What To Do When Stock Market Volatility Returns

What to do when the stock market vomits all over you

Stock market volatility is why I prefer investing in real estate over stocks. When the value of a stock can lose 30%+ of its value over night, it's really gut wrenching, especially if you have a big position.

Every so often, the stock market will take a dive when you least expect it. When we sense danger, the natural tendency is to run the other way, preferably in a herd for survival. As a result, sell-offs often intensify as computer algorithms now join us humans in rushing out of positions.

As I've gotten older, despite much larger absolute dollar swings, I've become a little more sanguine in times of stock market volatility. However, experiencing a 32% decline in stock values in March 2020 had me paying attention to my net worth allocation again.

Here are some things you can do to reduce your fear and not sell or buy at inopportune times. I'm investing more in private growth companies through venture capital funds to reduce perceived volatility.

During Times Of Stock Market Volatility

Stock market volatility often makes people do suboptimal things like day trade their portfolio. Here are some things you can due to protect your wealth.

1) Review your financial objectives.

There is no point saving and investing money if it doesn't have a purpose. Once you crystallize the reasons why you're working so hard and taking risk, you'll be able to make more rational decisions. You'll also re-motivate yourself to do what's financially best for you and your family.

Here are some common financial objectives:

  • Save enough in after-tax investments to give yourself optionality to do something new.
  • Return at least 2X the risk-free rate of return each year.
  • Save enough to make your child a 529 plan millionaire so she can graduate an independent woman after college all thanks to you.
  • Save enough to cover any long-term care costs for aging parents.
  • Max out your 401(k) every year without fail since few get pensions anymore.

Our key objective: Because we tried for so long to have a child and were finally blessed with one in 2017, my key objective is to enable my wife and me to be stay at home parents for the first five or six years of his life before he goes to kindergarten. Once he goes to kindergarten, one or both of us get to stop sacrificing our careers and income to go back to work since he'll be busy most of the day. Whether we go back to work or not, is a different matter. It's just nice to have the option to have more adult interaction again. 

2) Determine your risk tolerance to the best of your ability. 

To determine your risk tolerance, simply ask yourself how much you're willing to lose in your investments before needing to sell. If you never plan to sell because you know stocks and bonds have generally gone up and to the right for decades, perhaps you have a high risk tolerance.

Or, if you plan to take profits if the stock market is down 20% or more, perhaps you have a medium risk tolerance. If you're freaked out by a 10% correction, then perhaps your risk tolerance is very low.

Just know that whatever you think your risk tolerance is, you're likely overestimating it by at least 10%. When people started losing big money during the 2008-2009 financial crisis, there was mass panic because they were also losing value in their houses, which are usually owned with debt. Meanwhile, when your company is going through its third or fourth round of mass layoffs, the desire to raise cash becomes almost impossible to prevent, especially if you have a family to support.

See: Financial SEER: A Way To Quantify Risk Tolerance

Our risk tolerance: When we left work at 34 respectively, our risk tolerance was medium-to-high since we only had to provide for ourselves. Further, it took a lot of guts to truncate promising careers so young.

But due to our current #1 objective of being stay at home parents for at least five or six years, our risk tolerance is now medium-to-low. We would feel uncomfortable losing more than 20% of our after-tax investments, which cover 100% of our living expenses.

Stock Market Volatility Is Increasing

3) Understand the historical returns of different stock and bond portfolio weightings.

Knowledge truly is your best friend when it comes to investing. There are no investment guarantees, but we do have historical data we can study to get an idea of how our investment portfolios will perform over time.

Given you've gone through your financial objectives and made a best guesstimate on your risk tolerance, you are rationally going to build an investment portfolio that meets your risk profile. Here are the historical returns between 1926 – 2016 according to research from the Vanguard Group.

A 0% weighting in stocks and a 100% weighting in bonds has provided an average annual return of 5.4% since 1926, beating inflation by roughly 3% a year.

A 20% weighting in stocks and an 80% weighting in bonds has provided an average annual return of 6.6%, with the worst year -10.1% and the best year 29.8%.

A 30% allocation to stocks and a 70% weighting in bonds has provided an average annual return of 7.2% a year, with the worst year -14.2% and the best year +28.4%.

A 40% weighting in stocks and a 60% weighting in bonds has provided an average annual return of 7.8%, with the worst year -18.4% and the best year +27.9%.

A 50% weighting in stocks and a 50% weighting in bonds has provided an average annual return of 8.3%, with the worst year -22.3% and the best year +32.3%.

More Traditional Investment Portfolio Split

A 60% weighting in stocks and a 40% weighting in bonds has provided an average annual return of 8.7%, with the worst year -26.6% and the best year +36.7%.

A 70% weighting in stocks and a 30% weighting in bonds has provided an average annual return of 9.1%, with the worst year -30.7% and the best year +41.1%.

A 80% weighting in stocks and a 20% weighting in bonds has provided an average annual return of 9.5%, with the worst year -34.9% and the best year +45.4%.

A 100% weighting in stocks and a 0% weighting in bonds has provided an average annual return of 10.2%, with the worst year -40.1% and best year +54.2%. We saw this sell-off happen in 2008-2009 when many investors sold at the absolute bottom.

