From one perspective, the answer is yes; from another, no.

 

When you buy a home, are you investing? If you buy it to flip it or buy it as a rental property, the answer is yes. If you buy a home simply to live in it, the answer may be no.

Your home is an expression of your lifestyle, a wonderful setting for your life, and a place you can enjoy in privacy and comfort. As an investment, though, it is essentially illiquid, and its rate of return is no sure thing.

Home values do not automatically increase with time. Buyers learned that lesson in the Great Recession. Simply using the S&P/Case-Shiller home price index as a barometer, house prices today are roughly where they were in 2007 – it has taken the residential real estate market that long to recover from the mortgage meltdown.1

Through the decades, real estate values have risen, and they will probably keep rising for the near term – but perhaps, not as quickly as some buyers hope. Why, exactly?

Home prices are inexorably linked to wages. Over the past year, hourly earnings have grown 2.5%. This has mystified many economists and frustrated others. Normally, when the jobless rate is below 5%, you have much greater wage growth. Six months before the start of the Great Recession (March 2007), the unemployment rate was 4.4% (right where it is now), and wages were growing at 4.2% a year.2,3

Ideally, wage growth keeps pace with rising real estate values. That is not happening now. Across the past year, the 20-city S&P/Case-Shiller home price index has shown home values appreciating at a rate of between 5.5-6% annually. If real estate values continue to climb 6% per year and wages rise just 2.5%, you will soon see buyers priced out of the market – unless, of course, home prices drop because sellers can no longer get the prices they want. That is something prospective sellers (and buyers) ought to keep in mind, plus some other truths.4

The fact is, stocks have appreciated more than real estate in the long run. Through the decades, home values have increased about 4% annually and stocks have increased about 10% annually (albeit with some remarkable year-to-year volatility).1 

Stocks do not need upkeep. You will never need to tear out, reroof, or repaint a portfolio. Houses need all kind of repairs with time, and repair costs can eat into your gains. You must also pay property taxes. If you envision your home as an income-producing asset, that means playing landlord on some level. Many homeowners are not ready to take that step.

Remember that home values tend to rise gradually. If you see your home as an investment, see it as a long-term one. Staying put ten years or more before selling or trading up could help you realize the kind of financial outcome you want.  

 

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – businessinsider.com/buying-your-home-as-an-investment-is-a-1990s-mentality-2017-8 [8/9/17]
2 – epi.org/nominal-wage-tracker/ [9/5/17]
3 – bls.gov/opub/ted/2007/apr/wk2/art01.htm [4/9/07]
4 – ycharts.com/indicators/case_shiller_home_price_index_composite_20 [9/5/17]

 

 What do each of these terms really mean?

Investment management can be active or passive. Sometimes, that simple, fundamental choice can make a difference in portfolio performance.

During a particular market climate, one of these two methods may be widely praised, while the other is derided and dismissed. In truth, both approaches have merit, and all investors should understand their principles.

How does passive asset management work? A passive asset management strategy employs investment vehicles mirroring market benchmarks. In their composition, these funds match an index – such as the S&P 500 or the Russell 2000 – component for component.

As a result, the return from a passively managed fund precisely matches the return of the index it replicates. The glass-half-full aspect of this is that the investment will never underperform that benchmark. The glass-half-empty aspect is that it will never outperform it, either.

When you hold a passively managed investment, you always know what you own. In a slumping or sideways market, however, what you happen to own may not be what you would like to own.

Buy-and-hold investing goes hand-in-hand with passive investment management. A lengthy bull market makes a buy-and-hold investor (and a passive asset management approach) look good. With patience, an investor (or asset manager) rides the bull and enjoys the gains.

But, just as there is a potential downside to buy-and-hold investing (you can hold an asset too long), there is also a potential downside to passive investment management (you can be so passive that you fail to react to potential opportunities and changing market climates). That brings us to the respective alternatives to these approaches – market timing and active asset management (which is sometimes called dynamic asset allocation).

Please note that just as buy-and-hold investing does not equal passive asset management, market timing does not equal active asset management. Buy-and-hold investing and market timing are behaviors; passive asset management and active asset management are disciplines. (A portfolio left alone for 10 or 15 years is not one being passively managed.)

