Blog Archives - PFwise.com

Real Estate Investment Evaluation Model

6/30/2015

Q. I plan to buy a rental property as an investment. How do I evaluate its potential return?

A. There are many factors impact the return of your real estate investment. Some are under your control, some are not. Some are upfront decisions, some are future uncertainties. Some are property related, some are tenant-driven.

We have introduced a quasi-quantitative real estate evaluation model before, here we will introduce a truly quantitative real estate investment evaluation model that every investor could use to evaluate if a rental property is a good deal or not.

You just need to fill up the cells colored in yellow color with your estimated data, this model will return the projected NPV and IRR for this investment property. If you have a fairly high IRR, it's a good sign that the opportunity maybe a good deal. If not, pass it and keep looking for the next one.

Use Online Peer-to-Peer Fashion Marketplaces to Save Money

6/29/2015

Do you want to cash out the brand items that are left behind in your closet? Do you want to bargain hunt the hottest selling secondhand brand items? You should try those online peer-to-peer marketplaces, here are some of the better ones:

Tradesy (only for top designer items)
Liketwice (similar to Tradesy)
Vinted (Pinterest style marketplace)
The Realreal (the consignment store)
Grailed (for men's items only)

Are Rental Properties Good Investments?

6/28/2015

Q. Are rental properties good investments?

A. It's hard to say a specific investment is good or bad without the context of the investor's objectives and timelines. Below we will do a quick review a rental property's pros and cons, you will be the judge if it fits your objectives and timelines or not.

Major Pros of Rental Properties as Investments

Steady rental income (assume you could find a good tenant and the rental property doesn't require big maintenance expenses)
Tax benefits (interest expenses could offset rental incomes, depreciation of the property typically leads to paper loss which could reduce your tax liabilities)
Not as volatile as the stock market (this is for the long term, although in the short term, if you happen to buy the rental property at the peak time with little down payment, your equity could be wiped out easily)

Major Cons of Rental Properties as Investments

Poor liquidity (if you need access to capital quickly, rental property is not such a good source)
Not spectacular returns (historically, real estate's return is not as high as stocks, this is especially true if you buy the rental property with cash. What if you use leverage? You can run our real estate investment return calculator to find out more details about your rental property's return)
It's a job (managing a renal property is like finding yourself a part time job, too many small landlords get burned due to bad tenants and the nasty court process ensued)

We have introduced 3 ways to quantitatively evaluate a renal property's potential returns, check them out.

How Many Ways to Short a Stock or a Market?

6/27/2015

Q. I think the market has reached its peak and want to short it, how many ways I can short a market or a stock?

A. Here are the most common ways a regular investor can short a stock:

Sell short a stock or an index
Sell naked call
Buy a put of a stock or an index
Buy bear put spread
Buy bear call spread
Buy inverse ETF

Why Private REITs Are Bad For Regular Investors?

6/26/2015

Q. My financial advisor suggested me investing in some private REITs. Is that a good idea?

A. In one of our blog posts discussing different ways to investing in real estate, we introduced REITs as an effective way. REITs tend to distribute most of its earnings back to investors which make them great vehicles for retirees who need constant cash flows to cover daily expenses.

However, a warning is warranted here - be careful if you are working with a financial advisor and that person is directing your lifetime savings to private, instead of public, REITs.

2 Major Risks
There are two major risks associated with privately REITs:
a. Higher commissions for the sales people, which of course will hurt the investors' returns
b. You can't get out of them easily due to lack of liquidity.

A real sad story was shared at the edelmanfinancial.com, go check it out.

3 Ways to Play the Financial Sector If Fed Raises Rates - Part C

6/25/2015

In our last blog post, we recommended investing the conservative and proven winners in the financial sector when the Fed raises rates and inflation also goes up.

What if the Fed raises rates and slows down the economy?

There is one subsector within the Financial sector that could perform well in this scenario - Insurance companies!

Insurers' businesses don't depend heavily on a strong economy, raising rates could benefit insurers as the premium payments they collect from customers (to be paid later for claims) could earn the insurers higher return now.

Also, the demographic movement is on insurers, especially life insurance companies' favor - demand for life insurance and annuity could only grow with baby boomers age.

Any good play here? Go with a low cost ETF with diversified holdings - PowerShares KBW Insurance ETF (KBWI) is a good choice with only 0.35% annual fees, its average three year return is 25%.

