Unfortunately, we may have to accept the reality of living with dead money for a while. The forecasts of lower expected returns in the stock market over the next decade may very well be coming true. As a result, we must adapt and think ahead.
In this post, I'd like to discuss several suboptimal financial scenarios we might find ourselves in and what we should do about it. Ultimately, our goal is to ensure our wealth continues to buy us time so we can do more of what we want.
Dead Money Scenarios To Consider
Here are some difficult financial situations you might find yourself in. Given so much about reaching financial independence is mental, it's good to talk things through so you can take more appropriate action.
1) Your company's stock got clobbered
Let's say you work at a publicly-traded company whose stock has fallen below the level when you first started working. Your Restricted Stock Units (RSUs) are still worth something, but clearly not what the company hinted they might be worth today. What do you do?
In a strong labor market, your main option is to ask for a raise and more RSUs. If you like what you're doing, provide a lot of value, and still believe in the company, then you must ask for more during your next performance review. Do not wait for meritocracy to recognize your value.
If you no longer believe in your company, then you should look elsewhere. First, search for companies in your field that are outperforming. They might offer better overall compensation packages and more job security. Well-performing companies are always looking to hire more talent.
Second, look for promising companies in your field that seem oversold. Joining a company when it is down could prove to be a shrewd move if there is a turnaround. However, also be aware of a company death spiral. At the end of the day, you need to view the company you join as one of your biggest investments.
2) You retire right before a stock market correction
In general, it's better to retire near the bottom of the market rather than near the top. If you retire near the bottom of the market, your finances have already been tested. You will likely experience financial upside in retirement as the markets recover.
If you retire near the top of the market, your finances haven't really been tested. You have likely not properly extrapolated a bear market into your financial forecasts. Given so much about financial independence is psychological, you will likely feel distressed after losing your active income and seeing your net worth decline.
At this point, you should find ways to earn supplemental income until your investments stabilize. The average bear market lasts between three to twenty-five months. However, corrections and bear markets tend to recover much quicker nowadays. Therefore, mentally tell yourself two years is likely the longest you'll have to wait until your dead money comes alive.
To earn supplemental retirement income, reach out to your old firm to see if they have any part-time consulting work for you. When my wife retired in 2015, her old firm kept asking her back for two years.
If there is no work to be had at your old firm, reach out to competing firms to see if they could use your services. There's often a tremendous amount of interest hiring previous competitors as consultants, at the very least, for the competitive intelligence they can provide. When I left in 2012, many of my competing firms wanted to at least meet up for a chat.
If you can't find any consulting work, then you can always become a solopreneur. Surely, there is some skill you have learned in all your years since high school that can generate some value. For me, it's teaching tennis for $80 an hour. I could also start offering 1X1 personal finance consulting again for much more.
3) You want to retire after a stock market correction, but worry things could get worse
This is the situation I find myself in. When the pandemic began in March 2020, I decided to work hard for two years since there were fewer things to do. Then I would re-retire after a couple of years for an unknown period of time.
My assumptions were that by 2022, taxes would be higher, government subsidies had increased, and there was a greater social safety net. Therefore, at the margin, under such a scenario, it would make sense to take things down a notch. Unfortunately, I've found it difficult to stay retired once you retire early!
Deciding to retire right after a stock market correction is better than retiring right before a stock market correction. You've already seen a 10%+ hit to your investments. If you're still willing to give up your day job income, then you likely have some pretty realistic assumptions about your finances.
The uncertainty lies in how deep your investments will correct. If your investments start cutting their distributions and dividend payouts, will you still be OK? The realistic worst-case scenario is about a 35% decline in your investments from the peak over a two-year period.
But since you're deciding to retire after a stock market correction, your realistic worst-case scenario is probably at most a 20% further decline in your investments over a one-year period. Therefore, if you can withstand such a decline, then you should probably go ahead and retire.
Just don't forget to negotiate a severance if you've been at your company for longer than three years. If you don't have a pension, walking away with a severance package will feel like winning the lottery.
4) You join a startup after it raised a funding round at a high valuation before a crash
Startups raising money at high valuations is a double-edged sword. The higher the valuation, the higher the expectations. If a startup cannot fulfill the high expectations, the startup might have to raise a down round and lay off plenty of employees.
An example of raising at an overly optimistic valuation is WeWork. In January 2019, WeWork raised $2 billion from mostly Softbank at a $47 billion valuation. After a failed IPO in 2020, WeWork had to slash its workforce and sell off assets. Softbank valued its position in 2020 at only $2.9 billion.
