InvestmentsReal Estate or Real Opportunities
WARNING!
THIS IS A WARNING. DO NOT BUY REAL ESTATE AT THIS TIME.
THINK ABOUT WHAT HAPPENED DURING THE 1930'S. WE ARE GOING INTO AN INFLATIONARY-DEPRESSION, HIGH INFLATION & HIGH UNEMPLOYMENT (Think 1979-1983) EXCEPT MUCH, MUCH STRONGER. Can you imagine what an inflationary depression is like?
Some may disagree with some of our points, but does it make sense to risk tying up dollars during periods of economic uncertainty? Especially when there are other opportunities specifically designed to PROFIT from what's coming?
We hear and speak to clients everyday as to whether now is a good time to buy real estate. We also have many discussions as to whether South Central America is a good choice if so. While many of our clients follow our thinking on this, there are some that either get emotionally involved in the thought of owning property offshore or are purchasing it out of fear that the US is going to collapse. In either case when they have decided to buy against our recommendations, they have come back with stories that we knew were coming.
These stories consist of clients having the lot right next to theirs discounted in order for the developer to stay afloat. By the way, these have not been small discounts. These discounts have been 30% - 50% below what they had bought at just a few months earlier. Most times these clients thought that they negotiated their lot and cost of construction down to a discount that couldn't go any lower. They just couldn't pass up "such a good deal." This was not the case.
We have other clients tell us about how the initial developer went out of business and now they need to bring in another one in which they have no relationship. Then others have delays due to a project not having enough liquidity to start the construction process, and once it is started, it gets stalled because of insufficient cash to finish it. Other delays are due to not enough of the units being sold--which of course means they will need to drop their prices which in summation means lost value to their investment.
Another example is where the developer was willing to carry the loan at no interest for the construction. A short few months later, that same developer / builder was asking for additional dollars to get started.
We could go on and on with those that did not follow our advice when buying real estate: onshore, offshore – it doesn't matter.
It is not only stories we receive from our clients that brings us to this determination. Those are all after-the-fact of us urging them not to buy. Our original recommendations were based on many years of experience and seeing these cycles repeat themselves... through an exhaustive and ongoing understanding of economic history and inter-personal relationships with those who are at the forefront of these transactions. This includes a developer in Central America who was selling primarily to Americans wanting to "escape it all." He confessed to us that he's had to drop his prices by 40%. He didn't want to do it because he had just sold a lot of property within the past year, but it was the only way to keep his company alive and continue to make sales. Even at his new prices, he has laid off most of his workers.
Let's take a look at some hard reasons why now is not the time to buy real estate:
- The real estate market has not bottomed.
- It still has a long way to fall yet.
- Do not tie-up your money into illiquid real estate during periods of economic uncertainty.
- It will be many years, perhaps 20 or more, before real estate values get back to even. (Think 1930's, when property sat idle for decades.)
- Anyone that believes in rising inflation and rising gold prices must believe in rising interest rates. People will only loan out their money if they can get their money back adjusted for inflation. This means devaluation per the most basic valuation formulas, just as what happened to the stock market. Except that with hyper-inflation it means a hyper-loss in values.
- We hear them all: all those commentators talking about real estate but they are merely commentators and are not economic historians. The inter-relationships and results are sure.
- There are too many opportunities to profit from what's coming. Why tie-up your dollars in sure-losers? If someone wants real estate, at least wait 3-4 years and then buy cheaper.
- Those on the inside of real estate also see the false signs, just as are seen in the stock market. You cannot have sharp devaluations of the dollar, and a rise in the real value of real estate simultaneously.
- Who's going to keep buying to prop real estate values up... as these commentators are all preaching to Americans, what happens when Americans discover the reality of economic collapse? And all retreat by pulling in their dollars? Where will the buyers be then? There will be no-one to prop up their values.
So you may be asking whether there are other opportunities out there? Absolutely. In fact we are most optimistic about the opportunities that are available.
For example, many think it might be a bad time to invest in an IPO. In stocks tied-to the rest of the regular economy, we definitely agree. In stocks that are contra-cyclical to the rest of the economy, they are liquid and are likely the opportunities of the decade, poised to outperform gold or silver by double, triple or more.
Think 1930's again. General Mills, General Motors, and others bought all their acquisitions for a song, and flew past Post cereals and Ford who had the big market share before then. There were more millionaires created per capita during the decade of the 1930's than during any other decade before or since! THIS is exactly where the opportunities are-- in businesses that are designed to profit from what's coming, who see what's coming, who have a unique story and will fill the gaps of those that will have to be retrenching because they don't know where to go.
In closing, there was a time when real estate was a sound investment--and will be again. It just isn't right now. Again we are very optimistic on the opportunities abound and we want to make sure that we keep our clients in the know. We're not suggesting our clients put their dollars anyplace where we aren't making our own investments. This is why you hired us. We keep you informed and give you access to not only our historical research but also experiences and established relationships that we are involved in. If you have additional questions, get in touch with our team of advisors--especially if you are thinking about purchasing real estate any time soon... Or, if you want to be involved where the real opportunities are at this time.
Take your pick: real estate, or real opportunities.
Bond Credit Ratings 101
Credit rating agencies have been criticized for not providing adequate warning about risky securities. Despite their recent high-profile failings, credit ratings remain a useful tool for bond investors, as long as their limitations are understood.
Three credit rating agencies
Three major credit rating agencies - Moody's, Standard & Poor's and Fitch - issue ratings on the credit worthiness of companies and public entities that issue debt, as well as ratings on the debt itself. Ratings represent an agency's opinion of a bond issuer's ability to make scheduled interest payments and to repay principal at maturity. However, a high rating is only a guide - not a guarantee of creditworthiness.
