The Stock Market Could Drop 50% Tomorrow And I Wouldn’t Care

Dramatic events can often lead to massive stock market gains or losses.

The media takes advantage of these big events and writes exciting or terrifying headlines.

Headlines generate excitement, fear and traffic for the websites.

However, these stories predicting a long term bull market, an impending correction or stock market crash should largely be ignored.

The problem is, I constantly see stories predicting the next market downturn. I bet you do, too.

Unfortunately, most people don’t stick to their investment plans and eventually give in and listen to these crazy people. They sell their investments at the worst possible time.

Why? Because if you hear something enough, you begin to believe it is true.

So, why do these stories not matter? Why should you ignore them?

If The Stock Market Dropped 50% Tomorrow It Wouldn’t Affect My Strategy

If stocks plummeted tomorrow, it wouldn’t affect my strategy and it shouldn’t affect your strategy either. Why? Because you should have your investments set up in a way that matches your risk tolerance.

If you’d sell your investments if your portfolio went down 50%, then your investments shouldn’t be 100% in stocks.

Think of it this way. If you had only 50% of your portfolio in stocks and stocks went down 50%, your total portfolio would only go down 25% if nothing else changed.

If you only had 10% of your portfolio in stocks, your total portfolio would only go down 5%. However, if you had 100% of your portfolio in stocks, your total portfolio would drop by the whole 50%.

You should have your investment portfolio set up so that you won’t likely experience losses that go beyond the pain point that would make you deviate from your investment strategy.

If you do this, then short term stock drops won’t matter. All that matters is the long run.

What The Stock Market Does In The Short Run Is Irrelevant

I’m a long term investor and my retirement is decades away. While no one can predict the future, history has shown that whenever stock prices as a investment class go down, they eventually recover over time.

Due to the fact I’m a long term investor, I have options short term investors don’t. Whenever stocks drop I look at it as an opportunity to buy more shares on sale because in the long run, stocks have always recovered.

Why would long term investors be scared of a drop in stock prices when in reality stocks are just on sale? In fact, I might even put more money in the stock market if it drops 50% in a short period of time.

Your Short Term Money Should Not Be In The Stock Market

The real reason why what the stock market does in the short run is irrelevant is the fact that you shouldn’t have your short term money invested in the stock market.

We do know that historically that the stock market can crash and a significant amount of wealth can disappear in a short time period. For that reason, never lock up money in the stock market you can’t afford to wait to withdraw.

If you keep enough money in cash or other less volatile assets to hold you over until the stock market recovers, it will be much easier to ride the roller coaster.

Since I already have my short term money, my emergency fund, I don’t have to worry about my long term investments. If they crash 50% tomorrow, I wouldn’t care and you shouldn’t either.

Have the right asset allocation and stick to your investment strategy. If you can do that, you’ll be doing much better than the average American investor.

Do you freak out when the stock market crashes? Do you change your investment strategy? Or do you stick it out and wait for the markets to recover? I’d love to hear your real life experiences!

Should You Buy Or Rent A Home? This Secret Will Help You Decide

The buy versus rent debate is currently a hot topic when it comes to housing and personal finance.

Personally, I think too many people get too caught up in the numbers.

Yes, numbers are important, but there is something even more important. Buying or renting a home is a lifestyle choice in addition to a financial choice.

You shouldn’t make your decision on only one of these factors.

You must consider both.

Financial Decisions

Renting and buying a home are two totally different beasts when it comes to money. Renting offers a fair amount of financial certainty for your housing expenses.

You will know exactly how much your rent will be for the period of your lease. You won’t likely have to pay much else for your basic housing costs.

When you buy a home, your mortgage payment will stay close to the same if you have a fixed rate mortgage. Of course, it may increase or decrease based on changing real estate taxes and insurance rates.

Additionally, if you have a variable rate mortgage, the payment can change as interest rates change.

Utility expenses are another large cost that are associated with your housing. If you rent, you might luck out and have some of your utilities included in your rent. However, if you buy a home, you’re stuck with all of the utility bills in most cases.

