131 comments

How to Prosper in an Economic Boom

boom beachWell, here we go again: it’s boom time.

If you’re a US resident with a short memory (or a young adult who only recently started making a living for yourself), you might be under the impression that we live in a country with permanently high unemployment, a slow housing market, and mortgage interest rates that never exceed 3.5%. Sure, you’ve seen the stock market double in price since 2008, but other than that there hasn’t been too much prosperity sloshing around.

The thing is, the ground is rising beneath our feet and we’re right in the middle of a great change. I can predict that with relative certainty, because the economic picture is always changing and cycling back and forth. You don’t always see it in advance, but you definitely see it when looking backwards.

US unemployment, 1947-present (source: Google public data)

US unemployment, 1947-present (source: Google public data)

In 1982, my parents moved us from an expensive suburban area to a cheap little town, to escape the variable interest rate mortgage that had suddenly exploded to 18% on them. As a boy, I remember buying a savings bond worth $1000, that paid out $120 (12% interest) for the next three years.

In 1987, one of my childhood friends told me his dad lost his job as a stockbroker, in the aftermath of the Black Monday crash. The father joked with us he had been unwise to buy his new Lincoln Town Car. But the stock market roared back from that crash rather quickly.. until the 1993 recession sliced a bunch of things in half, including property values in certain areas.

In 1997, I graduated with a Computer Engineering degree, and the job market was in fair condition. I was fortunate to get a good job lined up upon graduation, but some of my classmates had to search around for a few months and settle for lower salaries. However, by 1999 the headhunters were ringing the phones in every cubicle and I had an easy time upgrading my career, choosing from a bouquet of seven job offers around the US. After less than a year, I switched jobs again in 2000, enjoying a salary bump and watching the market valuation of Cisco Systems exceed $500 billion (even today after 13 years of revenue growth, the company’s value is about 75% lower).

All this was turned on its head in 2001, when the dot com boom ended, stocks collapsed, companies closed, and many of my software developer peers found themselves unemployed. The housing market in my area turned from fire to ice, with appreciation becoming depreciation and higher-end houses languishing on the market for years. The local high-tech scene was expected to forfeit its gains from the late 90s and remain quiet forever.

Until it wasn’t. By 2005, employment was rising rapidly, the stock market was on a tear, and mansions were being built and sold as fast as the custom house builders could complete them.

Until 2007, when the great financial crisis slammed the brakes on everything. House builders went instantly out of business, giant banks collapsed, millions of people stopped making their mortgage payments, and the entire US economy tipped over like a speeding school bus that missed a corner, screeched noisily along the shoulder throwing sparks and smoke, barely coming to rest in a teetering position at the edge of the Grand Canyon. Surely, THIS was the end of prosperity. Capitalism had failed, and we were in for permanent doom…

..Until now, when the stock indices are breaking records, IPOs are in plentiful supply, and house prices in some markets (including Denver metro) are back above their 2007 peaks. I’ve submitted five offers in on rental houses in my own area over the past year, being outbid mostly by people who, I thought, ended up paying too much for the house.

And we’ve had it pretty mild here in the US: Canada, Australia (and I hear Brazil too) have been in a much bigger boom for many years now, with average-income people stretching to mortgage $700,000 homes, just because that seems to be the thing to do these days.

Is there is a lesson in all of this craziness? Why yes, I believe there is. Since we’re getting started on yet another boom, I thought we might as well prepare ourselves for it, in order to get more out of it.

What to Do in a Boom

Jobs: You start hearing about job opportunities. Your friends get enviable new positions. Maybe some are even offered to you. In magazines and newspapers, you read about entrepreneurs who are making far too much money for doing things you could have damn well thought of and done yourself. Damn!

If you’re ambitious, this is your time. Instead of sitting tight, harvest some of those jobs yourself. Maybe fire out some resumes. Or get a raise. Jump into an expanding division of your company, taking on far more seniority than you’re qualified for. Or switch industries completely, to one where they just can’t find enough qualified people. Get a bunch of new skills, while somebody else is paying you do to it. Hang around with some of those entrepreneur-in-a-magazine-type people, and sniff up some of their contagious optimism.

LifestyleBut then save those windfall earnings. This is not the time to buy the new Accord V6 or the 92″ television, or fight with your coworkers to buy a bigger house in a rising market. An economic boom is the time you maximize earning (because the money supply is high), but minimize spending (because prices are likely high due to competition from other buyers). If you have a big house that you’d like to downsize, this is the time to do it. The most avid housing optimizers might even move to a rental during this time.

Investments: Everyone is speculating vigorously on stocks, and the index is at a high valuation. You’ll want to continue your regular investing program, but your asset allocation rules will automatically make you buy fewer stocks and more bonds. And especially look into alternatives like paying off your mortgage early – this is the time to get out of debt, because the getting is easy.

For those interested in their local real estate scene as I am, this can be a frustrating time, as rental houses may become too expensive to provide appropriate returns (I look for monthly rent equal to 1% of the purchase price as a rule of thumb). But this opens up another opportunity: the fix-and-flip. In expensive markets, prices for the same house can vary by $100,000 or more just based on cosmetic condition. If you know how to create residential beauty out of ugliness on an efficient budget, the boom market is the place to ply this trade.

… And eventually, once everybody gets used to the good times, the next bust will arrive.

 What to do in a Bust

Jobs: Now you’re feeling pretty smart about the way you handled the boom. Your friends used it to sign up for car payments and new houses, and yet their jobs are suddenly unstable. You used the proceeds of the boom to pay down debt and invest more, so you are more financially stable than ever. The money may not be flowing so freely, but you are ready for it.  Your reduced stress level at work may even help you keep the job while others are let go, or give you the confidence to jump ship if your own company is sinking.

Lifestyle: The best time to buy a house (or move to a bigger house) is in a poor housing market. The pricing scale usually compresses, meaning expensive houses tend to drop more than cheap ones. So the premium to upgrade is lower. Note that this exactly the opposite of what most consumers do: upgrading whenever the “equity” due to appreciation is large enough to cover a down payment on a bigger house that has appreciated even more.

During a down-market upgrade, there should be no pain felt in selling your previous house at a loss: after all, you are buying the new one at a correspondingly bigger discount. But if your old house makes a suitable rental house, you might even keep it, using it to generate income until the next boom comes.

This is also the time to buy a great used car if you need one, take vacations that might normally be overbooked or overpriced, and get anything else done that is normally difficult when everyone is overbooked.

Investments: The best part of any bust is the spectacular stock market crash that goes along with it. Although this borders on the taboo practice of market timing, I feel every big market crash is a time to joyously go out and buy as many more shares of your index funds as you can. Increase the contributions. Drain the cash reserves. Enjoy the lower valuations and higher dividend yields.

And, man oh man, the rental real estate millionaires that were made during the 2008 housing crash, buying up houses at 75% off from the banks, will become legends of generations to come.

So there’s your Contrarian Soup for the day. You may already feel the boom roaring in. The old you would get excited and start clicking through the BMW website looking for a way to celebrate your promotion. But the new you realizes that the booms are not really there to get you more stuff. They are there to help you become wealthy.

If you spend away the wave of wealth that the boom brings, the eventual bust will feel painful. Instead, hang in there. Keep earning and learning, and ride the wave. The next bust is surely less than 10 years away, and this time, you’ll be ready for it.

 

Further Reading: this Economist article called The Stealth Boom analyzes some of the characteristics of our current boom-in-progress, and explains why we haven’t seen rampant inflation despite the amazing free money that the US Federal reserve system has been temporarily pumping out. The Economist actually suggests even more easing, but I’d personally say we should err on the side of caution and take it easy, given how well things are going already. Time will tell who gets this little wager right.

  • Free Money Minute May 7, 2013, 5:37 am

    I have told my wife over the last few years that we need to save up for the next recession. It is just a around the corner (probably only a year or two away IMO). If only we weren’t so greedy and we were more patient than we are!

    Reply
  • rjack (Mr. Asset Allocation) May 7, 2013, 5:41 am

    Thanks for the trip down the memory lane of the boom-bust cycle. I remember them all and a few more (I’m older).

    Your advice about asset allocation is spot on. It’s psychological difficult to buy stock when everybody else is selling and vice versa, but that is precisely what you must do.

    In fact, I think you should apply some market timing as you describe and amplify you buying/selling when the stock market get particularly low/high. It’s what I do with my Market Level Allocation Strategy.

    Reply
  • Bobby @ Ban Excuses May 7, 2013, 5:48 am

    Completely agree MMM. As Warren Buffett once said, “Be fearful when others are greedy and greedy when others are fearful.” Do the opposite of conventional wisdom and you will make out like a bandit.

    Reply
  • CashRebel May 7, 2013, 6:00 am

    Would you be willing a little advice to a relatively recent grad. I’ve been with my current company for 2 years and im kicking ass. How soon is too soon to interview elsewhere without looking like a job hopper?

    Reply
    • Mrs PoP @ Planting Our Pennies May 7, 2013, 6:26 am

      I was at my first job for 1 year, second for 1.5, and have been at this one for over 4. I don’t think anyone will look at you as a hopper for interviewing at 2 years early in your career.

