Resist trying to time the market, and do this instead

By Sabrina Karl

“Buy low, sell high” has been touted as the simplest investment advice there is. Unfortunately, while it makes sense in theory, in practice it’s a flawed strategy that most investors are best off ignoring.

“Buy low, sell high” is also called market timing, and the reality is that no one can do it reliably. Even money managers paid to spend full-time hours analyzing the markets rarely time things perfectly. And even if they manage to perfectly capture the right buy and sell opportunities in one particular market cycle, doing so reliably over time isn’t sustainable.

That’s because markets are extremely unpredictable, and timing them involves making the right move not just once, but twice. First you have to choose the right buy point, and then you also have to choose when to sell. Nailing this on both ends, as well as across all your investments over time, is a pipe dream.

Many studies have illustrated the case against market timing, including a 2021 Charles Schwab analysis. They analyzed stock market returns for every 20-year period from 1926 through 2020 and assumed an annual investment of $2,000 according to five timing strategies.

Not surprisingly, an investor with a crystal ball who could perfectly invest their funds on the market’s lowest day each year did the best over 20 years. But investing all of the money on the market’s first day each year earned only 10% less over 20 years.

Next best was splitting the investment up over 12 months. But even investing on the very worst market day each year led to triple the earnings over someone holding the funds in cash instead of investing.

So to maximize returns, consider swapping out “Buy low, sell high” with “The best time to invest is whenever you have the money.”

How dramatic are the recent Fed rate hikes?

By Sabrina Karl

Last week, the Federal Reserve announced another rate hike in their mission to tamp down inflation. It’s the fourth increase this year, and almost certainly will not be 2022’s last.

What’s notable is how steep the incline has been. Last week’s hike was by 0.75%, which followed on the heels of a mid-June increase, also of 0.75%, and before that, a 0.50% increase in May. Only the first 2022 increase, in March, was for a more typical 0.25%.

So how unusual is this in Fed history? Looking back at more than 30 years of Fed rate changes, we can see that the Fed hadn’t previously hiked rates by a 0.75% increment in more than 28 years, all the way back in November 1994.

This year has also already registered the fastest period of Fed increases since 1990. From March to July of this year, the increases have totalled 2.25% over just five months.

Compare that to the other four periods of Fed rate climbs over the last 30-plus years. From 1994 into early 1995, the Fed hiked rates by 3.00%. But that climb took 13 months, and its steepest portion was a 2.25% increase over 10 months.

Major periods of Fed increases also took place in 1999-2000 for a 1.75% climb over 12 months; in 2004-2006 with a 4.25% increase that took two years; and a very slow increase of 2.25% across a three-year period in 2015-2018.

As a reminder, Fed rate hikes primarily impact savings and borrowing rates, but not directly mortgage rates. So credit card and loan rates will rise with each Fed hike, while savers with money in the bank will benefit from increasing interest rates paid on their balances.

But the 2022 rate climb is far from done, and will likely extend into 2023 as well.

What is a reverse mortgage?

By Sabrina Karl

For seniors with significant equity in their home, tapping into that equity with a reverse mortgage can be appealing. But reverse mortgages are complex, and can be costly, so aren’t a good fit for everyone.

First, you must be at least 62 years old to qualify for a reverse mortgage, and must have at least 50% equity in your home. If you meet these criteria, here’s how it works.

While a standard mortgage enables you to take out a loan to finance your home and then make monthly payments on that balance over time, a reverse mortgage is so named because it does the opposite. It takes out a loan from the equity you already hold in the house and instead of you making monthly payments, the lender pays you, with the accumulated loan balance not due until a later date.

The equity withdrawals through a reverse mortgage can be paid out in a lump sum, or through monthly annuity payments for either your full lifetime or for a fixed number of years. You can also opt to just access the equity as you need it, like a home equity line of credit, and can even combine this option with a lump sum or annuity structure.

But it’s important to know that upon your death, or the sale of the house, or you ceasing to live there as your permanent residence for a year or more, your reverse mortgage balance will become due, either to you or your heirs. It will also become immediately due if you don’t keep up with your property taxes and homeowner’s insurance.

Additionally, there are fees involved, both up-front and ongoing. So it's critical to shop around and do your due diligence to find the best terms, as well as avoid scam providers.

Are mortgage rates high right now? Depends on how you look at it

By Sabrina Karl

You might have seen the headline: 30-year mortgage rates hit 5%. That was last week’s news from Freddie Mac, the government-owned mortgage buyer that’s been tracking national mortgage averages for more than 50 years.

 Freddie Mac, or the Federal Home Loan Mortgage Corporation, surveys lenders across the country once a week, with most responses arriving Monday and Tuesday. Freddie Mac then compiles the rates and on Thursday publishes the resulting national average.

 Though Freddie Mac’s weekly structure, weighted to the start of the week, means it doesn’t capture every high and low, Freddie Mac provides the industry’s longest-running historical rate record, reaching all the way back to 1971. That framing is important now in providing perspective on today’s rates.

 It’s true that a 5% average on 30-year mortgages is notable. Indeed, the last time Freddie Mac recorded a weekly average above 5%, it was February 2011, making this the highest average in over a decade.

 Still, anyone who’s held a mortgage more than 10 years ago can likely remember being quite pleased with a rate in the 5 percent range. That’s because mortgage rates of the past were so much higher, often in the double digits.

 Freddie Mac averages throughout the 1970s ranged from 7.23% to 12.90%, and the 1980s were even worse, peaking above an eye-popping 18% and only dipping to 9%. It wasn’t until the 1990s that we saw almost all single-digit averages, sinking as low as 6.5%. And it took until January 2009 for the Freddie Mac average to dip below 5% for the first time in history.

 So yes, mortgage rates may feel high right now, especially given how low they receded during the pandemic. But overall, these are still historically low rates, and a 5% loan still provides an affordable value for today’s homebuyers.

30-year or 15-year? What’s the better mortgage choice?

By Sabrina Karl

The 30-year fixed-rate mortgage is about as American as personal finance gets. Few countries offer home loans with a long-duration fixed rate. Yet in the U.S., 80-90% of new mortgages are 30-year fixed-rate loans.

In distant second place is the 15-year fixed-rate mortgage. It’s probably most popular with refinancers, who have whittled down their loan balance for several years and can now afford to finance what remains over a shorter term.

The main reason people choose a 15-year loan is to enjoy a lower interest rate while paying off their house more quickly. This can be especially appealing to those wanting to retire their mortgage before they retire themselves. A lower rate with a shorter term also means the homeowner will pay less over the life of the mortgage.

But that simple arithmetic isn’t the only thing to consider. What the 30-year mortgage has going for it is its smaller monthly payments. This has two advantages. One, if the homeowner suffers a financial stress, like losing a job or becoming weighed down with medical bills, smaller monthly payments are easier to keep up.

Second, by committing less to your mortgage, surplus funds can be used elsewhere, like a child’s college education, or investments expected to out-earn your mortgage interest, as well as be easier to access than home equity. As with all things, money committed to any purpose involves an opportunity cost of where you could have put the money instead.

Interest rates matter, too. Right now, interest rates are rising. Though they’re still historically low over the long arc of mortgage history, they’re considerably higher than the last two years. When rates tanked in 2020, it became a terrific time to lock in a historically unheard-of rate for 30 years. But of course when rates increase, that advantage diminishes.