July 14, 2024

Financial Samurai
Slicing Through Money's Mysteries
Published: by 20 Comments
Let’s say you’ve currently got a good amount of cash to invest. With the global financial recession building, opportunities are piling up. However, things could get worse in this bear market given we’re only nine months in. How would you invest it?
2022 has so far been a terrible year for both stocks and bonds. Real estate has outperformed stocks by over 27%. But even real estate is starting to fade as mortgage rates surge higher.
I’ve been accumulating a larger-than-normal cash hoard this year. Usually, I’ll have between $50,000 – $100,000 in my main bank account. But so far, I’ve accumulated over $250,000.
In addition to accumulating cash, I’ve also been dollar-cost averaging in the S&P 500 on the way down. I’ve also been dollar-cost averaging in private real estate on the way up. But these purchases are usually only in $1,000 – $10,000 increments.
Now that my cash balance is larger than normal, this is my thought exercise on how to deploy it. If you have less than $250,000, that’s fine too. I share the percentages of where I will allocate my money.
I’m 45 and my wife is 43. Our kids our 5.5 and 2.5.
We consider ourselves moderately conservative investors since we haven’t had regular day job income since 2012 for me and 2015 for my wife. We fear having to go back to work, not because of work itself but because we fear losing our freedom. As a result, we are unwilling to take too much investment risk.
Although we don’t have day jobs, we do generate enough passive investment income to cover our living expenses. We also generate online income, which we usually reinvest to generate more passive income. Therefore, our cash pile will continue to build if we don’t spend or invest the money.
For life goals, we both want to remain unemployed at least until our youngest is eligible for kindergarten full-time in 2025. This way, we can spend more time with both children. After 2025, we might find day jobs or I might focus on becoming a professional writer.
We’re also looking to upgrade our home in one to three years. That said, my wife and children would be happy living in our current home for the next ten years. Therefore, buying another home is not a priority.
Our children’s educational expenses are on track after we superfunded two 529 plans. We also have life insurance and estate planning set up. Therefore, there’s no major big ticket items coming up.
Here’s how we’d invest $250,000 cash in today’s bear market. This is what we’re doing with our own cash and not investment advice for you. Please always do your own due diligence before making any investment. Your investment decisions are yours alone.
Only about 5% of our net worth is in bonds, individual muni bonds we plan to hold until maturity. Our target annual net worth growth rate is between 5% to 10% a year, depending on economic conditions. Therefore, being able to earn up to ~4.45% on a 3-year treasury bond is enticing.
At the same time, I’m always on the lookout for a nicer home because I believe living in a great house is the best way to enjoy our wealth. Think about all the time we spend at home nowadays.
There is no joy or utility derived from owning stocks, which is one of the reasons why I prefer investing in real estate over stocks. However, dividend stocks do provide 100% passive income.
Once the 10-year bond yield reached around 4%, I decided to purchase the following Treasury bonds totaling $142,872.91.
Although locking in a 4.2% to 4.45% return won’t make us rich, it will provide us peace of mind. We also already feel rich, so making more money won’t make us feel richer. Our focus is on optimizing our freedom and time.
Here’s a tutorial on how to buy Treasury bonds, which includes some buying strategies to consider.
Roughly 24% of our net worth is in stocks. It was about 30% at the beginning of the year. Thanks bear market!
The range has hovered between 20% – 30% since I left work in 2012. Since I started working in equities in 1999, I’ve done my best to diversify away from stocks and into hard assets.
My career and pay were already leveraged to the stock market. And I saw so many great fortunes made and lost during my time in the industry. When I left work, I continued my preference of investing mostly in real estate.
Unfortunately, we front-loaded our stock purchases in 2022 through our kids’ Roth IRAs, custodial accounts, SEP IRAs, and 529 plans. For over 23 years, we’ve always front-loaded our tax-advantaged accounts at the beginning of the year to get them out of the way.
Most of the time it works out, some of the time it doesn’t. That’s market timing for you. But we do get to front-load our tax-advantaged investments again in 2023, which will prove to be better timing if the S&P 500 stays depressed.
In addition to maxing out our tax-advantaged accounts, we’ve been regular contributors to our taxable online brokerage accounts. After all, in order to retire early, you need a much larger taxable investment portfolio to live off its income.
I just don’t enjoy investing in stocks due to the day-to-day volatility and lack of utility stocks provide.
If the Fed insists on raising the Fed Funds rate to 4.5%, then the S&P 500 could easily decline to 3,500. And if earnings start getting cut by 10%, then the S&P 500 could easily decline to 3,200 based on the median historical P/E multiple.
As a result, I’m only nibbling at these levels. The Fed says it plans to hike through the end of 2022 and reassess. With investors able to get a guaranteed 4%+ return in Treasuries, it’s hard to see the S&P 500 rebounding strongly until the Fed admits inflation has peaked.
Therefore, I’m just buying in $1,000 – $5,000 tranches after every 1% – 2% decline through the end of the year. In the chart above, you can see one purchase of $2,543 worth of IVV on 9/27/22. If the S&P 500 goes below 3,500, I will increase my investment size.
I enjoy investing in private funds because they are long-term investments with no day-to-day price updates. As a result, these investments cause little stress and are easy to forget about.
I’ve already made capital commitments to a couple venture capital funds from Kleiner Perkins. I also made a capital commitment to Structural Capital, a venture debt fund. As a result, I will just keep contributing to these funds whenever there are capital calls.
I expect venture debt to outperform venture capital (equity) during this time of higher rates. Venture debt is a lower risk way to generate returns in private companies.
