Contingency Plans For A Digital Bank Run

When the S&P 500 futures were pointing to another -5% opening on February 6, 2018 I got excited. After all, the S&P 500 closed down 4.5% on February 5. I get aggressive whenever the stock market corrects by 10% or more because history has shown positive returns in subsequent days and months.

History of stock market corrections

The initial down 5% move was blamed on the 10-year bond yield jumping to 2.85%. But since the 10-year bond yield declined from 2.85% to 2.75% after the 5% stock market drop, and futures were signaling another 5% drop in the stock market, I figured it was time to deploy some significant cash. Fundamentally, corporate earnings growth and economic indicators were still sound.

Armed with $200,000, my plan was to use $100,000 to buy the morning gap down and deploy the remaining $100,000 throughout the day just in case the stock market panicked even further (you just never know). I set my alarm clock for 6:15am just in case, brushed my teeth, sat on the toilet, and fired up my Fidelity account to put in my $100,000 buy order.

Preventing A Digital Bank Run

Tried to log on between 6:25am – 7:30am and couldn’t

Of course, when I tried to log onto Fidelity, I couldn’t! I remember this happening to me several times in the past. So, I just kept on trying, all to no avail. While all the previous times, failure to be able to log on immediately was simply annoying, this time it was important because I had some serious cash to put to work compared to my usual $5,000 – $20,000 buy orders.

As you probably already know, the market went from down ~4% at the opening to finish up ~2% that day. We’re talking a 1,000+ point swing on the Dow. My inability to place timely buy orders caused me to lose out on potential gains of up to $16,000. Once I finally got online, I ended up investing only about $20,000, or 10% of my original plan for that day as prices were not as attractive.

I wondered whether other people had the same issue of not being able to log onto their online brokerage account. From the feedback I got over social media, it looks like Fidelity, Merrill Lynch, TD Ameritrade, and some robo-advisors went down as well.

Could it be that financial institutions are purposefully shutting their digital doors to prevent a bank run? I run a website and have had many talks with my system administrator on how to keep Financial Samurai up 99.9% of the time. You would think with multi-million dollar technology budgets, online brokerage firms wouldn’t have frequent outages anymore.

The only time Financial Samurai was down for more than several hours was when a construction worker accidentally sliced a main internet cable underground. Whenever there is a traffic surge or anticipated traffic surge on Financial Samurai, we have proper caching in place. I could tap some keys to shut down my site as well, but I won’t.

If the online brokerage firms are not purposefully shutting their digital doors, then there is some serious incompetence going on because people’s livelihoods are being affected.

Merrill Lynch trading downIf you are an investor, you’ve got to ask yourself this question: during a large and sustained market correction, will you be able to place trades or access your capital?

Based on the historical track record of online brokerage accounts, it’s hard to say yes with full confidence. Therefore, it’s important to develop a contingency plan in anticipation of the next bank run.

Please note I’m not a trader. I’m a long term investor who is trying to build a risk-appropriate portfolio to provide a financial tailwind for my family. Given I have dependents, I need assurances my money will be there if truly needed. If you are a trader, having a contingency plan is important as well because you could miss out on big gains or get wiped out if you cannot exit.

Contingency Plans When Market Freaks Out

1) Have two or more investment accounts. During the Fidelity outage fiasco, I kept trying to log on to their site for 45 minutes until I gave up and decided to do something else. I could have bought stock in my Citibank wealth management account, which was accessible, but by the time I remembered to do so, the stock market was already in the green and I didn’t want to chase. Therefore, the next time there is some huge market move, have all your investment accounts ready to go at once. Unless there is some type of online brokerage conspiracy, hopefully at least one of your accounts will work.

2) Create staggered limit orders before the market is open. I could have potentially bought the gap down on February 6, 2018 if I had put in staggered limit orders the night before or way early in the morning. For example, if the futures were portending to a 5% gap down, I could simply put a limit order on a S&P 500 index fund 5%, 4%, and 3% lower. The same goes for buying individual securities, but their opening prices will be harder to gauge. I just don’t like putting in large limit orders because things change so quickly.

3) Make a phone call. It never occurred to me in this digital age that I could just call Fidelity to place a trade. Perhaps they would have jammed me with a 10 minute hold period, but I don’t know for sure. Again, everything was moving so fast that by the time I could have gotten hold of a live person, the markets would have moved. Therefore, the strategy is to call before the market opens to deliver the trading instruction before things get too hectic. It’s just hard to know exactly what the market will do because the futures market isn’t a 100% reflection of normal market trading.

Dow Jones intraday chart during Feb 6, 2018 panic

Feb 6, 2018 DJIA intrada day chart. Tried to buy the open but couldn’t, then the Stocks app on my iPhone froze, hence the straight line.

If There Truly Is A Bank Run

So far, we’ve just discussed three no-brainer things we can do if we wanted to make a trade, add, or withdraw capital. You’re never going to get your timing right, even if you are a full-time trader, so don’t beat yourself up too badly if you miss things. But if you can envision things getting really bad, then it’s probably a good idea to spread around your capital across various banks, and limit each account to $250,000 per person.

The standard FDIC deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured bank, per ownership category. Deposits held in different ownership categories are separately insured, up to at least $250,000, even if held at the same bank.

For example, a revocable trust account (including living trusts and informal revocable trusts commonly referred to as payable on death (POD) accounts) with one owner naming three unique beneficiaries can be insured up to $750,000. This is straight from the website.

If you shorted volatility, you got taken out on a stretcher

During times of uncertainty, everybody needs to do a thorough rundown of their cash holdings. It’s cash that allows you to survive a prolonged downturn without having to sell anything at fire sale prices. It’s cash that allows you to take advantage of panic selling. And it’s cash that allows you to sleep better at night so you can be energized to take care of your family every day.

As for the future of the stock market, I’m still relatively bullish if the 10-year bond yield doesn’t breach 3%. I don’t want to see another 5%+ gap down again, but if there is, I’ll be ready to buy.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Related: Things To Do Before Making Any Investment If You Don’t Want To Lose All Your Money

Readers, have you ever been blocked from accessing your online investment account? Do you think these financial institutions purposefully deny access to stem any large transactions? How do you protect yourself from a digital bank run? Is this the beginning of the end of the bull run?

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It’s Time To Start Worrying About The Housing Market Again

Housing bust fearsDespite publishing cautionary posts about investing in the stocks, bonds, and alternatives at current levels, the biggest caution I should be writing about is taking out massive debt to buy property at record highs.

If you lose 50% on your stock and bond portfolio, you’ll be upset, but fine. If your property loses 20% of its value, however, this means you’ve lost 100% of your 20% downpayment. In this scenario, you’ll also probably still be fine – if you don’t have to sell. But when property prices correct by 20% or more, many people become forced sellers because they’ve also lost their jobs.

I understand that millennials are coming of buying age and inventory is on the decline, making competition for buying a home fierce. However, only if you are fully cognizant of the following points I’ve highlighted below should you proceed with a property purchase today. 

Things To Know Before Buying Property in 2018

1) Rents have softened from peak levels in many of the most expensive cities. Given property prices are a function of rental income multiples, a real estate buyer should be looking to buy at similar pricing discounts from peak rental periods. For example, research whatever comparable New York property you want to buy today that was sold for in March 2016 and aim to buy at a 14.8% discount to the March 2016 price because that’s how much rent prices are down.

In 2017 I experienced softening rents first hand when I tried to find replacement tenants for my SF rental house at  a similar rent of $9,000 a month. After 45 days of aggressive marketing, I only got two offers, both for $7,500 (-16.7%). I even hired a rental listing agent for two weeks to find people for at least $8,000 and he failed. As a result, I sold. Pricing pressure starts at the most expensive markets and works its way down. The large supply of condos in many expensive cities has really put a damper on rents and housing prices.

Buying at peak prices when rents have fallen from peak levels means you are paying a higher valuation. This is a dangerous scenario when prices are at record highs.

Rental prices softening around the country

Rents in 12 of the most expensive markets as of January 2018

2) Mortgage rates are rising. With the surge in the 10-year bond yield to 2.85%, mortgage rates are following suit. My last mortgage refinance was in 2016 when I locked in a 5/1 Jumbo ARM at 2.5%. This same mortgage is now 3.58% based on the latest rates. In other words, if I were to take out the same mortgage today, my monthly payment goes from $3,951 to $4,535, a 14.8% increase. A 14.8% increase is significant because average income only increases by ~2% a year.

5/1 ARM Rate Chart 2018

5/1 ARM Mortgage Rate Breaking Out

While 3.58% is still relatively low for a 5/1 ARM, everything is relative, especially since property prices in some cities have risen by double digits since 2012. If the average interest rate for the 5/1 ARM were to rise to recession levels 10 years ago, a $1,000,000 mortgage payment would go to $6,321, a whopping 60% increase.

