Fed Chair and centi-millionaire Jerome Powell is a DIRE Movement enthusiast by continuing to raise rates despite a global stock market sell off and inflation way down. More pain is on the horizon as JP bows to no one. Here are the biggest benefits of the stock market meltdown.
I've never liked investing in stocks as much as I enjoy investing in real estate due to the volatility, occasional corporate malfeasance, and countless uncontrollable exogenous variables stocks face.
When you're but a piddly minority investor with no say in anything, investing in stocks can sometimes feel hopeless. However, I recognize that investing in stocks is one of the best ways to build wealth over the long term, which is why I'll always have at least 20% of my net worth in stocks.
Although losing money in the stock market is never fun, I thought I'd highlight some benefits of a stock market meltdown. After all, if it wasn't for the global financial crisis, Financial Samurai would never have been born.
The Benefits Of A Stock Market Meltdown
- More humility. People tend to brag about their wins and hide their losses. When times are good, there is an incessant amount of boasting that can get extremely annoying after a while. It's very similar to people posting only the best moments of their lives on social media. A return to modesty is a wonderful benefit of a cratering stock market.
- Reset expectations. People tend to get bearish when stocks are going down, and bullish when stocks are going up. Being a contrarian thinker by forecasting what might happen in the future is extremely difficult, but worth practicing. With lower earnings growth expectations, stocks now have a higher chance of beating beaten-down expectations, resulting in better future performance. The below chart shows that global fund managers are as pessimistic as they were during the global financial crisis, which seems excessive.
- Fewer crowds. A stock market boom creates more jobs. More jobs bring more people to restaurants, bars, and other entertainment venues. Due to more people, reservations and tickets are harder to come by. Everything is also more expensive. Further, traffic can become unbearable to the point where you don't want to leave the house. Back in 2001, San Francisco was a pleasant city with lots more room thanks to the dotcom bubble pop. Now, San Francisco feels more like Manhattan, where every time you step outside feels like going to battle.
- The return of mega unemployment benefits. Sometimes, you just need a break from the grind. During the last financial crisis, the federal government stepped in and offered 73 weeks of additional unemployment benefits on top of the maximum 26 weeks of unemployment benefits by the state. Receiving up to $450/week or $1,900/month in some states can sure go a long way. Add on a potential severance package and thousands of Americans might finally be able to afford that long-term vacation they so desperately need.
- Development of better financial habits. When you're losing a lot of money in the stock market, you're forced to look at your budget to see where you can cut spending and boost saving. You'll also spend more time analyzing your net worth because it's suddenly at great risk. It often takes a financial shock to finally start aggressively staying on top of your finances. When times are good, it's easy to take your financial well-being for granted.
- Diversifying investments. A lot of folks put their entire retirement nest egg into the stock market. It's almost like having blind faith that index investing will all work out. If they can hold on for the long-term, their investments will probably turn out OK. But tell that to the people who were shaken out during the 2008-2009 financial crisis. If only they had a broader diversification of their wealth into bonds, real estate, and alternative investments. They may have been able to more easily pull through the mire.
- A catalyst to create a new income stream from nothing. Besides investing in other passive income generating investments, a bad enough stock market correction might force you to create your own income stream that is less dependent on exogenous variables outside of your control. Plenty of lifestyle businesses and traditional businesses were created during the last downturn because people simply had had enough of depending on other people for returns.
- An opportunity to invest for my children. I'm currently actively contributing to both their 529 plans. Therefore, a stock market meltdown helps me accumulate more shares at a lower price. Given I have a 12-15-year time horizon before they go to college, I'm fine with stocks on sale.
My Favorite Benefits Of A Stock Market Meltdown
Stock market meltdowns are great for those who are looking to buy stocks or buy pretty much anything that is dependent on the health of the economy. The worse the economy gets, the lower prices go.
My favorite benefit of a stock market meltdown is cheaper real estate prices. Unlike stocks, which can correct overnight, real estate usually takes years to decline given the asset class is less liquid. But I like slow-moving train wrecks because they give me the time to discover the ideal property without having to make a snap decision.
