The 2012 predictions turned out to be surprisingly on track with Obama’s victory, a 13% increase in the S&P 500, and a collapse in the social media sector. If you want to know how to become a better negotiator, study how the Democrats decisively outmaneuvered the Republicans into accepting $1 of spending cuts for every $41 in tax increases to avoid the Fiscal Cliff.
Making predictions is an academic exercise that helps provide a framework for building wealth. It’s important to put your biases aside and make reasonable predictions about the future in order to optimize your asset allocation.
Creating wealth becomes much easier if you can begin to consistently outperform even by a couple percent over the long run. Imagine being so against President Obama that you decided to keep all your wealth in 0.1% interest producing savings accounts rather than invest in stocks. You would have missed out on 10-15% gains!
For 2013, I’m keeping things simple because I really only care about the stock market, the real estate market, and interest rates as it pertains to lower risk investments. My net worth is still split quite evenly between the three. Furthermore, I’d like to offer up some thoughts on a couple popular stocks everybody likes to talk about, as well as highlight my own goals.
GENERAL PREDICTIONS FOR 2013
* The Stock Market Recovery Slows Down. If you analyze the budget proposals between Democrats and Republicans, you’ll find they are actually quite similar. In other words, it’s all been a bunch of political grandstanding. We know that raising taxes will do very little to reduce our budget deficit given we have a spending problem. That said, the new $400,000/$450,000 single/couple income threshold provides a nice moral boost for those living in high cost of living areas.
With the agreement, individuals, small business, big businesses, and notably banks will feel more confident about investing again. As a result, the S&P 500 climbs 8.8% to 1,551 in 2013 (vs. a 13% 2012 increase). 8.8% is a 5.5X return over the US risk-free rate. This is huge outperformance and puts us at the highs reached in July 2007. For reference, the S&P 500 closed the year valued at around 16X FY2012 earnings, with a 2.25% index yield. Consensus has earnings growing by roughly 18% to put the S&P 500 at around 14X FY2013 earnings vs a historical average of around 14X-15X. I’m bullish on gold hitting $1,800/oz (7.3% increase) and oil hitting $103 (12% increase) by year-end or sometime during the year.
If your portfolio is up over 9% early on, take some profits. Congress still has to negotiate a debt ceiling and budget by late February/early March. There’s also the sequester issue. If we can get through the first half unscathed by politics (grand agreements), then look for 1,600+ on the S&P.
* The Bond Market Stays Strong. You’d think that with the 10-year Treasury only yielding ~1.7%, investors would move out of bonds and into riskier assets such as stocks. The S&P 500 dividend yield is roughly the same after all. The fact is there’s been a 30 year bull run in the bond market which has entrenched investors for the rest of their lives. Financial attitudes are hard to change, and I do not foresee a cascade of selling to chase stocks which have burned investors multiple times in the past 15 years.
Central Banks around the world have committed to pumping as much liquidity into the system to keep rates low. There’s no point in going against the omnipotence of the Federal Reserve. They aren’t just providing moral suasion with their announcements, they are actually pumping $45 billion worth of new money every single month into the economy and won’t stop until unemployment breaches 6.5% in the US. The 10-year yield end below 2%, and ends the year at 1.6% for a total return of only 5%. The obvious action is to refinance your mortgage if you haven’t done so in the past 12 months.
* Housing MANIA Ensues. There’s been five years of pent up demand from renters who want to buy a home, but were either too afraid, too unsure, or just always a day late and a dollar short. Meanwhile, new housing construction figures have been below average, while population has continued to grow. With 30-year mortgage rates under 4%, and 5/1 ARMs under 3%, we’re setting ourselves up for the return of housing mania. It’s not a coincidence I received a free mortgage loan modification from Bank of America via FedEX after the stock climbed 100+% in 2012. We’ll see whether this offer of a no-cost 1.625% rate cut is too good to be true in another post.
The San Francisco housing market is one of several leading indicator cities for the national housing market. I’m frequently attending open houses and tracking homesales to get a feel of what’s going on. One house listed for $1.99 million this fall after the owner put $150,000 in remodeling. He got multiple offers with a final sale price of $2.4 million (bought for $1.1 million in 2004). The more amazing thing is the new owners gutted the place and are now spending $500,000 in new upgrades over the next six months!
