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!
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About the Author: Sam began investing his own money ever since he opened an online brokerage account online in 1995. Sam loved investing so much that he decided to make a career out of investing by spending the next 13 years after college working at Goldman Sachs and Credit Suisse Group. During this time, Sam received his MBA from UC Berkeley with a focus on finance and real estate.
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.
Hi Sam,
i’m 20 years old and want to start investing money in the stock market. Are there any articles you would recommend on where to start? I’ve already read the growth versus dividend article but I also want to know what sites I should frequent to actually obtain stocks. Thanks.
Probably the most difficult thing about locking in gains is: A) the prospect for even MORE gains and B) capital gains taxes. But you’re right about one thing, paying a 15% tax on capital gains is better than seeing 50% of your principal wiped out when the market tanks.
I get your point but I think it is difficult to time the market.
As others here have stated I get how you determine when to sell but the question is how do you determine when to get back in? If we could always time the market perfectly then we should get in the money management business since that model is easy to scale and if you could consistently generate positive returns you’d get very wealthy from all business you would attract.
I look at valuations, market expectations, and economic conditions and make a judgement call when to get back in. Everything is relative.
If I’m up 12%, lock in gains, and the market pulls back 5% after being up 11%.. I can buy the entire market, and lock in a 6% outperformance for the year, no matter what the market does.
I can’t time the market perfectly at all. I just have my own expectations and so should you.
Hi, I know that I would almost certainly be happy and sell with the 12% in gains, and I’m not sure if this question was raised earlier…but when does this mean you will buy back in, sometime next year? It just doesn’t feel intuitive that, with the goal of earning ~4-5% per year, one could invest in the mentioned stable value fund, which returns less than your desired gains. So I suppose my question is, why is your timeframe of judgement equal to 1 year. Why isn’t the goal to return 1-1.25% every quarter?
Further, I understand selling due to the expectation that the market will go down, but I just can’t grasp the concept of selling solely to lock in the gains. With this article being written on March 15, why not start a new period of judgement at the time of writing, and try to earn 4-5% before next March 15 instead of ‘losing’ for 9 months?
Thanks!
The stable value fund of 2-2.5% would not work if my starting point of the year was 0%. It does work with my starting point at 12%, leading to a 13.5% gain for the year.
It’s up to each of us to figure out what we are comfortable with, and our investment horizon.
How have you done YTD, and what is your strategy?
ooh thanks for the reply.
i’m currently writing the strategy. i’m 22, searching for a first real job, and trying to figure out how to best invest my current assets.
but going back, i guess i just can’t phrase it correctly…but doesn’t it seem counterintuitive that youre locking yourself into this relatively losing (drawn out for a year it wouldn’t meet your annual goals) rate for such a large part of the year? it seems so limiting to try to beat the market over an arbitrary timeframe.
say, if your timeframe of reference were 6 months, with a goal to return 6%, would you really just sell to ‘lock in that gain’ let’s say in february while you still believed the market would go up in march?
i guess i’m trying to say that you really are losing by locking in that gain, if the purpose is solely selling to lock in the gain.
thoughts?
You can never lose if you lose if you lock in a gain.
Don’t know if you’re still replying to this post, but I have to ask: What are the tax implications of taking everything out? How does that impact your returns?
Good question. I’ll have to look into that more. What I’m more concerned about is taxation during withdrawal time, as I generally hold for longer than a year, it’s LT capital gains tax anyway.
https://www.ici.org/policy/tax/faqs_taxation_investors
I am compelled to ask, what is your stable value fund comprised of?
Fidelity MIPIII fund.