Investment showdown -- beyond the Roth, SDP, & TSP

[Guest CannonCrashPad]

I was wondering if you understood how foreclosure works. It is now apparent that you do not.

Well perhaps you'll educate me? While terms may differ depending on what bank and what mortgage contract you sign, I'm under the impression that when you have a mortgage that contract includes language giving the bank the ability to seize the mortgaged asset if you are unable to pay your mortgage payment. I understand they may "work with you," but that is the bank's call. They can just take the property plus the money you threw in paying off the mortgage. If this is not a true statement, then by all means, please educate me.

[Red Fox]

JS posted in regards to my opinion about buy and hold

"With all due respect, I think you are a little wacko on some of this. With regards to equities and the "buy and hold" stuff - I have mentioned in a few posts, but the broader stock markets are already past their rock bottom after the 2008 crisis. If you started investing before that, you are still way up as opposed if you had settled for lower bond returns. If you invested when the general stock market hit rock bottom after the 2007-2008-2009 crisis (March 6, 2009, the S&P hit rock bottom), you are way ahead on returns. And if you just started investing in the past year or two in the greater stock markets, you are way up as well. Some actual numbers from S&P Return Calculator online (these are returns not taking inflation into account, and assuming reinvestment of dividends):"

JS, of course I'm not going to agree with your assesment that I'm a little wacko. We may be from different generations - I don't know. I started investing about 25 years ago (several years after I graduated UPT). Granted I have done some buy and hold via $$ cost averaging with mutual funds. Fidelity Contrafund has been very good to us. But, I believe its a different environment now. When I first started, the Fed wasn't propping up assets prices with cheap money. I would say the value was more real back then and the market didn't respond with such big moves to Fed policy. Also there were not as many hedge funds that were hugely leveraged nor ETFs. Those two entities move the markets in ways I didn't see 25 years ago. It seems to me more of a trader's market than an investor's market. Here's a link to an article that speaks to some of what I'm trying to communicate. http://www.cnbc.com/id/100654075 . You may be far smarter and successful with it than me. Good luck with it. Regards, RF.

Edited April 19, 2013 by Red Fox

[JS]

If you only owned 10-20% of your home, PMI would cover the difference. Same for a VA backed loan.

You sure about that? I always thought PMI was "lenders" insurance to protect against defaults. I am pretty sure it is not an additional bump up on homeowners insurance for this type of situation. I think the philosophy is that if you get foreclosed on, the bank will lose 10-20% of the value in collection costs and possibly a firesale to unload the house. So the lender stands to lose money if you default with less than 20% equity. If you have more than 20% equity and get foreclosed, the bank uses the proceeds to fully cover their costs and there should be some left over.

Dude, no need to be a dick. Especially an ignorant dick. FYI, I have a substantial emergency fund that I can last about 5-6 months on if I lost my job. It's completey liquid, in a savings account. In just a few years, I'll have the house completely paid off. That will give me a steady flow of secondary income if I lost my job or had some other large financial stress. If I really needed a large amount of money, I could sell the place. My Roth TSP is diversified in a number of funds, not just one. In my view, what I just laid out is an acceptable amount of risk and safety.

I re-read my post three times and still don't see where I was trying to be a dick, but I guess it comes off differently when someone else reads it. Either way - sorry about that. I was just trying to point that I believe if you are funneling extra cash into equity in your house as opposed to putting it into a broader investment account, then you are indeed decreasing diversification while increasing risk due to "having all of those eggs in one basket." Having that money tied up in the house as opposed to an Ameritrade account opens you up to liquidity risk (you might not be able to sell the house so quickly) as well as the risk that the housing market will go down, or whatever.

In the end, it is mostly personal preference with regards to your risk assessments and diversification levels. I personally like having my extra $50K in a liquid account earning 5% or more while only paying 2.5% on the mortgage as opposed to have it tied up in the walls of my home while not earning the 5% is could be earning. Not only is my net return higher, but I have easy access to that money. Plus I, like you, also have a separate emergency fund that is in a boring savings account losing money each month.

