Wednesday, September 25, 2019

The Best Advice I've Heard in a Long Time

While it's true that I keep a journal of trades, so I can go back and look at what I did, especially the mistakes, this is only a learning tool. I do not wallow in misery over missed profits, missed trades, or any such thing.

I get Jeff Clark's Market Minute newsletter every morning. Today he repeated an essay that I think every investor or trader should take to heart. I repeat it here.

“Don’t look back.”
That was the advice the angels gave to Lot and his family as they led them out of the city of Sodom, just before it was destroyed by the wrath of God.
Whatever happened to the city after he fled was no longer Lot’s concern. It was no longer any of his business. He couldn’t do anything about it.
So, “don’t look back” was the angel’s way of saying, “Look forward. There’s nothing to gain by watching what happens behind you. Focus on your future and what is ahead of you.”
As the Bible tells us, Lot’s wife wasn’t all that good at following directions. She couldn’t resist the temptation to look back and see what happened to the city she just left. And she was turned into a pillar of salt.
Why salt? Who knows? Maybe it’s because too much salt can lead to high blood pressure and heart problems. Maybe it’s because a pillar of salt is fragile, yet immovable.
Whatever. The bottom line is, Lot’s wife shouldn’t have looked back. And neither should traders.
Once you’ve exited a position, whether for a gain or a loss, it doesn’t matter what happens to that trade anymore. There’s nothing to be gained by looking back at it. Focus on the future and the opportunities that are in front of you.
If you look back, you run the same risks as Lot’s wife – not that you’ll be turned into a pillar of salt, of course. But that you’ll be rendered fragile and immovable.
Think about this…
If you’ve taken a profit on a trade and then choose to look back at it, then one of two things will happen…
  1. The position will reverse. You will have sold at the perfect time. And you’ll expect to be able to do that consistently in the future. This leads to overconfidence and the belief that you’ll always be able to get out of town just before the market gods unleash their wrath. This is a dangerous thought process.
  2. The position will go on to even bigger profits. You will have sold too early. And, even though you took a good profit on the trade, you’ll feel bad because you could have made so much more. This leads you to question every future trade. You’re more inclined to hang on longer than you should. And you may not be able to get out of town in time.
If you’ve taken a loss on the trade and look back at it, then even if the position continues to fall, you’ll still feel bad about having taken a loss.
And, if the position turns around and starts to move in your favor, then you’ll likely start hanging on to other losing trades longer than you should – hoping they’ll start moving in your favor as well.
Traders have nothing to gain by looking back at trades they’ve already exited. You can’t change your decision whether it’s proven brilliant or stupid. All looking back will do is paralyze you, like a pillar of salt, on future trades.
It’s important to understand that longevity as a trader has nothing to do with achieving the maximum profit on any one position. It has to do with consistently taking profits on trades as they reach your price targets.
You’re NEVER going to consistently buy at the low and sell at the high. Trying to do so will eventually lead to missing out on good trade setups, and holding onto trades longer than you should.
So, avoid the temptation to look back at the trades you’ve exited. Be happy with your decision to get out of town. Focus on the future and don’t look back.
Lot and his family left Sodom and prospered in the neighboring town of Zoar. Lot’s wife looked back and was turned into a pillar of salt.
Best regards and good trading,
Jeff Clark

Tuesday, September 24, 2019

What Do I Do Now?

Probably nothing but watch closely, at least your weekly charts. Many of my investments have already stopped out (for gains) this week, as the market weakened a bit, and has been kind of sideways like. 

With recession concerns lingering as soft global economic data is countering relatively upbeat domestic reports, Schwab’s Chief Investment Strategist Liz Ann Sonders offers her latest article, Take Me to Your Leader: Analyzing the Latest Leading Indicators, noting that leading indicators are at a record high, but in a relatively flat trend over the past year. 

Liz Ann adds that manufacturing remains weak, while services/consumer remains healthy; with confidence/employment likely defining whether the divergence persists. She concludes that Citi’s Economic Surprise Index has shot up, but Bloomberg’s Economic Surprise Index of Leading Indicators has not confirmed.

As of this morning, the consumer confidence index had been showing exceptional strength but did fall back unexpectedly in September to 125.1 which is down sharply from a revised 134.2 in August and 135.8 in July. Nevertheless, this index has been trending higher this year in continued contrast to the rival consumer sentiment index which has been slumping noticeably.

From Kelly Evans at CNBC:

There has been a clear loss of momentum in prices since the 2018 highs--which isn't necessarily a bad thing. The last thing anyone wants is another housing bubble a la 2005-07; and affordability was getting pretty bad, especially for first-time buyers. The 20-city index was rising 6.7% year-on-year during its March 2018 peak, according to J.P. Morgan.

So what changed? According to Jefferies, "The deceleration has been driven by high-tax locations and especially for high-end homes." Remember, the 2018 tax cut act limited the state & local tax ("SALT") deductions which hit those households the most. That has coincided with a general exodus out of the highest-priced, top-tier cities and into more affordable ones. The five worst performing cities in July were Seattle, San Francisco, San Diego, Chicago, and New York. Seattle prices outright declined year-on-year.

For now at least, the broader FHFA gauge of U.S. home prices is still showing a healthy (maybe too healthy) 5% annual growth, down from its 7.5% peak in early 2018. And affordability for first-time buyers is still an issue. But for markets where prices are now flat to falling, the potential loss of equity--and population--will create much larger future headaches.

Sunday, September 22, 2019

Democratic Hopefuls Plan to Rob You Blind

I thought that headline would be sensational enough to get your attention. But it has some truth to it.

Update Sept 25: Warren and Sanders now want to tax wealth (assets) not just income. Watch your pocketbooks.

You might not realize it yet, but all the "free" programs that are being promised by Democratic presidential candidates all come with a price tag. And you may also not realize it, but the "rich" don't have enough money to pay for it all.

So who does?

