Before reviewing my 1Q 2021 and discussing what's next for various asset classes, let's talk about hard things.
Waiting for the opportune time to propose after buying an engagement ring is hard. The ring just starts burning a hole in your pocket. But do you know what's even harder? Writing an April Fool's Day post and not responding to a single comment for two days! I'm sorry for tricking y'all folks. I hope you will forgive me. I'm a jokester at heart.
Ever since I was a kid, I've also been a dreamer. Over time, I've noticed the more you dream, the more good things tend to come true. It must be due to one part positive mindset, one part taking action to achieve your goals. If you go about your day-to-day like a zombie, never dreaming about a better future, I'm not sure anything special will ever happen.
Buying that beachfront dream home in Hawaii costs closer to $15 million, not $10 million as the online estimates say. Sadly, there's no way I can afford it. The funny thing is, one of my good friends can easily afford it, yet he still refuses to live it up!
If the house can earn a $900,000 a year net operating income, a 4% cap rate would give it a valuation of $22,500,000. But it probably earns closer to $500,000-$600,000 a year as the house sits empty most of the time when asking between $85,000 – $250,000 a month in rent.
When in doubt, follow this real estate investing rule: Buy Utility, Rent Luxury. It's much cheaper to rent a luxury home than to buy one. The ongoing maintenance costs are a killer.
1Q 2021 Review Overall: 3.75/5
1Q 2021 went by quickly! Overall, it was a hopeful time due to better-than-expected progress with the vaccine rollout. For example, in San Francisco, everyone is eligible for a vaccine starting April 15, 2021, versus the former expectation of May or June 2021. Now we just have to wait for the vaccine trial data to come out for young kids sometime towards the end of the year.
Financial Samurai is humming along as usual. My wife and I updated another 200 posts or so in the quarter. By the end of 2Q 2021, all posts on Financial Samurai should be fully updated. It's been a blast to revisit some of the older posts from 2012-2015. The key recurring theme is sticking with things for the long term. Good things tend to happen if you keep at it.
On the family front, the kids are doing well. Our daughter is walking all over the place now so we've padded all the floors and corners. She is such a joy to hold every day. Our son got into a language immersion preschool that goes through the 8th grade starting this August. It's nice to look forward to some changes. It's also time for him to meet some friends his age.
1Q 2021 Stock Portfolio Review: 1/5
1Q was pretty volatile. My growth stocks like Tesla and Netflix got HAMMERED as investors rotated into old economy stocks. What's annoying is that I had felt there was a 65% chance tech stocks would underperform. However, I didn't do anything about it because I didn't want to create any capital gains tax liability.
When my growth stocks were getting pummeled, it didn't feel as bad this time because they had all risen so much. All the gains since March 2020 really feel like funny money. Thankfully, many of these growth stocks began to rebound towards the end of March. Let's hope it continues.
After the sell-off, I decided to buy $30,000 in ARKK, Netflix and Tesla towards the end of March. I figured if I'm going to hold many of these names for the long-term, I might as well continue to buy after a correction.
For solely S&P 500 index investors, 1Q 2021 was a fantastic quarter, up about 5.8%. But my portfolio underperformed and closed up only 2.53% due to my heavy tech weighting. Further, bonds had a terrible quarter as well.
Therefore, stock pickers, be careful what you wish for! Sometimes you win, sometimes you lose. In this case, I'm a loser. Notice the widening gap between the orange line and the blue line in my Personal Capital portfolio tracker.
1Q 2021 Real Estate Review: 4.5/5
As more time goes by, it is becoming clear buying real estate in the summer of 2020 and holding onto all real estate assets until now has been a shrewd move.
Demand for single-family homes is strong in San Francisco and all over the country. My tenants have continued to pay on time as they are all gainfully employed. There were no maintenance issues. Further, there is a revival in commercial real estate underway.
The only blemish to an otherwise 5/5 quarter is that my rental property remodel is still lagging. I finally got our remodeling plans approved on 3/9/2021 after 2.5 months of waiting. However, supposedly, the Building Department has not called back my contractor to schedule the inspections despite repeated inquiries.
Each month that goes by is at least $1,500/month in lost rent. I never plan to do another major remodel again. Remodeling is a young person's game.
1Q 2021 Net Worth Review: 3/5
Due to sluggish stock market performance and not changing any estimates on my real estate holdings, business holdings, or alternative investments, my net worth grew 3%. Talk about unexciting. Perhaps if I mark to market all investments, my net worth might be up closer to 6%.
Since leaving work in 2012, my target net worth growth rate has been 10% a year. My goal is to beat nominal inflation by at least 5% a year and to grow my wealth in a less volatile way.
Formerly, in my 20s and 30s, I used the S&P 500 as my net worth growth benchmark. Today, I feel ecstatic if I can reach 10%.
I seldom update my real estate holdings because I'm focused on the cash flow they generate. Net worth is nice, but it is the passive income to pay for our living expenses that counts the most. Further, I like to be surprised on the upside years down the road if I ever want to sell.
As for my investments in alternatives, they are hard to measure because they are mostly in 5-10 year funds. As for my online business holdings, I don't care because I don't plan to sell.
What's Next For Stocks, Real Estate, And Bonds?
