Despite not wanting to buy stocks after the S&P 500 has rebounded by over 30% since its March 2020 bottom, I still own a significant amount of stocks across a number of investment portfolios: two 529 plans, a SEP IRA, a Rollover IRA, a Solo 401(k) and a couple taxable investment accounts. Then there's my wife's SEP IRA, Rollover IRA, and two taxable investment accounts that own mostly stocks as well.
One would think that if I didn't want to buy stocks after a rebound, I should also be willing to sell stocks that I already own. I do want to sell and I have sold plenty in my accounts in order to de-risk, but I've held off on selling stocks in most of my tax-advantageous accounts due to a variety of reasons I'll talk about in this post.
To be clear, I’m not advocating buying after a huge rebound. I’m going to explain in 12 reasons why I haven’t gone to 100% cash or short-term Treasury bonds across all my portfolios.
Everybody is at a different stage in their financial journey. Nobody knows for certain what the stock market will do, so please keep an open mind when reading. This post should help explain why so many people keep buying, despite all the destruction.
Why You May Want To Buy Or Keep Owning Stocks After A Huge Rebound
1) Many are benefitting from the depression.
There are winners and losers in any economy. In the global pandemic of 2020, some of the winners include video conference companies, online consumer companies, cleaning product companies, and all the people who continue to work from home and collect a full paycheck.
Just because you are depressed from reading demoralizing headlines in the news every day doesn't mean that everybody is suffering. The media tends to focus on the negatives to drum up more viewership.
During a recession, people would rather read about people suffering more than they are, rather than read about someone doing very well. It's just human nature.
If you are easily spooked, I suggest not following the news during a crisis. The news will only make you feel like the world is coming to an end.
2) The Federal Reserve is on the investor's side.
Time and time again Fed Chair Powell has indicated he will do whatever it takes to ensure that the financial system continues to operate properly. He has said he will use the Federal Reserve's balance sheet to buy up different types of assets at whatever price necessary.
With the return of Quantitative Easing 4 (QE4), the Fed's balance sheet will continue to surge higher until economic prosperity is restored.
Hypothetically, if the Fed decides to buy everything, based on Deutsche Bank's estimate below, the Fed's balance sheet could grow by $130 trillion. One week the Fed might be buying municipal bonds.
Another week the Fed could be buying mortgage-backed securities. The S&P 500 will rocket higher if the Fed ever announces it will start buying equities. It's probably unlikely to happen, but it could.
When you can print endless amounts of money and sell endless amounts of debt, there really is no limit to the size of the Fed's balance sheet. To the future children of America who have to pay for all our debt, sorry!
3) The Federal Government is on the investor's side.
Whether you believe in the powers to be or not, the Federal Government is on the investors' side, especially during an election year. The Federal Government can pass stimulus packages that will excite investors. The Federal Government can conduct tremendous infrastructure spending to get millions of people who have permanently lost their jobs working again.
Between 1933 and 1939, President Roosevelt announced The New Deal, a series of programs, public work projects, financial reforms, and regulations to help the United States recover from the Great Depression.
With Joe Biden as President, he has already called for an additional $1.9 trillion in stimulus in 2021. He also wants to forgive $10,000 in student loan debt, which predominantly favors the middle class and upper-middle class.
4) There could be a vaccine for the coronavirus sooner.
Although scientists say that a vaccine is more likely to be developed 12-18 months from now, a vaccine could be developed much sooner. With the potential for billions in profits, you know that scientists and entrepreneurs are working overtime to be the first to find a cure.
On May 18, 2020, we saw the S&P 500 rally by over 3.5% after Moderna announced promising results from its initial trials. Whether its results are legitimate, nobody knows for sure. Given how quickly stocks move, equity investors tend to buy or sell first and ask questions later.
We now know there are at least two highly efficacious vaccines by Moderna and Pfizer, with Astrazenca and J&J also in the works.
5) You want to hedge against a layoff.
Ironically, the more terrible the unemployment numbers, the more the stock market rallies. Every weekly unemployment claim in April resulted in a stock market surge. The assumption is that the worse unemployment gets, the more the Federal Reserve and the Federal Government will step in to stimulate the economy.
You see the same phenomena of a company stock rising when a company announces a big layoff. Layoffs show investors that management is being proactive in cutting costs and increasing the company's chances to return to maximum profitability.
For example, after Uber announced another 3,000 job cuts after already laying off 4,000 employees several weeks earlier, its share price jumped by 8%. All the remaining employees are benefitting.
The more a company can do with less, the higher the profits. The higher the operating profits margin. The higher the potential earnings, the higher the potential share price.
6) You want to own companies you can't join.
One of the reasons why I bought stocks such as Facebook, Google, Netflix, Apple, and many other names is because I wasn't able to land a job at any one of them. Here I was, living in San Francisco since 2001 and missing out on all the tech mania because I worked at an investment bank.
