Before 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 good times where assets remain relatively stable as they track historical returns. Let's discuss the best investment opportunity for this year and each asset class in a little more detail.
Stock Market Outlook 2018: 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 the heart and muscles 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 regulation 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.
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, perhaps investors are now thinking there's another 10X multiple higher to go until we reach 2000 peak bubble levels.
Nobody really thinks 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 touch 3,000 in 2018. If we get back to 2000 peak level valuations, we're talking ~3,600 on the S&P 500, which isn’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 2018: Low Interest Rates
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.
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%.
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 who wanted to move in in two months. 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 soft in the most expensive markets.
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.
See: The Maximum Mortgage Tax Deduction Benefit Depends On Income
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. Always think in percentages
Enjoying One Last Year Of Good 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 these return do come to fruition, 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.
Update Nov 7, 2018: Volatility is back with Trump now talking about trade wars. Democrats take the House and the Republicans retain the Senate. The yield curve will be flat after two more rate hikes in 2019 as the long end still isn't going up much, and coastal city real estate is slowing as expected. Real estate is also slowing as expected. Time to be more cautious all around. Build your cash hoard!
Sam,
I feel conflicted about how to invest in bonds. I am 29 and my 401k is currently stocks. I know that I will get punched in the balls by a bear market, and so I should be partly invested in bonds; but I think of these as a pressure release valve, to be emptied into stocks in order to buy at the bottom, wherever and whenever that is. I know that an equities-based portfolio will always beat a bonds-based one over time, and the more equities I have, the more this will be true, especially the more time you give things to work through the wiggles of market cycles.
So, with this bull market getting long in the tooth, am I making a dumb move by staying 100% in equities until, say, 5 years before I plan to retire?
It all depends on your risk tolerance. If I knew I was retiring in 5 years, I would personally shift to around 60% stocks and 40% bonds based on MY risk tolerance. I don’t want to risk losing 30% – 50% of my money like so many retirees did in 2008-2009. They were ruined, or had to keep working for 5-10 more years.
If you know with confidence you are retiring in 5 years, then you probably aren’t depending on your investments to get you there. In that case, I just want to view my investments as a nice, low risk tailwind.
Related: The Proper Asset Allocation Of Stocks And Bonds By Age
Hi. I am only discovering this great site. It is friendly, educational, & read by many smart and supportive folks. I also like that, at least in other posts, fear is so openly addressed. I have no retirement funds as I have always put all my money (and blood and sweat) into my real estate. I am the janitor, plumber, property manager, etc. I have taught many young folk about how to respect my property and we have always ended on friendly terms. Now, at 61, we move South to be able to look in on an 85 year old Mother in Law. My dilemma: I will need to put $2.4 million into a 1031 Exchange. I’m looking at everything and learning alot—I am far from a sophisticated RE guy. I’m probably one of those guys that won’t be comfortable in a Fund or even a NNN. Control issues? I have my eye on a well located, really nice, hip, $6.5 mil 33 unit apartment complex, only 2 years old, in a mid-size, thriving city in Virginia. I can make the numbers work but still maintain a certain level of fear. I am running worst case scenario’s and not looking at returns as much as I am what we need to live a comfortable, non-extravagant, fairly stress free lifestyle that will enable us to give our time and what money we can afford to others. Oh, as we live in one of our places, I can’t 1031 all of it, but we should get that $500,000 married couple deduction (though I’m in the process of confirming & understanding this). Any thoughts about taking on this much debt at this stage of our lives? It’s a seller’s market right now, and that might change soon, but I will run into those dreaded 1031 time issues. NOI after debt is $150-160,000. Thanks in advance. Toddy
My worries stem from Amazon very likely putting their second headquarters in my already HCOL area. I’d like to use life insurance proceeds as the down payment on a small condo, and worry that housing prices will go even higher if they come and make it unobtainable at my current income level. Highly specific and not the entire economy. However, if that happens, I may just use the proceeds to buy more dividend stocks or work on my small business full-time while I stop gigging.