At the beginning of the year, my crystal ball had the following estimates by year-end:
- S&P 500: 4,088 (+8% YoY, $170 EPS estimate, 24X P/E)
- US Median Real Estate: +5% YoY
- 10-Year Bond Yield: 1.25% average (started the year at 0.91%)
All three estimates are currently looking to be too conservative given the S&P 500 is already at 4,019. The US median home price is up 11% as of January 2021, the fastest clip in 15 years. Meanwhile, the 10-year bond yield is at ~1.7%.
There is still a chance all my predictions could come true. However, 4,200 – 4,300 now seems more likely on the S&P 500 by year-end due to a robust earnings rebound and an accommodative Fed. Instead of the S&P 500 earnings growing by 30% YoY to $170/share, we could perhaps see $180-$190/share. Using a 23X multiple leads to 4,140 – 4,560 on the S&P 500.
At this rate, it is really hard to see the Fed wait until 2023 to hike rates as it indicated during its last meeting. The market is basically giving the Fed the green light to raise the Fed Funds Rate by a total of 0.5% without negative repercussions.
Can real estate continue to go up by double digits year-over-year? I doubt it as 2Q, 3Q, and 4Q comps get harder. With interest rates ticking up, higher prices, and tougher comps, the US median home price growth will likely decelerate. I'm now estimating a 7% YoY price change for the entire 2021, up from 5%.
Historically speaking, anything above 2-3% is a fantastic year for real estate price growth. Thanks to leverage, the cash-on-cash returns will be tremendous.
Supply should increase in the second half of the year, making it easier for homebuyers. If you want to buy property, I would focus on deals in big cities like New York. I'm very confident there will be a huge snapback in demand. Personally, I am looking for a pied-de-terre in Manhattan.
The real estate freight train has a ton of momentum for several more years. The millennial generation is in their prime home buying years. Therefore, I am still a buyer.
The other attractive real estate asset class is hospitality commercial real estate. So far, there are few sigs yet of distressed property sales, except for Hotels. But with so much pent-up travel demand and travel volume surging right now, investing in hospitality commercial real estate that is in need of capital seems like a smart bet.
Check out Fundrise and CrowdStreet, my two favorite real estate crowdfunding platforms to keep track of such opportunities. You will be notified via e-mail when deals or funds come up. However, demand is very high now and deals are getting filled within 48-hours.
There's now probably only a 30% chance the 10-year bond yield will average 1.25% for the year. Risk-appetite is too strong as the economy roars back. Therefore, I'm raising my 10-year bond yield average to 1.75% for the year.
The US added back 916,000 jobs in March, the strongest gain in 7 months and better than expectations. The official unemployment rate is now 6%, down from 6.2% in February. Overall, the US has now gained back 13.7 million jobs (62%) of the 22.2 million jobs lost since the start of the pandemic.
Check out this chart that shows where job gains were highest: leisure and hospitality.
There's now a higher likelihood the 10-year bond yield will hit 2% versus go back down below 1%. So far, the stock market and real estate market are taking higher interest rates in stride. ~3% for an average 30-year fixed-rate mortgage is still cheap, especially if you've kept your job and have seen your stock portfolio balloon by 20%+ over the past 12 months.
If the 10-year bond yield hits 2%, I'll be buying bonds again. I just hope we don't hit 2% until the very end of the year. If we hit 2% by the summer, I expect to see at least a 5% correction in the S&P 500 as the risk-free rate alternative will look to be relatively more attractive.
If you have debt, the higher interest rates go, the less inclined you should be to pay down debt. Your existing debt interest rate becomes relatively more attractive. In other words, the value of your debt with a locked-in rate has gone up.
Getting The Direction Correct Is The Most Important Thing
As an investor, in order to make money, your main goal is to get the direction correct. It's very difficult to pinpoint exactly where something will end up. My direction-calling (stocks up, real estate up, bonds down for 2021) has led me to keep my positions the way they are. I've just been adding to some positions with new capital.
You could get the direction correct and go on massive leverage to get rich quicker like Archegos Capital. However, you just need to also be aware of the consequences. I really don't recommend stock investors go on margin.
Today, I'm slightly bullish on stocks, bullish on single family homes and commercial real estate, and still slightly bearish on bonds.
My existing net worth allocation, excluding business equity, is about 30% stocks (70% index funds, 30% mostly in tech stocks), 40% real estate (includes real estate crowdfunding), 20% bonds (mostly CA munis), 8% alternatives (venture debt, private equity), 2% risk-free.
If I had $1,000,000 to invest right now I would:
- Invest $200,000 in hospitality and industrial commercial real estate deals
- Invest $200,000 in a diversified private eREIT to take advantage of the overall real estate trend
- Invest $200,000 in my favorite tech stocks or funds that have corrected by 20%+
- Pay off $150,000 remaining in a vacation property mortgage that is stuck at 4.25%
- Sit on the remaining $250,000 until there is another 5%+ correction in the S&P 500 or another 10%+ correction in some of my favorite tech stocks. Manhattan real estate is also really calling to me. I don't mind holding a good amount of cash here.
Overall, 1Q 2021 was a good quarter. I continue to expect 2021 to be a profitable year. By June 1, 2021, everybody I know will be fully inoculated. Then, I think it's really time to enjoy our wealth more.
Readers, how was your 1Q 2021? What are your forecasts for the rest of the year? Do you think the good times can continue? How would you invest $1,000,000 right now? Disclaimer: Invest at your own risk. There are no guarantees. The investments made in this post are mine alone.
You can sign up for my free weekly newsletter here. I've been helping people achieve financial freedom sooner since 2009.