Perhaps I’m confusing some positive things that are going on with my life, but I haven’t felt this good about the current state of the markets since 2007. Sure, everything went to hell the next couple of years and mass carnage ensued. But that’s neither here nor there.
As of right now, we are living in the best of times. If you’ve been a Financial Samurai reader for at least a year or are a reasonably savvy investor, your net worth should be hitting new record highs. In turn, the amount of investment income you’re generating in order to live free should also be generating new record amounts.
With the Fed now firmly on our side, investors have gained new confidence in taking on more risk. Further, we can all earn risk-free money in our savings accounts at an interest rate substantially higher than the 10-year bond yield. This double win is rare.
I’d like to offer up some thoughts on how to invest and spend in a bull market to live a better life.
The Bull Market Financial Checklist To Living Your Best Life
1) Take advantage of lower rates. With the 10-year bond yield at two-year lows, mortgage rates and longer term student loan rates are also at two-year lows. You should take advantage by refinancing your mortgage and your student loans if you have any.
Unfortunately, for those of you with credit card debt and other short-term loans, rates have not fallen because the short-end of the yield curve has increased since the Fed started raising the Fed Funds rate at the end of 2015.
I’m wrapping up my 7/1 ARM at 2.75% with all fees baked in plus a $2,400 credit this summer. If I waited until now to lock, I may have been able to get 2.625%.
2) Stay exposed to risk assets. Stocks, bonds, and real estate are your friends in a declining interest rate environment. Lower interest rates make owning other assets with higher interest rates or potentially higher returns more attractive. Interest rates are likely to stay low for longer.
I can’t tell you how much risk exposure you should have since everybody’s risk-tolerance and financial situation is different. All I can say is that you need to quantify your risk tolerance and then invest accordingly.
The most logical risk asset for me to invest in is real estate because lower mortgage rates bring in more real estate demand. We’ve already had a significant slowdown in many real estate markets in 2H2018. Without a correction 2H2018 I’d be more cautious.
With mortgage rates roughly 1% lower than in 2018 coupled with a retreat in real estate prices, it is my belief that real estate will rebound or at least stay steady in the coming years. The Fed has telegraphed it is willing to be accommodative (cut rates) to fend off a recession if necessary.
3) Ask for a raise or change jobs. We’re currently at a 3.6% national unemployment rate in America. That’s close to full employment. Now is the time to ask for a raise or hunt for the “perfect job” if you are not satisfied with your existing one.
The general rule of thumb is that you can get at least 20% more if you put yourself on the open market tomorrow. Depending on performance and industry, after about three years on the job in a hot labor market, you could conceivably get 50% or more.
Loyal employees tend to lose out the most. Don’t be like me. I stayed at my old employer for 11 years and probably gave up more than $1 million in earnings as a result. The main positive about loyalty is that it increases your chances for negotiating a juicy severance if you ever want to move on.
4) Take a sabbatical. Given it’s currently an employee’s market, now is the time to take a long vacation or a sabbatical. Yes, it’s tough to get off the grid when so much money is to be made. But it may be now or never as it might be career suicide to take a sabbatical during a downturn. Because when you get back, your job might not be there!
If you plan to work for at least five more years, please take an extended vacation or sabbatical. Money is working the hardest for you in a bull market, so don’t worry so much about trying to make even more money.
My biggest mistake was not taking at least a one-month sabbatical. I was too worried about my job during a downturn and wanting to make max money during a bull market.
It was a never-ending cycle because I always expected a downturn to be right around the corner. But if I had taken a sabbatical, I would have been refreshed and likely extended my working career by at least a couple more years. This is one of my big regrets as an early retiree.
5) Start strategically living it up. If you can’t live it up when times are good, you certainly won’t be able to live it up when times are bad. When times are bad, you’ll want to save more and take on side hustles. The end result is that you never end up spending any of your money on living the good life.
During a bull market, you’re making money way beyond your normal expected income (day job, side hustle income, passive income). In other words, bull market money feels like “free money” or “funny money.”
Your goal is to calculate how much funny money you’ve made each year from the bull market and proceed to spend some of it on yourself, your family, and your loved ones. You don’t have to spend 100% of your bull market gains each year. However, you should try to allocate and spend at least 10% of the funny money living it up.
For example, in 4Q2018, I was down about $300,000 (15%) in my House Fund portfolio. That hurt. Luckily, the House Fund portfolio made up all its losses and then gained about $200,000 for a $500,000 swing in six months.
