Thursday, September 14, 2006

It's started

Check out this article. Yes, just like the tech stocks before it and the Junk Bonds in the 80s, the end of the great "can't lose" investment strategy has started. We've seen for a few weeks now stories on the news about how it is becoming impossible to sell properties around the nation, and now with the massive uptick in interest rates causing more and more foreclosures we can expect the game of real-estate hot potato to finally end. People who planned to ride a 10% increase in home-value to sell six months later are finding that they either have to carry the property or face losing not only the massive transaction costs but also the prospect of not even digging out the original purchase price in a lot of areas.

Unfortunately, spikes in foreclosures lead to three things:
1) Drops in the value of the home, both as the ownership exchange creates motivated sellers and as many residents stop caring for the property (or in some cases are purposefully destructive)
2) Drops in the value of area homes, as cheaper and less cared for homes in the neighborhood at best make more bargains depress the opportunity for supply, and at worst can lower the desirability of the neighborhood by opening it up to lower social strata.
3) More crime. Especially in urban areas and in cases of neglect/long waits on the market, there is a noticable upswing in crime in many neighborhoods where foreclosures exceed 10%. Part of this is due to the second factor: if your home losses value and your monthly payments rise with the interest rates, this can lead to negative equity (that is, the loan balance is bigger than the resale value of the home) which can encourage more foreclosures, which continues feeding the cycle.

It's really sad that so many people were putting their faith in a never-ending housing run-up, but it always amazes me how caught up in these things people can get. This is compounded by the fact that a lot of the people who are going to be stuck with outrageous mortgages in homes they can't afford are in this situation because they thought something along the lines of, "Gee, I lost half my money in the Tech Bubble, so I've got to jump on this Real Estate thing in order to catch up to where I was." And honestly, don't be surprised if these same people flip out in two years when the energy stocks they bought last week are still hovering around the same levels next year.

2) Speaking of energy stocks, I actually am pretty high on Pengrowth Energy Trust (PGH). How is it possible that I am pleased with an investment that I made which has since lost about 13% of it's equity value and has a 15% Canadian tax on all dividends? Because I've more than made my money back on the initial investment, since the stock is now yielding over 12% on it's dividends and my reinvesting those has more than made up for the loss in equity. Basically, I invested at just under $22 in '05 (in my IRA), it peaked at $25, is now below $22, and I've increased my holdings from 100 shares to 155 shares just from dividend reinvestments. Even if the dividends are being taxed by the Canadians, I'll take 85% of a 12% yield over 3% yield tax-free any day. Especially when the earnings have been rising.

Look at it like this: I'm essentially getting a free share and a half every month from a company that isn't really overextended and is making good money.

3) For the record, I think the purpose of this post is the following: there are always going to be run-ups, failures, and nice investment opportunities, but figuring out how to play them is hard. That's why it's best to be diversified pretty well. In terms of full disclosure, I'm invested in the following:

Individual stocks: 12% of my portfolio (up from 10%)
Mutual Funds: 78% of my portfolio
Bonds/Bond Funds (including TIPS): 9% of my portfolio (down from 10%)
Cash funds: 1% of my portfolio.

Plus I'm earning 5.25% on my savings in my One United savings account.

The mutual funds are 20% large cap value, 25% large cap growth, 20% international, 20% small and mid cap mixed, 10% commodities, and 5% REITs.

Basically, I've got my toes into everything, and I don't need to do anything other than rebalance occasionally. Don't put all you eggs in one basket, because market return is acceptable.


At 8:41 AM, September 15, 2006, Anonymous Dorf said...

Oh yeah. Market return is great. Or you can check out the chart for my company's stock: PHLY is the ticker symbol. Tripled in value over the last three years (since I've been with the company and been able to purchase at a 15% discount with an interest-free loan). And it's not just the last three years. Since its IPO 13 years ago, it's multiplied in value by about 20 times.

At 1:19 PM, September 15, 2006, Blogger Fletcher Austin McGuffin said...

Very true. I hopped on the PHLY bandwagon back at 68 when dorf put me onto it, and it promptly skyrocketed past 90 and had a 3:1 split. Good times.


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