Rent or Buy?

Rent or Buy?Last week the Wall Street Journal ran an article where readers weighed in on the question: Is Now the Time to Buy Your First House? Actually, the question of renting or buying a house is a good question for all ages to consider.

Historically, for most people, the answer has been pretty simple. “Don’t waste money on renting- buy a house as soon as you can scrape together the down payment.” A house was more than a home. It was typically one’s largest investment and the leveraged appreciation over time was fantastic. 

Everything has changed in the last five to six years. The decision today is not so easy. 

Here are some of the reasons to buy a house:

  • Own your permanent dream home for years to come
  • Get a tax break for the interest and real estate taxes paid
  • Build equity with your principal payments
  • Hopefully obtain long-term appreciation

 Here are some of the reasons to rent:

  • Payments are fixed with the monthly cost often lower than buying
  • No repairs, grass cutting or painting to do and/or pay for
  • Opportunity to invest funds elsewhere; spreading your investment risk
  • More flexibility to move quickly for business or personal reasons
  • No closing costs during buying or selling

There are free, online rent-or-buy calculators available. One is However, please be aware that there are major estimates that are required, including annual maintenance and appreciation. Even so, the site can help people focus on some key factors. As a generalization, I think it is fair to say in today’s market that renting may be better than buying for those people who might need or want to move within 3-5 years. Those who plan to stay in one spot for a longer time will likely do better to buy.

Of course, housing decisions are one of the major pieces of a complete financial plan. Every situation is different. What makes it even tougher is that the decision to buy or rent a house is typically three decisions all rolled into one; a lifestyle decision, an investment decision, and a risk management decision. Fun stuff. We love working through these decisions with our clients, of all ages.

Europeans Reject Austerity

Europeans reject austerityFrance, Greece and parts of Germany voted on Sunday. Their message was loud and clear: many Europeans are not prepared to go along with threats to their cherished way of life.

Francois Hollande ousted Nicolas Sarkozy, becoming the first Socialist elected president since Francois Mitterand. Mr. Hollande declared after this victory that “Austerity need not be Europe’s fate.” The new president stressed a “growth” agenda instead. The problem is that he equates growth with more government spending. French government already controls 56% of French GDP, the largest percentage in Europe. Mr. Hollande expects to balance his budget on the backs of millionaires whom he proposes should be paying a 75% income tax. Even though the French government hasn’t balanced their budget in 35 years, he is not suggesting fiscal reform; rather he has campaigned on a promise to renegotiate the German-French euro collaboration known as “Merkozy.”

Greek voters sent an even louder message against austerity in elections Sunday. They rejected the country’s two incumbent parties; supporting smaller left-and right-wing parties that campaigned against the austerity program Greece must implement in exchange for continued European financing. Apparently, Greeks want an end to the sacrifices directed by Brussels and Berlin. Now, with seven parties expected to enter Parliament, Greece has a completely fragmented government. The front-runners have until May 9th to form a coalition. Political instability may ultimately challenge the country’s future in the euro zone.

Closer to home for Angela Merkel, her Christian Democrat Union took 31% of the vote in Schleswig-Holstein to place first, but it was its lowest share of the vote since 1950. Ms. Merkel has continued to focus on policies to cut debt. Two weeks ago in Berlin, she put it this way: “You can’t spend more than you take in. You can’t live your whole life this way. Everybody knows this.” The elections Sunday show that many Europeans don’t agree.

Mr. Hollande campaigned on modifying the euro zone’s “fiscal compact” so that it not only constrains government deficits and public debt, but also promotes growth. However, according to the Economist on April 28th, his program is not suggesting slower fiscal adjustment to smooth the path of reform; he is proposing not to reform at all. With the Dutch government brought down over deep budget cuts and the election results from Sunday, the “balance” in Europe may be changing. More Europeans are rejecting austerity. If Europe is not collectively willing to pursue painful reforms, can the euro survive?

Survey Shows… Investors Seeking More Advice

High Net Worth Investor surveyIn a recent survey conducted by Koski Research and released by Charles Schwab, 37% of high net worth (HNW) investors say their desire for investment advice has increased over the past four years. HNW investors said they are worried about risks home and abroad. These include federal government deficits, political gridlock, the economic crisis in Europe, and uncertainty about taxes and inflation.

