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Retirement Income; What are my assumptions? September 7, 2012

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Everybody uses assumptions to guide problem solving, or at least they should.

Most of the time these assumptions are subconscious or not explored.  Unexplained assumptions are the leading cause of poor advice.  So I thought I would spend a few minutes explaining my assumptions that are the backbone of my advice.  

#1  Take on the least amount of risk to solve the problem

If you the ability to save large amounts of money for your retirement it makes little sense assume the risk of reaching for high rates of returns when a lower rate of return with lower risk will do the job of providing adequate retirement income. 

#2 Avoid the “one tool fits all needs” type of thinking

If the problem is how to save for retirement income, it makes little sense using a tool that has high variance/risk associated with it because variance is your enemy in producing consistent income.  It also makes little sense using tools that are great if you have a never-ending time period [mutual funds for example] but poor if you have a specific time period you need the money for.  This is the greatest problem that the CFP and RIA folks present with.  They think everyone should be investing in stocks or mutual funds.

#3  Assuming you can predict the unpredictable

The corollary of this is trying to “time any market” with buys and sells.  I assume that whatever strategy employed must not depend on either predicting peaks and valleys or finding “a greater fool” to purchase my investment.

#4  Being blind to actual historical results

I wonder how so called financial advisors can still give out the same advice that has failed so miserably over the last decade.  Using long term historical results to guide decisions is imperative.

I welcome your comments to these assumptions!


Real Estate Bottom? September 3, 2008

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In the county I live in Florida, real estate prices went up 1.6% last month.  This is after two months of flat pricing.  So, for the last three months we see a 1.5% uptick.  Nothing to write home about, but definitely a change from the 10% drop the quarter before.  So have we hit bottom here?  Not one to make predictions on market bottoms, but the environment has certainly changed.  I certainly wouldn’t argue that the real estate market is healthy again. 

So where are we now.  Well credit for all those with little credit issues has gotten more expensive.  Those with big issues are locked out now.  Down payments are now required, even by FHA (After October1).  Rates are still historically lower than average.  Supply is still high, meaning it is a buyers market.  Foreclosures are still an issue, although this seems to be more about recent job losses than anything else.  Credit issues is general are being seen in all credit markets (credit cards, auto’s, mortgages) lending credence to the thought the business downturn is the cause. 

Rents still have some downward pressures.  And of course some areas of the country are much stronger than others.  However, if we are starting to see trend reversals in my county in Florida, which has been one of the worst hit by the real estate downturn and unemployment, then other areas can’t be far behind.  Why is this important?  Well, as real estate goes so does people’s attitudes.  And it is peoples attitudes that will change the economy.

Just some thinking points for folks out there.  Have a great day and increase your wealth!!!!!

Fresh Thinking on Investment Real Estate, Rent, Home Ownership July 24, 2008

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Recently had an interesting conversation with a young man.  He was wondering if he should buy a house in his area to live in.  I asked him some basic questions like why he wants a house.  He answered, for an investment!  Further he said he was happy with renting the place he lived in because it was ideally located for him and relatively cheap.  He couldn’t afford to buy into the same area he lived in, so he was looking into some less desireable neighborhoods to buy.

So I suggested he treat this transaction as what it is, an investment.  I explained to him that the decision matrix for investment real estate was very different that for a personal residence.  It was like a light bulb went off in his head.  He had been struggling because he was approaching this decision from the wrong direction.  He really didn’t want to move.  I sent him off to do some research and gave him a couple of names of trustworthy folks that understand investment real estate. 

This is, of course, anathema to my real estate agent friends, but renting can make sense for people.  And since people aren’t trained to think like a real estate investor, they are unprepared to make good decisions about real estate.  Like my client who was paying $600/month for a place he was comfortable in and finding a similiar place to own would have cost him $2000/month.  Now he is free to look all over the US to find a investment property since he is not limited to being close to work.  He can still bike to work and own an investment that will give him double digit returns putting him in good stead for his future!

Wall Street Patsy; Part II July 10, 2008

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Let me ask you a question?  If you had to recommend someplace to put someones money, and your choices were an investment that data demonstrated the average person got a return of less than 5%, and the best you could hope for was around 8% or the other choice was an investment that has returned 21% over the last 43 years and 18% over the last 10 years, which would you advise?

Now, let’s add in the final point.  The first investment meant you could make a good living and the second meant you would not make a living advising.  Which would you advise now?