Although investment real estate can often be a defensive asset class during a downturn due to sticky rents (see the outperformance in REITs and alternative real estate investments), a primary residence may not perform as well if a homeowner gets a pay cut or loses his or her job. During the last recession, thousands of homeowners were forced to fire sale their homes at huge losses.
Therefore, those of you searching for a new primary residence should love a stock market collapse, especially while the Fed is raising rates. Already, inventory is growing in many big cities around the country. As the fear of a recession grows, further price declines are an inevitability.
Real Estate Is Attractive
Since 2016 I've been looking for my Honolulu beach home and years later, I'm absolutely thrilled to see continued weakness in residential property prices. This one home I visited in 2016 had an asking price of $4.7M. They might have accepted $4.5M if I had put in an offer. Today, I think there's a decent chance the house could be had for $3.5M, a 25.5% decline from their original asking price.
It feels amazing to just wait and watch prices fall. This is as close to making money by doing nothing as I've ever seen. No wonder why economists fear deflation. If enough people just sit on their hands earning a healthy risk-free yield, self-perpetuating a decline in asset prices, economies fall apart as nobody ends up buying anything!
I've decided to upgrade homes and buy my new forever home in 2023. There is much less competition and I found the home to raise my family for the next 12 years. It's great!
As the economy worsens, luxury assets that people don't really need suffer the most. If you've been looking to inflate your lifestyle, a stock market collapse could be just what the doctor ordered!
Invest In Real Estate Strategically
Real estate is my favorite way to build wealth. Real estate is a tangible asset that provides shelter, is more stable, and generates income. Therefore, I recommended dollar-cost averaging into real estate over a lifetime.
My favorite two real estate crowdfunding platforms are:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eREITs. Fundrise has been around since 2012 and now has over $3.5 billion and over 400,000 investors. Fundrise's focus is on residential real estate in the Sunbelt region where valuations are lower and yields are higher. The demographic shift toward lower-cost areas of the country is a multi-decade trend.
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 and higher rental yields. Growth is likely higher as well due to strong demographic trends.
Both platforms are free to sign up and explore. I've personally invested $954,000 in private real estate investments since 2016.
Invest In Private Growth Companies
Another benefit of a stock market meltdown is that private company valuations have gotten cheaper as well. After all, the end goal is for these private companies to go public or get sold.
Consider diversifying into private growth companies through an open venture capital fund. 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.
In addition, 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.
No need to wait for a stock correction to find a good investment property. They existing in all markets. You need to be ready to move when you find one. Some people are reading the tea leaves and moving some of their portfolio into REITS and actual real estate purchases. I have always suggested that real estate investment estate investment will in the long term earn more than stocks if you buy right.
I want to go to cash to from stocks and funds they are – 20 to -30 Pct lower now , stocks and funds qualities are not bad but itcame down with the market decline.
I also see cheaper stocks value now? It’s catch 20 . I donot want to bring fresh money from CD s etc also
Perhaps holding for 5 to 7 years is answer?
I am 20 Pct in the market and has enough cash and income to last for next 7 years..
Any ideas?
I am wondering how this will impact the Dallas real estate market, especially close to city center (uptown, oak lawn, highland park etc). Dallas has seen some of the largest gains in the country in the last decade and did not experience a heavy downturn compared to the rest of the US in 2008-2009. Do you think there will be a significant correction in Dallas given the ever growing population and strong job market?
Jarome Powell was a known hawk before his appointment to the Chair of the Federal Reserve, and his predecessor Janet Yellen was far more dovish. This was also well-known.
Perhaps this should have been factored into the Chair’s nomination, and not whether or not someone was too short to run the Fed, see https://www.washingtonexaminer.com/news/white-house/trump-asked-aides-if-janet-yellen-was-too-short-to-head-the-fed.
Against the advice of a financially savvy friend/advisor I sold many of my equities last march and paid off my primary residence. So glad I did while the iron was still hot. Where is the new bottom for the DOW?
