The best way to get rich is to turn funny money into real assets. Funny money is money that is built upon far out assumptions that may never come true. Funny money is money you earn by just doing something you love. Funny money is lucky money.

By converting funny money into real assets, you help ensure that your wealth will continue to grow for a longer period of time. Otherwise, it might just go POOF one day and disappear!

One of the biggest funny money assets is equities. Equity valuation is based on future earnings projections that may or may not happen. While you wait, you receive zero utility from equities. Funny money.

The first stock market meltdown I ever experienced was the 1997 Asian Financial Crisis. International college students from countries like Korea and Indonesia had to drop out because the Won and Rupiah depreciated so much, making tuition unaffordable.

Construction cranes stopped moving in Bangkok and the IMF had to bail out the entire region. Of course some people made a killing in the downturn when they swooped up assets for pennies on the dollar. But most people lost their shirts.

Then when things really started getting good again in 1999, the NASDAQ decided to collapse in the Spring of 2000. Such a shame to only experience one brilliant year of mega exuberance after college before the floor fell out.

Many people in finance lost their jobs. Then 9/11 happened. I remember seeing my stock portfolio go from $3,000 to an absurd $200,000 in six months. It then lost about $40,000 in a couple weeks when B2B stocks and internet stocks started imploding.

I remember thinking: Where does all the money go? It’s all funny money!

Paper millionaires who exercised their stock options early and didn’t sell not only lost everything, they also owed huge tax bills as well. Remember, the government always wins in the end.

On September 15, 2008, Lehman Brothers went bust. I remember this day clearly because I made a $200 side bet with my friend over the weekend that the US government would bail them out. To my surprise, the US government didn’t rescue Lehman, and the stock cratered that Monday and never recovered. This is my most poignant memory of the financial crisis.

Despite all the economic devastation, I wouldn’t mind rewinding time and going back to 2008. I’d rather be 31 than 42, simply because I love life and want to live as many years as possible.

As we potentially head into another recession due to the coronavirus locking up economic activity and the collapse of oil prices causing tremendous job loss in the oil & gas sector, here are some lessons learned during and since the financial crisis.

During the last downturn, I lost about 35% of my net worth in about six months. I don’t plan on doing that again. I want to share how we can make lots of money during the next downturn, which is happening right now in 2020.

Losing 35% is not as bad as the S&P 500 losing ~60% during its worst period, but it still hurt like hell due to the speed and absolute dollar amount of the loss.

At the end of February 2020, the S&P 500 lost 10% faster than any other 10% correction in history. The the S&P 500 proceeded to collapse by 32% in March as the coronavirus pandemic grew. As a result, if we are equity investors, we must be extremely vigilant in guarding our net worth. 

Realistically, my target net worth growth scenario during a recession is to stay flat – neither make nor lose money. This is the first rule of financial independence. But my blue sky scenario is to actually try and make lots of money as the world collapses all around.

Here’s how I plan to do it and how you might too if you’ve accumulated enough money or are planning to retire within the next five years.

The proper asset allocation of stocks and bonds by age is important. However, there is no “correct” asset allocation. There is, however, an optimal asset allocation I’d like to share in this post. 

Your asset allocation between stocks and bonds depends on your risk tolerance. Are you risk averse, moderate, or risk loving? I’m personally risk loving or risk averse, and nothing in between.

When I see “Neutral” ratings by research analysts, I want to slap them upside the head for having no conviction. Then the optimist in me thinks what a great world to have occupations that pay well for providing no opinion!

Your asset allocation also depends on the importance of your specific market portfolio. For example, most would probably treat their 401K or IRA as a vital part of their retirement strategy because it is or will become their largest portfolio.

Meanwhile, you can have another portfolio in an after-tax brokerage account that is much smaller where you punt stocks. If you blow up your online trading account account, you’ll survive. If you demolish your 401K, you might need to delay retirement for years.

The Proper Asset Allocation Of Stocks And Bonds Analyzed

I ran my current 401K through Personal Capital to see what they thought about what my proper asset allocation is. You should do the same thing since it’s free. To no surprise, the below chart is what they came back with.

I essentially have too much concentration risk in stocks and am underinvested in bonds based on the “conventional” asset allocation model for someone my age. To run the same analysis on Personal Capital, simply click the “Investment Checkup” link under the “Investing” tab.

I am going to provide you with five recommended asset allocation models to fit everyone’s investment risk profile: Conventional, New Life, Survival, Nothing To Lose, and Financial Samurai.

We will talk through each model to see whether it fits your present financial situation. The proper asset allocation will switch over time of course.

Before we look into each asset allocation model, we must first look at the historical returns for stocks and bonds. The goal of the charts is to give you basis for how to think about returns from both asset classes.

Stocks have outperformed bonds in the long run as you will see. However, stocks are also much more volatile. Armed with historical knowledge, we can then make logical assumptions about the future.