Reverse mortgages are hot. Baby boom demographics, inadequate retirement funding, and problems in the traditional mortgage market (pushing brokers into alternate products) have combined to make marketing of reverse mortgage products to senior citizen homeowners one of the hottest niches in the mortgage business.

And the effort is paying off for marketers. Federally-insured Home Equity Conversion Mortgages (HECMs) are the predominant type of reverse mortgage in the U.S. Recently, the number of HECMs originated has averaged about 9,000 per month, more than double the average in 2005. Moreover, about two-thirds of the total HECM reverse mortgages ever issued have been originated in the last two years.

Reverse mortgages are only available to homeowners age 62 and older who have paid off their mortgage or have only a small mortgage balance remaining. The sales pitch for these loans is enticing: tax-free retirement income for as long as you own the home – even for life; no monthly loan payments; no repayments until the home is sold, and payment options flexible enough to meet any need! In many cases a reverse mortgage is the ideal tool for senior homeowners.

But there is one big drawback with reverse mortgages: high up front closing costs that can sometimes reach $20,000 or more. Combined with the regular interest that accrues on the loan balance, the up front costs can make this an extremely expensive way to borrow. To spread these costs out and make the cost of borrowing reasonable, it is imperative that the borrower be confident in their ability to remain in the home for at least 5-7 years and, preferably, longer. Unfortunately, government data shows that most HECMs are paid off in seven years or less.

So, while a reverse mortgage may be a good fit for seniors in many situations, it is always important to carefully explore alternatives to see if a more cost-effective means to achieve your retirement financing goals is available.

We discuss below seven alternatives for you to consider:

1. Intra-Family Loan – Do you have a relative or friend with deep pockets and a good heart? An intra-family reverse mortgage loan can be an excellent way to gain the advantages of a reverse mortgage, but avoid most of the costs. The concept is straightforward: instead of a bank lending you retirement funds in exchange for a lien on the house, structure an arrangement with a relative or friend to lend you the money instead – collateralized with your home, of course. You can avoid most of the up front costs this way and have more flexibility to set interest rates and loan terms. There is even a company called Circle Lending (http://www.circlelending.com/familyadvantage/reverse-mortgage.asp) that specializes in drafting these loans as “official” arms length transactions and then provides monthly loan servicing just as a traditional lender would do.

2. Price Appreciation Agreement – There are also firms that will give you money today in exchange for an “equity-share” in the future appreciation of your home’s value. These programs are usually aimed at higher value homes (over $500,000) and may only be available in areas of the country with a track record of strong property value growth. The benefit of these programs is that you may be able to tap into your equity without the high up front costs of a reverse mortgage. The drawback is that it could cost you substantially more in the long run in the form of foregone home appreciation.

If you think this type of arrangement may be a good fit for you, here are two programs to look into to: Equity Key (http://www.equitykey.com/) and, Rex Agreement (http://www.rexagreement.com/)

3. Home Equity Line of Credit (HELOC) – As noted, reverse mortgages make most sense if the homeowner is able to remain the home for seven years or more. The reality, however, is that more than one-half of all HECM reverse mortgages terminate in less than seven years. To finance short and intermediate cash needs, a HELOC loan may provide a more cost-effective way to tap into your home equity. With a HELOC, closing costs are generally minor (sometimes zero). The downsides are two-fold: 1) there are monthly loan payments required and, 2) you will likely need to show the lender that you have adequate income to make the required loan payments.

An “interest-only” HELOC loan typically requires monthly payments equal only to the accumulated interest on the amount borrowed to date. With care it is possible to borrow an amount each month that provides cash for living expenses and is adequate to make the monthly interest-only payment. In this way the HELOC mimics a reverse mortgage with interest building up in the loan balance until the loan is repaid when the home is sold.

4. Delay Receipt of Social Security Benefits – The majority of Americans start their (reduced) social security benefit at the earliest possible age (62). While people may feel it is smart to “get the money while you can”, the truth is that Americans are living longer than ever before and the decision to take early social security can cost you several hundred dollars per month for the rest of your life. People in their seventies and eighties often feel a reverse mortgage is needed to close a budget gap – a gap that might not exist if they were receiving full social security benefits.