      Reply
      • Ross May 8, 2013, 6:58 am

        Thanks for the advice! Its always good to hear about other peoples actual experiences. Ill start thinking about it…

        Reply
    • Emily A May 7, 2013, 7:13 am

      I agree with Mrs Pop. Additionally, it’s widely held that they only way to get ahead these days is by hopping when you’re young – there are little to no pensions, golden watches, and awesome perks to vest into these days, and everyone knows it. So I don’t think hopping is judged as harshly as it once was.

      Reply
      • Katie May 14, 2013, 7:44 am

        All of that is good to hear, I’ve been very fearful about job hopping after reading an article damning people who switch too frequently. But after a year at my entry-level job with extremely low pay and not much chance of pay increases (though long hours and high responsibility) I’m seeing a lot of things that are looking better right now!

        Seems there are opposite views: sticking with your company to show loyalty and move up the ladder, though perhaps more slowly, OR jumping around to gather varied experience where the pay/experience/work-life balance is better.

        Reply
    • Bobby May 7, 2013, 7:33 am

      Yesterday

      Reply
    • Johnny @ Our Freaking Budget May 7, 2013, 8:44 am

      I think it depends on the industry. If there’s a potential corporate ladder and networking still to be had with your current gig, it might be worth sticking it out and looking for more responsibilities (and $$$).

      In my industry, hopping is the way to get a promotion and raise. So similar to Mrs. PoP, I spent 1 year at my first job, 1.5 years at my second and 1 year at my third. And no one batted an eye.

      It might be worth taking a peek at successful folks in your field on LinkedIn and see when and where their career journeys took them. Or talk to a few recruiters and get their take.

      Reply
    • Marcia May 7, 2013, 12:47 pm

      Depends on the industry, but hopping is the way to get money. I have had many many young people working for me over the last 10 years (new grads), and it has been very nearly impossible for me to give them the raises they deserve.

      The company is not willing to budget for it. So I know that other companies in town are willing to pay someone with 2+ years of experience $15k to $20k more than we do. Heck, we are willing to pay that if we hire someone from outside, but aren’t willing to give raises to the people that are here (that works at my management level too, unfortunately.)

      I like loyalty and I don’t ever want to lose anyone but I have, more than once, told my employees to take a better paying job when it arises.

      Reply
      • Ali Santi May 7, 2013, 4:56 pm

        As a hiring and firing manager, I agree 100%. Getting hired from outside pays more than the raises everyone is getting inside a company. I’ve seen a lot of young technical folks hop 5 years and increase their pay almost half (I live in Austin, TX where theres a lot of tech jobs). That will never happen if you wait at a job and max out at the companies 4% annual “best worker” raise. Even getting a promotion inside a company will not get you a better pay – they will usually put you in the lowest scale and work you up once a year. Problem is, inflation catches up.

        Reply
        • Aaron May 8, 2013, 12:43 pm

          I’ve never understood this. What is the insane reasoning going on that someone who is unfamiliar with the company (so has to come up to speed), hasn’t yet proved themselves to be a good worker or fit in, is worth more than someone who has proved themselves.

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          • secondcor521 May 8, 2013, 1:17 pm

            Not that I agree with the practice, but I think part of it is to entice the employee to switch. There’s always somewhat of a risk of switching, and the $$$ is there to ease that concern. In my industry 10-15% is pretty typical and I’ve seen more than that in certain cases.

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          • Leah May 8, 2013, 9:36 pm

            Because once you’re in a company, then they know your weaknesses and faults. We all have them. When they hire from the outside – the negatives are not known and assumed to be nonexistent. You could have the exact same qualifications as the new hire who was picked over promoting you, but they know you warm up weird smelling Thai food on Thursday’s. Amazing new guy from from super impressive company doesn’t do that. Yet.

            Reply
    • pliglee May 8, 2013, 9:11 pm

      My sister has job hopped at least 3 times since shit went south in 2008. Every time it was an improvement either in pay or work/life balance. It’s never been a problem for her. She gets fed up and leaves or gets an offer she just can’t refuse!

      Reply
    • Ann May 15, 2013, 12:41 pm

      Depends on your field. I’m in higher ed, and a total of more than three job changes in a decade is a major red flag when hiring. So make sure you ask someone in your own profession!

      Reply
  • JJ May 7, 2013, 6:05 am

    If you consider the fact that the only category of the money supply that has increased is M0, we may have a long way to go until boom time. Seems that people are just now beginning to think about re-leveraging. With so much more M0 to leverage upon it will be interesting to see where things go from here.

    I mostly agree with the Fed’s monetary expansion. We needed something to fill the hole in M2 and M3. He filled that hole with newly minted M0. The question now is, how fast will the supply grow if/when we see the consumer re-leverage and will the Fed be able to (or even try to) pull in M0 while M2 and M3 expand.

    Reply
    • Mr. Money Mustache May 7, 2013, 9:11 am

      Exactly! I find the subculture of “the Federal Reserve is INSANE!!” to be a little bit odd.

      Do that many people really think they know more about macroeconomics than the collective knowledge of the brilliant team of economists who set policy for our financial system, working at it for years, and with instant free consultation available from the likes of Warren Buffett and the professors at Harvard and Princeton?

      Do they really believe it’s all controlled by a bunch of dundering politicians just to influence the vote at the next election cycle?

      Look at your lifestyle – the incredible efficiency of production, banking, finance.. the damned fancy computer you’re reading this on. Could this all really exist if the people who set economic policy were a bunch of fools?

      Check out the book “towards rational exuberance”, which describes a nice history of the US financial system and how it came to be, and it might reduce some of these fears.

      Get your macroeconomic knowledge from big, thick, complicated books from the library. Not from blogs selling survival guides for the next crash, and not from thin books with brightly colored covers and tantalizing subheadings foretelling world destruction.

      Reply
      • Mr. 1500 May 7, 2013, 10:27 am

        It’s also interesting to consider that monetary policy in the wake of the crisis is one of the few things that both sides of the political aisle seemed to agree on. Bush famously said, “If money isn’t loosened up, this sucker could go down.”

        Reply
      • Barry May 7, 2013, 11:00 am

        MMM, usually I enjoy your postings but this one deserves a calling out, way too many canards.
        First of all, nobody knows anything about macro, it is not to be known. Hayek had it right, and Taleb is shining a flashlight on this aspect more and more each day. He seems like a big enough jerk to carry, thank god. If you are going to listen someone on macro, start with Steve Keen (at least he knows money should be modeled), or Kyle Bass/Hugh Hendry for guys with skin in the game. These guys are not Harvard/Princeton. Rogoff and Reinhart are and how are they doing these days? And don’t get me started on Summers/Rubin.
        Monetary policy is not controlled by politicians, I don’t know anyone who thinks that. US monetary policy has been equally disastrous over the last few administrations, regardless of the party in power. ls Greenspan’s track record seem any better than Bernanke’s? See his 2008 confession for evidence of the big fancy guys in expensive suits getting it wrong in the most fundamental way.
        The author of the book you recommend is a Goldman Sachs (vampire squid) guy for crying out loud. Instead read “all the devils are here” to get insight into how the current mess we are in got started. I-bankers pontificating about market robustness? I wonder if he would sing the same song after taking TARP money in 2008?
        And those big thick macro books are not all they are cracked up to be. I have read them and theoretical models are just that. Most central bankers in the last few years have tried to shoehorn the big messy world into the DSGE framework and did that ever not work out. The obvious counterpoint is that the authors of those books you revere thought they had it figured out as you assume they do. So they started a hedge fund called Long Term Capital Management……

        Reply
        • Ben May 8, 2013, 11:16 am

          For all the benefits the policies of the FED have created, I think there are nearly as many detriments. I think it is also important to look at the wastefulness of our society, and question if perhaps our wastefulness would be less if we didn’t have such an easy monetary policy. In addition, would my education cost as much as it does today if debt wasn’t made so readily available?

          20 years ago, an undergrad student working 20 hours a week at minimum wage during the semester could cover their cost of living and a portion of their tuition. At my university, if you work the maximum hours as a student worker (20 hrs/wk) you still fall short of affording the dorms alone by about $1,500 a year, not to mention tuition which doubles the student’s costs.

          For every expert and economist that support the Keynesian policies of the FED, there is one that disagrees entirely. Just read about Austrian economics and the Von Mises institute.

          The only other thing I have to add about the policies of the FED is that they are mostly theorists and have spent much of their lives focus on the theoretical study of economic systems rather than the practical application. I’m not saying this is wrong, just that you need a strong understanding of both aspects in order to create adequate monetary policy. I have no doubts that Bernanke knows how to extend the current practices further into the future, but is it really the right direction? What happens when the next debt bubble pops? (Seems likely that student loans are next, and might actually be popping as we speak) Are we just supposed to accept an economic system that continually over-leverages only to crash and start the entire process over again?

          Reply
        • mysticaltyger September 24, 2013, 11:59 am

          I’m totally with you on this one, Barry! The populist version of your post would go something like this: “Do not trust the elite folks at the Federal Reserve. They do not represent you or your best interests”. Sure, they are very smart….smart like foxes. They represent the interests of a few elite families….the Rothschilds, the Rockefellers, et. al.

