Be afraid, my friends. Be very afraid. If you have no fear, click on the image above for a larger, clearer picture of what’s slouching toward Bethlehem.
That thing came in a report from my money managers today. It tracks the value of a dollar invested in my portfolio from June 30, 2000 forward.
Now, if you take a ruler and lay it horizontally across the page so that it passes through the start point on the left-hand side of the page and stays parallel to the x-axis, you will see something alarming. In all that long, eventful decade, only a tiny little nubbin pokes up above the top of your ruler.
That’s right. A dollar invested in my vast holdings was worth a dollar or more for two out of ten years, between third-quarter 2005 and third-quarter 2007. For the other eight years, it was worth less than a dollar. Sometimes significantly less. In third-quarter 2001 it was worth about 68 cents. At the end of June 2010, when this report was generated, that year-2000 dollar was worth about 85 cents.
Suspicions confirmed. Some time ago, it occurred to me that the amount in my investment account was about the same as the amount I recalled coming away with from the divorce, some 20 years ago. Statements from those days have been packed away, and offhand I couldn’t say where they are. They may even have been discarded. But the figure that sticks in my mind is…well, just about the figure on the bottom line of the statement that comes in the mail once a month.
Still think long-term investment in the stock market is the way to grow your savings? Read on…
On the phone with the investment guru:
“Is there a reason to believe keeping money I will need to live on for the rest of my life (which we may sincerely hope will be short) in the stock market is a good thing to do? Unless these funds grow or at least quit losing money, there won’t be enough for me to live on. I can’t keep on forever putting in 16-hour days, 7 days a week to scrabble together $15,000 a year, which is what happens when you’re ‘self-employed.’
“Should we be considering some other investment strategy? Maybe we should take a chunk of dough and pay off that damn mortgage on the downtown house, so I don’t have to worry about where 10 grand a year is going to come from to pay for it. If M’hijito pays rent to me, then about $600+ a month would come from him to me, instead of me having to fork over $800 a month. After the kid moves on, I could probably rent that place for $1,000 a month. Or sell my house and move into it, banking $235,000 in the exchange.”
Well, of course, the very idea is anathema to an investment manager. Put your money in real estate, and he doesn’t have anything left to manage!
The conversation that ensued was eye-opening. The firm has moved large amounts of funds into income-producing instruments, which my guy says are returning 7 percent just now. So even though the apparent value of the securities appears to drop, they’re still bringing in cash.
Couldn’t prove that by me, but then you can’t prove much by me.
He then said that the consensus among his partners is that the future of investing is off-shore; that effectively the U.S. economy is done, and smart money is going to emerging economies. He believes China’s economy will surpass America’s within ten years. The jobs we have lost in construction and manufacturing—where the bulk of job losses have been—will never come back. Jobs in the service sector, which is where most of the remaining employment resides, are poorly paid and will never be anything but poorly paid.
If you thought the middle class in this country is disappearing, you thought right. A young person, he suggested, would do well to look for employment overseas. Americans are in demand in Hong Kong, he said, although given Americans’ reluctance to learn languages other than English, Canada or Australia is probably a better bet. He would, he added, seriously consider moving to Canada if he were younger (and hadn’t yet started his family and career) or older.
Not scared enough? Well, put on your 3-D glasses and look up your address on Zillow. For jacking up your adrenalin level, that beats any chainsaw movie.
My house, whose value held steady through the bubble-burst at $235,000, has suddenly dropped to around $200,000. The downtown house house is between $50,000 and $60,000 underwater. Real estate values have not stabilized; they continue to drop steadily. When I mentioned this to Investment Dude, he said yeah, his place also had fallen in value even more than it already had, which was plenty; he and his wife managed to get a refinance, but only because no appraisal was required—the lender accepted a recent valuation. If they’d had to have the house appraised, they could never have gotten a new loan.
So…how has your investment dollar been doing? Dollar, heck… Can you spare a dime?
July 29, 2010 at 1:45 am
I never ask money advice from a person who gets paid for my investments. They’re in it for their pocket book, not mine. I already knew that real estate took a dive in price ages ago. My income is from 2 rental houses (one inherited, one purchased). I can’t recommend it for completely steady income, but I banked the rent income for years when I was working and the bought house is still worth twice what I paid for it, so I’m not fussed about it. We plan to move to SLC to live in that house in a few years and then I will try renting this house in England where I live now. Bill will be retiring – or ‘semi-retiring’, doing odd shifts instead of 80% time job – in the next year some time. I expect that to be a real eye opener. I don’t think it helps to be scared, though. Even if our standard of living drops a bit, we’ll still be far wealthier than most people in the world. I try to remember that.
