Emma and I caught the “house hunting bug” lately – we have been touring a ton of houses. The whole process is similar to advertising in that the more houses we look at, the more we want to look (and buy). No wonder my realtor was so aggressive even though we told her our time frame to purchase is in 6-12 months. (It’s all an evil ploy if you ask me but anyway…)
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The impact of investment costs is never emphasized enough. In order to see how much it affects mutual funds returns, let’s compare a few different domestic stock mutual funds:
- Fund A: Vanguard’s Total Stock Market Index charges no sales load and has an annual expense ratio of 0.15%.
- Fund B: American Funds’ Investment Company of America charges a 5.75% sales load and has an annual expense ratio of 0.59%.
- Fund C: BlackRock’s Focus Growth Fund charges no sales load and has an annual expense ratio of 2.03%.
With credit cards so convenient, loans so common and debt socially acceptable, getting into debt is extremely easy. I still have vivid memories of the two people who sold me on my college credit card. It had the school logo on there and best of all, it helped the school every time I use the card to pay for a purchase. How cool is that?
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California is a beautiful place to live in since there’s no shortage of pacific ocean views down here. The gorgeous surroundings and year round perfect weather have attracted many who want to buy a house here. During the last decade, this went to the extreme as home prices went through the roof..
I frequent a local housing blog daily, and a property it featured a few days ago really raised my eyebrow. The owners of the house managed to withdraw $886,800 through home equity loans during the 14+ years that it’s been occupied. While these examples are abundant in places close to where I live, this one takes it a step further because the owners only put down $29,300 in 1994 for the house that cost $263,200 at the time. Apparently, the home values appreciating fives times at well over $1 million dollars (again, with a $29,300 down payment) isn’t enough to keep them afloat.
Oh my god.
If I told you that you can make 30x the investment in 14 years, you’d think I am just a salesman who is trying to sell you a financial product. In fact, if a buyer accepts the asking price, it would make the investment close to 56x but I heavily discounted the multiple because it’s hard to say how much the house will eventually sell for.
With decades of good fortune in the home purchase, what was left? Memories of a lavish lifestyle and nothing more.
Why? While the owner is asking for close to $1.6 million, it’s improbable that someone will buy it at those ridiculous prices. There are much newer homes for sale in nearby areas for as much as 25% less, so even 25% off the asking price might be too high. With the total debt of the property at $1.15 million (HELOC + mortgage), the owner will be lucky to come out even.
- Hopefully, the family will learn a lesson.
- Hopefully, this gives you a glimpse of why we are in such a mess.
- Hopefully, nobody tries this again (or at least for a very long time)
Reading these types of stories makes you wonder. Maybe:
- It’s not all wall street’s fault for creating this mess.
- It’s not the government’s fault for trying to help.
- We should share some of the blame too.
Responsible spending lessons should be drilled into every America’s mind, because our survival as a nation will depend on it.
As our economy and stock market tanked over the last several months, talk of inflation seemed to disappear. Instead, people began discussing the possibility (and ramifications) of deflation. Now that the stock market has picked back up–at least for the moment–I’ve heard several people voice concerns about inflation again.
Over an investor’s lifetime, inflation takes a giant bite out of investment returns. For example, if an investor owns a portfolio of bonds on which he earns a 6% rate of return, he’s probably only increasing his purchasing power at a rate of roughly 3% per year. In other words, inflation can easily eat up more than half of the return provided by fixed income investments.
Owning Tangible Assets
Investment “experts” often suggest owning gold or other commodities as a hedge against inflation. The idea is that tangible assets should be able to hold their value even in an economy in which the primary currency is losing its own value.
This makes sense to me. And historically, it’s worked fairly well. However, I don’t personally own any gold or other commodities in my portfolio.
Why? Because stocks are real assets too.
Many people seem to think of stocks (or mutual funds made up of stocks) as simply numbers in an account. And, given the everything-happens-online nature of the investment world we live in, it’s easy to forget that a stock represents a piece of ownership in a very real asset–a business.
Stocks Over the Short-Term
An astute reader might point out that stocks prices don’t typically increase when inflation levels increase. That’s true. And as a result, stocks aren’t very good at protecting against short-term inflation.
I’d argue, however, that inflation over short periods tends to be fairly inconsequential. Most people aren’t even going to notice if their portfolios decrease in value by 1-2% due to inflation. It’s generally only over extended periods that inflation becomes a big threat.
Stock Over the Long-Term
Thankfully, over long periods, stocks do quite well at holding their value in the face of inflation. Why? Because again, stocks represent businesses. And what do businesses do during inflation? They just raise their prices.