          Reply
      • David Wendelken May 7, 2013, 6:37 pm

        The Federal Reserve will, over the next 20 years, make sure there is enough inflation to pay down the US national debt. Given that the political will to spend less is not present it’s the only other option besides defaulting on the debt.

        Reply
        • CALL 911 May 8, 2013, 10:21 am

          But if we spend less (align income with expenditures), we’ll have a less luxurious national lifestyle! We DESERVE IT! :0
          I totally agree. Inflation is coming. By denominating our debt in a currency we control, we can always print our way out of a jam. As wise and flexible mustashians, we should come out OK. Everyone else though . . .

          Reply
      • win May 10, 2013, 8:49 am

        “Brilliant team of economists” Read some of Bernanke’s predictions and you see that economists are more like the Wizard of Oz.

        http://www.freerepublic.com/focus/news/2306834/posts

        Reply
  • Mr. 1500 May 7, 2013, 6:07 am

    One theme that seems common in life is that it’s always better to go against the herd, especially if that herd is on it’s way to the fancy car dealership.

    At a higher level, I attended the Berkshire meeting this past weekend and noticed that much of Warren Buffett’s philosophy is a mirror of MMM’s. Buffett mentioned how fuel prices should be much higher and much of this post could have been written by Warren himself.

    Reply
  • jlcollinsnh May 7, 2013, 6:16 am

    wonderful trip down memory lane and a great strategic plan.

    Everybody savors a boom, although only a few effectively.

    Only the aware and well prepared savor the busts. But that’s when the real money is made.

    Reply
    • rjack (Mr. Asset Allocation) May 7, 2013, 6:29 am

      Ironically, the best thing that ever happened to me was the 2008 Financial Crash.

      Reply
      • Paul Silver May 7, 2013, 8:26 am

        Same here. It brought house prices down far enough for us to get a small(ish) home somewhere good to bring up our then soon to arrive son, and the UK recession(s) sparked a huge boom of work for my line of work. Shame the government here seems hell bent on extending the recession way in to the future rather than sorting things out. Then again, I can always look for more clients in the USA & elsewhere with better economies.

        Reply
      • Jamesqf May 7, 2013, 12:20 pm

        I felt the same way about the ’87 crash. A few years out of school, I had paid off the (small by today’s standards) student loans, and had money in a savings account. Invested it all in the month after the crash, and a couple years later had made enough profit for a sizeable downpayment on my first house.

        Reply
  • kk May 7, 2013, 6:27 am

    Here in India, it is not uncommon for young adults to live with their parents. Since I started working in 2011, my parents have been telling me to spend less and save more. And to buy ‘some sort’ of real estate, which I just can’t because it would require taking ‘some sort’ of loan. (can be attributed to my general lack of interest in anything that I don’t understand)

    My parents are very MMM-natured, it is just that I have not listened to them too much :-) Reading your blog makes me see the sense in their (almost insane till now) suggestions.

    Reply
    • Mike @ UB May 8, 2013, 10:01 am

      Me too. The more I read MMM, the more I’ve come to realize how wise my parents were. My mom used to say, “Some day, some day you’ll see that what I’m telling you is true”. How right she was.

      Now if only I could pass on this wisdom to my child.

      Reply
      • kk May 8, 2013, 10:06 am

        No need to pass on the information to your children. Just pass on the link to MMM :-)

        Reply
  • JC May 7, 2013, 6:28 am

    It’s so exciting to finally see things turning around, and I’m so glad I found MMM about 6 months ago so I know how to handle the changing economy.

    Reply
  • Mrs PoP @ Planting Our Pennies May 7, 2013, 6:31 am

    Sounds about like our experiences so far. We rode the last part of the wave up coming out of school in 2006 and I was able to get to a decent sized salary and where I could make certain demands of my time before the bust hit and we went shopping for as much real estate as we could find. For the last year and a half we’ve been paying that investment RE off as fast as possible and we’re pretty curious to see what comes next after that’s all done.

    Reply
  • bc May 7, 2013, 6:53 am

    We are buying our first home now because of the low interest rates. We locked in 3.25% on a very modest home. It is going to be a great place to raise our young son in.

    DH and I work in higher ed so the salaries don’t fluctuate that much for us without major time sacrifices (longer days+travel). Definitely wish that we had a more robust investment portfolio to take advantage of the boom!

    Reply
  • My Financial Independence Journey May 7, 2013, 7:04 am

    Jobs wise, boom or bust you still need to be a good worker and do your best. You can probably slack off more in a boom, but you’ll pay in a bust. Also, boom times may be good to run into some crazy startup that you’re passionate about, but just be aware that the company may fold the minute the economy heads south.

    Lifestyle wise, I think it’s hard to time things. Usually upgrades happen when something like the arrival of children demand them.

    Investment wise, profiting in a boom is easy. No matter what you do, no matter how poorly thought out, you’ll make money. When the crash happens, you’re going to lose money. And you’ll lose tons of money if you bought assets (stocks, index funds, houses, bonds whatever) without taking valuation into account.

    Reply
  • smedleyb May 7, 2013, 7:05 am

    I love Mustachianism because it cuts a third path between the “1% vs 99%” dichotomy that infuses so much of the commentary on the current economic “boom.” Yes, the capital gains off the crisis lows have disproportionately swung toward the upper brackets, but many of us have learned that significant lifestyle adjustments coupled with steady, methodical investment is powerful enough to overcome all the economic negatives out there (which are not insignificant) in order to create a better life. Enough of these “can’t live of 6 figures in NYC” articles. I want to hear more about people living on a pauper’s budget and extracting more happiness out of life because they’ve rejected the trappings of consumerist culture. It’s the most subversive idea extant.

    Reply
  • Kraig - Young Cheap Living May 7, 2013, 7:13 am

    I’ve been noticing that we’re in boom time as well (even as others continue to talk about how bad the economy still is). I go back and forth on whether or not to invest in bonds at all. I’m currently 20% cash and 80% stocks (VTSAX). As I build wealth, the stock to cash ratio will get larger though. Do you think bonds are a good idea right now?

    I’m a new investor and am loving the boom. Having cash in reserves gives me peace of mind as well in that I’ll be ready to buy cheap when stocks go on sale instead of freaking out when all of my assets lose value.

    If this boom lasts over 5 years, I’ll be bordering on financial independence. I’m definitely taking advantage of this time.

    Reply
    • Jacob@CashCowCouple May 7, 2013, 8:02 am

      There is disagreement on bonds right now. I wouldn’t touch long term bond funds, because interest rates can do nothing but climb. Short term pose less risk, but the rewards is terrible and I wouldn’t allocate more than 5% short term.

      Some folks like to move into 100% equities when interest rates have been held so low for a long period of time, but you ought to read the Boglehead forums to get a more complete picture.

      Reply
      • Charles May 7, 2013, 7:35 pm

        I would always check your assumption of “interest rates can do nothing but climb”. People said that about housing and stocks. The reason the rates are what they are is that someone is always wiling to take the other side of the bet.

        Although in this case it has been the fed, and they can print money…

        Reply
        • CALL 911 May 8, 2013, 10:23 am

          Normally I agree with checking absolute statements, but it’s hard to pay less interest than 0% . . .

          Reply
        • Simply Rich Life May 8, 2013, 12:39 pm

          Exactly – right now I would almost think bonds are undervalued because of the number of people who don’t like them. Except that there is one very big buyer that keeps on going, which is why I don’t like them either.

          Reply
  • @debtblag May 7, 2013, 7:13 am

    This is all very true. Consumer, corporate, and federal spending all balloon during booms. Mine doesn’t have to; in fact, I can profit off of everyone else’s big spending and use it as a good opportunity to save and pay down debt.

    Reply
  • Stephen at SE May 7, 2013, 7:19 am

    A nice post about economics! This is actually pretty entertaining to me. I like the way you talked about positioning yourself in different types of economies. I am an economist by trade and I work in the economics department of a large research university. The irony is how many other economist are terrible with their personal economics! I know plenty of research economist who would scoff at this very notion on the way to the bmw dealership during a boom then be surprised when we have ‘another’ recession. I’ll be enjoying the boom and I’ll be excited about the opportunities in the next bust too!

    Reply
    • Mr. Money Mustache May 7, 2013, 9:23 am

      Stephen, what is your opinion on the quantitative easing and other recent attempts at recession-smoothing?

      I can’t pretend to know enough to critique the quantities they have been allocating to the various buckets, but I’m wondering if we will see a rapid reversal (and thus hopefully a healthy return to more normal monetary policy) as the current boom scales up?

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      • Stephen @ SE May 7, 2013, 12:43 pm

        To be honest, like you mentioned earlier, I tend to default that the FR actually does a better job than most people give them credit for. Macroeconomicly, QE works pretty similarly to lowering interest rates. QE gets a bad wrap (mostly by late night talk shows) but in general it is decently effective in the short run. Typically QE only happens when interest rates can not be lowered anymore. The main issue we have now is that there is less the FR can do in regards to fiscal policy because they have already lower interest rates effectively to zero and done a fair amount of QE. Economies that have little flexibility in terms of fiscal policy (0% interest rates, large monetary bases) tend to experience sharper booms and bust. The near term policy is expected to remain stimulative so it doesn’t appear from a policy standpoint that we will have that flexibly back anytime soon.

