Anchored in this Anomalous Economy
I read often about the kids who have come of age during the Great Recession and Great Recovery (Millennials, broadly) and the predicted to be lifelong implications of having one of those birth years. While I think that many of those assertions are overly dour and do not ring true for me personally, I have been reflecting recently on how this current economic climate is such an anomalous one to become my anchor for all future climates.
Based on my experience in my 20s, my first experiences as a financially independent adult, I implicitly believe that the stock market always goes up, that it’s a waste to leave money in a savings account, that secured debt is practically free money, and that I’ll always have a job I want. I know intellectually that those things are not true all the time (if you even think they are at the moment), but first impressions matter.
The Market Always Goes Up
I lived in somewhat in a bubble during college and paid zero attention to what was going on in the wider world. I started perusing online news sites regularly in 2008 and so the first regular financial news I consumed was all about banks failing and the stock market dropping and so forth. However, that period was actually rather brief, and by early 2009 the stock market had hit bottom and was starting to rebound.
My only personal connection to the post-recession economy was through the stock market. Although I started saving in 2007, by mistake I didn’t start investing until January 2009, almost exactly coinciding with the market trough. That means that I have seen practically nothing but gains (albeit with a lot of volatility in some years) for my own money. The 5 year annualized return of the S&P 500 concluding in 2013 was 18%!
Home and Car Loans Are Comparable with Historic Inflation Rates
For those who can get it, credit right now is extremely cheap. I looked back over historic mortgage rates when I was trying to figure out why Dave Ramsey’s investing advice is what it is and was truly shocked by the number of years that mortgage rates were at or above 10%. Even contemplating a 7% mortgage rate sounds offensive to my 4%-and-below-anchored ears. I am seriously going to be mad when I finally get a mortgage and the rate is higher than 3%, even though I am certain that will happen. It’s going to be much more difficult to justify keeping a mortgage forever with higher lending rates.
It’s also pretty unusual that you can get 0 or 1% car loans! I hope that we never have to take out a car loan again, but given the low interest rates and high rates of return in the market I would be really tempted to leverage a car loan like we have with my student loans. But it’s doubtful that approach will make much sense in a few years when interest rates increase again. I am also going to be pretty steamed if we ever take out a car loan that’s more than a few percent.
Principal-Protecting Accounts Give No Returns Whatsoever
I’m pretty stoked when I see a savings account or CD rate around 1%, but I’ve heard from complain-y older people that there used to be high enough rates provided by CDs and similar vehicles to actually be considered legitimate investments. I suppose this might be an area where I will be pleased to find my anchor is so low in the future when I look at savings account or CD rates, but that would likely mean that inflation is higher.
We All Have Job Security
My default belief in my job security comes more from starting my working life (if you can call it that) out in grad school rather than the specific timing of my graduation. I realize that the major effect of the Great Recession on my ‘generation,’ and on others, was in un- and under-employment, but as Kyle and I graduated from college in 2007 we were just slightly older than the graduation years most affected by the Great Recession. I had secured my first post-college job a semester before I graduated and by fall 2008 I was safely ensconced in my PhD program. Yes, it has been a very rough period for research funding, but my and Kyle’s advisors have worked very hard to protect their students from income insecurity, and at no time have I thought that I was at risk of unemployment.
Even though I know that Real Job security is lower now than ever with the rise of the preference for contract work, I have trouble forcing myself to acknowledge the possibility that I’ll face a period of unemployment when I finish my PhD (or later). I essentially believe, based on my past experience, that my job will last as long as I want it to and I’ll always have another one lined up before it ends.
In Comparison with Other Times
When is the last time we had such an unusual economic climate – that the pendulum had swung so far? The late 1970s/early 1980s (but the opposite)? I wonder how that generation’s anchors are different from mine and from people who came of age in more typical times. I know all these rates will come and go as the economy shifts over time, which is why it kills me that we aren’t locking in a low mortgage rate and keeping it after this unusual period is over.
Are your financial/economic anchors the same as mine? How do you think having unusual anchors will affect a generation? How long do you think anchors last?
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Filed under: psychology · Tags: anchors, economy, interest rates, market
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We’re the same age, so I obviously have a lot of the same anchors. I think the mortgage rate one is the thing that will get me the most. If we don’t buy for a few years and rates have really climbed that will be a tough one to swallow. But that should coincide with things like interest rates on savings accounts going up as well, so from a big picture standpoint it might not be much of an actual change.
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I think the stock market and the prime rate and those kinds of fluctuations you just have to accept, because they are always changing and you can’t really hold on to them. But a 30-year mortgage lasts through all climates! Sure, refinancing is available if you get a sucky rate, but there’s no guarantee that rates will ever get this low again (I don’t expect them to) or that you’ll jump on the refinance just at the right moment. Ugh!
