Do You Believe These Money Myths?

There are a lot of different things you’ll read when it comes to your money.  The personal finance world has lots of people with many opinions.  I’m one of them!  But with so much out there, it can often get confusing.  What do you believe?  What’s true and what’s a suggestion?  I don’t have all the answers.  But there are a few money myths that I’ve seen come up more than a few times.

#1: Always Pay The Higher Interest Loan First

The higher the interest rate means that less of your payment goes to your principal.  This is true.  So, you should always pay the highest interest loan first, right?

Not always.

I think you have some flexibility here.  If you have a loan with a low balance, maybe consider paying that off first.  It will free up some cash flow.  Plus, paying off a loan will give you a ‘win’ on your scorecard.  Those can be very important and might be worth a few bucks in higher interest in the short term.

#2: It’s Too Late To Start Saving

Many people start saving for retirement or their first home right out of the gate.  If you’re one of those people, then congrats.  But if you’re not, don’t worry.

It’s never too late to start saving.  I don’t care how old you are.  Many people who give this answer are just making excuses to continue bad habits.

I don’t care if you have friends that are your age who are already retiring and you haven’t saved a buck.  You should and you can start making a difference.

#3: You Have To Choose Between Paying Off Debt Or Saving Money

I’ve read at least a thousand pieces over the years on this topic.  Which is better if you have extra money?  Paying off debt?  Or saving/investing?

I’ve never understood why people think it has to be either or.  It doesn’t.

If the answer isn’t clear or you don’t have motivation toward one, why choose?  Try a mix of both.  Either one is going to help you in the long run.  And, you might find that one excites you more than the other.  If that happens, then you can make adjustments.

#4: Having An Emergency Fund Is Good Enough

OK, so you saved $1,000 for an emergency fund.  You’re covered, right?  Wrong.

The fact is that even if you’ve built yourself a cushion, there is still work to do.  What if you have an emergency greater than $1,000?  How will you restore your fund if an actual emergency depletes your fund?  What if someone comes to you with an emergency of their own?

Be prepared.  Think ahead.

#5: Following Someone Else’s Budget Is Your Ticket To Success

A budget that works for someone else may not work for you.  Everybody has different circumstances and different needs.

Also, many people are at different stages of how they can handle a budget.  Someone who’s never used a budget should start simple. If they tried to use the budget template of someone that’s had one for twenty years, it probably won’t work.

Budgets come in all shapes and sizes.  There is no one size fits all.

#6: Focus On Cutting Spending To Save Money

This isn’t bad advice.  It’s actually really good advice.  However, it may not always be the best advice.

After all, the advice here only focuses on one side of the equation.  Spending.  This is great, but there’s also opportunity that comes by making more money.

Consider that we all have limited time in our lives in which we can focus on saving money.  If your time allows you to cut $1,000 per month in expenses, that’s great.  But what if you focused that time on earning more money instead?  If you could earn $2,000 per month with the same effort, then focusing on cutting expenses could actually be costing you $1,000 per month.

#7: The Stock Market Is Always Going To Go Up

It may seem like this is true given that it pretty much has for the last ten years.  But it doesn’t.  And it won’t.  Don’t believe people on CNBC that tell you that ‘this time it’s different’.  And that the market can go up forever.

It’s not and it won’t.

Everybody needs to keep an eye on the market and recognize that it’s not a one way only road.  The experts that tell you that it can only go up probably have a plan in place.  And when the market starts going down, they’ll have executed their plan before they go back on the air and talk about the downturn.  Trust me on this.

The fact is, they don’t care about your money.  They care about theirs.  Don’t get the two confused.

Readers, what advice have you heard that may need some corrections or clarifications?  What do you think about the items I mentioned?  Please let me know your thoughts in the comments below.  Thanks for reading.

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Being a Better Long-term Investor

We tend to bring our biases everywhere and we interpret information according to these biases. It is human nature and often hard to escape. We tend to be heavily influenced by recent and previous events or trends.  In order to become a better long-term investor, there are some things to know.