There you have the essentials of the investment game.  Advise mutual funds and make a living or advise Berkshire Hathaway and be out of the business.  So is anyone surprised that advisors push the mutual funds over the proven better performer?  Is anyone surprised that Wall Street devises all sorts of propaganda to convince folks of the prudence of mutual fund investing?  I mean in what world can a financial advisor suggests an inferior investment with higher risk to folks who NEED maximum return to have a shot at a decent retirement?

When I talk to groups I ask folks to raise their hand if they own mutual funds.  Then I ask them to raise their hand if they own Berkshire Hathaway.  Do you know the results?  I bet you do, few raise there hands on the second question and most raise their hands on the first. 

So the question to you, who is Wall Street’s Patsy?  Who has gotten solid financial advice? Who has gotten advice that enriches the advisor and their bosses at the cost of the consumer?  I understand speculation, but how do you bet your retirement on a proven loser, when there is a proven winner out there?

Ready to leave the herd yet?


Mutual Funds; Good or Bad Investment? May 23, 2008

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I will keep this simple. I have posted often about my thoughts on mutual funds as an investment.  Here are the latest datum from Dalbar Inc. on the actual rate of return folks get from mutual funds.  I will put three columns together, actual returns from investors who invest in mutual funds, actual returns from the S&P Index and actual returns from Berkshire Hathaway.  Then I will post as a comparison the what if you invested $10,000 question that equity prospectus usually have.  This is a much more accurate comparison because negative returns hurt, and cause you to have to get a greater return to make up for the negative.

                  Actual Mutual Fund Return     S&P Index       Berkshire Hathaway

20 years                    4.48%                      11.81%                      19.77% 

10 years                    5.66%                        5.91%                       12.7%

$10,000 invested in Berkshire Hathaway Jan 1, 1988=  $315,381 Dec. 31, 2007

$10,000 invested in the S&P 500 Index including dividends with no expenses (an impossibility) on Jan 1, 1988= $93,423 on Dec. 31, 2007

I can’t do it for actual mutual fund returns because I don’t have year to year data. 

So there it is in stark black and white.  $315k actual numbers, versus $93K pretend, no expenses, number.  Actual rate of return over the last 20 years of 4.48%, which is 7.73% below the index and 15.29% below Berkshire Hathaway.   You make the decision.  Are mutual funds a good investment, or are they merely a hedge against inflation?

***Once again this is only the ravings of a person who can do math.  Shafer Financial does not have a license to sell equities (stocks), nor does the SEC consider him an “expert” who can give advice on particular stocks***

Simple Statistics for Investments! May 7, 2008

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Today there were several reactions to my letter to the editor in the St. Petersburg Times on teacher pay.  The first letter from a teacher made it clear she did not understand what “average” meant as in “average salary.”  So I thought I would spend a few minutes going over some basic statistics with the readers.  As many of my friends know, I taught statistics at the Univesity of South Florida for several years so please excuse this post if you already have a good understanding of basic stats or find it to didactic.

Average is one of the central tendency statistics that represents the middle of a data set.  It is the most used stat and is easily calculated by simply adding up the data set and dividing by the amount of integers in the set.  For example the average or mean of  the following numbers:  1,2,3,4,5 is three (1+2+3+4+5/5) or 15/5.  This is a good stats if you have a somewhat homogenous group like if you wanted to know what the average school teacher’s income in a school district.  It is not a great stat if you have a large number of outliers (numbers that are far away from the main group).  For example say you were looking at a group of people where 9 made $100,000 and 1 made $1,000,000.  The average would be $190,000.   That really doesn’t represent what the middle of the group makes so a better stat is the median which looks at the middle number in this case $100,000. You simply arrange the set from lowest to highest and pick the middle number.  If you have an even amount of integers you simple average the two middle numbers to get the median.  The median is really a better stat to use for income or wealth for example  because there are a few people who make so much more than the majority that it skews the average up and gives a really wrong impression.  This is why if politicians want to give a number that makes the average income look better they quote the average, while those who want a more accurate number quote the median.  Anytime you see a quote about “average income” among large groups you know they are trying to hide the real middle income which is what the median would give you.

I have posted about leverage many times before.  It is simple to calculate.  For example if you purchase a home with the traditional 20% down you have a 4 to 1 leverage situation (80%/20%).  Or if you put down 10% you have a 9 to 1 leverage situation (90%/10%).  Or if you have equity in a home worth $300,000 of $150,000 you have a 1 to 1 leverage situation (50%/50%).

