Today there was an article on CNBC stating that Pimco's Bill Gross believes the MAX future returns in the stock market will be 5% per year. URL: http://www.cnbc.com/id/45474748
Just wanted to hear what everyone thinks about this. Are there any real estate investors out there that sold off their stocks and purchased real estate recently..taking advantage of the depressed real estate values? .
I don't see how anyone could get excited about a 5% return, especially if you are trying to BUILD wealth/capital. If you have several million dollars then I can see how 5% might be an OK passive return.
Also I am wondering what the returns have been (Cash on Cash) for real estate investors in today's market. Of course this is probably a bit harder to calculate than in the stock market, but it would be interesting to hear returns that people are making on their invested capital.
How does this compare to your stock market investments (if any?)
There are a lot of folks that believe in the time worn threat of inflation. It appears to me though that we're in a deflationary period. The stock market can't get out of its own way. The RE market is still flat or drifting down. I think we can all agree that until the bulk of the shadow inventory, call it what you want, but all the bank owns are cleared out, this RE market is going nowhere. Probably for several years. Commodity prices are still high but I think not for long. As the world economy continues to slow so will oil, gas and the hard metals. Cash flow RE, for me, is where I see the best and most secure(if there still is such a thing) investment.
I'll be honest, that sounds bogus to me... only because I believe we'll see a good bit of inflation over the next few years. He's essentially saying output will stay completely flat minus the effects of inflation? I don't see that happening.
I'd say I fall into this category. I started working for "the man" a few years ago, right after the crash of the market. I've been building up my 401K pretty nicely over the past 2-3 years. I've taken out 2 loans against it in the past few months strictly for RE investment.
I won't stop contributing because my company match is essentially a 50% return now that I'm fully vested, but I have every intention of maxing out the loans every 6-12 months until I no longer need my employer's services (aka a paycheck).
Regardless of whether you agree with this article or not, I think it's fair to say that the stock market has been insanely volatile over the past 3-4 years. I feel much more comfortable plopping my money down on a roulette table, at least you know the odds and potential outcomes.
Until the market goes back to the good ol' days where stock prices were based on the underlying fundamentals of the particular company, it seems like a waste of time and capital to me.
Why not put your money into something that you can influence the performance of?
I like knowing I can go into a house and remodel, update, etc. to improve the value and performance (rent). If stock ownership allowed you to fire the morons running the company or the "dead weight" I'd be much more interested in it :D
There are a lot of folks that believe in the time worn threat of inflation. It appears to me though that we're in a deflationary period. The stock market can't get out of its own way. The RE market is still flat or drifting down. I think we can all agree that until the bulk of the shadow inventory, call it what you want, but all the bank owns are cleared out, this RE market is going nowhere. Probably for several years. Commodity prices are still high but I think not for long. As the world economy continues to slow so will oil, gas and the hard metals. Cash flow RE, for me, is where I see the best and most secure(if there still is such a thing) investment.
Michael : I am curious about the borrowing from the 401k. I don't have a 401k but I have something similar a 403b account (for nonprofit employees) . I also have a Roth IRA. It would be nice to be able to borrow from these accounts if possible.
What percentage of the account value were you able to borrow? Were there any fees to do this? I agree with you that the current stock market is not based on fundamentals. I like the relative control that one has in real estate.
Craig: I agree that cash flow RE seems to be the best and more secure investment. I am actually surprised the stock market isn't lower based on the uncertainty and risk.
I agree. Cash flow RE is a great way to go. With all the shorts and REOs keeping the RE market down relatively low there are some great buys even on single families which were really tough to make cash flow.
I have always bought multi families and made them cash flow nicely but at the prices I am seeing Single families at and taking into consideration the much greater ease of management/headaches on single familiy investments VS multi families I am starting to take a closer look at g etting into single family cash flowo properties.
