How_Im_investing_my_cash
00:00:00.000 | Hello, everybody.
00:00:01.000 | It's Sam from Financial Samurai.
00:00:02.800 | And in this episode, I want to talk about taking action in this bear market.
00:00:07.300 | Because in the previous episode, I talked about how to buy treasury bonds.
00:00:11.680 | So in Financial Samurai fashion, it's good to learn how, and then it's actually good
00:00:16.420 | to take action.
00:00:17.420 | Otherwise, you're just learning for learning's sake, and nothing's ever going to change,
00:00:21.880 | or nothing is ever going to happen.
00:00:24.760 | So right now, we are back to bear markets.
00:00:27.320 | S&P 500 is down about 25%.
00:00:30.520 | And I remember-- this is interesting-- I remember back in 2009, it was much worse then.
00:00:37.120 | It was pretty scary.
00:00:38.120 | We had like a 50% drawdown in the S&P 500.
00:00:41.640 | And I started buying five-year CDs.
00:00:45.520 | And why did I buy five-year CDs?
00:00:48.000 | To lock up my money.
00:00:49.120 | Well, it was because friends left and right were getting laid off.
00:00:53.160 | I thought there was a good chance that I might get laid off.
00:00:55.880 | So I was thinking to myself, hmm, I better start saving aggressively.
00:00:59.860 | And CDs at the time, five-year CDs, were yielding over 4%.
00:01:04.520 | So is this deja vu?
00:01:05.820 | Because US treasuries are yielding over 4%, or at least they were.
00:01:10.440 | But you can still see some durations, like five-year treasury notes yielding over 4%.
00:01:16.680 | And so I have been buying three-year, two-year, one-year, nine-month treasuries, because they're
00:01:24.440 | all yielding over 4%, 4.18% to 4.45%.
00:01:31.440 | And what I remember about the global financial crisis is that when my CDs came due in 2012
00:01:38.440 | and 2013, I staggered them.
00:01:41.720 | But they were five years.
00:01:42.720 | I think I might have bought a seven-year once.
00:01:46.200 | But I was like, wow, I should have just bought stocks, because the stock market had roared
00:01:50.040 | back after five to seven years.
00:01:52.920 | So I say there's a good chance the stock market will roar back in five to seven years.
00:01:58.040 | And it's almost like deja vu.
00:02:00.640 | Do I want to make that same mistake and invest so heavily into risk-free assets?
00:02:07.320 | This is something that you and I have to think about on our own.
00:02:11.520 | And my answer is I am going to invest about 60% of my cash hoard into US treasuries.
00:02:18.080 | And this time, I'm going to stagger them, not all five-year and seven-year.
00:02:22.040 | I'm going to stagger them to three-month, nine-month, one-year, two-year, and three-year.
00:02:27.960 | Three-month treasury bills are only yielding about 3.5%.
00:02:30.880 | So you're not getting the 4.45% as you could with a three-year.
00:02:36.000 | But you get that money back in three months.
00:02:38.520 | And it's nice to always feel liquid during times of uncertainty.
00:02:42.220 | It always feels off, folks, to deploy your capital during a bear market.
00:02:48.000 | It's a natural instinct to hold onto certainty, to hold onto what you have.
00:02:53.040 | But US treasuries, as you listened in my previous episode, are risk-free investments, especially
00:02:58.320 | if you invest on the short end of the curve.
00:03:00.700 | So I would utilize, at least take advantage of these higher rates for the cash that you
00:03:06.720 | plan to sit in your bank account and protect you from emergencies anyway.
00:03:10.700 | Because after three months or nine months or six months, you're going to be liquid on
00:03:16.120 | a rolling basis.
00:03:17.620 | So start now.
00:03:18.800 | And in three months or later, depending on the duration, you're going to be liquid.
00:03:22.760 | And you're going to have that rolling liquidity every single month.
00:03:26.520 | Well, with 60% allocated towards US treasuries at various durations, what about the remaining
00:03:32.600 | 40%?
00:03:33.920 | 10% is going to go into the S&P 500 at 3,600 or below.
00:03:40.040 | The valuations are reasonable.
00:03:41.560 | But the fear, the risk, is that earnings will be cut by the end of this year, let's say
00:03:46.240 | by 10%.
00:03:47.880 | And the S&P 500 could therefore go down another 10%.
00:03:52.020 | Nobody knows.
00:03:53.020 | But it would seem logical with all this slowdown and all this uncertainty that earnings would
00:03:56.920 | be cut and the stock market could go down.
00:04:00.760 | However, the PE valuation of the S&P 500 could go up as the markets anticipate the future
00:04:07.160 | six to 12 months from now, better times ahead.
00:04:10.000 | So nobody really knows, which is why I'm willing to leg in at current levels.
00:04:15.280 | And I look at 3,200 on the S&P 500 as a realistic worst case scenario, or 10% downside from
00:04:22.120 | here.
00:04:23.120 | The other 10%, I'm still legging into Heartland Real Estate.
00:04:27.200 | Heartland Real Estate has done phenomenally well in 2022.
00:04:31.240 | It's outperformed the S&P 500 by over 30%.
00:04:35.080 | But Heartland Real Estate is going to slow as well.
