Archive for July, 2014:

Bob Farrell’s 10 investing rules

Written on July 9th, 2014 by Jamesno shouts

This never gets old and every few years I like to dust this off and post it on the blog.  I have a shortcut on my computer to this article on and click on it every now and then when I need a reminder.  Uncanny, how just a few months after this originally posted on Marketwatch the market imploded.

Bob Farrell was a pioneering technical analyst that worked with Merrill Lynch as far back as the 1950′s, so he saw it all.  He came up with his 10 rules for investing, which have proven time and time again to be correct.  From the article by Jonathan Burton on June 8th, 2008:

1. Markets tend to return to the mean over time

By “return to the mean,” Farrell means that when stocks go too far in one direction, they come back. If that sounds elementary, then remember that both euphoric and pessimistic markets can cloud people’s heads.

2. Excesses in one direction will lead to an opposite excess in the other direction

Think of the market as a constant dieter who struggles to stay within a desired weight range but can’t always hit the mark.

3. There are no new eras — excesses are never permanent

This harkens to the first two rules. Many investors try to find the latest hot sector, and soon a fever builds that “this time it’s different.” Of course, it never really is. When that sector cools, individual shareholders are usually among the last to know and are forced to sell at lower prices.

4. Exponential rapidly rising or falling markets usually go further than you think, but they do not correct by going sideways

This is Farrell’s way of saying that a popular sector can stay hot for a long while, but will fall hard when a correction comes. Chinese stocks not long ago were market darlings posting parabolic gains, but investors who came late to this party have been sorry.

5. The public buys the most at the top and the least at the bottom

Sure, and if they didn’t, contrarian-minded investors would have nothing to crow about. Accordingly, many market technicians use sentiment indicators to gauge investor pessimism or optimism, then recommend that investors head in the opposite direction.

6. Fear and greed are stronger than long-term resolve

Investors can be their own worst enemy, particularly when emotions take hold.

7. Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names

Markets and individual sectors can move in powerful waves that take all boats up or down in their wake. There’s strength in numbers, and such broad momentum is hard to stop, Farrell observes. In these conditions you either lead, follow or get out of the way.

8. Bear markets have three stages — sharp down, reflexive rebound and a drawn-out fundamental downtrend

9. When all the experts and forecasts agree — something else is going to happen

As Stovall, the S&P investment strategist, puts it: “If everybody’s optimistic, who is left to buy? If everybody’s pessimistic, who’s left to sell?”

Going against the herd as Farrell repeatedly suggests can be very profitable, especially for patient buyers who raise cash from frothy markets and reinvest it when sentiment is darkest.

10. Bull markets are more fun than bear markets

No kidding.


What is a Reverse Mortage?

Written on July 7th, 2014 by Jamesno shouts

With the multitude of Reverse Mortgage commercials on TV, thought a little refresher on this product might be in order.  So the biggest thing is just defining what exactly a Reverse Mortgage is?

A Reverse Mortgage (more commonly called a Home Equity Conversion Mortgage or HECM for short), is basically exactly as it sounds, it is borrowing against the equity in your home but it differs from a Home Equity Loan or Home Equity Line of Credit in many ways:

  • This tool was created by the Federal Government and administered by HUD as a way for seniors to tap the equity in their primary residence for retirement funds.
  • You have to be age 62 or older and this can only be used with your principal residence (no rental properties)
  • The loan amount is based off the youngest borrowers age, home value, equity and interest rates. (can be north of $600k)
  • The biggest difference between the HECM and a traditional home equity loan?  You don’t have any monthly payments.  You are extracting some of the equity in your home and deferring all payments until you sell the house or the last remaining borrower permanently leaves (either by selling or death)
  • You the borrower are still responsible for upkeep of your home, property taxes and insurance.
  • When you are no longer around, your heirs can either pay off the HECM and keep the home or hand over the keys.
  • Since you are borrowing against the equity in your home it is a non-taxable event and you can use the money however you wish.  (supplemental retirement income, travel, long term care, buy a vacation home, etc)

Because of the nature of this type of a loan there are certain requirements that borrowers have to adhere to, the most important is to speak with a HUD counselor prior to the loan to make sure you understand the pros/cons of the product.

As a planner, I can see the benefits of this type of tool for retirees in specific circumstances, but I also understand that there are potential drawbacks.  The biggest thing you must realize is that the loan amount you borrow begins accruing deferred interest that eventually must be paid back.  If you take out a HECM loan then you pretty much need to plan on staying in the home throughout your lifetime since you are giving up your home equity.  There won’t be much left in the way of profits if you decide to sell your home 10 or 15 years down the road to try and downsize.  Outside of that drawback, this is a tool that could provide some much needed funding for retirees low on cash, just do your homework before proceeding.

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