Plan by Investing in Mortgages: Part III
This will be the third in a six part series of articles on using your IRA to investment in non-traditional investments such as mortgages.
The US Treasury Secretary asks for $700 Billion to buy “toxic assets” from the banks – then says, “oops“– let’s buy bank stock instead. Then joining the banks and insurance companies in the bailout queue – the automakers say, “me too –you can’t afford to let us fail”. The purveyors of the policies that got us into the mess not so surprisingly are unable to extricate us from the growing uncertainty of both a national and international economic crisis.
Our stock and bond portfolios have taken a nose dive, at the very time our jobs and industries are at risk – with no personal bailout likely for any of us. We are told by many of our advisors to stick with our (or their) investment strategies – they say it’s a poor time to sell, because we must be at the bottom. Any flight to safety seems to come with little if any earnings, as yields are beaten down by the stampeding herd of investors who are sickened by the continuing losses of principal.
Government policies encouraged risky lending with banks and financial institutions eager to oblige – then wrapping and repackaging these flawed instruments to sell to the greater fool. Investment opportunities with earnest sounding names such as derivatives, mortgage swaps and other creatively developed equities fed an insatiable appetite from Wall Street and international investors.
Then it all came apart….. Now what?
We still need to invest, we want to retire, and would prefer not moving in with our kids until absolutely necessary.
Getting back to the basics wouldn’t be a bad start. Let’s review:
1) Avoid the herd, or at least get in front of it
Shop for investments much as you would buy consumable commodities for your household. Wait until they are on sale, and then buy enough to last a while. Despite what some stockbrokers may be telling you, just because stocks cost significantly less than they did one year ago doesn’t mean that they are “on sale”. That is simply the price that the market says they are worth today. Private investments often can be purchased at a true market discount simply because they are not as widely available.
2) Don’t act on impulse, rather on information
Most of us have at one time or another acted on a stock tip, whispered or e-mailed from those in the know. Let’s be honest, its not investing, its gambling. Despite the outcome, with enough rolls of the dice, the laws of probability will constantly triumph. Hanging out with bright people is much better than the alternative, but building long term wealth from the crumbs off other people’s tables is unlikely. You must keep your own counsel, do your own homework.
3) Take your time – there is no rush. Build capacity
Jim Seneff, the Chairman of CNL Financial Group has his own philosophy of life. Mr. Seneff started buying real estate in Orlando in 1973 – and now runs a $5 Billion real estate investment empire. Jim’s viewpoint is that you must be deliberate in your preparation for success – in your career, and I would extend that to your investments. If you want to invest in oil and gas, read everything you can get your hands on – and find the experts and grill them too. Then stay in touch with new trends, market shifts, demand curves – and all other critical variables in the sector.
If that seems too difficult, then find a business that you can understand and track – see principal #10.
4) Expand your advisor base – develop new relationships
Investment advisors come with various backgrounds and expertise. They often earn their fees from commissions charged based on the advice they proffer. While that model may serve the investor well in times of growth, it can be unnerving when those commissions only serve to increase losses.
Seek out new advisors – perhaps those that have little to gain from managing your money. Attorneys, CPAs, or simply seasoned investors may be additional voices to add to your portfolio of counselors.
5) Challenge conventional wisdom (teenager rule)
For those of us that have teenagers – non are better at questioning our wisdom (conventional) with their views (enlightened). It would serve us well to look at our investment choices in a similar light – questioning the appropriateness of the risk and the fundamentals of our holdings. We often take far more time to analyze new investments than we do reviewing the advisability of continuing to hold current assets that may now be underperforming.
6) Invest on fundamentals – then be ready to change when fundamentals do
This is a bit of Warren Buffet type advice. If the economy is in decline, look to industries that are may be impervious to the downturn. If you need income, perhaps you should be lending directly, instead of investing in CDs. Banks are no longer providing loans to very qualified individuals – and that will open up significant opportunities to individuals to privately lend – including within their IRA.
7) Leverage your knowledge with others
Join a group that is populated with investors with similar goals and interests as your own. For example, Real Estate Investment Clubs are found in every major metropolitan area of the country - each dedicated to providing education in all facets of buying, holding and selling real estate and real estate related assets.
8) Manage the down side
The balancing of risk with reward is a delicate act that drives the pricing of investments. Many investors are far too focused on the reward side of the equation – perhaps because that is the emphasis of their broker. Now, there is a far greater concentration on reduction of risk. Once we emerge from our current economic malaise, there is little doubt that most will forget the risk again, in a stampede for the elusive big return.
Always ask – what is the worst that can happen? I used to think that AT&T would always be around – and that if the long distance market declined, certainly their equipment side, Lucent – would always survive. Worst case? Bankruptcy. If you can lose it all – what separates investment from gambling?
Will real estate go to zero? Well, there are holding costs – such as property taxes and insurance if the property has improvements, but the likelihood that the equity will completely disappear is unlikely – and rental income may produce cash flow.
Will a private loan go unpaid? Perhaps, but with sufficient collateral, it may not matter. Fact is, it may be possible to better understand and manage risk with private investments as well or better than those that are publicly traded.
9) Invest in the idea, then the team that is implementing it
At a recent panel sponsored by the Miami Finance Forum, the subject was private equity. The panel was asked by the moderator what was the most important consideration in determining whether they were to invest in a particular company. Two of the private equity representatives agreed that the quality of the management team was paramount. The third panelist was a bit of a contrarian….
He said, the most important consideration was the power of the idea, or the fundamental business model. He felt that assembling a good team wasn’t the difficult task.
10) Invest in only what you know and understand
Of all the basic principals of investing, this is the most intuitive, yet often discounted. Entire life savings are placed in the hands of advisors – trusted completely to preserve investment capital and produce a reasonable return.
The fact is, no one will care more about your investment return than you. If you are using an advisor, insist on understanding not only their investment strategy, but also why they are buying/selling/holding the individual stocks within the portfolio.
In the November 2008 issue of Florida Trends Magazine, in an article entitled “Lessons from Wall Street, Ash Williams, the chief investment officer of the Florida State Board of Administration was quoted “…never invest in anything you cannot explain, ideally to a child.” Good advice.
There are great opportunities in the marketplace today. Real estate is being discounted at unprecedented rates. Banks cannot meet the demand for loans, sometimes despite significant collateral. Mortgage loans yielding 13% are begging for investors.
While CNN, CNBC, the Financial News Network and the nightly news continue to measure economic health by the Dow Jones, NASDAQ and S&P 500 indices – your retirement plan can employ a much different yardstick. Stick to the fundamentals, save aggressively and invest wisely. After all, it is your choice and your retirement. The choice is clear, surround yourself with good advisors and consider in investing in mortgages through your IRA.