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Dear Financial Samurais,
When you suddenly lose a lot of money in the stock market, what’s the first thing that comes to mind? Some common thoughts might include:
- I'm an idiot. Of course, the stock market has to go down right after I invest.
- Well, that stinks. Now I’ve got to save even more just to get back to where I was.
- It’s all the Fed’s fault for not cutting rates sooner!
For me, the first thought is: What a waste of time! All that effort spent saving and investing, only to see it disappear in one random day. I could have spent that time enjoying life rather than working for money.
My second thought during a stock market correction is: I’d better spend more money before the stock market takes even more of it away! Ironically, I've found it easier to spend money when I’m losing a lot, at least on paper.
For example, a week after the market began selling off on July 16, I started buying wagyu steaks at $39/pound again at Safeway. Then I spent $200 on lobster and crab at a local seafood restaurant near the airport. What’s $250 worth of delicious food when your portfolio is down tens of thousands in one day? It makes no difference.
As soon as I let go of the relentless pursuit of building more wealth, I felt better. And naturally, I decided to write this new post, How Stock Market Crashes Can Change Your Life for the Better. Check it out if you’re feeling unsettled by the increased volatility. And yes, I’m still buying the dip.
Decumulation in Full Effect
If you’ve been saving and investing for 20+ years, you might find it challenging to start spending more money so you don’t die with too much. I think most personal finance enthusiasts struggle to break frugal habits long after they need to. I know I do, and so do my parents.
When the stock market is crashing, you might realize that holding onto stocks forever is pointless because stocks provide no utility. To capitalize on your investments, you need to sell once in a while to pay for something or some experience you want. Otherwise, what’s the point of investing in stocks?
By far, my favorite way to use stock market gains is to buy a nice primary residence. Not only do you get to enjoy your investment by housing your family and creating memories, but you also have a good chance of making money on your home over time. What’s not to love about that combination?
During the sell-off, I also had another realization: retiring early is essentially the same as spending more money to decumulate wealth. With early retirement, you choose to forgo a steady paycheck instead. Both retiring and spending more money reduce your savings rate and accelerate decumulation.
Since deciding to spend more money than average in 2022, when I turned 45, it’s been a struggle. However, I now realize I’ve been intentionally decumulating wealth since 2012, when I last had a steady paycheck. As a result, I feel better knowing I’m doing what I can to not waste all the time and effort I spent in my 20s and 30s working 60+ hours a week in finance.
If you’re struggling to spend more money, I think you’ll appreciate my new post, How to Decumulate Wealth: A Practical Guide.
Preparing for a Recession
Finally, we should all prepare for another recession. We might be in one already. If the unemployment rate (currently 4.3%) continues to rise by 0.2% a month, the economy could feel shaky by the end of the year.
Companies also love cutting employees right before the holidays to save on paying year-end bonuses. Cutting just before Christmas was a classic move in the banking industry. I’m sure we’ll see similar cuts in other industries like tech, law, and consulting.
The key is to prepare for a recession before we’re certain we’re in one. If you’re worried about your job and finances, you may want to read A Recession Preparation Checklist to Survive Bad Times.
If we do go through a recession, the silver linings are:
- You can more easily negotiate a severance package and break free from a job you dislike because companies will be looking for people to cut. If you can volunteer yourself.
- Treasury bond yields and mortgage rates will likely decline further, making housing more affordable if prices don’t start accelerating on the upside.
- The Fed will likely be more aggressive in cutting rates (65%+ probability of a 50 bps cut in September), reducing credit card and auto loan interest rates.
To Your Financial Freedom,
Sam
Thanks again to long-time sponsor Fundrise for supporting this newsletter. This year, I’ve personally invested $143,000 in Fundrise's venture capital product. It will be my primary way of gaining exposure to private growth companies going forward.
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