If you find yourself at a startup with deeply out-of-the money stock options, you must ask for new stock options at a lower strike price. If you don't, your stock options will likely be dead money for years, if not forever.
In the unfortunate situation where management does not grant you new stock options with a lower strike price, then you must leave.
Startup employees earn much lower base salaries than established-firm employees. There is no point sticking around at a startup if you have stock options that will never pay out. Sure, learn as much as you can while you're there. But find another opportunity as fast as you can.
For most people, working at a startup will likely make you poorer than richer. Only a minority of employees hit the lottery where their startups become multi-bagger success stories. It's just that the media and society mostly focus on the winners, not the losers.
5) Your private business takes a hit
During a downturn, public growth companies with weak balance sheets, low profit margins, or no profits tend to get hit the most. If you own a private business, take note and adjust accordingly to avoid having dead money. Depending on how much you own of your private business, you have a greater luxury to make drastic changes without public scrutiny.
As a private business owner, your goal is to survive until the good times return. The leaner you can get in terms of operating costs, the greater your chance of survival. List out all extraneous expenditures and ruthlessly cut them. Work on areas of your business that can help boost your brand without costing much money, e.g., social media, connecting more with your clients through e-mail, etc.
If your private business is in a healthy financial situation during a downturn, now might be the best time to expand and take marketshare. Input costs are usually lower during a downturn. You may also consider acquiring beaten down, but promising companies.
The one thing we know since the pandemic began is this: a business that cannot be shut down is more valuable. Therefore, move more of your business online where possible. Don't be at the mercy of local governments that will unilaterally force your business to close for an indefinite period of time.
Dead Money Takes Away Time
Mentally, we should all prepare for at least two years where our money goes down or nowhere. Yes, there are certainly circumstances where we could experience a lost decade of dead money, like the NASDAQ experienced after the 2000 Dotcom bust. However, expecting to make no financial progress for 10 years is unrealistic.
The reason why we think so deeply about a proper asset allocation of stocks and bonds and an appropriate net worth allocation is to save ourselves time. Even if we are properly allocated, losing money will still be disheartening. However, we will fare much better than the average person who disregarded proper risk parameters.
The investor who went all-in on margin to buy a hot growth stock that corrects by 80% is now broke. They will have to extend their employment time period for an indefinite period of time.
The real estate investor who took out a home equity line of credit to buy another house with debt will not fair well during the next housing downturn. Yes, taking on maximum leverage during recent years has worked. However, stretching too far beyond my 30/30/3 home buying rule may have serious mental and financial consequences.
Losing money on your investments is already tough enough. Having to then spend many more years making up for your losses might get depressing real quick. Please don't get to the point of no return, where you completely give up.
If you find yourself hurting more than you thought you would during a downturn, it's imperative you reassess your asset allocation. What's done is done. Just make sure you learn from your mistakes so they don't set you back as much again.
A Mental Hack To Overcome Dead Money
When certain types of investments are no longer performing, you may gain a mental boost by mentally writing them off. In other words, once you assign zero value to the portion of your net worth that is struggling, you will have faced your worse fears. From there, it's easier to move on.
Focus your attention on the assets that are currently working. Do your best to optimize these investments while also protecting them from downside risk. Over time, risk assets like stocks tend to recover.
About 32% of my net worth is in stocks, which are now doing poorly. It feels bad to lose money, but I also feel fine about my stock exposure. Corrections are to be expected. The realistic worst case scenario is that my stock holdings lose about 35% of its value, hitting my net worth by about 10%.
By mentally writing down 10% of my net worth, I actually feel more at peace. If you track your net worth using a free software like Empower, try deleting a good portion of your net worth.
For example, you might want to delink your 401(k) or one of your taxable brokerage accounts. By removing a portfolio, you not only no longer see it lose value, you also tend to forget about it as well. You'll get used to living with a lower perceived net worth. Then one day, you might remember you had this account all along.
This upside surprise is one of the reasons why I enjoy investing in private funds. It's hard to remember how much or what you invested in years ago. But surprise distributions 5-10 years later always feel like a gift because you weren't expecting it.
Focus On The Good Parts Of Your Net Worth
As I wait for stocks to eventually recover, I will focus more of my attention on real estate, which now makes up about 55% of my net worth. Real estate has always been my favorite asset class to build wealth given it is less volatile, generates income, and provides utility.
This year, I fixed a window leak and repainted one rental, which feels great! I'm also finalizing a two-year-long remodel of another rental property. I'm expanding the livable square footage by about 300 square feet. Once the expansion is done, I will look to find a tenant to boost rental income.
