Sunday, November 09, 2008
US-Personal Finance: Where Do You Park Your Money?
World stock markets have tanked (for a couple of months at least), there is no indication of recovery of the housing market anytime soon, short & long term interest rates on CDs/MMAs are in the 3.x range with the Fed expected to reduce rates again, the job market has soured considerably, the economy is in a recession (3rd quarter growth was negative, although we don't have the official numbers for the 4th quarter yet) corporate profits are low at best with companies deciding to reduce/forgo dividend payments, and lets not talk about our 401(K) or similar retirement accounts (folks lucky to have pension plans are probably the only ones seeing rising balances even at reasonable interest rates, although most large companies have cut back if not done away with such plans).
Lets review some options to see what you can do with your money.
Cash (Savings, CD, MMA, Checking accounts):
You can just hoard your cash at home or safe deposit box, or keep it in a savings account (which barely gives you any interest; exceptions follow). The Gov (FDIC) now guaranteeing upto $250K for individual Savings, CD, MMA, Checking accounts (couples are protected upto $1mil but you'll have to setup 4 different accounts under appropriate "names", or you can keep upto $250K each in multiple banks, which may be a hassle keeping a tab on, of course), having money in an ING Orange savings account yields 2.75% interest as I write this article - better than the dwindling 401(K) plan! You could also use ING's Electic Orange checking account for a yield of 1.5% for account balances upto $50K. Everbank beats checking account rates with 2.01%
Pls note that these banks are Internet banks - so, you have to do everything via snail mail (unless you combine these with a "pass-through" traditional account at a bank that maintains ATMs', using fund transfers to transfer money across accounts (which still take a week though, and some like Bank of America charge for each external fund transfer). I've personally used Corus Bank, Everbank, CapitalOne, and GMAC Bank, although I prefer and use Everbank most for such needs now. I hate Bank of America - they're huge, but provide the lowest interests, but they have ATMs in most states.
Use BankRate.com to find the best rates, then call the banks (ideally via bankrate.com) to choose the best product suited for your needs. Internet research is assumed, but sometimes its faster to just call.
Gold:
The price of gold has fallen considerably (about $735 as I write this article) since hitting a closing price peak of $1002 the week of March 2008. Use the linked chart (you can change the time scale to weekly to see above mentioned trend) to see how this precious commodity is behaving.
I think gold will probably find some support roughly around $650-700 (I'm not a short term trader), before continuing its downward slide for a few years. The support will probably come as we get absolute confirmation that we're in a recession; it may happen now also, but I doubt that.
So, if you like to "play" in markets on a daily basis look for that sign of support for a few weeks/months and ride it to make some dough. If you're thinking longer than a couple of months, I suggest looking elsewhere to park your money.
Stock Market:
This is one of the worst stock markets to be in. There is no one area that is consistently outperforming the market, at least for a retail investor like us to be participating in it. Sure you can day trade, or even do trades over a few days or weeks, but think about the anxiety you have to undergo. If you can handle it, go right ahead. My suggestion, stay out of this volatility (up 400 points today, down 300 or 500 tomorrow). Do you really need the stress of worrying about your money, while working full time (as if worrying about your job isn't enough already)? Some individual stocks are holding up very well while everything around them crumbles, but even they're not completely safe. You never know what tomorrow brings. Btw, I'm not referring to big names. Most of the names I'm seeing holding up well I've never heard of over the years - some went public in the last year or so. Keep a lookout for these guys, since when the market turns (which it will, even if it is say mid or late next year), these stocks will be the first ones out the block. Check out Investors Business Daily as a potential tool for your stock investments - its an excellent market newspaper while providing investment tools that are criticial to your success.
Euro (and possibly other currencies):
The time to bet against the US$ is long past. You'll probably get a chance to do that again, but not in the next year at least. If the US economy turns around before other world economies (especially China & India), then don't even think of betting against the $. Pls note that I imply China & India are going through corrections; even though they technically are not in recessions, the slowdown in US & Europe affects their growth since both these countries depend on US consumption along with increasingly their own (they're economies haven't matured to the point where they're sustainable by their surging middle class yet, although that time will come). India's upcoming election in 2009 with its inherent uncertainties will hurt, in addition to the inflation hurting right now (the fuel aspect will calm down, but it still imports most of its oil) along with the credit crunch (which affected this country in unforeseen ways). I am deeply optimistic on India, and this is a good time to hone your research skills and decide your move as this country eventually bounces back (probably at the same time as the US). The Indian Re. has taken a serious hit against the $; I wouldn't buy $ if I was in India now, although this is a great time to convert cash into the Re., since I doubt we'll see the Re. falling too much below the Rs. 50mark against that $.