Was curious about your thoughts on corporate vs passthrough taxes. I know passthroughs get a 20% deduction on their taxes, but is there any way to make a passthrough a corporation? If you elect for S or C corp are you then subject to the lower 21% taxes reserved for corporates? Or do you have to have a certain number of employees or certain amount of revenue?
The tax rate should come out to around the same. Otherwise, there would be a big waste of corporation identity changes. But, we’ll only really know in 2019 when we do our 2018 taxes. I’m hopeful though!
I have a friend who set up a directed IRA for his retirement accounts that allows him to focus on rental real estate. He has to abide by strict rules to not do work on property himself but it allowed him to get a rental unit. Is this a strategy to shift assets from the stock market retirement investments where we have maybe a year left of good times to prepare for a downturn. I dont think you have done a blog post on this yet
He is in to space exploration, windmills in Texas etc. Americans are generous, I come from India, where wealth get passed on to heirs. Compared to that Americans are more caring of future generations than just their blood line. Just my personal opinion.
FS, I am 48 and the stock(s), first it was ANET (2014-2016). Now AMZN(2017-present)
Gotta love the conviction. I’m a fellow Amazon shareholder myself. If you can’t fight a monopoly, join it! I wonder what Bezos will do with his $100 billion.
FS, My thinking is that this year 2018 is going to be the raging bull market that will be the equivalent of mid to late 90s. We are still not in Euphoria phase, but it will be here before you know it. Enjoy the bubble/bull market, because it ain’t coming for another 2 decades…Best of luck. May be the force be with you. I enjoy reading all your articles.
I am ‘all in’ stock market in a single stock, I used to own 10 stocks, now I have held only one stock for the past 3 years. Real estate is in foreign countries they are around 30-35% of net portfolio.
I am of the belief, you research a handful of stocks and bet big on not more than 2 or 3. Concentration is not suggested because it can blow up big as well. So diversification is not only protection but also dilution of strategy. Would love to hear the thoughts of others as well.
Love the confidence. How old are you and what stock is this?
A measure of your comment’s worth would be politely identifying your beloved one stock. What’s the big secret? Otherwise you lack credence. My take is that you are insecure, whether you realize it or not. I’ve been around this block so many times!
Great read Sam! Many are anticipating the market to become bear either this year or next but of course who knows. We all need to prepare by investing in more short-term maturity high quality bonds and blue chips(defensive investing) and see what happens.
It will be interesting to see how investors react to a bear market especially the millennials haven’t experience it.
I remain bullish and am nearly an exclusive passive investor. I’m in it for the long haul (25-35 years). I don’t really care about the ups and downs and getting enveloped with all the hoopla the media banters around. I’m definitely a subscriber of Burt makliels philosophy towards investing.
I’m 33 and my wife is 34. We have a newborn daughter as well. Both in very stable jobs that are nearly recession proof.
I’ve been able to increase my income for our family substantially over the last few years from ~100K in 2014 to over 600K last year. We paid off all of our student loans, paying off an extra 35,000 annually to principal in our mortgage, max out both 401K’s with accompanying matches around 13,000 in total, backdoor Roth IRAs each year, and plan to do 30,000 this year to my newborn daughters 529. We don’t have the cash on hand right now to superfund her 529, even though that would be more ideal.
We also plan to invest 60-100k in a taxable account diversified among 15-20 low cost etfs spread among emerging markets, foreign developed markets, us securities, energy, dividends and municipal bonds.
Anything left over after this is allocated to vacations, basic expenses, donating to charities we deeply we care about, and helping out various family members. I firmly believe you need to enjoy the moment to a certain degree as well. And my newborn daughter has brought that into laser focus for me.
I’ve been investing like this for the last couple years and have avoided any speculative or high risk investments. However, given my income has increased much more dramatically than I ever thought it would, I’m strongly considering having “fun” with some alternative/high risk investments.
