tomfoolery wrote: ↑Thu May 06, 2021 1:28 am
Xan wrote: ↑Sat May 01, 2021 6:14 pm
Somewhere in-between is a great place to be. If you had a choice between:
a) flipping a coin between being filthy rich and being dirt poor
b) being reasonably well-off for certain
wouldn't you take b?
There’s another alternative that I find myself in. I want to buy a house in cash without a mortgage. Housing prices have gone up faster than the combination of my portfolio and my 6-figure job can keep pace.
My portfolio is up 40% in the last 18 months. At the time 18 months ago my total portfolio could buy 2 small single family houses in my city. But I didn’t not want to spend half of my portfolio at the time on one, because my goal is financial independence and owning a house debt-free. If I had to choose, I’d rather be financially independent in an apartment than be required to continue working but own a house.
Well it’s 18 months later and my portfolio has grown 40% and back in December 2019 I could buy 2 houses in my city with my portfolio and now I can buy 1.5
So my effective purchasing power of the most important asset has dropped significantly in spite of substantial portfolio growth between my job and investment returns.
At this point, I have two options:
1) invest prudently and wisely, cautiously. But, I’ll never be able to keep up with housing prices way and perhaps next year my portfolio will only buy 1.25 houses and in a decade only buy 0.75 houses in spite of double digit portfolio returns.
2) take a decent amount of risk, if I lose half of my money in the process, my life is no different than it was last year, I’ll still be financially independent as a renter with half of my current net worth. But if I can roll the dice and get a substantial return, I can afford to buy a house. And that would change my life.
So, for me it’s not like Xan’s scenario, for me, if my risk doesn’t pay off, I don’t really change my lifestyle, but if my risk does pay off, my lifestyle can change for the best.
This is a result of the government ZIRP and now NIRP policies. It forces people like me to move further down the risk curve.
I suppose a third option is I remain cautious and prudent with my investments and hope there is a drop in the housing market. Because if I am super risky and I lose half of my portfolio at the same time the housing market drops in half, then I’ll feel bad.
So my current portfolio is 45% stocks, 25% cash and 30% gold.
My nominal cash allocation (25%) was enough to buy 0.75 houses 18 months ago, and now will buy about 0.4 houses. So with this allocation it’s possible for me to take more risks, such as holding a higher percentage of stocks, and hold riskier individual stocks, and still be able to buy a house if both the stock and housing markets crash in tandem because I have enough cash to nearly buy a house, along with selling some gold, without needing to sell stocks at the bottom.
Of course that’s not what will happen. The stock market will likely crash while the housing market stays flat. Because everyone did cash out refi’s at 2.6% last year and no one will sell those houses ever. The interest rates are too low. I predict the next 30 years we will have higher interest rates, because we’ll have to, the fed can’t stop it, and stocks will crash and remain down, and housing will remain flat, but still completely out of reach in most cities for anyone who didn’t get in before mid-2020.
And housing inventory will remain at record lows for 30 years. Imagine if interest rates rise to 10% on a mortgage in 3 years. Who will sell their house with a locked in 2.6% rate, if it means buying a new house with a 10% rate?
And if they don’t need the house anymore, they would keep it to rent Out forever. Because rents will keep going up but their 2.6% mortgage will last 30 years and as inflation hits 10%, it will be a negative real mortgage rate. No one will get rid of those and there won’t be any housing inventory so only the wealthy will be able to afford houses, or people who got in pre-covid.
Of course, I hope my bleak prediction is wrong because it means I’ll be able to afford a house in cash and still remain financially independent.
And for those who might suggest I work longer and then buy a house, I don’t believe that’s necessarily true. I make well over $200k a year when I work full-time in consulting and in spite of my portfolio having double digit returns and me grossing 250k last year, my purchasing power of homes went from 2 down to 1.75.
So unless I can find a job that will pay me $500k a year, extending my career at the expense of my personal health and well-being will not guarantee a house in cash.
So earlier this year I cut back to a very part-time role at 50k a year so I can focus on health and happiness but still have some income. And I’m semi-retired in an apartment and can stop working at any time and be financially independent but I like the people I work with and it’s not bad if only working a few hours a week from home at my own schedule.