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Down Payment or Investment Opportunities?

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The current dilemma I am having is whether to stash my savings for a down payment on a house or contribute to my Roth so I have cash available for buying opportunities.

I’m pinching pennies, and I’m saving money wherever I can so that cash is accessible when I need it. I just don’t know what to do with it.

Do I put it towards a down payment or set it aside for investment opportunities. Like most things in life, the answer will lie somewhere in the middle.

Down payment

I’ve mentioned in prior reflections that I’m renting right now.

I’m renting because I got divorced and exhausted all of my savings on the down payment for my house. That house is currently being rented by another family, and my ex-wife and I still own it.

That’ll help build equity into the house so we receive more if/when we decide to sell, which is good.

I’m happy with my current living arrangements. I like the place. I like the neighborhood. My commute to work is 2 minutes, and I’m close to all of my family and friends. All good things.

The only bad part is I have no outdoor space to call my own. I have no yard.

I’m trying to frame it positively by saying that I’m not spending my time on yard work, and instead, have more time to spend with my son/work on myself when he’s not here. These are both very good things.

However, I want to give my son a space to play. A place to put a jungle gym and a sandbox. A place where he can just run around and have fun.

I want to give him that because he deserves it. I want to use my savings for a down payment on a house so we can have a place to call our own. 

Investment opportunities

Here’s the second part of my dilemma. I see a lot of chances to put my money to work in the market.

I’m able to play the long game because of my investment philosophy and my training. The best investors I have long term time horizons.

What I mean to say is I can see past the present and I have an idea of what my investments can do over the long term, and the [possible] reward for investing now can’t be ignored.

That’s why I’m having a difficult time deciding what to do.

What will I do?

As a parent, you want to give your kids everything. I want to have a place we can call our own.

At the same time, I know how valuable it is to start saving and investing early so I can take advantage of compounding returns.

So here’s what I’m thinking. I’m going to develop a “savings plan”. I’ll take the dollar amount for an ideal down payment and how far in the future (in terms of years) when I’ll want to use it.

I’m thinking of $25,000 for a down payment and four years until I’ll use it. I’ll, then, divide $25k by 48 to get my monthly savings goal. Anything over that number I’ll put in my Roth.

That’ll take care of saving for a house and for retirement.

My Last Reflection:

My Experience with Life Insurance

Related reading:

Your Go-To Budget Guide

What is Time Horizon and Risk Tolerance?

My Life and How I Manage Stress

My House and What Brought Me Here

Stock Market 101: Basics of Investing

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Sometimes I hear people tell me that the stock market is like magic. That’s not the case at all.

Making money in the stock market does not have to be an impossible or difficult feat. Perhaps the biggest obstacle when it comes to investing is making sure time is on your side. Time is maybe the most important factor in investing for two reasons:

– there is longer for your money to compound

– you can make mistakes and learn the basics through trial and error

By reading some of the tips below on how to succeed in the stock market, you should be well on your way to starting an investment portfolio in stocks.

History proves that with time on your side, you can count on the history of the market to know that your investments will pay off. It is a well-known fact that in the long term, stocks have historically outperformed all other types of investments. Over long periods of time, that stock market has averaged around 10 percent.

What About Over Shorter Time Frames?

Quite to the contrary, stock performance over the short term is a much riskier. There are countless examples in history where stocks have plummeted in a single day.  When it comes to stocks, timing the market or day-trading is a skill that takes a lot of time and knowledge, and still is a dangerous pursuit. All in all, stock investments should only be relied on as long term investments unless you want to risk your savings. If so, I’d still recommend a day at the casino over the stock market. You’ll probably lose all of your money there, too, but you’ll certainly have more fun!

Risk/Reward

It’s true that as you increase your risk, you have a greater chance for a nice reward at the end of the rainbow. This is certainly the case when it comes to stocks. To take more risk, focus on sectors that historically have seen more volatility, such as real estate. If you’re hoping to lower your risk while investing, do your due diligence and never invest in something that you have not researched completely. Most investors have problems when they “take a flyer” or “trust their gut.” These are horrible ways to invest.

How To Pick Long Term Winners

Nothing is a better predictor of stock price appreciation over the long term than earnings. Companies with solid earnings sometimes can outspend their profits, but usually if you focus on earnings, you’re headed toward winning companies. When it comes to valuing a stock or determining how risky it is, looking at the historical data on earnings to discover risky or potentially successful the investment will be to you. The company earns little money but shows a profit? That company is downsizing and showing profits through cutting. You can’t do that forever. One huge quarter for earnings? You should ask yourself how the company can duplicate that feat in the future. You can learn a ton from earnings.