Note the contrast between this and the situation in which workers find themselves. As an employee, it’s hard to simply “raise your price.” Comparatively speaking, businesses are well-suited to dealing with rising price levels.
In summary…
If for some reason you’re worried about a huge jump in prices during the next few months, putting (or keeping) your money in stocks might not be the way to go.
If, however, you’re simply looking to protect yourself from the long-term effects of inflation, a diversified portfolio of stocks should get the job done quite nicely.
Mike writes at The Oblivious Investor, where he reminds readers to ignore the day-to-day craziness in the market and focus instead on getting the investing basics right. Subscribe to his blog for daily updates.
Just as night time in Asia parallels day time in North America, there are always two sides of every story. Are you feeling like the economy is really hurting you? Here are 10 ways to see heads even if the coin always seem to land on tails. Having a positive outlook will not only help you feel better but it will change your life.
Advertising and the Idea of More
For corporations, advertising works. Not so much for us who want to spend responsibility on the other hand. The more we think about our “wants”, the more we need to buy it. We know this, but instead of accepting this as a fact, why don’t we turn it around in our favor? If the more we think about it, the more times it comes up again, then the more we think about solutions to our problems, the more ideas we get too. I know that:
- The more I practice, the better I get.
- The more I write, the easier it becomes.
- The more actions I take, the more I will accomplish.
Good and Bad Retailers
Tiffany & Co is a high end jewelry chain and naturally, times are tough at this retailer. On the other hand, Walmart is doing exceptionally well recently. The lack of new cars buyers are hurting the automakers but it’s great for companies that make car parts. There are many companies that are shrinking but some are growing even in this bad economic environment.
Seesaw Government Statistics
While the government domestic product (and consumer spending) is decreasing, our savings rate as a nation is rising. For the first time in decades, we are actually saving money on average. It might not be so good for the stock market, but how can that be bad for the citizens of this wonderful country?
The Parent that Shows Up
For decades, the average weekly work hours for Americans have been increasing. We may be stronger and wealthier (in dollar terms) as a nation, but we are giving up precious time with our family for a few dollars earned. 50 years ago, almost every family were living off one salary and we were just as happy (if not happier). Now, we are stressed because our spouse got laid off. Less weekly work hours may sound bad, but it means more time with your family, more time pursuing your hobby and more time to rest.
The Consumer that Can Buy China on Credit
We hear stories upon stories of people that had their credit lines reduced, but is the lack of buying things on credit supposed to be a bad thing? We might not be able to buy a huge house now, but so what? With less purchasing power, we don’t have to spend as much energy to make sure we are responsible with it. How great is that?
At Unprofitable Banks, We Try Harder
After years of arrogant bankers who never care about our business, we are finally starting to see them change their attitude when so many banks are laying people off and trying to retain any customer they can. I see many more non-credit card offers in the mail for your business, and when I’m at the bank, people actually want to help. I welcome anything that makes my banker treasure the real relationships of the good old days.
The Real Estate Rush of the Late 21st Century
As housing prices plummet and everyone is racing to put up for sale signs, it is finally allowing responsible young families to buy a house that is starting to becoming affordable. In Southern California where I live, $300+ per square feet is considered a bargain. How can any young family afford a house with normal salaries? Many people are suffering the psychological effects of falling home prices, but the downturn is allowing many potential home buyers to enter the market and live the American Dream.
The Scared Entrepreneur
As many people lose the security of a job, they turn to entrepreneurship. It’s incredibly difficult to quit your good paying job when times are good to start your own business, but there are tons of success stories for those that do. Why not give entrepreneurship a try while you are looking for a job? It might be the best thing that’s ever happened to you. Even if it doesn’t work out, the experience you will gain is invaluable. Being self-employed, all I can tell you is this – Quitting my $100k job 6 months ago was the best thing that happened to my career.
The Numb Sleeper
Sometimes, it takes a huge slap in the face to wake up from our dream. 40 to 1 leverage might be extremely high, but I bet if the housing bubble doesn’t burst for another 20 years, institutions will be at 200 to 1 leverages. How bad would that have been?
The Starving Businesses
Business is bad, but what has it meant for the consumer? Have you noticed that there are tons of coupons these days for everything? Travelzoo alerted me of $14 airline tickets via its newsletter. All of a sudden, I was able to cut my bills by 10% just because everything is on sale. There are really awesome deals out there. Take advantage while they last.
You never win when you call heads and the tails show up, but as long as you are responsible with the wager, losing once in a while only helps you put everything in context. The key is to be responsible. Be optimistic and ready to take advantage in every situation.
Be Happy Everyday. You Deserve It.
