Right now is an excellent time to consider a refinance as interest rates are near historic lows. Reasons to refinance include lowering your monthly payment, reducing the time period of your loan, to gain an income tax advantage, or to take cash out the equity of your home. Many factors need to be considered before pulling the trigger on a refinance.
The first factor to consider is how long you will be in your home for. If you refinance and then move two years later, you may never see the true benefits of the refinance because of closing costs that you would have to pay on the refinance. Conversely, if you know that you will never leave your home there is an excellent chance that a refinance will be a great benefit to you.
A general rule of thumb is that you would like to see a 2% decrease in an interest rate for your refinance to make sense. A refinance of a $300,000 loan that results in a 2% decrease in interest rate could result in a payment difference in excess of $350 a month. A lower margin can be acceptable, but every case is different.
In some cases, a refinance doesn’t have to have any change in interest rate to help. One example would be a recent case I worked on where a high income couple had substantial student loans, but they were limited in the tax deductions they could take on the student loan interest because of their income. By taking a home equity line of credit and paying off the student loan debt, the interest all became deductible on the client’s Schedule A. Remember to consult a CPA before trying to execute a change like this.
Lower interest rates also provide the opportunity to reduce the term of a loan. In the right situation you could refinance from a 30 year mortgage to a 20 year mortgage, and see your payment only slightly increase or stay the same. Retirement would be a lot easier with no mortgage, especially in light of what health care costs may look like 20-30 years from now.
Refinancing to take cash out of a home can be a risky proposition and must be well thought out. Reasons that may make sense to take cash out would be to make an investment such as a rental property or investment into the stock/bond market. Taking cash out to finance a vacation, to make home improvements, or to pay expenses can result in you losing your home as many did in the 2008 housing crisis.
Lastly, it may be difficult to refinance because so many homes don’t have enough equity or are under water. Look at comparable sales in your area to determine if you may have enough equity in your home for a refinance. As always, consult your financial professionals before making a decision that is irreversible.
Marc J. Morrow, CFP
The fiscal cliff has kept markets on edge and caused huge up and down swings to the S&P 500 in the last month of 2012. Democrats and Republicans have sparred publicly over deals that have been proposed, and so far they haven’t made much progress. The problem has been simmering for 50 years and a positive a solution is required to keep this country from becoming the next Greece.
The fiscal cliff refers to large tax increases and spending cuts that will be enforced at the end of the year unless some agreement is made before then. The fear is that a recession will occur unless something is done. Contrary to popular belief, going off the cliff would not be a terrible thing. American politicians have failed to understand how to complete a very simple task that most were taught in high school: How to balance a checkbook. The automatics tax increases and spending cuts would solve this problem as it simply forces the politicians to do what they were supposed to do a long time ago. Balance a budget! The politicians simply do not have the economic intellectual capacity to make the right economic decisions, and they have proved this over the last 10 years.
It is never that simple though. Nobody wants to see tax increases for 98% of Americans that really can’t afford to pay those taxes right now. But if we had to we could deal with it and we could get by. A mild recession would likely occur, but our budget issues would be on a course of repair, which has proven to be a great thing for the stock market in the past. Both sides of this issue are making critical mistakes and assumptions and the right answers lie somewhere in the middle of what both are proposing. The right answer is moderate tax increases and moderate spending cuts. One side doesn’t want to raise taxes enough and the other doesn’t want to cut expenses enough. A moderate approach would help avoid a short-term recession and improve our long-term debt levels.
Warren Buffet made a quote about a year ago describing how easy it would be for him to solve all of these issues. Essentially he said if the deficit reached a certain level related to GDP that all present members of Congress would not be eligible for re-election. It sounds harsh but could be a necessary cure for the spending sickness the politicians have. If you’re invested in this market and are a long-term investor, nothing should be changed because of the fiscal cliff. In the end going off the cliff could be a better for this country in the long-run, so don’t spend too much time worrying about bickering politicians who don’t understand the economy. If you are retiring soon, you should have been meeting with your financial advisors long ago in order to reduce your risk.
Marc J. Morrow, CFP®
Most investors with investable assets over $100,000 use a financial advisor that charges a 1% management fee. This service usually includes quarterly meetings with your advisor, account statements with economic reports, and a broad selection of mutual funds to choose from. This arrangement is viewed as beneficial as the advisor has financial incentives to grow your account as compared to the commission sale where the advisor has little incentive to help the client after the transaction.