Koski Research polled 504 HNW investors between the ages of 34 and 80 with a minimum of $1 million in investable assets. The survey was conducted using an online panel of general investors. Koski is not affiliated or employed by Schwab.

When HNW investors were asked what words first come to mind about working with a financial advisor, investors stated knowledge (71%), advice (59%), investment performance (49%), trust (48%) and service (47%). Bernie Clark of Schwab put it this way, “Investors are bombarded daily with market and economic information, and advisors play a valuable role as trusted guides in helping clients separate the noise from the news and translating that information into tailored strategies that will help clients meet their long term goals.” Among professionals that HNW investors trust, doctors and advisors are the top two most trusted.

Koski Research also conducted a companion survey of 900 Registered Investment Advisors, including DWM. They asked RIAs about many topics, including the role of women in client relationships. Their findings confirmed our experience- that women are key decision makers in most of the client relationships. The survey found that 21% of the time a woman is the sole or primary decision marker. 38% of the time, a woman was part of a couple making joint decisions.

Lastly, the survey confirmed another key fact, that RIAs, like DWM, are attracting new business. The biggest single source has been investors leaving brokerage firms. 40% of HNW investors first learned of their primary financial advisor by way of a referral from a friend, colleague or family member. This is all good news for DWM. We are definitely experiencing increased demand for our services. We continue to welcome new business, especially referrals from friends, clients and associates. Thanks for thinking of us.


When You Pass On, Don’t Leave the Passwords Behind

Digital assets and passwords - RIPIsn’t it fun keeping track of all the different user names and passwords required in a digital world?  I updated my own list a week ago and I had 52 of them, 3 with Apple alone.  If you think it is tough getting into some websites now, can you imagine what happens when someone dies and their digital information needs to be accessed?  It can be a mess.  Leonard Bernstein died in 1990. His password protected memoir Blue Ink has not been broken into yet.

Online accounts have expanded exponentially.  Digital accounts and property may greatly exceed an individual’s paper records and lists of those records.  We are now at the beginning stages of how to include digital assets in estate planning.

On April 19th, Robert W. “Bobby” Pearce, Jr. of Smith Moore Leatherwood LLP presented “Digital Estate Planning” to the Estate Planning Council of Charleston.  My take away from his excellent presentation is that with the explosion of digital assets, all of us must rethink our estate planning.  Who owns the digital assets? Who can access the assets? In short, Bobby suggested that currently, the “rights of representatives, executors, beneficiaries and others are as clear as mud.”

Digital assets are any online property you own including any file, email, documents, photos, videos and images stored on digital devices including desktops, laptops, tablets, smart phones and other storage devices.  Digital accounts are email accounts, software licenses, bank accounts, social networking accounts, domain names, professional accounts, personal accounts and other online accounts.

Mr. Pearce indicated that the current legal status of online property records is largely dealt with by each online website’s Terms of Service (“TOS”). And TOS’ differ greatly.   For example, for yahoo, the account is nontransferable and will be deleted after 90 days.  Google requires a cumbersome process to obtain access to an account. Ultimately, court orders may be needed in both situations.  Only one state, Oklahoma has passed legislation dealing with digital property.  The question is, does the statute trump the TOS contract?  And what happens in the other 49 states?

There are other issues.  What is the value of your digital property?  Domain names and copyrighted work online may have commercial value.  And what about the personal and emotional value of photos and videos on Flickr, You Tube and other sites?  Who should be in charge of your online accounts, user names and passwords when you die?  What will be your instructions to the person?

At a minimum, you should get the following done now:

  1. Inventory your digital assets of all types and locations
  2. Identify the person to handle them
  3. Provide a list of accounts, user names, passwords, PINs and answers to security questions
  4. Instruct your designated person with how you want these to be managed
  5. Provide authority through a digital asset POA or other means

In short, it’s time to put your digital asset affairs in order.

Simplifying the Tax Code


Simplifying the income tax codeMillions of Americans participated this week in the annual ritual of filing income taxes-probably cursing this confusing, complicated process. While many politicians rail about the complexity of the tax system, few are actually willing to support meaningful simplification efforts. The chart above demonstrates the problem.