5/1 ARM 10 Year Historical Chart

10 year history of the 5/1 ARM mortgage rate

Here are the latest mortgage rate averages as of February 2018. You can check for a free quote hear with LendingTree, a stock I should have bought for under $100 a share when I first met up with senior management a couple years ago. TREE has tripled in price.

Latest mortgage rates 2018

3) Prices have blown past their previous peaks in many cities. While every city is different, if you look at the prices in Denver and Dallas, you’ll find that the prices are roughly 45% higher than they were in 2006-2007. This price performance is similar to San Francisco’s. Meanwhile, hot cities like Seattle and Portland are only about 20% above previous peaks.

The US median existing home price is about 12% higher than its previous peak, which is a modest rise since over 10 years have passed. As a real estate investor, your goal is to invest in markets that have both underperformed and have the potential to catch up.

San Francisco historical home price and home sales by year

Do you think you should be selling or buying at these prices?

4) Tax reform takes time to negatively impact housing prices. Conceptually, we all know that limiting state income and property tax deductions to $10,000 and limiting mortgage interest deductions on new mortgages up to $750,000 are net negatives for expensive coastal city real estate markets. Until homeowners file their 2018 taxes in 2019, however, no financial pain will be felt.

Some will argue that lower income taxes will offset these deduction limitations. Perhaps. But nobody really knows for sure until 2019 tax returns are filed and accepted. Tax reform is a headwind, not a tailwind for coastal city property price appreciation.

5) It takes a while to recognize a peak. The housing boom that began in January 1996 ended in March 2006. But it wasn’t until the beginning of 2008 that people started to accept that the housing market had already peaked. Until 2008, property investors were still clinging to hope or at least were in denial that prices would no longer be going up. Once Bear Sterns was sold for nothing to JP Morgan in March 2009, people started to panic. Then Lehman Brothers went under on September 15, 2009, a full two and a half years after the housing market peaked. And things got even worse!

Below is a great chart that shows how badly housing prices corrected in some of our major cities. Notice how the previous boom lasted 10 years and the crash lasted 5 years. We’re now going into the 8th year of a bull market.

US housing price boom bust by city

Keep Your Unbridled Enthusiasm For Housing In Check

The mass media and the real estate industry will focus on strong demand, strong job growth, and a dearth of inventory as drivers for higher property prices in 2018 and beyond. If you look at property nationwide as a whole, prices will probably continue to go up in the low single digits percentage-wise.

However, if you look at individual markets, you are beginning to see cracks in the foundation. I don’t recommend leveraging up to buy expensive coastal city real estate as an investment at this point in the cycle. Look to the heartland instead, where valuations are much cheaper and net rental yields are much higher.

If you’re dying to buy a primary residence today, make sure you can withstand a 20%+ correction over a five year time frame, if history is any guide. If you don’t have a financial buffer equal to at least 10% of the value of your property after putting down 20%+, then you are not financially prepared for a downturn.

Too much debt is really what will kill you if we ever return to hard times. Buy a house to enjoy life instead of looking to make a profit. I doubt we’ll have a correction as violent as the last one given lending standards became far tighter after the housing crisis. All the same, please buy and borrow responsibly.

Related: Buy Utility, Rent Luxury: The Real Estate Investing Rule To Follow

If you are buying property in this market, what are your reasons for buying? What are your reasons for not buying earlier? What are some bullish and bearish anecdotes you’ve observed in your respective property markets? When do you think the peak of the real estate cycle is? What are some worries you have about the property market?

The post It’s Time To Start Worrying About The Housing Market Again appeared first on Financial Samurai.

Here’s When You’ll Become A 401(k) Millionaire

401(k) MillionaireThanks to the unrelenting rise in the stock market since 2009, there’s now a trend on social media to share your 401(k) balance, especially if it’s over a million bucks. Despite the distastefulness of bragging, just the fact that more people are talking about saving for retirement via their 401(k) is a good thing.

Make no doubt about it, being a 401(k) millionaire is very impressive given the maximum contribution limit has never been higher than 2018’s contribution limit of $18,500. When I was first able to contribute to a 401(k) in 1999, the maximum contribution limit was only $10,000. Check out the chart below for details.

Historical 401k Contribution Limits Up To 2018

Here’s When You’ll Become A 401(k) Millionaire

Given we know the various portfolio returns based on asset allocation in my post, How Much Investment Risk You Should Take In Retirement, one can simply do a little math to figure out roughly when someone will become a 401(k) millionaire if they are starting with $0, max out their 401(k) this year and every year after, and return the average annual return of the portfolio composition since 1926.

100% Equity Allocation (10.2% historical return): 401(k) millionaire in 18 years.

80% Equity / 20% Fixed Income (9.5% historical return): 401(k) millionaire in 19.5 years.

70% Equity / 30% Fixed Income (9.1% historical return): 401(k) millionaire in 19.7 years.

60% Equity / 40% Fixed Income (8.7% historical return): 401(k) millionaire in 20.5 years.

50% Equity / 50% Fixed Income (8.3% historical return): 401(k) millionaire in 21 years.

40% Equity / 60% Fixed Income (7.8% historical return): 401(k) millionaire in 21.5 years.

30% Equity / 70% Fixed Income (7.2% historical return): 401(k) millionaire in 22.2 years.

20% Equity / 80% Fixed Income (6.6% historical return): 401(k) millionaire in 23 years.

100% Fixed Income (5.4% historical return): 401(k) millionaire in 25.5 years.

100% Cash (1% assumed return): 401(k) millionaire in 44 years.

Of course, historical returns cannot guarantee future returns, but after a 10-20 year period of investing in your 401(k), your average annual portfolio return will likely begin to mimic the historical averages. Further, if your company provides a generous 401(k) match or profit sharing plan, then it is likely you will become a 401(k) millionaire sooner.

For those readers with more than $0 in your 401(k), simply find an online compound interest calculator and input your data for your specific results. The good thing is, all the numbers above can be considered the maximum longest amount of time it will take to get to 401(k) millionaire status in a normal market.

Let’s say I’m 40 years old with $500,000 in my 401(k) and will max it out every year. I’ve got a 70% Equity / 30% Fixed Income portfolio and expect to earn 9.1% a year based on historical averages. Using a compound interest calculator, I’ll simply input my current principal, annual addition, interest rate, plus a guess number in the Years to Grow field. When the future value equals roughly $1,000,000, you’ll know about how long it will take for you to achieve 401(k) millionaire status.

401k Millionaire

The Key To 401(k) Millionaire Status Is Longevity

I worked for 13 years for two employers and got my 401(k) balance up to ~$400,000. But once I left my job in 2012, I rolled over my 401(k) to an IRA. If I worked for seven or eight more years, I probably would achieve a $1,000,000 401(k) balance due to strong returns and great company profit sharing. But alas, I’m not a 401(k) or even a rollover IRA millionaire.

The key to 401(k) millionaire status is being able to work at an employer with a great 401(k) plan for as long as possible. The year before I left my employer, I was receiving ~$20,000 a year in company profit sharing.

Before you decide to leave your cushy job, please first calculate what you are forgoing in company benefits. The same goes for people who are contemplating leaving higher paying, stable jobs to go work for startups which may have no 401(k) plan or most definitely have no 401(k) matching benefit since most startups are loss making.

Let’s review my 401(k) savings targets by age and see when various age groups of savers may become 401(k) millionaires if they are able to work at a job with a 401(k) plan for several decades.

401k savings targets by age

Click to learn more about the methodology

Based on my 401(k) by age estimates, older age savers (50+) should be able to become 401(k) millionaires around age 60 if they’ve been maxing out their 401(k) and properly investing since the age of 23. If not, then best of luck with Social Security, a paid off house, and hopefully after-tax investment accounts.

Middle age savers (35-50) should be able to become 401(k) millionaires around age 50 if they’ve been maxing out their 401(k) and properly investing since the age of 23. I’m expecting to be a 401(k) millionaire when I turn 50 in 2027 by contributing to a Solo 401(k) plan.

Younger age savers (20-34) should be able to become 401(k) millionaires around age 40 if they’ve been maxing out their 401(k) and properly investing since the age of 23.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Treat Your 401(k) As An Insurance Policy

According to Vanguard, the average 401k plan balance was ~$100,000 in 2017 and the median 401k plan balance was ~$27,000. If you get to 401(k) millionaire status, pat yourself on the back.

The funny thing about your 401(k) is that it doesn’t really matter if you have millions in your account. You can’t tap the funds without paying a 10% penalty before age 59.5 anyway, so it’s more like a retirement insurance policy. What you should really be doing is building up your after-tax investment account aggressively so that you can retire well before you are 59.5.

As you’ve only got one life to live, you might as well figure out a way to escape the grind sooner, rather than later. Not a day goes by where I’m not thankful for aggressively building a portfolio of non-401(k) investments in my 20s and 30s to have the courage to leave my 401(k) behind.

Readers, when do you plan to become a 401(k) millionaire? Are you aggressively building your non-401(k) investment balance?

