2018 Investment Outlook For Stocks, Bonds, And Real Estate

Financial Samurai Investment Outlook For 2018

Before you read my investment outlook for 2018, you must first understand my financial situation and my biases. Our biases often warp our reality by anchoring us to past situations.

  • Permanently left work in 2012 at the age of 34
  • Net worth got crushed by ~35% in 2008-2009
  • Small business owner who will benefit from the new tax plan
  • New father with a spouse who is a full-time mom
  • Favorite asset class is real estate with three physical properties in CA, one in HI
  • Worked in equities for 13 years at a couple large investment banks
  • Have significant investment positions in stocks, bonds, and real estate

With this background information, I believe 2018 will be the last year of good times where assets remain relatively stable as they track historical returns. Let's discuss the best investment opportunity for this year and each asset class in a little more detail.

Stock Market Outlook 2018: One Last Hurrah

According to the U.S. Small Business Administration, small businesses account for 48% of national employment. In number, they represent 99.7% of all businesses in the country. In other words, it is the guy with the plumbing store or the gal with the digital online marketing agency who make up the heart and muscles of the American economy.

Based on my interactions with other small business owners, everyone I've talked to is extremely excited about lower taxes and potentially less red tape. It's really less regulation that most owners are looking forward to, and not so much the 20% deduction of qualified small business income.

As business owners, we hardly EVER feel the government is on our side because we've got to: 1) pay license fees, 2) pay special small business taxes, 3) pay both sides of the FICA tax, 4) pay an accountant to figure out our more complicated taxes, 5) wonder why we can't collect unemployment after our business goes under, and much more.

With the passage of the new tax plan, there is finally hope the government is now on our side. Having a tailwind feels so much nicer than facing a headwind while climbing a hill – which is often what running a business feels like. As a result, I believe there will be a natural inclination to reinvest in our respective businesses and ultimately grow revenue. Higher revenue growth equals higher profits and higher company valuations.

Publicly traded companies are just a larger reflection of privately owned small businesses. And I think the mood in the boardroom is as bullish as ever with a 21% permanent corporate tax rate.

Stock market's history of bad things - 2018

When there is business euphoria, as there is now, valuations matter less. The chart below is the S&P 500 Case Shiller P/E ratio as of January 2018. Instead of investors now thinking 33.27X is too high, perhaps investors are now thinking there's another 10X multiple higher to go until we reach 2000 peak bubble levels.

Nobody really thinks we're going to get to 44X, but it's nice to know we still have this historical valuation buffer before everything blows up. After all, corporate cash balance sheets are massive compared to 2000, rates are accommodative, taxes are lower, and earnings are still growing.

Given we're now in the final stages of a blow off where it's liquidity, excitement, and FOMO driving the markets, I expect to see the S&P 500 touch 3,000 in 2018. If we get back to 2000 peak level valuations, we're talking ~3,600 on the S&P 500, which isn’t going to happen. I expect downside risk of 10% for an even risk / reward ratio. I'm buying the dips.

Valuations in 2018

Related: The Proper Asset Allocation of Stocks And Bonds By Age

Bond Outlook 2018: Low Interest Rates

I've said this before, and I'll say it again: we are in a permanently low interest rate environment. The 10-year bond yield has been going down since the late 1980s due to information efficiency, globalization, and policy efficacy. I expect interest rates to remain accommodative for the rest of our investing lives.

10 Year Bond Yield Historical Chart up to 2018
Will 2018 be the year where bond yields finally go up aggressively?

For 2018, I'm looking for another sub-3% level for the 10-year bond yield, and more likely an average of 2.6%, despite a couple more Fed Funds rate hikes expected this year. In other words, I expect bonds of all types to at least provide a total return equal to their coupon return as principal values hold rock steady. 

With the Fed raising the short end, and longer term rates staying steady, the yield curve is flattening. Historically, a flat or inverted yield curve portents an imminent recession as higher rates on the short-end choke off credit growth, make existing credit more expensive and curb excess reserves, thereby slowing the economy.

Flattening Yield Curve

But if the Fed is really going to cement itself as an inflation fighter, then this belief gives confidence for bond traders to invest in longer duration Treasuries at lower yields because no accelerated inflation is expected. Hence, I'm confident investing in 20-year municipal bonds that pay a 3.5% – 4% tax free yield for the low risk portion of my net worth.

We will know the end is near if the Fed raises the Fed funds by 1% and the long end remains flat. That's when inversion occurs and should have enough time to reduce our risk exposure by then. I expect downside risk of half the coupon bond yield. I'm buying muni bonds whenever the 10-year bond yield goes above 2.6%.

10 year bond yields breaking above long term average downtrend
Interest rates are beginning to rise, but the 10-year yield still has not broken 3%

Real Estate: A Tale Of Two Cities

Remember how I said in June 2017 that the rental market was soft in San Francisco due to a large supply of new condominiums and nose-bleed level rents that far outpaced wage growth? From 2H2015 to May 2017, I rented out my house for $8,800 – $9,000/month.  When I tried to get prospective new tenants to pay the same rent in May 2017, I got zero takers, despite aggressively marketing the house for 45 days. The best two offers I got were for $7,500 from a divorcee with an unstable startup and from a family of six with a dog who wanted to move in in two months. So, instead of going through the pain of continuing to be a landlord, I sold the house for a little over 30X annual gross rent.

The numbers are finally showing up in the data. Check out the rent prices for one bedroom and two bedrooms in December 2017 according to Zumper. If there was a three bedroom segment, I'm sure the numbers would look even weaker. Like stocks, real estate prices should trade on earnings fundamentals. With a decline in rent in so many of the most expensive cities and new negative tax laws in effect, real estate prices should remain soft in the most expensive markets.

Rents are down from their peaks in many cities as of Feb 2018

Take a look at NYC housing market data from Douglas Elliman. Sales volume and prices headed down in 4Q2017 as buyers took a wait-and-see approach regarding the tax plan. Now that the tax plan has passed, it is worse than most people expected due to the $10,000 SALT cap and the $750,000 mortgage cap for interest deduction.

See: The Maximum Mortgage Tax Deduction Benefit Depends On Income

NYC real estate market

Real estate investors should view NYC and SF as “leading indicators” of what should be expected for other expensive real estate markets. Now that prices are softening, you should be in no rush to buy. Be picky about what's likely going to be the largest purchase of your life. Focus on location and expandability, the #1 way to increase your chances of making money in real estate. If you can build for $200/sqft and sell for $400/sqft, you win. And most of all, run the numbers to see if valuations make sense.

With the slowing of coastal city real estate, it's only a matter of time before non-coastal real estate slows as well. But figuring out the timing of when the slowdown will occur and by how much is the biggest conundrum. Three to five years tends to be a good lag, so we can make an educated guess that between 2019 – 2021 is when the data will appear. Let's just say 2H2020 to be more precise.

I don't think there will be more than a 5% – 10% correction in coastal city or non-coastal city markets over the next couple of years because the economic engine is still quite strong. Further lending standards have tightened since the last financial crisis. Therefore, if you're buying a home to live in for the long term, you should be fine.

Some folks have questioned the wisdom of my $810,000 investment in real estate crowdfunding outside of San Francisco. Understandable, given the absolute dollar amount sounds large. But I had a $2,740,000 position in a single SF property with a $815,000 mortgage where rents are declining. Therefore, I've reduced risk exposure while diversifying into 12 different non-SF properties where rents are stronger. Further, I keep my alternative investments to no more than 10% of my overall net worth and still have three California-based properties to manage. Always think in percentages

Enjoying One Last Year Of Good Times

As a business owner, I haven't been this bullish since 2007, when I got promoted to Vice President at my banking job. Of course a year later, shit hit the fan and I saw a 35% destruction to my net worth in a matter of months. If a downturn happens again, I'm better prepared because I've got far more passive income streams, a variety of defensive investments, and a much lower debt to equity ratio.

