Managing your life through the rear-view mirror …

Not many people are rich, so following COMMON financial wisdom can’t be all that it’s cracked up to be, can it?

Case in point: paying down your mortgage is a subject that always gets a rise out of my readers.

I see it very simply:

If mortgage rates are currently 5%, what investments can give you 5% + whatever margin you feel you need to compensate you for risk?

How ‘risky’ is that risk? And, what do you stand to lose?

Some people, like Executioner, look at the 100% risk/loss scenario:

Although I’ll concede that it is unlikely that a broad index fund would ever drop to zero, it’s not outside the realm of possibility.

Sure, it’s not outside the realms of possibility, but has it EVER happened?

What’s the worst 30 year return that the stock market (as represented by, say, the entire S&P500), a basket of ‘blue chips’ (say, Coke + Berkshire Hathaway + GE + IBM etc.) have returned, or any solid piece of real-estate (be it residential or commercial)?

I’m betting that it’s not zero … not, by a long-shot!

But, maybe the rules have suddenly changed?

Neil thinks so, at least when it comes to house values:

House appreciation used to be a sure bet, but it isn’t any more.

But, I can’t help wondering … we used to say: “the market is going UP, blue sky everywhere … the rules have changed, it’s going to keep going UP”.

And, that thinking, of course, lead to ridiculously high valuations of both stocks and RE … and, a correction had to come.

And, it did. Big time!

Now, we seem to be saying: “no 8% returns for next 30 years [Executioner]” or “House appreciation used to be a sure bet, but it isn’t any more [Neil]” … “the risk/reward balance is different now [I made this one up]”.

So, I can’t help wondering:

If this is really the case … if things really weren’t different BEFORE (i.e. the market couldn’t keep climbing) are they really different NOW (or, can the market really keep falling?) …

… or, are we just guilty of doing more ‘rear mirror’ personal financial management?

I can’t give you the answer … only 30 years of ‘future history’ can do that!

But, if things haven’t suddenly changed PERMANENTLY – if the fundamental principles really haven’t changed – then, isn’t a ‘down market’ a GOOD time to buy?

Or, is that just the way that Warren Buffett thinks?

And, I know one which side of this coin I’ll be betting on 😉

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9 thoughts on “Managing your life through the rear-view mirror …

  1. “This time it’s different” – there will be no recover, shares will be a losing investment for 30 years, property prices will never go up again, taxes and deficits will go up for ever……is exactly what so many people were saying our here in Hong Kong during the Asian crisis and again during SARS. Both occasions proved to be an excellent time to buy shares and the latter was the bottom of the local property market cycle.

    Of course, I have no idea what the future holds but I do know that if I am not prepared to take some risks (and live with the consequences), then I will be stuck with returns that will never be better than mediocre and spend more of my life chained to my desk.

  2. I think housing won’t go down forever,But, on the other hand ,we need to look at Japan. Are we heading into a Japan style situation? where housing stays depressed for 10 to 20 years?
    Phys cal responsibility on the part of Government might be a good idea at this pint to assure we don’t head in that direction.

  3. I doubt the rules have changed- I’m still investing in stocks and real estate through REITs. Right now the investment that I have the biggest worries about is bonds…because interest rates are at historic lows and when they go up bond values will go down. Government debt is at an all time high, if they inflate out of it interest rates will sky rocket.

    -Rick Francis

  4. Wow, quoted and everything. Now I can call myself an “expert”, right?

    I cetainly didn’t mean things were “different” in that it is a fundamental change to economic principals, but I did mean that people suddenly realized that house prices can go down as well as up, and you to consider that when doing any investing. The real risk people made was betting on their house as their only investment.

    There is risk on being over-leveraged with your house, and if you are close to the 20% equity mark it isn’t a good idea to think about pulling out equity in the short term. We have talked a lot about risk mitigation (and zero-balance emergency funds) so this is easily managable risk.

    Personally, I think it is an excellent time to invest in the right things. I wonder if tulip options are available?

    Japan has a different problem that the US. Negative population growth. They don’t need new houses build except to replace existing older ones. In the US there is certainly a glut right now, but not enough to cover projected housing demand for 20 years.

  5. @ Neil – Yes, and, with a payment of only $19.95 per month, you can now wear the 7million7year Expert badge … 😉

  6. Ok.I understand this,but we have also had negative population growth for the past 3 years, that may or may not hold in the future. But we need to look at is it possible that we are entering into such a situation as japan.Plus,with unemployment at its current rate, many families are chosing to live together(creating less demand. So how will this affect housing and for how long can/will it last?

  7. @ Steve – If you can find property that (because of the low interest rates that you can – hopefully – lock in) generates POSITIVE cashflow (by no means, easy to find) … don’t you have a ‘hedge’ against these POTENTIAL future appreciation risks?

    And, if you DON’T invest – because of these future fears – don’t you LOCK IN a loss (of potential future gains)?

  8. if your in bonds right now, keep them ultra short term bonds. you won’t want to be caught in long term bonds for the very reasons you just pointed out

  9. of course. I am not saying don’t invest. I am saying take into account these potential problems when deciding what is this property really worth. If you don’t expect to get your money back for many many years in the future,either you need to get that investment at a low enough rate,to compensate for the time needed to be held , or you need to find an investment with better future potential. thats all I’m saying.

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