History of Bull And Bear Stock Market Performance Since 1926

My public investment portfolio weighting: I've gone from a 95% average equities weighting in my 20s, to an 80% average equities weighting in my 30s, to a now 60% average equities weighting in my early 40s. My objective is to earn 2X the risk-free rate of return, or now roughly 6% a year.

Based on historical returns, having a 30% stock / 70% bond weighting for my return objective would be more appropriate. However, given my financial background and passive income, I'm comfortable taking on more risk. After getting an MBA and spending my entire career in finance, it would be strange if I wasn't comfortable with investing. 

4) Make up for your losses with extra work.

Stock market volatility can be a real bummer when you are working so hard. Watching your investments lose more money then you make is disheartening! Whenever your investments lose money, a humbling way to look at your paper or realized loss is to figure out how many more months of work will be required to make up for your loss. This exercise will not only help you assess your true risk tolerance, but it will also motivate you to build extra income streams.

One of your goals on the road to financial independence is to never experience a decrease in your net worth each year. In the beginning, your income and aggressive savings should be enough to consistently grow your net worth.

But once you start amassing a large investment portfolio, there will be a breakpoint where your investments may start generating a significant boost or drag to your net worth. This is one of the reasons why you should dial down risk the wealthier you get.

If your investments are losing money, get offended at your sensibilities. Then get motivated to do some consulting work or take on some gig economy jobs or my favorite, build a side hustle online. Only as a last resort should you be selling and drawing down principal to pay for life.

My hustle: When I started losing big bucks starting in 2008, I decided to finally start Financial Samurai in 2009. I knew it wouldn't make a lot of money in the beginning, but I had to at least try in order to give me options in the future. If Uber or Lyft had been popular back then, I'm sure I would try and make extra money at night as well. 

5) Always have a comfortable cash hoard equal to 5% – 10% of your investable assets.

When there is stock market volatility and the markets are crashing, you will feel most helpless if you don't have a cash cushion. By having a cash hoard, you will not only have a financial cushion, you will also have the firepower to take action during violent sell-offs.

Buying stocks during a downturn is a positive that counteracts the negative of losing money from your investments. Sometimes it feels like shooting a rifle at a fighter jet bombing your village, but at least you're doing something about the siege. This helps your psyche.

Buying stocks during the 10/11/2018 sell-off - stock market volatility
Bought $30K in my wife's after-tax account on 10/11/2018 after the 6%+ correction

My cash: At any given moment, I've always got between 5% – 10% of my investable assets in cash, especially now that money market rates are paying over 2%. As a result, I never feel helpless during a stock market correction anymore. Instead, I feel excited to put some cash which I don't need to work. 

6) Have a concrete plan of action.

Given you always have spare cash to take advantage of opportunity, you should always develop a plan whenever there are significant changes in the market.

For example, we know that the S&P 500 moves +/0 ~0.76% a day on average. Therefore, if you are long term bullish, you should consider buying when the S&P 500 sells off 2X, 3X, 4X, or 5X greater than average with increasing amounts of capital. You can follow my dollar-cost averaging strategy.

Average daily change of the S&P 500 - measuring stock market volatility

What I'm doing: My goal is to maintain a roughly 60/40 stock/bonds split after such a huge bull run during the pandemic. I don't want to give up my gains! When equities are selling off, my stock weighting naturally declines. Therefore, I will look to re-up my stock weighting whenever there is a 1.5% or greater decline in the S&P 500.

Generally, I will deploy capital in three to five tranches over a 5% – 10% decline e.g. $20K when -1.5%, another $30K when -3%, another $40K when – 5%, etc. If the S&P 500 declines by greater than 10%, I will redeploy a set amount of capital for every 1.5% decline over three to five tranches again.

Given I don't plan to buy another property for a while, my goal is to invest 100% of my savings each month to generate passive income

7) Extend the investment time horizon.

We used to joke on Wall Street that whenever we made a bad investment we'd describe it as, “a long-term investment.” But if you can truly extend your investment timeframe into the decades, you'll feel better about your paper losses.

The trick I've learned which helps me elongate my investment time horizon is to think in the future what my kid or younger relatives will think about asset prices today.

Every one of us wishes we had purchased and held stocks and real estate 30 years ago. Therefore, think about what the children in our lives will think about the investment opportunities we have today.

My time horizon: I'm certain stocks and real estate will be higher by the time my kid enters the workforce circa 2039, therefore, I'm comfortably in the buy and hold mode. Whenever there are corrections in the S&P 500 index or in specific stocks I believe are long-term winners, I utilize my cash hoard to buy.

Then I imagine the day when my son graduates from college and ventures into the real world to be his own independent man. If he's a good person with a kind heart, I will be that loving father who will one day say, “I'm so proud of all the struggles you've had to overcome.

Let mom and dad help you with anything you need, because surprise! We invested in stocks and real estate when you were a baby, just in case you decided investing back then would have been a great idea.”

Of course if he's mean and rotten, we'll donate all the money to charity instead. 

See: The Average Daily Move In The Stock Market

8) Keep busy doing something more pleasurable.