Correct me if I'm wrong, but if I only owned 10-20% of my home, and something like a housefire/flood happened, and the insurance company came up short... wouldn't you be even more screwed than the guy who owns 100% of the house? You would still owe the mortgage company, and you would be equally screwed by the insurance company coming up short. I would much rather be the guy who can collect all the insurance money and walk away in that scenerio.

Not sure I follow this. Usually homeowners insurance is for the same amount that the appraisal was for when you closed on the mortgage. Actually, I believe it is required to be that exact amount by law. So even if the house jumps wildly up or down in price, if the place burned down, the homeowners insurance would be enough to pay off the mortgage, which is it required to do by law, hence protecting the lender (and you), and you would keep the difference in whatever you had built up in equity so far.

- $300K purchase price on the house. You have $50K equity and the place burns down. The homeowners insurance pays the bank $250K and pays you $50K (plus your money for personal belongings per your policy). You then either rebuild or buy a new house and take out a new mortgage.

- $300K house that you own outright. The house burns down, the insurance company pays you $300K and then you either rebuild or buy a new house (using a new loan as opposed to paying cash so you could invest the other $300K in the market, right??? Ha ha, sorry had throw that in there).

Either way, even if the house was worth $150K or $500K on the open market when it burned down, the above numbers should still stand. So in actuality, if you owned the house outright but its value had gone up, you would actually lose money in the deal. It would be the opposite if the home value went down. Either way in the end, the mortgage company is covered, unless you increase your policy after you own it outright (if you value went up).

[flyusaf83]

Not sure I follow this.

I was responding to the above post which talked about the possibility of the insurance company not paying you what your home was worth. I don't know if that's a potential problem or not, but I was just responding to the hypothetical.

I understand your point more now, I just choose to put my money into a house that I can rent out instead of the broader market. I do put other money into the broader market for long term stuff. I just don't want all my money in the market, since it is so volitle these days. Different strokes for different folks.

[Danny Noonin]

Usually homeowners insurance is for the same amount that the appraisal was for when you closed on the mortgage.

In my experience homeowners insurance covers the cost to rebuild vs the entire appraisal. It is not necessary to cover the value of the lot since even if the house burns to the ground, you don't have to buy a new lot to rebuild.

Edited April 19, 2013 by Danny Noonin

[Guest CannonCrashPad]

Personal finance by SNL and Steve Martin: http://www.nbc.com/saturday-night-live/video/dont-buy-stuff/n12020/

Government finance:

[Jughead]

Well perhaps you'll educate me? While terms may differ depending on what bank and what mortgage contract you sign, I'm under the impression that when you have a mortgage that contract includes language giving the bank the ability to seize the mortgaged asset if you are unable to pay your mortgage payment. I understand they may "work with you," but that is the bank's call. They can just take the property plus the money you threw in paying off the mortgage. If this is not a true statement, then by all means, please educate me.

Seize the asset to force a sale, yes. Keep more than what they're owed plus expenses of getting that money (cost of sale, legal, ongoing interest during foreclosure, etc.), no. That's the part of your statement that was incorrect (the bank keeps your equity).

If you get foreclosed, will it be expensive as hell & an enormous hit to your credit (not to mention a humongous PITA)--no doubt, and it should be avoided if at all possible. However, it's inaccurate to state that the bank gets to keep all your equity. You possibly lose your equity, if that equity falls short of the expenses involved (plus a potentially low-price foreclosure sale), but that's a case-by-case situation, generally applying to those with minimal equity.

[sky_king]

So why should you pay as much as you can on your mortgage?

Lets say you have a $1000/mo payment and you pay $1500/mo to pay it down faster. This causes you to eat into your reserves. If you lose your job or have a large, unforseen bill, you now have little reserve to pay the next month's mortgage payment. If you just pay the $1000/mo payment, you can build a $500/mo reserve! Plus, the loan interest vs. investment interest has already been discussed.

