Investing: Withstanding the Tides of Change
I’m a lover of history, there are a lot of important lessons to be learned. The most important is that things change, and from this you can derive that putting all of your eggs in one basket is a foolish idea. Here are a few thought provoking examples from the book “The Next 100 Years:”
Imagine that you were alive in the summer of 1900, living in London, then the capital of the world. Europe ruled the Eastern Hemisphere. There was hardly a place that, if not ruled directly, was not indirectly controlled from a European capital.. Europe was at peace and enjoying unprecedented prosperity. Indeed, European interdependence due to trade and investment was so great that serious people were claiming that war had become impossible—and if not impossible, would end within weeks of beginning—because global financial markets couldn’t withstand the strain. The future seemed fixed: a peaceful, prosperous Europe would rule the world.
Imagine yourself now in the summer of 1920. Europe had been torn apart by an agonizing war. The continent was in tatters. The Austro-Hungarian, Russian, German, and Ottoman empires were gone and millions had died in a war that lasted for years. The war ended when an American army of a million men intervened—an army that came and then just as quickly left. Communism dominated Russia, but it was not clear that it could survive. Countries that had been on the periphery of European power, like the United States and Japan, suddenly emerged as great powers. But one thing was certain—the peace treaty that had been imposed on Germany guaranteed that it would not soon reemerge.
Imagine the summer of 1940. Germany had not only reemerged but conquered France and dominated Europe. Communism had survived and the Soviet Union now was allied with Nazi Germany. Great Britain alone stood against Germany, and from the point of view of most reasonable people, the war was over. If there was not to be a thousand-year Reich, then certainly Europe’s fate had been decided for a century. Germany would dominate Europe and inherit its empire.
Imagine now the summer of 1960. Germany had been crushed in the war, defeated less than five years later. Europe was occupied, split down the middle by the United States and the Soviet Union. The European empires were collapsing, and the United States and Soviet Union were competing over who would be their heir. The United States had the Soviet Union surrounded and, with an overwhelming arsenal of nuclear weapons, could annihilate it in hours. The United States had emerged as the global superpower. It dominated all of the world’s oceans, and with its nuclear force could dictate terms to anyone in the world. Stalemate was the best the Soviets could hope for—unless the Soviets invaded Germany and conquered Europe. That was the war everyone was preparing for. And in the back of everyone’s mind, the Maoist Chinese, seen as fanatical, were the other danger.
Now imagine the summer of 1980. The United States had been defeated in a seven-year war—not by the Soviet Union, but by communist North Vietnam. The nation was seen, and saw itself, as being in retreat. Expelled from Vietnam, it was then expelled from Iran as well, where the oil fields, which it no longer controlled, seemed about to fall into the hands of the Soviet Union. To contain the Soviet Union, the United States had formed an alliance with Maoist China—the American president and the Chinese chairman holding an amiable meeting in Beijing. Only this alliance seemed able to contain the powerful Soviet Union, which appeared to be surging.
Imagine now the summer of 2000. The Soviet Union had completely collapsed. China was still communist in name but had become capitalist in practice. NATO had advanced into Eastern Europe and even into the former Soviet Union. The world was prosperous and peaceful. Everyone knew that geopolitical considerations had become secondary to economic considerations, and the only problems were regional ones in basket cases like Haiti or Kosovo.
This should impress upon you that what seems solid and unchangeable about the world right now probably wont look that way in 20 years. You can also apply this to economic periods of change, such as the great market crashes or the dust bowl. Because you can never be certain that your main bread winner will last, you should diversify your investments in jobs, skills, and assets.
Most people have one job, or source of income. This an investment of your time, you only have so much time in a day, and so to invest this time in only one place is dangerous. It is very, very, vulnerable to a market crash. I’ve suffered from this twice now, and I’m only 28! After 9/11 the job I held at a travel company dried up, no one was traveling for fear of another attack, and so travel jobs became very hard to come by with businesses closing down all over the country. I was hit again in the downturn of 2008/9 when IT budgets were being phased out all over the country. In 2007 when I moved to a new city, I was able to secure 2-3 interviews a day. In 2009 I was able to find maybe 1 a week, there simply were no jobs.