13500
Nice post! I pulled 100k out of the market so that could start saving for a primary residence or a duplex. I ended up pulling out about 5 months ago and I was very lucky that there is this downturn. I hope what you’re saying is true and prices will fall. Seems that it doesn’t make sense to buy at an all time high.
Rob
I love reading your site as it always gives me great food for thought. We are a little heavy in the market, and that could be bad in the long run. It’s hard to say. We are certainly diversified there, and IMHO REITs are my exposure to property. I think I would have liked to have rebalanced a few months ago, as another commenter said, but aside from that, it’s all about earning now. My hope is that, like in 2008, this is just another buying opportunity. I did well in that one, and I am still not convinced that we are going into a recession yet. The fact that the Fed is still talking about raising rates in 2019 tells me that we have options at least to smooth out this coming recession. Time will tell
we’re not very young in our house, 50 and 55. i’m glad i raised cash from 3% to around 17% in october when the markets started to smell a little gamey. i would say our net worth is about 35% in a house that we own outright and the balance in investment accounts. it feels good to have 4-5 years living expenses in cash and zero debt. i’m still working at my low impact/decent paying job for now and just switched back to buying small caps in the ol’ 401. if stocks continue to shrink i’ll deploy cash when it gets above 20% of the total. i would rather sacrifice some potential return for the comfort of knowing we can fund our life for years if need be without having to sell. i learned a valuable lesson in ’09 when i bought with the market down 10% and it ended something like 60% down before coming back.
i like that picture of maggie siff in the betterment ads. she’s hot. enjoy the holidays.
It will be interesting to see where the bottom forms in this market. I’m waiting on the sidelines with cash but I don’t see an entry point yet. It’s hard to believe a company such as Apple is trading at a forward P/E ratio of 10.30. I’m very close to jumping in on aapl and other quality stocks that are at a huge discount to where they will be in a few years IMO.
How long have you been sitting in cash? And what is your net worth composition look like?
If the economy cant handle 2.5-2.75% fed funds, than this wasn’t a bull market, nor a real recovery.And R.E especially Hi will take a serious bruising, and there pension liabilities won’t feel good.
Powel did/does what he has to do,by mandate and data.
Wild ungrounded violent policy swings across many intersections and jawboning from other branches definitely hasn’t helped.
dave
As a cash buyer looking for a new primary home, I readily welcome the elimination of my mortgage-driven competition. Interest rates only matter to me in that my cash is earning more as I wait, and prices in Houston are melting before my eyes.
Is it really that bad in Houston? If so, I need To pay more attention to buying in the heartland of America thesis.
I haven’t found good y-o-y selling statistics, but I am seeing lots of nice places drop their asking price 10-30% from May. (and, that have been on the market that long) If there really is something to it, then waterfront will drop. You also have to watch out for neighborhoods that flooded during Harvey.
Another benefit – downturns always get me tightening up my own budget or looking for extra income. Every extra dollar is another dollar of reduced stocks or down payment!
I’m no economist, but sometimes I wonder if these opportunity zones that have been set-up, or are being set-up, this year are leading the markets lower, as private equity firms etc realize their gains from selling stocks and mutual funds and put money into these real estate opportunity funds. This article from the Baltimore Sun says “They are flocking to what financial analysts say are some of the most generous tax benefits they have ever seen.”
https://www.baltimoresun.com/business/real-estate/bs-md-ivanka-trump-jared-kushner-opportunity-zone-tax-breaks-1212-story.html
I know you posted your acticle on the opportunity funds a few months ago, Sam, but I wonder if there are other funds available for investment from us regular folks.
Maybe this is the start of a prolonged downturn. However, while I think the days of everything going up in tandem are likely gone given the rate environment, there seems to be significant value in certain areas of the equity market if one is willing to do some homework.
I am definitely not an expert and do not have a ton of experience, but I have worked in corporate banking for over 4 years now at a larger institution. Can say that while leveraged loan spreads are widening, loan demand is still strong, driven primarily by M&A. As of the September quarter (keeping in mind these companies report late October / November), most of the companies I cover were not flagging any serious macro softness. Maybe we will see it in the December quarter.