Dr. Daniel Mitchell, an economist and Chairman of the Center for Freedom and Prosperity, says:

"Lower-income and middle-class taxpayers need to realize that they’re the ones with bulls-eyes on their back."

The plans laid forth by Warren, Sanders, Harris and others use what Mitchell calls "sloppy math."

During an "interview" with Stephen Colbert on the Late Show, Elizabeth Warren said this when asked How was she going to pay for "Medicare for All."

“So, here’s how we’re going to do this,” she started. “Costs are going to go up for the wealthiest Americans, for big corporations… and hard-working middle-class families are going to see their costs going down.”

Where have we heard that before? Remember, Obamacare was going to lower the average cost of health care by $2,000 per family. Did that happen?

Bernie Sanders, the guy who “wrote the damn bill” isn’t so squeamish. He admitted in July that tax increases for Medicare-For-All could go as high as $10,000 per household. Not just for the millionaires and billionaires. For middle-class families.

So brace yourselves for a value-added tax, a carbon tax, a financial transactions tax, and higher payroll taxes. Brian Riedl of the Manhattan Institute just released his Book of Charts.

It would be wise of you to be familiar with this information. 

Saturday, September 21, 2019

Are Markets Overpriced?

The Shiller PE ratio and the Buffett Indicator are two measures to indicate whether markets are over valued. These are not indicators to time the market. They just provide general indicators of value. Markets can certainly go higher -- if over valued -- or down -- of under valued. But they are useful as a gauge whether you should be watchful and cautious.

The Shiller can be found here. The Buffet Indicator here.  The Shiller PE is first, the Buffett Indicator is second. Both show overvaluation.

Monday, September 16, 2019

What are some ticker symbols a trader must know for monitoring the market like VIX, TLT, SPX etc?

I use the flowing ETFs, more or less; some I don’t pay attention to on a daily basis):
SPY (S&P index)
DIA (DJIA index)
(QQQ) (NASDA 100)’
IWM (Russell Small Caps)
Though you could just do SPY and be close to market trends, I also do the QQQ because of its tech weighting)
AGG (Agreegate Bond Market)
GLD (Gold)
HYG (Hi-Risk bond market,mostly incorporates)
QLD (Corporate Investment Grade Bonds)
RXE (Real Estate)
TLT Treasury Bond).
Even on most day’s that too many. Pick what you want to specialize (6 maybe) in and follow those more closely. I have two stock lists. The overall markets, and 6 or 7 stocks (or an ETF or Mutual Fund) I’m really interesting right now.
I’m not a professional trader, so I don’t get paid to track these markets. In fact, most professional traders focus on one or two asset classes. They must know something.
And do yourself a favor. If your watch list is larger than 20, pare it down. Humans tend to handle categories and process information in 7-bit chunks. (Remember where and my my degree is from and for. My master thesis was in information processing.)
You can follow me at
(Full Disclosure) I dot not necessarily endorse or carry assets in any of these EFTs, though I have a couple.)

Is a savings account the saftest investment for a recession?

Forget all the analysis (There' a Recession Coming! There's a Reason Coming!)* and all the “mix” of ideas depending on your “circumstances’) and / or rationalization or reasons behind savings counts or investments or burying your gold coins in the back yard.

There is a very basic principle (which has been around since at least the invention of writing) that most people don’t follow. And it's so simple. Forget recessions and all the super analysis by talking heads and financial reporters. And especially those who want a recession because they think it will make Trump lose an election (pathetic humans who wan to see millions suffer because they hate one guy).

Most economists, like weathermen, are wrong on predictions, especially when it comes to your money. The number 2 requirement of any financial plan is to have a saving accounts with emergency fund. (Number #1 having a budget). Forget the rest of the stuff for now -- if you don’t have this emergency account, in a savings or money market (where you can get your funds with 24 hours without affecting our retirement goals.) start one now. Like today. Not tomorrow, and not next week, or “when I get my next raise at work.”

If you don’t have an emergency fund, your first goal is $1,000 or equivalent.

If you do have one, you’re better off than 60 percent of Americans, and I’ll bet this is close world-wide. A recent poll says that most American would have to borrow money to replace their hot-water-heater. Pathetic. Says a lot about our educational system.

Not building that emergency fund (not investment fund) to at least 30 days of living expenses, is a disaster waiting to happen. I’ve been working on mine for 25 years and have 12-months. Overkill, probably, but I’ve been putting away 10 to 20 percent of my income for investments in the mean time. Something will happen. Going in debt will dig you a deeper whole. And you know what the Greeks say: “Shit happens." Unless you’re in Greece. Then it’s “You know what the Chinese say?”

Forget this this basic rule, and you’ll struggle to get ahead of the game.

So don’t worry about recessions. You have no control over these. Control and take charge of what you can.

Tuesday, September 10, 2019

Tips for Buying a Home

Once you have your financial house in order, as explained in my article Critical Financial Steps When Buying a Home, it's time to actually buy a home. These tips are generally for the buyer of existing homes, but can apply to purchasing a newly built home. 

 1. Hire a real estate agent

An experienced real estate agent can be the key to help you find your dream home and negotiate with the seller on your behalf. This person should be on your side, helping you make informed decisions and refer you to other professionals like home inspectors, contractors (if needed), appraisers and title companies. That said, you should still shop around and compare fees from other professionals, too.

Before hiring a real estate agent, find out about their track record, knowledge of your desired neighborhood and what their workload is like (some agents may be over-scheduled).

An agent with knowledge of an area can also tell if your budget is realistic or not, depending on the features you desire in a home, They can also point you to adjacent areas in your desired neighborhood or other types of considerations to help you find a house.

How this affects you: A real estate agent can save you time and money by helping you look for a home that suits your needs.