Yep, I have a lot of these notions as well, being of the same age as you. That is the main reason I have invested $1000 in the stock market, so I can try to get used to ups and downs that I know will for sure happen.
Sometimes I doubt my choice to do a PhD rather than “just” a Masters, but honestly a steady income, albeit reasonably low, was a nice perk in that troubling time. It helped weather the storm while that whole market low-point hit. I found my biggest trouble was still finding a job – it took four months of intense job searching, mostly because I live in an area that has a few good schools, but isn’t exactly big on science and tech. Also, I am in Canada, so if wasn’t the same here as the US.
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We invested our student loan money just at at a moment of lower gains and higher volatility in the last 5 years, so it’s really been a learning experience on how to not take action! Is your strategy to not be aware of the fluctuations or to train yourself not to act on them?
I don’t think the steady stipend income influence my decision to stick in for the PhD when I was debating leaving with my MS, but it certainly has colored my outlook on the job market. You must have started looking for a job quite in advance of graduation if you spend 4 months searching and then had overlapping employment!
I don’t think the stipend was a huge deciding factor – I think it was more like “it’s safe in here and I love what I’m researching. I don’t want to go out into that mess”
As for my timeline – I defended in January, and did corrections while teaching full time on a four month contract at my university. That gave me time to search without losing a pay cheque. I had started searching back in the fall, but no one wanted an “almost PhD” (except postdocs which I didn’t want). So the brunt of the fruitful job search was December to March.
I think about this weird set of circumstances a lot. I’m totally in the same boat. I didn’t start paying attention to the market until 2010, so I believe that it always goes up. I too have heard stories from old timers of 5% CDs that are legitimate investments. I wonder if we’ll see those days again anytime soon?
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Impossible to say! I hope the shift isn’t too fast. We do have one of Ally’s “raise your rates” CDs if they do spike, which is a nice comfort although we’re only locking up the money for 1 year at a time.
Totally with you on the mortgage one! I knew we got a low rate, but I had no idea how low until my mom told me that her and my dad’s first house came with a mortgage of something around 10%! I couldn’t believe that, and I was amazed that anyone had the money to afford a first home at all. I’ll probably still feel that way in the future if we end up with a new mortgage on a new place, simply because I’m so used to the low rates we enjoyed for the last few years.
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It shocks me when I hear of mortgage rates on par with credit card interest. My first credit card has a 9.99% interest rate! Keep your low-rate mortgage for the whole term!!!!! I agree that I don’t know how anyone affords a home at those interest rates.
I’m a few years older than you – finished undergrad in 2005, but always tended to hang out with those older than me so I felt a bit of the tech boom and bust, then the malaise of tech hiring as friends started to graduate college in 2002. Then some easy years where friends were moving up in homes left and right through 2007… All followed by the crash and subsequent rise. It’s been such a strange 15 years in many regards that I don’t know what my anchors might be? Maybe 3% on savings accounts, and 6% on mortgages with some crazy housing and stock market fluctuations thrown in there. I don’t know if I’ll ever view housing as a “safe” way to appreciate capital.
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You certainly have seen more than I have with observing what older friends went through. It has been a wild 15 years. I would like to see some slow changes for a while!
I feel old now.
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I felt old last week when we attended a wedding of some 22/23 year-old friends and met a bunch of their peers… but I didn’t mind. 🙂
It’s funny – I graduated college at the same time as you, and also had a one-year fellowship afterwards, but since I took a second year off before grad school, I walked right into the 2008 recession and employment crunch. Now I am incredibly risk-averse, pessimistic, and terrified of unemployment because of all the news stories about how people only hire people who already have jobs. This is probably financial bad news, in that I keep a 9 month emergency fund in a savings account with 0.10% interest instead of maxing out our IRAs or wiping out our student loans. It’s also emotional bad news, since it makes me very anxious about the future and doubtful about my decision to get a PhD. It’s funny what a difference one year makes!
I can definitely see how that one particular year would make a big difference. Most of my friends from HS and college were also in grad school by 2007/2008 so I didn’t closely observe any friends struggling with their jobs, either. I’m sure the difference in our attitudes also results from the difference in our fields and career aspirations, though. I hope you’re not right, for both of our sakes! Do you think you’ll keep such a large EF after you and your husband have your first post-PhD jobs?
