The only true wisdom is in knowing that you know nothing.”
-Socrates

When people hear that I am a Financial Advisor, they often ask me: “So, what are stocks going to do this year?”

My response inevitably disappoints them: “I don’t have a clue.”

It’s not what people want to hear, but it’s the truth, and some wise souls can appreciate that. They know that, contrary to popular belief, sensible investing for the vast majority of people is not about getting a hot tip from some genius about whether the market will be heading up or down in the near future. It’s not about reading some tea leaves and placing some well-timed bets on a winner.

It never ceases to amaze me, though, how many people in positions of influence and authority will so casually tell people otherwise. Open a popular financial rag or turn on a leading financial news network, and people are lining up to tell us what is going to happen in the stock market this year, next week or even tomorrow.

It is all noise.

Sure, we can make guesses as to what will happen, and some guesses are better educated than others. It’s fun to make such guesses and debate them with friends and so forth, but at the end of the day, they’re still only guesses, and if you’re basing your investment decisions on guesses, you’re playing some long odds. Why not just go to Vegas and have some real fun in the process of losing your shirt?
So, where does that leave us as investors trying to make intelligent decisions about our money and our financial future?

The first step is to be humble and aware that we don’t have all the answers and we don’t know what the future holds.

When it comes to the stock market, we can look at its long-term historical performance and assess our own time horizon when it comes to our financial needs to decide whether it makes sense to take on some equity risk.
If it does, you can assemble a portfolio of stocks that fit that criteria and hold onto it for years — through the short-term ups and downs of the market — then you have successfully put the odds of success in your favor.

That’s the path to achieving above-average investment returns over time, and as those returns compound over the years, the patient investor will eventually find themselves in possession of a lot more money than they started with.

— Nikki Earley

Housing Continues to Get Less Affordable for Many Americans

According to new research by Harvard University, almost 40 million Americans cannot afford to pay for housing. The report is titled the “How Housing Matters Survey,” and was commissioned by the nonprofit John D. and Catherine T. MacArthur Foundation and carried out by Hart Research Associates. The report points out that homeownership has gone down and rental prices keep going up, meaning that millions of residents are forced to pay far more than they should.

Homeownership keeps declining, according to the Joint Center for Housing Studies in a detailed and comprehensive 2017 State of the Nation’s Housing report, in part because homes prices in many markets have continued to go up while wages have not kept pace. In 2016, “the homeownership rate fell to 63.4%, marking the 12th consecutive year of declines.”

A lot of people who would like to buy are stuck renting, Harvard reports: “The surge in rental demand that began in 2005 is broad-based—including several types of households that traditionally prefer homeownership.” At the same time, renting is more expensive, as “rent gains across the country continue to far outpace inflation.” And adding to the difficulty, supply is tight. Since most of the new units being built are at the high end, “the number of modestly priced units available for under $800 declined by 261,000 between 2005 and 2015, while the number renting for $2,000 or more jumped by 1.5 million.”

Many Americans cannot buy and cannot rent. For a lot of people, especially in the pricey major metro areas where so many of the good jobs are, the situation looks grim. NBC News sums up the findings this way: “Over 38 million American households can’t afford their housing, an increase of 146% in the past 16 years.”

Over half of Americans (52%) have had to make at least one major sacrifice in order to cover their rent or mortgage over the last three years, according to the report. These sacrifices include getting a second job, deferring saving for retirement, cutting back on health care, running up credit card debt, or even moving to a less safe neighborhood or one with worse schools.

Even people lucky enough to own already are not immune. Harvard reports that “the typical homeowner has yet to fully regain the housing wealth lost during the downturn.” Although home values have gone up by as much as 40% in swaths of California, Florida and New England since 2000—and, in 12 metro areas, have even doubled—they have remained stagnant or even gone down by as much as 46% in much of the South and the Midwest.

Whether or not you can afford housing depends largely on where you are. In terms of purchases, only 19%t of residents of Honolulu, and only 25% of residents of Los Angeles and San Francisco, can afford to a buy median-priced home there. This situation is particularly hard on the working poor. Across the country, “70.3% of lowest-income households face severe housing cost burdens,” including “nearly nine out of 10 lowest-income renters” in places like Cape Coral and Las Vegas. That means more than 50% of their income must go toward housing and cannot be used to either pay down debt or add up to savings.

Citations

1. http://cnb.cx/2vsedd0 – CNBC
2. http://on.mktw.net/1x6rHYp – MarketWatch

The Good News Is . . .

• Core consumer prices rose (CPI) just 0.1% in June. This is the third straight 0.1% rise for the index which excludes volatile food and energy prices. Total prices were unchanged in the month with food neutral and energy down 1.6%. Housing, which is a central category, continues to moderate, also rising only 0.1% percent following a 0.2% gain in May. Apparel and transportation prices fell for a second month. Medical care prices gained 0.4% and prescription drugs rose 1.0%. Year-on-year, the core CPI is steady at 1.7% with total prices, indicating that inflation remains under control.

