Margin
Loans instead of Mortgages
A story in the Wall Street Journal explains a recent
trend in home buying - utilizing a brokerage account
as collateral for a mortgage. Similar to a margin
account, these mortgages are for the full purchase
price of your home. The loan works like this - the
borrower is typically asked to pledge securities valued
at between 33% and 40% of the price of the house.
The lender provides 100% of the price of the home,
utilizing the investment account and the house as
collateral for the loan. Interest rates are comparable
to a traditional loan and the home buyer makes all
of the investment decisions. If the stocks do well,
the profits are yours and you come out ahead (instead
of sinking the cash into the down payment). However,
there is substantial risk on the downside. If the
investments do not do so well, you can be subject
to a maintenance call. If you do not have sufficient
funds to cover the maintenance requirement, which
is typically 85% of the original value, the brokerage
firm/lender can freeze the account and can move the
investments into something more conservative. They
cannot repossess the house as long as the mortgage
payments are being made. There are potential tax advantages
associated with these types of loans. Because the
loan is for the full value of the house, rather than
the traditional 80% or less, your interest deduction
will be larger. You also have the potential capital
gains savings since you do not have to liquidate assets
to make the down payment. These mortgages have been
around for a while and are offered by most of the
larger brokerage firms. They have gained popularity
recently as many people have large stock portfolios
that they are unwilling to liquidate. These mortgages
do have some limited usefulness for that purpose;
as long as there are sufficient assets available should
there be a market correction and the home buyer fully
understands and accepts the risks. These types of
loans are very risky and are not suitable for most
investors. CCP does not typically utilize margin accounts
for clients and would not advocate utilizing this
type of loan in most circumstances. However, we are
always happy to discuss options with our clients.
Call us for an appointment
if you would like to have further discussion.
ETF's
Many of you may have heard or read about Exchange
Traded Funds or ETF's. ETF's are funds that represent
a group of securities (an index) and trade like a
stock on a major stock exchange. Examples included
S&P 500 Index shares known as SPDR's, World Equity
Benchmark Shares (WEBS). Barclay's Global Investors
introduced several ETF's that track various indices
as well, and Vanguard has announced that they too
would begin to offer VIPERS (Vanguard Index Participation
Equity Receipts) to compete in this market. There
are some key differences between these securities
and mutual funds. Whereas mutual funds are only traded
once per day at the closing price, ETF's can be traded
continuously. Mutual funds automatically reinvest
dividends, the ETF's reinvest the dividends quarterly.
Perhaps one of the largest differences is the taxability
of transactions. As you know, when you hold a mutual
fund you pay taxes on gains at the end of each year,
and your basis is adjusted accordingly. Because these
ETF's trade like a stock, your basis is always your
purchase price and you don't pay any taxes until you
actually sell the investment. This may be a significant
advantage for some investors, although we caution
that eventually the tax bill does have to be paid.
We are looking at these types of investments more
closely and may have further discussion with you if
we feel you may benefit from investing in some of
these instruments. We're happy to discuss
any questions that you may have.
Jumping
on the Technology Bandwagon
With
all of the media hype surrounding the record setting
NASDAQ index, we find that some of our clients feel
that they are watching the technology revolution from
the sidelines. In fact, though many widely owned mutual
funds already have a substantial portion of assets
invested in the technology sector. For example, the
Vanguard Index 500 had about 26% in technology in
1999 and the Janus fund had about 27%. CCP's diversified
portfolios provide exposure to both the older blue
chip companies as well as the newer technology holdings,
small cap stocks, and international companies. We
are considering a larger, but well controlled investment
in various sectors for certain clients who are a good
match for a riskier portfolio. Please contact
us for further information.
Carol's
Reading and Restatement
It
has been a long time since we have experienced a lengthy
bear market. That last major bear market was in 1973
and 1974 and the last cyclical bear market was in
1990. We had a major correction just recently in January
of this year, which seems to be continuing as of this
writing. Whereas these dips have alerted us of possible
buying opportunities, the prolonged bull market has
spawned a "can't lose" attitude on the part of most
investors. This is giving us the opportunity to revisit
the psychological perspective between risk tolerance
and rate of return and the achievement of goals.
CCP,
Inc, as advisors, is faced with coaching our clients
to maintain discipline and avoid impulsive behavior.
What are some of the issues that we can relate to
in the here-and-now?
- Using
the short term trends to become the starting point
or anchor of our expectations
- Using
headlines, the media and their interpretation of
isolated sectors/industries/stocks as the basis
of intuitive appeal and investor biases
- Applying
simplistic extrapolations and trend investing ignores
fundamentals and negates realistic long term assumptions
due to short term overconfidence
- Using
hindsight as a decision making tool creates an illusion
of predictive powers rather than using it as a single
form of analysis
- Consider
your goals: consider the diversification of your
current assets and income resources as solutions
in optimizing the wealth needed to achieve your
goals rather than chasing the inflated expectations
of market results over the past few years
It
is important to us, as a trusted investment advisor
to clients and families, to have clearly defined,
consistently applied investment strategies for their
portfolios. It is through experience, research and
listening to client needs that our diversified portfolios
have been created and thus implemented.
Our
services go beyond just the investment analysis...
there is nothing more important to us than the
overall achievement of client goals and financial
security of each and every participant in our financial
planning process.
