Dear Financial Samurai,
The Fed under new chairman Kevin Warsh hiked the Fed funds rate 25 basis points, as expected. The market sold off immediately after, then rebounded the next day.
I view the hike as a positive. It signals the Fed is focused on combating inflation and won’t be a puppet to the White House. The 12-0 vote matters too. Three members dissented back in July, and Warsh got every one of them on board this time.
But a 25 basis point increase does almost nothing to actually combat inflation. The bigger question is whether this is the start of a long series of hikes.
16 of 19 FOMC members expect at least one more hike this year, and the dot plot now sits at 4.1% by year end. Markets are pricing in three more by mid-2027. Seems reasonable, and relatively mild compared to the 11 hikes that started in 2022.
Look at where this hike sits historically and you’ll feel better. We spent the 1990s between 3% and 8%. The 2022 to 2023 cycle moved 525 basis points in 16 months. This one moved 25.
Your Credit Card Rate Just Went Up
A 25 basis point hike flows straight through to variable rate debt. Credit card APRs will drift up about 0.25%. So will car loans and HELOCs. Cue the headlines telling you to buckle down.
Let’s do the math instead.
Carry a $5,000 credit card balance and the hike costs you an extra $12.50 a year. That’s a burrito. Meanwhile, you were already paying $979 a year in interest at 19.58%.
Finance a $43,610 new car over 60 months and the hike adds $5.10 a month, or $306 over the life of the loan. You lose more than that driving it off the lot.
Here’s the thing. If you’re carrying a revolving balance at 19.58%, the Fed is not your problem. The 19.58% is your problem. Fixating on the 25 basis points is like complaining about the tip after ordering the $200 bottle of wine.
None of us should be carrying revolving credit card debt. Not at 19.83%, not at 19.58%, not at any rate a credit card has ever offered. Pay it off and the Fed can do whatever it wants while you feel nothing.
That’s the underrated luxury of being debt free. Fed meetings turn into a spectator sport until they go too far and crunch your equity investments.
A Change In Mindset Helps You Hold For Longer
When it comes to building wealth, holding on to your asset for as long as possible is usually the best strategy. You let compounding do its thing and you don’t create taxable gains that lead to economic waste.
I couldn’t hold onto a rental property last year, so I sold it once the tenants gave notice. As a result, I missed out on another double digit return in the San Francisco market while paying commissions and fees. At the time, I was spooked by the Pacific Palisades fire that came out of nowhere and wiped out an entire neighborhood.
I also didn’t want to deal with finding and managing tenants anymore. The house was rented to four roommates. But if I had viewed those tenants differently, as guardians of the property, I might have held on for one more year and made a lot more money.
You see, properties left unattended for months have a higher risk of experiencing damage that grows in size. My latest tenant incident with the fire alarms reminded me that having someone in my rental units is important. These are assets I rely on to fund our freedom. Insurance companies agree.
Check out: Vacancy Clause: Why Insurers Won’t Cover A Vacant Home. Please review your homeowner’s insurance policy and see what its vacancy clause is. You might be surprised at what you find out.
Manage Expectations Down
Eventually, you will be taken for granted by your clients, colleagues, friends, and acquaintances. It’s an uncomfortable feeling, as we all want to be acknowledged for our efforts. But as I wrote in a previous post, the desire for recognition is a cause of suffering. Recognize that and let go, and you will be happier for it.
Letting go is easier said than done. So I encourage you to manage the expectations people have of you instead. If you can regularly outperform expectations, not only will you feel better, the people closest to you will appreciate you more.
For example, a fellow school dad invited me to play golf today at his club with other school dads at 3pm on a Saturday. But my daughter has a soccer game at 2pm, and I block out 9am to 6pm on Saturdays and Sundays for family time. There’s no way I’d feel good if I missed her scoring a goal. I’m also the driver.
Another dad has been playing golf during the day on Saturday or Sunday for the past 10 years, so his wife is used to him not being around. He also travels for work regularly, whereas I don’t because I don’t have a job. So on the rare occasion he skips golf and spends the weekend with his family, he is viewed as a hero by his wife and children.
Manage expectations down if you know what’s good for you.
Read: Sandbagging As A Way Of Life To Build Greater Wealth
Funny Money Psychology
I’ve long argued that investing in stocks is funny money given it provides no utility. A stock’s value can surge 20% in one day and collapse the very next. Unless we occasionally sell stocks to pay for things or experiences, investing in stocks is pointless. As a result, I’ve long favored real estate as an investment.
But as I experience more tenant and maintenance issues, the more I dislike owning physical rental properties, and the more I like owning 100% passive investments, hence my investments with Fundrise for real estate. And given it is AI mania now, I’m digging the paper returns.
You’ll see in my latest post, Venture Capital Paper Gains Aren’t Real But Still Feel Great Anyway, how enormous returns can boost your mood. Even if you can’t sell the position to buy anything, you get an extra pep in your step.
The wild thing about this latest multi-bagger investment is that there’s intense competition, especially from an incumbent with massive resources and an enormous platform. But these top VCs are betting big on it anyway.
I view this as a sign of how much continued appetite there is for AI companies. Some argue we’re in the 7th or 8th inning of the AI revolution. I think we’re still closer to the second or third.
As a result, the greater risk is not losing a ton of money in AI companies. The greater risk is missing the revolution altogether. And given we’re all disciplined capital allocators who will only invest a portion of our capital in private AI companies, even if we lose 100% of our 20% allocation, we’re still going to be OK.
The WSJ also reported on Friday that Anthropic is pushing its IPO back to November, still targeting a $2 trillion valuation off a potential ~$110 billion year-end revenue run rate. The more time it has to demonstrate it can actually get past $100 billion in revenue, the greater the belief in its growth. And the more time for anticipation, the greater the demand when the IPO finally happens.
Let’s see.
To your financial freedom,
Sam
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Everything I write comes from firsthand experience since 2009, not theory. Money is too important to be left up to pontification.
If you’re working toward your first or next million, my USA Today bestseller Millionaire Milestones: Simple Steps To Seven Figures (Portfolio Penguin) lays out the path in order. Given this week’s discussion about holding assets longer and staying out of revolving debt, it’s the most relevant of my books to what we covered.