I propose that in most cases the 1% management fee is a waste for the investor. The primary reason is that there are a large number of advisors that are simply not qualified to do their job. It is difficult and unfair to blanket my profession so I want to be very specific here. There are over 300,000 advisors in the United States and there are only 66,187 CFP’s. There are roughly the same number of CFA’s out there but most do not practice individual financial planning. My argument is that most advisors that do not carry one of these certifications do not possess the required skills to effectively manage client portfolios. Many have not experienced a recession as an advisor and many have been in the business for less than 5 years.
I’m willing to submit that over 50% of financial advisors do not know what a Rank In Category means. Personally, I have only met three advisors that did not have a CFP or CFA that knew what it meant, and none of those used an Investment Policy Statement (IPS), another critical piece to the investment management process. I routinely here stories from new clients explain how they lost 45% or more in 2008, when the S&P 500 was down 37%. Part of the problem is poor training. Part is poor education. Part is because some of the best advisors at sales often have the lowest personal finance skill sets. Lastly, if you work for a broker dealer, you are required to do what is in the best interests of the firm, not what’s in the best interest of the client, as required by a CFP.
There are a few companies out there that do mutual fund selection, quarterly rebalancing, and reporting for a 1% fee on an automated basis and some advisors are moving to this platform. An advisor that is a personal friend recently admitted to me that he did not have the ability to properly manage client portfolios before this service was available to him. Another advisor that has been in business for over 10 years admitted that he had never heard of an IPS.
The process of mutual fund selection is already becoming automated, and soon there will be services available that will be automated, cheaper, and more effective than paying an advisor a 1% management fee. There are plenty advisors out there that are more than qualified and deserve a 1% management fee, but you have to choose your advisor carefully to get your money’s worth. Clients will still want to meet with an advisor face to face so that market will never go away. The consumer who has been burned in the past will have new options in the future that will be more cost effective and will be able to do it without a financial advisor.
Marc J. Morrow, CFP®
Purchasing a car is usually the 2nd biggest financial transaction you will make outside of your house. The mistakes that can be made are numerous and the decisions endless. The folks at www.intellichoice.com have made things a lot easier. There are links below to these topics that will help you out. Follow these guidelines and you should save thousands off every car purchase.
A great part of this site is that you can see the 5 year estimated costs of owning a vehicle. The value here is tremendous. You may be comparing two cars and find that one is $1,500 cheaper than the other. After using Intellichoice, you may find that the 5 year costs of ownership are actually $3,000 more with the cheaper car. To use this feature, click on either new or used cars from the home page and begin selecting criteria for cars you are interested in and compare the five years costs of each.
Buy Vs. Lease
In short, leasing sometimes is better but is usually a bad deal overall. Click here to see why.
Pay cash or take out a loan?
Usually paying in cash is better. Click here to what IntelliChoice says.
New or Used?
Generally buying used is a better deal. Click here for an explanation.
The topics are endless and include:
Alternative Fuel and Hybrid Vehicle
Is an Electric Vehicle Right For You?
Trading In Your Old Car
The Golden Rule of Car Buying
Why Ownership Costs are Important
Preparing for Negotiations: Knowledge is Power
Getting Ready to Negotiate
Value Defined: An inexpensive car to buy could be expensive to own
Standing vs. Running Costs
What is a Good Value?
Used Car Research Overview
Certified Pre-Owned Program Overview
Don’t Get Soaked Buying a Used Car
If you saved $2,000 every time you purchased a car, and bought a car every 8 years, you would save $10,000 over 40 years!!!
Marc J. Morrow, CFP
Last week we saw Facebook go public, and it looks like the investment world agrees with my earlier comments on Facebook. The stock is clearly over-valued and there are a number of concerns with FB that won’t be repeated here. We are seeing other social media companies that might be more fairly valued also taking a hit today.
The stock market has sold off in the last few weeks despite strong financial results for the quarter from individual companies. The downturn is undoubtedly due to uncertainty in Europe, but the concerns are overblown. Warren Buffet has made a sizable investment in GM, which has a large operation in Europe. The world’s greatest investor doesn’t make mistakes often, and the investment signifies that the global economy is doing fine.
