Newsletter For October 21, 2024: Starting To Reach

Dear Financial Samurai,

With the S&P 500 hitting yet another record high, it feels like we can do no wrong. The economy remains strong, with September retail sales up 0.4% from August, while expectations point to further rate cuts—potentially 25 basis points at every meeting through next July. The Fed aims to be restrictive, but perhaps not this restrictive.

According to a recent Wall Street Journal survey of 66 economists, the probability of a recession over the next 12 months has dropped to about 25%. With these odds, leaning into this bull market seems logical. Bull markets are prime opportunities to build extraordinary wealth.

However, I’m at a different stage in my financial journey, with a family to care for. How aggressively you choose to invest is up to you, but here’s my approach: I “trick” myself into staying invested by imagining I’m the Chief Investment Officer for my kids, who lack the ability to invest on their own. Expanding your investment time horizon to 20 years can make staying the course much easier.

Still, there are reasons to be cautious. UBS recently raised its S&P 500 target for 2024 to 5,850 and its June 2025 target to 6,300, while simultaneously lowering earnings forecasts. This kind of strategy isn’t driven by fundamentals but by FOMO, especially with valuations already stretched at ~22X forward earnings.

For those into retirement planning, Goldman Sachs released a 10-year forecast for the S&P 500, predicting an annualized return of just 3%. If that materializes, the classic 4% withdrawal rule could be too aggressive. High valuations and lackluster earnings growth are weighing on the outlook.

Goldman Sachs S&P 500 forecasts - Financial Samurai newsletter

You Don’t Know What You Don’t Know

Since I began investing in 1996, I’ve tried to stay measured during economic cycles. It’s important to avoid the FOMO-driven frenzy in bull markets and resist panic-selling during downturns.

Working in investment banking and landing early wins can breed dangerous overconfidence. In the long run, the market tends to win. Rather than constantly trying to time the market, focus on a proper asset allocation based on your goals and risk tolerance. Stick to it, regularly contribute, and let time do the rest.

This same discipline applies to real estate, where the average holding period is around 12 years. The difficulty of buying and selling homes helps most people stay invested, building wealth over time.

Sometimes, it helps to step back and get some perspective. Read more about it in my post: How Speaking to a Financial Professional Saved Me from Myself.

A Year of Intentional Spending

As a dedicated saver and investor, you may hesitate to splurge, even on essentials. I was the same for 23 years, until I turned 45 in 2022 and started questioning the point of all that hard work if I wasn’t going to enjoy the fruits of my labor.

I began by splurging on fancy foods, which lasted three months before the novelty wore off. Gourmet cuisine often comes with extra sugar, oil, and fat—not exactly a recipe for health. Next, I spent more on vacations but felt foolish paying an extra $1,000 for a first-class seat to Honolulu when an Economy Plus seat would suffice.

Then, I directed more money toward charitable donations to a disability rehab center and my kids’ school, which felt rewarding but had its limits. With debt to pay and family to provide for, I couldn’t give endlessly.

Ultimately, I went all-in last October and bought the most expensive home I could afford. It was my way of decumulating wealth while still providing for my family. The first three months were stressful, but a year later, I’m confident it was the right decision—even if it meant missing out on stock market gains.

If you’re tired of living frugally to achieve financial freedom sooner, upgrading your home might be the perfect solution. Read my latest post: Reflecting on a Year After Purchasing a House I Didn't Need.

New Financial Samurai Posts For The Week

This week, I’m thinking about writing a post on how to “quit the money.” It’s challenging, especially if you have little of it or make a lot. But if you’ve managed to step away from the financial chase to pursue something you’re passionate about, I’d love to hear your story. What gave you the courage, and how did it improve your life?

Another post idea I’m considering is exploring how to be psychologically at peace with getting rich from investing in, or working for, a company that produces harmful products. What justifications or mental strategies do we use to keep going?

To Your Financial Freedom,

Sam

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