Posts
Hello everyone.
Sorry for not keeping these articles coming. I have been busy raising a family and pursuing my other interest of composing original instrumental rock/jazz music on keyboards and drums. If interested, you can follow my fan page on facebook at www.facebook.com/olecrammusic. You can also follow me on YouTube with my channel www.youtube.com/olecrammusic or on Twitter www.twitter.com/olecrammusic. Having said that, I wanted to provide a summary here that provides links to all my past key articles for easy, quick reference. Thank you all for being loyal readers. My best wishes to you.
Ole Cram
This is a table of contents for all previous key articles. Provided for quick access.
Understanding accredited investors:
Understanding accredited investors
http://accreditedinvestortalk.blogspot.com/2008/03/undestanding-accredited-investors.html
What differentiates a successful accredited investor? What makes them successful?
http://accreditedinvestortalk.blogspot.com/2008/08/part-1-what-differentiates-successful.html
You may be an accredited investor and not know it
http://accreditedinvestortalk.blogspot.com/2008/03/you-may-be-accredited-investor-and-not.html
General articles:
Being laid off? Think about becoming an entrepreneur
http://accreditedinvestortalk.blogspot.com/2009/03/being-laid-off-think-about-becoming.html
The cost of borrowing from your tax deferred account
http://accreditedinvestortalk.blogspot.com/2009/02/cost-of-borrowing-from-your-tax.html
Understanding inflation and how it affects you
http://accreditedinvestortalk.blogspot.com/2009/01/part-1-understanding-inflation-and-how.html
Understanding debt and mortgage related:
Understanding debt (what it really costs you and how to get out of it)
http://accreditedinvestortalk.blogspot.com/2008/12/understanding-debt-credit-card-trap.html
Should you pay off your mortgage early?
http://accreditedinvestortalk.blogspot.com/2009/04/should-you-pay-off-your-home-mortgage.html
Fallacy of buying a home for the tax deduction
http://accreditedinvestortalk.blogspot.com/2008/09/fallacy-of-buying-home-for-tax.html
Investing in general:
Why do you need to earn a higher rate than the percentage of investment loss?
http://accreditedinvestortalk.blogspot.com/2009/03/why-do-you-need-to-earn-higher-rate.html
Don't let fear drive your investment decisions
http://accreditedinvestortalk.blogspot.com/2009/02/dont-let-fear-drive-your-investment.html
Understanding compounding interest
http://accreditedinvestortalk.blogspot.com/2008/12/part-1-compounding-interest.html
Psychology of trading - how pros count on emotional amateurs
http://accreditedinvestortalk.blogspot.com/2008/12/understanding-debt-strategies-for.html
Investing in stocks/options:
Stocks - Understanding the use of margins
http://accreditedinvestortalk.blogspot.com/2008/11/stocks-understanding-use-of-margins.html
Understanding stocks - how businesses generate funds from initial sale of stock
http://accreditedinvestortalk.blogspot.com/2008/11/understanding-stocks-atm-for-business.html
Understanding options
http://accreditedinvestortalk.blogspot.com/2008/10/options-understanding-puts-making-money.html
Stocks: Understanding stock shorting - making money when a stock price goes down
http://accreditedinvestortalk.blogspot.com/2008/09/stocks-understanding-stock-shorting.html
Investing in oil and gas drilling ventures:
Almost everything you need to know about oil and gas drilling investments
http://accreditedinvestortalk.blogspot.com/2008/09/almost-everything-you-need-to-know.html
An example of a combined Oil and Gas and Real Estate investment
http://accreditedinvestortalk.blogspot.com/2008/09/combined-oil-gas-and-real-estate.html
Thank you again for following my articles. I hope they have been of some benefit to you with your financial goals.Ole Cram
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Sphere: Related Content
Thursday, January 19, 2012
Sunday, April 26, 2009
Part 3: Should you pay off your home mortgage early?
Overview
This is the third in a series of articles on whether you should pay off your home loan early. In the first article, I covered the importance of considering the opportunity cost, tax consequences, and whether you have other debts to consider paying off first. In the second article, I provided examples of paying cash for your home in only about 10 years with no loan. In this article, I will continue the previous article buy providing an alternative of keeping your funds invested longer before taking out cash to buy your home. A future article will continue this series providing various scenarios for paying extra on your existing mortgage to accelerate payoff of your mortgage debt.
Recap of using a $100,000 mortgage in these articles
For simplicity, I use a $100,000 mortgage in all of these articles. That way you can simply multiply all numbers in the articles by the multiplier that matches your home mortgage. If you have a $200,000 mortgage, then use a multiple of 2 (your $200,000 mortgage divided by $100,000 mortgage of my articles gives a multiple of 2). If you have a $500,000 mortgage, then the multiple would be 5, etc. Just divide your mortgage by $100,000 to get the multiple to use.
Choosing to buy your home with cash
Recall in the previous article that I showed how you could pay cash for your home after only about 10 years of investing. The benefit of doing so is that you never need to have a mortgage and your reward for waiting 10 years to buy the home is a home free of debt. From that point forward, you can continue investing to create wealth for retirement or other plans you may have.
However, using you full investment funds to pay cash for a home would lose the momentum of compounding interest that kicks in strongly at about that same time. In the previous article, I showed how investing instead of making a mortgage payment for 30 years would provide a balance around $500,000 to well over $1,000,000 that would be lost if all funds were withdrawn to buy the $100,000 house. Therefore, another alternative would be to wait until your investments reached a $200,000 balance before removing $100,000 to pay cash for the home. This way the other $100,000 balance would be large enough to continue compounding into a significant sum after 30 years. In fact, waiting for your investments to grow from $100,000 to $200,000 will not take near as long as the first $100,000 did. In the last article, I showed the time it took to reach $100,000 for the different investing scenarios. Here I will repeat those tables and add another line showing how long it will take to reach $200,000 under those same investing scenarios.
When would you have $200,000 to buy the house with $100,000 cash and keep $100,000 to compound?
If $536.82 per month were invested instead of used to pay a 5% mortgage, you would have $100,000 and $200,000 by:
If $599.55 per month were invested instead of used to pay a 6% mortgage, you would have $100,000 and $200,000 by:
If $665.30 per month were invested instead of used to pay a 7% mortgage, you would have $100,000 and $200,000 by:
If $733.76 per month were invested instead of used to pay a 8% mortgage, you would have $100,000 and $200,000 by:
What would your 30 year investment balance be under these scenarios?
Here I will show three different 30 year ending balances for each monthly investment scenario. The $0 line assumes you never remove funds from the account to show what the ending balance would have been. The $100k line assumes $100,000 is removed immediately when the funds reach that amount and then the monthly investment is continued through the 30 years. The $200k line assumes $100,000 is removed only when the account balance reaches $200,000 and then the remaining $100,000 is compounded along with the addition of continued monthly investments.
Investing $536.82 per month (a 5% mortgage payment) for 30 years would provide the following ending balances:
If $599.55 per month (a 6% mortgage payment) for 30 years would provide the following ending balances:
If $665.30 per month (a 7% mortgage payment) for 30 years would provide the following ending balances:
If $733.76 per month (a 8% mortgage payment) for 30 years would provide the following ending balances:
Opportunity cost of both options
Opportunity cost is the difference between what would have been earned by investing without withdrawing funds to buy a house and either the $100k balance or $200k balance option ending balances shown above. For example, in the $599.55 monthly investment table above you see at 8% you would have had an account balance of $893,545. However, if you chose to withdraw $100,000 to buy the house immediately when $100,000 was in the account, your 30 year ending balance would only be $377,408. The difference of $516,137 ($893,545 - $377,408) is the lost opportunity, funds you lost by withdrawing the $100,000 immediately. You can think of this as the $100,000 house costing you $616,137 over 30 years since you paid $100,000 and lost another $516,137 in opportunity cost.
If you chose to wait until the account had $200,000 to withdraw $100,000 for purchase of the house, then you 30 year ending balance would be $556,195. The difference of $337,350 ($893,545 - $556,195) is a much less opportunity loss. However, the house still cost you $437,350 or your $100,000 paid and the $337,350 opportunity cost.
Both of these total costs of your house are much less than taking out a 30 year mortgage with the associated monthly payment where you end up paying several times your home price in interest. You also lose out on the monthly investment and associated compounded balance had you invested the monthly mortgage payment over 30 years instead, as seen in the examples above. If you think about it, purchasing a $100,000 home with a mortgage could cost you well over $1,000,000 and even closer to $2,000,000 with the combined opportunity loss from no investment and the loss from paid interest over 30 years to the bank. Most sophisticated accredited investors understand this fact and wait for this reason to pay cash for their home. They would much rather pur their money to work making more money than give it to a bank in interest payments.
