Michael Morrow | Financial Planner

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blog header for michael morrow financial planner's website, "business strategy: transferring risk"

Business Strategy: Transferring Risk

Whether you are an independent investor or are overseeing the investment portfolio of a company, risk will always be a factor that you will be faced with.

According to its definition, risk involves the chance of an investment’s actual return will differ from its expected return. In other words, risk includes the possibility of losing some — or even all — of the original investment.

It is important to note that investment risks come in many shapes and sizes, with some of the most common being as follows:

Inflationary risk: Also known as purchasing power risk, inflationary risk is the chance that inflation will undermine the performance of one’s investments. Ultimately, this form of risk has a direct impact on one’s real return.

Market risk: Also known as systematic risk, market risk is inherent to the entire system, as its severity is entirely dependent on the natural fluctuations of the market itself. The factors that impact market risk cannot be mitigated nor predicted.

Political risk: Another somewhat unpredictable trend, political risk is defined as the risk an investment’s returns could be thwarted as a result of political changes and instability, as well as the possibility of nationalization.

Although it seems as though these risks are inevitable and impossible to combat, there is a rather successful method of not only protecting one’s current investments, but one’s livelihood as well.

Similar to how one would insure their home or car in the event of a disaster or accident, one can self-insure their investments as well. This is known as transferring risk, or employing risk management strategies.

Transferring risk occurs when an investor purchases low-risk investment vehicles — such as indexed annuities or indexed life insurance policies — to ensure they are able to remain in the market while protecting a percentage of their portfolio in case a market correction or downturn arises.

This is often the wisest course of action, as it places the risk of a market downturn on a third party that is both trusted and well-equipped to do so. By placing your assets in their care,  accountability will be lifted from your shoulders and you will be more resistant to losing a sizable amount of your investments and retirement funds.

If this method sounds as though it would be beneficial to you and your financial future — as it should — it is recommended that you speak to your financial advisor as soon as possible. After all, the sooner you are insured against an economic disaster, the better.

blog header for michael morrow financial planner's post, "22 troubling facts regarding investing"

22 Troubling Facts Regarding Investing

With US equity markets sitting at all-time highs, the masses are looking to join the investment fray. Needless to say, it would be prudent for potential investors to note that risk levels are also sitting at all-time highs.

With that in mind, here are 22 troublesome investing facts that are hard to look past. They have been divided into three categories (Valuations, Economy, Federal Reserve) for a clearer understanding of the inherent risks that exist:

Valuations:

  • The S&P 500 Cyclically Adjusted Price to Earnings (CAPE) valuation currently sits at levels only seen one other time in history: the late 1990s. Additionally, the current level is eerily similar to the levels seen just prior to the stock market crash of 1929.
  • Based on current economic growth patterns, the CAPE is overvalued more than any other time in history.
  • Total domestic corporate profits have grown at an annualized rate of only .097.
  • The S&P 500 Price to Sales Ratio currently sits at an all-time high.
  • S&P Corporations have earned less in the last 10 years than they have returned to shareholders via stock buybacks and dividends.
  • According to a Prudential analyst, the current yields on high-yield debt, adjusted for defaults, are lower than those found with investment grade bonds.
  • Using the top 200 S&P 500 corporations, the current shortfall on pension payouts sit at an alarming $382 billion with GE leading the way.
  • Investor complacency is currently highlighted by Implied equity and U.S. Treasury volatility, which both sit at 30 years lows.

Economy:

  • GDP has only grown by 1.97%, .83% and .69% over the last 3, 5, and 10 years respectively.
  • The Feds estimate GDP will only grow by about 2% in both 2018 and 2019.
  • Government debt currently sits at 105.85% of GDP. Preferable levels would be around 90%.
  • Debt is expected to grow 3X the rate of GDP over the next 10 years.
  • Corporate debt levels ($8.6 trillion) have grown by 30% over the last 9 years.
  • Private debt + government debt sits at $329,000 per US household.
  • Worker productivity is falling to near zero levels.
  • The ratio of corporate debt to GDP (45.3%) currently exceeds that of the last two recessions. It is currently near historic highs.
  • Instability of Medicare and Social Security continues as 70,000 baby boomers are retiring every day.
  • State and local pension funds are sitting at a shortfall of $3.8 trillion.