If one can get a 10% return in stocks, a 4% return in bonds, and an un-levered 5% return in real estate without much volatility, I say that's pretty easy money. If these return do come to fruition, perhaps I'll finally be satisfied with a blended 2% – 3% guaranteed rate of return in retirement.

If you haven't done so already, run your investment portfolio through an investment analyzer to see what your latest exposure is to the market. Then carefully analyze your net worth composition and make sure you are comfortable with its construction. I wasn't entirely comfortable about my net worth composition in 2017, but now I am for 2018.

Personal Capital Investment analyzer
Sample Investment Analyzer by Personal Capital

Update Nov 7, 2018: Volatility is back with Trump now talking about trade wars. Democrats take the House and the Republicans retain the Senate. The yield curve will be flat after two more rate hikes in 2019 as the long end still isn't going up much, and coastal city real estate is slowing as expected. Real estate is also slowing as expected. Time to be more cautious all around. Build your cash hoard!

About The Author

113 thoughts on “2018 Investment Outlook For Stocks, Bonds, And Real Estate”

  1. Sam,

    I feel conflicted about how to invest in bonds. I am 29 and my 401k is currently stocks. I know that I will get punched in the balls by a bear market, and so I should be partly invested in bonds; but I think of these as a pressure release valve, to be emptied into stocks in order to buy at the bottom, wherever and whenever that is. I know that an equities-based portfolio will always beat a bonds-based one over time, and the more equities I have, the more this will be true, especially the more time you give things to work through the wiggles of market cycles.

    So, with this bull market getting long in the tooth, am I making a dumb move by staying 100% in equities until, say, 5 years before I plan to retire?

    1. It all depends on your risk tolerance. If I knew I was retiring in 5 years, I would personally shift to around 60% stocks and 40% bonds based on MY risk tolerance. I don’t want to risk losing 30% – 50% of my money like so many retirees did in 2008-2009. They were ruined, or had to keep working for 5-10 more years.

      If you know with confidence you are retiring in 5 years, then you probably aren’t depending on your investments to get you there. In that case, I just want to view my investments as a nice, low risk tailwind.

      Related: The Proper Asset Allocation Of Stocks And Bonds By Age

  2. Hi. I am only discovering this great site. It is friendly, educational, & read by many smart and supportive folks. I also like that, at least in other posts, fear is so openly addressed. I have no retirement funds as I have always put all my money (and blood and sweat) into my real estate. I am the janitor, plumber, property manager, etc. I have taught many young folk about how to respect my property and we have always ended on friendly terms. Now, at 61, we move South to be able to look in on an 85 year old Mother in Law. My dilemma: I will need to put $2.4 million into a 1031 Exchange. I’m looking at everything and learning alot—I am far from a sophisticated RE guy. I’m probably one of those guys that won’t be comfortable in a Fund or even a NNN. Control issues? I have my eye on a well located, really nice, hip, $6.5 mil 33 unit apartment complex, only 2 years old, in a mid-size, thriving city in Virginia. I can make the numbers work but still maintain a certain level of fear. I am running worst case scenario’s and not looking at returns as much as I am what we need to live a comfortable, non-extravagant, fairly stress free lifestyle that will enable us to give our time and what money we can afford to others. Oh, as we live in one of our places, I can’t 1031 all of it, but we should get that $500,000 married couple deduction (though I’m in the process of confirming & understanding this). Any thoughts about taking on this much debt at this stage of our lives? It’s a seller’s market right now, and that might change soon, but I will run into those dreaded 1031 time issues. NOI after debt is $150-160,000. Thanks in advance. Toddy

  3. My worries stem from Amazon very likely putting their second headquarters in my already HCOL area. I’d like to use life insurance proceeds as the down payment on a small condo, and worry that housing prices will go even higher if they come and make it unobtainable at my current income level. Highly specific and not the entire economy. However, if that happens, I may just use the proceeds to buy more dividend stocks or work on my small business full-time while I stop gigging.

  4. Was curious about your thoughts on corporate vs passthrough taxes. I know passthroughs get a 20% deduction on their taxes, but is there any way to make a passthrough a corporation? If you elect for S or C corp are you then subject to the lower 21% taxes reserved for corporates? Or do you have to have a certain number of employees or certain amount of revenue?

    1. The tax rate should come out to around the same. Otherwise, there would be a big waste of corporation identity changes. But, we’ll only really know in 2019 when we do our 2018 taxes. I’m hopeful though!

  5. Todd Cramer

    I have a friend who set up a directed IRA for his retirement accounts that allows him to focus on rental real estate. He has to abide by strict rules to not do work on property himself but it allowed him to get a rental unit. Is this a strategy to shift assets from the stock market retirement investments where we have maybe a year left of good times to prepare for a downturn. I dont think you have done a blog post on this yet

  6. He is in to space exploration, windmills in Texas etc. Americans are generous, I come from India, where wealth get passed on to heirs. Compared to that Americans are more caring of future generations than just their blood line. Just my personal opinion.

  7. FS, My thinking is that this year 2018 is going to be the raging bull market that will be the equivalent of mid to late 90s. We are still not in Euphoria phase, but it will be here before you know it. Enjoy the bubble/bull market, because it ain’t coming for another 2 decades…Best of luck. May be the force be with you. I enjoy reading all your articles.

    I am ‘all in’ stock market in a single stock, I used to own 10 stocks, now I have held only one stock for the past 3 years. Real estate is in foreign countries they are around 30-35% of net portfolio.

    I am of the belief, you research a handful of stocks and bet big on not more than 2 or 3. Concentration is not suggested because it can blow up big as well. So diversification is not only protection but also dilution of strategy. Would love to hear the thoughts of others as well.

    1. A measure of your comment’s worth would be politely identifying your beloved one stock. What’s the big secret? Otherwise you lack credence. My take is that you are insecure, whether you realize it or not. I’ve been around this block so many times!

  8. Great read Sam! Many are anticipating the market to become bear either this year or next but of course who knows. We all need to prepare by investing in more short-term maturity high quality bonds and blue chips(defensive investing) and see what happens.
    It will be interesting to see how investors react to a bear market especially the millennials haven’t experience it.

  9. I remain bullish and am nearly an exclusive passive investor. I’m in it for the long haul (25-35 years). I don’t really care about the ups and downs and getting enveloped with all the hoopla the media banters around. I’m definitely a subscriber of Burt makliels philosophy towards investing.

    I’m 33 and my wife is 34. We have a newborn daughter as well. Both in very stable jobs that are nearly recession proof.

    I’ve been able to increase my income for our family substantially over the last few years from ~100K in 2014 to over 600K last year. We paid off all of our student loans, paying off an extra 35,000 annually to principal in our mortgage, max out both 401K’s with accompanying matches around 13,000 in total, backdoor Roth IRAs each year, and plan to do 30,000 this year to my newborn daughters 529. We don’t have the cash on hand right now to superfund her 529, even though that would be more ideal.

    We also plan to invest 60-100k in a taxable account diversified among 15-20 low cost etfs spread among emerging markets, foreign developed markets, us securities, energy, dividends and municipal bonds.

    Anything left over after this is allocated to vacations, basic expenses, donating to charities we deeply we care about, and helping out various family members. I firmly believe you need to enjoy the moment to a certain degree as well. And my newborn daughter has brought that into laser focus for me.

    I’ve been investing like this for the last couple years and have avoided any speculative or high risk investments. However, given my income has increased much more dramatically than I ever thought it would, I’m strongly considering having “fun” with some alternative/high risk investments.

