Investing 102

[GregWeld]

Originally Posted by Lenie

Great thread, would love to sit and pick your brain one afternoon over a coke.

Bring it on buddy! You know where I live!

[GregWeld]

Annaly Capital (NLY) went "ex-dividend" today - so it's trading down roughly the amount you just got paid... it paid out .55 a share and is trading down .53 a share as I write. Do not attempt to adjust your TV -- this is totally normal. Stocks typically always trade down the amount they pay out... then "normally" they'll take a couple days to recover.

[Woody]

Originally Posted by SLO_Z28

Youd be surprised how cheap you can live if motivated, all my bills combined are $1300/mo. Even my dad lives quite well off $1000/mo social security income.

Anyways on to some planning, I can retire at 59 with 90% of my pension for the rest of my life(government pension, costs 10% of my salary), should I buy a house now and amortize the hell out of the loan by paying double the payment on a 15 year loan then put the entirety of my house payment into a 457(b), or just make regular payments on the house and pay the excess into my 457 thus reducing my tax burden. Basically im asking is it better to pay down a debt at 3% and gain equity and defer investing for 7 years(how long it should take to pay off a house), or invest for the entirety of those 15 years at the 457 maximum? If I invest the full amount into the 457 I can lower my federal tax rate to 15% (I have a 48,000 salary that when reduced to 43,000 by the 457 contributions drops me to a 15% tax bracket from the 25% im at now), so I would guess that the tax deferral would be worth it?

You have to answer that question by analyzing risk vs. return. Paying off your loan early is a guaranteed no risk investment which produces a rate of return equal to the interest rate you are paying. You could also invest that money elsewhere such as the stock market in anticipation of getting a higher return (7% to 10%). If you invest in the stock market instead of paying the loan off early, you are taking on more risk in anticipation of a higher return. So it becomes a personal descision on whether you are willing to take on more risk to get a higher return. The risk is higher in the stock market because it is not a guaranteed return. The market may indeed go up 7% to 10% a year over the next 15 years, but there is a chance it will not go up at all, decline or even go up more than 7% to 10% a year.

You can also look at it and rate risk on a scale of 1 to 10 where 1 is a no risk investment with a low rate of return where 10 is a high risk that has the potential for high return, but also the change of loss. Paying off your loan would rate 1 or 2 whereas investing the money in the stock market maybe a 5? Where is your comfort level on the risk vs. return scale?

It is similar to asking should I invest in government bonds where I have a safe rate of return or invest in corporate bonds where the risk is higher, but the potential return is also higher. How safe do you want to be?

[67pro-street]

I am in the same situation with the housing loan vs. investments. I went to about 4 different lenders, local and online, and talked to them about possible home loan rates. Currently, I am 3 years into my 30 year fixed @ 4.375% which is a pretty good rate as it is. I was unsure if I should refinance with a 15 year, 20 year, or go back with a 30 year at a lower rate. In order to compare apples to apples, I had each lender give me a GFE (Good Faith Estimate). It is a standardized template that will help you compare apples to apples. If you dont get a GFE from each lender, then it will be hard to know what numbers you are really comparing against each other... So here is how it broke down for me:

Current @ 4.375%: $2300 (including escrow and PMI)
15 year @ 2.875%: $2700 (including escrow and PMI)
20 year @ 3.25%: $2400 (including escrow and PMI)
30 year @ 3.375%: $2000 (including escrow and PMI)

I could have swung the 15 year and cut the time it takes to pay my house off in half! BUT, That is a high monthly payment for me on top of electricity, water, garbage, groceries, etc and wouldnt leave me with much money at the end of the day to put into investments. So essentially, if i kept my current salary for the next 15 years I would have to hold off on investing for retirement for 15 years and basically lose that time for compound interest to help out my investments.

The 20 year came out to basically the same payment I have right now so I could live with the exact same habits I currently have (as far as spending goes!) AND cut 10 years off my home loan. It would have also allowed me to comfortably put in ~$300 bucks per month into an IRA on top of my company 401k contributions, and I could comfortably invest that money today...

With the 30 year I save ~$300 bucks a month from where I am at right now. So, this allowed me to now make my montly house payments AND invest $300 bucks per month with absolutely no change to my lifestyle. And, since I am currently able to make my house payment and swing $300 bucks per month into a Schwab account, if I take the 30 year then essentially I am able to keep my same lifestyle, make my monthly house payments AND put 600 bucks a month into additional savings for retirement (Schwab acct.)!! Thats $7200 bucks a year that I can invest, without changing my lifestyle at all. This is also assuming that I keep the same salary forever, which wont happen but its a worst case scenario.

In the end, I decided to refinance with a 30 year @ 3.375%. I would not have bothered refinancing unless I could save at least a percentage point. Reason being is that I am already 3 years into my 30 year loan so essentially I have 27 years left. By refinancing with another 30 year I am somewhat losing those 3 years of time. The other reason I wouldn't have refinanced unless I saved at least a percentage point goes hand in hand with the first reason. By the time I pay the closing costs, or have them rolled into my total loan value, not only am I losing that 3 years but I am also increasing the total loan amount by roughly 9k. If I were to just keep my current loan and make an additional 9k payment on my principal I could save a year or two of payments and interest which would have equaled the amount I save (this is assuming I was refinancing and saving less than a percentage point...).

