Here is the state of things. The economy looks peaked with unemployment at 8.1% and climbing. You need a microscope to see interest rate yields with money markets earning under 2% and long term CD’s even lower. Nationally, average home prices have dropped around 20% in the last few years. And how about that wonderfull stock market? It’s down a whopping 50% in just over a year.
The fundamentals still seem sound:
- Live Below Your Means – Don’t spend your entire paycheck on living expenses. Tighten up the budget and save at least 10% of income every month. Always remember there are a lot of people in the world that make do with a lot less than us and 10% is hardly noticeable once you do it.
- Keep At Least Six Months In Cash – With layoffs looming and unemployment rising, keep at least six months to a year’s worth of living expenses on hand in cash. Don’t touch it unless you’re unemployed and need it to live off until you find more work.
- Pay Off High Interest Debt – with rates as low as they are, any loans with rates over 7% should be targeted for payoff. Start with credit card and car loans and then hit the mortgage. If you have a lot of credit card debt in the 10%+ category, that might even take priority over a large cash buffer. Of the 10% in savings every month, maybe stick half in the bank and half on debt reduction.
- Invest – this part seems to get tricky. Once you hit the above, you’ll have around 10% or more of your monthly salary piling up.
Where to Invest the Money?
But what is a young, dumb, investor to do? There seems to be no safe haven for our investment capital except cash. Even that will probably get gobbled up by inflation once all our drunken government spending and bargain basement interest rate loans finally catch up to us.
I feel now, as I have always felt, that there are only three places to reliably make money with money over long periods of time: stocks, real estate, and business ownership. The horrible returns we’ve seen with the stock market collapse, property values tobogganing, and businesses failing, is an inevitable correction due to decades of rising markets and bad decisions made assuming it would continue forever.
The plus side to this mess is that real estate values have come down significantly and are now much more reasonable. Purchasing ownership in companies via stock is also more affordable than ever.
The Solutions
If your time horizon for your investment is short, like you’re ready to retire, it’s just a bad time to be you. You’ve probably lost a ton of money and probably won’t get it back anytime soon. There are also no good short term solutions to make money without a lot of risk. You’ll either be living on less, or you’ll be working longer than you hoped.
If, however, you have a longer time horizon for your investment, now seems to be a decent time to invest. You still might lose some, (or a lot) of money in the short term, but if you reliably invest every month in real estate, stocks, or a business of your own, you’ll be ideally positioned to ride up the eventual turn around.
The Argument for Real Estate
Real estate seems to be a good candidate for purchase. Mortgage rates are laughable. Locking in fixed rate mortgages in the low fives is a great idea if you’re a first time buyer or have an existing ARM or higher rate financing. Non-owner occupied loans in the high fives to low sixes are also an amazing deal. Combining current low interest rates with the greatly reduced property values found today seems to make a sound, long term investment strategy.
The Argument for Stocks
Businesses are having a hard time staying profitable and even staying in business. There are, however, solid, profitable businesses to be found that are scooping up market share as their weaker competitors struggle to stay alive. It also interesting that the price to purchase a portion of those businesses has dropped a lot faster than the actual income they generate. Dividend yields on an S&P Index Fund (SPY) for instance are up from 1.2% in 2000 to over 3.2% today. Even though it’s certainly possible that the markets have a lot further to fall, building a well diversified portfolio now will get you good stocks at a discount as well as build good habits of monthly investing that will benefit you for the rest of your life.
Overall, the level of risk in purchasing real estate and stocks has gone down dramatically over the last few years. Saving money and investing monthly has always been a sound strategy and is even more important today. As long as we have the discipline not to touch the money, keep our spending in check, and develop a well diversified portfolio, now seems to be a great time to invest.
Tags: economy, investing, money, real estate, retirement, saving, stocks