Active investment management attempts to beat the benchmarks. It seeks to take advantage of economic trends affecting certain sectors of the market. By overweighting a portfolio in sectors that are performing well and underweighting it in sectors that are performing poorly, the portfolio can theoretically benefit from greater exposure to the “hot” sectors and achieve a better overall return.

Active investment management does involve market timing. You have probably read articles discouraging market timing, but the warnings within those articles are almost always aimed at individual investors – stock pickers, day traders. Investment professionals practicing dynamic asset allocation are not merely picking stocks and making impulsive trades. They rely on highly sophisticated analytics to adjust investment allocations in a portfolio, responding to price movements and seeking to determine macroeconomic and sector-specific trends.

The dilemma with active investment management is that a manager (and portfolio) may have as many subpar years as excellent ones. In 2013, more than 80% of active investment managers outperformed passive investments indexing the S&P 500 (which rose 29.60% that year). In 2011, less than 15% did (the S&P was flat for the year).1,2

The two approaches are not mutually exclusive. In fact, many investment professionals help their clients use passive and active strategies at once. Some types of investments may be better suited to active management than passive management or vice versa. Similarly, when a bull market shifts into a bear market (or vice versa), one approach may suddenly prove more useful than the other, while both approaches are kept in mind for the long run.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – forbes.com/sites/investor/2015/03/30/active-versus-passive-management-which-is-better/ [3/30/15]
2 – macrotrends.net/2526/sp-500-historical-annual-returns [2/2/17]

The two should not be confused.

What is risk? To the conservative investor, risk is a negative. To the opportunistic investor, risk is a factor to tolerate and accept.

Whatever the perception of risk, it should not be confused with volatility. That confusion occurs much too frequently.

Volatility can be considered a measurement of risk, but it is not risk itself. Many investors and academics measure investment risk in terms of beta; that is, in terms of an investment’s ups and downs in relation to a market sector or the entirety of the market.

If you want to measure volatility from a very wide angle, you can examine standard deviation for the S&P 500. The total return of this broad benchmark averaged 10.1% during 1926-2015, and there was a standard deviation of 20.1 from that average total return during those 90 market years.1

What does that mean? It means that if you add or subtract 20.1 from 10.1, you get the range of total return that could be expected from the S&P two-thirds of the time during the period from 1926-2015. That is quite a variance, indicating that investors should be ready for anything when investing in equities. During 1926-2015, there was a 67% chance that the S&P could return anywhere from a 30.2% yearly gain to a 10.1% yearly loss. (Again, this is total return with dividends included.)1

Just recently, there were years in which the S&P’s total return fell outside of that wide range. In 2013, the index’s total return was +32.39%. In 2008, its total return was -37.00%.2

When statisticians measure the volatility of major indices like the S&P 500, Nasdaq Composite, or Dow Jones Industrial Average, they are measuring market risk. Trying to measure investment risk is another matter.

You can argue that investment risk is not measureable. How can investors measure the probability of a loss when they invest? Even after they sell an investment, can they go back and calculate what their risk was at the time they bought it? They only know if they made money or not. Profit or loss says nothing about risk exposure.

Most experienced investors do not fear volatility. Instead, they fear loss. They think of “risk” as their potential for unrecoverable loss.

In reality, most apparent “losses” may be recoverable given enough time. True unrecoverable losses occur in one of two ways. One, an investor sells the investment for less than what he or she paid for it. Two, some kind of irrevocable change happens, either to the investment itself or to the sector to which the investment belongs. For example, a company goes totally out of business and leaves investors with worthless securities. Or, an innovation transforms an industry so profoundly that it renders what was once a leading-edge company an afterthought.

Accepting risk means accepting the possibilities of equity investing. The range of possibilities for investment performance and market performance is vast. History has shown that to be true, history being all we have to look at. It fails to tell us anything about the negative (or positive) disruptions that could come out of nowhere to upend our assumptions. A “black swan” (terrorism, a virus, an environmental crisis, a quick evaporation of investor confidence) is always a possibility. Next year, the performance of this or that sector or the small caps or blue chips could be spectacular. It could also be dismal. It could certainly fall in between those extremes. There is no way to calculate it or estimate it in advance. For the equities investor, the future is always a flashing question mark, regardless of what history tells or pundits predict.

