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The Myth of Taking Equity from Your House

You aren't smarter than the market. It really is that simple.

The idea that you can "take money" out of your home is a common myth that gets a lot of people in trouble in a hot real estate market. It is a myth that is based on several misunderstandings that are often repeated.

Myth 1: When an investment you own goes up in value you have "made money."

In fact, you only make money from an asset's appreciation when you sell the asset. Until then, the current valuation is just an estimate of how much money you will make when you actually sell it. As long as you still own the asset, the value you will get is still in play. It isn't money. This is particularly important with a home. If you want to take your profit out of your house you have to sell it and that usually means replacing it with another home.

Myth 2:  Refinancing  "takes your equity" out of your house.

This myth is particularly pernicious. In fact, the description of people "using …
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The Stock Market hasn't gone up, the Value of the Dollar has Just Gone Down.

You aren't smarter than the market. It really is that simple.

The New York Times had an article about the stock market's recent gains. The story noted that while the market had gone up 11% since the election, the dollar had dropped 10% against a basket of foreign currencies during that same period. They described this as "almost a mirror image."

Unfortunately it is exactly a mirror image for people who hold those foreign currencies. Lets say they paid a $100 for a share of stock the day of the election and they exchanged 100 units of their own currency for that $100. Now if they sell that stock they will get $111 dollars, but when they exchange that $111 dollars, they will get back 100 units of their own currency. They have earned nothing, in their own local currency's terms the price hasn't changed.

In a world investment market, the price of stock is set by what people around the world are willing to pay for it. Most people are still paying the same price fo…

How Safe is Gold?

As often happens when the markets are bouncing up and down, some people are turning to the "safe haven" of gold. But how safe is gold?

Gold has several attributes that make it attractive:

1) Gold is durable. In fact, some of the gold you buy today was probably mined by the Inca's thousands of years ago.

2) Gold is universal. With very few exceptions, gold always has value. This is true historically. And no matter where you go today you can likely trade gold for other goods either directly or by converting it into the local currency.

3) Gold is portable. While heavy, gold packs a lot of value in a small package.

4) Gold is beautiful. You can store it as jewelry or other decorative art.

So if you are looking for an investment that will last a 1000's of years and still hold value, gold is a great commodity. Or if you are looking for something that will be likely to survive a complete societal breakdown like a war. However, when you start to look at likely financial cond…

Self-Directed Real Estate IRA's the New Scam?

You aren't smarter than the market. It really is that simple.


You know the marketing folks have been out talking when the New York Times does a fluff story on some new way to make more money with your investments. So watch out for the new scam promoted by the same media advisers who told you a few years ago to buy the most expensive house a lender would finance.

Paul Sullivan story is about people'e successful investment of their retirement money in real estate using a self-directed IRA. He provides us with several "success stories".  Of course they are all recent converters to this idea and, not surprising, all but one of the people whose story Sullivan tells are also in real estate sales.

The problem isn't really Paul Sullivan. Its that there is no one who makes money by digging out the horror stories from people who invested their retirement funds in real estate at the height of the housing bubble. There aren't any public relations firms devoted to debunk…

Traditional IRA and Roth IRA Contributions are Not Equivalent

The Minneapolis Star-Tribune financial advice columnist, Chris Farrell has an article in the Sunday May 1, 2011 edition that epitomizes the results of over-simplified financial analysis. For some reason, most of the media's financial advisers seem intent on ignoring the complexity of comparing Roth and IRA contributions and the result is often poor advice. Let's take a look at the media's conventional wisdom and how it compares to reality.
Most media financial columnists will say that an IRA and a Roth contribution are equivalent assuming that your tax rate is the same on both ends. If you expect your taxes to be lower in retirement, then the IRA will give you a better return. If not, then the Roth is probably a better investment. On one level this is accurate.
If you put $100 into a Roth IRA and are in the 25% tax bracket, you will have spent $125 including the taxes. Lets assume your investments break even over the next ten years and then you withdraw the balance of the a…

Taming the Risk of Markets

You aren't smarter than the market. It really is that simple.
A few years ago, in October 2008 right after the market "crash", I did a post on confusing volatility and risk. Yesterday an article on CNN Money in their "Ask the Expert" column made it clear that confusion about the risk of volatility extends to the media who provide advice on personal finances.
You can read the column for details. But the short version is that someone approaching retirement asked for advice on changing the balance between different assets in their retirement accounts to reduce its overall risk. Specifically they wanted to know "Should we rebalance all at once or slowly over time?"
The columnist response was all at once. His argument was "by transitioning to the new asset mix over time, you're really postponing (or perhaps more accurately, undermining) your decision to re-set the risk-reward balance in your portfolio."
This is just plain bad advice. The m…

The T-Party Movement and Running Government Like a Business

There is a media narrative out there about the T-party that it is made up of people who are angry because they lost their jobs or fear losing their jobs. The actual demographics of T-party supporters don't really reflect this at all. Instead, the typical T-party adherent is male, moderately well to do and in his 40's. Of course, not all fit that demographic. But far from being "trailer trash" as some people imagine, the T-party folks have been relatively successful.
So why are they angry? Because they fear life is getting worse, rather than better. And they, as individuals, react psychologically to their fears by getting angry, as opposed to other extreme of going to bed and pulling the covers over their head. But to focus on the causes of their anger, which are mostly personal psychology, is to ignore the causes of their fear.
Of course, we can't expect politicians or the media to address those causes. Success in politics requires validating that fear and ange…