I didn't join any of the tech companies because I didn't have any tech skills and it was hard to leave a healthy finance paycheck behind. Instead, I just bought a bunch of tech stocks. I also decided to get as long as possible on San Francisco real estate. Real estate is one of the best ways to invest in the local economy.
If you can't join a company you like for whatever reason, consider buying its stock so you can still participate in its potential upside.
7) You have specific reasons for investing.
The best way to continue investing is if you have reasons to invest. I own stocks in my Rollover IRA, SEP IRA, and Solo 401(k) to help fund my retirement after the age of 60. Because I've got 17 more years to go until I reach 60, I'm OK with being overweight stocks in these portfolios.
I am also overweight stocks in two 529 plans because the money won't be touched for 15 and 18 years, respectively. I'm confident that by the year 2035+, the S&P 500 will be higher. Even though it's my money, it kind of feels easier taking more risk for my children.
I also own stocks in my taxable investment portfolios because I like some individual companies that have incredible growth potential. I also like receiving passive dividend income. However, I'm underweight stocks in my taxable investment portfolios because I count on these portfolios to provide for our retirement income today, not decades in the future.
To help you stay the course during times of uncertainty, identify specific reasons why you are investing in stocks.
8) Stocks generally do well over the long term.
If we look back since 1926, stocks have returned roughly 10% a year, including dividends, on average. A stock investor has almost always made money in stocks over any 10-year period.
One of the keys to good performance is investing in the right time period. For example, if you invested in stocks in 2000, you basically returned nothing for the entire decade.
Below are the 20-year annualized returns by asset class between 1999 – 2018. Stocks started doing well between 2009 – 2019. However, it was REITs that performed the best among all the below asset classes.
9) Bond yields are too low.
Everything is relative in finance. When bond yields are high, bonds look relatively more attractive than stocks. If you can invest in a bond that pays 10% a year with minimal volatility and a guarantee you will get all your principal back, you'd probably invest most of your assets in bonds. I would.
With the 10-year bond yield around 1%, it's hard to invest in bonds for capital appreciation. Instead, investors are mainly investing in bonds for safety. If the S&P 500 is reasonably valued and provides for a higher dividend yield, investors may be more inclined to invest in stocks.
Below is a historical chart of the 30-year U.S. Treasury bond yield versus the S&P 500 index dividend yield. Based on the last global financial crisis, buying equities was a good idea once the S&P 500 index dividend yield surpassed the 30-year U.S. Treasury bond yield in 2009.
10) You believe earnings estimates are too low.
If earnings estimates are too low, this means that current equity valuations are too high. When equity valuations are too high, investors tend to stay away. However, if you believe a company's true earnings are higher than currently expected, then you may want to buy the company's stock in anticipation of analysts catching up to your higher earnings estimates.
In other words, buying when valuations are high is the perfect time for investors who believe earnings have upside surprise. Below is chart that shows the S&P 500's historical P/E and where it should be based on a 20X P/E, 15X P/E, and a 10X P/E.
Earnings Forecast Example
Let's go through a stock example to highlight why buying when valuations are high may be a good idea. Let's say a pharmaceutical stock trades at $10 a share and the consensus earnings estimate for the year has fallen from $2 to $1 a share. As a result, the P/E is an expensive 10X versus a historical P/E multiple of 8X.
A typical investor might think the stock is too expensive and stay away. However, based on your knowledge about its vaccine trials for COVID-19, you believe the true earnings estimate for the year is between $5 – $10 a share, giving the company a current true valuation of only 1X – 2X P/E.
If the company's vaccine gets approved and the company's earnings go to $5, then based on a historical earnings multiple of 8X P/E, the company's share price could rise to $40 (8 X $5) from $10. If the company's earnings go to $10, then its shares could surge to $80.
At the end of the day, a stock's share price is based on its earnings potential and a valuation multiple. Generally, the higher the earnings potential, the higher the share price.
V-Shaped Recovery
In today's environment, if you believe in a V-shaped recovery, 90% – 100% of laid-off employees getting their jobs back at full pay, no second wave of COVID-19, and a vaccine by the end of the year, you should be buying stocks since the S&P 500 is still more than 10% below its all-time high.
Below is a chart that shows how forward earnings estimates have been cut by about 15% across all capitalization indices. A stock market bull will believe a 15% earnings cut is too much. A stock market bear will believe that only cutting earnings expectations by 15% is way little.
Below is another interesting chart that highlights the number of S&P 500 companies that beat or missed consensus estimates by greater than one standard deviation. So far, the data is not looking good for bulls because analysts have not cut their estimates fast or large enough.
11) You have a high risk tolerance.
Dollar-cost investing in stocks doesn't take a lot of guts because the average amount you are investing isn't very large relative to your income or net worth. You just have to keep on investing in good times and bad times. On the other hand, investing a much higher-than-average amount of capital after a 30% rebound during a global pandemic with record-high unemployment is another thing.
