How I Saved My Parents a Small Fortune! And the Advice Ive Been Giving Them!
In 1999, I had my parents sell all stock market assets and move into money markets (cash). In 2003 I had them sell their California real estate and become a renter. In 2003, I had them buy gold at $424 and silver in the mid $7s. And during 2008, we have spent most of the year on the short side of the stock market. All in all, their net worth has held up like the rock of Gibraltar and we've made some money along the way.
I've been in the finance world for almost 20 years. I've carried a license as a stock broker and real estate agent, but the majority of my career has been as a banker, specifically as a business banker. As a business banker, it's my responsibility to analyze the assets and cash flow of a business to make sure they warrant the issuance of credit to support their business. Essentially, I evaluate and manage risk within the banking system to make sure the loans being recommended will be repaid and provide shareholders of my institution a return of and on their equity. And lastly, I also manage money for my parents, who really have little desire to follow or analyze investment markets and trends.
In 1999: I called my parents and asked them to move the money they had in stock mutual funds (I had recommended they purchase in 1995) into money market mutual funds. My father asked why? I said, "the stock markets were building a bubble and nothing goes straight up forever, and when it ends it will not be any fun for those who hold there investments during the expected correction." I further stated, "I could not time when the stock markets would peak and correct but from the perspective of risk/reward management and protecting their net worth from a sizeable correction it was a great time to move to the sidelines." Note: At that time, many thought we were nuts!
April 2003: My parents told me of an IRA investment they had placed without my knowledge, and we discussed why that particular investment might not be the most appropriate and it was sold to them because it had the biggest fee within the industry. It was around this time, I asked my parents if they wanted me to manage all of their net worth, consult on their business and create a pre-retirement strategy for a small fee (the family rate). The answer was yes.
I also realized at this time the stock markets had bottomed (I realized the 2000-2003 correction in the markets was a deflationary scare and not the beginning of deflation). So, we deployed some money back into the stock markets, but on a trading basis supported by technical analysis, as I felt the markets were in or soon to enter a secular bear market, which tends to be more conducive towards short term trading and holding periods, a method I felt provided less risk than the traditional buy and hold strategy.
Later in 2003: I shared with my parents the notion the real estate market, especially California, was building a bubble much the same as the stock markets of 1999, and since they had 40-50% of their retirement money tied up in their home, they should consider selling the home, all tax free, and become a renter. I shared with them the concept of renting is cheaper than owning, and when I did the math for them they realized they could move up by renting and break even compared to owning on a cash flow basis. Essentially, in 2003 we sold their home and while we missed the top (summer 2005) in their market, the same model house on their former street just sold for 30-35% less than theirs. I recommended this strategy because they were not going to retire in this home, and thus there was no long term loyalty to that asset, and they could sell it free of capital gains taxes, rent down the street, and prepare and protect their assets for retirement.
My Rule #1: In managing my parent's net worth, rule number one has always been all about keeping what they have and avoiding the markets with the most potential risk. Notice how I didn't say, "we followed every Tom, Dick, and Harry into the hot investment theme of the day right into a peak and lose our shorts".
When we sold their home their friends and my clients all thought we were crazy, just LOONEY! They all said, "California real estate will never go down!!!" Then I recommended to my parents that they start dollar cost averaging money into gold and silver. Again, everyone back then thought we were just off the deep end wrap around jacket crazy. (Note: We have sold half of their silver this year @ $19ish, just to pocket some gains).
The combination of capital savings through the timely selling of their house in California and the upside gains from buying precious metals has turned out to be nothing short of a home run. I know of no one who made this combined trade.
Fast forward to today: My parents over the past 9 years have completely avoided the correction in stocks during 2000-2003, they have avoided the real estate nightmare of current, they have no debt, their precious metals are up, and in the stock market since April 2003, I have placed 1535 trades and we have made money on 1368 or 89.12%. Simply put, my parents got real advice (advice that was very different from what just about everyone else was getting and doing with their money) that worked in good and turbulent times with LESS RISK!
I'm writing this article because from time to time I may post my thoughts about money, investments, strategies and/or other trends that I see in hopes that someone else in this world can benefit from my vision and ideas, as I truly believe the financial world we have for the next 5-10 years will be the most interesting but turbulent in a lifetime and you surely better understand what risks are out there, and what risks you're willing to take in investing.