Real estate is my favorite asset class to build wealth. It provides shelter, generates income, and is less volatile. Unlike with some stocks, real estate values just don’t decline by massive amounts overnight due to some small earnings miss. Real estate accounts for about 55% of our net worth.
No matter what happens to the value of our current forever home we bought in 2020, I’m thankful it has been able to keep my family safe and loved during the pandemic. When it comes to buying a primary residence, it’s lifestyle first, investment returns a distant second.
All the memories, photos, videos, and milestones our kids have achieved in our current house are priceless. Even when I was suffering from real estate FOMO earlier in the year, our kids said they prefer our much cheaper home. As a real estate obsessed father, that meant a lot.
Their response showed me the price of a home isn’t necessarily the main thing that makes it nicer. The house layout and its familiarity matters a lot too.
Given my wife and kids are happy in our home, I shouldn’t try to buy another one so soon. Ideally, we live in our current home for at least five years (2025), save up a lot more money, and comfortably upgrade based on my net worth home buying rule.
Therefore, I will continue to dollar-cost average into private real estate funds like Fundrise that invest in single-family homes in the Sunbelt. Prices and rents are cooling. However, Sunbelt real estate should be a long-term beneficiary of demographic trends, technology, and work from home.
I will be investing in $1,000 – $3,000 tranches through the end of the year.
In a high inflation and rising interest rate environment, I’m not paying down any extra mortgage debt. I already paid down some mortgage debt at the beginning of the year when inflation was high and Treasury bond yields were low.
At the time, it was a suboptimal move since it’s best to keep your negative real interest rate mortgage for as long as possible. High inflation was paying off the mortgage debt for me. But I paid off some mortgage debt anyway because it felt good.
In retrospect, paying down some mortgage debt was the right move as it saved me from losing ~20% had I invested the cash in the stock market. Hence, if you have debt, consider following my FS DAIR investing and debt pay down framework. This way, you’re always making financial progress.
Today, with inflation still high but Treasury bond yields much higher than mortgage rates, it makes no sense to pay down a negative interest mortgage rate. Instead, it’s better to buy Treasury bonds and live for free, which I’m doing.
If you have revolving credit card debt or auto loan debt, I’d follow my FS DAIR framework and accelerate paying down principal. You want to benefit from rising interest rates not get hurt by it.
Just make sure you don’t compromise your liquidity too much in a bear market. Always have at least six months of living expenses in cash.
When the investment return is certain, it’s easier to invest. When you’re certain you don’t need the money, it’s easier to invest for longer durations as well. But not all investments are created equal.
I deployed 60% of my $250,000 in Treasury bonds because I wanted to earn a higher return immediately. In fact, I’m actively trying to get my wife to invest in Treasury bonds and figure out a way to optimize our business cash as well. The investment is risk-free, so I have no fear.
I will most certainly fulfill my venture capital and venture debt capital calls when they come due. Otherwise, I will be banned from ever investing with these fund managers again. These investments have risks, but I want to diversify further.
I’m happy to keep investing in Sunbelt real estate funds, like I have since 2016, because I’m confident in the long-term demographic trend of relocating to lower-cost areas of the country. However, I’m also confident real estate prices and rents will fade over the next year, hence why I’m slowly legging in.
Finally, I’m certain I don’t like stock market volatility. I’m also uncertain how far central bankers will go to crush the middle class. As a result, I’m in no rush to buy and will focus on valuations.
It is discomforting to see your cash pile dwindle as you invest during a bear market. However, investing during a bear market tends to work out well over the long run. Further, if you maintain your income streams, your cash pile will replenish over time.
We know the average bear market lasts about a year. Hence, there’s a decent chance we could get out of this rut some time in 2023. Taking advantage of higher guaranteed returns while legging into risk assets today sounds like the right thing to do.
Readers, how would you invest $250,000 cash in today’s bear market? Even if you don’t have $250,000, where would you invest your money? What type of investments do you think will generate over a 4.2% return over the next 12 months?
To gain an unfair competitive advantage in building wealth, read Buy This, Not That. It was written exactly for volatile times like these. I utilize my 27+ years of investing and finance experience to help you make better decisions.
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Filed Under: Investments
Author Bio: I started Financial Samurai in 2009 to help people achieve financial freedom sooner. Financial Samurai is now one of the largest independently run personal finance sites with about one million visitors a month.
I spent 13 years working at Goldman Sachs and Credit Suisse. In 1999, I earned my BA from William & Mary and in 2006, I received my MBA from UC Berkeley.
In 2012, I left banking after negotiating a severance package worth over five years of living expenses. Today, I enjoy being a stay-at-home dad to two young children, playing tennis, and writing.
Order a hardcopy of my new WSJ bestselling book, Buy This, Not That: How To Spend Your Way To Wealth And Freedom. Not only will you build more wealth by reading my book, you’ll also make better choices when faced with some of life’s biggest decisions.
Current Recommendations:
1) Check out Fundrise, my favorite real estate investing platform. I’ve personally invested $810,000 in private real estate to take advantage of lower valuations and higher cap rates in the Sunbelt. Roughly $160,000 of my annual passive income comes from real estate. And passive income is the key to being free.
2) If you have debt and/or children, life insurance is a must. PolicyGenius is the easiest way to find affordable life insurance in minutes. My wife was able to double her life insurance coverage for less with PolicyGenius. I also just got a new affordable 20-year term policy with them.
Brian says

