5 Obvious Strategies (That Apparently Aren’t So Obvious)

Most people, on paper, would agree with these strategies. But a much smaller percentage of the population actually use them to when making financial decisions…

1. Buy low and sell high.

You won’t find a single person who disagrees with the theory behind this investing concept, but many people behave differently in practice.

We are all emotional beings. And sometimes we allow our emotions to dictate our actions and unfortunately that can be detrimental to our finances. We know we are supposed to buy when markets are low and sell when they are high. But we don’t always do that. Last year about this time the big news was Brexit. According to the media, this was going to be an event that would have lasting ramifications to world economies and the stock market. And the Dow Jones Industrial Average did fall 600 points in one day. If you allowed your emotions to rule you may have sold some or all of your portfolio out of fear. Yet, the Dow had a 52 week high within 30 days of Brexit and look at where the market is today! We all need to have a long term investment strategy that is not short sited. We need to understand what we are invested in and why. Owning companies or being in the market has historically been the greatest wealth generator known to mankind. But markets don’t move in a linear fashion as we would like. We can’t afford to have our emotions dictate our actions when we experience market downturns.

2. Don’t pay more in taxes than you have to.

Nobody voluntarily signs up to pay extra taxes because they feel strongly about the federal government as a beacon of efficiency and virtue. But many people do pay more taxes than they have to.

Unfortunately people tend to focus more on tax preparation instead of tax planning. April is too late to start thinking how to save money on your prior year’s tax return! Our tax code is about 74,000 pages long. It is no wonder that many of us pay more than we should. There are many so opportunities for savings that we just aren’t aware of.

I am extremely concerned about future tax rates and how they are likely to affect our retirement. Believe it or not, historically we are in a very low tax rate environment. The top marginal bracket is only 39.6% in comparison to that of the 1970s when the top marginal bracket was 70% or worse in 1945 it was 94%. I realize that most of us aren’t in the highest marginal bracket. However if rates go up, I promise it will be across the board and not just for the wealthiest Americans. Why am I so convinced rates are going to go up? Think about all our underfunded government programs! Think about the deficit! Think about all the baby boomers leaving the workforce and starting Social Security. Frankly it’s scary. The money to pay for all of this has got to come from somewhere.

We have been taught over the years to throw all our retirement savings into tax deferred vehicles like traditional IRA and 401Ks. Thinking we would defer the payment of taxes because our rates would likely be lower in retirement. What if that is not the case?

There are steps that can be taken now that can dramatically affect the amount of taxes you pay in retirement. That is why tax planning versus tax preparing is so important!

3. Don’t put all of your eggs in one basket.

Most people understand the importance of diversification, but most people still don’t do a good job of having a truly diversified portfolio.

The fact is that most people have no idea what they are invested in and why. They think because their portfolio owns multiple funds that they are properly diversified. Most of the time when I am analyzing a client’s portfolio, I find that many of their funds are buying the same companies. Instead of diversity, I see a lot of redundancy.

A truly diversified portfolio can own up to 30 different asset classes, not just the large US companies we are familiar with. But the proportions of those asset classes need to be specific to the individual or couple based on their particular goals and their particular situation.

4. Market timing is virtually impossible.

Everyone nods along as we say this, but often their behavior doesn’t line up.

We let our emotions dictate our behavior – even when we know our actions not to be prudent. We need to have a specific investment stategy in place and stick with it when markets are volatile – especially when markets are volatile. Study after study show us that the average investor under preforms the market as a whole. This is largely because many of us are jumping in and out of the markets because somehow we think we know what is going to happen in the future.

The truth is nobody truly knows what is going to happen. I always like to remind clients that if news is unpredictable and news effects markets then you’d have to agree markets are unpredictable. So unless you know tomorrow’s news – don’t bother trying to time the market.

5. Keep costs low.

It’s no secret that lower costs within your investments will let your money grow faster. But people still end up in investments with high fees.

Most people have no idea what the internal cost of their investments are. They may know what their advisor is charging them but have no concept of the cost of their individual funds. The internal cost of some mutual funds can be very high which can dramatically decrease the earnings of your portfolio over time. Not only do I look at expense ratios when analyzing a client’s investments but I also look at turnover ratios which tell me if the funds you own are being actively traded. Meaning, if a fund you own has an 80% turnover ratio that means that if at the beginning of the year your fund held 100 different companies then at the end of the year your fund would only hold 20 of those original companies. This in turn means the fund manager is buying and selling a lot with in that fund. That creates two problems. First, that fund manager believes he or she can predict the future. Second, all that trading has a cost to it which again is affecting your returns.