5. Sell and Downsize or Rent – Using home equity to help pay for retirement is not a new concept. For generations, it was common for elderly homeowners to sell their homes and use the proceeds to buy or rent a smaller, more affordable dwelling. This remains a viable strategy and one of the best methods available to ensure you get full use of your hard earned home equity.

It is sometimes possible to sell your home to an “investor” and who will then rent it back to you. This provides you with needed cash while allowing you to remain in the home. Investors like this type of transaction since they get a “good” tenant who likely will take good care of the property.

6. Deferred Payment Loans – Many states, local governments and nonprofit organizations sponsor loan programs for the benefit of “house rich, cash poor” senior homeowners. Much like reverse mortgages, these programs lend money today that is paid back when the senior homeowner sells the home or dies.

The drawbacks are: 1) the use of loan proceeds is usually restricted to a specific purpose (e.g. home repair, payment of property taxes or special assessments, etc.) and, 2) eligibility may be restricted to seniors qualifying as lower income.

Deferred loan programs often have very low (even zero) closing costs and interest rates. This which makes them an alternative worth looking into before deciding on a reverse mortgage. To find out what deferred loan payment programs are available in your area, contact the Area Agency on Aging (AAA) for your region (http://www.eldercare.gov/Eldercare/Public/Home.asp).

7. Other Assets – Home equity should be viewed as a financial asset on par with CDs, stocks, bonds, cash-value insurance policies or other investments you may own. Before deciding to “cash out” home equity with a reverse mortgage, compare this strategy to other possibilities like selling other financial assets you may own. Stocks and bonds can be turned into cash much more efficiently than home equity can.

Deciding whether to take out a reverse mortgage is an important financial step for both you and you heirs. Be sure to consider the alternatives before making a final decision.

About The Author
Tim Paul is a financial management executive with more than 25 years experience. His websites focus on personal finance issues and include: http://www.sagetips.com and http://www.reverse-mortgage-information.org.

Reverse mortgage loans are being touted as the ideal solution for older homeowners who may need extra income during their retirement years. On the surface, reverse mortgages seem to have no down sides. The homeowner receives a monthly payment from the bank, which allows them to remain in their home and pay expenses. There are no payments due as long as the homeowner remains in the home, at which time the loan is due and can be repaid by selling the home. A reverse mortgage loan agreement can seem like a godsend, but there are both pros and cons to reverse mortgage loans. A wise homeowner will do well to examine them carefully.

What is a reverse mortgage loan?

A reverse mortgage loan is a home loan that is paid out in monthly installments to the homeowner. No payments are due on the loan as long as the homeowner continues to live in the home as their primary residence.

What are the requirements for getting a reverse mortgage loan?

One of the earliest reverse home mortgages was created by the Federal Housing Administration (FHA). Since then, there have been specific requirements set up to qualify for a Home Equity Conversion Mortgage, more commonly called a reverse mortgage. In order to qualify for a reverse mortgage through the FHA:

- you must be at least sixty two years of age

- you must either own your home outright, or have a small amount remaining on your mortgage that can be paid off with the proceeds of the reverse mortgage

- you must live in the home

- the home must be either a single family home or a 1-4 unit multi-family home, with the owner occupying one of the units

- condominiums and manufactured homes that meet FHA standards may also qualify

- the homeowner must speak with an HUD-approved counselor before signing a reverse mortgage loan

What are the pros of a reverse mortgage loan?

Because reverse mortgages are designed to benefit seniors who want to remain in their homes, there are some very important benefits to a reverse mortgage. They include:

- There are no income requirements to qualify for a reverse mortgage loan, so it is easy to qualify for one.

- There are no payments due on the reverse mortgage as long as the homeowner continues to use that home as their primary residence.

- You can never owe more than the value of your home at the time that you (or your heirs) sell the home, even if the lending company has paid out more than the home is worth at sale time.

- You can choose one of several options to receive your loan, which makes it one of the most flexible home loans available.

- The reverse mortgage loan does not come due until the borrower (or borrowers, if there is more than one) dies, sells the home, or moves out of the home. At that point, the mortgage comes due in full.

