Book recommendation — “The Investment Answer”

If you are investing (and I hope you are), if you are thinking about investing, or if you just think you might start investing sometime in a foggy future, do yourself a huge favor and pick up a copy of “The Investment Answer” by Dan Goldie and Gordon Murray.

It is very short and very sweet. And eye opening in a very good way.

I picked it up months ago and finally read it the other night. Great, great stuff. And full of simple, actionable advice.

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Want to shake up your investment ideas?

Check out this article on six, well different, approaches to investment.

From the link, number one:

You should hold more in stocks when you’re young, and less when you’re old. That’s the conventional wisdom. After all, stocks tend to do well in the long run but are volatile in the short term. But when you’re in your twenties or thirties and have the longest to run, you might have only a few thousand bucks in the market. By the time you’re in your fifties and sixties, you’ll have the most money but will want to risk less of it.

In their book “Lifecycle Investing,” Yale economists Ian Ayres and Barry Nalebuff propose an audacious solution: Increase your stock position with borrowed money when you’re young. You can do that with a margin loan from a broker. Or, as Ayres and Nalebuff prefer, with LEAPS, which are options to buy an index like the S&P 500 in the future at a low price. (You win if stocks beat that price plus your cost.) Either way, your top allocation to stocks should be 200% of assets, meaning every $1 of your own money is effectively matched by another $1 borrowed.

Looking for the next financial bubble

As far as investment instruments go, bonds aren’t very sexy, but the bond market is shaping up to be the next major financial bubble. Food for thought for anyone currently rethinking investment strategies.

From the link;

Don’t let the lack of fanfare fool you. A projected $380 billion will pour into bond funds this year, more than went into domestic stock funds in the past decade. That’s on top of a record $376 billion last year.

“The bond market is a bubble,” says Robert Froehlich, senior managing director of the Hartford Financial Services Group. “And it’s getting ready to burst.” One major reason: Despite the recent rally in treasury bond prices and slide in yields — due to fears over the European debt crisis — the long-term direction for interest rates is headed higher.

Like all financial manias, this one is being fueled by a combination of fear and greed.

James Stack, a market historian and president of InvesTech Research, notes that many baby boomers who have stampeded into bond funds did so in reaction to their stock losses since the financial crisis began in 2008.

All about the 1031 exchange

I’ve written about the 1031 exchange — also known as a Starker exchange — in the past (here’s a link to menu of my 1031 offerings) and it’s a great tax-deferred way get out of an investment property you are no longer interested in owning.

Here’s my intro from the first link:

The Internal Revenue Code 1031 exchange, also known as a Starker exchange, is a powerful tool investment second home owners can use to sell their existing real estate and purchase new property with all capital gains taxes deferred as long a certain criteria are met. A 1031 exchange is considered a “like kind” exchange of property. This exchange can be tricky and should be conducted through the services of a Qualified Intermediary, also referred to as an Exchange Accommodator. This independent party helps accommodate both the sale and subsequent purchase transactions.Before pursuing a 1031 exchange remember this option is only available for investment property. If you’re not sure if your second home is considered investment real estate, check where it falls in the four tax categories for second homes. If you use your second home for no more than 14 days in a year, or 10% of the days rented if that number is greater, the IRS will consider your second home investment real estate.

And here’s a link to a recent article at Forbes.com. The article provides a nice overview of whys and hows of a 1031 exchange, plus the comments provide additional insight into the process.

From the above link:

Because of the concentrated nature of a real estate investment, it is important for portfolio managers to have the flexibility to rebalance their portfolios and make tactical bets in either different property sectors or investment regions. A 1031 exchange encourages such rebalancing by allowing investors to move in and out of real estate exposures through the exchange of one property for another without the burden of immediately incurring capital gains taxes. By continually using 1031 exchanges when acquiring and unloading property, investors can defer the capital gains tax until it is time to liquidate some or all of the portfolio, there is a favorable change in the tax law, or they have accrued enough capital losses to offset the capital gains obligation.

Gambling and investing

Looks like the skills that make for a strong poker player can help you improve your investing strategies. (I should quickly add the title could be a little misleading because I consider poker a gambling game of skill, not chance. Much like investing.)

From the link:

The psychological issues that drive investing and gambling decisions aren’t merely similar. They are “identical,” says Andrew Lo, director of the Massachusetts Institute of Technology Laboratory for Financial Engineering and one of the leaders in the field of behavioral finance (listen to our podcast with Lo). It’s easy to find investment professionals and professional poker players who agree. Says poker pro Daniel Negreanu, who holds four World Series of Poker bracelets and two World Poker Tour Championship titles: “Having emotional stability and emotional control is key to both investing and poker.”

Pros and cons for trust deed investments

Are you looking for an investment vehicle combining strong return-on-investment and still considered a secure bet?  Trust deed investments may be the answer. Trust deed investments have the potential to offer high returns relatively safely, but this investment vehicle isn’t for everyone. Like with any investment you should take the time to learn about the pros and cons of trust deed investment.

Trust deed investments come with one major entry on the con side of the balance sheet — very little liquidity. If you need your investment money at a certain time or on short notice trust deed investments are not for you. Another potential con is you might end up owning the property behind your trust deed investment.

The pro side has its one major entry as well, and it’s pretty strong — trust deed investments are one of the safest high-yield investment vehicles out there. With trust deed investments your investment is secured by a deed of trust against a property owned by the borrower of your money. A trust deed investment allows you put money into real estate through an intermediary and typically you only deal with the outlay and return aspect of investing in property.

From the link, eight points from Federal Home Loans Corporation on trust deed investments:

Having provided all the pitfalls and negatives, you should not lose your money in trust deeds. Let’s recap:

1. Keep your money in the bank if you need it.
2. You may end up owning the property.
3. Keep your broker honest; use the title company.
4. Demand paperwork in your name.
5. Understand how value is determined.
6. Invest in first trust deeds only.
7. Be aware of the occasional requirement for the temporary investment of additional funds.
8. Adjust with the market.

A trust deed investment primer

Trust deed investments can offer high returns relatively safety, but this investment vehicle isn’t for everyone. Like with any investment you should take the time to learn about the pros and cons of trust deed investment. Understanding the risks involved and the upside to any investment should be a major part of your investment strategy.

With trust deed investments your investment is secured by a deed of trust against a property owned by the borrower of your money. This promissory note involves risk to your investment, defines a time period for the return of your investment and is not covered by any federal insurance.

If the borrower default on this promissory note you will acquire the property through foreclosure. This could be a pro or a con depending on your view of directly owning and investing in real estate. Before a foreclosure you are buffered from direct real estate investment by the trustee of your investment.

Here are some points to consider with trust deed investment:

• Trust deed investments are high-yield and and relatively safe, but they aren’t liquid. Don’t make trust deed investments a part of your overall portfolio if you need access to your money at a specific time.
• Be sure to use a title company, and not your broker, to deposit your investment and receive your return when the loan is paid off. Allowing your broker to handle the funds make trust deed investment much more risky than necessary.
• Appraisal shouldn’t be the only method you use to value a property, but it is a major tool in your valuation toolbox. An appraisal will give you a wealth of important information about the property.
• Only invest in first trust deeds. You should never put money in a second, or even more junior, position in a trust deed investment.