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!
With the risk free rate at ~1.7%, I’m still willing to invest in other asset class besides US treasuries. It just doesn’t interest me to return 1.7% a year for 10 years, even if it is guaranteed.
However, if stock market armageddon returns, I’m hedged with structured products. 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. 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.
RECOMMENDATIONS TO BUILD WEALTH
Manage Your Finances In One Place. The best way to become financially independent and protect yourself is to get a handle on your finances by signing up with Personal Capital. They are a free online platform which aggregates all your financial accounts in one place so you can see where you can optimize.
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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 was the latest example. However, real estate held steady and appreciated in value then.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity.
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 has consistently generated steady returns, no matter what the stock market is doing.
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 $810,000 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 ~$300,000.
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.