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        • Jerry May 9, 2013, 11:48 am

          I am completely against the FR in every way. I personally think the gold standard is the way to go, banks and car companies should fail, and new ones should created by more level headed people to fill the void. The thing that brings us together is our drive to be well off, so however that is done is fine by me.

          What I would like to know, is how does the FR policies help average people become prosperous. Is it just the FR and gov’s manipulation of the market to create these recessions and allow us to buy things at a lower value than before (perhaps even true value) instead of a hyperinflated value? And if we do it smart we generate superb amounts of wealth at a boom time, or is it something else?

          After all if we were on the gold standard our money would be stronger, and if the government would not force mortgage companies to lend to people with poor credit, the bust would have never happened, and if tarp never occurred and had no political backing of ever happening then banks would have made more conservative decisions on how to lend money and those who did not would be out of business now.

          Reply
          • Mr. Money Mustache May 9, 2013, 4:24 pm

            I can see your points in principle.. but have you read about the history of finance before the federal reserve and when we had the gold standard? As I recommended in another comment, the book “towards rational exuberance” has some amazing stories and statistics about how wild things were before the counterweight of a federal reserve system. They have saved our asses since then more than once.

            While some of the things they do sound morally wrong on the surface (bailing out various entities, indirectly causing credit bubbles occasionally, etc.), it is generally done with an eye towards preventing something much worse. More Great Depressions, which can even lead to worldwide wars as another commenter noted.

            My point in supporting them is not to suggest they are all-knowing gods. Just that when you look at how prosperous this country has been for the last 60 years or more, with some of the world’s fullest employment and highest material standards of living, you can’t really fault them for doing that bad a job.

            Compare the US (in a financial sense) to each of the 200+ other countries in the world, and remind yourself that the same species with the same intelligence lives in every single one of those countries. How bad does our financial system look now? On health, education, and energy use, we’re looking a little shabby by comparison. But we’ve got the shit with the dollar bills locked down.

            Reply
      • Kokuanani May 27, 2013, 3:45 pm

        I am against Quantitative Easing for another reason: why not apply that money to something that WORKS to stimulate the economy, rather than rescuing banks whose bad judgment filled their balance sheets with crap loans?

        A couple of alternatives: instead of funneling $85 billion per month to the banks [who DON'T loan it, but either sit on it or gamble with it], put that money in a newly-created “Infrastructure Bank.” Then lend it out at slightly over 0% to states, cities, etc. so they can build infrastructure. Hell, they can use it for other purposes — like hiring teachers. Just get the low-cost-to-the-borrower money into the hands of some people who will do GOOD, not the criminals whose greed and stupidity got us into this mess.

        And what does the Fed DO with all those crap loans it buys to remove them from the balance sheets of idiot banks? Does it negotiate with borrowers, creating some sort of cram down and/or refinancing at a lower rate? I’m not saying that everyone who refinanced to the hilt to max out on jet skis ought to be saved, but folks who lost their job or had a huge medical expense, and thus couldn’t make their mortgage ought to be helped. THEY should get to stand in line at the Federal trough before the banks.

        Reply
    • Pretired Nick May 7, 2013, 10:40 am

      That’s actually pretty interesting. Goes to show how much psychology plays into personal behavior even when you understand something intellectually. Getting your plans set for each situation ahead of time is critical to withstanding the pull of your natural instincts.

      Reply
  • Daniel May 7, 2013, 7:23 am

    I don’t have anything overly productive to ad but this post really meant a lot to me as someone moving to a big city (toranna) from a stable simple job in ottawa. Planning to rent as cheap as possible and prosper while enjoying those around me adding an enormous amount of material items.

    Reply
  • Andre May 7, 2013, 7:31 am

    Here in Brazil, the bust is coming slowly.
    Real State is extremely overpriced due to lowering of interest rates, creating more credit.

    Now, interest rates started rising again… and the bubble will soon bust.

    Reply
  • Kasey May 7, 2013, 7:41 am

    I’d be very careful changing your “investment” allocations based on timing booms or busts unless you are very close to cashing out entirely. There is tons of evidence out there that for most everyone that is a terrible investment strategy. Rather, your portfolio should be diversified enough that the peaks and valleys are limited and your investment horizon should be long enough that you don’t sweat it. Also remember, in boom times things like stock splits, cash payouts, one time dividends, etc are more common mitigating some of the inflated valuations.

    As for your “speculation” money. Feel free to try a contrarian market level approach. It might work out, but if it does, it will be mostly because of luck.

    Couldn’t agree more with the rest of the post though…

    Reply
    • Aaron May 7, 2013, 12:29 pm

      “You’ll want to continue your regular investing program, but your asset allocation rules will automatically make you buy fewer stocks and more bonds.”

      I don’t follow where MMM is talking about changing investment allocations, in fact with the quote above he seems to directly go against that.

      The closest to market timing is when he says to go out and invest more when stocks are already low. Yes, they could go lower, but this is still a better choice than going out and buying a car or more stuff that you don’t need.

      Reply
  • Phoebe May 7, 2013, 7:51 am

    Fabulous article MMM! I am so excited to be able to free myself from the rollar coaster of the US economy and instead be able to capitalize on it instead!

    Reply
  • jf May 7, 2013, 7:54 am

    One quick comment, Buffett just stated that he believes that bonds are (currently) terrible investments and stocks are attractive. Comments??

    Reply
    • Mr. Money Mustache May 7, 2013, 9:26 am

      I agree, in the sense that I don’t have any bonds at all (I have so far been an all-stocks-and-real-estate person). But sometime in the not-too-distant future, bonds will surely be looking pretty good if interest rates return to normal.

      I have been using Lending Club as an experimental substitute to holding a small porftolio of corporate low-grade/high-yield bonds: http://www.mrmoneymustache.com/the-lending-club-experiment/

      Reply
      • jf May 7, 2013, 10:23 am

        I agree, when interest rates return to more normal levels, I think bonds make more sense. I have been a landlord once and did not find the experience particularly pleasant (but my Vanguard REIT has done really well over the past year!!).

        Reply
      • Doug May 8, 2013, 8:08 am

        That’s consistent with my thoughts also. Interest rates are at historically low levels now, and years from now these rates will seem just as odd an anomaly as were the high interest rates of 1981-82. The key here is patience. Eventually most people will be raving about how great the stock market is and interest rates will be quietly notching up bit by bit, just like in 2005-07. When that time comes it will be a good time to take profits from stocks and move more money into bonds or bond funds.

        Reply
  • Savvy Financial Latina May 7, 2013, 8:05 am

    Great article! Wise words. I tell my hubby we cannot inflate our lifestyle as much as everybody else. We have two used cars, while some of our friends are buying super expensive cars. I know for a fact we make more money than they do. I often wonder how they can afford their lifestyle.
    The housing market is really hot right now. Sometimes I wish we would have bought a house in December when prices were still good in Dallas, but we didn’t have the money!
    I’m hoping the market will cool down by the fall so we can find a steal.

    Reply
  • Mark Ferguson May 7, 2013, 8:06 am

    I think you have the right idea trying to by rentals. It is definitely tough now to get a good deal, but possible. All my rentals have been purchased at 20% below market to ensure positive cash flow even in a down turn. It takes a lot of time and work to find those deals.

    Reply
  • Jacob@CashCowCouple May 7, 2013, 8:07 am

    I don’t think I would agree that we are in or beginning a boom. Actually, my position is that no one really has a clue where the next cycle is leading. The market is at all time highs, but that’s really just a symptom of the Fed’s never ending printing press. The governments fiscal policy is backwards, true unemployment is near all time highs, and the velocity of money isn’t increasing much.

    I’m hoping for a correction over the next 4 months, but we’ll see how the cards fall.

    Reply
    • Dillon May 7, 2013, 8:35 am

      I was under the impression unemployment hadn’t been this low since 2008 (7.5% as of April 2013). If you measure “true” employment by some other more robust proxy, maybe you could share that valuable information with the Bureau of Labor Statistics and the Census Bureau.

      If you don’t use the financial markets’ levels as one main measure of macro-level economic health, what indicator(s) do you use for that? How do you parse out how much the Fed’s policies are responsible for?

      Reply
      • Derek Chamberlain May 8, 2013, 11:26 am

        Dillon,

        Read this article for one person’s take on what effect QE has had on the markets.

        http://www.zerohedge.com/news/2013-05-06/sp-and-without-qe

        It is pretty scary…

        Reply
      • Use it up, wear it out... May 9, 2013, 9:41 am

        Actually, I think in these times a better indicator than unemployment is the labor force participation rate – and it’s not good:

        http://www.usatoday.com/story/money/business/2013/04/07/march-labor-force-participation/2057887/

        Reply
        • Mr. Money Mustache May 9, 2013, 10:09 am

          That USA Today article sounds like good news portrayed as bad: plenty of net job creation, plus baby boomers retiring. Economic growth slowing, for voluntary reasons, which will lead to lower average consumption than would otherwise happen. Exactly what we need in this country!

          As for the discouraged manufacturing and construction workers: Anyone feeling adventurous should move to a growing area and get an electrician or plumbing license, or become an independent carpenter. We need more of them around here and there is always more work than people to do it – at $40-$80/hour if you own your own business.

