Advice for New Nesters

New NestersThey have graduated from college and have finally secured their first job. They are officially launched. Give yourselves a high five. It is what all parents dream of and sometimes fear. An empty nest with quiet solitude and, presumably, less mess and lower grocery bills. Now those fledgling adults need their own places to roost, but rents are high in Charleston or Chicago or other cities where they may have migrated. The best areas to live and work are always the most expensive. Paying rent to a landlord can seem like throwing money away. Wouldn’t it make more sense for them to buy their own nest?

The good news is that mortgage rates are favorable now and the real estate market is stronger in many areas. Real estate will likely be an asset that appreciates. There are some favorable mortgage programs for first-time home buyers. Generally, there are two categories for loans: the conventional mortgages offered by Fannie Mae/Freddie Mac and then the slightly more lenient programs offered by the FHA. There is also a kind-of hybrid program offered by Fannie Mae called My Community Mortgage that is similar to the FHA loan programs, but has income limitations based on the HUD median income in your area. Lastly, if looking in a small-town area, there is a USDA loan program that offers favorable rates, flexible lending guidelines and can offer options with no down payment. There are location and income limitations for the USDA loans, but worth looking into, if purchasing real estate in a small town. The individual banks will occasionally offer short-term “niche” loan programs, but there can be some catches with those.

The first place to start in the home-buying process is to get an accurate and current credit score and credit report for your first-time home buyer. All loan programs will require this information from the buyer and it is good for them to know where they are before starting the process. Lenders look carefully at payment history, debt ratios and employment history for young buyers. FHA loans will allow letters of explanation for credit issues and flexibility in some of the other guidelines. They can get pre-approved for a mortgage so they know exactly what amount is possible to borrow. Generally speaking, the conventional mortgages require a credit score minimum of 680. The other programs are more flexible and will individually evaluate to qualify, though 620 is probably their minimum. They can certainly start by checking with their bank on what they can do. The mortgage broker we spoke with says that they work hard to find the best available option for the borrower and to make sure that they manage the underwriting process to ensure qualification. Having options and someone to help with underwriting can be especially useful for a first-time buyer. The rates and down payment minimums might be better in a conventional loan program, but the guidelines are a little stricter. It is advisable for the new buyer to get educated and look into improving their credit worthiness, if needed.

Prior to real estate shopping, it is also recommended that the buyer have a very good understanding of their budget so they know exactly how much house they can afford. It is good to remember all the “sleeper” costs in both the purchase and ownership of a home. There are settlement costs, taxes, insurance, maintenance, repairs, HOA fees etc. that all should be considered as part of the budget. Also, have the potential new nester check out the neighborhood at different times of day to see if it meshes with their lifestyle. And be sure to test the commute to and from work… in this day and age, that can be a very big consideration for quality of life as well as resale!

There are several options for you to participate in as parents. All of the programs allow some down payment and/or settlement cost help from family members. The rules vary, but there are definitely options to provide 100% as a gift, as long as the buyer can qualify for the mortgage on their own. The lender will require proper gift letters and possible bank statements. There is also the ability to be a non-occupant co-borrower that can help with qualification, as long as the occupant can demonstrate that they can afford the payments with their income. This will affect the parents’ debt ratio and appear on their credit report. You could also purchase something and rent it to your child, possibly even with a rent-to-own contract. There are, of course, tax advantages to ownership for the young buyer and may be advantages for you, also.

DWM clients know that financial planning assistance for their children, including first time home buying, is covered as part of our Total Wealth Management process. We’re happy to help with nest-building for the entire family.

67 New Emojis Under Review

I’m sold. That bald-headed clown is really cute. I am going to start using emojis, including that one. Emojis really do a great job of communicating emotions.

I was intrigued this morning by the NYT article about the 67 new emojis under review. More about that process in a few minutes. But, first, a little information about how emojis were started.

In 1995, NTT Docomo, one of Japan’s largest mobile phone companies, added a heart symbol to its Pocket Bell devices. It became an instant hit, particularly with millions of high school kids. Market share of Docomo rose to 40%. However, apparently the “suits” took over and decided to abandon the heart symbol and replace it with Latin alphabet support and kanji, a system of Japanese writing using Chinese characters. Customers immediately jumped ship for Tokyo Telemessage. Docomo needed a killer app. Enter Shigetaka Kurita and the emoji.

