Brad DeLong's Semi-Daily Journal (2004)

what's the large house for?

Hey, Brad, why don't you update your 1996 piece, "Is the Market Overvalued?"

Is one of the goals of your investment advice to shield assets from college financial aid calculations?

and why not "triumph of the optimists" Dimson, Marsh and Staunton; Princeton, ISBN 0-691-09194-3 ?

Eric Tyson's Personal Finance For Dummies is quite good. (He, too, recommends Vanguard.)

Shouldn't your correspondent begin with a good book on personal finance, before reading up on what in the end is a narrow slice of most people's financial lives - investment? Sounds like your correspondent is well along in his/her financial life, but that doesn't mean things are well arranged.

Brad, would also recommend a small book by Justin Mamis entitled the "Nature of Risk." It does rely a bit too much on technical analysis, in my opinion, but the overall discussion of risk is very solid, and very eye-opening.

I'd recommend The Motley Fool for lots of reading that makes these choices understandable (on general personal finance as well as investing.)

Brad, would also recommend a small book by Justin Mamis entitled the "Nature of Risk." It does rely a bit too much on technical analysis, in my opinion, but the overall discussion of risk is very solid, and very eye-opening.

Brad, would also recommend a small book by Justin Mamis entitled the "Nature of Risk." It does rely a bit too much on technical analysis, in my opinion, but the overall discussion of risk is very solid, and very eye-opening.

Regarding suggestion #1: how does this square with earlier discussion of a bubble (be it a "housing bubble," "interest rate bubble," or whatever)? Would real estate be expected to rebound from any bubble-bursting, or is the expectation that prices will increase significantly for an indefinite period of time? I am (obviously) quite clueless there.

Also, such concerns aside, what does it mean for society as a whole to have such a distorted housing market, pushing consumers into houses larger than they would otherwise purchase? I would hazard a guess that perhaps this isn't the wisest use of government market-distorting power.

very sensible. I would add Boston to the list of weird places re housing.

Jane Bryant Quinn's retirement book is supposedly excellent. Heck, I've got 10 linear feet of investment books I'd sell him for .10/foot.

Brad acknowledges that the "large house" just isn't an option in the Bay Area, so the point is moot for me. I'm guessing the idea is to get a leveraged real estate investment at current low (tax deductible) mortgage interest rates. The deal is just too good to stop at the point where your living needs are satisfied.

But suppose you just don't want a big house even if you can afford it? A big house means more heating, more maintenance. What's next? Hire a maid that you would not otherwise need? Lock off the unused rooms? I mean, it just seems silly if the goal is investment rather than living space.

Isn't there any purely paper investment that serves as proxy for the oversized house? (I know there are REITs, but you don't get the tax deductible interest) This would be useful for those who don't want a bigger house, or those who cannot afford one due to the local real estate market.

I thought capital was supposed to move at the speed of light these days. I'm a little disappointed to hear that in order to maximize my investments I have to be chained to a big wad of matter whether I want it or not. I find it disturbing to think of orchards being uprooted as Americans who just wanted a little house leverage themselves out to the max just to follow Brad DeLong's investment strategy (I know, I know, most Americans want the big new house anyway, but it's just the idea.)

Thank you! Added to favorites, safe for when t : my_networth(t) > 0 :-)

I've never met an individual investor who was able to turn either book -- Burton Malkiel's "Random Walk Down Wall Street" or Benjamin Graham's "The Intelligent Investor" -- into investing success.

Most people lack the skill set (forensic accounting), the discipline and the strategic planning to use either of those books productively.

I suggest Jack Schwager's Trading Wizards as a starter -- only because of the emphasis on discipline, risk management and capital preservation, as it cuts across all manner of trading (bonds, commodities, currencies, equities, etc.)

A few comments:

1) The house is great, but remember that you can't buy food with it per se. The appreciation in your primary residence can help you, but it is not a replacement for assets you can sell to generate liquid, usable cash.

2) Index funds are great, as long as you are comfortable with the idea that if everyone did the same thing, we'd all sink together. The value of the index depends on someone actively evaluating the underlying issues.

3) Tax deferred vehicles are monstrously powerful over the long run, unless you believe that you personally are going to wind up paying through the nose later in life to fund endless entitlement demands made by boomers. I'm joking. Mostly ...

and Diversify.