Federal Reserve:

  • After sitting at 1% or lower for only one quarter in the 1950s, the Fed Funds rate has now been at or below that level since 2009.
  • The real price of money is being distorted by a Fed balance sheet that sits almost six times higher than other pre-crisis levels.
  • Low interest rates and a high balance sheet have been tolerated too long.
  • The Fed is having great difficulty setting policy and clearly stating objectives.

For these and many other reasons, investors are encouraged to proceed with great caution. When the bubble bursts, the pain figures to be widespread.

blog header for michael morrow financial planner's blog post, "the best annuities for retirement."

The Best Annuities for Retirement

When it comes to planning for retirement, one can never be too diligent. After all, failing to plan for a secure financial future is equivalent to planning to fail. Therefore, one should familiarize themselves with the various financial tools available in order to optimize their savings as much as possible before retirement.

One of the best means to achieving this seemingly insurmountable feat is investing in an annuity. Regardless of the various misconceptions surrounding this investment tool, annuities are one of the few methods that will provide a regular infusion of cash with little to no additional fees.

With that in mind, let us delve deeper into the topic and discover the best annuities for retirement:

Immediate annuity

As you approach the end of your time in the workforce, you hopefully have a decent amount of money stowed away in your savings or in other investment accounts. It is at this time that you should consider withdrawing that money and investing in an immediate annuity, which would not only guarantee you an instant retirement income, but some peace of mind as well.

This form of annuity is rather straightforward. All the account owner must do is put down a lump sum in exchange for monthly checks that incur little to no fees. Of course, the worth of said checks is entirely dependent on how much the lump sum is. However, this payment in conjunction with any Social Security or pension plans, could be an excellent way of ensuring you will retire comfortably.

Deferred annuity

Also known as a longevity annuity, this method is excellent for older workers whose current savings may not carry them through the rest of their days. Therefore, payments to the owner of the account do not begin until they have reached a set age — which is typically around 80 years old — thus giving the money an opportunity to grow.

Alternatively, this account can be established by young workers who have already earned a considerable amount of money and do not intend to retire for some time. However, the only downside is that this money no longer grows with the owner of the account. Additionally, said owner will have to pay a larger sum of money to open such an account so early, along with any fees that may come with the account itself.

Regardless of which form of annuity one decides to purchase — or when they choose to purchase it — they should always meet with a certified financial planner first. After all, it is much better to be safe than sorry, especially in regards to one’s life savings.

5 Reasons for Life Insurance

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Despite popular belief, life insurance policies do not serve a singular purpose. While they are primarily used to provide vital funds to families whose loved ones have passed away, these policies can also serve as an excellent addition to a personal financial portfolio, collateral for a personal or business loan, and so on.

Here are five reasons you should consider opening a life insurance policy as soon as possible:

They are guaranteed to grow. Similar to a traditional IRA, a life insurance policy’s cash value is guaranteed to grow on a tax-deferred basis and never decrease in value, no matter how dismal the economy may appear. This is because the growth of a policy’s cash value is dependent on the payments the owner makes. Therefore, a life insurance policy is an investment that can act as a safety net for your financial security.

They can be leveraged to meet greater financial goals. If you are hoping to start your own business or even foresee some financial trouble later on in life, a life insurance policy can be used to cushion the blow of — or entirely cover — either expense.

There are some stipulations to this process, however. While you may borrow against your policy without entirely cashing it in, you are held responsible for repaying that amount before the end of your lifetime. If that requirement is not met, the overall value of your policy will be decreased, leaving your family with fewer financial benefits in the event of your death.

They can aid you in paying for college tuition. Borrowing against your life insurance policy is also an excellent option for financing your child’s college education. Similar to traditional federal and private loans, you will be required to pay interest on the amount of money you borrowed. If interest goes unpaid, you run the risk of compounding your loan — or paying interest on your accrued interest. Therefore, you should ensure that you are financially secure enough to handle such payments prior to making a decision.

They are an investment, not an expense. Although starting a life insurance policy may certainly sound like an expense, seeing as you are required to make monthly payments to keep the policy, the overall benefits greatly outweigh the costs — which, frankly, may not be that high to begin with, depending on one’s coverage, provider, and physical health.

