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Cheat Sheet Q & A:
Today’s question: Investment Options
The actual question: You’ve mentioned that as the Federal Reserve indicates they’ll make changes later this year, it’s changing the way some investors go about investing. How so?
Bottom Line: The Federal Reserve has been all in on making the environment as favorable as possible for Real Estate and the stock market for the better part of three and a half years. The Fed’s policy of 0% interest rates and QE which is currently producing $85 billion per month that’s been mostly used to buy back mortgage debt has created the lowest mortgage rates we’ve ever experienced and lots of liquidity for lenders to reengage would be borrowers. Stocks have benefitted from the improved housing market and the super low interest rate environment which hasn’t provided income seeking investors other options for yield.
Many investors and investment advisors prefer to have allocations in multiple asset classes. A certain percentage in stocks, bonds, cash for example. Because the fixed income market has yielded so little, much of that money made its way into the stock market with companies that pay a decent divided. As interest rates rise it enables those investors to begin reallocating some of their portfolio back to the fixed income market. Here’s an example of just how much has recently changed.
That’s a 53% increase over in yield in just a month. For many investors that is starting to look attractive. Here’s another way of looking at the risk/reward situation:
As interest rates rise more options for income are produced. It’s easy to forget but a typical longer duration CD has historically yielded over 4% vs. the 1% rates we’ve seen in recent years.
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The value of a dollar – This is for you if need motivation to save or if you want to teach your kids to save:
Bottom Line: Once I learned how to invest at a young age (thanks Dad!). I never looked at money the same way again. The reason? A dollar wasn’t worth a dollar. It was worth much more. I’ll explain.
At just average stock market returns (8.4%)… a dollar is worth:
So I’ve always viewed discretionary spending through that prism first. One basic question you can consider for yourself is, would I pay twice the price for that item (or expense)? If the answer is still yes – then go ahead. If the answer is no, then don’t spend it and invest that amount instead.
When I was seriously dating my eventual first wife I had a saying. A dollar isn’t worth a dollar, it’s worth two. For you kids that have a lifetime to save and invest a dollar can be worth $11! And again it’s important to note that these figures are just based on average returns. If you do better than average – then, well, you can imagine.
Bottom Line: Yesterday we hit two year highs on a 30 year fixed rate mortgage. 4.51% to be exact. It’s been a meteoric rise in mortgage rates over the past 5 weeks. I’ve been warning about rising mortgage rates but even I didn’t expect to see a 1% increase in a little more than a month. I talked to one of the mortgage pros I work with yesterday and he indicated that the past month has been the worst of his career (that includes 2008 & 2009). The reason…
Those who have been house hunting but hadn’t locked in their rates have been getting a rude awakening. It’s not just that borrowing costs are higher; buying power is being dramatically reduced. That 29% increase in borrowing costs over a year ago or to put it another way…
Per every $100,000 in buying power at 3.5% - that person can now only afford $71,000. So what do you do if you are looking to buy and you didn’t rate lock before rates rose?
This is where perspective is important. The historic low for a thirty year fixed rate mortgage is 3.3% (hit in January of this year). The all-time high is about 18% (in 1980). The historic average is about 8%. So historically a 4.5% mortgage rate is still a terrific rate. If you’re looking to buy you need to decide if it the best move for you and your family. If it is then this still makes sense. Too often people compound financial mistakes by trying to time a market hoping that things change back to the way they were.
Many decided not to buy late last year because prices had been rising and instead paid higher prices this year. Many are trying to time mortgage rates hoping they go back to 3.5%. That’s not working either. Take a step back, figure out what’s best for you and your family and proceed accordingly.
Macbook Air Wi-Fi Issues:
Bottom Line: If you recently purchased a Macbook Air and have been having issues with the Wi-Fi, it’s not likely you or your internet connection.
Apple has identified a glitch in the recently manufactured MacBook Air’s that can cause problems with Wi-Fi. They are offering to replace your MacBook if you’re having this problem. The best course of action is to call the Apple store closest to you and following their guidance with regard to getting a replacement. You don’t have to worry about losing anything on your current MacBook because it can be quickly backed up to your iCloud account and loaded onto your new computer.