We all know the strategies that we are supposed to employ, it’s just a matter of doing so…

— Nikki Earley

Adobe’s Cloud Subscription Strategy Creates a Profit Boom

When Adobe Systems Inc. started the transition from a product-sales model to a cloud-based subscription model less than five years ago, the move looked risky. Skeptics figured it would eat into the rich profit margins of the company’s pricey design, photography, and video software. At the time, prices on its popular Creative Suite package, which bundled together Photoshop, Illustrator, and other programs, started at $1,300 and went as high as $2,600, depending on the version. Meanwhile, some customers openly rebelled against the idea of renting cloud-based versions in perpetuity. About 50,000 signed a Change.org petition demanding the company abandon the scheme. Revenue shrank 8% in 2013 and was pretty much flat the next year. There are not many doubters today, however. Adobe’s revenue was just shy of $5.9 billion for the fiscal year ended in November, up from $4 billion in 2013; about 80% of that came from subscriptions and other recurring sources. Melissa Webster, program vice president for content and digital media technologies at researcher IDC, calls it a great example of “smart paranoia.” Says Webster: “If they didn’t reinvent, someone might reinvent them out of business.”

When Adobe began thinking about leaping to the cloud, less than 5% of its revenue came from subscription products. “Every single quarter we started from scratch,” says Chief Financial Officer Mark Garrett. The downside of the sales model became painfully clear during the recession, when revenue dropped 18% in a single year. A pilot program in Australia followed, then an initial subscription offering, then the big step: announcing it would stop selling its Creative Suite products. Customers could keep using their existing software, but if they wanted to get updates and product support years into the future, it would be the cloud or nothing. It was a no-retreat, “burn the boats” strategy, Garrett says: It could work only if customers, and Adobe itself, had no choice.

That said, Chief Technology Officer Abhay Parasnis argues the shift also depended on making Creative Cloud better than Creative Suite—adding capabilities for users to work on mobile devices, for example. “This was a brand-new product,” he says, “a new experience.” Moving to the cloud meant users could share files and collaborate on projects, and Adobe could roll out features and improvements as they are developed, instead of saving them for a major software release every 18 to 24 months.

Zsolt Vajda, a freelance designer in Budapest, cites some of these factors—particularly the ability to collaborate without worrying about who was using which version of the software—to justify his early embrace of Creative Cloud. And, he says, “buying each component of Creative Suite, if you’re starting out, could be very expensive.” Paying $50 a month for the comparable cloud package feels more manageable for a small company or an individual (though it adds up to $1,800 over three years).

Garrett says more than a third of Creative Cloud subscribers are new to Adobe, a figure that may well include those who previously turned to pirate versions of the software. Despite early complaints, Adobe says it’s managed to convert a large portion of its customer base—if not always enthusiastically. “I am seeing it as complete capitulation, honestly,” says John Schnall. His New Jersey animation studio doesn’t need the latest software to achieve Schnall’s hand-drawn style, but clients increasingly expect his company to have Creative Cloud access, he says. Schnall says it is possible he will come to love the new programs, but it is not a choice he would have made on his own.

Creative Cloud is Adobe’s core product, generating about 55% of revenue, but the company’s future may depend more on its other cloud offerings. Document Cloud, with Acrobat as its centerpiece, is designed to help companies go paperless. Experience Cloud, built partly through the acquisitions of Omniture Inc., a maker of analytics and other software, and the video-advertising company TubeMogul, offers a set of online marketing tools. “Connecting the creative pipelines to digital marketing in a more seamless way is a great opportunity,” says IDC’s Webster, noting there are not a lot of software platforms that allow the different actors in what she calls the “content supply chain” to plan, organize, and manage their work. Adobe is “in a unique position,” she says.

When Adobe announced its move to the cloud in 2013, photographer Brad Trent was among those who strongly objected, supporting the Change.org petition with an epic blog post arguing that pro-level customers would get no new value from the switch. “I was ranting pretty hard,” he says. His views haven’t really changed; he wonders, for instance, what incentive there is for Adobe to continue to innovate. Under the old business model, the onus was on the company to demonstrate that each iteration of Creative Suite was an improvement on the previous one, to get customers to part with more than $1,000. That’s less of an imperative when the customer is paying $50 a month. Nevertheless, Trent has grudgingly signed up for a Cloud version of Photoshop. “As a business move for them, I get it,” he says. “But you can’t get off. It’s like they’ve hooked everybody on digital heroin, and you’re gonna be on it for the rest of your life.”

Citations

1. https://bloom.bg/2sMfJq7 – BusinessWeek
2. http://bit.ly/2sMxqG0 – TheStreet.com

The Good News Is . . .

• Initial jobless claims came fell 10,000 to 245,000 in the June 3 week. The 4-week average was up but only slightly, at 242,000 which is in line with the trend. Continuing claims were lower, at 1.917 million in lagging data for the June 3 week with the 4-week average at 1.915 million and hitting a new low going back to the early 1970s. Jobless claims have been very low, pointing to unusually strong demand for labor.