Recommendation: Run your 401(k) through Personal Capital’s 401(k) Investment Fee Analyzer to see how much you’re wasting in fees. I ran mine through and found out I was paying $1,748.34 a year in fees I had no idea I was paying. After discovering how much I was wasting on actively managed mutually fund fees that didn’t have a perfect track record for beating their respective benchmarks, I switched to low cost index fund ETFs. Their Investment Checkup tool also allows you to analyze your investment risk exposure and make appropriate adjustments. 

401(k) Fee Analyzer By Personal Capital

The post Here’s When You’ll Become A 401(k) Millionaire appeared first on Financial Samurai.

How Much Investment Risk To Take In Retirement: Various Portfolio Compositions To Consider

How much investment risk should I take in retirementCongratulations for being retired or having enough money to never work again! Don’t listen to the naysayers who tell you retirement life is boring. Be assured that only boring people get bored. One question you should consider thinking about, however, is exactly how much investment risk should you be taking.

In 2012, I retired from the salt mines because I thought I had enough to provide a humble life for a family of up to four in San Francisco. But once I stopped receiving a bi-weekly paycheck, reality hit home that maybe my passive income and side hustle income wouldn’t be enough. The fact that I tried to sell my primary residence in 2012 to live in an apartment 65% smaller and cheaper shows that I had reservations about whether it was wise to leave a healthy paycheck at 34. But I was determined to provide a free life for my wife and I both before the age of 35.

In early retirement, I concluded that I needed to take the least amount of risk necessary to maximize my chances of never having to go back to work full-time again. At the same time, I was still pretty young and it looked like the economy was recovering so I ended up constructing a 60%-70% stock and 30% – 40% bond portfolio with the hopes of achieving a 4% – 6% rate of return each year. Doubling my investments by the age of 50 seemed like a good enough goal to have.

But thanks to a bull market in stocks and bonds, my public investment portfolio returned more. And thanks to a strong recovery in San Francisco real estate, everything has turned out fine so far. I wasn’t smart, I just stuck to an investment framework that fit my risk profile.

But I “Missed Out BIG TIME”

In 2017, my public investment portfolio returned 15.9%. Given my annual return objective was only 4% – 6%, I was feeling pretty good about the performance. Then of course a reader left this lovely comment after reading my investment lessons from a surreal 2017 post. I wrote that due to uncertainty, I didn’t pile into stocks at the beginning of the year.

You missed out BIG TIME then. Seemed pretty obvious that the stock market would soar once Trump was elected despite what many so called experts said. Regardless of accomplishments, investors gained trust in the market again once a businessman was elected as opposed to another career politician (on either side).

Isn’t it interesting how all investment decisions are obvious in hindsight? Yes, my combined stock and bond portfolio underperformed the S&P 500 index by about 3.5%, but my stock only exposure outperformed since I was heavy in tech. I didn’t invest my entire portfolio in the stock market because I wasn’t comfortable with the risk.

For those of you who may feel bad about your investment performance or were criticized by others for not doing better let me share some following thought gems:

1) You’re already free. Money is a means to an end. If you’re able to earn or accumulate enough to be free to do whatever you want every day, you win. It’s much better to only be up 10% and do your own thing than be up 50%, but still have to report to someone.

2) Don’t forget the absolute dollar return. As someone who is close to retirement or in retirement, you’ve likely already got way more capital than someone who is still far away from retirement. Therefore, the absolute dollar amount you return is also much greater. It’s much better to be up $1 million on a 15.9% return than be up $100,000 on a 100% return.

3) Don’t forget all your other assets. You likely have a wide assortment of investments as part of your net worth compared to most Americans who have most of their net worth in their primary residence. Even if your public investments underperform, your other asset classes such as coastal city real estate, private equity, venture capital, real estate crowdfunding, venture debt, fine art, etc might outperform.

4) More money won’t make you happier. After you earn more than ~$100,000 a year in a non-coastal city or ~$300,000 a year in a coastal city, you won’t be happier. The same can be said with building a greater net worth beyond what you’ve deemed necessary to retire on. But if you want a specific net worth number, I will say anything above a $3 million net worth won’t make you much happier if you are truly free to do what you want and don’t have to make your partner work to enjoy your lifestyle.

5) It’s great to sleep well at night. All retirees know what it’s like to lose money because we’ve been through enough down cycles. When you can combine the freedom to do what you want with not having to worry about ever going to work because your investments are generating enough income, you feel like the luckiest person on Earth. Not only have you won the game, you get invited back as a VIP with front row seats and all you can drink and eat privileges.

Retirement Investment Risk Levels

Zero risk: Your baseline investment goal in retirement is to at least beat inflation. You can easily beat inflation with no risk if you invest all your money in treasury bonds. With inflation hovering around 2% a year and the 10-year bond yield providing a ~2.7% yield, you’re golden, forever. Treasuries will almost always yield more than inflation. So long as you hold your treasury bond until maturity, you will get all your principal back plus the annual coupon.

Minimal risk: The next investment you can make is to invest your entire liquid net worth in a portfolio of the highest rated municipal bonds in your state. You can find 20-year municipal bonds yielding 3.8% – 4% tax free. AAA-rated municipal bonds have default rates under 1%. In 15.5 years, you’ll double your money. So long as you hold your municipal bond until maturity, you will get all your principal back plus the annual coupon, if the municipality doesn’t go bankrupt.

Municipal Bond Default Rates By Grade

Moderate risk: The Barclays U.S. Aggregate Bond Index provides about a 5% annual return each year, depending on which 10 year time frame you’re looking at. You can take more risk buying individual corporate bonds, emerging market bonds, or high yield bonds. But overall, buying the aggregate bond index is a moderately risky investment. If you buy an index fund, you have no guarantee of getting your principal back. You are riding appreciation or depreciation and collecting coupons. Corporations can default or corporate bonds can lose principal value if a corporation experiences financial difficulty. There are no guarantees. If you bought Venezuela sovereign bonds you’d be down big as the government is in disarray and inflation is sky high.

Higher risk: The stock market has returned anywhere from 8% – 10% a year on average, depending on the time frame you are looking at. Just like in the bond market, you can buy all sorts of different stocks with different risk profiles. But as we know, the stock market can have violent corrections. See the recent number and magnitude of corrections below in the chart.

History of stock market corrections

Retirees will have a combination of different types of risk levels. The question to ask is what type of investment weightings one should have in each based on their risk profile.

There is no right answer because everybody’s risk tolerance is different. But we can start by looking at the risk / reward metrics of different types of portfolios.

Income Based Retirement Portfolio

Income based portfolios are what the typical, truly satisfied retirees should focus on. There’s minimal risk to principal and only modest medium-to-long term growth of principal. Given retirees are generally in a lower tax bracket, an income based portfolio is also usually more tax efficient.

Even with a super conservative 100% allocation in bonds, your average annual return would be 5.4%, beating inflation by roughly 3.4% a year and twice the current risk free rate of return. In 14 years, your retirement portfolio will have doubled.

With a 30% allocation to stocks, you could improve your investment returns by 1.8% a year. But if you are already satisfied with the amount of money you have, who cares about an extra 1.8% a year? The improved performance will make no difference in your lifestyle. With a potential improvement of 1.8% a year, you increase the magnitude of a potential loss by 75% (from -8.1% to -14.2%) based on history.

Income Retirement Portfolio Asset Allocation

Source: Vanguard

Balanced Retirement Portfolio

A balanced-oriented investor seeks to reduce potential volatility by including income-generating investments in his or her portfolio and accepting moderate growth of principal. This type of investor is also willing to tolerate short-term price fluctuations.

For most retirees, allocating at most 60% of their funds in stocks is a good limit to consider. An average annual return of 8.7% is more than 4X the rate of inflation and 3.3X the risk free rate of return. But you’ve got to ask yourself how comfortable you’ll feel losing over 20% of your money during a serious downturn. If you’re over 65 years old with no other sources of income, you will likely be sweating some bullets.

For the first two years after leaving work, my public investment portfolio was around 60% stocks / 40% bonds. Once I got out of early retirement mode by working on my online business, I got more aggressive in stocks because my business income began to surpass my investment income.

Related: Ranking The Best Passive Income Investments

Balanced Retirement Portfolio

Source: Vanguard

Growth Based Portfolio

To be comprehensive, let’s take a look at the risk / reward metrics for portfolios with 70% – 100% allocations in stocks. These portfolio allocations are mostly for those who are looking to build a retirement nest egg you’ve already built.

Even with a 100% allocation in stocks, the average annual return is only 10.2%. But there have been 25 years of losses out of 91 years, and in the worst year you would have lost 43% of your money. Losing 43% of your money is fine if you are 30 years old with 20+ years of work left in you. But not so much if your goal is to spend the rest of your days cruising around the world.

Unless you retired before the age of 50, have a variety of passive income streams, run a lifestyle business, or have a net worth equal to over 30X your annual expenses in retirement, I wouldn’t have greater than a 70% allocation to stocks.