Summary
You can see how having patience to put off purchases and being a debt-free investor can help you create large wealth over your lifetime. I plan to continue this series on paying down mortgages so stay tuned.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below (viewable on blog site only): Sphere: Related Content
This is the third in a series of articles on whether you should pay off your home loan early. In the first article, I covered the importance of considering the opportunity cost, tax consequences, and whether you have other debts to consider paying off first. In the second article, I provided examples of paying cash for your home in only about 10 years with no loan. In this article, I will continue the previous article buy providing an alternative of keeping your funds invested longer before taking out cash to buy your home. A future article will continue this series providing various scenarios for paying extra on your existing mortgage to accelerate payoff of your mortgage debt.
Recap of using a $100,000 mortgage in these articles
For simplicity, I use a $100,000 mortgage in all of these articles. That way you can simply multiply all numbers in the articles by the multiplier that matches your home mortgage. If you have a $200,000 mortgage, then use a multiple of 2 (your $200,000 mortgage divided by $100,000 mortgage of my articles gives a multiple of 2). If you have a $500,000 mortgage, then the multiple would be 5, etc. Just divide your mortgage by $100,000 to get the multiple to use.
Choosing to buy your home with cash
Recall in the previous article that I showed how you could pay cash for your home after only about 10 years of investing. The benefit of doing so is that you never need to have a mortgage and your reward for waiting 10 years to buy the home is a home free of debt. From that point forward, you can continue investing to create wealth for retirement or other plans you may have.
However, using you full investment funds to pay cash for a home would lose the momentum of compounding interest that kicks in strongly at about that same time. In the previous article, I showed how investing instead of making a mortgage payment for 30 years would provide a balance around $500,000 to well over $1,000,000 that would be lost if all funds were withdrawn to buy the $100,000 house. Therefore, another alternative would be to wait until your investments reached a $200,000 balance before removing $100,000 to pay cash for the home. This way the other $100,000 balance would be large enough to continue compounding into a significant sum after 30 years. In fact, waiting for your investments to grow from $100,000 to $200,000 will not take near as long as the first $100,000 did. In the last article, I showed the time it took to reach $100,000 for the different investing scenarios. Here I will repeat those tables and add another line showing how long it will take to reach $200,000 under those same investing scenarios.
When would you have $200,000 to buy the house with $100,000 cash and keep $100,000 to compound?
If $536.82 per month were invested instead of used to pay a 5% mortgage, you would have $100,000 and $200,000 by:
| Balance | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| $100k | 13 years | 11 years | 11 years | 10 years |
| $200k | 21 years | 18 years | 16 years | 15 years |
If $599.55 per month were invested instead of used to pay a 6% mortgage, you would have $100,000 and $200,000 by:
| Balance | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| $100k | 12 years | 11 years | 10 years | 9 years |
| $200k | 19 years | 17 years | 15 years | 14 years |
If $665.30 per month were invested instead of used to pay a 7% mortgage, you would have $100,000 and $200,000 by:
| Balance | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| $100k | 11 years | 10 years | 9 years | 9 years |
| $200k | 18 years | 16 years | 14 years | 13 years |
If $733.76 per month were invested instead of used to pay a 8% mortgage, you would have $100,000 and $200,000 by:
| Balance | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| $100k | 10 years | 9 years | 9 years | 8 years |
| $200k | 17 years | 15 years | 13 years | 12 years |
What would your 30 year investment balance be under these scenarios?
Here I will show three different 30 year ending balances for each monthly investment scenario. The $0 line assumes you never remove funds from the account to show what the ending balance would have been. The $100k line assumes $100,000 is removed immediately when the funds reach that amount and then the monthly investment is continued through the 30 years. The $200k line assumes $100,000 is removed only when the account balance reaches $200,000 and then the remaining $100,000 is compounded along with the addition of continued monthly investments.
Investing $536.82 per month (a 5% mortgage payment) for 30 years would provide the following ending balances:
| $ Removed | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| $0 | 372,580 | 539,244 | 800,055 | 1,213,475 |
| -$100k | 168,743 | 227,454 | 313,878 | 436,837 |
| -$200k | 224,977 | 328,990 | 486,482 | 733,543 |
If $599.55 per month (a 6% mortgage payment) for 30 years would provide the following ending balances:
| $ Removed | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| $0 | 416,117 | 602,257 | 893,545 | 1,355,276 |
| -$100k | 203,269 | 274,522 | 377,408 | 525,326 |
| -$200k | 259,403 | 376,798 | 556,195 | 833,816 |
If $665.30 per month (a 7% mortgage payment) for 30 years would provide the following ending balances:
| $ Removed | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| $0 | 461,751 | 668,304 | 991,536 | 1,503,903 |
| -$100k | 241,701 | 325,522 | 447,221 | 624,312 |
| -$200k | 296,467 | 427,742 | 628,606 | 942,004 |
If $733.76 per month (a 8% mortgage payment) for 30 years would provide the following ending balances:
| $ Removed | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| $0 | 509,266 | 737,073 | 1,093,566 | 1,658,656 |
| -$100k | 281,769 | 380,338 | 523,336 | 734,159 |
| -$200k | 336,099 | 482,944 | 705,701 | 1,053,182 |
Opportunity cost of both options
Opportunity cost is the difference between what would have been earned by investing without withdrawing funds to buy a house and either the $100k balance or $200k balance option ending balances shown above. For example, in the $599.55 monthly investment table above you see at 8% you would have had an account balance of $893,545. However, if you chose to withdraw $100,000 to buy the house immediately when $100,000 was in the account, your 30 year ending balance would only be $377,408. The difference of $516,137 ($893,545 - $377,408) is the lost opportunity, funds you lost by withdrawing the $100,000 immediately. You can think of this as the $100,000 house costing you $616,137 over 30 years since you paid $100,000 and lost another $516,137 in opportunity cost.
If you chose to wait until the account had $200,000 to withdraw $100,000 for purchase of the house, then you 30 year ending balance would be $556,195. The difference of $337,350 ($893,545 - $556,195) is a much less opportunity loss. However, the house still cost you $437,350 or your $100,000 paid and the $337,350 opportunity cost.
Both of these total costs of your house are much less than taking out a 30 year mortgage with the associated monthly payment where you end up paying several times your home price in interest. You also lose out on the monthly investment and associated compounded balance had you invested the monthly mortgage payment over 30 years instead, as seen in the examples above. If you think about it, purchasing a $100,000 home with a mortgage could cost you well over $1,000,000 and even closer to $2,000,000 with the combined opportunity loss from no investment and the loss from paid interest over 30 years to the bank. Most sophisticated accredited investors understand this fact and wait for this reason to pay cash for their home. They would much rather pur their money to work making more money than give it to a bank in interest payments.
Summary
You can see how having patience to put off purchases and being a debt-free investor can help you create large wealth over your lifetime. I plan to continue this series on paying down mortgages so stay tuned.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below (viewable on blog site only): Sphere: Related Content
Saturday, April 11, 2009
Part 2: Should you pay off your home mortgage early?
Continuation from the last article
This is the second in a series of articles on whether you should pay off your home loan early. In the last article, I covered the importance of considering the opportunity cost, tax consequences, and whether you have other debts to consider paying off first. In this article, I will cover specific examples to help illustrate some of these points. However, as I said before, you should consult a financial advisor who knows your situation before making a choice on either paying off your mortgage sooner or not.
The total 30 year cost of your mortgage
Assume you recently refinanced or bought a home with a 30 year fixed payment mortgage of $100,000. I used $100,000 for simplicity since the results shown are per $100,000 loan. If you have a $200,000 mortgage, simply multiply the numbers by two. If you have a $500,000 mortgage, simply multiply by five and so forth depending on what your mortgage amount is as compared to $100,000.
The total amount of money you give the lender over 30 years will be shown below at different mortgage rates. The monthly payment against the loan for each interest rate is also provided for reference. This payment does not include property taxes, insurance, etc. that may be included in the total monthly payment for a house beyond just paying against the mortgage debt.
At 5%, the monthly mortgage payment is $536.82
At 6%, the monthly mortgage payment is $599.55
At 7%, the monthly mortgage payment is $665.30
At 8%, the monthly mortgage payment is $733.76
The total amount paid over 30 years at different interest rates for a $100,000 mortgage are:
What would you accumulate by investing the monthly payments instead?
Consider what would happen if you did not get a mortage and took what would have been paid monthly toward accumulating wealth through investments.
If $536.82 per month were invested instead of used to pay a 5% mortgage, the total 30 year account balance would be:
If $599.55 per month were invested instead of used to pay a 6% mortgage, the total 30 year account balance would be:
If $665.30 per month were invested instead of used to pay a 7% mortgage, the total 30 year account balance would be:
If $733.76 per month were invested instead of used to pay a 8% mortgage, the total 30 year account balance would be:
How can you have a much larger return from investing than if paying a mortgage for 30 years?