While earnings is a great place to start as you’re getting your feet wet, it’s definitely not the only indicator. Remember the whole “Time on your side so you can learn” speech above? This is meant to point you in the right direction. People spend years perfecting their knowledge of more advanced concepts such as price to book and price to earnings ratios.

Stocks Vs. Bonds

When comparing a bad day for a stock to a bad day for a bond, the differences are significant. Bonds tend to bounce back from a bad day much more quickly than a stock would. Historical data shows that a small dip in a stock’s price versus a bond’s price can mean entirely different long term results. A bond may bounce back quickly while a stock may take more than five years to recover. While bonds will rebound (or the company will go bankrupt), you never know with a stock.

Another good indicator for both the performance of stocks and bonds comes with a look at what interest rates are doing. When interest rates go up, bond prices fall. On the other hand, when interest rates fall, bond prices go up. Similar trends occur with stocks. Knowing these patterns can help you determine when a good time to buy or sell would be. While it is never a good idea to time the market without significant experience in investing, it is wise to know what the economy is doing. In general, the success of your investments will follow the success of the economy.

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3 Easy Steps to Increasing Investment Returns

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Hello Free Financial Advisor readers! I’m Marvin from Brick By Brick Investing, a blog that focuses on teaching the average joe how to invest in the stock market and grow their wealth in order to achieve financial independence. It’s my pleasure to have you as my audience today. If I could explain one thing to investors it would be this…

Investment returns are not the number one factor in regards to building wealth through the stock market. Now before you strike me down and start to curse my name hear me out. I pride myself in being completely honest with you and if our roles were reversed I would want you to do the same. Here are the three things that you have complete control over that matter most.

 

Earn More Money

 

While some make the noble attempt to educate themselves financially it has been my experience that they prematurely start investing and in return lose a substantial amount of money. I would advise instead of focusing all that energy chasing hot stock tips, attempt to be the best in your field. Strive hard for that promotion at work or for that bonus and when you achieve success allocate your increase in income to your overall portfolio. I would much rather see a safe low risk return of 6-8% on a portfolio of $100k+ than a high risk return of 15-20% on a portfolio of $10k.

Throughout college I worked hard and was able to levy that hard work into a favorable job market where I obtained a very coveted job skill. In return I was able to start making a large sum of money compared to my peers that I graduated with the year before. It wasn’t easy, there was a lot of sacrifice not only from myself but from my family as well. I basically sacrificed three years of my young adult life in order to acquire a nice salary. Now I am able to make low risk trades and investments and compound my wealth.

 

Increase Your Savings Rate

 

Stop trying to keep up with Joneses and stop living above your means. Eliminate your debt and spend less than you earn while investing the rest. I believe a good bit of us have been deployed and lived under basic conditions. Therefore I believe it is safe to say you can do without some of the luxuries that deplete cash from your wallet. I personally recommend that individuals should strive to save 50% of their income AFTER tax.

Time and time again I hear that this cannot be done but I did it for two years of my life. In fact I use to save 80% of my after tax income before I got married. I will never forget the day my wife discovered that I used shirts on hangers as curtains for my room, her facial expression was priceless. For six months I had nothing more than a mattress, laptop, and gorilla case in my room. These are the things that allowed me to save so much money at a young age. Since then my wife and I have come to happy medium and we save 50% of our after tax income and indulge in some luxuries but if it were up to me we could save a lot more.

 

Choose A Great Financial Advisor

 

While no fault of their own a lot of individuals believe all financial advisors are created equal, but the harsh reality is they are not. It is imperative that you verify potential advisors credentials, fee structure, and capabilities. Some advisors may try to use a broad stroke with all their clients and you need to verify that your potential advisor has a plan for your specific situation. Do not feel that you cannot ask questions. In fact you are interviewing them for a job to manage your investments. Ensure that you leave no questions unasked and make sure you understand the answers that are given to you. Albert Einstein said, “If you can’t explain it simply, then you don’t know it well enough.”

 

Increasing Investment Returns Can Be Simple

 

If you do these three things I guarantee you will outperform 90% of your peers in terms of investing and ensure a successful retirement. These are the things I live, preach, and teach.