Some key points about hiring a real estate agent:
  • Sign a buyer's broker agreement. It creates a relationship between you and the agent and explains the agent's duties to you. 
  • If  you're not ready to sign a broker's agreement, do not expect the agent to show you homes.
  • Make sure there is a cancellation clause to the broker's agreement. 
  • Do not call the listing agent. Arrange the view with your agent. 
  • Practice Open House protocol. Check with your agent if it's OK to go to an Open House alone, or does your agent wish to be there?
  • Have realistic goals and let your agent know what they are. 

2. See multiple homes

Once you meet with your real estate agent, you’ll likely be set up with a profile in the local Multiple Listing Service, which houses all listings for sale in a given area. Your agent can set you up on automatic searches for homes that meet your criteria. You can then let your real estate agent know what specific homes you want to see, or you can search online yourself. It’s also a good idea to drive through neighborhoods you want to live in to see what’s for sale, and attend open houses.

It's important to keep in mind that you may not be able to check off everything on your home amenity wish list, so you’ll want to prioritize what’s most important to you aside from location. Also, keep notes on each property you visit. After a few showings, it’s easy to forget which homes you liked and why.

Keep your schedule open so you can pounce when a great home is listed, especially if you’re in a competitive seller’s market. If a home comes on the market, you could gain an edge over other buyers the sooner you see it and put your offer in.

While its important to look at several homes, don't take this to extremes. You'll lose the interest of your agent if you look to long, or are too picky. 

3. Make an offer

Once you find “the one,” it’s time to make an offer, which your agent can help with. A complete offer package should include your offer price, your pre-approval letter, proof of funds for a down payment (this helps in competitive markets), a personal letter to the seller to help your offer stand out, and terms or contingencies.

Typically, a seller has about 24 hours to counter on an offer. In my experience, they'll come back much faster.

Sellers might counteroffer on your price, terms or contingencies. From there, you can choose to respond to the counteroffer or reject it and move on.

Once an offer is accepted, you’ll need to sign a purchase agreement that includes the price of the home and estimated closing date. Then you’ll pay an earnest money deposit, which shows that you’re serious about purchasing the home. It’s typically about 1 percent to 2 percent of the total purchase price. The seller may have a right to keep the money if you back out of the contract.

However, there are cases where you can back out of a contract without penalties. That’s where contingency clauses come in and typically include appraisal, financing and home inspection and are designed to protect the buyer. For example, if a home inspection report shows major problems, you can back out of the contract and get your earnest money back.

Understanding how to make an attractive offer can increase your chances the seller will accept it, putting you one step closer to getting those coveted house keys.

4. Get a home inspection

A home inspection helps you get an overall picture of the property’s mechanical and structural issues. Depending on your contract and state of residence, you’ll need to complete a home inspection 10 to 14 days after you sign a purchase agreement.

Your real estate agent may have recommendations, but you should do your homework before choosing an inspector. To make sure the home inspector has enough experience, read online reviews, ask for past client references and look at their credentials.

Remember, an inspector doesn’t investigate all aspects of a home, so it’s helpful to look at a home inspection checklist to see what is and isn’t covered. As a buyer, you’re responsible for paying the home inspector, and while the fees can vary, you’ll pay an average of $300 to $450, according to Angie’s List.

The home inspection will help you figure out how to proceed with the closing process. You might ask the seller for repairs, decide to back out of the deal if you have a contingency in the contract, or simply anticipate future repairs after moving in.

5. Negotiate repairs, credits

Your home inspection report may reveal issues in the home — some major, some minor. The minor issues may be a sign that you’ll need to do repairs in the future, but major problems will likely need to be dealt with before a lender will finalize your loan.

Your agent can help you with negotiating any repairs — either the seller oversees the repairs, or you can ask for a cash-back credit at closing and handle them yourself. Some sellers may not agree to extensive repairs, and that’s why a home inspection contingency is a good idea to give you a way out of the purchase if the home is in less-than-ideal shape.
If there are safety or hazard issues like structural damage or improper electrical wiring, some lenders might not approve you for a loan. Plus, you might not have the budget or desire to handle those repairs after buying the home. Enlist your agent’s help to negotiate these items with the seller.

6. Secure your financing

At this point, you may need to submit additional paperwork as your lender completes the underwriting process. Documents might include bank statements, tax returns and additional proof of income, as well as a gift letter and written statements about any major deposits into your bank account.

Generally, it’ll take anywhere from 21 to 30 days to complete the financing process. Delays mostly happen when buyers either don’t respond to disclosures quickly enough or don’t provide the exact documents that the lender needs.

Another tip: Keep the status quo in your finances until closing day. In other words, don’t run up credit cards, take out new loans, close credit accounts or change jobs. Doing any of these things can hurt your credit score or impact your debt-to-income ratio, and that can imperil your final loan approval. A pre-approval doesn’t mean you’re in the clear until a lender has given the final stamp of approval, so it’s important to keep your finances and credit in good shape from pre-approval to closing.

Getting final loan approval means you need to keep your finances and credit in line during underwriting. Respond promptly to requests for more documentation and double-check your loan estimate to ensure all the details are correct so there are no hiccups later.

7. Do a final walk-through

A final walk-through is an opportunity to view the property before it becomes yours. It’s a good idea to have your real estate agent there who can act as a witness and help answer any questions you may have. Come with your home inspection checklist and other documents, like repair invoices and receipts the owner conducted, to ensure everything was done as agreed upon and that the home is in move-in ready condition.

This is your last chance to view the home, ask questions and address any outstanding issues before the house becomes your responsibility.

6. Close on your house

Once all contingencies have been met, you’re happy with the final walk-through and the closing agent has given the green light to close, it’s time to make it official and close on your home. Your lender will issue you a “clear to close” status on your loan.

Three business day before your closing date, the lender will provide you with a closing disclosure, a document that outlines all of your loan details, such as the monthly payment, loan type and term, interest rate, annual percentage rate, loan fees and how much money you must bring to closing. Review the closing disclosure carefully and compare it to the loan estimate to ensure closing fees and loan terms are the same. This is your final chance to ask questions about your loan and correct any errors (like your name or personal details) before you sign closing paperwork.

