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Q&A with Jacci Geiger, Realtor with Kentwood Cherry Creek

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Denver Real Estate Market Update

Q&A with Jacci Geiger, Realtor with Kentwood Cherry Creek

The influx of people moving to Denver over the last 10 years coupled with the diverse, local economy has created one of the most robust housing markets in the nation. Today, we interview one of the top real estate agents in the Denver area, Jacci Geiger. She will provide insight into Denver’s housing market during a time of historically low interest rates and uncertainties surrounding COVID-19.

Question: What is your outlook for the Denver Real Estate Market? 

Answer: Great question. To address it pre COVID-19, we started the season with a bang. As agents, we noticed the market “turned on” much earlier in the year than normal. We like to think our market is controlled by the weather and the school calendar, but if you recall, we had one of the wettest Februarys on record, and from January 1, 2020 until the present we have closed 13,619 houses. That is a fantastic first quarter!  Depending on the price range, we are seeing the market start to level off, which is healthy. I have written many contracts in the mid $500,000’s that are still seeing multiple offers. The luxury market, $1 million and above, is seeing more of a balanced market with less bidding competition.

Denver
Denver Real Estate

Question: What impact will Covid-19 have on the real estate market? Will it change the way sellers, buyers and agents interact going forward?

Answer: This is a tricky question at the moment. We have to adjust our way of doing business day-by-day, just like everyone else. Currently, real estate does fall under the critical category. People do need to move and that involves many other industries, such as inspectors, appraisers, movers, contractors, lenders, and title companies. I have been following many of the leading economists lately and they are all echoing the same sentiment: We came into this crisis with a very strong real estate market, the shorter the crisis, which they believe it will be, the more likely we will have a very robust 3rd quarter. This virus spread fast and made a big impact but may be gone before an actual financial recession, like in 2008. This was not caused by subprime loans, this is a pandemic. Yes, there will be some fall out, but no one at this moment has lost 30% of their home value. Home prices are holding strong. We are still in an active market here in Colorado.  

In regard to how doing business will change, like anything we are adjusting. I had three closings last week where the sellers were able to sign their documents by e-signature or at the windows of their own cars. I am hearing lenders are working towards remote signatures, as well. The title companies are asking agents not to attend closings and are only allowing two or three people in a room (of course with Purell on the table, a new pen and sitting 6 feet away from each other). Photographers are asking that we do not meet them at the property, but to leave all lights on because they will not touch the light switches. Many of these changes are good. It is about time we have all documents available online and signed via the internet.  It saves a lot of paper and time.  

As far as physical showings, we have seen a slowdown. A lot of them are now “Virtual Showings”. Vacant homes are much easier and more comfortable to show.  At my office, Kentwood Cherry Creek, we have put kits in each home with hand sanitizer, booties and have asked people not to touch doorknobs, handles, etc. There are now addendums we are attaching to contracts which allows more flexibility because dates might need to be adjusted based on the current circumstances. It is a new world and we are all adjusting. I do believe some of the changes will stick after this crisis is over and for good reason.

Question: In the greater Denver area, are there any neighborhoods or areas quickly developing?

Answer: Yes, as always there are the “up and coming” areas.  The first one is actually my neighborhood, Holly Hills. This is located off of Yale and I-25 and has homes built in the 1960’s, Cherry Creek schools, great lots, plenty of trees and the accessibility is amazing. I’ll run down a few more that readers can look into. A main factor is an easy commute to downtown or DTC, as those areas are getting too expensive to live in for some. People also look for walkability to restaurants, bars, retail, work out facilities, parks, etc. Some neighborhoods that are on the up and up are Villa Park, Elyria-Swansea, West Barnum, Sun Valley, River North, Globeville, East Colfax, Hampden, Walnut hills, Ruby Hill and Marlee.

Denver Market
Downtown Denver

Question: Is Denver a buyer’s or sellers’ market right now? In addition, what is your outlook for interest rates going forward?

Answer: Experts say to figure out if we are in a buyer’s or seller’s market, it is based on a 6 month inventory. In other words, if no more homes come on the market, how long would it take to sell the inventory? As of this minute there are 8,700 homes, single family, condos, etc. on the market and in the last 3 months we’ve sold over 13,000 homes and that was dead of winter! Therefore, it is likely we would have the 8,700 homes sold in no time, which makes it very much a seller’s market. 