A simple way to calculate capitalization rate in real estate is to add up all the yearly expenses (management fees, maintenance fees, taxes, etc.) then add up all the income (rent) and divide it by the cost of the real estate.  Say your total expenses are $15,000 and your total income is $30,000 so you have a net gain of $15,000 or a cash flow of $15,000.  You paid $150,000 for the property so the cap rate is 10% ($15,000/$150,000). Cap rates are a great way to value investment real estate, but they are usually an unleveraged valuation that doesn’t take into account debt service or leverage.

Finally rate of return is the ratio of money gain or loss on an investment.  This is calculated by looking at the total appreciation or depreciation over a given time period.  Usually, this is calcalated in years, for example the rate of return for the last 10 years for Berkshire Hathaway is 18.3%/year.  Note this is calculated by looking at the change of asset value each time period (usually a year) for example on Jan 1 the asset value is $1000 then on Dec. 31 the asset value is $1100 there is a 10% rate of return (1100/1000-1).  Also important is that you simply can’t average the annual rate of returns to get the overall rate of return because negative numbers don’t mix well with positive numbers in this statistic.  A simple way that will get you close to the annual rate of return for an investment is to divide the initial investment into the current value + any dividends paid out to get the overall rate of return and then divide that number by the amount of years the investment has been held.  For example initial investment was $1000 and the current value plus dividends is $2,000 and the investment was held for 5 year then it had a 20% annual return (2000/1000-1)/5. Note that most investments state an average rate of return which doesn’t accurately reflect the real dollars made or lost as losses count more than gains. (A $100 investment that goes up 10% one year and goes down 10% the next is worth $99 not $100).  A litle trick of the trade to fool folks!

Hope this helps some folks. 

What does neurolinguistics have to do with investments? April 22, 2008

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The field of neurolinguistics has an interesting argument going on.  The evidence seems to be gathering that language is mediating the way we can think about the world.  We need to be able to have the language to form the categories before we can perform some basic analysis.  So what does this mean to the investment world?  Well, the vast majority of folks out there have not developed the language of investments.  Without this language people are unable to make rational judgements.  This is why we see the “lemming effect.”  In short, people follow the herd because they are making decisions based on emotions because they don’t have the language to enable them to perform basic rational analysis.  Every body is getting rich buying tech stocks we think, so we go out and buy them too.  Same with real estate.  Now, real estate is spiraling down so we don’t buy.  In the stock world this is a well known phenomenon.  We have known for years that the mass of people do the exact opposite of what successful folks do (See Warren Buffett), therefore cutting their rate of return significantly.  Real estate, because it is not easy to buy and sell, has been somewhat protected from this phenomenon until recently.  But the broad point is that you need to acquire the language of finance before you decide to become an investor, any kind of investor.

The Shafer Wealth Academy (www.shaferwealthacademy.com) remains dedicated to teaching people this language as a precurser to building wealth.  Once you have the language, then you can perform the analysis to make rational decisions. Without it, you are left to your emotions and those who would manipulate them.

Opportunity Costs April 15, 2008

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As we deal with the effects of the recession (gasp I said the word), I have been asked how investors should deal with the business downturn.  Common wisdom says to never sell in a recession when the price is down, but I believe that is not quite true.  Where that comes from is Wall Street, which assumes that folks are invested in the market looking for average returns over the long haul.  If that is your goal then the advice holds.  But investors looking to build wealth need to take a different view.  Each different economic situation requires some thought as to where to place one’s money.

People who are attuned to opportunities that might present themselves are always analyzing data.  For example, if you own rental property in an area where rents are decreasing and property value is steady or decreasing does it make sense to hold onto that property?  Or does it make sense to exchange that property for one in an area where the fundamentals are more solid and the numbers make more sense?  Same with stock ownership.  Does it make sense to own the stocks you own or are there other stocks where the fundamentals make more sense?  

The bottom line is to achieve better than market returns, you must always understand that by keeping your money in one investment you lose the ability to put it in another.  It is called opportunity cost.

Now Warren Buffett says he holds stocks as long as the fundamentals remain intact and I think that is good advice for all types of investments.  As long as the fundamentals haven’t changed, you ride out the recession.  However, if the fundamentals do change you are best to sell and find an investment with better fundamentals so as to not forego opportunity costs.


**As usual take this and all other advice from Shafer Financial with a grain of salt.  I do not have a real estate or a stock pickers license so I can’t give advice on specific real estate properties or stocks.  This is just the musings of the author meant for entertainment only!!!!


