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.
REMEMBER WHY YOU WANT TO GET RICH
Most people start off investing with the simple goal of making more money with money. Eventually, your financial nut grows to the point where you start getting tired of the idea of just making money for money’s sake. You actually want to use your money for something. Which is good, because money should be earmarked for purposes e.g. kid’s tuition, early retirement, more free-time, charity, a room with a view, etc.
When a stock you are long goes from $10 to $100, you feel like a genius. Everybody is a genius in a bull market. The trick is to not really believe you are really a genius, but simply a financial engineer who carefully asset allocates his or her money in the most optimum way possible. By developing a methodical habit of re-investing your savings into your decided asset allocation model, chances are high that you will have more winners than losers over the long-run thanks to the tailwinds of savings, inflation, and demand.
When I saw $40,000 of my paper profits disappear into thin air at the age of 23, I came up with a promise. That promise was to turn funny money, vaporware, any type of lucky break, windfall, and unexpected stock market profits into something tangible. The only way I could make the tangible thing disappear would be to set it on fire or blow it up with a grenade.
Funny money is the medium by which one makes something from nothing.
Vaporware refers to companies who make nothing tangible, but who have hefty valuations because of expectations for future growth. Many vaporware companies are unprofitable and are just expecting investor sentiment to continue buoying them along until they can stand on their own two feet. Companies in the social media space are good examples of vaporware. Many people are getting super rich and I encourage those who are fortunate enough to profit from this space to diversify into physical real assets.
COMMON REAL ASSETS TO BUY
1) Real Estate. Property is the most logical real asset to buy with funny money when you first start out because you are likely renting an apartment unless the Bank Of Mommy And Daddy hooked you up right after college (more common than you know). One of the main problems with real estate is that real estate limits mobility. Make sure you know with high certainty that you will be there for at least five years because transaction costs are still egregiously high at 5-6% of selling price.
I do believe the best time to buy property is when you can afford it. Once you’ve bought your first property, you can consider investing in other income generating properties. But at the very least, try and be neutral the property market by owning your own home. Check out my Real Estate Category for more.
2) Precious Metals. Gold and silver can grow in value and act as a hedge against a decline in the US Dollar due to government upheaval and periods of war. Unfortunately, precious metals provide no tangible value, don’t produce any income, and are not very fun to own, unless you are talking fine jewelry and watches.
The below chart shows that Gold has been a dog of a performer compared to the S&P 500 over time. However, notice how Gold really started to rise since 2000 (internet correction) and 2008 (financial crisis). Once the Federal Reserve started cutting interest rates aggressively and pumping lots of dollars into the system, Gold became a relatively more valuable commodity. But if you look at CPI adjusted returns, gold really started losing out to stocks in 1991. Own precious metals if you think doom is on the horizon.
3) Valuables & Collectibles. Classic cars, coins, and stamps have all outperformed the MSCI World Index over the past 10 years according to The Economist’s chart below. The prices for Van Goghs, Warhols, and Vermeers have done well thanks to fixed supply and a massive creation of the newly rich from countries such as China. Once you buy your mega mansion, you’ve got to decorate the walls. Besides insurance, there’s little maintenance costs for fine art, just the initial frame, setting, and security details. When you can visibly enjoy your investment everyday and make money from it, what a joy.
Not buying fine art is one of my biggest regrets because I thought I couldn’t afford it. I was naive to think that buying fine art meant just buying an original. The reality is that the entire chain of fine art from originals to third edition prints have rose in value. The only thing I collect are ancient Chinese coins and stamps. But I collect coins and stamps because I enjoy them. I love to flip through my collection and attend coin and stamp fairs when I have time. There’s just something about owning a piece of memorabilia that’s so fascinating.
4) A Cash Cow Business. Owning a cash cow business not only generates an additional income stream, it also allows you to deduct your ongoing expenses. Relevant travel, lodging, transportation, electronic equipment, and meals can all be expensed, thereby reducing your tax bill by your marginal tax rate. Of course not all businesses are created equal, and there is plenty of risk in buying a business, so do your due diligence.
I believe everybody should start a website today. In my biased view, running an internet business is the best business in the world due to high margins, low capital expenditure, a huge potential demand curve, scaleability, and good flexibility. When buying a business think about potential for margin expansion, sustainability of earnings, defensibility of the business model, and payback period to name a few. You can register a domain and get hosting via Bluehost for under $4/month today. It was the best decision I ever made back in the summer of 2009. Nowadays, my business is generating tens of thousands of dollars a month.
Common Theme: Buy Experience-Generating Machines. Whether you buy a vacation property to enjoy with your family, a Degas to hang on your living room wall, a Patek Philippe rose gold watch to wear everyday to work, or a lifestyle business that generates 50% operating profit margins, make sure that all your purchases have the ability to also generate wonderful experiences. We already know there’s a good chance such assets will appreciate over time. But experiences tend to appreciate even quicker in value than real assets.
YOU CAN’T GET RICH DEPENDING ON LUCK ALONE!
There has to be meaning towards the money you accumulate in your savings accounts and investment portfolios. The goal is to find a real asset that has meaning to you because luck tends to run out. How many times are you really going to inherit $500,000 from your Aunt Sally? Once. How many times are you going to make large year-end bonuses until you burn out? Maybe only a handful of times. How long will you enjoy an incredible bull market before there’s another violent correction? Maybe seven consecutive years if you are truly fortunate.
If you’ve ever gone to a casino and gambled, you’ve likely experienced two things:
1) The stupidity of making a lot and then losing it all.
2) The absolute joy of walking away with a profit and turning the funny money into something that lasts.
We can’t get lucky all the time, even for those of us who work obscenely hard to try and create our own luck. Not only that, there’s a tendency to sometimes go crazy when we receive an unexpected windfall.
Convert luck, funny money, and windfalls into real assets. The real assets might not last forever, but they are a great way of diversifying your good fortune into something more. I’m currently using my online business income to pay down a rental property mortgage and look for new property as well. I’d like to one day look back when I’m 70 and say that my rental property was paid for with online business funny money before I ran it into the ground!
RECOMMENDATIONS TO BUILD WEALTH
Manage Your Finances In One Place: The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform 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 25+ difference 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 and how my net worth is progressing. I can also see how much I’m spending every month.
The best tool is their Portfolio Fee Analyzer which runs your investment portfolio through its software to see what you are paying. I found out I was paying $1,700 a year in portfolio fees I had no idea I was paying! They also recently launched the best Retirement Planning Calculator around, using your real data to run thousands of algorithms to see what your probability is for retirement success. Once you register, simply click the Advisor Tolls and Investing tab on the top right and then click Retirement Planner. There’s no better free tool online to help you track your net worth, minimize investment expenses, and manage your wealth. Why gamble with your future?
About the Author: Sam began investing his own money ever since he opened an online 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 $175,000 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.