On Thanksgiving, I was speaking with a relative’s friend, who was new to our Thanksgiving table this year. He is a full-time real estate investor, and he seemed to be very successful.
With real estate prices surging nearly everywhere, I asked him how he’s approaching new investments. He told me he’s sitting on the sidelines.
“Everything is going to crash,” he replied. “Real estate, stocks, everything.”
When I pressed him on why he thinks so, he told me, “Inflation is too high, mortgages are too high and unemployment is too high.”
I couldn’t argue with him about mortgages. After years of ultra-low interest rates, a 7.5% mortgage feels very high, especially combined with inflated housing prices.
And while inflation is coming down significantly, our guest still had a point: That decline isn’t providing much relief. Lower inflation simply means prices are rising at a slower pace. It doesn’t mean prices are coming down. (Now, energy prices have fallen recently, but I don’t expect that to last.)
I was stumped by his statement that unemployment is too high, though. There are plenty of things that aren’t going well in the United States right now. Unemployment is not one of them.
The current unemployment rate of 3.9% is higher than the 3.4% rate from a few months ago, but that is primarily due to more people reentering the workforce. In fact, 22,000 fewer people were jobless during the week ending November 11 than during the prior week.
Perhaps our guest was referring to the fact that the number of new jobs being created is dropping. As we came out of the pandemic in 2021, more than 600,000 jobs were being created each month. Last year, the number was 400,000. This year, it’s fallen again to an average of 239,000 jobs added per month, including just 150,000 in October.
So nearly anyone who wants a job can get one, and with wages increasing, workers are getting paid more.
That doesn’t feel crashy to me.
No doubt, shoppers are looking for bargains and for ways to cut spending with prices higher than they were last year. We’ll see soon where holiday retail sales come in. That could be a good signal of the health of the consumer in 2024.
There are a lot of moving parts that affect the economy and markets, but as long as unemployment stays very low, I have a hard time envisioning “everything” crashing. If anything tumbles, I’d expect it to be real estate, as homes are becoming unaffordable for many people.
As a real estate investor, my new friend may be very smart to wait to put money to work. But for stock investors, it’s vital to remember that the stock market goes up over the long term. Timing a crash is impossible.
Now, it’s always a good idea to keep some cash on the side in case the market or some individual stocks you’re watching go on sale. But sitting out of the stock market because you’re afraid of a crash is always a losing proposition.
Let’s face it. On the rare occasions that stocks do crash, there are very few ice-in-the-veins investors who are bold enough to deploy money as prices are tanking.
Lots of people say they’re going to buy when prices go lower, but in reality, most investors are too scared to do so because they’re afraid of further losses. It’s not until stocks have recovered in a big way that they finally feel comfortable investing their cash.
The solution is to not play that game. Since 1957, the S&P 500 has returned an average of 10.7% annually with dividends reinvested. That’s a very solid return and includes many crashes, such as the COVID-19 crash in March 2020, the global financial crisis from 2007 to 2009, the dot-com crash at the beginning of the century, the 1987 crash, etc.
Another way to avoid fearing a crash is to take any money out of the market that you’ll need within around three years. This way, your long-term money will still be invested and growing while the funds you’ll need in the short term to pay bills will be protected. (I recommend putting that money in short-term Treasurys and certificates of deposit, which can earn you more than a 5% return.)
Lastly, some of your portfolio should be in corporate bonds. Today, you can earn nearly stocklike annual returns with a fraction of the risk of stocks.
Having bonds in your portfolio provides ballast when stocks tank. Bonds pay you interest twice a year, and you get your money back at maturity no matter what the stock price of the underlying company is doing. A company’s stock could be down 90%, but as long as the company doesn’t go bankrupt, bondholders will continue to receive interest and will get paid back at maturity.
I’m not worried about a stock market crash at all. But if it does happen, I’ll rest assured knowing that stocks go up over the long term and that the money I need to pay the mortgage and college tuition won’t be affected.
I hope to see this new friend next Thanksgiving to compare notes and see what moves he’s made in reaction to the markets. I know that I won’t have done much.
— Marc Lichtenfeld
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Source: Wealthy Retirement