investing

I have been through a few market swings in my tenure on this earth. I’d bet you have too. And, I bet, you have read and listened to a ton of advice on what to do when the market is up and what to do when the market is down.

Some of the advice probably was absolutely right on while the rest of it was simply somebody’s opinion and without much merit. That is about par for the course and you can expect to hear the “do this” and “don’t do this” birds chirping in every market.

I propose the one characteristic ALL investors need is patience. The old advice that says something like slow and steady wins the race seems to be true no matter how many banks and/or investment firms close their doors or how many foreclosures hit the market. If you work at one of these going out of business facilities your outlook may be a tad bit different.

Investor Consistency

Wall Street is the home of many myths but also the home of one fact that has remained true as long as records have been kept. I would suspect this fact is as true for real estate investing as it is for stock investing.

That one glaring fact says investors tend to rush in at market tops and out at market bottoms. I can’t speak for every locale in the U.S. nor for every investor but I noticed here in my backyard that fact was much in play.

I say that because I’ve attempted to contact some of the so called players who were in action at the top of the market only to get disconnected phone numbers or when I do reach one, I hear how tapped out they are at the moment.

Heck, “at the moment” is merely a euphemism for I lost my keister and have to find two jobs just to pay my bills. No, I’m not making fun of, or talking down about, anyone, I’m simply relaying my very unscientific findings.

Facts are facts. A lot of investors are on the side lines because they didn’t pay closer attention to several other factors. Important factors if I do say so myself.

The Law Of Balance

In my humble opinion, an investor should maintain a portfolio balance no matter what the market condition. I’m not talking about stocks, bonds and mutual funds only. I’m talking about real estate categories coupled with other money machines.

Tough markets can really skew your financial perspective if you don’t utilize the law of balance. I’ve mentioned a few in previous posts. Such programs as CDs, TIPS, annuities come to the forefront and are easy to grasp without any explanation.

That’s what I’m talking about. I’ll use one fellow as my example. As the housing market was roaring, I asked him in what other arenas had he put his profits. SFRs man and lots of them was his answer. He even had one of those evil grins, ala Bruce Willis or Vic Mackey, on his face as he replied.

When the housing market tanked, he was one of my first incoming calls. He needed to sell and sell fast so he could save his residence from being foreclosed. His “balance is for the other guy” mentality came home to roost in a big way.

What he never even considered in his investment adventures was the next investment principle one should know like one knows the back of one’s hand.

This Thing Called Value

This poor chump didn’t quite grasp the value principle. He assumed value had only one side. As you and I both know, value is a multi-sided-algebraic-pythogorean-aritotle-socrates animal. Or something like that, right?

Why would I buy his properties at the sand based foundation housing value existing at that time? I wasn’t a professional prognosticator - and still aren’t - but I did know house values were dropping and the free fall period was at least several months in duration.

The point is not how smart I am. The point is value for me wasn’t determined at one point in time based on one need in time. Even the boys on Wall Street don’t rely only on the price to earnings ratio to value a company.

They use up to twenty other paramters. That was a given yesterday and will be a given tomorrow. The real estate market shouldn’t be any different.

The real estate market offers one bennie not found in too many other markets. In the real estate market, you can afford to be off by a few thousand dollars per asset and not get hurt very bad in most downside markets.

Why?

The dollar value per property that’s why. Pricing is always in the thousands. When it falls, it falls by thousands. When it rises, it rises by thousands. Stocks on the other hand aren’t priced that way. bonds aren’t priced that way. Mutual funds aren’t priced that way. Hence, the dollar value of real estate lets you make a several thousand dollar mistake and come out with a profit.

For example, I have my eye on an REO about three blocks from my house. It has fallen by over 100K. I’m not sure if it has hit bottom but I know if I bought it at current asking price and I was wrong, I more than likely would be wrong by about 20K on the down side.

To the amateur investor that sounds horrific. My God, that’s 20K down the drain or some such sort of (ir)rational thought would be hurled in my direction.

To the experienced investor that may or may not be too bad. 20K is easily recoverable in an upswing with the one minor stumbing block being the amount of time to recover that 20K. I’d probably have to wait an extra three to six months given the velocity of the upswing.

The purist would call me ignorant for not waiting till it bottomed out. However, I have yet to meet a successful purist so I never pay attention to anything this breed has to say.

