bostonbubble.com

[balor123]

Bet on housing with Shiller's new ETF

Nice thing about the ETF is that it can be traded more often than every 2 months and, most likely, with higher volume than futures. Downside is there's fewer choices available. Still, it's not a bad way to hedge a bet on housing.

And if you like to gamble on housing, then you could trade derivatives like options, preferably on borrowed money. Or you could just go out and buy a house (granted not as diversified), which will likely make you an even bigger gambler as you can lever 5x or more! Why did/do we think that housing doesn't present a systemic risk to the economy again?

[GenXer]

Houses, gold, commodities are great for day traders, because they are extremely volatile, but as far as returns - they are terrible (long or short term), and they do not pay a dividend, which accounts for almost half (at least 40%) of the returns of S&P500, for example. Also, these ETFs are not diversified - they are all in residential real estate, or as concentrated as it gets.

Just as with any commodity ETFs, day traders (and institutional day traders) will use these (due to their volatility) to try to make (and lose) money quickly. These ETFs are completely useless as a hedge against anything, so don't get your hopes up.

On the brighter side, the best way to bet on housing will probably have to be REITs, which typically can be geographically diversified (though still not truly diversified). Day traders also like these, but the advantage is that REITs pass through income and currently yield upwards of 10% (down 65% or more from their peak. Its a long bet, but then again, dividends are the best way to go, with a possibility of capital appreciation in the future. However, REITs can still lose a lot, and many may close. There are REIT ETFs (IYR, VNQ are two examples, VNQ has 13% yield).

[balor123]

That requirement to pay dividends for REITs is part of their problem. Not taxable account friendly.

[GenXer]

Right! But I bet most people are not even using the available qualified non-taxable accounts which are great for REITs.

[balor123]

For many years most people weren't even saving, much less saving in the right places. Most people shouldn't touch REITs, though, because they already have significant exposure to real estate through their houses. Even if they did want to save the money, the industry is so crooked that everyone has to be an expert in personal finance to avoid being scammed. How much money is wasted as a result of conflicts of interest? Check out this article about Fidelity: Ex-Fidelity brokers claim sales pressure
. I especially love the quote:

[GenXer]

While a house is an investment, for most people this investment dwarfs anything they have in their portfolio, so if you think of a house as part of your investmnet portfolio, not only is it a terrible investment, but it makes your portfolio totally vulnerable and non-diversified, especially if you've sunk all of your money into the house. So it may make sense to build your portfolio FIRST before buying a house, at least on the order of the cost of the house (to avoid the problem many people have later, when their house value plunges 50%, especially if they paid it out and have all of their money locked in the house). The only 'hedge' against falling house prices is a well-diversified portfolio!

REITs have a place as part of a portfolio, because they represent an asset class which is good to have, especially in a long term tax-deferred account.

This by the way is a tip of an iceberg. Fidelity products aren't the worst out there. Try annuities. This is where you'll find plenty of big scams. As far as investment advice, I've seen plenty of CFPs whose compensation comes from many different sources for selling products to clients. CFP in and of itself does not guarantee that you are getting unbiased advice. However, ask anybody on the street - and they could care less whether one has a CFP or a CFA? The answer is no! They just want unbiased investment advice, and if they can get it, they'll overlook everything else.

[balor123]

You could exclude the house from your portfolio if you considered it a sunk cost. That might work in Texas but not in high cost of living places like Boston. Most of us are forced to consider it in our portfolios because if we lived in a house which could be considered as a sunk cost it wouldn't be in or remotely near Boston (then you have commute costs, which are real sunk costs!).

You are correct that housing is (or should be) a terrible investment. Unfortunately, Bostoners have learned that they can use politics to make it a good investment in the sense that it has become one giant ponzi scheme. Those same people are building themselves affordable retirement homes here while keeping prices high for the next generation. It seems like that trend is ending though and I certainly wouldn't have planned on it increasing. Anyway, the point is if you can't afford to lose the money in your home then you need to make your portfolio as diversified as possible considering the home as part of your portfolio, and that means avoiding real estate because it is unlikely that you'll have enough outside of your home to justify adding more.

I agree that most Fidelity products aren't bad. They've also gotten better over the years to remain competitive but when it comes to advice there are still plenty of conflicts of interest and I think even the most ethical will at best disclose it. Amercians need to make smart financial decisions for capitalism to work. Mortgage brokers are getting all the attention but most of these people could also have been helped by a good financial planner but they avoid them because they have a reputation for sucking money out of your pocket. I don't know why regulations haven't appeared to eliminate the conflicts of interest. Maybe there's more people providing financial advice than I realize (and thus have a strong lobby).

[john p]

You know many people are conditioned to say that a "house isn't an investment".

This is kind of semantics.

Whatever you want to call it, you have a mortgage.... I see it as an investment because an investment is a place where you park any asset or liablity is an investment. For example, you can invest your time at a bar. Some investments are negative as far as cash flow, things we consume and the return is quality of life. We have to decide how much quality of life we enjoy along the way. Some bottle it up until they retire and others space it out. The community you choose is also an investment. The older I get the more I value the meaning of SOCIETY. think about the word society. Societies are a very important thing in your life. In the past generation people have often moved away from family and friends in order to follow their dreams. Often times people don't end up doing exactly what they want and when you step back, often times they might have been better off in a place where they could grow up around loved ones. Opening your eyes to that is kind of important but when I crunch the numbers sometimes I lose sight of that. It is really nice for me to hear my sister's kids voices on the phone. I was phoning my God Child the other day from the train. I wanted to say "Uncle Johnny is taking the choo-choo train home, or taking Thomas the Train home". The problem was that he had out grown that stuff and now he's playing t-ball. Time goes by very, very fast and you have to catch the waves in life and ride them. You often don't regret the things you do, you regret the things you don't do. Inaction is an investment decision.

