After a raging bull market, capital preservation is generally a good idea. After all, the last thing you want to do is give up all of your gains and then some. If you do, that would be like wasting a whole bunch of time and emotional capital.
Since I started investing in 1995, I've round-tripped many individual investments. As a result, most of my equity capital has been invested in passive index ETFs. You might get lucky buying a stock with great gains. But you've got to get lucky twice by knowing when to sell the stock as well.
For example, soon after I had bought Life Time Fitness Group, the stock zoomed up 40% within 30 days. Once the omicron news came out, the stock came all the way back down to my original purchase price. As the stock collapsed, all I could think about was what a waste of time it was researching and writing my article.
Let's discuss capital preservation and our desire to protect our money.
Capital Preservation Investments
If you want to protect your capital, here are the most obvious conservative investments:
- Hard cash
- Treasury bonds of all durations
- Certificate of Deposits – $250,000 FDIC-insured per depositor, per FDIC-insured bank, per ownership category
- Money market accounts – $250,000 FDIC-insured per depositor, per FDIC-insured bank, per ownership category
- U.S. savings bonds (Series EE and I Bonds)
For capital preservation with more risk and potentially more reward, you can also invest in the following:
- Annuities
- AAA-rated municipal bonds
- AAA-rated corporate bonds
- Gold and other precious metals
- Fine art and other rare collectibles
- Target-date funds
- Real estate
- Hedge funds
- Other active funds like leveraged buyout funds
I've got investments in all of the above capital preservation investments except for Series EE savings bonds and annuities.
Cryptocurrencies, unfortunately, are not capital preservation investments. When Russia invaded Ukraine, cryptocurrencies plummeted in value while gold rose in value.
Related reading: The Best Financial Moves To Grow Your Wealth
Capital Preservation Investments As A Percentage Of Net Worth
The more conservative you are, the greater the percentage your net worth consists of capital preservation investments and vice versa. At the minimum, everybody should have at least six months' worth of living expenses in cash or liquid securities in case of an emergency.
In terms of recommended capital preservation investments as a percentage of net worth, I've generally followed this net worth allocation guide I created. My steady-state Risk-Free allocation is 5% of net worth. Risk-free includes Cash, Treasury bonds, Certificate of Deposits, Money Market accounts, U.S. savings bonds, and AA-rated Municipal Bonds.
Corporate bonds, target-date funds, hedge funds, and real estate are clearly not risk-free. But they do help to preserve capital versus an all-equity portfolio during a downturn. If we are to include all of the capital preservation investments above, then an appropriate net worth percentage can easily range between 5% – 70%.
Excluding the value of my business, target-date funds for my children's 529 plans, and real estate, roughly 15% of my net worth is in capital preservation investments. I know that if all else fails, I'll have at least 15% of my net worth to live off.
I can either draw down principal to pay for living expenses. Or I can live off the roughly $45,000 in passive income my capital preservation investments produce.
For reference, I do have ~50% of my net worth in real estate. It is the best risk-adjusted investment for someone at my stage in life. I enjoy its income, lower volatility, and tangibility.
Check out Fundrise, my favorite real estate investing platform if you want to earn more passive income without much volatility.
Disadvantages of Capital Preservation
The biggest disadvantage of using a capital preservation strategy is inflation. The higher the inflation, the less purchasing power your capital preservation investments have over time.
The interest rate paid by fixed-income investments is almost always a nominal interest rate. This means the rate doesn’t account for inflation. A fixed-income investment’s real interest rate is the nominal rate minus the rate of inflation. Therefore, if a municipal bond fund is yielding 3%, but inflation is 5%, the real municipal bond yield is -2%.
The more negative the real interest rate, the more your investment is losing value. As a result, in a high inflationary environment, it is usually better to have a lighter capital preservation strategy. Instead, it may be better to take on more debt to buy potentially appreciating assets.
Of course, there are no return guarantees. In a bear market, earning a negative real interest rate is much better than losing a tremendous amount of principal.
