Dear Stock Market, you have been so good to us for a decade, now please crash!
Love, faithful investorsOften in life it is only in hindsight that we realize how “lucky” we were! It was 2007-2008 timeframe and my world was completely falling apart. I was in between stressful jobs, getting a divorce and my net worth was crashing like a house of cards. There was $30k in a 401k and I owned a small rental property. Within a matter of months the 401k balance was slashed to $15k and the “value” of the rental property went from $300k to $150k! As you can see, things were bad, cashflow went negative and I was living temporarily with a family member in survival mode. How lucky I was! Add up the costs of a divorce and it was a real gut check. So I don’t need to tell you that the great recession was not kind to me on paper or emotionally. It was like a tsunami of violent change. Everything about my life was completely shaken like I lived in one of those little snow globes. In fact, the snow globe was thrown on the floor and shattered into millions of pieces. I do realize I had my health and some supportive family, therefore I realize how lucky I was in that regard. From a financial point of view, I thought all was lost!
How we rise from the ashesThe old story of the Phoenix can be so poignant and inspirational. In this old Greek story it teaches us that we can rise from the ashes of chaos/destruction and become something new, something stronger, something different. I remember the day I was fed up and decided to move on. A good friend and a brother that made a huge difference for me. Never underestimate the power of a good friend or someone close that truly cares about you. They helped get my head straight and I decided to not give up. This is actually about the time I decided to shave my head and embrace my baldness. I was transforming physically, emotionally and financially. In hindsight the deep discounts on assets could not have happend at a better time. It was a great bargain sale, and perhaps it is time for another, are you preparing? Check out the S&P 500 yearly average returns since the Great Recession. This gives a good sense of your annual returns if the money worked in your standard S&P Index fund like SPDR or Vanguard 500:
|Dec. 31, 2018||-5%|
|Dec. 31, 2017||21.83%|
|Dec. 31, 2016||11.96%|
|Dec. 31, 2015||1.38%|
|Dec. 31, 2014||13.69%|
|Dec. 31, 2013||32.39%|
|Dec. 31, 2012||16.00%|
|Dec. 31, 2011||2.11%|
|Dec. 31, 2010||15.06%|
|Dec. 31, 2009||26.46%|
|Dec. 31, 2008||-37.00%|
The bottomlineThe chart above shows us If you just diligently contributed to your 401k or individual retirement account over the last 10 years, then you did eye popping well! Of course this depends on low fees and asset allocation, but many folks made nice returns. But the problem now is that this does not afford as many options in terms of acquiring any kind of new assets at a discount. If assets continue to rise astronomically, then we would eventually all be priced out, acquiring fewer and fewer shares.
The trifecta of wealth creationSo what do we do with this information now? Over long periods of time you want to harness what I call the “Great Trifecta of Wealth Building”. When the market is tanking is the beginning of harnessing the power of the trifecta. Here are the magical elements that you can combine:
- Dollar cost averaging is when you are buying stocks or index fund shares as they fluctuate up and down. Over time, the average is lower than what you would have paid at any one point in time.
- 401k company or government match. If you work for a company or the government that offers a match, you have to take it, this is 100% return on your money!
- Compounding Interest, in other words your interests is reinvested and begins to make more baby dollars. Those baby dollars make more dollars and the cycle can continue forever!
Time to rebuildBack in 2009, I started focusing on re-building emotionally, physically and financially. Each became a focus area and fed off each other. I rented out the rental property to break even and ignored the Zillow value. I kept plowing funds into investments and dollar cost averaged at a low rate acquiring additional discounted shares. At the time I was buying shares on the cheap. I took care of my health and spirit. It was slow, painful and grueling at times. This is the way life treats us sometimes. But, we cannot fall into a quagmire of victimhood. Many people were suffering much worse than me, I realize that! I had nothing to complain about! Time to soldier on.
Fast forward 11 yearsThe crash of everything was one of the best things that ever happened in terms of investing opportunities. That is why we talk in our blog about the few big investing opportunities we will get. I am not fabulously wealthy or anything, just a normal middle class guy building wealth slowly, but the crash of everything gave me a gift. A gift to re-launch, re-brand myself, re-grow and re-build. And I was determined to do it every day.
When things crash, remember the time tested rulesMarkets go up and down, up and down. But value is mainly made over long periods of time through diversified accounts of quality companies, such as through Vanguard “Boglehead” Investing. Remember the old Graham quote:
“In the short run the stock market is a voting machine, in the long run it is a weighing machine”Public and popular opinion is fickle and subject to herd mentality. It doesn’t matter in the moment what the herd is thinking, it matters if a company provides value and turns a profit. It is just a natural way of the Universe of building and destroying and building and destroying… Not even the ancient pyramids are forever, they too are disolving into dust in spite of the Kings mustering the forced labor of millions of people. Over long periods of time, high quality assets go up in value because they provide value to others. If the asset provides value then it will rise in value again someday.
2019 and beyondWhatever 2019 and beyond may bring, remember to never give up and keep striving each day to cut costs, increase assets and reduce liabilities. These are truly the simple formulas for sound money management or the “back to basics” building blocks of wealth creation. Maybe in this era of cryptocurrencies and other outside the box concepts, we should all get back to sound basic principals of financial management. And like many things about life, the journey is the thing and you may look back at the hard times as a kind of blessing in disguise.
RECAP: What to do as the market goes nuts (almost nothing)
- If you have a sound financial strategy, appropriate asset allocation, do nothing but continue to buy shares of quality long term assets at a cheaper price.
- Remember it kind of always goes nuts, day to day the market is a “voting machine” and voting can be erratic. In the long run the market is a “weighing machine” and can measure the value of a company.
- I sometimes focus on the number of shares being acquired in quality stock and index funds vs. the actual account balance. It doesn’t matter what the account balance is on a day to day basis.
- Focus on the dividend income that can be generated. Focus on cash flow from assets and dividends, not the paper value that will fluctuate over time.
- Prepare yourself for opportunities (click link to read about the big 3) to acquire assets at a discount. If everything always went up then there would be a few super rich people and none of us normal folks would have a chance.
- Have an emergency fund, something always breaks at some point, that is the nature of the Universe.
- Never give up, always try in the moment, that is winning! Success at life is about trying, habits and attitude. Life is managed, not cured or solved!