Talk About the Law of Unintended Consequences

As I look at the stock market, at the moment the DOW is at 10,844, down another 215 points today. Do you know what this means?

That as of right now the market is only 476 points above where it was eight years ago after the internet bubble burst. It’s still above the lows that we saw after 911, but when you look at the market as a whole?

Over the last eight years the market has had an average annual return of 0.26%

You read that right. I didn’t mess up my decimals. One quarter of ONE percent. Per year. On average. If things continue we’re on track to have the fifth down market year out of the last eight.

But that’s not really the point of this post. Besides, you and your 401k know this already.

My point is really two things:

  • That all of this weakness, and in particular the weakness in the financial sector, should end up driving more money into investments in hard ASSETS. And that means things that have intrinsic value where the value can’t go to zero.

Don’t think so? Ask any Lehman Brothers or AIG shareholder if a month ago, heck a WEEK ago, they would have even considered it POSSIBLE that their investment would go to zero. Do you want to bet lunch on the answer?

  • That all of this bailout cash that the Federal Reserve is busily printing is going to further exacerbate INFLATION, which is already above 4%. Again, this should drive more investment dollars into hard assets with intrinsic value.

Both of these factors should give a spark to the real estate market by driving investors to buy real estate. And in particular I expect this to be particularly beneficial for the first time homebuyer market because that’s where a lot of investors buy. And that just happens to be the part of the market that’s keeping the rest of the market down.

Over the past few days though I’ve had some spirited discussions with folks that favor investing in precious metals, which are considered another “store of value” when inflation or other economic problems arise. While I do agree that they provide a good store of value, I disagree that this is the right time to buy them. That’s what makes the conversation “spirited”.

One factor in particular is important to consider when trying to decide between real estate and precious metals. And that’s this – would you rather buy something near it’s historical low price (real estate) and ride the price UP or something near it’s historical high price (gold and precious metals) and ride the price DOWN?

Which provides a better hedge?

I’m obviously biased but given that choice I’m staying with real estate.


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