All in all it took me a lot of chicken scratch on a paper pad, an excel spreadsheet with different amortization schedules on it, and a hell of a lot of back and forth and this and that before I decided on the 30 year. BUT, now I feel comfortable with my decision and feel like I can back up my reasoning. There are thousands of people out there who know more about money and future value of money vs. present value and all that stuff who would/will tell me I did the wrong thing. If I didnt spend all that time researching and somebody told me I did the wrong thing I would have started second guessing myself and thinking i eff'd up. So, spend some time, do some math, talk to your friends/family, and then choose a loan that you will feel comfortable with not only today, but also 10 years from now...thats my 1/8 of a cent

[GregWeld]

Originally Posted by 67pro-street

With the 30 year I save ~$300 bucks a month from where I am at right now. So, this allowed me to now make my montly house payments AND invest $300 bucks per month with absolutely no change to my lifestyle. And, since I am currently able to make my house payment and swing $300 bucks per month into a Schwab account, if I take the 30 year then essentially I am able to keep my same lifestyle, make my monthly house payments AND put 600 bucks a month into additional savings for retirement (Schwab acct.)!! Thats $7200 bucks a year that I can invest, without changing my lifestyle at all. This is also assuming that I keep the same salary forever, which wont happen but its a worst case scenario.

Brilliant strategy!

When you do the time value of money... saving the MAXIMUM EARLY... is a key to long term returns compounded over time.

Will your investments always compound double every 7 to 10 years -- NO... but they only have to do that once or twice over your lifetime to make a SUBSTANTIAL difference!

But what will remain the same - your house payment and the fixed rate loan percentage. Where people screw up is in using their house as a piggy bank.

REINVEST the dividends and you're going to be a winner in the long run. You've got 30 years to retire - and then you'll live another 25 or 30 years... Your house will be paid for and your investments keep paying you.

[GregWeld]

WOW.... this market is just whacked out! I like it -- but it's still just whacked.

You "newbs" are getting to see one crazy azz market that's for sure.

These market moves show you why you can't "time" the market -- and why it's so hard to "trade" the market... The days you think it should go up it goes down - the days you think there's nothing happening and the market is up 200 points.

It's days like today that show the "shorts" the door... and yet I think I'd have been betting with them (in other words - betting the market was going LOWER).

[GregWeld]

A very interesting look at investing.... and investing in big best of breed dividend payers.


http://seekingalpha.com/article/6917...g_income&ifp=0

[GregWeld]

Today I took a look at some of the home builders... Which is a group I don't own and have never owned. I now know why! Wow what horrible charts. I thought perhaps now might be the time to look to see if there's some upside to them but AS USUAL I'm way late to that party. The smart money has already bid them up over the last couple years.

Lennar (LEN) has moved 200+% in the last TWO years! And now trades near its peak and pays a lousy half a percent dividend.

K B Homes (KBH) is one they talked about on CNBC this morning as having "not traded up with its peers" --- but it too is up this year 35% already and pays a stinky little dividend.

It's easy to look and say -- geez! They're going up big time and I'm losing out... and that MAY be true enough.. and yes... I think we're on the road to a housing recovery based on the bids for property my buddy just got on his 5 acres (6 bidders slugging it out!).

SO HERE'S MY TAKE: This is gambling... you're gambling that there is a SUSTAINED (2 to 5 years) housing turnaround.. and at this point if there is one LITTLE hiccup in the numbers - you're going to see these sell off big time... and the dividends aren't the kind that will make you comfortable waiting for 'em to come back. So while I might miss a nice double over the next couple years - I might also miss getting my azz handed to me.

Remember that in investing - you have CHOICES... and if you make a wrong choice -- you get a double negative for your effort. The double negative is that you loose on the bet - and since your bet is now tied up - something else is on the move up. So you lost and you lost the ability to catch the ride on the upside... that's a double negative in my book.

So here's my thought when choosing investments -- you look -- like at a pretty girl - it's okay to constantly be looking... but you don't need to risk your marriage going on a date. Yes - the upside is appealing - everyone loves to hit a big winner.... but the downside is just not worth "the risk". Europe hiccups - we hiccup - the tax law changes (vote OBAMA if you want to continue on a downward "entitlement" slide ala Europe) that might happen etc... and there's a lot of risk to a shaky recovery at this point. And since you don't get paid to wait - why bother.

[bdahlg68]

Greg - any thoughts on coal? They don't seem to have recovered well from 2008 yet. Also gambling, but thinking about picking some up some small positions in the likes of ACI or ARLP.

[GregWeld]

Originally Posted by bdahlg68

Greg - any thoughts on coal? They don't seem to have recovered well from 2008 yet. Also gambling, but thinking about picking some up some small positions in the likes of ACI or ARLP.

I don't know anything about coal - or commodities like that. I don't have investments in anything along those lines.