Information and News

Every day we are bombarded by new information and investment news, which we use to make decisions. This should be a taxing process, but our brains make it easier by using mental shortcuts that help us make a quick decision without the need for lengthy analysis. These mental strategies are known as heuristics. Heuristics may help us save time, but may lead to errors in judgment. There are many behavioral biases and some of them should be all too familiar: Biases that affect our decision-making processes include anchoring (relying heavily on one piece of information), over-confidence, fear, confirmation bias (only searching for information supporting your belief), over-extrapolation and greed, to name but a few.

Investments require time to be successful. The triggers, mistaken beliefs and psychological traps that drive our investment behavior often cause irrational acts, which can destroy wealth.

Consider the Global Financial Crisis: Equity funds enjoyed excellent returns in the 5 years leading up to the 2008 crash. These returns caused investors to flock to the stock market, which drove the market even higher. Then came the crash and those very same biases, that once drove investors to the market, had led them to the biggest sell-off in the market’s history. Many investors found that, had they not succumbed to their biases, their losses would have existed largely on paper.

In fact, investors who did not give in to their emotions managed to make back their losses and, in some cases, almost double their money (in absolute terms) by September 2016.

It is important to note that this strong recovery was in part driven by the monetary policies devised by the central banks to increase asset returns globally. Previous market crashes have taken longer to recover in absolute terms and longer when one accounts for inflation.

What about stable funds?

Stable funds function to protect the investor’s capital. If you are averse to risk and seek stability then this is probably the best fund for you. This doesn’t mean that some investors in a stable fund are immune to emotional behavior. Many investors in stable funds tend to over-extrapolate short-term performance trends, which in turn informs their decision to invest or withdraw. The problem arises when investors withdraw on a downward trend and thus don’t benefit from the performance on the inevitable upward trend. This is why they don’t achieve the same returns as the unit trusts in which they are invested.

 So what should you do?

Overcoming one’s biases can difficult, but the first step is identifying them. Try and assess the information you receive and only use it when relevant. This increases your chances of seeing a better outcome. It is a good idea to find an investment manager you trust, who employs an investment philosophy that aligns with your goals. Make sure you understand the unit trusts you have invested in. This will make it easier to remain calm during periods of fluctuation, allowing you to benefit from the eventual upturn.

Dips in performance lead to lower prices, which generally makes it a good time to add to your portfolio (if you have the means to expand). In the end, it is the combination of heuristics/investor behavior and market/fund performance, which determines investor returns.

Try and identify your own personal biases and try to overcome them. This will allow you to make more rational decisions. Listen to your financial advisor and stick to an investment strategy tailored to your needs. Short-term market volatility is common and should not affect your long-term strategy. It’s easy to slip into old patterns, but a good financial advisor can help you make rational sense of all the information you have and help you stick to your plan.

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Smart Single-Family Rental Investing

Opinions often vary regarding the advantages of investing in single-family homes (SFHs) over multi-family complexes (MFCs). Some feel the short-term potential of MFCs surpass that of SFHs. While others cite the long-term potential of the SFH as being a preferable trait. The reality is—of course—it depends.

What are your long-term goals? How much is your available capital? What is your overall tolerance for drama? Depending upon your answers to those questions, smart single-family rental investing in a city can indeed be preferable to multi-family rental investing when you take the following factors into consideration:

Lower Barrier to Entry

On the whole, it’s easier to get started with SFHs. In fact, a good strategy for young investors is to purchase a starter home in which to live while they save and help appreciation bolster the value of the property. Once their equity position becomes sufficient, they can then refinance the house to purchase a larger home. If you start at age 25, repeat this process every five years with 15-year mortgages and acquire your last property at age 50, you’ll have a nice home free and clear when you turn 65 — along with six paid-for rentals from which to derive retirement income.

Easier to Afford

Buying a SFH generally entails much less expense than acquiring a MFC. They are lower-priced, easier to finance and require much less liquid capital to buy. Plus, if you ever need to sell, they also tend to move more quickly when they come on the market—assuming they’re well maintained and in good locations.