Stock market volatility makes people stressed and miserable. It's counterproductive to overly focus on your tanking investments when you've got objectives 1 – 7 down. Instead, go have some sangria with friends and loved ones. Go for a nice free long walk in the park. Exercise. Life is the same whether stocks are going up or down.

My activities: I always feel better after a good game of tennis or softball. The endorphins kick in, the body becomes nice and sore, and my mind feels like it got a nice massage. I also spend more time writing on Financial Samurai because writing is cathartic. It helps me work through logic and emotion to see things more clearly. 

9) Earmark some profits to pay for a better life. 

Instead of having the market incinerate all your money, you should consider spending your profits on yourself, especially if you've hit your financial objectives. Otherwise, there's really no point saving and investing.

You want to consistently crystallize the value of your investments, which is why buying real assets that provide utility like a house feels so good. Alternatively, you can use your profits to buy experiences that tend to appreciate over time as well.

What I've spent money on: I've used some profits to buy a family car prior to our son's birth. Sometimes I catch myself at a stop light feeling giddy the car was bought with the returns from my severance check. I also built an awesome deck facing the ocean off our master bathroom with some NASDAQ proceeds. Eventually, when our son turns five, we'll take some profits to pay for an exciting international family vacation.

Although I could have made more money if I kept the money invested, it feels wonderful to actually see the investments be utilized for a better life. My biggest hope now is that my son's 529 plan returns enough in the next 17 years to provide him one or two years of free college tuition. 

Stock Market Volatility Will Happen

The bigger the stock market grows, the more common stock market volatility will be. Accept that part of earning a reward is taking on risk. Over the long run, your risk should pay off if you have the proper asset allocation and time horizon.

The only people who lose are those who are too afraid to take any risk at all. These are the people who hoard most of their net worth in cash. These are also the people who stay at one job forever because they're too afraid to move.

If you have a clear plan for how you will allocate capital, you will better conquer your fear of investing. Alternatively, you can always just have a robo-advisor automatically invest for you once you've established your risk parameters.

However, if you believe in the bull market, then you should buy the dips. If you believe a bear market is imminent, then you should sell into strength. Given my investment horizon is at least 20 years, I plan on consistently generating enough cash flow to buy as many dips as possible.

Consider Real Estate If You Don't Like Volatility

One of the main reasons why I prefer real estate over stocks is due to real estate's less volatile nature. With real estate you have steadier rents and an asset the is tangible that provides utility. Real estate just doesn't disappear overnight like stocks. As a result, I have invested in private real estate investments since 2017.

For example, take a look at Fundrise's 5-year performance versus the S&P 500 and the Vanguard Real Estate ETF. When the S&P 500 took a tumble in 2018, Fundrise's platform portfolio outperformed by a whopping 14%.

Fundrise performance

You can sign up for Fundrise and explore their offerings. Fundrise has private funds that enable you to earn income 100% passively in a diversified manner. If you hate stock market volatility, you will like Fundrise.

I've personally invested $954,000 into real estate crowdfunding to take advantage of lower valuations and higher net rental yields in the heartland of America. As a retiree, the last thing I want is more stock market volatility bumming me.

Invest In Private Growth Companies

Finally, if you hate stock market volatility, 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. 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.

61 thoughts on “What To Do When Stock Market Volatility Returns”

  1. Really great post here. A quick question or two about the daily moving average as I think this is a great concept to help take advantage of some of the recent volatility.
    1. Over what time-frame do you consider the 1.5% movement to be signifigant enough to ring the register OR buy in weakness? 1 day, 2 days, 1 week?
    2. Where did you get that chart?
    3. If you were following that strategy, when would you reset your new baseline? For example, the S&P will generally rise over time, but if you are simply sticking to +-1.5%, then your basline never moves.
    Thanks in advance for the thoughtful responses.

  2. Leonardo Candoza

    The biggest mistake I see people make with their investments is home country bias. Americans particularly invest in their own stock and bond market with extreme prejudice. A 60/40 bond stock portfolio is fine and dandy except when you’re in a sovereign debt bubble and there is a risk of a socialist being elected.

    Diversification – real assets, precious metals, emerging market stocks, natural resources are key for a portfolio focused on long term wealth preservation.

  3. Certain that the stock market will be higher in 2039? Wouldn’t think of this as a given. The consensus view out there is that the stock market always goes up over the long-term, which has contirbuted to a massive increase in passive investing over the last decade.

    Look at the Japanese Nikkei for example. It is still below all time highs set in 1989. Also look at the Dow after the great depression in 1929. It took 30 years to get back to all time highs.

    Who knows if a correction as extreme as those two examples will happen again, but it definitely is a possibility. Would be way more cautious about equities now after a massive 10 year bull cycle.

  4. TheEngineer

    What To Do When Stock Market Volatility Returns?

    Keep it simple!

    If you are already living off the passive income without any new income source – DO NOTHING!

    If you are building up wealth – BUY. Pick your ice cream flavor, stocks or real estates. It does not matter much because when the ocean rises, all boats are lifted.

    AND most importantly have a margarita with your best mate!

  5. I’m hoarding cash now to buy more real estate in the winter of 2019/2020. I’d rather own something tangible than stocks.

