I Agree

Here's a piece from Ben Stein that contains many statements with which I agree. I'll list them and give my thoughts as well.

However, let's assume we do have a recession. I hope we don't, but we might. What do we do about it? What can we do about it? Just keep plugging along. Just keep buying broad indexes. Just keep a good chunk of liquid assets. None of us can control the economy. Thus, we just have to keep swimming in the roiled waters.

That's about it. All you can do is keep plugging along. If history is any indication, we'll eventually pull out of this economic downturn and those who have kept at investing as normal (or even buying more than normal) will do very well financially. And if we don't pull out of the downturn? Then we're all in a heap of trouble.

As we cling to our life jackets, please remember this: no recession lasts forever. I can well recall so many times in the past when every single headline in The Wall Street Journal was about some record growth of sales or profits. Then time passes and every single headline is about horrible news. Then time passes and there is mixed news, and then it's all good news again.

Yes, yes, yes! It wasn't that long ago that we were in boom times. And it wasn't long before that when we were in down times. And it wasn't long before that when we were in boom times. And, well, you get the picture. Wait it out, keep the faith, and everything will be well in the economic world once again.

Economies go through cycles. But the long-term trend is up, and people who buy broad indexes when the news is bad, if they live long enough, live to be happy about it.

My strategy exactly.

Yes, there will be news saying housing will not recover THIS TIME. But in fact, except in really depressed areas, housing recovers EVERY TIME and goes on to pass its prior record.

It always surprises me when someone leaves a comment here along the lines of "this time is different" or "this time we won't recover." really? Does anyone REALLY believe that? If so, my bet is that they are relatively young and/or haven't studied their history.

The plain fact is that you don't know when real estate will be at bottom until it's too late. If you see a home you love, buy it now if you plan to be in it a long time.

Good point -- and one I need to listen to. If we find a home we like and plan on staying in it a long time, we shouldn't worry about it going down in the short-term since we won't be selling in the short-term. Of course it would be great to buy at the bottom of the market, but who can predict when that will occur?

And know that the headline writers want to whip you up and make you crazy about the economy. They sell fear. Stay calm and stay well to do.

We all KNOW that the media THRIVES on over-exaggeration and bad news, and the economy is simply the current whipping boy. Yes, things are bad, but we're not teetering on the edge for financial collapse as Constantly Negative News would have us all believe. Keep spending less than you earn and keep saving/investing. Do this for a long time and you'll be rich. It really is that easy.

Comments

[WiseMoneyMatters]

I think now would be the perfect time to buy both stocks and real estate. You always want to buy when things are down and sell when things are up. Too many people see stocks going up and want to buy them. If they are already going up, it means you are already too late. The best time to buy is when things are going down. Everyone else is trying to sell and get out before the drop. You need to position yourself to get in before everything goes up.

Those are my 2 cents.

[kuros]

there is just that one item and its a big one
we are coming to the end of the oil age
whatever the next "age" will be and who sees what it will be will determine the winners and loosers

[Apex]

The end of the oil age? We will be pumping 80-100 million barrels of oil per day for decades. We are definitely in a supply crunch right now. And we may find it difficult to increase production from here. But calling this the end? Even Hubert's peak theory says the back side of the curve is as long as the front side. We need to diversify our energy sources but we are not at the end of the oil age and those who continue to propagate that lie are the ones causing us $4.00 gas because they don't want to explore and expand production. It can be a self fulfilling prophecy if we simply quit pumping it. There is actually quite a lot of oil out there yet. We just need to go get some of it.

[LotharBot]

The only thing I disagree with in the above is the comment about housing recovering. Yes, housing always "recovers" if you mean, gains dollar value over a long enough time period. But I think it's more useful to think in terms of house prices vs incomes.

Traditionally, in a given city, the median house price is X times the median income (X is higher in certain cities than others; 3 is pretty typical.) At the peak of the bubble, the median house price was 1.5X or even 2X in many cities, almost entirely due to the presence of "funny money" leading to imaginary gains in the market. Many cities are on their way back down toward X, but not there yet. If you buy a house right now at 1.2X and the market returns to X, you'll need an awful lot of appreciation to cover that loss. Just as an example, in Seattle the median house price has historically been about 3 times median income, but recently it was up over 5 times median income. If you buy median-quality house right now for 4 times median income, you're very likely overpaying by a third.

Now, if you keep your eyes open for foreclosures, short sales, etc. you can get a median-value house for X or even less. But do your homework first.

[sahm]

When my husband opens our investment statements every quarter, he keeps saying "we're buying more shares". I don't open them because it keeps going down. Fortunately, we have a long time until retirement. The irony is that his 401(k) at his former employer is doing phenomenal overall. It is the only one that is not loosing money overall.