Why You May Want To Pursue Capital Preservation
We've already mentioned that pursuing capital preservation after a massive bull market may be desirable. The last thing we want to do is violate the first rule of financial independence: never lose money.
Here are some other reasons why you may want to shift more towards a capital preservation strategy:
1) Plan on buying a house.
A house is a large ticket item, which often requires a 20% down payment. Therefore, it's good to minimize risk on your down payment the closer you get to purchasing your house. If you're within six months from purchase, you should probably have the lowest-risk capital preservation strategy possible. Here's my framework on how you should invest your down payment.
2) Close to paying for college within five years.
College tuition is also, unfortunately, a large ticket item. The closer your child gets to attending college, the more conservative your investments should be that are earmarked towards tuition. During the 1997 Asian Financial Crisis, many international students from Thailand and Indonesia had to take a leave of absence because their currency got devalued and their stock markets got crushed.
3) Close to retirement.
If you're almost at the finish line, then adopting a greater capital preservation strategy makes sense. I know people who made millions on paper during the 2000 Dotcom bubble only to lose it all and then some.
One sandwich shop guy I knew planned to go back to Lebanon and retire. But since he lost all his money after the 2000 dotcom collapse, he ended up making sandwiches for at least seven more years. It's not worth taking on so much risk if you've already accumulated enough capital and passive income to live free.
4) A health issue that is chronic or growing.
Unlike in retirement, you might not be able to work if you have health problems. Therefore, you cannot afford to risk losing a lot of money because you might not have the ability to make up for your losses through active income.
Hopefully, you have insurance, a pension, passive income, and social security to cover you in case of a problem. The older I get, the more I appreciate life insurance. Life insurance was my #1 financial move to help decrease stress and anxiety during the pandemic.
Protect Your Gains After Great Runs
We've had a great run since 2009. We've also had a speculator run since the start of the pandemic in 2020. To give up a lot of our gains would be a shame. Frankly, being able to make solid returns from our investments is one of the reasons why the pandemic has been bearable for so many investors.
Please spend some time calculating what percentage of your investments and net worth are in capital preservation investments. Now run some various market scenarios to determine whether your allocation makes sense.
With only about 15% of my net worth in lower-risk investments, I will lose a lot of money in the next downturn. Therefore, my plan is to raise more cash and reduce some of my equity investments in my tax-advantaged accounts. I'm about 5% over my target equity allocation of 30% of net worth.
Further, I plan on spending more of my investment gains so that I actually get something out of them. If things get ugly, at least I'll have a nice memory or something tangible to show for!
Here are the 2023 S&P 500 Wall Street forecasts and 2023 housing price forecasts. So far, the returns have been positive. However, you never know the future. Therefore, stay diversified and focus on capital preservation if you've already made a killing!
Invest In Real Estate For Capital Preservation
One of the main reasons why I love to invest in real estate is because it is a less volatile asset that provides shelter and generates income. Stocks, crypto, and other risk-assets are funny money to me. In order to enjoy your wealth, you've got to take profits and spend it on occasion.
With real estate, you can enjoy your home and make money at the same time. And if you've reached the limit for the number of physical properties you want to manage, invest in real estate online.
Check out Fundrise, my favorite private real estate manager. It has multiple funds that predominantly invest in the Sunbelt region, where valuations are lower and rental yields are higher. There is a strong demographic shift towards lower-cost areas of the country due to work-from-home and technology.
Fundrise manages over $3.5 billion and has over 400,000 investors. I've personally invested $953,000 in private real estate funds to diversify my expensive coastal real estate holdings.
Track Your Finances Diligently
A key part of capital preservation is staying on top of your finances. The more you know where your money is going, the better you can optimize your wealth. Winging it is not a good personal finance strategy.
The way I track my finances is with Empower, the web's best free financial app. Not only can you get a great breakdown of your net worth allocation, you can also calculate your expected retirement income and expenses.