Since 1999, I've had no problem investing a maximum amount each year in my 401(k). While I was working, the maximum contribution amount was between $10,500 – $18,000, or less than 20% of my gross income each year. But I could never get the guts to invest more than $200,000 at a time into the stock market during times of uncertainty. Instead, I bought property because I knew property wouldn't just disappear overnight.
If you have a high-risk tolerance because you're young, have a stable job, don't have dependents, don't freak out about volatility, make a lot of money, or have endless energy to make up for any potential losses, then investing in stocks can be a good choice.
12) There is a massive amount of cash on the sidelines.
Despite the big rebound in the stock market so far, cash on the sidelines continues to move higher as skepticism about the recovery increases. As a result of a large amount of cash, there is the potential for the stock market to go even higher if more good news starts getting reported about the virus and the economy.
When cash levels were high back in August 2009, the stock market was near its low and proceeded to march higher as cash was put to work. The problem with today is that we've already rebounded a lot from March lows.
When Investing, Think In Probabilities
Conventional wisdom says to buy and hold stocks for the long term. Based on the S&P 500's historical track record, it's hard to go against conventional wisdom. However, I'm also a strong believer in regularly spending your profits to pay for a better life.
There's no point investing if you never end up using your investment money. If you hoard all your investments until your remaining few years of life, you will have wasted all that time working and saving.
When investing, always think in probabilities. Ask yourself what is the probability the stock market will go higher or the probability the stock market will go lower within a certain time frame. Time is an important factor because we can't live forever and there is an opportunity cost for investing your money.
Investing Example
For example, if you believe there is a 30% chance stocks move higher within a year after a big rebound, you logically believe there is a 70% chance stocks move lower in the same time frame. You don't know for sure, but you can invest according to your beliefs and invest more conservatively.
In this situation, if you have $1 million in investable assets, perhaps you will only allocate $300,000 (30%) in stocks and allocate the remaining $700,000 (70%) in bonds or leave it in cash.
Given the opportunity cost to investing is not spending money today, you can also spend some or all of the remaining $700,000. For example, I know with 100% certainty that spending $15,000 for a hot tub will bring me tremendous joy. Therefore, if I needed another one, I would absolutely spend $15,000 instead of invest the money.
Despite all the economic destruction that has happened since lockdowns were implemented, I do believe there is still a 40% chance a new all-time high will be reached in 2021. I also think there's a 60% chance the S&P 500 stays rangebound between 3,500 – 3,900 for the year. Given these percentages, I will keep my tax-advantageous money mostly in stocks with the expectation that I will be wrong.
However, with my taxable investment portfolios, which are larger, I don't want to risk being too wrong because I need the money to spit out a steady stream of retirement income. If I end up losing a lot in my equity portfolio, I increase the risk of having to go back to work. Therefore, I have logically lowered my equity exposure the higher equities go.
Look To Invest In Real Estate Too
Finally, given I believe there will be real estate buying opportunities in the near future, I'm looking to amass more cash instead of always investing new cash flow into the stock market.
Real estate is likely always going to be my favorite asset class to build wealth given it provides shelter for my family and has the potential to go up. Living in a larger home with a backyard for my son has really been a godsend during the lockdown period. Real estate may not provide as much appreciation as stocks, but it won't fall as drastically as stocks either.
If you still want to buy stocks after a massive rebound and after carefully reading this post, go ahead. Just be aware of the risks. I've maxed out my tax-advantageous retirement accounts for the year and won't be investing any more money in my taxable portfolio in stocks until valuations look more reasonable.
In the meantime, let's go bull market!
Keep Track Of Your Finances
Stay on top of your Roth IRA and overall finances by signing up with Personal Capital. PC is a free online tool I've used since 2012 to help build wealth. Before Personal Capital, I had to log into eight different systems to track 35 different accounts. Now I can just log into Personal Capital to see how my stock accounts are doing. I can easily track my net worth and spending as well.
Personal Capital's 401(k) Fee Analyzer tool is saving me over $1,700 a year in fees. Finally, there is a fantastic Retirement Planning Calculator to help you manage your financial future.
Related: How To Predict A Stock Market Bottom Like Nostradamus
Readers, I'm curious to know what are your reasons for buying and holding stocks after a huge rebound?
Added some stocks during the downturn, more than i normally would contribute with my plan. Instead of buying my usual etf I started a stock portfolio buying growth names.
Now that the markets ha rebounded I go back to regular contributions and rebalancing the etf allocations.
During the downturn and all along the rebound I invested as usual. For the long term I’m sticking with a simple allocation to a world stock ETF as I have faith in humanity to push forward. I could hold cash but then I would be playing a betting man’s game. Time in the market > Timing the market. I know my limitations. I’m no Warren Buffet :)
Great summary, Financial Samurai.