- The homeowner can not be evicted from his or her home as long as insurance and taxes are kept current.

What are the cons of a reverse mortgage loan?

While reverse mortgages have many benefits, it is also crucial to look at their potential negatives. They include:

- Closing costs on a reverse mortgage loan can sometimes be twice as high as closing costs on a regular mortgage.

- If there is an outstanding mortgage or home loan, it must be paid off with proceeds from the loan at closing. Thus, if you can borrow $100,000, but have a $10,000 outstanding mortgage, you will need to take at least $10,000 in a lump sum payment to pay that off.

- The proceeds of the loan, whether in a lump sum payment or in monthly payments, may affect your eligibility for Medicaid or other state or federal aid payments.

- Your loan will come due when you no longer occupy it as your primary residence. At that point, you or your heirs will need to sell the house to repay any money that has been paid out. If you want your home to remain in the family, a reverse mortgage may not be the best plan for you.

Deciding whether or not to take out a reverse mortgage against your home is a complex decision with many pros and cons. The FHA requires that those considering reverse mortgages sit down with a home loan counselor and discuss all the ins and outs of the process. Take full advantage of the requirement to explore all the pros and cons of taking out a reverse mortgage so that you can make the best decision for your financial circumstances.

About The Author
Allan Young is a freelance writer who writes about financial products and specific services available from a mortgage lender .

Simply stated, a reverse mortgage is a loan that enables homeowners (age 62 and older) to convert part of the equity in their home into a tax-free income without having to sell the home, give up the title, or take on a new monthly mortgage payment. More and more homeowners are using this to supplement their retirement income, pay for health care, modify their home, or just get some cash for emergencies. Since this is a new product, some people have misconceptions of what a reverse mortgage is. The bank doesn’t give you money and take your house. Let’s look at some of the most common questions.

Are reverse mortgages for desperate people? No. It is an excellent financial planning tool used from people of all walks of life.

How do I qualify? You must be 62 or if both parties are on the mortgage, then you both must be at least 62. And, you must have equity in your home.

What if I still owe on my home? You may still qualify even if you have a balance on your first mortgage. The proceeds must be used to pay off the mortgage, first.

How much can I get? This depends on several factors such as, the age of your home, the value, your age at the time of closing, and interest rates.

Is it just monthly payments? No. You can get a lump sum, line of credit, monthly payments or a combination of monthly income and a line of credit.

But, won’t I have to pay taxes on these monthly payments to the government? No. The funds are tax-free. Its your money, not additional income.

Should I seek a lawyer or receive some counseling before I get a reverse mortgage. Yes. You must be counseled before receiving a reverse mortgage. You don’t have to talk to a lawyer or accountant, but it would be advised.

Who owns the title to my house? You still own the title.

What happens when I die? Once your home is passed on to your heirs, the mortgage becomes due. Your heirs may pay the mortgage and keep the home or sell the home and pay off the home. They may keep any excess sales proceeds.

What if I owe more than the house is worth? You can’t. Your repayment amount will never exceed the value of the home at the time the loan comes due. Also, there are no prepayment penalties.

What if I move? If you move, then the mortgage becomes due and must be repaid.

Where can I learn more? The National Reverse Mortgage Lenders Association at http://www.reversemortgage.org

About The Author
Stuart Simpson has a neat mortgage calculator FREE to use. Try it out at:
http://www.mortgage-refinance-review.com/calculator.php

The Investment Grade Value Stock Index “Bargain Stock Monitor” clearly reflects the profit taking that hit the market late in January— you and I have been harvesting our gains all along though. Right?

Although there are nearly twice as many IGV stocks 15% below 52-week highs as there were at year-end, there is no evidence that a new correction has commenced— tune in again in March or April.

The numbers are telling you that most Investment Grade Value Stocks are still well above bargain price levels, and no matter how much “smart cash” has accumulated in your portfolio, it’s not necessary to re-load your portfolios with new stuff all at once. Like apples, one a day is just fine.

Most Market Cycle Investment Management (MCIM) Program portfolios are still a hiccup or two below the all time high profit levels achieved in 2007, but those with larger income allocations are generally well above those levels.