Housing always overshoots on the downside and the upside. Just when you finally want to buy (which should have been in 2010, 2011, 2012), everybody else wants to buy. This is the rule of the herd and why you need to invest a little contrarian to outperform. Real estate and financials will continue to do well. If you’ve been thinking about buying, I’d run the numbers immediately and start hunting before competition gets out of control.
THOUGHTS ON GOOGLE & APPLE: TWO STOCKS PEOPLE LOVE TO TALK ABOUT
* The Return Of Google. Google is probably one of the most talked about companies in the online community given its monopoly-like power to make dreams come true for entrepreneurs everywhere. There are countless examples of web-owners who see massive drops in revenue due to a sudden 50-75% decline in search traffic on algorithmic changes. The opposite can be said for those who produce the best content. It is pretty scary if you rely on online income to survive!
Although Google’s stock ended the year at $707, you’ll be surprised to know the stock was only up 6.8% for 2012, underperforming the S&P500 by 6%. The stock has de-rated with a P/E ratio in the 30s several years ago to now roughly 22X as growth expectations slow. Behind the scenes, Google has been hard at work to make their search algorithms bring up the most relevant, high quality content as possible for its customers. I won’t go into detail about all their changes, but believe a webmaster when I say they have de-emphasized thin content from content factories who employ freelancers and focused on thick, juicy content written by more authority figures. As a result, I expect Google to attract even higher advertising rates and more advertisers at the margin.
Google isn’t a top stock pick due to potential other headwinds such as the rise of Yahoo, Bing, and potential anti-monopoly inquiries by governments around the world. That said, I do believe Google will outperform the S&P 500, which is currently predicted to rise by 8.8%.
* Apple Tastes Fine. People think the world is ending for Apple after falling from a high of $700 down to $532. If providing a 31% return in 2012 is bad, then I hope we can all have bad returns for the rest of our lives! The more pertinent question is whether Apple is a buy in the low $500s. Despite the almost 5% pop on the last day of trading, my answer is yes. At 12X trailing P/E, and under 10X if you strip out cash, it’s hard to not see value in Apple as it ramps up its product cycle.
We know Android’s penetration into lower end consumer markets is forcing Apple to follow suit and accept lower margins for lower priced products. There’s been management uncertainly with Tim Cook and the firing of his chief lieutenants after the Google Maps debacle. We also realize that when you reach a $500 billion market cap, it becomes harder to grow at a 20%+ clip a year due to the law of large numbers. I think Apple will hit $600, a 12% rise in 2012. The consensus earnings growth rate of 13% for Sept 2013 and 18% for September 2014 look realistic and beatable.
PERSONAL GOALS FOR 2013
* Live Free. Although retiring from corporate America in the summer of 2012 allowed me to travel freely, I decided to take a moderate approach instead due to the unknown feeling of no longer having a paycheck. I planned for two years before my leap, making sure my passive income from real estate, stocks, bonds, and CDs was enough to support my existing lifestyle. My negotiated severance package equaling roughly six years of living expenses was also a fantastic kicker. That said, I’m risk averse when it comes to huge life changes.
Now that I’ve given myself six months to experience no day job income, I’m more confident than ever to relax a little more. Ever since the ninth grade when a senior told me not to mess around because grades accumulate in high school (unlike in middle school), I’ve been determined to become self-sufficient. Now that I’m financially independent 21 years later, I’ve got to stop being so afraid to live it up. Instead of traveling for seven weeks a year like in 2012, let’s go for 10 weeks. Instead of only ordering water with a lemon for lunch, let’s go for that $6 fresh coconut water please. Part of living free is also detaching myself away from all the noise that goes along with having an online presence, namely social media.
* Bring The Family Closer. My immediate family all live 5+ hour flights away. Now that I’m free, I plan to visit all of them more regularly in 2013. My parent’s two week visit this past December helped achieve my goal of seeing them four times a year. Perhaps we can kill two birds with one stone by all taking a two week cruise somewhere nice. Finding harmony is difficult, but important. I plan to leverage my finances, the internet, and our shared interest for travel and writing to keep our relationships healthy.
