How To Make Lots Of Money During The Next Downturn

During the 2008 – 2009 recession, I lost about 35% of my net worth in about six months. I don't plan on doing that again. I want to share how we can make lots of money during the next downturn. We could be in one right now as the Fed aggressively raises rates and takes away our easy money.

So far in 2022, the S&P 500 has given up all its 2021 gains. Real estate is still holding strong, outperforming the S&P 500 by over 25% in 2022.

I don't think there will be a housing market crash as demand fades with higher interest rates. Although rates went up aggressively in 2022, they are starting to decline again in the second half as a recession gets baked in.

If you want to make a lot of money during the next downturn, investing in real estate is probably one of the best ways to go. Real estate is less volatile, produces income, and provides utility. We saw real estate significantly outperform after the 2000 downturn.

I expect real estate prices to go down by 8% in 2023 due to a slowing economy and an aggressive Fed. But that means there will be buying opportunities.

How to make lots of money during a downturn

Realistically, my target net worth growth scenario during a recession is to stay flat – neither make nor lose money. This is the first rule of financial independence. But my blue sky scenario is to actually try and make lots of money during the next downturn.

How To Make Money During The Next Downturn

Here's how I plan to make money during this downturn.

1) Be OK with no longer making money.

The first step to making money during the next downturn is to be OK no longer making money during an upturn. In other words, you must be mentally OK. So much about investing success is having the right mental fortitude to last through the downturns.

It hurts to miss out on gains, but missing out on gains is the only way to not lose money. Your goal is to time your asset allocation so that you have the least amount of risk exposure when the cycle turns. The problem, obviously, is that nobody knows when the cycle will turn.

To get a better idea of where we are in the cycle, it's important to study history and make an educated guess.

Bull markets last on average about 97 months (8 years) each and gain an average of 440 points in the Standard & Poor's 500 stock index. By comparison bear markets since the 1930s have an average duration of only 18 months (1.5 years) and an average loss in value of about 40 percent.

With the Fed starting to tighten, valuations close to all-time highs, and earnings growth slowing down, we can conclude making money in stocks is no longer going to be easy.

As the bear market is here again in 2022, we must be OK with no longer making money. We must also accept no longer making as much money in our businesses and in our jobs. This acceptance will help with your mental health. 

How To Make Lots Of Money During The Next Downturn

Related: How Much Investment Risk To Take In Retirement

2) Be at least neutral when the cycle turns. 

Remember, even if you move to 100% cash or CDs, you are still going to make a guaranteed ~2%+ on your money each year based on today's risk-free rate. You must weigh your guaranteed return against the possibility of missing out on further gains or the possibility of losing money.

If you have already made over a 250% return in the stock market since 2010, is it so bad to only make 1% a year instead of potentially 8% a year if you have to take more risk and potentially also lose 10 – 15% a year? Of course not. Having cash, bonds, and CDs is all about capital preservation not about making lots of money. 

If your property equity is up 500% since 2012, do you really want to pay three more years of property tax, mortgage, and maintenance expenses if prices might stay flat or go down 20%? These are some of the questions you should ask yourself.

In addition to CD accounts, CIT Bank also offers the highest rate money market accounts and savings builder accounts I’ve seen. 

It’s easy to set up a secure account online without ever needing to step into a branch. You can access your account info 24/7. And their customer service team is available to help with questions six days a week.

open an account today

3) Take some risk and go net short. 

The only way to make a lot of money in a downturn is to take risk. This means losing money if the downturn never comes. However, rich central bankers are very focused on protecting their legacy and crushing the economy to tame inflation.

The easiest way to short risk is to buy an ETF that goes up when the underlying index it tracks goes down. Here's a list from ProShares which includes leveraged short and long ETFs to really juice your returns or blow yourself up.

A list of short ETFs - how to make money during the next downturn

You can also short individual stocks as well if you feel you have an edge and want more direct exposure. The stocks that usually get hammered the most during a downturn are high beta stocks with weak balance sheets and no earnings.

In other words, small cap names in the biotech and tech sectors often go down the most because their valuations are all based on speculative terminal values. Such companies will be relentlessly attacked on the short side as speculation grows they will go out of business.

Company Balance Sheets Matter

If you're a loss-making company with no moat like Uber, you will die if the downturn lasts long enough because the capital markets will be shut to any fundraising. This is why shorting the Russell 2000 small cap index (TWM) is quite popular in a bear market.

On the other hand, cash-rich, mega capitalization companies that have a long history of paying a dividend tend to go down the least. Think about names in the utilities space and consumer staples space like AT&T or Proctor & Gamble. They are not only highly profitable, but also have enough cash to last them through years of unprofitability. 

Thus, given we know the average recession lasts only 18 months, many investors seek relative safety by buying utility or consumer staple stocks. Unfortunately, the signs of a recession happening are increasing over the next 12-24 months.

Beware, if you short a high dividend yielding sector or stock or treasury bond ETF, you will be forced to pay that dividend.

Related: The Proper Asset Allocation Of Stocks And Bonds By Age

4) Go Long Volatility

You can also go long volatility by buying a volatility ETF such as VXX. During the early 2018, 10% sell-off in the S&P 500, the VXX doubled from $25.68 to $50. The same thing has happened with the August 2019 sell-off Just beware that going long volatility for the long term is a losing proposition due to a thing called “decay.”

The chart below is a 5-year history of the VXX. Notice how the price was $1,090 back on August 1, 2013. Today it's only at $30 for a 97% loss! In other words, you can only go long volatility for brief periods of time (less than a couple of months) before the structure of the investment drags you down.

VXX Volatility 5-Year Chart

Related: It Feels A Lot Like 2007 Again: Reflecting On The Previous Peak

5) Go Long US Treasuries

When the world is collapsing, investors tend to seek the safety of US Treasury bonds. Two of the most common ETFs to buy are IEF (iShares 7+ Year Treasuries) and TLT (iShares 20+ Year Treasuries). Buying TLT will give you more upside and volatility given longer duration bonds are more sensitive to interest rate changes.

Notice how TLT spiked from $92.83 on Oct 1, 2008 to $119.35 on Dec 1, 2008 (+28.6%) during the depths of the financial crisis. There have been several more 20%+ trading opportunities since 2008 due to geopolitical risk, policy risk, and further stock market sell-offs.

It's interesting to note that even if you had bought TLT at its high during the crisis, you're back to even today while earning a steady ~3% annual yield. Bond funds like TLT have gotten demolished since 2020. Dollar-cost averaging now may pay good dividends in the future.

At least buy some individual Treasury bonds yielding almost 5.5% and hold them to maturity.

LTL 20+ US Treasury Long Bond Historical Chart

Related: The Case For Buying Bonds: Living For Free And Other Benefits

6) Go Long Gold

Gold is a hard asset that also tends to do well during a downturn. Even though gold generates no earnings and provides no dividends, it's a commodity that can be traded. The more dire the economic situation, the more valuable hard assets become.

The largest, most popular gold ETF is GLD, followed by IAU. As you can see from the GLD historical chart below, it did phenomenally well from Oct 1, 2008 up until early 2012 (+170%) before fading as the bull market took off.

GLD Gold Historical Chart - how to make money during the next downturn

If you invest in gold for the long-term, it's important to understand global demand and supply dynamics, and take a view on the US dollar since gold is denominated in US dollars. Gold is an imperfect hedge.

7) Go Long Yourself By Building More Skills

The people who don't lose their jobs in a recession are those who are too valuable to their firms. Therefore, build enough skills, client relationships, and internal goodwill to be forever employed. You are likely your largest money maker.

Going to business school part-time was one of my best money makers because not only did I build new skills, my firm felt they had invested too much in me by paying 85% of my tuition to just let me go. They wanted their three years of indentured servitude in return for tuition assistance.

Besides getting more formal education, you should put some time aside each week to exercise your creative mind. Maybe you'll write a counter-cyclical book, or come up with a song that earns royalties, or start a website that earns advertising revenue about your favorite hobby. These extra engines could blast you off into financial space.

Thanks to Financial Samurai, my overall net worth has outperformed the S&P 500 and San Francisco real estate since it began in 2009.

The Easiest Way To Make Money In A Downturn

Shorting the market long term is a losing proposition due to population growth, ever-growing demand, dwindling supply, and inflation. It's the same concept as renting long term.

If you want to short the market, you must be disciplined to short for only a short duration of time. It could be only one week if you are buying volatility or at most two years if you are shorting the S&P 500. During this shorting time period, you will likely lose money as your timing will be imprecise.

As a result, many investors looking to hedge against a downturn build a portfolio of longs and shorts and rebalance their net exposure whenever they feel more bullish or bearish. But in such a scenario, you might lose on your longs and shorts as well.

Given you can mistime the market in both directions and none of the investments above are perfect hedges, the easiest way to make money during a downturn is to go long cash or cash equivalents.

Consider Risk-Free Investments

Again, you can earn a risk-free return in an online money market account. Or, you could earn a risk-free return investing in the 10-year bond yield. But with a 10-year bond, you've got to hold it for 10 years to guarantee you get such a return.

Making a guaranteed return low return may not seem like much, but it will feel like a fortune when the S&P 500 is correcting 3% a day!

The other obvious way to make a guaranteed return is to pay down debt or refinance your debt. Don't let your lenders make money off you while the world is falling apart. Make money off yourself. The very least you should do if you have mortgage debt is to refinance it ASAP with interest rates falling to all-time loans.

Consider Diversifying Into Real Estate

With interest rates collapsing, another defensive way to make money is to diversify into real estate as real estate becomes more affordable. Given real estate provides utility, has sticky rents, and is a tangible asset, investors have flocked to real estate for shelter during difficult times. This is what happened after the dotcom bubble burst in 2000.

Instead of leveraging up to buy a single property, it's probably better to avoid concentration risk and diversify into REITs or real estate crowdfunding.

Fundrise is my favorite real estate crowdfunding platform that's free to sign up and explore. In an inflationary environment, investing in a diversified eREIT by Fundrise makes sense. Inflation acts as a tailwind for asset price appreciation.

The Fundrise platform portfolio has consistently outperformed stocks during down years and times of volatility. If you like less volatility and more stable returns, Fundrise is something to look into. It manages over $3.5 billion for over 400,000 investors.

find out more

Look At Individual Real Estate Deals

CrowdStreet is my favorite real estate crowdfunding platform for accredited investors. CrowdStreet focuses on commercial real estate in “18-hour cities” that have faster demographic growth, lower valuations, and higher net rental yields.

We're talking about cities such as Charleston, South Carolina and Memphis, Tennessee where cap rates are 3-5X higher than 24-hour cities like San Francisco and New York.

Thanks to the rise of remote work and working from home due to the global pandemic, it only makes sense that more and more people will relocate out of expensive cities with high density and into lower cost cities with lower density.

This is a multi-decade trend that is being take advantage of by savvy investors. CrowdStreet is also free to sign up and explore.

get started

I've personally invested $954,000 in 17 commercial real estate properties across the country after selling my main single family rental for $2,745,000 in 2017.

It feels great to diversify and earn income passively. Just make sure you read all the material and understand what you are investing in.