Current individual income tax breaks exceed $1 trillion per year. It may come as a surprise that the largest is the exclusion for employer-provided health insurance coverage. If taxed, Uncle Sam would get an extra $164 billion in annual revenue but employers might drop coverage and get out of the health insurance business for their employees. The mortgage interest deduction costs U.S. coffers $100 billion annually. But repealing that deduction would raise the cost of housing for homeowners and likely cause a further drop in home prices. Eliminating deductions for charitable donations would certainly hurt not-for-profits at a time when many are already struggling from reduced state and federal support.


Two years ago, Alan Simpson and Erskine Bowles, co-chairmen of the National Commission on Fiscal Responsibility and Reform put forward a plan to wipe the slate clean and start from scratch. They proposed eliminating all deductions, exclusions and credit and provide three tax brackets; 8%, 14% and 23%. The Simpson-Bowles proposal, which also included huge budget cuts, was finally brought to a vote in the house on March 28. It received only 38 votes. The fact is that the majority of the “tax breaks” are immensely popular and have become imbedded in our economy and society. Americans are not prepared to live without them.


Recently, Professor Michael Graetz of Columbia Law School came up with another possible solution. He would abolish the income tax for most Americans and replace the revenue with a 12.5% value-added-tax. Prof. Graetz would give each family a $100,000 tax exemption, which would eliminate income tax for 90% of those currently filing. For those with income above $100,000, top tax rates would be 20-25% on taxable income. Mr. Graetz outlined the details in his 2007 book “100 Million Unnecessary Returns.” His basic concept is that if the current tax breaks are so much a fabric of our society that their elimination is unlikely, then make them irrelevant to most Americans by instilling a large exemption and a new VAT tax.

Very interesting.

Gentlemen Prefer Bunds (German Bonds)

On March 10th, U.S. stocks declined for a fifth day.  The reason most often given was concern over Europe. Bond prices on most European bonds have declined, producing higher yields. Investors have flocked to safe havens, such as U.S. and German bonds, pushing those prices up and those yields sharply lower.

Spain’s ten year bonds are now yielding 5.8%. Spain is entering its second recession in three years, unemployment is at 23% and the government expects the economy to contract about 1.7% in 2012. The Spanish stock market is the lowest since March 2009. The concern is that austerity measures could have the effect of further depressing growth and creating a vicious cycle in which more budget cuts are needed to balance the books. Italy’s ten year bonds are not far behind, yielding 5.5%.

French business confidence has stagnated and factory output has dropped. Manufacturing production fell 1.2% in February and the Bank of France said its surveys suggest that GDP didn’t expand in the first quarter. On March 31st the Economist characterized France, Europe’s second largest economy, as “A Country in Denial.” Comparing them with Greece, the Economist indicated that “the Greeks know that free-spending and tax-dodging are over. But (France) has yet to face up to its changed circumstances.” Upcoming French elections demonstrate the reluctance to change. Front-runner Socialist Francois Hollande has promised to rollback most of the recent pension-age reforms and install a 75% tax rate on the wealthy. None of the candidates are offering radical reforms or austerity programs seen in other European elections recently. Yields on France ten-year bonds are currently 2.93%. But that could move up quickly and significantly right after the elections.

Germany is the one major bright spot. German ten year bonds are yielding 1.8% (as compared to ten year US treasuries yielding 2.04%.) Germany’s exports are up and its trade surplus surged in February. The above chart tells it all. German productivity has far outpaced the rest of Europe in the last eight years. Nominal unit labor costs have stayed almost level in Germany, while growing in Italy, Ireland, Spain, Greece and France. During this period, only Ireland has seen their costs drop, starting in 2008, as their labor accepted pay cuts and productivity increased. To get on par with Germany, all five countries would need a 30% pay cut to become competitive. It’s unlikely we can expect that to happen any time soon.

Preventing the Next Financial Overdose

Financial overdoseNew drugs are vetted by the Food and Drug Administration before they reach market. Should the same process be considered for new financial instruments?

Two professors at the University of Chicago, Eric Posner and E. Glen Weyl, think so. In February they published a paper arguing that regulators should approach financial products the way the FDA approaches new drugs. They suggest that the potential dangers of financial instruments “seem at least as extreme as the dangers of medicines.”

Their idea is that there would be a federal agency, designed along the lines of the FDA, which would test new financial products for social utility. In their analysis, products that serve only to increase speculation would be rejected. Products that help people hedge risks would be approved. The goal would be to deter financial speculation, or gambling, which contributes to systemic risk.