I've been using the app since 2012 and have seen my net worth skyrocket, partially due to better wealth management. I'm very focused on capital preservation today after the markets have had such a good run since 2020.
Readers, what are your thoughts on capital preservation at this time? Are you OK with your risk exposure? Or do you plan to increase it or dial it back? What are some other reasons for pursuing capital preservation?
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I’m finding very little to like about the Equity market right now and expect things to be rocky in the 1H of the year. I also don’t like to move in and out of the market but conditions are so volatile right now that I am moving some of my 401K to the sidelines and waiting for things to settle down a bit. I’m over-allocated to equities for someone who is retired so it makes sense to lessen the risk and put that money back to work after the COVID peak has passed and we see how the market reacts to these pending interest rate increases.
I’ve been over 90% in Equities and I am dialing that back to between 65-70% and increasing Cash for future deployment and putting some more money to work in REITs. We’ve all had a great run the last 3 years and the last decade and I just don’t like giving more of that back in a correction than I need to.
Hi, new to site. Interesting read. I see you mention Fundrise as a review; however, I’m curious about the liquidity of the investment. Keep asking myself, why would I invest in a REIT through this investment vehicle vs. just buying several REIT on the exchange, which i own several already. Just curious on your take on this.
If you are to invest in private real estate funds or deals, you need to allocate a 3-5-year holding period. Therefore, only invest in the money you don’t need for 3-5 years. Personally, I love to lock up my money for years so it can compound and I can forget about it.
I don’t like looking at daily stock and real estate price movements. It distracts me from what I want to do in life. That said, about 35% of my net worth is in stocks and publicly-traded real estate ETFs and REITs.
I agree with you in general re: non publicly-traded ereits. But, in regard to Fund Rise specifically, their “Interval Fund”, which has become their main fund, they have a “repurchase” option offered each quarter. I think this is the rule for all “interval funds”. This is one of the attractions of the Fundrise Interval Fund besides a 20+% increase for 2021 (the first year of the fund). Most of my money in Fundrise is in the Interval Fund in part because of the liquidity option.
There are major changes at Fundrise and most of it involves the Interval Fund.
True. So good the fund returned over 20% 2021. With the stock market looking dicey in 2022, I’m going to focus on real estate and building up a cash hoard.
Hi, what is your take on all these 2022 market crash predictions??
Which ones? I think we could easily see a 5-10% correction this year due to valuations and Fed headwinds.
For me “cash” is whatever amount you need so you don’t mess with your investment portfolio during rough market time. When people talk about raising cash – I think, like you, they are generally talking about within their investment portfolio, not for a emergency fund. At 57, my investment portfolio is 75% stocks, 15% Bonds, 10% REITs + a $750k home fully owned. I stick to that through think and thin. I have learned I can’t time the market (some very hard lessons!!!). Dividend generally reinvested. So I don’t really have a cash position and don’t raise cash.
Then I have my “cash”, which is 2+ years of living expenses = $300k = about 5% of net worth. This is the “sleep well at night” when the market drops 5% that day, 20% over a month. It just sits in Vanguard money market.
When the market is in a downtrend I will build that cash stash from my saved regular income and then take the new money and buy when new opportunities present themselves – hopefully in the vicinity of the bottom. I am not real concerned about getting an extra 1% in a CD with the cash. I get it – inflation inflation inflation…but if my portfolio works as it has and likely will, then it really isn’t a big deal overall. And like you said, I feel pretty good when I didn’t buy aapl last week when it is 180, and now I can get in maybe later in the 140s with some of the “cash”. That makes the inflation concern kinda mute.
At this point in my life, I’m willing to take on the risk of purchasing more stocks even as the market continues to go down. My goal is to have $300,000 in equities, so the way I see it, everything is on sale now. I just have to keep reminding myself that the market always moves up and to the right in the long term. Plus, plenty of research has shown that it’s suboptimal to time the market so I don’t want to pull money out if my ultimate goal is to have more money in the market. Of course, the money being invested isn’t anything I’m going to need in the short term. I’m in the wealth building phase. If I keep at it, hopefully, my fortunes will one day be worthy of employing a capital preservation strategy. I think it’s a great idea to take some profits to enjoy life after earning huge gains.
