After 25 years investing in stocks, real estate, etc.
Updated: Aug 15, 2022
Being a young financial and tax advisor in the late 1990s my job was to talk savers out of their bank CDs holdings (at around 6% interest), and convince them to go into stock investments in the hopes of averaging 8%-12% in returns. Well....that strategy has worked terrific for the past 25 years. The Feds have pushed interest rates to near zero so the stock market got all the benefits from a low interest rate environment. Poor retirees who were comfortable in safe CDs were now forced into more riskier assets in order to find some yield. The most comfortable way to allow your money to work for you is in something that is safe, secure and guaranteed. The stock market has had NO real competition for investment dollars in a couple of decades.
No other country in the world has as much as Americans committed to the stock market. I think in the 80s, companies started to move away from safe pensions for their employees and into 401Ks, etc. So every week money keeps flowing into Wall Street to buy stocks. Money managers just can't keep the funds in cash otherwise their counterparts will gain higher returns and eventually those managers will lose thier customer base. So they are forced to keep buying...even if stocks are way overpriced. Amazon...a month ago was trading well over 100Xs thier future earnings. So basically if Amazon were to give you all their profits as dividends it could take you 100 years to get your investment back. Back in the day a good PE was considered 7-10...you wanted your investment back in dividends within 7-10 years. A good investment should double for you within 10 years. Basically most stocks were overvalued, and still are. Had you told people the world would experience a pandemic and the stock markets would experience one of their best years in history...you probably would have been ask to sign in to a mental institution. We were telling our clients to take the Covid rally as a gift and take some money off the table. Most didn't of course.
I've seen many crashes. I was a teen when 87' happened. Didn't really know what was going on, and really didn't care, but I do remember a bunch of older guys all upset over it. My first real one was Dot.Com. It was ugly. Amazon's revenues were doubling, but no one was really buying it around $6. I could see the real estate crash coming around 2007...and I was right...just not properly positioned (you can't just flick a switch and be out of your real estate holdings)....so I took a big hit like everyone else that owned real estate. I did however sink my last dime into real estate when it was on the bottom. I wanted to buy all I could, but banks weren't lending. Kind of makes me mad that banks were throwing out money when they shouldn't have been, but not lending when they should have been. I've always felt with real estate you still have some level of control, rather than no real control was with stocks. The stock market soon rallied back, but real estate took much longer to get back.
So the stock market kept rising and rising. I thought the suprised Trump victory would drop the market (futures were down 800+ points that morning), but the market rallied. The market continued to rally for the next 5 years. The old saying...the higher they are the harder they fall...well the stock market hasn't had a real correction in a long time.
There were many signs the market was topping out. Silly stocks like Gamestop shot up 1000%. Crypto coins shot up millions of percent. Amazing how something made out of digital thin air can actually become on asset and carry some monetary value. A Bitcoin is suppose to be a digital piece of programming that is left over and can be "mined like gold". Isn't the digital world infinite? Why couldn't some programmer just program their own "left-over bytes" and mine them themselves?? Yes, someday there will be some worldwide currency, but who knows which ones will win out. I have dabbled in crypto, but all I know is I don't want to own something that was 6 cents a decaded ago, and now sells for 30K. Not going to take that chance.
So what do I think going forward? Well lets go back to 87' when everything was "Turning Japenese". Japan was dominating. Their population was vibrant, energetic, smart, ambitious. Then they started to age. The country grew old and less productive. Thier stock market hit 39K. Their Feds had to slow their economy down due to inflation, so they raised rates 5 times. Well, it has been 30 years and thier stock market sits around 26K, and it got below 10K during this period. Could that be where we could be heading?? I hope not, but the striking similarities do make me nervous. Our greatest generation has retired, and next great generation of Boomers are retiring. Now the workforce is being replaced with Millennials, and Post-Millennials.
Rule of thumb is in order to battle inflation the interest rates should be near the level of inflation. I feel inflation for the past 20 years has been around 4%. However the Feds use ex-Food and Energy when they use that number. So it has been artificially low. In the last 20 years anything that is a basic necessity has increased dramatically. Food, rents, taxes, insurance, medical, autos, etc. The only items that didn't were electronics, toys, clothes, etc. The Feds have had plenty of opportunites to raise rates and to keep some power dry, but they didn't. Imagine buying a shiny new car 25 years ago, and never doing any maintenance on it. Well that car is breaking down, and their isn't another one that the Feds can drive. Now they want to put it in the shop. Question is for how long, and can they fix it?? If we want to really control inflation we may have to see interest rates around 8%. If that happens, and investors can simply get bank CDs or safe Fixed Annuities around that level, that would create real competition to Wall Street for money. Heck, next year's Christmas Bonuses may only be $200K instead of $247K to the average Wall Street worker. Money managers are now telling their clients to anticipate 6-7% returns going forward...well after you pay their 1.5% annual fee....then why put up with the voliltility and risks??
So after 25 years of investing in many asset classes your wondering what I'm doing? Safety and security. Bubbles are going to bursts. Is it time to buy back into the markets now? Has the bubble already burst? Do you "stay the course and keep sinking fresh money into the markets"? History will tell you yes, but I feel economies go in cycles. Probably 40-50 year cycles. So 1929....1970s,,,2020s....we may be overdue, and the Feds may not have enough ammuntion to rescue the economy again. Call my office if you want to dicuss one of our investments to protect what you have worked hard for. Don't give it back or let it evaporate. Your investment picture probably looks like an upside down pyramid that can topple over. Take some off the top and put it back to the foundation. For the past year one of the best assets has simply been "Cash"...or savings...getting a simple, but safe interest rate. That is my job now...bring investors back to a safe place.