Where To Put My Money In Different Market Cycles?

The economy may be gradually improving, but a quick look at the stock market's skyrocket upward and subsequent slump over the last month certainly looks different from the slow slog in overall U.S. economic growth.  Where is the best place to park money when the economy and various markets are improving?  What about during a recession?  Where are we right now?

Everyone knows the adage “buy low, sell high,” but ascertaining the bottom of the trough and the peak of a bubble is far more difficult.  Still, you don’t have to know the exact bottom or the exact peak, you just need to answer the question “Does the mood seem cavalier in assuming growth in the last few years, without enough healthy skepticism?” Or conversely, “Does it feel like it’s been raining an unnaturally long time in the markets?”

Let us imagine it is December 2008, and the financial markets – all markets – are in free fall.  You could pull out your money at a loss, but you already know that’s a bad idea, so you leave alone what you already have invested there.  But what about the 10-25% of your paycheck that you set aside for saving and investing each month?  When markets are actively falling, it should go toward paying down debts and boosting liquid savings, until you feel more optimistic about any given market.  If you have no personal debts, then it is a wise time to pay down the mortgages on your rental properties.  The return on paying down mortgage debt is better than investing in government bonds or putting money in a bank CD, and gold already shot up during the crash earlier this fall, so stick with the safe bet for now and simply pay down debts.

Now fast-forward to May 2009.  U.S. stock markets had plummetted for six months, then turned around and have been climbing steadily again for a couple months, but the real estate market is still tumbling downward.  Hopefully you have now put a dent in your rental properties’ mortgage debt, and set aside some savings.  It is now time to invest in stocks, which dropped so far, so fast that you agree with all the analysts saying the market over corrected downward and is now correcting back upward.  Ph.D in rocket science not required – just buy into a low-fee mutual fund that tracks the Nasdaq or another major index, and use an IRA to cut your tax bill down at the same time.

It is now August 2011, and real estate markets are still looking awful.  But for all that, the rental market has been strong, and the foreclosure wave is visibly ebbing, which means prices cannot keep falling much longer and have probably over corrected downward.  Interest rates are extremely low, making mortgages more affordable than ever.  While everyone is still spooked away from real estate, the time is perfect for scooping up as many rental properties as you can afford.  But each should still pass the cash flow test immediately, putting money in your pocket each month and not relying on future appreciation.  A side benefit: rental properties are a good hedge against inflation, and you know that years of the Federal Reserve pumping money into the economy will eventually cause inflation.

And on to June 2013, when the stock market may have over corrected upward and is now wobbling precariously, as the Fed talks about ending its stimulus and China and Europe appear to be on unsteady footing.  Real estate is still undervalued by 6-7% in most markets, but inventory is now tight, and it is once again hard to find a good deal on rental properties.  Keep an eye out for good deals on rental units, but flips may be easier to find, especially as November and December come around and fewer people are in the market to buy.  With the stock market's skyrocket seemingly slowing at the moment, and real estate inventory tight and bidding wars common once again, I believe it's now a good time to invest indirectly in real estate, through lenders.  Investing in banks is one option for this, and hard money lenders often offer an even better return on investment, often in the 7-10% range.

The economy may have been trudging slowly upward for four years, but the stock and real estate markets have been doing their own acrobatics during this period.  Knowing what to do with that reserved 10-25% of your paycheck is almost as important as setting it aside in the first place, but fortunately it’s not as hard to do.  Simply ask where each market is in its cycle, and if none of the markets look promising to you, pay down your debts, boost your liquid savings and wait until you like the look of one market or another.

And if the very idea of trying to time the market evokes sweaty palms and stress, then forget about timing the market altogether.  Just follow a few simple rules to earn a strong return on your money: avoid investment funds with high fees, always maximize tax advantages, and never buy a rental property that does not immediately offer strong cash flow.  The hard part is just setting aside that 10-25% of each paycheck!