors lose their home. That’s just what occurred two doors down from us.

My neighbor, a hardworking guy with a nice family did what he thought was the right thing at the time. After all it was 2004 and with local real estate prices spiraling upward, it seemed to him that it was now or never to own a piece of California real estate. He plunked down most of his savings for the down payment and fatefully was directed to an “option ARM mortgage” (which as early as 2006, were referred to in Business Week as a “nightmare mortgage“).  In addition, he didn’t quite have enough for the down payment and borrowed the remaining amount from a family member.

All was going according to plan. The following year, the home’s value had escalated and he tapped a home equity line to pay back the family member and consolidate a few other bills. But just a few years later, the perfect storm of 2008 arrived.

By the time the dust had settled, not only did they owe more than the home was worth, gone were the low payments which marked the first five years of his “creative” mortgage plan.  If he wanted to stay in his home which was still dropping in value precipitously, it was going to cost him another $1000/month.  He literally handed the keys back to the bank.

For every disturbing story like this, there are many out there who will vehemently make the case that home ownership has been vital to the growth of their personal net worth. Yet, as I previously suggested in the midst of the stock market meltdown, the best time to study an asset class is when the thrill is gone, or at least on pause.

There have recently been some astute articles which challenge the validity of viewing our homes as long term wealth builders. Notwithstanding that housing prices nationally have reverted to 2002 levels, the question is, should I see my home as an investment or merely a great place to live? Last week Wall Street Journal Columnist, Brett Arends, concluded that, by his calculations, the real return on buying a home is lower than buying government bonds.
Over the years, anxious young homebuyers told me that they were justifying their home purchase because taxes were eating them alive.  Homeownership was a wise move because the tax deductibility of their new mortgage interest was going to net their payment to the near equivalent of renting.  Their logic was flawed by a significant omission…property taxes. In fact, I have calculated for many, at least in California, that the mortgage interest deduction benefit is just about totally offset by the annual property tax expense.

Sounds like I am anti-homeownership, but the truth is, I own one.  But having lived 19 years in the same house (not really the same house, we gutted the place 8 years ago and added a 2nd story), I have learned that, just like stocks, the residential real estate market is cyclical.  I’ve just talked myself into not caring.  It’s been enough that our house has served as a stable headquarters for the wellbeing of the family. With respect to its monetary value, let the chips will fall where they may, if and when we ever move.

What’s in Your Financial Constitution?

Published by JS Wolff on May 25, 2009 in Economy, Financial Education and Financial Tools. 0 Comments Tags: , .

Voters in the state of California spoke loudly and angrily last Tuesday. After years of convoluted budget fixes, exotic borrowing schemes and skirting tough issues, Californians just said “no” to another series of band-aid fiscal ballot measures that just seemed like more of the same. Voter frustration has risen to such new levels that now there is even a movement to completely rewrite the State’s constitution to prevent the politicians from operating like credit drunk consumers.

“No Gold In State” was the title of this week’s article about California in The Economist magazine.  The article chronicled, “At one point during his desperate campaign for six ballot measures meant to reduce California’s gaping budget deficit, Arnold Schwarzenegger, the governor, pleaded with voters not to make California ‘the poster child for dysfunction.’ But on May 19th they did exactly that.”

The sludge-like layers of complexity that have become the California budgeting process all seem rooted in the inability of politicians to grasp the flow of money….basically economics 101.  And yet, when was the last time we heard someone running for office talk about their financial education or their qualifications for office because of their responsible economic track record?

Setting better boundaries by rewriting the State’s constitution may be a good start but I’m thinking our future depends upon something a little more homespun.  Let’s get this money thing right in our families. First, raise financially responsible kids and then later as adults we can send them off to run the government.

So parents, consider rewriting your family’s “constitution” to lend the same emphasis to money smarts as you do reading and math smarts. And the sooner, the better.  Scores of college kids get bushwacked by loans and credit card debt before they even graduate. A study conducted by The Project on Student Debt indicated that nearly half of all graduating college seniors enter their careers with 5 digit debt.

Helpful websites are popping up that simulate real life money situations and are targeted at the younger set.  A good example is Savings Quest which looks like it’s directed at the pre-teen – teen crowd.  In a colorful, narrated eLearning format, it walks the viewer through choosing a job, building a budget and saving for both short and long term goals. And importantly, even though it sort of feels game-like, the choices and resulting consequences can create some real life feelings.

Did I think it’s appropriate for pre-teen to teens? Sounds about right for those legislators in Sacramento.

Have Financial Baggage?

Published by JS Wolff on May 18, 2009 in Economy and Financial Wellness. 0 Comments Tags: .

A few weeks ago I referenced the “Miracle on the Hudson” and how Captain “Sulley” Sullenberger’s Flight 1549 heroics can guide us during financial emergencies. You may recall that Sullenberger safely landed a commercial airliner on the Hudson River after hitting a flock of geese and losing both engines. I was intrigued by his success enough to study a few of the attributes that led to this amazing outcome.