When first looking at the numbers above, it makes no sense that a 4% yearly return on your investment can grow a much larger investment balance than a 5% mortgage would cost over 30 years. In other words, how can a lower rate of return on your investment grow much faster than a higher rate mortgage over 30 years?
Keep in mind that the starting point differs for both. For a mortgage, it starts with a balance due of $100,000. Each month, only a very small amount of you payment goes toward reducing this balance with the bulk of the payment going toward interest. However, when investing, your entire monthly payment goes toward accumulating more money the next month. You also get the huge benefit of interest compounding as well. Each month interest is paid on the full payment you put in the previous month and on the total balance of the account to date. So, as your balance grows, so does the amount of interest that is paid to you each month. This is the power of compounding growth.
I wrote a four part series that goes into detail on how compounding is a key tool, if not the most important tool, most sophisticated and accredited investors use as part of the wealth building strategy.
When would you have $100,000 to buy the house with cash instead of with a mortgage?
Consider the fact that consistently investing what would have been paid on a mortgage into investments would allow you to accumulate a balance of $100,000 very soon. You could then buy the house with cash and still be able to continue investing each month. Here is when you would accumulate $100,000 balance.
If $536.82 per month were invested instead of used to pay a 5% mortgage, you would have $100,000 by:
If $599.55 per month were invested instead of used to pay a 6% mortgage, you would have $100,000 by:
If $665.30 per month were invested instead of used to pay a 7% mortgage, you would have $100,000 by:
If $733.76 per month were invested instead of used to pay a 8% mortgage, you would have $100,000 by:
Opportunity cost of having a mortgage instead of investing the payments
Opportunity cost is the difference between what would have been earned by investing instead of paying a mortgage. To see what the opportunity cost is over the 30 year period, simply look at the table that shows the total mortgage paid at the different interest rates against what the associated monthly mortgage payment would have grown to had it been invested at a specific rate for 30 years.
For example, consider the 5% mortgage which had a monthly payment of $536.82. The total you would pay for the mortgage is $193,254. However, you could have invested that monthly payment instead for 30 years and earned from $372,580 at a 4% yearly return to $1,213,475 at a 10% yearly return. The 30 year opportunity cost the difference which ranges from $372,580 - $193,254 = $179,326 to $1,213,475 - $193,254 = $1,020,221. The range shows the significant loss of earnings that would have been realized if the money had been invested instead of spent on the mortgage. Continue this for any of the interest rates and associated monthly payment shown above over the 30 year period. The opportunity loss ranges are even more dramatic.
Consider buying a house with cash from investments
As you read earlier, your investment account could have accumulated a total of $100,000 on average in about 10 years. If you had saved first to buy the house with cash, then from that point forward you could continue with the same saving plan to again build up your investment account for other purchases or investments. This opens doors for you to continue building your wealth without debt. You will have more options on how and when you want to retire with a paid off house and a growing investment portfolio that would grow to where the yearly returns eventually pay your day-to-day expenses in a short time.
Examples above don’t really consider rent verses owning a home
The above examples don’t take into consideration that you need to pay for some type of housing during the 30 year period of investing if you don’t buy a home with a mortgage. In that case, you would be paying a comparable amount on rent so it could not be invested. However, I wanted to keep it simple and just focus on the opportunity cost of investing verses having a mortgage. Ideally you would have started an investment plan early in your career by renting a cheap place while investing significant amounts monthly into your investment account to where a home could be bought with cash in a few short years.
The above example also do not consider the added benefit of tax deductions on the mortgage interest paid yearly, the capital gains that would be paid selling your investment to pay cash for the house, and other factors for the sake of simplicity. Again, I wanted to keep the focus on the benefits of investing verses getting a loan.
Summary
I don’t want to say that it is best to always pay cash for a home instead of getting a mortgage. I strongly advise working with a qualified financial planner early in your career to look at your long term financial goals. Then divide those goals into a workable plan of action to know what you need to do periodically over time toward reaching those long term goals. However, the information above does show that for some people, building wealth without debt can definitely have significant advantages, especially in today’s environment where credit is bringing down economies around the world. I wrote another series of articles in the past that tells how to get debt free that might also be of interest to you.
I hope these articles help you consider the bigger picture when evaluating a plan of action. Always play out the numbers over time. See what you will gain and what you will lose. Understand why the numbers are what they are. Learn how to use those differences to your advantage.
Next article in the series
The next article continues this series continues this discussion providing several scenarios for payying cash to buy your home. Other future articles in this series will explore scenarios for paying extra each month on your mortgage for faster payoff.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below (viewable on blog site only):
Sphere: Related Content
This is the second in a series of articles on whether you should pay off your home loan early. In the last article, I covered the importance of considering the opportunity cost, tax consequences, and whether you have other debts to consider paying off first. In this article, I will cover specific examples to help illustrate some of these points. However, as I said before, you should consult a financial advisor who knows your situation before making a choice on either paying off your mortgage sooner or not.
The total 30 year cost of your mortgage
Assume you recently refinanced or bought a home with a 30 year fixed payment mortgage of $100,000. I used $100,000 for simplicity since the results shown are per $100,000 loan. If you have a $200,000 mortgage, simply multiply the numbers by two. If you have a $500,000 mortgage, simply multiply by five and so forth depending on what your mortgage amount is as compared to $100,000.
The total amount of money you give the lender over 30 years will be shown below at different mortgage rates. The monthly payment against the loan for each interest rate is also provided for reference. This payment does not include property taxes, insurance, etc. that may be included in the total monthly payment for a house beyond just paying against the mortgage debt.
At 5%, the monthly mortgage payment is $536.82
At 6%, the monthly mortgage payment is $599.55
At 7%, the monthly mortgage payment is $665.30
At 8%, the monthly mortgage payment is $733.76
The total amount paid over 30 years at different interest rates for a $100,000 mortgage are:
| Year | 5% | 6% | 7% | 8% |
|---|---|---|---|---|
| 30 | 193,254 | 215,835 | 239,505 | 264,150 |
What would you accumulate by investing the monthly payments instead?
Consider what would happen if you did not get a mortage and took what would have been paid monthly toward accumulating wealth through investments.
If $536.82 per month were invested instead of used to pay a 5% mortgage, the total 30 year account balance would be:
| Year | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| 30 | 372,580 | 539,244 | 800,055 | 1,213,475 |
If $599.55 per month were invested instead of used to pay a 6% mortgage, the total 30 year account balance would be:
| Year | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| 30 | 416,117 | 602,260 | 893,545 | 1,355,276 |
If $665.30 per month were invested instead of used to pay a 7% mortgage, the total 30 year account balance would be:
| Year | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| 30 | 461,751 | 668,304 | 991,536 | 1,503,903 |
If $733.76 per month were invested instead of used to pay a 8% mortgage, the total 30 year account balance would be:
| Year | 4% | 6% | 8% | 10% |
|---|---|---|---|---|
| 30 | 509,266 | 737,073 | 1,093,566 | 1,658,656 |
How can you have a much larger return from investing than if paying a mortgage for 30 years?
When first looking at the numbers above, it makes no sense that a 4% yearly return on your investment can grow a much larger investment balance than a 5% mortgage would cost over 30 years. In other words, how can a lower rate of return on your investment grow much faster than a higher rate mortgage over 30 years?
Keep in mind that the starting point differs for both. For a mortgage, it starts with a balance due of $100,000. Each month, only a very small amount of you payment goes toward reducing this balance with the bulk of the payment going toward interest. However, when investing, your entire monthly payment goes toward accumulating more money the next month. You also get the huge benefit of interest compounding as well. Each month interest is paid on the full payment you put in the previous month and on the total balance of the account to date. So, as your balance grows, so does the amount of interest that is paid to you each month. This is the power of compounding growth.
I wrote a four part series that goes into detail on how compounding is a key tool, if not the most important tool, most sophisticated and accredited investors use as part of the wealth building strategy.
When would you have $100,000 to buy the house with cash instead of with a mortgage?
Consider the fact that consistently investing what would have been paid on a mortgage into investments would allow you to accumulate a balance of $100,000 very soon. You could then buy the house with cash and still be able to continue investing each month. Here is when you would accumulate $100,000 balance.
If $536.82 per month were invested instead of used to pay a 5% mortgage, you would have $100,000 by:
| 4% | 6% | 8% | 10% |
|---|---|---|---|
| 13 years | 11 years | 11 years | 10 years |
If $599.55 per month were invested instead of used to pay a 6% mortgage, you would have $100,000 by:
| 4% | 6% | 8% | 10% |
|---|---|---|---|
| 12 years | 11 years | 10 years | 9 years |
If $665.30 per month were invested instead of used to pay a 7% mortgage, you would have $100,000 by:
| 4% | 6% | 8% | 10% |
|---|---|---|---|
| 11 years | 10 years | 9 years | 9 years |
If $733.76 per month were invested instead of used to pay a 8% mortgage, you would have $100,000 by:
| 4% | 6% | 8% | 10% |
|---|---|---|---|
| 10 years | 9 years | 9 years | 8 years |
Opportunity cost of having a mortgage instead of investing the payments
Opportunity cost is the difference between what would have been earned by investing instead of paying a mortgage. To see what the opportunity cost is over the 30 year period, simply look at the table that shows the total mortgage paid at the different interest rates against what the associated monthly mortgage payment would have grown to had it been invested at a specific rate for 30 years.
