Stock market armageddon seems to happen every 5-10 years. 2018-2020 were extremely volatile years. Who would have thought the stock market would rise to all-time highs during a global pandemic! The best I could do was call a stock market bottom in March 2020. But I did not foresee this!
I'm buying as many rental properties and investing in as many hospitality commercial real estate opportunities as possible. Prices are down as mortgage rates are at 17-year highs. But eventually, rates will fade and demand will return.
I'm hedged with structured products during a stock market armageddon. It provides principal guarantees or downside buffers in exchange for locking up my money for a certain period of time.
IN VIOLENT DOWNTURNS CONSIDER THE FOLLOWING
Let's say stock market armageddon returns. Here's what you should think about.
* How do you feel about losing money? If the answer is “gut-wrenching”, then perhaps your risk tolerance is not as high as you thought, and you should lower your exposure to the markets. If your answer is “It feels so good, baby!”, then perhaps you are short, or should consider investing everything you've got.
* If you lost it all, would you still be OK? If the answer is “no, I will be begging on the streets”, then perhaps you're over exposed. I'm willing to lose 30% of my net worth hence my allocated exposure. It will be painful to lose it all, but I'll manage. The remaining 70% is split roughly evenly between 4% yielding CDs (love you guys), and real estate (making a comeback!). Assess your risk tolerance using Financial SEER.
* Do you have excess liquidity to put to work? We've seen the markets snap back time and time again. Nobody knows when, but the odds are in your favor that they will. 70% of the time, the stock market closes up. So during a stock market armageddon, I'd continue to buy! We've got a President who is trying to get re-elected, Bernanke whose got an unlimited supply of money to print, and inflation, the most powerful force in the universe.
More Things To Do During A Stock Market Armageddon
* Reassess your long-term goals. If you're young, good looking, and employed, you'll be fine. If you're young, beautiful, but unemployed, perhaps not so much. If you're old, unemployed, and unattractive, well then I guess there's always the lottery and divine intervention! When things go wrong, you've always got the excuse of thinking “long-term”.
* Do you have your health, family, and friends? Money comes last in this equation. Whenever I lose tons of money, I notice that I tend to exercise more, eat better, and spend more time with loved ones. Perhaps it's because money lost reminds me of what's most important in life. Or perhaps when I lose money, the last thing I want to do is think about money.
* Is making 2% better than losing 10% and making 4%? Huh? Dividend investors love to say, “It doesn't matter what the market does, I've still got my dividends! I'll just buy more!” That's fine if you've got an endless pit of money to put to work, but simple quantitative reasoning suggests that making 2% is better.
What I Like To Do During Stock Market Volatility
I'm “dollar-cost structured producting“. In other words, I plan to farm out the free liquidity sitting in my money market accounts and buy the stock market through a structured product once a month. The first is the 100% principal protection guarantee with a 0.5% annual coupon and 115% participation to the upside of the Dow Jones over 6 years. The second is the 10% downside buffer and 2X upside to the S&P500 up to 25% for 2 years with 0% coupon.
This is additional money to my 401K, which means my networth exposure to the stock market will increase from around 30% to 40% over the coming 12 months. I'm highly allergic to losing money because it has taken so long to build up the nut. I'm willing to lock up my money and even some upside to know that the money will still be there in the future.
Invest In Private Growth Companies
Personally, I like investing in private growth companies. Companies are staying private for longer, as a result, more gains are accruing to private company investors. Finding the next Google or Apple before going public can be a life-changing investment.
Check out the Innovation Fund, which invests in the following five sectors:
- 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. In 20 years, I don't want my kids wondering why I didn't invest in AI or work in AI!
The investment minimum is also only $10. Most venture capital funds have a $250,000+ minimum. You can see what the Innovation Fund is holding before deciding to invest and how much. Traditional venture capital funds require capital commitment first and then hope the general partners will find great investments.
Achieve Financial Freedom Through Real Estate
Real estate is my favorite way to achieving financial freedom. It is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile. The -32% decline in March 2020 and -19.6% decline in 2022 were the latest examples. However, real estate held steady and appreciated in value then.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and manages over $3.3 billion for over 400,000 investors. Fundrise primarily invests in Sunbelt residential and industrial real estate.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I've personally invested $954,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$380,000.
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. He also became Series 7 and Series 63 registered.
In 2012, Sam was able to retire at the age of 34 largely due to his investments that now generate roughly $175,000 a year in passive income. He spends time playing tennis, hanging out with family, consulting for leading fintech companies, and writing online to help others achieve financial freedom.