    Likely will keep below 5% total of my planned investment money this year:
    -bitcoin, likely lite coin. Ride the roller coaster and see where it goes.
    -some individual stocks that seem hot, have momentum on their side
    -diversify more with some real estate crowdsourcing. I have both of our backdoor Roth IRAs stacked with vanguard admiral REITs right now.

    We’re lucky that we live in one of the 7 American states that has no state income tax so the new tax laws will be decently beneficial for us.

    I thoroughly enjoy your blog and I look forward to more inspiring and educational posts on your website!

  10. Hi,
    I am new to investing in crowdfunded real estate(Also real estate in general.. No investment except expensive bay area home).
    The owner of this site seems to like realty share a lot. I am thinking of using the same platform.

    Any pitfalls for new small investor from experienced folks on the site. There seems to be lot of technical terms regarding the priority of loan payment. I generally like safer investment even if return is bit low.

  11. Larry the Crocodile

    Looking over the comments it appears that most are concerned about an equity or real estate bubble rather than interest rates. Maybe that’s where people are over-crowded:

    “I’ve said this before, and I’ll say it again: we are in a permanently low interest rate environment. The 10-year bond yield has been going down since the late 1980s due to information efficiency, globalization, and policy efficacy. I expect interest rates to remain accommodative for the rest of our investing lives.”

    What if that’s the one that you have to worry about? I can’t lay a high probability on it, but I still see a number of ways that inflation could spike. We’re layering fiscal stimulus in tax cuts and infrastructure spending (at a huge deficit nonetheless) on top of years of accommodative monetary policy and stimulus. We’re adding debt to stimulate the economy and create jobs with an unemployment rate of 4.1%. At some point will wage inflation really kick in? What if GDP jumps up to 4%? What if interest rates in foreign sovereign debt start pricing in any sort of risk? Will US sovereign debt become too much of a burden?

    I’m generally with you that rates are lower for longer. I think that assumption is built into almost all of the models though. At a time when demographics are shifting and boomers are increasing their fixed income allocation I can also see a lot of money locked into losing positions that have a negative real rate if inflation rises.

    Asset prices are obviously tied to interest rate assumptions. Those would fall on a spike in rates at least in the short term. But for 35 years when your equities or real estate under-performed your fixed income diversification helped you out. In this case it wouldn’t. That’s the scenario that we’re not prepared for imo.

    1. Sounds good. Where are you investing your money and how is your investment portfolio or net worth currently allocated? What are some of your predictions for this year? I’d love to know where people put their money where their mouths are.

      1. Larry the Crocodile

        32 yrs old, no kids. 87% Equities, 13% Gold for Investments. Sold out all of my fixed income over last couple years. Cost of storage on gold and no coupon payments, but my thinking is that Gold has a lower floor and higher ceiling in most scenarios vs. fixed income over the next couple decades. That’s 1/3 net worth though with 1/3 in cash/margin to back myself as full time futures trader, and 1/3 in almost paid off condo. Condo will be income property after I make the Chicago exodus to FL next year.

        I’m in the same boat as you on Equities this year. I think the melt up continues until global central bank balance sheets tighten enough to make a difference, inflation shows up (causing CB tightening), or interest rates/yield curve hamper business. I think 6-36 months (S&P 3000-4000) left in bull before substantial pullback and couldn’t make a narrower guess right now. I think Powell is going to be more hawkish than expected, wages could surprise to the upside, and we see an uptick in inflation. 10 Year hanging on a technical ledge right now. I think it trades above 3% by July, with an outside chance at 4% if we get really hawkish. Crude oil spikes to $75 this year, but retreats in 2nd half. I don’t study real estate enough across the country to make a great guess. I’m neutral on Chicago despite all the state and local negatives, so I guess that makes me bullish the rest of the country this year and think it probably correlates well to the S&P upside/downside.

  12. Hey Sam!

    I always enjoy reading your content and predictions. I tend to agree that this bull market has one more leg. Everyone in their brother is talking to me about investing, which is what I remember happening in 2007/2008. Back then everyone was talking about how stocks and real estate were no-brainers and you had to get in before you were left behind forever.

    These days its stocks and cryptocurrencies. I personally know people that have a hard time making their mortgage payment every month somehow finding a way to put money in crypto-currency. In my opinion, these are the last people that should be putting money into crypto-currency.

    Then again, I also thought this party was going to end a few years ago. I think the combination of low rates & tax reform could continue to fuel this bull market longer than any of us think. I haven’t participated nearly as much as most in the equity gains, but have still managed to increase our net worth from $42K in 2012 to $664K at end of 2017. And actually, at one point our net worth was negative $300K in 2009, so I am not too upset with where we are.

    Quick Facts About Us:

    – 31 Year Old Dink Household
    – Starting Net Worth in 2018 $664K
    – I’m a C-Suite Executive at a Consulting Firm in the Construction Industry.
    – My wife is in Real Estate, owns an escrow company with her mom.
    – Projected income for 2018 is $431K
    – Cash on hand is about $120K
    – We have been aggressively paying down our mortgage in lieu of any bond allocation.
    – Outside of 401K, most of our investments have been going to alternative investments.

    We graduated college in 2008 and we have focused almost exclusively on the Income side of the equation. We have increased our income by about $300K over the last three years. We believe this is in our control way more than the returns we can earn. As we start to think about bringing a kid into the world, this will begin to evolve.

    For 2018 I plan to put about $181,900 of capital to work in the following areas:

    (1) $70,000 into Life Settlements (currently hold $30,000)
    (2) $18,500 into 401K (invested in stocks)
    (3) $38,400 additional principal reduction in mortgage (Yr 4 of 7-year plan)
    (4) $18,000 into hard money lending (brings total outstanding to $100,000 spread across 50 loans)
    (5) $37,000 to Commercial REIT (brings total position to $50K)

    And we should still end the year with $120,000 or so in cash.

    The X-Factor to our net worth over the next 5-10 years will be the stock/option based compensation I receive.

    I tend to believe there are always going to be opportunities regardless of whether the market is in bull or bear mode. There are many paths to Rome as they say.

    Happy New Year!!!


    1. Awesome job growing your income so much! That’s huge! What is the commercial reit your investing in?

      I’m always looking for real estate ideas that are completely passive now.

  13. Thanks for the opportunity to throw my 2c in.

    I think the economic keys here are productivity. Fracking puts downward pressure on oil prices, encouraging cheaper renewables, the internet, automation and innovation expand profit margin potential. Nimble businesses like yours can make profit with fewer barriers to entry like no time in history.

    That bodes well for business profit, tax cuts, the stock market and dividends.

    It also shifts the supply curve out, eliminating cost push inflation. We live in an environment of easing. Essentially future inflation expectations depend on these two opposing forces.

    We can see higher valuations on the markets. But with innovation, higher alpha. The beta or market return above the interest rate is essentially unchanged.

    My positioning would let market gains run, pay back debt and diversify.

    Ps. Didn’t know about you fourth property. Can I have a link?

  14. The stock market is not in a bubble. Infrastructure is not even priced in yet. There is no exuberance. We are in a bull market which means easy money. For example I mentioned CAT previously. It’s up 77% I’ll sell 75% around $200. Don’t listen to me, these are GS projections and they have been accurate lately. GS also says UTX will hit ~$176. Tomorrow I’ll put in an order for ~$133 and a 2nd order to sell for $180. It’s easy money in a bull market, enjoy it while you can!

    I don’t know who you are all talking too. Everyone I know is gloom, which means boom.