China is a different animal. Its become a superpower both economically & militarily, possibly its weakest link being from a social standpoint (tensions between rural & urban China). While the Chinese government is working to reduce that massive divide, this credit crisis and their tanking market may force some kind of a showdown in 2009 (my level of confidence on this is low, not having been in that country ever and not understanding its social & political structure, except reading about them). Its currency has actually appreciated against the US $ in recent weeks, and the fact that it has loads of US treasury bonds along with the artificial price of the yuan probably works in China's favor. Too many unknowns about China, forces me to stay away from the yuan, along with the fact that you cannot own it in the open market unless you're Chinese or married to one.
The yen strengthened considerably against the US $ in recent weeks. Japan is in a recession, yet such a behavior. Its been written that they're probably going to be one of the world's credit crisis saviors along with China. They've nearly put their decade long deflation behind them. I see Japan "rising" again along with its currency against the US $ in the future; this may be a possible currency play for the mid-term (couple of years), if you can keep up with a country's news that's awake when you're sleeping in the US.
I would buy the euro when it falls a bit more - probably closer to the $1.15/$1 mark. The ECB along with the Bank of England have been slower than the US Fed the last few years in managing interest rates. That provides an opportunity for you to get in around that price, and then hold for the long-term. If nothing else, you can spend the euros when you visit the "continent", although I think the euro will be a very safe bet from a long term standpoint, as the US $ restarts its slide post this worldwide economic downturn (and the world starts looking for a $ replacement/balance for world trade).
Home Improvements:
If you believe this real estate downturn will eventually end (peak to peak real estate cycles seem to last about 8-10 years), and you need to upgrade some part of your current home, or need to expand a wing instead of moving to a bigger house due to addition to your family, or some such eventuality, then you could consider making such improvements as a way of investing in your home, which is considered by some to be an asset. Depending on who you ask, that statement ranges from true, to partially true to absolutely incorrect (per Rich Dad, Poor Dad author Robert Kiyosaki for e.g., if your house not providing some cash back, how can that be an investment?). I think its probably not so black & white for most folks; as long as you have a decent amount of equity in the house (and I mean a number higher than 60-70%), your house could be considered an asset. Problem is it does generate any cash, but you cannot sell it & keep all the money, since you will have to live somewhere, meaning you will use that money to buy another house - the only way it becomes a possible asset is if you downsize.
Farm Products:
I single out farm products among commodities in general, since as the world population grows and the middle class in India & china continue to explode, demand for farm products and better ones at that will do the same - explode. So, while we may believe the commodities bull run from the past few years has come to end, I believe it will restart that run after this economic crisis abates or the world economies start pumping in money to get out of the current mess or cut rates further to jump start their countries, thereby restarting the worldwide inflationary trend. India has seen immense growth in the farm retail market in the past couple of years with Western style food marts mushrooming in the cities. The supply chain mechanism to get produce from the farm to the distribution houses to these marts are become increasingly sophisticated, so that intermediary influence can be reduced and profits of the mart owners increased. This is a potential area to invest in - either the companies that are opening these stores like Reliance, or buying farmland itself in India. One huge caveat is that land records & the law upholding a person's ownership have the most dismal track record unless you have connections. So, be careful how you invest your money in this area.
Residential Real Estate:
Again, if one believes this residential real estate debacle will sort out over the next so many years, this is a potential time to think about (not buy yet) what kind of residential property to invest in. Pls note that I'm referring to residential real estate market only; the apartment real estate market is managing to hold up ok - there are issues, but its not a disaster like the residential side of things. Some folks are doing short sales of the single families hit by the owners' inability to pay their mortgage and the Banks deciding that they'd rather get back a certain percent of their outlay in mortgages rather than take ownership of the houses underlying defaulted mortgages. There are lots of people/companies who are willing to teach you how to get into this real estate mess and make a profit. Read in between the lines to ensure they'll just not educate you theoretically but support you after the workshop ends (and how) before jumping into this market. This is not the time to buy & hold single families, since you don't know how much further prices will drop, especially the worst hits areas (not just Florida, Phoenix & Las Vegas, but places in your backyard as well). Wait for the buyers to step in before you buy & hold. Short sale transactions the way to make money at this time.