• Pepsico Inc., a leading diversified food and beverage company, reported earnings of $0.91 per share, an increase of 42.2% over year-earlier earnings of $0.64 per share. The firm’s earnings topped the consensus estimate of analysts by $0.10. The company reported revenues of $12.0 billion, an increase of 1.6%. Management attributed the results to global volume growth, operating efficiencies and positive net price realization across its businesses.

• Worldpay Group, the British payment processing company announced that it had agreed to be acquired by Vantiv, an American rival, for $10 billion. Worldpay, based in London, provides payment processing for mobile, online and in-store transactions in 146 countries and is the largest payment processor in Britain, where it accounts for about 42% of all retail transactions. The acquisition is one of the most significant in the field since the financial crisis. Payment processing has become increasingly important for financial institutions as more people shop online and move money using cellphones or other digital devices. Under the terms of the deal, including a dividend, investors would receive $5.04 in cash and shares for each share of Worldpay they own.

Citations

1. https://bloom.bg/2eVhfSb – Bloomberg
2. http://cnb.cx/2lwnm3s – CNBC
3. http://bit.ly/2tZqpCU – Pepsico, Inc.
4. http://nyti.ms/2tYTi3I – NY Times Dealbook

Planning Tips

Guide to Understanding the Types of Mortgage Refinancing

If you are in the market to refinance your current mortgage rate, you will most likely be asked if you want any “cash out.” Loan officers and mortgage brokers ask this question to determine what type of refinance you want or need. And it is important to know because the pricing and qualification will differ depending on which type you choose. Below is a brief guide to understanding the difference between a “rate / term” refinancing and a “cash out” refinancing. Be sure to consult with your financial advisor to determine the refinancing option that is most appropriate for your situation.

Rate / term refinancing – The simplest and most straightforward type of refinancing is the rate/term refinance (refi). No actual money changes hands in this case, outside of the fees associated with the loan. The size of the mortgage remains the same; you simply trade your current mortgage terms (interest rate and length of the mortgage) for newer, presumably better, terms.

Cash out refinancing – In a cash-out loan, aka cash-out refinance, the new mortgage is bigger than the old one. Along with new loan terms, you are also being advanced money—effectively taking equity out of your home, in the form of cash or to pay off other debts.

Qualifications – You can qualify for a rate/term refi with a higher loan-to-value ratio. It is easier to get the loan, in other words, even if you are a poorer credit risk. Cash-out loans come with tougher terms. If you want some of the equity you have built up in your home back in the form of cash, it is probably going to cost you. How much depends on the amount of equity you have built up in your home and your credit score. For example, the lender might add 0.750 points to the up-front cost of the loan, or require you to pay a higher interest rate–0.125% to 0.250% more depending on market conditions. This is because cash-out loans carry a higher risk to the lender. Statistically borrowers are much more likely to walk away from a home if they get into trouble if they have already pulled equity out of it. It is particularly true if a borrower has pulled out more than he or she initially invested in the down payment.

Tax consideration on cash-out refinancing – You are not getting free money via the refinance transaction. You are taking out a new loan with a larger balance and you must pay it back (with interest) over time. So there is no income tax to worry about. Even better, it is tax deductible, though there are limits of $100,000 ($50,000 if married filing separately). So if you pull $150,000 cash out, only the first $100,000 is fully tax deductible. However, if $50,000 of that amount is used to improve your home (a new bathroom, kitchen renovation), that portion would be deductible via your “Home Acquisition Debt” and the remaining $100,000 would be deductible under your “Home Equity Debt.” So you could deduct everything, assuming you stay under the separate limits on the “Home Acquisition Debt” and otherwise qualify per the many IRS tax rules.

How your refinancing is categorized – A refinance will likely be considered cash-out if a borrower refinances a non-purchase money home equity line of credit. That is, if you open an equity line behind your existing first mortgage after the original purchase transaction and then later want to refinance it, it will be treated as a cash-out transaction even if you are not taking cash out at that time. What this may mean to is another pricing adjustment when you refinance, which will result in a higher interest rate. Many borrowers also feel if they are not getting cash in their pocket, their refinance is not considered a cash-out refinancing. This is false. If you pay off credit cards or auto loans and receive zero cash in hand, the bank or lender will still consider it a cash-out refinancing, and it will be underwritten as such.

Citations

1. http://bit.ly/2tvrH6N – Zacks.com
2. http://bit.ly/2fm15ie – Bankrate
3. http://bit.ly/1fb0hMr – Investopedia
4. http://bit.ly/2vrXYNe – TheTruthAboutMortgage.com
5. http://bit.ly/2tZ66XP – LendingTree.com