Don't Panic in Rough Financial Times

Here is a GREAT piece from Ben Stein advising us all not to panic in the uncertain economic times we're facing. Sure, the stock market's been rocky, the dollar is in the toilet, and the real estate market has collapsed. That said, it is NOT a time to panic. A few thoughts from Ben:

The stock market fluctuates. It's had five good years in a row, with some of them very, very good. Even with recent corrections, at the of end of 2007 it was higher than it was at the beginning of 2007, and dramatically higher on the Dow than it was at its peak in 2000 -- and that doesn't include dividends.

That's right -- the stock market MADE money in 2007. Read the financial press and you'll think it was down 20% or something. And while it may be down in 2008 (no one knows what will happen), the high likelihood is that in the long-term it will be up 8% to 10%. So if you have a longer than 10-year time horizon, go ahead, invest away!

In fact, it's now the perfect time to make some long-term investments:

If you're a long-term investor, it signals a time to buy. The history of stock market investing is unequivocal on this point: When the market is low, when the economy is in a recession, it is -- in the long run -- by far the best time to buy.

Exactly! When the market goes down it's a great time to buy.

I have a lot of cash on the sidelines right now since I'm saving up for a major downpayment on the new home we hope to buy this summer. But I've used some of it to buy more shares of stock index funds lately. Of course I have my 401k money being invested every month too. In addition, part of my paycheck goes directly to Vanguard to be invested in the market. Yep, I'm buying as much as I can now. Don't know how long it will take for me to see a decent return on the money I'm investing now, but I have time to wait. I won't need it for another 20 years or so.

Next, Ben shares an amusing perspective:

The whole reason you get paid so much more to be in the stock market than in cash is that it fluctuates so much. You get paid to be scared.

Ha! I guess lots of people are making sure they earn that extra return!

Next, he suggests that if you find a home you really like, go ahead and buy it. he says not to worry about the market going down further. Here's why:

The history of home prices tells us that when housing reaches a peak, it falls (of course), but then when the next wave comes along, that wave lifts housing higher than it was at the last peak -- often far higher. In the meantime, you get to live in the home rent-free -- with the "imputed rent," which is sort of a dividend composed of the rent you would have had to pay if you'd lived in the home as a renter.

I'm hoping (and somewhat expecting) this happens to us. Here's what I think has a good chance of happening: We'll find a home this summer, snatch it up, watch its value fall for a year or two (though slightly as we're buying in a decent area and only bidding at the very bottom of the price range), stabilize in the next couple years, then start to take off. I have no fear that we'll lose money on the purchase -- especially at today's cheap (and getting cheaper) prices.

Comments

[Finance Monk]

The 'buy when low' comment is probably a good idea, but I have to disagree with the 'housing won't get much lower' argument.

We have a huge glut of excess inventory right now in the market, which is going to be depressing house prices for most of the year if not longer. Realistic estimates show the inventory not going away until early 2011. Add to it the developing deflationary expectations of consumers (if i wait longer it will go lower) which becomes a self-fulfilling prophecy as long as there's excess inventory, and you're looking at a few years of gradual decline in house prices. Housing is a very laggy market, and it takes a long time to work through these kinds of cycles.

If you need to buy a house (moving, divorce, etc) then don't panic too much since there's not much you can do and you can haggle a good deal now. But if you can afford to wait a year or so, I would. I'd imagine we're in for a rather flat house appreciation market like the 1990s for quite some time. Of course, all housing is local, so who knows how this applies to you. ;)

[Susan]

Consider the scenario where the stock market dives to half its value over the next 3 years and then rises back to it's all time high over the next following 3 years. If you invest $20K every year over those 6 years, dollar cost averaging, when the market finally does make a new high, you would have recieved an average return on your money of approximately 50%. So you would have invested $120K and returned $60K for a total of $180K in only 6 years. This would go a long way to funding a lot of retirement accounts.

[Bill]

Look back at some of Ben's predictions before you put too much stock in his advice.

[FMF]

Bill --

Are you talking about his housing trend prediction or his thoughts that the economy will eventually bounce back?

[Becky]

Amen to this post!

[Jake]

The reason to listen to this advice is not "because Ben Stein said so." The reason is because it is fundamentally sound advice.
(1) People shouldn't try to time the market, they aren't successful at that.
(2) The equity market has higher long run returns than other asset classes.
(3) Statistically, investors are too pessimistic about future returns when the market is down, and too optomistic when it is up.

The stock market is essentially cyclical and mean reverting. Human beings, on the other hand, look for patterns based on very recent events (the availibility bias). The market went down 3% today. Statistically speaking, it is more likely to be UP 3% tomorrow than to be DOWN 3% tomorrow, but 8 out of 10 non-professional investors would tell you the opposite. That is why more of your coworkers or golfing buddies have sob stories about selling at the bottom than have success stories about selling at the top.

[TreyD]

I can't believe you're spreading advice from Ben Stein. The guy has proven himself to be a complete moron over and over again, he's an interesting marketing tool for the media but he's a joke in any professional circle. Not that I don't agree with the obvious "advice" that markets fluctuate but go up over time. And by the way, I don't think anyone would have "thought" the market was down in 2007, the fact that it was up is not a surprise to anyone. Of course the media would write about the problems that were brewing, that's their job because that was the news.

Keep reading Ben Stein though, you'll do as great as he does. It was in August where he was on TV saying their is no subprime problem and that his top stock pick was Merrill Lynch. You can find that video on YouTube. He's been saying there is no subprime problem and no problem with the bank's balance sheets during all of last year. That's what you get when you listen to a failed actor/armchair economist instead of reading the market and watching what the smart money is doing.

[Easy E]

I can't disagree that buying low is a great idea, but Ben Stein is an idiot. He said that there was no need to worry about the economy because housing was sucha small part of it. I'm not a pro but even I could see the flaw in that logic. Housing is contained in some bubble, every part of the economy affects every other part.

If you want real advice about where the economy and markets are head check out:

http://www.dailyreckoning.com/
http://www.dollarcollapse.com
http://www.dailypfennig.com/

[klauss]

"but Ben Stein is an idiot"

slow down there. The economy might be slowing and may slow significantly, but it is not reckoning day. Last time I checked out the local starbucks and movie theatre they were packed and the airport was overcrowded as well.

Merrill Lynch will most likely be a great buy if held for 10+ years, and I would say the same for a personal home. He was off on bank balance sheets, but most diversified banks will recover in time. I think he usually provides reasonable advice when looking at the long term outlook.

[Easy E]

It's funny you would say that Merrill Lynch would most likely be a great buy if held for 10+ years because you don't really know. Anything could happen. Everyone thinks that stock market returns are a gauranteed thing but if you look at what has happened seen the tech bubble, the DOW hasn't even gained back all of it's losses after adjusting for inflation (and that's gov't inflation not real inflation). And I'm not saying that it is reckoning day, all I'm saying is that unless your prepared for anything you will never see it coming AND that Ben Stein is consistently wrong. He didn't recommend Merrill Lynch based on a 10 year outlook, he recommended them based on their past gains, which were inturn based on fradulent valuation of packaged mortgage debts. The economists and market watchers that I read have been talking about this happening for over 2 years, not knowing when, just knowing that it had to happen.

http://simplycharts.files.wordpress.com/2007/03/dow-and-sp500-inflation-adjusted.jpg