For example, consider the 5% mortgage which had a monthly payment of $536.82. The total you would pay for the mortgage is $193,254. However, you could have invested that monthly payment instead for 30 years and earned from $372,580 at a 4% yearly return to $1,213,475 at a 10% yearly return. The 30 year opportunity cost the difference which ranges from $372,580 - $193,254 = $179,326 to $1,213,475 - $193,254 = $1,020,221. The range shows the significant loss of earnings that would have been realized if the money had been invested instead of spent on the mortgage. Continue this for any of the interest rates and associated monthly payment shown above over the 30 year period. The opportunity loss ranges are even more dramatic.
Consider buying a house with cash from investments
As you read earlier, your investment account could have accumulated a total of $100,000 on average in about 10 years. If you had saved first to buy the house with cash, then from that point forward you could continue with the same saving plan to again build up your investment account for other purchases or investments. This opens doors for you to continue building your wealth without debt. You will have more options on how and when you want to retire with a paid off house and a growing investment portfolio that would grow to where the yearly returns eventually pay your day-to-day expenses in a short time.
Examples above don’t really consider rent verses owning a home
The above examples don’t take into consideration that you need to pay for some type of housing during the 30 year period of investing if you don’t buy a home with a mortgage. In that case, you would be paying a comparable amount on rent so it could not be invested. However, I wanted to keep it simple and just focus on the opportunity cost of investing verses having a mortgage. Ideally you would have started an investment plan early in your career by renting a cheap place while investing significant amounts monthly into your investment account to where a home could be bought with cash in a few short years.
The above example also do not consider the added benefit of tax deductions on the mortgage interest paid yearly, the capital gains that would be paid selling your investment to pay cash for the house, and other factors for the sake of simplicity. Again, I wanted to keep the focus on the benefits of investing verses getting a loan.
Summary
I don’t want to say that it is best to always pay cash for a home instead of getting a mortgage. I strongly advise working with a qualified financial planner early in your career to look at your long term financial goals. Then divide those goals into a workable plan of action to know what you need to do periodically over time toward reaching those long term goals. However, the information above does show that for some people, building wealth without debt can definitely have significant advantages, especially in today’s environment where credit is bringing down economies around the world. I wrote another series of articles in the past that tells how to get debt free that might also be of interest to you.
I hope these articles help you consider the bigger picture when evaluating a plan of action. Always play out the numbers over time. See what you will gain and what you will lose. Understand why the numbers are what they are. Learn how to use those differences to your advantage.
Next article in the series
The next article continues this series continues this discussion providing several scenarios for payying cash to buy your home. Other future articles in this series will explore scenarios for paying extra each month on your mortgage for faster payoff.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below (viewable on blog site only):
Sphere: Related Content
Wednesday, April 1, 2009
Should you pay off your home mortgage early?
Overview
This is a question that many home owners ask themselves – “Should I apply additional funds toward paying off my home mortgage early or invest this money elsewhere?” There is no universal answer. You should consult a financial advisor who knows your situation before making this choice. However, my intent is to help you consider various factors involved with this decision. This topic will be covered over more than one article in order to provide the depth needed.
Do you have other debts?
If you have other debts, then it may make better sense to apply the extra funds toward paying those debts off first. I wrote a three part series that give insights into what credit card debts really cost you and strategies to remove all of your debts. You can read the first article in the series by clicking here.
Consider the opportunity cost of paying your mortgage off sooner
The opportunity cost of money simply means the difference between the rate off return you could earn by investing in something else verses using the funds to pay down your mortgage. Since money used to pay down your mortgage reduces the principle balance of the loan, you are saving the mortgage interest that would have been paid on the extra amount applied toward paying down the loan balance. In other words, if you have a 6% annual interest rate on your mortgage, then applying an extra $100 toward your loan payment would save paying 6% against that $100 or $6 over a year. Now assume you could have invested that $100 in a fund that paid 8% annually, then you could have earned 8% of $100 or $8 over a year. Since you could have earned $8 and only saved $6 by paying down your mortgage, the opportunity loss is the difference between the two or $2 annually ($8 you could have earned - $6 you saved on mortgage interest).
Consider the mortgage interest deduction
I wrote an article in the past about not buying a house simply for the mortgage deduction (click here to read the article). Bottom line is that you only deduct a portion of the total amount paid yearly on your mortgage according to your state and federal tax bracket. In the article I show how someone in a combined state and federal tax bracket of 40% and who paid $25,000 in mortgage interest would receive a $10,000 benefit ($25,000 x 40%). However, the difference of $15,000 ($25,000 paid on interest - the $10,000 benefit) was paid to the bank with no benefit to you. The lost opportunity cost must be considered for what the $15,000 could have received had it been invested in an investment vehicle that paid a higher rate of return than the interest rate on the mortgage. This becomes an even bigger issue for people with a lower combined state and federal tax bracket.
Assume someone has a combined state and federal tax rate of 30%. The benefit then would only be 30% of $25,000 mortgage interest paid, or a $7,500 benefit ($25,000 x 30%). The remaining $17,500 paid to interest ($25,000 - $7,500) must be considered for the associated opportunity loss.
Consider the benefit of reinvesting the tax benefit received
If you have accurately projected your tax exemptions to reduce taxes paid through the year by the $10,000 or $7,500 benefit (based on your tax rate), then the money saved on paying taxes could be invested for an added benefit.
For simplicity, lets just talk about someone in the 40% combined tax bracket that receives the $10,000 benefit yearly. This person increased his or her tax exemptions to reduce the taxes paid from income throughout the year to equal $10,000. If the person receives a monthly paycheck, then the take home pay is increased by $833.33 each month ($10,000 divided by 12 months). This person can now invest $833.33 each month in some investment and receive additional benefit from the associated return.
A secret of the sophisticated accredited investors
Think about this…You paid $25,000 total in mortgage interest over the year and received $10,000 back as a result of tax deductions. In this case, you paid a total of $2,083.33 each month on interest ($25,000 divided by 12 months) of which $833.33 was returned each month to you for investing. Sophisticated investors recognize this double use of the money as part of their investment strategy. However, they don’t do this just with their mortgage, but when structuring all of their investments. Look for ways of getting multiple benefits from the same dollar.
Next article
The next article will continue this discussion. Stay tuned.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below (viewable on blog site only): Sphere: Related Content
This is a question that many home owners ask themselves – “Should I apply additional funds toward paying off my home mortgage early or invest this money elsewhere?” There is no universal answer. You should consult a financial advisor who knows your situation before making this choice. However, my intent is to help you consider various factors involved with this decision. This topic will be covered over more than one article in order to provide the depth needed.
Do you have other debts?
If you have other debts, then it may make better sense to apply the extra funds toward paying those debts off first. I wrote a three part series that give insights into what credit card debts really cost you and strategies to remove all of your debts. You can read the first article in the series by clicking here.
Consider the opportunity cost of paying your mortgage off sooner
The opportunity cost of money simply means the difference between the rate off return you could earn by investing in something else verses using the funds to pay down your mortgage. Since money used to pay down your mortgage reduces the principle balance of the loan, you are saving the mortgage interest that would have been paid on the extra amount applied toward paying down the loan balance. In other words, if you have a 6% annual interest rate on your mortgage, then applying an extra $100 toward your loan payment would save paying 6% against that $100 or $6 over a year. Now assume you could have invested that $100 in a fund that paid 8% annually, then you could have earned 8% of $100 or $8 over a year. Since you could have earned $8 and only saved $6 by paying down your mortgage, the opportunity loss is the difference between the two or $2 annually ($8 you could have earned - $6 you saved on mortgage interest).
Consider the mortgage interest deduction
I wrote an article in the past about not buying a house simply for the mortgage deduction (click here to read the article). Bottom line is that you only deduct a portion of the total amount paid yearly on your mortgage according to your state and federal tax bracket. In the article I show how someone in a combined state and federal tax bracket of 40% and who paid $25,000 in mortgage interest would receive a $10,000 benefit ($25,000 x 40%). However, the difference of $15,000 ($25,000 paid on interest - the $10,000 benefit) was paid to the bank with no benefit to you. The lost opportunity cost must be considered for what the $15,000 could have received had it been invested in an investment vehicle that paid a higher rate of return than the interest rate on the mortgage. This becomes an even bigger issue for people with a lower combined state and federal tax bracket.
