Mortgage Rates & Refinancing

Missing an Opportunity? I wanted to let you know of a real opportunity of which many people are not currently aware. Due to recent weakness in the stock markets, real estate, and the potential slowing of the U.S. economy, mortgage rates are at very low historical yields today. As reported by Mortgage News Daily, see the current Mississippi averages below:

10-Year Fixed Ranging from 3.75% to 4.00%
15-Year Fixed Ranging from 4.00% to 4.25%
30-Year Fixed Ranging from 4.25% to 4.50%
(For information purposes only; Rates subject to change without notice.)

Historically these are very low rates. Yes, they could possibly go even lower, but no one is sure—and if they were to drop lower they may not stay there for long. According to Mortgage News Daily, the U.S. Average Weekly Mortgage Rates show 30-Year fixed rates, just a year ago, were ranging between 5.25% and 5.75%. So, you can clearly see the changes that have taken place. Also, now could also be a great opportunity for many people who have fairly large second-mortgages (Home Equity loans) to possibly secure a fixed rate which could be much lower. Remember, over time rates could eventually go significantly higher.

We wanted to let you know this in case you have been considering the potential benefits of refinancing. If you think you need some help, don’t hesitate to call and we can help you determine what’s best in your situation. If you do call, please tell us how much you currently owe, your current interest rate, and how long you plan to live at your current location. Also, remember that we do not provide mortgages ourselves, but can help analyze your situation in view of your current planning goals.

Is this the Same Kind of Fire?

Being burned so badly in 2008-09, many investors are wondering why the markets are selling off and if this is a repeat of the last big correction. No one can say for sure, but this correction doesn’t feel like the one we experienced in ‘08. Here are a few factors we are hearing that may be the cause.

1) Necessary Correction due to large run-up the last 12-months. Since the March 9th low in 2009, the S&P 500 rebounded 79% through April 23rd high close in 2010. This is a pretty significant rebound, so profit-taking or some amount of correction should happen eventually as this is a natural cycle for markets. Interesting to note, since April 23rd the S&P 500 has corrected -12% through May 26th. (Sources: Morningstar, Inc. and Wall Street Journal)

2) Global Economic & Debt Issues (Euro-zone countries). In the news as of late are the government debt problems in Greece, with the possibility of spreading into Spain, Portugal, Ireland and Italy. Remember Greece is only approximately the size of the state of Indiana. Nevertheless up to this point Europe has not convinced the investment community that they will make the tough decisions and deal constructively with their serious government debt issues. If Europe gets it’s act together, we could see the markets improve overnight.

3) Possible Global economic slow-down affecting the U.S. Economy. We now live in a Global economy as many U.S. companies (Caterpillar, Proctor & Gamble, GE, IBM, Cisco, etc.) sell some of their goods and services outside the US. If these foreign customers buy less goods and services from us, then our economy could slow down again. This is why we are starting to hear news services talk of the possibility of a “Double-Dip” Recession. Hopefully Europe’s problems won’t be “systemic” and spread, but no one knows for sure at this point in time. Outside of this, the U.S. economy is slowly improving and appears to be able to weather Europe’s problems.

4) Geo-Political Issues. From the North Korean/South Korean conflicts and the continuing Iran/Israel nuclear saga create political uncertainty which can also revamp market volatility. Plus many legislative changes coming from the White House and Congress such as Finance Reform, Healthcare Reform, talks of Cap and Trade, etc. indicate to the markets that the government is growing in both control and debt. Until these issues settle down, potentially larger government can produce some degree of uncertainty and increased market volatility.

Remember the markets hate uncertainty. When uncertainty exists, markets tend to increase in volatility and money begins to move around, increased hedging can occur, and securities can become shorted, etc. All of this makes market direction almost impossible to determine on a short-term basis. This is why advisors strongly suggest that investors not get caught up in making knee-jerk changes to short-term corrections.

