How Long Will It Take the Stock Market To Rebound?

October 17, 2008

When the U.S. stock market crashed in 1929, it took until 1954 before the Dow Jones Industrial Avereage regained all of its losses.  The Dow broke 10,000 (for the first time) on March 19th, 1999.  It peaked at 14,164 at the market’s close on October 9th, 2007.  When do you think the Dow will return to 14,164?  Will it ever get that high again?  I’m interested in seeing what you think.


Is It Worth It to Paying Points on Your Mortgage?

October 13, 2008

There are many options for people applying for mortgages, and yes…people are still getting mortgages.  There may be a credit crunch, but banks still must make a living.  And, that means making loans to customers.  If you have good credit and a decent down payment, you can still take out a mortgage and buy a new house.  The American Dream is not dead despite the doomsday news broadcasts.

There are tons of options for you when it comes to mortgages.  Will you take out a 15 or 30 year loan?  Will you borrow at a fixed or variable rate?  Will you prepay points to lower your total interest rate?

When you pay points on your mortgage, you pay interest in a lump sum upfront to get a lower rate on your fixed rate mortgage.  Each point costs 1% of the total mortgage amount.  For example, a $150,000 mortgage will cost you $1,500 for each point that you prepay.  The more points you pay, the lower your annual mortgage rate.  Soldiers, sailors, airmen, and marines have a unique set of circumstances because they move around so much from one assignment to another.  On average, one third of the United States’ military members and their families move every year.  So, which is the best decision for Servicemembers, pay points and a lower rate or no points and higher rate?

That was the quandary my friend was in recently.  He could prepay one point for a 30 year fixed interest rate of 5.6%, or he could not pay a point at closing and have an annual interest rate of 5.85%.  I know what you are thinking.  A quarter of a one percent is not much right?  But, not so fast…everyone’s situation is different and these choices should be carefully weighed.  The small change makes a huge difference depending on how long you stay in the home you buy.

My friend is actually moving to Washington, D.C. to work at a military base nearby.  So, of course his housing costs are rather large, but the same calculations that we go through below can and should be used by everyone to weigh your options whether you are buying a home in the nation’s capital, Minot, North Dakota, Manhattan, Kansas, San Diego, and any points in between.

The total loan amount for my friend is $472,000.  After three years, he will have paid $81,200 in interest payments alone on a loan with an interest rate of 5.85% and no points.  The mortgage will have been paid down by $18,900 (approximately $2,700 monthly mortgage payments).  After five years, $133,400 worth of interest will have been paid, and $33,600 of new equity will have been created (not including down payment).

Now, lets look at how much less in interest you will pay if you choose to prepay the one percent “point”.  One percent of the original loan amount of $472,000 will be $4,720.  At 5.6% annual interest, you will have paid $77,700 in interest payments in three years or $3,500 less in interest when compared with the other plan ($81,200-77,700=3,500).  After five years, you will have paid $127,500 in interest (not including the point).  So, after five years, you will have saved $5,900 in interest (not including prepaying the point).  $5,900 is greater than the $4,720 you paid for the point.  So, you should only prepay the point if you are going to live in your house for four years or longer.  The four year point, in this example, is actually the breakeven point where paying for the interest up front will begin to outweigh the other option.

So, for military Servicemembers, you should only pay a mortgage point up front on your loan if you know that you are going to be living in your new home for four years or longer.  Usually, that is a long time in one spot for a lot of members of the military.  For a civilian staying put in the home for the entire 30 years, it makes sense to pay the point up front if you can afford it.  It will save you thousands in interest over the life of the loan.  The quarter of a percentage point really does add up to a lot of money over a long time period.  The average civilian home owner in America keeps their mortgage for approximately seven years, and in that instance, paying the point makes sense too. 

I hope this example helps and does not add to the confusion.  There are several mortgage point calculators on the internet.  Also, feel free to drop me a line if there is anything else I can clear up or add to this post.  I’ve added the mortgage amortization table for the first six years of these interest rates to show you where I got these numbers. 

