Fed Chair and centi-millionaire Jerome Powell is a DIRE Movement enthusiast by continuing to raise rates despite a global stock market sell off. 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.
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!
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!
Related: Why Real Estate Will Always Be More Desirable Than Stocks
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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.