Regarding interest rates, they are incredible right now. They have been all over the board, but that is starting to calm down. The CARES act was just passed and that should help that effort. I have closed several loans in the last month in the 3.25%-3.75%. These are great rates and they allow people much more buying power.

Jacci’s Final Thoughts:

The bottom line is, we came into this crisis with a very strong market and we will come out even stronger. I mean this metaphorically and financially. People are realizing how much their home means to them. Of course, this pandemic has created uncertainty and you should not put yourself in a risky position. However, if you are secure in your job, it is a great time to buy with great rates, less buyers to compete with and sellers that are ready to move. We are also realizing what matters to us most and are learning how to adjust our sails in a different direction with the new winds. Maybe this will be our finest hour. I know everyone in the real estate industry that I have worked with has been professional, careful and extremely optimistic that this too shall pass.

Market Insights & Commentary – March 2020

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Market Insights & Commentary – March 2020

The last three months have been a roller coaster ride of emotions for investors. At the beginning of the year, you could hear the ticking of the coaster’s wheels being pushed upward by positive GDP numbers, unemployment at a 50-year low and strong end-of-year earnings. Most market outlooks delayed a chance of recession to 2021 or beyond. Nothing could impede the slow, steady growth the economy was seeing—until COVID-19.

Wuhan, China reported its first case of Coronavirus in December of 2019. The markets seemed to stay stable and even climb to new heights as whispers of Coronavirus were heard around the world and cases started to spread to new countries. The roller coaster then hit its peak on February 19th and the downward track was steeper than expected. This is where rational thoughts began to be overpowered by fear and uncertainty.

In sharp market corrections, it’s difficult not to get weighed down by the great uncertainties during this unprecedented time. Many people’s daily commutes and hours spent with coworkers have been replaced with eerie streets and stressful grocery store visits. The endless news cycle about the Coronavirus makes it easy to lose sight of the “big picture”. However, investing is and always has been about your portfolio needs for the long-term. We know it’s difficult to maintain a long-term perspective during times like these, but we must remember that this too shall pass, and brighter times are ahead.

Our goal is to highlight some key questions we have been facing and re-center focus during this time of heightened emotions.

coronavirus investment chart
stock market crash chart

What Does This Mean for You?

Although sometimes it may feel like it, this market pullback will not last forever. The term recession has been tossed around a lot lately. By definition, a recession entails two consecutive quarters of negative Gross Domestic Product (GDP). We likely won’t know if this period of time will be classified as a recession until October of this year—and by that point we may have seen the worst of it. That is because on average, recessions span 11 months. We will continue to see volatility in the markets until the Coronavirus curve begins to flatten and the markets begin to regain confidence. We will not understand the true economic impact of COVID-19 until we know the severity and length of the outbreak.

Timing the markets is seemingly impossible but as history shows, once the markets rebound from the “bottom”, we can witness dramatic returns. The chart below illustrates the length and severity of several bear markets, followed by their 1, 3 and 5-year market returns.

SDJ investment chart

Source: A Wealth of Common Sense

That is why it is important to keep the focus on your long-term investment goals and try not to let emotions take control.

hundred dollar bill corona mask

What is SH&J Doing?

Heading into 2020, there were two investing themes: we were entering into the eleventh year of the longest running bull market and the U.S. has an upcoming election. Knowing election years tend to experience increased volatility, our Investment Committee worked to rebalance portfolios to be more defensive. All portfolios are unique and constructed to fit each client’s specific circumstances, however, one example of a defensive strategy that we have utilized is minimizing exposure to high-yield bonds, which tend to move like stocks in time of volatility. In the last few weeks, as uncertainty increased, another strategy has included decreasing exposure to small and mid-sized companies and international equities in portfolios when appropriate. In times of prolonged market drawdowns, these asset classes are usually hit the hardest and slower to recover. We will be looking for opportunities with the cash we raised as markets begin to stabilize.

What Should You be Doing?

The welfare, health and safety of our clients, employees and families are of the utmost importance to us here at SH&J. Please, take this time to embrace social distancing and prioritize you and your family’s health. We want to say a special thanks to our clients and their family members who are medical professionals, store clerks, and all those providing essential care to others in this time of need. Know that we are continually monitoring client portfolios so that you can focus on you and your family’s health and well-being.