Fundrise Real Estate Crowdfunding Properties

Venture Capital Investing

Venture capital investing is an area predominantly dominated by the rich. Investing in private companies is where you might be able to find the next Google, Meta, Figma, Apple and more. 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. 

The fund's investment minimum is also only $10. Most venture capital funds have a $200,000+ minimum. 

Continue Investing For The Long Term

For those of you who are under 40 or who have at least 20 years of work left in you, you might as well keep taking risk based on a more traditional asset allocation model. Stay disciplined with your dollar-cost-averaging approach.

Long term, investments such as the S&P 500 and real estate tend to go up and to the right. When you combine not spending money with long-term compounding, you will likely get rich beyond your expectations.

For those of you who have enough money to be happy, taking excess risk is unnecessary. Once you've made your money, the key is to keep it.

Read The Best Book On Becoming Rich, Happy, And Free

If you want to read the best book on achieving financial freedom sooner, check out my Wall Street Journal bestselling book, Buy This, Not That: How to Spend Your Way To Wealth And Freedom. BTNT is jam-packed with all my insights after spending 30 years working in, studying, and writing about personal finance. 

Building wealth is only a part of the equation. Consistently making optimal decisions on some of life's biggest dilemmas is the other. My book helps you minimize regret and live a more purposeful life as you build more passive income.

BTNT will be the best personal finance book you will ever read to help you make money during a downturn and during a bull market. You can buy a copy on Amazon today, which has a great sale!

The richest people in the world are always reading and always learning new things. Learn from those who are already where you want to go. Knowledge will help you make money no matter the economic environment.

Track Your Wealth For Free

Sign up for Empower, the web’s #1 free wealth management tool to get a better handle on your finances. In addition to better money oversight, run your investments through their award-winning Investment Checkup tool to see exactly how much you are paying in fees. I was paying $1,700 a year in fees I had no idea I was paying.

After you link all your accounts, use their Retirement Planning calculator that pulls your real data to give you as pure an estimation of your financial future as possible using Monte Carlo simulation algorithms.

get started
Personal Capital Retirement Planner Free Tool

How To Make Lots Of Money During The Next Downturn is a Financial Samurai original post. How to Prepare For A Recession is a FS original post too. The time to raise cash and button down spending is now.

During a downturn, having a good amount of cash to cover your living expenses for 6+ months is very important. CIT Bank is currently my favorite online bank where you can earn maximum interest in a money market account.

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. I help people get rich and live the lifestyles they want. 

189 thoughts on “How To Make Lots Of Money During The Next Downturn”

  1. One problem I’ve had with a lot of the advice here is that it often requires you completely selling out of all of your positions. It’s sort of silly to have money tied up in an S&P 500 index while simultaneously snorting the market. You are essentially betting against yourself.

    And selling your long positions causes tax issues and missed dividend payments.

    I always preferred just to ride it out. My net worth may suffer but eventually it always bounces back.

  2. Most of those market timing strategies listed above can end up doing more harm than good if your timing is not impeccable. Selling all your long positions to buy shorts after a 20% drop is more likely to lose you even more.

  3. JULIE A BRADLEY

    Hello there,

    I was wondering when this post originally went up? There is an updated date of 5/2020 but there are comments dating back to 2018. This would answer my questions about the fact that if I had come across this type of information within the last 6 months this would have provided lucrative guidance to move my 401k to the short options from your graph. Upon analyzing the TWM Ultra short, had I moved the distribution I initiated in January 2020 it would have over doubled in value in mid March. Have I completely missed this opportunity now?

    1. Given the S&P 500 and many stocks have rebounded by over 30% from its March 2020 lows, we’re in a tricky situation now. The market is discounting a lot of recovery and a quick recovery in 2H2020.

      After the rebound, I think a wise move is to de-risk. Let’s thank our lucky stars the market didn’t tank further.

      I do believe there’s a 30% chance we re-test the lows. The more likely scenario is that we remain rangebound 2,600 – 3,000 for the rest of the year. But it is possible we reach new all-time highs with so much devastation around us due to these reasons.

  4. Seems relevant article for today’s market. There are some pretty good arguments against holding these… read one at etfcom titled “dont-buy-and-hold-leveraged-etfs” and was curious your thoughts on “timing” if these leveraged ETFs are not made to be held.

  5. Or… just stick to the same investment plan you have always had and rebalance as needed. Keep investing monthly if you are able.

    People.who get crushed are those who didn’t keep a safety net during.the boom years and are forced to sell.

    Trying to time the market is a fools errand.
    Thousands.of studies have confirmed this.

    The only days that.matter are the day you buy and the day you sell. Most sell at the bottom and buy at the top.

    1. “Trying to time the market is a fools errand”. vs “The only days that.matter are the day you buy and the day you sell.” ?

      1. Virtually no one can consistently predict when the market will go up, or go down- therefore trying to time it is foolish. Many many studies show this. Warren Buffet admits as much.

        Reading:
        The Intelligent Investor
        A Random Walk Down Wall Street
        Bogleheads Guide to Investing.
        Rich Dad Poor Dad

      2. The only day that matters is the day you buy and the day you sell… What is meant is the fluctuation of the value of a security between these two dates is irrelevant to the return.

  6. Asking what you would do: My son & daughter-in-law have NYS 529 age based accounts for 11 year old, 9 year old, and 6 year old (Vanguard adjusts risk by age) – didn’t start early so totals are @ 7K, 4K, and 4K.
    Would you continue regular contributions as always or go into much more conservative choices the plan offers until you feel this downturn is ending (I know market timing is a gamble- but considering better to go back to age based with less loss when we “think” market is recovering).

    Additional beliefs and thoughts: at least 6 months or more of rising unemployment in country’s future due to Covid-19- big unknown. stocks: heavy industry will be hard hit for extended period as well as discretionary purchases, not to mention hotels, restaurant chains and ?

      1. Hey Sam,

        Would you recommend a 529 plan or a Roth IRA for saving for a child’s education? Or both?

        1. Rather then a 529 plan, purchase a rental property. I purchased a 3 bedroom condo for $75,000 in Boca Raton when my kids were born 18 years ago. I put down $10,000 and mortgaged the rest. Rent covered all fees and gave about $100 in profit each month. As rental rates went up and mortgage balance went down, I put the profits towards paying off the mortgage which I was able to do so after year 12. Fast forward to today. The condo is free & clear, value is $200,000 and rents collected are $1800 per month. Bottom line is that its sending two of my kids to college for all four years and it only cost my $10,000 for my initial investment. The 529 plan would pay for about 1/4 given the same investment cost.

  7. Love the article. My thoughts exactly. Admittedly, I was 2 full years early, but it’s paying off now!

  8. New to the blog here, but really enjoying the content. I especially like the idea of shorting companies that have their values entirely determined by Terminal Values or what I like to call (Hopes and Dreams). When the well runs dry, so does lenders tolerance for such ventures.

    I still would like to acknowledge that as educated a guess one can make, there is still no certainty on future economic growth or general market conditions. While assets are overpriced now compared to historical norms, it wasn’t until a looming pandemic sent investors running for the door. The opposite can be said for times in which productivity is improved with autonomy, AI, distribution networks, and much more. Being so, for my measly 23 years of age I will be playing in the high and low tides that come with the financial markets for the foreseeable future (30+ years)

    Even so, at what net worth does it become best to diversify into asset classes like real estate or perhaps should this even be part of my portfolio construct from the get go. I’ve always liked the idea of have a larger degree of control on my returns and to buy at equal to or better returns than the historical rate of return of the S&P 500 makes it even more appealing. Thoughts on this?

  9. David Payne

    I am sure I am not the first person to suggest this…in the last downturn my 401k really took a hit. Now it did come back…but it took a few years. Wouldn’t it make sense for this year where everyone is predicting a downturn…move the 401k money to cash or cd or anything that isn’t connected to stock (if possible) wait for the drop and than dump all the money back in. It always comes back so why not sell high…and buy low? I am not a pro at all…just looking for some thoughts.

      1. My spouse has the exact same idea/question as David. If we were to sell majority of our portfolio (90% stocks) and just hold it in cash this year, anticipating a recession; When it hits, we will have the cash to buy back into when it’s at a low & potentially make a really nice profit.

        Now, on the other hand, I have the long term mindset and say let’s just hold on and ride out the ups/downs (we are in our mid 30s). I have been trying to explain to him why this is a bad investment strategy – but at the same time, he has a valid point – and why not sell high (right now) and buy back when the market crashes? I guess I need more reasons why (or why not) do what my spouse and David think is a investment strategy?

        1. Lauren,
          I agree with your spouse. I wish I had done my research into how to protect a portfolio during a recession. But I think I’ve learned my lesson and hence why I’m on this site.
          I don’t agree with many of the financial advisors out there that tell you to ride the wave (up or down). I prefer riding the highs, cash out when the market is volatile, and wait until the market hits a low point. Figuring out the lowest point is the million dollar question. But you don’t have to be too greedy. If you check the major indices and see they’re 15/20% down, would you be mad if you got in and they still fell down another 5-10%? I wouldn’t because I would have bought at a 15/20% discount.
          There are tools that you can look at to view technical indicators (moving averages, RSI, MACD, etc) that definitely require some expertise. That would allow you to get in a better discount. But even without that, you can look at online charts of the indices (yahoo finance, finviz.com, stockcharts.com, etc) and you can kinda spot the bottom. You’ll see a v/u shape that will be hard to miss sometimes.

          Many financial articles only barely scratch the surface of stock market investing. In order to cash out at the right time, you need to have automatic “trailing stop loss” orders to sell if your securities drop 3 or 5% or whatever you’re comfortable with. There is a catch if you have mutual funds. Those don’t trade like stocks and their prices are set daily. So you can’t setup automatic orders. But you can still monitor your mutual funds and set alerts to notify you when they’re going down. Actually, a better fix to the mutual fund issue is to switch to ETFs since they trade like stocks but have the same risk level as mutual funds because they invest in baskets of stocks like MFs.
          This is my theory. I could be wrong. But I’ve put it to practice with some of my stocks and have cut my losses already. So I do think it’s working.
          Lastly, I’d recommend taking some courses and doing more research. Udemy.com has great courses for under $10-$20 each. It’s the best money I’ve ever spent.

      2. Plus, as soon as the Coronavirus starts to fizzle out in the summer, the market will likely continue to soar. Then, Trump will get re-elected for another surge. A lot of money still to be made in ‘20/‘21. Would be a shame to miss the rebound. But the discount is great!

          1. What do you consider a decent equity position when re-entering the market? What type of equity would you consider a good long term investment? Small cap index?

      3. Agreed. But doesn’t your strategy above rely on market timing? In my experience about all you can do is start reallocating buckets. Ie- I’ve been dollar cost avging bond funds over to stocks the last 2 wks. Will i win short term? Doubtful. In 5-10 yrs? Hopeful. In 20 yrs? Pretty certain

          1. True. Any thoughts on what Carona will do to Real Estate? I keep thinking it will run out of steam….. Just keeps gaining. Sure feels like a bubble…. Ppl overpaying for poor homes, sellers so confident they just say “offers due by____” alot of it feels even worse than 2008. And i live in MI! NOT CA

            1. I’m writing a post on it.

              I thin the coronavirus increases demand for larger homes and real estate in generally over stocks that have simply gone POOF overnight.

