In my beginning of 2021 review, I mentioned feeling uneasy about the state of the economy and the markets. That uneasiness hasn’t gone away based on my observations and some of the feedback I’ve recently received. Let me share a couple examples of concern and why you should worry about the stock market in 2021.
For reference, see my 2021 predictions for the stock market, real estate market, and 10-year bond yield.
A Daughter With COVID Asks To Be Picked Up
One of the reasons why you should worry about the stock market is because people are clueless and/or selfish.
My friend’s cousin has a daughter at UC Santa Barbara. She is a freshman who wanted to get the full in-person college experience.
About a month ago, she started telling her dad that many of her dormmates were getting COVID. She was beginning to get worried.
A month later, she got COVID and asked her 56-year-old father to immediately drive down and pick her up.
I asked my friend what if the daughter gave the father COVID during the 5-hour drive home? He said he and his cousin hadn’t thought about that.
I then asked him if the father was living alone. He said no. The father was bringing his sick daughter home to her mother and two siblings. Huh?
I’m not sure why the daughter didn’t just quarantine at UCSB for a couple weeks since she was already sick. Potentially spreading the virus to her family and others didn’t make sense.
But their actions do make sense because we are always looking out for our own interests first. Whether it’s a Governor shutting down public schools, but sending his kids to private school or a Senator flying his family to Cancun while his state freezes, we are always looking out for #1.
Therefore, if you find someone who is truly looking out for you, hold onto them for dear life. It is due to most people looking after themselves that I fear this pandemic will linger longer than expected. Someone is bound to mess things up.
Thankfully, COVID cases have dropped by more than 75% in the past six weeks.
A Preschool Teacher Leveraged To The Gills On Margin
The other main reason to worry about the stock market is because retail investors are using margin to invest.
A friend of mine is a preschool teacher. He makes roughly $70,000 a year. He helped me get into Tesla stock in 2018, which I am thankful for.
As we got to discussing the future of Tesla, he revealed to me he bought more stock on margin recently. I thought he had about a $250,000 position in Tesla, which was already a lot based on his income.
When I asked him how many shares he owned now, he said, “over 1,000!” In other words, at one point, he had about $900,000 worth of Tesla stock!
I’m not sure how he keeps getting new funds or how much he can borrow from his brokerage account. However, he did say he “only has to pay a 7% interest rate on his margin.” He’s addicted to growth stocks when valuations are sky-high. Dangerous!
No matter how hard I try to encourage him to de-leverage, he won’t. He’s adamant Tesla will continue to fly to the moon (I hope so). He needs to get rich. He wants to achieve financial freedom now!
Meanwhile, the stock is down about 20% from its 2021 high. But on margin, his decline is closer to 40%. He truly has “diamond hands.”
Investing On Too Much Margin
Investing FOMO is the most difficult type of FOMO to overcome. Unfortunately, I’m sure many retail investors are margined-up. And when the great unwind comes, it is going to be FUGLY!
Take a look at this chart showing margin debt growth. It has gone vertical since 1Q2020. This chart clearly shows that there will be a significant correction in the stock market at some point. You should worry about the stock market in 2021 due to margin debt.
Please Talk To Someone About Your Investing FOMO
If you are suffering from an intense amount of investing FOMO there is a high chance you have excess risk exposure. Either that, or you’re considering doing something brazen with your capital.
Please talk to your spouse, your parents, or an elder about your current investment portfolio. Discuss with them your financial goals and your investment philosophy. Tell them to give it to you straight!
If you want to talk to a professional financial advisor for free, Personal Capital is running such a promotion. It usually costs $799 to talk to a qualified financial advisor who is a fiduciary.
After you link up your investment accounts, a financial advisor will run through your investment portfolio, provide asset allocation advice for your situation, and share what else s/he is seeing other clients do. Learning what other people with similar amounts of wealth are doing is the most interesting part IMO.
Make Sure Your Asset Allocation Is Appropriately
The quest for wealth can be a psychological mind bender. It’s one of the reasons why all of us think we’re middle class, no matter how wealthy we get! Make sure you have the proper asset allocation of stocks and bonds by age.
We’ve made so much money in recent years, it would be a shame to lose it all and then some. Leverage is a killer on the way down.
When possible, consider converting some of your funny money gains into real assets. It’s one of the best ways to get rich and STAY rich.
Invest More In Real Estate
Real estate is my favorite way to achieving financial freedom because it is a tangible asset that is less volatile, provides utility, and generates income. Stocks are fine, but stock yields are low and stocks are much more volatile. The -32% decline in March 2020 was the latest example. However, real estate held steady and appreciated in value then.
Given interest rates have come way down, the value of rental income has gone way up. The reason why is because it now takes a lot more capital to generate the same amount of risk-adjusted income. Yet, real estate prices have not reflected this reality yet, hence the opportunity.
Take a look at my two favorite real estate crowdfunding platforms that are free to sign up and explore:
Fundrise: A way for accredited and non-accredited investors to diversify into real estate through private eFunds. Fundrise has been around since 2012 and has consistently generated steady returns, no matter what the stock market is doing.
CrowdStreet: A way for accredited investors to invest in individual real estate opportunities mostly in 18-hour cities. 18-hour cities are secondary cities with lower valuations, higher rental yields, and potentially higher growth due to job growth and demographic trends.
I’ve personally invested $810,000 in real estate crowdfunding across 18 projects to take advantage of lower valuations in the heartland of America. My real estate investments account for roughly 50% of my current passive income of ~$300,000.