Gaining back $300,000 felt like free money because I had foolishly over-allocated towards tech stocks. But making $200,000 really felt like free money. Therefore, I took a portion of the $200,000 and bought myself some new underwear. I feel so fresh! But seriously, I made a massive purchase earlier this year which I might share in the future.
6) Hunt for unicorns. During a bull market, bigger bubbles tend to form. If you can catch a bubble and ride it before it implodes, you could potentially make a lot of money.
I would set aside 10% of your cash flow (not existing investments) in search of the next great speculative investment. A speculative investment is usually an unproven product, doesn’t have positive cash flow, and is something not mainstream.
You should expect to lose 100% of your 10% with the chance of making a 1,000%+ return. The likelihood of either happening is probably small. At the very least, you will learn more about investing in assets that are often overlooked.
It’s absolutely fine to invest in index funds for the long term. The vast majority of your funds should be allocated towards a boring S&P 500 and bond index. You just have little chance of ever getting richer faster than the majority of the investing population.
If I hadn’t invested $3,000 in VCSY in 2000, I wouldn’t have been able to make a $120,000 down payment for my first SF property in 2003. If I hadn’t bought my first property in 2003, I may not have had the courage to go all-in on a single family home in SF at the end of 2004.
All you need is one lucky break to supercharge your wealth. But in order to get your lucky break you need to take extra risk with some of your funds.
7) Shop your business around. Valuations tend to be at their highest during a bull market because expectations are so high for future earnings growth. If you believe expectations are higher than reality, then you should aggressively try and shop your business around to the highest bidder.
But to be able to shop your business around, you must first have your own business. Having a business is great because not only does it have a cash flow component, but it also has an equity component as well. To create next level wealth is all about growing the equity component.
Although the trailing 12-month P/E ratio doesn’t look outrageous yet at 21.9X compared to the 14.75X median multiple, the Shiller P/E ratio is getting up there at 30X compared to the 15.75X median multiple. The Shiller P/E ratio is based on average inflation-adjusted earnings from the previous 10 years.
8) Become a charlatan. In a bull market, qualifications and credentials are often overlooked because everybody is making so much money. It’s only after people start losing money that folks start carefully reading the fine print and questioning the background of the person.
During the last bull market, I know one guy who wrote a book about how to get rich despite having recently graduated from college with hardly any money. He ended up getting rich partially because of his book. Brilliant!
Today, I know of 25-year-olds with zero financial backgrounds who are teaching people how to invest in the stock market and retire early. It’s impressive how folks are soaking it up.
If you’ve ever wanted to make money as a charlatan, now is the time to take advantage. It doesn’t matter if you’re a failed political consultant trying to position yourself as a financial expert or a company founder with no pertinent experience. If you fake it, chances are higher you will make it during a bull market.
The company, Theranos, is probably the best example of allowing charlatans to get rich if they were able to sell some shares during their $400 million in funding rounds.
9) Calculate your financial independence number. It’s fun to calculate how much you’ll have if the bull market lasts for X years. It’s also very dangerous to extrapolate massive gains for a long period of time.
Your goal should be to come up with a financial independence number that will produce enough investment income so you never have to work again. Then you should create three scenarios (bear case, normal case, bull case) on how long it will take to achieve that FI number.
Once you have created your three FI scenarios, you will naturally start taking steps to get there. Too many people just wing it when it comes to their finances. Then they wake up 10 years from now wondering where all their money went.
In my case, my FI number keeps growing because of kids. But I believe I will be able to hit my investment income goal of $300,000 a year by the end of 2022 in a conservative scenario. I’ve created an entire saving and investing plan to make it happen.
Make The Bull Market Count
Nobody knows how long this bull market will last. All I know is that for the foreseeable future, the Fed is on our side, interest rates are low, and there’s a Presidential election coming up promising us lots of freebies.
It’s conceivable at the rate the candidates are going that our children will never have to work for a living. If so, we may be over-saving for our children’s future.
Be aware that one recession indicator to look for is when the Federal Reserve actually begins to cut their Fed Funds rate. If history is any guide, once the Fed starts cutting aggressively, a recession (grey bars below) is within 12 months away. If the Fed only needs to cut a little bit, then chances are higher the good times will continue to last.
If we can’t enjoy life to the maximum during a bull market, then we’re never going to enjoy life to the maximum at all.
Do your best to live it up today!