July 29, 2010 at 7:03 am
This is the scary decade: it begins with the tanking of tech stocks and ends with the economic meltdown (or goes beyond a bit). If you had invested steadily throughout the gruesome period, you would have bought at many points lower than the end point on June 30. Those purchases would have gone up.
Also, June 30 itself was a down moment. I was talking to my pal at TIAA the other day (about an unrelated matter) and he mentioned that my holdings had risen 10% since June 30.
I wonder if your investment guys are trying to scare you.
I’m scared too, but I think this picture is incomplete. And even misleading.
July 29, 2010 at 7:42 am
You know, this really is scary. I don’t live in the U.S. but the same applies in Western Euroe where I live (Ireland) where we have just seen the mother of all bubbles bursting to spectacular effect. We don’t actually know the baseline value of property here – sales throughout our much-vaunted ‘boom’ lost all contact with reality and it is taking a lot of lawyers a lot of time to figure out how much the rash of ill-considered and empty houses/apartment complexes are actually worth in this economy (hint: halve peak-boom estimates and from then on it’s anyone’s guess).
I still think quality property (i.e. well-located and well-built) is a solid investment and always will be. But I wouldn’t trust fund managers after the fiasco of the past two years.
July 29, 2010 at 7:44 am
P.s. I enjoyed your Yeats quote 🙂
July 29, 2010 at 11:28 am
@ Kate: Thanks. Plus there’s the ineffable quote from The Fly!
July 30, 2010 at 10:42 am
@FoM: Your investment guy probably thinks investing overseas is a good deal because then he can rake in some more commissions from churning your investments a bit more.
You might want to ask him why he didn’t suggest this 15 months ago when the emerging markets were way down and there was real money to be made.
Personally, I think there IS merit in investing overseas, and have been doing so for a long time, but these “gurus” often seem to jump on the bandwagon way too late.
July 31, 2010 at 8:29 pm
@ Mark: There was an article in this morning’s Times about the issue of whether the stock market reflects the state of the economy (it doesn’t). Peripherally, the author remarked that the stock market (i.e., the businesses its figures represent) functions in the world market, not in the US economy.
My guys actually have been investing internationally for quite some time…much longer than 15 months.
The real issue with the stock market, IMHO, is that for the average Jane and Joe, it’s a crap shoot. The conventional wisdom that you should be in it for the long haul appears to me to be somewhat questionable. Yes, historically a long hold has panned out for many people. But in the atmosphere we’ve seen over the past decade or so, I wonder. Clearly, few of us are growing our retirement savings in instruments like 401(k)s and Roths. What appears to be growth, at least extrapolating from my case, is actually the accumulation of contributions over the years. And in fact, often those contributions have shrunken rather than grown.
But where else can you invest? Putting your money in CDs would be insanely self-destructive, unless you’re worth several million dollars. A 1% return on a million bucks would supplement your $15,000 worth of Social Security benefits by a grandiose $10,000 a year. Two million at that rate would allow you to spend your golden years in the lower middle class. Maybe three million invested in something safe like CDs would give you enough to live in middle-class comfort, assuming you don’t live in one of the big coastal cities–a $45,000 gross income? Anything less than that, and you’d be eating into principal, which brings you right back to the craps table: how long will you bet you’ll live?
July 30, 2010 at 10:50 pm
Thanks for the link to “Brother Can You Spare a Dime” loved it!!
July 31, 2010 at 8:01 pm
Oh, wow, FAM, you must have the same portfolio managers we do!!!!! Retirement stagnation. And not a dime made in 15 years in our Roth; in fact we are still down a couple of thousand.
Zillow does not seem accurate; Our house was purchased in 2004 for 315,000. It appraised at the time of purchase for 325,000.
In 2007, based on comps, our house was worth 415,000.
We refinanced in Jan., 2009, and it appraised at 365,000. I had known nothing about Zillow then (if it even existed).
So I found out about Zillow this past May. It reads $89,000. There is no possible way that the house is worth $89,000! This has to be a value used for tax assessment or something!
