Photo (cc) by AMagill
With banks paying historically low interest rates – in many cases less than 1% – they certainly doesn’t seem to be a good place for your long term savings. At least until you compare them to the stock market, where doubts about the economy are keeping prices depressed.
Then there’s housing. While prices have shown signs of stabilizing in some parts of the country, foreclosures in other parts make investing in real estate equally unnerving.
I’ve been investing in stocks, bonds and real estate for more than 30 years. For about 10 of those years I was a stock broker for three major Wall Street firms, so this is a block I’ve been around. I also put my money where my mouth is, because I disclose exactly what I’m buying and what I own.
While I can’t tell you what’s going to happen in the next few months, I’m not afraid to make some long-term bets. Nor am I afraid to show you exactly where I’m putting my money to work today.
Let’s start with this recent news story. Watch it, then we’ll continue the discussion on the other side.
Stocks – My two-year prediction: Dow 12,000.
As I write this (before the market open on July 6th, 2010) the Dow Jones Industrial Average stands at 9,686.48, down 13% from April highs and about 10% below where it was 10 years ago. Other indexes are faring worse than the Dow: the S&P 500 is down 16% since April and the Nasdaq is down 17%. Should any of those measures reflect a drop of 20%, that would mark an official bear market, which could trigger additional selling, driving the averages even lower.
And there’s certainly no shortage of negative news that might trigger additional selling. There’s more and more talk of a “double-dip” recession. Europe is still in an economic funk. Chinese growth is slowing. And here at home, according to the latest unemployment report, 125,000 more Americans lost their jobs in June – the first monthly decline in jobs this year.
So things aren’t looking great in the short term. Time to run for the exits? Nope. Time to buy.
Before I tell you why, let me tell you this: starting in March of 2009 I began buying stocks in an online public portfolio so you can follow what I’m doing with my own money. Disclosures: 1. I also own stocks in my retirement plans, so this portfolio isn’t my only exposure to the stock market. 2. I’m not “cherry-picking” my picks. Every stock I buy outside of my retirement plans is reflected in this portfolio at the price I paid, along with the date I bought it. 3. While this portfolio doesn’t reflect my entire net worth (that I’m not going to disclose online), I’ll assure you that this isn’t “play money.” It represents a significant portion of my savings.
Now, back to why I think stocks are a buy.
My 20-year television career has included dozens of on-set appearances where I’ve been asked about the future for the stock market. When it comes to short-term predictions, I always say the same thing: I don’t know and neither does anyone else. In my opinion, only a liar or a fool will claim to know the immediate future when it comes to stocks. There are simply too many short-term variables that can potentially impact stock prices. Textbook example? The Gulf oil spill wasn’t on anyone’s radar and it has certainly influenced stock prices.
Predicting long-term stock prices is much easier and really is the only type of prediction that matters anyway, since stocks are a long-term investment: a place where you put money that you absolutely, positively won’t need for at least five years.
I think the stock market will be at least 20% higher two years from now than it is today. The primary reason is simple: in order for stocks to stick to their historic growth rate of approximately 9% annually, they’ll have to go higher. As I mentioned above, stocks are about 10% lower today than they were 10 years ago. In order to equal their average annual return over the last 100 years, a sustained move higher has to appear at some point. The only real question is when.
Potential problems with my “revert to the mean” investment strategy:
- The world may have changed. In other words, the stock market won’t return to its average annual return of 9% because the investment environment is permanently altered. Possible? Sure. It’s also possible the world will come to an end in 2012, but betting against history generally isn’t a great idea.
- The timing may be wrong. Just because stock market returns have dipped below historical norms and should ultimately revert to the mean doesn’t mean a rally has to start soon. On 10/1/2008, the Dow closed at 10,850: not far from where it was on 10/1/1998. The same logic I’m applying here could have been used to suggest buying stocks then, but that certainly wouldn’t have been a good idea since five months later the Dow had dropped about 40%, closing around 6,600.
While the above problems definitely deserve consideration, I’m still betting that stocks will outperform over the next two years. If the world has changed to the extent that the stock market will never again offer positive returns, potential implications would be dire indeed – that the US economy will fall into a long-term economic depression, or even that the capitalist system itself is no longer viable. In either case, the only decent short-term investment might be gold (I do own some in my portfolio) and the best long-term investments will be canned food and guns.
As for the timing, it’s true that a “reversion to the mean” rally doesn’t have to start tomorrow, next week or next month. There are issues that could drive prices lower – maybe much lower. As I said above and want to emphasize, the market may go lower in the short term – see this article from Dan Dorfman at the Huffington Post.
But that’s why my prediction is for two years from now. But that’s OK. I never invest all at once and always keep some extra money on the sidelines. If the market takes off tomorrow, I win, since I already have a bunch invested. If the market falls, I’ll simply buy more, as I did with Citigroup back on April 16th and may do again soon. And I’ll be patient. My most recent purchases of Citigroup are now underwater (I paid $4.56/share in April – the stock will open today 17% lower at $3.79) but I bought this stock because I think it will be $20/share – not 10 months from now, but 10 years from now.
Remember, when it comes to investing in things like stocks, by the time the prognosis is both certain and bright, the “easy money” has already been made. When you look at my portfolio, you’ll note how many stocks I bought in the spring and summer of 2009. That was when times were the darkest and very few of the high-profile prognosticators on Wall Street were recommending stocks. The news was all bad and the Dow was hitting new lows. By the time the recession was pronounced dead in late 2009, the market had already rebounded the Dow to 10,000 and many of my picks were up more than 50%.