              But if the S&P 500 goes down more than 30% and stays there for longer than 6 months, people will start hesitating about real state and probably reduce real estate demand.

              I like real estate crowdfunding for this reason. You can invest in smaller amounts and not have to go all-in, and often with a mortgage.

    1. I went all cash six months ago. I watched things keep going up. But I didn’t doubt myself for one reason…the market stopped making sense. Valuations were too high. Retail investors were running up prices of stocks because they identified with the dope smoking ceo and his hipster existence rather than the soundness of the company. Tesla worth more than Ford, GM and Chevy and the millions of units they produce each year versus a few hundred thousand cars Tesla puts out? And those companies not very sound in and of themselves because of pension obligations?
      When it stops making sense, I go out. Enron never made sense to me. Being outbid on houses by people with no jobs and four kids didn’t make sense until the market crashed and you learned why. (That person never made a single payment but lived large for a year and a half before taking cash for keys.)My neighbor with five cars and a hundred k wardrobe and no job…didn’t make sense until you find out during the divorce it was all a house of credit cards. People tweeting about the money they’re making on Tesla stock between classes? That’s a sure sign it as about to come crashing down.

      When it stops making sense, when the punters fall in and start bragging about all the money they’re making, when the fed is printing money so the Ackerman’s of the world can do nothing more than buy companies and jack the price of products rather than add value, (which was also Enron’s play) when gold is down precipitously when it should be above $2000 an ounce….it’s not making sense. Something is at play that we are not going to be made privilege to. Bail and wait it out until things start functioning rationally.m P.S.
      You will not know when that time comes if you’re watching the money honeys and hunks on the tele.
      Hope you trusted your gut, went all cash in January, and plowed some of that into the vix which you sold last week.
      We CAN predict the future. Toxic money, like toxic people, usually devours itself and brings down the economy-Coronavirus or not.

      1. Very cool. One of the biggest reasons why I’m bullish on the U.S. economy is because I have never met anybody online who has lost money. They either went all cash before the downturn, shorted the market during the downturn, or went all-in and bought stocks before the bull market began and held on until selling at the top.

        There is more money out there than we know. Which is why I think it’s important we always stay humble and practice Stealth Wealth.

        1. The cruelty in your comment doesn’t suit you. But I’ll try and address your comment rationally without facetiousness, though I doubt you’ll allow it to be posted.

          I did lose money. I lost money sitting in cash while everyone else was making money in the market. I was out half the year the vanguard 500 went up more than 20 percent.

          Sorry it makes you angry I didn’t stay all in when valuations were at an all time high. I don’t have the stomach for it and there were a lot of respectable people out there who were warning it was inexplicable. I know I can’t weather the losses, so I am happy not cashing out at the top.
          I have never shorted the market except this year when I took a lot of time to see how the VIX works.
          I work for a living. I come from a family that works for a living. Perhaps the reason you remained bullish on everything is you’re living in an area that is perpetuating the fantasy that insane valuations are justified for profit-less companies and average homes that average salaries can’t afford.
          You are old enough to have witnessed several of these cycles now-especially since they all follow the same pattern…evaluations divorced from reality, a black swan event, wealth redistribution.

        2. Got to love it when people come here to brag they went all cash before the market meltdown while most people lost a lot of money.

          Jadon is an a-hole.

  10. Victor Emanuel Vulpescu

    Very good article!

    However, what do you think about what Ray Dalio says regarding debt monetization? He claims that the central banks will start buying treasuries with freshly printed money and this will cause inflation in first reserve currencies (USD, EUR etc).

    If we go long cash before a recession, are we safe against such a debt monetization scenario or we should add more gold as a hedge like for instance 85% cash & cash equivalents, 15% gold?

    I am not interested in taking any risk in the financial markets right now, so the no risk approach seems very good for me right now. But aren’t risk-free assets risky themselves in a way in which money might be devalued against both assets and consumption goods?

    1. Paper Tiger

      Ray Dalio is like a broken clock. He’s only right twice a day. Stick with the fundamentals and don’t worry too much about all of the doomsday scenarios that are out there. Good asset allocation tied to your risk tolerance and investing for the long-term have worked pretty well over time. I’ve been investing for 40 years and held together through all of the ups and downs in the market and the net result has been pretty solid over the long haul. The trick is to keep your nerves and emotions in check, both through the ups and downs of the market. Every time I try to get cute and think I’m so smart, I usually get burned. People have different opinions about “buy and hold”. I have no problem with taking a little risk every now and then but buy and hold, for the most part, has been good to me.

      I moved some money to the sidelines the week before last and I will want to get that money back into the market and catch some of the upside when things turn back around. However, I would like to see some corporate downgrades announced for Q2 and projections for the rest of the year and I’d also like to see some stability in the coronavirus spread before beginning to leg back into the market. I don’t know where the bottom is in the latest slide but I do know there is not enough information available yet to keep us from sliding a little further.

      I don’t mean to preach; I’m just trying to offer some insights to my own personal experiences.

  11. Aloha Sam, I noticed this model spring up as a slightly different take to real estate peer to peer lending methodologies. Look at what one company is doing. Worthy Bonds are offering partially secured backed asset accumulation for a flat 5% dividend payout to personal lenders.

    I understand that this strategy had significant risks to chase the additional 2 basis points (since you can still find CD’s paying 3%) but is it worth it in your mind?
    Mahalo for your response on Worthy Bonds.

  12. This was a good article. Thanks, Sam.

    I’m planning on (at least the option of) an early retirement in ~12 yrs, so I will just wait to get in the market until the sooner of 3-4 yrs (by mid-2023) or whenever it seems we’ve had the appropriate correction.

    1. Just keep on saving and keep on diversifying your investments throughout that time. 12 years is a pretty long ways away. It is good to have some fire power to Invest if that downturn does come.

  13. Sam,

    When coming across this article and reading about the leveraged ETF’s I did some more research and discovered beta slippage if held on for too long. Assuming the market will perform the way it has been in the past (+7-10% yearly) would it be possible to buy and sell UPRO (3x leverage) every single day and bypass the effects of beta slippage. Obviously this would be a hassle to do every day but theoretically is this possible?

    Thanks!

    Andrew
    Senior
    Grand Canyon University

    1. There will probably always be slippage. But the worst thing you can do is try to trade every day. You will not only lose to the commission cost, but time and cost. It is impossible to Trade every day successfully

  14. Some good insight in this article – most people do not know that you can make money on capital appreciation on long-duration treasury bond ETFs during a recession.

    You should caution people on investing in those ulta-short ETFs. They are designed to decline in value over time and should only be used for short periods of time. People need to be very cautious when using these types of securities as they can lose 50%+ in any given year if they just leave it invested.

    1. gold is the way to go if u are looking at ria long term 5years i purchased gold at 1242 some 25 months ago with the profit from THE TRUMP SERGE about 250k now have a look at the ira amazing ill put that above any market gains. the market has little or zero effect on the economy in middle class. proven by TRUMP he has give the power back to the middle class. now 8.75% of the middle income have savings accounts. economy downturn you kidding me. TRUMP TRUMP all the criers are CHINA investor s downturn in retails check wallmarts P&L

  15. Perhaps you guys can advise on my current situation? WWYD? I am the Trustee of $550,000 cash. My brother & I are beneficiaries. No one needs the $ to live.

    My Navy retirement starts in 5 years (41 yrs old). I have about 4 low-end RE investments that will be paid off in 5 years (projected $600/mo each), 1 ‘normal’ rental, $50k in Roth. My brother is FDNY and retires in 10 years (40 yrs old).

    I am thinking about lending approximately $250k of 550k to local RE investors (standard $30k loans per person). Return is roughly 12% and secured by the home.

    The other $300k is the problem. Personal Capital wants to do the standard Stock/Bond portfolio. Financial Managers sell products. I don’t think I could stomach a 30-40% drop in the market at this time.

    Should I position myself to enter the market after the predicted crash? Should I enter now? CDs? This article had some great options. But we’re pretty young. I’m OK with investing this $300k chunk as a long term investment, but obviously don’t want to lose a huge chunk out the gate.

    1. Dont do it unless you actually know your in the money, people these days are quick “GIMME GIMME GIMME” they just take because its easier then to give

  16. Andrew Mallin

    Financial Samurai,

    Had a quick question about decay and going long on the volatility VXX you mentioned. Considering it continues to inch lower as the market moves upward, wouldn’t it make sense to throw some money lets say 1% of portfolio on this? Considering the exponential change once the market reverses (it was over 115,000 during the 2008 recession). Even a small investment couldn’t it be off set with dollar cost averaging as a hedge against the bull run and eventual downturn? I was intrigued by the decay idea and would like some clarification, if I read correctly it could make huge gains. Is there a penalty or cost for holding on to the ETF?

    1. Aaron Petrovsky

      DO NOT HOLD volatility ETFs or ETNs for extended periods of time! They lose a huge amount of value over the long run because the underlying assets are constantly being rolled and rebalanced. They are a tactical trading instrument!

  17. I’m late to the party and I’m going to oversimplify, but I like to think of reducing exposure to bear markets as dodging a punch.

    Most of us are only investing in the markets for relatively short runs. We might have substantial capital in the markets for 30-60 years. You’ll experience something like 2-7 recessions of the magnitude that Sam has outlined.

    If you can dodge a couple punches and not take the -20% or -30% hits, you come out better even if you miss a +20% or +30% year to match (see the spreadsheet below).

    Everyone saying that the markets turn quickly and can’t be timed is correct. The bull goes up the stairs and the bear goes out the window. It’s [historically] sudden and sharp.

    That said, once you have a lot of capital in the market, there’s no reason to lose a lot of it and ride it out. Ben Graham was right in that “preservation of capital is first.”

    Sitting a couple years out can be a fine strategy and you don’t have to go from 100% equities to 0%. You can reduce or hedge your exposure.

    I assume the next downturn will happen when the American financial industry at large achieves a net short position. =)

    Reference spreadsheet (you can copy it and tinker): https://docs.google.com/spreadsheets/d/13fVbfy0DO6QdtiGI5lgLU_wu5GNxGHBXg1ugIr2TR80/edit?usp=sharing

    1. “If you can dodge a couple punches and not take the -20% or -30% hits, you come out better even if you miss a +20% or +30% year to match (see the spreadsheet below).”

      Yep, that’s how fractions work. Always need more %gain than the %loss to get back to breakeven because intuitively you’re working from a smaller number after a loss. And it gets worse (need exponentially more gain) for the greater loss you take. Flip the fraction. A 20% loss will require a 25% gain to get you back to even. (4/5) * (5/4) = 1.

      Similarly, if you can greatly mitigate a recession (don’t think most people gain during a recession), you can make a shit-ton of money (1/2)*(2/1) = 1 (no mitigation, would require doubling your money to break even) vs (3/4)*(4/3) = 1 (mitigating to only a 25% loss would require only a 33% gain to breakeven.