  6. I keep 10% of my portfolio as dry powder cash. And then I follow a set of rules to invest that cash in the stock market as it drops by 10%, 15%, 20%, and more. By having a set of rules, I try to keep emotions out of my way. These occasional 10% bumps are not stressful but I know how the media and regular joe blow behave when the market is in the midst of a severe downturn. I plan to keep myself in check by following my rulebook for investing – no over-exuberance or outright panic.

  7. Great article. My favourite point is number 2, understanding your risk tolerance. I feel a lot of the younger generation of investors have never experienced a true market crash. The gut wrenching feeling experienced when a huge chunk of your wealth is wiped out can really mess with your emotions. I was invested in 2008 and I had a plan but man it was difficult and made me seriously question my strategy. When the world is panicking around you it’s hard to keep a cool head.

  8. What does redeploy mean? Under your scenario below does this mean restart at $20K again once you hit the 10% decline?
    -$20K at 1.5%
    -$30K at 3%
    -$40K at 5%
    -$50K at 8%
    -$60K at 10%
    Start over?

    Therefore, I will look to re-up my stock weighting whenever there is a 1.5% or greater decline in the S&P 500. Generally, I will deploy capital in three to five tranches over a 5% – 10% decline e.g. $20K when -1.5%, another $30K when -3%, another $40K when – 5%, etc. If the S&P 500 declines by greater than 10%, I will redeploy a set amount of capital for every 1.5% decline over three to five tranches again.

  9. The S&P gain from the 2009 low is misleading. A better metric is the 29.5% inflation-adjusted S&P gain from the 2010 high through September 2018.

  10. One thing I would add to this post is the number of years it took from the end of the last bull market until the prices reached that point again. That is I think important for folks as they close in on retirement, or are in it. I am still more than a decade away, and I know that time horizon has worked for major indexes.

    That being said, as others have said, this is a timely post. It’s just so hard to know where we are in this business cycle. I found it comforting to see that table, and see the real math that supports it.

    We keep about 12 months or more of cash in I-Bonds, T-Bills, and high yield savings accounts. I bonds are my favorite for cash. That puts us in the 5-10% range for cash, and the rest of our investments can just sit there. As we get closer to retirement, though, that will change, and so must our investment balance.

  11. Great Post Sam

    It’s timing to get some returns on individual stocks/funds winners now

    1) Get rid of dangerous individual stocks (or expensive exotic funds) you bought
    2) Cash the gains
    3) Put the gains in decent yield CD or treasury bills
    4) wait for the big dip (-20/30%) and reinvest in index or , why not, down payment or cash only deal for real estate

    Win Win Win Win scenario

    (And by the way it’s not timing the market but just clever rebalancing your assets)

  12. Save enough to make your child a 529 plan millionaire
    WOW…Anothe Suse Orman here ! Look around to the real world man where people barely make end’s meat !

  13. Great article. Rule #1 of investing is to not time the market. To me, timing the market means pulling out completely and jumping back in completely. Most people do this as a reactionary maneuver when the market dips and lose money. However, one of the things I think that “don’t time the market” has come to mean is to have a a particular asset allocation and never deviate from it no matter what the market is doing. In fact, people are quite brutal to anyone who suggests that they might change their asset allocation as if they are somehow the stupidest person on the planet. I have not found someone who has done the math on this. But if the difference in 30/70 and 70/30 is only 2% over time, changing your asset allocation from a 30/70 to a 70/30 in a bear market and back to 30/70 5+ years into a bull market seems like it would come out ahead. I’ll anonymously admit that I changed my asset allocation to be more bond-heavy about a month ago, with plans to change back to stock-heavy after the next substantial drop. I’m ok with 7% long term. Thoughts? And I’m looking for something beyond the knee-jerk response of any asset allocation change in a bear or bull market is sacrilege.

  14. Trying to get ahead

    Dear Sam and other members of the FS community,

    I need some advice. I am generally frugal by nature (with some occasional splurges and indulgences, e.g., travel and fine dining) but I have always wanted to buy my dream home, a 6,000 sq ft home on the water with a wrap-around porch. In my market, that will cost me around $2.3 mm and $35,000/year in property taxes. I plan to wait for prices to correct, given how far prices have run the past few years.

    I am 42 years old, married, my wife is 41 years old, and have a 5 year old child. We make a combined income of $550,000 (2/3 me and 1/3 my wife) and earn about $55,000 per year in passive income on some rental properties and dividends in taxable accounts. Currently, we have about $60,000/yr in fixed expenses and spend another $40,000/yr or so on travel, entertainment, and eating out. We have a combined net worth just over $5 mm. The breakdown is $611,000 in cash, $1.6 mm real estate (3 homes worth $370,000, $925,000 and $813,000 with $480,000 combined in mortgages), $2.7 mm in stocks ($918,000 taxable, $103,000 529 Plan, and $1.67 mm retirement), $75,000 crowdfunding real estate, and $35,000 misc. assets. I drive an 11 year old Honda and my wife leases a new Honda for $218/month. We collect $6,300/month in rental income from the 2 rental properties but much of that is to pay expenses and the profit on those is baked into the $55,000/year passive income amount provided above.

