First few years out of college were just "max out 401k contributions into some target fund" + build emergency fund, but now that I've amassed more cash than what an emergency fund requires, what does one do?
Originally, my plan was to use it for a house down-payment, but with the mortgage rates having nearly doubled in the last 6 months, that's kind of out of the question at this point (especially having moved to a higher property value area to be closer to friends and family).
Everything I've seen in the news for last few months just seems to say "sorry, the last 50 years was a gravy train, it'll never work that way again, you're screwed".
Both my parents' and grandparents' entire careers existed (or to this point existed) during the "good times", so I'm honestly feeling like I can't just take their advice directly.
Part of me wants to leave my present (tech) job and move to a FAANG type company (for the pay increase), but with all the uncertainty on the horizon, are the big tech companies going to maintain their current headcount or salaries if another '08 style recession (or worse) hits? How stable are their revenues if people start spending way less money on things?
> Everything I've seen in the news for last few months just seems to say "sorry, the last 50 years was a gravy train, it'll never work that way again, you're screwed".
I first came to Palo Alto in 1984. All the houses were underwater (worth less than their mortgages). The tech boom was over and consensus was that it wasn’t coming back. Too bad you missed that!
Just keep investing (dollar cost averaging). Pick your poison: “barbell” as some other comments have suggested or just a couple of very broad index funds. Since you have a long time ahead of you, I’d recommend the latter. You can spend some of it on a down payment when that makes sense to you.
People tend to not appreciate the struggles that the people before us had. We are looking at their situation with the absolute knowledge that things got better.
We distort the lives of those in the past much in the same way do the people we follow on social media.
> Originally, my plan was to use it for a house down-payment, but with the mortgage rates having nearly doubled in the last 6 months, that's kind of out of the question at this point (especially having moved to a higher property value area to be closer to friends and family).
Higher interest rates lead to lower home prices, which should make it easier to make a down payment. Interest rates may double, but mortgage payment amounts typically end up staying the same. You are in a prime position to buy a house. In the next 30 years, mortgage rates will likely decrease and you can refinance to a better rate, and end up paying a lower price for your house than what you would have had mortgage rates stayed low.
That's what my plan is. Just waiting/hoping housing prices drop within the next year or two. Been waiting a while now though so who knows if they'll actually come down
Home prices are coming down in my area of Portland, OR, which was already an overpriced market. Homes have been on the market much longer, and several homes have had price reductions in my neighborhood. Ultimately though, I wouldn't try timing the market, if you can afford the down payment, and the monthly, and like the house, I'd go for it. Always time to refinance later.
Portland got some pretty negative press in the last few years.
I barely knew Portland existed before that and now I just know I wouldn't want to settle there.
Real estate seems still up in general, I assume because of a mix of inflation and BlackRock / investors overpaying for it to escape all the other failing assets
> now that I've amassed more cash than what an emergency fund requires, what does one do?
Pick a few things you can put your money into, which you have confidence won't lose value given a long enough time horizon. For me, this is SPY (highest alpha but needs 10 years to recover). The traditional 60/40 SPY/TLT mix is great. Currency funds also good. VTI & chill is good. Right now the Euro has Dollar parity (ECB isn't fighting inflation aggressively and won't start reducing its balance sheet for a while), maybe throw some of that into the mix.
Sell covered calls to reduce your cost basis.
Don't spend cash. Invest cash, borrow against it at favorable interest rates, and make purchases with the borrowed money. SBLOC, portfolio margin (>100k) can unlock some cheap (75bp above prime) cash.
If I could send a message to myself 20 years ago it would be the above.
All of my words are nonsense, nothing in this comment shall be construed as professional or financial advice. I've been excessively stupid with money far longer than I should.
This sounds like hard fought knowledge, where can I start to build a good foundation for understanding the financial terminology you posted? Thanks for sharing.
House prices are at a peak and stocks are in a trough. Try to make clear economic decisions and don't be enamored with home ownership. A house is a huge illiquid asset that you can live in. There's calculators out there to use but know that buying a house usually only makes sense if you're definitely staying for at least 10 years. And don't be swayed by headlines. Big tech is doing extremely well and isn't slowing down.