    My footnotes are I am using less than 1% of my net worth, but is still substantial. I have a foundation of stock with large margin of safety. For example I own GE at $11, so I don’t care about its current decline that much and I always sell percentages at higher levels. I own in declining order: stock, municipals, treasuries, commodities, utilities, real-estate, cash, emerging markets, tech. I hate real-estate because I’m lazy and I hate renting. Most of this bull money I will give away. And this is my main point, find a PERSON to help. It will be an unbelievable experience. You’ll be a rock star in someone’s home or village, and maybe you have to go half way around the world to do so or out your front door.

    Also read Time magazine, “Warren Buffett shares the secrets to wealth in America”, by Warren Buffett.

    1. Pretty cool it’s so easy to make money. How is your net worth structured?

      Does my article read like a gloom article? If so, can you point out exactly where it sounds like I’m very gloom? Your feedback is very helpful. Thanks

      1. I think your article is cautious per the biggest bull stock market in our lifetime and the tone of the article changes if the reader is a buyer or a seller. You asked for feedback, and I have gratitude for Sam’s teaching. Don’t take my feedback as criticism, I value your thoughts but don’t always agree. I think the post is mixed on stock. You wrote S&P 500 at 3000 and downside risk of 10%, I would not call this, “One Last Hurrah”. I would agree it is a buying opportunity which you later wrote. I think the post is confusing on bonds. You wrote, “Lower Interest Rates Forever” and “no accelerated inflation”, if this is the case than the place to be is stocks. Stocks would explode. Interest rates Vs stock dividend yield is an important indicator to value stocks, but I think you are comparing with historically low interest rates? I could never invest in more than a 10-year bond. Stocks will substantially beat 20-year bonds and longer maturities, but there is always peace of mind and you can get that with shorter terms. I think the post is spot on for CA real estate. It’s important you distinguished between investment property and a home to live in. I also like the gratitude in your conclusion. You are happy with your listed rates of return, but why call it, “Enjoying One Last Year of Great Times”. There will be many more buying opportunities you just need the cash and idea.

        Very few in finance can shout, ”BULL MARKET” from the roof tops because there is too much business at stake if they are wrong. You could be right 2018 is the last year of easy money, but I plan on another bull year because of infrastructure, jobs, taxes, and revenue are all good and Europe has room to rise. I hear your point about the flat curve and there can always be a 10% dip which is a buying opportunity as you wrote. Bay area tech jobs are stable so bay area real estate is in demand but softening. I don’t see any big changes from overpriced rents to less overpriced rents… rented in one weekend Vs 2 weeks. Some of the reader replies are gloomy, but this probably has more to do with caution from the past recession. My colleagues are gloomy and I’ll blame this on the media and politics, but the checkout clerk is gloomy too. I don’t know why, but when they start getting their real estate licenses I’ll take that as one sign of exuberance.

        The past 9 years are proof that a bull market should be taken advantage of. This bull has years to run because most people have not been participating for 9 years. Some people I know well have missed it. I think average people are starting to participate more now. I think people were shell-shocked from the banks failing causing 2 mistakes. Selling during the great recession and then not participating in this bull. There are still too many bearish investors in my opinion.

        I am 80% in stock, about half of this is VFIAX, and the other half is in smaller number of individual US stock most with low purchase prices offering higher safety margins. I still have couple stocks from the 1980’s as a kid. The remaining 20% I have in cash, bonds, real estate (I don’t live in), utilities, commodities, emerging markets (BYDDF), and tech. I mostly hold the dividends until I see a buying opportunity with minimum monthly investments, give it away, or spend it. In this stage of the bull I buy stock that I researched will pop than sell after a preset percentage no matter what (I can only do this in a bull market because it’s easy).

        1. Got it. Where do you predict S&P 500 will be at the end of the year vs my 3,000/+10%? It’s hard for me to think about next year without thinking what will happen this year.

          I particularly like this sentence you wrote, “The past 9 years are proof that a bull market should be taken advantage of.” It’s always fun to look at hindsight as proof. The more exciting thing though is predicting the future to get rich.

          Related: https://www.financialsamurai.com/how-to-get-rich-practice-predicting-the-future/

          We must be talking to different people, because the people I talk to, many of whom are fellow small business owners and some of whom big business CEOs are very bullish because it finally feels like the government is on our side.

          By holding stock since the 1980s, have you retired or are you close to retired? I’m running a follow up post on how much risk one should take in retirement. Happy to hear your thoughts about this topic.


          1. With a 21% corporate tax and potential infrastructure bill, the S&P will be much higher than 3000 for years to come. I don’t know what the number will be, but I see much more fuel being added to this bull. Some say tax cuts are not even factored in yet.

            Yes, hind sight is fun. The Dow went from 80 to about 25,000 in 100 years. The future is exciting, because in another 100 years the Dow could easily be 1,000,000? I don’t know, but I know we have an excellent chance and I would not bet against this.

            What CEO is not optimistic? I think the best indicator of exuberance is when the checkout clerk owns bitcoin, or is getting a real estate license, or…

            My thoughts on retirement, I don’t believe anyone should ever not be 80% US stock/ 20% cash and bonds if they have FI in retirement. I think you will have a much better answer than I will, but I will add 3 things you may have not considered 1. Something to keep you motivated in old age 2. Quality of life at 75 3. Long term care insurance.
            1. It’s important to be preoccupied in old age. Writing is a perfect occupation. Richard Russell wrote Dow Theory, the king of subscriptions, every day until his late 80’s. FS could be a life extender in 30 years.

            2. Gaussian curve says you have until age of 75+/-. I see patients with a common story, around 75 there will be an inflection point. Something is going to happen followed by a few years without a quality of life. If I make it to 75 I will be sure to eat and do whatever I desire, because if I do make it to 80 I will be watching TV all day or maybe writing. There are very few 85-year old’s that can walk around the block, but there are exceptions.

            3. Wealthy don’t need long term care insurance, minimum $3M not
            including the house you live in. Poor don’t need long term care insurance with medicaid. Middle class is a different story, I would give away as much money as possible before I need long term care and consult an Elder lawyer well before 75. I have not seen reasonable rates for long term care insurance that the middle class can afford at the time that they need it.

            1. I am 48. I’ve always worked in medical field earlier in corporations and later in healthcare. I retired at 41 in 2011 willingly due to stress but waited 2 years for a buyout. 2 years later I semi-retired after boredom and trouble. I had opportunity to buy a few stocks when I was a kid. My 1st stock was 7-Up because I liked the taste, no other analysis. I enjoy your writing and consider you one of my teachers. Thanks for letting me participate.

  15. Damn Millennial

    I echo your sentiment here and just wrote about what to do when everyone is getting rich.


    -Live in the best state in US, Colorado.
    -Purchased a home in 2014
    -Invested heavily in public markets since 13.
    -Keep large E-Fund so I can sleep at night and continue to stay invested when the inevitable comes.
    -Pay down my mortgage in place of bonds at this point in my life.
    -Rarely dabble with individual stocks, crypto, speculative investments less then 5%.
    -Still working FT
    -Only debt is small mortgage.

    I just don’t see the path of rapid growth continuing, maybe I am wrong who really knows? I have opted to not get to greedy and have been paying down my mortgage aggressively. Hope to buy my second property in the next 5 years when I see a better opportunity. I will always be investing as I work FT though in a diversified portfolio DCA.

    Good read.

    1. Kathy,

      I am glad you caught that as I was about to post something to the effect that “did I miss something or did Sam buy a house in Hawaii?



  16. Sam, thanks for your analysis. Our rental experience is similar in 2017: a 2-bedrooms condo in south bay sat un-rented for a few weeks, which used to take just 1 weekend. Rents in east bay are also flat and stopped the upward trend. Our current CAP rate (by market value) is ~3.5%.