Legendary investor Warren Buffet said it best: “Be fearful when others are greedy. Be greedy when others are fearful.” Today, as they were last year at this time, investors are fearful.
If you’d like to learn more about investing in stocks, real estate and other types of investments, check out a book I wrote a few years ago, Money Made Simple.
For more on my theory of stocks returning to their historical average returns, check out this article from Forbes.
Real Estate – My two-year prediction: Higher, especially in hardest-hit and hardest-to-build markets.
In addition to owning several houses over the years, I’ve also owned rental properties and a portion of a partnership that developed raw land. While real estate has historically averaged about the same return as stocks over the long-term, I’d guess that I’ve made more money from real estate during my investing life than I have from stocks.
Real estate is much more difficult to discuss than homogeneous investments like stocks. In other words, 100 shares of IBM is the same whether you’re buying it in Boston or Beijing. But housing markets are local. If you live in an area of growing employment opportunities, your profits will almost certainly be higher than if you buy in shrinking cities with high unemployment.
I paid $440,000 when I bought my Fort Lauderdale waterfront home back in 2001. As the market peaked in 2007, it was worth more than a million dollars. At the height of the bubble, I knew many people who were buying houses and flipping them: holding a house or condo for a few months, then selling it for more than they paid for it. The mantra at the time was “You can’t go wrong because housing prices always go up and everybody wants to live in Florida.” But I didn’t participate in the frenzy by buying additional houses. Why? Having been around the investing block a time or two, I used the same logic that applies to any investment: whenever you hear the words “you can’t go wrong” things are about to go terribly wrong. And, of course that’s exactly what happened.
My house is now worth something south of $500,000; maybe as little as I paid for it in 2001. Many friends who were speculating on housing were wiped out. Needless to say, none are buying houses today.
Too bad. Because today, buying a house in South Florida is a good idea, and an even better idea in other parts of the country.
Nationwide, we need about 1.5 million new houses a year to accommodate new households being formed and to replace old houses that are lost to fire, flood, age, etc. The annualized rate of homes being built however, was only about 700,000 in April, and less than 330,000 in May: the lowest number ever recorded and around 20% of what’s needed. Result? Sooner or later the pent-up demand for houses will materialize as higher housing prices. As to when that will occur, it will happen when the economy improves, unemployment begins to recede, mortgage money becomes more readily available, and the huge inventory of foreclosures is worked off, especially in bubble states like Florida, Arizona, California and Nevada. (See How to Buy a Foreclosure.)
To learn more about the supply-demand housing imbalance, read Is a housing shortage coming? from CNN/Money.
What do you do when an investment with long-term promise has a short-term crash? Whether you’re talking stocks or real estate, the answer is the same: if you have long-term money available, you buy more.
As I said above, it’s possible the world has changed. It’s possible that houses will never again appreciate. That’s the guns-and-canned-food-great-depression scenario. But if you believe that housing will return to the historical mean of gentle annual appreciation in the 5%-7% range, logic would suggest that buying at 2001 prices would make a lot of sense.
I have yet to buy any more houses – the only real estate I currently own is my home and a bit of vacant commercial property in Arizona – but I’m looking into foreclosures in Fort Lauderdale. Buying real estate isn’t nearly as simple as buying stocks and requires a great deal more research, not to mention a great deal of cash. If you’re buying foreclosures, no mortgages are allowed; you have to write a check for the full amount. I’m simply too busy at present to devote the time necessary to buy more real estate, but then again, I’m not in a huge rush. I doubt the stock market is going to take off tomorrow – neither is the housing market.
Best place to buy a house or other real estate? In the formal bubble markets mentioned above where housing has been over-sold and foreclosures are plentiful, or in fully developed cities where employment is rising and space for new homes is at a premium, like New York City, San Francisco and Seattle.
Interest Rates – My two-year prediction: Twice as high as today.
Interest rates are historically low. As with stocks and real estate, I feel that the path of least resistance is up, especially when looking a couple of years out.
If I’m right, those predicting a double-dip recession will be wrong and the economy will continue recovering. As the economy improves, demand for loans will improve with it from all sectors: consumers will borrow for cars and houses, businesses will borrow to expand and the government will borrow to finance its ballooning deficit. Increased demand for borrowed money means higher interest rates.
If you own bonds, higher interest rates are dangerous, because bond prices move inversely with interest rates. In other words, higher rates mean bonds you own today will decline in value. You want to own bonds when rates are falling, not rising.
If you’re keeping money in the bank or money market mutual funds, higher interest rates are obviously a good thing. So if I were keeping money in ultra-safe investments like bonds or CDs, I’d resist the temptation to chase a little extra interest by investing long-term and stick to short-term savings so you’ll be ready to lock in higher rates down the road.
As with stocks and real estate, this prediction depends on the economy improving. If we’re instead on the verge of another Great Depression, interest rates will stay low or perhaps even go lower – although on many investments they’re already close to zero.
That’s it: now I’ve recorded my predictions for all the world to see. Now all we have to do is wait two years, take a look back and see if they were accurate.
Important: When you look at my stock portfolio, please note that THESE ARE NOT RECOMMENDATIONS! What stocks you should buy, if any, are a reflection of your net worth, your tolerance for risk and many other factors. Just because something works for me doesn’t in any way make it right for you. In short, I do my research: you do yours.