Herman School of Business
What if you did it right?
When the neighbor moved in and you found out he bought the place for four hundred thousand dollars it didn’t change your habits. When the couple on the other side of you took out a Home Equity loan, went to Europe and then came home and put in a swimming pool…it didn’t make you splurge.
You kept on saving and living within your means.
Your co-workers were buying houses and flipping them and making thousands of dollars. They didn’t put the money in a CD, they kept buying bigger houses to flip because bigger houses meant bigger paydays…or they stretched their luck and played the stock market but for sure…they didn’t pay off any debt!
You were putting in the maximum in your retirement fund and playing it straight. And you felt a little cheated that others seemed to have so much more than you. My wife and I would ride around and look at the houses getting bigger and bigger. We kept asking each other the same question, “What do these people do for a living?” It was impossible to imagine people making the average living and buying so much house…where they could park the new Lexus.
Boom. The end of overextending is upon us. And several people have asked me to comment of what to do now that the world is upside down. What to do after losing a small fortune in the stock market in your retirement fund. Well, one honest answer is that if you didn’t sell you haven’t lost anything! Your quarterly statement looks awful compared to last year and it will look worse in the next two quarters. But it doesn’t mean anything unless you sell now. It took less than fifteen days to lose twenty percent of your portfolio. History says that when the turn comes the first fifteen percent climb happens fast. I have advocated since the first of the year to get out and stay in cash. Forty percent of your money is gone and there may be another ten percent yet to go. So if you want out do it Monday or Tuesday. If you can’t stomach another falling quarter when earnings reports all are adjusted downward then cash out. But be ready to get back in.
There are billions of dollars on the sidelines waiting for the bottom. That is why it will jump up fast when it hits bottom. The huge players who can make the market clime rapidly will act quickly and if you don’t get in when they do you will not hit the big upside in a hurry. My view is that it could fall to seven thousand before it turns North again…and I own not one dollars worth of stock right now. Some banks have three percent CD’s and that safety beats the risk of the market.
Another thing the “good guys” should do is consider waiting with their cash for the bottom to hit real estate. Watch prices in your neighborhood. If you have cash wait until prices fall far enough that you can put down twenty to twenty-five percent down on a nice house and then have a tenant pay more than the mortgage with enough left over to handle normal annual repairs. Positive cash flow makes real estate an investment. Having to collect rent and still put money out for real estate means it is no longer an investment…it is an expense.
Plan now to buy a new or slightly used car in the next year. Those walking into a dealership with cash…or at least half down will get unbelievable bargains starting about the first of the New Year. Don’t jump too fast…cars will go down for at least the next twelve months. Watch prices fall on the kind of car you want…and, give yourselves a treat for being such good money managers. When prices start going up again and the bargains disappear in about 12 to 18 months…you will be driving a bargain, a small reward for the additional pain of the coming higher taxes.
For those who can do it think about this…keep saving for about a year… then rent out your house at a positive cash flow and buy that bigger house you have had your eye on but couldn’t afford. Prices are falling, but they will keep going down. When they start going back up as credit policies return to normal you will buy a house at the correct price…not the inflated price of the last two years.
And most importantly of all…do not change your credit habits. Stay debt free and you will be rewarded when the economy does swing back. This time it will take longer than normal…perhaps until 2010 or 2011. But you will have a newer car and maybe a better house with less debt when America recovers.
- Posted: 13 October 2008
- Comments: 0
- Category: Business success
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