So the other day I was reading through my daily Wall Street Journal, and I have to admit what I saw there came as a shock. Deep in the bowels of the newspaper, on page B13 of the Business & Finance section (sidenote: Does the Wall Street Journal have any other sections than business and finance?), was hidden the warning:
“Trump takes office with the most expensive stock market in history.”
The article proceeded to point out how, with the average S&P 500 stock currently selling for 37 times its average earnings over the last 10 years, U.S. stocks today cost 33% more than they did at the start of Mr. Trump’s first term in office… 83% more than when Bill Clinton was sworn in… 145% more than at the start of Barack Obama’s first term… and four times the average P/E ratio on the S&P 500 when Ronald Reagan first took office!
And it reminded me of a lady I saw once, years ago, who had called into The Dave Ramsey Show to ask for advice on her own investments. As I recall, this lady was a widow, age 50 or perhaps 55. She told Dave she had $400,000 in savings and was looking ahead to retirement. One problem was that all this money was sitting in a bank account earning just 1%, which didn’t even keep up with inflation, meaning her life’s savings were actually losing value every day they sat there, effectively idle.
The other problem was that she was too afraid to invest it in anything that might produce higher returns, saying she had a friend who had invested money in the stock market, and lost a year’s-worth of income in a month’s time when the market went down.
What to do, what to do?
Here’s what to do
Dave, as usual, had multiple ideas for what to do. “Invest in real estate,” was one option. Buy a house for $400,000, rent it out for $4,000 a month, and earn $48,000 a year in rental income. That’s a 12% annual return, and a whole lot better than any bank was paying then (or now).
I have to say, that idea made a whole lot of sense to me. Even if you use the landlord’s rule of thumb, and assume a worst case scenario that half your rental income will go to taxes, expenses, maintenance, and so on, half of $48,000 on a $400,000 investment is still a 6% annual return on your money, which is 6x better than 1%. And should you spread out the $400,000 across several properties, putting at least 20% down on each and mortgaging the rest, your returns would be even higher.
Don’t dismiss the stock market
But let’s focus on this caller’s main concern: She wants to invest in the stock market, which historically returns about 10% or better annually over long periods of time, and without the hassle of homeownership and needing to play landlord to a changing cast of tenants. But she’s too afraid of stock market volatility to get started. What’s to be done about that?
The answer immediately jumped to my mind, and within mere seconds, Dave’s assistant had the same bright idea: Why not start small, and gain confidence along the way?
Just because you have $400,000 to invest doesn’t mean you need to invest it all at once. If you’re afraid of stock market volatility, and of how it might cost you your entire $400,000 investment, don’t invest $400,000. Start out by investing $50,000, or $10,000, or even just $1,000.
If the stock market works the way it’s advertised as working, then within a year of investing $1,000, you should have $1,100 or so, which is $90 more than you’d have had if those $1,000 were just earning 1% in a bank.
And what about the $399,000 that you didn’t invest in the stock market? Well, those dollars are no worse off sitting at the bank than they were if you’d done nothing new with them. And now you’ve got one year of experience “in the stock market” under your belt. One more year of confidence that stock investing does, in fact, work like it’s supposed to.
Next time, you can invest a bit more, and earn a bit more, too.
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