"I've never met an individual investor who was able to turn either book -- Burton Malkiel's "Random Walk Down Wall Street" or Benjamin Graham's "The Intelligent Investor" -- into investing success. "

I know several people (including economics professors) who hopped on the Vanguard bandwagon and have invested heavily in low-cost index funds after reading Malkiel.

I am uncomfortable with the large house idea as a general recommendation, because it is such an undiversified investment, because in undiversified regional economies, its value is correlated with the (localized) value of human capital, and because people's desired housing consumption may exceed the optimal level of housing investment from a portfolio standpoint.

Think about people who lived in the upper midwest in the 1970s, or in Texas in the middle 1980s. The regions suffered economically, and lots of people lost jobs. As these people were losing their jobs, their houses lost value, often to the point where they had lost all their equity. Tom Davidoff at your institution has done work somewhat related to this point.

Finally, Jan Brueckner has shown that the utility maximizing level of housing consumption may well mean that households have an excessively large share of their investment portfolios in housing. Because housing is a joint consumption/investment good, it is difficult to get the margins right.

I have nothing against owner-occupied housing. But I am dubious about whether it makes sense for people to buy more of it than they wish to consume.

And for those housing bubble wizards, is the SEATTLE market also to be included in those over-priced bubble areas to avoid? It seems like it to me...

"I would appreciate recommendations on reading material.... My focus is finding out about investments and rudimentary money management. I am trying to learn about this for both my sake and to pass on info to my sons who are college age. I am not asking for investment advice, etc. Just some suggested reading material (books, magazines, web sites) to better educate myself and my sons on the basics and so I can better prepare myself for retirement."

Andrew Tobias, "The Only Investment Guide You'll Ever Need." I can't recommend it highly enough. I first read it back in high school; I've given copies to numerous friends and family members since then.
http://www.amazon.com/exec/obidos/ASIN/0156005603/

I would be very surprised if, after correcting for survivorship bias, even a fifth of professional investors outperformed the market over the span of a decade or more. If you adjust for risk and take into account tax considerations and trading costs, the percentage of even professional investors who do better than they would in an index fund is vanishingly small. Of course, it's very good for all of us that investors are still out there trying to beat the market, since if they weren't the market's judgment would be much worse than it is.

A suggestion:

Go to the Morningstar binder at your local library, and look up the value of $10,000 invested ten or twenty years ago in growth or growth-and-income Vanguard Funds. Then do the same for the same styles of American Funds. After that, compare the betas for each. I think it'll be an eye-opening experience - in many cases, better total returns for less volatility.

The numbers include all loads and other fund-levied charges. However, taxes are a significant factor, so I'm more confident about American in tax-deferred accounts, although they don't do much trading, so they're not terrible as non-qualified accounts either, but may not outperform an index there when including the effects of taxes (and the lost opportunity costs thereon).

You've got your fixed rate debt and your big house and your diversified stock portfolio. Don't you also want a deflation hedge or at least something to protect you if real interest rates decline? Like some fixed-rate, long-term bonds.

Aaron--

Your fixed rate mortgage is just such a hedge, because it comes with a refinance option than can be exercised cheaply.

http://www.nytimes.com/2004/07/11/business/yourmoney/11watch.html

GRETCHEN MORGENSON
That High-Tech Balloon Is Going Ssssssssss

THE warnings from technology companies came fast and furious last week, cuffing investors who had bought their shares on hopes of super earnings generated in a hot economy. Individual investors and hedge funds alike had piled into tech stocks and enjoyed the ride through 2003, convinced that 2004 results would justify the shares' soaring prices.

But with software companies like Siebel Systems and Veritas Software, hardware companies like Unisys and computer resellers like the CDW Corporation and Ingram Micro Inc. cautioning that their businesses softened in the second quarter, the sound of air escaping a balloon is more than detectable.

Inquiring investors want to know: Is this a blip, or is the second-quarter slowdown the beginning of a longer-term malaise in tech?

Fred Hickey, editor of The High-Tech Strategist in Nashua, N.H., and a technology stock analyst who knows the industry down to its nittiest and grittiest, says the setbacks in the sector are just beginning.