Boeing recently announced profits that beat expectations, they increased their guidance for the year, but the stock has declined from around $77 a share to around $70 a share. Hopefully the stock continues to slide, as there appears to be tremendous value here as the aerospace business continues to experience excellent growth. Another company to keep an eye on in this space is BE Aerospace, symbol BEAV. This is a much smaller company but has been posting excellent results for the last several quarters and the stock has also recently declined with the overall market.
Market corrections are common and healthy. What is happening right now will create excellent buying opportunities for smart money managers. Investors are still pulling money out of equity mutual funds, which is a clear contrarian signal that the market will have a healthy rebound. Be patient with your investments and you will be rewarded.
Marc J. Morrow, CFP
Facebook goes public today, 10 minutes from this writing. The smart money may trade this at the open, then sell within a 10-60 minute time period. Facebook is a great company, but the stock is horribly over-valued, and the real money to be made in the 6 months is likely to be shorting this stock. Concerns for Facebook include excessive valuation, the world’s 3 largest advertiser leaving (GM), difficulty making money off mobile users, and recent profits that did not have sequential growth from the last quarter. Let’s see how it plays out. I would expect a pop at the open. It should be exciting to watch.
A major investment dilemma is developing within portfolios due to the low yield that bonds are paying and the potential for a bond market bubble explosion. Abby Joseph Cohen of Goldman Sachs recently stated that owning bonds may be more risky than owning stocks in this market. The danger is that interest rates will eventually begin edging back up, resulting in a loss of principal to your bond portfolio. The simplest way to view this is that it is an inverse relationship. When interest rates go up, bond prices go down. The Federal Reserve has stated that they will not increase interest rates until 2014, meaning that the only way rates are going up from here is if the market pushes them there.
I’ve been following Jim Carmer’s international stock recommendations from about a year ago. He is down about 14%. One of his picks, Banco Santander, is down 53%. He made this pick in the middle of Europe debt crisis last year. Starting to think if you do the opposite of what this guy says you can make a lot of money.
Cramer is pretty much a tool that makes investment decisions on a notion. He made a sell recommendation on ZAGG on Monday which sent shares from $11.10 to $10.60. Apple blew out earnings, and ZAGG is now trading at $12.02. ZAGG is considered an Apple play because they make accesories for cell phones. Betting against Apple is generally a very bad idea these days. Be very careful in taking any advice from this guy. His track record is notorious.
In personal finance there can be advice given or received that is contrary to facts, is false, or is misleading. At work you may meet a co-worker at the water cooler and discuss some of these topics. A few common topics you might hear are:
Paying off the mortgage early is a good thing
It is best to pay off high interest rate credit cards first
Owning cheap index funds is the best way to invest
Receiving a large tax refund is a good thing
Paying off a mortgage early will surely reduce the total amount of interest you pay to the bank and result in no mortgage payments at an early date. A more detailed calculation is required however to see if this will actually help you. Factors included would be your current interest rate, the rate you could earn on a conservative mutual fund portfolio if you invested instead, your effective tax rate, and the time until you retire to name a few. MorrowMoney.com has designed a complex spreadsheet that can take into account these factors and help you make the right decision with respect to paying off a mortgage early. The wrong decision could cost you anywhere from $100-$500k or more.
Popular opinion says that you should pay off your high interest debt first, which sometimes can be the best way to go. Much more important is to pay off smaller debts first because it results more cash flow available to pay down the bigger balances. MorrowMoney.com has also designed a formula to determine which debts should be paid off first. If one of your high interest rate cards is also a high balance, it could take years to pay off. You will have better results by paying off smaller debts first. For example, would it be more effective to immediately make $300 payments towards a large, high interest debt, or wait a year and make payments of $900 a month towards the same debt? It’s usually going to be the latter. The math can be complex, but a good adviser should be able to simplify it for you.
Most people believe that owning mutual funds with the lowest expenses ratios is the best way to go, but what is the cost relative to the value? Those who have read my previous blogs know that I do not believe in index funds because you are guaranteed to lose exactly what the index loses in a downmarket. The best mutual fund managers are paid as such, so their expenses are typically a little higher. That being said, you can still find excellent no-load funds with expenses ratios below 1.25%. Settling on an index fund is settling for mediocracy, which is a word that does not exist in my vocabulary.