          Reply
    • Mike May 7, 2013, 9:08 am

      This is my sense as well, but maybe I’m not paying enough attention.

      On Dillon’s point, “true” unemployment factors in individuals who have given up and left the work force, plus I believe individuals who are under-employed.

      A bit here, that I found with a hasty Google search: http://www.cnbc.com/id/100691168

      Reply
    • ike9898 May 7, 2013, 11:00 am

      I agree that we know less than we might think we do about where we are in cycle. People don’t fail to see crashes coming in advance because they are stupid; predicting the future with any consistency is close to impossible. Better to have a plan that doesn’t require near impossible feats in order to succeed.

      Reply
  • Adam May 7, 2013, 8:28 am

    I have to say, this topic has been a small nagging thorn in my side since starting to read this blog, everything of which I absolutely love by the way.

    Economy, the mother of topics these days. I am no financial expert but I am a very watchful, careful, and savvy researcher of issues that will affect me. This site puts a lot of merit into index funds (trust in an overall gain in the market). It speaks of riding out the temporary lulls and how the highs will come soon enough (this article). It speaks of the numerous economic “crashes” we have survived, most of which stem from poor policy or wall street greed (sub prime lending, bailouts, etc).

    Here is my issue: one thing I haven’t seen yet is talk of the dark side of the economic boom, “quantitative easing.” Talk about the fact that many (more nations simultaneously than ever in history) are rapidly printing their currency at record rates. The fed, the mint. We are printing money (devaluing future buying power) at RECORD RATES. I don’t necessarily think the recent economic recovery are due to productivity, healthy market, etc that maybe occured in the past. I think a good portion of this “boom” is a temporary bandaid.

    This process can be expected to temporarily buoy a dying economy (major contributor to the last 3 years?), but we are still deficit spending as a nation…. why don’t I hear that mentioned in an article? As it stands now, we still do not have the policy in place to run a stable surplus for the many years it will take to pay back the national debt. I don’t see current events/policy lighting a “fire under peoples butts” and getting the machine working again, I see just as many people asking for handouts, and I personally see more unemployment/food stamp abuse (from people in my little piece of the world) than I ever remember growing up.

    How are we in a boom… nothing has changed. Why are index funds so trusted on this site? I’m not referring to surviving another temporary dip in the stock market, I’m talking about sustaining financial independence if the dollar dies, dead, gone, value is placed back on commodities/metals/services etc.

    I know that’s extreme, but current events haven’t proven to me that the dollar has a chance of surviving. I’m a little torn, because I embody all of the frugal/healthy tenets found on this site. I love this mindset, my fiance and I are planning our lives around very similar values, but it seems like everyone is REALLY heavily dependent on market health (or only surviving short 1-10 year lulls), and real estate income.

    Can anyone bridge the gap a little for me?

    Reply
    • Jimbo May 7, 2013, 9:10 am

      Ok, I see you are teethering on the edge of doomer-ism there, so I feel compelled to save you.

      First, the US$ will never fail. Not in this lifetime or next. Not in this century. Very great chances of not in this millenia. So take a minute to think about this perspective. The world needs a stable currency, and the USD is it. Not gold. Not silver. Not the yuan/renmimbi. Trust that.

      Plus, if the USD ever loses all of its value, nothing you hold (gold, silver, name it) will be useful. Not even oil, guns or bullets. Actually, a bike will be best by then. But that’s it.

      Now, about quantitative easing. Publicly traded companies have used this to deleverage, get better balance sheets, increase profits (through layoffs and better debt service) and increase overall corporate health. This is why we are at all time highs in the stock market: companies are very profitable and are posting massive earnings/profits. This is positive. This will lead to jobs eventually, given time. But it is already starting. We are on an upswing trajectory.

      Once the jobs come, QE will decrease and then stop. The economy is getting better every day, despite the doomer’s claims.

      Reply
      • Adam May 7, 2013, 9:28 am

        You can’t just state “the dollar will never die” without supporting evidence.

        The Denarius died, right around the time the infrastructure of the Roman empire died. It too was a global currency, it too was the foundation of other remote territories’ currencies, and it also existed longer than the US has been in existence. Nothing is too big to fail.

        If/when everyday buying power inflation catches up to QE inflation of the economy, I (as would most people) for sure would exchange (abandon) my paper dollars for real estate/food/metals (day to day useful goods). “The world needs a stable currency, the US dollar is it”….. the US dollar is in NO WAY stable. IF it’s so stable, then stick $300,000 cash under your mattress and wait 15 years, do you think you’ll still be able to buy the same quantity of food/oil/homes/services then? Only if you answer yes, is the US dollar stable. Hence it is not, by definition.

        I’m not a doomer/gloomer. I’m a very positive person. I’m excited about the future because I feel the attitude of entitlement is closing, and people will soon need to get off their butt to survive. In four years I will be graduating into what is considered the most recession/depression-proof profession. I am increasing my frugality daily. But I am also a planner, watcher, and critical thinker. Blind trust is not part of my arsenal, and “trusting” your evidence-deficient comments would require exactly that.

        I mean no offense, I believe we are all friends here and I have great respect for anyone who is taking MMM-minded positive steps to improve their life and increase their productivity. I just need more than conjecture.

        Reply
        • Jimbo May 7, 2013, 9:42 am

          Of course I can state that, because it is a fact. ;-)

          There will be no hyperinflation in the States. But there will be inflation. Which is why the mattress idea is bad. Plus, instead of under a mattress, I would rather put it in money producing assets. But that’s me.

          Stable does not mean immune to inflation.

          The romans had a 2000 year run, then got crushed in barbaric wars. Empires rise and fall, but the days of endless wars are behind us. Plus, this still gives the US a 1750 life expectancy. And you know the English Empire fell and they’re still doing good. Dont underestimate the incredible human will to live free and be merry.

          Reply
          • Adam May 7, 2013, 10:17 am

            “There will be no ” I requested to refrain from making sweeping statements without evidence. I also said nothing about hyperinflation.

            I wouldn’t put paper currency under a mattress either. I would place it into productive markets/tangible goods. We are in agreement. I used that image to illustrate a point.

            “The romans had a 2000 year run, involved in costly wars, that leaves US a 1750 life expectancy..” Yes they did all those things. In no way does our fate correlate year:year to theirs.

            But, from 2000-2010 (and still counting), we funded a 10 year war entirely on deficit spending. ie: we didn’t pay for it. We borrowed it from China. So yes, endless wars still do exist. I am a veteran who served active duty naval special forces starting in 2002, and I can assure you, we engaged in an endless/pointless war that achieved nothing. Please don’t argue that, I was there.

            The English empire fell, but their currency did not. Their stranglehold on slave colonies and free trade is what died.

            I feel we are a little sidetracked from my original point of basing one’s FI portfolio on the success of a climbing (and possibly artificially stable) market. I wanted to hear opinions on why and what other alternatives people are using besides real estate income (I see the value) and index funds (I am hesitant).

            I appreciate your replies. I would like to leave my original concerns open to additional bloggers at this point. Thank you.

            Reply
            • Jimbo May 7, 2013, 10:37 am

              Your patience with me is to be commended, and I definitely enjoy your writing style, so I allow myself one last reply.

              By dollar cost averaging, you can take advantages of lower valuation/crashes of indices.

              Even if the stock market is overvalued, it does not mean it is a wrong idea to buy. It is impossible to foresee the future, but unless you are planning to need money in the short term, the value of the stock market is irrelevant. The more time you spend with money in the market, the more chances you have of coming out ahead. This has been proven time and time again. Even if another 50% crash should occur, you will have the same amount of shares. And you can buy more at discount prices. Event at the current valuation level, the stock market could climb 10% this year. Or crash 10%. Or more. But the most effective way to invest is to invest regularly, no matter the market conditions.

              Reply
            • BadAss CPA May 7, 2013, 11:49 am

              I tend to be wary of putting 70% of my wealth in stocks as someone my age (30) is generally advised to do. Currently assets are split between the following below. Possibly over-diversified, but open to suggestions.

              35% US Stocks (index funds)
              20% real estate (REITS and rental, not including home)
              10% international stocks
              10% bonds
              10% lending club
              5% annuities (wouldn’t advise, we’re stuck with it)
              5% business development companies
              5% good old cash

              Reply
            • fiveoh May 7, 2013, 12:54 pm

              Hold a small portion of your portfolio in pms if you are concerned with this. They dont generate cash but they are a good inflation hedge.

              Reply
          • Jamesqf May 7, 2013, 12:25 pm

            “Empires rise and fall, but the days of endless wars are behind us.”

            Humm… Another case of “This time is DIFFERENT”?

            Reply
            • Jimbo May 7, 2013, 12:39 pm

              Hmmm, sure, if you will.

              When was the last time a superpower used military action to gain vast territories?…

              a long time, in my mind. I dont think the likes of Alexander the Great and Genghis Khan, Hitler are coming back on this side of history.

              Reply
              • fiveoh May 7, 2013, 12:56 pm

                With nuclear weapons available to more countries, you dont need to be a super power to start wars…

              • David Wendelken May 7, 2013, 2:54 pm

                1945, in living memory.

              • Jamesqf May 7, 2013, 8:11 pm

                “When was the last time a superpower used military action to gain vast territories?”