Photo: Tony Crider

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Jemstep Portfolio Manager Review: Finding the Asset Allocation Middle Ground

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How do you review your investments? We give Jemstep a test-drive to see if it’s worth your time and money.

As OG bemoaned last week when writing about his broken garage door, at some point, calling a professional is the right move. In the comments, there were some wonderful discussions about finding “experts” without consulting with a person locally by using YouTube videos, better online tools and calling trusted friends.



The Middle Ground in Asset Allocation

There’s plenty of middle ground between wingin’ it and hiring a financial advisor when picking the right basket of investments. One tool I’ve had the opportunity to test drive is Jemstep. After meeting a Jemstep rep at FINCON last year, I was impressed enough with the product to have Simon Roy, the firm’s president, on our 2 Guys & Your Money podcast. He informed me that they were upgrading the product, and now it’s available.

The “New” Jemstep Portfolio Manager

Jemstep is a program that helps you diversify your investments. You know that dartboard you’ve been throwing at? No longer. Jemstep takes the guesswork out of discovering which investments you should be using and pinpoints suitable replacements for duds (or, surprisingly, good investments in asset classes that really don’t meet your investment needs). During my trial run, JemStep told me some things I’d (shamefully) already knew: I’d let my winners run a little too long, and Jemstep recommended cutting back in those “overgrown” areas where the risks now exceeded the chance for rewards.

How Jemstep Portfolio Manager Works

The Jemstep approach is consistent with that of an advisor. First, JemStep asks you questions about your goals. What do you need your portfolio to do? It asks questions about how far away the goal is, how much you may need to access at a time, and other relevant questions. I found this process fun. The interface is intuitive and the style of the website draws you in.

Jemstep Portfolio Manager Review at The Free Financial Advisor

Jemstep asks you for information about your retirement goal, among others. The interface is easy to use, and the blue lines below tell you just how far you still have to go: I have to still fill in information on my finances and investment preferences.

Once you’ve answered goal-related questions, you can upload your portfolio directly from your broker or add in funds manually. Finally, JemStep does it’s work and voila….gives you the correct asset allocation for your goal.

Jemstep Portfolio Manager basic recommendations

Here is the basic recommended portfolio. With these changes, I stand to gain over $9,000 per year in retirement. Yee-haw!

The premium version of Jemstep includes lists of what investments you should sell (in many cases only trim back), which investments you should accumulate, and new suggestions for your portfolio (often in asset classes that don’t exist in your portfolio). Here’s what that looks like:

jAction-Plan

Jemstep not only tells me which investments to sell, but alerts me to potential capital gains taxes. Every sell recommendation is accompanied by a detailed reason why this investment is on the chopping block. In this case: Apple is one of my worst performers and I have too much individual stock for a portfolio of this size.

The Cost

The Jemstep pricing model isn’t surprising. You can access basic advice for free (this includes the asset allocation you should be using, plus the differences between your portfolio and the suggested one). The premium model, which includes continuous tracking, rebalancing advice, a detailed breakdown of recommended sale quantities and investments, is also free for people just starting out. Pricing begins at $17.99 per month for portfolios over $25,000, and increases based on the amount of money Jemstep is helping you manage. While some who are looking for a freebie might be turned off by the price, this is less than the 1% fee often charged by a financial pro. Want professional advice in your corner without having to sit in an office with some team of people? Great. Jemstep won’t call you with hot stock tips and is there when you need it. In exchange, you’ll pay a model comparable to those used by seasoned investors for less than half the cost.

What I Like, What I Don’t

Here’s what I love: this asset allocation is a proven winner that points you toward the low cost, high return investments in a balanced portfolio. If you’ve ever wanted to have a well-managed portfolio but didn’t know where to start, Jemstep is a great place to begin. Different than some generic asset allocation models that I’ve used, JemStep points you toward specific investment options. For the person who wants to make sure they have low cost investments with a proven track record, Jemstep is for you.

Jemstep partnered with Windham Capital Management to create their recommendations. When back-tested against the S&P 500, Jemstep’s recommended portfolio was impressive: all five of their model portfolios outperformed the S&P 500 over the last 14 years with significantly less risk.

Here’s what I don’t like: results. Yes, JemStep provides impressive results, but will you use them? As I’ve stated before, financial advisors exist for one reason: to make sure that the job is finished. When people left my office, the portfolio moves were complete and people could go about their lives, knowing that the important decisions had been made. A JemStep rep was excited to tell me that 12% of JemStep users actually made changes to their portfolio “because it’s so hard to get people to take action.”