Assume someone has a combined state and federal tax rate of 30%. The benefit then would only be 30% of $25,000 mortgage interest paid, or a $7,500 benefit ($25,000 x 30%). The remaining $17,500 paid to interest ($25,000 - $7,500) must be considered for the associated opportunity loss.
Consider the benefit of reinvesting the tax benefit received
If you have accurately projected your tax exemptions to reduce taxes paid through the year by the $10,000 or $7,500 benefit (based on your tax rate), then the money saved on paying taxes could be invested for an added benefit.
For simplicity, lets just talk about someone in the 40% combined tax bracket that receives the $10,000 benefit yearly. This person increased his or her tax exemptions to reduce the taxes paid from income throughout the year to equal $10,000. If the person receives a monthly paycheck, then the take home pay is increased by $833.33 each month ($10,000 divided by 12 months). This person can now invest $833.33 each month in some investment and receive additional benefit from the associated return.
A secret of the sophisticated accredited investors
Think about this…You paid $25,000 total in mortgage interest over the year and received $10,000 back as a result of tax deductions. In this case, you paid a total of $2,083.33 each month on interest ($25,000 divided by 12 months) of which $833.33 was returned each month to you for investing. Sophisticated investors recognize this double use of the money as part of their investment strategy. However, they don’t do this just with their mortgage, but when structuring all of their investments. Look for ways of getting multiple benefits from the same dollar.
Next article
The next article will continue this discussion. Stay tuned.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below (viewable on blog site only): Sphere: Related Content
Tuesday, March 17, 2009
Being laid off? Think about becoming an entrepreneur
Overview
With millions of talented people being laid off during the current financial crisis, there is opportunity to turn tragedy into triumph by becoming an entrepreneur. I would recommend first trying hard to get another comparable job so the income stream is there to support day-to-day expenses. However, if you are not able to get a job, then perhaps entrepreneurialism might be your path forward. Even if you do have income from a job, it may make sense to start a business on your own while you have the income stream. Over time, your business may grow to take over as your primary and ongoing income source providing you with many more options with your career than currently might be possible.
What do you need to consider when going into business?
There are a lot of things you need to consider. However, don’t get so wrapped up in worrying about all of the minute details that you procrastinate actually getting started. The first thing I recommend is nailing down what business to start. Do this by creating two columns on a blank piece of paper labeled strengths and weaknesses. Write down all of the strengths and strong skills that you have personally, in business, relationships, etc. Then write down all of your main weaknesses in the same categories. Really study the list. Look for ways of overcoming your weaknesses to turn them into strengths. Perhaps you need to get some education that will build your abilities in certain weak areas. Perhaps one of your strengths could be paired with the weakness to help overcome it. Personally, I like to face my weaknesses and fears head on. I like to force myself to learn and grow in those areas to turn them into future strengths. That is my own challenge so I’m always growing and not allowing weaknesses to keep me stagnant. Continually overcoming weaknesses will give you knowledge and skills needed to face and overcome barriers that will come while growing a business.
Find a mentor/possible partner
Find someone that is strong in the area(s) you are weak in that can mentor and guide your development. This may actually be a way of finding someone else who would be a good fit for you in starting the business. Many times people who are opposites have made the best business pair since one was strong in an area the other was weak. They are able to recognize the strengths and weaknesses of each other to capitalize on who would be best suited for a particular task/client/etc. while building the business.
Ego can be your friend and enemy
We all know people who have very strong ego. Many times these people make very strong managers that take action and get things done. It is fine when ego is used constructively to drive action and get results. However, when ego is used to put others down and gets in the way, then it is a huge barrier to ever getting long term success. You must recognize what level of ego you and your partner(s) have, understand if it is constructive or destructive, take corrective action as needed to reshape the ego to be a positive driving force that motivates others to feel passionate about succeeding together.
Also, never be so proud that you don’t listen to and use the advice and help of others. Always known your weaknesses and recognize when someone can help, then accept that help. Life is too short to let pride get in the way of success.
You need a team to create long term success
Going completely on your own is a very hard way to start a business. Start meeting people as you take training classes, work with clients, go to church or other gatherings, etc. Get to know who has strengths that could be tapped to help you in business. Find a way of bartering for their help – perhaps you will provide a product or service to them in exchange for them doing the same for you.
The Small Business Administration and SCORE are invaluable resources
Don’t forget that the Small Business Administration (SBA) is an invaluable source of education and counseling to help you succeed. They also have a separate arm called SCORE, which is comprised of retired executives who now volunteer their time to consult with business owners and many other resources to help entrepreneurs succeed. In fact, the SCORE website www.score.org has set up a feature for you to select consultants for free geographically and by industry at http://www.score.org/ask_score.html. They also have online classes on various subjects. Anyway, SCORE is an amazing free resource that can help tremendously with starting, running, and growing a business.
Consider the finances required
Once you have a business, create a business plan that includes timelines of accomplishments and any project income and expenses at each milestone on the timeline. Always know where your finances stand. Know when you need to make cuts to get by enough to continue moving forward. Also recognize when the business is not going to succeed to cut your losses early and try another business. Again, don’t let pride keep you from moving on. However, always learn from everything you do to incorporate your knowledge into the next venture.
Don’t take things personally
Don’t take rejection personally. Don’t take failure personally. Recognize that these things always happen and are a requirement for success. Until you have failed or experienced rejection, you don’t really learn how to overcome them and move forward. Personally, I look forward to failure and rejection since those are my most challenging times that require me to be very resourceful in finding solutions to overcome. I feel the most personal growth and satisfaction after overcoming my hardest challenges. Welcome them as opportunities to grow and become an overcomer.
Share your success
Treat your employees well. Provide unexpected small bonuses such as a gift certificate to a nice restaurant or store when someone does something nice. Write a hand written note that says you are proud of their accomplishment on a task. Get a simple plaque made that they can put on their desk. Bring them into your office to tell them how much you appreciate their work on that task.
Consider doing similar things for people outside of your company who help you and your business. Give your supplier, banker, customer, etc. a nice surprise. Let them know they are appreciated and valued.
Doing these things will go a long way toward building fierce loyalty. People will remember you and your company will be their first choice when needed.
Understand you are in the business of people, not products or services
Remember, you are in the people business, not a business of selling products or services. Products or services won’t likely be bought until you have first built the relationship with a decision maker/customer. Think about yourself – would you rather buy something from a friend or complete stranger? Take that even further – would you be willing to pay more buying from a trusted friend or paying less from a complete stranger? In that case, you can see there is a financial value placed on the level of trust and friendship you can build with the customer, and with your employees.
Be a lifelong student of business
Take every opportunity to continue learning. As mentioned before, take classes and read books about areas you are weak in. Continue building on your strengths through ongoing education. Talk with successful people who can mentor you. Always be moving forward with your personal development and knowledge of every aspect of business.
Summary
As you know, there are many books, articles, etc. on starting a business. I could not possibly include everything that is needed to start a business in this article. My hope here was to at least get those who are currently being threatened by the negative job market to consider going into business for themselves. Doing so could be a way of creating job security in the long run. Sure there are up and down periods in business, but those events can be anticipated and planned for through proper investments that ensure continued survival of the business. If you do take the entrepreneurial plunge, I wish you the very best and say it will be hard, but very rewarding in the end. Expect many challenges, but make those opportunities to develop character and strengths as an overcomer.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below (viewable on blog site only):
Sphere: Related Content
With millions of talented people being laid off during the current financial crisis, there is opportunity to turn tragedy into triumph by becoming an entrepreneur. I would recommend first trying hard to get another comparable job so the income stream is there to support day-to-day expenses. However, if you are not able to get a job, then perhaps entrepreneurialism might be your path forward. Even if you do have income from a job, it may make sense to start a business on your own while you have the income stream. Over time, your business may grow to take over as your primary and ongoing income source providing you with many more options with your career than currently might be possible.
What do you need to consider when going into business?
There are a lot of things you need to consider. However, don’t get so wrapped up in worrying about all of the minute details that you procrastinate actually getting started. The first thing I recommend is nailing down what business to start. Do this by creating two columns on a blank piece of paper labeled strengths and weaknesses. Write down all of the strengths and strong skills that you have personally, in business, relationships, etc. Then write down all of your main weaknesses in the same categories. Really study the list. Look for ways of overcoming your weaknesses to turn them into strengths. Perhaps you need to get some education that will build your abilities in certain weak areas. Perhaps one of your strengths could be paired with the weakness to help overcome it. Personally, I like to face my weaknesses and fears head on. I like to force myself to learn and grow in those areas to turn them into future strengths. That is my own challenge so I’m always growing and not allowing weaknesses to keep me stagnant. Continually overcoming weaknesses will give you knowledge and skills needed to face and overcome barriers that will come while growing a business.
Find a mentor/possible partner
Find someone that is strong in the area(s) you are weak in that can mentor and guide your development. This may actually be a way of finding someone else who would be a good fit for you in starting the business. Many times people who are opposites have made the best business pair since one was strong in an area the other was weak. They are able to recognize the strengths and weaknesses of each other to capitalize on who would be best suited for a particular task/client/etc. while building the business.