The only time stocks have been this expensive was just before the great depression and just before 2008. They are practically the most overvalued they've ever been, ignoring the last year or two of QE, which were intuitively overpriced. Thinking they are cheap now is how you get burned.
Don't buy a house until the real estate market crashes. Then buy.
I bought a fixer-upper in 2008 for 200k; sold it for 425k 5 years later. Recently it sold for 650k (we still get redfin notifications.) In the meantime I bought a house for 625k (nice house with some rough edges) and sold it 18 months ago in covid real estate madness for 950k. We certainly put money into both houses over time, but we'd never have been able to do what we did had we not started at the bottom of the market.
The Great Financial Crisis will be the only event of this nature in our lifetimes. The country would need to overbuild like crazy to cause housing to crash like that again.
Everyone is expecting housing prices to fall in "a year or two." I've been hearing this for two years now. The market has a habit of doing the opposite of what people expect it to.
Housing prices are correcting now, at least in some areas. It's definitely happening in AZ. I've seen drops of almost 15%.
OpenDoor has been taking a loss on a lot of properties it bought over the past few months too.
Considering inventory is up over 2X YOY as well, I expect prices to fall even further here. I'm not sure if it'll get as bad as 08 though, but a 30-40% drop isn't out of the question the way things are headed imo.
The thing is though with rates as high as they are, housing prices dropping this much actually doesn't make affordability any better unless you can pay in cash.
Yep, it'll take a long time to bottom. That said, I'm surprised how much things have already fallen in AZ. Some of the properties with 10% price cuts, have been sitting on the market for over 2 months. Demand has fallen off a cliff here. I can't see how it gets any better with the Fed continuing to rate rates.
As cheap debt dries up there are less people that are able to pay the high price for a house. If the Fed keeps raising the federal funds rate it is a near certainty that home prices are going to fall, on average, due to lack of buyers.
There's too much demand for housing for this to happen. Worst case, they go down 5-10% in the hardest hit areas, but most places are going to see low or no growth even if rates hit 7%.
The real estate market won't crash, and it especially won't crash in high-demand areas (Southern California, the Bay Area, Atlanta, SoFlo, Colorado, etc.). We'll likely see a steep-ish correction in "second-tier" markets, like the ones in Texas, Tennessee, and the Rust Belt (Pittsburgh comes to mind).
If history repeats itself you are dead wrong. During 2008 the Texas market barely flinched while California and Florida was tanking. I think Texas won’t budge much again considering the consistent flow of people and jobs to Texas in pretty much every major city.
You can rent, but that's money wasted. The longer you rent, the longer you didn't invest. Also rents are higher than mortgage payments, making it worse.
I really hate this mindset. I rented for about a decade. Renting allowed me to bounce around from job to job in various cities and grow my career. Had I owned houses during that time I would have lost money due to the transaction cost overhead. I was also not responsible for any upkeep, which I'm not well suited for anyway. Oh and I absolutely did invest. My money was simply invested in the stock market which had a far higher rate of return than the housing market.
I own today, but I'm well ahead of most of my peers that bought houses right out of college.
Yes people who move often shouldn't buy. No disagreement there. But that's like saying that you shouldn't invest in stocks because if you sell in a year then it's probably at a loss. Investments are to be held for a long period.
As for investing: you invested what you had left after rent, but you didn't invest what you paid in rent. With a mortgage, you are investing the mortage payment minus interest, and you can still invest what you have left.
If rent really is lower than the mortgage payment (assuming the alternative return on the downpayment is taken into account, etc) for an equivalent property, then buying is pretty reasonable in most circumstances.
I'm observing rents way, way below mortgages, but it's very location dependent.
When making decisions about where to put my money, I stopped worrying about what other people are going to do and are doing, what the market might do, etc, and instead think what makes _sense_ for me to do. If some expense makes sense for me, offers good value, etc, independent of attempting to prognosticate the future, it probably does for others as well and the investment will probably work out fine. If it doesn't, it doesn't matter, it still made sense for me to do it.