I have some money in the stock market and things are way down so I don't want to realize those losses by selling. I am hoping to hold what I have in the stock market for awhile as I believe the next few years we will see at least some growth.
regards,
C
Anyone that thinks they can know what will happen with the stock market for several years is kidding themselves IMO. There are simply too many variables, many of which are systemic. By definition these are unknown and uncontrollable. Those that don't stay diversified will lose out over the long haul IMO. Sure...some will concentrate their bets and win big. For every one of those there are many, many who will lose relative to having a hedged position though.
Regarding inflation...The REAL inflation rate is roughly 6% right now:
With mortgage money south of 6% by a cozy margin that money is MORE THAN FREE in real terms. Owning debt in amounts a bit higher than what one would normally consider moderation seems like a great bet to me.
I have my 401k through Schwaab and they allow me to borrow up to 50% of the account value. I believe the origination fee is $135 or $165 and I'm required to pay the loan back through an auto-deduction from my paycheck at 4% interest.
The nice thing about this loan is that the 4% is going right back into my 401k, not to some bank, so as I pay it back I can also borrow against the interest that I've paid myself in the future.
On a semi-related note, I wonder how many people look at the fees that they get charged by having their money in a retirement fund. I was poking around looking at the different funds available the other day and noticed that if I were to invest my retirement funds in my own company's stock, I'd get charged about 3/4 of a percent. The reasoning was to maintain active trading and liquidity standards...blah blah blah.
On top of that, the "fund" is only 96% invested in my company (4% liquid), so if my company's stock goes up $1.00 I will only see about $0.95.
To be more specific on borrowing provisions for 401ks (or 403b's) you can borrow up to 50% of your vested interest up to a maximum of $50,000. Most plans will have some type of fee associated with it as well as an interest rate which you must pay (although you are paying yourself back, not some bank).
IRA accounts do not have borrowing provisions, however, there are some tricks to the trade where you can take out money for a 60 day period and put it back in without penalty or interest. But beware, not getting the funds back in on time will result in a distribution that will be taxed and penalized 10% for early withdrawal.
@ Michael - When you borrow from your 401k next time, create a note against your personal residence (as a second or third) and record it with the county recorder. Doing so will make your loan a "personal home loan" and thus, the interest you pay back to your 401k (which is yourself) becomes a tax deduction!
This one piece of advice can increase your returns and make you more money (by saving tax exposure) without doing any work other than filing the appropriate documents.
All stocks are local.
What kind of return would you expect from a stock that is trading at 27 times its past year's earnings and grows its earnings by 5% a year over the next 5 years?
And what kind of return would you expect from a company that is now trading at 13 times earnings and grows those earnings by an average of 30% per year over the next 5 years?
So just as in evaluating a real estate investment, a bit of fundamental stock analysis is in order.
Thanks for the advice Will, I had never thought of filing my own lien but it's a great idea! I just wish there wasn't a cap at $50k on the loans, I'm not anywhere near that amount currently, so it doesn't matter, but this info may help me with future planning.
BRyan,
I'm not saying I know what the future holds in the stock market. But I do believe there will be some growth in the upcoming years. Things are very slowly getting better. How much growth is the million dollar question. There are still plenty of blue chip companies that are still increasing their quarterly dividends which is one of several indicators that a company is healthy. I am trying to focus on dividend paying quality companies as of lately so I am getting income at the same time
With that said, I think it's a good idea to stay diversified by investing in RE as well as the stock market.
As you said if your not investing in these infaltion is just eroding your interest or savings at a much faster rate then you can add to it.
That sounds close to the definition of stagflation to me. Which has been my basis for what asset class to be in for a while.
However, I hope I am wrong. It will help many if production and wages rise, too.
Churn em and burn em!! Pimco is a huge and successful fund but is not always right. Earlier this year they got burned big by shorting US treasuries. I am sure the losing trade did their investors a lot of good. There are a lot of people who are all about the inflation, like the Pimco fellas. They were wrong and Pimco is back on page with the Big Ben Bernankie. As they say don't fight the fed. Let the money flow and the good times roll!