[waveshaper]

This is my first post. I am retired USAF and all the posts about mortgages got me thinking about a few mortgage related questions I have. I live near two major bases, have a couple friends who are realtors, and these are some of the observations I have made in my neighborhood about, 0-2 thru 0-5, and home mortgages.

Ob1#. Get the best or close to the best interest rate available.

Ob2#. Realtors top rated customer base, 5 stars.

Ob3#. Average length of holding mortgage 3 to 5 years before PCS or retirement for senior folks.

Ob4#. 0-2/3 first mortgage in career, 0-4 second or more mortgages in career, 0-5 third or more mortgages in career.

Based on my gut observations i was wondering; apx how many mortgages would a typical officer hold during a normal career (20 to 30 years) and whats is the average length of the mortgage?

[Learjetter]

I've had three mortgages: on-base 91-95, then

1) 95-02 (last 3 yrs as a rental) ($105k),

99-04 on base

2) 04-08 ($210k),

3) 08-present ($225k).

Three different bases, first one I got as Capt, 2nd as Maj, 3rd as a Lt Col.

[flyusaf83]

So why should you pay as much as you can on your mortgage?

Lets say you have a $1000/mo payment and you pay $1500/mo to pay it down faster. This causes you to eat into your reserves. If you lose your job or have a large, unforseen bill, you now have little reserve to pay the next month's mortgage payment. If you just pay the $1000/mo payment, you can build a $500/mo reserve! Plus, the loan interest vs. investment interest has already been discussed.

Part the answer goes to being realistic about money and behavior. Using your example, saving $500 month in a reserve, most folks would be likely to spend it. It's human nature, you see something you want, you have the money, you rationalize it, you buy it. If you put that $500 into the mortgage right away, it's already gone. It's not liquid anymore. It's the same reason people use automatic withdrawals for investments, or enroll in plans like TSP that take $$$ straight out of your check. It takes the choice away from you, and removes the temptation to spend it. When you make extra payments on a mortgage, it all goes to principal. That means you pay less to interest on future payments and it means you are building equity.

[joe1234]

I think of a lot of disagreements come from the fact that a lot of you tend to have extreme risk aversion. If you seriously think that the government is going to collapse in 20-30 years, then you have extreme risk aversion. You pay for this by sacrificing opportunity cost. So, really, it comes down to the question of whether giving up tens of thousands of dollars a year is worth your peace of mind.

To me, these people who do this are like people who have an irrational fear of flying and refuse to go anywhere in the world because of their fear. Obviously once you're educated about aviation, you realize how foolish and unfounded this fear is, but they still refuse to get on that plane because they just know it's unsafe no matter how much objective data you throw at them.

This pretty much accurately describes investors with extreme risk aversion.

[flyusaf83]

We all know Obama's belief that eventually, you make enough money and the government is then somehow entitled to it. Now he believes you can save/invest enough money, and he wants to take it.

http://online.wsj.com/article/SB10001424127887324050304578412932073225110.html

From the article - "The White House explanation is that some people have accumulated "substantially more than is needed to fund reasonable levels of retirement saving."

Wow what a tool. I'm so glad the government is going to dictate what is "reasonable" for me to save in their grand wisdom. Because we all know the government is so reasonable themselves when it comes to saving and spending, who better to trust?

The truth is people being self-sufficient is dangerous for Obama and those who think like him. They need to be needed to stay in power. So I guess I'll stop investing so much, I would hate to be unreasonable.

[BattleRattle]

I'm looking to pick someone's brain who is knowledgeable about setting up a 529--please PM if you'd be willing to answer a few questions. I'd really appreciate it.

[JS]

Yeah, you can PM me if you want, but I just logged into USAA and clicked on the 529 link under investments. You obviously link your USAA checking/savings account to it, and can feed it money monthly, through one-time contributions, etc.

If you want to know more about the pros/cons/details of a 529 plan in general, you can read some basic articles online like these two good ones:

529 Basics

529 Questions

In summary, you can pretty much contribute an unlimited amount of money to it, contributions are after tax dollars, any growth made over the years is tax free if used for education, and the account is in the parents name, so it doesn't affect financial aid as much as it would if it were a general investment account in the kids name. Other than that, you just set it up like a regular investment account and pick some mutual funds, or one of those age-based funds that adjusts from more risky to less risky as the kid gets older.

