Hundreds of customers braved the cold temperatures Friday morning to line up for the grand opening of the new Giant Food Store at 300 Lincoln Avenue in East Stroudsburg.“Just in time for Thanksgiving and all the holiday entertaining season, our new East Stroudsburg store offers plenty of fresh ideas, meal solutions and new convenient amenities from the beer and wine to curbside grocery pick up and more to make the shopping experience a little bit easier for our customers, [...]
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الجمعة، 15 نوفمبر 2019
Is There a Retirement Savings Bubble Forming From Long-Term Investments?
A reader writes in:
Hi Trent, have you seen this article from Planet Money? This article makes a good case that a bubble is forming in the stock market based on the reduced influence of individual investors. The question is, where do you put the money if you’re already diversified with real estate, bonds and have a sizable emergency fund? I don’t know if set it and forget it index investing will be a smart move over then next decades…
Is Your Retirement Fund Ruining Our Economy? @ NPR Planet Money
So, let’s break down what the article is saying into some bite-sized pieces we can work with.
The article’s main point is that people who are putting money into their retirement savings are having weird effects on the overall economy.
In the past, investors would move money around from investment to investment based on how that particular type of investment was doing. So, if you had shares of Coca-Cola and it looked like Coca-Cola might be struggling and you instead felt good about, say, real estate in the outer suburbs in your city, you would sell your Coca-Cola stocks and use it to buy some land from a farmer out around the city edges. Maybe a person put all of their money into a municipal bond issued by the city they live in to build better sewers, but they decided that it wasn’t returning as much as they wanted, so they sell it so that they can buy shares in Google because they believe it has a big future. You get the idea — people are buying and selling based on information. Good information makes the price of an investment go up, and bad information makes it go down.
Nowadays, many individual people are saving for their own retirement. They’re not being promised pensions anymore, so they use 401(k) and similar plans to save for retirement. Within those plans, they have a lot of investment options and, because most people aren’t active investors, they find what seems to be a good investment and park their money in it. Often, that investment is a broad-based index fund, which means that they’re essentially buying tiny amounts of tons of different companies.
Here’s the thing: people put their money in there and then just let it sit for years and years and years and years. They never move it out until they actually need it in retirement.
If enough people do this, investments start to change in nature. If a lot of people who own Coca-Cola stocks are just going to sit on them for decades regardless of news, weird things start to happen.
For starters, the price is slowly but constantly being driven upwards by the fact that more and more and more shares are being bought and held, which means that there are fewer and fewer and fewer shares of that company actually available. As with any kind of supply and demand, if there are fewer shares available, the price is going to go up.
That’s good for the time being, but eventually people will retire and will start selling those shares off. At that point, there will be a steady increase in supply, so the value of those shares is going to go down.
The strange part is that none of this has to do with the actual health and performance of the company. A person buying into an index fund is basically buying a share of Coca-Cola — regardless of how Coca-Cola Company is doing at the moment — sitting on it for a long time, then selling off that share of Coca-Cola, regardless of how the Coca-Cola Company is doing at that moment, and it’s doing this with all of the shares in the stock market at once.
To be specific, from the article:
Legal scholars Lucian A. Bebchuk and Scott Hirst recently published a working paper called “The Specter of the Giant Three.” The vast majority of money flowing into index funds are run by three companies: Vanguard, BlackRock, and State Street Global Advisors. Their combined average stake in each of the top 500 American corporations (the S&P 500) has gone from 5.2% in 1998 to 20.5% in 2017.
So, right now, people putting money aside for retirement into “buy and hold” index funds collectively own more than 20% of the shares of the top 500 American corporations. The article expects this to continue to grow for a while.
So, here’s the big question: is that a bad thing?
The article looks at a few different reasons why it’s bad, but the reason that really matters to individual investors is that this might be a bubble. At some point, people will start selling all of the stocks that they’ve bought and held. That likely has more to do with people growing old naturally than anything in the economy, but it will eventually happen. What happens then? Since this will be a gradual shift, what you’ll probably see, rather than a crash, is a gradual slowdown in stock market growth. Everybody won’t start selling at once, so rather than “popping” like a lot of investment bubbles, what you’ll see is a gradual slowing.
