1, 2, 3 panic! The stock market meltdown of 2020 has taken us all for a ride. Thanks the coronavirus pandemic, the stock market meltdown will likely come back.
It’s a good thing that most of us are super savers, have a diversified net worth, actively rebalance our portfolios, and haven’t confused brains for a bull market!
We’ve also been preparing for downturns all year with posts such as: “Are We In Another Financial Bubble,” and “Creating A More Defensive Portfolio With Bonds,” so I suspect most of us are doing just fine. But what about other people who might feel like jumping out the window because they went on margin? Or how about that starry-eyed person who thought the grass was greener at a startup?
In this post, I’d like to go through the implications for various types of people if there is a sustained market correction. It’s nice to say that all of this is really just noise since we’re investing for the long run. But over the next one-to-three years, a lot of things could change if the pummeling continues.
Besides, it’s always good to have plans for various scenarios, whether they come true or not. Let’s imagine a current scenario of a 20% correction in the stock market.
Stock Market Meltdown: Implications For Startup Employees
You’ve got to face reality that your lottery ticket is not going to make you rich. Since you aren’t going to be rich, then you might as well enjoy the journey!
It is imperative that you ASK the founders what is the latest condition of the company’s financials e.g. what is the burn rate, how long will the company last if revenue stays flat or goes down, etc. An implosion in the public markets means that private investors will be much more stingy in funding companies that aren’t clearly on the path to profitability.
Paul Graham, founder of Y Combinator admitted that 93% of his companies fail, even though his accelerator has less than a 5% acceptance rate. The only people getting rich are the founders or employees in the inner circle who’ve been able to raise enough money to cash out to rabid Venture Capitalists.
The Secretly guys who cashed out for $3 million each and shut down their company within 12 months, while leaving their employees in the dust, are winning. Sure, they may never be trusted again, but who cares?
One guy drives a Ferrari and has $3 million bucks! But Zirtual management is not as lucky, and neither are the 400 employees who got let go at 1:30am Monday morning via e-mail. The need for funding is imperative given most startups don’t make money for years.
There’s just no liquidity for most startup employees. Even if you are eligible to offload 10% of your shares in the latest Series D round (not many startups get that far), you’re going to feel tremendous peer pressure from management to not do so. Your next pay raise or promotion might be at risk.
I say, screw the pressure! Your mission is to try and get as liquid as possible, because that’s what any smart founder who has brought his/her company this far is doing. Trust me, I’ve spoken to many, and all of them want to desperately cash out a large part of their holdings.
You’re already accepting 20-50% below market pay in hopes of making it big with your equity. Turn profits into cash. Strongly consider applying to companies that have massive cash on their balance sheets. You can always say you at least tried the startup world with no regret.
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Stock Market Meltdown: Implication For Entrepreneurs
Raise as much cash now and seriously rethink your desire to ever go public. Once you go public, your happiness will drop drastically. You’ll now have regulators watching your every move. You’ll have thousands of new masters, even though some might own a tiny amount of stock.
By staying private, you can manipulate folks into thinking everything is great. You don’t have to disclose your financials, and you’ve got Venture Capitalists out there dying to give you money. Raise more money from them ASAP. What do they care? It’s not their money they are investing, it’s their limited partners’ money.
Do you know how hard it is to hold on to your employees when your stock is cratering? It’s virtually impossible. Seriously, who the hell wants to work at Twitter?
It’s a shit show that does not even have a full-time CEO. Even with the stock in the dumps, it still paid its new CFO over $70 million dollars after just one year of work! Talk about demoralizing for everybody else. His nickname while at GS was “Anthony No Bonus,” after getting the bullish internet stock calls totally wrong.
Just do what most smart co-founders do, and cash out at every single round. Use your funny money to buy something tangible that will last far after the bubble bursts. There is absolutely nothing wrong with the lifestyle business. In fact, the lifestyle business is what it’s all about!
One thing we’ve learned during the 2020+ pandemic is that business can be shut down by the government. Therefore, online business valuations should grow. They cannot be shut down.
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Stock Market Meltdown: Implications For Every Day Employees
Let’s say you’re like most people that don’t count on equity options to make you rich. You’re getting a 1-5% raise every year and have come to grips you’ll have to work for 40 years before you can retire. This life sucks if you don’t at least like what you do.
The only way out of this situation is to start building multiple income streams through side hustles. If you don’t like your job five years in, you sure as hell won’t like your job 10 years later. But if you start developing different income streams now, in 10 years, these streams may provide enough fire power for you to break free and do what you really want to do, even if the pay is much lower.
Since you’re in your job for the long run, unlike many ADHD-suffering startup employees who hop around every 1-3 years, these violent downturns in the stock market should be viewed as buying opportunities. For the first 20 years of your career, the amount you save in your 401k or other retirement portfolios will make up the majority share of your portfolio’s total value.