Hopefully this helps explain some of the reasons we are experiencing so much continued volatility in 2010. Though we may be wrong, what we are hearing is that this should not be a repeat of the market problems we experienced in 2008. We are still hopeful and believe markets will settle down at some point, usually when we least expect it. The advice we can give is that it’s usually best for an investor to develop good, long-term investment plans that can weather the many short-term bumps in the road. Quite possibly, if an investor can’t do this, they may need to avoid non-guaranteed investments (stocks, bonds, etc.) and settle for potentially much lower returns.

In the meantime consider these positives: declining interest rates (30-year mortgages are now below 5%), cheaper gas prices, as well as zero inflation. Hopefully some short-term positives will put more money in your wallet while you wait for your portfolio to grow again.

The Cost of Getting Even

It’s more and more commonplace to have a discussion with someone who must come to grips with what Dennis Gartman calls the “viciousness of percentages.” This is simply the average one needs to obtain to regain from a loss, “the cost of getting even.” Remember, a loss of -25% one year and a gain of +25% the next year does not get you back to even. Instead, this leaves someone a good bit behind “par” and the greater the loss, the greater the required return on capital to get back to even. Therefore, find below a chart that illustrates the average gains necessary to regain from a loss:

In summary, the lesson here is really quite simple: keep your losses to a minimum. In other words, what is your risk tolerance level and how long do you have to invest? Make sure these match up accordingly and don’t put too much at risk without the proper amount of time necessary to ride out short-term volatility in the market.

A Crash Overhang

One of the unfortunate hangovers from the 2008–‘09 market crash has been some investors continuing to try to “time” the market with their mutual funds. We continue to hear that small retail investors, and usually those without an investment advisor, have not completely returned to the stock market. Whether this is with their 401(k) plan or other investment portfolios, some investors have missed much of the recent recovery employing some unproven strategies.

Frankly I can understand their concerns and fears and their desire to be out when the next crash happens. The problem is there’s usually no one who knows exactly when the next correction will happen. Consider this… since March ’09 the stock market has grown back in spite of all the negatives we hear in the news today, while many have warned another correction is coming. Sometimes in the industry we hear this referred to as, “the market climbing a wall of worry.”

Remember that a strategy of “market timing” almost never works to improve one’s overall return when considering a full market cycle (from the peak, to the valley, and back to the peak again), particularly with mutual funds. This can be validated by third-party research and is why you hear most Investment Advisors discourage market timing. However, I must say moving out of the market can be an effective means of reducing fear.

I have found some of the confusion comes for personal investors as they have heard and read investment language (reduce stock exposure, increase cash position, expect a market pullback, stop-loss, limit order, etc.) that typically can be effective when trading individual stocks. Don’t confuse this with investing in mutual funds. According to Vanguard, mutual fund investing provides greater diversification as, “a single mutual fund most likely holds more securities than you could ever buy on your own. An advisor handles the fund’s investment management responsibilities, taking the burden off of you.” Therefore, remember that an actively managed fund manages within its prospectus objective in light of what is happening in the economy.

Also given the logic that investing in individual stocks can be significantly more risky than investing in stock mutual funds, it’s logical to conclude that you can also lose more in individual stocks. This contributes to why we saw many individual stocks decline much greater than stock mutual funds over the recent 2008-’09 market correction. Consider as Investorguide.com explains, “Earning a high level of return requires taking more risk, but taking more risk does not always equate to a higher return. No matter what you invest in there is an inherent level of risk associated with all investments.”

So in the end, unless there becomes a serious market correction, which doesn’t happen very often, mutual funds may not offer enough volatility to pay off using common timing strategies. In other words, mathematically it’s very difficult to make it work. As we have learned in the last correction, a market correction is not a clear signal that another major correction is around the corner.

In summary, there are some strategies that can help worried investors that are concerned of market risks. But quite frankly, and contrary to what you may hear, market timing usually does not improve the overall long-term return. And if you feel advisors are not forth coming about timing, ask your investment advisor if he “times” his or her mutual funds.