I’d argue that you either protect your Stock Portfolio with Gold or with Aggregate / Core Bond Funds (mix of Treasuries, High Quality Investment Grade Corporates Bonds and Mortgage Bonds). But I would AVOID Treasuries at this point since they have downside risk and generate negative real returns.
I have done some research around it and compiled all major ETFs and what comes out is that Aggregate Funds give you protection while generating 3% Yield.
Gold is also not a bad bet in this environment. It reacts to a few factors: #1 Low Real Interest Rates #2 Weaker USD / Debasement #3 Further Economic Shocks
#4 High Inflation (Above 3%) and #5 Retail & Central Bank Purchases. While #1,#4 and #5 are not good catalyst in the short term #2 is a great one and also you have no opportunity cost of holding Gold these days. It has done well as Equity diversifier over the past 30 years.
Stay healthy,
BoW
Thank you for the article. It’d be great if you can date them. It can be confusing as things change quickly.
You say “Despite all the economic destruction that has happened since lockdowns were implemented, I do believe there is still a 30% chance the S&P 500 will reach a new all-time high in 2020 and a 40% chance a new all-time high will be reached in 2021. I also think there’s a 60% chance the S&P 500 stays rangebound between 2,600 – 3,000 for the year. ”
I guess this means probably there is 60% chance it will be all-time high sometime in 2022? That is about %15 profit in two years (from current 2950 to 3400). Though, I think it will be very hard to reach the pre-crisis PE ratios within three years which should be valued in two years in the stock market. Also the risk is too much for 15% profit in two years in case things get worse. I still believe there will be a big crash in the coming months before the end of 2020 as it was always the case in big recession/depression periods. Bounce back is usually 60% of the sharp fall and then there is a bull trap and it goes much further below of the first bottom.
Somewhat off-topic, but you mentioned specifically in your post:
“There’s no point investing if you never end up using your investment money. If you hoard all your investments until your remaining few years of life, you will have wasted all that time working and saving.”
My wife and I have no children and no plans to have kids. She’s an only child, one cousin with no kids/no plans. I have one brother, no kids, no plans.
So both family bloodlines are ending, so to speak.
I’m always looking for ways to grow my money, but it’s important to actually USE some of that money for life experiences. You can always get more money. Time never comes back.
-Bo
I’m not sure whether you hit upon this reason to not sell, but capital gains taxes is what prevents me from becoming a day trader (and my complete lack of timing acumen). Like most other people, I don’t know whether the market will go up or down in the short-term. What I do know with certainty is:
1. The market will go up over the long-run
2. I will pay taxes if I sell and made money
So with certainty, at least I can avoid taxes if I don’t sell–forever if possible. I’ve taken long-term investing to the extreme–my grand plan is to let my heirs inherit my taxable portfolio with a stepped up tax basis thereby avoiding all capital gains taxes. (IRAs and 401Ks ahve their own rules so be careful). My estate has the good fortune of not likely exceeding the current estate tax limit of $11.58M per adult.
Great knowledge bomb, Sam. Like most,
my timing is horrible when it comes to buying and selling. I learned this right out of college. Young and dumb
I agree with you on real estate opportunities on the horizon. How are you looking to take advantage of them when they arrive (I.e. more crowdfunding or other)?
Hi Sam
What do you think of REITS like VNQ for those of us who are not based in US and cannot do real estate crowd funding ?
Would you buy REITs at today’s levels or are you taking a similarly cautious approach ?
Kind regards
David
I’m don’t agree with the idea of changing asset allocation based on market conditions; it takes a lot of luck to time the market well. Pick an allocation that makes sense for your risk appetite, financial goals, life phase, etc and stick with it until those factors change.
After some soul searching following the 08/09 crisis, I decided to go with a neutral portfolio allocation of 25% each stocks, bonds, cash, gold. Yeah, it didn’t perform as well as the S&P during the good times, but now its outperforming by a margin; right now my average return is just shy of the S&P over the time period but with a much smoother, predictable ride.
Psychologically, it also helps that during extremely good or bad times you tend to need to rebalance which gives you something constructive to do without trying to time the market. It’s also helped me get used to ignoring media hype about which asset classes are hot and which are not (there’s always atleast 1 asset class that everyone loves while another one is hated so I just get used to it).
The one downside (possibly upside depending on how you look at it) is that the amount of total return from interest/dividends is less than the same amount invested completely in stocks. Personally, I’m fine with that; I don’t think you need to only live off dividends to achieve a sustainable withdrawal rate. An added bonus is that it reduces your income tax while you’re still working and not drawing down.
May I ask if you don’t agree with changing asset allocation based on market conditions why you subsequently wrote, “After some soul searching following the 08/09 crisis, I decided to go with a neutral portfolio allocation of 25% each stocks, bonds, cash, gold.”?