Ego can be your friend and enemy
We all know people who have very strong ego. Many times these people make very strong managers that take action and get things done. It is fine when ego is used constructively to drive action and get results. However, when ego is used to put others down and gets in the way, then it is a huge barrier to ever getting long term success. You must recognize what level of ego you and your partner(s) have, understand if it is constructive or destructive, take corrective action as needed to reshape the ego to be a positive driving force that motivates others to feel passionate about succeeding together.
Also, never be so proud that you don’t listen to and use the advice and help of others. Always known your weaknesses and recognize when someone can help, then accept that help. Life is too short to let pride get in the way of success.
You need a team to create long term success
Going completely on your own is a very hard way to start a business. Start meeting people as you take training classes, work with clients, go to church or other gatherings, etc. Get to know who has strengths that could be tapped to help you in business. Find a way of bartering for their help – perhaps you will provide a product or service to them in exchange for them doing the same for you.
The Small Business Administration and SCORE are invaluable resources
Don’t forget that the Small Business Administration (SBA) is an invaluable source of education and counseling to help you succeed. They also have a separate arm called SCORE, which is comprised of retired executives who now volunteer their time to consult with business owners and many other resources to help entrepreneurs succeed. In fact, the SCORE website www.score.org has set up a feature for you to select consultants for free geographically and by industry at http://www.score.org/ask_score.html. They also have online classes on various subjects. Anyway, SCORE is an amazing free resource that can help tremendously with starting, running, and growing a business.
Consider the finances required
Once you have a business, create a business plan that includes timelines of accomplishments and any project income and expenses at each milestone on the timeline. Always know where your finances stand. Know when you need to make cuts to get by enough to continue moving forward. Also recognize when the business is not going to succeed to cut your losses early and try another business. Again, don’t let pride keep you from moving on. However, always learn from everything you do to incorporate your knowledge into the next venture.
Don’t take things personally
Don’t take rejection personally. Don’t take failure personally. Recognize that these things always happen and are a requirement for success. Until you have failed or experienced rejection, you don’t really learn how to overcome them and move forward. Personally, I look forward to failure and rejection since those are my most challenging times that require me to be very resourceful in finding solutions to overcome. I feel the most personal growth and satisfaction after overcoming my hardest challenges. Welcome them as opportunities to grow and become an overcomer.
Share your success
Treat your employees well. Provide unexpected small bonuses such as a gift certificate to a nice restaurant or store when someone does something nice. Write a hand written note that says you are proud of their accomplishment on a task. Get a simple plaque made that they can put on their desk. Bring them into your office to tell them how much you appreciate their work on that task.
Consider doing similar things for people outside of your company who help you and your business. Give your supplier, banker, customer, etc. a nice surprise. Let them know they are appreciated and valued.
Doing these things will go a long way toward building fierce loyalty. People will remember you and your company will be their first choice when needed.
Understand you are in the business of people, not products or services
Remember, you are in the people business, not a business of selling products or services. Products or services won’t likely be bought until you have first built the relationship with a decision maker/customer. Think about yourself – would you rather buy something from a friend or complete stranger? Take that even further – would you be willing to pay more buying from a trusted friend or paying less from a complete stranger? In that case, you can see there is a financial value placed on the level of trust and friendship you can build with the customer, and with your employees.
Be a lifelong student of business
Take every opportunity to continue learning. As mentioned before, take classes and read books about areas you are weak in. Continue building on your strengths through ongoing education. Talk with successful people who can mentor you. Always be moving forward with your personal development and knowledge of every aspect of business.
Summary
As you know, there are many books, articles, etc. on starting a business. I could not possibly include everything that is needed to start a business in this article. My hope here was to at least get those who are currently being threatened by the negative job market to consider going into business for themselves. Doing so could be a way of creating job security in the long run. Sure there are up and down periods in business, but those events can be anticipated and planned for through proper investments that ensure continued survival of the business. If you do take the entrepreneurial plunge, I wish you the very best and say it will be hard, but very rewarding in the end. Expect many challenges, but make those opportunities to develop character and strengths as an overcomer.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below (viewable on blog site only):
Sphere: Related Content
Monday, March 9, 2009
Why do you need to earn a higher rate than the percentage of investment loss?
Overview
One thing that confuses many investors is the fact that any percentage loss must be recovered by earning a higher rate of return than the percentage of loss (will illustrate this with examples later in this article). Accredited investors are aware of this difference and understand the relationship between percentage loss and percentage required to gain back the loss. This article will provide the math behind the relationship in a easy to read format. I’ll first look at the mathematical equation used to calculate the percentage loss of an investment. Then I’ll look at the mathematical equation to calculate the percentage gain required to make up a loss. By the end, you will be able to understand what percentage of a gain is required to make up for any loss in your investment. This knowledge is required to accurately manage your investments while implementing your long term investment plan.
We now consider the equation for calculating the percentage of loss.
Equation to calculate the percentage of loss:
Percentage loss = (Initial value – current value)/initial value
This is derived by thinking about this in the following way…
If you lose money, the loss is based on the initial value of the investment. You consider what the value was initially and what it is currently. The difference between the two is the amount of loss. That is where the equation shows (Initial value – current value). Then to get the percentage of loss, you need to divide this amount of loss by the initial value of the investment. The idea is the find out how big this loss is when compared to the initial value of the investment. That is where you see this difference between the initial and current value being divided by the initial value in the equation. The result of this division tells you what percent of the initial investment was lost. Now consider an example to help understand the equation better.
An example of a 25% loss:
For this example, lets assume Joe had a retirement account with $100,000. Now, some time later, the account is worth $75,000. I will walk through the percentage of loss equation to calculate the percentage of loss.
Percentage loss = ($100,000 - $75,000)/$100,000
Percentage loss = $25,000/$100,000
Percentage loss = 25%
So we calculate that a drop from $100,000 to $75,000 is a 25% loss.
You can’t get back your investment by earning the same percent that was lost
You may be tempted to think a 25% gain is needed to get back to $100,000. However, the problem is Joe now only has $75,000 to start with. The amount of gain required is against $75,000, not against $100,000. The 25% loss was against the initial $100,000 account value and any percentage gain must now be against the remaining $75,000. Before calculating the percentage gain required to get back to the initial $100,000, consider the associate equation…
Equation to calculate the percentage of gain required to make up a loss:
Percentage gain required = (Initial value – current value)/current value
Did you notice the very slight difference in the equation? The only change was dividing the loss by the current value of the investment instead of dividing by the initial value. This is required since you are starting with the current value that remains after experiencing the loss. You need to know what percent of additional funds are required against the current value to get back to the initial value. Now use the equation against the above example to find out what gain is required to make up for the 25% loss.
Calculating the percentage gain required to make up for the 25% loss:
Using the above equation for calculating the percentage gain required,
Percentage gain required = ($100,000 - $75,000)/$75,000
Percentage gain required = $25,000/$75,000
Percentage gain required = 33.3%
So, we need to earn 33.3% against the remaining $75,000 in order to get back to the initial $100,000. Now consider additional examples.
Example of a 50% loss and calculating the percentage gain required:
Here Joe’s $100,000 initial account value drops to $50,000. Calculate the percentage loss first…
Percentage loss = ($100,000 - $50,000)/$100,000
Percentage loss = $50,000/$100,000
Percentage loss = 50%
Since the current value of the account is $50,000, what percentage gain is required to get back to the initial $100,000 value?
Percentage gain required = ($100,000 - $50,000)/$50,000
Percentage gain required = $50,000/$50,000
Percentage gain required = 100%
Joe now needs to earn 100% against his remaining $50,000 value to get back to the initial $100,000 value of the account.
Example of a 75% loss and calculating the percentage gain required:
Here Joe’s $100,000 initial account value drops to $25,000. Calculate the percentage loss first…
Percentage loss = ($100,000 - $25,000)/$100,000
Percentage loss = $75,000/$100,000
Percentage loss = 75%
Since the current value of the account is $25,000, what percentage gain is required to get back to the initial $100,000 value?
Percentage gain required = ($100,000 - $25,000)/$25,000
Percentage gain required = $75,000/$25,000
Percentage gain required = 300%
Joe now needs to earn 300% against his remaining $25,000 value to get back to the initial $100,000 value of the account.
Recap of above examples:
If Joe has a 25% loss, he needs to invest in something that will provide a 33% gain against his remaining funds to get back the loss.
If Joe has a 50% loss, he will need a 100% gain against the remaining funds.
If Joe has a 75% loss, he will need a very high 300% gain.
