My Financial Advice for Mom and Dad
On December 14, 2008, I wrote an article for Safehaven.com titled, "How I Saved My Parents a Small Fortune! And the Advice I've Been Giving Them!"
If you read that article you know I manage my parent's entire net worth, and have provided them some of the most timely and successful investment calls.
Every April, my parents and I get together to review the performance of their net wroth, their net worth strategy, and discuss strategies and/or money moves for the up coming year. Those strategies typically stem from what I feel are current trends in place, trends coming to a finish, or potentially new trends we either want to take advantage of or risks we need to avoid.
At the very core of their net worth strategy is the philosophy of keeping what they have by reducing risk, which has ultimately protected their net worth in some of the most financially turbulent times since the great depression.
What I find truly interesting is the advice, especially some of the most unusual and/or timely advice I've given my parents is advice you would have never received from most bankers, brokers, real estate agents, or insurance agents (And I ought to know, at one point in my life I've worn all those hats), or at the appropriate time to do the right thing with your money, and for several reasons:
Their job is to sell a product or service for a fee/commission, which is a great service most of the time, except for deflation. I'm not knocking the services they provide, it's a valuable one, but their job is structured to earn a commission to sell you something, and the best investment (cash) for deflation has no commission. It's simply not profitable to sell deflationary strategies or advise you not to buy something.
Very few if any of them expected what we've experienced in 2007 and 2008 way back in 2003 like I did. In fact, my first inclination that we would have deflation was as far back as 1990 when I was a former stock broker doing demographic analysis on baby boomers. Even back then I thought 2006-2008 was going to be a problem as boomers headed into retirement. If you didn't expect all this to happen back in 2003, than you couldn't help your clients plan for it like I did for my parents.
None of them are positioned to advise someone on their entire net worth and all of their assets from the top down like I do for my parents. The industry isn't structured that way, and they've turned everyone into asset specialists versus risk manages and wealth strategists. And with exception to the extremely wealthy, people don't see value in paying for that kind of advice yet. My mother asked me over Christmas, "Why people don't have a net worth consultant the way we do?" That's my mom, a smart business woman who understands power money concepts. The minute my mother asked me that question, I knew instantly her money brain was the strongest it's ever been.
In our family, we have a definitive plan and strategy for my parent's wealth, and we discuss money as an every day topic to make sure we are devoting the time and energy it deserves. It became imperative back in 2003 that I convert my parents from their paycheck type brains, and develop strong investor money type brains, as it would be a necessity heading into deflation because all of our big moves have been early, unusual at the time, but all have turned out to be immensely successful. I have to give them a lot of credit, as much as it's my vision and advice, it's ultimately their decision.
At our annual money review session last week, I had some specific money thoughts for them that might be helpful to all to consider.
Retirement Distributions: My basic advice is that my parents should systematically take money out of their retirement accounts during the next few years. The thought is a simple one: I/We believe income tax rates (Federal and State) in the future will be significantly higher than today, so we can minimize the impact of taxes today on those retirement distributions that have to come out at some point in time, and since they are of retirement age its their option as to when to take those funds out prior to being 70, so we are choosing a time frame (now) when their personal tax rates are minimal.
This strategy has been discussed with them as part of their on going strategy as early as 2003, and we finally started taking funds out in 2008. Leading up to this move, I had my parents shift their assets on the taxable side, sell their home in California and retain a much smaller retirement house in another state that is paid for free and clear. Thus, their two social security checks with no debts at all places them in a solid financial position. Since retiring, their reportable income has declined as we expected, thus their income tax rates have dropped sharply, which also improved by leaving a high income tax state like California. So now that their income tax rates are extremely low we can continue to move money out of their retirement accounts at minimal tax rates today, avoiding higher tax rates of the future, which should thereby minimize the impact of taxes on retirement distribution, and allow them to keep more of their money.
It's my belief that some day, we all get to pay for the bubbles of the past, and the bail out plans of today. And since we couldn't raise tax rates in the good times, we will most likely see those tax rates head higher in the near future, and it seems like a smart money decision to move the money out of retirement accounts prior to the expected higher tax rates.
And while we see some tax increases at the state level (like California), the federal rates might take a few years before they head higher for everyone for purely political reasons of a new administration.