Maybe it’s who we know, as well – none of my friends from HS went to grad school, and less than half of my friends from college did right after graduating. I had a pretty big handful of friends in different fields who struggled with underemployment, and many went to different grad programs (including teaching, pharmacy, nursing, etc.) after a while to try to start fresh, although I also knew people who did well right out the gate. The academic job market even has a pretty big postdoc-to-faculty bottleneck in the sciences, and I certainly hope we all make successful attempts at our desired careers post-PhD…but the only people who look really secure to me right now are doctors and really talented programmers!
I definitely aim to be in a place where we could have a smaller EF and use the rest of those savings for something more productive. Depending on what point in the future that happens, that could mean wiping out undergrad loans (which we’re working on already), a down payment on a house if we live somewhere cheap, or retirement/kids’ college savings. We’d have to have job security greater than a one-year teaching or postdoc contract, either from one income that could support the household or two combined.
You are definitely pointing out my biases about the job market! Most of my close HS friends are MDs now (how did that happen??) and a few are working on/finishing up their PhDs. Many of the people in my friend group who did seek gainful employment right after college are computer scientists (and a few engineers).
We’re going to keep an extra cash cushion over the next year-ish, until we both have jobs, partially because of the way your comments on EFs and job transitions have sunk into my brain. But I hope not much longer than that!
I love the concept of anchoring, and this is a neat angle on it. I think our investing career coincided with yours, roughly, but our first foray was just slightly earlier, and we saw huge losses in 2008. So our anchor is to be conservative, as losses can be big and quick. I think that’s reflected in our approach towards investing and debt.
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If I had started investing when I had intended to, I would have seen some losses, though I didn’t have much money in at that point. I wonder if I would feel very different about the stock market if I saw my $1,000 decline to $500, for instance. It’s crazy how fast that decline happened – everyone’s sitting pretty in 2007 and thinking the world is going to end in 2008.
It’s interesting that Mrs PoP doesn’t see houses/mortgages as safe capital – there’s still that feeling amongst most Australians and our mortgage loan rates are at their lowest in a long time at about 5% (two years ago, I secured just under 6%, so I’m impressed they’ve stayed low for those two years and now I’m secured on 4.99 and 4.88%). To us, this is pretty much as low as they can go – though house prices are growing less at the moment. My point is, 3% is shocking to me!
My parents second ‘family’ home that they bought when I was 2, was at an 18% interest rate on the mortgage. That being said, when they got it, they never saw a time they could pay it off. But by the time I was about 13, I think they’d paid it off due to some good fortune in their careers.
As to investing, I’m pretty timid. My strategy is to invest $2k pa pretty much on a random stock. I feel like I can ‘lose’ $2k per annum happily (in a crash) as I’d spend that on a sofa/airfare and not expect any appreciation. My plan is just diversifying my money, and leaving it there longer term. For ‘savings’ I have used traditional savings accounts, even though I know that the interest rate is no better than inflation. Just now, I’m moving to the idea of an offset account to my mortgage, to lessen the interest paid on my loan.
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18% interest! OMG! I’m glad to hear they were able to pay it off.
Your investing strategy is so different from mine, but I don’t know if that’s because of the national differences or what. Why are you buying individual stocks instead of mutual funds/ETFs? It would take a lot of money and a long time for us to diversify if we were buying individual stocks.
I started with buying about $2k in an ETF, but after that I ‘felt weird’ and wanted to have shares in companies I knew about and could understand a little more on why their price went up or down. Perhaps not entirely rational or logical, but I mainly have ‘shares’ as a way of having money in different places, essentially spreading my risk.
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Yeah, I don’t believe mortgages have ever been as low as 3% in NZ. Maybe 4.something. 5% is a good rate IMO and 3-4% on savings is a good rate… house prices below $500k I would also consider a steal. The thing is America had such a huge housing crisis and mortgage crash, unlike us down under – property in Aus/NZ is still about as safe a bet as you can get in that regard.
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I’ve never really stopped to think about this stuff, but you’re totally right. When I was working, tons of coworkers told me to buy a house and I thought that was the craziest advice (I was so not ready for that kind of commitment, haha). Now that you mention it, I guess that’s because they have seen how bad mortgages can get and wanted me to be able to take advantage of the low rates! Bah, I can’t even imagine a mortgage at 10%!!!!
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It’s funny that your coworkers said “you should buy a house” if they really meant “you should take out a bunch of debt – check out the interest rates!” We were tempted to buy, but it’s a much lower buy-in in Durham than in the DC area.
I think it’s really great that you are introspective enough to think about these things! It’s true that we all have a good bit of “recency bias”, although looking back through history, it’s not clear what’s an anomaly and what’s normal. It really is true that “whatever is has already been, and what will be has been before.”