Summary
As you can see, there is a very large difference between the percentage loss of an investment and the required percentage gain to get back to that initial value. The higher the loss, the dramatically higher the required gain will be to make up for the loss. As the amount of loss increases, the required gain to make up for the loss increases much more since the remaining funds get smaller to use for making back the much larger loss. Again, seasoned investors, such as active accredited investors, understand this relationship between percent loss and percent gain required to make up the loss. Understanding the relationship will allow you to consider which investment strategy to consider as you move forward toward your long term financial goal.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer:
This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below (viewable on blog site only): Sphere: Related Content
One thing that confuses many investors is the fact that any percentage loss must be recovered by earning a higher rate of return than the percentage of loss (will illustrate this with examples later in this article). Accredited investors are aware of this difference and understand the relationship between percentage loss and percentage required to gain back the loss. This article will provide the math behind the relationship in a easy to read format. I’ll first look at the mathematical equation used to calculate the percentage loss of an investment. Then I’ll look at the mathematical equation to calculate the percentage gain required to make up a loss. By the end, you will be able to understand what percentage of a gain is required to make up for any loss in your investment. This knowledge is required to accurately manage your investments while implementing your long term investment plan.
We now consider the equation for calculating the percentage of loss.
Equation to calculate the percentage of loss:
Percentage loss = (Initial value – current value)/initial value
This is derived by thinking about this in the following way…
If you lose money, the loss is based on the initial value of the investment. You consider what the value was initially and what it is currently. The difference between the two is the amount of loss. That is where the equation shows (Initial value – current value). Then to get the percentage of loss, you need to divide this amount of loss by the initial value of the investment. The idea is the find out how big this loss is when compared to the initial value of the investment. That is where you see this difference between the initial and current value being divided by the initial value in the equation. The result of this division tells you what percent of the initial investment was lost. Now consider an example to help understand the equation better.
An example of a 25% loss:
For this example, lets assume Joe had a retirement account with $100,000. Now, some time later, the account is worth $75,000. I will walk through the percentage of loss equation to calculate the percentage of loss.
Percentage loss = ($100,000 - $75,000)/$100,000
Percentage loss = $25,000/$100,000
Percentage loss = 25%
So we calculate that a drop from $100,000 to $75,000 is a 25% loss.
You can’t get back your investment by earning the same percent that was lost
You may be tempted to think a 25% gain is needed to get back to $100,000. However, the problem is Joe now only has $75,000 to start with. The amount of gain required is against $75,000, not against $100,000. The 25% loss was against the initial $100,000 account value and any percentage gain must now be against the remaining $75,000. Before calculating the percentage gain required to get back to the initial $100,000, consider the associate equation…
Equation to calculate the percentage of gain required to make up a loss:
Percentage gain required = (Initial value – current value)/current value
Did you notice the very slight difference in the equation? The only change was dividing the loss by the current value of the investment instead of dividing by the initial value. This is required since you are starting with the current value that remains after experiencing the loss. You need to know what percent of additional funds are required against the current value to get back to the initial value. Now use the equation against the above example to find out what gain is required to make up for the 25% loss.
Calculating the percentage gain required to make up for the 25% loss:
Using the above equation for calculating the percentage gain required,
Percentage gain required = ($100,000 - $75,000)/$75,000
Percentage gain required = $25,000/$75,000
Percentage gain required = 33.3%
So, we need to earn 33.3% against the remaining $75,000 in order to get back to the initial $100,000. Now consider additional examples.
Example of a 50% loss and calculating the percentage gain required:
Here Joe’s $100,000 initial account value drops to $50,000. Calculate the percentage loss first…
Percentage loss = ($100,000 - $50,000)/$100,000
Percentage loss = $50,000/$100,000
Percentage loss = 50%
Since the current value of the account is $50,000, what percentage gain is required to get back to the initial $100,000 value?
Percentage gain required = ($100,000 - $50,000)/$50,000
Percentage gain required = $50,000/$50,000
Percentage gain required = 100%
Joe now needs to earn 100% against his remaining $50,000 value to get back to the initial $100,000 value of the account.
Example of a 75% loss and calculating the percentage gain required:
Here Joe’s $100,000 initial account value drops to $25,000. Calculate the percentage loss first…
Percentage loss = ($100,000 - $25,000)/$100,000
Percentage loss = $75,000/$100,000
Percentage loss = 75%
Since the current value of the account is $25,000, what percentage gain is required to get back to the initial $100,000 value?
Percentage gain required = ($100,000 - $25,000)/$25,000
Percentage gain required = $75,000/$25,000
Percentage gain required = 300%
Joe now needs to earn 300% against his remaining $25,000 value to get back to the initial $100,000 value of the account.
Recap of above examples:
If Joe has a 25% loss, he needs to invest in something that will provide a 33% gain against his remaining funds to get back the loss.
If Joe has a 50% loss, he will need a 100% gain against the remaining funds.
If Joe has a 75% loss, he will need a very high 300% gain.
Summary
As you can see, there is a very large difference between the percentage loss of an investment and the required percentage gain to get back to that initial value. The higher the loss, the dramatically higher the required gain will be to make up for the loss. As the amount of loss increases, the required gain to make up for the loss increases much more since the remaining funds get smaller to use for making back the much larger loss. Again, seasoned investors, such as active accredited investors, understand this relationship between percent loss and percent gain required to make up the loss. Understanding the relationship will allow you to consider which investment strategy to consider as you move forward toward your long term financial goal.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer:
This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below (viewable on blog site only): Sphere: Related Content
Sunday, February 22, 2009
Don’t let fear drive your investment decisions
Overview
Most investors know investment prices move up and down over time. However, many investors panic when things get tough and make investment decisions that are opposite of what should be done. With the current worldwide dramatic fall in prices of so many investments (stocks, real estate, etc.), emotions can be even more dramatic resulting in many people selling (and buying) at the wrong time.
Seasoned investors count on fear driven selling
In a previous post, I wrote how professional investors count on panic selling by unseasoned investors to determine good buy points (click here to read the article). Usually during very heavy sell volume days when prices drop dramatically for a stock, that is the point that the price starts to turn around as most sellers finish selling their shares. At this point the professional investors know they can get a rock bottom price when buying into the investment. However, in this market, there is no assurance the low price won’t get lower in the near future if these buyers also begin to sell through even lower prices.
Remember a loss is not real until you sell the investment
It is scary holding one or more investments where the price has dropped 40%, 50%, or more just in the past few months. If you have continued to hold your dropping investment through this downturn - whether it be stocks, real estate, or other investment – remember you have a paper loss until the investment is actually sold. As an example, if you have a rental property that was previously worth $250,000 and is currently worth only $150,000, it can be very tempting to sell the property for fear of even lower value in the future. If you don’t sell, then the perceived loss of $100,000 ($250,000 past value - $150,000 current value) is not realized. Only if you actually sell the property will there be a $100,000 loss in value.
Commenting on a recent article on CNN
This past week money.cnn.com ran a story on a young couple who have done a good job saving and investing money. The story can be found at: http://money.cnn.com/2009/02/18/retirement/makeover_savers.moneymag/index.htm. Financial advisors provided thoughts on whether the couple should make changes in their saving/investing strategy based on losses experienced with the recent downturn in stock and real estate values. One of the recommendations was to sell the rental property this couple has that has a $400 per month negative cash flow over rent. The sales recommendation is not necessarily based on fear, but was suggested to free up the $400 per month for use in other after tax investment accounts.
That recommendation really bothered me since this couple is in their late 30s and don’t plan retirement for 20 more years. In my mind, they have many years to wait for the real estate value to recoup the $100,000 drop, while collecting rent all the while to pay down the associated mortgage. After 20 years, the mortgage will be largely paid off and the monthly income from raising rent over those years should have erased the $400 negative. Since the property was bought in 2006, they would only have seven years left on the mortgage. Even if they do retire in 20 years as planned, holding onto the property seven more years to pay off the mortgage would provide a nice rental income to use for whatever purpose they needed during the rest of their lives. Hopefully, the value has grown over all of those years as well to increase the value of their estate as an added benefit for the heirs.
Assume they sold the property out of fear
For purposes of discussion, let’s assume this couple was getting very nervous about the perceived $100,000 drop in property value and sold out of fear of losing even more. In that case, they would miss out on the scenario I provided above where eventually the property could be debt free with a large cash flow going into the couple’s future retirement needs. If the couple had a mortgage on the property higher than the current $150,000 value, then the couple would owe taxes to the IRS on the difference between what the couple owes on the property and what the mortgage lender was able to get paid back from the sale. The IRS treats this difference as income to the owner. This all assumes new tax laws are not implemented as part of the stimulus package. Check with your tax advisor if you are in a similar situation before taking any action.