The benefit of owning a home is the fact that you can make your home more efficient with regards to heating, cooling, electricity and water usage if it is a smart financial move.

As a renter, it wouldn’t make sense to make these improvements as they’d likely be cost prohibitive. They wouldn’t pay off before you had to move again.

Yard maintenance is sometimes covered in your rent as a renter and could potentially be included in homeowners association fees if you own a home.

However, this particular cost will vary widely depending on your specific situation regardless of whether you’re a renter or you buy your home.

Regular home maintenance is almost always paid for by your landlord if you’re renting. If you own your home, you need to make sure you can afford all of the maintenance that is necessary or your home could end up losing value quickly.

Once you take all of these factors into consideration, you should have a good idea if buying or renting will be cheaper on a monthly basis. If buying ends up cheaper, remember that you’ll have to include money for a down payment and closing costs as well.

Even with all of these financial considerations, you still need to consider the lifestyle choice you’d be making when you choose if you’ll rent or if you’ll buy a home.

Lifestyle Decisions

Unfortunately, the better financial decision doesn’t always make sense when you consider your lifestyle.

The secret that will help you make a sound decision about whether to buy or rent is matching your finances with your lifestyle. Owning and renting a home are two very different lifestyle decisions.

If your lifestyle doesn’t fit your choice, you could end up in a world of hurt, financially speaking.

The first lifestyle choice is the length of time you’ll live in a home. If you’re not sure where you’ll be in one year, let alone five years from now, then you’re most likely better off renting a home.

You can sign short leases and minimize the financial impact a mobile lifestyle would have on your wallet.

However, if you’re certain you’ll be in a particular area for decades, you might want to put down roots and avoid the costs of rent increases. After all, moving every couple of years sucks when your landlord doesn’t want to renew your lease.

If you hate yard work and performing maintenance tasks around the house, renting will definitely fit your lifestyle better. Since these things aren’t normally the responsibility of the renter, you’ll alleviate that stress on your life.

If you live for having the perfect yard, you probably would want to own the home so you don’t spend a ton of money fixing up a yard before the landlord decides not to renew your lease.

As you can see, deciding whether to own or rent a home isn’t a simple decision. It takes a lot of reflection on your situation to determine what is best for you. Don’t let others bully you into a situation you aren’t comfortable with. Do what’s best for you!

What do you think about the buy vs rent debate? Which side to you fall on, or do you run the numbers for every scenario?

You Will Never Get Rich By Just Saving – Do This Instead

I’m here to tell you that you’ll never get rich by just saving money.

It’s a simple fact of life.

Unless you’re a ultra high earner, saving alone won’t make you rich.

However, people tell you every day that you need to save money. They have to be on to something.

How can these people be financially successful if they aren’t saving money?

The answer is simple and requires a small distinction.

That small distinction is what makes the difference from someone just getting by and someone who has promise to accumulate wealth. Would you rather just get by? Or do you want to accumulate wealth?

The key difference is what you do with the money you save.

Just simply saving money, whether you put it under a mattress, bury it in a can in your backyard or put it in a saving account earning a measly 1% interest, will never allow you to grow meaningful wealth if you start from nothing.

Instead, you must invest your savings. That is the key.

When To Invest

Investing makes many people uncomfortable, so not everyone invests. How can you bypass the uncertainty and lack of comfort with investing?

First, you need to set up a stable base in your emergency fund. You can start investing before your emergency fund is full, but it should be full before you put all of your extra money every month into investments.

This base should give you the comfort you need to take that next step to start building wealth by investing.

After you’ve built up a suitable emergency fund for your family, it’s time to start investing full speed ahead. Putting more money into liquid savings beyond an emergency fund is a wealth destroyer, unless you’re saving for a specific short term goal.

What To Invest

Now that you have your emergency fund, or at least have it started, what money do you invest? Great question!

