Posts in Loans and Debt

Reflections on Real Estate Investing

August 4th, 2016 Posted by Asset Allocation, Foreign Investing, Homes and Mortgages, Investment Strategy, Investment Vehicles, Investor Behavior, Loans and Debt 0 thoughts on “Reflections on Real Estate Investing”

Just as the natural world around us comes from the elements found in the periodic table of elements, capital markets are made up of asset classes, broadly organized into stocks, bonds, and hard assets like commodities and real estate.

As elemental as asset classes are to investing, it may make sense to include some real estate investments in your globally diversified portfolio. That said, as with any investment, there are better and worse ways to go about implementing an otherwise sound strategy … with a lot of misleading misinformation out there to add to the confusion.

If you intend to invest in the market’s risks and potential rewards with informed discipline rather than as a speculative venture, most of the same principles apply, whether it’s for real estate or any other asset class. To help you avoid hanging out with the wrong elements (so to speak), let’s review those essential guides.

Seek Global Diversification

As with stocks, it’s wise to spread your real estate risks around by diversifying the number and types of holdings you own. By diversifying your holdings across a number of investments and a mixture of property types, you are best positioned to earn the returns that the asset class is expected to deliver, without being blindsided by holding-specific risks such as property damage, deadbeat tenants or unscrupulous property managers.

One way to achieve diversification is through a well-managed, low-cost Real Estate Investment Trust (REIT) fund, or a “fund of funds” combination of multiple REIT funds. As one REIT fund prospectus describes, this enables you to own hundreds of properties across a diversified range of domestic and global companies “whose principal activities include ownership, management, development, construction, or sale of residential, commercial or industrial real estate.”

Understand the Risks and Expected Rewards

Why bother with real estate? The magic word is “correlation.” As Forbes contributor Frank Armstrong III wrote in 2013, “It’s really nice in times of volatile markets like now to have an asset class that may zig when traditional stocks and bonds zag. An asset with low correlation to others in your holdings can both reduce risk at the portfolio level and increase returns.”

In his July 2016 column, “The best performing asset class no one talks about,” Reformed Broker Josh Brown observes that, “Going back to the year 2000, REITs are the best performing asset class in the market, according to JP Morgan, up 12% on an average annual basis. … [I]t’s weird that people generally don’t focus on them.”

So, real estate can serve as a stabilizing force and a source of returns in your portfolio. But, like any investment, potential rewards are accompanied by notable risks.

  • Taxes – Real estate investing tends to be relatively tax-in Domestic and international tax codes vary and change, with different treatments required for different kinds of real estate investments. Due to potentially unfavorable tax treatments on distributions, they are best located in your tax-sheltered accounts, lest the taxes incurred exceed the benefits.
  • Liquidity – Unlike publicly traded stocks, which can usually be traded with relative ease in busy markets, real estate ventures can be relatively illiquid investments that don’t always lend themselves to being bought and sold on a dime. This can be tricky for an individual investor purchasing them directly. It also can impact a fund investor. If the fund manager is forced to place ill-timed trades to meet popular demand, the trades can be costly for all shareholders.
  • Volatility – Although an allocation to real estate can contribute to decreased volatility in your overall portfolio, the asset class itself typically exhibits a wide range of performance along the way. Some providers may try to mask this reality by playing fast and loose with their reporting strategies, but you really should expect a relatively bumpy course with your real estate holdings, whether or not it’s being reported to you as such.

Investors discovered these risks in 2007–2009 when a U.S. and U.K. housing market collapse generated a global credit crisis. Investors had been treating any and all real estate prices as sure bets, despite the underlying risks involved. We’re seeing these risks play out again in the U.K.: Due to heavy sell-offs, investors in Open Ended Property funds are discovering that the return “smoothing” they thought they were enjoying may have been built on a house of cards. As one columnist observed: “Just because risk is not immediately visible, does not mean it isn’t there.”

Select an Appropriate Allocation – for You

In light of its potential returns and known risks, evidence-based investment strategy suggests that stocks and bonds are typically the staples in most investors’ portfolios, with real estate acting more as a flavor-enhancing ingredient.

Beyond this general rule of thumb, your personal circumstances also may influence the allocation that makes sense for you. For example, if you are a real estate broker, or you own a rental property or two as a side business, you may want to hold less real estate in your investment portfolio, to offset the real estate risks that you’re already exposed to elsewhere.

Incidentally, we suggest you avoid treating your home as a real estate investment. If it happens to appreciate over the years, that’s great. But don’t forget that its highest purpose is to provide you and your family with a dependable roof over your heads. This is one of several reasons your home is best thought of as a consumable expense rather than a reliable source of investment returns. At the very least, you do not want to over-expose your home to the risk of loss.

Manage the Costs

As always, the less you spend on your investments, the more returns you get to keep. Given that there are well-managed REIT funds that offer relatively cost-effective and efficient exposure to the asset class being targeted … why would you choose a more complicated alternative where the costs may be both insidious and excessive?