Rest assured, our team is here for you during these uncertain times. We will be conducting business as usual, monitoring the markets and your portfolios closely. Our goal is to provide continued and uninterrupted service to our clients, while maintaining the safety and well-being of our clients, employees and families. We cannot wait to meet with you face-to-face again soon.

Market Insights & Commentary – December 2019

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Market Insights & Commentary – December 2019

2019 was an anomaly because almost all asset classes delivered returns above their 10-year averages. Historically, stocks perform better when the economy is expanding and bonds perform better when the economy is contracting. Despite the lack of drama in the U.S. equity markets, behind the scenes many factors shifted the trajectory of the global economy.

Global Economy:

The Trade War, Brexit, and global monetary policy ruled the headlines in 2019. The tensions between China and the U.S. caused a slowdown in the Chinese economy and a great deal of uncertainty in the U.S. stock market over the last 18 months. As of December 13th, President Trump has agreed to the first phase of a trade deal with China, which will roll back some existing tariffs. The deal is only the first phase, but it could help ease tensions and alleviate China’s struggling economy.
Britain has officially voted to leave the European Union. Brexit has been the center of many debates since the original referendum in 2016, but has now reached an answer. Britain must now navigate leaving the E.U., while also balancing a fragile economy.
Interest rates have dropped below zero in many European countries, as well as Japan, in efforts to encourage people to spend their hard-earned money and support their individual economies. Unfortunately, this strategy hasn’t been able to push the economies out of the later stage of the cycle and the E.U. continues to slow.

The U.S. Economy:

You wouldn’t know it by looking at the stock market, but the U.S. economy is cooling off. The economy is near the end of the business cycle, but it is still being supported by consumer spending and low unemployment rates. Corporate earnings have continued to grow, but at a slower rate. The Federal Reserve joined the international trend of lowering interest rates throughout 2019, after raising rates four times in 2018. Lowering rates boosted bond prices and created an environment where U.S. bonds and stocks were both positive for the year. The interest rate movements also created an inverted yield curve. An inverted yield curve happens when shorter term rates are higher than longer term rates. For example, the yield on a 10-year Treasury dropped below the yield of a 3-month Treasury. Monitoring the yield curve is important because it can be a sign of a weakening economy and a future recession. The yield curve has since rebounded and is no longer inverted.

What to Expect for 2020:

The markets always come with their fair share of unknowns, but investors can expect a few changes in 2020. The Federal Reserve will most likely be less active than what we have seen in the last 2 years. After 4 rate hikes in 2018 and 3 rate cuts in 2019, the Fed will probably take a back seat in 2020. The U.S. is currently in the slowdown phase of the business cycle which tends to be when we see increased volatility in the stock market. The Presidential Election of 2020 will only add to the expected volatility. On a global scale, international stocks are priced below historical averages, but will be impacted by Brexit, the Trade War and the much needed reacceleration of economic growth (or lack thereof). To conclude, 2019 was an anomaly both for stocks and bonds. Recession fears for 2020 have faded, tensions with China have eased and The Federal Reserve may have an uneventful year. Regardless of what’s happened and what’s yet to come, we believe portfolio diversification, understanding your risk tolerance, and talking to your financial advisor should be on your list of things to do in the New Year.

Value vs Growth Investing

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Value vs Growth

When it comes to investing in stocks, there are many different approaches. Two popular styles are value and growth investing. While both styles seek to take advantage of capital appreciation over time, they go about finding which stocks to buy in a very different manner.

There are many methods to determine the fair price of a particular stock. When you buy a stock, you are buying a share of the future earnings of that particular company. One metric that is often used to analyze stocks is called the Price-to-Earnings (P/E) ratio. This ratio tells us how much a shareholder is willing to pay per dollar or earnings for a company. A higher PE ratio means a more expensive stock, and a lower PE ratio signals a cheaper stock.

Growth stocks typically have higher PE ratios than their peers. The reason is they have exhibited higher-than-average earnings growth, and are expected to continue on this high growth trend. Growth investors believe these stocks have higher earnings potential, and are willing to pay more for them. Growth stocks are more volatile than the broader market, meaning they are more sensitive to market shocks.