  18. MustardTiger

    Ya know, I just make boxes at a factory for a living, I’ve never worked for Goldman or tell people how to run their finances on the internet. But I think if I were telling people about buying inverse or leveraged ETF’s, I might add the fact about daily rebalancing and decay and how you could and probably will lose money even if you are right about the direction of the market, especially in a non-volatile market scenario.
    And why not add the possibility of just shorting an ES contract for instance. Taking all those problems away.
    I mean holy hell.

  19. Ms. Wright,

    RE: “I think a lot of people don’t invest due to not even understanding the basics…”

    One of the basics to learn is accounting or double entrty bookkeeping. They used to teach it in grade school in some countries.

    The index idea above is great. Warren buffet advises it.

    In order to evaluate individual investments, one needs to have learned some accounting or double entry bookkeeping.

    One of the biggest fundamentals is double entry bookkeeping and accounting. It can be learned by ones self through books or in class. You could even talk to an accountant.

    Accounting is mandatory knowledge for understanding the financial statements of individual entities (companies, persons, governments, charities, etc.) Thus it is mandatory and very helpful for analyzing individual investments records.

    Accounting is called the language of business and is endemic to all thriving societies. It used to be taught in school. The robber barrens, Andrew Carnegie and Rockefeller, both learned it as boys.

    If you need some motivation to learn it talk to some people who understand it and ask them how valuable it is.

    There is also a motivational book, “Double Entry: How the Merchants of Venice Shaped the Modern World”, by Jane Gleeson-White. And, the first half tells how important it has been in history. (Actually some of her source material is excellent, but she does an excellent job.) This book is even more interesting while learning bookkeeping or having learned it.

  20. What are your thoughts about buying more TIPS instead of CDs? Tips are already 10% off my portfolio.

  21. My solution is to hold portfolio insurance. The problem with big market loss in retirement is SORR. SORR doesn’t happen till you open the portfolio to withdrawal. Till then you merely own shares and owning shares and not worrying about what they are worth is the name of the game. The proper maneuver is to sell shares and convert them to bonds on the way up. Sell high buy low. This is called rebalancing. When the bear comes you do the opposite. Sell bonds and buy shares back. Buy low! If you are living off your wad what you need is a risk free asset to live on during the bear, and close the portfolio to withdrawal. How do you do that? Save 2 WR in a risk free account. If your WR is a 4% level, move to 3%. Then spend down the risk free money at a 3% spend rate, while rebalancing the portfolio every year.

    What this does is re-index your portfolio to a better path. If you go to the home page of FIREcalc you will see 3 portfolios one starting in 73 one in 74 and one in 75. In 73 the market fell 14%. In 74 the market fell 26%, 40% over 2 years. By rebalancing over those 2 years and living off your insurance, you would have front loaded your share ownership. You would have converted your excess bond money that you had collected in good times into shares. Shares poised for the 37% gain of 1975 and 24% gain of 1976. You live off the risk free asset and the portfolio insurance gives you the cajones to rebalance and not turn your shares into hamburgers. I did VXX during the last downturn, good way to loose money. I recommend against. Portfolio is simple, cheap, low risk and all you have to do is stash a couple extra WR in something that has a very different risk profile than your portfolio. The point of a portfolio is not to die as the richest dead man in the grave yard but to not die poor

  22. Sounds nice, and easy, making money… But there are a lot outhere who haven’t done anything at all on a stockmarket, how to go short is simple unknown!, or known but not familiar with it. For those is a course needed, there are a lot of them, but i recommend this,http://tinyurl.com/z5ru5uo one, it worked for me.

  23. We are definitely due for a recession within the next couple years and may even happen sometime this year. I’m already getting preparing by going to have 40-50% in bonds/cash when I had it at 20-25% the beginning of this year.
    Great detailed post as usual Sam!

  24. Sam, I don’t recommend going short stocks. What we face is the mother of all bubbles itself—bonds and the currency that denominates them. If sovereign debt implodes naturally or by CB devaluation then nominal shorts will get killed. What CBs have done by stepping in to stem the GFC was move the risk onto their balance sheets. CB liabilities are the currencies we use. It is likely CBs will be pressured to conduct LSAPs ( Large Scale Asset Purchases) to prop collateral values of bonds, stocks, and RE. Such a policy is described in Ben’s 2002 speech. Check out the two paragraphs under Fiscal Policy and you’ll see what’s coming. All bears will be shot. In the end the CBs will fail. Deflation will win and they will have no choice but to recapitalize the system with revalued gold. GOMO. Gold Open Market Operations. The QE that will be delveraging in nature and actually heal sovereign balance sheets. That’s the end game to all this.

    So the way I see it, the only way to go short is to own physical gold and quality mining shares. No GLD. The gold bullion ETFS will likely trade at a discount as there are holes in the prospecti to drive a truck through. Stay away from these things. Open a GoldMoney Holding, go to the coin shop buy some Eagles.

  25. Sam, I’m 29 and a long time reader of your blog. I was one of those that graduated in the aftermath of the 2008 recession and I can clearly remember how difficult it was to secure a job, let alone a high paying one.

    My career in the last few years have taken off and I am very fortunate to have saved $500k in stocks, $200k in cash. Portfolio is made up of 25% in Vanguard ETFs, 60% tech stocks, 15% in consumer, bonds etc.

    I’m married, with no kids and both my wife and myself cleared over $450k in after tax income last year. We also bought a property with a $450k downpayment and mortgage is around $6k/month. We have other misc low interest loans that comes to $2k/month and our living expenses are no more than $3k/month.

    I feel that we could weather out a 40% reduction in the stocks portfolio, but like you, I would like to make lots of money as the world collapses all around. What would you do if you were me?

  26. I just posted regarding the impending recession this morning. I think you’re dead on: starting within 12-18 months, we will see a major recession. US equities have sky-high valuations, the buffet indicator is at around 140%, yield curve is nearly flat, US economy slowing, and fed raising rates. Investors need to seriously expect a major market downturn by 2020 at the latest. Great tips!

  27. Texas Hill Country

    First time post. Age early 40s, NW 2mm in unleveraged control income property in 3 midwestern states.

    I have thought about this a lot, and concluded that houses/duplexes in safe locations within low-mid priced cities (KC is too holding) yielding 7-10% has superior inflation, deflation, income, and control characteristics. If houses in KC go down by 8-10% per year and I am yielding that much unlevered, I am breaking even in NW – if deflation warps rents then I will make less $$ while the levered competition gets foreclosed. And I have the option to leverage up if needed later to grab bargains.

      1. Texas Hill Country

        Sam I like this better than REITs as a small play but giving up control in levered entities is painful for me – I was in numerous private partnerships like this and about half were eaten by bank debt in the recession.

  28. Adam and Jane

    A trader asked Groucho Marks: “Groucho, how do you invest your money?” Groucho answered: “All in bonds.” The trader asked: “But Groucho, they don’t pay much return.” Groucho said: “They do when you have a lot of em!”

    Since we have no money in the stock market, we have no plans for a rise or for a correction.

    We are 53/54. We just plan to maintain our stress free passive income with min risk. We don’t have 10 mil but we have 2.1 mil in NY muni bond that will generate 94K tax free next year. That covers our 55-65K expenses. With my wive’s pension, our passive income covers 2X expenses. We not greedy. Our munis pays around 4% tax free. Our 401Ks are in fixed 4.3% for this year and generates 80K combined interest.

    We also have many years of living expenses in liquid savings just in case.

    Adam

  29. Thank you for a different way to think about a downturn, WHEN it comes. I’m mid 50s so my investment time horizon has shortened. I figure keeping three to five years expenses in safe investments guards against having to sell when markets stagnate, decline, or crash and gives time for equity investments to recover. But, as Sam points out, this approach misses opportunity to make smaller returns, albeit better than those returns in a declining market. Maybe I’ll look more into longer term CDs funded with sales of higher risk stocks. I will keep the dividend payers, though. I’ve always had a stomach for investment risk – I stuck it out and bought equities during the 2008-2009 crash but perhaps it’s time to dial the risk back a bit and be satisfied with a lower return. Why risk what I’ve accumulated just to continue seeing relatively high returns? Interesting, one can become investment return greedy without realizing it.

  30. This article is giving me major anxiety! I am in my late twenties and am still unable to pull the trigger with stock market investing. Logistically I dont understand it for instance, in a down turn is this article saying to rebalance your portfolio say if you had 90/10 reduce to a different ratio within your portfolio or pull your money out and put it in the US Treasury, gold or CD? I am a long time reader and have been studying for years. I think alot of people dont invest due to not even understanding the basics, real estate is much easier to comprehend at least for me! I really want to get started with investing any help is appreciated! Thanks Sam!

    1. If I may Ms. Wright,

      It’s quite simple to get started. Open a account at Vanguard. Vanguard is the largest brokerage firm in the world. You can do it online and it only takes about 10 minutes. Second invest in what they call the S@P 500 fund. The S@P fund is made up of the largest 500 US based companies in the world. Think Apple, Home Depot, Bank of America. Every dollar you put in is split amongst all 500 companies. This provides you with a lot of diversification. Diversification usually means less risk. A added bonus is that the majority of these companies earn money outside the US so your not only investing in the US your also investing in economies all over the world. This gives you even more diversification. Second, set up what they call automatic contributions. You pick a set dollar amount and Vanguard will automatically take that amount of money out of whatever account you picked the exact same time every day, week, or month. I personally started with $100.00 every Friday and increased the dollar amount as my pay increased. By doing this you will not only buy stocks at all time highs, more importantly you will buy at the lowest of the lows and all the times stocks are not at the highs. Third, and I think most important click the button that allows you to reinvest your dividends. Close to 60% percent of stock market returns are generated by reinvesting your dividends.

      I started doing this in 2003 and according to Vanguard my annual returns since then have been 10.9 percent annually.

      Hope this helps, Bill

  31. Thanks Sam! I’m worth about $2M, just 32 years of age, but live in an expensive city and going to start a family. Not going to need my funds for quite some time so I’m staying the course of essentially all of my NW in equities, other than the 20% of cash which I would deploy if things get messy etc. Given that I’m still grinding and the end isn’t too soon for me; not sure what else I would do etc.

  32. Very interesting article, I have had my investments on automated for the past 6-7 years (Betterment , Acorns , Wealth front ) I’m in my late 20’s and would not dare to time the market and risk on missed gains then having to “guess” a good entry point to get back on, instead what i have been doing is slowly diminishing or stopping altogether my automated contributions as i do not want to be contributing to a Peak Market ( I agree with you that a Big Market Correction has to be near ) my plan is to then restart my automated contributions and probably increase them as the market continues to go down.

  33. There is definitely nothing wrong with “taking something off the table” if you are worried or not sleeping well at night, or simply don’t have the stomach for stock volitilty. If you are not worried though, buying the right stocks will work out better in the long run.

  34. Ya wanna be safe and win? Cake and eat it too? Bake two cakes!

    Similarly, two strategies. Fixed and home run at the same time.

    We’ve discussed option strategies before, I’m a little surprised ya did not mention it in your write up.

    3% on the value of one SPY contract is about $840 a year that you have to play with options. Let’s begin.