You need to be investing any and all money you don’t have any other purpose for. If your money just sitting around in a liquid form, such as cash or your savings account, then it isn’t working for you.

It’s that simple! Don’t let fear and uncertainty destroy your future wealth potential. Start investing that idle money today. But what should you invest in?

What To Invest In

What to invest in is the tricky part that most people get stumped on. However, with a little bit of work, and I mean VERY little, you can come up with a strong investing plan for yourself.

The first thing you need to do is determine your risk tolerance. Next, come up with a set of future goals for your money. After that, just invest your money according to your risk tolerance and future goals.

Determining Your Risk Tolerance

Risk tolerance is a fancy way of saying “When will you freak out and sell all of your investments in a downturn?”.

Can you only accept moderate declines before you start screaming at your financial adviser to sell everything? Or do you have a mindset that no matter how low stocks go they’ll eventually recover without a doubt?

Figure out how comfortable you are with risk and that will help you determine what investment options you have available to you.

If your risk tolerance is low, you should invest in safer, less volatile assets and if your risk tolerance is crazy high, consider investing in riskier, more volatile assets.

Generally, risk and reward are correlated with investments so in theory higher risk equates to higher potential returns. Just keep in mind, depending on what your goal is, you may have to invest crazy amounts of money with a low risk tolerance to reach your goals.

Setting Goals

Setting financial goals is key in order to determine how your money needs to work for you.

The two factors that are most important, in terms of investing, is the time until the goal needs to be complete and how important it is that the money is available for the goal on that date.

While you may be able to put off buying a new car for a year or two because it is a want, nothing is going to change the fact that your child will graduate from high school at 18 and college bills will be due shortly after.

The further away the goal is, the more risk you can take with your investments since you’ll have more time to recover from potential losses.

The more flexible your goal timeline is will allow to you to take more risk as well. However, if your time frame is short and you have to have the money, you’ll generally want to stay away from riskier investments.

Invest According To Your Risk Tolerance And Goals

Based on what you’ve learned about your risk tolerance and your goals, pick an investment that matches your constraints.

In general, the less time and less flexible your goal timeline is, the more conservative your investments should be regardless of your risk tolerance.

The longer and more flexible your timeline is, the more risk you can take, as long as it doesn’t exceed the your overall risk tolerance.

All you have to do now is do a little bit of research to find an appropriate investment and start investing your money today.

What’s holding you back from investing your money rather than just saving it?

Please keep in mind, I am not an investing professional and the above is not advice for any specific individual situation. Please consult with an appropriate investment adviser before making any investing decisions to assess your personal investment plan.

Investing Shouldn’t Be Exciting – If It Is You’re Doing It Wrong

We don’t talk a lot about investing here on the Money Manifesto blog.

Honestly, it’s because I find investing quite boring.

Don’t get me wrong, investing is very important. It’s a key to eventual financial freedom.

While I find the act of investing very boring, I can’t say the same for watching my investments grow.

I get very excited to see my retirement and investments accounts slowly grow toward my eventual goals.

That wouldn’t happen without having some guidelines to follow when I invest. So what concepts do I use to guide my investments that is so boring?

Dollar Cost Averaging

Unfortunately, I don’t have huge amounts of cash laying around to invest at any given point in time. My guess is that you probably don’t either. That’s OK though.

Instead of throwing big chunks of money in the market at any given time, I simply invest with money from every paycheck and distribution we get.

How does it work? I simply set up automatic transfers to my retirement and brokerage accounts to invest money for me one day after each of our paychecks and distributions. That way I don’t forget and I don’t have to think about it.

In addition, I’m slowly buying shares a little bit at a time. What’s the benefit of that? I know that I’m not investing all of my money at a potential peak of the market.

Instead, I get a few shares as they go up and down and in the long run I’ll benefit from the historical increases the stock market has provided.

Low Cost Investing

Low cost investing is the only way to go in my book. I personally use Vanguard due to their large selection of low cost funds that meet my needs.

