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Investing In Inflated Investments

Staying on the sideline or jumping on inflated investments

As of this writing, 2017, the real estate and the securities markets are considered highly inflated.

This doesn’t mean that they are bad investments, it just means that there are a few factors to take into consideration in order to ensure that we as investors will get a healthy return on our investments.

How to tell if investments are inflated

We are constantly told by financial experts that there is no way to successfully time the market. However, history begs to differ. Some of the wealthiest individuals have made their fortunes grow and capitalized on down economies and inflated markets.

Real Estate inflation

When everyone and their momma are buying real estate with little regard to overall cost then it’s an artificially inflated commodity. Unless, 1,000,000 new individuals moved to your city, in which case it’s an issue of supply and demand.

Real estate is considered an investment even though it clearly isn’t when purchased by the average consumer. As such, when the price and demand for it go up, most individuals will look to get on the bandwagon.

Consider your local market. If you are living on pill hill then it’s quite likely that the value of your real estate will go up in the long-run. Of course, banking conditions have to be favorable in order for doctors and other professionals to continue their ability to obtain loans.

Doctors are notorious for purchasing far more leveraged real estate than their budgets can handle. This is bad because it’s a strain on the household and it’s great because there is demand>supply on pill hill.

Salaried professionals, those who earn a high income with secure jobs, are the classic demographic who will borrow heavily for transportation and real estate. There is a reason why they call them “physician mortgages”.

The irony is that among ourselves, we have driven the prices of homes up. If we as a group decided that we weren’t willing to pay $1 million for a 2,000 sqft home then the buck would stop there.

Can and would the home you’re buying rent for as much as you’re paying for it? This is just one way to determine whether you’re paying in excess of the true value of a home.

Securities inflation

I don’t keep track of this stuff in detail, but I know that my securities investments are up by an absurd amount, double-digit percentages.

Was there a new invention such as the automobile that changed the world economy? Nope.

Did we invent a cure for something health related that increased life expectancy multifold? Don’t think so.

Did we pass worldwide laws to break international borders to allow free trade? Yea, not quite.

Did humans suddenly realize that they can drive the economy by becoming entrepreneurs as opposed to consumers? Actually, maybe, we’re getting pretty close – but not yet.

When citizens of an economy feel that things are going well then this sentiment translates to them more into investments which appear to be thriving. They are more likely to mobilize their savings in order to secure a higher return.

They will put more money into their 401k’s and IRA’s and they will buy stocks since they are seeing them go up, up, and up.


But Can the highs and lows be predicted?

No, you cannot predict the peaks/troughs of the highs/lows, that’s a guarantee. However, you can speculate the trend and if you’ve been playing the game long enough then you’ll probably be correct most of the time.

This is the time when some investors are pulling out of equities, setting it aside and waiting for securities to drop down a little before getting back in.

Those without experience will be buying securities right about now because they are performing well. Those same individuals are more likely to sell when they see the equities drop in the near future.

The seasoned day-traders above, will buy low and sell high. Their investment strategy depends on market timing. And over their investment career, they will be more right than wrong.

The highs…

There is a famous investment blogger who pulled his money out of securities back in late 2014, citing and inflated market. I am not saying he’s wrong but he has missed out on 2 years of very nice returns.

Even the best market timers won’t ever time the market exactly. Which means, they will miss out on some highs.

How much will they miss out on? It depends whether they have the kind of portfolio that is heavily geared towards speculation versus dividend growth.

The lows…

Back when I was learning about investing, I sold a ton of investments as soon as the market started crashing sometime in 2008. I locked in some incredible losses.

Once the market dipped really low I started buying a lot of banking stocks. Then it dipped some more, I panicked again and sold again, losing even more money.

A buddy of mine at the time not only held onto his investments but doubled down. He put nearly $100k of cash towards those investments which had gotten hit the hardest, banks and tech.


How we can capitalize

I follow a timing strategy that is not considered a timing strategy – for whatever reasons – which involves holding my investments for a long fucking time.

By staying in the market for a long time, I take advantage of dollar cost averaging and continued dividend payout regardless of whether my investments are doing well or doing shitty.

It’s like rental income properties. I don’t care what the value of the property is, all I care about is that it will earn me rental income. It can go up by $200k or drop by $100k, doesn’t matter, my strategy is focused on rental income and not asset appreciation.

Mix and matching strategies can dilute your profits or even worse hurt your progress.

Studies have shown that you are far more likely to succeed in the investment world if you stick to one strategy and learn to master it. By the time you are so savvy that you don’t need advice from ‘studies’, you will likely be coming up with your own hybrid investment strategies.


Figure out your strategy

1. The most important thing you can do for wealth building is to save by lowering your expenses.

Remember the medical students who were so set on learning a one-handed knot? Yea, it’s like that. Learn the surgery first (save), then learn the one-handed knot (invest).

2. The second most important thing you can do in order to build your wealth is not overextend on debt and not spend your savings.

Looking back on my personal finance history, I got hurt the most by:

  • spending more than I should have
  • raiding my savings and retirement accounts
  • dabbling in shit I had no business investing in
  • taking on way more debt than I could feasibly service
  • wanting a better return than what the conservative market had to offer (greed).

3. The third thing you can do in order to assure your wealth is to figure out your investment strategy so well that no matter what funky moves the economy makes, you will know how to respond.

Your financial adviser is critical for this purpose.

I will always think about my money and my investment from an emotional perspective – I bled for this shit. But my adviser can take a secular stance.

I know there are other financial bloggers out there who are vehemently against having a financial adviser. But I assure you, they either are very closely tied into the personal finance community, collaborating with other professionals or they will eventually give up and hire a professional.

If you don’t know how to figure out your strategy then talk to a financial adviser. Choose one who shares your lifestyle values and can make you feel comfortable with the risk level you are taking.


Ignore the noise

Once the inflated assets start on their path of correction you will hear a lot of noise in the news.

Tune out as much as you can and stay the course.

The only reason you would need to change your course is if something massive happened. If you invested purely in mortgage-backed securities in 2008 then yes, you’d need to get the fuck out.

However, hopefully, you don’t have such a narrow investment window and are diversifying.

But, if you have a fairly conservative investment strategy, unless the whole US economy collapses then you don’t need to make any investment changes.

If the US economy collapses the last thing you’ll be worried about is your investments.


Investment horizon

On a long enough investment horizon, the current prices aren’t inflated, they are simply another peak blip on the chart.

If you are planning on staying the course then you will always be able to take a little off the top whether the investments are inflated or whether they are crashing.


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