Are you saying that you made a mistake and regret the change in asset allocation based on market conditions?
At the end of the day, any decision you make is market timing. You’ve got to do what’s best for you and your family.
See: https://www.financialsamurai.com/every-investment-decision-is-market-timing/
I hold onto stocks because I just flat out stink at market timing. I never get out at the high and never get back in at the low. I know I will just kick myself (as I’ve done in the past) when I try to time the market and end up being financially worse off than if I just held onto my stocks/S&P 500.
I know I am not alone. Most people are not very good at timing the market. It can be nerve wrecking to hold onto stocks, especially after such a strong rebound in a short period of time.
But if you have no need for the money in the near future and have a nice time horizon to invest that money, why are you getting out of stocks now? The question is can you outperform the S&P500? The vast majority of professional money managers cannot.
You need to not only exit at the right time but, more importantly, buy back in at the right time. There are a lot of psychological factors involved which make it very difficult to do versus just holding onto stocks through the highs.
I agree. My market timing over the long run stinks as well, which is why I usually just buy and hold and make sure my investments have a purpose.
But sometimes, I get lucky and buy a dip that ramps 20% – 30% in a short period of time. I like to take profits on my lucky investments and reinvest the proceeds into real assets that tend to last longer. Whenever I’ve gotten lucky with funny money stocks, I tend to use the proceeds to buy real estate since 2003.
Real estate has saved me from my emotions many times b/c it’s harder to panic sell real estate.
You can’t lose if you lock in a win!
With the current COVID-19 crisis, this post will help people like me a lot. I’m still learning about stocks, let’s see how well I can improve.
By stock do you mean individual company stocks or ETFs?
Either, or index fund. There’s an endless variety of stocks to buy. Equities is the proper overall encompassing term.
Deciding which type of equity to buy is a whole other blog post. But for this one, I focus on the S&P 500.
Thanks for being so thorough in assessing the stock market. After reading your 12 points, I’m feeling bullsy. Well, the chart at the end of #10 is a bit scary but only for short term holdings. The reality is that I’ve got my eyes on the prize which is buying an investment property with all cash within the next 12 months so I can’t be putting that much more into stocks.
Ah, I think I’m too convincing then, b/c I’m not bullish at all. I’m begrudgingly holding my equities. I keep asking my wife if I can sell some of her stock and she says no :)
Yes, focus on the purpose of your investments.
Why would you buy the property with all cash when mortgage rates are so low? Assuming you plan to hold the property long term, it shouldn’t be difficult for your investments to beat your mortgage rate, right?
Investing is hard. Especially when headlines people read don’t seem congruent with stock market highs.
The stock market is forward looking while headlines are point in time. I see a melt-up given the fiscal and monetary support. Plus lack of other good options
Nice post. I kind of fit into your point 8. Even though I feel the market has gotten ahead of itself, I’m not betting against it long-term. Especially not with the full force of the Fed and Gov’t behind it.
Nice point on cash reserve potentially leading to newer highs. I didn’t realize that was still the case.
It makes sense that cash reserves are rocketing higher. People with decent assets during the last crash know how long and painful crashes can be.
Holding more cash is a logical move given there is a risk we may repeat history.
Besides, holding cash feels GREAT in times of uncertainty.
A guest on CNBC this morning said there is $5T dollars sitting on the sidelines right now waiting to be put back to work. It is hard right now to be investing in equities but I did jump back in this week with a sizable investment. I’ve had no luck predicting these market moves and I might wind up jumping back out but we will see how it goes. I’ve been going against my long time buy and hold mentality this year trying to navigate this crisis.
So much trading is AI generated. It doesn’t care about short medium term corrections since it’s window is seconds or minutes. That is what is keeping stock prices up. The machines don’t lack confidence in generating profits. Stocks are still overpriced because this certainly WON’T be a V shaped recovery since everywhere that has re-opened has experience a resurgence in cases even as the season should be turning against covid. Any bounce will be short term. I see a short term peak/ then oscillation around 26.5 27 followed by a deeper correction as worse than expected revenues in the third quarter arrives just in time to greet seasonally aided uptick in Covid cases.
Hello Sam,
Thanks for this post.Very interesting.
On another thread , you had cautioned me against buying a house since I do not have a green card(work visa). Since that could take at least 4-5 years, what should i do with the money ? CD’s are down and i based on my appetite for risk putting much more money in Index funds may not be plausible?
What’s wrong with cash? You can get a decent 1.3% online now.
Do you still think it is wise to buy property without a green card when there are 40 million people claiming unemployment and many of these jobs might be lost forever?
No. Not right now anyway.
Just wanted to determine what to do with my cash(since it may be a while for the GC) . Based on what you’ve said I guess keeping it in a savings account (Capital One has a 1.5% savings account) might be okay.
