The reason why I prefer owning real estate and starting a business is that I can do things to help improve my chances that the assets will perform.

With Financial Samurai, there’s a strong correlation between the number of articles written and the amount of traffic the site receives. I can spend more time building rapport with readers. I can also write guest posts on other sites to widen Financial Samurai’s reach.

With a real estate investment, I can paint the interior and exterior, refinish the floors, change the fixtures, landscape the front and back yards, expand the livable space, keep up with market rents, find higher-paying tenants and so forth. Then when rates get low enough, I can refinance my mortgage to improve my cash flow.

But with stocks, you and I are minority investors with no say. We are at the mercy of exogenous and endogenous variables. Maybe Trump will announce an all-out trade assault on China. Maybe a CEO will be found guilty of embezzlement. Maybe there will be some type of data breach. Or maybe Amazon or Google will announce they are entering your space.

Who knows!

Yet, investing in the S&P 500 over the long term has proven to be one of the best ways to build a fortune as well. Therefore, all of us should have some exposure to the S&P 500. It’s the amount of exposure that is up to all of us to decide.

Arbitrage is the practice of taking advantage of a price difference between two or more assets or markets, and profiting until the price difference disappears. Being able to recognize and then take advantage of kinks in the system will be one of your greatest catalysts towards financial freedom.

For example, as a elementary-schooler in Taipei, Taiwan, I would buy Nerds candy at the U.S. commissary for 25 cents and sell them to my classmates for 50 cents. Only foreign service families had access to the commissary. But eventually, other candy stores opened and my profits were competed away.

Today, I’ll share with you one of the most obvious arbitrage opportunities. It is an arb that my wife and I are wholeheartedly engaging in because we love free money.

With the 2-year yield higher than the 10-year yield, the yield curve has officially inverted as of 3Q2019. History has shown us there’s a high chance of a recession within the next 6-18 months. I’ll peg the probability at 70%.

To parry a recession, the only thing the Fed can do is to cut rates aggressively from 2.25% down to perhaps 1.6% (where the 10-year bond yield currently hovers) or lower to entice consumers and investors to borrow and get the yield curve closer to normal. Even then, perhaps it’s too late.

When short term interest rates are much higher than long term interest rates, consumers tend to hoard cash and not invest. Why should they when the future looks so cloudy and short-term rates are paying higher than inflation?

Lenders, on the other hand, get squeezed because they have to pay higher short-term deposit rates while earning a lower interest rate on their lending portfolio. As a result, credit standards go up, and even less borrowing and investing occur.

When the velocity of money slows, investment growth, corporate earnings growth, and economic growth also slow. Finally, if enough of us think a recession is on the horizon, then a recession is probably what we’ll get.

With the fear of a recession on the horizon thanks to an inverted yield curve, the stock market has begun to sell off. Due to investor psychology, the S&P 500 generally goes up like an escalator and goes down like an elevator.

If we’re long-term investors, it’s a good idea to understand how much the stock market moves a day on average. When stock market volatility spikes, we’ll feel more calm and reduce our chances of doing something irrational.

Below is a fantastic chart that shows the daily percentage movement of the S&P 500 over the last 10 years. Each dot represents one day.

As you can tell from the chart, the majority of the time, the S&P 500 moves between -1% and +1% a day. Therefore, if you are a long-term investor in the capital accumulation phase, you should consider buying more than your normal investing cadence when the S&P 500 is down greater than 1%.

If you’re in capital preservation mode, you might consider selling some of your S&P 500 index position when the S&P 500 is up greater than 1%.

Of course, nobody knows the future. Trying to beat the S&P 500 over the long run through market timing is unlikely to work.

However, we’re not trying to outperform the S&P 500. What we’re trying to do is figure out how to best invest our cash flow, or larger-than-normal cash injections, during the capital accumulation phase and vice versa.

Here’s another historical average daily percent change chart for good measure.

During the last downturn, I lost about 35% of my net worth. I don’t plan on doing that again.  

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

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

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

The Federal Reserve’s decision to cut the federal funds rate on July 31, 2019, the first time in 10 years, signifies several things:

1) The Fed screwed up in December 2018 by hiking rates for the 9th time in three years. Cutting rates just 7.5 months after hiking rates is like getting a divorce within a year. The signs were everywhere, but the couple simply chose not to look because they were too horny.

2) The Treasury bond market is a better indicator of the economy’s health and dictates the proper interest rate policy, not the Fed. All year and parts of last year, the yield curve has been flat or inverted, telling the Fed it needed to cut rates as growth slowed. The Fed finally relented.

3) The Federal Open Market Committee members may have PhDs and plenty of financial experience, but they are often guessing at the best course of action just like the rest of us. Do not treat their word as God. Do not underestimate your own abilities to make money either. Relying on someone else to make you rich is suboptimal.

4) We should all be on high alert for an impending recession within the next 12-18 months. The more the Fed cuts, especially when rates are already so low, the more we should worry.

If you want to build great wealth, you must invest in risk assets over the long term. If you hold most of your net worth in cash, your purchasing power will fall behind due to inflation.

Today, $3 million is the new $1 million when people talk about what it’s like to achieve real millionaire status. Heck, some people might double that figure to $6 million if there is a two-parent household.

I remember filling up my Toyota Corolla beater for 95 cents a gallon back in 1995. Today, I sometimes have to pay over $4 a gallon. So many things have gotten so much more expensive over the past couple of decades. Inflation really is a nasty bugger if you’re on the wrong side of it.

Let’s drill down and see how the prices of select consumer goods and services have changed since January 1998.

A Bull Market Checklist To Living Your Best Life is a good resource for living it up when times are good. But how hard is it really to live the good life when you’re making money hand over fist? As hard as getting a massage on the beach.

The real challenge is living your best life during a bear market, which tends to happen every 3.5 – 10 years since the early 1900s. Bear markets are usually a time of worry and remorse. I hated working through the 2000 tech collapse and the 2008-2009 housing crisis.

We haven’t had a bear market since 2009, although we came close in 4Q2018. Therefore, now is as good a time as any to prepare.

First, let’s look at some data and charts to see where we stand in 2H2019.