Tax time is here and most consumers look forward to a large tax refund, but they could be hurting themselves. It is not uncommon to see a family receiving an $8,000 refund, but they don’t have enough money to cover their monthly expenses. This often leads to credit card debt and makes it difficult if not impossible to save. The large refund is only an interest free loan to the government. A W-4 shift will allow you to reduce your tax withholding and place more money in your wallet each paycheck. Consult your tax adviser on how to execute this change.
The bottom line is to be very careful who you listen to regarding personal finance matters. No matter what you hear, including here, the advice might not be right for you. Everybody has a different situation, and you should consult your CERTIFIED FINANCIAL PLANNER regarding any outside advice you receive.
Marc J. Morrow, CFP®
Apple’s stock valuation has been a popular topic lately as the share price approaches $560 a share and the total market capitalization passes $500 billion, making it the most valuable company in the world. Market capitalization equals the current share price of the stock multiplied by the number of shares that are outstanding. One camp says the stock can go much higher and the other argues that the larger Apple becomes, the more difficult it becomes to beat earnings expectations.
The average stock price target for Apple is about $650 a share, and the stock is still relatively cheaply priced with a trailing Price to Earnings Ratio of just under 15 and a forward P/E ratio of 11. Revenues in 2011 increased at over a 70% rate compared to 2010 and earnings increased at over a 117% rate. By all basic valuation methods Apple appears to be undervalued, even at these elevated stock price levels. There doesn’t seem to be any slowdown with iPhone sales or iPad sales either. In the 4th quarter of 2011, 37 million iPhone’s were sold and 4.2 million iPad’s were sold. Both of these products should help Apple generate increasing revenues and profits for several years.
We also have no idea what the new Apple TV is going to be. Apple TV already exists but is not currently an impressive technology. It is a software program that runs through your current TV. Advantages to this product include receiving new Hollywood titles often on the same day they are released on DVD and not having to worry about a movie being out of stock. TV shows can also be watched without commercial interruption for $1.99 in SD or $2.99 in HD. Apple TV also allows you to transfer data including songs, movies, TV shows, and photos from your computer to your TV. What will the new product be? Could it be an actual TV that includes Siri? That would be pretty cool if you could tell your TV what to do. The current product has some neat features but isn’t enough yet to make the product a hit. If Apple TV is done right, they could take a huge share of that market, get customers to pay a higher price for the product, and provide one of the coolest technologies out there. I don’t want to get too excited about Apple TV because the product details are all speculation right now, but this might be the only catalyst to take the stock above $1,200 in the next few years.
The skeptics of Apple argue the law of large numbers will take effect. This law states that the larger a company becomes, the more difficult it becomes to beat prior year earnings expectations. The concept has a great deal of validity and it will eventually become a problem for Apple. The same thing happened to Microsoft and the stock pretty much did nothing for a 10 year period, despite fairly decent financial results. Microsoft did make several tactical mistakes in business execution and strategy. Apple has already made a small mistake, and it hasn’t hurt the company terribly. Steve Jobs was asked how he felt about his stock price by Warren Buffet when the stock was still in the $200’s, and Buffett advised him to buy back stock because Jobs was confident the stock was grossly undervalued. Jobs didn’t listen and sat on billions of cash that has done nothing for the company. The missed move by Jobs may have cost the company $15 billion. One could argue that these are the kind of mistakes that can compound and cause larger problems for larger companies. This move would not hurt them as much as Apple TV turning out to be a bust. Apple will get to a point where it gets too big to keep beating profit estimate by, but it could be a while before this happens.
It’s clear to most smart phone users that the iPhone and the Droid are the two most popular phones on the market. iPhone market share is only 5.6% worldwide, and still has plenty of room to grow. iPad market share is roughly 60%, and is clearly the market leader in the segment, but is facing competition from various other products on the market. On the upside, the market for tablets is expanding at a high rate, and Apple should be able to maintain at least a 50% market share.