Certainly, their proposal has gotten pushback from those who believe that financial innovation is always good and regulation is always bad. Yet, given the fact that exotic instruments contributed to the credit crisis, it is valuable to review their proposal in a more detail.

Professors Posner and Weyl would distinguish between financial markets-where institutions lend money, trade securities and make investments and the real economy, where people trade goods and services. They believe that the real economy should be largely unregulated but the financial markets need regulation.

Furthermore, they don’t believe that disclosure alone is enough for financial instruments. “In pharmaceuticals, we could allow a company to sell whatever it wants as long as it tells the people the product might work but also might cause your head to fall off,” said Professor Posner. But, “we don’t do that because people will ignore the information, so we draw the line and say, ‘You can’t buy the product’.“ The same logic, they say, should be applied to financial instruments that could be harmful.

It’s unlikely that their proposals will become reality anytime soon. However, their comments may someday help to limit financial overdoses in the future.

Investment Behavior- Do Your Genes Control You?

Economists assume people act rationally. Bad assumption. Investors often don’t act the way they should. There is a long list of investment biases and many people are born with them. Five of the major follies of investing are 1) the reluctance to realize losses, 2) chasing performance, 3) insufficient diversification, 4) excessive trading, and 5) non-objective evaluation of risk and reward.

The recent report, “Why Do Individuals Exhibit Investment Biases?” researched and written by Henrik Cronqvist and Stephan Siegel illustrates how genes impact investment decisions.

Investment Behavior- Do Your Genes Control You?Economists assume people act rationally. Bad assumption. Investors often don’t act the way they should. There is a long list of investment biases and many people are born with them. Five of the major follies of investing are 1) the reluctance to realize losses, 2) chasing performance, 3) insufficient diversification, 4) excessive trading, and 5) non-objective evaluation of risk and reward.

The recent report, “Why Do Individuals Exhibit Investment Biases?” researched and written by Henrik Cronqvist and Stephan Siegel illustrates how genes impact investment decisions.

Their research was based on analysis of investment decisions made by identical twins in Sweden. They selected Sweden for two reasons. First, the Swedish Twin Registry (“STR”) is the world’s largest twin registry. Swedish twins are registered at birth and STR collects additional data through in-depth interviews. In particular, Cronqvist and Siegel wanted to focus on identical twins with identical genes rather than include fraternal twins, who share only 50% of their genes. Furthermore, until 2007 taxpayers in Sweden were subject to a wealth tax based on investment assets. Information about individual portfolios including holdings and sales was required to be filed with the Swedish Tax Authorities annually from 1999 to 2007.

Cronqvist and Siegel selected 15,208 pairs of identical twins and tracked their investment behavior using the wealth tax data. Controlling for various factors, they found that identical twins were more similar in their investment behavior than fraternal twins.

They also found that twins who had a “home” bias in investing also had a home basis in other ways. A home bias in investing typically would means that the individual would rather own stock in Swedish companies rather than stocks of foreign companies. Hence, this portfolio probably had insufficient diversification. Twins showing this bias also showed a preference for living closer to their place of birth and for marrying a spouse from their region of the country.

The researchers concluded that genes explain up to half the variation in investment behavior. They also looked into other factors. In particular, they reviewed education as a possible influence in investment behavior. Earlier research has shown that education reduces expressions of genetic predispositions to poor health. A baby born with bad health genes can overcome this deficiency with education and discipline. This is not the case with investment behavior. Cronqvist and Siegel found that education was not a significant moderator of genetic investment biases.

So, there you have it. Some lousy investors now have a new excuse. Their genes “made them do it.” Fortunately, financial advisors like DWM are here for many reasons; one of which is to help individuals make rational investment decisions regardless of their genes.

Will you be able to celebrate your century mark?

Lester Detterbeck of Detterbeck Wealth ManagementFrom the Charleston Mercury today:

“You’re invited to my 100th birthday party, so mark it down: Nov. 20, 2047 – only 35 years from now. This isn’t a joke. Recent studies show that Americans are living longer. It’s likely I will reach 100. Will you? And, if you do, will your savings last that long too? “

 Click here to read my latest contribution to the Charleston Mercury.