I'm not licensed for investments in any way, I'm neither a bull nor a bear, I'm not a affiliated in politics, I am not a gold bug, and thus my investment strategy is only trying to get it right to protect my parents money as rule #1, provide cash flow for retirement as rule #2, and helping their money grow as rule #3. My goal is to understand the markets and their risks, and draft plans to protect them against the risks we are not willing to take, and make money where I see opportunities when the risk/reward scenarios make sense.
I'll be the first to admit I tend to be early in my calls and most of my insightful calls and investment strategies stem from technical analysis, chart pattern recognition, cycle analysis, and Elliott Wave Theory. It's my belief that technical analysis and chart pattern recognition will put you ahead of changing market conditions and the financial news. For example, we've been shorting the market and stocks most of 2008 because the technical analysis I use on long term charts reflected the stock market peak in 2007 might have been the end of bullish days for many years to come. I do not believe that now is a time for the buy and hold strategy, and trading using technical analysis will be a more appropriate strategy over the next several years because we are now in a secular bear market.
It's been paramount that I have been so correct, as my parent's net worth has been the rock of Gibraltar as they entered retirement, while unfortunately so many have seen their net worth negatively impacted by deflating bubbles and flawed investment strategies that have little recognition of the various risks at any given time. It's also been immensely important that my parents acted on this advice prior to market changes, which is the biggest opportune time to make an investment change. YES, we've been early in our moves, and it has paid the biggest dividends of all!!! It's what you keep that can amount to far more than what you make.
Summary: I provide all of the above as my resume (to you the reader) as someone who has made the timely and unlikely investment calls against what most were thinking and have been so correct in my prognostications. More importantly, I've actually put my parent's money (their retirement nest egg) to work using my views and strategies to protect their net worth or make them money, and have a track record that I feel is well above average. We have designed strategies that have less risk than most people while achieving their goals.
My current advice for my parents:
For the past 4-5 years, I have shared with my parents I felt deflation will be upon us soon, and there are various methods that could tip our country into a deflationary period equal to or greater than the post 1929 period.
My Primary View: In short, I feel deflation began with the 2007 stock market peak. I believe the stock markets will make a new low maybe two coming in the weeks and months ahead (early 2009), and that low will serve as a bottom for a while and the markets and later the economy will begin a multi-month rally into 2010.
It's at this point when this anticipated rally ends (markets peaks) that I believe the stock market will provide a significant confirmation we are in deflation. I'm looking for the stock market to make a lower high (no where near the 2007 peak) on the monthly charts. Lower lows and lower highs are a classic sign of bear market conditions, and I believe on a monthly chart, that condition will confirm deflation. After that peak forms, we will begin a deflationary spiral into 2012-14 (I'm leaning towards 2014). If that does happen, the technical analysis would suggests significantly low prices in the major stock indexes.
In essence, the problem is there will not be enough government assistance and future economic activity to pull us out of the deflationary problems we have today, and everything the government does will only partially re-inflate the economy and the stock markets. It will serve as a band aid, and essentially draw out this deflationary period.
When the markets and economy elevate, it will falsely convince most that we have put the damage behind us and that once again our government has come to the rescue like prior recessions. And if this were a mere recession, it would most likely work again. You might even hear pundits comment on how the risk of deflation is dead.
Unfortunately, this is deflation, and when we start the deflationary spiral from those lower highs in the stock markets, the economy will soon follow and the problems we have today will be larger and more significant the next time around. Real estate will take another big hit and include all types of real estate more widely, the stock markets will take another big hit, business failures will mount, unemployment will dwarf anything we see in 2009, and state and local government budget short falls will be far more significant.
AND, when this deflationary spiral begins, there will be potentially two new problems not baked into the pie. The first and obvious one is higher taxes. Our tax rates are essentially at the low end of the historical range. If we could not raise taxes in good times to pay for our over spending, we will mostly likely have to raise them in bad times when tax receipts at the local, state and federal level decline sharply. Higher tax rates are not factored into stock or real estate values yet, so when it becomes apparent taxes are going up, it will adversely affect those asset values.