In this case, fear would prevent the couple from enjoying the benefits of owning the rental property as I outlined earlier. The couple could potentially owe a large tax to the IRS on the portion of the mortgage loan that was not paid off from the property sale. They would add shame and a sense of failure to their self image, likely keeping them from considering other potentially good investments in real estate for fear of losing large amounts of money again. The loss of self image and lack of confidence in their ability to chose investments could lead them toward investing only in safe assets like CDs or even savings accounts. Those investments will lose money over time as inflation eats away what money they do have saved. All of this because the couple sold, rather than rationally thought through that there isn’t really any loss unless the property is sold. Even though you should mainly focus on buying rental properties that have a positive cash flow from the beginning, in this case, the loss is only $400 per month against their combined income of $250,000 per year. That, to me, makes no sense to sell with the added costs that could result from selling the property vice the monthly loss of $400.
These consequences of fear selling apply to other investments as well
Personally, I sell stocks when I first see technical indicators showing a down term coming. However, if you have already ridden down the price drop without selling and are scared of losing more, sit back and take a breath. Look at the reasons you bought the stock – hopefully rising market share, increased net cash flow, etc. If those same indicators are still valid, then think twice about selling into a significant loss if the stock should have a good chance of making up the loss over the next 5 or 10 years. You need to consider each stock on its own merits. Of course, there are many stocks where the fundamentals have changed dramatically for the worse where they no longer have any prospects of increasing income or market share, etc. In that case, you may need to sell now to prevent even further loss. All I ask is that you don’t sell out of fear. Look at all the information you can get on the company. Look at how much debt they have on the books and how likely they are to pay off those debts to remain profitable. Look at the industry the company is in. Is the industry one that is being hit and continues to be hit seriously? Make your decision based on facts, not on emotions of the moment.
Summary
Don’t play into the hands of seasoned investors who count on the inexperienced investor selling at the worst possible time, handing these seasoned investors potentially great bargains. Many of these seasoned investors make this part of their investment strategy to wait for the panic sale periods in the market before making purchases. Imagine if you were patient enough to wait for these periods of uncertainly to build a portfolio of investments at very good prices. Now imagine how much money you would have when the markets then recover and grow beyond where they were before the market fell. You would have bargain priced investments with strong growth over time. It is like looking for fire sales at the store before making your purchases. It builds your self esteem and reinforces your confidence as an investor. Learn to control your emotions and invest based on facts to increase your long term prospects for success as an investor.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
- - - - - - - - - -
Two Investor Learning Resources:
MarketClub is an online charting system with buy or sell signals designed to help traders research and help time getting in and out of trades as quickly and efficiently as possible. Learn more by copying the following URL into your browser: http://www.ino.com/info/69/CD3400/&dp=0&l=0&campaignid=8
INO TV is an online collection of over 500 video trading seminars from some of the foremost experts in their areas, designed to teach new and seasoned traders alike from the comfort of their home. Learn more by copying the following URL into your browser: http://www.ino.com/info/128/CD3400/&dp=0&l=0&campaignid=13
- - - - - - - - - -
This article was posted at Accredited Investor Blog: http://accreditedinvestortalk.blogspot.com/
Your feedback is wanted:
Please provide feedback to our generic email at AccreditedIT@yahoo.com on questions you have, ideas for future articles, and any other thoughts that could lend themselves to future articles for the benefit of all readers.
Marcobe Investments, Inc., is a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration. We are not licensed to sell any interest in a project, nor are we registered advisors.
Disclaimer: This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision.
Find similar articles by clicking the Sphere.com icon below:
Sphere: Related Content
Most investors know investment prices move up and down over time. However, many investors panic when things get tough and make investment decisions that are opposite of what should be done. With the current worldwide dramatic fall in prices of so many investments (stocks, real estate, etc.), emotions can be even more dramatic resulting in many people selling (and buying) at the wrong time.
Seasoned investors count on fear driven selling
In a previous post, I wrote how professional investors count on panic selling by unseasoned investors to determine good buy points (click here to read the article). Usually during very heavy sell volume days when prices drop dramatically for a stock, that is the point that the price starts to turn around as most sellers finish selling their shares. At this point the professional investors know they can get a rock bottom price when buying into the investment. However, in this market, there is no assurance the low price won’t get lower in the near future if these buyers also begin to sell through even lower prices.
Remember a loss is not real until you sell the investment
It is scary holding one or more investments where the price has dropped 40%, 50%, or more just in the past few months. If you have continued to hold your dropping investment through this downturn - whether it be stocks, real estate, or other investment – remember you have a paper loss until the investment is actually sold. As an example, if you have a rental property that was previously worth $250,000 and is currently worth only $150,000, it can be very tempting to sell the property for fear of even lower value in the future. If you don’t sell, then the perceived loss of $100,000 ($250,000 past value - $150,000 current value) is not realized. Only if you actually sell the property will there be a $100,000 loss in value.
Commenting on a recent article on CNN
This past week money.cnn.com ran a story on a young couple who have done a good job saving and investing money. The story can be found at: http://money.cnn.com/2009/02/18/retirement/makeover_savers.moneymag/index.htm. Financial advisors provided thoughts on whether the couple should make changes in their saving/investing strategy based on losses experienced with the recent downturn in stock and real estate values. One of the recommendations was to sell the rental property this couple has that has a $400 per month negative cash flow over rent. The sales recommendation is not necessarily based on fear, but was suggested to free up the $400 per month for use in other after tax investment accounts.
That recommendation really bothered me since this couple is in their late 30s and don’t plan retirement for 20 more years. In my mind, they have many years to wait for the real estate value to recoup the $100,000 drop, while collecting rent all the while to pay down the associated mortgage. After 20 years, the mortgage will be largely paid off and the monthly income from raising rent over those years should have erased the $400 negative. Since the property was bought in 2006, they would only have seven years left on the mortgage. Even if they do retire in 20 years as planned, holding onto the property seven more years to pay off the mortgage would provide a nice rental income to use for whatever purpose they needed during the rest of their lives. Hopefully, the value has grown over all of those years as well to increase the value of their estate as an added benefit for the heirs.
Assume they sold the property out of fear
For purposes of discussion, let’s assume this couple was getting very nervous about the perceived $100,000 drop in property value and sold out of fear of losing even more. In that case, they would miss out on the scenario I provided above where eventually the property could be debt free with a large cash flow going into the couple’s future retirement needs. If the couple had a mortgage on the property higher than the current $150,000 value, then the couple would owe taxes to the IRS on the difference between what the couple owes on the property and what the mortgage lender was able to get paid back from the sale. The IRS treats this difference as income to the owner. This all assumes new tax laws are not implemented as part of the stimulus package. Check with your tax advisor if you are in a similar situation before taking any action.
In this case, fear would prevent the couple from enjoying the benefits of owning the rental property as I outlined earlier. The couple could potentially owe a large tax to the IRS on the portion of the mortgage loan that was not paid off from the property sale. They would add shame and a sense of failure to their self image, likely keeping them from considering other potentially good investments in real estate for fear of losing large amounts of money again. The loss of self image and lack of confidence in their ability to chose investments could lead them toward investing only in safe assets like CDs or even savings accounts. Those investments will lose money over time as inflation eats away what money they do have saved. All of this because the couple sold, rather than rationally thought through that there isn’t really any loss unless the property is sold. Even though you should mainly focus on buying rental properties that have a positive cash flow from the beginning, in this case, the loss is only $400 per month against their combined income of $250,000 per year. That, to me, makes no sense to sell with the added costs that could result from selling the property vice the monthly loss of $400.
These consequences of fear selling apply to other investments as well
Personally, I sell stocks when I first see technical indicators showing a down term coming. However, if you have already ridden down the price drop without selling and are scared of losing more, sit back and take a breath. Look at the reasons you bought the stock – hopefully rising market share, increased net cash flow, etc. If those same indicators are still valid, then think twice about selling into a significant loss if the stock should have a good chance of making up the loss over the next 5 or 10 years. You need to consider each stock on its own merits. Of course, there are many stocks where the fundamentals have changed dramatically for the worse where they no longer have any prospects of increasing income or market share, etc. In that case, you may need to sell now to prevent even further loss. All I ask is that you don’t sell out of fear. Look at all the information you can get on the company. Look at how much debt they have on the books and how likely they are to pay off those debts to remain profitable. Look at the industry the company is in. Is the industry one that is being hit and continues to be hit seriously? Make your decision based on facts, not on emotions of the moment.
Summary
Don’t play into the hands of seasoned investors who count on the inexperienced investor selling at the worst possible time, handing these seasoned investors potentially great bargains. Many of these seasoned investors make this part of their investment strategy to wait for the panic sale periods in the market before making purchases. Imagine if you were patient enough to wait for these periods of uncertainly to build a portfolio of investments at very good prices. Now imagine how much money you would have when the markets then recover and grow beyond where they were before the market fell. You would have bargain priced investments with strong growth over time. It is like looking for fire sales at the store before making your purchases. It builds your self esteem and reinforces your confidence as an investor. Learn to control your emotions and invest based on facts to increase your long term prospects for success as an investor.
Copyright 2009 Ole Cram, President of Marcobe Investments, Inc.
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