A Few Short Thoughts on Long-Term Investments
By Vedran Vuk
Recently, I stumbled on an interesting Gallup poll from a few months ago. The respondents were asked, “Which of the following do you think is the best long-term investment?” Here are the results:
There are a few things to deduct from this data. First of all, the excitement over bonds may be way exaggerated. The long-term preference for bonds has only increased by 4% since the market crash. With few individuals seeing bonds as long-term investments, the bond bubble must deflate.
Financial prophets predicting a multi-decade bond era are in for a rude awakening. There’s simply not enough long-term interest in fixed income. According to the poll, long-term preferences for equities already rebounded 7% since early 2009. As soon as the market begins to recover, investors will dive right back into equities. And when that happens, bondholders will either write down losses or wait patiently for maturity. In either outcome, they’ll be stuck between a rock and a hard place.
The high demand for CDs and savings accounts is noteworthy as well. Apparently, retail investors are mimicking the institutional flight to Treasuries. Despite the next-to-nothing returns, the preference for safety remains high. This fact adds another argument to discredit the long-term bond story. Investors are placing a premium on safety – not necessarily steady cash flows. There’s risk in bonds, and investors know it.
Surprisingly, 29% still expect real estate to be the best long-term investment. This reminds me of a bloodied and beaten boxer who remains in the ring only to save face. But rather than save face, he will most likely have his nose broken instead. In my opinion, this is complete delusion. Even if the general market recovers, the Fed will begin to raise rates. Real estate tip-toes a fine line between a double dip and higher interest rates. Either direction will hurt.
Also, we may not be at a bottom yet. There’s too much focus on how far real estate has fallen and little attention to how far it climbed. Take my own example. As a younger analyst at Casey Research, I still rent. Out of curiosity, I found my rental’s 1995 purchase price in city records. If I had made mortgage payments equivalent to my rent back then, I would have paid off the house in 7 years. Even inflation doesn’t change the figure much. It’s not surprising that every other block has long-standing sale signs. When prices come back down to reality, they’ll be sold.
The money that would once purchase a home and quickly pay it off now barely meets the rent on the same home. Think about that. We’re far from normalcy in real estate. The clock has turned back to 2003-2005, but the bubble started long before.
Real estate blinds people with a fairytale retirement story. You buy a home at a younger age, watch the price skyrocket, and then sell the home for an endless paid vacation in Florida. What many don’t realize is that the dream only works if the same dream works for next generation too. Meaning, the younger generation has to buy the houses. Otherwise, one generation or the other is left holding a hot potato. And as I pointed out in my own example, young professionals today are lucky to pay their rent. Most houses are still well out of range.
And that’s just one problem. Furthermore, the baby boomers will cause a real estate avalanche in the next 10 to 15 years as everyone downsizes from 3- and 4-bedroom homes. There will be an enormous glut in the market pulling prices down again. However, this could be an opportunity for those owning condos and smaller dwellings. Unfortunately, condo association fees make them a hard investment to profitably buy and hold for long periods of time.
Higher interest rates, economic downturns, and demographic issues are more problems than I’d care to bear in an illiquid investment. The market still has a lot more to teach the 29% who believe real estate remains the best long-term investment.
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