If you have money in retirement accounts and are of minimum retirement distribution age, I highly recommend discussing these issues with your CPA, and seeking professional advice for your situation. We selected a time in their life when their tax rates are extremely low and before the government starts to adjust those rates higher.
In general, there are 3 different ways to invest in real estate. The purchase of real estate tax receipts. The providing of real estate secured loans (be the lender). And direct ownership of real estate in some form.
Even though I have my parents looking at investment real estate in several states on a regular basis, I still believe real estate is vastly over priced. There are pockets where values are depressed to what seem like compelling values, but my macro problem with real estate is that there are several issues not yet factored into the value of real estate:
There is another bubble or wave of potential foreclosures stemming from the Alt A, Option Arm and Jumbo Subprime programs, and that should begin later in 2009. The television show "60 Minutes" did a great piece on this topic a few months ago. This should create another wave of supply.
Higher tax rates are not factored into real estate prices. If you give more to Uncle Sam and the State, you have less for everything else including your housing. I expect this issue to take a few years to develop, and is more dependant on federal tax rate increases.
Higher unemployment and lower salaries. While higher unemployment is to be expected and might be priced into real estate (maybe), there is a beginning wave of employers lowering salaries and bonuses for their employees. It's simple math, if you make less you afford less home. This relatively new dilemma is not factored into real estate values, and I expect this tend of lowering salaries and bonuses to continue for years to come.
While we've seen a big drop in housing pricing, it seems like a falling knife and trying to catch the bottom is always a tough thing to do, and we seem to have several issues that need to work themselves out. AND, when we get right down to fundamentals: The ratio median housing prices compared to median income levels in most markets is still too high. I still think real estate is a sell, and for me you can't sell it fast enough.
And, income real estate (commercial, office and apartments) is just beginning its correction, which will include much lower rental rates for all types of income properties.
So, what I've shared with my parents is the notion that for real estate investing, I prefer strongly the purchase of tax receipts as our primary real estate alternative and super low loan to value 1st deed of trust hard money loans as a secondary alternative. Our risk in either is almost none, and the yields are strong, and most importantly, we don't have to play the real estate valuation game. I still want them to due their due diligence to make sure any tax receipt or hard money loan investment is deflationary proof.
Cash or Cash Equivalents:
You hear it all the time: CASH IS KING. Usually it is not that important, well until a couple years ago.
Last year we had about 50% of my parent's net worth in cash or T-bills, and for the foreseeable future, I see a significant portion of their wealth in cash, money markets, T-bills, and a little mattress money (No, it's not actually in the mattress, but it's not in the bank account either).
I firmly believe that the leg down in 2008 is the beginning of deflation, and we are just getting started, and protecting their net worth is paramount, and to do so, the easiest way to reduce risk of capital is to increase the level of cash or cash equivalents. Yes "CASH" is and will be king for a while.
But from the perspective of investing, I just don't see investment options to put cash to work for the next 3-5-10 years. There's simply too much risk in the system, and too much unwinding of bubbles to come in the future that will continue this deflationary period.
Again, my primary focus is to keep what we have in an absolute manner and to out perform on a relative basis, and in a deflationary period cash is the ultimate buy and hold investment. It's boring, but it's been oh so effective.
During 2003 and 2004, I had my parents buy most of their existing gold holdings in the $425 pricing area, and we are currently sitting on sizeable long term gains.
My basic premise since 2003 for my parents is that true diversity consists of assets other than stocks and real estate, which have been typically held in far too great a percentage or concentration of most people's net worth, which sadly has been the down fall of so many individual balance sheets in 2007 and 2008.
True diversity or capital preservation models should allocate 5-20% of net worth to gold or precious metals in some form depending on the risk profile of the individual.
Below is a monthly chart of gold for the past 28 years.
There are "NO" bearish divergences in the MACD or RSI on the monthly chart of gold, which points the way to higher prices before the price of gold exhausts itself. It doesn't have to happen that way, but that is classic technical analysis when looking for a market that has topped out. This is why I expect to see higher gold prices in the long run.
The long term chart of gold "MIGHT BE" building a large cup and handle pattern. While this pattern is very bullish, it's still too early to commit to that view now, and more time and price action is needed.
My view of why I think this pattern is developing stems from these thoughts:
We already have in place the cup portion of the cup and handle pattern over the past 28 years, and a handle pattern would be the next expected pattern.
