Should you jump in now? page 2

However, that doesn't mean that the U.S. stock market is risk-free. Far from it. No matter how cheap stocks may look, they can grow significantly cheaper. The classic example: Warren Buffett, the best investor of our time, who issued a buy recommendation on the U.S. market in an Oct. 16 New York Times op-ed article.

Standard & Poor's 500 closed at 908 the day before Buffett's article appeared and subsequently fell as low as 741. It's 871 as I write this. (Disclosure: Rodriguez's mutual funds and Buffett's Berkshire Hathaway (BRK-A) are two of my family's biggest investments.)

The unstated assumption behind what Buffett and these other folks are saying is that you must have the stomach and financial resources to survive declines, possibly very steep ones.

Let me elaborate. You need to have staying power. Don't borrow to buy stocks. Don't use your eating money or next year's college tuition money to buy stocks. Don't bet on having a much better year financially than you're having now unless there are special circumstances, such as being a medical resident about to become a practicing physician. Invest only money that you can afford to tie up for years, if not decades, and that you can afford to lose.

And now to houses, which are much trickier than stocks. That's because while you can buy a piece of the whole U.S. stock market through an index fund and thus diversify your risk, you can't buy a piece of the total U.S. housing market. You can buy only a house - and you have to take on a lot of debt to do it, which in itself increases your risk.

Nationally, house prices on average have begun to look reasonable for the first time since 1999, when the housing bubble began. The steep drop in home prices has made them relatively cheap in terms of rent and family income.

Those relationships matter because when prices are rising much more rapidly than income (the case until last year), more and more people get priced out of the market. So in order to play the game, buyers and their lenders have to take on idiotic risks - option ARMs, anyone? - that ultimately make buyers and lenders look like idiots.

The National Association of Realtors affordability index (the median income divided by the median mortgage payment) has risen to 1.42 from 1.08 in 2006, the height of the real estate bubble. That means that the median household income is 142% of the median mortgage payment, up from 108%.

This index assumes a 20% down payment and doesn't cover real estate taxes, insurance, or other homeowning expenses. Thus "affordability" is in the eye of the beholder (or mortgage lender). But the trend is what matters, not the specifics that the index measures.

Then there's the index kept by David Wyss of S&P. It shows that the ratio of average house prices to average income has dropped to about 2.45 from 3.41 in 2006. That means houses are becoming cheaper relative to incomes.

Finally, there's the rent-own index by Louis Taylor of Deutsche Bank, which compares the cost of renting a home with the cost of buying it. Those numbers are starting to reach the point where house prices may be supported by people who buy them to rent them out.

But just because those indicators are improving doesn't mean that buying any house in any market is a good deal. A lot of people tried doing that during the great housing bubble and got burned. House markets are intensely local, even though mortgage financing is national.

When I talk about buying a house, I'm talking about making a serious down payment - call it 10% or 20% - and borrowing the rest at a fixed rate for 30 years. You accumulate that down payment by living below your means and saving. You can probably buy with less money down, but the less you put down, the more you have to borrow, and the bigger chance you're taking.

So there you have it. If you've gotten this far, I hope that you're more confident thinking about houses and stocks. They may well be cheaper when the 2010 Fortune Investor's Guide rolls around than they are now.

And if you buy conservatively and have staying power, I think you'll feel a lot more optimistic than you do now when you read the 2016 issue.

Looking for guidance in navigating these choppy markets? Let us know which topics you'd like us to cover and we'll try to address your questions in an upcoming Investor Daily. Please note: Fortune cannot give personalized advice on specific investments in your portfolio. 

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