Apartment Real Estate:
While technically part of Commercial Real Estate, apartment buildings are in a class of their own. These make money for you right out of the block, if you buy right, finance them right, and continue to make money for you if you run them well over the months & years. There's significant money to be made, depending on the size of the building/number of units. You cannot make money where these buildings are already expensive - most of the East & West coast areas, and you definitely don't want to invest in areas that are bleeding jobs or people (out-migration). Leave these areas of the country out, and you still have a ton of areas to invest in. Depending on the area, there wasn't a lot of construction of multi-family buildings (as opposed to duplexes or fourplexes) in the past few years. So, there's not a lot of spare inventory. People will always need a place to live, even if they cannot afford to buy a house. That is especially true when credit's dried up, like now, and companies are shedding jobs. So, rentals become the way to go until the market recovers. If you're looking for passive income (let management companies run the buildings for you of course), and have some money in the bank, this is the way to go. You will be surprised how many units you can own for the price of a single family in areas that didn't explode during the recent real estate market appreciation. If you've done your homework, the rent tenants pay, will cover all maintenance costs including management fees (about 6-7%, although some areas charge more, while others charge less), and also pay the mortgage with money left over for you to start thinking about purchasing your next building. Don't get me wrong - this is not a get rich quick scheme. It takes time to amass the kind of buildings/wealth that will enable you to leave your favorite 9-5pm day job, but it happens nevertheless. And once that happens who cares about how the stock market is doing today, although if you're intelligent you'll be making money in that market also.
Self Directed Retirement Accounts:
This is a relatively new investment type; well not necessarily new, but has become known to at least investors only recently. Google "IRA real estate self directed" for example, and you'll get articles such as this. You can own real estate for investment purposes through a SDRA (self directed is not a type of IRA, its just used to distinguish IRAs that can hold alternative investments like real estate; you can also own the regular stocks, bonds, etc.). The catch is that you have to do everything via the IRA. The down payment comes from IRA money, expenses on the property comes from the IRA, income goes directly into the IRA, and so does profits from a sale. Same as a stock or mutual fund owned by an IRA, only different since this is actual, physical real estate. You can either setup a LLC for this and write checks yourself for better/direct management of the IRA, or let the Custodian do it, meaning there will be a time lag in whatever you do and costs associated with each & every transaction. The same custodians who offer this product also offer business owners a SD (self-directed) 401(K) product. Neat! The only thing I cannot help you with yet, is pricing for this kind of offering.
Lets review some options to see what you can do with your money.
Cash (Savings, CD, MMA, Checking accounts):
You can just hoard your cash at home or safe deposit box, or keep it in a savings account (which barely gives you any interest; exceptions follow). The Gov (FDIC) now guaranteeing upto $250K for individual Savings, CD, MMA, Checking accounts (couples are protected upto $1mil but you'll have to setup 4 different accounts under appropriate "names", or you can keep upto $250K each in multiple banks, which may be a hassle keeping a tab on, of course), having money in an ING Orange savings account yields 2.75% interest as I write this article - better than the dwindling 401(K) plan! You could also use ING's Electic Orange checking account for a yield of 1.5% for account balances upto $50K. Everbank beats checking account rates with 2.01%
Pls note that these banks are Internet banks - so, you have to do everything via snail mail (unless you combine these with a "pass-through" traditional account at a bank that maintains ATMs', using fund transfers to transfer money across accounts (which still take a week though, and some like Bank of America charge for each external fund transfer). I've personally used Corus Bank, Everbank, CapitalOne, and GMAC Bank, although I prefer and use Everbank most for such needs now. I hate Bank of America - they're huge, but provide the lowest interests, but they have ATMs in most states.
Use BankRate.com to find the best rates, then call the banks (ideally via bankrate.com) to choose the best product suited for your needs. Internet research is assumed, but sometimes its faster to just call.
Gold:
The price of gold has fallen considerably (about $735 as I write this article) since hitting a closing price peak of $1002 the week of March 2008. Use the linked chart (you can change the time scale to weekly to see above mentioned trend) to see how this precious commodity is behaving.
I think gold will probably find some support roughly around $650-700 (I'm not a short term trader), before continuing its downward slide for a few years. The support will probably come as we get absolute confirmation that we're in a recession; it may happen now also, but I doubt that.