At the closing, you (the buyer) will attend, along with your real estate agent, possibly the seller’s agent, the seller, in some cases, and the closing agent. Depending on where you live, the closing agent may be a representative from the escrow or title company or a real estate attorney. This is also the time where you’ll wire your closing costs and down payment, depending on the escrow company’s procedures.

Once all of the paperwork has been signed, the home is officially yours and you’ll get those house keys. Congratulations! Now comes the fun part: moving in and making the house your home.

Closing is the last step before you become a homeowner. Review all of the documents you sign carefully, and ask for clarification on anything you don’t understand. You’ll leave closing with copies of the paperwork (or a digital file) and your new house keys.
Bottom line

Buying a home involves a lot of moving parts and complex steps, but this guide — along with the professional expertise of your real estate agent and lender — can help you navigate the process smoothly. Don’t be afraid to ask questions along the way and learn as much as you can before diving in. By doing your homework ahead of time, you’ll have more confidence in your decision and relish getting those coveted house keys on closing day.

Monday, September 9, 2019

Critical Financial Steps When Buying a Home

In my lifetime, I have bought six houses, and sold five. I currently live in the sixth, which was new construction, which was an adventure unlike purchasing an existing home, But the principles of buying a home are the same, whether you are purchasing a new home, or an existing home.

1. Understand why you want to buy a house
Purchasing a home is a major decision that shouldn’t be taken lightly. It’s important to define your personal and financial goals before proceeding. Think about factors such as whether you’re craving more stability, whether it makes sense financially and whether you’re prepared for the responsibility of maintaining a home.

You should explore some resources on Renting vs. Buying before you make the decision. I posted a article with a couple of good videos on this subject, and as an informative article here

2. Dig Into Your Credit Reports and Credit Scores
Your credit score and history are the first things all lenders will look at to decide whether or not to consider offering you a mortgage, so you need to check your credit to make sure you’re in good standing with all your debts. Numerous sites offer free credit reports and free estimated credit scores. Your bank may offer this service.

When you pull your report, first check out your score, which will be a three-digit number that generally ranges from 300 to 850. Most lenders look for a score of at least 600 to 640 to offer you financing, but some will make exceptions for buyers in the high 500s. This estimated score will give you a good idea of where you stand, but keep in mind that lenders have their own scoring models, so your official score will vary.

After checking your score, you’ll want to dig deep into your credit report to find any old unpaid debts that could affect you. Forgot to pay that old electric bill six years ago? That's probably on your report as an old collections account and will impact lenders’ willingness to approve you.

You also want to check for accounts you don’t recognize and dispute them if you believe they are fraudulent.

Your credit scores will affect how much you pay for a mortgage. There is a ton of information over at myFICO. The chart below shows and example of payments on a $300,000 30-year fixed mortgage,  

3. Fix Any Outstanding Issues with Your Credit Report(s)
If you found any outstanding debts, even ancient ones, it is worthwhile to track down the creditors and call them. It may sound strange to call a debt collector yourself, but hear me out.
Once you get the collector on the phone, find out what the debt is for, how much you owe and if there is a discounted settlement to pay it off in full. If the collector offers you a settlement to pay it off in full and leave it as a $0 balance, take it. If the creditor offers a payment plan only, you will want to pass, as this could renew the debt on your credit and make it look more recent than it actually is. The collection account will remain on your credit after paying it, but lenders are more likely to forgive an older collection account with a $0 balance than one you still owe money on.

You will also want to type up quick explanations of any collection accounts, even those with a $0 balance. Remember, the mortgage underwriting process involves a human element, and these explanations go a long way in easing an underwriter’s mind.
4. How Much House Can You Afford (Should You Afford)?
I was once told that I should have bought the biggest and most expensive house my budget would allow. At the time I had purchased a 2,000 square foot house in nice neighborhood for just me and my wife. The mortgage payment with taxes and insurance was only 15% of my income. It worked out just fine. The advice was bad. 
You have wants and needs in mind for your new home, but can you really afford to pay for a home that checks of all the boxes? This is often the most difficult part of the home buying process.

Many so-called “rules” govern much you should spend on a home, but most financial gurus like Dave Ramsey recommend a conservative approach that’ll keep you from getting too deep in debt. Ramsey suggests limiting your mortgage payment to 25 percent of your take-home pay or less. Sure, your realtor and bank will likely base everything off your pretax pay, but you must pay that mortgage from the cash that hits your bank account after taxes.

Using this approach, if your household take-home income is $4,000 per month, you should limit your monthly mortgage payment to $1,000. There are numerous mortgage calculators on the internet, but Dave Ramsey’s calculator is one of the easier ones to use, plus it helps you estimate taxes and insurance, which you need to include in your 25-percent budget.

Based on your $1,000-per-month budget, you can afford up to a $171,500 home on a 30-year mortgage with a $10,000 down payment at 4.125% interest.

Keep in mind, with this strict budget you may run into the unfortunate reality that it doesn’t align with your wants and needs. This means there are sacrifices you must make like mothballing that man cave or scraping the she shed to stay within your budget.

Another factor to keep in mind is that besides the mortgage payment, there are other costs to home ownership. You should estimate maintenance expenses (1 percent of the home value per year is a good rule of thumb to start with) and utilities. You total housing budget should not be more than 35% of your take home pay. 

Part of the process of determining how much house you can afford is the down payment you'll need. This can vary from 3% for a VA or FHA loan, to 20% for a conventional. A rule of thumb -- again -- is the larger the down payment you can afford, the better off you are.

For those who don’t have that much saved, there are other options backed by the federal government. Borrowers who get a loan insured by the Federal Housing Administration, called an FHA loan, need just 3.5 percent down in many cases. Loans guaranteed by the U.S. Department of Veterans Affairs and the Department of Agriculture, known as VA loans and USDA loans, respectively, require no down payment.

