In Barron’s “Retirement: Safety first” Karen Hube looks at recommendations from five experts on how to minimize losses (stabilize returns) in shaky markets. Peter Bernstein suggests protecting yourself against extreme scenarios by hedging with TIPS (inflation indexed government bonds) against runaway inflation, long-term treasuries against deflation and gold against extreme financial instability. Charles Ellis (whose book “Winning the Loser’s Game” is a must read classic on investing) recommends a market capitalization weighted globally diversified portfolio; he calls diversification “the truly free lunch”. Barton Biggs suggests global large cap stocks as the best value now, especially technology. Jeremy Siegel recommends index funds which are dividend weighted. David Darst whose focus is always on asset allocation suggests including a slice of alternative investments (commodities, real estate, hedge funds and gold), managed futures and TIPS.
In my August 17th, 2008 Hot Off the Web blog. I referred to a new product whereby investors will give you up-front cash in exchange for future participation in the appreciation of your home. I suggested that this deserves further look as compared to reverse mortgages, but we should look at the fine print before we get too enthusiastic. Now Kenneth R. Harney has a couple of related articles in the LA Times “New industry offers cash to owners in exchange for a share in future growth of their home’s value” and “Offer of cash for share in future equity growth carries risk for homeowners” on similar products. The first article describes the product and gives examples of $70,000/$117,000 up front cash for 30%/50% participation in the price increase of a house, upon its sale, currently valued at $900,000 in San Francisco (now restricted to single family homes). In the second article he talks a little more about the fine print. Among the fine print items there are: effective interest can be quite high (as discussed in my August 17thblog, if there is significant appreciation- but then if then if there is no/low appreciation there may be little or no interest), there are (decreasing) pre-payment penalties if sale occurs within the first five years, and “deferred maintenance adjustment” if investor finds (with third party corroboration) that some maintenance, that should have been, was not done. This last point could become a can of worms, since this leaves a great deal open for subjective assessment. (Of course there is also the matter of striking an acceptable starting valuation for the home, with owner/investor wanting a high/low valuation for minimum/maximum payout upon sale.)
Both WSJ’s Brett Arends in “Ignore your instinct to flee” and NYT’s Ron Lieber in “Memo to uneasy investor: Be strong” recommend that you should think carefully about selling your stocks now (after significant market fall) and moving into CD/GICs and hoping to re-enter market when you feel more comfortable. Doing that will most likely not just lock in your losses, but also will insure that you will most likely miss a significant part of the rebound.
And finally, on the Florida front the farce continues. First Miami Herald reports in “High court axes 3 key amendments” that Florida’s Supreme Court has removed from the November ballot three amendments (5, 7 and 9) placed on the ballot by the Taxation and Budget Reform Commission after years of work. “Amendment 5 would have eliminated property taxes that pay for schools, lowering average tax bills by 25 percent and forcing legislators to replace the money with sales and other taxes. So you can stop holding your breath if you were counting on property tax relief from this amendment. In WSJ’s “Condo buyers in Florida seek exit deals” Markus Balser describes how buyers of tens thousands unfinished or just finished condos are looking to the courts to extricate themselves from contracts on units that have often hundreds of thousands under water compared to contacted price, though not very successfully so far. The buyers options are buy the unit or walk away from 10-20% deposit. Balser indicates that the Miami market has four years of inventory in the pipeline and the growing number of units which are contested in the courts are depressing market further as others are worried about closing on units in half empty condo buildings and then risk potentially getting stuck with maintenance cost of the unsold units as well.