Diversification helps investors cope with volatility & risk. Spreading assets across various investment classes may reduce a portfolio’s concentration in a hot sector, but it also lessens the possibility of a portfolio being overweighted in a cold one.

Volatility is a statistical expression of market risk, constantly measured. Volatility, however, should not be confused with risk itself.

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – fc.standardandpoors.com/sites/client/generic/axa/axa4/Article.vm?topic=5991&siteContent=8088 [3/31/16]
2 – ycharts.com/indicators/sandp_500_total_return_annual [3/31/16]

Even the most seasoned investors are prone to their influence.                                                                                                   

Investors are routinely warned about allowing their emotions to influence their decisions.  They are less routinely cautioned about letting their preconceptions and biases color their financial choices.

In a battle between the facts & our preconceptions, our preconceptions may win. If we acknowledge this tendency, we may be able to avoid some unexamined choices when it comes to personal finance. So it may actually “pay” us to recognize our biases as we invest. Here are some common examples of bias creeping into our financial lives.

Valuing outcomes of investment decisions more than the quality of those decisions. An investor thinks, “I got a great return off of that decision” instead of thinking, “that was a good decision because ______.”

How many investment decisions do we make that have a predictable outcome? Hardly any. In retrospect, it is all too easy to prize the gain from a decision over the wisdom of the decision, and to therefore believe that the decisions with the best outcomes were in fact the best decisions (not necessarily true).

Valuing facts we “know” & “see” more than “abstract” facts. Information that seems abstract may seem less valid or valuable than information that relates to personal experience. This is true when we consider different types of investments, the state of the markets, and the health of the economy.

On Main Street, we find a classic example in Gallup’s U.S. Economic Confidence Index. In the August edition of this monthly poll of more than 3,500 U.S. adults, 55% of respondents said the American economy is “getting worse” instead of better. In fact, more Americans have told Gallup that the economy is getting worse rather than better since March.1

This flies in the face of the declining jobless rate, the strong hiring of 2015, the comeback of the housing market, and key surveys showing years of consistent monthly growth in the manufacturing and service sectors – but in all probability, these poll respondents are not looking at economic indicators when they make such a judgment. Their neighbor was laid off, or there was a story on the nightly news about a new homeless camp growing in size. These are facts they can “see” – and therefore, in their minds the economy is getting worse.1

Valuing the latest information most. In the investment world, the latest news is almost always more valuable than old news… but when the latest news is consistently good (or consistently bad), memories of previous market climate(s) may become too distant. If we are not careful, our minds may subconsciously dismiss the eventual emergence of the next bear (or bull) market.

Being overconfident. The more experienced we are at investing, the more confidence we have about our investment choices. When the market is going up and a clear majority of our investment choices work out well, this reinforces our confidence, sometimes to a point where we may start to feel we can do little wrong thanks to the state of the market, our investing acumen or both. This can be dangerous.

The herd mentality. You know how this goes: if everyone is doing something, they must be doing it for sound and logical reasons. If most investors are getting out of equities, or getting back into equities, it follows that you should follow them. The herd mentality is what leads many investors to buy high (and sell low). It can also promote panic selling. Above all, it encourages market timing – and when investors try to time the market, they frequently realize subpar returns.

Did you know that American retail investors held equity shares for an average of 6.3 years during the 1950s? That duration kept shortening until the 2000s, when it was reduced to roughly six months – which is still the average today. We have exponentially greater media coverage of Wall Street today than we had in the 1950s, and that may be the big factor in that difference – but still, you have to wonder how much better the typical investor’s return would be if he or she had the patience of the investors of the past.

Extreme aversion to risk. Some investors want zero risk, or close. What price do they pay in pursuit of that goal? The opportunity cost may be sizable. In building an extremely risk-averse portfolio, they thwart their potential for significant gains when the equity markets advance.