    Buy the 275 puts for 1380 and sell the 255 for 865. Mr Market goes up, stays the same you have 1.5% or so. Mr. Market drops you get all the drop down to 255 for a nice ~9%.

    If ya want to play both sides take the $325 remaining and do the same on the up side. Buy the 280 for 1615 sell the 285 for 12.65. If Mr. Market stays flat, ya make nothing, Mr. Market goes up you make gains from 280 to 285. Down.. see above.

    Lot’s of strategies you can do with 3% of your money every year even at the current volatilities.

    1. Good stuff. Do you wanna try to guess post about option strategies to head your bets and make money during the downturn? I’d love to have it and I’d be surprised if you didn’t want to write it.

      1. Sam,

        I’ll think about. Still prefer real estate notes `cause I can control the risk better. When I move more into Mr. Market and want to move from semi-retired to retired then I’ll move more in the the Market.

        Occasionally, I see the banks annuity pusher, het told me about a 10% max gain and 10% max loss annuity that had no fees. After researching, found out that I could do the same thing at almost zero out of pocket while tossing the principal in the credit union at 3%, so, the fee was 3% ;)

    2. This is a long premium reverse iron condor strategy. It works if you enter the trade when the volatility is low and you get paid when the volatility explodes. It rquires good timing or you would lose the premiums you pay to set up the trades.

        1. That is OK if you plan on spending the 3% as the price you are willing to pay as premiums for your downside protection. With that said, the 3% will add up and which is your inventory carrying cost.

  35. This:

    “For those of you who are under 40 or who have at least 20 years of work left in you, you might as well keep taking risk based on a more traditional asset allocation model. Long term, investments such as the S&P 500 and real estate tend to go up and to the right. When you combine not spending money with long-term compounding, you will get rich beyond expectations.”

    At 25, I can not imagine being anything less than fully invested. Having money sitting on the sidelines feels like it is burning a hole in my pocket!

    In the case of a market downturn, I can imagine myself going short the index with geared ETFs (ASX: BBOZ, ASX: BEAR) to take some profits on the way down as well as dollar cost average into the index after major falls.

  36. What is to stop a person from taking a short position on VXX and just keeping it open long term to make money on the structural decay?

    I’m not too experienced shorting other than buying put options a couple of times, but it seems like this can’t be allowed (although I don’t understand the mechanism…)

    1. Jordan volatility has been a very popular and crowded Trade over the years. But sometimes, volatility can spike drastically, as it did earlier this year and wipe out alot of games.

    2. Nothing stops a person from doing that. I’ve had a short position for years on VXX, and am up 846% on it. As Sam said, volatility can spike drastically with no warning, so it is a risky game. My current short position is so profitable that the spike this year hardly registered, and I added to my short position the day the short volatility trade blew up.

      I’ve found another benefit for me of shorting VXX is that if I never cover, there is no tax liability. It makes no sense to cover my original short sales since the market value is converging to 0. My original shorted shares have gone through three 1 for 4 reverse splits already, LOL.

      1. Trader42069

        Impossible. There is no way to make more than 100% of the capital you received when you initially sold the shares short. The asset will not go below zero, so your maximum return is the share price you received initially when you shorted VXX. Each time it reverse splits you get fewer and fewer shares at a higher price, that has no bearing on your gain/loss. Also, you have to pay margin interest to your broker to maintain the short position, so your maximum return will begin to diminish over time when factoring in the interest you have been paying every month to your broker.

  37. Hey Sam-

    I am in late 20’s and as each day goes by, become more aware and fearful of a downturn. Not only what it will do to my inflated sense of my net worth, but also my job, income, and spending (lifestyle).

    I’m trying to go through exercises of mentally preparing for how I’ll feel and react when the market goes down. I am undecided if I want to sell some of my stock, or none and just keep buying. The market has taken a few hits the last 3 years and I ignored them and kept buying – that has worked out great. If I sold then (Feb for example) because I thought it would be a downturn, that would have hurt a lot.

    What’s unfortunate is how much of my headspace a future downturn is taking up but I think it’s helping me prepare for the future. When I think about how I’d feel with 60% of my NW, I still feel fortunate and well off, so I’m leaning toward “staying the course” knowing I have so much time to recover. What the A+ play would be is to sell, wait for a downturn, and then buy my first house. It’s just a lot to time but we’ll see what happens.

    1. Again, it depends on what stage of your financial journey you’re at. But I will say this, and I’ll probably write a new post about it: You don’t truly know your wrist tolerance until you actually start losing a lot of money.

      1. The financial journey never ends. One may be old but the journey for his children/hairs is just starting. What investment strategy will you use Sam when you are 60? The old age conservative standard advice for you or the aggressive standard approach for your still young son? Once you have made finances an intergenerational issue then perhaps you are always young, the financial journey is always at the beginning — and thus should always be aggressive?

        1. You are right in that once you extend the financial journey to our children, now looks like as good a time as ever to invest. Our children will tell us how cheap things were today, even though things don’t seem cheap now.

          But here’s the thing. Our children have the energy to go out there and earn and take risks. The older we get, the less energy and risk tolerance we have. We need the next generation to make their wealth and their mark.

          1. If you have achieved financial independence three times over what your expenses are — and I understand the challenge of quantifying that — then there may be capital risk, but there’s never risk of having to take a hit on your expenses (save the unlikely but very real black swan event I mentioned in other comments where at the end of the probability distribution assets are completely lost to never recover).

            In such a situation, of FI surpassing two three times expenses, you can safely look at your FI journey through the eyes and interests of your heirs. In that sense, there’s an argument for staying aggressive (or becoming aggressive again) once you go over your financial goals and are thus rather insulated from downturns. That is the counter argument to becoming ever more financially conservative with age.

            Most of the standard advice is given to people who have just enough to fulfill their financial goals so the advice concentrates in not running out of money before dying. That may not apply to everyone — especially people who having been diligent about FI since their youth are now in a good position, hopefully the future situation of readers frequenting your blog.

            BTW, If you want successful people to continue making that higher risk higher reward loan on the mom and pop store down the corner that is having a hard time when I’m old and secure, then we need to let the heirs of successful people keep the gains. If we estate tax the gain then successful people will consider the risk not worthwhile, buy government bonds, and their funds become one thousand dollar staples and two thousand dollar staplers. This is how estate taxes disincentivise economic growth and longer term prosperity.

            1. Well, I’m not there yet (returns that equal three times expenses). At the depth of the crisis I was below expenses. But after the hefty appreciation and another decade of investing I think I’m now close to two times expenses. So I think I can now take a more holistic intergenerational approach, becoming aggressive again, in real estate for the time being. For people who have a lot of offsprings this is obviously a bigger and more open ended challenge.

              There are, I think, a lot of articles you could write about how to teach our offspring to handle money properly. I’d be interested in what you and other people have to say. I, myself, feel clueless in that area. Mostly because an even bigger challenge is to foresee what “properly” handling money will be in the vastly different era our offspring will be living in. The world is moving ever faster. In the next twenty five years we will see more change than in the past fifty. Then, the next cycle is likely to be half that at twelve and a half years, and then six snd a quarter… Simple arithmetic implies a singularity, actually.

              Human growth is not only continuing but the rate of growth itself is growing. There has never been a time in human existence where worldwide growth was a sustained four percent — not even remotely close. And the rate of growth itself is on an ascending trendline. But even if you assume that the growth of the growth stalls and thus growth rate stays at four percent, then in a century average per capita income worldwide will be $650,000 per year — in today’s money! — and even a few hundred dollars of that money will be able to easily buy things that today we cannot have at any price — like a cure for cancer — or who knows, an age stalling biotechnogical treatment that falls completely outside our current imagination, like the power of a supercomputer was completely unimaginable a century ago.

              That is the vastly different world our heirs will live in. What lessons can we teach them about money? Do you have any idea? Because to me it’s mind boggling and nearly intractable.

      2. In the last downturn I was ok up to -30%. Once we got to -45% I said: “This is it, this is the black swan where losses become permanent and some assets disappear, expunged forever, 1930s prewar Europe style, never to recover again”. But then I said “maybe not, maybe this is not quite the black swan yet” and prices stabilized. Then there was the slow recovery.

  38. Hi Sam. Please let me know your recommendations for accounts or CDs that provide a 3% yield. Love your blog. Thanks!

  39. Good luck with market timing. Empirical evidence shows that it does not work. Anecdotal evedence will show than one lucky person did time it right one time.

    How about if you accumulate more and live off 1.5% of the S&P 500 dividend instead from the SPY. (That is more or less the Warren Buffet solution. Works for me). This way you don’t care if you loose 30% or 60% on paper. You never touch your principal and you keep all the upside of 8 to 10% annual stock performance without having to hedge a zero sum game where you can’t have upside.

    In a market over the years that shows a 10% return over 100+ years, shorting the market is a guaranteed looser.

    The only solution is timing the short term market drop and then timing the bottom too.

    I am that talented.

    1. The solution to having more money by accumulating more money is a logical one. But I don’t know how insightul that is.

      Unfortunately, I will always care if I lose money. And I think so will other people.

      I think I need to explore the topic of why so many people are against taking down risk and earning a 3% risk-free rate of return. What do you think that is?

      1. A 3% risk free is not so risk free. The US is not that safe of an investment over 1000 years. It is the same logic as the sequence of return that terrifies new retirees. Who is to say that the US Falls in disarray and China rules the world after negotiations with India.
        A black swan to the US is very realistic. Just when? Like a volcano in HI or an earthquake in California. It will happen.

        Further once adjusted for inflation, the 3% is really a zero return.

        I would rather have equities across 10 different counties than 100% in US bonds. The reason is as follow: world domination is a zero sum game. Winner one day, looser an other. Further having a multi national stock is not as safe as 10 country specific stocks.

        With that, most people are risk averse. So most investors will go with the 3% “safe” return.

        Warren buffet says double down when there is blood in the water.

        What do you think?

        1. Absolutely double down when there is blood in the water. I’m actually surprised if people didn’t buy more during the last downturn. That’s why so many people are much wealthier or have retired early by now.

          Then again, maybe it’s not so easy…

        2. Great comments. Wish I had read them before posting mine as a virtual duplicate.

          What about buying rental property and potentially taking only a small hit on modest rent decreases? Isn’t that like living off the dividend and not caring much about the underlying capital?

        3. Profitfromthecrash

          I miss your logic: if US is black swaned what will happen to your SP500 dividend? You are too sure that your US dividend will be forever while unsure if US will keep its position in the world. How is that?

    2. If you were to just live off the dividend yield of SPY, why not double or triple or quadruple the yield by writing covered calls against your stocks. It is a relatively simple strategy that doesn’t require much management. By adding some short deltas to your primarily long positions, it reduces your net longs and as a result adds a small hedge against the downside risks.