Mr. Kurita was part of the team working on i-mode, designed to be the world’s first widespread mobile internet platform. Mr. Kurita and others visited San Francisco in 1998 to learn more about AT&T’s Pocket Net, the first cellular service to offer email and weather forecasts. It wasn’t fast- 19.2 Kbps- about 500 to 1,000 times slower than what we use today. Not only was it slow, but Japanese people were having a hard time getting used to the shorter, more casual nature of email as compared to long, verbose letters full of the sender’s emotions. They liked face to face conversation, telephone calls or long letters. Digital communication seemed to create misunderstandings and was void of warmth.

That’s when Mr. Kurita decided he could add faces, since he knew a heart would work. He grabbed some paper and a pencil and created 176 12×12 pixel characters. He wanted to cover the entire breadth of human emotion and looked to different elements of his childhood, including kanji and manga, a Japanese comic book.

With only a 12×12 grid, Mr. Kurita had to simplify his designs. The original grinning face has a rectangular mouth and upside-down Vs for eyes. His bullet train was lopsided. But, no worries, Kurita never envisioned them as art images, but rather as symbols. Docomo couldn’t get a copyright for the symbols and, subsequently, competitors launched their own emoji designs.

Standardization of the emoji came through a group called the Unicode Consortium. The group includes executives from Apple, Google, Facebook and other tech giants. Unicode was started in the late 1980s to develop a standardized code for text characters. They assign for every letter, number, symbol and punctuation mark, including an emoji, a specific number that a computer will recognize. Obviously, manufacturers will only use approved emojis with a computer number.

The consortium released Unicode Standard version 6.0 in October 2010 with 722 approved characters. Unicode 7.0 added 250 characters. Unicode 8.0 (released June 2015) added another 41 emojis including cricket bats, tacos, and signs of the Zodiac. And, now they are reviewing 67 hopefuls.

In deciding which emojis to add, the Consortium considers compatibility (with current emojis), frequency of use, and completeness. For example, the group added a mosque, a synagogue and a generic place of worship to complement the Christian church that was already included. This current group of wannabes also includes a large number of sports icons. That is to accommodate people watching the Olympics.

After the vote next May, the final version 9.0 will be issued in June. From there, manufacturers determine which ones they will add to their lineup of emojis on their phones. For users, there are lots of categories: people, nature, food and drink, celebration, activity, travel and places, flags, and objects and symbols. With over 1,000 emojis available and more on their way, it’s a great way to end a text message or a blog. Cheers!clinking-beer-mugs

Recent Success Projects Cubs to Win 2015 World Series!

cubs_headlineIt’s simple. The Cubs have won eight of their last nine games. If that pace continues for the next nine games, the Cubs will win the World Series for the first time since 1908. Wouldn’t that be wonderful!

Yes, let’s hope the Cubs do, in fact, get to the World Series and win it. However, how they fared in the last nine games may or may not extend for the next series or two. We don’t know what’s coming, although we would certainly love to see a Cub dynasty for the next century as was forecasted in 1908, based on the 1907 and 1908 victories. As you can see, it’s easy to use our recent experience as the baseline for what we think will happen in the future. In behavioral terms this is called “recency bias.”

Behavioral biases can have a big impact on our decision making, particularly in investment matters. As Jason Zweig points out in his book “Your Money and Your Brain”: “When you win, lose, or risk money, you stir up some of the most profound emotions a human being can ever feel.” It’s a very important topic. Brett and I will be talking about some of these behavioral biases at our seminars in Palatine on October 28 and Mt. Pleasant on November 4th.

The recency bias is one of the reasons undisciplined investors chase performance and buy high and sell low. When a bull market keeps rising, it’s not surprising that people will forget about the ups and downs in a typical market cycle and believe this upward trend will last forever. They keep adding more equities to their allocation and then are shocked when the bubble bursts.

Similarly, when the market is down, they become convinced that it will never go up again and emotionally want to put their money in a mattress. When investors sell low they are typically victims of the recency bias. Of course, these same folks will “jump back in” after the markets have come back and by then have missed out on much of the recovery.

Recent events are easier to remember and understand than either events in the distant past or unknown events in the future. Rather than doing the hard work of analyzing/understanding the full range of possibilities (both positive and negative) in the future and assessing/understanding probabilities to each, investors emotionally really don’t want to be “confused with facts”. Using recent events to make quick decisions is easier and in many circumstances in our daily lives it can work well. However, recency bias can be a problem when it impacts our investment decisions.