So, aren’t you glad you’ve been taking profits and positioning yourself to take advantage of the new bargains sauntering down the runway? Take your time. Always start new positions slowly while you continue to take profits instantly.

The Bargain Stock Monitor is reporting a slight dip in Investment Grade Value Stock market values, but it is predicting nothing. What matters now is what you do with the paper profits that remain in your portfolio. You should always “beat” your index!

If you have not, or have not taken profits, one or more of these things has happened:

* You were greedy and reset your profit taking targets higher than 10%.
* You didn’t have profit taking opportunities because you failed to take advantage of hysterically lower prices over the past two years.
* You didn’t have profits because you were unable to add to your portfolio when prices were lower
* You didn’t want to be burdened with short-term capital gains.
* You thought that the rally would last forever.

Yes, we are still in a rally, and the longer that we experience slow improvement over longer than monthly analytical periods; the less likely it is that the next correction will be as devastating as the last. But there absolutely will be another correction, and remember—

An ex-NFC team is certain to win the Super Bowl!

For your information, the Bargain Stock Monitor is one of three market statistics used as performance expectation analyzers in Market Cycle Investment Management portfolios. Search Investment Grade Value Stock Index for current data.

A “WCM friendly” watchlist program identifies specific IGVSI companies trading at least 20% below the 52-week high water mark, and that also meet the price selection criteria outlined in The Brainwashing of the American Investor: The Book that Wall Street does not want YOU to read.

The fewer IGVSI stocks at bargain prices, the stronger the market and the more “smart cash” that should be building up in investment portfolios. As the list of bargain stocks grows, portfolio smart cash should be finding its way back into undervalued securities.

The other numbers used for MCIM portfolio performance evaluation are: The Investment Grade Value Stock Index itself (The IGVSI), IGVSI Issue Breadth, and new 52-week High vs. new 52-week Low numbers.

Steve Selengut
http://www.valuestockindex.com
Professional Portfolio Management since 1979
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

The IGVSI Bargain Stock Monitor clearly reflects the strength of this eleven-month-rallying stock market. In fact, the bargain monitor is sporting the best numbers ever recorded. No, this is not a “buy” signal.

The numbers are telling you that most Investment Grade Value Stocks are at or approaching their highest valuations of the past 52 weeks. Market Cycle Investment Management (MCIM) Program portfolios are approaching the all time high profit levels achieved in 2007, and only a handful of IGVSI equities are at “bargain” price levels— i.e., down 20% or more from their 52-week highs.

Additionally, the most conservative MCIM portfolios have been achieving new all time highs regularly, for the past three or four months— this because managed income closed end funds rose about 31% in market value during 2009.

So, with the very best numbers we’ve seen in two and a half years, why aren’t you taking profits and positioning yourself to take advantage of the next market correction instead of (as usual) being victimized by it?

The Bargain Stock Monitor is reporting that a 52-week high has been achieved in Investment Grade Value Stock market values, but it is predicting nothing. What matters now is what you do with the paper profits that the past eleven months’ rally should certainly have provided for you.

If you have not taken profits, one or more of these things is happening:

* You are being greedy by ignoring Working Capital Model (WCM) profit taking guidelines.
* You do not have profit taking opportunities because you fearfully failed to take advantage of hysterically lower prices over the past two years.
* You don’t have profit positions yet because you were unable to add to your portfolio significantly when prices were lower
* You don’t want to be burdened with short-term capital gains.
* You think that this rally will last forever.

Yes, we are still in a rally, and the longer that we experience slow improvement in the more widely worshipped numbers, the less likely it is that the next correction will be as devastating as the last. But there absolutely will be another correction, and

There is no such thing as a bad profit!

For your information, the Bargain Stock Monitor is one of three market statistics used as performance expectation analyzers in Market Cycle Investment Management portfolios.

A “WCM friendly” watchlist program identifies specific IGVSI companies trading at least 20% below the 52-week high water mark, and that also meet the price selection criteria outlined in The Brainwashing of the American Investor: The Book that Wall Street does not want YOU to read.

The fewer IGVSI stocks at bargain prices, the stronger the market and the more “smart cash” that should be building up in investment portfolios. As the list of bargain stocks grows, portfolio smart cash should be finding its way back into undervalued securities.

