Around 30% of my net worth is getting hammered right now because I’ve got 30% of my net worth invested in the stock markets. I jumped “all-in” for my remaining 30% of my 30% when the S&P 500 sold off to 1,295-1,300 in May, and here we are at ~1,280 during the writing of this post. The Dow has wiped away all of its gains for the year thanks to a slowdown in China PMI, continued European stress, and a dismal May jobs report where the US only added 69,000 jobs. Economists were expecting around 120,000.
Why didn’t I just follow through and accept a 13% return for the year after selling almost everything in March?
Greed and hope. I hoped others would be greedy! After all, it’s an election year and we’ve got Bernanke! But now, everybody is just scared of the duck of death.
My 401K is now up only ~5% (after estimating a 1.8% drop after today’s close) for 2012 and even though its outperforming the broader market, I’m not happy. ~32% of the 401K is in gold related stocks and I’m just hoping at least that portion holds up. It perturbs me how with the 10-year bond yield at 1.45%, we’re turning into Japan!
With the risk free rate at 1.45%, I’m willing to invest in every other asset class besides US treasuries. It just doesn’t interest me to return 1.45% a year for 10 years, even if it is guaranteed. Heck, you can buy a 7-year CD from Bank of America right now for 2.3%, and completely arbitrage the returns!
The fact that 7-year CDs are yielding more than 10-year Treasuries means the market is in full blown panic mode and we should be putting capital to work.
I’m worried just as much as the next guy, which is why I’m going the structured products route which provides principal guarantees or downside buffers in exchange for locking up my money for a certain period of time.
IN VIOLENT DOWNTURNS CONSIDER THE FOLLOWING
* How do you feel about losing money? If the answer is “gut-wrenching”, then perhaps your risk tolerance is not as high as you thought, and you should lower your exposure to the markets. If your answer is “It feels so good, baby!”, then perhaps you are short, or should consider investing everything you’ve got.
* If you lost it all, would you still be OK? If the answer is “no, I will be begging on the streets”, then perhaps you’re over exposed. I’m willing to lose 30% of my net worth hence my allocated exposure. It will be painful to lose it all, but I’ll manage. The remaining 70% is split roughly evenly between 4% yielding CDs (love you guys), and real estate (making a comeback!).
* Do you have excess liquidity to put to work? We’ve seen the markets snap back time and time again. Nobody knows when, but the odds are in your favor that they will. We’ve got a President who is trying to get re-elected, Bernanke whose got an unlimited supply of money to print, and inflation, the most powerful force in the universe.
* Reassess your long-term goals. If you’re young, good looking, and employed, you’ll be fine. If you’re young, beautiful, but unemployed, perhaps not so much. If you’re old, unemployed, and unattractive, well then I guess there’s always the lottery and divine intervention! When things go wrong, you’ve always got the excuse of thinking “long-term”.
* Do you have your health, family, and friends? Money comes last in this equation. Whenever I lose tons of money, I notice that I tend to exercise more, eat better, and spend more time with loved ones. Perhaps it’s because money lost reminds me of what’s most important in life. Or perhaps when I lose money, the last thing I want to do is think about money.
* Is making 2% better than losing 10% and making 4%? Huh? Dividend investors love to say, “It doesn’t matter what the market does, I’ve still got my dividends! I’ll just buy more!” That’s fine if you’ve got an endless pit of money to put to work, but simple quantitative reasoning suggests that making 2% is better.
SO WHAT AM I DOING?
I’m “dollar-cost structured producting“. In other words, I plan to farm out the free liquidity sitting in my money market accounts and buy the stock market through a structured product once a month. The first is the 100% principal protection guarantee with a 0.5% annual coupon and 115% participation to the upside of the Dow Jones over 6 years. The second is the 10% downside buffer and 2X upside to the S&P500 up to 25% for 2 years with 0% coupon.
This is additional money to my 401K, which means my networth exposure to the stock market will increase from around 30% to 40% over the coming 12 months. I’m highly allergic to losing money because it has taken so long to build up the nut. I’m willing to lock up my money and even some upside to know that the money will still be there in the future.
INVESTMENT PLATFORM RECOMMENDATION
Invest In Ideas Not Stocks: Motif Investing is a terrific company based right here in the San Francisco Bay Area. They’ve raised over $60 million dollars from smart investors such as JP Morgan and Goldman Sachs because they are innovating the investment landscape with their “motifs.” A motif is a basket of 30 stocks you can invest in, which are aimed to profit from a specific idea or underlying theme. Let’s say you think new housing construction is going to quicken in the US next year. You could buy a housing motif which might contains Lennar, KBH, Home Depot, Bed, Bath, and Beyond, Zillow, and more in various weightings.
You can buy a basket of 30 stocks for only $9.95, instead of buying them individually for $7.95 through a typical broker. You can build your own motif, buy one of the motifs created by Motif Investing, or buy a motif by a fellow Motif Investor with a great track record. You can even buy retirement motifs, much like target date funds, except you don’t have to pay the 1% management fee. You get up to $150 free when you start trading with Motif Investing. Given my focus on buying winning long-term ideas and ignoring the short-term volatility, I really like Motif Investing’s value proposition for retail investors.
Invest With A Low Cost Algorithmic Advisor: Wealthfront is an excellent algorithmic advisory choice for those who want the lowest fees and can’t be bothered with actively managing their money themselves once they’ve gone through the discovery process. In the long run, it is very hard to outperform any index, therefore, the key is to pay the lowest fees possible while being invested in the market. Wealthfront charges $0 in fees for the first $10,000 and only 0.25% for any money over $10,000. Their minimum is only $500 to get started. Invest your idle money cheaply, instead of letting it lose purchasing power due to inflation.
About the Author: Sam began investing his own money ever since he 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 working at Goldman Sachs and Credit Suisse Group. 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 34 largely due to his investments that now generate roughly $150,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.
Updated for 2016 and beyond.