[privatebanker]

I’d recommend asking your friends/family if they work with an advisor. If that doesn’t uncover anything, you can check the financial planning board site:

http://www.fpanet.org/plannersearch/search.cfm

That might direct you to someone good. I’d recommend meeting with possibly two or three advisors.

Watch out for advisors that try to only recommend insurance strategies, stock picks, hot dot chasing, etc. They should help you establish a diversified portfolio of low correlating asset classes. Also, pay attention to fees and don’t be afraid to ask how they’re compensated. Some charge a flat fee and an additional fee for investment implementation. Others charge a fee based assets under management.

Most importantly, do your homework before meeting with them so you cover all of your concerns.

Good Luck!

[privatebanker]

Hey Jim, how are you doing? I just wanted to touch on a few things you mentioned here from the perspective of someone in the private wealth management world.

You bring up a good point with the having some exposure to gold and other precious metals in your portfolio. We are definitely in a bull market along with other commodities. There’s a lot of money to be made going forward. But I wouldn’t commit more than 10% of my portfolio to it.

As for money managers always thinking the market will only go up, I think this is untrue. I’ve had many conversations with portfolio managers and have heard just about the same thing from all of them. Most fund managers seek to outperform their respective benchmarks while minimizing risk. They all realize that everything is cyclical and certain asset classes outperform others during different economic cycles. I’ve never had a manager tell me that the market is always going up. Over the long term it has but as the old disclaimer goes, past performance is no indication of future results. Alternatively, I’ve had many debates with real estate agents with their claims of real estate only going up.

Portfolio Managers are usually Chartered Financial Analysts (CFA) and MBAs with thorough knowledge of all the financial markets. As for their tenure and having been in bull & bear markets, I would advise anyone looking to invest in a fund to look for a manager with a long consistent track record in all market cycles. To your point, most big wirehouses will have “rookie” portfolio managers run or be apart of their proprietary funds, which I would recommend avoiding.

I think you are missing the point for investing in mutual funds. Indeed, they are not insured by the federal gov. but that’s where risk vs. reward comes to play. Most fed. insured investments have a return that is at or below inflation. To offset those returns, one invests in an asset that can provide more return for the risk assumed. Modern Portfolio Theory implies that by spreading your money across a variety of low correlating asset classes, it will provide consistent returns while minimizing overall portfolio standard deviation. Gold is not insured either and is very volatile, however when mixed with other low correlating investments, the volatility is reduced.

I think “baby boomers” should seek the advice of a successful, intelligent wealth advisor with a CFP or CFA designation that can educate them on diversifying their portfolio to gain exposure to low correlating asset classes such as gold, managed comodities, etc. This will help them hedge against the “dooms day” that I’ve been seeing everyone talk about lately.

Not that this is a big deal but it’s SIPC that protects investors not SPCIC. ;)Sorry, couldn’t let that one go by.

Thanks again!

[privatebanker]

Docteur,

Do you have any insight to the land entitlement madness that’s occuring in Las Vegas? I know someone who quit their professional career a few months ago to do this and acts like this will always be a thriving business with astronomical rates of return.

I think it is very suspect (equivalent to day trading telecom stocks) and can come to a staggering halt in the near future. In turn leaving them with a bunch of worthless land and a major financial predicament.

What are your thoughts?

[privatebanker]

I can’t imagine in any way, shape or form there would be a so called “soft landing” for real estate prices. I’m hearing the same arguements that I heard in 2000 regarding the stock market. When there is an asset class that has been driven to extreme levels (up or down) on major speculation and greed, there’s a major correction that follows. Reason being is that there are no fundamentals in place to support the prices. There were new paradigm proclamations by analysts and investors every day during ’99 & ’00. What happened shortly there after? I realize real estate is not a transparent, liquid investment which has allowed the NARs to manipulate public sentiment, but at some point, panic will set in and create a very bad scenario. Once emotion gets involved, most people are destined to make the wrong decisions. Behavioral finance at it’s best.

[privatebanker]

The thing that concerns me is I’ve noticed a lot of people thinking that once the market “crashes”, they’re going to go in a buy up a bunch of properties and make a ton of money. What if the market drops significantly and stays down there for a long time. I believe this is very feasible. We have just experienced one of the biggest real estate booms in history, it might take a very very long time for prices to come back to these levels. So people go in and buy properties with rates that will probably be a bit on the high side in a very depressed market that could be going sideways for a long time.

My best advice is to not follow herd mentality. Be very careful!