Recency bias gets amplified in down markets. Behavioral finance has demonstrated that fear is a stronger emotion that greed. So, in a year like 2015, when, after a strong January and February, the markets first go sideways and then start declining, the fear of losing money coupled with the recency bias of a weak market naturally causes people to worry about their funds, and for undisciplined investors to want to put money into cash.

Behavioral finance is a tremendously interesting topic. We look forward to seeing many of you at our seminars where we will discuss more about investor biases and how to avoid falling prey to them. And, perhaps by the time we meet, the Cubs will actually be on their way to winning the World Series. Let’s hope the prediction from the movie “Back to the Future 2” comes true. Go Cubs!


DWM’s “Spooky” 3Q15 Market Commentary

Nightmare on Wall StWith Halloween coming later this month, some people may perceive October as scary. But after the blood-bath that took place in the markets during the third quarter, August and September may well be claiming themselves as more frightening than Frankenstein and Dracula (or Freddy and Jason, for you 80s/90s movie buffs). In fact, it was the worst quarter that stocks have experienced since 3Q11. What is creating all of this horror one may ask? Well, the black cats are the uncertainty of what the Fed will do with interest rates and China’s economic slowdown (see our recent blog for more info). Fortunately, it’s not so gruesome for most of our clients, as they have well-balanced portfolios which also include fixed income and alternatives. These two asset classes can really help cushion the equity carnage in times like these.

Here’s how the major asset classes fared:

Equities: The MSCI AC World Equity Index suffered a 9.5% stabbing in the third quarter and has dropped 7.0% Year-To-Date (“YTD”). International funds had an even bloodier quarter, with the MSCI AC World Index Ex USA down 12.2% and now off 8.6% for the year.

Fixed Income: The Barclays US Aggregate Bond Index was up 1.2% and 1.1%, 3Q15 and YTD, respectively; and the Barclays Global Aggregate Bond Index +0.9% and -2.3%, respectively. Longer term bonds did the best, but not many people have much of that exposure going into the lurking rising interest rate environment. The lower the duration and lower the quality, the more ghastly it was for the quarter. High yields which correlate more to the equity market fared the worst, down 4.9%, as represented by the Barclays US Corporate High Yield Index.

Alternatives: We prefer alternatives that aren’t that correlated to the equity market for wicked times like these. Some alternatives did just that. For example, the BlackRock Long/Short fund was a positive at 0.7%, the Pioneer Insurance-linked Securities fund was up 4%, and the AQR Managed Futures fund was up over 6%. Unfortunately, not all of the holdings went a positive direction. MLPs have been under attack all year, as have many energy-related securities, but we think it is gravely overdone and there may be opportunity here. Gold is typically a great diversifier and behaves differently than equities, but it sold off in 3Q15. In any event, alternatives definitely fared better than equities, but unfortunately produced overall negative results in 3Q15, with the Credit Suisse Liquid Alternative Index down -2.5%.

So, is this Nightmare on Wall Street almost over? It should be noted that at the time of this writing, just a few days into the quarter, the markets have rallied. In fact, the S&P500 has risen 5.6% over the past five sessions, its’ best 5 day gain since December 2011. Ironically, in the ‘bad news is good news’ department, it was a weak jobs report last week that fueled the rally. See, the market is convoluted in that many times it reacts positively to bad news and vice versa. The weak jobs report was actually perceived as good because that means that weakness from abroad may be spilling over into the US, which cools expectations for a Fed increase in interest rates. And, as long as we stay in a low interest rate environment, that’s good news to stocks because the other asset classes aren’t as attractive on paper. Confused? Unfortunately, that’s how these markets work and why you want a professional wealth manager helping you.

Markets don’t always go up. And 2015 may go down as only the 2nd losing year for the stock market in the last 12. But that doesn’t mean that the Grim Reaper is lurking around every corner. It’s just part of a market cycle. By staying invested in a well-diversified portfolio made up of multiple asset classes, you can fend off the evil the market throws at you from time to time and come out unscathed. But you need to be disciplined and controlled, something a good Financial Sherpa can help you with. Don’t let emotions take over, which could haunt you for the rest of your life. Know that a disciplined investor looks beyond the concerns of today to the long-term growth potential of markets.

Here’s to a not-so-scary October. Happy Halloween!