Value stocks typically have lower PE ratios than their peers. Value investors seek stocks that have experienced poor price performance, but still have strong fundamentals. The goal of value investing is to buy stocks cheaper than the broader market, and experience capital appreciation once the market realizes the fair value of the stock is higher than when it was originally purchased. Value stocks are typically less volatile than the broad market.

Which is Better?

Whether you are a value investor or growth investor, you can always find a timeframe where your particular strategy is advantageous. Since the Great Financial Crisis in 2008 and 2009, however, growth has been king. In the 10 years prior to September 2019, the Russell 1000 Growth index gained 14.72% per year, compared to 11.26% per year for the Russell 1000 Value index. The reason for the outperformance of growth has to do with being in the longest economic expansion in U.S. history, as well as one of the longest bull markets. Value investing tends to outperform when the economy starts to contract and enter into a recession.

At Sharkey, Howes & Javer we implement both styles of stock investing. If you want to learn more about these types of equity investing, please get in touch with us today for a complimentary consultation with a CERTIFIED FINANCIAL PLANNER™.

ESG Investing 101

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What is ESG Investing

Many people think that ESG investing is simply investing in companies that are more environmentally friendly than a typical company. ESG actually represents more than just sustainable environmental factors. ESG is short for Environmental, Social, and Governance. Companies are assigned scores based on how well they implement policies that excel in these three areas. 

The environmental factor is straightforward. A company with a high environmental rating will display sustainability practices as to not harm the environment, as well as being proactive on issues such as climate change. A company that scores well in the Social factor would exhibit diversity throughout the company, as well as be outspoken on social issues such as human rights and animal welfare. Corporate governance is probably the least well-known factor of the three. Corporate governance reflects how a company is structured. A company that scores well on this factor would exemplify responsible executive compensation and/or above average employee compensation.

Socially Responsible Investing; How do they Differ?

Many people often think ESG and SRI investing are synonymous, but there are some key differences between the two investing styles. First, ESG is a scoring system. Companies are graded on how well they embody the three factors that were discussed in the prior paragraph. SRI uses screens to filter out companies that exhibit certain qualities. For example, if you wanted to own a fund that didn’t own any companies that relied on fossil fuels, this would be an SRI fund. SRI funds can also screen-in companies that engage in a variety of ESG and SRI factors, such as environmental sustainability.,

 How to Invest in an ESG Portfolio

According to the 2018 Report on U.S. Sustainable, Responsible and Impact Investing Trends, there was over $12 trillion invested in SRI and ESG strategies in the U.S. alone. This number is only expected to grow over the next decade. The easiest way to implement an ESG portfolio is by using mutual funds and ETFs. Mutual funds that are dedicated to ESG investing have an ESG mandate, meaning they can only select companies that score highly on the ESG scale. These ESG mutual funds typically have higher expense ratios than non-ESG funds due to the extensive screening process. ETFs are a more cost-effective way to invest, as they track various indices. There are now over 1,000 unique ESG indices. 

Sharkey, Howes, Javer has ESG portfolios available to clients. If you would like to learn more about ESG investing and how you can implement a socially-conscious portfolio, please contact us or call 303-639-5100

Market Insights & Commentary

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The summer months are a historically dull time in the stock markets. This is a time when many of the powerful fund managers and traders take their vacations and there isn’t a whole lot of activity going on. The summer of 2019 has been different, however, as there have been a multitude of headlines that have moved the markets in both directions.

The topic that has ruled the headlines this summer has been the continuing trade talks with China. All year long there has been constant back and forth between President Trump and President Xi threatening each other’s economies with tariffs. This uncertainty is putting a strain on the global supply chain, causing stock market investors to be weary. The U.S. and China are still in discussions on what a trade deal could look like, but until that comes to fruition expect more ups and downs in global stock markets.

International stocks saw a nice rebound the first 5 months of the year, as the EAFE index (tracks large company stocks in Europe, Australia, Asia, and the Far East) was closely tracking the performance of U.S. markets. There has been a divergence over the past 3 months, however, mainly due to the bleak economic data coming out of the European Union. Europe may already be in a minor recession.

All the chatter surrounding tariffs and a global economic slowdown has seen investors flee for safety this past summer. When investors get spooked by the stock markets, they put their money in long-dated bonds. This demand for longer maturity bonds drives bond prices up, thus lowering the yield. When shorter term bonds are yielding more than longer term bonds, it’s called a yield curve inversion. This inversion has historically been a recessionary signal.