Secondly, there's something I've been sharing with my parents for the past 5 years, what I call the demographic switch: It's the changing demographics behind the "Baby Boomer". It's my opinion this is a major reason nothing the government does the next 6-18 months will work.
The Baby Boomers are the largest demographic segment of our society, and they are closing in on retirement rapidly. My father is now 62 and he is at the leading edge of that group and he has recently retired. And as the front portion of this group hits retirement in more significant numbers (2010) they will start the retirement process. It goes something like this; Hmmn, let me quit my job, file for social security, sell my house and move down in house size and price level, slow my consumer spending, and shift my assets into more conservative investments that preserve my capital.
Unfortunately, right when this country financially will need people to borrow, spend, and invest to re-inflate our economy, the largest segment of our population (the people with most of the current wealth) will effectively check themselves out of the game. The demographics behind the soon to be retirees do not bode well for the U.S. economy. That first wave of retirees is the 2011 to 2014 period. Unfortunately, the circumstances for the perfect storm lie ahead of this county. I firmly believe this deflationary spiral will make 2008 feel like a picnic.
I also believe the toughest hit areas within the United States will be the areas that benefitted the most from the social/financial engineering of the past 30 years as the credit bubble continues to deflate. I believe California and the money centers on the East Coast (New York) will get hit the hardest on a relative basis. California in particular creates a special issue because in any given year, it's the 5th to 7th largest economy on the planet. It has a significant portion of our population. It's also has a significantly larger portion of the Baby Boomers who I believe will exit the state in large numbers for cheaper retirement havens. It's also where we see a concentration of over valued real estate and exotic lending practices in mass volume. And it's the state that will have one of the biggest continual problems with State and local government budget short falls. For the first time in decades, the sunshine state might not be so golden. The NEXT BUBBLE to pop might just be California!!!
My Secondary View: It's important to understand we can get to deflation in different ways. There's not just one simply road. And the alternative view I see is a strong inflation move prior to deflation. The government is and will be printing tons of new money and dumping it into our economy through various bailout or civil programs (Note: The true definition of inflation is an increase in the money supply. It causes higher prices and often that is concentrated in a handful of places).
If we get strong inflation because of the sharp increase in money supplies, there's a very good chance gold will take off, and more importantly interest rates could spike. The long term US Bond markets have rallied hard and should begin a process of making a topping pattern. If the expected correction in bonds is sharp, we could see a spike in interest rates equal to the spike we witnessed in oil, and yes I know that's huge.
Significantly higher interest rates are not factored into real estate market values. An inflation spike in interest rates would drive all real estate values significantly lower as the cost to finance soars and the expected rates of return to discount income from real estate forces values lower.
At the heart of deflation is a severe correction in real estate, and inflation/higher rates is no friend in the long run. If you believe all the government bailout programs will help us today, well they might. It does come with a large price tag in the future. I raise this alternative view because it highlights specific risks in the system so few have factored into their investment strategy.
Deflation Summary: I'm not so concerned with how we complete the deflation process, but understanding the risks that stem from it in our system. I'm a firm believer the technical analysis, cycle analysis, and Elliott Wave Theory already confirm we are in the middle of a deflationary period. Further more, a deflating credit bubble combined with the changing demographics behind the baby boomer, and potentially higher taxes and/or interest rates are negative trends that have yet to begin. Therefore, I feel it's ill-advised to think our government can pull another rabbit out of the hat.
Net Worth Strategy:
For the most part, I've had my parents on deflation alert for a while and we started shifting assets years ago. They own a retirement house with no debt that's only 10-15% of there net worth. Note: They have NO debt what so ever. They have 10-15% of their assets in gold/silver bars. They currently have cash or short term treasuries that equal in total 50% of their net worth. The remainder I use to trade in the markets for them. It's an asset structure that has served them well during this market melt down. Below is a list of assets I like in a deflationary model:
Gold and Silver (not gold and silver stocks, and not ETFs in gold and silver), but owning the metal or coins, and vaulting it. The metals are a form of liquidity (cash like) in the toughest times, and a diversification hedge that should be in everyone's portfolio for balance. In the long run, my technical analysis for gold has a target range of $1,800 to $2,400 an ounce. I still like a dollar cost approach. My only concern regarding the metals is the potential government confiscation in deflationary times.
