Saving to Invest included me in this week’s Carnival of Personal Finance, and I noticed another great post, “What if saving was stupid?” It makes a powerful argument for investing in real estate instead of keeping money in the stock market or in a savings account. The author’s in-laws, who lived in the Soviet Union, saved diligently and then saw their savings disappear almost overnight when communism collapsed.
I don’t think saving is stupid. And I don’t think we’re at risk of a Soviet Union-style collapse. But in the last few months, I have seen how important real estate can be as a hedge against illness, a layoff or a market collapse. My in-laws bought a house about six months ago, taking money out of the market to pay for it. If they hadn’t bought the house, that money would have lost 40 percent of its value when the market tanked.
Then my dad got hit by a car. He broke his collar bone and several ribs, and since he’s a builder, those bones are pretty important to his livelihood. Now, almost two months after the accident, he’s just starting to get back to work. We still don’t know if the injury will heal completely. Thankfully, my parents own a two-family house in Cambridge, Massachusetts, so they have some rental income.
They bought the house in 1980 for $37,000, and now it’s probably worth close to half a million, despite the real estate downturn. In the past, they have considered selling it. Thank goodness they didn’t. They would have lost 40 percent of the money in the recent bear market. And they wouldn’t have the regular income coming in, boosting their income while my father can’t work.
Of course, buying real estate isn’t the only way to hedge against a market collapse. Saving to Invest also highlighted this post on building a retirement emergency fund. The author argues that you should keep a significant portion of your retirement savings in very safe investments, in case the market tanks.
2 Comments
December 23, 2008 at 3:14 pm
Thanks for the mention. Your parents are sitting on a nice piece of real estate, particularly considering that it also brings in some extra income. Good job by them.
December 28, 2008 at 2:57 am
Thanks for the mention! Hope your dad is getting better. I’m not sure real estate is completely risk-free either; there’s certainly some risk that property taxes in a given area will be abruptly raised, etc. But you’re right that it certainly serves as a hedge against stock market investments.
When you get right down to it, hedging is key. Invest in all kinds of different areas; generate multiple income streams; insure and protect what you already have! It’s a struggle…