    On the other hand the stocks had gone up so much since 2017, like 30+%. This just can’t last forever. Our current strategy is not to sell anything, but just keep saving and put our savings in cash (taxable account) and bond (non-taxable account).

  17. I agree with your assessment for 2018. In SoCal I see a lot(though not as much as in 2005) construction going up. SFHs and condos. This reminds of 2005-2006 because it was about 18 months before the bottom fell out. I don’t think we will see the same drop this time but I do think it will drop.

    I have found that I love contributing to my 401k/Roth IRA and 529s. I contribute on auto pilot and occasionally glance at the balance. If it’s down I don’t care much because it’s for the long term. Probably about 80/20 stocks to bonds among retirement accounts. I’ve learned I can’t stomach investing in individual stocks while I do own several. I often check their prices multiple times a day while holding a finger over the sell button. I freak when they fall just a little. I am going to transition to a roboadvisor at 50/50 stock bond ratio for my taxabale account. Set it on auto contribute and rest easier.

    1. SoCal seems to be slowing already from what I can tell. It would be nice if 2018 really turns out to be a banner year. If so, I would have no problem investing all new money in a 20/80 stock/bond fashion. I’m not sure about drastically altering my after-tax portfolio due to all the tax consequences.

  18. Ms. Conviviality

    My husband and I are making a risky investment this year.  Of course, we invest knowing that we can afford to lose the money.  I’m 37, an auditor, with a pension that will allow me to retire in 15 years and our primary home is paid off so we feel comfortable taking more risks. Ever since I started reading FS, I’ve gotten creative looking for investment opportunities which all did well last year, except the loser condo which was purchased pre-FS.

    We’re keeping our investments from last year since they had great returns (2017 gains are in parentheses) and adding on cryptocurrencies for even greater returns:

    5% Stocks NVDA, ACLS, and STM (96% gains).  These are all companies that are developing technology for self driving cars which I believe are inevitable.  In addition, we are also putting money into index funds VOO and ARKW to diversify.

    7% Rental Boat (53% gain)

    8% Mortgage Notes (17% gain)

    20% Condo (18% loss) This property is underwater but at least it’s never been vacant and tenants have all been good for the last 6 years it’s been rented out.  If we can wait it out for another 2-3 years the property will generate positive cash flow.

    60% Cryptocurrencies – the cryptology and bitchain are solid so currencies can’t be lost or stolen unless the owner loses their private key.  Markets naturally move towards efficiency and crytocurrencies offer that in fast processing times, no storage costs, and security, not to mention an easy form of payment when in foreign countries.  It’s a good sign when big companies like American Express, Amazon, and Overstock are accepting cryptocurrencies/bitchain technology.  The risk is if the government makes crytocurrencies illegal but I don’t think this is likely because as more people really understand how much more efficient and reliable crytocurrencies are it wouldn’t be logical not to use the technology.

    1. Ryan Farber

      It is a huge mistake to put so much money in cryptocurrencies (another word for “things like Bitcoin”).

      1. It’s money – if you have to explain to someone that it’s money, it’s not money!
      2. It’s a store of value – heck no, it’s way too volatile
      3. It’s a unit of account – no, normal people use dollars
      4. It’s a unit of exchange – no, everyone is hoarding it hoping it goes up and up
      5. It’s secure – 10% of all Bitcoin is supposedly just “missing” and hacks occur quite frequently, security is one of it’s worst traits.
      6. But blockchain! – This has been around for a decade and we are still waiting for this “game changing” technology to be implemented across industries and businesses. Blockchain is not like the internet in 1997, it’s a coding language.

      Unless you are OK with 60% of your portfolio going to zero then I would suggest investing a bulk of your money elsewhere in proven/real/liquid assets. Please protect yourself, it sounds like you have otherwise done quite well for yourself!

      1. Ryan Farber

        I just wanted to add how correct I was in my assessment above. Bitcoin was at $18,000 when the comment above was originally posted. Today it sits at $7,500.

        Cryptocurrencies are not investment tools people. Protect yourselves!

  19. Meaning we never established a 529 because we weren’t in a situation where we could do that and adequately fund retirement accounts. We have since been able to max out 403b contributions as our incomes have increased. Very minimal after tax investment accounts. Not enough to go around to fully fund retirement accounts and create significant after tax savings.

  20. With pensions that will generate 60-80% of our pre-retirement income, we can be pretty aggressive with our tax deferred portfolio. Our pre-tax buy and hold portfolio is built based on the following:

    1) Low-cost index funds

    Every academic I’m familiar with expects that, over the long term:

    2) stocks will continue to have higher returns than bonds;
    3) small-cap stocks will continue to have higher returns than large-cap stocks; and that
    4) value stocks will continue to have higher returns than growth stocks
    5) adding international asset classes like large-cap blend stocks, international large-cap value stocks, international small-cap blend stocks and international small-cap value stocks reduces the influence of the S&P 500. Over the last 47 years, these international asset classes have really helped increase the compound returns

    I believe these are reasonable expectations, and this is the best way I know to put them to work.
    I can describe this portfolio briefly: The portfolio starts with the S&P 500 index then adds small and equal portions of nine other very carefully selected U.S. and international asset classes, each one being an excellent long-term vehicle for diversifying.

    Vanguard 500 Index Admiral Shares VFIAX 11%
    Vanguard Value Index Admiral Shares VVIAX 11%
    Vanguard Tax-Managed Small-Cap Admiral Shares VTMSX 11%
    Vanguard Small-Cap Value Index Admiral Share VSIAX 12%
    Vanguard REIT Index Admiral Shares VGSLX 5%
    Vanguard Developed Markets Index Admiral Shares VTMGX 9%
    Vanguard International Value VTRIX 18%
    Vanguard FTSE All-World ex-US Small Cap Index VFSVX 9%
    Vanguard Emerging Mkts Stock Index Admiral Shares VEMAX 9%
    Vanguard Globel Ex-US Real Estate Index Admiral Shares VGRLX 5%

    2018 Goals:
    A) Start adding to a very small after tax portfolio
    B) Figure out how to fund college for the oldest (starts in 2018)
    C) Open Roth IRA for the youngest (13-years old)
    D) Complete costly home improvements (landscaping)
    E) Possibly purchase a Model III Tesla to take advantage of $7,500 federal and $2,500 state EV purcahse incentives before they expire. 10K in incentives makes the 35K base model pretty inticing (or conisder it 10K in free upgrades for a 45K+ model)

    1. I like your goal of opening up a Roth Ira for your 13 year-old. That’s a no-brainer.

      But I’m kind of concerned for your first two goals. What do you mean when you say figure out how to pay for your oldest’s college next year? And do you not have any after-tax investment account, just 401K and Ira?

  21. 65% Real Estate, 25% equity’s, 10% cash. Net Worth just north of $1M.

    Consistently tossing around selling my investment property(s). What I initially purchased as long term buy hold/cash flow properties have now appreciated significantly ;25x annual gross rent. Incurring the Cap Gains tax along with Dep recapture is less than appealing and worse yet other investment options are highly inflated and primed for a correction too.

    I’m confident we have 1 more year of a bull market. In my business many are elated with tax cuts and significant expansion will occur due to it.

  22. Excellent outlook! Makes a lot of sense to me. I didn’t expect last year to be so strong but it was. I agree with your comments regarding small business owners. It’ll be really interesting to see how things unfold. Less red tape is a huge win imo!

  23. Sam to answer your question about allocation, I’m positioned like this:

    SF 2/2 Condo 38.28% (paid off)
    Stocks Fund ETFs 37.02%
    Bond fund ETF 4.52%
    Liquid Cash 20.18%

    SF condo is valued valued at $1.1m on Zillow and currently renting for $4300. After expenses and HOAs it’s yielding about $2k in profit per month. Considering selling it if I can get that amazing 30x like you did. Bought it in 2000.