    Can we afford the house?

    /x/ Trying to get ahead

      1. Trying to get ahead

        Northern New Jersey. Do you apply the same 3x metric if we put down a substantial down payment? Keep in mind we have $600,000 in cash to put down and can sell off some of the $900,000 stock portfolio in our taxable account plus we can sell our primary home for $800,000. Those 3 items get us all the way there to buy the house mortgage free but we were thinking of only selling part of the stock and maybe even renting our current home and then take a mortgage for $1mm or more of the money. Is 4.2x stretching it even though only half or less of it is on a mortgage? Does our stage of life effect anything. We bought our current home when I was 25 yo and spent modestly considering my income at the time (1.85x my sole income). Lately I have been wanting more but don’t want to be foolish either after spending the last 17 years getting where we are today. Appreciate your feedback.

        1. FinancialFree123

          What about buying a 3000 sq ft house instead? Furnishing a 6000 sq ft house will cost you $200,000 if you want the Devore to match the stature and value if the house :0

          1. Trying to get ahead

            My house now is over 3,000 sq ft lol. Maybe I just have my priorities messed up, but I just always wanted the grand home with a palatial 2 story entrance, but I don’t want to buy it at the expense of my financial future. Maybe some of this is “Keeping Up With the Joneses” but I feel that, if I am ever going to buy “the big house,” this is the time to do it. As my child gets older, it makes less and less sense each year because we will get less utility out of it as time goes by and then we will downsize at some point. We are also in a school district rated 7/10 and new town would be a 9/10. Many of my friends who live in more expensive markets like Boston or San Francisco need to pay $2mm+ just to get a decent 2,000 sq ft home in a decent area. That’s partly how I was justifying this to myself. I live in a much lower cost market (although not compared to the nation as a whole) where you can get a nice normal home for 650-850k, but that does come with an hour commute each way to NYC. If I use the 3x income or 1/4 net worth metrics, I will need to kick the can another 5 years and by then, I will have a 10 year old and may just stay where I am to avoid switching school districts, etc.

            1. Pamela Webster

              Have you considered the potential damage that a storm(s) could cause to a waterfront home. Damage caused by water and wind to waterfront homes on lakes and oceans can be severe. As an East Indian friend said to me after a spring flood caused severe damage to homes on a river…there is a reason why wealthy people in my country (India) live in the hills.

    1. Tryingtogetahead:

      I use a 1:4 rule of thumb myself. In round numbers, I’m at $10M net worth including my homes.

      I wouldn’t let personal use real estate go much beyond 25% of my net worth at any time. Coincidentally, my homes (fully paid for) are worth approximately $2.5M.

      I find this a very useful guideline and have discussed it with other aspirationals many times. It seems to keep their egos in check. You are in a different (higher) snack bracket but you may still find the advice useful.

      1. Trying to get ahead


        Thanks so much for your feedback. That’s actually a great way to look at it that I hadn’t considered. It goes to show you the usefulness of this forum. Currently my house is worth 813k so that’s 16% of my net worth. Do you mind me asking you what “snack bracket” means and how old you are? I only ask b/c I’m curious given your high net worth. I’m on track to hit $10mm by age 48 but let’s see what happens. My household income is about to go up but who knows what to expect from the market…

        1. Congrats, you are doing incredibly well. We’re in the same rough snack bracket for all intents and purposes – that is, ~ $10M in net worth under say 55 years of age.

          I think that $10M net worth bracket opens up a lot of possibilities, primarily the opportunity to secure your financial future forever by avoiding mistakes using prudent risk management, diversification, tax efficiency, and careful execution of a long-term plan for the next 40 years.

          In your case, you are also producing very high net family incomes with the potential for extreme saving. I think your saving rate is much more important than your investment plans. You have and can continue saving your way to riches. Just avoid mistakes – like buying expensive housing assets (that don’t produce income) that eat up too much of your otherwise productive capital base.

          I strongly believe

    2. Givemeadvicetoo

      In our early thirty’s, we built a 7500 sq ft home for $1.5M. We paid it off within 5 years. Home theater, game room, custom pool and all. The biggest benefit (which is really big) is enjoying our now mid teenage kids enjoy it with their friends. Another big benefit is it forced us to build equity into real estate rather than blowing the money on consumables. BUT, I would definitely not do so much all over again (you can get 3K-4K sq ft with lots of great upgrades for far less). Why do I say this? A residence is not a great long term financial investment. My home is only worth what I paid for it about 12 years ago, but I paid hundreds of thousands in furnishings, real estate taxes, repairs that never end, landscaping, pool maintenance, association fees, wife wants upgrades, pool and solar problems, (and on and on). Remember things/possessions always age/break down (repairs take not just money but more importantly consume your time), financial stress can cause marital problems, things loss their appeal over time, you may be forced into more modest travels, etc. Around the same time I built, I bought a Ferrari and two very high end BMW’s.

      Your (our) dreams will change as you (we) get wiser. My dreams were like yours.

