Is Your Home an Investment?

Posted on July 11, 2012July 11, 2012 by Danielle

(Photo credit: mharrsch)

Yup, that’s what we all believed for so many years. But the gyrations in the housing market, and the huge amount of “wealth” lost by so many of us, are making a lot of people question just exactly what home-buying is worth, as well as their own homes. I’d like to propose that we re-consider just what kind of investment a home actually is: IMHO, it’s actually more like a collectible—closer to a coin or doll or maybe even a wine collection. And a lot of people would be happier with their “investment” if they re-cast their thinking along those lines. How so?

Buy a collectible or house only if you’ve taken care of the basics. You shouldn’t be buying either one if you have huge credit card bills, no emergency fund, and no significant retirement savings (appropriate to your age). Otherwise, you really can’t afford either.

Realize you can’t easily convert to cash. Of course, a Jumeau doll, a bottle of Chateau Something, or a stucco four-square in Evanston can eventually be converted to cash. But you might have to wait for the right buyer, and selling costs for the auction premium or the broker’s commission can take a healthy bite out of the proceeds.

You have to be prepared to hold them for a long time to see a profit over purchasing costs, and ride out bad markets and changes in fashion. Beanie Babies, Cabbage Patch dolls and McMansions aren’t really the top of the value heap right now.

You can see the market take surprising dips. The stock-in-trade at Antiques Roadshow is the person gasping at how much their ugly vase or over-wrought china cabinet is worth compared to what they paid. Yes, it’s my favorite show too—everyone would like to pick up a piece of junk at a yard sale and make a cool $100K. In a recent show, they re-priced items that had originally appeared on the show in the 1990s. It was a shocker—many, many items had gone down in value significantly, and many more were static. Even a crummy but diversified portfolio did better than that. I probably don’t need to draw the parallels with the housing market. There’s no investment that can guarantee steady appreciation.

Neither a housing investment nor collectibles pay you any income. I’m excluding rental property here. You can sell either one to raise cash, but you may need to overcome some emotional attachment to something you love. When you retire, at least some of your wealth needs to be generating income. If most of your net worth is tied up in something that produces no income, well, I hope your Social Security is adequate for your needs. Rich on paper doesn’t necessarily mean rich income.

Significant ongoing costs continue throughout ownership. Both cost you insurance. For collectibles, you might need to maintain ideal storage conditions. For your house, there are property taxes, ongoing maintenance, periodic major repairs, and the seemingly endless bills from the phalanx of tradespeople who are my on-going “best friends”.

Part of the fun is continuous upgrading. No, no, no.

And the one good comparison I can think of…

Both collectibles and your home can provide significant enjoyment while you own them.

Normally I don’t advise on collectibles, but for them and for a house, people can have very good reasons to own them. Sinking part of your worth into either requires more thought and less “givens” than most of us considered prior to 2008. My suggested rules of thumb: the equity in your home should constitute no more than 1/3 of your total net worth, and an investment in collectibles no more than 5% (and that’s pretty generous), and only if you actively participate and understand whatever you’re buying. We can argue about those figures, but you’d probably agree that most of your friends have way more house than they can afford. Right?

My take on another popular money guru

Posted on June 22, 2012June 22, 2012 by Danielle

: Confessional dans la cathédrale de Bourges (Photo credit: Wikipedia)

There’s a lot to like about Dave Ramsey’s program, but don’t drink the Kool-aid just yet. Recently a couple of clients have come to me after attending one of his programs. I’ve read several of his books before, but this time I took a good look at his website and promos. There are a few, er, issues there.

Ramsey is what I’d call a conservative Christian, and therefore a lot of churches sponsor his programs, or religious organizations use his group to present programs for employees. But, as generations of journalists have been told, “If your mother says she loves you, check it out”. Don’t believe financial advice just because someone is a friend, or a brother-in-law, or claims to be religious. All scoundrels prey upon trust.