* Grow Net Worth Faster Than The S&P 500. It’s one thing to have the stock portion of your net worth outperform the S&P 500, it’s another thing to have your total net worth outperform the index. I can reach 8.8% overall growth if stocks and real estate (~70% of my net worth) grow faster than 11% to make up for my bonds and CDs (30% of net worth) which will only grow by around 4%. The cash on cash return in real estate should do very well in 2013 as housing fever spreads. I’m also going to work on my X Factor, which is currently not part of my net worth.
* Put My Finances On Autopilot. I started Financial Samurai because I deeply cared about my finances in 2009. It was disconcerting to see years of savings disappear so quickly, which is why I made it a goal to track my finances more carefully. I’ve been using an Excel spreadsheet with over 50 line items to track all my expenses, assets, and liabilities manually for the past three years. I still enjoy keeping on top of my finances, but I want to spend less time focusing on the nitty gritty since my spending, saving, and investing patterns are pretty set. Instead, I’ve inputted all my accounts with Personal Capital and am leveraging free technology to track my net worth and tell me where I can be saving or investing more.
My goal is to spend less time on my finances so I can spend more time traveling and being with family. To care less about your finances, you first have to care a great deal about your finances. I’ll write a dedicated review post about Personal Capital in the future. If you want to learn more, you can click this overview post I put together.
* Smile Much More. When I was younger, a friend of mine nicknamed me, “Smiles” because I would always be smiling and not even know it. I’d walk by strangers on the street who would always weirdly smile back. I realized it was because I was beaming a huge smile at them that they would always reciprocate. As I entered into the real world of work, bills, graduate school, and financial responsibility, I think my smiles have faded. I’d like to regain this natural disposition and spread some cheer. Ever notice how the Dalai Lama is always smiling, no matter how he’s being photographed? I’d like to be more like him.
ONE LESS YEAR IS ONE MORE YEAR
Yin yang is inescapable. We have the power of free will, which allows us to move towards something greater. I look forward to hearing about your predictions and your thoughts for 2013.
Recommendation For Building Wealth This Year
Manage Your Finances In One Place: The best way to build wealth is to get a handle on your finances by signing up with Personal Capital. They are a free online software which aggregates all your financial accounts in one place so you can see where you can optimize. Before Personal Capital, I had to log into eight different systems to track 28 different accounts (brokerage, multiple banks, 401K, etc) to manage my finances. Now, I can just log into Personal Capital to see how my stock accounts are doing, how my net worth is progressing, and where my spending is going.
The best feature is the 401K Fee Analyzer which has saved me over $1,000 a year in portfolio fees I had no idea I was paying. Personal Capital takes less than one minute to sign up and is the most valuable tool I’ve found to help people achieve financial independence.
Be your own boss: It’s been over six years since I started Financial Samurai and I’m actually earning a good passive and active income stream online now. The top 1% of all posts on Financial Samurai generates 31% of all traffic and revenue.
I never thought I’d be able to quit my job in 2012 just three years after starting Financial Samurai. But by starting one financial crisis day in 2009, Financial Samurai actually makes more than my entire passive income total that took 15 years to build. If you enjoy writing, creating, connecting with people online, and enjoying more freedom, see how you can set up a WordPress blog in 15 minutes with Bluehost.
You never know where the journey will take you. In 2015, I fulfilled a bucket list item by visiting the ancient temples of Angkor Wat in Cambodia, while stopping over at the DMZ in Korea, and attending a friends wedding in Malaysia. Starting this website is the best career/ lifestyle move I’ve ever made.
About the Author: Sam began investing his own money ever since he first opened a Charles Schwab brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college on Wall Street. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate. He also became Series 7 and Series 63 registered. In 2012, Sam was able to retire at the age of 35 largely due to his investments that now generate over six figures a year in passive income. Sam now spends his time playing tennis, spending time with family, and writing online to help others achieve financial freedom.
Disclaimer: These predictions and thoughts are my own. Please make your own investment decisions or consult a financial advisor.