Casey Fleming, a mortgage adviser with C2 Financial Corp., recommends finding a qualified loan officer in your area to help you determine the best option.

“Being willing to buy with less of a down payment gets you into your new home faster, but putting more down lowers your costs,” Fleming says. “The right decision for any particular person or family is highly personal.”

5. Gather Up all Your Records
Eventually you'll need to provide a lender with documentation, such as income, bank accounts, income tax records, etc. If you're a veteran, you'll need a copy of your DD-214. When you do apply for a loan, these records will make it easier. 

If you're self employed, you'll need some type of profit and loss statement, as well as those income tax returns.

Why is printing out a few bank statements so tedious? It’s not the printing. Instead, it’s all the analysis these statements will go through. The underwriter will tear through every page of your bank statements looking for red flags and asking for written explanations.

That $10 your Aunt May gave you for your birthday last month won’t raise any suspicions, but that $3,000 check you deposited from selling your car sure will. After printing out your statements, just do a quick scan to see if there are any irregular large deposits or withdrawals and type out quick explanations ahead of time. Your lender will appreciate your initiative.

I downloaded all my statements, which were in PDF format, and when I selected a loan officer, it was easy to upload them on her web site.

6. Get Prequalified for a Loan 
When you are about 60 to 90 days from buying your home, or just before you start lookng, it's time to take the first big leap and get prequalified for a mortgage. This is an important step, because it assures your realtor and any seller that you are a serious qualified buyer, as well as your own self-assurance that you can proceed. But first you have to find out what kinds of mortgages you can qualify for. There are more types of mortgages than anyone cares to count, but the most common ones are conventional, adjustable rate, Veterans Affairs, United State Department of Agriculture and Fair Housing Administration.

You can do a little light reading to see what you may qualify for, but you will want to speak with a mortgage professional to highlight your best options. Many people qualify for low-rate FHA mortgages, but its mortgage insurance requirements and other regulations offset lower down payment and interest rates they offer. A mortgage professional will quickly identify these details and steer you in the right direction for your financial situation.

To get prequalified, simply apply online through one of the countless mortgage lenders online or call a few local lenders. They will pull your credit and do a quick check of your finances to see if you qualify. If you qualify, the lender will tell you your spending cap, which will likely be way above the 25 percent budget you set earlier (many use a 35 percent rule). Don’t let the amount you are approved for dictate your budget — future you will appreciate if you stick to the 25 percent rule.

One thing to keep in mind about a prequalification: It does not guarantee approval.

7. Choose a Lender and Get Approved
When you are about 30 days from officially buying a home, pick a lender. At this point you should be looking at homes you might want to buy. You want to start this process so that if you are in a position to make an offer, it won't be held up because of financing problems. And of course, any offer letter should state that it is contingent on suitable financing. Sure, you may have gotten a prequalification letter from one or more lenders, but that doesn’t marry you to them. Feel free to shop around for the best rates.

You may be scared to shop for rates because each lender must pull your credit when giving you a rate, and inquiries generally hurt your credit score. According to MyFico, you can shop for rates for 14 to 45 days, depending on the scoring model, and all the inquiries in that span will count as just one inquiry. So feel free to shop around. I shopped five lenders on my last home purchase, and it only showed up as one inquiry, and did not affect my credit scores, nor my final loan approval.

Keep in mind, you are shopping for more than just the lowest payment. You also want to consider the interest rate, closing costs and many other variables. One way to keep this all in check is to ask the lender for a quote that includes the total cost to finance the home. This will add the price of the home, closing costs, interest and all other fees to give you the complete cost of the house over the course of the mortgage.

Once you find a lender with the best overall deal for your financial situation, apply and get your preapproval letter. This is the official approval that basically means as long as nothing changes in your financial situation, you are good to go.

8. No New Debts
When house shopping, it's common to get a nasty case of the I-want-its and rack up debt buying furniture and other items for your new digs. Make sure you pump the brakes on that desire, as one of the key terms to your preapproval is no new debts that cause significant change your financials.

No, a $200 couch on an existing credit card will not raise any red flags to the lender, but a $10,000 bedroom suite on a brand-new credit account may be enough to kill the deal. Even worse, a new $60,000 truck to put in that fancy three-car garage you plan to have — that will certainly raise a stink.

So, keep your shopping to the window variety and make tons of lists of what to buy after you close on the house.

9. Don't Forget Insurance
The mortgage company sees your house as collateral on the big loan it’s about to give you, so it expects you to insure that collateral against damages. Before you close, shop around for homeowners insurance. In most states you have virtually limitless options, so call a handful of them and find out which offers the best total package at a fair price. Sadly, in some states prone to natural disasters, like Florida, you may have few options.

Compare apples to apples, though, so make sure you have standardized deductibles and other coverages for the insurers to quote you on. Also, get every quote in writing so you have a record of it and to keep the insurer from changing anything at the last minute.

Once you choose your insurer, sometimes you can opt to pay the premium yourself up front or have the mortgage company pay it via escrow. In most cases, the mortgage company is going to want to pay it out of your escrow.

10. Collect Your Cash for Closing
Just days before your scheduled closing date, you will receive the update you’ve waited months to hear: “You are clear to close.” This means you have jumped through every hoop, wiggled every left elbow, twinkled your nose just right and kept your credit clean enough to buy your new house. But there is one last step: cash to close.

Cash to close is the amount of money you must bring to the closing table to pay all your prepaid items to get the house. These can include your down payment, initial escrow funding, unpaid taxes, closing costs and much more. When you get the clear to close, the mortgage or closing company will give you the final amount of cash you need to close, and it will give you several options to pay it. These options generally include a cashier’s check, certified check or a wire transfer.

Regardless of which option you choose, have that cash ready to go well before closing. So, if your savings are in several areas, pull the cash needed to close into one account so you’re not bouncing around various accounts and making multiple checks or transfers. Only transfer the exact amount needed to close, as this makes it easier to explain to the bank if it suddenly requests an updated bank statement at the closing table.