The sooner you buy, the more insurable you will be. One of the last things the majority of young individuals want to think about — let alone discuss — is preparing for anything related to the end of life. However, purchasing a life insurance policy does not need to be viewed as morbid, but as a safety net that could greatly benefit its owner in the future.

With that in mind, it would be wise of more people to purchase life insurance policies as soon as they are financially able, as they would not only have a higher likelihood of being approved, but would have the ability to lock in lower premium rates as well. This also gives them great flexibility if they decide to expand their coverage to a spouse or invest in additional benefits down the line.

Michael Morrow - Real Estate Resources for New Investors

Real Estate Resources for New Investors

If you want to be a successful real estate investor, then you have to do your research and build up your knowledge base. With so much information out there, though, you might not be sure where to start. Which resources are worth pursuing and which resources should you avoid? Below are some of the top real estate resources for both new and veteran investors alike. While this isn’t a complete list, it is a great starting point as you walk down the path of real estate investment.

Real Estate Listings

The obvious first step to becoming a real estate investor is actually purchasing a property, and you can’t purchase a property if you don’t know what’s available. Today there are numerous websites that feature local real estate listings. Zillow and Trulia are two of the most popular. Zillow is particularly useful because it gives you access to various helpful statistics that will give you more insight into particular neighborhoods.

Property Assessments

Property assessments are essential to understanding the true value of a property as well as how much of your money will go toward taxes. In many cases this information is online, but it can be difficult to locate. Patriot Properties and Vision Government Solutions are two helpful sites that feature extensive databases of property assessments. State & Local Government on the Net is another resource that can help you find property assessments for a particular area. The site doesn’t actually list the property assessments, but it lists local government websites by their particular topics.

Trends

If you want to be a knowledgeable real estate investor, then you should have some awareness of what’s trendy in home design. Houzz focuses on highlighting the latest trends in home design. The site is a great resource for inspiration. Plus it features a database of local professionals who you can hire to do repairs, interior design, and other services.

Books

One of the best ways to increase your real estate knowledge is to read a book. Here is a list that will help you get started. It features seven of the best books for new investors. One book that’s not on the list that you should still check out is Real Estate Finance & Investments written by William Brueggeman and Jeffrey Fisher. The book is currently in its fourteenth edition, and it’s used in college classrooms around the country. After reading the book, you will definitely feel more comfortable with the entire investment process.

Michael Morrow - Done For You Real Estate

Done For You Real Estate

Investing in real estate is one of the best decisions you can make with your money. However, there are many hurdles that you will need to jump over in order to get started. One of the biggest hurdles that investors face with real estate is securing enough cash to purchase a rental property. Homeowners know how difficult it can be to accumulate a twenty percent down payment for a home. Saving money for a rental down payment is just the same. While real estate has significantly less risk than other forms of investment, there is still the risk that you can’t find someone to rent your property. Then you would be responsible for paying monthly payments on two properties at the same time. Partnering with others to purchase property is one of the best strategies that first-time real estate investors use.

Done For You Real Estate

Done For You Real Estate (DFYRE) is one organization that removes many of the headaches associated with real estate investment. For example, managing the property itself can be one of the most time-consuming aspects of real estate investment. It’s especially a burden if you have multiple properties and work a full-time job at the same time. DFYRE takes care of this issue as well as many other issues related to real estate investment.

The organization finds the best markets and the best houses for you. Then it does the necessary repairs to get them prepared for renters. Once the houses are ready it does all of the legwork associated with finding renters. Finally, it manages the properties so you don’t have to worry about ongoing repairs or any other related issues. All you have to do as an investor is provide the capital, and DFYRE provides all of the services. Since the organization began in 2007, it has helped investors receive a 20+% return year on year. In particularly hot markets you can expect a conservative income of $3900 per house for each year that you invest in the program. The potential equity growth of 3 – 10% is just a bonus.

Learn More

If the DFYRE system sounds attractive to you, then you should watch this video to learn even more. You can also visit the DFYRE website to download a free kit that has even more information. One of the founders of the organization is named Kris Krohn. He began investing in real estate when he was 23 years old. By the time he turned 26 was able to earn a passive income of six figures. He is very knowledgeable about real estate, and his system helps investors get involved in real estate in a turnkey manner.