• At Home Group Inc., a leading home décor superstore chain, reported earnings of $0.17 per share, an increase of 21.4% over year-earlier earnings of $0.14 per share. The firm’s earnings topped the consensus estimate of analysts by $0.02. The company reported revenues of $211.8 million, an increase of 23.1%. Management attributed the results to broad-based success across new and existing stores, geographies and product categories.

• The Japanese technology conglomerate SoftBank agreed to acquire Boston Dynamics, a manufacturer of animal-like robots, from Google’s parent company, Alphabet. SoftBank also agreed to acquire Schaft, a secretive Japanese bipedal robotics company, also owned by Alphabet. “Today, there are many issues we still cannot solve by ourselves with human capabilities. Smart robotics are going to be a key driver of the next stage of the information revolution,” said Masayoshi Son, chairman and chief executive of SoftBank. The deal is an unwinding of some of Google’s robotics investments. Boston Dynamics, a company spun out of the Massachusetts Institute of Technology 25 years ago that has received funding from the Pentagon, gained notice for its two- and four-legged robots. Designed for military use, they move with uncanny balance and speed.

Citations

1. https://bloom.bg/2eVhfSb – Bloomberg
2. http://cnb.cx/2lwnm3s – CNBC
3. http://bit.ly/2rKyPyj – At Home Group Inc.
4. http://nyti.ms/2raDUkU – NY Times Dealbook

Planning Tips

Tips for Financing Investment Property

Home prices have been on a steady climb from the depths of the housing crash, leaving many wondering if it is still a good time to invest in the residential real estate market. According to the National Association of Realtors (NAR) 85% of major metropolitan areas saw gains in existing single-family home prices in recent years. However, low interest rates are still attracting buyers and limited inventory is escalating prices in some desirable areas. But while interest rates remain low, the days of quick-and-easy financing are over, and the tightened credit market can make it tough to secure loans for investment properties. However, a little creativity and preparation can bring loans within reach of many real estate investors. Below are some tips to consider if you seek out financing for a residential investment property. Be sure to consult with your financial advisor to determine if this type of investment is appropriate for your situation.

Have a sizable down payment – Mortgage insurance will not cover investment properties, so you need at least 20% down to secure traditional financing for them. If you can put down 25%, you may qualify for an even better interest rate. If you do not have the down payment, you can try to obtain a second mortgage on the property, but it is likely to be an uphill battle.

Be a ‘strong borrower’ – Although many factors—among them the loan-to-value ratio and the policies of the lender you are dealing with—can influence the terms of a loan on an investment property, you should check your credit score before attempting a deal. It will have the greatest impact on a loan’s terms. Below a score of 740, it can start to cost you additional money for the same interest rate. Below 740, you will have to pay a fee to have the interest rate stay the same. That can range from one-quarter of a point to 2 points to keep the same rate. The alternative to paying points if your score is below 740, obviously, is to pay a higher interest rate. In addition, reserves in the bank to pay for all your expenses, personal and investment-related, for at least six months also have become part of the lending equation. If you have multiple rental properties, lenders often want reserves for each property.

Shy away from big banks – If your down payment is not quite as big as it should be or if you have other extenuating circumstances, consider going to a neighborhood bank for financing rather than large, nationwide financial institutions. Neighborhood banks are going to have a little more flexibility. They also may know the local market better and have more interest in investing locally. Mortgage brokers are another good option because they have access to a wide range of loan products, but do some research before settling on one.

Ask for owner financing – A request for owner financing used to make sellers suspicious of potential buyers, because almost anyone could qualify for a bank loan. But these days, it has become more acceptable due to the tightening of credit. However, you should have a game plan if you decide to go this route. Be ready to tell the seller the amount and terms of the seller financing. You have to sell the seller on owner financing, and on you.

Think creatively – If you are looking at a good property with a high chance of profit, consider securing a down payment or renovation money through home equity lines of credit, from credit cards or even from some life insurance policies. As always, research your investment thoroughly before turning to these riskier sources of cash. Financing for the actual purchase of the property might be possible through private loans from peer-to-peer lending sites like Prosper.com and LendingClub.com, which connects investors with individual lenders. Just be aware that you may be met with some skepticism, especially if you do not have a long history of successful real estate investments. Some peer-to-peer groups also require your credit history to meet certain criteria.

Citations

1. http://bit.ly/2aFaX5z – Credit.com
2. http://bit.ly/2rbcnzD – Investopedia
3. http://bit.ly/1dMJXj4 – Bankrate.com
4. http://bit.ly/2s6Cp6k – LandLordology.com
5. http://bit.ly/2s6qsO9 – Zillow