We are currently over bought on the RSI and MACD, and we need a consolidation pattern to work off over bought levels, and the handle part of the cup and handle pattern would work off over bought levels quite nicely.
A consolidation pattern is the basing pattern needed for the next significant leg up. Note: I don't want to seem like I'm backing into my view, but it does fit very well for gold.
So, if that view is correct we should see the price of gold range bound to build that consolidation or handle pattern, and that will take time. I would expect the handle to be an Elliott Wave Wedge, or more likely a complex correctional pattern (an example: ABC Down, then X Wave up, then Declining Wedge).
Since we already enjoy a low cost basis on gold, my advice to my parents is we might sell gold on price advances and buy gold on price retreats. In the long run, we expect to add to our net holdings. As always, we will wait for the technical's to tell us what to do.
If my parents did not own gold, I would recommend a slow dollar cost averaging approach given the pattern that may be developing, which if correct should take some time to form the handle.
The US Long Bond:
In late 2008, I thought the technical picture for a bond market sell off was immanent. The technical's looked so good; I entered two short positions using inverse bond funds for my parents when the US Bond Market was at $118. The bond market trade down to about $113-115, but then the stock market sell off picked up steam, and money flowed into the safety of the treasury market, and that market reverse hard in what looks like a panic buying spike.
We held our position and to date are carrying roughly a 15-17% paper loss. We've mitigated our risk by holding our position to a modest level, and may chose to add to it at some point.
The US Bond market might be the biggest bubble on the planet, and has been in a bullish trending channel for decades. The technical picture reflects severe bearish divergences on the RSI and MACD the entire way up, and at some point, this market will get very tired and heavy, and will finally break down and correct below the channel.
At this point though, the US Bond market is trading right in the middle of the channel with no evidence of a topping pattern. It doesn't have to have one, but more often than not, markets provide one. So, it's too difficult to gauge if the bond market is ready for that sell off or if we need more time. I suspect more time and price action is needed.
The target zone on the chart is the minimal Fibonacci retracement zone, so there is quite a bit of upside in the inverse bond trade. Outside of our gold position, this is one of the few positions I don't mind holding for an extended period. It might take time to get to the target zone but the upside is well worth the wait.
If we didn't own the inverse bond funds, my recommendation to my parents would be to slowly dollar cost average into them to take advantage of the expected correction in this bubble.
In our annual review, we discussed the stock market in a brief manner. Their investment year with me ends March 31st of every year, and during the prior 12 months I placed 303 trades, and they made money 258 of those trades or 85.15%. 56.77% of those trades were on the short side of the market.
My advice to my parents is that it still seems like the stock market is more of a trading vehicle and during this coming year we might be on both sides of the fence (short and long) at different times, as the technical indicators I follow on long term charts still suggest this is trading type market, and not a buy and hold type market.
Is it possible that we had one big sell off and then we'll return to a new multi year bull market? That's a very slim possibility statistically, and the technical's do not point to that.
I do expect a bear market rally, and one of these rallies will be quite impressive. That being said, I also expect the markets at some point in 2011-2014 to make new lows, WELL below those lows of 2008, as part of the deflationary cycle process. I can't see how the buy and hold strategy over 3-5 years will be a solid financial move.
If my parents didn't have me trading the stock market, my advice would probably be to avoid the markets for the time being, and avoid the brain damage and risks. Or, use the expected bear market rally to exit the holdings they have.
We are still moving forward under a deflationary investment model. We like "CASH" because it is "KING", a solid position of gold, what I call real estate alternative investments, some inverse bond plays, and trading the stock market.
My strategy is really what I like to call, "A little old lady fund with a shot of Jack Daniels and a pinch of Snuff". It's all about capital preservation with selective low risk opportunities to make money from time to time.
My parents are quite fortunate, as last year was a devastating financial year for most, but I had them prepared for this back in 2003-2005. Their net worth held up, which allowed them to spend the winter on the beach in Mexico stress free.
My model works and has worked quite well. And during the past several years, I have yet to hear of a total money strategy that I like better than ours.
It's a model that is managed constantly to make sure it stands the test of time, it takes advantage of opportunities, and reduces the risk of the day.
I encourage all to develop and actively manage a plan for your wealth regardless of what your wealth is or might be in the future. Having a plan is half the battle.
I hope all is well.