Likely will keep below 5% total of my planned investment money this year:
-bitcoin, likely lite coin. Ride the roller coaster and see where it goes.
-some individual stocks that seem hot, have momentum on their side
-diversify more with some real estate crowdsourcing. I have both of our backdoor Roth IRAs stacked with vanguard admiral REITs right now.
We’re lucky that we live in one of the 7 American states that has no state income tax so the new tax laws will be decently beneficial for us.
I thoroughly enjoy your blog and I look forward to more inspiring and educational posts on your website!
Good stuff! How did you guys 6X your income so quickly? I’d be feeling pretty good too if I did that!
Hi,
I am new to investing in crowdfunded real estate(Also real estate in general.. No investment except expensive bay area home).
The owner of this site seems to like realty share a lot. I am thinking of using the same platform.
Any pitfalls for new small investor from experienced folks on the site. There seems to be lot of technical terms regarding the priority of loan payment. I generally like safer investment even if return is bit low.
Hi Dave,
If you like safer investments that are more liquid, then I would stick to REITS, S&P 500 index funds, and bonds. Real estate crowdfunding is not liquid for 1-5 years usually, and is considered an alternative investment.
You can read a post I wrote about the risks of REC investing and an investment guide to choosing deals.
Thanks for info!
Looking over the comments it appears that most are concerned about an equity or real estate bubble rather than interest rates. Maybe that’s where people are over-crowded:
“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.”
What if that’s the one that you have to worry about? I can’t lay a high probability on it, but I still see a number of ways that inflation could spike. We’re layering fiscal stimulus in tax cuts and infrastructure spending (at a huge deficit nonetheless) on top of years of accommodative monetary policy and stimulus. We’re adding debt to stimulate the economy and create jobs with an unemployment rate of 4.1%. At some point will wage inflation really kick in? What if GDP jumps up to 4%? What if interest rates in foreign sovereign debt start pricing in any sort of risk? Will US sovereign debt become too much of a burden?
I’m generally with you that rates are lower for longer. I think that assumption is built into almost all of the models though. At a time when demographics are shifting and boomers are increasing their fixed income allocation I can also see a lot of money locked into losing positions that have a negative real rate if inflation rises.
Asset prices are obviously tied to interest rate assumptions. Those would fall on a spike in rates at least in the short term. But for 35 years when your equities or real estate under-performed your fixed income diversification helped you out. In this case it wouldn’t. That’s the scenario that we’re not prepared for imo.
Sounds good. Where are you investing your money and how is your investment portfolio or net worth currently allocated? What are some of your predictions for this year? I’d love to know where people put their money where their mouths are.
32 yrs old, no kids. 87% Equities, 13% Gold for Investments. Sold out all of my fixed income over last couple years. Cost of storage on gold and no coupon payments, but my thinking is that Gold has a lower floor and higher ceiling in most scenarios vs. fixed income over the next couple decades. That’s 1/3 net worth though with 1/3 in cash/margin to back myself as full time futures trader, and 1/3 in almost paid off condo. Condo will be income property after I make the Chicago exodus to FL next year.
I’m in the same boat as you on Equities this year. I think the melt up continues until global central bank balance sheets tighten enough to make a difference, inflation shows up (causing CB tightening), or interest rates/yield curve hamper business. I think 6-36 months (S&P 3000-4000) left in bull before substantial pullback and couldn’t make a narrower guess right now. I think Powell is going to be more hawkish than expected, wages could surprise to the upside, and we see an uptick in inflation. 10 Year hanging on a technical ledge right now. I think it trades above 3% by July, with an outside chance at 4% if we get really hawkish. Crude oil spikes to $75 this year, but retreats in 2nd half. I don’t study real estate enough across the country to make a great guess. I’m neutral on Chicago despite all the state and local negatives, so I guess that makes me bullish the rest of the country this year and think it probably correlates well to the S&P upside/downside.
Hey Sam!
