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Re: Noob Investor Here
wfsaxton--
For what it's worth, I was recently in the position of being a 'noob' investor -- young, some small amount of capital, and eager to buy housing. That was in 2004, when I was 28. Actually, come to think of it, I started at $70k -- so I was pretty much in your shoes.
I did what Jim Nickerson has suggested to you, which is to start by educating myself. The first book I read was The Intelligent Investor by Benjamin Graham (with commentary by Jason Zweig). That is considered the bible of value investing (as opposed to speculation). However, its approach is more-or-less agnostic about macroeconomics. This has the advantage that you need not speculate correctly about the direction of the economy -- Warren Buffett is the most famous practitioner of this style, and he's done alright for himself. He recently said in an interview that although he has definite ideas about the direction of the economy, he doesn't "invest a cent" based upon his macroeconomic views. (I'm not sure this is so, since he was an early dollar-bear, but I digress.)
I also read "The Economist" magazine (well, they call themselves a newspaper) out of the UK. They strike me as the best of the main-stream financial press. However, you can't read The Economist for very long before you start to wonder about macroeconomics. I'm a physical scientist by trade, and I have a passion for understanding how stuff works. As I read stories from The Economist and other areas of the financial press, I started to get a feel for some basic macroeconomics -- for instance, simple relationships such as inflation, interest rates, the money supply, etc. I also started to form some opinions about what was likely to happen... and it wasn't good. This was before the housing bubble was widely recognized. At this point, I became convinced that I could improve upon pure value investing -- and started to target my investments for macro conditions.
Once I decided to engage in macro investing, it became very important to flesh out my view of the macro picture and find some reliable sources of information. Here there's a problem, because you will find countless conflicting viewpoints out there. I think that my scientific training gives me a nose for rational and objective arguments, and helps me find the holes in weak arguments, so after a few months of reading, I came to some very definite conclusions about who was right, and who was full of rat droppings and sawdust. I got to iTulip somewhat late (I had concluded that the housing market was a bubble before I was exposed to iTulip's arguments in this regard, although iTulip's statement of the bubble predates my own investigation). Anyway, a friend tipped me off to iTulip, and I found the quality of the analysis to be very high.
At that point, maybe two years into my investing career (in 2006, at the age of 30) I had developed a fairly comprehensive macroeconomic world view, and was prepared to invest accordingly. My own trajectory has been from energy in 2004 (originally what I felt was a pure value play) to Canadian and Norwegian indexes in about 2006 (I thought of that as a dollar hedge) to precious metals in 2007. Obviously, my timing hasn't always been perfect, but I've made good returns thus far. For me, the best call was in late August of last year. At this point, it was pretty clear that the problems in the subprime mortgage market were playing out pretty much like iTulip had predicted, yet the markets had staged a rally to new heights (DJIA around 14,000). I bought a bunch of long-dated puts against the DJIA, and doubled my money when the rest of the market caught up to the reality of the crisis. That was the point at which I paid for a premium subscription to iTulip, since that was almost 100% an iTulip-inspired trade.
Bear in mind that my free advice is worth exactly what you pay for it. However, if I were you, I most definitely wouldn't buy the condo -- not with zero down, and not now. In the first place, you shouldn't buy a condo anyway, because that gives you all the luxury of an apartment with all the hastles of home-ownership. (That, and condos are often built in a hurry during housing booms, with inferior craftsmanship, precisely because they are priced such that they are an easy entry point for speculators.) Second, never EVER buy a property with zero down. You need an equity cushion to weather fluctuations in property value, plus the terms of your mortgage will most likely be BAD. Finally, we're nowhere near the bottom of the housing market, so now is still a bad time to buy. My wife and I have been saving up for a house for four years, and we've got a bit over $100k put away (which is 20% of a rather nice house in our area)... yet we still rent. Why? Because the market hasn't bottomed, and because we're able to rent a very nice home with a yard and garden in a good location for about as much as we'd pay in mortgage interest. So long as the rent and the mortgage interest are a wash, renting gives you greater flexibility and lower risk. You can be very comfortable indeed in a rented house, and it should allow you to save up a bigger down payment for when it's a good time to buy. (You may not be able to sock away $100k in four years, but I had some help -- I was lucky enough to marry a good engineer, plus -- as I mentioned -- I've had pretty good returns.)