I do have vanguard managed roth ira and brokerage accounts and will put some more gradually into it this year (3-4 K)
But , if things do improve with the economy&jobs in 6+ months I may reconsider.
If you cannot withstand a 50% drop in equities you are need to change your AA as the sp500 is only down about 8% YTD
The stock market has historically gone up 85% of the time. I like those odds. On CNBC today they reported that even with 30 million unemployed the overall cash compensation paid to every american has only dropped by 5%.
I agree the earning estimates are way to high for 2020. The thing is it doesn’t matter. Everyone has already written off this year. One thing I’ve learned is that when the Fed is printing money risks assets goes up. I believe its as simple as that. The other thing I’ve learned is that I can’t time the market. I dollar cost average every week no matter what.
Another thing that helps me is looking a the stock market like a shiny new truck. In february that truck was selling for 70k. Buy March that same truck was selling for under 50k. Would you rather buy that truck for 70 or 50? You know 10 years from now that same truck will be selling for 90k. When I see a discount I always add more to my weekly purchases. I’m not timing the market I’m just buying more of it when its on sale. I’ve done this for 30 years now. I”m so happy I did!
If you’ve been doing this for 30 years in a row now, don’t forget to spend some of your profits on that shiny truck!
Wow your posts are truly incomparable to any other PF site out there. I learned SO much from this post. I haven’t sold any of my stock positions and am glad to have made some of my paper losses back. Fascinating about the Fed’s commitment to buying assets at any price to keep the economy operating properly. Kinda scary actually.
If you are retired you gotta be nervous. Where are you getting income. As we approach 40 million unemployed and many not counted(illegals, cash business, etc) A Depression is imminent.
As a retiree you need to have your fixed expenses covered for 5-7 years at a minimum
Hi Sam,
re: “as long as possible on San Francisco real estate” — What’re you thoughts on the possibility that WFH/Remote Work for Tech workers becomes a more permanent thing, and folks leave the Bay Area?
Ex: bloomberg.com/news/articles/2020-05-14/tech-workers-consider-escaping-silicon-valley-s-sky-high-rents
I’m a tech worker who left SF for Austin last year, and I get pinged regularly by SF colleagues at my company who want to know more about our relocation process. Ex: What approvals they’ll need and how quickly they can get it done.
Yep, check it out: https://www.financialsamurai.com/focus-on-investment-trends-why-im-investing-in-the-heartland-of-america/
https://www.financialsamurai.com/the-best-cities-to-buy-real-estate-in-america/
How has the move to Austin been for you? What are the pros and cons compared to San Francisco? I’m looking to relocate to Hawaii myself.
Loving Austin so far. I feel like it’s one of the best decisions I’ve ever made and I wish I’d come sooner, but career and $$ in SF was a reasonable thing to spend a few years sacrificing for. The people here are super-friendly, and it’s way less crowded and noisy vs SF (I lived in Marina/Cow Hollow). I live by Austin’s big park (Zilker) and running trial, and go paddle boarding 2x/week.
Cons? It’s a lot warmer here, but TBH I enjoy it. Ex: Earlier this week I was hanging in the park till 9.30pm in t-shirt and shorts. In SF I hardly ever went out after 7pm bc it was always so damn cold and windy.
re: Real Estate in the Heartland — Yes, I am closing on a SFH which is a 5 min walk to downtown next Wednesday! The two previous buyers backed out because of COVID fears and I was able to get it for $50k less with a “no financing contingency” offer.
I’m speculating that many Tech workers will leave the SF Bay Area, and home prices there will stagnate or drop over the next 1-2 years. We’ll see.
Thanks for all the posts! I’ve been reading for years and started listening to your podcast this week.
Very cool! Glad you are enjoying it.
Are you able to make a similar salary too?
Had to take a 20% cut in my SF salary, but I got to keep all of my equity in my public tech co. Most of my compensation comes from the equity now.
Originally wasn’t happy to take the salary cut, but it’s bearable given the circumstances.
20% cut ain’t bad if your living expenses are down my much more.
So long as you believe moving to Austin is the best decision you ever made, that’s all that matters.
Great article. Points #7 and #11 struck particular chords with me. Wife and I are both 45 years old. In 11 years and 7 months (whose counting?) my wife will achieve 30 years service credit with Her Public Employee Retirement Account (PERA). As a teacher, she will receive a pension commissurate with her tenure and pay level. We will be roughly newly minted 57 year olds (I’m a month older). My plan is at this point, to achieve enough passive income from her pension, our 3 residential rental units and dividends/interest from savings, to completely cover our monthly living expenses via passive income.