I always enjoy reading your content and predictions. I tend to agree that this bull market has one more leg. Everyone in their brother is talking to me about investing, which is what I remember happening in 2007/2008. Back then everyone was talking about how stocks and real estate were no-brainers and you had to get in before you were left behind forever.
These days its stocks and cryptocurrencies. I personally know people that have a hard time making their mortgage payment every month somehow finding a way to put money in crypto-currency. In my opinion, these are the last people that should be putting money into crypto-currency.
Then again, I also thought this party was going to end a few years ago. I think the combination of low rates & tax reform could continue to fuel this bull market longer than any of us think. I haven’t participated nearly as much as most in the equity gains, but have still managed to increase our net worth from $42K in 2012 to $664K at end of 2017. And actually, at one point our net worth was negative $300K in 2009, so I am not too upset with where we are.
Quick Facts About Us:
– 31 Year Old Dink Household
– Starting Net Worth in 2018 $664K
– I’m a C-Suite Executive at a Consulting Firm in the Construction Industry.
– My wife is in Real Estate, owns an escrow company with her mom.
– Projected income for 2018 is $431K
– Cash on hand is about $120K
– We have been aggressively paying down our mortgage in lieu of any bond allocation.
– Outside of 401K, most of our investments have been going to alternative investments.
We graduated college in 2008 and we have focused almost exclusively on the Income side of the equation. We have increased our income by about $300K over the last three years. We believe this is in our control way more than the returns we can earn. As we start to think about bringing a kid into the world, this will begin to evolve.
For 2018 I plan to put about $181,900 of capital to work in the following areas:
(1) $70,000 into Life Settlements (currently hold $30,000)
(2) $18,500 into 401K (invested in stocks)
(3) $38,400 additional principal reduction in mortgage (Yr 4 of 7-year plan)
(4) $18,000 into hard money lending (brings total outstanding to $100,000 spread across 50 loans)
(5) $37,000 to Commercial REIT (brings total position to $50K)
And we should still end the year with $120,000 or so in cash.
The X-Factor to our net worth over the next 5-10 years will be the stock/option based compensation I receive.
I tend to believe there are always going to be opportunities regardless of whether the market is in bull or bear mode. There are many paths to Rome as they say.
Happy New Year!!!
Dom
Awesome job growing your income so much! That’s huge! What is the commercial reit your investing in?
I’m always looking for real estate ideas that are completely passive now.
Rich Uncles.
There head quarters is near me in Newport Beach.
Thanks for the opportunity to throw my 2c in.
I think the economic keys here are productivity. Fracking puts downward pressure on oil prices, encouraging cheaper renewables, the internet, automation and innovation expand profit margin potential. Nimble businesses like yours can make profit with fewer barriers to entry like no time in history.
That bodes well for business profit, tax cuts, the stock market and dividends.
It also shifts the supply curve out, eliminating cost push inflation. We live in an environment of easing. Essentially future inflation expectations depend on these two opposing forces.
We can see higher valuations on the markets. But with innovation, higher alpha. The beta or market return above the interest rate is essentially unchanged.
My positioning would let market gains run, pay back debt and diversify.
Ps. Didn’t know about you fourth property. Can I have a link?
The stock market is not in a bubble. Infrastructure is not even priced in yet. There is no exuberance. We are in a bull market which means easy money. For example I mentioned CAT previously. It’s up 77% I’ll sell 75% around $200. Don’t listen to me, these are GS projections and they have been accurate lately. GS also says UTX will hit ~$176. Tomorrow I’ll put in an order for ~$133 and a 2nd order to sell for $180. It’s easy money in a bull market, enjoy it while you can!
I don’t know who you are all talking too. Everyone I know is gloom, which means boom.