      What’s my dream now? – 2000 sq ft with minimal maintenance/lawn and an old beater to drive so I don’t worry about every pebble that hits the windshield or scratch my kid puts on it as she learns to drive. But now I’m stuck because I’m the only one that shifted my “dream”. I dream of simplicity and freedom now. And with all that my income is comfortably 7 figures now – it’s the hassles more than anything. Lifestyle creep ultimately stinks for lots of reasons.

      Not trying to discourage – I did it but my lesson now for you is simple is my dream and how I act now. Just take a step back and make sure your dream is what you (and your spouse) really want after thoughtful consideration and advice. I do think unless your income grows you can be more house poor than you think, given so many ancillary expenses associated with owning such a large home. Been there, done that. Have in depth conversations together. Will she want to stop working if you have another child?

      Generally any large purchase done impulsively or with high emotion tends to be regretted (stocks, home, car or otherwise) after the fact. This decision is a very big one, no need to rush. Yes interest rates are going up, but you can also build more cash reserves if you take the plunge to minimize monthly loan burden.

      We’re mid 40’s with about $10M net worth. So liberating to want absolutely nothing. I don’t want to worship the false god of possessions any more. Empathy and generosity to others will fulfill you more than a 50,000 sq ft home.

      Wish you well.

      1. Trying to get ahead


        Thank you for the advice. Your note was very thoughtful. My wife and I both read it a few times and discussed it. I can see where you are coming from with changing goals because our goals have already changed since we bought our current home. We wanted to be the millionaires next door and now we are considering inflating our lifestyle. The more we talk about it, the more we are going to hold off and think about it because there are implications that extend far beyond just the house itself. Thanks for taking the time to respond.

  15. Sam,

    It usually takes a few days to ACH funds from one bank to another brokeage firm. So by the time I have new funds to buy stocks, the market may have gone up substantially as attested by today – S&P is up 1.94% as I am writing.

    I have a BoA account as well as a ML Edge account. You can transfer funds from BoA to ML and buy securities right away. However, I typically do not keep a lot of cash in my BoA checking account as it only earns 0.01% interest.

    How do you handle a situation like that?



    1. One way is to keep your cash already deposited in your brokerage account so you always have it ready. Another way is to just ask your brokerage account if they have a system where they provide instant credit for purchase after a fund transfer is made.

      This is what I have for my brokerage account even though it takes three days to hit.

        1. Other ways – invest the idle cash, if you meet the minimum dollar threshold, in your Merrill Edge brokerage account using Merrill Edge Preferred Deposit program, paying 1.97%. When ready to trade, call for same day transfer.

          Or open accts at E-Trade or Ally Invest. Both brokerages have high yield bank accounts (1.90%) tied to their brokerage accounts and will do same day online transfers to and from.

    2. Michael Hurley

      Hey Frank Wang – I also have BoA and ML Edge. ML offers a 1.82% Preferred Deposit account that is completely liquid and can be used instead of a savings account. This is where I keep all my dry powder for weeks like this and last. The BoA checking account only has enough to pay one months worth of living expenses at any point in time. Every dollar is at work, all the time, one way or another.

    3. I use Ally Bank as online savings and brokerage which enables same day transfer between accounts.

  16. I hold stocks for the dividends. I don’t worry much about volatility as long as the dividends aren’t cut.
    If the market takes a nosedive, stocks are on “SALE”! More dividend per dollar.

  17. Great advice here. “No pain, no gain” but timing is everything. This is how I look at stock market investing, and it sure has been painful in the past few days. On risk tolerance, it is somehow associated also with age. I was once an aggressive investor (high risk), I’d say about ten years ago but my time and my financial situation have changed. Investing should not be stressful. Controlling our emotions is the key. I once used to be that type of person who sells out when I’m stressed out.

  18. Love the post! I feel like most people say they can handle the risk, but end up selling in market downturns and then buying again once the markets go back up. Personally, as a young person, I buy more shares of index funds and will hold until I retire. If anything, I am excited for market downturns as it provides an opportunity to put excess cash to work while assets are at a discount like you mentioned.

    Keep up the good work!

  19. Hilarious post image and title. I definitely know the feeling! What has helped me is not logging into my accounts too often unless I have cash to deploy. I realize that isn’t possible for some people especially those who follow the markets closely but it has worked ok for me. I have a very long focus so I try not to mess with my accounts too much but I do remain diligent about saving and putting cash to use at least once a quarter.

  20. RE: Historical returns in this post

    What kinds of stocks and what kinds of bonds?

    S&P 500? Treasuries, Corp, etc?

  21. Givemeadvicetoo

    Great article on treading in more dangerous waters. I take risk very seriously – too seriously to where I think it limits our returns. That being said, wife and I went from a net worth of about 0 upon finishing my education/training age 27 to about $10M at current age of 45 (she’s 44).

    This is how I mitigate some of the volatility risks personally. Doesn’t mean my way is right for everyone, and I appreciate how I do things now may be different than how I did at the onset of my career, at $500K net worth, at $1M net worth, at $3M net worth, etc. More wealth = more choices.