She’s right on.

While 12% usage is a great number for an often-free tool used by people on the internet, you should examine yourself. Are you going to follow through and actually take the advice on JemStep? If you don’t trust yourself to do the job, pay more and hire a human being who’ll give you a shove.

Overall Impression

If you’re managing your own money and aren’t sure how to do it well, give Jemstep a shot and follow the recommendations. If you don’t like your advisor or wonder if the recommendations you’re receiving are any good, take the time to use JemStep to give yourself a “second opinion.” The tool is robust enough that you’ll know immediately if your advisor isn’t diversifying your portfolio in a way that makes sense for your goals.

Jemstep can be found at Jemstep.com. I am not an affiliate of Jemstep and was not compensated for this review.

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So You Want to Manage Your Own Money?

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A friend texted me this morning.

“We should talk soon. Julie is coming around to the idea of us managing our own money.”

It seems easy, right? My initial reaction to my friend was, “That’s awesome!” because it is. There are few things more satisfying than achieving your financial dreams and knowing that you climbed the money management mountain yourself.

No “money-god” came down and did it for you.

You didn’t need the Powerball numbers.

You actually plotted a financial course and landed safely at your destination.

For my friend, and for you if you’re about to embark on this journey, there’s good news and bad news: the good news is that it isn’t difficult to manage your own money.

The bad news is that to effectively manage your own money you’ll need to be ready to face some fairly difficult tasks.

 

Two Types of People

 

When I was a professional advisor, I’d meet some smart people who wanted to jump into their own money management and wanted an expert with an opinion to look over their shoulder, hold them accountable, and make sure they didn’t miss any “I” dotting or “T” crossing.

…and then there were other, often equally-smart people who wanted to hand it over to me and have someone else take care of it for them.

Believe it or not, most advisors I knew preferred the latter type of client and loathed the first one. Someone questioning their motives? Someone asking “why are we doing it this way?” all the time? That’s preposterous!

But if you’re going to ever learn how to manage your own money, you’ll need to be the first type, not the latter.

The steps aren’t difficult:

 

The Steps to Managing Your Own Money

 

My kids are reading myths in school. In the story of Hercules, he faces a series of challenges to achieve is goal.

I look remarkably like the guy on top, but I’m a little paler and not quite as naked. And I have less hair.

You’ll have a series of gauntlets in your way too, if you want to manage your own money.

1) Write out your goals. I’m not talking about writing:

Retirement

College

New Boat

Fall Deeper in Love

Real goal writing has a specific time, dollar amount and vision attached.

I want to be able to live on $65,000 per year (in today’s dollars) by age 65 without having to work every day. With this money I’d like to: (here you write your bucket list, which should include visiting every NASCAR track in the country).

That’s a goal you can shoot for and be excited about (except for visiting the track at Pocono, which I thought was pretty overrated).

2) Next, you write out all the hurdles in your way.

– I have $25,000 in credit card debt (separate by interest rate, term, amount)

– I have to put two children through college

– I know nothing about money management

3) Then, you find one of the nearly bazillion financial calculators online (you can use our powerful little PlanWise calculator here on the site!) and figure out how much you need to save to reach your goal.

– I need to save $250 per month to reach my dream if I achieve an 8% return.

Armed with your money management return information, now you figure out how to come up with $250 per month.

– Tweak your budget

– Pay down debt

– Take on more work

4) Before investing, though, you have a big problem. You have to insure yourself against some of the huge “what if’s” out there for you and your family:

What if you die?

What if you are disabled?

What if you have a car accident?

You’ll need to create a will and evaluate insurances.

5) Finally, you begin the heavy task of research to find investments that have historically achieved 8%.

 

No Step is Difficult, You Just Shouldn’t Miss One

 

As you can see, when you take on the hard task and decide to manage your own money, getting it right will be difficult. Each area demands time and energy:

– Planning, milestones and tracking

– Budget, income advancement and debt reduction

– Insurance need projection and comparison analysis

– Estate planning

– Investment allocation, picking and monitoring

These are five basic money management steps, but each packs a punch!

 

I Don’t Mean To Imply You Can’t Do It

 

As soon as I finish this piece I’m calling my buddy and talking him through these points. Before he takes on the task, he should know how long the financial security road really is. Going in with your eyes wide open is half the battle if you plan to win the “manage your own money” game.

He can do it, and so can you!

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