Investors may have been lulled into thinking that the second-quarter results at tech companies would be sunny because reports of shortfalls had been relatively rare.

Companies typically alert investors to problems late in a quarter, but by June 30, that front was quiet. "Normally the third month in a quarter belongs to the confessors," Mr. Hickey said. But at the end of June, he added "there were more positive preannouncements than negative."

Nevertheless, two signs point to problems ahead for technology stocks, he said. First, semiconductor shares, which often lead the action in tech stocks, have gone into a nose dive. The semiconductor stock index, known as the SOX, is down 11.2 percent this year, and spot prices of computer chips are forecasting further declines.

But the biggest trouble spots on Mr. Hickey's horizon are the ballooning inventories on tech companies' balance sheets. Already rising in the first quarter, these inventories will probably show a surge for the second quarter, he said, because few tech companies appear to have cut production in recent months.

Investors may not have noticed how inventories have grown at some of their favorite technology concerns. After all, balance sheets are boring; income statements make for much jazzier reading. And comparing balance-sheet items in quarterly reports requires some work: most show only assets and liabilities from the current and previous quarter, not from the same quarter during the previous year.

IN the first quarter of 2004, inventories jumped 21 percent to 61 percent, year over year, at such tech stalwarts as Dell, Cisco Systems, Intel and Texas Instruments. And that was when the economy was cooking. So Mr. Hickey expects inventories to show a surge for the second quarter. When inventories rocket, profit margins are hurt. Hefty write-downs are another common result.

The sales shortfalls at some technology companies will become most evident in the third quarter, Mr. Hickey said, making for some very ugly earnings comparisons from the same period in 2003. Back then, tax rebates were propelling consumers into the stores and gross domestic product soared 8 percent, annualized. Computer notebook sales in the third quarter of 2003, for example, were up 60 percent.

But this year, personal computer sales in the United States are growing at rates in the single digits or low teens. PC and notebook sales are also slowing in Europe and are actually declining in Japan.

In addition, the tax rebates, courtesy of the White House, are spent, mortgage refinancings have peaked and rising oil prices are pinching consumers. So it's no wonder that sales of tech gear have slowed.

Mr. Hickey said the inventory situation at some of the nation's biggest technology companies reminds him of late 2000, when demand from nascent Internet companies screeched to a halt. Although it became apparent in March 2000 that the Internet boom, created in part by a profligate Wall Street, was over, the impact of this steep decline in demand did not show up in major suppliers' results until much later that year and in early 2001.

"This industry is hopelessly optimistic," Mr. Hickey said. "They always overproduce."

None of this would matter if technology shares were cheap. But they are not. The price-to-earnings ratio on both Dell and Cisco is 32. Texas Instruments' is 30, and Intel's is 26.

"On June 30, the bulls were extremely long and vulnerable, even though underneath the surface there was a lot of trouble in a lot of places," Mr. Hickey said.

Perhaps the companies issuing early warnings recently will prove to be in the minority by the time all second-quarter results are out. But technology has had a heck of a run in the past year. As they say, nobody ever went broke taking profits.

I think I understand the house advice (outside superbubble areas, where a near 6 figure household income couldn't buy a hovel):

It's a forced savings plan! Every dollar not paid in interest is going to the principle, as forced savings. Likewise, the interest rates right now are very low, so the cost of borrowing is low.

Also, a fixed mortgage has two other great side effects: It makes long term housing costs fixed and predictible (allowing long range planning, and hedged against inflation), and once you pay it off, your housing cost goes to near 0, a wonderful position to be in!

someone moving from The Economist to financial markets once asked me what to read. I suggested then and would still suggest today that he ought to read Kindleberger's classic.

I think Brad's comments are relatively generic ones - always good.
Save lots (live below your means) - Comment 3
Invest those savings in a tax-efficient way - Comment 2
Don't create investment expenses that don't buy you anything (commissions, expense loads, etc) - Comment 4

His specific comments are directed at the belief in the impact of the dual deficits (trade and federal budget). They are likely to drive down the value of the dollar (hence foreign currency earnings exposure) - Comment 4 - and cause inflation (giving an edge to hard assets and equity over debt and cash) - Comments 1&4

The best book I've read on the subject is called IIRC "The Top Ten Investment Mistakes Canadians Make". Unfortunately it might not be available in the US.