So where do we go from here? When you peel back all of the headlines surrounding the stock market and look at the fundamentals of the U.S. economy, there seems to be no sign of a recession in the near term for the U.S. 75% of S&P 500 companies beat their Q2 earnings estimates, unemployment remains around 4%, and the U.S. Consumer Confidence index remains high. A recession may take up to two years to manifest after an inversion, and on average the stock market advances another 13% before the recession. Going into an election year, these next 3 months are sure to be another bumpy ride in the stock market. As long as investors know how much risk they are taking in their portfolios, no outcome should come as a surprise. Contact Sharkey, Howes & Javer

Why You Should Invest in a Financial Advisor

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Are you starting to feel under the weather? Search your symptoms on WebMD. Need to talk through an emotional issue with a licensed professional? You can now text an online therapist. Have a few extra dollars and need help investing in the markets? Hire a “robo advisor”. Thanks to the evolution of technology, advice is more accessible than ever. With many inexpensive options for investing, why should you invest in a traditional financial advisor?

 

The role of a financial advisor has progressed tremendously over the last 50 years. Advisors used to specialize in one aspect of your financial life. Your financial advisor could’ve been your stockbroker who assisted in managing your investment portfolio, or they could’ve been an insurance agent who you bought life insurance from. Today, you can hire a CERTIFIED FINANCIAL PLANNER™ who will provide you comprehensive financial planning.

While investment management is part of your overall financial picture, it is only one component. Advisors now provide additional value by acting as an ally to clients during major life decisions that may create financial stress. Barron’s reports that the industry average cost for financial advice is 1% of assets under management. By working to control behavioral tendencies of the average investor and coaching clients through pivotal times, advisors as a whole can be worth the fees. According to a study done by Vanguard, advisors who follow best practices in wealth management can add an additional 3% in net returns over the long term, with half of that coming from behavioral coaching.

Investing is an emotional activity. Whether derived from fear, greed, or past experiences with finances, most investors have an emotional tie to money. Financial experts can work with you to keep these emotions at bay, while staying focused on your goals and identifying hidden risks along the way. A good financial advisor will provide a roadmap for your financial goals and keep you motivated to achieve them.

Are you or a loved one interested in working with a financial advisor? Contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™. We’ll work with you to align life goals with financial realities through financial planning and investment management.

Sharkey, Howes & Javer Investment Process

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Investment Management is a very important part of our business here at Sharkey, Howes & Javer. Designing a custom investment portfolio is integral in helping our clients achieve their financial goals. Below is an outline of the investment process at SH&J, and an overview on how we choose investment portfolios for clients.

SHJ investment pyramid

We first take a macro level view of the global economy and work to identify trends and how they could potentially impact clients’ portfolios. Macro economic research, as well as insights from various mutual fund managers and investment professionals, is used to determine what asset classes may add value to portfolios during various economic conditions.

The biggest driver of investment returns is the stock and bond exposure of a portfolio. The more stocks in a portfolio, the greater the long-term rate of return is expected to be. Portfolios can range from 100% stocks, which are the most aggressive, to portfolios that may have over 60% in bonds, which are more conservative by nature. We then discuss how much international stock and bond exposure is appropriate, and also evaluate if there are opportunities in alternative asset classes, such as real estate or commodities, for additional diversification.

Once the asset class allocation is outlined, the individual mutual fund or exchange traded fund (ETF) position for each asset class needs to be chosen. Third party investment research tools aid in scanning the entire fund universe. Many factors are considered in selecting each holding. Such as how long a fund manager has been managing a particular fund, what the fund’s underlying expense ratio is, how much risk the fund is taking compared to the benchmark, and if the fund has had consistent 3, 5, and 10-year performance numbers.

The economic conditions around the globe are fluctuating every single day. And, what’s also changing is the number of mutual fund and ETF options available for people to invest in. It is important to stay up-to-date on your investment portfolio and make adjustments as needed. If you would like to discuss your current investment portfolio or discuss our strategies, please contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™.