  40. What will cause a recession in 2 years? There is a venture capital bubble and will probably cause a 10% decline in SF real-estate but for how long and from what level? There is a student loan bubble and I have not convinced myself of any outcome. There are also mature real-estate markets. I don’t think SF is in a real-estate bubble, but any job losses will impact SF area quickly but temporarily, for less than 1 year? I did talk to a mortgage broker in LA last week and he is convinced of something happening in the next 2 years because he is seeing more less qualified loans being written like 2008. So what will cause job loss? I think tariff war is unlikely and any war with North Korea is ridiculous after 50+ years of the non-sense. Infrastructure spending is likely, and tax cuts will have more impact in 2019. Italy is a problem child. There is even a 2nd phase of tax cuts planned. So, I don’t see it. Do you?

    I am taking 25% out markets in areas that have done well.

    1. The student loan bubble is an interesting one. But the taxpayer is the backstop bailout.

      Corrections tend to only last 1-2 years, then it’s back to normal.

      I hope folks use this article to think more about risk.

  41. I’m not really a typical reader. Couldn’t say I’m rich at all (yet). I can’t help but smell a downturn on the horizon no matter what so many seem to be thinking right now.

    For us, our biggest asset is absolutely our house (I know, yikes. We’re working on that). We’re in our 20s and bought in the depths of the housing downturn here locally. It seems we did get our house for a song. Now, being in close proximity to Seattle’s crazy housing market, we’ve seen such dramatic growth in the value of our home that we’re scared to lose it. Around 40% growth so far.

    Our plan is to relocate closer to family (with a baby due soon, it seems smart) and cash out this house to buy something smaller. With our equity now, we can actually buy something outright with no mortgage or very little–seems like a smart move to shed the mortgage debt and streamline expenses. Our family thinks we’re nuts. They think our house increasing in value is a sign we should hold tight. But our mortgage payment is too high for our comfort and we are tempted by the prospect of ditching a mortgage altogether to help us start on a path to FIRE.

    I’m watching my home value climb almost by the week. It’s making me steadily more nervous, but home supply in this market continues to drop as Seattle retirees cash out and buy cheaper homes here–there are 25% fewer homes for sale now than last June. I’m scared prices will drop back down before we’re able to leave, but we’re aiming for Fall or Spring to make an exit. It’s an interesting time, for sure.

    -Kaitlin

    1. we just sold a seattle rental (formerly a primary residence). i thought the time was right based on what i was seeing from various metrics.

      if you can sell, walk away with enough cash to buy in cash in a LCOL, and escape the seattle hellhole, that sounds like a win to me. being close to family is very underrated when you have a new baby.

    2. If you can go mortgage free, go for it. It provides certainty. The key is to make sure you now bank the mortgage payment you saved into an investment, preferably in a Roth IRA for you and your spouse for a total of $11,000 per year. This would be a good start for a family in their 20’s.

      1. But if you bought a house at the depth of interest rates then why not keep that cheap mortgage and let inflation and higher safer returns vaporize your debt payment and balance over a relatively short time? The same interest risk/opportunity exists on the short as well as the long side of debt.

        As I see interest rates (and inflation) rise I keep my low interest mortgages and celebrate the fact that the true cost and balance on my mortgages is being vaporized. What is being vaporized? It is the very investment money that the Fed forced investors to lend me at a low rate during the recession. It is the money of many investors on this blog I’m vaporizing. But heck the Fed forced you to lend it to me for a song just a few years ago.

    3. If I were you, and you only owned this one home, I’d hold onto it forever. Sounds like you are very in the money and can afford the payment and a correction.

      It’s important to be at least neutral inflation with real estate (own one residence). If you want to move, I’d try renting it out first. If you just can’t take it, then sell. You won’t regret trying. But you might regret selling in an area like Seattle 10-20 years from now.

      If you haven’t read this post, it’s worth a read: Why I Sold My Rental: Had To Live For Today

  42. I agree with the outlook, but for people who were positioned corectly the last decade or two, what actionable advice is there? If you were positioned correctly, you’d have made multiples of your net worth during this last cycle. How do you de-risk without losing a big chunk of your capital? 23.8% long term capital gains plus 13.3% state tax. Selling to de-risk would be like a 30+% market crash. My largest positions have negligible cost basis.

    De-risking can be accomplished by someone with an income or new money coming in, tough to do for a true retiree with a lot of gains.

      1. Agreed. Taxes are important consideration but don’t let the tail wags the dog, and I am speaking from my experience.

  43. Shouldn’t younger folks actually be looking forward to a downturn in stock market, Since they have enough time for it to recover and grow? That’s at least how I look at it, since I have at least 20 more years to tap into my pre-tax retirement accounts, I plan to do nothing with them. I have also hoarded some cash though, in case good buying opportunities come up ( RE, stocks, etc..). But yeah since I am already in rather high income tax bracket selling stocks means even higher taxes, so I am staying the course ( Its close to 100k and 50% is in index funds, anyways not much..). But it’s always good to read your work, I have noticed even if it is not useful for me at the moment , sometimes in the future it actually comes handy and generally makes me look at things differently

    1. Absolutely. The only way younger/poorer folks are ever going to catch up to the rich is if there is a massive correction. During the crisis, we were tens of billions of dollars closer to Warren Buffet’s net worth. Now, he has surged even farther ahead, we’ll never catch up.

      Pray for a downturn, and pray you have the courage to go all-in.

  44. If one doesn’t plan on accessing or drawing down one’s investment portfolio (401k, IRA, brokerage account) for at least 25 years, would your advise be different? I’m planning on rebalancing my oldest child’s 529 plan some since he starts college in 12 years. Otherwise, I’m not sure it makes sense to change my asset allocation in my other accounts.

    As far as real estate goes, I’m currently paying down my investment property mortgage aggressively, but it might make more sense to save more cash for a buying opportunity during the next recession.

  45. HalfGlassFull

    Realizing that this most recent run in equities, real estate, etc. will likely turn down at some point in the next five years, I have been researching various strategies similar to those cited in this article. One strategy I plan to deploy to some degree is paying down existing mortgage debt (24 year, fixed rate loan with 4.75% agfarm residence loan) on primary residence. Paying down the debt will be a clear net positive. However, in addition to moving money into less risky investments over next few years, as things turn down, I want to begin to incrementally redeploy money back into equities and real estate. Knowing this will be my strategy, I do worry about relying significantly on the mortgage paydown because it will limit the amount of capital I have to redeploy during the downturn. Do you have any thoughts on benefit of paying down mortgage debt (which also includes peace of mind) vs. holding cash equivalent (which allows for more capital investment)?

  46. Why don’t you think a bout of stagflation is a possible outcome here? Because it seems like using a combination of bonds (locking yourself into inflation adjusted losses) and shorting (where nominal prices could rise while the value of companies decreases) would be catastrophic in that scenario.

    That’s what worries me most about attempts to time the market: not that you aren’t right about the macro-forecast (the economy is unhealthy) but that it manifests in an unexpected way.

      1. You listed gold, and I’d expect that to reasonably hold value in bad markets of whatever flavor. But many of the rest seem to be making a bet for low inflation, and I know that I don’t know enough to have a good opinion about that. That said, I’ve erred in the past on paying down debt over investing, which has its own built in assumptions about macroeconomics, so take my question as an observation and in no way a criticism.

        Thanks for asking. I’m 32, with about 2x annual income in net worth. So to early commentor’s points there may be an age divide in “productive businesses will return value in the long run” and “I don’t have time to wait around for a recovery”. Positioning, about 40% home equity/45% stocks/5% bonds/5% cash&CD’s with stocks and bonds as the growing category. Arguably I should have been investing more, but coming into the labor force in the recession having a $400/month mortgage as my only debt makes me feel a lot better about weathering bad outcomes.

        1. To be 32 is great, but it can also be dangerous b/c of such a long bull run you’ve experienced for the majority of your investing career.

          It’s really hard to know your risk tolerance until you start losing lots of money. Hence, this post serves as things to think about when the time comes.

          At the end of the day, it’s just money. Even if you lose 50% of your net worth, you can just take the loss and divide it by your savings and expected return amounts each year to calculate how much time it’ll take to get back to even.

          I’m personally vehemently against having to go back to work again after 6 years of being away. I want the flexibility to take care of my son full time. Only got one shot at this.

  47. Damn Millennial

    I will take a big hit when the next correction happens, but it comes with the territory of aggressively investing. What allows me to continue with my path is the simplicity of the plan.

    There comes a point when you have to be honest with yourself about the type of personality you have. For me it is much easier to focus on the things I can control (savings rate, personal overhead costs, how to earn more money) vs. those that I can’t (timing the market).

    I am more comfortable with my plan the further I progress. With that being said I have VERY low overhead costs right now. In addition I have the biggest EF I have ever had and own a ladder of CD’s that would get me through the average length of most bear markets.

    Hopefully those pieces combined will keep me fully invested and give me the ability to continue to invest when the next down turn comes.

    I also am not a multi millionaire and am still in my 20’s so a different perspective for me compared to you!

    1. Thanks for your comment. I have the same mind set as you. I am in my 20s and have the time to recover. I just keep investing in companies with huge cash balance. Example brk and apple

    2. In your 20s, with no family to support, take as much risk as you want. Even if you blow yourself up, you can make the money back b/c you probably didn’t lose a large absolute dollar to begin with. You have so much time on your hands.

      I hope more readers recognize that TIME becomes the absolute most valuable asset the older you get. But I don’t think I’m getting this theme through, probably because you don’t really appreciate how valuable time is until you get older.

      1. Damn Millennial

        I think you are totally getting it through! I have been reading since I graduated (2013) and appreciate all the insight.

        Time is extremely important. I actually think the best investors have to grasp this concept early in life to grow a large net worth. You really start to realize how much of an advantage those with trust funds etc have over the average Joe.

        For now my focus is just to keep stashing cash and not overthinking it. It has gotten me this far! Have to get that tailwind going.

      2. I am a father of a 2-year-old and another on the way. I’ve always been a risk taker for stock and real estate investing, until recently. I’ve been a co-owner in a business for nearly 10 years and I’m tired…lol.
        Something recently hit me as I have a mortgage and soon to be father of 2, I don’t feel as though I want to be as risky. That said, I finally started investing in the market again (as of last year outside my 401k and ira) and being I’ve been burned by early 2000s crash, 2008 crash including owning a bunch of Washington Mutual stock when I worked there. I think it just hit me that I feel as Fin. Samurai said I don’t know if I still have the stomach to recoup losses after so many years of saving and not spending. . . my only change is I wouldn’t have sat on the sidelines as long as I did because I thought the sky was falling (2008). Time is your biggest asset.. I’ve realized this a lot more recently as I’m getting closer to being in my late 30’s.
        Ive put my head down and grinded away for so long i think im becoming more aware of the value of time. It’s just that as a kid who grew up without much you have to put funds away and delay gratification. Seems like an endless wait.

        1. Double Entry

          It is a must to learn accounting. It has the power to prevents losses amongst many other advantages.

  48. I like the idea behind this strategy but I’d be curious to see you crunch the numbers for the last downturn for example. I have a strong feeling that staying the course would allow you to capture all the gains fully and offset the eventual downturn even if you know when the downturn is coming and take a 12 year dca type strategy to deleverage as you suggested.