Everyone loves to be certain about things. Sometimes, however, we need to ask ourselves what that certainty is based on, and what it reflects about ourselves. Examining our preconceptions may help us as we invest.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – gallup.com/poll/184640/economic-confidence-index-stable.aspx [8/18/15]
2 – nytimes.com/2014/01/13/your-money/stocks-and-bonds/why-we-buy-in-a-marked-up-market.html [1/13/14]

A good financial strategy is not just about “making money;” it is also about protection.

Some people mistake investing for financial planning. Their “financial strategy” is an investing strategy, in which they chase the return and focus on the yield of their portfolio. As they do so, they miss the big picture.

Investing represents but one facet of long-term financial planning. Trying to build wealth is one thing; trying to protect it is another. An effort must be made to manage risk.

Insurance can play a central role in wealth protection. That role is underappreciated – partly because some of the greatest risks to wealth go unnoticed in daily life. Five days a week, investors notice what happens on Wall Street; the market is constantly “top of mind.” What about those “back of mind” things investors may not readily acknowledge?

What if an individual suddenly cannot work? Without disability insurance, a seriously injured or ill person out of the workforce may have to dip into savings to replace income – i.e., reduce his or her net worth. As the Council for Disability Awareness notes, the average length of a long-term disability claim is nearly three years. Workers’ compensation insurance will only pay out if a disability directly relates to an incident that occurs at work, and most long-term disabilities are not workplace related. Disability insurance can commonly replace 40-70% of an individual’s income. Minus disability coverage, imagine the financial impact of going, for instance, three years without work and what that could do to a person’s net worth and retirement savings.1

What if an individual suddenly dies? If a household relies on that person’s income, how does it cope financially with that income abruptly disappearing? Does it spend down its savings or its invested assets? In such a crisis, life insurance can offer relief. The payout from a policy with a six-figure benefit can provide the equivalent of years of income. Optionally, that payout can be invested. Life insurance proceeds are usually exempt from income tax; although any interest received is taxable.2

Most people want a say in what happens to their wealth after they die. Again, insurance can play a role. At a basic level, those with larger estates may use life insurance to address potentially large liabilities, such as business loans, mortgage payments, and estate taxes. An ILIT may also shield the cash value of a life insurance policy from “predators and creditors.” Beyond that, a sizable life insurance policy can be creatively incorporated into an irrevocable life insurance trust (ILIT), through which an individual can plan to exclude life insurance proceeds from his or her taxable estate.3

Yes, the estate tax exemption is high right now: $5.49 million. Even so, if a person dies in 2017 while owning a $5 million life insurance policy and a $500,000 home, his or her estate would be taxed. An ILIT would be a useful estate-planning tool in such a circumstance.3

Why do people underinsure themselves as they strive to build wealth? Partly, it is because death and disability are uncomfortable conversation topics. Many people neglect estate planning due to this same discomfort and because they lack knowledge of just how insurance can be used to promote wealth preservation.

The bottom line? Insurance is a vital, necessary aspect of a long-term financial plan. Insurance may not be as exciting to the average person as investments, but it can certainly help a household maintain some financial equilibrium in a crisis, and it also can become a crucial part of estate planning.

 

This material was prepared by MarketingPro, Inc., and does not necessarily represent the views of the presenting party, nor their affiliates. This information has been derived from sources believed to be accurate. Please note – investing involves risk, and past performance is no guarantee of future results. The publisher is not engaged in rendering legal, accounting or other professional services. If assistance is needed, the reader is advised to engage the services of a competent professional. This information should not be construed as investment, tax or legal advice and may not be relied on for the purpose of avoiding any Federal tax penalty. This is neither a solicitation nor recommendation to purchase or sell any investment or insurance product or service, and should not be relied upon as such. All indices are unmanaged and are not illustrative of any particular investment.
Citations.
1 – nerdwallet.com/blog/insurance/disability-insurance-explained/ [6/27/16]
2 – tinyurl.com/knroq9u [3/27/17]
3 – thebalance.com/irrevocable-life-insurance-trust-ilit-estate-planning-3505379 [3/21/17]