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The Independent Investor: The Super Committee
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By now we should be well acquainted with these binary events. You know these do or die, pass or fail decisions that promise to send us all to Nirvana or Armageddon every other week or so. This year we've lived through the U.S. deficit reduction/debt ceiling 11th hour deal, the will-they-or-won't-they credit rating downgrade of our sovereign debt, the two-year-old Greek tragedy, the EU bailout plan and more recently, Italy's antics.
What is really at stake in this Super Committee decision? As readers may recall, the Republican Party originally demanded a deficit reduction package before agreeing to an increase in the country's debt ceiling. In August, an austerity package of cuts worth $2.4 trillion was announced by the Obama administration.
At the 11th hour, both parties agreed to raise the debt ceiling and set up a committee charged with coming up with a deficit reduction compromise by Nov. 23. Failure to do so will automatically trigger cuts of $600 billion in Washington's two sacred cows—defense (Republicans) and entitlements (Democrats) beginning in 2013. But none of these efforts were enough to stave off a reduction in U.S. debt rating by the credit agencies, which happened on Aug. 6.
Many pundits had warned that markets would collapse around the world if and when we lost our triple "A" credit rating. None of that occurred. In fact, markets rallied and rates declined. Yet, party leaders swear up and down that they feel duty bound to uphold the automatic cuts if the Super Committee fails to come up with a deal. At the same time, 100 House members of both parties are urging the committee to "think big" and expand their deficit reduction efforts to $4 trillion or more. It all sounds to me like more of the same — political theatre with little substance — a legacy of this do-nothing congress.
If the worst happens and no Super Committee deal is forthcoming, how bad would it be?
The credit agencies could use that as an excuse to ratchet down our debt rating again. But given the results of the first reduction in our credit rating, I'm not sure that another one will have much impact, especially given the turmoil occurring in the rest of the world.
It was also interesting that the markets declined on the news of a $2.4 trillion austerity deal in August but not on our debt downgrade. That tells me the markets are far more concerned with economic growth and the high rate of unemployment than they are with the nation's deficit. I'm all for reducing the deficit when the economy is strong enough to withstand the hit. But now, while the economy is still floundering, is not the time. I suspect that the deadline will come and go with little in the way of compromise and the markets will disregard the entire exercise.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
@theMarket: Paid to wait
So here we are again. Another G-20 Summit, Greece on center stage, the Euro trading like a seismograph and you, my dear reader, simply trying to cope.Earlier this week we had the pullback I was expecting with the S&P 500 Index dropping about 5 percent in two days. Then we rallied back into Friday when traders dumped stocks again before the weekend. Along the way, we had the bankruptcy of MF Global, an on-again, off-again Greek Referendum and mixed signals on the viability of the Euro zone bailout plan. Who said it would be easy?
Of course, life can be a bit easier in the stock market if you are willing to ratchet down your expectations and "settle" for a 4-5 percent return. I guess right now, with the S&P 500 Index slightly negative for the year, 4-5 percent would look pretty good. The problem is when markets skyrocket, like they did in October, gaining 18 percent in 18 days, no one wants to settle for a measly 5 percent return. Am I right?
Now don't get down on yourself simply because you are greedy. We all feel this way. When markets drop, fear reigns supreme. We all become conservative. The opposite occurs in up markets. The secret is finding that middle ground where both fear and greed are manageable.
As regular readers know, I have urged investors to stay defensive for the most part even through this rally. That means keeping a large part of your portfolio in dividend and income. Sure, there is always room for a few aggressive investments such as technology, precious metals, etc. but they should not be the majority of your portfolio.
Granted, you won't perform as well as the market on those ripping up days nor will you lose as much on the dips. And if you step away from the daily, weekly and monthly gyrations of the markets and look at the longer term results, you will find that after several months of gut wrenching volatility, we are just about where we were at the beginning of the year.
Consider if your portfolio had been invested defensively since January? Your average return could have been 5-6 percent this year, way ahead of the market right now. This type of strategy really works in volatile times like these.