Here’s my bottom line - if you are patient and employ balance in your investing endeavor and understand value as it exists in your field of expertise, you should do fantastically better than my above mentioned friend.

Truth is you probably are still doing above average in your field while everyone else is mystified and wondering what the heck is going on. These are the people looking for a bailout that will never materialize.

Photo Credit: epicharmus

If you're new here, you may want to subscribe to our RSS feed or sign up for our real estate social network. Thanks for visiting!

Tags: invest, investor, market, real estate investing, stocks

With the recent crash of the Stock Market and continued weakness in the housing market, people are scrambling to find “safe” places to invest.  Many people are taking their money out of the market in fear that the system will crash.  There are many valid reasons for doing this. However, if the primary reason is that you are afraid of the current volatility in the market, you could make an extremely costly mistake.

Selling now and buying back into the market when the economy recovers is in essence, attempting to time the market, which is extraordinarily difficult to do.  Even worse, simply hoping that the economy recovers and that you will avoid losses by selling is speculation and does not involve any true analysis.  The following are some guidelines that I like to follow.

1. UNDERSTAND YOUR FINANCIAL SITUATION

Have a strong understanding of how steady your household income is (future raises, possible fluctuations, and changes in employment).  Have a grasp on your monthly expenses including not only big ticket items like mortgages and taxes, but also entertainment, gifts, and traveling expenses.  You should be able to estimate how much money you have left over to invest every year, after creating an emergency fund.

2. ESTABLISH CONCRETE GOALS

Project how much wealth you would need to accumulate to retire comfortably, taking into account inflation and rises in living costs.  Other goals could include college tuition for the kids or buying a new home or vacation home.  Goals should be realistic and have an estimated price and time horizon.

3. REALITY CHECK

Calculate what rate of return you would need to accomplish your goals.  You may find that buying the perfect house or retiring with houses in Florida and New York is not attainable unless you change your current spending habits.  Evaluate your current financial situation and see if there are places where you can cut spending (restaurants, pricey gifts, traveling).

4. DEVELOP AN INVESTMENT STRATEGY

Your risk preference, financial goals, and time horizon should dictate what type of investment strategy you will use.  If you live a relatively frugal lifestyle and you do not have a taste for the fancier things in life, you may choose to minimize your exposure to risk and invest in Bonds and Treasuries.  If you are relatively young, with a steady flow of income, and have expenses under control, you could take on more risk gain added return in the Stock Market, Futures, and maybe even fund certain startups in addition to investing in Bonds, Treasuries, and Real Estate.  Make sure you modify your strategy and minimize risk as you approach certain target dates when you will need to withdraw funds.

Pay attention to asset allocation and work towards minimizing risk to your overall portfolio, not just through each individual investment.  Make sure you minimize correlation between investments and make sure they are affected by different economic factors.  Diversify across industries and Time.  In Real Estate, diversify by buying properties in different market areas and across different property types (condos, multi-family, single family, apartment complex etc.).

There are all types of investment strategies that will appeal to different types of people with different financial goals and risk preferences.  What is critical is that you manage your finances in a systematic way, seek help from a competent financial advisor, and avoid speculation, especially in the current economic environment.

Photo Credits: Pete Travels, Purpleslog

Tags: diversification, real estate investing, Real Estate Investing, retirement, stocks

The economy is sinking faster than a mafia hitman wearing cement shoes in water; and, the mortgage/housing crisis is clearly to blame.

Wall Street was apparently totally shocked today when the Labor Department reported that 63, 000 nonfarm jobs were lost last month….As Reuters points out, the problem is that Wall Street experts had expected that 25,000 positions would actually be added. So much for experts!

Stocks Down

This news helped send stocks into a tailspin, closing at their lowest level in 19 months.

Reuters points out that this bad news came at the same time that “jumbo” mortgage lender Thornburg Mortgage was unable to meet demands from creditors for upfront cash. Not good.

More and more experts are now saying the U.S. is in a recession, official or not.

And, the worst is yet to come. There will be still more foreclosures this year…many more. The credit markets are getting tighter despite Fed action. And, consumer confidence continues to go down.

It is no longer accurate to refer to this as a subprime mortgage crisis. Let’s just agree that this is a financial crisis, period! Okay.

Tags: Foreclosures, housing crisis, labor-department, recession, stocks, subprime mortgage, thornburg mortgage, Wall-Street