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The Doom and Gloom of it all…
Many investors are now asking when their stocks will get back to even. My response is always; “What do you mean by even? Is it the amount of money you initially invested, or is it the amount that your investments were worth on the day the Dow hit its high on October of 2007?” Human nature, being what it is, the answer is usually the latter: the value at its high. We all tend to anchor on the highest number we can remember.
Think of your house, for example. You probably remember the price your neighbor’s house was sold for during the very good times. I know I do. My house was originally purchased for $215,000 in 1996, and I remember seeing it worth over $500k as other homes sold in my neighborhood at that price. (Of course, they didn’t have the extra features my home had). When I looked up the value of my home on Zillow.com the $500,000 value was further reinforced.
I understand my home is now worth somewhere in the neighborhood of $300-$350,000 which is a decline of 30-40%. Yet, from my initial purchase, my home is still higher in value by 40-60%. If I’m not selling, how important are these numbers to me? Important in mainly one respect. What we all want financially from owning our own home is for the value of the home to keep pace with the cost of housing in general. In other words, in order for me to have enough flexibility to move to another home, I would need the capital from my first home to be close to the capital needed for my new home. If prices are rising, I will have more money to pay for a new house whose price has also risen. If I was renting, I would not have the money to pay for the higher cost of a new house. Fundamentally, home ownership enables us to keep pace with the rising (over time) cost of housing in the United States.
You might say: “Fine Steve, but that’s your house, what does this have to do with my investments?” I suggest it’s very much the same thing.
Think of your 401k or IRA for example. Values were much higher 16 months ago (I’m sure you remember THAT number) and yes, today’s value is lower, but are you spending any or all of that money right now? If you’re not using all the money today, it’s like staying in your home. It doesn’t really matter what its worth this day or this year. It will only matter when you are ready to spend it all.
You may reply: “But, I came into the market late and the current value of my 401k is LOWER than all of my monthly contributions combined! I don’t have the satisfaction of seeing the value of my 401k worth more like you do with your house.”
True, but what is the real effect on you? In hindsight we know now that the values 16 months ago were high and perhaps the future rate of return from those high numbers will not increase much for the next 5 years or so, but the future rate of return from today’s prices, should be MUCH higher.
Let’s look at the stock market. The Dow reached approximately 14,000 in November, 2007 and let’s say from that point, stock prices rise at a rate of only 3% per annum on average. (Not a very good return from the 14,000 level.) If this is true, the level of the Dow will be 17,734 in 10 years. With the Dow now around 7,000, the annual rate of return from 7,000 is 9.75%. This is far better than 3% you would earn if you did nothing, so you can see the benefit of continuing to invest when prices are low.
Of course nothing is ever this simple and there certainly are unknowns. Maybe the market won’t appreciate 3% over the next 10 years from the 14,000 level (even though history suggests a high probability that it will earn more.) Nevertheless, right now you only have to beat the 2.5% return you earn on your risk free investments like CD’s or Treasuries to be successful. That, I think should be relatively easy to accomplish.
How then, do you weather this awful downturn? 1) Turn off financial TV. (…except when I’m on, of course.) 2) Suck in your belt and get your emotions under control. Think past this recessionary cycle. Investigate the downturns of 1973-75, 1980-82, 1990-91, and 2000-2002. You’ll discover each one of those periods felt scary and different from the previous recessionary period. Experts lectured about the end of capitalism or the irreparable damage to America’s position in the world. These lectures and conjectures continue today.
Remember though, if you didn’t buy into their negativity back then, you likely would have profited very well, and chances are, doing the same in these days of uncertainty will profit you very well indeed.
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Click here to listen…
The Doom and Gloom of it all…
Many investors are now asking when their stocks will get back to even. My response is always; “What do you mean by even? Is it the amount of money you initially invested, or is it the amount that your investments were worth on the day the Dow hit its high on October of 2007?” Human nature, being what it is, the answer is usually the latter: the value at its high. We all tend to anchor on the highest number we can remember.
Think of your house, for example. You probably remember the price your neighbor’s house was sold for during the very good times. I know I do. My house was originally purchased for $215,000 in 1996, and I remember seeing it worth over $500k as other homes sold in my neighborhood at that price. (Of course, they didn’t have the extra features my home had). When I looked up the value of my home on Zillow.com the $500,000 value was further reinforced.
I understand my home is now worth somewhere in the neighborhood of $300-$350,000 which is a decline of 30-40%. Yet, from my initial purchase, my home is still higher in value by 40-60%. If I’m not selling, how important are these numbers to me? Important in mainly one respect. What we all want financially from owning our own home is for the value of the home to keep pace with the cost of housing in general. In other words, in order for me to have enough flexibility to move to another home, I would need the capital from my first home to be close to the capital needed for my new home. If prices are rising, I will have more money to pay for a new house whose price has also risen. If I was renting, I would not have the money to pay for the higher cost of a new house. Fundamentally, home ownership enables us to keep pace with the rising (over time) cost of housing in the United States.
You might say: “Fine Steve, but that’s your house, what does this have to do with my investments?” I suggest it’s very much the same thing.
Think of your 401k or IRA for example. Values were much higher 16 months ago (I’m sure you remember THAT number) and yes, today’s value is lower, but are you spending any or all of that money right now? If you’re not using all the money today, it’s like staying in your home. It doesn’t really matter what its worth this day or this year. It will only matter when you are ready to spend it all.
You may reply: “But, I came into the market late and the current value of my 401k is LOWER than all of my monthly contributions combined! I don’t have the satisfaction of seeing the value of my 401k worth more like you do with your house.”
True, but what is the real effect on you? In hindsight we know now that the values 16 months ago were high and perhaps the future rate of return from those high numbers will not increase much for the next 5 years or so, but the future rate of return from today’s prices, should be MUCH higher.
Let’s look at the stock market. The Dow reached approximately 14,000 in November, 2007 and let’s say from that point, stock prices rise at a rate of only 3% per annum on average. (Not a very good return from the 14,000 level.) If this is true, the level of the Dow will be 17,734 in 10 years. With the Dow now around 7,000, the annual rate of return from 7,000 is 9.75%. This is far better than 3% you would earn if you did nothing, so you can see the benefit of continuing to invest when prices are low.
Of course nothing is ever this simple and there certainly are unknowns. Maybe the market won’t appreciate 3% over the next 10 years from the 14,000 level (even though history suggests a high probability that it will earn more.) Nevertheless, right now you only have to beat the 2.5% return you earn on your risk free investments like CD’s or Treasuries to be successful. That, I think should be relatively easy to accomplish.
How then, do you weather this awful downturn? 1) Turn off financial TV. (…except when I’m on, of course.) 2) Suck in your belt and get your emotions under control. Think past this recessionary cycle. Investigate the downturns of 1973-75, 1980-82, 1990-91, and 2000-2002. You’ll discover each one of those periods felt scary and different from the previous recessionary period. Experts lectured about the end of capitalism or the irreparable damage to America’s position in the world. These lectures and conjectures continue today.
Remember though, if you didn’t buy into their negativity back then, you likely would have profited very well, and chances are, doing the same in these days of uncertainty will profit you very well indeed.
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