At the very least you should be maxing out your 401k. Hopefully you’ve got some 401k match program or company profit sharing to help add to your retirement account as well. Once you’ve maxed out your 401k, shoot for 20% or more in after-tax savings. You’ll eventually build a financial nut so large that it’ll hopefully start returning more money than you put in every year.
But remember, try to retire by a certain age, not after accumulating a certain financial figure. Your life expectancy is pretty certain at around 80 years old. On the other hand, there’s always one more dollar you can make.
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Stock Market Meltdown: Implication For Real Estate Owners
Real estate usually follows the stock market with a 12 month lag. If the stock market stays flat-to-down over the next 12 months, we should expect the real estate market to finally flatline or decline by 2017.
When equities are tumbling, bonds are generally rallying. As a result, you’ve seen the 10-year yield decline from a 2015 high of 2.48% to now only 1.95%. Mortgages rates have also fallen by a commensurate ~0.5% across different durations as well, which is why you should refinance if you’ve haven’t done so already.
Credible is the best place to get mortgage refinance quotes. Qualified lenders are competing for your business. You can get free quotes in minutes. Take advantage of all-time low mortgage rates!
There might be a short-term knee jerk reaction where investors transfer capital from the stock market to the real estate market as we saw post 2000. That said, in the long run, real estate appreciation is tied to corporate and individual earnings power.
I strongly suggest those with more than a primary residence to deleverage through principal pay down, increase savings, or sell a property. I’ve personally paid off the remaining $100,000 of a rental property mortgage I took out in 2003 this year even though the mortgage was only 3.37%. So far, no regrets. When my tenant’s lease is up in June 2016, I am strongly considering selling as well to not only cash out, but simplify life.
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Stock Market Meltdown: Implications For FIRE Movement
Many of us regulars are financial freedom fighters. We are part of the FIRE movement I helped ignite in 2009.
We want to achieve financial freedom sooner, rather than later. As a result, we’re often trying to find the quickest way to make enough money so we never have to work again.
Trying to accumulate wealth quickly almost always results in the need to take more risk. There are those people who literally have over 90% of their net worth in the stock market. Meanwhile, others have leveraged to the gills and bought multiple properties in currently hot locations.
If you don’t have the liquidity to hold on during downturns, you will be crushed. You’ll be forced to sell your positions during the worst times, and when things finally recover, you’ll start hating everybody around you.
I don’t have a problem if you want to take concentrated positions in things you really believe in. Just know that in every transaction, there is a buyer and a seller. Both buyer and seller believe they got a good deal. Depending on your time horizon, one of you is going to be wrong, sometimes very wrong.
Having a risk-free fund in CDs or a money market account is a must. During a bull market, everybody makes fun of people with boring old cash. But cash can definitely be considered an investment. Only an ignorant idiot or someone trying to sell you a product would ever advise against having a certain amount of cash in your net worth. Focus on cash on hand and cash flow.
Here’s a sample of a recommended net worth allocation. Having anywhere from 10% – 30% of your net worth in risk-free assets is a good move. There are several more frameworks to look at if you click the chart and read the post.
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Stock Market Meltdown: Implication For Retirees
For those of you who are already retired, these market moves should mean very little. You’ve seen the worst before, and all of this is just noise. Your investment portfolio should have no more than a 50% weighting in equities. As a result, you may actually be making money if your portfolio is heavily weighted in bonds.
With debt levels at zero or close to zero, Social Security paying out, and a steady stream of dividend income, interest income, and alternative income coming in, you are sitting golden. You can’t take it with you, so the focus on cash flow is key.
Only after a 50% decline in the stock market, should your worry-meter begin to rise. Good thing the chance of another 50% decline is minimal. Corporations have much more cash. Consumers are much less levered. And the creditworthiness of borrowers has steadily increased since the crisis.
Enjoy life to the max! Ignore the markets in the short run.
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Everything Will Be OK
When I was an Associate back in 2001, my Director said I was lucky I didn’t make much in the first place. I lamented about my bonus getting slashed by 50%. I wasn’t very happy with him at the time, but now I’m ecstatic I was poor during the dotcom collapse!
For younger folks, or folks who don’t have a lot of money, a stock market correction is fantastic if you actually deploy some capital and hold on. Unfortunately, a lot of people just talk about investing if the market collapses. But then get too wigged out to do anything once the market actually does.
For older folks, you’ve gone through enough cycles that your net worth is hopefully properly diversified to weather the reoccurring tsunamis. And even if you were too stubborn not to diversify, at least you’ve developed new income streams to keep the boat afloat.
The worst case is that we’ll all have to go back to working minimum wage jobs flipping burgers or picking up passengers for a living. I’ve done both, and I can tell you that life isn’t so bad making less. So long as we have each other, everything will be OK!