Basically it uses a bit of cognitive psychology to show how people are typically their own worst enemy in investments, and why the best thing to do is good ol' "put a certain amount of money away each month into diversified index funds, and forget about it".

Brad's suggestion of Vanguard is a good one. If you are investing over 100,000 dollars through a financial advisor, though, use DFI (they're available only through advisors and only with at least 100,000 invested). The point in general is to use globally diversified index funds with a good selection of small companies and "value" companies (not just big companies like the S&P 500, not just a techs index). DFI has the best funds in this respect, Vanguard the second best. Invest and FORGET it. Unless you plan to retire within a couple years, do not much with your balance. And do not sell - if you want to keep a certain % of your money invested in certain kinds of funds, use the new money you add to even up the balance.

If you have a company 401(k) plan, they'll probably have a limited selection, usually with the only index fund being an S&P500 fund. That is a fine short term investment, either put it all in S&P 500, or add some developing-world mutual funds if they have those. But whenever you change jobs, roll over your old company's 401(k) into a traditional IRA account with someplace like E-Trade that gives you loads of options to invest it. Then put it all in diversified index funds.

"The Millionaire Next Door." Mandetory reading for anyone who wants to learn about how to manage money.

James,

You don't even need to take into account survivorship. As of June 30, only 17.75% of Large Value, Growth, and Blend funds in Morningstar's database (i.e. excluding the ones that were killed off) outperformed the S&P 500. Slightly fewer after sales charges are taken into account.

Book number is Stocks for the Long Run. Irwin 3rd ed., McGraw Hill, 2002 Jeremy J. Siegel

Book number two Technical Analysis of the Financial Markets: A Comprehensive Guide to Trading Methods and Applications
by John J. Murphy

I disagree with the big house. Taxes, high utilities, high maintenance expenses (Twenty thousand for a roof instead of eight thousand)will bankrupt you. They don't call a home a money pit for no reason.

Invest heavily overseas. IBM is going nowhere. What, $82 to $95. GE is touting their nubers and yet the stock was at $60 a few years ago.

Buy country EFTs that are positioned to do well to diversify. Do not leave out India AND China. While the US companies invest offshore, India is investing 10 BILLION in their OWN biothech industry.

As Sir John Templeton says, buy when there is blood on the floor. This is hard to do. A year from now Nokia bought at 13 will look pretty good. Same applies to ETFs for countries.

Lastly, use stop losses and preserve your principle.

Walons, thanks for that. There's also the problem that, even if 10-15% of professional investors can beat the market, there's no obvious way of identifying them before the fact.

The point is index investing works. Just average into the Vanguard total market index, and you will be quite pleased in time. Want a bit more diversity, try the total international market index.

Hey, James! You're a smart guy. What's in your portfolio? What's yer asset allocation?

i want to second the Tobias and Kindleberger, which, along with the three that Brad cited, are the list i give people who ask.

As for those who suggested it's hard for individual investors to live up to graham and malkiel, the single most important thing that Graham said is (iirc; i may be off slightly): "it's easier to do adequately in the market than most people think and harder to do well than most people think."

Hence james and others make the point that for most of us, index funds make the most sense, and anyone who reads Graham and doesn't came away realizing that the way to apply his aphorism is to buy index funds isn't thinking about what they're reading....

While persistence in 'good manager' returns is difficult to locate, it's easy to determine which types of funds will underperform. High fees and high turnover are highly correlated with underperformance. Vanguard wont beat the market, but it won't underperform either.

Look at hedge funds too, if you have capital over $1M. Excellent diversification - stick with the big guys or the FOF>

I'm a big fan of the Malkiel book as well.

I used to like the Motley Fool as well, but their investing advice has been a mix of good and bad. I like what they've said about index funds and how to get out of debt and a lot of the stuff aimed at novices. But they've also promoted several stock-picking strategies that ended up underperforming the market, and now they're trying to sell their newsletters -- also of stock picks.

They have pretty good message boards, though (at least, they did back when I started blogging over 6 months ago -- haven't checked lately).