Thanks for the article. I haven’t made any changes to my current allocations or paycheck contribution strategy, but I got a nice size bonus this year that is sitting in a savings account indefinitely (other than I used a portion of my bonus to purchase another $10k of iBonds for 2022 per your earlier article). Usually I invest my bonus as soon as I get it, and I had planned to just top off my youngest kid’s 529 plan with this year’s bonus, but this year I have analysis paralysis. Maybe keeping more cash around is the answer.
I’m legging into contributing the max $16K to my kids 529 plans now. With such a long time horizon, it doesn’t matter so much about getting the timing perfectly right.
Many of my waking hours are spent thinking about this topic. I finally pulled the trigger and put in for my state pension. Luckily I’ve got a few other irons in the fire.
My family has always gone the real estate route as small time landlords beginning with my grandparents. I own a few single family homes other than my residence that I’ve made more money in appreciation than I thought possible- more than doubling in the past few years . The rent in my area has gone up at an incredible pace.
Originally my background was in construction so I do all of my own maintenance except carpet/vinyl installation. As any landlord knows, it’s not exactly a passive route. I currently have one of my homes vacant. Getting it ready while battling pneumonia isn’t exactly fun but not terrible either.
The rest of my money is in cash, metals and bitcoin. With my cash supplementing my pension, I’m guessing I could live on it a few years if I had to. But it still only represents about 7% of my net worth.
I never did actively invest in stocks. Reading your regular posts makes me wish I did. But I’ve done well enough in real estate, with all of my homes owned outright and paid into a state pension plan for decades so I’m not too worried about it. Great food for thought.
Ah, to be able to have the skill to do your own work on your properties is huge. I have developed many handyman skills since 2005 myself and it is sometimes very interesting how one of my tenants always needs help on simple things. Immaculate educated, but doesn’t know how to clip in a blind, for example.
If your pension that can pay for your living expenses, you’ve won the lottery. No need to worry much! But if you do, I’d love to hear the reasons.
The pension alone probably would pay for living expenses but there wouldn’t be any money for savings or big ticket expenses. My state doesn’t have huge pension payouts but it’s very well funded. Add the rental income and and now we’re getting somewhere.
Yes- immense amount of education but no handyman skills. My dad was an electrical engineer educated at UCLA. He was a legend at his job. He “helped” me hang drywall on an project I did for him. That was an experience I’ll never forget. I never could completely convince him that a 1/8” gap in drywall sheets when hung is perfectly acceptable.
Ha. Just need good taping and mudding!
Is there a reason why you’re not putting money into annuities?
I round tripped LTH with you. I got stopped out at the price I paid for it but it was a fun ride!!
Increased my cash position to ~15% for protection and to buy dips.
Another great article. Really appreciate your writing and insights.
I totally agree with you on the part where you said you have to be lucky twice with stocks. Lucky when you buy and lucky when you sell. I’ve always said it a little different, “the hardest part of stock investing is when to buy and when to sell”. That is why I’ve eliminated the “when to sell part” by only investing in dividend stocks. (Full disclosure, I do have a few cybersecurity stocks that don’t pay a dividend).
I use the website “simple safe dividends” to pick out stocks that are predictable. They have a long history of not only paying dividends, but raising their dividends. I plan on living off the dividends one day. I don’t have to worry about ever selling the stock unless the fundamentals of the company really changes. If the share price drops, that just means I am getting more shares when I reinvest my dividends.
Looking forward to your next article.
Makes sense investing in blue-chip, dividend-paying companies for the long term. So much easier to not worry about holding names like Procter & Gamble and Apple over the long term versus a turnaround story that may never turnaround!
A refocus on dividend stocks versus growth stocks may be in order. Growth stocks have done so well, with valuations so high, they are susceptible to getting pummeled.