3 Ways to Play the Financial Sector If Fed Raises Rates - Part B

6/24/2015

In our last blog post, we discussed which part of the Financial sector to invest if the Fed raises rates but there is no sign of inflation.

Now we will discuss another related scenario - when the Fed raises rates, inflation is also going up.

In this scenario, banks will generally perform well because despite their short term borrowing cost rises, their long term lending rates going up as well. But not all banks are created equal, there are a lot of banks' profits rely heavily on fixed income trading and installment debts which are vulnerable to rising rates, you can pick more conservative and well positioned big banks, such as Wells Fargo (WFC).

What if the Fed raises rates and slows down the economy? We will discuss this in our next blog post.

3 Best Free Apps For Car Travellers

6/23/2015

If you are planning your summer car travels, here are 3 mobile apps you better download now:

1. Gas Buddy
It provides crowd-sourced guide for the lowest gas prices across the U.S.

2. Scout
It provides turn-by-turn directions and recommendations for where to eat, stay, and more.

3. Road Trippers
It helps you find the best attractions along your route and saves the trip for easy access on the road.

3 Ways to Play the Financial Sector If Fed Raises Rates - Part A

6/23/2015

Q. If the Fed to raise the rate soon, is Financial sector the sector to be for investors?

A. It's hard to say, because there could be 3 likely scenarios associated with the Fed raising rates.

Fed raises rates because the economy is doing great, with no sign of inflation;
Fed raises rates because the economy is doing great, but inflation goes up;
Fed raises rates and slows down the economy.

Depending on which scenario will play out, the impact on financial sector's stocks could be dramatic.

If the Fed raises rates but there is no sign of inflation, banks could suffer. The reason is the banks' business model could be summarized as - borrow short term and lend long term. The Fed controls short term rates, but long term rates hinge on inflation expectation, if no sign of inflation, demand for long term bonds will rise, pushing prices higher and driving down yields. Banks suffer. Historical data also supports this statement, see below.

Average return after rate hike (since 1971, data source: S&P Capital IQ) -

Financials: -0.8%
S&P 500: 2.4%

In scenario 1, which subsector of Financials could outperform? Try local banks!

Local banks absorb local deposits, mostly with no interest checking accounts, therefore suffer less from the negativity from short term rate hikes. SPDR S&P Regional Banking ETF (KRE) is a good low cost tool to use to invest in this sector.

In our next blog post, we will discuss what to do in scenario 2.

The Worst Fees in America?

6/22/2015

Do you hate overdraft fees that hit you off guard because you are short a few cents in your checking account? How about you have to pay $100 for carry on bags? If you want to see what fees American consumers hate the most, you can check out an article from GoBankingRates.com - 31 Worst Fees in America!

As you pay attention to these annoying and outrages fees, you can take actions to prevent them from hitting you!

Websites Offer Free Tech Support Advices

6/21/2015

If you have some broken electronics, don't throw away, instead, seek free advice from the following reputable websites and fix them -

Are 401k or 403b Plans Free?

6/20/2015

Q. Are 401k plans free?

A. No, actually, 401k plans or 403b plans are quite expensive.

401(k) or 403(b) plans have great tax benefits, but that's thanks to the IRS policies. Inside 401k or 403b plans, there are some very costly options - very high fees that most plan participants don't even notice.

Based on Investment Company Institute and Lipper studies, the average 401k fees are below:

2003: 0.83%
2008: 0.72%
2013: 0.58%

Yes, these fees are slowly declining, and if your portfolio size is small, you won't notice at all. But at 0.58% expense ratio, if at your retirement time, you accumulated $1 million 401k portfolio, your annual expense could be $5,800!

The good news is, a recent supreme court ruling has made it possible for employees to sue employers who fail to provide the lowest possible mutual funds in the 401k/403b plans.

Top 10 Activist Investors

6/19/2015

Q. I am interested in following activist investors' actions. Who are the top activist investors?

A. Activist investors have had many successes in the past three decades, starting from corporate raiders (with Carl Icahn being the first of that group) to collaborative investors (working with corporate board and management teams to institute major changes), they put money where their mouths are.