What does that mean for people with a 401(k) with a lot of money in index funds? It means that, right now, they’re seeing growth in their stocks that’s bigger than one might expect based on the health of the economy. However, in the future, when lots of people start selling off their 401(k) money in retirement, the growth in stocks will be slower than one might expect based on the health of the economy.
I think this entire idea makes a lot of sense, so the question then becomes what can we do about it?
The solution, as always, is diversification. Don’t have everything you own in one type of investment, particularly if you will need that money soon. The article offers at least one clear suggestion for alternative places to put your money – the stocks of smaller companies that aren’t included as heavily in index funds. You might also want to put money into international stocks, real estate, bonds or other things.
How do you do that easily, though? The easy way to do it is to just use a target retirement fund in your retirement plan. Most target retirement funds diversify quite a bit and don’t just put everything into the stocks of big American companies. They’ll often have some bonds, some real estate, some small company stock, some cash, and some international stocks. This is particularly true as people get closer to that target retirement date.
So, go into your retirement account and take a long look at the target retirement funds they have on offer. Are they very heavily invested in stocks, especially those of big companies? You might want to consider putting part of your contributions into something else. However, if they’re like most target retirement funds and are diversified a little with stuff besides big American companies, that’s another reason to put your money in there.
In the end, no one knows for sure how all of this will turn out. No matter how you choose to invest, you’re taking a risk, and the reason index funds are so successful is because they spread out the risk, but in being successful at that, they may have created another kind of risk.
Just remember that your contributions trump everything else. By simply increasing the amount you’re saving for retirement, you render much of this a moot point.
My advice? Save as much as you can for retirement and put it in a target retirement fund. Make sure that the retirement fund is invested in more than just big American companies — look for things like small companies, international companies, real estate and bonds. The best thing you can do to spread out your risk is to diversify.
Good luck!
The post Is There a Retirement Savings Bubble Forming From Long-Term Investments? appeared first on The Simple Dollar.
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Best Mortgage Rates in Pennsylvania
Home values in Pennsylvania have increased sharply since 2011, from that year’s median sale price of $131,000 to $163,000 in 2018, according to real estate database Zillow.
While significantly lower than the national median value of $320,000, according to the U.S. Census Bureau, this significant in-state increase means that it’s important to seek out the best mortgage rates in Pennsylvania.
Zillow estimated a year-to-year increase of more than 5 percent in home value, so it’s very likely that the price of homeownership will continue to increase for some time. With national and local economic factors playing a role, from state law and lender competition to federal decisions about interest rates and the nation’s economy, it’s a complicated marketplace.
Pennsylvania’s size, a mix of urban and rural areas, slowly increasing population, proximity to the densely developed Boston-Washington corridor, and other factors also play a role.
Finding the best mortgage rates in Pennsylvania means understanding the broader economy and your personal situation to find the most useful home loan or refinancing product as well as the most competitive rates and terms. Read on to learn more.
Current Mortgage Rates in PA
Mortgage Rates Factors in Pennsylvania
A strong understanding of mortgage rates in Pennsylvania, as well as refinancing options, can help you secure the type of loan you want with the most favorable rates and terms possible.
In many cases, a thorough grasp of the many lenders and options available can help you save thousands of dollars each year instead of needlessly spending it on a more substantial mortgage payment. Researching providers, rates, and terms as well as thoughtfully comparing them puts you in the best position possible.
Credit Score
Your credit score has a significant impact on the loans you qualify for and the terms and conditions involved. Not only can a credit score mean approval or rejection from a specific lender, but it also influences the terms and conditions offered. In general, the higher your credit score, the less you’ll have to pay in interest over the life of your mortgage.
Because a credit score is a quick, generally accurate reference point for the reliability of a customer, many lenders will refer to it early on in the loan application process.
The Consumer Financial Protection Bureau offers a helpful introduction to credit score specifics that can help you understand the factors that go into calculating a score as well as why the exact number will often vary depending on the circumstances in which it is requested and viewed.
Down Payment
The down payment incorporated into a loan agreement affects the amount the lender provides and the associated interest rate in the long term.
It also demonstrates the ability of the customer to fulfill a financial obligation early on in the term of the loan. Generally, a high down payment can reduce costs but requires a significant, up-front commitment of cash, while a low down payment generally provides more immediate financial flexibility but also leads to more interest charged over time.