Vic is spot on. Bill Gross is a smart man but even he, nor anyone else, can know with certainty what markets will do - he is trailing market returns this year.
That said, you can buy dividend stocks that will ensure your return will be a certain %, if you buy and hold long term (with some fundamental analysis to ensure the safety of that dividend). I just bought into NYB and am earning an 8%+ return per year, and with enough time I will make a capital gain as well.
Relatively speaking, I see more opportunity in real estate, with depressed prices and interest rates, than I currently do in the stock market. A bit of exposure to each is wise, just adjust what proportion of your overall portfolio you allocate to each based on opporunity.
An alternative to buying is to sell/write a put option and collect the premium instead of a dividend. You keep enuf cash to buy an equivalent number of shares in your account as margin.
Here's how it works. Currently NYB trading at 11.88. If you sell an Apr put with a strike of 11, it will obligate you to buy the stock at $11 (8% discount from current price) if the current price drops below 11. In return, the buyer of the put pays you a premium of 75 cents a share. If the price doesn't drop that far by april, you keep the premium without even owning any shares.
Someone actually pays you to buy a stock you already want to buy if it drops 8% from today's price. You could sell 2 such puts per year and collect $1.5 per share in premiums. That's around 13% a year return without even owning the stock!
If you are assigned the shares, the cash left in your account is used to buy the shares. You can then sell a call option on the shares you now own (covered call) to bolster the dividend! Instead of just getting an 8% dividend return, you can earn 12% with the addition of a call premium you receive. If your shares are called away, you rinse and repeat by selling puts again.
I love OPTIONS! Only suckers buy options! Selling/writing is the way to go! :wink:
Uncle Phil
Bill Gross is a bonds salesman so of course he wants to talk the stock market down. Just like Wall Street tried to talk down real estate during the go go years a few years ago. Salesmen always talk their book. Personally I think the stock market has become so corrupt and unregulated since the Internet blew up that the only way to really make money in it is to trade macro trends. Buying and holding is ok for dividends but it's a losing strategy, been so for over 12 years now. I hate CNBC, that network is doing a huge disservice to the average investor. I can throw a dart at a board and outperform all those clowns.
Dividend stocks. That's where it's at, imho. Companies like AT&T, Lockheed Martin or some solid utilities that pay 4, 5 or 6% dividends annually can give you a sick return if you reinvest the proceeds. Until I have enough saved up to get into the RE market, that's where I've got most of my cash parked. Where else can I put it? The bond market is crap. Interest rates are so low that loading it into a CD will get you next to nothing. I don't have the risk tolerance to get into companies like BAC or the likes. Just my two cents, though...
Drew
Yes, I have seen a strong sentiment recently of people recommending dividend paying stocks in this market. There are some stocks that have really high dividends..of course high return sometimes means more risk . I haven't really focused on dividend paying stocks myself, but I am considering it.
Option writing on good blue chip dividend stocks.
Buy the stock, then sell a call option with a strike price 10-15% above market, and also sell a put 10-15% below market. Collect call/put premiums, in addition to qtrly dividends.
What you have is a covered call position with a cash collateralized put. If the stock price stays within a price range 15% above, and 15% below market over the option period of say 6 months, you keep all the premium and your current shares are not called away, nor additional share put to you.
Sounds complicated, but it's not. Been doing it with Altria, Walmart, Coke for awhile now.
PG
Somewhere in the neighborhood of 15% before taxes.
You can milk 10% worth of option premiums on most blue chips. Add to that 4-6% yield from the dividends.
It depends on how you enter a position. It's best to enter a position after one of those market sell off's we seem to get once or twice a year. That's the best time to acquire good stocks in any strategy. So option writing is really an "add on" strategy meant to generate additional income with the odds in your favor.
There are on-line option probability calculators you can use. You add in current stock price, option expiration month, strike price...and you get a bell curve probability distribution graph. I use:
http://www.optionistics.com/f/probability_calculator
The options I write have a 70% probability of expiring worthless.
PG