Ask me in 20 Years!

I was asked recently if I am invested in the stock market. That question was prompted by our recent financial "crisis" and the current aftermath. The answer is YES! Here are my reasons:

1. Both my spouse and I are employed. We do save a portion of our earnings each month and a substantial portion of these savings goes into retirement accounts.
2. We are of an age where it is likely one of us will still be on this planet in 40 years. Look at it this way. Consider that today it is the year 1968 and that one of us will probably still be on the planet in the year 2008! From the perspective of 1968, that's a long, long way into the future. A lot can happen in 40 years, and probably will. For example, there were seven (7) bear or near bear markets in that period, including the "bear market of 2008-2009". So we need a financial plan which can accomodate that unknowable, somewhat distant future.
3. Inflation is a long term concern.
4. There is evidence that the stock market is a good hedge against inflation, over the long term.
5. That portion of the funds we do have "invested" are in a diversified portfolio. That portfolio is somewhat conservative and includes dividend paying stocks, mutual funds and bonds.
6. We are applying the principle of dividend reinvestment. Dividend yields are highest when the stock market is at the bottom, and dividend reinvestment ensures that new shares are purchased at these lower prices. In the super- or mega-bear market of 1773-74 and during the ensuing malaise when stock market indexes were flat for nearly 10 years, there were dividend yields of up to 5%. Those yields enabled substantially better total returns than the market indexes would suggest.
7. We have some funds, including an "emergency fund" which are not invested in the stock market and we can tolerate waiting 10 years for a market return.
8. We are doing our best to maintain a long term focus.
9. We are aware there are risks. There is always the unknowable. It is possible neither of us will be alive in 5 years. It is also possible that we will both be alive in 40 years. So we do our best to plan for both possibilities.

So that is our rationale. On the other hand, it isn't easy watching the government hand over $$ of our taxes to the banks and investment bankers who contributed to this mess. Nor is it easy listening to the whining of those who want to help the "poor homeowners". Many of those "poor homeowners" were as greedy as the bankers who got us into this mess. I suppose some sort of intervention will be necessary. There are rational arguments both for and against. I suspect that the financial turmoil will not end until the housing market is stabilized. One good thing, "Wall Street" has finally gotten the "black eye" it has deserved! No matter who is elected as President in 2008, there will be some change in the way that Wall Street is treated in America.

I think it is important to seperate the housing problems from the economy at large. I don't know how people will adjust to the reality of the new credit landscape. The worst could be over in 6 months. However, I do think it will take years to sort some of this out, and that home prices will fall for perhaps 5 years or until 2013. That will not necessarily be universal, as "all real estate is local" as the saying goes. However, California in particular will have many single-family homes priced below their peak levels of 2006-2007. Home valuations in the hardest hit areas will probably be 50% of their peak value. This is not my SWAG here, I am presenting numbers I have distilled from many sources.

As the economy stabilizes and panic recedes, many people will realize that things aren't as bad as they thought they would be. The stock market will recover. In particular, there will be a need to invest and as housing will no longer be the rock star it once was, the stock market may be considered a reasonable place for such investments. I base this optimism on the recent past, most notably the aftermath of the internet boom and bust of 2002.

When I was asked "why am I invested in the stock market", the question could as easily have been "why am I invested in America?", for that is what I am doing. I have always had a faith in the ability of this amazing country to transcend certain problems and idiosyncrasies of human beings. However, the past 10 years have been trying, and have tested that faith. Should I be concerned? Yes, I think I should be! Should I panic? No, and to help me in that I will attempt to watch as little financial news as possible. (Note: keeping these blogs going and minimizing exposure is going to be a task; I'll definitely be avoiding most of the "popular" media and as many of the "talking heads" as possible).

One other thing I keep in mind. A lot of the financial news is generated in New York and as we know, that town is tightening it's belt and looking toward gloomier times. I am of the opinion that this will cloud the news emanating from that city. Consider it an internal bias to the news. I will be listening for that bias.

The bottom line: Have I made good decisions? How will it turn out? Ask me in 10 to 20 years!

PS: I know that the conventional wisdom is oil and other consumables will tank in a recession, or a serious recession. However, I couldn't pass up the opportunity to pick up some National Oilwell Varco (NOV)