I’ve been working on a long post about some tech stuff, specifically Amazon’s EC2, cloud computing in general, and some of the things that I’ve been working through lately with regards to making a quickly-growing website scalable. I’ll post it once I’m convinced that it’s done.
For the moment, I want to write about something different. Money. Specifically, why this recession doesn’t actually suck for everyone.
You’ve probably noticed that the economy is in serious trouble.
The stock market is down a full 50% from it’s high point of a little over a year ago. I’ve had something like 55% of my 401k wiped out over the past 6 months, which isn’t a good thing by any measure. Even my little “play-money” investment account has had a big chunk taken out of it.
Housing used to be a safe investment, but housing prices are falling quickly (even softening in Cambridge, MA for the first time in my memory). Combined with the fact that rates are going to have to go back up sometime soon, which is going to further depress prices, this just doesn’t seem like the time to buy something that you’re not going to hold onto for 5 or 10 years at least.
For a lot of people — most people — the combination of these things means lots of pain at the moment. Anyone over 50 is looking at their retirement savings and wondering if they’re going to be working until they die. Anyone with a family and a mortgage is looking at those falling home prices and probably beginning to wonder what happens if another kid comes along or something like that.
But for those who are lucky enough to have an active job market in their field, there is actually an opportunity to start to build wealth in a way that there hasn’t been for decades. The S&P 500 hit 1350 not too long ago, and today it’s around 700. But that just means that it’s really affordable as a long-term investment. Things are going to be a little crazy over the next couple of years, I’d imagine, and it’s very possible that the equity markets are going to drop a lot farther (as is very well explained in the Economix blog at the NYTimes site). But in the long term, they’re going to stabilize, and the value of the stocks in them are going to start to go back up.
Look at this way: the S&P 500 is made up of 500 massive companies. They collectively account for a very large portion of all of the economic activity in this country. If you buy tracking shares in the S&P 500 today, one of two things is going to happen: the economy is eventually going to recover and that index will start to go up again (historically, at a rate of return of around 8%); or, the economy won’t recover in which case we’re in hard-core Mad Max territory and it doesn’t matter anyway.
So, if you’re young and you have cash flow, go open a Roth IRA, or start investing in your 401k (my employer doesn’t offer a 401k, which makes me sad). Open an investment account. Set aside enough cash to cover you for a couple of months, and use the rest of it to buy into an ETF that tracks one of the major indexes. Go back to your budget, and see if you can figure out a way to max out your 401k contributions or IRA contributions. Or do both! Once you’ve maxed those out, invest anything else you can for a couple of years, in tracking funds, and let it sit for a couple of years. (Or, if you’re in particularly good shape, buy some Bershire Hathaway while it’s, uh…cheap.) Worst comes to worst, you’re going to maybe lose a little money, maybe break even, in which case you’ve effectively just put your money in a savings account. Best case, you can leave it there until the economy turns around, and your money will have grown.
(I want to make clear that I’m cognizant of the fact that this doesn’t apply to lots and lots of people; and that I’m not making any attempt to gloss over the amount of pain and turmoil this economy is causing for a lot of people. I’m simply trying to explain why it is that I don’t see the current adjustment as being a universally bad thing. In a lot of ways it’s pain that we as a nation had to take at some point, and for some of us who have been very, very lucky, it’s actually a chance to build for the future in a way that hasn’t been available for decades.)