Were you “greedy when other people were fearful” (as Warren Buffett would say) when the market tanked this week?
If you managed to scoop up some bargains you were no doubt patting yourself on the back for the rest of the week as Wall Street staged one of its strongest one-day rallies … ever.
Winning like Warren, right?
Maybe. However, if you look at the value of the US share market by the size of the economy (the indicator that Buffett calls “probably the single best measure of the stock market at any one time”), it’s at almost twice the long-term average.
In other words, if Buffett and history are our guide, those ‘cheap’ shares you bought this week are still bloody expensive. Yet that shouldn’t be a surprise when you look at what’s happened over the past decade …
To ward off a worldwide economic cardiac arrest, the US Federal Reserve created three trillion dollars out of thin air and injected it directly into the banking system. Then they dropped rates to emergency levels — zero per cent — and left them there for seven years.
Now the US economy is looking stronger, the patient will soon have to be weaned off the drugs — by increasing interest rates. And when that happens, it’ll likely be brutal for investors.
That’s a complete guess on my part, of course, because the truth is that the world’s central bankers are currently conducting a financial experiment that they’ve modelled on an untested academic theory. And just like my back-of-the-shelter-sheds science experiment with a Mentos and a Coke, it could all go horribly wrong.
But you needn’t worry. Let me show how you can make money, regardless of what the market does.
From Walpeup to Wall Street
Let me tell you about my Uncle Bob, who’s a farmer in the Mallee town of Walpeup. His family has been farming the same hostile patch of dirt since settlement.
A few years ago Bob began painstakingly restoring the original homestead that his father lived in as a boy. Bob showed me the fully restored shack when I was last back home.
“What’s this?” I asked, pointing to a hole in the ground.
“That’s a makeshift cellar …”
“Your dad drank wine?”, I asked.
“No. That’s where they buried the meat … to keep it cool. Remember, there was no electricity.”
Walpeup is thirty clicks from the small town of Ouyen. Today, a 20-minute air-conditioned drive, but in Bob’s dad’s day it was a death sentence if you were unlucky enough to be bitten by a snake. There were no cars, and therefore no roads. Just a horse and a buggy, and hours of trudging along a track. (And even if you made it to the hospital, what could they do?)
Still, as Bob was explaining all this, I was having my own problems. I was trying to take a selfie at the shack and upload it to Facey, but the network was a total friggin’ disaster … seriously I was struggling to get even two bars on my iPhone! Two generations on, my biggest problem was that my phone couldn’t connect fast enough to a satellite somewhere so I could temporarily negate my narcissism.
There’s the rub: you don’t get a true understanding of just how amazing life is right now — just how far we’ve come in such a relatively short period of time — unless you have your own Uncle Bob or unless you’re a lifelong, long-term investor.
Wharton finance professor Jeremy Siegel worked out that one US dollar invested in the stock market back in 1802 would have grown to $930,550 by 2014. Staggering. In that time we went from horses and buggies to walking on the moon (and that phone in your pocket has more power than the one that sent Apollo XI into space).
Yet throughout that time there have been plenty of very sensible reasons not to be an investor: recessions, depressions, two world wars, plagues that have wiped out millions of people … the Backstreet Boys.
Okay, so maybe 212 years is a little too long term.
So what about if you’d invested $10,000 in 1980? It would have grown to be worth roughly $370,000 today (and be paying you roughly $18,500 a year in dividends).
Again, throughout this time there have been plenty of pundits suggesting you ‘sell and stay away’: the 1987 Crash (now that was a real crash, where 23 per cent of the market’s value was wiped out in a single day), the Tech Wreck, the ‘Asian Contagion’, the Global Financial Crisis … and Justin Bieber.
Really, the stock market is a barometer of our standard of living. The two go hand in hand — though it’s difficult to see the progress happening if you’re checking your portfolio on a daily (or even yearly) basis.
How to Boost Your Returns (Even When the Market Tanks)
Okay so, that’s the big picture.
What can you do today?
Well, obviously it depends on your age.
If you’re young, besides stapling this column to your computer, you should make your investing automatic: set aside a regular amount of money each month and invest it, whether markets are going up, down or sideways. With this strategy, you’ll buy more shares when the market is low, and less when it’s high. Simple.
If you’re heading towards retirement you should aim to have five years of living expenses in cash and fixed-interest deposits. This will enable you to ride out the next downturn, which on the balance of probabilities, is likely to come sooner rather than later.
Regardless of your age, you need to ensure that you aren’t getting ripped off.
Paying more than 1 per cent of your nest egg to a fund manager is cra-cra, and not in a good way. The biggest beneficiaries of the long-term compounding returns are money managers — collectively they rip $21 billion out in fees each year, despite repeated studies showing the majority of them fail to add any value.
And it’s an equal opportunity rort. Proportionally, retirees pay most of the fees (because their balance is highest), while young people are a gravy train for decades to come. Lowering your costs is one concrete thing you can do to automatically boost your returns, today.
Tread Your Own Path!