                China’s invasion & ongoing occupation of Tibet, ca 1950-present. Soviet conquest of eastern Europe & parts of Asia, 1945 to collapse.

                If you back off on the superpower qualification, there has been quite a bit of military action & attempts at conquest in Africa, also Argentina’s attempted invasion of the Falklands…

                If we look at non-state actors, the current Islamist military actions are a pretty fair repeat of their conquest of the Eastern Roman (aka Byzantine) Empire.

    • Derek Chamberlain May 8, 2013, 11:35 am

      Adam,

      I tend to agree with you, but I’ve been dead wrong about things so far.

      No one can know the future. If you have concerns like this, I think the best bet is to plan a little bit for the worst and expect the best.

      All countries with central banks are in a race to debase their currencies. As long as they all keep pace with each other their theory is we can inflate away the debts without collapsing anyone’s economy.

      Also, I think Jimbo’s view of everything will be fine just because is a little narrow. We are really in a fiat currency experiment here since Nixon took us off the gold standard in 1971….

      The fall of most great empires can be marked by the point in time when they began to aggressively debase their currency based on excessive debt.

      If you are particular about the news you read, you can see that China and Russia have recently made deals to pay for oil not in dollars, but with their own currency (Yuan/RMB for China). If that doesn’t make you raise an eyebrow, then you need to have your pulse checked!

      Reply
    • Walt May 11, 2013, 12:40 pm

      Here’s the thing – inflation is a feature, not a bug. I hear all the time about how “fiat currencies are always debased” and “I could buy a horse for a nickel in 1892″ and such. Those things are true. They are also GOOD (I’ll qualify this with a “the economy harming our environment makes it too complex to discuss here”).

      Point 1: Assuming you want an economy in which people exchange goods and services using money rather than barter (I hope we can take that as a given), having a supply of money which slowly loses value is GOOD FOR EVERYONE, because it encourages people to produce more good stuff and consume more of the good stuff other people are producing, since just accumulating huge amounts of cash and sitting on it isn’t profitable. If you have too much inflation, that’s bad, just like eating too much food is bad. But if you have zero inflation, or deflation, suddenly the incentive is for everyone to hoard their money and buy NOTHING. And if everyone does that, the entire economy collapses because people have started to excusively value (and hoard) their money INSTEAD of the good things they can get or do with money. You’ve put the cart before the (5 cent) horse!

      Point 2: All kinds of kooks have been saying there will be hyperinflation and we should all run out and buy gold for what, almost a decade now? There’s no hyperinflation problem now, futures markets predict no hyperinflation – so if you really thing it’ll happen, you could make a killing betting against the US dollar. I don’t see anyone rushing out to actually do that (what’s the yield on a 10 year Treasury right now?), so I think most of the fearmongers are just trying to sell you something (as opposed to MMM who is just trying to give you free info and happiness).

      Do whatever makes you comfortable, of course. If having gold or ammunition or fertile womenfolk stockpiled at your compound is the only way you can sleep at night, do it. I’ll buy more tinfoil and cordite futures.

      Reply
  • Mona May 7, 2013, 8:29 am

    Thank you so much, this makes a lot more sense to me than the gloom and doom I read elsewhere about the economy. I didn’t really understand the economic cycles before reading this (I’m 26), it’s actually really reassuring to know that it is possible to weather the ups and downs with financial security. Thanks also in general for this website, I’m trying really hard to become financially responsible and educated, but I’m so new to it that many sites are far over my head, throwing out constant jargon. I feel like this site alone has done more to help me understand money than any other source I have found anywhere. I really appreciate it, I’m now living on 50% of my income and making great strides toward financial independence.

    Reply
  • Jessica May 7, 2013, 8:35 am

    I’m not complaining about the closing documents we signed last night to seal the deal on the zero cost refinance of our rental house. 2.875%? Yes, please!

    Reply
  • Forrest Lundstrom May 7, 2013, 10:17 am

    So, an important related topic here is dollar-cost averaging.

    It’s always easy to time the market in hind-sight, but today you don’t know if +30% or -30% will be the next market move. So instead, buy regularily and avoid panic-selling or giddy buying.

    Slow and steady in all times, whether you think it is boom or bust.

    Reply
  • mediocre mustache May 7, 2013, 11:18 am

    What delicious irony that the 2013 Crysler Town & Country is being is being advertised at the bottom of this post. At least it isn’t a BMW.

    To your point about paying off debt in boom times. I suppose it makes sense, in a ‘less debt = more freedom” way. But with mortgage rates below 3% on 15 year mortgages, I can’t help but think that long term I’ve made a mistake putting $90,000 into my mortgage these last 3 years rather than putting into an index fund. Paying off the mortgage sounded like a good idea at the time, but at one time so did the Ramseyan idea of having a 6-12 month ‘emergency fund.’ I’ve been toying with the idea of pulling out $100,000 and putting it all into the market now. But of course we are in ‘boom times.’

    Can I expect to make more than 3% on the market in the long term – absoultely. But more bills, less freedom, and who knows if the market crashes. Things would be a lot more clear for me if the market would drop 40%+ again. Then this would be a no brainer. I’m left with making a decision that makes sense (is positive EV) but with significant risk (variance). That was the opposite of what I wanted to do when I decided to pay off my home.

    Reply
    • BadAss CPA May 7, 2013, 12:01 pm

      Currently contemplating the same thing. I recently bought a property in March as a short sale and got a great price. Between the discount we got plus appreciation, we’ve probably made $170k already. My mortgage is currently at 3.25%, but I could refinance in September (have to wait 6 months from purchase I’m told) and pull out $125k to invest but at a higher rate (3.75%).

      If I feel I can make double the interest at 7.5%, then I may do it. Still have a few months to ponder. Your interest, and therefore your hurdle rate, is a bit lower. If you can make double 3%, I think you should do it. Even after factoring risk in, I think you’re net positive long-term. Just be sure to diversify sufficiently.

      Reply
  • Cathy Severson May 7, 2013, 11:36 am

    Great recap of the last 30 years. “It was the best of times, it was the worst of times.” As a career counselor, I’ve worked with unemployed people during peaks and valleys. Of course, if you’re unemployed, it’s your own personal recession. While there are always going to be economic change, people are going to need to be more resilient, resourceful, and entrepreneurial in the future.

    Reply
  • JaneMD May 7, 2013, 11:51 am

    We were in graduate school/residency during the economic downtown and now have real paying jobs. The number of friends that are like ‘quick, buy a house before the market recovers here’ cracks me up. We have 200K in student loans to pay off first. By the time we are done with that, this wave will have crested and the market will be headed down again.

    Reply
    • Adam May 7, 2013, 11:56 am

      I start med in 2 months, and this is exactly my line of thinking as well. I actually hope to catch a bursting bubble in 7-8 years when I’m ready to buy, but this current “buyers market” has passed in my opinion. We will be paying off loans aggressively at the rate of 85-90% of take home pay, and transitioning into roughly 75% savings rate after loans are gone. I hope to love my career, but if I don’t I’m fortunate enough to only need 5 years of work to be FI.

      Reply
  • Champion May 7, 2013, 12:20 pm

    All MMM’s thoughts about countercyclical moves make sense.

    The one thing that doesn’t seem to make sense is the idea that we are launching into a boom.

    MMM, you’re an optimist, and I give you credit for being one.

    However, I think prudence dictates caution when it comes to declaring the next boom.

    The stock market has more than doubled in the past 4 years and is at all time highs. When it comes to stocks, the boom has been ON in a HUGE way for 4 years–that’s quite different from your assertion that it’s about to start.

    Similarly, the last recession ended in 2009. We’ve been in a recovery/expansion for 4 years, even though it didn’t feel like it to many overindebted, underemployed people.

    While there are job offers for highly skilled professionals, the total % of the population that is employed is plumbing lows.

    Since WWII, we’ve had a normal cycle of booms and busts. But the last bust was different–it was caused not by the Fed raising interest rates to stop inflation, but rather it was the result of a huge credit bubble in the preceding decade. This latest bust actually had a lot more in common with the great depression than with the typical post WWII recessions.

    And the recovery has been fuelled by a massive expansion of debt throughout the economy. Household debt, corporate debt, and government debt are all UP, government debt insanely so (it has just about doubled in the past 5 years).

    So the problems that caused the last bust still exist, but in much bigger ways.

    While housing prices are recovering in some markets, it’s due to record-low interest rates enabling people to pay higher prices for a given monthly payment. And the banks are deliberately withholding housing inventory from the market because if they put it all up for sale, the lower prices would reveal the banks’ insolvency.

    Productivity is not rising, employment is not rising, and incomes are not rising. First-time home-buyers, the lifeblood of the market, represent a record-low percentage of sales. Gen Y is saddled with more student loans than any previous generation.

    it seems to me that MMM is mistaking a run-up in house prices with the start of “the next boom.” That may be a pattern he’s seen before, but we’re not dealing with normal patterns here. The national debt has never doubled in 5 years before, certainly not AFTER the biggest debt run-up in history in the prior decade.

    Is this a good time to make more money and spend less. Yes. Should we assume the next boom is here? Probably not.

    Would I go long stocks here? No. Would I go long housing? No. Would I demand a big raise? No. There are good jobs and opportunities out there for those who are qualified, and by all means they should go after them.