The other numbers used for MCIM portfolio performance evaluation are: The Investment Grade Value Stock Index itself (The IGVSI), IGVSI Issue Breadth, and new 52-week High vs. new 52-week Low numbers.

Steve Selengut
http://www.valuestockindex.com
Professional Portfolio Management since 1979
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

From the end of 1999 through the end of 2009, all of the popular Wall Street market performance measurement tools were in the red. The average bloodletting level of the DJIA, the S & P 500, and the NASDAQ was a disturbing-to-some minus nineteen percent.

The Media has dubbed it “The Dismal Decade”.

Most of the investment community is either open-mouthed in shock or strident in blame about the somethings or someones who must be responsible for such horrific performance. Never again they swear to their clients— without ever a hint that they might themselves be the problem.

It won’t be long before the Wizards of Wall Street announce that they have studied the situation, and readied their sales minions to switch the shattered investment public into yet another fail proof (fool-magnet?) portfolio of hedges, gimmicks, signal responders, and panaceas for whatever the new decade brings.

Once again they will attempt to debug the market cycle and create an upward only future for the masses. Try not to be abused again— the markets aren’t broken, just the market shakers. Your portfolio should be up in market value— and not by just a little for the “dismal decade”.

These are the same geniuses that created the dotcom bubble by cramming valueless securities and speculative IPOs down your throats. They are the same charlatans who created the derivative markets and fraudulently hid their gaming devices in innocent looking rolls of tissue paper.

Wall Street thrives on the boom and bust scenario— because it doesn’t really matter to them how many of you win or lose. The evidence is clear; a boring-but-winning approach has been out there (and ignored) for three equally productive decades. The investment gods are outraged!

The past decade was a fabulous decade for old-fashioned value investors, particularly those with a reasonable selling discipline in their methodology!

It was a fabulous decade for those who understood that quality, diversification, and income generation are principles as opposed to media placating buzzwords.

It was a fabulous decade for those investors who were able to see over, beyond, and through artificial time constraints to find the long-term opportunities within every beautiful market cycle undulation. There were plenty of gyrations to gyrate to if you only knew how.

Investing is no longer a passive enterprise; and it never really was. If you can’t manage your portfolio throughout the market cycle, without succumbing either to greed, to panic, or to artificial and complicated hedging strategies, just stop. Right now. Listen and learn something old.

The only market cycle hedges needed are quality, diversification, and income— all classically defined. Throw in some disciplined selection and selling guidelines, a cost-based asset allocation formula, and a non-calendar year perspective and success will follow— cyclically.

You may miss a speculative spike or two (i.e., bubbles), but in the long run, Market Cycle Investment Management (MCIM) is a proven methodology for long run investment success.

You just can’t replace market cycle reality with calendar year gimmickry. Do better. Google investment grade value stock and request the ten-year MCIM numbers.

Change is good.

Steve Selengut
http://kiawahgolfinvestmentseminars.net/Inv/Search.cfm
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

During the past sixty years, most economic, market, and interest rate cycles have lasted from two to five years, peak-to-peak. Rarely have any of the cycle-tracking market indices moved in tandem, and none of the cycles are considered to be particularly predictable.

Individual securities (the stuff that indices are made of) complicate things significantly by having even less predictable cycles of their own. This generally uncertain atmosphere is the very nature of the financial markets. If investors could come to grips with the non-calendar, cyclical, nature of markets, it is likely that they could improve their investment performance considerably.

In spite of decades of irrefutable evidence to the contrary, Wall Street has convinced most investors and far too many financial professionals that the calendar year is somehow investment relevant. Simple, yes; tax-code friendly, perhaps; but investment realistic— not.

Too many experts have abandoned the financial world’s fascinating cyclical undulations for the simplicity of the planet’s annual orbit around the sun. It’s time for a change in direction— one that doesn’t ignore the realities of the investment markets. It’s time to get back on our “hogs”, and ride!

