One major challenge to living sanely is the chaotic state of financial markets, both in the US and throughout the world. Thus far in 2016 stock and bond markets have been more volatile than usual, rising and falling sharply, but with much more fall than rise. Oil continues its historic decline, which should be a very good thing for most consumers – unless it’s a sign of a coming recession.
If you’re a home owner, the value of your house has probably risen in the last couple years, but we all know from recent experience that rising housing values is not something to take for granted. Government bonds have entered a bizarre era where people lend money to insolvent governments in return for almost no interest, because they are supposedly a safe investment. But government bonds are much riskier than they appear, as the value can be sharply eroded by inflation. Safe alternatives, like money markets, earn almost no interest.
Here are some guidelines to Living Sanely in a chaotic world:
- Don't waste a lot of time trying to figure out who's to blame. In many cases, such as the last housing crisis, the answer is probably "everyone". Many homeowners mindlessly took far bigger loans then they could afford, in order to buy bigger houses than they needed. Bankers encouraged such loans and profited from them. Regulators and government officials ignored the problems until it was too late, and then often made the problems worse when they did act. Lawyers made a lot of money by suing everyone involved. But that’s all in the past. What you should focus on is what you should be doing now.
- Markets go up and markets go down. You can't control them, and you probably can't predict them with any long-term accuracy. If you put all your money in any one asset class, you are begging for trouble, as well as a huge amount of stress. Now, just like any other time, you should have some portion of your assets in cash, some in the stock market, some in real estate, and perhaps some in alternative investments, like commodities or collectibles.
- "Experts", particularly in the financial markets, are more often wrong than right. Do your best to ignore them and follow what makes long-term sense to you. You will generally make more money betting against the "experts" than following their advice. It wasn’t long ago that the “experts” were talking about “peak oil” with the price going to $200 a barrel. It’s now closer to $30. When all the experts have given up on something and declared it hopeless, that may well be the time to buy.
- If you don't understand it, don't do it. If someone is pressuring you to do something you don't understand, they will probably profit at your expense.
- There is nothing wrong with cash in the bank. It will earn almost nothing, but it won't go down in value, at least in the short run.
- In the long run, most professional investors do not outperform the market indexes. The chances that, on average, over the long run, your stock picks will beat the market is quite low. That portion of the money you want to invest in the stock market should probably be put into very broad, simple index funds or broad market ETFs that simply track the market rather than try to outperform the market.
- In terms of housing, there is nothing wrong with renting.