Liquidity and Marketability

Someone, or many people, once said that if you get the fundamentals right everything else eventually falls into place. Doing so doesn’t guarantee the task will be easy, but I think we can all agree that getting the fundamentals wrong makes things a lot harder.

Unfortunately, most people don’t realize they’re getting the fundamentals wrong until times of stress (market, economic, and so forth) or, as has been the case for certain local investors in recent months, until there’s nothing to be done to fix the problem.

Case in point is the recent uncovering of how a highly regarded real estate fund based in Marin turned into a massive Ponzi scheme. The promise of higher returns led many folks to put far too much of their life savings into this deal and now they find themselves between a rock and a hard place. The details of the scheme are available online, so you can look it up if you like.

While there are several investing and planning fundamentals imbedded in this financial tragedy, let’s look at one of the most fundamental: understanding the difference between, and the importance of, liquidity and marketability. A lack of personal liquidity is one of those problems that isn’t until it is and then it’s a big one. And it’s easily overlooked when times are good, even by some of the most intelligent folks around.

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Quick Update

I don’t know about you but I’m running out of words to describe the times we’ve been enduring these last months. Challenging? Uncertain? Scary? Apocalyptic? Whatever we call this, it’s just plain tough to handle. And with the new local fires emerging it seems inappropriate to write about anything financial right now.

We’re ending the quarter this week and next Tuesday I’ll post my regular update. Until then I wish you and your family safety and good luck. These are (insert your own descriptive term here) times indeed, and we’re all going to have to dig deep to get through them.

While it may be small consolation with everything that’s going on, know that we’re still hard at work for you and are available to help whenever you need it, wherever you are and wherever we are.

Have questions? Ask me. I can help.

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From Straw to Bricks

That old saying about the last straw breaking the camel’s back has been on my mind a lot in recent days. How much is too much? It’s tough out there and things only seem to be getting tougher. But now it’s a growing number of conversations and news stories about folks just being done with it and planning to move out of the area. Many say they’ve been at the tipping point for a while and the current smoke situation is that final straw that feels like a ton of bricks.

All this has me considering the thought process behind relocating. It’s a complicated thing, upending your life. There’s lots of risk but big potential rewards. And deciding to move involves a series of tradeoffs that are intensely personal. So this is a big topic, but I’ll highlight some of the core financial issues now and in the coming weeks.

Let’s look at a common question when you’re moving out of state: to sell your home or rent it.

If you’ve owned your home for a while you likely have a good amount of equity. This is great because you can transfer it, so to speak, to somewhere on a long list of states with cheaper housing prices and probably overall lower cost of living. We pay a premium to live here and it’s no surprise that our housing cost is over twice the national median and over 50% higher than Austin, TX, a popular would-be destination for folks leaving Sonoma County.

To illustrate how leveraging this Sonoma County premium could work at the household level, here’s a scenario using median home prices and typical homes here and in Austin.

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Quarterly Update

Before we begin, I just want to say that I hope you and your loved ones are well, all things considered, and that your home has survived the recent fires. Its tough out there right now and natural disasters don't help matters at all. One day at a time. Now, on to this week's post...

During the third quarter (Q3) we continued to climb out of the pandemic-induced hole we found ourselves in earlier this year. Broad economic numbers improved, stocks performed well, and bonds held steady. But our economic and financial recovery has continued to be uneven and this adds risk to the outlook.

Here’s a roundup of how major markets performed during Q3 and year-to-date, respectively:

  • US Large Cap Stocks – up 9%, up 5%
  • US Small Cap Stocks – up 5%, down 7%
  • US Core Bonds – 0.4%, up 7%
  • Developed Foreign Markets – up 5%, down 7%
  • Emerging Markets – up 10%, down 1%

Tech stocks continued to lead the way during Q3, with the largest companies getting larger. According to Bespoke Investment Group, the five largest stocks in the S&P 500 (Apple, Microsoft, Amazon, Google, and Facebook) now account for nearly 23% of the index’s value. This is radically different from ten years ago. Back then only Apple and Microsoft made the top five and were joined by Exxon (then the largest company), Berkshire Hathaway and Walmart. Those top five made up only 11% of the index’s value in 2010. Now we’re relying more heavily on so-called Big Tech to drive market performance, making diversification harder.