Your next step will be to get a realtor and go find a house. Even with new construction, a realtor can be good to have.

My last home purchase was new construction, an adventure in home buying that is quite different from purchasing an existing home. Still, the advice of a realtor was essential. And the builder paid her commission.

Sunday, September 8, 2019

The Next Bear Market Could be Worse than 2008

No one knows when the next bear market will occur, but as you may know, the yield curve recently inverted. Historically, every single bear market over the last 50 years has been preceded by an inverted yield curve, so it's a very strong indicator. When the curve does come before a bear market, the market usually drops a year later on average. Though every bear market has been preceded by an inverted yield curve, every inverted yield curve has not signaled a bear market.

Why do I believe this bear market could be a bad one? According to a May 2019 report by the Federal Reserve, tens of millions of American families are on the edge of economic oblivion based on the following:
  • Many families struggle to save for retirement and unexpected expenses. In fact, 39% of the 11,000 adults surveyed would have to either borrow or sell something to cover a $400 emergency.
  • Three in ten adults experience financial strain due to family income that varies from month to month, and one in ten struggled to pay their bills at some point in the prior year because of those changes in income.
  • Many survey respondents—particularly young adults—need financial support from family or friends to make ends meet.
  • One in four adults have no retirement savings or pension.
  • In the years since the Great Recession, student debt has exploded from $500 billion to $1.6 trillion.
  • Non-housing related debt has climbed from $2.65 trillion in 2008 to more than $4 trillion by the second quarter of this year.
  • A record number of Americans (7 million) are or have been at least 90 days late for their car payments.
I’m also concerned by a Pew Center report that says that more Americans are living month-to-month in rental housing than at any time in the last fifty years. Why is this an issue? In times of trouble, people often rely upon home ownership to help them out, by borrowing against home equity loans, etc. That assistance won’t be there for renters.

And it’s not just individuals who have massed mountains of debt—it’s countries, including ours. If incomes drop, and people (and/or countries) default on their debts, we could be in for big economic trouble.

Are you prepared for an event like that? Do you have a plan that addresses the potential for a bear market? I strongly believe you should.

Have a strategy to get out of the market, especially if your close to retirement, or currently retired. One such strategy, while not perfect, is to sell when the market index (such as the S&P 500) moves 2 or 3 percent below it's 200-day moving average. The chart below uses this strategy. It is not perfect -- no system is -- but it can help you avoid large losses to your portfolio.

What's more important is to design a strategy now. Protect your principle and do not suffer huge losses.

Note: I learned of this strategy from Ken Moraif, from Retirement Planners of America. Much of this article was written by Ken.

Don't Major In Minor Things

Using your time wisely is key to success. Focusing on what's important. Don't mistake movement for achievement. Don't mistake courtesy for consent. Concentration is important. Learn to say no. Don't play at work.

Jim Rohn: Habits of the Wealthy (15 min)

Thursday, September 5, 2019

The Foundations of Building Weath

A short, but great video, on YouTube by Dave Ramsey on how to fix your financial situation. Get motivated. It's 20 percent knowledge and 80 percent behavior. I did it (more than 200,000 in debt and now debt free, except my home, 6 month's emergency fund and retired comfortably).

Wednesday, September 4, 2019

IRA Taxes: Rules to Know and Understand

Article from

Individual Retirement Accounts (IRAs) can be a great way to save for retirement because of the tax benefits they can provide. If you’re eligible, you can choose a traditional IRA for an up-front tax deduction and defer paying taxes until you take withdrawals in the future. Or, if eligible, you might opt for a Roth IRA and contribute after-tax money in exchange for tax-free distributions down the road.

So, what's the catch? There are a few. If you run afoul of some of the IRS rules surrounding these accounts, the penalties can be quite stiff—all the way up to a disqualification and taxation of your entire account.

Ignorance of the law is no excuse, and with few exceptions, the IRS isn’t very forgiving of mistakes. Knowing the rules can help you navigate the many potential IRA tax traps you might encounter on your way to retirement.

Keep in mind that when we discuss taxes and penalties, we’re referring to those at the federal level. In most states, you will also face ordinary state taxes and may incur additional state penalties as well.

Contributions and investments

Exceeding IRA contribution limits

If you contribute more than the contribution or income limits for your filing status, or if you contribute after you reach the age limit (70½ for a traditional IRA), the penalty is 6% of the excess contribution for each year until you take corrective action. For example, if you contributed $1,000 more than you were allowed, you would owe $60 each year until you corrected this mistake. To do that, you have two options:
  • Withdraw the excess amount, plus any earnings specifically tied to the excess contribution, by the due date (plus extension) of your tax return for the year of contribution.
  • Leave the excess contribution alone. You might choose to do this if the amount is so small that the 6% penalty isn’t worth the hassle of fixing it or if your contribution has increased in value so much that the tax on the earnings (plus the 10% penalty for early withdrawal) would be worse than paying the penalty.[1] In that case, you would pay the 6% penalty for one year, and then count the excess as a deemed contribution in the next year (assuming you’re eligible to make a contribution at that point).

Self-directed IRA prohibited investments

If you personally manage and invest your own retirement money through a self-directed IRA, be aware that IRA rules prohibit investing in collectibles, which include artwork, rugs, antiques, metals, gems, stamps, coins, alcoholic beverages and certain other tangible personal property. If you do so, the amount you invest will be considered a distribution to you in the year invested and subject to taxes and the 10% penalty, if the premature distribution rules apply.

However, you can invest IRA contributions in coins minted by the U.S. Treasury Department that contain one ounce of silver or gold, or one-half, one-quarter or one-tenth of an ounce of gold. You can also invest in certain platinum coins and certain gold, silver, palladium and platinum bullion. Likewise, owning real estate directly in an IRA isn't prohibited, but you could find yourself engaged in a prohibited transaction if you are not extremely careful.