    But when I think of the experiences MMM describes with booms and busts over the last 20 years, I predict that the next 4 years will have a lot more in common with previous busts than with previous booms.

    Reply
    • Mr. Money Mustache May 7, 2013, 9:50 pm

      Great! I’m approving your comment so we can have our little “bet” recorded here.

      Stakes are high, because someone WILL call you out on it if you end up being wrong, just as happened with this old doomer comment by “Cris”:
      http://www.mrmoneymustache.com/2011/09/15/a-brief-history-of-the-stash-how-we-saved-from-zero-to-retirement-in-ten-years/comment-page-1/#comment-4127

      The best part is that we can look forward to either outcome – four more years of economic expansion where my working friends earn more (and I might make a bit by selling my rental house at a high price).. or another crash which puts assets on sale again.

      For the record, my definition/prediction of the next US “Boom” is: lower unemployment, a continued recovery in beaten-down housing markets and more record-setting in the higher priced markets, and continued high profits in the corporate sector. I don’t consider the level of the stock market indices to be as important a factor, since those are so volatile and subject to speculation. It’s the earnings (and where they go) which define the economy for me.

      Reply
      • Debbie M May 8, 2013, 8:05 am

        Just want to add that in 1995 the stock market, especially tech, was breaking records and was clearly in a bubble. Yet it continued rising spectacularly for FOUR MORE YEARS. Interesting times.

        Reply
  • Jacob @ iHeartBudgets May 7, 2013, 2:10 pm

    I like this overview, and is the same advice that I heard from the smartest person I know (was an actual rocket scientist for a while, now just a PhD mathematician creating market investing algorithms that he sells to Hedge Fund managers). Basically, the economy is cyclical, and you need to know what to do during those cycles, and I think you’ve nailed it :)

    Gotta update my resume and get a linked in profile ASAP!

    Funny question for MMM: Do YOU have a Linked In profile? I’m assuming it would just say “majors in Badassidty, retired, so DON’T OFFER ME A JOB”

    Reply
  • John May 7, 2013, 2:47 pm

    MMM, I am new to investing and am carefully looking over where I should put my money. From everything I’ve read here and many other places, index funds are the way to go as you don’t have to “time the market” as they say. I am relatively young (24), so does it particularly matter when I put my money in a fund as I have quite a few years until I take it out?

    Reply
    • Garrett May 9, 2013, 1:11 pm

      You mostly have it right, from what I understand.

      Index funds are considered good because they tend to have lower fees associated with buying, selling & maintaining them. The fund is based on an index or simple algorithm so it is less work for the fund manager to select the stocks so they charge a lower fee for their services.

      Buying into that fund on a regular (monthly or every paycheck) basis, also called “dollar cost averaging”, is what prevents you from trying to time the market. The idea is that by buying regularly, you’ll sometimes pay too much, sometimes you’ll get a good deal but, on average, you’ll get a good price for your investments.

      I think most advisers would recommend that you get as much money into your investments as soon as possible (assuming you’re maintaining some reserves for emergencies and you’re using the dollar cost averaging). The more time your money has to spend in the market, the better the chance that it will appreciate and start compounding (your money makes money that makes you more money).

      If I were 24 with a decent job, I would set up an IRA (or 401k if offered by employer) with an automatic payroll deduction so that the IRA is funded to its max every year. I would also set up a separate payroll deduction or automatic bank transfer to begin filling up a separate emergency fund (I like to keep my emergency fund separate from my main account so I’m not tempted to spend it).

      Reply
  • Chucks May 7, 2013, 3:41 pm

    But MMM, the Accord V6 is so stylish without being flashy, not absurdly priced for a fully equipped sedan, roomy, powerful but reasonably fuel efficient and safe!

    Just kidding. The annual interest I’d lose from buying a new car like that would more than cover all my current fuel, insurance and repair costs.

    Reply
  • Adrian M May 7, 2013, 6:37 pm

    I find the comments supporting Fed, QE and the USD funny, Before anyone calls me a doomer be advised I am so optimistic that we will survive our own stupidity, that I brought new life into this world.

    MMM your belief’s and behaviour’s are Austrian not Keynesian, Yet you come out in favour of your government pursing Keynesian policy’s like printing money to try and cover for people saving and paying down debt. I find this a most interesting contradiction.

    I would suggest that anyone interested in economics read this book
    http://mises.org/books/economics_in_one_lesson_hazlitt.pdf
    no more than 200 pages.

    Reply
  • KMB May 7, 2013, 6:43 pm

    When people are greedy, be fearful. When people are fearful, be greedy. Then retire.

    Reply
  • Johnny Moneyseed May 7, 2013, 7:07 pm

    Today I was having a conversation with someone that told me that I was stupid for investing so much money into the stock market (Vanguard Index funds) and into real estate property (a rental house), because their parents did that and then.. oh shit, 2007 happened. They were out on their ass basically and had to go back to work.

    I don’t get what’s so hard to understand about a depressed economy. You get more for your money and even if your stocks aren’t worth as much at the moment, you don’t lose any shares. If you’re still investing you can take advantage of a sweet stock market discount sale.

    We’re in the process of buying a 2nd home in our area, and the ball is in our court. We’re going to wait for the next hiccup in the housing market to buy any properties after that.

    Reply
  • Angela P May 7, 2013, 7:51 pm

    I wonder if Australia is in the same boat as the US….

    At my husband’s work, they have laid off all the casuals and are now firing some of middle management. It is stressful for him just being there at the moment, despite his job being relatively safe (technician/mechanic). Everyone I know seems to be feeling the pinch across many industries.

    My point is, here times seem tough. No one is asking for a raise or leaving their jobs as having a permanent job means you can’t get fired. If you start a new job, you can be fired for any reason in the first three months.

    Our Reserve bank just lowered interest rates yesterday to 2.75% – apparently the lowest EVER. Our dollar then dropped too.

    I am not complaining, we are in a pretty good position. I wonder if our boom is just a little bit behind yours though?

    Reply
    • Doug May 9, 2013, 8:48 am

      Australia is more in the same boat as Canada is. Both countries have a disproportionately large exposure to commodity industries, and the commodities boom has slowed down. The long term outlook for commodities is positive, but presently they are taking a rest stop before the next upward trend, and that is affecting the economies of both countries. Another factor is the housing bubble is now deflating in Canada (I believe the same is happening in Australia, is that correct?) which will put a damper on the domestic economy.

      Reply
  • Ms. Must-stash May 7, 2013, 9:34 pm

    What I really appreciate is the reminder that we have never missed an opportunity! There are always different kinds of opportunities out there waiting for us. We just need to be strategic about how we act based on the current cycle.

    I’ve been feeling bad for quite a while about having a lot of money in cash. (And yes I recognize that this is a good problem to have). Up until I started reading MMM (all the way through) a few months ago, I knew intellectually it was inefficient to have so much in cash but still felt an emotional / security need to keep the cash handy. Thanks to MMM I feel that the emotional need has lessened and I managed to get a lot more of the ‘stash in the market at the beginning of the year (and of course have always done monthly automatic purchases and continue to do this now). But I am currently hesitating on doing additional major buys as the market continues to hit new records. I think I need to re-read this a few more times and think some more about opportunities – since they are always out there!

    Reply
  • jestjack May 8, 2013, 6:29 am

    Gonna respectfully disagree….as the Dow just broke 15K now is not the time to “jump in” BUT rather the time to take profits. The thing that I have worried about for some time and it seems is coming up on economists radar is when the FED quits lending money for 0% and printing money with abandon. The deficit has jumped to historic levels despite historically low interest rates on debt. Soooo just imagine if the interest on federal debt returns to a more historic norm…say 6%…that would mean that even if not another dollar was added to the debt it would DOUBLE every 12 years. I think any recovery will be short lived without employment gains….

    Reply
    • Mike September 1, 2014, 12:52 am

      I think you proved his point, with the Dow at 17,098 now, almost an additional 14% since you posted this.

      Reply
  • John Evans (CuencaSolo) May 8, 2013, 7:23 am

    I think MMM is being misled by overgeneralizing his own successful experience. The more people act the way he does, the more stable and prosperous the economy gets. That doesn’t mean the Keynesian policies of inflation and massive regulatory intervention are working, or are ever going to work. He’s more respectful of the Powers That Be than they deserve; you need an Ivy League PhD to believe some of the nonsense these guys are acting on.

    Reply
  • NZT May 8, 2013, 8:08 am

    MMM is dead on about how to act in a boom and a bust, but who is claiming we are currently in a boom? Sure stocks are up, but that’s 100% due to the Fed and could burst literally any day now (well, maybe a little bit due to companies firing all their workers during the recession to keep costs down). The all-important employment picture is still pure crap, the only reasons that U3 has come down at all are people dropping out of the labor force (LF participation is at a 30 year low), or else getting low paid part-time jobs. Housing prices in aggregate are still bumping along the bottom. Bank lending is very weak, the government is cutting back at all levels, and public finances in all major countries are in a hideous state. I’m not whining here (I’m doing OK personally) but the 2008 recession never ended, in fact the only thing keeping the patient alive at this point is the Fed QE defibrillator giving his heart another jolt every 6-12 months. If this is what passes for a “boom” these days we’re in a bad way indeed.