Regardless of direction, all cyclical movements have proven to be excellent investment opportunities for Market Cycle Investment Management (MCIM) navigators. The MCIM Program uses a time-proven methodology that befriends market and interest rate cycles by using strategies that most often should produce:

* Higher market value lows during market downturns.
* Moves to cash before corrections take over from rallies.
* Maintenance of planned income during financial crises.
* Faster movement to new market value highs.
* Steady growth in “working capital” in all market environments.
* Annual growth of realized “base income” in all portfolios.
* No major disappearing (unrealized) profits.
* Much better than average peak-to-peak market value numbers.
* Auto pilot maintenance of asset allocation structure.
* Reduction of analysis paralysis, appreciation of both rallies and corrections, and love of market volatility.

The past twelve years have included two major market cycles and one significant economic crisis. Email me to see how well Market Cycle Investment Management accounts fared during this interesting segment of financial history. Read “Brainwashing the American Investor” to appreciate the MCIM program— in operation since 1970.

All investors should become familiar with Market Cycle Investment Management accounts and the strategies they employ to keep portfolios on track from start up to retirement. As a family evolves over time, separately managed, “life cycle” friendly, portfolios will become necessary. For example:

Group One -Taxable income and Investment Grade Value Stock (IGVSI) portfolios for tax deferred accounts

* 70% IGVSI Equities and 30% Taxable CEFs
* 50% IGVSI Equities and 50% Taxable CEFs
* 30% IGVSI Equities and 70% Taxable CEFs

Group Two – Tax free income and Investment Grade Value Stock (IGVSI) portfolios for taxable accounts

* 70% IGVSI Equities and 30% Tax Free CEFs
* 50% IGVSI Equities and 50% Tax Free CEFs
* 30% IGVSI Equities and 70% Tax Free CEFs

Group Three – Tax managed portfolios, asset allocated as in Group Two, for taxable accounts.

Notes: (1) Group One and Two portfolios would be managed in accordance with The Working Capital Model, as documented profusely in the books and articles of Investment Manager Steve Selengut. (2) Group Three portfolios would be managed similarly; however, tax loss selling will be used annually to offset a significant portion of trading gains. 

Reasonable Expectations: (1) Portfolios should lose less market value during market corrections and recover to new highs more quickly. (2) Profit taking during rallies, regular cash flow, and strict stock purchase rules should produce quicker recoveries. (3) Income production from equities, combined with a significant income securities bucket, assure annual increases in “base income” levels.

Market Cycle Investment Management replaces the racetrack mentality that runs today’s investment performance evaluation methodologies with a calmer, more cerebral, strategy.

By looking at things cyclically, and analytically, instead of celestially and emotionally, we allow our strategy to prove itself over a reasonable period of time— as it has since 1970. 

If the investment strategy makes sense in the long run, why knock yourself out in months, quarters, and years? Pick the MCIM program or programs that suit you best today and let them work you through the cycles the investment gods are preparing for your future.

Attend a seminar, adopt the program, and smile.

Steve Selengut
KiawahGolfInvestmentSeminars.net
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

How pensions work

On reaching retirement your accumulated pension fund is used to buy an annuity, this is an investment that pays a periodic sum for the life of the holder. A cash sum may also be withdrawn from the pension fund before annuity is purchased.

Your annuity does not have to be bought from the company(ies) that managed your pension fund. Shop around for the best deal.

There are various types of annuity. With a “flat rate” the amount of pension stays the same for the duration of the annuity (NB if there is inflation the actual value of pension falls). With an indexed annuity the pension rises with inflation (ie the pension maintains its buying power), however the initial rate of indexed annuity is lower than a “flat rate”. Some annuities offer widow’s benefits, ie a (possibly reduced) payment continues to a partner should the annuity holder pass away.

Company Pension Schemes

Where available these are generally a very good deal as the employer also contributes to your pension fund (possibly as much as – if not more than – the employee). There are 2 flavors: a) individuals builds a personal pension pot which is used to fund an annuity, b) final salary plan in which the actual pension based on employee’s final salary & length of scheme membership (regardless of actual amount paid in). Company pensions are often index-linked to rise with inflation. The final salary plan is generally regarded as a superior deal but is now being phased out by many employers.