The economic conditions around the globe are fluctuating every single day. And, what’s also changing is the number of mutual fund and ETF options available for people to invest in. It is important to stay up-to-date on your investment portfolio and make adjustments as needed. If you would like to discuss your current investment portfolio or discuss our strategies, please contact Sharkey, Howes & Javer today to speak with a CERTIFIED FINANCIAL PLANNER™.

Retirement Risks

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Retirement, or Financial Independence, is a relatively new concept here in the U.S. Retirement used to be pretty simple: you step away from the company where you spent your entire career and they rewarded you with a pension check in the mail every month. That was really all there was to it from a financial standpoint. With people now living longer and a shift from employer sponsored pension plans to defined contribution plans (401(k)s, 403(b)s, etc.), people are now responsible for the success of their own retirement more than ever before. Listed below are risks that are unique to retirees, with explanations on ways that these risks can be mitigated.

Longevity Risk

Put simply, longevity risk is the risk of outliving your assets. According to the Social Security Administration, life expectancy for someone born in 1930 was only 58 for men and 62 for women. Now 1 in 4 people who reach age 65 will live past age 90, and 1 in 10 will live past age 95. One of the primary ways to combat this risk is to plan for longevity. When we create financial plans for clients, it is our standard to run the plan until the youngest client reaches age 95 at the minimum. Planning for a longer time horizon forces a retiree to be more conservative when pulling from their investment portfolio throughout retirement.

Inflation Risk

Inflation reduces the purchasing power of a dollar as goods and services increase in price over time. In your working years, inflation may not be as critical of an issue as many workers see cost of living adjustments to their salary. When you’re retired and not earning a salary anymore, it’s important that whatever sources of income you have, keep up with inflation. Social Security has a built-in cost of living adjustment that has historically been around 2% per year. Some government or employer-sponsored pension plans have living adjustments associated with them as well, but they are fairly uncommon and the adjustments are usually less than inflation. One way to help your investment portfolio keep up with inflation is by having a portion of your portfolio invested in stocks. Stocks have historically helped hedge inflation risk.

Long-Term Care Risk

Long-term care risk goes hand-in-hand with longevity risk. As our society continually makes medical advancements, we are able to live longer, but for some this may come at a cost. Many elderly people no longer have the ability to care for themselves, and they have to rely on either family members or professional caretakers to watch over them. According to a study by AARP, 66% of people aged 65 in 2005 will need some type of long-term care during their lifetime. Long-term care insurance policies are the primary way to mitigate this risk, but they are expensive and many people don’t like the “use it or lose it” terms of these policies. Therefore, life and long-term care insurance hybrid policies have recently become more popular. These policies allow you to access the death benefit for long-term care needs while you are still living, yet still provide a death benefit to your beneficiary after you pass away if you do not end up requiring long-term care.

Financial Elder Abuse Risk

A growing risk that retirees face is financial elder abuse. Financial elder abuse occurs when someone tries to take advantage of an elderly person for their own financial gain. What many people don’t know is that elder abuse most often comes from family members! One way to help prevent elder abuse is to simplify your finances as you get older. The less accounts a retiree has, the less accounts they have to monitor. Another way is to work with a trusted financial advisor, who can act as a safeguard if bad actors are trying to swindle money away from those who are no longer able to track their finances as easily as they have in the past.

Sequence of Returns Risk

As we all know, investment returns are unpredictable. We often have very little warning when an event like the 2008 Financial Crisis will occur and send global stock markets tumbling. Negative returns in the first few years of retirement can be detrimental to the success of a retirement plan. It is important to make sure you have a well-diversified portfolio heading into retirement with a mixture of stocks, bonds, and cash. If the stock market were to decline while you’re pulling money from the portfolio, you need conservative investments to draw from so you can allow the stocks to recover.

Loss of Spouse Risk

Losing a spouse can be a turbulent point in anyone’s life. It can be very hard to make sure you have your financial house in order after enduring such a tragic event, especially if the recently deceased spouse handled all of the finances. One of the best ways to ensure the surviving spouse maintains their level of lifestyle is to have a comprehensive financial and estate plan. Hiring a financial advisor in retirement gives the surviving spouse an advocate in such a trying time. The advisor should help create a plan to ensure the surviving spouse has enough assets and income streams to not alter their lifestyle.

If you or anyone you know is nearing retirement, contact Sharkey, Howes & Javer to meet with a CERTIFIED FINANCIAL PLANNER™ and develop a financial plan that helps mitigate these and other retirement risks.