    To stay the course though, you obviously have to be ok with the volatility. Are you doing this more to avoid volatility or to try and earn more $$(or not lose as much)? I think the latter actually wouldn’t work with this strategy but need someone smarter than me to crunch the numbers.

    I am curious though what you plan on doing during a down market to make money? Seems like there are amazing RE opportunities in cyclical markets during downturns. That’s what I was hoping this post would be about as it’s something I’ve been thinking about.

    1. Don’t forget the thing about all the time lost during the downturn. You basically have to take whatever you lost and divide by the amount of your annual savings to figure out how much longer you have to work. Because you really don’t know when your investments will recover to make you whole. All the time struggling to get back to even is time lost.

      1. that would be a difficult calculation because one would need to factor the opportunity costs of mistimeing the market into the equation if any gains were forgone in a defensive strategy.

  49. Great post! I’ve been thinking about when the markets are going to turn over. Going through another recession will suck but being prepared will make it a whole lot less stressful.

    I held SSO once and did pretty well but I didn’t have a large position in it. Given I am much more conservative now I probably won’t hold it again but it’s always good to know there are options like it out there.

    I like the idea of holding treasuries. I don’t plan to sell my stock holdings since I have a long term horizon but I do like the plan of putting new cash into conservative holdings and keeping some cash too. I’d like to use the next recession to buy low.

  50. Shorting stocks is extremely difficult. Most professional investors lost a ton of money on the longs and shorts in 2008 due volatility. Cash was preferred way to protect downside. Ultimately, the short sellers were right but overall lost money or were slightly flat. It’s just too difficult to time the market for really anyone. I’d follow your recommendations on cash, treasuries and CDs, once rate rise further. It feels a little early to buy bonds while rates continue to rise. I would not recommend anyone here short individual stocks in any meaningful way.

  51. Great article FS.

    Let’s say YOU are at the “I’m Rich” peak in the graph, and a downturn has begun.
    YOU somehow have a few $100G’s in cash to deploy and buy into the storm.
    What would YOUR strategy be?
    DCA a portion of the money every few months?
    Or wait a bit and do a lump sum when you think it’s “reached the bottom”?

    Curious as to what your strategy and thought process would be. Thanks,

    1. He has traditionally DCA’d in tranches based on how far the market slipped. I don’t remember the specifics but I think it was something like $10k invested for every 1% decline.

      1. I think that the “downturns last 18 months” is a simplification people have made to help classify in their brains what is essentially a chaotic market behavior. There are smaller dips that last less (e.g. earlier this year how many people thought “oh here comes the downturn”?). Or dips that last longer and contain several 18 month dips inside, like the 30s depression. Almost every recession has different characteristics.

        The market exhibits almost fractal behavior at almost any time resolution. Even 6 months into a dip you just don’t know if the bigger 18 month dip has started or this is just s minor dip and you’re just missing out on buying st the shallow bottom.

        If there were a pattern, the smarter of investors would spot it and their very actions would make the pattern disappear.

    2. Given the average correction amount is 40% over an 18-month time period, if I KNEW a downturn was here, I would try my best NOT to buy anything for the first 6 months or first -20%, whichever comes first, and then start legging in every -1% to -2%.

      Patience really is the key during a downturn. It’s so tempting to go all-in after a 10% correction in the first couple of months. But corrections take time to play out in the stock market AND real estate market. It’s better to start investing aggressively AFTER the bottom and the market is starting to pick up steam.

      In other words, investing in 2013/2014 aggressively had a better risk reward profile, even if 2010-2012 was the bottom for stocks and real estate.

      1. Wow. I think this could be a post topic all to itself. Incredibly insightful and I’ve never heard anyone ever say this.

        1. Ms. Conviviality

          Ditto what Matt said!

          (side note: This is why the Comments section shouldn’t go away)

      2. Bear in mind that capitalism was still under attack, the Eurozone crisis was unfolding in 2012, Chinese debt was a worry and wars were raging in the Middle East.

        That wasn’t quite the case in 2009 -10 where a concerted and global effort was made to work through financial markets worries.

        At the time (2012), the smart money was calling the markets price action a ‘dead cat bounce.

        My take on when to move money on/off the table would revolve around not timing the markets but if an investment was sound (understandable), well priced and had good fundamentals.

        I have often wondered that a DCA approach could be replaced with a by when the price changes. Ie: -1%

  52. Great post!

    The one thing that keeps me from selling and moving to cash is the capital gains tax I’ll incur should I sell – I know that if it goes down 50% I’ll be upset I didn’t sell now, but having to pay a 20% tax now in order to take risk off makes selling very unattractive. Of course, I’m only paying taxes because I actually made money, so there is some consolation.

    Instead, I’ve just stopped buying equities for the past year and have been buying and re-investing dividends into preference stock and fixed income like instruments to move away from risk assets, such that my split is moving towards 60/40 of risk/fixed income.

  53. Simple Money Man

    Since I’m under 40 and plan to work 20+ more years I’ll be excited that my 401k is buying into lower prices allowing more shares and hopefully greater returns in the future. I welcome a downturn for now. :-)

  54. Thanks for this. I’m worried about a big downturn too. It seems inevitable.
    So you’ll go to 70% cash/CD by 2020? I’ll keep checking to see if you can do it.

    My goal is to go to 30% bond/cash by the end of this year and it’s really slow going. It’s difficult to take money off the table because I’ve been an investor for so long.

    1. My goal is to go 70% cash/CDs and a mixture of several of the investments I mentioned in this post.

      I will be incredibly bummed out to lose 20%+ of my principal that took years to build. I’m happy with low returns in 2020.

  55. My favorite is go long yourself :) although in my early morning daze I totally read something else at first glance haha.

    “Thus, given we know the average recession lasts only 18 months, many investors seek relative safety by buying utility or consumer staple stocks.”
    We were looking into PepsiCo last night since I wanted some more in consumer staples. We lost about $700 since 2016 in staples but that’s how cookies crumple.

  56. I thought in a downturn the mantra was “stay the course”, and if you are invested in low cost broad based index funds, just keep buying on the cheap?? When the market comes back as it always does, you got a lot of cheap shares and made a ton of money without any radical plays.

    1. That is the mantra. But Financial situations are different for everyone.

      Let’s say you have $10 million and you can live off $250,000 a year. Do you really wanna risk losing $4 million as 40% is the median very market correction, when you can Earn $300,000 a year is free and your net worth was only $3 million just 10 years ago?

      What is your age and financial situation today?

      1. Why not just invest that $10 million in high quality dividend stocks that have raised their dividends for decades on in, and live off the dividend income? At even a very conservative 2.5% total portfolio yield, you’d be receiving $250k per year in dividends, and that number will INCREASE every year, REGARDLESS of what happens to the stock market.

        1. Sure. But you would’ve lost over $3 million in the last downturn, which is a lot more than $250,000 in dividends.

          How are you investing your money and what is your current financial stage?

          1. Yes, seems easy in theory but actually losing that money and having to go through real life while the world is in theory crashing is hard to do. Plus, last time the crash happened my industry (business lending) many lenders closed up or slowed down their lending so it seems easy to stay the course but you still have to survive the tough times

          2. You don’t lose anything if you don’t sell. That’s the whole point of high quality dividend stocks. You’re living off the INCOME they produce, not the actual principal of the shares.

            So, your INCOME remains consistent (actually increases) every year, EVEN when your ‘principal’ is down $3 million.

            Easy peasy.

    2. Doctor Nancy

      You must be young, because losing money cause you to lose time because you half to spend more time working to get your money back. When you are young, it’s easy to take time for granted. When you are old, it’s much easier to take money for granted.

  57. Great post. But I’ve learned to never try to time a top. Please take a look at the ‘Ivy Portfolio’. Once the markets go under their 10 month simple average at the end of any given month, you go to cash. It would have saved anyone a bulk of their portfolio in the 2000 and 2008 downturn.

  58. Seem to have read my mind on this topic – I spent a few hours yesterday researching in this area and reallocating our investments. I love the idea of some of these, but ultimately just decided to move a larger percentage into some Vanguard bond funds, and am going to put all excess cash in a “high yield” savings account rather than investing for the next year or two – looks like GS’ Marcus accounts at 1.7% are the best for this.

    Was previously 90/10 stocks to bonds, and now plan to make that more like 50/30/20 (with the 20 being savings account). We’re in our late 20s, so I don’t see too much reason to go shorter than that.

  59. Mike @ Balanced Dividends

    Without reading the post and only reading the title, I wrote the following in the comments here: do nothing.

    What did I mean by this? Stay the course.

    Now what do I think after reading this and considering the points you covered? Stay the course but consider taking some calculated risks.

    On your questions:

    1. Continue purchasing income-producing assets right now (bluechip dividend payers, contributions to less liquid investments via RE crowdsouce platforms, etc.) while stashing cash for additional buying opportunities (looking for growth opportunities at attractive valautions or lower entry points).

    In general, also considering:
    – both lump sum and DCA
    – not focusing on what we can’t control
    – leveraging different types of accounts for different purposes and opportunities

    2. I have no idea for certain, but I’d speculate sometime late this year or early next year. Who knows though?

    Thanks for the post. – Mike

    1. Do nothing is conventional wisdom. I wanted to offer some advice to people actually searching for how to make money during the downturn. This is a very specific question.

      I feel very bad for the older folks who were planning to retire before 2010 and did nothing.

      1. Sam ~

        Older folks (or anyone looking to be drawing down on investments) should be keeping 2-3 years worth of living expenses in something liquid and stable, like you were talking about CD/Money Market/Bonds.

        The balance you are trying to time the market on, unfortunately that very rarely works out. its often measured in days or at best weeks when the majority of the movement occurs, and if you miss it either way, you were probably better to just ride it out.

        ~T~

        1. I think one of the things people are not realizing is that timing the market by going risk free or low risk is simply going back to point number one of being OK with not making as much money anymore. I’m not talking about timing the market to take risk and potentially losing per my conclusion.

          If you are older, TIME is so much more valuable than money. How old are you?

          I will discuss this in the podcast. Thx

        2. But if a bull market lasts say 5-9 years and a downturn 1-2 than the total cycle time is in the ballpark if 6-11 years. Seems like this is how much liquid asset you should have (6-11 years of expenses) the to ride out the downturn and avoid selling low.

          With a 3 year reserve you will ride the downturn without selling but you will eventually be forced to sell in the very early stages of the recovery. Still almost as bad as selling at the bottom.

          BTW this does not seem to apply only to older folks, but to anyone who has already FIREed.

          Thoughts?

  60. I believe last year you thought real estate would start to dip summer of 2018. Here we are now, and it seems to be going strong. I too agreed, however it hasn’t played out that way. Looking at what’s going on now, what do believe has kept things going forward? If population keeps growing, building regulations aren’t easing up…can this hypothetically just keep going, even in a economic slowdown?

    1. Check out Toronto, Vancouver, NYC and London. Prices are down YoY now. I’m seeing a lot more homes sit on the market here in San Francisco as well.

      But yes, the hypothetical median home price in San Francisco and a lot of these coastal cities can reach $3M -$5M at this pace. But I don’t think so for the next 20 years at least.

      Which market are you long property and seeing a lot of strength?