I like this approach too as it takes out the complexity of when to sell as the dividends do this for you.
However, is not a high quality dividend etf an even simpler choice? The fund will “self-cleanse” the losers out and the winners in over the long term and make it even simpler. ETFs like this are available for 10 basis or less. Seems worth it to me.
Very timely on discussing capital preservation. I’ve been mulling about it in the back of my mind and think it’s time for me to make some adjustments to my allocations. It’s always nice to make new changes in the new year!
Not sure why Gold and other precious metals are not mentioned in this article on capital preservation, especially during an inflationary environment. Gold is not only held by the US federal reserve, its an alternative currency as written in the US constitution. Article I, Section 10 of the Constitution explicitly forbids the states from making anything but gold and silver coin legal “tender”.
Gold is mentioned.
Hi Sam,
My view of capital preservation is a little bit different. I feel that lots of what you describe is more about “liquidity risk” than “capital preservation”. For example, when we want to buy a piece of real estate, then we need the cash for the down payment, in order to avoid a “liquidity event”, or “not having the cash we need when we need it”. I see capital preservation as a more long term concept, with maybe a 10, 20 or even 50 years time horizon, where the main objective is to preserve purchasing power of the initial capital.
When I manage my investment money, I always try to protect 100% of my capital. I do that by always seeking the best investments possible on a price vs value basis as well as with using proper diversification.
In that sense, I view cash, bonds and other “guaranteed investments” as highly risky, because of the loss of purchasing power in the long term. When Benjamin Graham wrote his books “Security analysis”, he strongly adviced against investing in foreign bonds, viewing them as “too risky”. At that time, the US government had a very low level of debt, and the US dollar was convertible into gold (or at least equivalent to gold). The likelyhood of a US government defaulting on its debt was close to none. And the possibility of the US dollar losing value (currency debasement) was very low.
I don’t know what he would think about the US government bonds today, but I think he would put them in the same category as the foreign bonds of that time and advice against investing in US bonds for capital preservation.
If we deem US and foreign bonds to be uninvestable for capital preservation (long term protection of purchasing power), then the obvious choice for the “safe” part of the portfolio is gold, or any other physical asset, like real estate, other commodities like silver or platinum as well as indirect ownership of real assets, through equity investments for example.
As for the equity part of the portfolio, I try to invest in the best companies at the lowest price possible. Diversification help me to avoid being exposed to major losses on a single investment as well as it allows me to double or triple my position when an investment I like goes down. On the opposite, when my favorite investments go up a little too much, I either trim a little bit, or sell completely (more rare lately due to very costly mistake in the past).
Starting 2021, Tesla was my biggest position in my portfolio at around 14.8%. In continued to increase and I finally sold 80% of my position in February 2021 at around 860$ per share. That was a little bit too early since the stock is even higher today. But I was more concerned about capital preservation than another +40% gain on Tesla stocks.
I sold a couple of other stocks as well, like Deere (350$), Applied Materials (100$) and Macy’s (13$) following gains of around +200% for each of them. I would have done better if I had waited, but nobody knows what the future will bring. I had to make the decisions with the information I had back then.
I redeployed this capital into other stocks I thought were I good value for the price at that moment, those are still major positions for me today :
– Couche-Tard (gain of +30%)
– Suncor (gain of +30%)
– TC Energy (flat)
– BCE (gain of +18%)
– Riocan (gain of +25%)
– Barrick Gold (loss of -12%)
All of them have done worse than Tesla (+40% since selling my shares, considering a 1200$ share price). But I feel that even with these price increases, those company still have potential for increase. And I feel much more confortable that, on the downside, they will retain their value better than Tesla. This also give me more buying power if Tesla goes back down to, let say, 300$. We never know… (?!)
Anyway, there are so many public companies available on the stock market, there will always be some good opportunities somewhere. It’s just a question of finding them and having the courage to invest.
Sometime, they are very obvious, like Apple, Microsoft or Google a few years ago. Maybe the best opportunity today will turn out to be Alibaba. How knows ?