Michael Morrow - Learn More About Sequence of Return Risk

Learn More About Sequence of Return Risk

One of the biggest concerns that retirees have is whether their nest egg will be large enough to support them during retirement. The worst case scenario that every retiree fears is experiencing a market downturn just as he or she is ready to enter retirement. Since retirees need to draw from their retirement portfolio in order to live, they must be aware of and prepared to deal with sequence-of-returns risk.

In my article Jack Bogle Warns: Prepare for Two Massive Market Declines in The Next Decade, I wrote: “In simple terms, sequence of return risk means that in retirement, it can be more critical when you get returns than what returns you get.” Investopedia defines sequence-of-returns risk as “the risk of receiving lower or negative returns early in a period when withdrawals are made from an individual’s underlying investments. The order or the sequence of investment returns is a primary concern for retirees who are living off the income and capital of their investments” (Investopedia – Source).

While investors don’t have to worry about sequence-of-returns risk before retirement, it becomes a big issue during retirement. If you plan to retire soon and you want to limit sequence-of-returns risk, keep reading for some tips and strategies.

Limit Risk

When you make risky investments there’s always the chance of losing your money. For example, if your portfolio only includes stocks you’re at the mercy of the market. If your stocks take a beating and you continue to withdraw money from your portfolio, you make it difficult for your portfolio to recover. At Aspen Creek Wealth Strategies we recommend a “risk bucket” strategy based on the rule of 100. If you are 65 years old then 65% of your portfolio should go into a safer bucket of assets. You can put the remaining 35% into a riskier bucket. Investors can increase their chances of a successful retirement by making wise investments and avoiding unnecessary risk.

Lower Percentage of Stocks

Another strategy to consider: during the first years of your retirement your portfolio shouldn’t include a high percentage of stocks. Over time, though, you can increase the percentage depending on the risk you feel comfortable taking. The first years of retirement are the most important. If you withdraw too much money or lose too much money as a result of risky investments, you’ll make the rest of your retirement difficult.

Don’t Overspend

One of the easiest ways to protect your retirement funds is to only withdraw the amount that you actually need. Ask yourself before making a big purchase, “Is it really necessary?” Every retiree wants to enjoy their retirement, but you don’t need to carelessly spend your money to enjoy yourself. If you withdraw your money wisely you’ll help ensure it lasts you and you don’t outlast it.

Michael Morrow - The Dangers of Buy and Hold

The Dangers of Buy and Hold

In general “Buy and Hold” is an investment strategy where stocks are purchased and then held on to regardless of how the market performs. While the Buy and Hold strategy has many supporters who believe it is the best investment strategy, the reality is that the strategy has many drawbacks. The strategy is especially dangerous as a retirement strategy. Some investors who are averse to risk think that Buy and Hold will limit the risk they face. Unfortunately, this isn’t always the case. Keep reading to learn more about the disadvantages of Buy and Hold for retirees.

Market Downturns

The biggest disadvantage of Buy and Hold is dealing with market downturns. If the market crashes or there is a recession, you stand to lose a lot of money. For retirees, this is especially dangerous because they don’t necessarily have the time to “hold” as the downturn corrects itself. Imagine if the market experiences a downturn a year before you plan to retire. If all of your gains are erased, how will you make retirement work? Jack Bogle can preach Buy and Hold because he has enough money to tolerate heavy losses. However, normal investors may not have the safety net that Bogle has, so Buy and Hold isn’t the best strategy for them.

Length of Time

In order for Buy and Hold to work, an investor needs time. Yet if an investor chooses the wrong stocks and holds on to them year after year, he or she may not see any significant gains. Many Buy and Hold supporters recommend investing in index funds to avoid selecting the “wrong” stocks. However, even index funds are susceptible to events like market crashes. Today many Americans aren’t preparing for retirement soon enough. Therefore, they might not have the necessary time to employ a Buy and Hold strategy and see any meaningful returns by the time they’re ready to retire.

Self-Discipline

A large number of investors lose money due to their emotions. They either chase stocks that they believe will make them rich in the short run, or they sell when their stocks underperform. However, the Buy and Hold strategy requires an investor to ignore the urge to sell or buy whenever it strikes. Every investor finds it difficult to ignore these urges at various times. When it comes to savings for retirement, safety is the most important element. Yet if risk is managed correctly, it can be beneficial to a retiree’s investment strategy.