I can always spend more time trying to make more money online. However, after two years of doing just that, I'm not inspired to continue at the previous pace. I mostly just want to have fun. Whatever income that comes from my online endeavors will mostly be reinvested to generate more passive income.
The Best Solution To Dealing With Dead Money
Finally, if you can afford to do so, the best revenge against dead money is to live your life the way you want. If you don't let a decline in your investments affect your lifestyle, then you win, no matter the economic environment.
Still going on vacation after losing 20% in your stock portfolio? You win! Still getting married to the love of your life during a financial crisis? Rock on! Baby still coming during a pandemic? Whoo hoo! Dream home now for sale? Time to buy it!
Put your financial losses into perspective. Your net worth is likely much higher than it was two, five, and ten years ago. Celebrate how far you've come!
Remember to enjoy your money along the way. And most importantly, please enjoy more time with your friends and family. They are the ones that matter most.
Invest In Private Growth Companies
Investing in private companies is where you might be able to find the next Google, Meta, Figma, Apple and more. Although the money might seem dead given it is illiquid, it could be compounding vigorously in the background. Personally, I allocate about 10% of my capital to venture capital.
The most interesting fund I'm allocating new capital toward is the Innovation Fund. The Innovation fund invests in:
- Artificial Intelligence & Machine Learning
- Modern Data Infrastructure
- Development Operations (DevOps)
- Financial Technology (FinTech)
- Real Estate & Property Technology (PropTech)
Roughly 35% of the Innovation Fund is invested in artificial intelligence, which I'm extremely bullish about. I don't want my kids asking me in 20 years why I didn't invest in AI or work in AI today.Â
Read The Best Personal Finance Book Today
If you want to achieve financial freedom sooner, purchase a hard copy of my new book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. The book is jam packed with unique strategies to help you build your fortune while living your best life.
Buy This, Not That is a #1 new release and #1 best seller on Amazon. By the time you finish BTNT you will gain at least 100X more value than its cost.
After spending 30 years working in finance, writing about finance, and studying finance, I'm certain you will love Buy This, Not That. Thanks for your support!
Related articles:
A Bear Market Checklist So You Can Thrive During A Downturn
How To Feel Better Losing Lots Of Money In The Stock Market
Readers, what are you doing about your dead money? What parts of your net worth are doing well? How do you plan to adapt to a potential bear market?
For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009. To get my posts in your inbox as soon as they are published, sign up here.
I probably got hammered more than the S&P YTD cause my portfolio is a bit growth heavy.
I’m thinking of just DCA’ing into the Vanguard growth fund since my time horizon is 15+ years till retirement, thoughts???
I’m often asked how I seem so carefree. I think it’s because I try to focus on what I can control and letting go of the rest. Even now, my stocks are down 22% from three months ago but I wasn’t even aware of the extent of the loss (until I calculated for commenting) since I invest for the long term and whatever the market is doing now doesn’t impact my day-to-day life. In fact, I think now is a good time to feed the bear. I don’t want to look back in a few years and regret that I didn’t buy the dip.
My husband and I are constantly evaluating where we can put our efforts to work that will provide the greatest returns. In November 2020, we purchased a 3/2 single family home with an ADU, as a fixer upper at 58% below its after repair value. Our intent was to have it ready to Airbnb within 6 months but a temporary job opportunity came along during Spring 2021 where we were making $140/hour which was significantly more than the Airbnb could provide monthly so we put renovations on pause. Now we’re back to fixing the Airbnb since that makes the most sense at the moment. Usually, labor costs 3-4 times materials so I highly recommend the DIY route if you’re limited on funds or don’t want to get into more debt. Of course DIY takes much longer so an assessment of how much you’re losing out by not hiring help and therefore delaying rental income should also be a consideration. We are trying to be FI soon so it doesn’t make sense for us to get into more debt.
“Focus on what I can control and letting go of the rest” this is a great goal for us all. Not easy to do for many though, including myself.
The more complicated our lives, the more things can go right and wrong. We have to just roll with the punches.
I feel like a lot of what we do now feels inconsequential due to all the unnecessary suffering happening. It’s good to take a break, but then focus on what we can control and fulfill our purpose.
Whatever is on your mind, ask yourself if you can do anything about it. If you’re thinking about Ukraine, there are charitable organizations you can contribute to that will help its citizens. In personally knowing and hearing stories from refugees, having support and assistance when they don’t have the means to help themselves is something that is appreciated and never forgotten.