For me, this has meant buying a house when lots of my peers were running scared at what turned out to be the bottom of the housing market, selling one recently, and renting for the moment. In each case, this was just the cheaper and 'sensible' approach. I think people overcomplicated this stuff.
In the Netherlands, there are no places where rents are below mortgages. Unless you apply for social housing, but that requires you to be below a certain income threshold, which means that you couldn't have bought a house anyway. Social housing also have 20 years waiting list.
That sounds really weird. In Germany an apartment that rents for about €1000 would sell for €400,000 or so, which means a mortgage would cost 2 to 3 times more (with a 20% down-payment). This is with a 2% interest rate.
An apartment that's worth about €400,000 rents for about €1,550. The equivalent mortgage with 3.85% interest is €1875, but becomes about €1426 after tax breaks. The 10% down payment can and often is financed too. This leaves about €10,000 of notary fees and taxes that you have to pay yourself.
Interest rates used to be lower so the mortgage used to be much cheaper.
If the real estate market is near a local maximum, then rent is still a better deal, for now, with your numbers. Upkeep, hoa fees, insurance on an apartment very likely sum to more than €124/mo. That said, of course, if the real estate market is still going to grow by a significant percent, and you time selling correctly, then you could make money by owning.
But are rents higher than the mortgage + insurance + maintenance + lack of liquidity + the potential home value changes.
If the expectations is that the home value are dropping, the math seems pretty simple.
But in a different financial environment, maybe a few years from now, your expectations might be different and the math works out differently
Yes, in Netherlands, rents are higher than mortgage + insurance + maintenance + taxes - tax breaks. That's why everyone wants a house.
A bit odd that you talk about liquidity. The house itself isn't liquid, but you finance it so you don't need a huge liquidity up front. Also, rents paid are no longer liquid to you either.
A mortgage ends one day. Rents do not.
House prices increase 20% year on year in Amsterdam. Even during the 2008 financial crisis did they barely drop in value.
Wow congrats on pulling this off, I wish I can do this too but the homes are still $8-900k like your example and it just makes no sense to buy unless it cools down to 600’s, which seems like it may never happen. I sure as hell am not paying 900-1 mill for these homes that need a ton of work and are 50+ years old sigh
This doesn’t mean anything to me. Can you elaborate? Also, why are revenue generating assets better, and doesn’t pursuing revenue generating assets imply prioritizing cash flow? Sorry for the noob questions.
> This doesn’t mean anything to me. Can you elaborate?
Taleb elaborates better in his very accessible book(s). The basic idea is to invest/use most of your net worth in “safe” investments, those primarily keeping up with inflation or just barely beating it. If shit hits the fan, you have a cushion to fall back on.
Anything beyond keeping you safe and comfortable enough should go chasing the highest returns possible. So you can partake in as much upside as possible.
Startup comp follows this logic. Enough salary to fund your life and basic savings, equity to chase high upside.
Revenue generating assets are nice because you don’t just need to sell for a higher price to make a return. They have intrinsic value. For example owning a profitable business or a rental property.
Can you recommend a specific book that discusses this in the context of private investors? I have read a couple of books from Taleb and he only talks about similar strategies for investment firms.
First few years out of college were just "max out 401k contributions into some target fund" + build emergency fund, but now that I've amassed more cash than what an emergency fund requires, what does one do?
Originally, my plan was to use it for a house down-payment, but with the mortgage rates having nearly doubled in the last 6 months, that's kind of out of the question at this point (especially having moved to a higher property value area to be closer to friends and family).
Everything I've seen in the news for last few months just seems to say "sorry, the last 50 years was a gravy train, it'll never work that way again, you're screwed".
Both my parents' and grandparents' entire careers existed (or to this point existed) during the "good times", so I'm honestly feeling like I can't just take their advice directly.
Part of me wants to leave my present (tech) job and move to a FAANG type company (for the pay increase), but with all the uncertainty on the horizon, are the big tech companies going to maintain their current headcount or salaries if another '08 style recession (or worse) hits? How stable are their revenues if people start spending way less money on things?