[privatebanker]

REITs have been traditionally attractive because of their dividend yields and their low correlation to other asset classes. With the recent run up in this sector, it has created an interesting scenario. The yields on a lot of the REITs have been squashed because the share price has been charging up. As of today, most money market funds are providing an essentially “risk free” yield of 4% – 5% depending on share class. That’s about a spread of 1%+ over the Cohen & Steers REIT index. If you been in the REIT game for a long time, you’d probably know what’s in store. Most major REITs are concentrated in commercial properties. Commercial properties have been red hot the last few years and have been appreciating at record levels just like the residential market. I think we all know where residential properties are going. Why would commercial properties be so different? Sure these big companies have a lot of cash but at some point the cost of borrowing will become too expensive and pull down the property prices. Basic supply and demand.

I’ve gotten out of REITs entirely. The risk is too high now. If you’re more strategic than tactical, I’m sure they will revert to their average return over the long haul. There just may be some big pot holes in the road in the near term.

[privatebanker]

Hi Josh,

That’s an interesting question. Well, first off, when the Fed decided to start lowering rates their intent was to mainly stimulate businesses to borrow and invest in their R&D, raw materials, etc. The byproduct which I still question if the Fed had the foresight of this is cheap money for the consumer to borrow for Real Estate, Cars, etc. I believe that there has always been creative financing out there however, this has been the largest push in exotic financing in a very long time.

To answer your question specifically, I personally think that the downtown boom wouldn’t have happened like it did. Most of the buyers down there were either speculators or first time buyers who could only pull the purchase off via adjustable loan, I/O loan & 80/20’s. If they had been required to put 20% down and obtain a 15 – 30 year fixed mortgage, I’d bet most of them couldn’t have done that. The building of Petco park was the backbone of the downtown buzz. Developers realized the opportunity and embraced this. Cheap money, loose lending standards and media hype were the only reason that downtown really took off.

[privatebanker]

Anyone that is buying downtown is really going to feel the pain in the next few years. What is the intrinsic value of a small box with a view of other buildings? I may be crazy but I could see some of these going for $50k – $100k. Please explain to me what the true value is in a downtown shoebox? $100,000 is a lot of money and people have grown accustomed to throwing around terms of hundreds of thousands of dollars. This will all change soon. Banks are becoming concerned and borrowing at some point will be a lot harder to obtain. Think about this, if there were no such thing as ARMs, do you think 3/4’s of the borrowers out there would be able to afford anything? I think not.

I’ve already heard nightmare stories of people that have bought a shoebaox and for some reason or another are trying to get out but can’t. Also had a conversation with a prominent realtor in San Diego and he is absolutely scared of downtown and would never recommend a client to that area.

[privatebanker]

Rich,

Thank you for your thoughtful reports on this feeding frenzy of a real estate market. I’ve shared many of your insights with clients and colleagues and all were truly amazed. You have opened many eyes and have probably saved many people from financial ruin as a result.

I look forward to learning more of your discoveries.

The Private Banker

[privatebanker]

Here’s an interesting twist to what you are saying here:

http://www.eldoradogold.net/cornered_rats_030326.html

[privatebanker]

Well now, there are a lot of “wealthy” people who enjoy these types of forums. Just because you have money doesn’t mean that you shouldn’t be well informed of the market activity and public sentiment.

Most wealthy investors would really be upset to lose a few hundred thousand. Believe me I know, my job is to make people money while minimising risk but when things go the other way, I have to hear it. It’s all about setting expectations I guess.

[privatebanker]

RightSide, please define your sophistication? Are you a sophisticated futures trader? Do you run a hedge fund? Do you run a REIT? Are you a home builder? You’re going to need big bucks and a lot of futures/options knowledge to play this game. The thought of hedgeing your SFR with complicated futures contracts is interesting.

BTW, what type of sophisticated investor would want to lose all of their investment?! I’ve never met one.

That was a very strange post you wrote. Especially lashing out at other folks that post on this page. I think we’re all here to share our takes of what’s going on in the RE market. We’re not here to boast and act like we are above one another.

I’m calling your bluff.

[privatebanker]

If you would like to diversify out of US dollars and maybe take a look at gold, check out Everbank. They offer F/X denominated CDs and they also offer precious metals accounts.

http://www.everbank.com/main.asp?affid=eb

http://www.theprivatebanker.blogspot.com/

[privatebanker]

Well I think buying gold stocks/indices should be considered only for a small portion of your over all portfolio. This is an interesting asset because it has no earnings and pays no dividends or interest. You just banking on it’s appreciation or depreciation.

Personally, I think international stocks/bonds have a lot of opportunity including emerging markets. I think they will do well and I have overweighted my holdings into this area.

http://www.theprivatebanker.blogspot.com/

[privatebanker]

I think you brought up a very good point with commodities rallying. The last time gold got really expensive, the economy was about to take a knee for a while. This just further confirms that everything is cyclical and those who do not recognize our current situation are going to be “spanked”. There’s a somewhat silent acknowledgement that when gold is rallying, there’s a major storm on the horizon.

http://www.theprivatebanker.blogspot.com/

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