“Paying the Point” = 5.6% Interest

Year Beginning Balance Interest Payment Ending Balance
1 $472,000 $26,273 $32,516 $465,758
2 465,758 25,915 32,516 459,156
3 459,156 25,535 32,516 452,176
4 452,176 25,134 32,516 444,794
5 444,794 24,710 32,516 436,989
6 436,989 24,262 32,516 428,735

No Points = 5.85% Interest

Year Beginning Balance Interest Payment Ending Balance
1 $472,000 $27,454 $33,414 $466,040
2 466,040 27,096 33,414 459,721
3 459,721 26,716 33,414 453,023
4 453,023 26,313 33,414 445,922
5 445,922 25,887 33,414 438,394
6 438,394 25,434 33,414 430,415

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Using a Personal Escrow Account Instead of Buying an Automobile Extended Warranty

October 8, 2008

My wife and I face an expensive decision in a few months.  We must decide if buying the extended warranty for our car is worth the cost.  The bare minimum extended warranty to cover oil changes and normal yearly services will cost over $2,000.  We did the math and talked it over, and we are not going to buy the warranty.  We are going to use a personal escrow account instead to save for our future car repairs.

Most people are familiar with escrow accounts when they purchase a home.  Usually, your property tax and insurance premiums are wrapped up into your mortgage payments.  When you pay your mortgage, your mortgage company sets aside a portion of your payment in an escrow account for your yearly tax and insurance bills.  Instead of getting a huge bill all at once during the year, you essentially pay a twelfth of the payment every month to the escrow account.  So, if your yearly property tax bill is $1,000, then you mortgage company will set aside $83 per month in an escrow account.

You can set up your own personal escrow accounts at your bank much the same way.  Now, with automatic payments and transfers through online banking, you can easily set up a reoccurring transfer to fund a personal escrow account (savings account) nicknamed “Car Maintenance”.  For example, my wife and I will be receiving a moving allowance this winter from my work.  It will be almost the same amount of money as the extended warranty would have cost us.  So, we will just deposit it into a separate bank account just for automobile expenses. 

It is estimated that you will spend an average of $100 per month per car on maintenance.  That’s a great rule of thumb, and a safe bet is to save that $100 per month for car repairs.  My wife has driven a Jeep for two years now, and the SUV has had about $1,000 of repairs over that time.  We are doing slightly better than average, but since I have been saving $100 a month for car repairs, we did not have to pay for the new axle and other repairs with a credit card.

Consumer Reports calls extended warranties a sucker’s bet.  Extended warranties are an insurance policy, and companies do not get rich paying out insurance claims.  Most consumers do not even use half the cash value of their warranties.  Extended warranties are a waste of money, and you would be better off self insuring your car maintenance costs with a personal escrow account.  You can also check out this posting on a cost benefit analysis of why automobile extended warranties are not worth their cost.

So, keep building your personal escrow account a little bit every month in order to mitigate the chance that large bills like car repair will devastate your monthly budget.  You can also use personal escrow accounts to smooth out your budget for any yearly or quarterly purchase such as insurance, gym memberships, magazine subscriptions, association dues, club memberships, etc.

If you enjoyed this posting, you might also like these:
1. An Army Second Lieutenant (2LT) Will Earn Over $100,000 in 2032
2. How to Pick a Good Individual Stock to Buy? – Part 1
3. Lump Sum or Dollar Cost Averaging?

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Using a Stock Screener to Find the Perfect Individual Stock to Buy

October 7, 2008

There are a lot of stocks out there to buy, over 6,000 actually.  There are 3,190 companies’ common stocks that are traded on the New York Stock Exchange.  And, another 3,000 stocks are traded on the Nasdaq and American Stock Exchange.  So, how do you go about finding those diamonds in the rough?  How do you separate the wheat from the chaff? 

Stock Screeners.  I like to find new stocks to consider buying through an online stock screener.  I personally use the Yahoo Finance and Google Finance stock screeners.  Yahoo Finance lets you input several key attributes that you are looking for in a stock in to the online computer program.  You can reduce the number of companies by looking for specific ranges of share price, market capitalization, dividend yield, beta, revenue, industry, profit, earnings growth, and a host of other metrics.  The stock screener program on the websites then whittles the universe of 6,000 stocks down to a manageable list of ten to twenty that will enable you to conduct more in-depth research.

The Google stock screener lets you use sliding bar graphs to trim the number of stocks you are looking for based on the criteria.  I especially like that Google Finance’s stock screener lets you compare companies that have been recently beaten up in the market.  I routinely look for companies that are off of their 52-week high price in the hopes that they will once again return to those highs of their stock price.

Example.  I used these inputs to drawdown the list of stocks and find some good companies to invest in.  In Google Finance, I entered: market capitalization between five million and 300 billion, P/E ratio between 8 and 15, dividend yield between 2 and 5%, a 30% drop from their 52-week high, earnings per share (EPS) of between $2 and $5, and earnings per share growth rate of between 10% and 100% for the past year. 