Even a 0.50% difference in investment fees can mean hundreds of thousands of dollars difference in your eventual nest egg. Crazy but true.

Not Trying To Time The Market

I never try to time the market and this works perfectly with dollar cost averaging. I simply invest every single paycheck. Why is this important?

If you miss just a couple of the best days in the market each year you’ll lose at least a couple percent off of the annual return.

Plus, if I try to time the market with my investments I have to make two decisions.

First, I’d have to decide when to sell before or right at the peak of the market. If I sell too early I’d lose out on profits and if I sell too late I’d lose a ton of money.

The second decision is when to move back into my investments. If I get in too early, I’d lose even more money but if I get in too late I could miss some of the biggest gains of the year.

It doesn’t sound worth it to me, because I’m no fortune teller.

Reevaluate Investments At Least Yearly

One last thing I make sure I check at least yearly is how my investments fit my goals. I make sure that they still fit my risk tolerance and that they’re not slacking in performance.

One day you’ll be living off of your investments, so you’ll want to make sure that they still fit your needs and you don’t ignore them. You could quickly end up in bad shape if you do.

By following these simple rules, my investing strategy has become extremely boring. Personally, I think that’s a great thing!

It makes it so I don’t worry or freak out over market dips or gains. Instead, I’ll simply watch my investments grow until one day they put off enough income so I don’t have to worry about making money ever again!

Do you subscribe to the boring method of investing or do you look for excitement in your investments? How has your strategy worked out for you?

The Benefits Of Apartment Living We’re Excited About

After owning a house for five years, we’ll become apartment renters for a short time.

It’s a temporary move while we wait for our dream house to be built.

However, I’m totally willing to admit there are a few things about apartment living that I’m excited about.

They’ll probably even save us some money and would definitely save us even more money if we stayed longer.

No Lawn Maintenance

I know some people like maintaining their lawns, but I am not one of those people. Part of our rent will pay for the lawn maintenance of the apartment complex.

I’m really excited I won’t have to mow the lawn or fix broken sprinkler heads like I would if we had rented a home.

No Worrying About Major Repairs

Part of renting means I am not responsible for the major systems in a home that can fail. Appliances, air conditioning systems, plumbing systems and roofs are all expensive items that must be maintained and occasionally replaced when you own a home.

While we’re renting, I won’t have to deal with any of these issues. If there are issues at the apartment complex dealing with these systems the landlord will have to take care of them.

Lower Heating And Cooling Costs

We used to live in a three bedroom, two bathroom 1,850 square foot single family home. Now that we’re living on the bottom floor of a 3 story apartment complex in an 1,100 square foot unit, our heating and cooling costs should drop drastically.

I’m totally looking forward to a lower electric bill during the few months we’ll be renting the apartment.

No Property Taxes And Cheaper Insurance

Renting an apartment means we get temporary relief from paying property taxes and homeowner’s insurance bills. It will be nice to no longer pay hundreds of dollars each month into an escrow account to pay for these bills.

Of course, we’ll still be insuring our stuff. We picked up some renters insurance through USAA to cover ourselves from a liability and personal property standpoint while we’re renting. Thankfully it is much, much cheaper than homeowner’s insurance.

We’re Still Excited To Own Our Dream Home

Even with all of the benefits I listed above, we know we wouldn’t be happy in an apartment long-term. Both financially and psychologically, it doesn’t make sense for us to rent an apartment forever. We like having a home that allows us to do what we want.

At the apartment complex we won’t be painting any walls or hanging anything on those walls because we don’t want to pay to repair them when we move out.

We won’t be able to always have a parking spot right outside our front door. We also won’t be earning any equity as we pay our rent.

For some, it makes sense to rent on a long-term basis. Fortunately for us, it makes more sense to own a home than to rent in our local real estate market.

Even with the benefits above, we’ll be counting down the days until our dream home is finished being built and we can move for hopefully the last time for quite a while.

Do you enjoy anything about apartment living? If so, share in the comments below!