ON THE MONEY: Wise investors always have an exit strategy in mind

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By John Grace

Contributing Writer

Let’s begin with a very basic question. How is the U.S. average $60,000 household income expected to buy a median $400,000 home now?

That’s the national average income whether one or two people are working in the same household, along with the national average home price. Closer to home, the median California household income in 2020 dollars was $77,358 per the U.S. Census Bureau and with California having one of the highest costs of living in the country, the typical 2020 home price was $818,260, according to the New York Times.

To help put things in perspective, homes now cost 5.4 times more than the typical national buyer’s gross income after the pandemic, reports CNBC. At the same time, from the same source, annual average earnings growth has remained below 3% just as home prices have increased more than 5% over the past few years.

Now if you have anyone telling you, “This is not a bubble because…” snatch their rose colored glasses, which discolors everything, off their face and ask questions later.

What’s different this time, is that a number of bubbles are above the water line thanks to the printing of money around the world that has been so extreme since COVID.

“The U.S. alone has printed $5 trillion since March 2020 versus printing $3.6 trillion from early 2009 into early 2020. That’s why the only safe havens now are the highest-quality long term U.S. Treasury and AAA corporate bonds,” opines HS Dent Publishing.

In addition to rising real estate prices outside of dense major cities, the warning signs of market madness are everywhere. Price-to-earning ratios are high and climbing and there is an explosion of special purpose acquisition companies raising cash in initial public offerings and using the money to acquire private companies.

Special purpose acquisition companies are often led by a seasoned management team and backed by a sponsor. More and more the management teams and sponsors come from the world of private equity and execute on multiple special purpose acquisition companies, often within a short period time, explains Woodruff Sawyer, one of the largest insurance brokerage and consulting firms in the country.

We could be in the longest-lasting, greatest bubble ever. There is a bubble in stocks, bonds, commodities, and real estate for example. It’s not unusual to see different peaks at different times, “but almost all are coming to a head now,” financial writer Harry Dent asserts.

Dent goes on to say, “This is beyond overvalued. Neither you nor your adult kids will see anything else like this in your lifetime.”

Over the past 40 years, it is this financial planner’s observation that savvy investors hate losses more than they love gains. Now is the time to pretend that you have entered an auditorium just in time to recognize the exit doors you will need to use to avoid a catastrophe.

The same logic applies to all things where you have enjoyed spectacular appreciation. What are your exit strategies?

John Grace is a registered representative with LPL Financial. His On the Money column runs monthly in The Wave. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.

 

 

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