    1- Diversification both within and outside of the stock market are key for me. As a matter of fact, most of my growth is outside of the lofty stock market at this point. Only about 15% of my NW is in the markets. 85% is not. Let’s talk about each.
    A- I hold about 12 mutual funds in the markets currently. Going with index funds is more steady than what I do here, but I generally prefer sector funds for me that are currently in healthcare, biotechnology, technology, semiconductors, Nasdaq, China, broader international. Returns last 12 months 12%. I think dollar cost averaging is fine at the beginning of a bull run or during times of low volatility. Right now I prefer CONSIDERING buying on the dips after I see proof of stabilization. I did so in February, I am considering it again right now, but am not certain yet if I will be a net buyer or seller until the next major recession. So what do I do with the cash on hand, read the next section about the other 85% of my assets.
    B- The other 85% of my assets/investments help to diversify in a market where volatility is returning or in a bear market. I have another 15% of NW in cash currently earning 1.5% in a savings account, looking to move into a CD at 3% to be held until after the next recession, to be used as gunpowder for the next bull run. This is very safe money, which is also a cushion for my business which allows me a 7 figure take home income and growing. Business ownership is a great way to also propel unlimited earnings potential while cutting work hours to other workers as the business grows. Another 45% of my NW is in commercial real estate generating about $300k/yr in revenue – another form of diversification and good to have when markets turn bearish/volatile. Remainder is in primary residence and value of the business, which hopefully will continue to appreciate as I approach full retirement age of 67.
    2- I live in a low COLA area, helping to preserve and grow wealth without taking on excess risk.
    3- Couponing. Yes, given my business ownership it probably saves me at least tens of thousands every year (possibly into the hundreds of thousands).
    4- I like my cars but buy all lightly used (5K-25K miles). To me, the huge savings here equate to more money for all types of investments.
    5- Private school for my kids since elementary. This is one of the best investments I can make to ensure they will not be coming to me for money (most of the time) in adulthood.
    6- Don’t smoke, don’t drink, good BMI don’t take health any health risks. Never hospitalized. Health = wealth.
    7- No shortage of scams out there. There are no shortcuts. Don’t invest with a friend or a solicitor.
    8- Surround yourself with like minded people and learn from those who are wealthier, rather than criticism or jealousy. I have friends worth 10X myself.
    9- It’s only money. Grow it, protect it, don’t obsess over it. Love what you do and it will come. Carpe diem, tomorrow will take care of itself.
    10- When you have enough, buy time – your most valuable asset.
    11- Tithe and help others around you. It’s good for the soul.
    12- Don’t let stubbornness or political polarization adversely impact your financial decisions. Know we all make mistakes and know what you do and don’t know. This will cost you in returns.
    13- I personally don’t understand the FIRE thing very well, it scares me not just financially but fear of boredom and limiting services to my fellow citizens is on my mind. FIRE seems risk in volatile/bear markets. One thing I know, I am confused about more financial things than not, so I learn from everything you all post!

    1. Good stuff and nice net worth surge! What type of business are you in?

      Some questions:

      1) With $10M+, do you still feel you don’t have enough since you said “when you have enough, buy time” and are still working?

      2) How do you know your kids won’t come to you for money after sending them to private school since they are accustomed to you paying lots of money when the alternative is a free education? I would feel they might feel entitled to money more since their friends are probably wealthier than average too.


      1. Givemeadvicetoo

        I am a family physician and she is a pharmacist. We own our three provider medical business (with a pharmacy) and about 20,000 sq ft in commercial real estate that we lease to other doctors. I still see patients 4 days/week – I’m only 45 and love the work. However, one way I buy time is, every time I hire another provider, I plan to cut back 1 day/week. We started our careers about 18 years ago with a combined income of about $350,000 which has grown since comfortably into a 7 figure take home for about 4 years now and growing steadily.
        $10M NW sounds like a a great place to be and it is, but is different as a business/real estate owner vs that net worth as an employee (ie hedge fund manager). Consider our expenses are approaching $100,000/month, of which only about $10,000/month is personal – we live in a low COLA.
        Regarding the two teenage children, let me clarify. I already have in mind to pay all/almost all of their college/graduate school expenses (and all expenses including vehicles and housing during this time), their wedding expenses, and probably contribute some assistance if they decide to go into business for themselves. What I don’t want them to do is need me to bankroll too many unplanned expenses, so they are well grounded financially for themselves.
        We do struggle with how much to spoil the kids as you are right, their close friends are from multimillionaire families. My kids enjoy a 7500 sq foot home with a true theater room, game room and a luxury pool, my daughter competes equestrian and they enjoy getting picked up at school in a $200K convertible super car. Like other households like mine, we worry about our children’s work ethic. I was born as an ethnic minority in a third world country, they’ve never experienced that need and hunger for a better life. I pray about these things much more than I worry about a volatile market – I’ve diversified for that but not prepared for how the kids will turn out. My free time is heavily committed to molding their moral character, work ethic, and self-reliance.

        1. Trying to get ahead

          Did you give any thought earlier in your career to living far below your means and practicing stealth wealth so your kids wouldn’t know how wealthy you are so that they wouldn’t be influenced by all the material possessions and access or did you feel you couldn’t replicate your upbringing so it didn’t make a difference? I grew up in a working class environment with parents who dropped out of HS so I am concerned by kid will also lack the same motivation and drive you speak of.