My footnotes are I am using less than 1% of my net worth, but is still substantial. I have a foundation of stock with large margin of safety. For example I own GE at $11, so I don’t care about its current decline that much and I always sell percentages at higher levels. I own in declining order: stock, municipals, treasuries, commodities, utilities, real-estate, cash, emerging markets, tech. I hate real-estate because I’m lazy and I hate renting. Most of this bull money I will give away. And this is my main point, find a PERSON to help. It will be an unbelievable experience. You’ll be a rock star in someone’s home or village, and maybe you have to go half way around the world to do so or out your front door.
Also read Time magazine, “Warren Buffett shares the secrets to wealth in America”, by Warren Buffett.
Pretty cool it’s so easy to make money. How is your net worth structured?
Does my article read like a gloom article? If so, can you point out exactly where it sounds like I’m very gloom? Your feedback is very helpful. Thanks
I think your article is cautious per the biggest bull stock market in our lifetime and the tone of the article changes if the reader is a buyer or a seller. You asked for feedback, and I have gratitude for Sam’s teaching. Don’t take my feedback as criticism, I value your thoughts but don’t always agree. I think the post is mixed on stock. You wrote S&P 500 at 3000 and downside risk of 10%, I would not call this, “One Last Hurrah”. I would agree it is a buying opportunity which you later wrote. I think the post is confusing on bonds. You wrote, “Lower Interest Rates Forever” and “no accelerated inflation”, if this is the case than the place to be is stocks. Stocks would explode. Interest rates Vs stock dividend yield is an important indicator to value stocks, but I think you are comparing with historically low interest rates? I could never invest in more than a 10-year bond. Stocks will substantially beat 20-year bonds and longer maturities, but there is always peace of mind and you can get that with shorter terms. I think the post is spot on for CA real estate. It’s important you distinguished between investment property and a home to live in. I also like the gratitude in your conclusion. You are happy with your listed rates of return, but why call it, “Enjoying One Last Year of Great Times”. There will be many more buying opportunities you just need the cash and idea.
Very few in finance can shout, ”BULL MARKET” from the roof tops because there is too much business at stake if they are wrong. You could be right 2018 is the last year of easy money, but I plan on another bull year because of infrastructure, jobs, taxes, and revenue are all good and Europe has room to rise. I hear your point about the flat curve and there can always be a 10% dip which is a buying opportunity as you wrote. Bay area tech jobs are stable so bay area real estate is in demand but softening. I don’t see any big changes from overpriced rents to less overpriced rents… rented in one weekend Vs 2 weeks. Some of the reader replies are gloomy, but this probably has more to do with caution from the past recession. My colleagues are gloomy and I’ll blame this on the media and politics, but the checkout clerk is gloomy too. I don’t know why, but when they start getting their real estate licenses I’ll take that as one sign of exuberance.
The past 9 years are proof that a bull market should be taken advantage of. This bull has years to run because most people have not been participating for 9 years. Some people I know well have missed it. I think average people are starting to participate more now. I think people were shell-shocked from the banks failing causing 2 mistakes. Selling during the great recession and then not participating in this bull. There are still too many bearish investors in my opinion.
I am 80% in stock, about half of this is VFIAX, and the other half is in smaller number of individual US stock most with low purchase prices offering higher safety margins. I still have couple stocks from the 1980’s as a kid. The remaining 20% I have in cash, bonds, real estate (I don’t live in), utilities, commodities, emerging markets (BYDDF), and tech. I mostly hold the dividends until I see a buying opportunity with minimum monthly investments, give it away, or spend it. In this stage of the bull I buy stock that I researched will pop than sell after a preset percentage no matter what (I can only do this in a bull market because it’s easy).
Got it. Where do you predict S&P 500 will be at the end of the year vs my 3,000/+10%? It’s hard for me to think about next year without thinking what will happen this year.
I particularly like this sentence you wrote, “The past 9 years are proof that a bull market should be taken advantage of.” It’s always fun to look at hindsight as proof. The more exciting thing though is predicting the future to get rich.