Compounding

Returns on pension funds are compounded (re-invested). If you save $100 a month with 5% added at each year end: after 20 years you have $41,663, after 40 years you have $152,208. Invest for twice as long, get 3.65x the funds. To put it another way, if you saved $328.50 a month at 5% pa return for 40 years you’d build a retirement fund of $500,000. But if you delayed, you’d have to save $1200 a month over 20 years to accumulate the same amount! The effect of compounding means the sooner you start the better.

Tax breaks

Many governments offer some form of (often quite generous) tax incentive for pension savings. However, this comes with conditions, eg investments must be held in officially designated pension funds, funds may not be withdrawn until fund holder reaches a certain age (the may be some exceptions, eg for sportspeople who retire early).

Retirement Financial Planning as a Long-term Game

The timespan concerned means you can afford to be adventurous, particularly in the early days, as short-term volatility will tend to cancel itself out in favor of long-term rewards.

The stock market is a good core investment either through: a low cost market index tracker fund, or individual stocks and shares. If you choose the latter be sure to invest in a broad range of stocks, eg at least 12, across different industry sectors.

Avoid managed funds, fund managers are deleterious to your wealth and on average, after fees, fail to beat the market as a whole (of course some managers do beat the market in some years – by judgment or luck! – the problem is it’s impossible to tell in advance which ones they are).
 
Diversification into real estate, overseas investment etc is advisable. Pension funds can also include art & other collectibles – fine if you have specialist knowledge, otherwise best avoided.

Reverse Mortgage

For many people reaching retirement their largest asset is their home. Many older people move from (more expensive) larger houses to (cheaper) condominiums, thus releasing funds. Reverse mortgage schemes release capital on all or part of your home in return for an income for life. You are allowed to remain in your home as the scheme doesn’t get its share until you pass away. However, reverse mortgages will have a negative impact on your dependants’ inheritance.

A participant in the morning Working Capital Model (WCM) investment workshop observed: I’ve noticed that my account balances are returning to their (June 2007) levels. People are talking down the economy and the dollar. Is there any preemptive action I need to take?

An afternoon workshop attendee spoke of a similar predicament, but cautioned that (with new high market value levels approaching) a repeat of the June 2007 through early March 2009 correction must be avoided— a portfolio protection plan is essential!

What are they missing?

These investors are taking pretty much for granted the fact that their investment portfolios had more than merely survived the most severe correction in financial market history. They had recouped all of their market value, and maintained their cash flow to boot. The market averages remain 40% below their 2007 highs.

Their preemptive portfolio protection plan was already in place — and it worked amazingly well, as it certainly should for anyone who follows the general principles and disciplined strategies of the WCM.

But instead of patting themselves on the back for their proper preparation and positioning, here they were, lamenting the possibility of the next dip in securities’ prices. Corrections, big and small, are a simple fact of investment life whose origination point, unfortunately, can only be identified using rear view mirrors.

Investors constantly focus on the event instead of the opportunity that the event represents. Being retrospective instead of hindsightful helps us learn from our experiences. The length, depth, and scope of the financial crisis correction were unknowns in mid-2007. The parameters of the current advance are just as much of a mystery— today.

The WCM forces us to prepare for cyclical oscillations by requiring: (a) that we take reasonable profits quickly whenever they are available, (b) that we maintain our “cost-based” asset allocation formula using long-term (like retirement, Bunky) goals, and that we slowly move into new opportunities only after downturns that the “conventional wisdom” identifies as correction level— i. e., twenty percent.

So, a better question, concern, or observation during a rally (Yes, Virginia, seven consecutive months to the upside is a rally.), given the extraordinary performance scenario that these investors acknowledge, would be: What can I do to take advantage of the market cycle even more effectively— the next time?

The answer is as practically simple as it is emotionally difficult. You need to add to portfolios during precipitous or long term market downturns to take advantage of lower prices— just as you would do in every other aspect of your life. You need first to establish new positions, and then to add to old ones that continue to live up to WCM quality standards.

You need to maintain your asset allocation by adding to income positions properly, and monitor cost based diversification levels closely. You need to apply cyclical patience and understanding to your thinking and hang on to the safety bar until the climb back up the hill makes you smile. Repeat the process. Repeat the process. Repeat the process.

The retrospective?