          1. Givemeadvicetoo

            Despite my possessions, one would probably still say we live well below our means. Our total personal annual expenses are only about 10% of our annual take home income.

            Regarding stealth wealth, I did not realize the impact of what I had on the kids perceptions. They were 1-3 years old when we accumulated the house, cars, etc.

            I just have to mold the kids perceptions daily so they don’t accept what’s around them as the only reality. They are doing well, but I have to be much more involved than my parents were with me because I had the motivation that they have less of.

  22. My Ibonds from 2000 actually outperformed the stock market until the recent runup last year. Goes to show you the turtle wins the race.

  23. Thanks for this post. Good to see veterans who have seen the ups and downs put things in perspective during a recent downturn.

    I’ll be sure to have enough cash reserve for a relaxing vacation when everything goes to he’ll. Something most people don’t budget for and usually the last thing on their mind when markets correct, capital dries, realty corrects and workforce reduces simultaneously. When it rains it can pour right? Why not head off somewhere sunny n thr meantime. Hawaii souns good.

  24. You lay out a good set of steps to follow for managing your emotions during stock market volatility. Having a plan within your risk tolerance goes a long way toward making any knee-jerk reactions during market turbulence.

    Biologically speaking, the thalamus receives sensory information and immediately relays it to two other parts of the brain simultaneously, the amygdala and the prefrontal cortex. The former governs our emotional responses while the prefrontal cortex dictates our rational thinking.

    The amygdala has an evolutionary advantage whereby it receives information from the thalamus in 12 milliseconds as compared to the prefrontal cortex’s 40 milliseconds. The 28 millisecond differential lends the human mind to making decisions based on emotion and not reasoned thinking. As a result, humans prioritize survival over maximizing opportunities. This is why market losses terrify us and make us want to sell first and ask questions later.

    If we can hang on for those 28 milliseconds and allow our prefrontal cortex to catch up, we can perhaps make better investing decisions. We can’t control what comes into our brains, but we can control the outcome of how we act.

    Having a plan is a built-in way of giving your prefrontal cortex a fighting chance. The rest of your list assists. As you say, stock market corrections will happen. Are you prepared?

  25. Thanks for actually giving the returns and risks for the various weightings of stocks:bonds (I am not sure if it was a typo but I found it strange in the example above that 50:50 and 60:40 weightings had the exact same numbers for both.

    I think because I have some relatively solid passive income streams coming in plus a larger percentage of money in real estate which does not have the wild volatility of Mr. Market, I have smoothed out my portfolio some.

    Before I discovered index funds (way too late in my opinion) I was much more influenced by the day to day volatility of the market. You have to keep apprise of the environment as it pertains to your particular holdings because there is a chance that it could go down to zero (blockbuster, radio shack, etc). That is essentially eliminated with the index fund philosophy (and if it ever did go down to zero you have much bigger things to worry about than money at that point).

  26. Simple Money Man

    I buy into dips when I can. Sometimes I have to sell in rallies, but this also realigns my asset allocation and provides funds when the dips happen.

  27. I dealt with this in 2000 and 2008 again. When times are “good” you need to take care of yourself.

    pay down debt
    emergency fund
    multiple income sources

    Market cycles come and go…

  28. Your plan is very methodical. That’s the best way to do it. Investing shouldn’t be emotional because people react badly to volatility. I’m much more conservative than 10 years ago too. In 2008, I had 100% equity and I didn’t mind the swing much. It was a little nerve-racking, but I kept investing. Having gone through the dot com bubble really helped.

    Now I have some cash cushion and 25% bond allocation. This will help cushion the volatility and give me some dry powder in case the market drops more. I plan to reduce our bond allocation if the market drops more.

  29. Definitely a timely article Sam. It’ll be interesting to see how long it takes the market to recover from this most recent pull back. It’s a nice unexpected sale for equities that are making for a fun October.

    I lean closer to a 5% cash reserve. I call it my LPO (large purchases and opportunities) fund. The market has regularly provided opportunities to deploy it at great equity prices. Always nice to buy dollar bills for .75 cents.

  30. My approach is pretty boring, but it works. I just keep on dollar cost averaging into the market with every paycheck. Pumping up my 401k and HSA each pay period whether the market is up or down and riding out all of the volatility.

    I’m seven years away from pulling out of work, so I still have time before I have to worry too much about an extended bear market.

  31. Just know that whatever you think your risk tolerance is, you’re likely overestimating it by at least 10%.

    I think the above is an accurate point, and possible understated. From my anecdotal experience with friends in the 2000 and 2008 downturns they “said” they were not going to do anything only to later tell me they sold quite a lot. We didn’t get into percentages, but it just goes to show that most folks perceptions of their own risk tolerance is untested until, well, it’s tested.

    And that First Trust chart is great, best visual representation of the bull/bear cycles I’ve seen in a while. Thanks for posting.

    1. Dave,

      In my case, I did not sell any security I owned hoping the value would come back. However, some firms were brought by others and some went under. Examples: Sun Microsystems, Lucent Technology. They were not small companies. Let alone other small cap tech firms went under.


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