Friday, February 19, 2010

Where should you Invest?

When I think of investing, I think mostly the stock market and real estate. Both of which have hit a snag as of late. Will the real estate market return to it's pre-2005 prices? Will the stock market return to it's pre-2000 or pre 2008-highs?

Eventually, but it might not be 1 year from now or even 10 years from now. In 1989 Japan had a double bubble burst. Both the stock market and the real estate market crashed relatively close in time. (sound familiar?)



As you can see from the chart above, from 1990-2004 the housing prices continued to drop. The bubble continued to burst. What we have in the U.S. is a similar situation but the U.S. government has intervened somewhat including very low interest rates, $8000 first time homebuyer stimulus package, various laws concerning short sale and foreclosures, etc. There is a lot of government intervention that is propping the real estate market up. They may be short term fixes/bandages, but the government is hoping it will be enough to keep the prices at an artificially higher level than if nothing was done.

What would happen if real estate prices did continual to go down? That is the difference between Keynesian economics and Hayek which in many sense came out of the depression era in which there was little to no government intervention.



Falling into a deflationary situation so severe that it would take decades to get out of. On the one sense, that is probably the best solution. We reap what we sow. If we borrow like crazy we have to pay it back and if we can't, we make ourselves slave to our lender.

But we don't get what we deserve. In order to prevent another depression, government intervention was used and in a sense all this government helped push us to boom and bust cycle. Originally these boom and bust cycles were relatively minor, but over time, say 40-50 years these boom and busts have turned into bubbles blowing up and bursting.

So where exactly should we invest? Given real estate and stock conditions, given the random hand of the government and the federal reserve in things, given the strengthing and decline of the dollar, here are a few good investment strategies.

1. Invest in yourself. You are the best investment you have. Get educated, make a plan for yourself, choose a life you want to live and go for it. No matter what happens with the stock market or real estate, you have a choice as to how you live your life. One of my best investments in 2009 was a broken $25 Ipod I bought off Craigslist.org. Since fixing it for less than $20 I am now able to get podcasts, iTunes University, classes in just about any subject I am interested in. That $25 investment is now close to $25k in education for one semester of classes at any Ivy League school.

2. Invest in people. Okay, so people grow apart and die, what good is that investment? The funny thing about life is that we don't really know what life is about. The irony of it is that if you don't know what is going on, then probably everyone else doesn't know what is going on. So in a sense life is like the blind leading the blind. By faith we put our trust in something or someone to teach us and lead us. As children, our parents taught us, when we grow older, we have teachers and professors and mentors throughout life to teach us different things, like what they learned in life, experiences, failures, successes, etc. But whatever the case, how you decide to live is really an act of faith whether we believe our parents, our government, the bible, historical people, etc. When we live a certain way, we affirm that those living before us were either right or wrong. And whatever system you live in, whatever you believe to be true, whatever you believe to be right, you have in a sense, an obligation to share that with the next generation. That's what I mean by investing in people. You are passing on a legacy or inheritance.

The bible says that the beginning of wisdom is the fear of the Lord. Knowledge or wisdom has to come from somewhere. True wealth, I believe, is not laid up in cash or a house or a nice car, but in something less tangible, something far less visible.

3. Gather little by little. On a more practical note, a good investment strategy is making more than you lose. A 0% return is better than a -50% return. Don't chase stocks, don't chase fantasies that you think you can do. In 2009, Powerball had one of those $300 million jackpot or some crazy number like that. Of course everyone and their mothers bought a ticket (okay, probably not my mother), but seeing such a number excited everyone, but it's not real. You probably get struck by lightning a couple times before you win the lottery. So saving little by little means exactly that. Invest your time in doing something you like, get paid for it. Be consistent and save. And I can guarantee you that over time you will have more than you started. (What about inflation? we'll address that later).

So that's three investments I guarantee you will get you great returns. Invest in yourself (Education), Invest in Others (Pass it Along), and Gather little by little (Work Hard and patient saving).

Did I say it was going to be easy?

Leave a legacy.

What can planning do for you?

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