Is there a better way to preserve capital than finding the next 2-bagger, 3 bagger or even 10-bagger and invest a good amount into it ?
I think not. :-)
Great article! As someone who went through the dot com bust and the Great Recession of 08 capital preservation is on my mind big time. With less than a decade to retirement I want to lock in the great gains I have had last 12 years. The only problem sizable percentage of my wealth is in a 401k with limited choices. What do you think of Vanguard’s REIT for a real estate play?
I have been buying VNQ for years as a strategic way to gain more real estate exposure in a passive manner. Same goes for real estate crowdfunding. Given I’m bullish on real estate, I will continue to buy. However, we need to observe the 10-year bond yield from getting too high (2%+).
Sam do you think the beginning of a new year is always a good moment for investors to invest or is better to wait for the first 6 months of the year to have an idea of this? My question is, where is the best month to invest money in your opinion when a new year begins?
I think we should always be investing a percentage of our cash flow every month. Stay consistent and disciplined over the long term.
I’m not really into real estate but I think my wife and I are going to purchase 25 acres that are cabin ready (two adjacent lots) with water and electricity. Except for the cabin site the rest is forest land with a steep slope and amazing views. This is remote wilderness territory near one of the few small towns (Jasper) along the Buffalo River, a national park. We will probably have a small, two bath two bedroom cabin built on it ($150K in that area). We hike up there all the time and while I doubt we’d ever move up there I think it has the potential to greatly increase in value since its in an area that is very popular for people to vacation in from both of Arkansas only metro areas. The land sells for $6,800 an acre, which is very high for our state but being so close to protected wilderness areas and also a few miles from an old defunct theme park, Dogpatch, that the Bass Pro people recently purchased to build a nature attraction on. Bass Pro Shops is huge in our part of the country, probably unheard of out there, but this will be a destination area even more when that thing opens up. Seems like moving a few hundred thousand out of stocks into land might make sense plus I just can’t see us having trouble getting our money back in the unlikely event we’d ever need it. We could easily VRBO it too, but we probably won’t since we don’t need the income or the hassle. I know you are a busy guy so I understand you might not have time to respond, but if you have any thoughts about the concept of buying land in the middle of nowhere I’d love to hear them? It seems like a “safe” place for money right now plus it would be a fun project.
Sounds like a wonderful getaway!
The only bummer is having to sell stocks to pay taxes.
I like this observation you made: Frankly, being able to make solid returns from our investments is one of the reasons why the pandemic has been bearable for so many investors.
I would generalize this to “bearable for so many human beings” in this country. Think of all the old people who retired early. All the people who quit their jobs for fear of their or their family’s safety. How many millions even now are still at home for the most part, isolated because they can afford to be?
If it all finally tanks, I think we’ll see more chaos and violence than we’ve seen in our lifetimes. People do strange things when they feel their lives are threatened, and we’re talking about a nation of delicate flowers here for the most part, not soldiers. The Federal Reserve must know this. This is the opinion of one observant medical doctor, not an investor per se!
We should all expect a 10% correction this year at some point. We saw a 13.5% correction in 4Q2018 when the Fed hiked rates and kept its tightening rhetoric strong.
I’m finishing my basement right now, and I need to pay the contractor every week. I’ve decided to fund it by selling some of my individual stocks that have done very, very well. Meanwhile during the pandemic, I started some capital preserve (mistakenly), but I put it in Worthy bonds (paying 5%) and a similar bond that Fidelity gave me access to (MFHVX) which is paying about 6%, but the price fluctuates. At least I have that money available in case the market drops. I’ve also been putting money into Fundrise based on your recommendation.
Forgot to mention that my ARM loan will adjust again this February. Last year it went down to 2 5/8% after the initial 5 years of 3%. I think it’s going to go to 2 7/8% (2.25% + LIBOR which is at 0.60 today). So I may think of putting money into my house, as rates go up. But we’ll see if they actually go up much
I LOVE spending some funny money stock profits on remodeling jobs. It feels great to get something out of the profits.