In case you’re wondering, here’s what I’m doing in this downturn:
- I’ve accelerated my dollar cost averaging given we’re seeing 2%+ corrections.
- I’ve talked to a private wealth manager to hear his thoughts and what he’s seeing.
- I spent several hours writing and updating this 2,400 word post to address those of you who have concerns.
- I’ve come up with a game plan as to what I must do in terms of generating income over a one, two, and three year time frame.
- My savings machine is on the maximum setting. I plan to save 80%+ of my after tax income until the end of the year, and at least 60% for the first six months of next year to build as much fire power as possible to low ball on a property or invest in equities.
- I’ve reassessed my personal burn rate (budget) to see if there have been unnecessary spending over the past six months I can cut out.
- I’m negotiating better terms, or not investing at all in any startups.
- I’ve written out a list of things I want to spend money on now instead of have it disappear into thin air.
- I’ve run my portfolios through a free Investment Checkup so that I know exactly what my current asset allocation is e.g. cash balance, equity and fixed income exposure compared to recommended exposure.
Protect Your Wealth
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I got slammed this week with a 10% loss (as with everyone). I’m heavily in stocks (~90%). And I’m not very diversified since banks won’t lend me enough money to buy a pencil. I got crushed during the last crisis in real estate and no longer own property.
Today I went in and bought more of a stock index fund and a short-term investment grade bonds fund, with my usual monthly allocation of $2k.
I’m wondering, should I be buying more stocks, or more bonds at this point? I realize I should have had more bonds in my portfolio to begin with, but maybe I should continue with getting more stocks since they are discounted.
I’m long-term…maybe another 20 years. 10-12 years, if I’m lucky.
Any advice? Thanks.
Well my SEP-IRA was $400,000 in equity. Now down to $350,000 over the last week lol.
I still have $40,000 cash on the side line not counting the $3000 a month standard dollar cost average that I been putting in.
So you are counting a further drop of about 10%? Which is very possible, but what if it drop only another 6%? What is your alternative strategy. Or if it drops another 20%. Will you regret not having extra money to put in?
Is it standard strategy to top off your dollar cost average by looking for period so larger percentage drop VS. dollar cost average the additional amount over a set period of time?
Right now I am real estate heavy. Close to $2,000,000 in real estate. I really want to use this opportunity to boost my equity. I am 44 y/o. I am hoping by the time I am 50 y/o I’ll be sitting on a $1,000,000 portfolio and start spreading out into fixed income.
Mmmm… just dropped $9000 into my index fund between Friday and Monday. Too early?
Dow 12,000 or 10,000?
How low do you think it’ll go?
I still have $40,000 to deploy. Dollar coast average over 1 year, 2 years, 5 years?
Financial Samurai says
Depends how big your existing portfolio is?
I’m deploying money in up to five separate tranches every time there is a 2% or greater swing. This is NEW money, on top of my normal monthly contribution. I dollar cost average every single month as standard.
Im about 32 and been hoarding cash for a while now too scared to really enter the market but this hit the past few days really is motivating me to make a change.
Fully maxed 401 of about 205k all invested and and IRA maxed last two year
If i were to muster up 100k-125k in cash post emergency fund do you think its time to maybe pick up a total market fund or Spy? Think its wise to pull the 401k finds out into cash and reinvest as well?
Financial Samurai says
Not sure what u are asking about the 401k. Please clarify.
I’d just leg into the market in multiple tranc
Ie dollar cost average so you don’t hurt yourself as you’ve shown reluctance to invest already.
The crash(correction) is just noise. The Fed will continue printing and there will be no interest rate increase. The market will recover- albeit temporarily. Other nations will continue to print and be weighted down by debt that will never be repaid. If something can’t go on forever, it will eventually stop. What happens then? Argentina in the 2000’s/Germany in the 20’s is my guess. At that time I’ll be buying RE with the same enthusiasm I had in 09….
Financial Samurai says
It seems like there’s less than a 50% chance there will be a Fed hike now if this type of volatility continues. We shall see. In the mean time, rates have come back down by 0.5%.
Alexander @ Cash Flow Diaries says
It’s days like today Im glad I am a real estate investor. Even if the real estate market lags or has a small decline I am still okay with it because people are always going to need to rent. Im positioned now so that worst case scenario, I can drop all my rent prices anywhere from $200 to $350 lower and I would still at least break even. And I highly doubt that will happen. Even with the last RE crash the rent market didnt drop that bad.
I don’t plan on selling any of my rentals, Im just going to ride anything out that comes and hope for the best. But ill need a nice cash cushion for sure to keep me feeling warm and cozy.
It is crazy to see what is going on though.
Financial Samurai says
Yes, I like real estate for this reason too. There is no constant mark to market.
My rents stayed flat and went up each year during the last recession due to one year leases. And the irony is that the more people who can’t buy, the more people rent in the short-term, until jobs are lost.