I do what I can with the available time and resources that I have. There have been seasons of my life that were devoted to volunteering (6 years with Habitat for Humanity, 2 years with Take Stock in Children) so I don’t feel the need to always be giving of myself. This year, for me, is dedicated to two very specific goals and I don’t feel guilty about taking the time to focus on them.
It’s ok if you don’t feel like writing. There’s plenty of evergreen articles from the last 13 years of FS to help folks. They won’t run out of reading material anytime soon. I should know because even with binge reading, it took a couple of years!
Agree to ask for a raise. Labor market is tight with people dead from the pandemic, immigration restricted, and births rates in the toilet. There is a reason Sam is doing the painting himself!
Painting is one of the most rewarding and relaxing things I enjoy doing. Love it! Instant results.
Ugh, yeah it’s scary out there. Gets me too antsy if I think about it too much. So thanks for the reminders to focus on our own assets that are currently working, and the general short-term nature of bear markets. Thinking about bear markets for at most 2 years does help me a lot.
It can feel like forever sometimes when we’re in the thick of it, but knowing there will be an out and recovery within reasonable reach does help a lot mentally. And I’m also reminding myself, be patient, buy low, sell high, look to the horizon… And also focusing on what we CAN control in our lives and spending time with those we care about.
seems like easy solution is keep 2 years of living expenses in cash. new money keep adding to investments on regular basis. just buy 1st of month or something like that, regardless of market conditions.
That is a good plan to help allay the fears and keep people on course. Every month, with new cash flow I invest. Sometimes more aggressively than other times.
Does it make sense to maintain a basic investment philosophy, but otherwise use extra funds to pay down mortgage instead of letting cash sit idle or adding to the market?
I’ve always felt that if you are going to pay down mortgage debt, it would be wise to Recast your mortgage. For those who are unfamiliar, a mortgage recast is when you make a lump-sum payment toward the principal balance of your loan. Your lender will then reamortize your mortgage with the new (lower) balance. The idea is that you can lower your monthly payments since your principal went down, but your interest rate and term remain the same. Most lenders don’t advertise this service and when I have called my lenders, most of the first line customer service reps are not familiar with a recast. Depending on the lender, a recast can cost anywhere from $0-250 to execute and takes a few days. To summarize, you pay down your mortgage debt while increasing cash flow via reduced monthly mortgage payment.
I used a recast once, but had no idea it could be done like this. Thanks for the info!
Hi Kevin, here’s a post on recasting a mortgage if you’re interested in looking further. https://www.financialsamurai.com/the-benefits-of-recasting-over-refinancing-a-mortgage/
I was always under the impression that’s how it worked. My current lender (a sizeable regional bank) reamortizes the loan over 360 months or whatever your original loan term was. Which is pretty annoying.
In an elevated inflation environment with negative real mortgage rates, it is a suboptimal move to pay down extra mortgage principal. Inflation is making your debt cheaper by the day. Hence, I thin it’s better to continue dollar-cost averaging into risk assets.
I just buy more of the S&P 500 and fund my real estate crowdfunding fund each month.
When inflation starts to dip and mortgage rates start to decline, you can then proceed to pay off more principal if you want.
However, I will say I’ve NEVER regretted paying off debt. It feels great, even though I could have made a greater return elsewhere.
Great article, however as you know, past performance is no indication of future results. Most people have a myopic view of market corrections, looking at the last 10, 20 or even 30 years. During this time period, inflation remained consistently low and Fed funds rates, especially in the past 10 years, have trended down and have been at or near zero for quite some time. Now that inflation is at a 40-year high and the Fed has been asleep at the wheel for a few quarters, it may take quite some time to get the raging inflation fire under control. If they continue to be accommodative, we may soon seen double-digit inflation. This would mean Fed funds rates having to enter double digits to contain the threat, which would trigger a recession of unknown duration. The 1970’s was a horrible decade – not year, not two, decade – for stocks. Based on our current vantage point and trajectory, seeing this is a close parallel makes sense. I have seen many predictions that returns in the next decade will be muted, and this resonates based on what’s happening at a macro level.
I’m confident inflation will start fading within the next 12 months and we will go back to the normal range of +2-4% by the end of 2023. In fact, I actually made a big bet with a reader on this subject!
Of course, there are no certain. But I believe capitalism, innovation, and efficiency will win out, at least here in America.
The world is volatile right now, and I agree that the best path forward is by living your life. Assets will perform and underperform, but if you stay the course you’ll come out ahead in the end!