The agencies issue ratings in a letter format. For example, the ratings from Standard & Poor's and Fitch range from AAA for the highest-quality bonds to D for bonds in default, meaning the issuer has stopped making interest payments.
The agencies also use plus and minus signs to indicate stronger or weaker ratings within certain groups. Moody's uses a different but similar scale, with Aaa as the highest rating.
Ratings, yields and risk
There typically is an inverse relationship between a bond's credit rating and its yield. Riskier, lower-rated bonds tend to offer higher yields than comparable higher-rated bonds. The higher yield compensates investors for the added risk they take in buying a lower-rated bond. Bonds in any of the four highest-rated groups (AAA, AA, A and BBB) are considered investment grade. All bonds below investment grade are classified as high yield, speculative or "junk" bonds - all terms with roughly the same meaning.
Because many institutions can't own bonds below investment grade, the investment-grade bond market is more liquid than the high-yield market. This leaves more opportunity to find bargains in the high-yield market. And when a bond is upgraded from high-yield to investment-grade status, it typically means a significant boost in price.
Lower-rated bonds may offer better return potential, but their risks are real. When an issuer defaults on a bond, not only does it stop paying interest, but it also may not be able to pay back your principal.
In an analysis by Standard & Poor's covering the 15 years from 1995 through 2009, the average default rate of U.S. corporate bonds in all investment-grade categories was only 4.62%. Compare that to the 32.41% average default rate for high-yield corporate bonds. In the lowest-rated high-yield groups, including CCC, CC and C, the average default rate was a whopping 62.30%.
Delayed downgrades
In an ideal world, credit ratings would change along with an issuer's financial condition. In the real world, though, rating agencies don't always respond promptly, especially when it comes to downgrading or lowering a company's credit rating.
When a company's credit rating is downgraded, it might be forced to pay higher interest rates on its bank loans or even repay the loans on an accelerated schedule. So rating agencies often drag their feet about issuing downgrades.
To cite one infamous example, defunct energy trader Enron carried an investment-grade rating until just four days before the company filed for bankruptcy in December 2001. More recently, the rating agencies were slow to recognize the risk in derivative securities held by Bear Stearns and Lehman Brothers - both of which collapsed in the 2008 financial crisis.
That's why, if you're buying an individual bond, it's important to research an issuer as carefully as you would if you were buying a stock. Additionally, even in a portfolio of highly rated bonds, diversifying across multiple issuers - some advisors say a minimum of 10 - as well as a variety of market sectors is likely a good idea.
Using bond credit ratings successfully
Bond ratings can be useful in your investment research, as long as you use them as one analytical tool among many. The key is keeping their limitations in perspective and incorporating the same principles of sound investing that you would apply to stocks - such as diversification - to dampen risk.
What You Should Know About Tax Advantaged Investments
Last Updated (Tuesday, 07 October 2008 15:21)
Tax advantaged investments are not “loopholes” in the Tax Law that the IRS is out to close up. They are not morally wrong, as some would have you believe. A common fallacy is to confuse tax evasion with tax avoidance. Tax evasion is illegal and punishable. Tax avoidance, however, is legal and is encouraged by the lawmakers. The United States Congress promotes the shifting of funds from the taxable sectors of the economy to areas of public need or good by passing laws which create tax deferred; tax sheltered and even tax free investments.
Many, uninformed of the nature of the tax advantaged investments, would have you believe that you are “robbing” the economy of tax dollars by not giving your taxes to the government to spend in their great wisdom. Such advocates are ignorant of the fact that tax advantaged investments are put into housing, energy, food, strategic metals, research and development, medical needs and transportation. These tax advantaged investments are actually a boon to the economy.
Rather than being filtered through bureaucratic mazes to the economy, these otherwise diverted tax dollars are being applied directly to where there is a need - creating new jobs, expanding specific industries and adding to the growth of the country. The famous jurist, Judge Learned Hand, remarked that, "There is nothing sinister in so arranging one's affairs as to keep taxes as low as possible."
In another famous quote, Judge Hand wrote: "Any one may so arrange his affairs that his taxes shall be as low as possible; he is not bound to choose that pattern which will best pay the Treasury; there is not even a patriotic duty to increase one's taxes" Helvering v. Gregory, 69 F.2d 809, 810-11 (2d Cir. 1934).
It is important to note that understanding tax advantaged investments should be a prerequisite to becoming involved in them. Many tax advantaged investments carry only minimal risk to the investor. Allocating funds into municipal bonds, life insurance, IRAs, etc. can provide excellent tax incentives.
On the other hand, some tax advantaged investments, such as oil and gas limited partnerships or real estate limited partnerships, can be and often are risky (note: this is not a comprehensive list of risky tax advantaged investments). Although there is the possibility of substantial returns with such endeavors, many have and many will continue to chance the loss of their investment. Yet when compared with the alternative, a 100% chance of loss when paying tax, such investments can look quite attractive to some investors. After all, which investment will offer the greater possibility of providing you income in your golden years or at any other time?
Individuals also need to remember that Congress has passed tax incentives because such investments are risky. Tax advantages are provided to encourage investing in high-risk areas that further the social good of the country.
Being involved with a tax advantage investment requires a proper frame of mind. Peace of mind is what you have to lose if you are uncomfortable with such an investment. Tax advantaged investments can be complex -- particularly with the ever-changing tax laws. Working with a knowledgeable and licensed investment advisor will help you avoid many of the pitfalls and help you keep more of your hard-earned dollars from taking a one-way trip to the IRS.
Brock and Associates, LLC is a fee-based financial planning firm that specializes in retirement, estate, and tax planning. For more information regarding tax planning strategies, please contact our office.