Related: https://www.financialsamurai.com/how-to-get-rich-practice-predicting-the-future/
We must be talking to different people, because the people I talk to, many of whom are fellow small business owners and some of whom big business CEOs are very bullish because it finally feels like the government is on our side.
By holding stock since the 1980s, have you retired or are you close to retired? I’m running a follow up post on how much risk one should take in retirement. Happy to hear your thoughts about this topic.
Thx
With a 21% corporate tax and potential infrastructure bill, the S&P will be much higher than 3000 for years to come. I don’t know what the number will be, but I see much more fuel being added to this bull. Some say tax cuts are not even factored in yet.
Yes, hind sight is fun. The Dow went from 80 to about 25,000 in 100 years. The future is exciting, because in another 100 years the Dow could easily be 1,000,000? I don’t know, but I know we have an excellent chance and I would not bet against this.
What CEO is not optimistic? I think the best indicator of exuberance is when the checkout clerk owns bitcoin, or is getting a real estate license, or…
My thoughts on retirement, I don’t believe anyone should ever not be 80% US stock/ 20% cash and bonds if they have FI in retirement. I think you will have a much better answer than I will, but I will add 3 things you may have not considered 1. Something to keep you motivated in old age 2. Quality of life at 75 3. Long term care insurance.
1. It’s important to be preoccupied in old age. Writing is a perfect occupation. Richard Russell wrote Dow Theory, the king of subscriptions, every day until his late 80’s. FS could be a life extender in 30 years.
2. Gaussian curve says you have until age of 75+/-. I see patients with a common story, around 75 there will be an inflection point. Something is going to happen followed by a few years without a quality of life. If I make it to 75 I will be sure to eat and do whatever I desire, because if I do make it to 80 I will be watching TV all day or maybe writing. There are very few 85-year old’s that can walk around the block, but there are exceptions.
3. Wealthy don’t need long term care insurance, minimum $3M not
including the house you live in. Poor don’t need long term care insurance with medicaid. Middle class is a different story, I would give away as much money as possible before I need long term care and consult an Elder lawyer well before 75. I have not seen reasonable rates for long term care insurance that the middle class can afford at the time that they need it.
How old are you now and what do you do?
I am 48. I’ve always worked in medical field earlier in corporations and later in healthcare. I retired at 41 in 2011 willingly due to stress but waited 2 years for a buyout. 2 years later I semi-retired after boredom and trouble. I had opportunity to buy a few stocks when I was a kid. My 1st stock was 7-Up because I liked the taste, no other analysis. I enjoy your writing and consider you one of my teachers. Thanks for letting me participate.
Good stuff Max. Early retirement does find a way of Becoming boring sometimes.
With regards to Financial Samurai being a life extender, I hope so and I agree. Some people called me crazy for trying to keep the side going for the next 20 years until my son goes to college. But I say, if you can speak forever, you can write forever!
https://www.financialsamurai.com/investing-lessons-from-a-surreal-2017/
I echo your sentiment here and just wrote about what to do when everyone is getting rich.
Biases:
-Live in the best state in US, Colorado.
-Purchased a home in 2014
-Invested heavily in public markets since 13.
-Keep large E-Fund so I can sleep at night and continue to stay invested when the inevitable comes.
-Pay down my mortgage in place of bonds at this point in my life.
-Rarely dabble with individual stocks, crypto, speculative investments less then 5%.
-Still working FT
-Only debt is small mortgage.
I just don’t see the path of rapid growth continuing, maybe I am wrong who really knows? I have opted to not get to greedy and have been paying down my mortgage aggressively. Hope to buy my second property in the next 5 years when I see a better opportunity. I will always be investing as I work FT though in a diversified portfolio DCA.
Good read.
So you finally bought that dream house in Hawaii????
Kathy,
I am glad you caught that as I was about to post something to the effect that “did I miss something or did Sam buy a house in Hawaii?
Regards,
–J
I’m looking forward to hearing more too!
Nope! I’ve always owned part of a property thanks to my grandparents. But the Hawaiian dream house might be coming soon!