Interesting post! My husband and I were able to pocket $50k from the condo that we bought when the economy crashed last time. We are doing what we can to get ready for the next one so we can use it to our advantage as much as possible. We are hoping to invest in a few more properties if the housing market dips again and add that to our asset portfolio.
So essentially this blog is the story of a guy who convinced himself to skip out on a golden decade of work and wealth-generation then jumped back in right at the start of the hard-times recession?
Exactly. It’s been a real struggle for me to miss out on all the gains, but I’m still relatively young and have time to make up for my mistakes. How about you?
With $200K in passive income how did you miss out? The only “mistake”, if you want to call it that, is staying where you are vs a lower cost of living area and saving $50K+ a year.
If you still expect to clear $108K passive income in the downturn you could live in a diverse HCOL area with good schools and still make the median income.
What is amazing is that I live in the county with the second highest median income and we still have 22% of the kids on Free And Reduced priced Meals.
Just being able to contemplate FIRE is a huge privilege.
In any case, missing out would be not working during a downturn because you can buy stocks at a discount with your earnings. Jumping back in now is optimal if you can in a way you enjoy.
I missed out because I didn’t work during the upturn and make maximum money. And now, I am seriously contemplating going back to work to help buffer my finances. I’ll be publishing a post for sure!
Why do you need to buffer your finances? Your website is generating more income than you made at your previous high-paying job, you have built up a substantial passive income stream, and you get to pick your own hours. You’re living the dream!
Your honesty and transparency are great assets. I think that your story of being a recovering FIRE believer returning to the working world could actually make your site more popular and result in more income for you and your family. I think it could be a very compelling human interest story! Maybe like a redemption story.
I’ve enjoyed reading your blog for a few years and must admit I always thought FIRE wouldn’t work.
Dad and granddad were oil men and taught me everything is a boom and bust. Make as much money in the boom times as you can, then when the bust comes don’t fight it, just take your beatings and set up for the next boom.
I make a top salary in tech but i live in a tiny 0 bedroom apartment and don’t have a car. I save and invest more money than most people make. I’m very happy with my lifestyle and my philosophy is if you always spend like you’re in a bust you never need to fear for your lifestyle security.
It could be a compelling human interest in story indeed. Who doesn’t like a comeback story right?
How old are you now? With a top salary in tech, how do you balance The reason for earning and working and living a balanced lifestyle?
I lived in the studio for two years with my friend after college, but after that, I wanted to get my own room at least.
Yeah a comeback story! I think you’ve lived a fascinating life that few attempt but many dream about.
I don’t have balance, I work and I accrue capital, I’m 35.
The way I see it is Republicans have taken more control of our country every year for the past 30 years. Every year more wealth flows from the middle class to the 1%. And the engines of wealth creation are slowing down – both bonds and the stock market return far less over the last 15 years than the 15 before that.
I fully expect this 30 year trend to continue. So the way I see it I’m lucky I can work my butt off with no work/life balance and accrue capital today. Because the generation after us won’t even have that option once the engines of wealth creation stall and the 1% focuses on hoarding wealth.
I was looking for comparisons on the stock market as a whole (S&P500) to housing price metrics (average) and came across this article: http://www.businessinsider.com/real-estate-vs-stock-market-investment-2018-9. The data here shows returns better in the stock market than housing.
I’m interested in why you still think housing is better? Is it just because of the extra rental income not factored in these charts?
Thx
Sure. Check out: Stocks versus Real Estate
You should invest in what you’re most comfortable investing in. Don’t let anybody else tell you otherwise.
Although the recent sell-off in stocks is a little unsettling, it’s worth noting that the federal reserve are still very bullish about the economy. We also had a similar pullback in 2015/2016 and an even bigger one in 2011. I’m hoping it’s just a pullback…
Hope is not a viable strategy. Whether it is a pull back of long term bear market depends on a few critical factors down the road. At times, investing is like fighting a war. There are times when your troops would get ambushed by the enemies coming out from nowhere. Risk mitigation strategy is like fighting back and keeping your troop loss low so that you can continue to fight for another day.
Nice eclectic set of data and tongue in cheek analysis.