Related: Target Net Worth Amounts By Age Or Work Experience For Financial Freedom Seekers

Growth Based Portfolios

Source: Vanguard

Eliminate Financial Worry In Retirement

How To Invest In Retirement: Various Investment Portfolio Compositions

Now that you know what the risk/reward metrics are for the above portfolio compositions, you can decide on an investment strategy that best suits your needs.

Don’t let money get in the way of a wonderful retirement. Your investments should be a relatively worry-free tailwind that ensures you never have to return to the salt mines again. If you are starting to worry about your risk exposure, then dial down risk by raising more cash or rebalancing more towards treasury bonds.

Yes, it can get annoying if you underperform your respective benchmarks. But you’ve got to remember that you’ve already won the game. Every single dollar you make above the rate of inflation is gravy. During bull markets, you’ll sometimes be able to return a greater amount from your investments than you would make at your job.

The pain of losing money is always much worse than the joy of making money. If you’ve already got all the money you’ll ever need, there simply is no point taking outsized risk.


The Main Types Of Risk Exposure To Be Aware Of

The Fear Of Running Out Of Money In Early Retirement Is Overblown

The post How Much Investment Risk To Take In Retirement: Various Portfolio Compositions To Consider appeared first on Financial Samurai.

The Best Financial Move I Ever Made Is Something Everyone Can Do

Best financial move I ever made is something everyone can doAfter warning about financial destruction due to scams and get rich quick schemes, I’d like to balance things out with an uplifting financial story. As part of my productivity push, I’ve been spending some time answering questions on Quora, a Q&A platform, instead of spending time answering questions on Financial Samurai where the answers are readily apparent in the content.

One of the questions I answered was: What is the single best financial move you have ever made in your life?

I selected this question because it made me think hard about positive choices. I’ve been too hard on myself lately with the responsibilities of fatherhood and being the financial provider for my family. This answer ended up getting a couple hundred thousand views and 5,000+ upvotes in only a week, so I thought I’d share it with all of you.

The Best Financial Move I Ever Made Everyone Can Do

Getting on a bus at 6am.

While a junior at The College of William & Mary, I got on a bus at 6am on a Saturday to go to an investment banking career fair. Nobody else boarded the bus.  So after 30 minutes of waiting, the bus driver drove me to his office and we switched to a Lincoln Town Car.  He then privately chauffeured me 2.75 hours from Williamsburg, VA to Washington D.C. Even though William & Mary was a good school, it wasn’t a target school of any of the major investment banks. Therefore, I didn’t have a nice schedule of official interviews lined up.

Nobody else was on the bus, so after 30 minutes of waiting the driver drove me to his office and we switched to a Lincoln Towncar where he privately drove me 2.75 hours from Williamsburg, VA to Washington D.C. Even though William & Mary was a good school, it wasn’t a target school by any of the major investment banks.

At the career fair, I chatted with a bunch of firms, but nobody gave me the time of day. I remember a snobby Merrill Lynch recruiter looked me up and down said, ”Nobody will take you seriously.” She was making fun of my blue tie which had a pattern of a teddy bear holding a balloon. A loved one had given me the tie so I wasn’t going to take it off for no one.

The only company that invited me to meet for a real interview was Goldman Sachs. The recruiter, Kim Purkiss and I had a long and intimidating conversation where she peppered me about my thoughts on the economy, stock market, and Federal Reserve. I don’t think she smiled once. A month later, she invited me up to Super Day at their world headquarters in NYC, all expenses paid.

I was shocked because GS was the #1 bank to join back in 1998. The firm was still private, so it had this incredible mystique about it. All the candidates I met came from private schools like Harvard, Yale, and Columbia and boarding schools like Exeter and Andover. Nobody came from a public college or public high school like me.

55 interviews and seven rounds over seven months later, I finally got a written job offer to join the International Equities department as a Financial Analyst at 1 New York Plaza on the 49th floor. It took so long probably because they were unsure of whether hiring someone like me was a good idea. The interviews started on the derivatives desk, and after realizing I didn’t know a lick of derivative math, I moved on to the US trading floor and then finally to the Emerging Markets / Asian Equities desk where I actually had some experience having grown up in Asia for 13 years.

I got the job offer e-mail while I was visiting my girlfriend in Tokyo the month after I graduated from college with no job. I was hopeful Goldman would come through during commencement, but it still felt unsettling to graduate with no job offer after four years of studying. Perhaps subconsciously, getting my offer in Japan is why I named my site Financial Samurai.

I felt like I had won the lottery. In two years at GS (1999–2001), I gained a ton of knowledge and connections and parlayed my position into a higher position at another investment bank in San Francisco. I aggressively saved and invested ~70% of my after tax income for the next 11 years and left the workforce for good at the age of 34 in 2012 after negotiating a severance package worth six years of living expenses. I haven’t been back to work since.

I thank my lucky stars that my girlfriend at the time encouraged me to set my alarm at 5:15am after a late night of partying to get on that darn bus at 6am. She knew at least I could sleep on the bus ride up. I guess showing up really is half the battle!

My girlfriend is now my wife and we are full-time parents after the birth of our precious baby boy in 2017. Ever since that fateful Williamsburg morning, my life motto has always been: never fail due to a lack of effort, because effort requires no skill.

As I finish up this answer, I realize the best financial move I ever made was actually choosing the right life partner. She’s made all the difference in the world.

One Small Move Made All The Difference

I hope you enjoyed my story. At the time, it was really hard to imagine the benefits of going to a career fair because hardly anyone ever gets a job at a career fair. I knew it was just one big marketing opportunity for the companies to say how awesome they were without ever expecting to hire anybody there. The people they wanted to hire had been already contacted directly on campus. But I went anyway because I figured, you just never know.

When I started Financial Samurai in 2009, I had already been waffling for three years. In 2006 my dad had suggested I start a personal finance site since he knew I had a passion for finance and writing. But I was always too busy with work and didn’t think I had the energy or the ability to build something significant. When the financial crisis hit, however, I figured once again, you just never know.

Now I’m on my podcast journey because I want to build a huge library of audio content for my son to listen to just in case I pass away before he gets to really know me. Yes, it’s also a good opportunity to practice verbal communication and to tap new consumers who only consume via audio. In the past, I’ve only made a half-hearted attempt at podcasting. Since our son’s arrival, however, I’ve refocused and figured, best get going because you just never know.

It’s really impossible to predict how your life will end up. I hope everybody lives long and prospers. What’s certain is that if you do nothing out of the ordinary, nothing out of the ordinary will ever happen to you. Are you ready to get on that 6am bus? If not, we’ll talk about finding that life partner in a future episode.

Readers, I’d love for you to share your single best financial move you ever made. What are some extraordinary things you ended up doing that resulted in extraordinary results?


Be Unapologetically Fierce About Pursuing Your Dreams

The First Million Might Be The Easiest: How To Become A Millionaire By 30

The post The Best Financial Move I Ever Made Is Something Everyone Can Do appeared first on Financial Samurai.

Things To Do Before Making Any Investment If You Don’t Want To Lose Everything

Things to do before making an investmentThis post is a reminder to myself and to all of you that we can and will lose money if we invest in risk assets for a long enough period of time. The only way to never lose money again is if we never make any investments.

I’ve personally reached a level of investing discomfort that feels a little bit scary. After deploying a couple bucks in 2017, I invested a large chunk of change in the stock market during the first week of 2018. After all, I wrote in my 2018 outlook that 2018 would be the last year of good times. Not following through with my beliefs would be a waste of time.

The problem right now is that it feels like I’m suffering from investing FOMO and so are many of you. When you experience FOMO, you tend to do some incredibly irrational things. I hate the way money can make us greedy. Hopefully, this post will help those of you who feel the same take a pause and think about risk more. 

How To Lose All Your Money Easily

Now that I’m back in retirement mode, I’ve done more consuming and less producing. And one of the things I’ve been observing with great fascination is all the get rich quick schemes that have popped up thanks to the rise of cryptocurrencies.

There is this one guy who boasted making minimum wage a year ago and is now a cryptocurrency millionaire. He shows his electronic wallet on social media for all to see in order to create FOMO in his followers. He succeeds.

He began aggressively promoting Bitconnect in 2H2017, a bitcoin based lending platform where they take your cash or Bitcoin and give you a GUARANTEED interest of between 0.25% – 1% a DAY with Bitconnect currency. They said they have a “proprietary bitcoin trading bot” that produces such returns.

In other words, if you invested $1,000, after 3 years of 1% daily compounding interest, you would have something like $53,000,000! Come on! Check out this chart from Bitconnect highlighting their promised returns and capital back time table.

Bitconnect promised returns

Bitconnect’s false promises

When the Bitconnect platform realized they were running out of money to pay their new users, they decided to shut down their exchange, leaving all those who gave them cash or Bitcoin stranded. Their Bitconnect currency proceeded to plummet 90% overnight and its fate remains to be seen. Where did all the cash and Bitcoin they collected go? Who knows!

