Stock Market Survival Can Be Linked to Real Estate
By Saghir Aslam
Rawalpindi, Pakistan
(The following information is provided solely to educate the Muslim community about investing and financial planning. It is hoped that the Ummah will benefit from this effort through greater financial empowerment, enabling the community to live in security and dignity and fulfill their religious and moral obligations towards charitable activities)
How does an investor survive rocky stock market conditions like we witnessed at start of 2018. Well, fellow Californians, some of the best lessons about riding out market storms may very well come from the state’s quite volatile housing markets.
I tossed into my trusty spreadsheet data on investment returns from stocks, fixed – income options and California housing to see how the ups and downs compare.
Look if recent stock market volatility keeps you up at night, history tells you, there is only one guaranteed bet: Treasury bills! They have not had a down year in my study dating to 1976.
But the serenity comes with a price: 2017’s yield of 1.4 percent was the best year for T- bills since 2008.
As somewhat sharp comparison, California housing as measured by the housing finance agency has been wobbly, rising in value in just 31 out of 41 years. That means roughly 1 in 4 years has been a loser.
Sure California Homes have appreciated at an average 7 percent annual rate since 1976. But it has been a wild ride. If you recall: Results ranged from a 27 percent jump in 1978 to a 23 percent loss in 2009.
Now depending on how your stomach handles volatility stocks in the past four decades look nearly as volatile when measured by the total return of the S&P 500 stock index, gains plus dividends.
Stocks have had fewer drops than the state’s housing market, with upswings in 34 of the past 41 years, or roughly a loser in 1 in 6 years. But stock swings have been wilder: from up 37 percent in 1995 to down 37 percent in 2008.
For all those gyrations, though investors have been rewarded well: average annual returns of 12.5 percent since 1976.
This is not a pros and cons, homes vs. stocks analysis. This is about how longer ownership keeps a person sane and creates wealth.
Most home owners wouldn’t dream of selling their home in a period of economic turmoil. It’s a hassle. It’s too expensive. And then where would you live? (Yes unfortunately, some folks do get forced out of homes by their lenders).
For stock investors, selling is very easy and cheap. But I have long argued this added liquidity does the average person no good. It makes it too tempting to ride out a market storm in calmer investments, hoping you will know when it’s safe to jump back in.
Just so you know, even professional investors, as a group, poorly time these stocks swings, so, why do you think you can? Instead use timing to your advantage.
As in wait it out, if you can hold onto volatile investments like stocks or real state for 10 years or more, history suggests your chances for losing money are greatly reduced.
Over 10 years periods, these risky holdings start to look like a pretty sure things.
Stocks were up 94 percent of times, with the worst result in a 13 percent drop in 1999 to 2008. California housing was up 91 percent of time.
Worst? Down 13 percent from 2007 to 2016. And if you can create a 15 years horizon for your bets, the past 40 years show no money loosing / …. For stocks for California housing.
The usual caveat still rings to the past is no guaranteed predictor. But it provides pretty good things. Like after 9 state years of gains for stocks, will it surprise us if 2018 turns out to be a dud?
However, just because you can get minute by minute rising on a stock or folio though only guessing at what a home is worth. Short term economic or psychological blips should not change person’s investment priorities.
It’s this simple. If you need a junk of money for expenditures in, say, less than 45 years, and risky assets are not a good place to park your money.
If you can figure out what dollars would not be spend in an extended time frame, you will sleep better. This is why young adults can have an aggressive investment strategy with their long term dollars say for home, or child college expense. They have decades to recover for the inevitable down terms.
Measured risk taking is not just for the young. Middle career investors should they have long time horizons for good chunk of their savings. Such as retirement dollars that would be used for perhaps two decades.
Even people near retirement or retired can find some comfort by determining what share of their nest egg would not be spent in. say a decade or more, those funds could dedicated to some plays on high risk in hopefully high returning assets.
Look, anxiety is normal when you are bombarded by the daily noise of investment volatility as market indexes resemble yoyos.
But I suggest fellow Californians its to ponder those who have succeeded in real state by being long timers.
(Saghir A. Aslam only explains strategies and formulas that he has been using. He is merely providing information, and NO ADVICE is given. Mr Aslam does not endorse or recommend any broker, brokerage firm, or any investment at all, nor does he suggest that anyone will earn a profit when or if they purchase stocks, bonds or any other investments. All stocks or investment vehicles mentioned are for illustrative purposes only. Mr Aslam is not an attorney, accountant, real estate broker, stockbroker, investment advisor, or certified financial planner. Mr Aslam does not have anything for sale.)
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