I am somewhat bullish on equities through the end of the year but I'm not expecting any big upside moves like we had in October (although I'll be happy to take them if they come). I do expect a continuation of the volatility we have been experiencing throughout the year. Therefore you can expect 1-2 percent swings in the markets on a daily basis. By the end of the year, however, I would be surprised if we rallied more than 5 percent from the October highs.
That will be okay with me since I am being paid to wait out the markets' volatility with a portfolio weighted heavily in income and interest. As more and more investors realize the nature of this market, they too will gravitate to this same strategy providing price support for my funds and your stocks. It may not be the most exciting way to play this market. But that's OK; I could do with a little less excitement right now.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
The Independent Investor: Should You Consider Renting What You Can't Sell?
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The first thing to remember is there is no such thing as "can't" when selling your home. It is just what price you are willing to take for it. Some homeowners have no choice. Underwater owners that are running out of money to pay their mortgage must sell or face foreclosure. Their woes have been well documented. But what about those of us who would like to sell, either a primary residence or a second home, but have the money to wait for a bottom in the real estate market?
The rental market is booming across America. More than 3 million Americans have entered the rental market over the last three years and as foreclosures mount, that number will only increase. It appears that demand for rental properties is outpacing supply.
Obviously, renting your home only makes sense if you have another place to live. If you are relocating because of employment, on sabbatical for a year or two, if you have a second home, or will be moving in with someone else (because of a marriage, death of a relative, etc.) then the economics of renting may be appealing.
On the plus side, renting allows the owner to keep the property until prices bottom out and, hopefully, begin to appreciate. In the meantime, rental income can cover mortgages, taxes and insurance payments if the rental price is right. Better yet, certain expenses such as mortgage payments, property taxes, repairs, maintenance, advertising, broker's fees, transportation and insurance can be deducted from rental income.
There's also a phantom tax deduction called depreciation (the wear and tear on your property) that you can deduct each year from your rental income. All you do is divide the fair market of your home (excluding cost of land) by its recovery period, which is 27.5 years for residential property. For example, assume your home is worth $350,000 divided by 27.5 years equals an annual deduction of $12,727.27 from rental income.
But there are some negatives as well. Landlords have plenty of headaches ranging from renters who fail to pay their rent, to vandalism of their properties. Housing maintenance issues don't go away simply because you no longer live in your home. Depending upon its age, everything from leaky faucets, non-flushable toilets to really big emergencies like roof leaks, and lack of electricity and heat must be addressed immediately or you may be hauled into court and sued.
Renters too have rights and in some cases, even obvious reasons for evictions, such as failing to pay the rent, may involve the courts and we all know how lengthy court cases can be.
As it now stands, the U.S. government provides a generous tax break for homeowners who have lived in their house for at least two of the last five years. Married couples who file jointly can keep up to $500,000 in capital gains from the sale of their home, tax-free. Singles can enjoy up to $250,000 in windfall profits. By renting your home that tax break disappears under certain circumstances.
If you are renting for just a year or two, there is no problem. Simply move back within the qualifying time period, sell, and enjoy your gains. However, if you want to rent over the long term (five years or more), you need to understand the tax consequences. Of course, you can always have your cake and eat it too. If you are willing to rent for a period of years, then move back into the house for two years and then sell it, you will qualify for the tax break.
Before you decide, find out your rights as a landlord by consulting with an eviction attorney. You should interview property managers. They will charge a percentage of the rental income for handling all of your landlord duties; but it could be worth it. Finally, create a budget that encompasses all the expenses, taxes and other items you might incur as a landlord.
All of this may take more time and effort then you are prepared for, but let's face it, renting is a business just like any other and requires preparation, planning and work.
Bill Schmick is an independent investor with Berkshire Money Management. (See "About" for more information.) None of the information presented in any of these articles is intended to be and should not be construed as an endorsement of BMM or a solicitation to become a client of BMM. The reader should not assume that any strategies, or specific investments discussed are employed, bought, sold or held by BMM. Direct your inquiries to Bill at (toll free) or e-mail him at wschmick@fairpoint.net . Visit www.afewdollarsmore.com for more of Bill's insights.
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