July 31, 2010 at 8:21 pm
@ Holly: Zillow is very approximate. Sometimes it has the wrong house at a given address. Sometimes its estimates are off-target, but sometimes they’re right on. I wrote about this phenomenon a while back.
August 1, 2010 at 6:31 am
Funny-
Okay, thanks; still does seem strange since the house next to us sold in 2008 for 370,000 and it reads the house is ‘worth’ $79,000.
I just looked at it again now and it says: Zestimate: N/A. The values that are showing up say that they are the tax-assessed values (?).
Great post, thanks.
August 1, 2010 at 7:28 am
@ Holly: @ Holly: Is that so! Good grief…around here, the tax assessor’s values are a fraction of the sale value.
In this area, they lowered prices wholesale–everybody’s value dropped by about 14%. That might be explained if they were using the tax-assessed value, but at least on my house Zillow doesn’t say that. At least, not anywhere I can see…is this piece of intelligence hidden away somewhere, or does is it posted in an obvious place when you look at the house’s supposed value?
In my case, the drop in value could be real. The rental where Biker Boob lived sold for about $30,000 less than the absentee landlord paid for it. Unfortunately, despite months of renovation work that could only have been an exercise in diminishing returns, it appears to have been rented out again. At least these occupants are quiet, so far haven’t set up a car repair shop in the garage, and don’t bring car trunkloads of garbage across the street to fill up our dumpster. But rentals do push down property values.
According to Zillow, a house around the corner that never sported a for-sale sign sold last April about $100,000 under market. And of course Dave’s Used Car Lot, Marina, and Weed Arboretum was practically given away on the courthouse steps.
On the other hand, Zillow is showing a house as having recently sold for a little over $118/square foot, which would make my house worth $17,000 more than the “Zestimate” — though still way less than I paid for it before the bubble. Several houses in the neighborhood are on the market for what any normal person would think of as market value. But…they’re not selling.
The lightrail construction is not helping things. Even though the city has decided not to run the damn train up to our part of town, they didn’t do that until after they tore out an entire row of homes along 19th Avenue, demolishing property values for a block or two inward. Right now they’re ripping up the road to move the utilities — just in case they change their minds, and probably to spend use-it-or-lose-it funds. They claim they’re going to landscape the scars they left behind and build a wall along 19th, but they refused to block off the streets the burglars in the slum apartments across the road commonly use to raid our neighborhood.
Too, because of the drop in values around here, demographics are changing rapidly. All you have to do is read the comments on local news stories, especially those having to do with immigration, to know that the old nastry prejudices and bigotry that used to force property values down the instant a dusky face showed up in a neighborhood still exist. Although the most vocal hatred is directed toward Latinos just now, if you hate Mexicans you probably hate Blacks even more.
That downward force is compounded by class issues: it’s very obvious that the folks you see walking up and down 19th Avenue and inside the grungy Albertson’s are uneducated, ill fed, ill cared for, and employed — to the extent that they’re employed at all — in minimum-wage work. Our crime rates are rising because poverty in the surrounding neighborhoods is rising.
August 1, 2010 at 11:03 am
Yes, these assessments show up as soon as you scroll over the icon (house). We are in a state that has low property tax, no sales tax, and high state income taxes (up from 5.95% to 6.95% in 2010-2013, I think). Even with that, we are attracting more and more ‘transplants’ from the more expensive northern states.
Yes, I can see housing values dropping more rapidly in the city and nearby suburbs here (East Coast), but I do think that this was just a price adjustment as the housing was pretty expensive. I do believe these areas are going to increase again as more and more people move to lessen commute times.
I have seen homes listed on Zillow that I believe would sell for more than the ‘Zestimate’ because of improvements like large Trex decks, new a/c, new water heaters, new hardwood, new siding, etc., and an estimate is not the same as what a potential buyer would pay.
I hear you about the high home prices… we sold our previous house (built in 1963 — that we had completely renovated from top to bottom) and only 3 mos. later the nearby houses (comps, but none were updated) were selling for $35,000 more than ours had sold; A year later the same houses were selling for about $65,000 more. We were waiting on new construction which never happened. We purchased a home a year later at the high, fearing it was ‘now or never’ (be priced out of the market altogether).
Regarding demographics: My sister-in-law and her family just moved to VA from Yuma, AZ (military, they move every 4 years). I haven’t heard if she is finding a big difference in cost-of-living, but definitely a different culture.