Cash. That's right folks, cash will be the smartest investment during this deflation period, and having it will allow you to purchase assets at the bottom on the super cheap. Think blue light special. You might even want to think about a little mattress money. Please don't store it in your mattress, chose a vault or safe. WHY? Banks keep very little cash on hand, and during deflation, even if your money is at the safest of banks, you might not have access to all of it, as banks ration it to clients. And, it's the all cash buyer at the bottom who gets to make the investment of a life time.
A modest (MODEST: no more than 20-25% of your entire wealth) primary residence paid for with little but preferably no debt. It's really not your home until its debt free. And, if you have no debt it's all yours!!! My parents only have a fraction of their net worth tied up in their home, which frees their NET WORTH up to remain protected and liquid. Too many people have the MAJORITY of their net worth in real estate, and it will be their financial down fall.
Farm land with good water supplies and livestock held free and clear with no debt. I love this one, and this one could replace #3. This is the only asset that will allow you to generate your own food and water, and it most likely will put you in a place within this country that is not where the most distress will occur (ie large cities) during deflation.
Private money real estate secured lending. What you ask? Play the roll of the bank, and if you find someone who needs a first mortgage on real estate, at say 20% of the property value and it's a first deed of trust, make them a loan at a rate slightly higher than the market. Note: I'm recommending to my parents to keep the loan to value super low, and only as a first deed of trust to minimize risk. If something goes wrong, you own the home or property for a fraction of its value, or you collect interest. I can live with either. ***Do not lend in areas of blight, en example would be parts of Detroit.
Tax receipts: What you ask? Some states sell their delinquent real estate taxes they are owed from property owners to investors, and these tax receipts are a lien ahead of all other debts on the property and the lien to values are very conservative and the interest earned can be quite attractive. *** Again, take the time to understand the real estate behind the taxes owed, as not all real estate is worth purchasing the delinquent taxes.
Strategically, the assets we hold in the future should be different from those held during the bubble years, and the list above is quite different than the ALL-IN stock and real estate strategies of the past. I know very few people who actually have their money structured in the above in any significant manner!!! This leads me to believe again, that I'm early but making the right call for my parents, as it has been so in the past. We are actively looking to put money to work in #5 and #6. The list above provides a greater degree of diversity, and it allows one to structure money outside of the financial system (banks, brokers, and insurance companies) itself, which is a source of intense risk we need avoid or minimize in some manner as part of our global risk management theme.
Final Comments For Now:
Now is not the time to panic and sell everything, as that rarely works. There is still time to protect your money. If I'm correct nothing goes straight down or up for ever, and there will be one more rally into 2010 before the deflationary spiral begins. That rise will allow you to sell assets and reposition yourself for the deflationary period coming. It's time to ask yourself what risks are you exposed too and do you have a solid strategy for your money.
The most obvious risk I still see in the make up of personal net worth's is far (FAR) too much concentration of wealth in real estate, and during deflation I believe the values of real estate will be significantly cheaper than current levels. As it relates to real estate, this might be the one asset I wouldn't wait to sell, especially if it makes up the majority of your wealth and you have significant equity to protect. It's my opinion that a reduction in real estate holdings is paramount to protecting one's net worth.
Other thoughts: Payoff all auto loans, credit cards, and consumer debts as fast as possible. Debt or leverage is the new four letter word. Start to develop a life style that is living well (WELL) with in your means and increase savings. Consider selling excess personal assets to raise cash or retire debts.
I wouldn't at this time be buying long term treasuries, as the run up in bond prices of late has reduced yields to unattractive levels. If there is a correction in bond prices as stocks rally into 2010, there will be a better opportunity to purchase long term treasury notes with better yields as part of your nest egg. Lastly, keep the cash you have in at least 3 different banks for protection and accessibility.
****My biggest recommendation is take your money far more seriously and develop a strategy. As part of your plan, I would encourage ALL to remove any emotional attachment you might have for any assets you own and take the time to understand all of the potential risks in this environment and actively review your plan for potential adjustments.