Lessons from Investment Markets of the Past
When I was a kid in the 1960s my parents weren’t broke, but we didn’t have a lot. Thankfully, we had enough. My Dad was an engineer at Boeing, and Mom was a bookkeeper. Lots of parents just like mine were trying to make it in the world. World War II and the Depression were far enough behind that the sting had faded; it was time to make their mark in the world. On Friday nights at [8:00], Louis Rukeyser was on TV for 30 minutes talking about the stock market with some of the world’s most influential Wall Street titans. If you are old enough to remember Rukeyser, you remember his show Wall Street Week in Review and the catchy tune with glam pictures of the New York Stock Exchange. Back then, Rukeyser was a big deal. There was no such thing as a TV clicker let alone the internet. Rukeyser, other TV media, and the newspaper were how people kept up with the world.
Times and markets have changed. While the methods of gathering investment information differ then vs. now – there is still a constant and that constant is: risk!
Learning from the 1970s market
Back in the ’70s, interest rates were a lot higher than they are now. During those years when I was setting the table and sitting next to Dad watching Wall Street Week, the Federal Funds rate was anywhere from 4% – 20%. If there was one aspect of the economy that characterized the 1970s, it was inflation. Persistent for most of the decade, it choked off much of the growth in our nation’s businesses. Paul Volker, then the chairman of the Federal Reserve, had to eventually take decisive action and raise the Fed Funds rate to near 20% to “slay the inflationary dragon”. Money tightened, interest rates spiked, and homeowners with adjustable-rate mortgages (ARMs) were jammed as their mortgage payments shot higher. Enter the recession as unemployment peaked above 10% due to restrictive Fed policy. Thankfully, it worked. From 1980-1983, inflation dropped from above 13% to under 4%.
During this time the stock market was in a horrible sideways bear market arguably caused by rising rates, and there was a point in 1982 where the stock market was priced the same that it had been in 1968. In that same era in downtown Seattle, there was a billboard on the side of the highway that read, “Will the last one out of Seattle please turn out the lights?” (think recession). With all this being said, if you were an investor in 1982, do you think you would have been excited to buy real estate or stocks at that time?
My best guess is that in rough economic conditions most of us would prefer to stay liquid. Bonus question — what did you do with your stock portfolio in March/April 2020 with COVID? Buy, sell, or stay put? The answer to this last question tells you everything you need to know about your ability to buy low and sell high. That might sting a little. It does for me.
What is my point? When the Fed has literally had its thumb on the scale of the bond market for 12 years straight, knocking the natural cadence of our free markets onto its keister, there will be an equal and opposite reaction. Think Isaac Newton’s 3d law. Not to be overly dramatic, but it’s worth an internet search; it’s a thing! The “thing” of it is, we have yet to see the equal and opposite reaction. To get super granular here, the “action” began in 2008 when the Fed began flooding the bond market with liquidity. That liquidity injection has continued until this day and there will be a day of reckoning.
What will the reaction be?
What will the equal and opposite reaction be? I do not know. But let’s talk about that.
Rarely, if ever, investors are able to time the market with consistent success. What market? Any market. Stocks, bonds, oil, coffee, multifamily, syndicated second mortgage investments, or syndicated storage investments. Kahneman & Tversky, in 1979, nailed it with their Behavioral Economics study, Prospect Theory. In summary: when investing, the current environment subconsciously provides the framework for an expected outcome, and people generally have an aversion to losses. Why didn’t you and I both buy 200 shares of Amazon stock in March of 2020 when it was at $1,800 a share (vs. $3,000 today)? Because our perspective had been framed by the then current and volatile environment and we are loss averse. Now that the stock market has moved higher and is bumping its head on all-time highs, why have we been dragging our feet in selling some stock? We are, again, subconsciously framed by what we have experienced recently and wanting to squeeze a little more juice before dialing back our risk.
If COVID or some other life event has prompted you to evaluate risk and draft your own investment policy, I suggest three things. First, find the sum of your investments both liquid and illiquid — less liabilities (home equity/debt not included) — then multiply that number by your age with a decimal in front of it. If your number for example is 1,000,000 and you are age 50, the product is $500,000. That number represents the value of your investments you may want to have in conservative/stable investments such as bonds or bond surrogates. Could a syndicated multifamily investment be considered a stable investment? Yes!
Second, identify the annual cash flow you would like to have in retirement and divide that annualized number by 4, then multiply that number by 100. That’s your target net worth when you start playing full-time instead of working full-time. Your job is to grow your net worth to that number without taking excess risk (this is where you take a metric ton of salt and remind yourself what you paid for this advice)!
Third, you need the number from step one to equal the number in step two. Maybe you are 29, have been maxing your 401K at work, and have grown it to $800k. Are you really smart, or were you just fortunate with your timing? Now that the Fed has inflated nearly everything (remember your ego is the most expensive thing you will ever own) it’s a wonderful time to reassess. Investors should focus on making incrementally helpful decisions, not hurtful decisions. Do not make huge or impulsive decisions, ever. Because bonds pay almost nothing currently, consider substituting part of your bond portfolio with a syndicated real estate investment. Individual position sizes of 2-10% of your net worth make sense to me. But don’t take my word for it, ask a trusted friend what they are doing. When making syndicated investments, plan to hold at least seven different investments. The law of averages will help you here, but take your time (several years) as you build that portion of the portfolio.
Don’t try to adjust by making big decisions
I started this article by sharing about the investment environment when I was young. Interest rates near 20% and the stock markets P/E ratio was less than seven. Now 40-some years later we have a near opposite environment. The stock market’s P/E ratio is near 30, rivaling the years 2000 and 2008, and interest rates are near zero. As investors, a balanced perspective is often the most helpful. To that end, I suggest reading Ray Dalio on a regular basis. If you are off track from your ideal financial plan, don’t try to adjust by making big decisions. Emotionally we can all be overly hard on ourselves because our crystal ball may look more like a shaken snow globe in the hands of a five-year-old during the holidays. All-or-none bets are scary, bad, and pure luck when successful. My proposition is this: make incrementally helpful and small but strategic changes to your portfolio. Keep in mind the age-old rule of thumb, that your age with a percent sign behind it is your ideal allocation to fixed-income investments. I again volunteer that syndicated real estate assets may be bond surrogates. You may be off track from your target asset allocation. If so, start this spring. Identify what your ideal investment allocation is and make incrementally strategic decisions. Eventually, you can adjust your allocation to reflect your risk profile, and there is nothing wrong with simply saving more.
About Ted Greene:
Ted Greene is part of the Investor Relations team at Spartan Investment Group. Spartan syndicates self-storage assets for investment. Ted has 24 years of experience in the financial services industry as an investment advisor and Chief Compliance Officer. Ted can be found on LinkedIn at www.linkedin.com/in/ted-greene-dontbeafraid or email@example.com.
Disclaimer: The views and opinions expressed in this blog post are provided for informational purposes only, and should not be construed as an offer to buy or sell any securities or to make or consider any investment or course of action.