Adopt a Long-Term Perspective

While it can often make sense to include real estate in your globally diversified portfolio, the advantages are accompanied by portfolio performance that may often deviate from “the norm.” That’s by design, to help you achieve your own financial goals, not some arbitrary norm. Given these practical realities, it’s essential to embrace a patient, long-term approach to participating in real estate’s risks and expected returns. If your time horizon or risk tolerance isn’t in line with such an approach, you may be better off without the allocation to begin with.

Use Investment Vehicles That Best Complement All of the Above

If an allocation to real estate makes sense for you and your financial goals, the final ingredient to successful application is to select a fund manager whose strategies align with yours. Look for a fund that clearly discloses the investments held, the approach taken, the risks realized, and the costs incurred. Consider a provider who scores well on all of these counts; offers diversified exposure to domestic and global markets; and appeals to disciplined investors like yourself, who are less likely to panic and force unnecessary trading during times of stress.

Also, note that you may already be invested in real estate without knowing it. It’s not uncommon for a stock or hybrid fund to include a shifting allocation to real estate. Unless you read the fine print in the prospectus, it’s hard to know just what you hold, in what amounts.

Ask for Help

Is real estate investing right for you? If it is, how much should you invest in, which holdings make sense for you, which account(s) should hold which assets, and how can you maintain control over your target allocations? These are the kinds of questions we cover when helping investors with their real estate investments, embracing each family’s highest interests as our personalized guide. Please be in touch at 203-985-0448 if we can help you with the same.

[Photo Credit: Flickr user thinkpanama]

Family Wealth Planning Conversations

February 22nd, 2016 Posted by Budgeting, College Planning, Estate Planning, Family Finances, Homes and Mortgages, Life Planning, Loans and Debt, Marriage and Finances, Retirement Planning, Saving 0 thoughts on “Family Wealth Planning Conversations”

What Are Family Wealth Planning Conversations (And Why Have Them)?

Whether gathering for annual reunions, sharing childhood memories, or simply being there for one another during difficult times, family traditions nourish our most satisfying relationships. An important tradition that we at OpenCircle foster with our clients focuses on family wealth planning. We facilitate conversations that engage every family member, each of them contributing their talents and interests to achieving their collective and personal lifetime goals.

That does not mean that everyone must participate equally. As we work with families, one individual often emerges as the spokesperson or steward for the group. That’s fine … if the role is based on a mutual and deliberately planned arrangement. If it is instead based on unspoken assumptions or force of habit, a family’s wealth planning may benefit from a fresh conversation.

Even if a family is in full agreement on who is best suited to champion its interests, there’s always life’s many “what ifs.” Are others in the family adequately prepared to assume the stewardship role when and if it is required of them? Might they have unexpressed questions or concerns that are best addressed well before that day may arrive? Carving out time to hold candid conversations is where it all begins.

How We Guide Our Clients in Family Conversations

To launch a family wealth planning conversation with a client, we invite them and their family to meet with us at their convenience. (A face-to-face meeting is optimal, but we can harness technology to hold a meeting online if necessary.) We guide them in exploring key considerations such as:

  • How would each of them define their roles in their family’s wealth planning?
  • Are all of them satisfied with their current roles?
  • Do all family members have the essential information, should they be required to increase their participation? (For example, do they know how to reach us?)
  • Are there other questions, suggestions or family wealth dynamics they would like to explore, either immediately or over time?
  • How can we best assist each of them in these and other areas?

We help families find broader and deeper perspective in this area of their lives. Even though specific family members may never have joined us in prior meetings, we encourage them to be included at this time. They may well discover insights about one another that could strengthen both their financial conversations as well as their overall family dynamics.

Regardless of who may be “in charge” of a family’s wealth, every individual is equally dependent on the outcome of the efforts. Enabling a forum for everyone’s voice to be heard is another way OpenCircle helps our clients achieve their greatest life goals, keeping their family’s wealth fresh and meaningful over time. If you would like more information, please give us a call at 203-985-0448.

[Photo credit: Flickr user Luke Lehrfeld]

The Realities of Being Wonder Woman

February 15th, 2016 Posted by Family Finances, Generational Financial Planning, Investor Behavior, Jobs, Careers and Benefits, Life Planning, Loans and Debt, Marriage and Finances, Retirement Planning, Saving 0 thoughts on “The Realities of Being Wonder Woman”

Wonder Woman is 75! No, that’s not her age in comic books, but it is how many years have passed since her character was created in 1941. Her “diamond” anniversary has sparked renewed interest in this unusual heroine and reminded many of us about her accomplishments. From the days of World War II through the present, she has confronted and beaten many of the challenges that real women face. She has served as a role model and a trendsetter; she has emulated and fostered that we-can-do-it attitude. She is also a reflection of the world around us.