      1. In the heartland, I’m starting to see investment properties (other houses, commercial, etc.) loosening up as well with prices down YoY as well.

        A few notes, people who purchased on leverage for properties (investments/homes, etc.) will hold on and take minimal returns if they locked in too high of prices on their 30 year mortgages. Due to the emotions tied to selling at a loss many just won’t sell and will take terrible returns. Individuals who have commercial loans will likely be forced to sell as balloon payments become due and they purchased at too high of prices. The higher monthly payments on raised interest rates will turn near break even properties to properties that cause losses… when enough of these become due commercial properties have the opportunity to sell at losses and give investors good deals.

        Currently, I see investors trying to sell at extremely high prices and a few idiots are still out there paying… but in general most items are going for under asking. This is good news for the investor finally who is discipline about making their money on the buy.

        So Dave, as Sam was saying, yes prices are easing up. But I also agree with Sam on the long term horizons of the investments. Just by the Fed having a target 2% inflation rate tells you that assets will theoretically always increase by inflation so long as the Fed can achieve this.

        I’m finally starting to see a few good deals pop up by offering to pay all cash and all closing on multifamily to owners. The time is near to make off like bandits when the blood is in the streets!

        1. Jon,

          i would love to get more of your insight on what you’re seeing in the heartland. as someone that just sold a rental in the seattle market and is looking to invest in real estate in the midwest/east coast (LCOL), i’ve been curious what’s going on with how rates and the end of the bull run will impact things. i’d be buying in cash.

        2. “Just by the Fed having a target 2% inflation rate tells you that assets will theoretically always increase by inflation so long as the Fed can achieve this.” – This is logic readers should be aware of.

      2. I’m about 45 mins outside of Boston. Still a lot of competition, places going for over asking prices etc. Boston has really become a MAJOR city of late, people are moving further away from it with access to the train. I also own places in nearby RI. Lower end houses have really shot upward, auctions are busy. 2002-2004 I bought two places, then nothing until 2009. Bought another in 2013, and one in 2017. I’m looking to get out of my condo and into a newer house (rent the condo), but everything is high and needs updating. I try to buy when it makes sense but this run has gone on for quite a bit longer than I expected…..Even on my place purchased in 2017, after some light rehab I could sell for 30% more than I paid! I never pay retail, but its getting hard

  61. Great Post Sam! I think moving percentages into bond ETFs is not a bad thing especially if you have a target rate and buy when the yields are at a certain point. What I really like about the article is not so much timing for the short, but gradually changing your position and asset allocation.

    1. I’m in the same boat. During the 2008 downturn, I stayed firm and lost about 35% of my 401K and investment portfolio, but I was young enough and confident enough in my future employment that it didn’t worry me. By the end of 2009 I had recouped and was up about 38%. So, for me, not worrying about timing the market makes sense. Staying the course, knowing that things will recover, and being there for the snap-back, worked.

      Of course, now I have a lot more money, I want to rely on my employment less in the future, and I’m seriously not sure I can stomach dropping 35% plus again during the next cycle (even if I know it will eventually snap back up). Especially when I am living off a portion of my investment income stream.

      I’ve moved about 1/3 of my holdings into cash as an emergency fund, and have it in a high-yield savings account. Dumb, I know, as I’m only getting 1.75% on the cash, but it helps me sleep better at night knowing if I get let go from my job, and the markets swing wildly, I’ll have the cash to cover at least a year and a half to two years of expenses.

      I’m still heavily invested, though, and 66-70% of my money is in Vanguard ETFs, that have performed nicely over the last several years. I really don’t want to cash out and move into treasury bounds, but I know I’ll feel a fool come 25-30% in the negative for the year and being stuck at that point and HAVE to wait it out or actually lose money in the deal. At least, my thinking is, you never lose a cent until you sell at the lower price… There’s always a recovery if you can wait… But I do fear that wait.

      Would love to hear how others are feeling/allocating/thinking.

      1. In the same boat and in the end I believe it depends on your timeframe for each investment. For an emergency fund to have immediate access and sleep better at night is worth it in my opinion. For any funds I do not plan on accessing anytime soon, I try to put into the market knowing I will only see it again more than 7 years from now. Well that’s at least my outlook on this.

      2. Yours probably mirrors my situation, and strategy, as closely as any of these other posts. Currently 70% equities, 30% cash/ fixed income. The equity portion is about half large dividend-paying stocks, the rest small cap and international ETFs. The difference is I did leave my job at 53 and have been spending the last year strategizing over how to live off investments (along with some contract work along the way).

        Anyway, I concur with Sam and people on this thread on the need to suck it up, forego some of what “could be made” if stocks continue upward, and be more defensively-positioned for the inevitable downturn. It’s hard to throttle back when things seem relatively stable, but I’m going to make the shift to around 40% fixed income (cash or short-duration bonds), keep the high-quality dividend payers, and just generally bring down the other allocations.

        This portfolio will still take a hit if stocks tank 30-40%, but I have some recovery time. And I’m not quite willing to go the majority to cash, or make a big short bet. (I tried the double-inverse ETFs in the past 3-4 years, and look where that got me, per Sam’s example)

        Good luck all. Appreciate the shared advice.

      3. I have some investments in bonds but with rates rising and bond prices going down, it’s not always that good of an investment. I personally like investing in preferred stocks of large companies that produce 5-6% interest a year. They don’t fluctuate in price that much, even during downturn, and give you a very handsome income.
        My boss retired on 2 mil 15 years ago and put most of his money in preferred stocks, bond funds and CDs and is living a pretty great life just off dividends and interest. This is what I am going to do when I retire. It’s a pretty safe strategy and gives you plenty of income without losing principal.

      4. 2008-2009 GW Bush and Obama pumped @$2 Trillion as TARP fund. Majority Republicans opposed it. These TARP program recovered the trashed economy and market but caused huge debt under Obama presidency. He did not get credit but was blamed for increased national debt. So do not expect such bailout on next major down turn. The US national debt is already at the danger level so no one will come forward to create next economic bailout!!!

      5. Nick, have you read about bail-ins? It’s a very real possibility here, just like what happened in Greece. I’m investing in silver and gold. The Canadian government quietly put a bail in law in place in 2016. From my sources, what’s coming is no ordinary recession. With the amount of world debt, it will have to implode eventually. Governments have been using. Bandaid approaches for too long.

    2. Be careful with bond funds and ETF’s in a rising interest rate environment. You lose the biggest advantage of fixed income, which is the ability to ride it out until maturity if the price drops.

      1. True Randy but you can consider ultra-short term bond ETF that still gives 2.5% yield as of today. It won’t drop as badly as other bond index, and is far safer than preferred equities that some people chase for high yields.

        Sam, great post. This is why I have slowly shifted from 100% equities to 60%, with rest in combination of cash @1.5% yield and aforementioned ultra-short term bond @ 2.5%. The equities also have REITs and together, they throw off dividends that cover my living costs. I intend to stay this way till market drops at least 20%, then move 20% of the cash/bond portion back in, and if it drops another 20%, then go all in. Dividends would still be flowing in, just that the amount will fluctuate. What do you think of this approach?

      2. No. All you’re doing when buying individual bonds is closing your eyes to the mark-to-market losses when rates are rising. A bond mutual fund marks these losses daily. But a fund of the same duration as your average individual bonds will recover to “par” as well, assuming no permanent loss of capital in both cases.

  62. For those of you who have enough money to be happy, taking excess risk is unnecessary. Once you’ve made your money, the key is to keep it.

    That would be me. I’m already financially independent, and I just can’t see taking the effort to try to play the cards right here and time it correctly. The downturn will come, and I will just stay the course and keep doing what I’m doing now. I’m still plenty young enough to watch my net worth go down however much it will go down, and then see it recover all over again. Just like the last two or three times.

    1. Would you mind explaining a bit more about how the last 2-3 times worked out, which and how much investments went down, and how long to recover, etc.? Did you cut back on spending, or change behaviour in any way? Did you find other income sources? Sell some sectors of stocks and buy others? Before, during or after the downturn?

      I’ve only been through 1 downturn (2008-9) in the stock market, did nothing, waited and recovered in about 2.5 years. My real estate did not go down, just steadily up with market softer at times. Rental income has been even or up over the years. But I am wondering whether to do the same in the next recession because I am now actually withdrawing (about 30-50% of the increase in net worth of previous year).

      1. I went through the tech crash in 2000 and the 2008 crash. Basically I did nothing. I kept saving. Well, to correct the “nothing” part of that statement, in the 2000 crash I didn’t sell any mutual fund shares, but I also didn’t keep putting money in the market. I still saved as much as possible but back then money market funds paid a half-decent rate and I just switched my new savings to those for a short while until things settled. But I didn’t panic or sell.

        In 2008, I just kept on putting money in. So as the “sale” was going on, I kept buying (auto-pilot). Obviously that strategy paid off handsomely.

        I don’t know your age, but to me, for anyone under 60(ish) who is also healthy and expects to live until 80 (average), I would not sell in the next downturn, assuming it’s kinda soon. You might not wanna buy into it, but I still think you’ll have time to recover if your’re relatively young.

        But I’m no Nostradamus ;)

        1. Same philosophy here. When the market is down or just looking pretty lackluster is not the time to stop putting regular investments into it, if anything, you double down if you can.

          About our half our savings are in retirement accounts where we can’t really cash out, in any case. We also don’t currently foresee having to start drawing on any investments until mandatory drawing from retirement accounts kicks in at age 70 so I figure the best part of a decade and a half gives us some time to survive and more than recover from an adjustment. Of course, we have pensions and stuff that will see us through to then without hardship.

          May have to get some more bonds at some point tho, to ensure we don’t have to sell during an adjustment, because we are going to want some fun money for some serious fun when we no longer have get to work every so often.

      1. I am Negan.

        At first take, it looks like it is a copy due to the same subtitles and topic. But he quotes me at least and then paraphrases my work. I did a double take myself.

    2. If every market player had the expectation of eventual recover then downturns would probably never happen in the first place, or downturns would be much shallower. As soon as a downturn started, bargain hunters would start buying and thus keep prices from sagging too much.

      The reason assets often tank in downturns is the feeling that “this time is different” — that on the trailing end of probabilities there’s a small chance that things will tank and never recover. And indeed sometimes that does happen, the wolf does show up, like in Europe in the late thirties when investors were wiped out — never to recover again! — assets lost forever in a drain. I know that most Americans lack that experience, but such a black swan event is possible in America too.

      So sometime in the future the “this time the downturn is different” feeling will reappear — and in some cases may actually play out as true. For example if the US gets into a sovereign debt crisis and taxes have to be raised enough to trigger a vicious cycle where the country’s international competitiveness is permanently debased.

      For Americans this has never happened, but given the irreversible growth of American government in the relatively recent past, it does not mean that it will NOT happen.

      The wolf may indeed come someday. The probability is not nil. Hence the shivering to try to save what you can by selling while there is time will come again sooner or later. In what form will it come? If I knew I’d have won seven Nobel prices in economics.

      So what do you think? Will the real wolf of permanent loss ever come?

Leave a Comment

Your email address will not be published. Required fields are marked *