    Liquid cash is $500k and thinking, as always, of adding to stocks. Any other ideas for this cash? Heartland real estate rentals?

    Leaving everything to my niece and nephew and living a life I love and enjoy, living and teaching tennis in resorts around the world.

    Seems the more I enjoy my life and the less I think about these assets, the more they seem to increase in value over time. Letting it all be.

      1. Sam how much do you still love writing these articles? Is it still fresh and exciting? All the money you’re making from this site has got to be incredibly rewarding and absolutely terrifying at the same time. Are there topics you’re passionate about that you’re not writing about for fear of losing some of your audience? Excited to see you take it to the next level!

        1. I’m passionate about being a good father, therefore, I’m excited about the topic of parenthood and family finances. It’s going to be my toughest challenge for sure, and I’ll need all the help I can get.

          Since I hope to be father for the next 20+ years, that should be a lot more to write about it!

  24. Great post, thank you.
    I’ve been investing more in real estate syndication deals this past year (accredited investor). Specifically in class B multifamily, industrial flex (last mile), and “recession resistant” assets like self-storage. Just pulled the trigger on a senior assisted living facility. The reason for multifamily is that demographics of millennials and boomers will continue to support demand in a limited supply. I stay away from the class A that is being overbuilt in large MSAs. Industrial flex is a play on the growth of online retail business. Everything we use and touch comes through an industrial warehouse. East coast and southwest ports are taking on more cargo since the widening of the Panama Canal. Self-storage is for.. well, we all own too much crap. In a downturn, people downsize and need a place to store their stuff. Businesses downsize and use self-storage as a less expensive alternative. Senior living: baby boomers are aging. There is no cure for that yet. All the best to you and your family. Hope your aches and pains improve this year.

  25. I’ve been building cash reserves and cleaning up my portfolio. Hard to do when every sale generates lots of tax liability. I have a $3+ million cash position now, but still heavily invested in real estate and equity markets.

    Don’t do what I’m doing, coz it’s been all wrong so far. :-)

    1. The Alchemist

      Ha! Anybody who has “a $3+million cash position” but says, “Don’t do what I’m doing, coz it’s been all wrong so far” lacks credibility. ;) I would LOVE to be that “wrong”. Good work!

  26. As part of my work, I routinely spoke to the world’s top buyout, credit, and CRE firms. Buyout multiples are concerningly high, credit (particularly direct lending) is looking precarious, and much of the opportunity in CRE tends to be in transitional properties that banks won’t finance. Senior housing has been hot for the last couple of years but several metro areas are starting to see oversupply from either too much construction or not enough demand (Orange County, CA).

    Almost every high-quality credit shop I’ve spoken to is waiting for the other shoe to drop. I know of several who are holding 20%+ cash or even structured their funds to be able to swoop in when the bottom drops out (Centerbridge, Oaktree are obvious examples).

    Direct lending is especially concerning. What can go wrong when you put 3-4x leverage on top of 3-4x leverage and eschew underwriting standards to stay competitive in a high volume business? I’d get several pitch books for new DL funds every single week. People who don’t know what they’re doing are jumping in with both feet. Sounds familiar.

    All that aside, Happy New Year! Get it while the getting’s out there to be got.

    1. Indeed. Everything is expensive. Everybody is concerned. What to do?

      I remember in early 2007, it was the same thing. And boy, did we have a nice runup until the very end. Same thing with in 1999-2000. Here’s hoping things go parabolic, so we can have even more money so we can be even happier! <- being facetious. How are your investments positioned for 2018? How come nobody else is sharing? Let's go!

      1. My investment positioning for 2018 is rather boring.

        I left my job a couple of months ago so I’m not going too far out on the risk spectrum at the moment. I dabbled with small amounts in cryptos starting in late 2013/early 2014 and sold EVERYTHING after Bitcoin crossed $5k. No regrets. I’m bullish on distributed ledger technology but not on any individual coins since it’s a bit of a charlie foxtrot now.

        The 401(k) is 50% VINIX and 50% international growth (VWILX). I had a large cash drag there until I thought through this and realized I’m ok with the valuation dropping 60%+ short term. It happened in 2008 and I didn’t sell. I’m not going to try to time the market with retirement funds.

        On the alts side of things, I’m invested in one of the CRE lending funds that I did work on. The firm is amazingly good at underwriting and has a very low cost-basis on its properties. Virtually all of the loans are floating rate with floors on the interest rate so you’re covered on both ends. It has a healthy dividend as well.

        My brokerage portfolio is highly concentrated. I only invest in stocks that I’ve valued myself and you know very well how much work goes into truly understanding a company. On average, I pull the trigger on 2-3 companies per year now that we have a kid. They’re almost all event-driven since value investing is damn hard at the moment. This portfolio has done well. I may trim this significantly in the coming months and just sit on cash, we’ll see. Not a timing move per se but portfolio management.

        On the residential RE side of things, I’m happy to sit tight for the time being. Cap rates locally are 2% if you’re lucky. I’ve been looking at some second-tier cities on the East Coast since I can get cash flow positive (on paper) immediately, but more research needs to be done there.

      2. As of Jan. 26, 2018 – stock portfolio plus 6.05% YTD (97% equities plus 3-4% cash).
        As of Feb. 8 – minus .07% YTD
        Mar. 15 – plus 11.08% YTD
        Mar. 23 – plus 4.8% YTD
        I am planning to hold on through any downturn, just selling individual stocks that seem broken. I will sell some stocks this week for cash needs, but my Canadian portfolio is holding it’s own so far, so I won’t need to sell when the stocks are down.
        I am still light on the defensive stocks (fear of interest rates rising or at least think that others fear they will rise). I have studied this post to determine how or if to change my strategy at this time but I think I will hold for now. I tend to ride the markets up, down, and up in both real estate and stocks. I would like to see my investments grow another 30% to feel comfortable and maybe then diversify into bonds.
        The house is the real estate portion of my assets and its hard to extract equity from it. Rents have gone substantially so I can increase them after the next tenant turnover.
        Rental and pension income (almost passive) provide enough for a comfortable lifestyle (income 97600, expenses 95000 including income taxes). Travel expenses come out of the investment accounts.

  27. Ditto what Joe said. The business environment is improving on the tax and regulatory front and the investing public will take this news and go hog-wild. Hello, irrational exuberance! Our portfolio’s currently at 37.5% stocks and 62.5% bonds/cash. We’ll stick with that allocation and wait for the inevitable “blow off.” Then we’ll load up on stocks when there’s “blood in the streets.” Haha! That’s the game plan, anyway. I’m sure I’m the only genius who has thought of this strategy. Great post as always, Sam.

    1. Ha! Unfortunately, we all have the same game plan! Which means it’ll never work!

      The only thing that will work is to generate more income through hustle. Control what we can control.

  28. Things look well diversified except why you so underweight International? Pull up a 10 yr chart of spy, eem, vgk, which is us, emerging markets, and Europe. They are still very early in there recovery, while we are long in the tooth.

    I know you covered emerging markets in the past, just curious your thoughts on this?



    1. Are you talking about the sample chart at the bottom? I can get a sample chart with more international exposure if you wish.

      I have some good exposure in the EuroStoxx 50 index via FEZ, EEM, EJ. They’ve been doing well over the past couple of years, not so much after the past 10 years.

      1. jdogsupreme

        Was really hoping to see your allocation. Don’t care about the absolute values, but the proportions are of interest.

          1. jdogsupreme

            43% us stock, 19% real estate, 3% alternatives, 6% cash, 5% intl bonds, 13% us bonds, 10% intl stock.