We see regular reports about the progress women have made in recent times. They are better educated than ever before, with more women than men currently in college. There are more women than men in the workforce. Many more women are the primary breadwinners for their families than in the past. They are leaders in many professional fields and have made great strides in the business world.

With all this progress, however, women must still cope with difficult odds. While the gap is slowly narrowing, women continue to earn less money than men for equal work. While men are taking on more responsibilities in the home, women still shoulder more than their share of childcare and housework. They often end up with the bulk of caregiving for aging parents and other family members in need. And they continue to confront invisible barriers in the scientific and corporate worlds. The demands on their personal time can be overwhelming and the rewards of paid employment may be less than satisfying.

As if all this weren’t challenging enough, many women worry about having no one to care for them in their later years. They also worry about having a financial safety net that will withstand the unexpected. Concern about the cost of healthcare adds to overall anxiety levels.

Many women know that they need to do something about financial planning. They may feel, however, that they do not have the time to deal with it, adding to the emotional stress of their daily lives. They may believe that they should find professional advice, but may not know where to turn. While women as a group are becoming increasingly educated and informed about financial matters, they may not feel comfortable asking for help. At times like this, they do not feel very much like Wonder Woman.

The demands of 21st century life do not show any signs of diminishing. And as women are controlling more and more of the world’s personal wealth, the need for each of them to create and implement a solid plan for financial management is growing stronger. They need to find a way to do it that helps relieve stress, rather than adding to it.

At OpenCircle Wealth Partners, we can help. We have years of experience assisting women with the particular issues they face. We take great satisfaction in helping them find their way through the financial jungle to a place where they feel more in charge of their lives – to a place where they feel more like the Wonder Women they really are. Please give us a call at 203-985-0448 for a free, no-obligation, consultation. We look forward to hearing from you.

[Photo Credit: Paolo Rivera]

Making Sense of “0%” Credit Card Offers

December 17th, 2015 Posted by Budgeting, Economics, Family Finances, Loans and Debt, Saving 0 thoughts on “Making Sense of “0%” Credit Card Offers”

Are you unhappy with your credit cards? Does the “grass look greener” at other credit card companies? Are you maxed out on one or more credit cards and paying too much interest? Are you concerned about higher interest rates due to the rate increase that the Federal Reserve put into effect on December 16th? Whatever your motivation, you may be thinking about applying for a new “0%” card.

As we near the end of 2015, a number of credit card companies are still offering new customers 0% APR on purchases through 2016 and even into 2017. Many of them encourage applicants to transfer balances from their existing cards by extending the 0% offer to these transfers. This could look like the best of both worlds – wipe the slate clean on your old card and make a fresh start. After all, who can pass up an interest-free loan?

The beneficial features of these credit card offers are quite clear up front. The promotional material is designed to encourage your signing up, so the “perks” are highlighted. But as the proverb says, if it looks too good to be true, it probably is. It is essential to read the fine print. Here are some potential hazards to watch for:

  1. Annual fees

Some cards don’t have an annual fee, but many do. The cards that do have annual fees may waive them in the first year. Be sure you are aware of what the fee is or will be in the future.

  1. Other costs

There are lots of other charges that credit card companies may add on. These can include fees for late or returned (bounced) payment, which can be as high as $38 for each infraction. There may be a surcharge on foreign transactions. The interest rate on cash advances may be higher than on purchases. You could incur a fee for going over your approved credit limit. If you carry any balance at all, after the initial period, you may be charged a minimum interest fee. Make sure you know up front.

  1. Limitations

As stated above, the 0% rate may be applied to new purchases and balance transfers or only to one of those. The interest-free time period may be as long as 18 months or as short as 9 months. Even with a 0% offer on balance transfers, there may still be a transfer fee which could negate your potential savings. If you change card companies, you want it to be worth your while.

  1. Rewards programs

It is common for credit cards to offer rewards to their customers, in return for purchases on their cards. It is important to know that these cards may charge a higher interest rate in order to underwrite the rewards program. Some companies require a minimum spending amount before you are eligible for your earnings. Other companies may put a cap on your earnings. If the specifics of the program are not clear, insist on clarification.

Variable APR (Annual Percentage Rate)

The APR that a card company charges may be variable. Once the 0% period ends, you could be charged interest amounts that vary over time, with some APRs currently as high as 22.99% or more. Be advised that the rate on regular purchases could be different from the rate on balance transfers. And a late payment could cause your APR to rise, perhaps to as high as 29.99% or more.

  1. Fraud

When you sign up for a new card, make sure YOU are the initiator. Never accept a credit card offer over the phone unless YOU made the call. And never click on a link inside an email – if you apply online, do it through the company’s official and secure website.

A word to the wise:

Whatever credit cards you have, do your best to avoid carrying a balance. If you have an unpaid balance, chip away at it each month, because the interest you are paying is a negative investment. In other words, if you pay down your balance each month, the interest you save is money in your pocket.

[Photo credit: Flickr user Mighty Travels]