There are many alternative investment strategies to Buy and Hold that offer retirees more security and better returns. To learn more about the disadvantages of Buy and Hold as well as some alternatives read my article Jack Bogle Warns: Prepare for Two Massive Market Declines in The Next Decade (But Heeding His Advice Could Destroy Your Retirement).

Michael Morrow: Self-Directed IRAs vs. 401(k)s and Traditional IRAs

Self-Directed IRAs vs. 401(k)s and Traditional IRAs

When most people think about retirement savings they think of 401(k)s and IRAs. However, another option to consider are self-directed IRAs. While self-directed IRAs share a lot of similarities with 401(k)s and traditional IRAs, there are some important distinctions to consider. What sets self-directed IRAs apart from other options, though, are the variety of investment options available to you. Keep reading to learn more about the benefits of self-directed IRAs as well as some of the drawbacks of 401(k)s and traditional IRAs.

401(k) Drawbacks

  • There are numerous fees associated with 401(k)s, and most people don’t realize how much they’re even paying. Most of the time the fees aren’t even listed on your account statement. Over time these fees eat into your balance.
  • If you withdraw money from your account before the age of 59 ½, you’ll face penalties. Unfortunately, life doesn’t always go as planned. You might need to withdraw money due to divorce, job loss, or some other unforeseen circumstance. Take a look at this post to learn more about early withdrawal fees. In addition to the penalties, you will also have to deal with taxes. Any money taken out before the age of 59 ½ will be taxed as regular income.

IRA Drawbacks

  • Every IRA plan has contribution limits. If you contribute too much to your account, you will have to deal with IRS penalties. The penalties vary with age. For example, if you are under the age of fifty and you contribute too much, you’ll face a maximum penalty of $5,000. This article has more information on excess contributions.
  • When you reach the age of 70 ½, you have to withdraw funds from a traditional IRA account regardless of whether you need the money or not. Failing to withdraw the funds results in a penalty—typically a fifty percent tax on the minimum amount that was supposed to be withdrawn.

Self-Directed IRAs

A self-directed IRA is often a better option for investors. With a self-directed IRA, you can include assets like real estate rather than the traditional assets that most IRA accounts allow. Self-directed IRAs also offer tax benefits that aren’t available with traditional retirement options. As with every investment self-directed IRAs are not risk-free. However, investors who choose self-directed IRAs select assets that they understand well, so they are aware of the risks associated with the assets held in their self-directed IRAs.

Michael Morrow: How to Use Home Equity to Invest in Real Estate

How to Use Home Equity to Invest in Real Estate

If used properly you can take your home equity and transform it into an investment. Many people make the mistake of accessing their home equity for the wrong reasons. For example, using your home equity so that you can go on a lavish vacation or purchase an expensive car is just about the worst thing you can do. However, there are ways that you can leverage your home equity and put it to work as an investment. Specifically, if you use your home equity to invest in real estate, you can generate extra cash and set yourself up for retirement. Keep reading to learn more.

Line of Credit or Loan

When most people think of home equity, they think of home equity loans also known as second mortgages. Loans are popular options due to their low rates and favorable terms. However, there isn’t much flexibility with loans. You’re given the loan amount, and then you have to start paying it off. On the other hand, a home equity line of credit gives you more control. There is a maximum amount available to you, but you decide how much to take at and when. This way you don’t owe interest on money you don’t withdraw.

Risks

There is risk associated with every investment. Using home equity debt to invest in a property is no different. If there are issues with the investment property that cause you to miss payments on your home equity loan, you could end up losing both properties. Before you take out a home equity loan, make sure you are aware of the risk and you have a plan to continue paying even if something goes wrong.

Taxes

Home equity loans and lines of credit can usually be categorized as itemized deductions. As long as you don’t have to pay the Alternative minimum tax, you will be able to deduct up to $100,000 of your debt. When you use your home equity to purchase a rental property, though, you can list your debt and the rental property price on Schedule E. To learn more about Schedule E take a look at this link.

Buying Investment Property

Before you purchase an investment property make sure you have a plan to take care of potential home repairs. You should also have a good amount of money saved up to deal with such expenses. Having extra money saved up also comes in handy when you have trouble finding tenants to rent your property. While it is tempting to buy a cheap fixer-upper, sometimes they can be more work than they are worth—especially if you are inexperienced with rental properties and repairs.

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