            This is just a simple “set it and forget it” allocation that is light on foreign. Don’t expect to change the allocation much, but do plan to put most FY18 stuff into cash equivalents. We are close to retirement so want to have a bit of cash on hand to even out any near-term market corrections.

  29. I prefer the Austrian school of explaining recessions: the boom is caused by easy credit, causing people to throw money at anything that looks like an investment, causing a lot of malinvestment. When the boom happens, the bust in inevitable.

    The best thing to do is raise interest rates, tighten credit, and avoid the boom in the first place.

    At this point, a recession is necessary, and the sooner the better. The longer we wait, the worse it will be.

    The upside for me is that I’m not retired, and I’m in a buying mood. So a recession is a great opportunity.

      1. I’m 100% in stock ETFs: Vanguard US total market, developed markets, and emerging markets, so spread throughout the world.

        I’ve been buying consistently with automated amounts every month, but a big dip in stock prices is plenty of incentive to cut spending in my normal life to the bare minimum to increase buying of ETFs.

        “Sorry honey. We’re eating at home every night this month so I can buy more stocks. We’ll eat out again when the market bottoms.”

        It’s more of a game to me. So I don’t take it too seriously. It’s more like trying to be my high score on a video game. It may not matter that much in the actual impact on my life, but I get a certain feeling of accomplishment.

        1. I’m trying to wonder when my investments stop mattering for me as well, and I think it was after my business income surpass my investment income and after the business valuations are passed my investment holdings.

          But really, I do very much care about my public investments and my real estate holdings because they’ve grown so much now. I don’t want to start over at this stage of my life.

          Have you left the workforce as well? I’m always looking for insights to help people are Zen with their investments. Thx

          1. Oh no. I’m still working. I have no idea what I would do with my life if I stopped. I’ve had a mind for engineering since I was a kid. While I’ve fantasized about becoming an independent consultant so I only take the jobs I want, I’d rather offload the back office tasks to someone else, instead of doing accounting, billing, contracts, etc on my own.

  30. Based on my simplistic formula the current market is slightly more expensive that current date in 2008. A lot cheaper than 1998 and slightly cheaper than 1988. With the known above, the market is still a buy. We must remember how badly George Bush tanked the economy. We are still in recovery mode. Think Trump made moves last year and will make more moves this year that will tank it before the 2020 election. He will then argue that he is the person to fix it. The only 2 modern presidents that haven’t presided over a recession are Clinton and Obama.

      1. I’ve already shared it with you in the past. I do not remember which post.

        Anyone those that are heavily in the stock market will make out pretty well over the next couple of years. I’m pretty heavily in stocks as I’ve been saying they are cheap for a while. My guess is it’ll tank before 2020 election but who knows. I may pull some out late 2019 and buy a 2nd home.

        Below is some interesting recent Warren Buffett commentary.

  31. Charleston.C

    Only time will tell, but I think you did absolutely the right thing selling the rental at 30x. Sure in 30 years its going to be worth more, but so will every other successful investment options.

    On a separate note, always interested in reading more about bonds and interest rates. Seems like there are tons of coverage on most finance related websites or new outlets about stocks and to some degree real estate, but bonds/treasuries are less talked about (perhaps because its less exciting).

    1. If I didn’t work in equities for my entire career, I definitely would have worked in fixed income. I love fixed income, probably because I was an economics major in college. In retrospect, I should’ve gone into fixed income. My investment my track record there is much better, and the pay was huge in that department, much more so than equity guys.

      This was a situation where I was never introduced to fixed income as a kid, or even in college. I thought it was just some boring Barnes and stuff, but fixed income market is so much bigger than the equities market, and you see those like Bill Gross kill it.

      Note to self: teach my son about stocks, real estate, and fixed income.

      1. Charleston.C

        Always interested in learning more about fixed income from here or elsewhere. Keep up the good work and treat yourself!

        Much rather see 2 post a week (or hell even 1) if it means this blog will still be around in 10 years, than 3 posts or more a week taking you to the breaking point and POOF this site no longer exist.

      2. Micah Angelica

        I agree wholeheartedly with Charleston.C, I would love to take a deeper dive into fixed income. I read ‘The Allure of Zero Coupon Municipal Bonds’ twice and shared it with my hubby. It cleared away some prior fogginess.

        Mahalo for keeping me in-the-know, Sam.
        Happy New Year 2018 to you and yours!

  32. I agree 100%. This whole post read like a big confirmation bias for me. I think stock is going through the roof this year. Investors all think it will keep going up and valuation doesn’t matter at this point. A blow off will come soon.
    I’m having a really hard time renting our 1 bedroom condo too. I put it on the market and we’ll see how it goes.

    1. Confirmation bias for you or for me? Confirmation bias is generally not a good thing, and I’m hoping readers will challenge my view points so I’m not left broadsided.

      How long Have you been looking for a tenant? The new supply of condos everywhere is really putting a damper on rental prices.

  33. Wow this is such a thorough analysis!

    Your expertise really shows here. I keep hearing that the market will crash soon. In fact, some people predicted that the market was going to crash in 2017.

    I don’t know when it will happen, but my only hope is that neither hubby nor I will lose our jobs.

    1. It’s really the fear of a job loss compounded with investment losses that really make people lose their minds and a downturn. It’s understandable to panic so when your entire livelihood is at risk. Most folks under the age of 35 really don’t know the type of fear yet.

      The good thing about having no job is that there’s not much downside. I’m already at the bottom!

    2. Actually a lot of people were calling crash from 2013/2014.

      Ms. FAF,

      I saw 50% of my net worth evaporated in 2008/2009 which was more than nerve wracking. Thank God I still have a job and didn’t sell any of my investment but kept buying stocks all the way through. It turned out working great for me.

      Keep yourself marketable. You are young and have a lot earning potential and time. Since both of you’re working, losing two jobs at the same time is less likely. I would not be afraid of a crash because I could buy more stocks at the cheap… bottom fishing is fun.

  34. Thanks for this post, Sam! I live in Canada so things are a bit different but I also think at this time we are as good as it’s going to get. Unemployment is the lowest it’s been in my lifetime.

    Given that a downturn is coming, would you recommend I try to find a higher paying job now, or keep my head down and chug along since I’d lose any seniority? I feel like I could command a better income but then I’d be at the bottom of the totem pole again.

    1. Tough question. In a downturn, it’s almost always last in first out. I have probably been through 20 rounds of layoffs in my career and this was always the case.

      After taxes, a pay bump is never really as much as it seems. People underestimate the joy of working with good people and having some internal credibility.

      1. Very much underestimate this. I’ve worked with the best and the worst of people. I’ll have to say a high-paying job with awful people is so not worth it. The unfortunate part is with a downturn and layoffs sometimes you don’t get to pick and choose. Let’s hope it never comes to that. Try to gain as much institutional knowledge as possible and be a go-to and likeable person at your work.

  35. “Our biases often warp our reality by anchoring us to past situations.”

    So true. It’s important to keep this in mind.

    On your other questions, Sam:

    (1) Our background:
    – Both 33; worked in financial services and non-profit arenas since 2007
    – Currently D.I.N.Ks
    – Live in Chicago for +2 years now; NYC for 8 years prior to that
    – Renters
    – +99% of net worth invested (about 25% in real estate exposure).
    – Currently averaging +$1k a month in passive income via portfolio income.
    – No debt of any kind.

    (2) Thoughts on markets & assets

    – First fact: no one knows what will happen
    – Do agree with your prediction that 2018 or shortly thereafter will see some type of slow down. This has been a really, really long bull market.
    – Majority of our net worth is still in equities, but we’ll be mindful of additional capital allocation in equities.
    – Our new 401k contributions are going to a short-term bond fund for the time being. We’re not really touching existing equity holdings though, as we also want to to continue to benefit from any capital appreciation as well as income received. But we need to rebalance.