In fact, I’m finishing up a long remodel now. I hope it is done by February 15, 2022. It should increase the value of the property by $300,000 after spending about $110,000 on it.
Hi Sam,
As you shift from equities to real estate, how do you think about and manage capital gains impacts? As always, thanks for your insights.
Sure. Any changes made will be in my tax-advanced accounts first, so there are no tax liabilities.
I am a big fan of your blog and appreciate your advice and perspective!
I am not a fan of keeping my money in cash though…
I am a big believer in cash flow properties and particularly in NNN warehouse/distribution space. I moved from So Cal 5 years ago to Eastern Tenn. I had been buying warehouses for an additional 5 years before in the southeast. Unfortunately, now the word is out and cap rates have compressed to almost to west coast rates.
Inflation is here, and I dont think it is going away quickly. I am in a business that for 25 years had seen no upward trends in prices, but with covid, supply issues and in my business (golf) strong upward pressure in demand. Prices are up.
The problem in cash or its equivalent is that inflation is greater than being reported and that although wages are going up they are not keeping pace with the it’s decreased purchasing power.
I am putting my money in my business by purchasing inventory aggressively, and bringing modernization to my factory which will decrease need for labor ( greatly more difficult to hire now than in my 30 years of business)
In addition, I think buying single family homes in eastern Tennessee is great investment.
Homes here are still relatively cheap and jobs are plentiful and new companies are moving here everyday.
Jim
Has the pandemic really been going on since 2000?? Wow I knew I had cabin fever but had no idea it had gotten this bad :P
In all honesty I just bought a house. In the suburbs in Austin no less. I completely realize everyone says it’s a circus right now and that there’s a chance home prices will go down as rates potentially go up, but in this case we didn’t waive appraisal or inspection, it actually appraised for more than we offered (which was a few K over asking) and we even got a 2k back in a closing credit for inspection repairs. Plus I plan on being here for 10-15 years at least and am tired of renting and watching my heartless REIT landlord constantly jack up the rent. Also read an article yesterday that so many Californians are moving to Texas that U-Haul ran out of trucks for them so I doubt the market in Austin is going to stay down for long and am guessing I’ll do ok on this one in the long run.
As far as stocks I’m about 90% cash. I know you said you don’t expect a big drop in the market but I definitely think we could see a big drop in the Nasdaq and even more of one in high spec stuff (high growth / no profit, crypto, etc.). Given that, in my Roth I bought a little recently as the Nasdaq recently went under 5% from the latest high. I’ll buy more at 10, 20, 30, 40 and 50% levels with the assets getting riskier as the drop gets bigger (so for now I bought a couple of older profitable tech stocks and will probably end up buying something like cannabis if we get to the 40-50 range).
I usually go with dividend growth stuff for my IRA / 401k accounts so I’ll pick some of that up (VIG w/ a few high conviction individuals that I think will beat the S&P) as the S&P drops although I agree w/ you that we probably won’t see as much of a drop in the S&P as we will in the Nasdaq.
Funny thing about the Nasdaq is it seems like it’s been a lot worse under the surface lately, so while the index itself is only down a bit a lot of smaller tech / growth stocks are already down significantly and I think there are already some ok buys out there right now with some of the mid caps that are quality tech / growth companies that are below DCF fair value. In this case if the market drops I’ll do well, but even if it doesn’t I don’t think the potential growth is going to be all that great so I probably won’t be missing out on much.
90% cash is impressive. How long have you been in 90% cash and how did your portfolio do in 2021 and 2020? I’m about 70% confident we’ll see up to a 10% correction.
Austin has had quite a good run with lots of supply coming. If if you plan to live in your home for 10-15 years, you’ll probably be fine.
I’ve been bullish on Austin real estate since my 2016 post on investing in the heartland.
