There are may benefits of owning stocks over real estate. We’ve already discussed why I prefer real estate over stocks for most people. Now it’s time to argue the other way.

I’ve been an investor in both stocks and real estate since the 1990s. Both asset classes are core asset classes to own for most people. Roughly 30% of my net worth is in stocks and 50% of my net worth is in real estate.

Out of my estimated $380,000 in annual passive investment income, roughly $75,000 of the income comes from stock dividends.

Below are the newest 2023 Wall Street S&P 500 forecasts. The S&P 500 price targets range from 3,675 to 4,500. This implies returns of between -4.6% and +16.8% from the Dec 16, 2022 close of 3,852.

The key risks to the S&P 500’s performance include earnings cuts and valuation compression. If these two things were to happen, the S&P 500 could easily decline by 10% or more from current levels.

The S&P 500 could also see greater-than-expected earnings cuts and a valuation increase. This would occur if the market looks beyond the earnings cuts and expects better times ahead. The Fed could also pivot sooner-than-expected, thereby reigniting the bull market.

Personally, I believe the worst of the bear market was over when the S&P 500 hit 3,577 in October 2022. What matters most is what the Fed plans to do with interest rates. Come 1Q 2023, I think the Fed will have to pause its hikes and start cutting by the end of 2023. Sadly, Jerome Powell is now talking about a 5.125% terminal Fed Funds rate, which is way too high.

As Asana billionaire CEO Dustin Moskowitz wisely quipped, “I’m CEO of the Asana company, but lately, Jay Powell has been CEO of the stock price.” Sadly, this scenario will likely continue to be true for the next 12 months.

Let’s say you’ve currently got a good amount of cash to invest. With the global financial recession building, opportunities are piling up. However, things could get worse in this bear market given we’re only nine months in. How would you invest it?

2022 has so far been a terrible year for both stocks and bonds. Real estate has outperformed stocks by over 20%. But even real estate is starting to fade as mortgage rates surged higher.

You don’t need to be a great investor to make lots of money. You just need to be a good-enough investor. Once you’re good enough you’ll be able to ride an almost constant tailwind toward financial independence. Further, you’ll learn to no longer blow yourself up and lose all your progress.

One of my favorite things about investing is that it is a relatively meritocratic activity. You don’t need a fancy college degree, a good personality, or be of a certain race or sex to invest. So long as you have internet access and at least $10, you can get started.

In order to become a good-enough investor, it’s worth doing a post-mortem analysis of your investment calls. Constantly reviewing what we got wrong and what we got right is important for improvement.

We must not confuse any investment outcome with improper reasoning. If we do, we will suffer from Dunning-Kruger, which could lead to deleterious future investment decisions.

Determining whether you made a good investment decision is harder in the short run. There is so much noise in the short run investors can easily be tricked into thinking they are geniuses. It often takes time for an investment thesis to play out, which means patience and humility are required.

Instead of short-term thinking, I firmly believe it’s better to identify long-term investment trends. If you do, you’ll experience a much greater ROI on your time than if you try to pick individual investments.

Something crazy just happened. FTX, formerly the second-largest cryptocurrency exchange, collapsed overnight. It went from a valuation of around $16 billion to a negative valuation due to a liquidity crunch and debt. How did this happen?

FTT, a crypto coin that the FTX exchange issued, plummeted in value because Binance, the largest cryptocurrency exchange, said it was liquidating FTT. FTT then proceeded to crash, thereby causing a crisis of confidence in FTX as clients withdrew billions of dollars.

Binance, which caused the panic in the first place, then said it had signed a non-binding Letter of Intent to purchase FTX. But after reviewing FTX’s books, Binance backed out and has left FTX to collapse, thereby eliminating one of its largest competitors.

FTX Misappropriated Funds

Given it’s an exchange, it’s difficult to understand how FTX could collapse. Apparently, FTX now owes billions to its clients and doesn’t have the money to pay up. Where the hell did its customers’ funds go?

Supposedly, FTX’s founder, Sam Bankman-Fried’s hedge fund, Alameda Research, owned a bunch of FTT, the coin FTX created. FTT was posted as collateral which enabled FTX to use its client’s funds to invest in something else. When FTT collapsed, FTX was left with a massive liability.

This is akin to brokerage Charles Schwab using your cash and investments to invest in something speculative in a Schwab family sister company, losing it all and not being able to make you whole. You wouldn’t allow it unless you gave permission and were paid a high-enough fee.

How do you move $10 billion in client funds to your trading firm, Alameda, without anybody knowing? Supposedly FTX built a “backdoor” into its accounting software, which SBF used to move billions without triggering alerts to other staff and auditors, according to Reuters.

In a bear market, it’s hard to find bullish economic indicators. We’re always searching for silver linings to live better during difficult times. Thus, the good news is that I’ve found the most positive economic indicator yet!

This week, the Treasury Department announced Series I Bonds will pay an annualized interest from November 1, 2022 through April 2023 of 6.89%, down from the 9.62% rate offered since May 2022. A 2.73% decline is massive.  

What does this really mean? Most people seeing the news will just look at the rate for what it is. However, as a Financial Samurai, you think in derivatives. You try to connect the dots to improve your finances.  

The lower Series I Bond interest rate means the government believes inflation has peaked and is heading down. It is based on the historical CPI rate from the past six months, which is also gathered and reported by the government.

As a result, this is a bullish economic indicator for risk assets. But I don’t think investors have fully recognized the significance of the I Bond rate decline just yet. A 2.73% decline shows how quickly both inflation and interest rates can move down in a six-month period.

Government Must Act Consistently With The Data

Given one of the goals of government is to be fiscally responsible. The government isn’t willing to pay a higher interest than it has to. If you know inflation, and therefore interest rates are coming down, you aren’t going to pay a higher interest rate for the next six months on your debt.

At the same time, the Series I Bond interest rate has to be competitive enough to attract capital over the next six months. If the interest rate is not high enough, then the government won’t be able to meet its capital raising target from Series I Bonds to fund whatever it plans to fund.

The government has shown us its cards! Its action must be consistent with the data.

Can you imagine playing poker and seeing all your opponents’ hole cards? You can make higher expected value bets as a result.  

Although going through another bear market is a bummer, the positive is we can all generate more passive income! And given we can now generate more passive income we can also get that much closer to financial freedom.

As a reminder, financial freedom means having enough passive income to cover your desired living expenses. When this happens, you can do whatever you want.

For investors, this bear market with its surging interest rates may very well be a gift. The key is to not get too depressed about your declining portfolio’s value because you have the appropriate asset allocation. Eventually, portfolio values will recover.

Another important component is to maintain your active income streams to take advantage of depressed asset prices. Unless you have a guaranteed pension, retiring early and depending only on passive income sources may not be the optimal strategy.

However, even if you are a traditional retiree with zero active income, you should still see higher Social Security cost of living adjustments. Further, your income-producing investments may automatically generate more income in a higher interest rate environment.

The high-yield corporate bond spread is an important stock market indicator. The larger the spread, the greater the concern high-yield corporate bond investors have about the stock market and vice versa.

The high-yield corporate bond spread is the difference between the yield of the bonds issued by riskier companies and risk-free Treasury yields. The spread increases if there is a greater concern such companies may not be able to pay back 100% of the principal or at least not on time.