If you want to invest in precious metals or real estate in your IRA, then a mutual fund or exchange-traded fund (ETF) may be a better choice (although you might be subject to unrelated business taxable income, or UBTI). But if the ETF or mutual fund ever made an in-kind distribution of a prohibited investment such as gold bullion that doesn’t meet the Treasury’s definition of allowable investments, you would still be subject to prohibited investment rules.2

Unrelated business taxable income (UBTI)

Interest income, dividends, capital gains and profits from options transactions are exempt from UBTI, but an IRA could earn UBTI if it has any of the following characteristics:
  • Operates a trade or business
  • Has certain types of rental income
  • Receives certain types of passive income from a business it controls or from a pass-through entity such as a partnership that conducts a business (for example, master limited partnerships and real estate partnerships)
  • Uses debt to finance investments
If your IRA earns UBTI exceeding $1,000, you must pay taxes on that income. Your IRA might be required to file IRS Forms 990-T or 990-W and pay estimated income taxes during the year. And in the case of a traditional IRA, UBTI results in double taxation because you have to pay tax on the UBTI in the year it occurs and taxes when you take a distribution.

Prohibited transactions

Regardless of what you invest in, you should avoid prohibited transactions since they could cause your entire IRA to lose its tax-deferred status. Prohibited transactions include these:
  • Borrowing money from your IRA (for example, treating it as a margin account)
  • Selling property to it
  • Receiving unreasonable compensation for managing it
  • Using it as security for a loan
  • Using IRA funds to buy property for personal use (not including the first-time home buyer exemption)
If you engage in a prohibited transaction, your entire account stops being an IRA as of the first day of that year and the account is treated as having made a taxable distribution of all its assets to you based on fair market value on the first day of the year.

This is as bad as it sounds— engaging in a prohibited transaction could result in the destruction of your IRA.


You can make unlimited direct (trustee-to-trustee) transfers of your IRA funds. However, when you take receipt of the money yourself, you face a number of restrictions.3

First, you have 60 days to redeposit it into the same or another IRA or it counts as a taxable distribution. In addition, you are only allowed one such “rollover” each year. If you deposit the funds into another IRA and then attempt another rollover within 12 months, the withdrawal will be immediately taxable. Also, be aware that any transaction resulting in a taxable IRA distribution could be subject to a 10% penalty if you’re under age 59½.

One other thing to keep in mind is that when you take receipt of the money, it could be subject to withholding. You’ll get the withholding back when you file your tax return (assuming you don’t violate the rollover rules), but in the meantime you have to come up with 100% of the distribution amount in 60 days.

Bottom line: If you need to switch custodians, play it safe and stick to the direct trustee-to-trustee transfer method.

Traditional to Roth IRA conversion

Converting from a traditional IRA to a Roth IRA might make sense if you think you’ll be in a higher tax bracket when you begin taking withdrawals, you can pay the conversion tax from outside sources, and you have a reasonably long time horizon for the assets to grow. However, even if you meet these basic criteria, you should consider the following potential conversion traps:
Hidden taxes: A Roth conversion analysis shouldn’t just look at your marginal ordinary income tax impact. Depending on your modified adjusted gross income (MAGI) before converting, the additional conversion income could trigger increased taxation because of the following factors:

  • Taxability of Social Security benefits
  • Triggering the alternative minimum tax (AMT)
  • Phase-out of exemptions, deductions or eligibility for other tax breaks
  • Potential financial aid loss because of a higher AGI
  • Aggregation rule for partial conversions involving after-tax money: If you have made nondeductible contributions to your traditional IRA in the past (tracked via IRS Form 8606), you can’t pick and choose which portion of the traditional IRA money you want to convert to a Roth. The IRS looks at all traditional IRAs as one when it comes to distributions. Traditional IRA balances are aggregated so that the amount converted consists of a prorated portion of taxable and nontaxable money.
  • Failure to first take required minimum distributions (RMDs), if applicable: You can't avoid taking required minimum distributions by converting funds from a traditional IRA to a Roth IRA.
  • Premature withdrawal penalty: If you’re under 59½, you'll pay a 10% penalty if you withdraw funds to pay the conversion tax. Also, even though withdrawals of regular contributions made to a Roth IRA are normally penalty free, you can’t convert from a traditional IRA to a Roth in order to avoid the premature withdrawal penalty (unless you wait at least five years or to age 59½, whichever is less).
(For more, see 3 Reasons to Consider a Roth IRA Conversion.)

2. IRA withdrawals

Premature withdrawals

If you withdraw money from your IRA before age 59½, you will incur a 10% penalty plus ordinary income tax on the amount attributable to previously deductible contributions and earnings. There are some exceptions to this rule (see IRS Publication 590-B), including these:
  • Disability or death of the IRA owner
  • Withdrawals that constitute a series of “substantially equal periodic payments” made over the life expectancy of the IRA owner
  • Withdrawals used to pay for unreimbursed medical expenses that exceed 7.5% of AGI
  • Withdrawals used for a first-time home purchase (subject to a lifetime limit of $10,000)
  • Withdrawals used to pay for the qualified higher-education expenses of the IRA owner and eligible family members
Even if you can avoid the 10% penalty, you will still pay ordinary taxes. More importantly, you will have less money in your retirement account and you’ll lose out on any potential tax-deferred growth. Remember, you can only contribute so much to these accounts annually and you may never be able to make up for the money you withdraw.

