The first stock market meltdown I ever experienced was the 1997 Asian Financial Crisis. International college students from countries like Korea and Indonesia had to drop out because the Won and Rupiah depreciated so much, making tuition unaffordable. Construction cranes stopped moving in Bangkok and the IMF had to bail out the entire region. Of course some people made a killing in the downturn when they swooped up assets for pennies on the dollar. But most people lost their shirts.

Then when things really started getting good again in 1999, the NASDAQ collapsed in the Spring of 2000. I only experienced one brilliant year of mega exuberance after college before the floor fell out in March 2000. Many people in finance lost their jobs and then 9/11 happened. I remember seeing my stock portfolio go from $3,000 to an absurd $200,000 in six months, and then lose about $40,000 in a couple weeks when B2B stocks started imploding.

Where does all the money go? It’s all funny money! I remember thinking. Paper millionaires who exercised their stock options early and didn’t sell not only lost everything, they also owed huge tax bills as well. The government always wins. 

The markets in 2015 reached new record highs then corrected to close flat. 2016 has started off horrendously and the future looks very rocky in the stock market and real estate market.

The markets are currently in a transition period as the Federal Reserve is now on a rate hike course. I’ve taken the sanguine view that higher interest rates are a positive reflection of the economy due to rising demand for money. Interest rates don’t move in a vacuum.

Housing is the big question mark now. Will a 4.5% 30-year fixed mortgage rate start curtailing housing demand given the rate was 3.5% only a few months ago? Absolutely. Add on a 12% nationwide increase in housing prices year over year, and buyers are getting squeezed. If housing slows down so do the earnings for major lending institutions. You can see a cycle where layoffs occur if there’s a drastic slowdown causing a decrease in demand for credit that ultimately hits earnings some more.

What I suspect will happen is that greed takes over by both home buyer and financial institution. Home buyers will simply borrow shorter duration mortgages through adjustable rate mortgages to get a lower rate. I’m absolutely fine with ARMs as the spread between short and long duration loans is excessive. Unfortunately, we will inevitably see buyers borrow more than they can afford so hopefully everyone sticks with the 30/30/3 rule for home buying. Financial institutions will figure out ways for borrowers to get their loans and sacrifice credit quality to meet their numbers.

BUCKLE YOUR INVESTING SEAT BELTS!

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At long last stock market volatility returns due to rising interest rates and a collapse of oil in 2016. We’ve now seen a more than 60% increase in the risk free rate since its 2012 bottom and things are starting to get hairy.

Nobody knows whether rates will continue to move higher from current levels. However, it’s good to layout a what if scenario so we can be better positioned.

Rising interest rates do the following:

* Makes mortgages more expensive. You should check the latest mortgage rates now with LendingTree. They have the largest network of mortgage companies who compete for your business. When banks compete, you win!

* Makes car loans more expensive. One shouldn’t be borrowing money to buy a depreciating asset anyway, so all is good.

* Increases credit card interest rates to even more egregious levels. Nobody better have revolving credit card debt unless they are a financial masochist.

* Increases student loan interest rates, depending on what type of government subsidies you receive.

* Makes the stock market less attractive given the opportunity cost to own securities has increased. One of the main reasons why I aggressively invested in equities in 2012 was because the S&P 500 dividend yield was greater than the 10-year yield.

* Cools off the housing market as homebuyers are now hit with an increase in prices from a year ago and rising mortgage payments.

* Slows down consumption growth, which is the main driver for GDP growth in the Y = G + I + C + NI equation.

* Theoretically increases your savings rates and CD rates, but banks will move like molasses to adjust so don’t bet on anything great for a while.

* Leveraged buyouts will decrease at the margin due to more expensive debt financing.

* Makes bonds look more attractive given higher yields.

* Strengthens the US Dollar vs a basket of major foreign currencies.

* Makes you reflect on what’s next.

It’s important to realize that a rising interest rate environment often reflects underlying strength in the economy as the demand for money increases. Money demand increases due to better employment levels, higher wages, positive growth expectations and a host of other factors. It’s the short term adjustment, which which can be tricky to maneuver.

TIME FOR A GUT CHECK ON RISK TOLERANCE

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There’s one simple observation I’ve noticed in my journey towards financial freedom. Rich people make things more expensive for the rest of us. Given the supply of desirable necessities such as homes, schools, food, and even water is finite, the rich bid up prices far beyond what the middle class can afford.

I remember back in 1995 thinking $20,000 to go to a private university was ridiculous. Now such a private university costs $50,000 in tuition. Ridiculous again, especially with the internet providing so much free education now. Did the median salary increase by 125% in the past 18 years? No. The median wage actually fell 8.9% from its peak in 1999 to around $50,000 per household. That is a double ass kicking!

I remember wanting to buy a sweet two bedroom, two bathroom, double balcony condo in Manhattan with a view of the Chrysler Building and Madison Square Park for $720,000 in 2000. The problem was I only had one year of post college savings and stock gains under my belt and had to borrow about $50,000 to achieve a 20% downpayment. The cost of the 1,350 square foot condo is now roughly $1.7+ million dollars sadly enough. Just take a look at the price per square foot values of ultra high end property and you’ll see an increasing spread compared to the value of median priced property. Someone with enough money bought the place and is now that much richer as a result.

As my portfolio grew over time, I became much more risk averse with my investments. With the Asian financial crisis in 1997, the Russian Ruble collapse in 1998, the stock market implosion in 2000, and the mortgage market meltdown in 2008, it’s hard not to come away with a more conservative investment style.

Now that I’ve built up a livable passive income stream, I’ve gravitated more towards absolute return once again. So long as I don’t blow up the principal portion of my passive income stream, it’s risk-on. We should strive to outperform the competition, especially if we have the buffer to do so. In this article I’d like to discuss the various benchmarks you should consider using to measure your performance based on your wealth and risk tolerance.

FINANCIAL BENCHMARKS TO GAUGE PERFORMANCE

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