    (3) 2018 plans / focus area:

    – Taxable Accounts: increase passive income derived from taxable investments vs. non-taxable assets.
    – Schedule and Frequency of Distributions – consider obtaining appropriate assets that payout during lower contributing months (NOT: March, June, September, and December).
    – Liquidity: continue to be mindful of the massive disproportion of passive income from investment vs. banking/savings accounts.
    – Type of Income and Diversification: look for new sources of passive income beyond traditional “portfolio” income.

    Thanks for the post. – Mike

    1. To be 33 with no kids is a great time to take risk. That age really is one of the best ages where you have maximum energy and maximum opportunity. At the same time, but next 5 to 10 years could make or break you if you’re looking at early retirement or doing something different.

    2. 33, no kids, both working — I wouldn’t want to put any of my money in bonds if I were in your situation. Once you have kids and/or one spouse stays home, your risk appetite will change a lot.

      1. Can you expand on your comment since bonds are historically a defensive investment. Do you think there is a bond bubble? Where do you suggest investing instead? And how is your net worth and portfolio constructed? Thx

        1. I would invest in stocks instead if I know I am able to remain solvent in the next decade or two. The bonds seem more expensive than the stocks to me. I’m not sure if bonds would save me in the next melt-down.

          I’m not as young as him and my wife is a homemaker. We have 2 kids so my portfolio is more conservative than I wish:

          8% CA muni bond fund so IRS/FTB won’t rob me-:)
          4.8% cold hard cash in checking account earning nothing-:(
          40% Real estate, a rental prop and primary residence in SoCal
          47.2% US stocks/mutual funds.

          My job pays me very well but I could be shown the door anytime. I would continue invest in stocks for 2018, probably overweight in international.

          1. I’m a so cal native as well in a similar situation. Wife and 2nd kid on the way. 35% in cash 40% equities some real estate and alt investment like lending club. how are you currently allocated?

      2. Hi Klondike – thanks for you input.

        I was going to make a similar comment as Sam re: the bonds. Our portfolio is listed on our site for further details, but as of close-of-business today prices and reviewing Personal Capital:

        – Alternatives/Real Estate = ~22%
        – US Equities = ~51%
        – Non-US Equities = ~13%
        – US Fixed Income ~9%
        – Non-US Fixed Income = ~1%
        – Cash = ~4%

        Much of that cash figure is also included as part of equity mutual funds.

        Regarding risk appetite, we’re still long on our existing equity holdings and continuing to expand into real estate (primarily via Fundrise to diversify across our traditional REIT holdings).

        Two items on our current bond holdings:

        (1) We use a intermediate-term investment-grade bond fund with check writing privileges as part of our tiered emergency savings (the rest is in savings accounts and about 20% in blue-chip equities).

        (2) Our net worth grew 26.1% in 2017 vs. 19.8% in 2016. From January 2016 through the December 2017, our net worth increased over 50% in 2 years.

        Related to Sam’s point, some of this is just defensive posturing for the gains we’ve seen. The other is creating some potential capital for any downside buying opportunities.

        Thanks for sharing your thoughts again. – Mike

        1. Hey Mike, Thanks for sharing detail of your AA. Your idea of putting emergency fund (Oh sh1t Money) in bonds seems interesting to me. I may want to do something like that:)


  36. Did you ever consider the possibility that all the developed world could reach a Japan non-inflation situation that will last the next decades?

    At least here in the Eurozone, the inflation just doesn’t seem to pass the 2% target from the ECB. And with a lot of easy money.

  37. Everyone is excited about the positives of tax reform on the market and euphoric about stocks. That to me is a contrarian signal that means things are about to turn bad… but since I know timing could be now a year or two years from now I will do nothing. Market timing is a fools errand.

  38. Hi Sam

    Nice post. I am not an economist, nor do I have an MBA. I am a retired senior citizen with small business experience. I think that we are headed for economic problems. Sooner, rather than later.

    Run when you hear “this time is different”. The stock market PE is historically overvalued. The crypto currency love affair reminds me of the Dutch Tulip Bulb fad.

    Tax law changes are always temporary and subject to change depending on the winds of political fortune.

    As a society our excessive political disharmony is bad. The example set by the antics of ill mannered and discourteous national leaders is starting to blead over to society as a whole.

    Frankly, I think that the stock market is in the bubble mode. What will cause it to burst and when it will happen is anyone’s guess.

    The current suspects include future actions by Russia, North Korea, and Iran. Toss in the general instability in the Middle East, the actions of ever multiplying terrorist groups and unidentifiable risks, and you have a large cast of characters that might burst the bubble.

    It the stock market takes a hit, will it be a correction or something worse? Compare today’s stock valuations to prior history. Are today’s values slightly high, very high or approaching the stratosphere?

    Sorry if I sound doom and gloom but after more than a half century of watching the economy and life in general I am very concerned.

    As for real estate crowdfunding, I have concerns about both the illiquidity and transparency. If I didn’t want to be a hands on owner, I would look at Reits.

    Sam, your newsletter and blog are great. You write both from your head and your heart. May you and your family have a happy, healthy and prosperous new year.

    1. Thanks for your thoughts. I need to use my mind before it goes away. I cut myself put in the cereal in the refrigerator the other day.

      As a retired senior citizen, I’m curious to know how your investments are structured and any other thoughts on Wealth after retirement. I do plan to publish a post on investment risk and retirement in the near future.

    2. Hmm – perhaps you are correct but I actually think a lot of what you mention is “noise.” Russia is a weak country that does not have the ability to materially alter the world. NK and Iran are small players that cannot do much of anything except create noise and give the 24 hr news cycle something to crow about.

      Frankly, the world has never been safer.

      As far as stock market goes, less regulation will create more opportunities. Risk takers will be more comfortable taking said risk in hope of generating above average profit. I just want to ride their coat tails. I have been long the market for decades and it has not disappointed me yet.

      Assuming I retire in 2-3 years, I do not anticipate much change to allocation except maybe more dividend paying equities instead of a large position of high growth/high risk stuff.

      I guess I am wired to believe owning pieces of companies hopefully run by brilliant people that know how to make money over the long term will always be a good thing. Has worked for Warren Buffet and so far, has worked for me.

  39. I have to admit that the SALT deduction took me as surprised. It is going to crush a lot of people that were previously using it. I think I read that Maryland, DC and VA were some of the biggest users of the SALT deduction. It’ll be interesting if it affects these areas as well and what type of impact it has on housing around the area.

  40. 2018 is our bridge year. We use this year to upgrade the bolts and tie up any loose ends. If by the end of the year I’m not 100% satisfied with our finances then something went wrong in my planning. I plan for everything.

    In a selfish, morbid way I hope you are right Sam. I believe 4 Pillar Freedom’s data pointed out without a crash within the next 10 years, everyone’s returns would be much smaller. If it’s a steady stream upwards, the longer we’ll all be purchasing in at inflated prices which is bad for the already tarnished millennial crowd.

  41. You can just tell, can’t you. Everywhere the mood is bullish. People are starting to think – 1-2 more years of this, and I can retire. That’s typically the scenario when the #1 Wall Street Rule comes true – “If something can’t go on forever, it won’t”.

    I too feel 2018 will be the year a lot will unravel.

    1. Let’s see! Because I’m not taking the viewpoint the 2018 is when a lot of things will unravel. We’ve got a Teflon president, we’ve got accommodative interest rates, and we have a structural change in the tax regime.

      How is your investment portfolio structured?

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