    Reply
  • Eric Meng May 8, 2013, 9:37 am

    How does QE and governmental policy affect all this? Bonds are quite expensive right now, contrary to what they “should” be at, according to your (rational) model

    Reply
  • Emily May 8, 2013, 10:33 am

    Thanks MMM! The part about looking for jobs in a boom economy is very timely for me. After finding your blog and reading through almost all of the previous posts (sp far I’ve read backwards in time through July 2011), I’ve decided I want to find some freelance work. The openness and creativity that comes through when you discuss thinking about paying opportunities is very inspiring.

    Reply
  • earlyFI May 8, 2013, 4:44 pm

    There is definitely a pattern of ups and downs. I think realizing that can help people act rationally during the up or the down. For instance I was calmly paying off my house in 2008 when most people were freaking out about the falling stock market.

    Reply
  • Doug May 9, 2013, 8:54 am

    Yes, there’s plenty of evidence the U.S. economy is picking up. One indicator is the sales of trucks and SUV’s has picked up. The same fuel guzzling vehicles you could hardly give away 5 years ago are now selling quite well. Just watch, as the economies of big energy users like the U.S. and China picks up again the price of fuel will go back up, and most buyers will favour small econo cars over those bigger vehicles. Everything goes full circle, does it not?

    Reply
  • Birgit Platschka May 9, 2013, 11:15 am

    Hi Mr M.
    You should re-post this article again and again. It is common sense and good advice. Advice that is simple and useful, yet we often forget it …until it is too late, of course.
    As you said, markets go up and down all the time yet they creep up in the end.
    Thank you.

    Reply
  • Johanne May 10, 2013, 2:00 am

    Dear Super M.
    I’ve been hanging around here for a while, actually reading the blog from start to finish for the second time these days – now including comments! Your Mustachian Wisdom has inspired me to make several kick-ass changes to my economy and life in general. Thank you! One (big) part of your gospel never really took though, the O’ All Mighty Biking. Never been much of a biker really. And, because I don’t have a car (not even a license, hah!), I never really felt guilty about it.

    I guess your constant bike-nagging must have planted some kind of sneaky, subconscious seed though, as I have lately started making heaps of excuses for having to take the bus. The biggest one being that my way to work is basically one long hill, making the ride back home a steep upwards nightmare. Also, I work night shifts, so I’ll be way to tired to bike home. My bike is to heavy and it’s too far (4,5 miles). Due to me living in Norway, it’ll also bee too cold/windy/socialistic and risky due to polar bear/troll attacks. Waaaah Waaaah Waaah!!!

    Last night however, I lured all my complainypants excuses out from their dwellings and ninja kicked them in the same direction I kicked all my other non-mustachian habits. I groomed my mustache and got on the bike. It was a great ride, which included an awesome view over the entire city of Oslo. Imagine, my invisible mustache blowing in the wind, birds chirping “Eye of the Tiger” as I passed. Not very surprising though, the route being down hill only. I spent approximately my whole 10 hour shift agonizing and whining to my co-workers on how to get back home. Luckily, I deliberately didn’t take any money with me, that way I wouldn’t be tempted to wimp out and ride the bus. Morning came, and as soon as I got back on my bike, I punched myself in the face, fired my optimism gun and shouted STOP WHINING RIGHT NOW, OR YOU WILL BE STUCK IN THE RAT RACE FOR THE REST OF YOUR FUCKING LIFE. Luckily I work at mental hospital, so no one really noticed as I rolled screaming out the gates with my visibly growing mustache.

    Even though the ride home really was a struggle, leaving me panting and getting of my bike to walk for parts of the way, it was actually great. It too had some really scenic views, including a bird sanctuary. And the sense of accomplishment I felt when I got home – priceless. If I keep this up, I will also increase my level of fitness and saving money on bus passes. (As if all of this wasn’t enough, my route actually had me pass a perfectly good copy of a book I’ve been thinking of buying – just lying there on the ground next to a paper recycling station which it had probably fallen out of. Went straight in my backpack as a timely extra reward! If that’s not some cosmic mustachian karma, I don’t know what is.)

    Thank you MMM, for being kick-ass and kicking my ass!

    Reply
    • Schmidty May 10, 2013, 11:20 pm

      Way to go Johanne! You may have a newfound appreciation for this video of graffiti art found at the top of the last bit of hill to UBC in Vancouver:
      http://www.youtube.com/watch?feature=player_embedded&v=3f4tBJLB4k0

      In case it went by too fast: “A hill with a bike on it stands a little taller”.

      Reply
      • Johanne May 11, 2013, 4:04 am

        Thanks, Schmidty! And you’re absolutely right – I loved the graffiti! Might have to get my self a few spray cans now…

        Reply
    • Sara May 11, 2013, 6:28 am

      Loved your comment. Hey, even if you bike back and forth 2 or 3 times a week you would see financial and fitness benefits. And pretty soon, it would be such a breeze that the daily bike ride will seem as nothing. And finding the book is the perfect reward. I love when stuff like that happens to me (and it often does!!)

      Reply
      • Johanne May 13, 2013, 9:24 pm

        Thanks for the encouragement Sara – you’re absolutely right. I’m planning on still going strong for my shifts this week, rain or shine! (Unfortunately, the forecast says rain, but I’m so worked up about it I’m actually looking forward to biking no matter what :) Hey, it’s only water…)

        Reply
  • MissFit May 10, 2013, 5:35 am

    Hi! If I have 60K (all my savings!) at an ING account should I wait for the next bust to buy stocks on sale? Is there a place that’s better than ING where I should put the money as I wait for the next stock market crash?

    Reply
  • Chipamogli May 10, 2013, 7:08 am

    Somehow I am not convinced that the next boom is starting.. still sluggish in my home country of Canada to which I will return soon. It’s interesting how other countries’ economies are affected (or not affected) by the global reality… here in Chile things are fine and GDP has been growing at 5% annually. However, lately it’s been taking a hit due to the drop in mineral prices (one major industry here is mining).

    Reply
  • Barb May 10, 2013, 3:29 pm

    Mr. MMM – I have been trying hard for a year to buy some rental properties and it’s not working. They either have owner occupant restrictions, they have 5 offers on them to the point where the price is no longer good, or required so much work that the numbers don’t make sense or they are just not out there. As a person who has had her job cut 7+ times in the last 12 years (no fault of mine), I am trying to generate my own earning potential. I am in Mpls, MN. I am in my later 50s and it’s tough to keep starting over. Any advice?

    Reply
  • Francisco Noriega May 10, 2013, 10:47 pm

    Hi MMM,

    I’m a little confused.. after reading your post, and looking how things like the S&P 500 have done in the last 20 years, I thought that you meant that from 2009-2013 was the bubble, and right now was almost the end of it, and that the crash was soon, but you are saying that it is just the beginning of it??

    Also, I have most of my money in stocks (ETF/ESPP/REIT a few thousand in specific companies). I’m also Betterment for about half of my money. I thought you meant that the crash was coming so I was going to change my allocation to go towards a lot more bonds (and then when the crash happens, change to stock)

    It looks like I misunderstood you though, what is your opinion on how to allocate money right now?

    Reply
    • Mr. Money Mustache May 11, 2013, 9:58 am

      Uh-oh.. misunderstanding here. I’m not trying to predict the stock market – could go up or down, doesn’t matter and we don’t know when the swings will happen. The current stock market headline price is not the same thing as a measure of the health of the economy. In the long run, it simply averages out to keep up with the economy.

      This post is just to remind us the existence of the business cycle itself – right now in the US, employment is on a downward trend and housing prices are going up. This can lead to consumers going crazy, thinking their appreciating house has made them wealthier, so I was encouraging people to take a longer-term view and prepare for eventual busts, that is all.

      Reply
  • English Stache May 15, 2013, 5:15 am

    Boom Times? Based on the comments this seems like a no-brainer for several of your readers. But for me I just can’t get it down. How can I make $ in a boom. I have been beating down debt for the past 3 years paying off a total of 85k. I still have another 43k to go. I am an atty and bw my full-time job and some side work I am pulling in 140k a year. But I hate doing the work. I want to start on the path to a more financially freeing life but am not sure how to make that xtra $? We live in NJ and it is super high cost of living. We are down to 1 car and eventually plan to move to a cheaper area. But are there any suggestions on bringing in that extra cash?

    Reply
  • David May 19, 2013, 9:08 am

    I wonder where we are in the business cycle–boom or bust? IMO, we are in the middle, and dependig on your situation, it could go either way. I read these comments and wonder how many readers of this blog are average run of the mill blue collar workers. I mean by that 50k a year or less. I dont think anyone can put a proper value on where the market should be valued until the Fed stops keeping rates artificially low. When the Fed starts raising the rates even incrementally, we will find out how strong this rally really is. I dont see that happening anytime soon though. Most of my friends are barely making it—some of which is their own fault. So its hard to say either way which way we’re headed, but I must point out, at least in my neck of the woods, all my friends have decent jobs–they work where I work–for the area, and are still struggling.

    Reply
  • Amit C June 5, 2013, 1:09 am

    Nifty point of view.
    btw, you meant Black Monday??!!

    Reply

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