#5 What on earth should we do?
Investing when there are no good options
Unless you’ve been living under a rock, you are well aware that the last six months have been a challenging time in the world of investing. Netflix’s fall from grace is just the latest reminder that trees don’t grow to the sky. If you were a Netflix investor, you had to stomach a 35% drop in one day on April 20th, 2022. For those who are still holding on, they’re down 68% this year (YTD).
Netflix, the ultimate stay-at-home company during the height of the pandemic. The subscription every adult in the western world seems to pay for each month, absolutely fell out of the sky. But it’s not just Netflix is it? Throw a dart at exciting tech companies and you’re bound to land on a loser over the past year. Nothing, and no one is safe in public markets, it seems. If you are a growth investor you are down big time. And yet, the major indices are still at relative historical highs - the markets as a whole haven’t crashed by any means.
Inflation vs. crash
At the same time, you have inflation as hitting 8.5%. That’s CPI, and we can debate about whether that’s the ‘real’ inflation number, but needless to say the cost of living has become more expensive at a concerning pace. Wages for many jobs are increasing, but will they be able to keep up? Only time will tell.
And then there’s the property market. If you were trying to buy real estate this year, well I feel for you. Seller inventory has been at all time lows, driving multiple competing bids and properties selling well over asking price. Cap rates (cashflow yields) in competitive markets are now lower than mortgage interest rates, meaning the year-one yield on many properties is negative. Go figure.
So what are we to do? We know our cash is losing value at pace of at least 8.5% per year. If that rate continues, you lose a quarter of your wealth in three years. But, if you invest everything in the stock market right now, you could be facing a crash or recession that causes the market to drop 20%-30%. If you are able to buy a home right now, that home could lose 20% as mortgage rates increase and potential buyers can afford less and less home due to the increasing monthly payments (as a rule of thumb, every 1% increase to interest rates will lower the average homebuyer’s budget by 10%, so if you were looking at a $500k home, your budget is now more like $450k).
But there must be a solution, right? Some silver bullet strategy out of this mess. Unfortunately I don’t think so. Right now the key is balance. Diversification is the way. If you’re thinking about going all in on one strategy, or timing the market perfectly, then I wish you the best of luck. This is a time to be perfectly balanced and conservative but still taking action. Reduce debt (especially variable-rate) to reasonable levels, increase your cash reserves, continue to invest consistently by dollar-cost-averaging into index funds, and maybe own some bitcoin or gold.
There’s not one right answer - in fact there is no answer. No ‘right’ move, no clear path. We don’t know what is going to happen to asset prices over the next year. This is a time to be balanced, and minimize your risk of catastrophe, while still taking steps to invest for your future.
For example, if you are a 30 year old homeowner you may be looking at an allocation that looks similar to this:
40% Real estate equity
35% Stocks, ETFs, mutual funds
5% Bonds (inflation-hedged bonds such as Series I treasury bonds)
Now, is this the exact allocation for you? Maybe! Maybe not. Everyone’s situation is a bit different. All i’m saying is to be balanced and diversified enough to survive while staying mostly invested. Keep enough cash to live on for 6 months, just in case your income were to go to zero, and so you can stomach a major downturn in the markets without needing to sell assets. Own things that protect your purchasing power during inflation: physical property, stocks, bitcoin, gold.
Those are my thoughts for the week. Best of luck to you, and as always, keep compounding.