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WALL STREET, CALIFORNIA | FISCAL FITNESS

Maybe It's Time to Take Stock, Have Some Fun

September 02, 1997|SCOTT BURNS | Scott Burns writes for the Dallas Morning News

Remember buy low, sell high?

Well, it may be in for an unusual twist. Selling shares of common stock and buying the consumer goods we want may be one of the smartest things we could do. Stocks are high; everything else is cheap.

A good number of Americans are starting to notice that their stocks have become so valuable, their incomes so comfortable, that it seems that just about anything is within reach.

We are talking about people whose pensions are well-funded. Who maxed on their qualified-plan contributions years ago. Who have paid off their mortgages. Who have written the last tuition check. And who bought their last car with cash. We are talking about people whose checking-account balances seem to rise no matter how casual they get about spending.

Oh, they may not be rich in the "Lifestyles of the Rich and Famous" sense. Few have limousines, private jets, multiple houses or stables of racehorses. But they do have more than enough current income to meet their needs and more than enough in investments to see them through retirement.

And now, with the market possibly at a short-term top, maybe now is the time to take some profits and enjoy them.

OK, but how? Consider the plummeting relative value of houses, yachts and other goodies:

* First, what this doesn't mean. Sometimes value is simply plummeting in dollar terms. This is something we understand easily. There is the story of a man who in 1987 invested his reported life savings of $1.25 million in a 1971 Ferrari Daytona Spider. He believed its value could only increase because the car would never be made again. It is now worth $155,000. That's a loss we can understand.

* Other things are plummeting against the value of stocks, yet their prices are flat to rising in dollars. That is something we don't understand very well. Investments, like floating currency exchange rates, have relative value as they rise or fall.

A year ago, for instance, I noticed that the "exchange rate" between houses and common stocks had fallen in 1995 to the lowest level ever recorded. Whereas the median dollar price of a U.S. house had nearly doubled from $62,200 in 1980 to $112,900 in 1995, its value in terms of common stock had fallen by more than 60%. That's because stock values rose faster than house values.

*

Well, guess what? Houses are still relatively cheaper today (see chart). So are other things.

So does this mean that it might be prudent to buy a second home? How about a TV set? A stereo? A computer? A car? An airplane ticket? A luxury watch? An expensive meal? A sailboat? All are dirt cheap if you use your recently boosted stock to buy it.

Although our prudent friends in the investment community exhort us to save and invest more to avoid future indigence, it's just possible that the smart thing to do is peel off a few of those highly appreciated shares and exchange them for something that's fun. After all, what's it for, anyway?

*

If stocks are overvalued, as many worry, a sale today could be a timely purchase, because that $30,000 sailboat could look like a real deal if the stock you sold to buy it with plummets to $20,000. Similarly, if stocks continue to rise, you'll miss some of the appreciation, but in a sense you'll be more diversified.

And you'll have a whole lot more fun.

(BEGIN TEXT OF INFOBOX / INFOGRAPHIC)

More House for Less Stock

In terms of shares of common stock, homes have become cheaper. This chart divides the median U.S. home price by the broadest index of U.S. stocks to arrive at a ratio of house-to-stock value. In other words, in 1980 a house was more than 50 times the value of the index's basket of all stocks; now the house is less than 14 times that value.

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Median Wilshire House/stock Year home price 5,000 index exchange rate 1970 $23,000 830.3 27.7 1980 62,200 1,220.7 50.9 1985 75,500 1,923.8 39.2 1990 95,500 3,187.3 30.0 1995 112,900 6,057.2 18.6 1997 123,700 8,946.5 13.8

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Sources: National Assn. of Realtors, Statistical Abstract of the U.S.

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Scott Burns writes for the Dallas Morning News. He can be reached at scott@scottburns.com, or at his Web page at http://www.scottburns.com

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