It's a good idea to follow the best of the best activist investors, here is a list to consider (leader manager and number of active holdings in parentheses):

Carl Icahn (Carl Icahn, 18)
ValueAct Holdings LP (Jeffrey Libben, 14)
Pershing Square Capital Management, LP (William Ackmann, 6)
Jana Partners LLC (Barry Rosenstein, 53)
Greenlight Capital Inc (David Einhorn, 40)
Train Fund Management LP (Nelson Peltz, 11)
Relational Investors, LLC (Ralph V. Whitworth, 20)
Third Point, LLC (Daniel Loeb, 40)
Elliott Management Corporate (Paul Singer, 32)
Starboard Value LP (Jeffrey Smith, 26)

5 Ways to Reduce Car Insurance Rate Due to Adding a Teen Driver

6/18/2015

Q. I am about to add my teen age son to the family car insurance, how can I minimize the impact on the family auto insurance rate?

A. It's a fact that by adding a teen (especially boys 16-19) to a family car insurance, you could see rates double! Here are 5 ways every family could consider in order to lower such teen-driver impact on auto insurance rates:

1. Increase the Deductible
Increase the deductibles on collision coverage up to $1,000 on the car that is going to be driven by the new driver, this is where most of the premium associated with a young driver is.

2. Get an Accident and Ticket-forgiveness Policy
A new driver with a speeding ticket or an at-fault accident will double your rates. By spending a little more to get an accident and ticket-forgiveness policy, you can prevent rate hikes after an accident or a ticket.

3. Show Good Grades
Many insurers give discounts for students with good grades (usually B or better, and discounts could be as high as 25%), shop around for it.

4. Take a Defensive Driving Class
A defensive driving class is cheap and could be taken online, it could cut your auto insurance rate by 10-15%. Call your auto insurer first to make sure the course is approved by it.

5. Participate Driving Monitoring Programs
Some auto insurance companies offer programs that monitor driving habits, if your teen is a good driver, this will help lower the auto insurance premium.

How to Keep IRA Account in the U.S. When Moving Overseas?

6/18/2015

Q. I plan to move and live in overseas. Should I or can I keep my IRA account in the U.S.?

A. It's a good idea to keep the IRA accounts as they are today even you are moving overseas, so you can keep getting the tax benefits. However, the Patriot Act has led some brokerage firms close the financial accounts for people who cannot provide a U.S. mailing address.

But there are still some major ones allow you to keep your IRA accounts in the U.S. For example, Vanguar, Fidelity, and T. Rowe Price all allow their overseas clients to keep their IRAS with or without an U.S. mailing address, they will send distributions electronically or by check.

However, Federal government requires that 10% of a distribution be withheld for taxes for those without U.S. mailing addresses.

Best Online Banks

6/17/2015

Here is a list of top 10 best online banks based on GoBankingRates's research:

Ally Bank (no fee for checking account, best online interest rate, 24x7 live customer service)
Bank5 Connect (good rates, no fee, live customer service, but not 24x7)
Discover Bank
GE Capital Bank
Synchrony Bank
CIT Bank
Sallie Mae Bank
TIAA Direct
First Internet Bank
Barclays Bank

Are Target Date Funds the Same If They Have the Same Target Dates?

6/16/2015

Q. Are target date funds from different providers but with the same target date the same?

A. No. Target date funds are supposed to make an investor's life easier - a target date fund automatically reallocates the investment to different funds with different asset categories based on preset target dates, in this way, an investor doesn't have to worry about asset allocation, it's done by the pros.

Furthermore, many investors assume with two different target date funds, if they have the same target dates, then their risk levels are the same. Some investors even thought target date funds guarantee their returns at their retirement time.

The reality is with over 250 different target date funds out there, target date funds' performances could have a huge difference. For example, in 2008, for the 2010 target date funds, some dropped 3.6% and some dropped 41%!

Why such a big difference in performance? A key reason is different asset allocation between stocks and bonds. Some target date funds allocate 8% to stocks, while other funds with the same target dates could allocate 68% to stocks!

This certainly makes it very hard for an investor to choose the best target date funds - you need to dig into the fund's asset allocations and determine if that meet your risk tolerance level, the fund's sliding path, and the fund's expenses.

Best Personal Finance Websites

6/15/2015

Q. Which personal finance website(s) would you recommend?

A. There are many personal finance websites out there, most of them provide free services. The most famous one is Mint.com, which was acquired by Inituit a few years ago.

With Mint.com, you can manage all your finances in one place, and pay all your bills from one place. It sends you automatic alerts about coming bills and unusual transactions in your accounts.

Will Traffic Tickets Impact My Life Insurance Application?

6/14/2015

Q. I am applying for life insurance, I have received some traffic violation tickets in the past. Will these traffic tickets impact my life insurance premium?