Again, take this for what it's worth, but I'd suggest you stay out of the stock market for now. The market may or may not drop like a rock later this year -- it all would seem to depend upon whether the recession is short and shallow or long and deep. If it's the latter, then formerly-sanguine people are going to bail out of the market in despair once it becomes obvious that the rosy scenario ain't going to happen. At best, there's no way that earnings are going to rise gang-busters, so if the recession is short and shallow, you will have time to get in later anyway. You might consider parking your investments in Treasury inflation-protected securities (TIPS) -- although I gather they're rather expensive right now, and of course they don't adequately index for inflation. Still, they are the "plain vanilla" way to try to shield your stake from inflation.
Finally... the Roth. I'd say the odds are about 90% or better that income tax rates are going to rise. I could write for days about the federal government's budget problems (including a nice little feedback loop in which it loans money to itself and pays itself interest... which it borrows from itself to do so). Anyway, if you're young, taking the income tax hit now makes a lot of sense... assuming you are planning to use the money much later. (Otherwise, I guess it would be a wash.) In all probability, both the income tax rates, and your own tax bracket, will be higher down the road. Technically, if your tax rate stays the same, and you reduce the amount you invest in a Roth by the tax you have to pay on it, the Roth and Traditional IRAs are supposed to be equivalent. However, my take is that the tax rates won't be the same, so you should come out ahead with a Roth as a young guy. The only question, I think, is whether the federal government actually holds the Roth investments sacrosanct another decade or two from now, when they'll be really strapped for cash. (Jim Jubak of MSN money recently broached this question. I know the iTulip community doesn't like fluff like MSN Money, but Jubak is okay -- he doesn't always get the macroeconomics right, but he's usually a good and sane read.)
Okay -- this was very long, and I don't know how useful it was, but as another (relative) noob to a noob -- good luck!
wfsaxton--
For what it's worth, I was recently in the position of being a 'noob' investor -- young, some small amount of capital, and eager to buy housing. That was in 2004, when I was 28. Actually, come to think of it, I started at $70k -- so I was pretty much in your shoes.
I did what Jim Nickerson has suggested to you, which is to start by educating myself. The first book I read was The Intelligent Investor by Benjamin Graham (with commentary by Jason Zweig). That is considered the bible of value investing (as opposed to speculation). However, its approach is more-or-less agnostic about macroeconomics. This has the advantage that you need not speculate correctly about the direction of the economy -- Warren Buffett is the most famous practitioner of this style, and he's done alright for himself. He recently said in an interview that although he has definite ideas about the direction of the economy, he doesn't "invest a cent" based upon his macroeconomic views. (I'm not sure this is so, since he was an early dollar-bear, but I digress.)
I also read "The Economist" magazine (well, they call themselves a newspaper) out of the UK. They strike me as the best of the main-stream financial press. However, you can't read The Economist for very long before you start to wonder about macroeconomics. I'm a physical scientist by trade, and I have a passion for understanding how stuff works. As I read stories from The Economist and other areas of the financial press, I started to get a feel for some basic macroeconomics -- for instance, simple relationships such as inflation, interest rates, the money supply, etc. I also started to form some opinions about what was likely to happen... and it wasn't good. This was before the housing bubble was widely recognized. At this point, I became convinced that I could improve upon pure value investing -- and started to target my investments for macro conditions.
Once I decided to engage in macro investing, it became very important to flesh out my view of the macro picture and find some reliable sources of information. Here there's a problem, because you will find countless conflicting viewpoints out there. I think that my scientific training gives me a nose for rational and objective arguments, and helps me find the holes in weak arguments, so after a few months of reading, I came to some very definite conclusions about who was right, and who was full of rat droppings and sawdust. I got to iTulip somewhat late (I had concluded that the housing market was a bubble before I was exposed to iTulip's arguments in this regard, although iTulip's statement of the bubble predates my own investigation). Anyway, a friend tipped me off to iTulip, and I found the quality of the analysis to be very high.