I’m not saying Ramsey is a scoundrel. I think he gives excellent advice on budgeting, and has a nifty tool on his website that takes your income and instantly assigns amounts to his recommended spending categories. His recommendation of 10% to charitable donations may be a little high for some people, but hey, it’s a good goal.

I have nothing but admiration for his method of getting out of debt (the “debt snowball”) and recommend it when clients have that issue. He has lots of good info on his website about purchasing a car for cash, managing a budget, etc. Or get one of his books out of the library: there are a bunch and they basically all say the same thing.

Gosh, the guy even emphasizes the need to work with a professional planner, which I gotta love, right? Um, not so much. There’s a tab called “Dave recommends” and, well, these folks are just plain advertisers. Maybe Ramsey likes them, but they’re paying for the endorsement. And what about the financial planners (he calls them ELPs—endorsed local providers)? They’re salespeople. How do I know? Because the first requirement is that the “advisor” be regulated by FINRA. FINRA regulates the brokerage industry. Fee-only financial planners are regulated by the SEC or the State (depending on the size of assets managed). If you go to a financial “advisor’s” website site, scroll down the page to the tiniest print you (can’t) see. If it says “Securities offered through [blah-blah]. Member FINRA, SIPC” well, you’re about to be socked with commissions or some dumbo wrap account. You are NOT looking at the website of a fee-only financial planner.

How in good Christian conscience Ramsey can recommend “advisors” who are going to cost his stressed or frugal clients huge management fees, significant commissions, and nightmares transferring accounts when they finally wise up, is beyond me. Look for advice from people who have no financial interest in selling you some crap (check out bogleheads.org, for example), or who are paid by you and are legally obligated to work for you in your best interest (fee-only advisors).

Dave needs to go to confession.

Skimping on the small stuff: is it a latte bunk?

Posted on June 14, 2012June 14, 2012 by Danielle

I think it was David Bach who coined the term “latte factor”, the term for how easy it is to piss away a lot of money by spending a little at a time, and I think he’s right. The clients I see who have the most assets to plan with are generally people who watch the small stuff. It’s a certain habit of mind that says Hold on to your dough. Think a long time before you dribble it away. And that habit tends to make people scrutinize purchases and eke out savings wherever they can. But people who focus on the latte factor can go wrong in two big ways.

The first way is sweating the small stuff and missing the big wins. Of course, if you’re not saving anything at all, you better do some sweating, and saving your lunch-and-Starbucks money is better than saving nothing at all, or even spending beyond what you make and ending up in the minus category. But I talk to too many people who would never buy anything full price, but never re-evaluate their car insurance, their cell phone bill, or even whether their Megahouse is really what they can afford. Cutting your car insurance in half, or buying term instead of whole life insurance can buy an awful lot of lattes. Ramit Sethi makes a lot of fun of the latte factor in favor of recommending the big wins, and I’m with him on that half.

The second way I see people go wrong is to save and save and save, then get rooked by some smarty-pants broker because they don’t really understand how to invest and some “Raymond Jones” invited them to a free fancy restaurant for lunch and called themselves a financial coach. Sure, they probably avoided individual stocks, but they sure got sold some expensive commissioned mutual funds or fancy “managed accounts” and they don’t have a clue what it cost them or what they actually bought. Here’s the truth—you’re going to pay for solid financial advice. Nobody helps you for free, just like few doctors or lawyers will work with you because you’re nice. Even fee-only planners have to eat and send their kids to college. But KNOW what you’re really paying. Even though you’ll have to write a check to a fee-only planner (it won’t be disguised in management fees, sales fees, wrap fees or whatever else the brokerage industry has cooked up) and gee, that hurts, it’s still going to be cheaper than the true cost of working with your friendly neighborhood broker. But even before you go to a fee-only planner, read something! There’s tons of free advice at NAPFA, Get Rich Slowly, Motley Fool or check out my list of recommended books. The best way to save yourself some money is come into my office already knowing something. You’ll benefit far more from advice you understand.