This looks a lttle light on fixed income to me. Fixed income is tricky because bond funds aren't exactly fixed income themselves while bonds are hard to choose and buy in small quantities.

Vanguard/tracker funds eliminate manager risk and keep costs down.

I'm a fan of the Malkiel book but the latest editions cloud the efficient market message a little with qualifications that don't turn into obvious advice. Motley Fool is very engaging and quite effective. Fooled by Randmoness by Nicholas Taleb is limited in scope as an investment manual but debunks quite a lot.

C, my asset allocation is definitely not at the efficient frontier: about 60% of it is in equities (Vanguard) and 40% of it is in money-market funds (paying roughly no interest) because I think I'm going to buy a house some time soon, and I don't want to risk a serious reduction in my would-be down payment. Once I own a house, I assume all of my money will be in equities for at least a couple of decades (I'm fairly young, so I wouldn't shift a significant percentage into bonds until I get closer to retirement). I max on the 401(K), and I don't jump in and out of the market -- I just don't think market-timing can be done well (or at all, frankly).

Brad's advice sounds very good to me. I'd also recommend John Burr Williams' "Theory of Investment Value" for intellectual background. And this new little tome called "The Wisdom of Crowds" has some interesting stuff on investing and markets, too. Of course, I wrote it, so I would say that.

Brad,

Why not a large house in DC? Do you think that we're part of that "wierd" housing bubble?

I've been in my place for a little over a year now, and I'm not sure that your knee-jerk reaction is on the mark in regards to DC. Don't get me wrong, if that large house you desire is FAR away from downtown and outside the beltway (where you'll have a nightmare commute), I would agree with you. However, inside the District itself (as opposed to outlying neighborhoods in northern VA and southern MD) prices have been steadily climbing. Sure, they're overvalued--but there is still heavy demand. It must be something about that hideous commute time that keeps everyone interested.

In my neighborhood of far east Capitol Hill, prices are still high, but more reasonable (less than $350K for a 3BR). Nothing around here has been on the market for very long (certainly less than a couple of weeks), unless it's priced way over market average. This is also true for the "sketchier" parts of the District. They're slowly becoming more civilized. There are still pockets of decay, but the rising tide is raising the quality of housing. From what I can see, local contractors and Home Depot are doing very well with all the renovation business going on around here. House flippers are buying out 75-year old townhouses, putting in $50 K worth of new value (granite countertops and stainless steel in the kitchen, AC, and refinishing floors). They go on to sell these gems for over $100 K or more over their purchase price.

Demand has been strong for the last five years. Will it stay that way? I'm not sure. I am happy that I bought when I did. I've got more of a chance for my house to appreciate in value.

Why the overwhelming bias toward equities? Does everyone at this site have a defined benefit pension plan? What about inflation protected bond funds?

US equities have consistently outperformed bonds but if one looks internationally I recall the historical performance difference is less than thrilling. The US stock market has led a charmed existence but past performance is not a ...

As I recall "Stocks for the Long Run" by Jeremy Siegal (recommended above) made some very dubious claims about the long-term risk of equity investing.

Can someone who's economically literate comment on the general "We're all gonna crash, buy gold" predictive reasoning over at the Daily Reckoning? (www.dailyreckoning.com)

Yes, you can argue against them empirically by saying "we'll muddle through, we always have" - and "There are always things to worry about at the 'present time'" (whenever the present time happens to be) - but are they right, that economic fundamentals in the U.S. are really really lousy right now? that "the Fed is pouring money into the system beyond measure"? that Greenspan is off his rocker to be recommending adjustable rate mortgages, or if he's on his rocker, that he's not making this recommendation for the borrower's benefit? That American McMansions will serve admirably as bed-and-breakfasts for our Indian and Chinese tourists of the future?

I read this stuff, and it sounds plausible, but I have only the vaguest historical perspective on the doom-and-glooming so can't really judge.

It depends what you mean by dubious. Siegel showed that if you look at every twenty-year stretch over the past two centuries, U.S. equities had a higher real return than U.S. bonds in 96% of those stretches, and if you look at thirty-year periods, U.S. equities had a higher return than bonds in 100% of those periods. And that is without significantly higher risk. 200 years or (to be more reasonable in terms of when a real, healthy equity market was established) 130 years is a long time to be "charmed."