Bitconnect price chart

Bitconnect investors lost 90% of their money in one day

Once I saw the price plunge and learned about the promoters and how Bitconnect worked, I thought to myself there’s no way anybody could have been so gullible and fall for this scam. Here’s a comment after the plunge that parodies an Eminem song.

Bitconnect lost money comment joke

OK, people must be joking. Nobody could have given Bitconnect money right? Then I saw more serious comments from people who claim to have lost a lot of money in Bitconnect. Here’s one from a guy who supposedly invested $500,000 in Bitconnect and wants to take out a $5,000,000 loan to invest more in cryptocurrency!

Lost life savings in Bitconnect

Still unconvinced about the seriousness of these comments, I kept on reading the feedback and stumbled across this Youtube video of a guy who lost $30,000 in loans in Bitconnect. After watching this video, I’m now convinced there were actually people who did fall for Bitconnect’s wild promises. It does not look like he’s acting.

Seeing all the carnage, I couldn’t help but feel it’s my duty as a personal finance blogger to make sure more people don’t lose a ton of money investing in scams. I’ve gotten scammed before and so have some of my loved ones and I hate it!

Let me share some exercises I go through before making ANY investment. Hopefully these exercises will help keep you grounded as you seek to build your fortune.

Steps To Take Before Making Any Investment Decision

1) Calculate how many hours, days, weeks, or months you need to work to make up for a loss. Let’s say you make a $10,000 investment in anything that has risk. You earn $20/hour. If you lose all your money, you will have to work at least 500 hours to get all your money back. Since you have to pay taxes, you have to work more like 650 hours. Given you’re only making $20/hour, the job probably isn’t something you love to do. Knowing the “pain of recovery period” will help keep your FOMO in check and help you make more risk appropriate investment decisions.

History of stock market corrections

2) Look for keywords such as “can’t lose,” “guarantee,” and “get rich quick” in the marketing material. If you find any of these keywords, run the other way. There is NO GUARANTEE to any investment except for an FDIC insured savings account up to $250,000 per person or holding a US Treasury bond until maturity. Even then, the US economy could blow up. It baffles my mind that people believed Bitconnect had a sophisticated trading bot that would earn them 1% a day forever.

3) Ask yourself whether you truly understand the business model. If you cannot easily explain the business model with a straight face to a loved one, you do not understand what you are investing in. If you don’t understand what you are investing in, you should not invest in the product. For example, I had one guy ask me why he hadn’t received any returns three months after making a $25,000 equity investment in a three year real estate crowdfunding deal. He’d confused an equity investment with a debt investment and obviously hadn’t understood the literature about the deal discussing their strategy of selling the property in three years for a target profit.

4) Calculate your net worth composition to understand risk. You must understand your net worth composition in order to understand how much risk exposure you have or are comfortably able to take. Losing $30,000 in Bitconnect is survivable if you’re worth at least $300,000 and have a steady job making at least $60,000. But it doesn’t sound like the guy in the video has much more than $30,000 to his name since he said he “lost his life’s savings.” There’s a reason why professional money managers diversify client holdings. Related: Recommended Net Worth Allocation By Age

5) Limit all alternative investments to no more than 10% of your net worth. I define alternative investments as any investment other than publicly traded stocks, bonds, CDs, physical real estate and savings. Investing in stocks, bonds, and physical real estate is good enough to build enough wealth for financial independence. There is NO NEED to invest in anything else. Alternative investments do have the ability to generate higher returns than non-alternative investments, but they are often illiquid, more difficult to understand, carry higher fees, and may carry much higher risk. You are not the $25B+ Yale endowment with 50% of their fund in alternative investments because you don’t have the same amount of access, power, and team of investment professionals tracking the fund full-time.

6) For goodness sake, please don’t take out a loan to invest in alternative investments. The people who get into real trouble during a correction are those who not only invest too much of their net worth in the investment, but also take out a loan. Yes, margin investing in the stock market is at all-time highs, which is scary because the stock market is also at all time highs. Yes, taking out a mortgage you can’t afford when real estate prices are at all-time highs is also a terrible idea as we saw in the 2008-2010 financial crisis. If you lose 100% of 10% of your net worth, you will be pissed off, but survive. If you lose 100% of 100% of your net worth, you will be devastated and perpetually depressed, but will likely survive if you have a job. But if you lose 100% of 200% of your net worth due to debt, you will be ruined and likely stay poor forever. Related: Only A Petulant Fool Borrows From Their 401k

7) Please understand the background and history of the person trying to sell you something. If the person is a broke fella who was packing boxes for minimum wage a year ago and is now telling you how to get rich, be wary. If the person is a high school student teaching you about the fundamentals of investing, be wary. The person should have a multi-year track record before you listen to their advice. And even still, be wary. There’s a reason why institutions wait until a fund has at least a 3-year investment track record before investing any money. There’s a reason why funds that have a 10-year or longer track record tend to have the most assets under management.

This promotional video of Bitconnect is too hilarious. If you are spending thousands of dollars to go to an investment conference, the only person guaranteed to get rich is the one running the conference.

8) Get feedback from at least three people before making an investment. It is easy for us to get excited about an investment that could make us rich. We start fantasizing about what we would buy with our profits, where we would travel, or how we would quit our jobs. Yes, money makes us go crazy. Therefore, you must share your investment thesis with at least three people: a parent, a sibling or best friend, and the smartest person you know. Listen to all their criticism. I get someone telling me I’m an idiot every week for my investment decisions, and I appreciate it! If you have truly listened and still believe in your investment thesis, then go ahead and take a risk with no more than 10% of your net worth.

Invest Responsibly Please

One of the reasons why I’m so much happier just being a personal finance blogger than working in investment banking is because I’m not calling or e-mailing anybody to buy anything. If people want to read my writing by bookmarking this site, subscribing to my e-mail feed or private newsletter, or listening to my iTunes channel, folks are welcome to do so for free. You’re not going to get your face ripped off by learning about one guy’s perspective on money.

Please invest responsibly folks. Don’t ever give your money to someone you don’t know or invest in something you don’t thoroughly understand. Be wary of folks who are saying you just can’t lose. Please try and tame your desire for getting rich quickly. If you can avoid stepping on financial land mines, you will be able to reach financial independence more easily.

As for me, I’m back to building up a large cash hoard. I’ll still invest in risk assets when I see some opportunity. It’s just that the amount I’ll be investing will be much lower than usual. The Bitconnect implosion has really reminded me about risk. I’ve already gone beyond my comfort zone and plan to get back to my safe place.

If you think about it, every investment except for hard assets like real estate or your 1952 Mickey Mantle rookie card are just digital numbers on the screen. Your screen might show a fortune one day and a big fat ZERO the next. It’s the reason why I’m so much more comfortable investing in real estate than any other investment.

Finally, I leave you with this final investing thought. You can never lose if you lock in a gain. Yes, you might sell something too soon and kick yourself for not holding on for more gains. But selling early is much better than selling too late. The floor drops out from under you when everybody starts to panic.

Readers, do you feel your investing is out of control or has ever gotten out of control? What are some things you do that’s not mentioned in this post before you make any investments? Why don’t people spend more time researching an investment before making a decision? Any examples of investments where you lost big? Or am I the only one?

Related Posts:

It Feels A Lot Like 2007 Again: Reflecting On The Previous Peak – This is a must read for those of you who are going crazy with your investments. If you learn from history, you have a better chance of not repeating the worst times of history.

How To Invest In Speculative Investments Without Losing Your Shirt And Underwear – If you must speculate, then I suggest starting with the income from your stable investments. If you have no investment income, then don’t invest in speculative investments.

What A Potential Real Estate Crowdfunding Loss Looks Like – I’m bullish on investing in non-coastal real estate, but I am by no means delusional into thinking that you can’t lose investing in cheaper property with higher rental yields. There’s operator risk, natural disaster risk, economic risk, interest rate risk, etc.

Real Estate Investment Mistakes To Avoid – I lost big during the financial crisis because I stupidly bought a $710,000+ vacation property in Lake Tahoe in 2007 because I thought my income would go up forever.

Perpetual Failure Is The Reason Why I Continue To Save So Much – Saving aggressively is the best coping mechanism I’ve found to withstand all the mistakes I’ve made in my career, finances, and business decisions.

The post Things To Do Before Making Any Investment If You Don’t Want To Lose Everything appeared first on Financial Samurai.

Your Net Worth According To Wealth Managers And Socialists

Your primary residence and net worth according to a wealth manager and socialistOne of the common beliefs I’d like to overturn is the idea that one shouldn’t count their primary residence as part of their net worth. This belief is propagated by the wealth management industry because wealth managers only earn fees based on your liquid net worth. Ideally, wealth managers would also like you to believe that your 401k, IRA, and any tax advantageous retirement account are not part of your net worth either.