A 20-percent down payment is the gold standard for traditional mortgages, but there are other mitigating factors involved. Certain types of mortgages, such as Federal Housing Administration loans designed for first-time homebuyers, only require a small down payment as part of an effort to encourage more homeownership.
Loan Type
There are many types of loans available in the current market. The term “traditional mortgage” includes everything from short-term, adjustable-rate home loans to the classic 30-year, fixed-rate option.
There are also jumbo mortgages for especially expensive properties, loans offered by a variety of government agencies if borrowers meet specific lending criteria and other options.
A strong understanding of not only your finances but your situation and any unique factors, including an interest in a home in a rural area, status as an active-duty servicemember or veteran, and not having previously purchased a home all qualify individuals for government loan programs is vital.
Type of Refinance
Refinancing is a common strategy used by a variety of mortgage holders to achieve lower interest rates and reach many other goals. Before you refinance, consider your goals.
A rate and term refinance will help you find better loan terms and conditions. A cash-in refinance means investing more money to realize lower payments and a reduced loan-to-value ratio, while a cash-out refinance allows you to convert part of your established home equity to cash–although at the price of a more considerable total loan amount.
Short refinances help homeowners avoid foreclosure, although they aren’t always readily available. The Home Affordable Refinance Program allows those with home loans already guaranteed by Freddie Mac and Fannie Mae to refinance to avoid entering a state of negative equity with their homes.
Length of Refinancing Term
Just as the length of a mortgage affects the rates and conditions attached to it, so does the period tied to a refinanced mortgage. Shortening a mortgage’s term generally means a lower interest rate, as the Federal Reserve pointed out, because the lender recoups its investment in a shorter period, and leads to a lower total interest paid over the life of the loan.
Of course, the compressed timeline also means the monthly payment can be significantly larger. Conversely, lengthening the term of the mortgage means a lower monthly cost, but a higher interest rate and total interest paid overtime.
How to Get the Best Mortgage Rates in PA
The best way to find effective mortgage rates and favorable terms is to engage in comparative shopping.
The concept itself isn’t complicated: Making initial inquiries at a variety of lenders helps you gather many different mortgage proposals that are easily compared to one another, leaving you to select the choice that best corresponds with your preferences, needs, and financial situation.
However, the Consumer Financial Protection Bureau reported that close to half of all borrowers don’t follow this advice, instead just working with a single lender from start to finish. That can easily lead to a higher interest rate or less-favorable term, and the more considerable costs that come with it.
To make your comparative shopping as effective as possible, plan ahead, actively research options and don’t make a final decision until you’re confident it’s the right one. Determine which mortgage types best apply to your specific situation and seek out lenders that offer them.
Make sure to gather several quotes and don’t be afraid to apply to more than one lender, either. Apply online when possible and make phone calls if an online quote or application isn’t available.
Finally, make sure to pay special attention to fees, which can quickly drive up the amount you owe as the mortgage becomes official. Some costs, like the city or county recording fee, are set by the local government, but many others are more flexible.
You can attempt to lower the loan origination, document preparation, and credit fees, as well as the costs associated with the title search, title insurance, and credit fee.
Recommended Companies in Pennsylvania
There are a variety of lenders to consider in the Keystone State. Top lenders include:
- Quicken Loans: With such a large footprint across the country, it’s easy to see how the company has performed with other customers in the past and has received a ranking of 9.7/10 in our own evaluation of customer service outcomes and strong ratings across the board. Quicken Loans offers a full range of home loans, from traditional fixed- and adjustable-rate mortgages to VA, FHA, and USDA lending options.
- Ally Bank: Another company with nationwide operations, Ally Bank has competitive rates on 30-year fixed-rate mortgages that are often below 5 percent. The online-only nature of services may not appeal to everyone, but those comfortable with the process enjoy intuitive, easy-to-follow procedures from initial inquiry to final approval.
- LendingTree: An online marketplace that can automate some of the work that goes into seeking out rates and terms from different providers. By matching users with up to five different lenders, it’s easy to compare rates across a wide range of different mortgage products.
- J.G. Wentworth: With decades of operation under its belt and a wide range of loan and refinancing products, J.G. Wentworth is an attractive option for many homebuyers. Competitive rates and a fast application process, along with a customer experience rating of 9.5/10 make J.G. Wentworth well worth your consideration when it comes to seeking out a loan.
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