Mortgage rates have crossed 7% let alone 6% and confirming if Sam has honored his bet?
Avid reader and very surprised myself mortgage rates have gone up this high. Feel it will quickly go down once this Russian war ends/the big supply chain hold up there and more sensitively unnecessary loss of human life that has exceeded even covid now.
Financial Samurai says

I have! Donated $5000 to the United Way Foundation and $2,500 to the Pomeroy Rec and Rehab center.
I, too, am surprised by how high rates have gotten. But that’s the way things go as an investor. Always an exciting thing going on.
Jim Johnson says

I am looking to take advantage of the strong dollar
and current recession in Europe. I am going to invest 500k -1.5 mil in Portuguese real estate. If you Google golden visa, investors from the United States get citizenship with a 500 K investment. And access to all the EU countries. My investment is assuming the dollar continues to get stronger, I think in the spring could be a possible time with a strong dollar and very weak economy that will open up steep discounts. I have interest in getting money outside the United States so that’s part of it. Secondly I think this is a once in a lifetime opportunity to invest in a strong dollar overseas in conjunction with a weak real estate and complete instability in Europe.
Financial Samurai says

I agree about taking advantage of a strong dollar and buying real estate overseas. I hope you do and get to enjoy it!
My Dividend Dynasty says

I love these financial thought experiments. I have a preference for dividend stocks (I love 100% passive income). With the market down, there are opportunities to buy great companies at a discounted price.
If I had the $250K to invest right now at this moment in my life, the majority would go into the market to build up my dividend cashflow. But that is just me. 🙂
Thanks for the awesome post!
Kevin says

Living off of passive and online income, I’d probably do something similar to you. However, if I were still employed and this $$ came in as a windfall, here’s what I would do by priority:
– Pay off all consumer debt immediately
– Top off the emergency fund to 6 months’ expenses, maybe more depending on your confidence of future employment
– Boost tax-advantaged investment vehicles and 529 plans only if they are not on track to max by EOY
– Keep enough to offset maxing out your HSA (if your plan has one) if not on track to max by EOY
– If the rest of the cash can pay off your mortgage, do it. If not, DCA into your aftertax portfolio according to your current allocation over the next 6-18 months.
Zach says