All of us have baggage, some good and some not. Sulley packed incredibly good baggage for Flight 1549.  In his bags were years of serious and specific training. While he had no idea of how the events would unfold, the resources he packed proved perfectly suited for the situation. When the engines blew out two minutes into the flight, Sulley drew upon among other things:

  • 42 years of pilot training, he obtained his pilot’s license at age 14
  • an Air Force military jet fighter background
  • glider pilot experience- the US Airways airliner was essentially a glider after its total power loss
  • he was a flight safety expert – Sulley operated a flight safety school and had personally studied emergency cockpit behavior under stress.

In his own words… “One way of looking at this might be that, for 42 years, I’ve been making small regular deposits in this bank of experience: education and training…and on January 15, the balance was sufficient so that I could make a very large withdrawal.”

Financially speaking, 2008 was a wakeup call giving us insight into some of our baggage.  As it happens with almost any sustained market run up, the ascent that occurred from 2004 – 07 seemed readily sustainable.  The tech bubble was in the rear view mirror, a distant memory.

But while pilots like Sullenberger spend 80% of their post-licensing training simulating emergency situations, we tend to learn little from past financial 911′s. Anxious to make up the losses from the last crisis, at the first break in the clouds we open up the throttle and let her rip down the tarmac once again.

Maybe going forward we can learn to leverage some our experience to navigate a soft landing the next financial crisis. The first and most important step is to realize that it will happen again.  Perhaps keeping a percentage of our assets in a tax advantaged, conservative position equal to our age is how we should pack our investment bags going forward.

Historical Worst Case Financial Planning

Published by JS Wolff on May 12, 2009 in Economy and Financial Education. 0 Comments Tags: , , .

I’ve talked to some pretty nervous investors recently…even with this latest uptick they’re not sure if they can ever trust the stock market again. With their fears being totally understandable, I decided to research an historical worst case scenario to help them evaluate the length of time they needed to be in the market to be reasonably assured that they wouldn’t  lose money.

This was accomplished by portraying someone who had decided to invest in the stock market just before the onset of the The Great Depression.  If we could ascertain how long it took this unfortunate soul to get their money back including the worst market years ever experienced, then it may be helpful to of us who are nervous to get back in the game.

First let’s look at some the characteristics of the Depression era market.  Interestingly, in the three years after the initial sell-off, there were five “bear market rallies” where the market rose more than 20%. All of these stock market highs were higher than the previous highs, and the following lows were lower than the previous lows.

So this must have been really frustrating and disorienting. Adding to the disorientation is that an average investor lost 35% of their assets six different times is the same three years.  Tragically, the final damage after all was said and done from 1929-1932 was a loss of over 90%!

Looking at this historical worst case, if someone had the great misfortune of buying into the market just before 1929 crash, it took someone about 10 years to get back to where they started. There have also been some great 10 year windows in the last 100 years. For example, there have been three 10 year periods that have produced annual average rate of returns of +18%.

Contrast this with an investor getting in just before 1929 but had only had a 5 year horizon, their average annual return would have been a loss of 16.4% per year!

So for those of us who want to make market decisions based upon the historical worst case, we might want a window of no less than 10 years as a minimum “time in the market” to feel comfortable we have little chance of getting out less than we initially invested.

Listening to your Money and Financial Wellness

Published by JS Wolff on May 8, 2009 in Financial Tools and Financial Wellness. 0 Comments Tags: , , .

I’ve heard it said that you can tell a lot about a person by what they do with their wallet. In our life, I would say that’s pretty accurate.   A few years ago if someone went through our checkbook and debit card receipts, there is would be a pretty consistent pattern tracking what we value most highly.  Repetitive expenditures after essentials are traveling to hang out with our adult “kids”, charitable stuff and keeping my wife’s horticultural degree in bloom by regular visits to the local nursery.

After 2008, although our values didn’t change, it seemed time to be more intentional with our money.  While we didn’t want economic fear to dictate our lives the reality was, things were different. Both as a family guy and professionally, as a financial educator, I found myself wanting to reassess the foundations of my core money beliefs.

This led to researching and compiling four different tools to look at several personal financial indicators. And since collectively, the data really felt like a good reading of our financial vital signs, we started calling the suite of tools, “Money Pulse”.  Descriptions follow:

  • The Personal Financial Wellness Scale – Wanting to gauge our current level of financial stress we found this simple eight question survey authored by Dr. E Thomas Garman, a Virginia Tech professor.  The resulting composite score also benchmarks our results against national averages.
  • Risk Tolerance Assessment – most of us have done have taken one of these but we wanted to find one that was not associated with any financial provider.  We found one that was sort of fun to take and yet had a fairly deep scientific approach. It was developed by another Virginia Tech finance professor, Dr. Ruth Lytton at Virginia Tech and Dr. John Grable at Kansas State University.
  • Essential Spending – We use Quicken but it still can get complicated to track where our money is going. So we built a simplified spreadsheet that only provided two categories of expenditures designations …Essentials and Non Essentials.  We wanted to find out how little we could live on if need be and where we could save on non-essentials.  Hmm, in which column does a latte’ belong?
  • Dream Survey – With all this hunkering down talk is there do we have to give up our financial dreams? Good question but in the process of trying to answer it, we found out our money dreams were not very well defined.  So we came up with a few questions that prompted our thinking about a hoped for future …and chart a better course to reach our destination.

Going through the Money Pulse process required digging a bit deeper into our money beliefs and practices, but given that financial issues seem to weave into our lives on a daily basis, it felt right to better understand the story our money was telling us.