At that point, maybe two years into my investing career (in 2006, at the age of 30) I had developed a fairly comprehensive macroeconomic world view, and was prepared to invest accordingly. My own trajectory has been from energy in 2004 (originally what I felt was a pure value play) to Canadian and Norwegian indexes in about 2006 (I thought of that as a dollar hedge) to precious metals in 2007. Obviously, my timing hasn't always been perfect, but I've made good returns thus far. For me, the best call was in late August of last year. At this point, it was pretty clear that the problems in the subprime mortgage market were playing out pretty much like iTulip had predicted, yet the markets had staged a rally to new heights (DJIA around 14,000). I bought a bunch of long-dated puts against the DJIA, and doubled my money when the rest of the market caught up to the reality of the crisis. That was the point at which I paid for a premium subscription to iTulip, since that was almost 100% an iTulip-inspired trade.
Bear in mind that my free advice is worth exactly what you pay for it. However, if I were you, I most definitely wouldn't buy the condo -- not with zero down, and not now. In the first place, you shouldn't buy a condo anyway, because that gives you all the luxury of an apartment with all the hastles of home-ownership. (That, and condos are often built in a hurry during housing booms, with inferior craftsmanship, precisely because they are priced such that they are an easy entry point for speculators.) Second, never EVER buy a property with zero down. You need an equity cushion to weather fluctuations in property value, plus the terms of your mortgage will most likely be BAD. Finally, we're nowhere near the bottom of the housing market, so now is still a bad time to buy. My wife and I have been saving up for a house for four years, and we've got a bit over $100k put away (which is 20% of a rather nice house in our area)... yet we still rent. Why? Because the market hasn't bottomed, and because we're able to rent a very nice home with a yard and garden in a good location for about as much as we'd pay in mortgage interest. So long as the rent and the mortgage interest are a wash, renting gives you greater flexibility and lower risk. You can be very comfortable indeed in a rented house, and it should allow you to save up a bigger down payment for when it's a good time to buy. (You may not be able to sock away $100k in four years, but I had some help -- I was lucky enough to marry a good engineer, plus -- as I mentioned -- I've had pretty good returns.)
Again, take this for what it's worth, but I'd suggest you stay out of the stock market for now. The market may or may not drop like a rock later this year -- it all would seem to depend upon whether the recession is short and shallow or long and deep. If it's the latter, then formerly-sanguine people are going to bail out of the market in despair once it becomes obvious that the rosy scenario ain't going to happen. At best, there's no way that earnings are going to rise gang-busters, so if the recession is short and shallow, you will have time to get in later anyway. You might consider parking your investments in Treasury inflation-protected securities (TIPS) -- although I gather they're rather expensive right now, and of course they don't adequately index for inflation. Still, they are the "plain vanilla" way to try to shield your stake from inflation.
Finally... the Roth. I'd say the odds are about 90% or better that income tax rates are going to rise. I could write for days about the federal government's budget problems (including a nice little feedback loop in which it loans money to itself and pays itself interest... which it borrows from itself to do so). Anyway, if you're young, taking the income tax hit now makes a lot of sense... assuming you are planning to use the money much later. (Otherwise, I guess it would be a wash.) In all probability, both the income tax rates, and your own tax bracket, will be higher down the road. Technically, if your tax rate stays the same, and you reduce the amount you invest in a Roth by the tax you have to pay on it, the Roth and Traditional IRAs are supposed to be equivalent. However, my take is that the tax rates won't be the same, so you should come out ahead with a Roth as a young guy. The only question, I think, is whether the federal government actually holds the Roth investments sacrosanct another decade or two from now, when they'll be really strapped for cash. (Jim Jubak of MSN money recently broached this question. I know the iTulip community doesn't like fluff like MSN Money, but Jubak is okay -- he doesn't always get the macroeconomics right, but he's usually a good and sane read.)
Okay -- this was very long, and I don't know how useful it was, but as another (relative) noob to a noob -- good luck!
), would benefit a lot from it. Thanks in advance, the user's of this site are incredibly supportive and I know it's appreciated.
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