Just wondering if you buy US treasures through their website or via your brokerage account?
I couldn’t do it myself for whatever reason
Financial Samurai says

My brokerage account.
Emanuel Levy says

Great article but what about those of us who have only 3 or 4 thousand to invest on top of our emergency fund. How about an article for people like me?
Financial Samurai says

This article is not investment advice for you as we have different financial situations.
But I do highlight my percentage allocation to each type of investment.
I would talk to a financial advisor or trusted friend who is well-versed in finance and knows your situation if this article does not help you think about where to invest today.
Paper Tiger says

Sam, this article in addition to the tutorial on buying Treasury Bonds was both awesome and timely for me. Back in January, I moved all of my wife’s combined 401Ks into Stable Value funds thinking I would eventually put that money back to work in equities. Since these company plans do not have good fixed income options, and I now do not plan to jump right back into the equity market anytime soon, I intend to move these 401Ks to her Fidelity self-directed IRA account. Originally, I had planned to ladder up using brokered CDs but you have convinced me Treasury Bonds with slightly higher returns and the advantage of being tax-free at the State level are a better option.
Thank you for all of the great advice. You certainly have paid me back in spades for the investment I made in your book 😉
Canadian Reader says

I thought about locking in at 4.4% for one year, but the banks have been giving me 3.5-4.25% for 120 day periods in regular savings accounts without having to lock in. My current offer expires at the end of January.
I’m working a part time job now which is adding more all the time. I will be taking 4-5 months off though for an unpaid maternity leave starting in November.
So that is why I’m leaning toward staying liquid at this time.
Bill says

I’m in a similar situation with a different dollar amount then you. I’ve put 70 percent into treasuries, CD’S, and muni bonds ranging from 3 months to 4.5 years. I’m putting 25 percent into equities. I’ve bought some so far but the remaining is on autopilot. I Have buy orders in when or if the S&P hits 3600, 3400, 3200 and 3000. The remaining 5 percent I’m buying whiskey as a investment. Doing my diligence there are very wide price ranges for certain limited edition whiskeys and when I feel like I’m getting a good price I’ve been buying a few bottles. I got my very first Pappy Van Winkle 13 year old a couple days ago!
Thanks, Bill
Bradley K says

Thank you for the post.
One question – Venture Debt as an asset class is not easily available to most investors. Any alternatives in your mind (for a similar risk/return profile)?
Nate says

Stock market is down >20%…every penny invested goes straight into VTI. Don’t see the sense of not investing in this bear market aggressively if you are under the age of 50.
Prashanth says

Hi Sam, Avid reader of your blog since many years. you put things into succinct learning bytes for readers to absorb!
How do you get in touch with the VC firms like Kleiner perkins? We as a group are planning to deploy $1M-$2M during this downturn into VC. best companies are funded during the downturn since all hype and easy money is not there to fund garbage.
Appreciate if I can get an intro to these VC firms.
Jamie says

I paid down mortgage debt earlier in the year, which felt great. I’ve been sitting on cash for a while since but am slowly deploying it. It’s very insightful and helpful to read your thought exercises on how you are investing your cash. You’re very thorough and methodical! thanks
Simple Money Man says

I’m continuing to DCA mainly in Vanguard’s Growth ETF and a little bit in Fundrise’s Growth REIT. Each time I log on though, it’s painful seeing my account balance!
As someone heading into 40 and planning to continue working until traditional retirement age, I’d still consider myself in the growth stage a few years away from the balanced stage. So even though stocks are more volatile, I fee like they have more upside, at least at the moment.
Ross Elliot says

Sam, I enjoy your material. Are your kids going to have any “skin” in their education, etc costs? We have 15 grandchildren. The 4 oldest are working in addition to involvement in school activities. The 3 seniors are trying to attain scholarships and are at jobs in addition to school activities. Sports involvement is a very big deal in our family as it should be. Late practices, getting on a bus at 5:00 AM and being a teammate build a work and toughness attitude. 14 of 15 are in sports. One is 15 months. As for my college education I got $50 from my Dad, once, and repaid him 2 weeks later. I worked during breaks, school year and in summers along with some borrowed money. Sam, raise kids that are real kids! For you and your spouse that will be a mighty goal-maybe not possible? My $0.02 cents worth. Best to you. Ross
Sid says

Thanks for sharing. This strategy mirrors a lot like mine…have you looked at SDIRA to invest in alternative investments with AltoIRA? I’m thinking of getting into art, farm and RE etc in this way.
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