Best benefit of a stock market meltdown — delayed retirement.
Look at that YoY chart, the only cities that are improving with Sales volume are in Colorado… so proud.
I don’t know man, the inventory in the major Colorado cities are really creeping higher. And you to see the price declines year over year now.
Colorado is a little bit tricky because it has so much land to build on, but the jobs market is pretty good.
Sam – Where can I find YoY chart for east coast properties like DC, MD, VA , …?
You could probably find it on Redfin’s website.
Hope it doesn’t get too bad, just managed to finally buy a sweet Ski condo for a decent price and I’m getting pretty good rentals.
Oh man, you’re giving me PTSD because I bought a ski property in 2007 right before the collapse.
I wish you good luck! And the worst case, you enjoy your property and live life to the fullest!
https://www.financialsamurai.com/a-vacation-property-buying-rule-to-consider/
That’s why I went ahead and bought to enjoy it now and plan on retiring in the next 8-10 years and spending even more time there, Winter and Summer. I probably spent more of my percentage of net worth than you recommend, but I have been paying quite a bit extra on the principal in the year that I have owned so far. So far I have been able to pay all the HOA costs plus a little extra and it’s booked pretty solid this ski season, the mountain and village has had a lot of investment in the past few years and even the summer stays pretty busy. Thank you for all the info, I’ve really learned a lot.
How do you feel about the investment relative to more pure investment plays like rental housing near a university?
Was it a big premium over a place in town relative to earnings from rent? How bad is the HOA situation? Are you worried about lost income for time you want to spend there?
Great article Sam! I’m finishing up an article on the San Diego housing market and am clearly seeing the same price action. In some cases a 15% decrease in home values in less than a year. I feel like we still got more to go. Licking my chops over here for a good entry point in the housing market as I have been looking at homes all year long.
Also maintaining a large cash position too and waiting to deploy it.
Yeah, definitely be patient with the San Diego real estate market. It got pretty bad during the last global financial crisis, especially condos. I think you have at least another 12 months of softness down there. No rush! Negotiate aggressively. Fear begets fear and more inventory comes online.
It’s unfortunate the markets continue to nose dive. Stressful indeed. It takes experiencing tough times to truly appreciate the good though. There is a lot to that and the saying what doesn’t kill us makes us stronger. And also makes us take more steps to plan, save, diversify, appreciate what we have etc.
I agree with the benefits you wrote about and your timing is spot on. I’m gonna use these rocky markets to work on better financial habits and appreciating more of what I have. Good point on real estate for those looking to buy. It will be interesting to see how coastal city real estate prices react next year.
I’m not so convinced. If there is a trade agreement, decline will reverse quickly. 20% corporate tax cuts should offset any business losses in China except for small number of corporations. Right now, I see this as manufactured with an overreaction from the market. Interest rates are not that bad, but that could all change quickly for the worse or better. Oil prices are not good, and will show more of the future. The fear is wonderful, and I am nibbling at small pool of stocks. Real-estate in bay area has gone from overpriced to slightly less overpriced, but I don’t see much in job losses. 4 million properties seem to be sitting for 90+ days, and 600k properties seem to be sitting 30 days. I think negative sentiment could finally pop the venture capital bubble in the bay and lower real-estate another 10% which would begin to get interesting. For now I continue to invest dividends on the dips, and looking for property with a view, but there is no rush at current prices.
One positive highlight about bear markets, is people in the bay become much more open to dating, but I’m taken, sorry.
Well said. Let’s hope a trade deal gets done and the sharp declines turn around, or at least slow down and come to an end.
Great article! I’m curious why you only have 20% of your nest egg in the stock market? Would that number be different if you and your partner were employed?
I’m personally excited for the next year as we are close to paying off our credit cards and can start investing…and having stocks low is a great time to get into the market heavily for the long term.
I’m not a big fan of Stocks after spending my career working in equities and seeing so many corrections and bear markets.
I’m more a fan of real estate and building my own business, which I can better control.
I also try to follow my own recommendations: https://www.financialsamurai.com/recommended-net-worth-allocation-mix-by-age-and-work-experience/