I agree, keep looking at the long term and plugging away right now. Don't freak out.

[Rod Ferguson]

It depends on where we are in the Long Wave.

http://www.kwaves.com/kond_overview.htm

If you can buy and hold for the next few decades, then you will probably be okay. But you have to sell off before about 2025, then you'll end up breaking even or losing a bit.

If we're at the beginning of the Winter, that is. The pattern isn't really holding true.

I'm on vacation for the next two weeks, so my comments will be sparse :) Have fun and good luck on the wealth-building :)

[Kevin]

I think our consume now, pay later; aka entitlement mentality may be changing. Could it be we are reverting back to our WWII generation mentality of saving to purchase something or just doing without? Maybe people should start talking to their grandparents or parents to see how they lived and what advantages came from this philosophy.

I see some good things coming from this particular economic downturn (I don't think it's a recession yet):

1) people have actually started to change their habits regarding energy consumption
2) banks/mortgage companies are wising up and tightening their standards - which is what caused alot of this in the first place
3) there are probably lots of first time home buyers out there getting great deals on real estate
4) lots of good buying opportunities of us that like to "go against the flow" of what the media says
5) only 6 more months of Bush II....ok that was a cheap shot

["Mo" Money]

Good post. The last item on the media strikes a chord with me. The media is in business to sell. The won't make money by selling news that is not out of the ordinary.

[rwh]

I had an epiphany a few years ago that's related to this post. Essentially, it was "I'm just one person and have virtually no influence on events". I don't know if it was a middle-age realization, or if others have known that all along, but in my younger days I really felt what I thought mattered in the global sense, and of course it doesn't. It doesn't even matter on this blog.

So what that means to me in terms of investing is that I will keep up with the savings and investments, try to stay diversified and not worry about the news of the day.

However, there are certain opinions I still have, such as not purchasing a nice home in a distant subdivision, or a nice truck or SUV simply because the price is down from a couple of years ago. It's my opinion that certain aspects of our culture are likely to change permanently. We're adding new insulation and a new, higher efficiency furnace to our centrally located house instead of moving farther out. In the long run we'll save money from staying put.

I have great confidence in the future overall, but not so much in the future of the type of car-addicted lifestyles many of us live now.

[MB]

Apex:
This is the ludicrous economics of "Drill More, Use Less." It is a fact of economics that if there is more of something, its price will go down, and people will consume *more* -- not less. The idea that we can "drill our way out" of our dependence on oil is absurd on its face. Coming from "free-market" types it's even more baffling.

Kevin:
Count me among the first-time homebuyers scooping up other peoples' mistakes. We just bought a duplex condo that was more than twice the size of ones we were looking at last summer, with an extra bedroom, extra bath and lots of upgrades. Not to mention that we actually over-saved for our down payment. We had about $10,000 "left over" after closing.
Which we needed; it's taken a lot of fixing-up. We've spent about $15,000 in two months, most on "buy-now, pay-later" plans from Lowes, Best Buy, etc. We'll just let the $10k sit in the savings account until the interest comes due. I must admit, there are a couple things we bought only because they were "free" now. Nothing over $20, but still not the way I traditionally shop.

rwh:
I don't think that you're giving yourself enough credit. Yes, you're one of millions of consumers, so your individual choices don't necessarily move the needle. I think what you're discounting is the impact that a collective movement of individuals making similar choices can have. Those choices can be coordinated, like a political campaign, or uncoordinated, like our shifting away from SUVs and exurbs, but they are significant. Check out Clay Shirky's _Here_Comes_Everybody_ for a really interesting survey of this phenomenon.

I think what we lose when we hit middle-age is the need for the ego-gratification of youth, evidence that we can mould the world to our liking, commonly expressed in stupid haircuts and graffiti. :)

[Apex]

"The idea that we can "drill our way out" of our dependence on oil is absurd on its face."

I never said we could drill our way out of dependence. Who says we have to. We drill our way to higher supply to meet current demand. Of course you explore all alternatives. What is ludicrous is your crowd parroting this line about we can't drill our way out of dependence as if that alone means we should just abandon oil and move on to alternatives. We have to bridge the gap to alternative energy. It is both ludicrous and illogical to sit by and say we don't need to expand current energy supplies because we can't get enough to meet all future demands for all time.

And the American public doesn't buy your arguments anymore either because they are smart enough to know that $4.00 gas won't last in the face of increased drilling. And they want it right now. And if prices stay up here, they will get it too. Congress will only give 2/3 of the American people the middle finger for so long.