Elias, why will people’s mortgages be underwater when they’ve borrowed at incredibly low rates and housing prices have gone way up? I don’t understand your comment.
If I remember correctly, in 2005 -2007 the accepted belief was that housing prices never fell. That was shortly proven wrong, and, in part because of falling housing prices, in 2009 the financial markets stopped functioning at one point. Banks were merged, investment firms were merged, AIG lost something like $100 billion in one year and nearly failed. If we have a bubble again, housing is overpriced, in at least some cases. The value of some houses will fall below their mortgage amount. The housing purchase prices went way up before their market value went way down.
A diversified retirement portfolio should never fall by half. If it does, that’s your fault and no one else’s.
OK, what are you going to diversify into today? There has been more than one time in my lifetime when the stock market averages fell by 50%. Are you going to diversify into bonds? With interest rates at all-time lows, bond prices are at all-time highs. If you want to scare yourself, look at how much a 30 year, 3% bond would get marked down with a 100, 200 or 300 basis point increase in rates.
For the seasoned investor, volatility can be a friend. For the vast majority of people who can barely distinguish a stock from a bond, they go by what they are told, understanding it or not. Does society have any obligation to protect its citizens’ financial affairs? When I talk to my friends and relatives I can see they have only a very shallow understanding of investing, even in their 401-ks that they count on for retirement income. I don’t know what to tell them because I can’t tell them enough to impart the knowledge they need to properly financially protect themselves. The subject is too difficult. Is it their fault for not being financially savvy enough to navigate today’s market?
For the vast majority of people, a rather stable market environment where they can periodically invest new funds, earn some return, and then have a dignified retirement is optimal. They buy what they can, which is mostly stocks and bonds. They believe that they are doing the right thing, unaware that the Fed is manipulating assets prices so high that regardless of what they do, they are set up for a big fail when the bubble bursts.
There are three possible outcomes currently waiting us. One is a quick, huge reset of asset prices. Another is a 12 to15 year period with almost zero returns on today’s existing assets. The third is some combination of both. Which one of those do Mr. and Mrs. John Doe deserve?
IMHO there is no place to hide but cash, but most feel that they need to be invested and won’t take that option.