Even if one looks internationally, the superior performance of equities to bonds is universal. Siegel writes: "Over the 101 years as a whole, there were only two bond markets and just one bill market that provided a better return than our worst performing equity market." In any case, if you're thinking about America, the performance of bonds relative to historical norms has been just as exceptional in recent times as the performance of stocks. So it's not clear to me why we would think bonds are going to be a better investment, unless you think we're headed for deflation.

The introduction of inflation indexing does change the calculus here somewhat, and I certainly think as people get older they need to shift more of their assets into bonds. But I can't see how someone with thirty years of investing and work ahead of him should have a significant percentage of his assets in a class that is almost guaranteed to underperform equities over that period of time.

On the large house. I have a small house (actually three of them) in prime neighborhoods. Location beats size. Small houses have a smaller initial outlay, and since the locational rent is what matters, you get more bang for your buck. If I had bought Paris real estate in the neighborhoods I knew were taking off when I knew I should have (and could have) 15 years ago, I would be even richer). Location matters, and for that you have to hink ahead.

Otherwise, the best thing is to be young, so that compound interest can work for you. Being old sucks. Six percent per annum just isn't going to do it if all you've got left in relevant spending time is 25 years.

To the originial poster, buy Vanguard, buy a lot of Berkshire B (A if you're really rich), ladder some some bonds, sit tight and hope Bush isn't re-elected.

I happen to be somewhat sceptical about the obviousness of stocks' superiority. In 130 years, to take up James' point, you get four fully independent 30-year periods. Not much of a sample. Then there is the fact that the system is not obviously stationary, and we don't understand the ways the changes may or may not affect the equity markets. I would posit that we know much less than the conventional wisdom would suggest.

Make it real easy, go to:

http://www.armchairmillionaire.com

William Bernstein

'The Four Pillars of Investment Wisdom'

an excellent introduction to Malkiel, Vanguard, asset diversification et al.

see also www.efficientfrontier.com his superb website.

A more basic (but brilliant) book is 'The Wealthy Barber' by David Chilton.

'Your Money or Your Life' by Jo Dominguez is also excellent.

'The Millionaire Next Door' is interesting but the data set is flawed (only considers successful millionaires ie not people who followed these strategies and failed).

"Why the overwhelming bias toward equities? "

Peter Lynch in One Up on Wall Street oe Beating the Street said he is always 100% invested in stocks for the same reason Siegel says. Lynch did it in practice and made a lot of people a lot od money, as well as himself.

James S.: A central problem with Siegel’s analysis is his suggestion that long equity holding periods somehow reduce the risk of owning equities. While that has been true empirically in the US over many long periods, there is no reason to expect it will hold in the future. Zvi Bodie (http://papers.ssrn.com/sol3/papers.cfm?abstract_id=5771 ) effectively addresses this point by showing that under reasonable assumptions the cost of insuring a stock portfolio against shortfalls increases rather than decreases with the length of the holding period. Perhaps Mr. Siegel has some response but it is hard to imagine it would be anything but more hopeful empiricism.

Another problem with Siegel’s analysis is survivorship bias in his foreign equity data. Outside the US, equity markets have had a tendency to come and go and IIRC Siegel made no effort to account for this. I’m not sure if he has addressed this problem or if it can even be addressed in a convincing way.

A larger problem with the “all equity portfolios are great for young people” approach is not everyone should be planning to retire rich. If you are going to retire on a subsistence income you are likely to be much more averse to shortfalls in your retirement income, than if you are working with a high expected retirement income. Currently over half of retirees receive at least 50% of their income from social security. For the majority of Americans, I think it is way too risky to put most of your liquid savings in equities – particularly now that inflation indexed bonds are available. Mr Siegel talks a good game -- and probably admits his advice isn’t for everybody -- but I’ve seen him on TV touting equity investing without any mention of an investor’s risk profile.

When I go to Mr. Siegel’s site (http://www.jeremysiegel.com/) and see that he has organized himself into an equity promoting mini-conglomerate, I wonder about the young people seduced by his once unbridled enthusiasm for stocks (I think Siegel has finally toned things down a bit) who have taken out a home equity loan to finance their near risk-less long-term stock portfolio.

aw, Brad didn't bite on updating his 1996 piece on the market being overvalued.

