Turning Home ‘Buyers’ Into Renters
By JLP | November 6, 2009
Fannie Mae is becoming a landlord…
Fannie Mae will allow homeowners facing foreclosure to stay in their homes and rent them for as long as a year, as part of the government’s latest effort to help troubled borrowers, while keeping more foreclosed properties from hitting the housing market.
The “Deed for Lease” Program lets borrowers who don’t qualify for loan modifications transfer their property to Fannie Mae in exchange for a lease. Borrowers-turned-tenants will pay market rents, which in most cases are lower than the cost of mortgage payments, and might be offered extensions when their leases expire.
That’s what I read in today’s WSJ. You can read the article here.
The supposed goals of this program are to:
1. Allow people to stay in their homes by giving them rent payments that are lower than their mortgage payments.
2. Keep foreclosed houses from flooding the housing market with excess inventory.
3. Possibly allow Fannie to profit from the eventual sale of the homes when the real estate market recovers.
Fannie will hire a professional management company to handle all the rental details.
Basically, what this means is that since our government essentially owns Fannie Mae, our government is now a landlord. So much for property rights. Kinda scary if you ask me.
What do I think should happen?
Allow the market to address the housing situation instead of artificially propping it up until who knows when. Attack the situation like you do when ripping off a bandaid…one quick motion.
Topics: Housing Market | 4 Comments »
A Little Friday Fun For You…
By JLP | November 6, 2009
Back in August, my wife and I went to see Chris Isaak in concert. It was awesome! If you get the chance to see Chris in concert, GO! Anyway, below is a live video of my favorite song from his newest CD, “Mr. Lucky.” Enjoy…
Topics: Miscellaneous | No Comments »
Schwab is Introducing ETFs That Trade Commission-Free
By JLP | November 5, 2009
Charles Schwab recently announced that they were getting into the exchange-traded funds game by introducing several new Schwab-branded ETFs. I have listed the new ETFs below, along with their expense ratio and the description as provided by Schwab. What makes these particular ETFs interesting is that they will trade commission-free to Schwab clients. Of course, free doesn’t mean that they won’t have spreads—the difference between the bid and ask price—but they won’t have the traditional brokerage commissions that are paid when buying or selling other ETFs.
The intial list is slim but I expect that new offerings will be added with time.
Domestic Equity ETFs
• Schwab U.S. Broad Market ETF™ SCHB – 0.08%
Offers diversified exposure across large-, mid- and small-cap U.S. stocks. Seeks investment results that track performance, before fees and expenses, of the approximately 2,500-stock Dow Jones U.S. Broad Stock Market Index(SM).
• Schwab U.S. Large-Cap ETF™ SCHX – 0.08%
Provides exposure to large-cap U.S. companies. Seeks investment results that track the performance, before fees and expenses, of the Dow Jones U.S. Large-Cap Total Stock Market Index(SM) made up of approximately the largest 750 U.S. stocks.
• Schwab U.S. Large-Cap Growth ETF™* SCHG – 0.15%
Provides exposure to large-cap U.S. stocks that exhibit growth style characteristics. Seeks investment results that track the performance, before fees and expenses, of the Dow Jones U.S. Large-Cap Growth Total Stock Market Index(SM), representing approximately half of the market capitalization of stocks in the Dow Jones U.S. Large Cap Total Stock Market Index(SM).
• Schwab U.S. Large-Cap Value ETF™* SCHV – 0.15%
Provides broad exposure to large-cap U.S. stocks that exhibit value style characteristics. Seeks investment results that track the performance, before fees and expenses, of the Dow Jones U.S. Large-Cap Value Total Stock Market Index(SM), representing approximately half of the market capitalization of stocks in the Dow Jones U.S. Large Cap Total Stock Market Index(SM).
• Schwab U.S. Small-Cap ETF™ SCHA – 0.15%
Offers exposure to small-cap U.S. companies. Seeks investment results that track the performance, before fees and expenses, of the Dow Jones U.S. Small-Cap Total Stock Market Index(SM), made up of approximately 1,750 U.S. small cap stocks.
International Equity ETFs
• Schwab International Equity ETF™ SCHF – 0.15%
Provides broad exposure to international large-and mid-cap companies in over 20 developed international markets. Seeks investment returns that track the performance, before fees and expenses, of the FTSE Developed ex U.S. Index made up of approximately 1,400 international stocks.
• Schwab International Small-Cap Equity ETF™* SCHC – 0.35%
Offers diversified exposure to international small-cap companies in over 20 developed international markets and seeks investment results that track the performance, before fees and expenses, of the FTSE Developed Small Cap ex U.S. Liquid Index made up of approximately 1,800 international small cap stocks.