Re-Building Retirement Wealth, Part 4

Most have heard the phrase “don’t put all your eggs in one basket,” and pretty well understand the wisdom within this statement. But have you taken this a step further and applied it to diversifying your retirement income? We have seen many times that diversification among retirement income planning has been overlooked. And this can be a critical need for a retiree… so consider what some of the sources of retirement income you have in place. Perhaps you can identify with one or more of the following basic sources of retirement income:

Investment portfolio or savings – Income is generated from one’s investment portfolio, which is solely dependent on the stock and bond markets, such as a 401(k) plan, IRA or other accounts which may include mutual funds, individual securities, etc.

Employer benefits – Some still have an employer benefit (such as the Federal or State government, a large corporation, etc.) such as a Defined Benefit retirement plan which will send monthly checks after you retire.

Annuities – Another effective strategy can be variable annuities that offer lifetime benefits without annuitizing (via a Guaranteed Income Rider), which ultimately pays the policy annuitant a monthly income benefit for life, and the beneficiary receives the balance at death.

Rental and/or income property – Working assets that generate a constant flow of income, such as real estate, a trust or other account or inheritance property.

Notes Receivable – Can include private notes that others owe you or even arrangements with another party that can provide a set monthly income.

Timber proceeds – In the case of land ownership, periodically a timber cut or thinning can provided additional cash flow.

Oil/Gas partnerships – Can provide periodic income to the limited partner who assumes no liability beyond the funds they contribute to purchase units in the partnership.
During retirement the best of both worlds is at least stable income, but with some potential to increase over time. It is quite possible diversifying your retirement income may help produce that outcome.

Re-Building Retirement Wealth, Part 3

In this part, let us remind you of the importance of attempting to grow your investment portfolio reasonably. Consider this… if you have ever played baseball, how many home runs did you hit? Or maybe as a spectator, how many home runs have your children or grandchildren hit on a consistent basis? So now you get it! Just as base hits are easier to get, a reasonable investment return probably stands a better chance to happen with possibly less risks. Let me say it again – if your retirement plan’s success depends on you hitting home runs with your investment portfolio, then stop that! Make adjustments now (save more, spend less, work longer if necessary, even consider working part-time during retirement, etc.). Keep in mind, a reasonable goal may be more successful if no more than a 4% to 6% long-term result could get the job done.

Re-Building Retirement Wealth, Part 2

In Part 1 posted on 3/4/10 we discussed the benefits of a reasonable lifestyle, both today and during retirement. So let me illustrate to you what I meant and the benefits of spending within reason. Notice how much someone needs at age 66 to support a much higher standard of living. I would call this “living within your harvest.”

To illustrate, let’s make the following basic assumptions for a married couple:
— Current age of 55 and Retirement age of 66
— Combined Social Security income of $2,400/month (in today’s dollars)
— Growth rate on investments of 4% post-retirement
— Retirement period of 19 years (live to age 85)
— Current inflation rate of 3% annually

Based on these assumptions, someone may need to have accumulated the following amounts at retirement (Source: American Funds retirement calculator):

Living Expenses during Retirement —- Amount Required at Retirement (age 66)
$6,000/month —- $1,066,488
$10,000/month —- $2,158,247

Keep in mind this is just for simple illustration purposes, makes common assumptions, and assumes no market volatility. In real life, change is frequent and retirement assumptions, rates of return, inflation, etc. can vary from year to year. Plus, it’s very common that individuals will experience some type of unexpected need during their retirement years (such as increased medical expenses)… requiring more savings or a lifestyle change. Remember, everyone’s situation is different and should be monitored closely by a financial professional.

So what do you think? Which spending level can you truly afford?

The above information is for illustrative purposes only and is not intended to provide investment advice or portray actual investment results. Your financial situation and goals may change, so you might want to revisit the American Funds retirement calculator at least once a year. Be sure to discuss your results with your financial professional. The above information does not take certain factors into account, including early withdrawal penalties, required minimum distributions and holding periods. Regular investing does not ensure a profit or protect against loss. Hypothetical annual rates of return are not intended to reflect actual results; your results may vary based on market conditions. The above information compounds earnings annually and assumes that withdrawals are made at the beginning of the year. To access the American Funds retirement calculator go to https://www.americanfunds.com/retirement/calculator/.