Sam, thanks for your analysis. Our rental experience is similar in 2017: a 2-bedrooms condo in south bay sat un-rented for a few weeks, which used to take just 1 weekend. Rents in east bay are also flat and stopped the upward trend. Our current CAP rate (by market value) is ~3.5%.
On the other hand the stocks had gone up so much since 2017, like 30+%. This just can’t last forever. Our current strategy is not to sell anything, but just keep saving and put our savings in cash (taxable account) and bond (non-taxable account).
Thanks for sharing your anecdote. Did you end up dropping the rent price?
A 3.5% cap rate is not terrible for this area, as I have seen rates as low as 2.5%.
I agree with your assessment for 2018. In SoCal I see a lot(though not as much as in 2005) construction going up. SFHs and condos. This reminds of 2005-2006 because it was about 18 months before the bottom fell out. I don’t think we will see the same drop this time but I do think it will drop.
I have found that I love contributing to my 401k/Roth IRA and 529s. I contribute on auto pilot and occasionally glance at the balance. If it’s down I don’t care much because it’s for the long term. Probably about 80/20 stocks to bonds among retirement accounts. I’ve learned I can’t stomach investing in individual stocks while I do own several. I often check their prices multiple times a day while holding a finger over the sell button. I freak when they fall just a little. I am going to transition to a roboadvisor at 50/50 stock bond ratio for my taxabale account. Set it on auto contribute and rest easier.
SoCal seems to be slowing already from what I can tell. It would be nice if 2018 really turns out to be a banner year. If so, I would have no problem investing all new money in a 20/80 stock/bond fashion. I’m not sure about drastically altering my after-tax portfolio due to all the tax consequences.
Definitely going to try. Going to a UC so at least no private tuition.
My husband and I are making a risky investment this year. Of course, we invest knowing that we can afford to lose the money. I’m 37, an auditor, with a pension that will allow me to retire in 15 years and our primary home is paid off so we feel comfortable taking more risks. Ever since I started reading FS, I’ve gotten creative looking for investment opportunities which all did well last year, except the loser condo which was purchased pre-FS.
We’re keeping our investments from last year since they had great returns (2017 gains are in parentheses) and adding on cryptocurrencies for even greater returns:
5% Stocks NVDA, ACLS, and STM (96% gains). These are all companies that are developing technology for self driving cars which I believe are inevitable. In addition, we are also putting money into index funds VOO and ARKW to diversify.
7% Rental Boat (53% gain)
8% Mortgage Notes (17% gain)
20% Condo (18% loss) This property is underwater but at least it’s never been vacant and tenants have all been good for the last 6 years it’s been rented out. If we can wait it out for another 2-3 years the property will generate positive cash flow.
60% Cryptocurrencies – the cryptology and bitchain are solid so currencies can’t be lost or stolen unless the owner loses their private key. Markets naturally move towards efficiency and crytocurrencies offer that in fast processing times, no storage costs, and security, not to mention an easy form of payment when in foreign countries. It’s a good sign when big companies like American Express, Amazon, and Overstock are accepting cryptocurrencies/bitchain technology. The risk is if the government makes crytocurrencies illegal but I don’t think this is likely because as more people really understand how much more efficient and reliable crytocurrencies are it wouldn’t be logical not to use the technology.
It is a huge mistake to put so much money in cryptocurrencies (another word for “things like Bitcoin”).
1. It’s money – if you have to explain to someone that it’s money, it’s not money!
2. It’s a store of value – heck no, it’s way too volatile
3. It’s a unit of account – no, normal people use dollars
4. It’s a unit of exchange – no, everyone is hoarding it hoping it goes up and up
5. It’s secure – 10% of all Bitcoin is supposedly just “missing” and hacks occur quite frequently, security is one of it’s worst traits.
6. But blockchain! – This has been around for a decade and we are still waiting for this “game changing” technology to be implemented across industries and businesses. Blockchain is not like the internet in 1997, it’s a coding language.