• Schwab Emerging Markets Equity ETF™* SCHE – 0.35%
Offers diversified exposure to large- and mid-cap companies in over 20 emerging markets. The ETF seeks investment results that track the performance, before fees and expenses, of the approximately 740-stock, FTSE All Emerging Index.
It will be interesting to see if Schwab puts pressure on the competition to lower their ETF fees. It will also be interesting to see if Schwab somehow integrates these ETFs into their 401(k) offerings.
Related:
*Available in December
Topics: Exchange-Traded Funds, Investing | 5 Comments »
How to Use the RATE Function in Excel
By JLP | November 3, 2009
Yesterday I used the RATE function in Excel for a post. A reader asked me if I could explain the RATE function. This post will attempt to do that.
First off, you use the RATE function when you want to calculate what rate of return would be required to meet a certain goal, based on a few assumptions. Let’s use the information from yesterday’s post:
Retirement Goal: $1,000,000
Years until retirement: 20 (240 months)
Current retirement account balance: $100,000
Monthly contribution amount: $500
You can set it up like this in Excel:
Then, to solve for the rate, you simply put your click on cell E1 and then choose Insert > Function from the menu. You should then see this:
If you don’t see the RATE function listed in the center menu, then you might need to select “All” from the drop down menu above and then scroll down in the main menu until you see RATE.
Once you click on RATE and then “Okay”, you’ll see a menu that looks like this:
Then, you simply fill in the information, referencing the appropriate cells like this:
Here’s a quick explanation of each input:
Nper – the number of periods involved in this example. It’s 20 years but we’re making monthly contributions, so it’s more accurate to use 240 months. So we reference cell C1 and multiply it by 12.
Pmt – the monthly contribution amount expressed as a negative number. Think of it like a cash flow amount. The $500 is flowing out each month. So, we reference cell D1 and multiply it by -1 to get a negative number.
Pv – the present value of the retirement account—again expressed as a negative number. We reference cell A1 and multiply it by -1.
Fv – the future value of the retirement account. This value is expressed as a positive number. We reference cell B1.
Type – input 1 if the payment is made at the beginning of the month or 0 or leave it blank if the payment is made at the end of the month. I chose the beginning of the month and therefore inserted 1.
Guess – (you’ll have to scroll down to see this input as it is located under Type) This function requires a rate guess in order work properly. The default is 10 percent. I left this blank.
After you enter all the necessary information, click “OK.” You should see .78%, although you might see 1%. In that case, simply go into cell format and change the number settings to two decimal places.
Also, the formula will give you a monthly return. To convert it to an annual number, simply convert the percentage to a decimal and raise that number to the 12th power. Like this:
Hopefully, if I have done a good job, you now know how to use Excel’s RATE function. If you have any questions, please feel free to leave a comment.
Topics: Financial Math Basics | 4 Comments »
Liz Pulliam Weston – Debt: And you think you’ve got it bad?
By JLP | November 3, 2009
Interesting article by Liz Pulliam Weston over on MoneyCentral titled, Debt: And you think you’ve got it bad? The article compares the United States’ bankruptcy system to other systems around the world. People in the U.S. have it made in comparison. For instance, check out the Islamic system:
You also can get loans in Muslim countries, although they work differently. People who want to buy a car without paying cash go to a bank and write a series of postdated checks, to be cashed once a month until the debt is fully paid. A similar system is employed for apartment rentals.
In Dubai, if you don’t have enough cash in your account to cover the check in any given month, watch out: The bank can get a warrant for your arrest, and you can be jailed, Rhode said. Those in default also can have their passports seized, preventing them from leaving the country.
Something I thought about during the homeowner bailouts was that we should require some sort of community service from those who are receiving taxpayer help. There is a lot of trash to pick up and graffiti that needs to be painted over. There are also lots of neighborhoods that need cleaning up. Radical? Yes. I’m sure my thoughts will bother some people.
Topics: Miscellaneous | 16 Comments »
Reader Question on How to Determine How Your Investments Are Doing
By JLP | November 2, 2009
The following comment was left on this post from last week:
Have a question:
What reasonable standards should investors use to measure how well or poorly that they are doing?
I’m sure that an answer would include “it depends” but if so, depends on what?
We are about 10% under our 12.31.07 balances and we are pleased but how pleased should we be? There is always someone who well fare better or worse but I’m at a loss as to which reasonable “standards” that I should use to know how I’m doing?
That’s a very good question.
Unfortunately, the appropriate answer is: it depends.
From a general standpoint, your portfolio’s performance should be judged against the appropriate benchmark or benchmarks.
For instance, if you have a portfolio of 50% large-cap stocks and 50% bonds, you would not base your performance on solely on the S&P 500 Index. Rather, you’d base it on a 50/50 split between the S&P 500 Index and the appropriate bond index.