Based on the performance of the company, Apple could easily warrant a trailing P/E ratio of 22, placing the stock price at over $765 and the market valuation over $700 billion, and still be trading at a discount to its growth rate. This assumes that Apple continues to succeed as it has in the past with the iPhone and iPad. It also assumes no revenue from the Apple TV. The reality may be that the Apple TV would need to be a big hit for Apple to get to a P/E of 22. A valuation of $1,200 a share for Apple is not out of the question by the end of 2013 assuming continued iPhone sales, iPad sales, and a successful new Apple TV product. If that happens I would consider selling at that point. The other great strategy would be to place a stop loss 20-25% below the current market price of the stock and continue to increase the stop as the price increases. This will guarantee a significant profit for those of you who are long Apple at $200 or less. The stock is off recent highs of almost $550 and is trading at $521 on Tuesday morning. Buying on dips will likely pay off based on the current Apple valuation. If Apple continues to perform, purchasing leap options would also be very profitable. There is certainly a little more risk purchasing Apple today than there was a few years ago. If you use stop losses on your position, you can lock in your gains, or limit losses, and you are protected if the law of large numbers takes over.
My price target for Apple is therefore $765 for the end of 2012 and $1,000 for the end of 2013. These numbers are based on the ability of Apple to continue to gain market share with the iPhone and continue to sell iPad’s at an increasing rate, though losing a small amount of market share. Apple TV’s successful upgrade is the only way it gets to $1,200, and could keep Apple stuck under $700 if it fails to impress.
I have family members and clients that are long Apple stock, and clients that own January 2013 call options with a strike price of $570.
Marc J. Morrow, CFP®
Over the next year I will be researching mutual fund investing and how to make it easier for the investment public. Below are some topics I will be addressing along with a brief review of each:
1) Mutual Fund Expenses Ratios. Expense ratios are important but are highly overrated. Selecting only the lowest cost mutual funds removes some of the best performing funds from your portfolio. It’s simple. You get what you pay for. The best managers are paid well because they perform.
2) Cherry Picking Funds. The best way to invest in mutual funds is to purchase no-load funds that are available from most of the large online brokerage houses. If you have over $50,000 invested in you are only investing with one mutual fund company, portfolio performance will suffer because no one fund company can provide top performance adjusted for risk in every asset class. Most investors can’t cherry pick because they have the wrong type of account.
3) Index Funds. Index funds perform just as poorly as the index when the market declines. Investors have no choice but to suffer losses equal to the market, meaning there is no protection in a down market. Index funds are often used because they have low expenses and most mutual funds underperform their peer group. Actively managed funds are popular in one respect because they can sell in a down market and hopefully lose less than the index does. Both schools of thought are correct, but neither provides a legitimate solution to the problem of underperformance.
4) Actual Performance. Historical returns for the stock should be around 10% but the average investor has experienced about a 4.5% return. This is because investors allow their emotions to take over, and bad decisions are made at the wrong time. Human begins experience fear when markets perform badly, sending a chemical response to the brain which results in a sale of their investments at the wrong time. Human beings were not built to be successful investors. To have success, we must realize what is happening in a down market, and typically do the opposite of what our first instinct is.
Let me know what your experiences with mutual funds have been.
Marc J. Morrow, CFP®
This tip is a free sample of the MorrowMoney Saver which costs $12.99 a month.
If you have at least a fairly decent driving record, go to Geico, State Farm, Progressive, or Response and receive an online quote. It works if you don’t have a good driving record but not as good. If they ask you for how much you are paying currently (Geico), enter an amount $300-$500 less than you are paying. Typically they come back with an offer $100 less than what you enter. If this tip works for you, please e-mail me and tell me how much you saved. When this strategy works, morrowmoney.com clients save $400 per year on average per person. If you’re driving record is clean, you should not pay more than $900 a year for insurance and could get it as cheap as $500 a year. I’m personally trying a new feature through Progressive right now. It’s a tracking device they put on your car for 30 days. If Progressive likes what they see, they will knock up to an additional 30% off your bill. Please note that some carriers will not give you a good online quote. If you call you have a better chance of a significant premium reduction.
Make sure to you compare apples to apples when you get your price quote and get the same or better coverage before you decide to switch. It is critical that you maintain the same auto coverage. In some cases you may be under-insured, and may need to increase your coverage. You should have uninsured motorist coverage as there are a high number of drivers without insurance right now. Your policy needs should be reviewed with an insurance agent to ensure you have the proper coverage based on your net worth.
If this works, you may want to take the savings and purchase umbrella coverage. To purchase umbrella insurance, you must be maxing out your auto limits.
If you saved $400 a year for 20 years and earned 10% on that investment, the account would grow to $22,910!
Marc J Morrow, CFP®
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