Stock Market Armageddon Returns!

Duck Of DeathAround 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.

Updated on 12/1/2014. The bull market is alive and well. Don’t forget to rebalance and manage your risk exposure. Everybody feels like a genius during good times.

Photo: Duck Of Death, Ewa Beach, Hawaii, SD.

Regards,

Sam

Sam started Financial Samurai in 2009 during the depths of the financial crisis as a way to make sense of chaos. After 13 years working on Wall Street, Sam decided to retire in 2012 to utilize everything he learned in business school to focus on online entrepreneurship.

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Comments

  1. says

    Liked the post until the structured product part. While not knowing any of the details these instruments automatically raise a red flag. Depending upon the nature and the structure you could be incurring excessive fees, a guarantee that is really an unneeded ceiling on potential gains, and debt exposure to the issuer. Again I don’t know anything about the instruments that you are using.

  2. says

    I’m slowly buying. A smart man once said, “buy the fear, sell the greed.” I lean more towards value investing, buying low P/E companies that have a good business model and a solid Forward P/E. Adding fear into the market makes the companies I want to buy even cheaper. Nothing wrong with that. As of now you should be happy with your Gold stocks, gold is up $50 just today.

  3. says

    Sam,
    Stellar post as usual.
    I’ll be willing to bet that Obama will win again. I always appreciate another betting man, however in this instance we’d be betting for the same thing, so the point would be kinda mute. Here’s $1,000 on Obama.

    As for the stock market…thankfully I don’t have any stocks yet, but the few MFs I own are getting hammered. If I did own stocks now (or for the past 2 months), I’d definitely be a buyer, while staying pat on what I currently owned.

    I like your take on dividend investors…quite funny actually! :)

  4. says

    I realized a long time ago, I cannot control or time the market. I keep on dollar cost averaging into the market ieven in these shaky times. Luckily, I am not retiring now nor entirely depending on my investments as income in retirement.

  5. San Diego says

    Im right there with you Sam. I sold off my 401k at the peak of the market after moving jobs but then shortly after rolled it over to an IRA and invested in a managed mutual fund account. Im down about 8% so far. Why didn’t I wait to reinvest after liquidating my 401k? I was optimistic and thought that the economy was on the rebound plus I wouldn’t be touching the money for 35+ years so current market conditions were of little concern to me. If I were to do it again I would dollar cost average the investment over the year instead of an all in approach but Im young and can afford to take risks and learn along the way. Long term Im investing in land and building a hobby farm…seriously. I want to be able to support/feed myself and my future family irregardless of how much money is in the bank account. I had a professor in my MBA program that stated that he would only invest in FDIC insured products because stocks were too risky and akin to horse racing. I thought that my professor was overzealous but now Im starting to feel that slow and steady gains win the race so to speak. I have learned a lot this year and hope that I at least break even on my retirement investment by the end of the year which is totally possible in 6 months but I might be overly optimistic as I foresee shit getting worse in Europe as the Greeks make a run on the banks…

  6. says

    With no money to invest (I’m in the red), I am just looking at my Roth IRA and 401k go down right now. I’m not sure what I’d do if I had monthly income to invest. Probably chalk it up to dollar cost averaging and keep investing the same amount into whatever vehicle I had chosen. I am only 26, so the market fluctuations don’t bother me much.

      • says

        I agree that I should have a bit more of a sense of urgency about these things. Honestly, I’ve $500 short a month on the budget, so investing now is impossible. My main hustle is to create more income streams just to make ends meet, then look at investing as soon as possible after that. I’ve been perusing some dividend blogs and the CPA I work for is an active investor (seems to be doing quite well) so I hope to glean from him. I have about 20k in cash to help me survive until I get my income up, but once I do, I’ll be looking at putting some of that coin into the market.

  7. Jonathan says

    Real Estate! I wouldn’t touch the financial markets with a 10-foot pole (other than the fact that we’re leaving my wife’s mutual funds to do what they will). Partly this is because I don’t have the patience to learn how to evaluate stocks, and partly because there are just such good deals available in real estate with the combinations of low prices, insanely low financing rates, and rising rents. We’re saving up to buy one more rental house before calling a time-out to build up a $50k cash cushion for starting a family.

  8. says

    It’s killing me that I had to shell out $3k on car repairs during this slump. I’d love to have put that money into investments instead. I’m only 26, so slumps are a great opportunity for me to get a great deal on funds and stocks that I won’t need for quite a while.