Today I’m more hesitant. https://www.financialsamurai.com/cities-most-at-risk-of-a-housing-downturn/
I just recently went to holding this much cash once it was clear the fed had changed their stance and would begin tapering, so it has only been a few weeks. I actually made more in stocks over the last 2 years than I ever have previously, and a significant chunk of the down payment (we put 20% down) came from cashing out most of my tech shares in the second half of last year. In this case I think putting the money into a home will turn out to be a good bet, and while I agree there’s a good chance prices might go down here (and just about everywhere else for that matter) interest rates are also going to be higher so I don’t know how much of a change you would really see in the monthly payments.
I also think Austin in particular is going to grow a lot more due to the amount of tech jobs in the area. A lot of people look at overall job numbers but they don’t compare that to the population, so as an example if you type ‘python’ into indeed right now you get about 5k jobs in Austin and in Los Angeles. The difference is the metro population in L.A. is 18 million while its only 2 million in Austin (although I suspect the numbers are different now based on how traffic has gotten worse here). So given that, if you knew python which city would you rather be in? Having owned an old crappy 2br condo with no air conditioning in L.A. that would cost more today than the newish home here that also happens to be in a better neighborhood with better schools I’m happy with my choice.
This pretty much sums up why I don’t think a potential downturn would be so bad or last so long here. Funny thing is that article has Austin in the top right of that one pic in the article which makes it easy for people to look at that and say that’s where the biggest crash is going to be, and while I agree with almost all of the points you made in the article, I don’t think the simplifying things to the point where you say ‘the city that grew the most is going to crash the most’ is going to prove to be accurate. I personally think you might see more of a crash in places like Southern California where things are more expensive, home prices are significantly less affordable, and there aren’t as many jobs (that don’t completely suck) per person available but to each their own.
-Cheers
Amazing returns! Does that mean you’ve only recently been investing? Or did you just have a couple really good years?
I’ve got to do my calculation, but I don’t think my past two years gains have come close to the gains made since 1995. But the returns have surely been welcome since 2020.
Every tech employee I know over 35 has made over $1 million in equity since 2020.
I started investing in 2014 (unless you want to count a normal 401k which I don’t). These last 2 years have been the best in terms of returns and this last year was the best AGI to date. I wish I would have been investing when you were back in the 90s. It seems like you might be a little older than me but you chose finance in college so it makes sense that you were also financially literate before most of the people your age were. It still seems stupid to me that we make kids study algebra but financial literacy isn’t taught enough (if at all) in middle / high school.
I think you are probably right about a 10% correction overall (ie. in something like the VTI) but the S&P might dip a bit lower and I’d argue there’s a fair chance growth is probably going to do even worse. A 50% from the all time high in the Nasdaq would take us all the way back to………..wait for it……….2018 so I think there’s a fair chance you might see something like that depending on how hard the fed decides to pull the rug over the next few months.
Every tech employee you know sounds like they are doing a little better than me but I’m not complaining. At this point I just hope younger people start looking into investing more since it just seems to get harder as every year goes by.
I’m 44. I’d much rather be younger and poorer! Time is priceless.
There’s no need to worry about a 10% correction. I’ve been so many now – they happen usually at least once a year – that I can’t remember them all.
Even a 20% correction could happen. It feel bad. But when you look on a historical chart, we almost can’t see them.
I’ve lost money in the tech bubble and in the financial crisis as well. At that time, I thought that was a disaster. But all the stocks I had back then are now 3X to 5X the value they were back then plus dividend.
When we put things in perspective, market volatility is not fun, but it’s really not that bad.
I think buying a house was a great move. Congrats !
Don’t use the fear of a correction stop you from investing. In the long term, this is a very bad idea.
This is true for me. Profits since December 2019 are greater than from 1996 to December 2019. Partly it is the poor performance in my first 15 years of investing through the dot.com crash and Great Recession, and partly that I am playing with so much more money now.
I think you mentioned you inherited a lot of money several years ago? I forget. Can you remind me what percentage of your net worth was that inheritance?