I have recovered well from these incidents, but I have also learned that jobs are not reliable. Do not count on your job. Having one source of income should be avoided if at all possible. I used to think it was scarier to own your own business than to be employed, but I’ve realized it’s the opposite. While it is scary to be at the helm, constantly on your toes trying to ensure a flow of new sales, it is also more stable.
I made it a rule to make sure that I never became wholly invested in one job for my income ever again, and try to have at least 3 jobs at a time that could cover my bills. This way I could lose 66% of my work and still get by. This actually happened to me at the beginning of the 2013 when a few clients ran out of money, which was a real eye opener, but I was able to rebuild from the 33% starting point and gain back the other 2/3’s over the course of the year.
If it is not feasible for you to have multiple jobs, or to go in to business on your own, at the very least you need to be able to weather a storm, and possibly travel somewhere else for work. The residents of the dust bowl can teach us a lot here. Many farmers tried to hold on in the face of a crash and the destruction of their fields. They exhausted their savings, and built up debts, until they were truly broke. Be aware that there are shifts in markets, keep enough money on hand to be able to live a few months without income, and if it is necessary, leave! Set a mark for how much money you would need to leave a place, and never let go of that money unless it is for the actual act of a move to greener pastures.
The societal norm is for people to specialize in one skill and stick with it their entire lives. Like jobs, this is very vulnerable to crashes or economic changes. You generally make more money by specializing, which makes this a rational decision in many cases, but you should have a backup. It’s hard to develop skills in another area when all of your available time to invest is being consumed by your main job. But I think there’s an easy way around this.
Almost everyone has a hobby or two that they are interested in, or a business idea, that could make them a few extra bucks on the side and still be fun because it’s more for pleasure than pressure to get money. I love horticulture, and have dabbled in hydroponic fruits and vegetables in the past. Selling fresh herbs on the market or at a farmers market would be a piece of cake. My wife loves finding good deals on products directly from China, setting up a small online shop would be fun. A friend of ours loves to cook, and sets up shop as a barbecue stand in local fairs and events. Carpentry, painting, etc can all be a source of pleasure and a little extra income while developing a secondary skillset if you ever needed it. And hell, you might just find you like it more than your current job anyways and make the switch of your own volition. It’s easy to get stuck in a rut and feel trapped or miserable, so try new things and see what fits with you!
I love real estate, I’ve always loved real estate, when I was 15 I started dreaming about owning rental properties, and bought my first land at 18. That said, there is no guarantee that real estate will always pan out, especially in a specific area. My wife and I bought our first rental property last year, and we’re gearing up to get our second soon. It is tempting to buy in the same area as our first, but I have a strong inclination to look elsewhere for several reasons.
The first reason is economic change. Areas boom and bust, all throughout history booms and busts in human settlements have been as common as conflicts and political change. There are a few exceptions to this. For areas to thrive need advantages over other areas. The best advantage you could have had in the last several thousand years was being near a major port. Sea is still the cheapest way to transport goods, and as long as that is the case (and it may not be!) then being near a major trade port can only mean good things for your property.
When we buy property we have 4 factors: climate, demographics, jobs, and economic strength/size. For example, I don’t care how good deals are in Las Vegas, I will never buy there because the climate is inhospitable to human life. Las Vegas will always have an uphill battle supporting it’s people and it’s economy because they must import food, water, and power. If that ever stops, for whatever reason, it will be uninhabitable.
Demographics and population growth, are our next factor. I look for areas with good birth rates and a growing population. The more people, the more demand.
Jobs and economic strength are our final factors. I look for areas that have healthy, non specialized economies, and lots of jobs. Any place that focuses too much in one industry can go bust. The more jobs there are, the better the odds that people will have money to rent our homes.
Stocks and Bonds
As much as I love real estate, I will not put all my money solely in real estate. It hasn’t happened in human history, but some day there may be a breakthrough in technology, or a collapse in human population, that would render real estate assets useless. In the same vein, I also make sure not to invest in just one stock. I personally prefer index funds, but if you are going to invest in single stocks, make sure you spread the money around.
Bonds are low, but there are alternative sources of lending that can bring in much higher returns such as The Lending Club (where people are earning 10%+ in annual interest), or startup investing. Lots of people and small businesses need money to start new ventures, or consolidate debts, so there are plenty of opportunities.