Interestingly, the other group of people that believes a primary residence shouldn’t be included in one’s net worth is the socialist who looks to protect the feelings of renters who don’t own any property. Their logic is: if renters can’t include their place as part of their net worth, neither should anyone who perhaps saved for years to come up with a down payment and took some risk to buy. In the socialist’s mind, it’s OK to discount completely a $200,000 down payment or a 100% increase in home equity.

Let’s analyze a simple example to illustrate my contention that all savings and equity you’ve accumulated in your lifetime should count towards your net worth.

Your Primary Residence As Part Of Your Net Worth

Let’s say you own three, paid off properties worth $200,000, $500,000, and $1,000,000. You also have $300,000 worth of stock. You have no liabilities, no savings and no other assets to keep things simple. Your net worth is clearly $2,000,000. According to the wealth manager and  the socialist, however, it is not.

Wealth Manager’s Point Of View

If you live in the $1,000,000 property, the wealth manager will say your net worth is only $1,000,000 ($200,000 property + $500,000 property + $300,000 stocks). But practically speaking from the wealth manager’s point of view, your net worth is really only $300,000 because that’s the figure used to calculate fees. Even if you decide to rent out your $1,000,000 property and live humbly in your $200,000 property, the wealth manager’s business eyes still only sees you as being worth $300,000.

From the wealth manager’s perspective, one way to increase your net worth is to sell one of your properties and decide to keep the proceeds in cash or buy liquid investments such as publicly traded stocks or bonds.

Although I eliminated property taxes, insurance fees, maintenance fees, and freed up time by selling my rental house in mid-2017, I exposed myself to venture debt, real estate crowdfunding, and transaction fees through my reinvestments. Alas, there is no escaping investment fees. At least my reinvestments are 100% passive now.

Robo-advisors like Wealthfront have drastically lowered management fees from 1% – 2% to 0.25% or less. However, the problem with robo-advisors is that unless you tell them what percentage of your net worth they are managing, they will automatically assume they are managing your entire net worth. Therefore, it’s up to you to make sure their asset allocation corresponds with your risk tolerance.

Socialist’s Point Of View

If you decide to live in your $1,000,000 property, the socialist will also say that your net worth is only $1,000,000. But if instead you decide to move into your $200,000 property, it’s unclear whether the socialist will agree that your net worth is now $1,800,000. After all, the wealthier you are, the more concerned the socialist is.

In the spirit of equality, if socialists assign no value to the equity in your primary residence, then they should also assign a negative value to your net worth for renting. After all, the return on rent is always -100%. Therefore, the negative value assigned can simply equate to the cumulative cost of rent over time. The longer a person rents, the higher the negative value assigned to the renter’s net worth e.g. -$240,000 value to net worth after 10 years of spending $2,000 a month on rent.

In other words, renting will always be a drag on your net worth if the socialist is fair, no matter how much you use your disposable income to invest in other risk assets like stocks. At some point, the cost of renting might even outstrip your investment returns as you reduce risk in retirement and receive lower returns.

Now That’s Not Fair!

Renters and Homeownership rates over timeSince most of you are not wealth managers, most of you will agree how inaccurate the wealth manager’s assessment of net worth is. But given that roughly 37% of the US population rents, I can already hear a huge cacophony of complaints that it’s wrong to assign a negative value to rent, but okay for the socialist to completely negate all the home equity built up in your primary residence. After all, it is human nature to be completely inconsistent in thought.

One of the common arguments socialists make is, “You’ve got to live somewhere!” True, but after living somewhere for 30 years, who has the ability to live rent free, earn rental income, sell their property tax free up to $250,000 / $500,000, or pass on their property to their children at market value to avoid paying any capital gains tax? Only the homeowner.

Another argument socialists make is, “The return on rent is not negative! I get a place to live!” So does the homeowner, but with the added optionality of making a potential profit in the future.

It’s a tough pill to swallow that each rent check paid is never coming back, but acceptance is important for moving forward.

Think Clearly With Minimal Bias

In order to build wealth, you must be rational in your thinking. Liquidating your entire retirement portfolio because you find Donald Trump to be a vile man is not rational since he is pro-business. Expecting to go straight to the corner office because you’ve been working a couple years is not rational since you have colleagues who’ve worked for decades and are still not there yet.

I know none of you are socialists reading Financial Samurai, so please don’t think like one. It’s understandable to be biased towards stocks and against homeownership as a renter. The same goes for the 30% of homeowners in America who have no wealth besides their primary residence. Just realize that in 30 years you will kick yourself for not owning a primary residence just like you will kick yourself in 30 years if you don’t own stocks. Think about your children’s point of view when it comes time for them to invest in order to recognize the power of inflation and compounded returns.

If you would like to include your primary residence as part of your net worth, feel free to do so. Being able to rent out my old home a month after buying a fixer upper in 2014 was a fantastic way of monetizing the value of my primary residence. So was selling.

If you don’t want to include your primary residence as part of your net worth, that’s fine as well. Conservatively valuing your net worth might lead to greater wealth as you spend more time hustling. Just know that when you die, the government will include your primary residence in their estate tax calculations.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Readers, why do people not include their primary residence as part of their net worth when it so obviously is? If a primary residence isn’t to be include in a homeowner’s net worth, should a renter with no property get assigned a growing negative net worth value for renting? Why are people inconsistent in thought?


The Average Net Worth For The Above Average Person

Recommended Net Worth Allocation By Age Or Work Experience

The post Your Net Worth According To Wealth Managers And Socialists appeared first on Financial Samurai.

The Percentage Of People With No Wealth Outside Their Home Is Sad

I recently stumbled across a fascinating chart by Deutsche Bank highlighting that more families than ever before have ZERO or NEGATIVE non-home wealth. In other words, roughly 30% of households have no 401k, no IRA, no after-tax investment account, no private equity investments, no venture debt investments, no nothing beyond the value of their primary residence!

Check out the chart below.

Percentage of wealth outside your primary residence

If you have no investments outside of your primary residence, I’m not sure how you are ever going to be able to retire or reach Budget Financial Independence because Social Security alone is not enough to cover expenses after the age of 62.

I’m not even sure the average Social Security check of ~$1,200 a month is able to cover all your healthcare costs. In many cases, I suspect it isn’t. Let’s say you were”fortunate” enough to have worked 40 years and paid maximum FICA tax each year. You’d still only be getting a maximum Social Security check of ~$2,700 a month in today’s dollars.

The reason why the 2008-2009 financial crisis was so severe was because the vast majority of Americans (80%+) had the majority of their net worth locked up in their primary residence, and the chart above excludes the primary residence as part of one’s net worth. When the housing market crashed, so did the fortunes of the ~64% of Americans who owned their homes. Americans didn’t have enough cash or defensive bonds or even commodities to protect them from selling at fire sale prices.

What’s Going On With The Lack Of Outside Wealth?

Since breaching previous stock market highs at the end of 2012, the S&P 500 and the Dow Jones Industrial Average have marched to new highs each year. Further, real estate around the country has also improved dramatically. With so many asset classes doing well, why do a record number of Americans have no wealth outside their primary residence?

Here are some reasons I can think of.

* Runaway trains. After the economy started settling down in 2010, the typical American began thanking their lucky stars they were still solvent after the worst financial crisis in modern times. I cannot stress enough how shell shocked people were after experiencing so much wealth destruction in such a short time.

When you’re catching your breath, you’re not looking to aggressively invest in new assets. But starting in 2012, the stock market and real estate market really began to really take off. Meanwhile, the pace of appreciation for new assets like cryptocurrency rose faster than any asset class in history.

By the time Americans finally felt comfortable taking on more risk, all the investments we wanted to buy started giving us post traumatic stress because they’re at the same sky high valuations before the crisis. As a result, we couldn’t part with our cash. The trauma was just too recent.

The percentage of Americans that own stock has steadily declined over time

2) Spend before you lose all your money again. After the financial crisis, a lot of people questioned the wisdom of saving and investing all those years given it was so easy to lose so much money. Distrust in the stock market grew to new heights as people decided to spend their money on things and experiences rather than invest for tomorrow.

Here’s a millennial survey done by Goldman Sachs in 2015 about their thoughts on the stock market. GS should have asked millennials whether they trusted GS! I’ve come across many 35 and under people in my time who are cashed up and all about YOLO.

Distrust in stocks

3) Don’t know what to invest in. Despite TV, podcasts, books, and personal finance blogs, there is still a huge knowledge hole for how and where to invest one’s hard-earned savings. As a personal finance blogger, this makes me kind of sad because anybody who got on the “saving until it hurts” and investing train since I started this site in July 2009 would be much wealthier today. But as an online business owner who has two mouths to feed, this knowledge hole makes me extremely bullish about Financial Samurai’s future!

Of course, I can see a scenario where people finally gain the confidence and knowledge to invest only to see the stock market and real estate market start declining once again.The key is to at least have index exposure to various risk asset classes based on your risk tolerance.