[nsplayr]

Also look into state-run 529s, many of them have lower fees than the ones run by financial institutions. You can sign up for any state's plan and use it at whatever college your kid goes to, regardless of it it's in that state or not. Since (I think) every state runs their own independent 529, they compete against each other as well as against plans run by banks and etc. so you get the benefit as a consumer of choosing.

Some states also let you deduct whatever you contribute from your state taxes if you use your own state's plan, so if you live somewhere with state income tax consider using that state's plan if it makes sense and you like their investment options. I personally invest in Virginia's 529 for this reason...I'll be living there in the near future and with over 5% state income tax it will be nice to be able to deduct my 529 contributions. Comparison between all the states with some general 529 investing advice here.

Nevada and Utah in particular are popular year after year, but various organizations issue rankings each year. Examples here, here and here.

[JS]

Wow. Great point about using the State 529s. One of our very close friends is a financial advisor, and when I asked her this very question 4 years ago, she rolled her eyes at our state plan and immediately recommended for me to invest in the USAA 529 plan because the state plan is "crap," is what I think she called it. But our state is on that list for a state tax deduction (we are not talking much money here, but every little bit helps), and the expense ratios vary from .3-.6 versus USAA's ratios varying from .7-1.05. The 1 percent expense ratios can really sting - especially if the entire fund is only chugging along at like 3-4 percent return each year.

I will get with my friend again and she if she can elaborate. Maybe she was thinking that the returns and professional management of these state run funds are not up to snuff. But on the basis of cost and tax breaks, it seems like it would be cheaper/better to go with a state fund.

[rancormac]

My limited opinion of financial advisors is they are over-glorified insurance salesmen disguised as financial gurus, usually with no formal math/financial background.

[JTAC]

My limited opinion of financial advisors is they are over-glorified insurance salesmen disguised as financial gurus, usually with no formal math/financial background.

This. After graduating college with a degree in Finance, I can't explain to you how gimmicky 99% of "financial advisors" are in most offices. A financial advisor is a sales position.

Exceptions to every rule, of course.

Edited September 24, 2013 by JTAC

[RASH]

One question to ask when looking for a financial advisor...

"Are you wealthy?"

If they aren't (most aren't, or they wouldn't be working as a financial advisor to begin with), then why would you let them manage your money? There are a few who truly do it to help people, and most are independently wealthy due to their knowledge of finance. I personally know of two retired O-6s who do it pro bono...

[JS]

My limited opinion of financial advisors is they are over-glorified insurance salesmen disguised as financial gurus, usually with no formal math/financial background.

Bingo, bingo, and bingo. For the record, though, my friend has an accounting background (and CFP) and has been working under another advisor who "owns" the already established clients for about ten years now. So there is no insurance selling crap going on in that office.

But you are dead on, these positions are sales positions, that's why they are the only ones "hiring" qualified people into this economy. A few years back, I briefly toyed with the idea of using my engineering/MBA background to become a financial advisor, because I had a background in numbers and business and really kind of enjoyed investments, etc. I signed on with a company whose name shall not be mentioned here, and they had us out for an information session. The quality (or lack thereof) of these kids was fucking horrendous. I met multiple 20 year olds with nothing more than a high school degree, I met a hillbilly car salesman (perfect fit for this type of sales industry, by the way), a gym owner, a hot flirty chick with an IQ of around 80 (another perfect fit for this industry) and all kinds of other non-qualified people who were basically hired sight unseen. After all, there is really no commitment on the financial firms with regards to hiring. Most of these jobs are pure commission, although I had heard that one or two of them offer first-year regional airline pay for the first year, then they literally hand guys a phone book and tell them to cold call or knock door to door (Edward Jones). Amazing. My CFP friend had also heard of these sales companies requiring their future "advisors" to bring a list of 20 names of friends/relatives to the interview in order to help guide them in "launching their business" and "developing clients," and other bullshit.