Results.  I ended up with 49 stocks to choose from.  As I look through the names of the companies, I am personally biased and quickly eliminate all financial stocks, automobile makers, and airlines from the list.  I am left with several companies that I have heard of such as Barnes and Noble Bookstores (Stock Symbol: BKS), Northrop Grumman Corp (NOC), Raytheon (RTN), SCANA (SCG), Snap-On (SNA), and Sherwin-Williams Company (SHW).  And, the list also contains a few new companies that I am not very familiar with such as Herbalife (HLF), Alexander and Baldwin, Inc (AXB), and Brady Corporation (BRC).  That is the entire point of this exercise after all.  It is often very hard to find new stocks to research before buying.  Stock screeners like this are a great tool to help you narrow your choices and focus your limited research time before investing.

Disclaimer: I do not own any of the stocks listed above, and everyone should conduct their own research before investing anything in a stock.

If you are looking for some good guidelines on stock attributes, I think that you might like the six part series I recently wrote on what to look for in a good individual stock to buy.

Characteristics to spot a stock that’s ready to rise:
Key Metrics like P/E Ratio
Charts, Graphs, & Averages
Dividends & Dividend Growth
Analysts’ Recommendations
Insider Trading
SEC Filing and Reports

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Work At Home Scams Are On the Rise In Tough American Economy

October 6, 2008

Now that things are looking bleak on Wall Street and it is bleeding over onto Main Street, more Americans are looking to make a little extra money any possible way.  Work at home scams are also on the rise during the American financial turmoil.  Below is a list of some of the most famous scams and why they are not worth your hard earned money or precious time.

Stuffing Envelopes.  People have to pay up front fees to get starter kits.  There is a reason that large corporations no longer have a mailroom.  The internet and high priced, technologically advanced sorting and stuffing machines now produce envelopes and flyers in mass production.  A real person could not stuff enough envelopes fast enough to make it worth your time.  Now, there is a new twist on this classic….e-mail processing, which basically can be translated into spamming.

Member Only Sites.  There has been a scam in the past where people working from home were told that they would just have to type sentences into a form for an advertising promotion.  Scam artists would sell access to databases for data entry positions but would not pay employees for their work.

Medical Transcriptionist.  After overpaying for fancy software that many doctors may not even accept and maybe some schooling, a work at home businessperson will then find out that most medical clinics process their own bills, or outsource the processing to firms, not individuals.  The same thing is true with respect to processing medical insurance claims.  Doctor’s clinics do it themselves without the help of a work at home entrepreneur.

Assembling toys.  Most victims never get paid for their work.  Many never recover their start-up fees.  The trick is turning in your toys or crafts to get paid.  Once you finish assembling your first batch of toys, you’ll be told by the company that they “don’t meet our specifications”, and you will not get paid.

Money Mule. People are asked to cash counterfeit checks and then wire the money abroad in this scam.  When the bank realizes the checks are fake, the money is gone and the at home worker is left answering to the law.

Re-shippers.  Scam artists buy goods online with stolen credit cards in this scheme, have them shipped to “re-shippers” who repackage the goods, and then send them to a P.O. Box in another state or country. Like a football player who retaliates, guess who gets caught when the authorities try to trace activity on that stolen card?

We would all like to believe that it is very easy to earn extra money from home.  It is not easy.  If it was easy, then everyone would be doing it.  If everyone was doing it, then it would not pay enough to make it worth your while.  We all make too little and have been made nervous by the current rocky financial climate.  Keep all of your money in your wallet and away from these scams.

Many home based businesses are legitimate.  You should check potential opportunities at your local Better Business Bureau to ensure that they are legitimate.  If you think that you have been a victim of these scams, you can contact the Federal Trade Commission.

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What Should You Do with Certificates of Deposit That Are Maturing? CD Ladder.

October 4, 2008

A friend of mine recently e-mailed me to ask what she should do with a five year certificate of deposit (CD) that recently matured.  And, my advice to her and anyone who is looking to reinvest the money is to think short term.  Interest rates in America will be raising sooner rather than later as the Federal Reserve turns its attention to battle inflation.  Of course right now, the Fed has its hands full dealing with the current bailout plan and shepherd the bill through Congress.  But, right before the financial market turmoil began, the Federal Reserve was looking hard at inflation in America, and they will be looking at it again once the current crisis has abated. 