A. It depends on how many tickets, what kind of traffic tickets, and how far back you have received them, different insurance carriers have different policies and therefore their final decisions could be different too.

If you only have 1 traffic moving violation ticket in the past 3 years, usually it's not a problem for you to get the best underwriting class (assume you meet with other criteria for the class) at most carriers.

However, if you have 2 or more traffic tickets, your options of getting the best underwriting class will drop a lot, as only a small number of insurers will consider you for their best underwriting class. For example, Banner and Transamerica will consider you for their best class, SBLI will consider the best class too if no more than 2 moving violation in the past 3 years and no reckless driving in the past 7 years, no license suspension within the last 3 years, no DUI/DWI in last 7 years.

If you plan to apply for life insurance and have multiple traffic tickets, please contact us to do a search for you first so you can find the most "friendlier" carrier in your situation then apply.

After Age 59.5: Traditional IRA or Roth IRA?

6/13/2015

Q. I just passed age 59 ½ and still working. Since the 10% penalty for pre-59 ½ IRA distributions is no longer an issue, should I contribute to IRA or Roth IRA?

A. The answer is it depends what's your use of the saved money.

1. Leave to beneficiaries
If you don't see the need for the money and are simply saving money for the ultimate beneficiaries, then the Roth makes sense.

2. Need retirement income
If you need the money for your own retirement use, then the decision on IRA or Roth IRA depends on the tax bracket when you start the distribution.

Also, don't forget the IRA tax impact (RMD from IRA would be considered as your income) on social security benefits. If your total annual income is above $44,000, then 85% of Social Security becomes taxable.

Free Online Mortgage Calculators

6/12/2015

You can find all sorts of free online mortgage calculators, below is a short list. If you can't find one that meets your needs, please feel free to contact us, we will provide one for you.

http://www.pfwise.com/tools.html

Growth or Value Investing: Which is Better? Part IV

6/11/2015

In our last blog post, we discussed what's value investing. Now we will look at the pros and cons of value investing.

Pros of Value Investing

Find devalued assets when others are panicking.
Avoid the hype and herd mentality.
Day-to-day price fluctuations and market volatility are not much of a concern to value investors because they are focused on the value of a business instead of external factors.

Cons of Value Investing

It can be difficult to determine if a stock has bottomed out or could continue falling further down.
The value company’s price could underperform for many years or may never rise.
May lose out on larger gains due to searching for companies with a margin of safety.
Poor liquidity due to the stock’s underperformance or low market cap.
Extensive fundamental research required.

Why A Higher Coupon Rate Bond Is Not More Attractive?

6/10/2015

Q. If a bond has coupon rate 3%, isn't it better than a bond with coupon rate 2%?

A. Unfortunately the answer is no, there is no free lunch in this world.

For fixed income investing, what matters is not coupon rate, but yield. If you want to buy the higher coupon rate bond, assume everything else being equal, you will have to pay a premium for it over a bond with 2% coupon rate.

In short, your yield will be the same on either the 2% coupon rate bond or the 3% coupon rate bond.

Growth or Value Investing: Which is Better? Part III

6/10/2015

In our last 2 blog posts, we discussed growth investing. Now we will turn to value investing.

What's Value Investing?

Value investing is not about buying stocks that have fallen or priced low. Value investors look for companies that are undervalued by the market. If and when the markets adjust upwards to the true valuation of those companies, value investors will be rewarded.

What are the characteristics of value companies? Value investors look at various aspects of a company such as its cash flow, earnings, book value, and business model, for example:

D / E ratio < 1
PEG ratio < 1
Market Cap < Book Value
Cash > Market Cap
Current assets at least 2 times current liabilities

In our next blog post, we will look at the pros and cons of value investing.

Growth or Value Investing: Which is Better? Part II

6/9/2015

In our last blog post, we discussed what's growth investing. Now we will discuss the pros and cons of growth investing.

Pros of Growth Investing

Investors can gain exposure to cutting edge industries that are rapidly evolving.
It could be emotionally rewarding to watch the fast gain of stock prices.
Successful investments may appreciate much faster than the overall market.

Cons of Growth Investing

Higher risk and volatility.
Dividends are rare as most growth companies reinvest their earnings.
Time intensive to evaluate the credibility of various growth projection estimates.
Valuations could be much higher than the market average to reflect projected growth that may never materialize.

In next blog post, we will take a look at what's value investing.