If your portfolio is comprised of large-cap, mid-cap, small-cap, bonds, and real-estate investment trusts, then you need to base the performance on benchmarks for all of those asset classes.
The reason for this is that it’s easy to say, “Wow! We did awesome last year. Our portfolio was up 8%!” The reality could be that a benchmark portfolio might have been up 12%, making your 8% return not so stellar.
Of course, another way to judge your performance is to do what BG suggested in the comments of that post and that is to base your performance on whether or not you’re meeting your future goals. It doesn’t matter how your portfolio is doing if it’s not helping you meet your future goals.
For example…
Let’s say you have a retirement goal of $1,000,000 (purely hypothetical, ignoring inflation). Your retirement is 20 years away and you have $100,000 saved up so far. You are contributing $500 per month into an S&P 500-based fund. You don’t expect your contribution amount to change (again, hypothetical).
Using the RATE function in Excel, I figured that the required rate of return to meet that goal is .78% per month (9.79% annualized). Given that the monthly geometric average total return on the S&P going all the way back to 1926 is .77% (9.64% annualized), you most likely will fall short of your goal by around $25,000.
This leaves you a few choices:
1. You can accept the lower amount at retirement.
2. You can take on more risk by moving into small cap stocks, which have a higher expected return but also are a lot more volatile (more on that in a future post).
3. You can increase your contributions. Based on my numbers, increasing the contribution amount to $540 per month, put’s the expected account value at a little over $1 million.
I realize that we are talking about math based on linear growth, which never happens in the real world. But, it can still be beneficial to have some sort of basis in reality. If your goal is $1 million and you’re investing a certain amount per month, it would be wise to know if you have a shot at meeting your goal.
Thoughts?
Topics: Basics, Financial Math Basics, Financial Planning, Investing | 4 Comments »
Companies Are Stockpiling Cash
By JLP | November 2, 2009
Interesting article in this morning’s WSJ about how companies are stockpiling cash:
In the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings. That is up from $846 billion, or 7.9% of assets, a year earlier.
The trend appears to have continued in the third quarter, despite an improving economy. Of those 500 companies, 248 have reported third-quarter results. Their cash increased to 11.1% of assets, from 10.1% in the second quarter.
The article goes on to talk about how this is both a blessing and a curse. It’s a blessing in that companies have cash on hand, at the ready, for capital spending or hiring. The downside is that hoarded cash isn’t being used to help jumpstart the economy.
Large cash balances from an investor’s viewpoint can be both good and bad. They are good if the money is used wisely and bad if they do something stupid like paying too much in an acquisition or “deworsification” as Peter Lynch used to call it.
Anyway, on the whole, I would take the increased cash position of companies as a good sign.
Topics: Investing | 3 Comments »
Be Sure and Check Out This Week’s Carnival of Personal Finance
By JLP | October 29, 2009
This week’s Carnival of Personal Finance was hosted at MoneyCrashers.com. Please stop by and check it out.
Topics: Carnival of Personal Finance | No Comments »
Another Interesting Look at S&P 500 Index Returns
By JLP | October 29, 2009
Take a look at the graphic below, which shows the percentage of months that were up and down for the S&P 500 Index going back to 1926 based on the month of the year:
For example, looking at the month of January….
There were 84 January months in my sample. Of those 84 months, 36.9% of them produced negative total returns, while 63.1% of them showed positive returns. The months with the biggest positive spread was December which showed that 78.3% of the months were positive compared to only 21.7% were negative.
For those who are interested, I ran the numbers for all the months and found that there were 1,006 months, of which 383 were negative months (38.1%) and 623 (61.9%) were positive.
Just a little trivia for your Thursday…
*The S&P 500 was known as the S&P 90 prior to February 1957.
Topics: Investing, S&P 500 Index | 7 Comments »
October Looks to be the First Negative Return Month Since February
By JLP | October 29, 2009
As of yesterday’s close, the S&P 500 Index’s total return for October is -1.26%. If that number holds through tomorrow, it will break the seven-month streak of positive returns for the index.
Why was October a down month?
I can think of a few reasons:
1. Profit-taking. It seems to happen after we have a massive runup in stocks, like we saw from March through September when the index was up nearly 46%.
2. Investors might be wondering how much further up the market can go considering the current economic conditions. Unemployment is still up and is still trending up. It’s hard to have a recovery with legs if unemployment is high.
3. Consumer spending is down, which puts pressure on GDP since 71% of our GDP comes from consumer spending. People are still paying off debt. Those dollars going towards debt aren’t going towards spending.
I don’t know about you but I have been scratching my head, wondering why the market was marching back up as quickly as it did.
Topics: Investing, S&P 500 Index | 1 Comment »