  9. says

    I’m continuing to dollar cost average because I have 40ish year until retirement. I consider these times as a great discount but I know others who are closer to retirement should definitely be worried.

  10. James says

    I too was hoping others would be greedy. I think the word for that is hubris.

    I can certainly see why dividend investors say they don’t care what the market does. If you plan on never withdrawing money from the proverbial nut, you shouldn’t care. Things get scary when payouts change – then one might actually care about market value. Much like renting out real estate when prices crash but rental income stays roughly the same.

  11. says

    I’d consider going in on a partnership for buying farmland in the midwest if such an investment exits. If not let’s figure out how to structure one.

  12. BusyExecutiveMoneyBlog says

    FS, I put 20% of my entire 401K that’s been parked in cash since early May back in the market in a simple S&P 500 index. Today’s downdraft smelled of panic selling, but not of capitulation. What that tells me is that there may be a violent snap back rally of a few % and then another painful leg or two down as more bad data appears. If we get a snapback…I’ll book those gains and go back to cash and wait. If not, I’m comfortable with that 20% in lower than when I pulled it out. For the rest of my taxable assets, I’ve left them right where they are. I’m not interested in creating a bunch of tax events while in this spin cycle.

  13. BusyExecutiveMoneyBlog says

    I will also add in the spirit of full disclosure that I’ve been looking at couple of long-term unloved value stocks. I don’t like individual stocks as it becomes too emotional, but I must admit a couple of names are ridiculously cheap. No moves though…picking stocks is universally hard.

  14. greg says

    I’m currently pursuing financial independence and am in the early stages, so this could be my lucky break! If I suck it up and buy value in a bit, things can end up quite well … I ironically was a bit pessimistic about my high bond allocation until the past few days =P. There’s definitely a good amount of reason behind sticking with one’s plan if it was thought out beforehand instead of doing anything rash.

  15. Mike says

    The good news is didn’t lose any money in the stock market. The bad news is I don’t have the cash to go investing. Spending it all on getting a higher degree to find a job.

    Good lucky to those who got massacred today in the stock market casino.

  16. Permanent bear necessity says

    Hey dude….like the post.

    I went 40% stock/60 cash from dec-march …went to 95% cash end of April and decided to buy outs on consumer Internet about 4 weeks ago with deep out of money puts for shits and giggles…not giggling now as it went in the right direction and not so deep out of money now.

    May return 3-4x on this when said and done which would add 10% overall return to my stock portfolio on a net basis… But then again I am a RE guy as you know and only 20% of net worth is liquid. Keep buying the MP real estate folks…….come on FB hold up please. RE appears to be one of the few assets that will hold up in this massacre. I think things reverse once Romney is elected and budget ceiling is resolved…min 10% bump by q4.

  17. says

    I have about 75% of my net worth in the stock market so I’m not doing very well either. But I plan to dollar cost average on my way down, even if it means borrowing money if I run out of my own. My reasoning is every consecutive time the S&P 500 drops there’s an increasing chance it will gain it back some day in the future. So I’m buying in every time it drops by 50 points.

  18. says

    sam,

    i have next to nothing invested in the stock market. easier to generate higher returns for investments which i have more control over returns. have you looked into hard money returns. easy to get 8-10% annual returns. basically loans secured against 50% FMV of real estate. i dont see real estate dropping >50%. if they did, everything else you have invested would be down greater.

  19. Darwin's Money says

    I just leave long-term retirement money (most of my stock investments are in 401k/IRA accounts) 100% equities for decades. Chances are that will match or beat most actively managed portfolios, especially by focusing on fees.

  20. says

    My 401k/Roth IRA is about 90/10 right now and I’ve had it for 3 years so I’ve seen some pretty big ups and downs and it really hasn’t bothered me. I’m maxing out 401k and Roth IRA so although my portfolio isn’t doing amazing right now, every two weeks I’m seeing an increase in my overall portfolio.

    For younger investors, I think it’s important to focus on the rate of savings. Once you have that locked in, you can start worrying about what funds/expense ratios to invest in. If the guys who do it for a living can’t predict the market, why should I think that I can? I invest all my after tax money in real estate instead of stocks.

  21. says

    Buy, buy, buy!

    I’m still in the early stages of my investing journey, so I’m trying to use opportune times like these to purchase discounted, dividend growth stocks. If the market drops some more, I’ll buy some more. I’m just trying my best not to run out of funds in the process…

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