Related: The Proper Asset Allocation of Stocks And Bonds By Age

4) Real wages haven’t kept up. We can’t assign blame for lack of saving and investing solely to fear and ignorance. Despite nominal income increasing over time, real median household income has gone nowhere since the financial crisis. As such, real wages haven’t kept up, while everything has gotten more expensive in real terms. Thus, it’s much harder to accumulate disposable income for investment.

Median household income over time

There’s An Even Worse Scenario To Consider

Yes, it stinks if your entire net worth is made up of your primary residence. But can you imagine not only not owning any investments outside your primary residence, but also renting all these years? What a disaster! Renting is equivalent to shorting the housing market. For some reason people find shorting the housing market more palatable than shorting the stock market. But the end result is quite similar – negative returns.

American and Canadian City Housing Prices

By now, there should be no debate between owning versus renting. If you know where you plan to live for the long term, it’s best to stay neutral inflation by owning your primary residence. People who invest in stocks and rent realize this. However,  they just don’t want to acknowledge the truth that like with stocks, the long term trend for real estate is up and to the right.

For some reason, stock only investors trick themselves into believing they can’t simultaneously invest in both asset classes for the long term. It’s the weirdest thing! But this thinking just goes to prove point #3 above – there’s a lot more financial education that needs spreading.

Note: There is a poll embedded within this post, please visit the site to participate in this post’s poll.

Readers, do you own any investments outside your primary residence? Why do you think the percentage of people who own no wealth outside their primary residence has reached all-time highs? Why do you think people still believe renting their entire lives is the better way to build wealth?

The post The Percentage Of People With No Wealth Outside Their Home Is Sad appeared first on Financial Samurai.

The Three Levels Of Financial Independence: Because Money Is Only Part Of The Equation

The Three Levels Of Financial Independence by Financial SamuraiReaching financial independence is the holy grail of personal finance. But what does financial independence really mean? In this post I’d like to determine the various levels of financial independence. That’s right. Even in financial independence there is no one size fits all since everybody has a different desired standard of living.

Contrary to what you may think, financial independence is not all about having enough money to cover all your expenses and then some. Financial independence also means being able to overcome your psychological fears to truly live free.

For example, I have peers who have millions in net worth, yet still make their respective spouses work because they do not feel 100% financially secure. Common reasons include the need for health care coverage or their spouse’s “love” for their job even though they’d rather be doing something else.

Here are the three levels of financial independence I’ve come up with. All three levels of financial independence should meet the following basic criteria:

1) No need to work for a living because investment income or non-work income covers all living expenses


2) Net worth is equal to or greater than the number of years left in your life X living expenses e.g. $3 million with 30 years left to live is FI if your living expenses are no more than $100,000 a year

Budget Financial Independence

If your household income is less than ~$40,000 a year, you are considered lower middle class. Don’t be offended. It’s just a definition based on millions of datapoints. The current official poverty threshold is an income of $25,000 per year for a family of four and $19,000 for a family of three.

If you are happy with living a lower middle class lifestyle, then you would need between $800,000 – $1,600,000 in investable assets returning 2.5% – 5% a year. Of course if you’ve been investing in the bull market for the past 10 years, you’ve likely seen a higher return than 5%. But over the long run, it’s best to stay conservative since downturns do happen.

Given the 10-year bond yield is at ~2.5%, everybody should make at least 2.5% a year on their investable assets risk free. If you’re losing money during your financial independence years, you haven’t been investing properly.

This category of financial independence is interesting because there’s a lot of tradeoffs the individual or couple still make, such as:

  • Making one spouse work in order for one spouse to live the FI life.
  • Moving to a lower cost area of the world instead of living where most of your family and friends are
  • Downsizing to a small rental, small house, or even an RV or van.
  • Delaying or not having children, which can really hurt the FI budget.
  • Taking on a part-time job.
  • Aggressively working on your side hustle / passion project.

The question many people have in this stage is therefore: Are you really FI if you’ve got to do one or many of these things? Many who work a day job argue no, but it doesn’t matter because nobody can tell you how to live your FI life. If you don’t have to work a full time job and can cover your expenses, you are Budget FI as far as I’m concerned.

Budget Financial Independence (BFI) is where I found myself between 2012 – 2014. I was earning about $80,000 in passive income, which was more like $40,000 since I lived in San Francisco, and had negotiated a large enough severance to last for 5-6 years of living expenses. Even with these numbers, I was still afraid that I had made the wrong choice leaving a job at 34. As a result, I tried to sell my house and downsize by 70%, but nobody wanted to buy my house in 2012 thank goodness. Further, my wife and I agreed that she work for three years until she turned 34 (hooray for equality) to give us enough time to figure out whether we could both leave the workforce. At the end of 2014, she negotiated her severance as well before her 34th birthday.

Basic Financial Independence

The median household income in the United States is roughly $60,000. $60,000 is therefore considered a comfortable middle class income for most Americans. If you didn’t have to work for your $60,000 a year income, then life should be better, maybe even fantastic.

Based on a conservative 2.5% – 5% annual return, a household would need investments of between $1,200,000 – $2,400,000 to be considered financially independent. Once you’ve got at least $1,200,000 in investable assets and no longer want to work again, I don’t recommend shooting for an overall return much greater than 5%. You can carve out 10% of your investable assets to go swing for the fences if you wish, but not more. There is no need since you have already won the game.

Remember, once you’ve reached financial independence, you no longer have to save. Everybody striving for financial independence tends to save anywhere from 20% – 80% of their after tax income each year on top of maxing out their pre-tax retirement accounts. Therefore, if you’re able to 100% replicate your gross annual household income through your investments, you’re actually getting a raise based on the amount you were saving each year.

If you have 20 years left to live and only require $60,000 a year, having $1,200,000 can also be considered enough even if you make zero return. The only problem is that your purchasing power will decline by ~2% a year due to inflation. The other problem is that you don’t know exactly how many years you have left to live. Therefore, it’s always better to have more rather than less.

My blogging buddy Joe from Retire by 40 is a good example of having enough money, but finding it difficult to overcome the fear of not working. Every year, he questions whether his wife can join him in retirement, even though he’s been retired for over five years, has close to a $3 million net worth, and has online income and passive income to cover more than their annual living expenses. Every year I tell him she could have retired years ago, but he’s adeptly convinced her to keep on working.

Related: Achieving A Two Spouse Financial Independence Lifestyle

Blockbuster Financial Independence

This is a level of FI that I’ve been trying to achieve since I was 30 years old. I decided back then that an individual income of ~$200,000 – $250,000 and a household income of ~$300,000 was the ideal income for maximum happiness. With such income, you can live a comfortable life raising a family of up to four anywhere in the world. Given I’ve spent my post college life living in Manhattan and San Francisco, it was only natural to arrive at much higher income levels than the US household median.

These figures are partially due to a highly progressive tax code that was implemented in the mid 2000’s that really went after income levels above these thresholds. Further, I carefully observed my happiness level from making much less to making much more. Any dollar earned above $250,000 – $300,000 didn’t make a lick of difference. In fact, I often noticed a decline in happiness due to the increased stress from work.

Using the same 2.5% – 5% return figures, one would therefore need $5,000,000 – $10,000,000 per individual and $6,000,000 – $12,000,000 per couple in investable assets to reach Blockbuster Financial Independence. In addition, it is preferable if your home is also paid off.

If you are generating $250,000 – $300,000 in passive income without having to work, life is good, really good. At my peak in 1H2017, I got to about ~$220,000 in annualized passive income, but then ended up slashing ~$60,000 from the top after selling my rental house to simplify life. Therefore, I’ve still got a long ways to go, especially now that I have a son to raise.

The way many people reach Blockbuster Financial Independence with income of $250,000 – $300,000 is through a combination of investment income and passion project cash flow. Since FI allows you to do whatever you want, here’s your chance to follow the cliché, “follow your passions and the money will follow” without worry that there will be no money. My passion so happens to be this site.

But due to fear of not being able to comfortably provide for my wife and newborn, I worked too much in 2017 on Financial Samurai to my health’s detriment. Therefore, until I can reach $300,000 a year in passive income or never let Financial Samurai stress or tire me out again, I won’t be reaching Blockbuster FI any time soon.

All Levels Of Financial Independence Are Good

The Three Levels Of Financial Independence by Financial Samurai

The Pyramid Of Financial Independence

Even if you find yourself in the Budget FI category, it’s still better than having to work at a soulless day job with a long commute and a terrible boss. Most people who find themselves in Budget FI are either on the younger side (<40), don’t have kids, or are forced to live frugally. I’ve found that in many cases, folks in Budget FI long to lead a more comfortable life so they either get back to work, do some consulting, or try to build a business within three years to move up the pyramid.

The only way I’ve found to successfully overcome the fear of not working is by either negotiating a severance, building enough passive income to cover all your living expenses for at least 12 consecutive months, or trying out FI living first while your partner still works.