But I will give this company credit for honesty, after a bunch of outliers got up and told us about how much money they made as advisors, one chick straight up told the audience that insurance sales was where we were going to make all of our money. There really is none of the "sexy" stuff like picking investments, etc. They only required you to take the Series 6, not 7, which means all you can do is sell mutual funds and can't really pick individual stocks, options, etc., and actually build a customized portfolio for people. And of course, all these sales outfits have like 3 investment funds - conservative, balanced, and risky.

It was quite the sham, and needless to say, I got out before I even got in. I have learned more on this thread and from reading internet articles than most of these kids and personal trainers disguised as "advisors" will probably ever know.

Anyway, sorry for the rant, but stay away from these sales fucks at all possible costs. Get you some good term insurance based on an online calculator of insurance needs, build an emergency fund, and do 15 minutes of research into which retirements funds would be good for you based on your risk tolerance, and you will have conquered the "three pillars" of financial planning, all without paying these fuckos thousands in commissions for completely unsuitable whole life insurance policies.

One question to ask when looking for a financial advisor...

"Are you wealthy?"

If they aren't (most aren't, or they wouldn't be working as a financial advisor to begin with), then why would you let them manage your money? There are a few who truly do it to help people, and most are independently wealthy due to their knowledge of finance. I personally know of two retired O-6s who do it pro bono...

And if they are wealthy, like some of the more successful "advisors" are, then it is because they are good at selling whole/variable/universal life insurance policies to people who would do well with cheap term policies and investing the difference, which can sometimes be at much as ten times the premium cost for whole life versus term life. Any time you hear the words "whole, variable, or universal" next to life insurance, you need to run, not walk away.

[rancormac]

And if they are wealthy, like some of the more successful "advisors" are, then it is because they are good at selling whole/variable/universal life insurance policies to people who would do well with cheap term policies and investing the difference, which can sometimes be at much as ten times the premium cost for whole life versus term life. Any time you hear the words "whole, variable, or universal" next to life insurance, you need to run, not walk away.

My girlfriend got suckered into this. Her "financial advisor" scared her by saying if someting happened to her now, she'd be uninsurable, and she couldn't make the salary she makes now, and how can she ever support a future family... etc. Over $800 a month for over $2M in whole coverage. I shat a brick when I heard. Told her to get term and invest the difference. Whole policy soon cancelled. "Financial advisors" like that should be thrown in jail. Or maybe it is the fault of the ignorant...

[RASH]

And if they are wealthy, like some of the more successful "advisors" are, then it is because they are good at selling whole/variable/universal life insurance policies to people who would do well with cheap term policies and investing the difference, which can sometimes be at much as ten times the premium cost for whole life versus term life. Any time you hear the words "whole, variable, or universal" next to life insurance, you need to run, not walk away.

Not necessarily true in all cases. These guys sell nothing--they simply look at your current financial situation and advise you how to better invest your money. They're wealthy because they're smart with their money...

Sent from my iPad using Tapatalk - now Free

[flyjetz]

Thought I'd jump in to add my two cents to the financial advisor bashing. BTW, I own a Registered Investment Advisory Firm, (and I'm a BUFF pilot). Most everything being posted on the last few pages is TRUE. Firms like Edward Jones are looking for salesmen and saleswomen first, then teach them just the basics of investing so they can sound somewhat competent. While having life insurance is an important piece to the total investment portfolio, most of the insurance policies being pushed by these firms are done to rack up heavy commissions. The best advice I can give you is that if you are looking for professional investment advice, do a search for "independent, fee-only registered investment advisors". Under this model, there are never any commissions, and you are only charged a small percentage of assets under management. 1% to 1.5% annually is pretty standard. The more money the advisor makes for you, the more money the advisor makes too, keeping your interests aligned. Not going to advertise my firm here. You can PM me if you should want that info.

[matmacwc]

This.

I have no problem paying 1% for the 18% I've made and not having to look at it more than once a quarter.