However, I continue to invest monthly, in my Simple IRA, and once a year I match my employee designation with an employer contribution $13,500 plus another 1,080 or so depending on my pay amount. At 45, I hope to contribute to this account for another 15-20 years. There should be a decent chunk of change in the account, at that point. But I look at this as fun money that I do not plan to rely on (similar to social security if it is there for me in 17-20 years. I just make my contribution twice a month to a targeted fund 2040 allocation, hoping over time, the market behaves as it should. Knowing that if we work our plan, pay off our primary residence and eliminate our rental mortgage debts before this end date, our passive income will cover our expenses and we can use the other sources (SS, current active income from my business, etc) to travel and enjoy life with our kids.
Same age, different circumstances, but looking at 57 for a work-optional life ourselves. :)
Cool. Would love to hear your perspective/plan
Well, we don’t have kids and both work. So that makes it easier in the money respect up font; although when we’re old we will only hope a niece or nephew can help out.
While we don’t have a pension we are able to do maxing of 401ks and IRAs and even the HSA with some left over to save. But we started getting that aggressive only in the past 2 years. Wasn’t bad at all before but not what was certainly in our wheelhouse if we had been paying attention.
It was the “rule of 55” that really got my mind going. Easy, penalty free withdrawals sounded awesome. I likely will work to 57 to have the option to retire when my wife turns 55. Even factoring in health insurance and 20% of buffer and 15% giving, we should be able to live off of 3.25%.
Despite some views on social security, I think it will be mostly be intact so that should be gravy once we start collecting.
So, fairly different from you. I’m just too dang lazy to own rental properties. I probably shouldn’t be. And I suppose I have an unhealthy fear of problem tenants or a stupid lawsuit. I don’t know. It’s irrational of me for sure. Rental real estate can be such a sweet way to wealth so kudos to you for making that a part of your plan.
Congrats Pete. Thanks for sharing. Good luck with the remainder of your plan.
Jim
And thanks for your post. Kind of fun seeing the different ways to get to the same place.
Getting a pension is like winning the lottery. Congrats!
For the rest of us unlucky folks, we just gotta soldier on!
Yes, I agree. I try to explain to my wife the value and rarity of her situation with the pension. I even shared your post about calculating the value of a pension (I forget the exact title of your write up). She is of course appreciative, but everything from salary to her pension truly is secondary to her. It’s all about our family and her kids in her classroom. It’s kind of charming how she really does not give one hoot about finances or building wealth. Yin and Yang, I guess.
Great article Sam! My husband and I still own stocks and have actually been adding over the past few months. As you noted, with the market rebounding the buying opportunities have been hard to find, but I do believe they are out there. We have been buying or adding to positions for our daughters investment account. The key here is trying to find companies that remain undervalued and have not rebounded along with the rest of the market. As an example, we just started a small position in Brookfield Asset Management (BAM) under $30 a share and with a long term time horizon believe this is a good entry point.
As interest rates continue to decline, we believe investors will be looking for new or additional ways to generate returns and as you noted the stock market over the long term has historically generated strong returns. We’ve also been looking at potential Real Estate investment opportunities, but haven’t pulled the trigger yet.
Happy investing :-)
Thanks man, enjoyed the read.
First, did I miss that you now have a daughter as well! Congratulations. I’ve got two, grown and they were are are the best thing that has ever happened to me (second only to my wife). I took 6 months off when they are 5 and 3 to be a stay at home dad and loved every minute of it.
About finance. I personally just can’t see how this can’t turn negative. But I thought that in 2016 as well. As you pointed out the Feds are doing everything and will continue to do so. My concern is that so much of what’s done is window dressing. It doesn’t really get to the heart of building a sustainable economic model.
You pointed to the ‘Real Deal’ and I think that’s the best answer. Lord knows we need infrastructure, just look to Michigan. Funny how congress has been arguing about how costly infrastructure is, never providing any real dollars to fix these real problems to America’s competitiveness, and yet in the blink of an eye they spend $5T.
Tragedy often begets action.
Be well,
Hi Steve – Yep, you missed it! But thanks! See: Why I Failed At Early Retirement: A Love Story
But I’m kinda glad you missed it, b/c that means I haven’t been writing too much about my kids. I know some folks find people talking about and writing about their kids annoying, so I try not to and just focus on the bigger issues wrt Family Finances. But, as any parent would know, if we could talk about our kids 24/7, we would! LOL
another splendid breakdown, I just want to reiterate to all fellow readers, just like Sam said, do your own research and make your own judgement.. never trust a news source as modern day news is riddled with sensationalism to capture the audience no different from Netflix shows… just like Tesla and Zoom it’s all built on hype, the CEO smokes some weed or writes a bad tweet the stock goes down… lastly, the one thing I truly agree with in this post is “your purpose of investing”, majority of people are investing right now “just cuz” the markets are good to enter
I think there is 0% chance for a new high in 2020, but what do I know? I sold a bit of equity recently to replenish my war chest, but it really isn’t much. We don’t need money for a while so I don’t mind leaving most of our investment in equity for now.