The WCM was nearly fifteen years old when the robust 1987 rally became the dreaded “Black Monday”, (computer loop?) correction on October 19th. Sudden and sharp, that 50% or so correction proved the applicability of a methodology that had fared well in earlier minor downturns.

According to WCM guidelines, portfolio “smart cash” was building through August; new buying overtook profit taking early in September, and continued well into 1988.

Five and ten years later, there were less disastrous corrections, followed by clear sailing until 9/11. There was one major difference: the government didn’t kill any companies or undo market safeguards that had been in place since the Great Depression.

Dot-Com Bubble! What dot-com bubble?

Working Capital Model buying rules prohibit the type of rampant speculation that became Wall Street vogue during that era. The WCM credo after the bursting was: “no NASDAQ, no Mutual Funds, no IPOs, no problem.” Investment Grade Value Stocks (IGVSI stocks) regained their luster as the no-value-no-profits securities slip-slided away into the Hudson.

Embarrassed Wall Street investment firms used their influence to ban the “Brainwashing” book and sent the authorities in to stifle the free speech of WCM users— just a rumor, really.

Here we are once again. For the sixth time in the thirty-five years since its development, Working Capital Model operating systems are proving themselves to be an outstanding market cycle management methodology.

And what was it that the workshop participants didn’t realize they had— a preemptive portfolio protection strategy for the entire market cycle. One that even a caveman can learn to use effectively.

Steve Selengut
sanserve (at) aol.com
http://www.kiawahgolfinvestmentseminars.com/
Author of: “The Brainwashing of the American Investor: The Book that Wall Street Does Not Want YOU to Read”, and “A Millionaire’s Secret Investment Strategy”

A number of key accounting ratios can be calculated from the financial statements of a business. These ratios provide an objective summary of the financial health and investment quality of a business.

Remember though that accounting methods vary from one company to another, and also that typical ratio values may vary widely from one sector to another.

These ratios are a useful addition to the investor’s toolkit but should not generally be relied upon in isolation. Instead use them within the broader picture of the company’s performance and pospects, and your own intangible ‘gut’ feelings.

The Key Ratios

Earnings per Share = Profit Before Tax / No. of shares in issue

Price-Earnings (PE) ratio = Share Price / Earnings per Share

Yield = Dividend per Share / Share Price

Compare PE ratios with similar stocks within the same market sector. A higher PE ratio indicates a stock is “highly regarded” by the market. A lower PE ratio can indicate a bargain, or a dog!

Price/Sales ratio = Share Price / Sales per Share

The Price/Sales ratio is used for non-profit-making concerns, eg Internet start-ups. The lower the figure, the better.

PEG ratio = PE ratio / Average annual growth of Earnings per Share

A PEG ratio of less than 1 may indicate good value. But avoid using this, or any other single indicator, in isolation.

Current Ratio = Current Assets / Current Liabilities

The Current Ratio indicates how well a business can pay its current debts. A Current Ratio of less than two might be cause for concern.

Quick Ratio = (Current Assets – Inventory) / Current Liabilities

Also known as the Acid Test, the Quick Ratio is an even tighter test of how well a business can pay its current debts quickly. The Quick Ratio should be at least one.

Net Asset Value per Share = Net Assets / No. shares in issue

Often Investment Trusts and Real Estate companies trade at a discount,
ie Share Price < Net Asset Value per Share.

Return on Investment = Operating Profit / Owner’s equity

Return on Investment (ROI) is one of the best known financial ratios and essentially measures the performance of management. The ROI should be at least as high as other investments of comparable risk.

Inventory Turn Ratio = Turnover / Inventory

The Inventory Turn Ratio indicates how quickly goods are selling. The higher the better.

Receivables Turnover Ratio = Turnover / Debtors

The Receivables Turnover Ratio indicates how quickly the company turns sales into cash. The higher the better. Dividing 365 by the Receivables Turnover Ratio gives the average number of days to collect payment.

Debt-to-Equity Ratio = Total Liabilities / Owners’ Equity

The ratio of finance coming from creditors compared to shareholders. The higher the figure, the more shareholders stand to benefit from increased profits; however this also implies increased risk. A ratio exceeding one may be cause for concern.