3% and 4% mortgage rates look like an anchor to your generation and an anomaly to me. But my parents had such a mortgage one generation back from me! Throughout recorded history, we’ve had long periods of low and high interest rates. We’ve had booms and busts and bubbles. (We even had options on tulip bulbs in the 1600’s!) So we can never be too sure whether “now” is the aberration or whether the recent past was such. But your main point still stands: we all have our anchors and we need to be aware of them.
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An anchor can certainly be an anomaly, which is kind of what I’m concerned about – wouldn’t it be better to be anchored in an average time? Thanks for your comment!
I am not too much older than you, but I remember a few years of 5% return on my high-yield savings account (only a couple thousand in it to boot). At that point I debated with myself on paying off my car loan or not, since that interest rate was under 3%!
Kelly
I would probably have different anchors if my parents had let me handle money or investments more when I was younger, but I don’t think I had more than a checking and savings account until I opened my Roth IRA and I certainly wasn’t aware of the interest rates. Now that I think of it, Kyle had some CDs earlier in life so I wonder if his anchors are different. That’s crazy to have a 5% CD and a 3% car loan at the same time, and if I had the cash flow to pay the car payment I probably would keep the CD!
The crazy part is it wasn’t even a CD – it was pretty much a money market account! So no restrictions on it other than the normal 6x per month withdrawal policy. Hard to believe now!
I actually had some 5% CDs! I even had a one or two year 4.5% one! I opened those back in 2007. I remember asking the guy who was opening them for me if he thought interest rates were going up or down. Hah! I don’t think any of us could have predicted how amazing those rates were. I was pretty sad when I renewed that 5% CD into a 1.5% one a couple of years ago.
I’m curious to see how things go for me if the stock market drops and I’ve never really experienced an extended drop. There have been a few big loss months now, but nothing for more than a month or two in a row.
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Wow, 2007, that was right on the cusp! Getting a CD then was like getting a mortgage recently, only shorter-lived.
Yeah, I’m confident that we can sit through volatility and a rising market but we haven’t had that long declining market test yet. I hope I’ve learned enough and made our IRAs such a sacred cow that we won’t deviate but we won’t know until it happens!
I went through high school and college in the 90’s when everything was booming. Bill Clinton was in office. The good times were rolling. I have never thought if this might have influenced why we got into so much debt, but maybe we were still spending like things would always go up? Luckily, being in a small town and working in pretty recession resistant industries, we didn’t experience a loss in pay or even a job. I guess I am always pretty optimistic that things will work out. I’m not sure if that’s good or bad. Our first house was somewhere around 8% on the mortgage rate, and we thought that was pretty good, so I wouldn’t let rates worry you as long as you don’t buy more than you can afford. Interesting things to think about for sure!
I bet the economy during those formative years did affect your attitude toward debt. It’s so interesting to hear how people positioned differently in time and space and profession have different perspectives!
Good point about anchors. I had a different experience as you did though. I started investing in the stock market in about 2000 right at the time of the dot-com bubble. Everyone was making money right! My timing was awful…I started investing right when everything crashed. That didn’t deter me from investing, but it did make me a lot more cautious and of course I had much less to invest.
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When you started investing, were you DCAing or did you have a large lump sum? If I had invested a lump sum at that time I bet it would make me a DCA believer forever!
I wish I was DCAing…it wouldn’t have hurt that much. I was still in college and I took all the money I had to open a brokerage account to buy stocks. I then purchased some internet and tech related stocks which plummeted soon after I bought them.
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I graduated from college in 2005 and although the economy wasn’t great, it wasn’t completely terrible either. I guess I’m “old enough” to remember some of the savings rates I was getting back then and to lament that I’m making nothing close to that now. We bought our condo a year and a half ago and locked into a 4.25 interest rate. This isn’t our forever home, so it’s hard to think that the interest rates might go back up to the way they used to be (something I wasn’t paying much attention to until the last 5 years or so).
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Sounds like you were in a bit of a better place to take advantage of the anomalous economy when it came about. Would you consider renting out the condo when you eventually move out to keep the mortgage?
I totally wish I could buy a house now too with these interest rates! Plus, where friends of ours just bought a house in the Lehigh Valley of PA, about a 1.5 hour drive from NYC. That area is on the rise and I really want to buy a house now while you can still get a decent house for $150,000. Unfortunately, with no job offers there yet for either my husband or I, that doesn’t look like a smart purchase decision quite yet.
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What’s interesting emily is the stock market boom you’ve experienced. I know it’s a booming market when the world is full of early retirement. Happened every stock cycle, and when the bear comes it shakes people’s reality. You guys already have good values so you can stick to your investment plan.
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