You’re right about the opportunity cost as well. I want to remodel our kitchen, but we’ll wait a couple of years. It’s okay for now and it will be a big disruption to remodel. Once the stock market hit a new high, we’ll think about it again.
Good luck with finding the right HI property. We were supposed to be there this week but had to cancel. :(
0% chance? Come on.. there’s always a chance at anything, even if it is really farfetched.
For example, I believe there is a 1% chance I can gain 6-pack abs during quarantine, despite ordering lots of donuts yesterday.
I also believe there is a greater than 1% chance your wife will finally retire in 2020! :P
The stock market is doing a lot better than I expected so maybe there is a chance. Actually, here is my updated projections.
5% chance the stock market will reach a new high in 2020.
1% chance Mrs. RB40 will retire this year.
0% chance I’ll have a 6-pack anytime soon. This is pretty much impossible…
1%! So you’re saying there’s a chance! I coulda swore you said 2020 was the year she was going to retire with you though. What changed?
The plot thickens with the current bull run!
Issue with this rebound is the market breadth is weak across most us sectors and most world indexes. Concentration of index in top 5 amzn fb goog msft appl is at record highs 20% (more that even 2000 dotcom) .the equal weight sp500 is lagging.
That’s true about the concentration of tech stocks in the S&P 500 and the lack of breadth. But it also makes sense that tech stocks would outperform when physical economies are shutdown and everything is moving online.
If you can’t join them, invest in them. Point #6 in the post. I never had the skillset or the intelligence to join any of these booming tech companies. I tried briefly in 2012 when I left my day job, but I get rejected from every one of them, including my favorite at the time Airbnb. But now Airbnb is sucking wind… so it just goes to show you never know.
But if you have capital, you can hedge against your failures by investing in others. When you live in San Francisco, you can’t help but invest in tech stocks.
I moved all funds from taxable brokerage account to cash holding at the beginning of the free fall (I was freaked out), trying to buy real estate. 2.5 months passed, I missed the stock rebound, and I still haven’t found an RE deal. Both stocks and houses have increased crazy amount during corona. I’m now in deep reflection of my wrong judgement of the market in nearly every aspect during this crisis…
After reading your post, I’ve increased contribution to Roth401k (having been maxing out other retirement accounts), and still hoping for some RE deal to come up.
Sam, do you still hold the view that the next 1-2 months is the window opportunity to buy RE? I feel maybe we have to wait into the fall…
I’m beginning to see some deals here in SF. Definitely seeing some good deals in the Honolulu luxury property market now as well.
I’m afraid with the return to bull markets in stocks, the RE window is closing. Yes… 1-2 months left. But winter is perhaps another great opportunity if we see a second wave of the virus. Winter is generally the best time to buy.
I moved from a 70% stock asset allocation to one that is 40-30-30 stocks, treasuries and cash
While we may see new highs in 2020 the likelihood is low and not likely to greatly exceed pricing in Feb so the upside is likely maxed around 10%ish.
If the current rally is a bull trap, which based on past bears it may very well be, then a drop by 50% from where we are now is possible. If that happens I’ll push that 30% cash back into the market. While it might drop even further it likely won’t drop that much more before recovering to at least my buy price.
A V shaped recovery, even with the printing presses running 24×7 for QE seems unlikely. A U or L shape has a much higher probability given the current situation.
But whichever way it goes I’m positioned to do okay.
If it goes up a lot, 40% of my portfolio does well. I win.
If it goes down a lot, I can throw 30% into the market to buy low. I win.
If it stays about the same…eh, unless inflation hits the money isn’t earning that much less than a flat market. I don’t lose.
Actually trim ~2% off all three since I moved to being 5% GLD to hedge. That amount will likely not move again unless I need the insurance it provides against inflation or currency risks.
Most of the moves happened in Feb and May with a bit of buying speculatively in March. Sold some of that to offset the losses so I’m even for the year…but I don’t really know which way the market will jump even if I think it’s likely to go down so I want to position defensively and able to benefit either way.
I’m a bit more defensive than you but absolutely thinking the same win-win-ok scenario. I’m not looking to make big bets in my late 40s, just looking to slowly grow.
Focus now is family and career, in that order. Easy to save right now with expenses down 35%.
Love the breakdown! It helps to have a framework for making finl decisions. Thanks Sam. I’m still employed and saving my extra funds in cash. Still need to make some 2019 contributions for my wife’s solo 401k and am going to wait a bit to see if stocks come down a bit before the July tax filing deadline. If they don’t, I’ll likely buy a bond index fund instead. Always aim to maximize 401k contributions since we’re young in our early to mid 30s.
Will be an interesting finish to 2020 with the elections, covid uncertainties etc. just happy to have our health and about 12 years of savings in our after tax brokerage acct. it’s nice working from home more and 0 work travel after years of constant weekly travel