>Morningstar.com – PIMCO’s Bill Gross Is Worried

>Morningstar.com – PIMCO’s Bill Gross Is Worried

This is an interesting article where a major bond guru predicts long term rates to remain low and to get even lower……what?

Who knows he might be right, he might not be. I don’t buy into some of his fears about the American economy, I believe the economy will be good long term and that stocks will outperform bonds. But in the short term anything can happen – even 3% 10 year treasury yields…….

Scott

Kindle

>County pension fund’s rate to stay same – The San Diego Farce

>SignOnSanDiego.com > News > Metro — County pension fund’s rate to stay same

The San Diego County Pension fund continues to refuse to come to reality. When the board was faced with lowering expectations for investment returns to 8% from 8.25% they refused. You may wonder why this is a big deal?

The San Diego County Pension board and boards across the United States are using investment return assumptions that are unrealistic so that they don’t have to use current funds to make stable their pension funds that have overpromised and will underdeliver. This almost guarantees that at some point in the future San Diego will find itself in the same position as West Virginia – being forced to issue bonds to fund liabilities that cannot be met with current state revenues (they just issues $5.5 billion and now have one of the highest debt ratios in the country).

A typical pension plan has an allocation that is 60% stocks and 40% bonds, assuming this allocation will earn 8.25% going forward is absolutely ridiculous.

The Wall Street Journal asked several economists earlier this year what they thought future returns on the stock market would be after inflation – the most optimistic was 6.5%, if we assume only 3% inflation we would get about 9.5% for a total return on a portfolio fully invested in stocks. Since only 60% is invested in stocks we can assume that the portfolio will earn about 7.7% before fees and inflation – this is being optimistic. A reasonable assumption would be 7.5%, yet the board wouldn’t even consider lowering it to 8%. Clearly this board is not considering the long term best interest of the participants in the plan or the taxpayers of San Diego who will eventually be the ones making up the shortfall. This plan will continue to get worse and waiting a decade or two to fix it will hurt much worse than fixing it now.

There may be some pain to fix this pension now, but it is nothing compared to the pain that will be felt a decade from now. The board appears to looking at their own tenure and career in politics, not looking at the tough problems and finding solutions.

San Diego is not alone – this is a widespread problem and issuing bonds to fix the problem is not an acceptable solution.

ScottyD

Kindle

>FundAlarm

>FundAlarm

This is a great website that is updated each month and tracks changes at mutual fund companies that you may not otherwise hear about. It is a free site, but if you read it every month they request a donation to help offset expenses. This is truly one of the best mutual fund oversight websites you can visit.

Scott

Kindle

>The American College and NAIFA Create New Financial Services Specialist Designation

>ppc.thomson.com � Guidance you trust, tools you can use.

Is this a Joke?

This designation is worthless and yet another example of the lengths organizations will go in order to “appear” credable. No doubt in my mind that people who have been employees for less than a month will be putting “FSS” on their business cards and acting as if it really means something.

The FSS stands for Financial Services Specialist – it should stand for Full of Sh*t Specialist – pardon my french.

It just keeps getting more and more ridiculous.

Scott

Kindle

>The Globe and Mail: Mania over real estate spurs fears of a crash

>The Globe and Mail: Mania over real estate spurs fears of a crash

An interesting story about what some believe to be a Real Estate bubble in the US.

My thoughts on this subject are not new. I believe there are several local housing bubbles, but not a national bubble (mirroring Alan Greenspans view – or perhaps he is mirroring mine!). The problem is that we don’t know if there is a bubble until after it has popped. Just like with the Nasdaq in 2000 everybody thought prices could continue to rise even though they were completly disconnected from reality.

Don’t get me wrong, I am not saying there will be a drop in real estate prices in the bubble areas (Orange County, San Diego, & other places mentioned in the article), I have no idea what will happen with prices. I thought homes were overpriced last year and they increased by 20%, thus confirming that I have no predictive ability (as if you needed confirmation).

Everyday I get a call from someone wanting to start investing in real estate and I tell them that I think its a great idea. Of course I preface this by explaining the difference between investing and speculating. If you are purchasing a home solely because you believe the price will be higher in a few months (the greater fool theory of real estate) and you can sell it to someone else for a profit, you are not investing – you are speculating. There is nothing inherently wrong with speculation; our society could not succeed without speculation, however do not call it investing. An investment is something that you can reasonably expect to get a return on over a reasonable time frame. To me there are two basic ways to make money in real estate:

1) Buy a property at a reasonable price, preferably a depressed price and fix it up (adding value to it) – then either sell it or rent it out.

2.) Buy a piece of property for rental purposes, but in doing so make sure that you have cash flow that is at least break even. Not break even on an interest only loan, but break-even on a fully amortized loan (including taxes, insurance, etc).

I believe rental real estate can be a wonderful way to build a net worth, but only if done wisely. I always say that there is no other investment like real estate. What other investment is purchased for you (the bank) and paid off by someone else (the renter)? There is no other investment like this.

Imagine a 35 year old purchasing a few pieces of property and getting enough rent to cover expenses – if they have a 30 year mortgage it will be paid off by retirement and they will have an income stream that they won’t outlive and one that will rise with inflation (rising rents), this is smart investing.

The problem today is that this type of real estate investing is getting more difficult as more and more people are doing it and bidding prices up to levels that don’t make sense. In addition, many of these people have no reserves (which is a must in real estate) and no idea how to fix a toilet (another must if you want to be a landlord). Real Estate can lead to riches, but like anything it must be done over time and you must be patient and smart with your purchases. Buying real estate because it is going up is not a good reason to buy.

I can help you evaluate a potential deal if you are in the market, but be aware that I am quite conservative – i will apply the Graham and Dodd principles when evaluating a deal, it has to make sense and provide a reasonable level of safety.

Are we in a bubble? I don’t know. Does it matter? Not really, if you are living in your home for the long term you have nothing to worry about, but be careful with your ideas of buying property.

Scott Dauenhauer, CFP
scott@meridianwealth.com

Kindle

An Independent Fiduciary

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