So, if you like to "play" in markets on a daily basis look for that sign of support for a few weeks/months and ride it to make some dough. If you're thinking longer than a couple of months, I suggest looking elsewhere to park your money.
Stock Market:
This is one of the worst stock markets to be in. There is no one area that is consistently outperforming the market, at least for a retail investor like us to be participating in it. Sure you can day trade, or even do trades over a few days or weeks, but think about the anxiety you have to undergo. If you can handle it, go right ahead. My suggestion, stay out of this volatility (up 400 points today, down 300 or 500 tomorrow). Do you really need the stress of worrying about your money, while working full time (as if worrying about your job isn't enough already)? Some individual stocks are holding up very well while everything around them crumbles, but even they're not completely safe. You never know what tomorrow brings. Btw, I'm not referring to big names. Most of the names I'm seeing holding up well I've never heard of over the years - some went public in the last year or so. Keep a lookout for these guys, since when the market turns (which it will, even if it is say mid or late next year), these stocks will be the first ones out the block. Check out Investors Business Daily as a potential tool for your stock investments - its an excellent market newspaper while providing investment tools that are criticial to your success.
Euro (and possibly other currencies):
The time to bet against the US$ is long past. You'll probably get a chance to do that again, but not in the next year at least. If the US economy turns around before other world economies (especially China & India), then don't even think of betting against the $. Pls note that I imply China & India are going through corrections; even though they technically are not in recessions, the slowdown in US & Europe affects their growth since both these countries depend on US consumption along with increasingly their own (they're economies haven't matured to the point where they're sustainable by their surging middle class yet, although that time will come). India's upcoming election in 2009 with its inherent uncertainties will hurt, in addition to the inflation hurting right now (the fuel aspect will calm down, but it still imports most of its oil) along with the credit crunch (which affected this country in unforeseen ways). I am deeply optimistic on India, and this is a good time to hone your research skills and decide your move as this country eventually bounces back (probably at the same time as the US). The Indian Re. has taken a serious hit against the $; I wouldn't buy $ if I was in India now, although this is a great time to convert cash into the Re., since I doubt we'll see the Re. falling too much below the Rs. 50mark against that $.
China is a different animal. Its become a superpower both economically & militarily, possibly its weakest link being from a social standpoint (tensions between rural & urban China). While the Chinese government is working to reduce that massive divide, this credit crisis and their tanking market may force some kind of a showdown in 2009 (my level of confidence on this is low, not having been in that country ever and not understanding its social & political structure, except reading about them). Its currency has actually appreciated against the US $ in recent weeks, and the fact that it has loads of US treasury bonds along with the artificial price of the yuan probably works in China's favor. Too many unknowns about China, forces me to stay away from the yuan, along with the fact that you cannot own it in the open market unless you're Chinese or married to one.
The yen strengthened considerably against the US $ in recent weeks. Japan is in a recession, yet such a behavior. Its been written that they're probably going to be one of the world's credit crisis saviors along with China. They've nearly put their decade long deflation behind them. I see Japan "rising" again along with its currency against the US $ in the future; this may be a possible currency play for the mid-term (couple of years), if you can keep up with a country's news that's awake when you're sleeping in the US.
I would buy the euro when it falls a bit more - probably closer to the $1.15/$1 mark. The ECB along with the Bank of England have been slower than the US Fed the last few years in managing interest rates. That provides an opportunity for you to get in around that price, and then hold for the long-term. If nothing else, you can spend the euros when you visit the "continent", although I think the euro will be a very safe bet from a long term standpoint, as the US $ restarts its slide post this worldwide economic downturn (and the world starts looking for a $ replacement/balance for world trade).
Home Improvements:
If you believe this real estate downturn will eventually end (peak to peak real estate cycles seem to last about 8-10 years), and you need to upgrade some part of your current home, or need to expand a wing instead of moving to a bigger house due to addition to your family, or some such eventuality, then you could consider making such improvements as a way of investing in your home, which is considered by some to be an asset. Depending on who you ask, that statement ranges from true, to partially true to absolutely incorrect (per Rich Dad, Poor Dad author Robert Kiyosaki for e.g., if your house not providing some cash back, how can that be an investment?). I think its probably not so black & white for most folks; as long as you have a decent amount of equity in the house (and I mean a number higher than 60-70%), your house could be considered an asset. Problem is it does generate any cash, but you cannot sell it & keep all the money, since you will have to live somewhere, meaning you will use that money to buy another house - the only way it becomes a possible asset is if you downsize.