Getting closer to the numbers, a mortgage as an investment kind of factors in a number of things: tax shelter of mortgage interest and property tax (good), maintenance (bad), and other climatic stuff like hedging inflation or deflation. The second level of analysis is in the alternative as to where you could spend your money. In my MBA a lot of analysis was comparing alternative investment vehicles. What I loved about many of my colleagues was that they didn't care what the hell they invested in, they just factored in risk factor and return. This mentality gave them the freedom to pull the plug on one type of investment and plug into another no matter what the subject matter. Because I INVESTED in architecture and planning, it was hard for me to see any other business model. Some of the posters here often talk about viewing housing in another paradigm, meaning rent and grow your wealth in another investment vehicle. Honestly, in some of these tony towns, I have to agree with them.

[GenXer]

Ok, lets put things in perspective. When you pay rent, you don't say that you are investing in your landlord's apartment or house? Its an expense. A house is an expense. It can be an investment, in a sense that it can lose a lot of value, but at the same time, its an expense. If what you are paying for the house, including the mainenance and all the other costs are on the order of what you would be paying for an equivalent house if you were renting, then it can be considered an EXPENSE, an not an investment. It may or may not appreciate, but if you treat a house as an expense, you are all set. People who treat houses as 'investments' are typically those who paid too much for it, and now they need to get the money back. Many of them put MORE into the house than they could get back when they sell it, so they hope that their 'investment' appreciates (even if you hold the house for 30 years, after which you may sink a lot into it, you may get back very little). This is psychology - people who pay for a stock, and see the stock sink 50% hope that it comes back up before cutting their losses. They are simply trying to rationalize their loss, rather than confront the root of the problem - stocks are volatile and can lose a lot of value and may NEVER RECOVER (another psychological problem for many to overcome).

REITs are great diversifier, and as part of a tax-deferred portfolio REITs are a great investment, because they pay a huge dividend when the index is down (50% down, dividend doubles), and therefore it fits the 'value' investing approach very well, while mitigating the risk of owning a single stock (or an 'investment' property). Also, REITs (if truly an index) will track the market closely, giving you a chance to participate in market growth. Why should all investments be hedged? We truly forget that sometimes getting market returns can beat anything that hedges can provide! Of course, REITs are extremely risky, and should constitute a small portion of an overall portfolio.

Just focus on the basics. No need to overanalyze and overhypothesize. This is the problem many people have. They are not sure how to make use of all of the information out there, so they start putting it together in different arrangements to suit their fancy. There is one objective truth - the markets are scalable power laws, and there is nothing we can do about it, as we can neither predict nor make money on our predictions, so try to cast as wide a net as possible while making sure that the base is solid (i.e. approaching the rent vs. buy problem appropriately, as it is the biggest expense most people undertake in life).

[john p]

I get what you're saying (Gen-Xer) about what you qualify as "investment" but I think when you narrow it down to just the elements that appreciate or bring in some sort of dividend you tend to ignore other resources.

Oh, and before I forget, please, please expand on this and define it, I am very curious to know more about it.

[GenXer]

http://www.allbusiness.com/trade-development/economic-development/11744344-1.html
http://www.nature.com/nature/journal/v423/n6937/abs/nature01624.html

While I wouldn't be jumping up and down in anticipation of actually using their results to predict anything (or to explain why the power law works for the stock market, or what the exponent is), I'd venture out to say that this is the law of nature. You can't explain nature - you can simply study it and understand the implications. Those who are too ignorant or too intellectually lazy to do so will be left behind, no matter who they are - elites or not. In fact, it is the 'elites' with their billions that lost a lot more than the average joe, because they risked too much too quickly, relying on old school scammers (i.e. money managers) with the old school knowledge which is currently obsolete. This applies to almost everybody who was raised with the 'modern portfolio theory' hypothesis without actually having neither the proof that it works nor the tools to study the markets objectively.

Bottom line: forget everything you think know about the stock market. You may get lucky a few times, but when it matters most, you will get hurt if you do not understand the implications of the power law theory. In a nut shell, it tells us more about what the stock market is NOT rather than what it is. Negative information is also information, but it has to be used in a different way, though in the end this information is more useful than everything we think we know about the stock market.

[john p]

Those articles were very good.

It sounds like technical analysis on acid.

I remember after I graduated MBA in the early 2000's sitting and talking with a friend of mine at Harvard Square where they play chess by that coffee shop. Anyway, the stock market was correcting and he told me of this new way that firms were making money: riding the bumps with high volume trades. I think these firms started to understand that their activities were actually making echos. I know when I get in the tub with my wife, the water level goes up (TMI). I think this is sort of the notion when these big mutal funds come in and make a big transaction.

Investors know how to leave a big footprint and learn how to play with the echos. You then take into account that different nations monkey with their currency and that changes alot too.

Thanks for the take away, I've got something to let my brain chew on.

[admin]

Here are some more details on how the new ETFs, mentioned at the start of this thread, will work:

http://www.investmentu.com/IUEL/2009/April/hedging-home-value-with-etfs.html

- admin

[GenXer]

[GenXer]

A (cautionary) word about ETFs which use leverage: