I don't think it broke any real records, the only one is the absolute point drop in the indexes, but that's a meaningless stat that will constantly be broken in the future as the economy grows - proportion is what's interesting.
My bad, it did not break records outside the 1987, dot-com and GCF crises, made a mistake there. However, I don't agree with the theory of infinite economy growth (as you said "constantly be broken in the future").
In Canada, most people lock into their mortgage rate for 3-5 years. After that, you've got to renegotiate a rate but you're also free to switch banks. It's like starting over again at whatever you currently owe. I locked into mine 4 and a half years ago, so renewal is coming up this summer. Meanwhile, my home's value has skyrocketed (thanks to an insane Toronto housing market).
What this all means is that in a few months, at my renewal date, the mortgage interests rates may be incredibly low (they're already at 2.7% today), my home's value is much higher than what I owe, and the stock market looks like it's going to be hitting the bottom around that time too.
So the question is... do I gamble on this? I could easily access hundreds of thousands of dollars in a low interest mortgage and drop it all on index funds. If it worked, 10 years later I could retire early. If it doesn't, I'm another god-knows-how-many years away from paying off the mortgage.
Mind you, my (sane, rational, smart-than-me) wife would never agree to any of this so it's only nice to think about.
> If you actually had any inkling of which way the markets would move... you'd be retired already.
Yeah, this is exactly what my sane, smarter wife says. I briefly worked in a startup that built tools for professionals in the finance world. What I mostly learned there was that I knew nothing.
It doesn’t make sense to pay off the mortgage when money is essentially free, where interest rate is lower than inflation.
I believe it does make sense to invest what you can now in a balanced and diversified 60/40 portfolio. The current market turmoil is mere noise in the long term.
The fundamentals are still solid. Companies continue to make profits and hire people.
>The current market turmoil is mere noise in the long term.
Which is exactly my point.
Interest rates could skyrocket to 20% or more for yet another unknown unknown financial black swan event.
Or your home could be worth 25% of what it is today before you know it.
The ground could literally open up beneath your house and swallow it hole, leaving you with nothing but that massive debt obligation. (As most home insurance plans do not cover acts of god like sink holes).
That's an insanely rare and extreme example, but I hope you get my point.
It's best to get out while the getting-out is good.
If you have a large debt obligation that your current home value can pay off right now and then some, get rid of that debt and create some real wealth.
You've officially won the game of middle-class life at that point.
Then you can dream about what to do with that wealth until the cows come home... once you're actually wealthy and have the time and money to theorize how to properly invest that wealth.
Just 3 years? Usually you can ask the bank to guarantee the current interest rate for up to 15 years. Of course you will have to pay a premium on top of the market rate interest but e.g. getting 3.3% instead of 2.6% is not a bad deal compared to being surprised 3 years later that your original 1.5% rate is now 2.5%. 1% additional interest on a $600k house could mean that your monthly payments go up by $500. That shouldn't be taken lightly. However, negotiating a different interest rate after 10 or 15 years often makes sense because you have already accumulated equity. You no longer owe interest on the full sum. If only $200k are remaining on the loan then your monthly payments would only increase by $167.
If you want to get into the stock market then do it in a sustainable way. Don't try to time the market, you probably won't win a second time and lose your money before you have fully understood how the stock market works. Get a small financial buffer. Enough to stay unemployed for 6 months. Put the surplus into a conventional portfolio. If you don't care about the stock market but want to get your cut then focus on ETFs that index the market (S&P 500 is a classic) and put the rest in bonds. I recommend starting today. Just spend $100 on a random ETF to become familiar with the selling/buying workflow.
Most important rule always do your own research. Let strangers (financial advisors, friends, maybe random people on the internet) help you figure out yourself but never take their word as the truth.
I've seen 6 people in the last 2 weeks on wallstreetbets gamble away their student loans.
The sad part is one guy will post their success of doubling their student loan, and it will just cause a bunch of younger inexperienced 19 year olds to lose tens of thousands to their own gambles.
For some, it is addiction. For others, they simply cannot fathom the risk they expose themselves to. They have no concept of the time, effort, and stress they will cost themselves over the course of their lives as a result of their error.
Try explaining to a teenager that the 50k bet that costs them their chance at an education is actually them putting 1m+ at risk if you compound the effect over the course of their life.
I think there’s a lack of understanding of markets as well.
Great, you can toss 10k towards at it if you burn your student loans. GP might be able to toss 100k with a refi and investing his home equity.
Market movers have plenty more zeros at their disposal. We are bugs and the best thing to do is to make decisions that don’t make us end up as splats on their windshield.
All true. Even without the concern of competing against big money, there's always the simple fact that you can just lose a bet.
Through a personal connection, I'm aware of a failed SAP implementation that cost a company their position on the DOW. You'd never consider that was a possibility as a teenager because SAP doesn't even exist in your universe yet.
Maybe. They could also make a lot of money playing roulette. I'm not sure one is a better idea than the other, though at least if you lose a lot of money in a casino, they'll comp you a room and some meals.
I remember someone describing the appeal of Robinhood to millennials - they said that buying some stock and having it go down was like "dropping your iPhone in the toilet".
At the end of the day it depends on what your risk appetite is.
We've been on quite the bull run so in that regard I would say no, but given rates are super low and mortgage debt is cheap to come by (barely covers inflation), I honestly don't see why you wouldn't investigate it more. If you can make more than the mortgage interest rate, then it was worth it.
Using debt is fine is you can stomach a potential drop in a liquid market. That is more psychological than financial, actually. Would you panic sell if your (leveraged) investment drops 30 or 50%? I've come to realise I wouldn't hence I would consider making that investment, but to each their own.
This is less risky than using pure margin debt on your investments, because this can't be automatically liquidated.
You might consider the Japanese experience. In the 1980s they had an asset price bubble fueled by loose monetary policy.
The Nikkei never recovered from its peak.
Is that probable? Perhaps not. Is it possible? Definitely. We have had an asset price bubble and loose monetary policy.
Investing on margin is a mug’s game. You can’t realistically know when the bottom of a market is. Also, if an asset price bubble does pop, your home will likely go down a lot in value too.
Why would you ever want to pay off your mortgage? Mortgages are the best and cheapest way to get debt. Considering the rate environment, the rate risk isn’t a big deal, IMO. Hell, I would even go a step further: dump that 200k into a levered S&P 500 (2x should be good). Unless the world falls apart, you’ll definitely be a millionaire in 10 years. And if you do 3x, maybe even 5 years (that’s some more risk though).
I can’t really imagine a world in which the annualized yield of SPY over 10 years is less than 2.7%. And like I said before, rates are only going down and that’s not going to change anytime soon. Of course a financial advisor wouldn’t tell you to do it but they don’t really care about you in the first place.
"I can’t really imagine a world in which the annualized yield of SPY over 10 years is less than 2.7%."
Seems your imagination is lacking. From 2000 to 2010 it was negative. I wonder if the current market is the only market you ever have seen. Housing prices also have collapsed not too long ago in the past.
Downturns in the market will kill you if you are leveraged. Once the money it's gone, it's gone and it will be hard to make it back. that is, unless you have a rich dad who gives you more money. That's why I think it's very important not to be naive with investment advice.
A 2x levered S&P 500 ETF will always be buying when the market is high and selling when it's low (the debt will end up less than 50% of the value if the market goes up, requiring them to buy more to maintain 2x leverage, and the reverse when it's down).
So if the market doesn't move in a straight line you make less than 2x the S&P 500 return over time, including losing extra money in neutral and bear markets.
It's hard to objectively calculate how large the impact from corona virus will be and how it has affected the supply chain. Additionally, this could be a black swan event that could become a catalyst, this is not an isolated event and it will send a shockwave across the markets.
The losses in earnings as well as the reduction of consumption are hard to estimate, they need to be priced in into the stock's price which might be currently undervalued or overvalued. The idea is that no one knows exactly what the prices should look like. You might go for the S&P yield and end up losing 20% in the short term because of the price tanking.
The point is that investors like certainty, that's why some are holding cash or even a mix of bonds, cash and gold. They might prefer lower yields than S&P and more certainty.
The 2008 GFC was a good opportunity invest in hindsight because for a period of time stock prices were low and the economy recovered within a few years.
However today stock prices only 12%~ off all time highs and some are predicting prolonged stagflation.
That's a question of market timing, and of you try and time the market, you'll either be broke or lucky. Maybe stocks are insanely undervalued and we're on the cusp of a bull run. Or, maybe the markets are going to crash and the dividend rate isn't going to hold as we move into future as companies go bankrupt and stop paying dividends. Unlike treasury bonds, dividends aren't certain, so this one data point alone isn't enough to really conclude either way
I agree theres nonsuch thing as smart money, but there probably is a distinction between dumb and not dumb money - like someone putting a part of their savings in an index fund versus someone putting their entire net worth on far out of the money AMD calls
As an ex fund manager, albeit with little macro experience, here's some thoughts.
The time since the GFC is a sort of strange era. Again and again, we're told that central banks (and governments) are going to do whatever the heck keeps the market up. Buying the dip has more or less worked the whole time. A lot of asset classes look expensive if you take a longer-back view of things, but then again that longer view tended to not include "we'll do anything".
This virus thing could be quite a different thing to what traders and fund managers are used to. The kinds of things I used to look at were things like what do the brokers say about rates, or what do economists think about oil. Or more specifially for me what does the market think about the supply and demand of volatility risk. Even the GFC itself was something that many people in my circles had thought about. It was definitely in the financial arena; either you thought subprime was gonna be a mess, or you thought it would stay localized and not burst its banks.
Also keep in mind traders tend to be young, and there has been a trend towards juniorization particularly in the investment banks.
I'm in the UK at the moment, and the number of cases doubled in the last couple of days. It did the same a couple of days earlier. So then the question is whether this is an exponential process. And if it is, what's going to stop it being exponential? Public awareness isn't going to be it, because everyone in the whole world already knows they're supposed to wash their hands and stay away from old people.
Certainly we can't just pretend the virus is not here. An expert on the radio last night mentioned that if Twickenham was full for the match today, and the 80k people there all had flu, 8 of them would be expected to die. According to him with Coronavirus at 2-3% it would be in the ballpark of 2000. Chances are people who would be ill but recover would also be a fair chunk.
So something has to be done, governments aren't going to get away with just playing it down as the numbers double every other day.
And this is where fragility comes into play. We're used to the economy being coated in a thick layer of cheap money. Business models that were previously tenuous now seem solid, because there's always someone who will finance it. I'm sure you've heard of a few such businesses in the recent news. What this translates into is that you can motivate people to work in a certain way because you can borrow (and this is in the larger sense, not just loans) the firepower to pay them.
But what if a bunch of people suddenly cannot work? If you're properly ill, there's no amount of money that will make you able to work. And you will have to live with not earning money, and your boss will have to live with work not getting done. It doesn't seem like something that handing more money out for will help. At most you can help to make sure that peripheral issues are solved, like cash crises in people's private finances don't cause them to have to sell their house or business. But people not being able to work on a large scale will cause some kind of collapse somewhere in the system, and supply and demand isn't going to generate more supply, it will just raise the price of work. This is kinda like how historians write that peasants had a great time after the plague killed a third of Europe.
And of course companies are negotiating with labor over the spoils of production, so profits would seem to go down.
But this is all pretty sensitive to the size of the actual outbreak. If the top is today the death toll is similar to 9/11, and the economy will be fine. If it grows to shut down schools and workplaces all over the world, it's gonna be really interesting.
No, this isn't a crash, the main US indices are just back to where they were 6 months ago. That isn't a great buying opportunity, they weren't cheap 6 months ago either.
One way to look at is, when did we last see prices like this?
If this is a good opportunity then it's only slightly better than October of last year when the prices were about the same. (Slightly better because in theory, you could have done something else with the money in the meantime.) It's not better than any time before that, when prices were lower.
Stocks are on sale, but it's hard to beat time in the market, which is still better for most timespans.
The problem with this type of thinking is that it could always go even lower and by selling now you end up missing a lot of potential profit. The window of the global optimum is often only a few days wide.
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