There is this natural urge to still make financial progress by continuing the good financial habits that got you there in the first place. And wonderfully, the progress you make is like finding loose diamonds after you’ve already found a pot of goal.


Ranking The Best Passive Income Streams

The Average Net Worth For The Above Average Person

Readers, what is your definition of financial independence? Will you be satisfied if you only get to Budget FI? What stage of your financial independence journey are you currently in?

The post The Three Levels Of Financial Independence: Because Money Is Only Part Of The Equation appeared first on Financial Samurai.

2018 Investment Outlook For Stocks, Bonds, And Real Estate: The Last Easy Year

Financial Samurai Investment Outlook For 2018Before you read my investment outlook for 2018, you must first understand my financial situation and my biases. Our biases often warp our reality by anchoring us to past situations.

  • Permanently left work in 2012 at the age of 34
  • Net worth got crushed by ~35% in 2008-2009
  • Small business owner who will benefit from the new tax plan
  • New father with a spouse who is a full-time mom
  • Favorite asset class is real estate with three physical properties in CA, one in HI
  • Worked in equities for 13 years at a couple large investment banks
  • Have significant investment positions in stocks, bonds, and real estate

With this background information, I believe 2018 will be the last year of “easy money,” where assets remain relatively stable as they track historical returns. Let’s discuss each asset class in a little more detail.

Stock Market Outlook: One Last Hurrah

According to the U.S. Small Business Administration, small businesses account for 48% of national employment. In number, they represent 99.7% of all businesses in the country. In other words, it is the guy with the plumbing store or the gal with the digital online marketing agency who make up a massive part of the American economy.

Based on my interactions with other small business owners, everyone I’ve talked to is extremely excited about lower taxes and potentially less red tape. It’s really “less red tape” that most owners are looking forward to, and not so much the 20% deduction of qualified small business income.

As business owners, we hardly EVER feel the government is on our side because we’ve got to: 1) pay license fees, 2) pay special small business taxes, 3) pay both sides of the FICA tax, 4) pay an accountant to figure out our more complicated taxes, 5) wonder why we can’t collect unemployment after our business goes under, and much more.

With the passage of the new tax plan, there is finally hope the government is now on our side. Having a tailwind feels so much nicer than facing a headwind while climbing a hill – which is often what running a business feels like. As a result, I believe there will be a natural inclination to reinvest in our respective businesses and ultimately grow revenue. Higher revenue growth equals higher profits and higher company valuations.

Publicly traded companies are just a larger reflection of privately owned small businesses. And I think the mood in the boardroom is as bullish as ever with a 21% permanent corporate tax rate.

Stock market's history of bad things

When there is business euphoria, as there is now, valuations matter less. The chart below is the S&P 500 Case Shiller P/E ratio as of January 2018. Instead of investors now thinking 33.27X is too high, investors are now thinking there’s another 10X multiple higher to go until we reach 2000 peak bubble levels.

Investors aren’t really thinking we’re going to get to 44X, but it’s nice to know we still have this historical valuation buffer before everything blows up. After all, corporate cash balance sheets are massive compared to 2000, rates are accommodative, taxes are lower, and earnings are still growing.

Given we’re now in the final stages of a blow off where it’s liquidity, excitement, and FOMO driving the markets, I expect to see the S&P 500 breach 3,000 in 2018. If we get back to 2000 peak level valuations, we’re talking ~3,600 on the S&P 500, which ain’t going to happen. I expect downside risk of 10% for an even risk / reward ratio. I’m buying the dips.

Related: The Proper Asset Allocation of Stocks And Bonds By Age

Bond Outlook: Lower Interest Rates Forever

I’ve said this before, and I’ll say it again: we are in a permanently low interest rate environment. The 10-year bond yield has been going down since the late 1980s due to information efficiency, globalization, and policy efficacy. I expect interest rates to remain accommodative for the rest of our investing lives.

For 2018, I’m looking for another sub-3% level for the 10-year bond yield, and more likely an average of 2.6%, despite a couple more Fed Funds rate hikes expected this year. In other words, I expect bonds of all types to at least provide a total return equal to their coupon return as principal values hold rock steady. 

With the Fed raising the short end, and longer term rates staying steady, the yield curve is flattening. Historically, a flat or inverted yield curve portents an imminent recession as higher rates on the short-end choke off credit growth, make existing credit more expensive and curb excess reserves, thereby slowing the economy.

Flattening Yield Curve

But if the Fed is really going to cement itself as an inflation fighter, then this belief gives confidence for bond traders to invest in longer duration Treasuries at lower yields because no accelerated inflation is expected. Hence, I’m confident investing in 20-year municipal bonds that pay a 3.5% – 4% tax free yield for the low risk portion of my net worth.

We will know the end is near if the Fed raises the Fed funds by 1% and the long end remains flat. That’s when inversion occurs and should have enough time to reduce our risk exposure by then. I expect downside risk of half the coupon bond yield. I’m buying muni bonds whenever the 10-year bond yield goes above 2.6%.

Related: The Case For Bonds

Real Estate: A Tale Of Two Cities

Remember how I said in June 2017 that the rental market was soft in San Francisco due to a large supply of new condominiums and nose-bleed level rents that far outpaced wage growth? From 2H2015 to May 2017, I rented out my house for $8,800 – $9,000/month.  When I tried to get prospective new tenants to pay the same rent in May 2017, I got zero takers, despite aggressively marketing the house for 45 days. The best two offers I got were for $7,500 from a divorcee with an unstable startup and from a family of six with a dog. So, instead of going through the pain of continuing to be a landlord, I sold the house for a little over 30X annual gross rent.

The numbers are finally showing up in the data. Check out the rent prices for one bedroom and two bedrooms in December 2017 according to Zumper. If there was a three bedroom segment, I’m sure the numbers would look even weaker. Like stocks, real estate prices should trade on earnings fundamentals. With a decline in rent in so many of the most expensive cities and new negative tax laws in effect, real estate prices should remain weak in the most expensive markets.

Major City rental market price changes from peak

Take a look at NYC housing market data from Douglas Elliman. Sales volume and prices headed down in 4Q2017 as buyers took a wait-and-see approach regarding the tax plan. Now that the tax plan has passed, it is worse than most people expected due to the $10,000 SALT cap and the $750,000 mortgage cap for interest deduction.

NYC real estate market

Real estate investors should view NYC and SF as “leading indicators” of what should be expected for other expensive real estate markets. Now that prices are softening, you should be in no rush to buy. Be picky about what’s likely going to be the largest purchase of your life. Focus on location and expandability, the #1 way to increase your chances of making money in real estate. If you can build for $200/sqft and sell for $400/sqft, you win. And most of all, run the numbers to see if valuations make sense.

With the slowing of coastal city real estate, it’s only a matter of time before non-coastal real estate slows as well. But figuring out the timing of when the slowdown will occur and by how much is the biggest conundrum. Three to five years tends to be a good lag, so we can make an educated guess that between 2019 – 2021 is when the data will appear. Let’s just say 2H2020 to be more precise.

I don’t think there will be more than a 5% – 10% correction in coastal city or non-coastal city markets over the next couple of years because the economic engine is still quite strong. Further lending standards have tightened since the last financial crisis. Therefore, if you’re buying a home to live in for the long term, you should be fine.

Some folks have questioned the wisdom of my $810,000 investment in real estate crowdfunding outside of San Francisco. Understandable, given the absolute dollar amount sounds large. But I had a $2,740,000 position in a single SF property with a $815,000 mortgage where rents are declining. Therefore, I’ve reduced risk exposure while diversifying into 12 different non-SF properties where rents are stronger. Further, I keep my alternative investments to no more than 10% of my overall net worth and still have three California-based properties to manage.

Enjoying One Last Year Of Great Times

As a business owner, I haven’t been this bullish since 2007, when I got promoted to Vice President at my banking job. Of course a year later, shit hit the fan and I saw a 35% destruction to my net worth in a matter of months. If a downturn happens again, I’m better prepared because I’ve got far more passive income streams, a variety of defensive investments, and a much lower debt to equity ratio.

If one can get a 10% return in stocks, a 4% return in bonds, and an un-levered 5% return in real estate without much volatility, I say that’s pretty easy money. If I can get these types of returns, perhaps I’ll finally be satisfied with a blended 2% – 3% guaranteed rate of return in retirement.

If you haven’t done so already, run your investment portfolio through an investment analyzer to see what your latest exposure is to the market. Then carefully analyze your net worth composition and make sure you are comfortable with its construction. I wasn’t entirely comfortable about my net worth composition in 2017, but now I am for 2018.

Personal Capital Investment analyzer

Sample Investment Analyzer by Personal Capital

Readers, what are your thoughts about the stock market, bond market, and real estate market? How are you positioned for 2018? Please also share your background and biases. As always, do your own research and invest based on your own risk tolerance.

The post 2018 Investment Outlook For Stocks, Bonds, And Real Estate: The Last Easy Year appeared first on Financial Samurai.