Which side are you on? April 10, 2008

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Some interesting statistics came to my attention recently.  They only reinforce what I have been posting on a regular basis.  These stats are not broken down by age group as I have posted before, but are useful anyway.  They break down folks into either working age or retirees and look at total savings and investments not including one’s primary residence.  As usual, the majority of folks have little or no savings and investments.  For workers 49% have less than $25,000 total savings/investments, while retirees in this category is 60%.  Moving up to $100,000, which is the level at which one is considered part of the “mass affluent” we see that 73% of workers and 75% of retirees are below this level.  The final category is for those with $250,000 or more in which 12% of folks, both workers and retirees, have reached that amount of wealth.  This study concurs with the other information available.  The main part of the study was to look at people’s confidence in being able to retire with a comfortable lifestyle.  Only 18% of folks are very confident of a comfortable retirement a huge drop from last year.

The interesting part of the study for me is that at the top, the percentages are almost identical.  That reinforces what we already know is that most people remain in the same categories throughout their working life and into retirement.  In other words if your savings/investment totals are in the middle 20% you tend to stay there throughout your life, at least until the end when you rapidly eat through small savings. 

The other interesting statistic is that 51% of retirees have less than $10,000 in savings/investments.  Of course this group has a much higher percentage of folks with a defined benefit pension, than current workers, to help them out.

What this means is that at least 75% of folks can look forward to being poor in retirement.  Following the herd has its costs as I have pointed out before.  15% can look forward to making it by living frugally, extremely frugally.  And around 10% can look forward to having a somewhat comfortable retirement.  Just for comparison sake those at the $250,000 mark could buy a annuity that would pay them somewhere around $20,000/year for life.  This with another say $25,000/ year from social security could give them enough to live on today, but as inflation eats away will cause some issues if they live to life expectancy (17 years in retirement).  So even the highest category is not really enough to have a truly comfortable retirement.

What this means to the country on the eve of the baby boomer retirements is not pretty.  It is likely that as much as 95% of them will be dependant on social security to live in their retirement years.  Dependant on a program that is in crisis and will require increase tax collection to function in the future, no less!

Those folks who take these numbers to heart, and want to change their future, might want to go to www.shaferwealthacademy.com and contact me for a discussion about how to make that change.

Of course the ironic part of retirement planning is that the people who have real reason to change the course they are on (meaning the bottom 90%) tend to let “fear” rule the day and avoid doing anything different because they see it as risky, not recognizing the enormous risk they already are in.  

Don’t have enough time? April 1, 2008

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One of the key elements of our lives is time.  There never seems to be enough.  Of course, that perspective is really not about time but about how we spend our time.  What people mean when they say there is not enough time is that their time is already organized in such a way as to limit their use of time for themselves.  One of the more interesting sociological concepts involves the way we have chosen to give up our time to others.  Just two hundred years ago, there was plenty of time to spend with family, friends or even by ourselves.  But, little by little we have been trained to give this time to others.  It starts with school.  Once organized around other activities (farming) it now dominates our formative years.  Starting at age 4 (pre-k) we spend increasing amounts of time in the “classroom.”  Now, we are suppose to learn and prepare ourselves for a productive life with school, but judging from what I learned (and I see no difference with recent graduates), the amount learned versus amount of time spent is way out of line.  I mean if you want to scare yourself add up the time you spent in school.  No way it takes this long to acquire the ability to read, write, do arithmetic, and learn the basics about the world.

Then there is work.  Americans spend more time than anyone else working.  And that is increasing.  Now father puts in 50 hours and mother another 25 hours.  Time spent not working often is spent standing in line at the store, bank, or in your car in traffic. 

Even the peculiar statement “time is money” sends us a message about time.  But the truly strange fact is that time and money have only a very convoluted connection.  Take the businessman lunch or now the golf course.  If the businessman has a pleasant lunch meeting or plays a round of golf and does a deal it could mean many $$.  But was that work or pleasure?  Is the investor whose money is working hard for her, while she is skiing, any less productive than the person running the ski lift?  Our society would say so, and say it with the moral language of the day.  Work hard, save don’t spend, invest in mutual funds is the mantra.  But who benefits from that mantra?

Imagine what you could accomplish if your living expenses were taken care of, if you were free from worry about the day to day expenses of living.

Would you take back control of time?  Would you spend it as you desired, not as some authority figure tells you to?

After a lifetime of ceding authority over your time to someone else could you make the adjustment to taking control of it yourself?  It’s a overly used mantra, but maybe you should consider putting your money to work instead of you.  Maybe you should change your job to managing your money, instead of working to save enough so one day in the far future you could stop working for money.  Maybe you should take control of time instead of complaining there is no time! 

The Shafer Wealth Academy is designed to show you how.