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Thinking Long But Going Short

Last week we looked at some of the issues related to relocating amid all the uncertainty we’re facing. This is a popular topic these days. We focused on the question of selling your home here and transferring your equity to the new location, often leaving you with a good amount of cash.

We also touched on the idea of renting in your new location. Although this is likely anathema to many long-time homeowners (myself included), renting for a while has its benefits. The idea is to give yourself space to figure things out, investigate the new area and decide where you really want to be before pulling the trigger on buying a home. It takes time to determine which side of town you like best, the traffic patterns, where the nice parks are, and so forth. And since many housing markets around the country aren’t as active as ours, you’ll want to avoid feeling stuck in a hastily bought home in a less-than-ideal location.

Zillow, for example, says that on average nationally it takes about two to three months to sell a home (including the escrow period). Our area typically takes less than two. But beachy areas in Florida and South Carolina can take four months or more. Also, some of these markets are currently categorized as “hot” but are expected to flatten out or decline over the next year. So, while it’s possible to sell for a profit if you realize you made a mistake, it’s more likely you’ll need to hang onto your new home for a while. I think it pays to be cautious by trying to rent before buying unless you already know the area.

But what to rent and how? While it might seem obvious, this isn’t a time to think about being on vacation. If you need a vacation, take one. You’ll want to rent as if you’re living in the area full time. This means finding a rental that’s like a home in your target purchase price range and, ideally, even in your target neighborhood. In other words, no beachfront condos with amazing views unless that’s what you’ll be buying.

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Splits and Starts

Last week’s two-day drop in the stock market caught a lot of people off guard and it’s continuing this morning after the holiday weekend. Stocks had been on a tear for a while and some investors were getting a little too complacent. Sounds familiar, right? Periods of relative calm followed by volatility slapping you in the face – that’s been typical market behavior in recent years and is common over the long-term. But it feels worse when markets get extra frothy based on short-termism and thin news.

An example of this short-term thinking is how day trading is coming back into fashion. In recent months “retail” traders have been plowing money into the big tech names, helping to drive prices up to nosebleed levels for certain stocks. The popularity of the Robinhood “freemium” trading platform illustrates this point. The firm makes it incredibly easy (maybe too easy) to buy shares of stock and reported over 4 million trades per day in June, eclipsing more established firms like TD Ameritrade and Schwab. This followed a large spike in trading on the platform during the early stages of the pandemic.

These numbers are reported with a lag, but we can assume this activity continued through the summer as a relative handful of stocks rode the wave of popularity. The narrative here is that younger unemployed folks were bored during the shutdown and started trading stocks with their stimulus money. They did well by getting lucky and got too enthusiastic. That seems overly pessimistic and a little harsh, but I can imagine many of these short-term traders getting caught unawares and dumping shares in recent days. That, plus the rapidly shifting sentiment of computer algorithms and other speculators who make up much of the day-to-day on Wall St, was certainly sufficient to blow some of the froth off tech stocks.

So, in addition to everything else impacting stock prices these days we have to add newbies with itchy trigger fingers trading stocks on their iPhones. At least it provides a clear example of what not to do. Speculation versus long-term investing; know the difference!

Another factor driving stock prices lately was news that Apple and Tesla were splitting their stock. An abundance of splits helped fuel the 90’s tech bubble but had fallen out of favor in recent years. The current price slide notwithstanding, the split news had a big impact on each company’s share price, so it’s possible more companies will want to split their stock. If so, this could be a tailwind for the markets as we emerge from recession.

Along those lines let’s review a few paragraphs from my research partners at Bespoke Investment Group, in which they look at the recent Apple and Tesla splits and what they might say about the makeup of the market.

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