Unless you are OK with 60% of your portfolio going to zero then I would suggest investing a bulk of your money elsewhere in proven/real/liquid assets. Please protect yourself, it sounds like you have otherwise done quite well for yourself!
I just wanted to add how correct I was in my assessment above. Bitcoin was at $18,000 when the comment above was originally posted. Today it sits at $7,500.
Cryptocurrencies are not investment tools people. Protect yourselves!
Meaning we never established a 529 because we weren’t in a situation where we could do that and adequately fund retirement accounts. We have since been able to max out 403b contributions as our incomes have increased. Very minimal after tax investment accounts. Not enough to go around to fully fund retirement accounts and create significant after tax savings.
Got it. Maybe he can apply for some scholarships. I realized after graduating college there is massive amount of scholarship money that is begging to be applied for.
With pensions that will generate 60-80% of our pre-retirement income, we can be pretty aggressive with our tax deferred portfolio. Our pre-tax buy and hold portfolio is built based on the following:
1) Low-cost index funds
Every academic I’m familiar with expects that, over the long term:
2) stocks will continue to have higher returns than bonds;
3) small-cap stocks will continue to have higher returns than large-cap stocks; and that
4) value stocks will continue to have higher returns than growth stocks
5) adding international asset classes like large-cap blend stocks, international large-cap value stocks, international small-cap blend stocks and international small-cap value stocks reduces the influence of the S&P 500. Over the last 47 years, these international asset classes have really helped increase the compound returns
I believe these are reasonable expectations, and this is the best way I know to put them to work.
I can describe this portfolio briefly: The portfolio starts with the S&P 500 index then adds small and equal portions of nine other very carefully selected U.S. and international asset classes, each one being an excellent long-term vehicle for diversifying.
Vanguard 500 Index Admiral Shares VFIAX 11%
Vanguard Value Index Admiral Shares VVIAX 11%
Vanguard Tax-Managed Small-Cap Admiral Shares VTMSX 11%
Vanguard Small-Cap Value Index Admiral Share VSIAX 12%
Vanguard REIT Index Admiral Shares VGSLX 5%
Vanguard Developed Markets Index Admiral Shares VTMGX 9%
Vanguard International Value VTRIX 18%
Vanguard FTSE All-World ex-US Small Cap Index VFSVX 9%
Vanguard Emerging Mkts Stock Index Admiral Shares VEMAX 9%
Vanguard Globel Ex-US Real Estate Index Admiral Shares VGRLX 5%
2018 Goals:
A) Start adding to a very small after tax portfolio
B) Figure out how to fund college for the oldest (starts in 2018)
C) Open Roth IRA for the youngest (13-years old)
D) Complete costly home improvements (landscaping)
E) Possibly purchase a Model III Tesla to take advantage of $7,500 federal and $2,500 state EV purcahse incentives before they expire. 10K in incentives makes the 35K base model pretty inticing (or conisder it 10K in free upgrades for a 45K+ model)
I like your goal of opening up a Roth Ira for your 13 year-old. That’s a no-brainer.
But I’m kind of concerned for your first two goals. What do you mean when you say figure out how to pay for your oldest’s college next year? And do you not have any after-tax investment account, just 401K and Ira?
65% Real Estate, 25% equity’s, 10% cash. Net Worth just north of $1M.
Consistently tossing around selling my investment property(s). What I initially purchased as long term buy hold/cash flow properties have now appreciated significantly ;25x annual gross rent. Incurring the Cap Gains tax along with Dep recapture is less than appealing and worse yet other investment options are highly inflated and primed for a correction too.
I’m confident we have 1 more year of a bull market. In my business many are elated with tax cuts and significant expansion will occur due to it.
Excellent outlook! Makes a lot of sense to me. I didn’t expect last year to be so strong but it was. I agree with your comments regarding small business owners. It’ll be really interesting to see how things unfold. Less red tape is a huge win imo!