Avoiding the 5 Most Common Mortgage Mistakes

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For most people, a house is one of the biggest, most expensive investments that you’ll ever make. The journey to homeownership is often an exciting milestone, but you must be careful in order to ensure that it’s a positive experience.  Whether you are a first time homebuyer or you’ve purchased several homes, avoiding these common mortgage mistakes will help prevent financial problems following the purchase.  

Mistake #1: Making Yourself House Rich, Cash Poor

Home ownership can be more expensive than renting–especially when you add up all the taxes, insurance, and home maintenance costs over several years.  In fact, many people fall into the trap of making themselves “house rich, cash poor”–that is, tying up all of their available income in the house. Suddenly, despite having a reasonable monthly income stream, you have no extra money, and you find yourself living in a tight paycheck to paycheck struggle.

How to avoid the trap: Find out how much house you can actually afford! The fact that a mortgage broker has offered you a mortgage loan in a particular amount doesn’t automatically mean you can afford to spend that much on your house each month. In fact, many mortgage brokers will offer you a mortgage that exceeds the amount you really should spend on a house. This is because mortgage brokers don’t know your regular expenses since they don’t appear on your credit report.  Nor do they take into account the additional monthly savings necessary for you to reach your other short and long-term goals. Review all your expenses and required savings before committing to your mortgage.

Mistake #2: Ignoring the True Cost of Home Ownership

Home ownership expenses don’t just stop at your mortgage. You’ll also have to take into consideration homeowners insurance, property taxes, Home Owner’s Association (HOA) dues, and maintenance on your home. Once a home belongs to you, you no longer have the luxury of calling your landlord to fix something that breaks. You’ll need extra income or an emergency fund to cover those expenses instead! If you’re used to renting, you’re likely used to a fixed monthly housing expense in your budget. The cost of homeownership, on the other hand, fluctuates and can be difficult to predict month to month.

How to avoid the trap: Create a budget estimate that includes all of the costs associated with home ownership, not just your mortgage. Don’t forget to set aside an estimate for maintenance! This more detailed budget may give you a better idea of what you can afford when you’re setting up mortgage payments. One rule of thumb is to put away 1% of the home value in a separate home maintenance account. For example, if the value of your home is $600,000, save $6,000 per year (or $500 per month) toward future maintenance costs.

Mistake #3: Not Shopping Around for the Best Loan

All loans are not created equal! Some mortgage brokers will give you better terms on your loan than others. If you aren’t shopping around–looking for better interest rates or more favorable closing costs–you may end up paying more than you have to for your home.

How to avoid the trap: Take the time to get mortgage information from several lenders–and make sure you know what they’re really saying! Compare interest rates, down payments, fees associated with the mortgage, and private mortgage insurance requirements in order to be sure that you’re getting the best deal for your mortgage.

Mistake #4: Putting Little to Nothing Down

Although there are loan programs where you may not be required to make a 20% down payment, which seems appealing if you don’t already have a lot of money saved, there are some drawbacks to this option.  Unfortunately, lower down payments don’t just lead to more money paid over the lifetime of the loan. It can also lead to higher interest rates, higher monthly payments that are more likely to put you in a financial pinch, and the need for mortgage insurance.

How to avoid the trap: Save for a little while longer before jumping into the home buying process.  Putting down an additional 5-10% can make a big difference over the lifetime of your loan. Be willing to be patient and wait for it!

Mistake #5: Not Checking and Fixing Your Credit Reports

Your credit report has a significant impact on your mortgage: your monthly payment, your interest rate, and how much you have to put down on the loan, not to mention the need (or lack thereof) for mortgage insurance. If there’s something wrong with your credit report–and unfortunately, sometimes, there can be problems on your credit report that aren’t a result of your spending–it may send up red flags for potential lenders.

How to avoid the trap: Take the time to check your credit report before you start looking at mortgage rates. Make sure you don’t have any common red flags. If there are issues, take the time to fix them before you’re ready to buy a house.

Having a mortgage doesn’t have to be terrifying. By avoiding these common mistakes, however, you can save yourself and your family some money and ensure that you’re better prepared for the road to home ownership.

Are you thinking of buying a house? Give us a call or schedule a complimentary consultation to discuss how to avoid these mistakes with a CFP®.