Faster Appreciation

Single-family properties tend to appreciate more rapidly in cities than complexes do. The resell market is much broader for SFHs, as they can attract people who need to purchase a home as their primary residence as well as investors looking for nice rental properties to add to their portfolios. On the other hand, MFCs tend to appeal only to investors. As a result, the pool of potential buyers is smaller, so demand isn’t as great and appreciation happens more slowly.

Easier to Manage

Maintaining a SFH is much less involved than keeping up a MFC. In a rental house, you’re likely to have at best three toilets. In a MFC the number of units multiplies the number of toilets. Ditto appliances to fix, carpeting to replace, walls to paint and all of the other aspects of keeping your property in tip-top condition. Yes, good property management companies can relieve you of much of the burden, but even then, your costs are lower with SFHs.

More Desirable to Families

In general, SFHs are easier to rent when they’re in good locations because people with children prefer to live in houses. This also means your turnover rate will be lower because all things being equal, a family is more likely to stay put — as long as the place remains comfortable and meets their needs as a family. Further, most people with children prefer a neighborhood setting with backyards, trees and other like-minded people nearby. This is more likely to be the case in a neighborhood of SFHs, than in an area zoned for MFCs.

Fewer “Personality” Problems

Anytime you put a bunch of people in close proximity to one another, you’re inviting personality clashes. Yes, you can screen your tenants very carefully, but it won’t guarantee Tenant A’s preference for the Raiders won’t irk Tenant B’s love of the 49ers. In SFHs, the person who pays the rent calls the shots for the behavior of the occupants of the entire place. In a MFC the number of units multiplies this factor and everybody doesn’t have the same sensibilities, which can lead to landlords finding themselves in the uncomfortable position of arbitrator.

For these reasons and many others, many people prefer smart single-family rental investing in cities to multi-family complexes. Ultimately, it all depends upon the particulars of your individual situation.

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.

Three Factors that Affect Futures Trading

When prices fluctuate, it affects every area of the economy.  When this happens people want to shield investments from negative fallout.  This can make futures trading a tempting option for some investors. Futures can reduce volatility for both businesses and individuals alike.  Trading in futures contracts can help safeguard your money and protect gains.

Futures trading should be approached the same as any other investment.  Many investors fail to heed this warning.  It’s important to have a firm grasp over what these are and what affects them.

Here are three items to help you get started.

1: General Factors 

Like any sort of investment, the economy itself will affect the value of assets. For example, prices often increase during boom times.  When things are not going so well, prices may go down.  Spotting these patterns is important.  Knowing when to apply them is even more key.

The wider factors that impact these must also be taken into account.  Factors that can come into play include politics, social instability, and commercial or industrial prospects.  Having an idea of where these are headed is key when when choosing your futures investments.

#2: Commodity Factors

 One of the largest and most popular segments of the futures markets is commodities.  This means that any factors affecting this area will need to be considered. Events which influence the supply or cost of production of a particular commodity can impact its value on the futures markets.

Think of agricultural futures, for example.  You can look at recent weather patterns, such as droughts or floods, in a particular area.  If you use this information to predict what might happen next, you could have a great opportunity.

Other items that may be considered are import and export policies.  Also, look at major changes coming.  Brexit is a good example here.

#3: Currency Factors

 Currency futures are as volatile as the markets they’re based on.  They are Influenced by a large number of factors.  These include central bank decisions and government policies such as taxes.   They can even include impact from recent or projected political upheaval.  An in-depth  understanding of the foreign exchange and all of its intricacies is key

Summary

These factors only scratch the surface on what you need to understand.  Trading futures is not a decision to be made lightly.  However, if you’re willing to put in the effort, you can consider entering the futures market. Skills and knowledge are key to success.   You should also understand that futures trading brings more risk than many other investments.  For some, that is a reason to stay away.  But for the right investor, it could be a reason to consider trading futures.

Copyright 2017 Original content authorized only to appear on Money Beagle. Please subscribe via RSS, follow me on Twitter, Facebook, or receive e-mail updates. Thank you for reading.