Fed Funds Rate.  Eventually the Federal Reserve will turn its attention to interest rates and inflation.  With the cost of milk, bananas, gas, and most other consumer staples rising, there will eventually be talks of battling inflation, maybe not now during this presidency but soon thereafter.  A quick lesson on the Federal Reserve. . .a lot of media attention surrounds the Fed Chairman, who is currently Ben Bernanke, and interest rates.  In reality, the Fed does not control the rates that you and I earn on CDs or pay for car loans, etc.  The Fed controls what is called the Federal Funds rate which is the interest rate that banks and the Federal government charges each other overnight.  The Federal Reserve regulates the flow of money through the American economy by adjusting this rate every so often, and it is this adjustment that garners so much attention in the news when the rates move.  Raising the Federal funds rate will dissuade banks from taking out inter-bank loans between each other and the Fed.  Doing so makes cash that much harder to procure for banks, they raise their rates on CDs and savings accounts in order to draw in more money for operations, and then they pass those rate increases onto the loan customers buying new cars, etc. So, the Federal Reserve’s actions have a trickle down effect on the consumer.

Keeping Money In CDs.  So, if you have money maturing in a CD, what do you do with it?  You do not want to lock in a fairly low 5-year CD interest rate when rates will be climbing in a few months.  A CD ladder is a great way to hedge your best against rising interest rates.  A CD ladder is a version of stocks’ dollar cost averaging for certificates of deposit. 

For example:

If you have $10,000 to invest, you could build a CD ladder like the one listed below where you would invest the money in CDs with staggered maturation dates:

$2,000 in a one-year CD
$2,000 in a two-year CD
$2,000 in a three-year CD
$2,000 in a four-year CD
$2,000 in a five-year CD

As each one-year CD matures, you immediately invest your money into a five-year CD.  This keeps one year separating all of your CDs, hence the name CD ladder.

Here is a great website that has a CD Ladder Calculator that you can play around with and get a feel for how much money you would make from this strategy.  While you will not squeeze out every last dime of profit that you possibly could using this plan, you will earn a nice return while setting yourself up to take advantage of increasing interest rates when the Fed raises them.  Another great example of the earnings differences between CD laddering versus investing solely in one-year CDs can by found this great article on

Investing In Stocks.  If you wanted something better than a CD, most great blue chip stocks (good, big companies) have never been cheaper….same thing with some great mutual funds.  Everything has been beaten up these past few months even great stocks that didn’t deserve it.  Those stocks have just ridden the wave down with the rest of the market, but I have a feeling that they will be back up very soon.

If you enjoyed this posting, you might also like these:
1. Should Bonds Be a Part of Your Investment Portfolio
2. What the Best Way to Fight a Bear? Invest More!
3. Certificates of Deposit (CDs) Are a Waste of Time!

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What Is the Best Way to Fight a Bear? Invest More!

October 1, 2008

Now is not the time to panic. Now is not the time to pull money out of the market. Now is not the time to stop investing. Like real estate, it is a buyer’s market for stock investors. I am buying and so should you. I have been looking for any extra money to invest. I have been selling extra stuff on eBay and pinching my pennies in order to find extra money to invest in the markets.

This is the best time for beginning investors to start investing money in the stock market and in mutual funds. Good stocks and mutual funds are still fundamentally valuable, but the bear market that we are currently in and the nervousness of recent losses have driving their prices down considerably without merit in many cases. This is great news if you are just beginning starting to invest.

If you have been investing for a while now, the best thing that you can do for your future and retirement is to continue investing. Capturing dollar cost averaging or averaging down on great stocks and mutual funds is an effective and profitable strategy in the long run to lower your cost basis and capture gains when the markets rebound. And, they will rebound. There has never been a rolling 10 year period of the stock market that did not produce a positive return. In other words, the stock market is volatile and over the short term has lost money like this year. But, over a ten year period, any ten year period, the stock market as a whole has never lost money. The key is to be disciplined. Investors must be in the market for the long haul. Investing every month will ensure that you do not miss the next rebound whenever it will be. You will have perfect timing if you are constantly investing.

It has been years since stocks have been this cheap. Check out these high quality blue chip stocks that have been beat up by the market despite continuing to be leaders in their industries:

American Express (Stock Symbol: APX) – Financial services giant is down 39% in the past 18 months.

Google (GOOG) – Google is 42% off of its 52 week high.

Wendy’s International (WEN) – Hamburger leader who was recently taken over by Triarc is down over $12 since its 52 week high or 34% of its value.

3M (MMM) – The diverse conglomerate that brought us such innovative products such as Post-It Notes is down $28 or 30% over the past year.

Disclaimer: I own shares in Wendy’s International through a DRIP.

If you enjoyed this posting, you might also like these:
1. USAA Reassures Investors and Banking Customers of Safety, Strength, and Liquidity
2. How to Pick a Good Individual Stock to Buy? – Part 1
3. Lump Sum or Dollar Cost Averaging?

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