As for me, I stick to Vanguard Total Stock Market and Vanguard Tax-Managed International and Vanguard's various bond funds. Cheap cheap cheap!

Brad, why a fixed-rate mortgage, given that most people will move houses within 6 years*? Wouldn't a 5-year fixed switching to ARM be a better bet, given that you're paying a 75-basis points premium for fixing payments in the future that you'll probably never need?

*Okay, Prop 13 in California adds a major disincentive to move houses, but I'm talking about outside CA, in states that have more rational state financing.

Housing investment is "beneficial" for typical households because it is leveraged. Leverage is the name given to buying something you can't afford with a smaller down payment. Somebody has to pick up the rest of the price, typically a lender. This, of course, is how the mortgage market works.

Buying with leverage is only advantageous if the purchase is likely to offer some return. This works because the buyer's stake is equity, while the lender's stake is not. All returns above costs go to the holders of equity. So, if you put 10% down on a house, and the value of the (entire) house rises by 30%, you get the entire gain, for a 300% profit. Obviously, this will create big problems if the house loses value. So, leveraged purchases are a way of raising your return by increasing your risk.

Leverage is important to the investment advice linked below because the typical household is blocked from making leveraged purchases on many assets that would be likely to offer a high rate of return. Buying a house is the biggest leveraged purchase that is available to the typical household.

One (almost criminal) feature of our current system of financial regulation is that while households are barred from making leveraged purchases of many assets that might offer them a positive rate of return, they are free to make leveraged purchases of virtually everything with a negative rate of return - which includes most of the highly depreciable consumer goods that households buy with credit cards.

Robert Schiller suggests in "Irrational Exuberance" that at their current prices, stocks may not be a good investment *even for the long term*. Equities have fallen somewhat from their levels when the book was first published, but as I understand it, they're still pretty high.

Tobias's advice--you can't predict the future, so try to divide your investments between cash, bonds, equities, real estate--makes sense to me. If there's deflation, bonds (and cash) will do well. If there's inflation, real estate and equities will do well. If everything turns out just right, equities will do well.

BTW, Bill Gross of Pimco -

"Like the doomsayers we are, we stated that the global economy was more imbalanced than at anytime in the last 25-30 years...

"...bad things can happen in a levered economy. Think of two garages – one with two cars and an immaculately swept floor and the other filled with boxes, newspapers, paint cans and numerous oily rags. Which one do you think has the better chance of going up in flames if a match or a faulty electrical wire creates Fahrenheit 451? That is an apt metaphor in economic terms when comparing a healthy non-debt laden economy to one thriving on the creation of paper and artificially low interest rates... "

(from http://www.pimco.com/LeftNav/Late+Breaking+Commentary/IO/2004/IO_07_04.htm )

I recommend any of the investing books by John Bogle - excellent practical advice with enough theory to open your mind.

A comment on equity returns. Over half of the historic data comes from a time when dividend yields on stocks exceeded 5 & 10 year interest rates. And even since 1958 or so, when dividend yields fell permanently below govt bond yields, dividends stayed over 3% until the early 1990's. The almost continuous downward trend in dividend yields (ie, rising multiples) has supported and increased (distorted?) actual returns for several decades. Going forward, will the yield continue to fall? Or rise back up? or hold steady? I don't know, but my "efficient market" mindset leads me to invest based on a "hold steady" outlook - that is, forward returns for stocks should be about 1.5% (current div yield) plus 5% (dividend growth). Maybe stock buybacks adds another 1%, who knows? But don't base your plans on 11%. And don't base your withdrawal rates on historical studies that were done when dividend yields were higher. It's a simple fact that we can't all be penta-millionaires and live from dividends.

7623 You can buy viagra from this site :http://www.ed.greatnow.com

2065 Why is Texas holdem so darn popular all the sudden?

http://www.texas-holdem.greatnow.com

8817 ok you can play online poker at this address : http://www.play-online-poker.greatnow.com

8783 Get your online poker fix at http://www.onlinepoker-dot.com

8343 black jack is hot hot hot! get your blackjack at http://www.blackjack-dot.com