There are growing concerns that the 10 year bull market has come to an end in 2019 and it’s now time to take profits.
Downturns seldom ever last for just 6 – 12 months. It’s never worth raising some cash to live to see another day. I finally sold my rental house in San Francisco that went up 60% from 2012 to 2017. That is nuts! I cashed out at $2,740,000 after buying it for $1,525,000 in 20014. With $1,800,000 in cash, I’m feeling GREAT!
Here’s how I reinvested my proceeds. I’m all about making sure my profits last forever, or at least for as long as possible. The post below was written in 2012, and it goes through a thinking process I had. Amazingly, the stock market has reached all time highs in 2017 and will likely stay elevated for a long time to come.
A Recession Looms Once More
1) Pain at the pump. Gas now costs $4.52 for premium unleaded. As a result, it costs over $90 to fill up Moose. Now that is pain, especially since the snow season in Tahoe is finally getting really good. If I feel the pain only driving 7,000-8,000 miles a year with my income, and the average miles driving is 50% higher, I know others are feeling the pain as well.
2) Interest rate ramp. The 10-year yield is back down to 2%, signifying a tremendous slowdown in the economy.
3) Rental increases. As a landlord in San Francisco, I am intricately aware that rents are on fire in the city. We are talking a 15-20% increase in the past couple years thanks to all the tech/internet money and jobs flowing into the city. Rent is always a huge portion of one’s discretionary income, and if that is being squeezed, other things are getting cut down. It’s not just SF, but other places such as New York City where rents have gotten aggressive. The rent trend starts in the big urban centers and flows to the rest of the country at different magnitudes.
4) Market valuations. You can value the S&P 500 in any which way you want. Trailing Twelve Months, forward earnings, a composite, and so forth. The market is fully valued. We’re not in a bubble, but a lot of earnings expectations have to be met in order for the party to continue. Remember, the market discounts all news, good or bad, 6 months+ in advance.
5) Labor market. Although the unemployment rate is heading to under 8%, it’s clear that we aren’t creating enough jobs (250,000+) to win back all the jobs lost over the past 3.5 years. We have unemployment benefits that pay $1,850-$2,100 a month for almost two years, and people dropping out of the labor force because they’ve given up. The labor market is improving, it’s just not improving as much as I’d like for a +12% YTD performance by the S&P 500.
GOALS OF INVESTING
My number one goal is not to lose money. If I cannot make money, I sure as hell will do everything possible not to lose money. It was painful to lose ~20% of my net worth during the 2008-2009 collapse. I am all about capital preservation, and you will be too when you build your nut to a level which you deem as retirement worthy. Losing 10% on a $100,000 portfolio stinks, but it’s not that much at a $10,000 loss. If you lose 10% on $1.5 million, that $150,000 loss is painful for anybody, no matter how much you make.
When someone says, “I crushed the market and am up by 50%“, make sure you ask what’s behind the curtain. If their portfolio is $25,000, seriously, who cares. Ask them about their 5 year or 10 year track record. Ask them for their reasonings for why they think the way they do if they can’t discuss amounts.
I admittedly have a low hurdle, which is to return 2X the US risk free rate of return. That’s the 10-year government yield, which currently is at 2.35%. 2X 2.35% is around 5%, so that is my hurdle return for new money. I’m not greedy. I’ll take a 13.5% guaranteed return any day, every year for the rest of my life! I can’t predict the future, nor do I claim to know anything about Kim Jung Il’s death in 2011 back when I wrote the prediction in December, 2010.
All I know is that you can never lose if you lock in a gain!
RECOMMENDATIONS TO BUILD WEALTH
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In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $250,000 a year in passive income. He is aggressively investing in real estate crowdfunding to arbitrage low valuations and take advantage of positive demographic trends away from expensive coastal cities.
Updated for 2020 and beyond.