Required minimum distributions (RMDs)

If you’re age 70½ or older, you’re required to take RMDs from your traditional IRA. The penalty for failing to take your RMD is a 50% excise tax on the amount you were required to take but didn’t (plus ordinary income tax, of course). You need to take your RMD before December 31 each year.
The one exception is for the year you turn 70½, in which you have the option of waiting until April 1 of the following year. Waiting, however, means you will have to take two distributions in that next year, which may not be a good idea if it bumps you into a higher tax bracket. Luckily, original owners of Roth IRAs are exempt from RMD rules, but non-spousal beneficiaries who inherit a Roth IRA must take distributions over their life expectancies.
The IRS requires that you calculate the RMD for each IRA separately, based on the value of the account at the end of the prior year divided by your life expectancy factor (taken from the appropriate table in IRS Publication 590-B). However, once you've calculated your RMD for each traditional IRA account, you can aggregate the total and take it from one or multiple IRAs in any combination, as long as you withdraw the total amount required.

3. Estate planning

Designating a beneficiary for your IRA

Make sure you have up-to-date beneficiaries on your IRA accounts, since who receives those assets is not normally controlled by your will. For example, if your will states that your IRA is to go to your daughter but you have your sister listed on your IRA account as the beneficiary, your daughter may not get the funds.
Beyond that, beneficiaries need to be careful about how and when they access IRA funds. In general, the beneficiary would want to defer withdrawals for as long as the law allows, but the rules surrounding inherited retirement accounts can be complex, depending on whether the recipient is a spouse and whether the original account holder had begun taking RMDs.
Given the right set of circumstances, a beneficiary may be able to “stretch out” the IRA distributions over his or her lifetime. For more information on inherited IRAs, see IRS Publication 590-B or talk to a tax professional.

Naming a trust as your IRA beneficiary

Most of the time, naming your spouse as your IRA’s primary beneficiary provides the greatest flexibility. The next best route is to name a non-spouse beneficiary such as a child or even your favorite charity.
In only a few cases does it make sense to name a trust as the beneficiary of your IRA. For example, a trust could make sense if the intended beneficiary is a young child or someone who is not savvy with money.
Naming a trust as beneficiary can lead to all kinds of unintended consequences if you’re not careful. For example, naming a trust instead of a spouse as beneficiary removes the surviving spouse’s ability to roll over the IRA into his or her name to take advantage of the IRA ownership rules. In addition, a trust is not a natural person and must make RMDs over the life expectancy of the oldest trust beneficiary.
Another pitfall arises if a charity is named as a co-beneficiary of an IRA trust, in which case the entire IRA would need to be distributed within five years of the IRA owner’s date of death (if it occurs before age 70½), or over the remaining life expectancy of the IRA owner if the owner had reached the age of 70½.
Bottom line: Be sure you have a legitimate reason to name a trust as beneficiary, and then only do so after you consult with an independent and objective tax and estate expert working in conjunction with your financial advisors and account providers.
1Early withdrawals from an IRA prior to age 59½ and held for fewer than 5 years are generally subject to being included in gross income plus a 10% additional tax penalty.
2Check with your fund provider for details on any past distributions.
3A check made payable to a new financial firm for the benefit of an account holder that is sent directly to the payee and then forwarded to the new financial institution is considered a transfer and not a rollover.

What Should I Look Out For When Buying Stocks?

I was asked this question on Here's the answer I provided:

I assume you mean the purchase of individual companies, rather than a Mutual Fund or Exchange Traded Fund (ETF). The strategies are different. I’ll explain what I look out for when buying stock in a company.
  1. Do I understand the business? I tend to invest in telecommunications, information technology and/or energy stocks because I understand these markets.
  2. Is the company earning money? Are earnings growing? What are the prospects for the future (though this is sometimes just guessing)?
  3. Are revenues increasing? Does the company offer a service or product(s) that will be used for years to come?
  4. Is the company financially sound? Does it manage its debt well? Does it have a sound Return on Equity? A company with too much debt or doesn’t invest its earnings well will not have a sound future.
  5. Is the stock priced fairly? I don’t want to buy a company when the stock price is already inflated. I use technical analysis to attempt to determine the best time to buy. I’m patient and willing to wait until the price is low enough. This is called value investing. For example, I’m not going to pay $35 a share for AT&T. I’ll wait until its under $30. Same goes for Caterpillar. I didn’t buy when it was $135–140. I waited until it was $115. I thought that was a better price. No guarantees, but my odds of making money are better.
These are just some of the basics. There are some good books on this subject, but probably the one every serious investor reads is The Intelligent Investor by Benjamin Graham. I also really like One Up On Wall Street by Peter Lynch. While written many years ago, the principles in these books still apply.

Sunday, September 1, 2019

What I'm Reading Today

Luke Skywalker to Yoda. "I'm not afraid."
Yoda to Luke: "But you will be. You will be."

If you pay attention to the news, it's hard not to be a little bit fearful, or at least concerned. But the world has always been a dangerous place. So don't think things are worse today than in the past. In many ways, they are much, much better.

But we still have problems. We still need to attend to our surroundings.

Here's why Warren Buffett's record $122 billion cash pile could be a worrying sign for stock markets
Warren Buffett's mountain of cash may be a warning to investors that stocks are overvalued and that a crash is around the corner.

Christian scriptures described as “corrupted” while the Koran contains the “pure” word of God.

To take back America, we need to take back the schools
The fact that socialists are openly running for public office in America — that socialists actually hold public office in Congress — should serve as enough wakeup call that the nation’s moral and political compasses are skewed, in dire need of correcting.

Rejecting hijab dooms woman to 24 years in prison
The oppression of women continues in the Muslim world. 

Schwab Market Perspective: Storm Clouds Building
The theme to our 2019 outlook was “be prepared” and we continue to see some clouds forming on the horizon.

As Recession Fears Rise, Here's the Lowdown for Real Estate
It seems that whenever you pick up a newspaper or turn on the news these days, a scary word hits you in the face: "recession."

Confessions of an Anthropogenic Global Warming Fatalist
I’m neither an alarmist nor a skeptic when it comes to anthropogenic global warming, or AGW.

Top Five Consumer Cyber Security FAQs

By Equifax Business, technology, environmental and economic changes are a part of life, and they are coming faster all the time. All of thes...