Farm Products:
I single out farm products among commodities in general, since as the world population grows and the middle class in India & china continue to explode, demand for farm products and better ones at that will do the same - explode. So, while we may believe the commodities bull run from the past few years has come to end, I believe it will restart that run after this economic crisis abates or the world economies start pumping in money to get out of the current mess or cut rates further to jump start their countries, thereby restarting the worldwide inflationary trend. India has seen immense growth in the farm retail market in the past couple of years with Western style food marts mushrooming in the cities. The supply chain mechanism to get produce from the farm to the distribution houses to these marts are become increasingly sophisticated, so that intermediary influence can be reduced and profits of the mart owners increased. This is a potential area to invest in - either the companies that are opening these stores like Reliance, or buying farmland itself in India. One huge caveat is that land records & the law upholding a person's ownership have the most dismal track record unless you have connections. So, be careful how you invest your money in this area.
Residential Real Estate:
Again, if one believes this residential real estate debacle will sort out over the next so many years, this is a potential time to think about (not buy yet) what kind of residential property to invest in. Pls note that I'm referring to residential real estate market only; the apartment real estate market is managing to hold up ok - there are issues, but its not a disaster like the residential side of things. Some folks are doing short sales of the single families hit by the owners' inability to pay their mortgage and the Banks deciding that they'd rather get back a certain percent of their outlay in mortgages rather than take ownership of the houses underlying defaulted mortgages. There are lots of people/companies who are willing to teach you how to get into this real estate mess and make a profit. Read in between the lines to ensure they'll just not educate you theoretically but support you after the workshop ends (and how) before jumping into this market. This is not the time to buy & hold single families, since you don't know how much further prices will drop, especially the worst hits areas (not just Florida, Phoenix & Las Vegas, but places in your backyard as well). Wait for the buyers to step in before you buy & hold. Short sale transactions the way to make money at this time.
Apartment Real Estate:
While technically part of Commercial Real Estate, apartment buildings are in a class of their own. These make money for you right out of the block, if you buy right, finance them right, and continue to make money for you if you run them well over the months & years. There's significant money to be made, depending on the size of the building/number of units. You cannot make money where these buildings are already expensive - most of the East & West coast areas, and you definitely don't want to invest in areas that are bleeding jobs or people (out-migration). Leave these areas of the country out, and you still have a ton of areas to invest in. Depending on the area, there wasn't a lot of construction of multi-family buildings (as opposed to duplexes or fourplexes) in the past few years. So, there's not a lot of spare inventory. People will always need a place to live, even if they cannot afford to buy a house. That is especially true when credit's dried up, like now, and companies are shedding jobs. So, rentals become the way to go until the market recovers. If you're looking for passive income (let management companies run the buildings for you of course), and have some money in the bank, this is the way to go. You will be surprised how many units you can own for the price of a single family in areas that didn't explode during the recent real estate market appreciation. If you've done your homework, the rent tenants pay, will cover all maintenance costs including management fees (about 6-7%, although some areas charge more, while others charge less), and also pay the mortgage with money left over for you to start thinking about purchasing your next building. Don't get me wrong - this is not a get rich quick scheme. It takes time to amass the kind of buildings/wealth that will enable you to leave your favorite 9-5pm day job, but it happens nevertheless. And once that happens who cares about how the stock market is doing today, although if you're intelligent you'll be making money in that market also.
Self Directed Retirement Accounts:
This is a relatively new investment type; well not necessarily new, but has become known to at least investors only recently. Google "IRA real estate self directed" for example, and you'll get articles such as this. You can own real estate for investment purposes through a SDRA (self directed is not a type of IRA, its just used to distinguish IRAs that can hold alternative investments like real estate; you can also own the regular stocks, bonds, etc.). The catch is that you have to do everything via the IRA. The down payment comes from IRA money, expenses on the property comes from the IRA, income goes directly into the IRA, and so does profits from a sale. Same as a stock or mutual fund owned by an IRA, only different since this is actual, physical real estate. You can either setup a LLC for this and write checks yourself for better/direct management of the IRA, or let the Custodian do it, meaning there will be a time lag in whatever you do and costs associated with each & every transaction. The same custodians who offer this product also offer business owners a SD (self-directed) 401(K) product. Neat! The only thing I cannot help you with yet, is pricing for this kind of offering.
Labels: Personal Finance