00:04:38.240 | Supplies coming on board, rents are fading.
00:04:41.800 | And rents, it's really interesting because as mortgage rates rose, it pushed out the
00:04:47.720 | marginal buyers, or just buyers in general.
00:04:50.000 | And so they decided to rent.
00:04:52.200 | So rents went up in the Heartland, in the Sun Belt.
00:04:55.600 | But that is unsustainable in terms of the percentage gains.
00:05:00.000 | Rents should grow by the rate of inflation.
00:05:02.680 | Well, inflation is high at about 8%.
00:05:06.280 | But in the Sun Belt, rents have been growing in the double digits, in the 15%, 16%, 17%.
00:05:11.520 | I expect that to moderate.
00:05:13.360 | But I'm still legging in a little bit on the way up.
00:05:16.800 | And it's probably going to fade.
00:05:18.160 | But I'm focused on the long term in terms of investing in single family and multifamily
00:05:24.080 | real estate in the Sun Belt of America.
00:05:26.720 | So Fundrise is my favorite platform.
00:05:29.240 | That's been their thesis for a decade now.
00:05:32.640 | And that's been my thesis since 2016.
00:05:36.400 | You can check out fundrise@financialsamurai.com/fundrise.
00:05:43.200 | So so far, we have 60% to treasuries, 10% to the S&P 500, 10% to private real estate
00:05:49.520 | funds.
00:05:50.520 | We're at 80%.
00:05:52.400 | What's up with the last 20%?
00:05:54.120 | Well, I like venture capital and venture debt.
00:05:58.520 | I like investing in both asset classes.
00:06:00.400 | I've lived here in San Francisco for over 20 years.
00:06:03.400 | And it's all about building great companies.
00:06:05.920 | A lot of tech companies, just a lot of startups.
00:06:08.600 | And if you can invest early in some of these companies, you could do very, very well.
00:06:12.680 | A lot of these companies are staying private for longer.
00:06:15.160 | So the returns are being accrued to private investors more than public investors.
00:06:21.000 | And it's good for diversification.
00:06:22.600 | I don't have to see that daily price movements of these companies.
00:06:27.640 | Oftentimes, I just invest, meet the capital calls, and then just sit back and let the
00:06:33.720 | managers do their thing.
00:06:35.480 | And it does feel really good to farm out capital, to let professionals who are thinking about
00:06:40.800 | their investment style all day long try to invest in good investments for you.
00:06:46.440 | Yeah, you pay a fee.
00:06:47.560 | It's not cheap, folks.
00:06:48.920 | 2% of management, 20% of profits upside.
00:06:52.480 | It's a lot of money versus just buying the S&P 500.
00:06:56.360 | But again, I have about 10% of my net worth into these type of investments, venture debt
00:07:03.440 | and venture capital.
00:07:04.600 | So venture capital is investing more in equities, seed stage, series A, B, C, D, E, F, G, and
00:07:13.680 | so forth.
00:07:14.680 | And venture capital is basically investing in these private companies, but lending them
00:07:19.760 | money and getting a return.
00:07:21.440 | And sometimes you get warrants, which are options to buy equity as well.
00:07:26.960 | Venture debt is relatively less risky because the company is already capitalized, and you're
00:07:32.080 | just going in there and lending them money, lending well-capitalized companies money to
00:07:37.440 | get paid back at a higher interest rate.
00:07:39.880 | And in a high interest rate environment, venture debt actually as a whole should do better
00:07:45.620 | than venture capital.
00:07:47.120 | But again, no guarantees.
00:07:48.560 | I just like both styles of private investments.
00:07:52.600 | And I know the GPs, and I believe in the GPs and their work ethic and their vision.
00:07:58.840 | All right.
00:07:59.840 | So what else should you do with your cash?
00:08:02.240 | In terms of paying down debt, I would absolutely pay down consumer debt, revolving consumer
00:08:07.360 | debt, i.e. credit card debt, because your credit card interest rate is going to go higher
00:08:12.520 | with the Fed hiking rates by 3% to 4%, right?
00:08:16.520 | So the average credit card interest rate is about 18% to 19%.
00:08:20.400 | Don't pay that, folks.
00:08:21.640 | That is just highway robbery.
00:08:22.840 | So if you've got credit card debt, please use your cash to pay that down.
00:08:27.320 | You know, embolden, bolster your cash flow, and stop making the credit card companies
00:08:32.760 | rich.
00:08:33.760 | In terms of mortgage debt, I would say don't pay off your mortgage debt.
00:08:37.400 | Earlier in the year, I paid off some negative interest rate, negative real interest rate
00:08:41.240 | mortgage debt.
00:08:42.560 | And that was a suboptimal move, because you want to always be optimizing your cash.
00:08:47.540 | If you have a negative real interest rate mortgage, that means inflation is higher than
00:08:52.000 | your mortgage interest rate.
00:08:53.000 | So inflation is paying down your mortgage debt for you.
00:08:56.320 | However, I just did it anyway, because it always feels good to pay down debt.
00:09:00.360 | And I've always paid down debt and invested at the same time using my FS-DARE framework,
00:09:06.320 | so FS, Debt and Investment Ratio framework.
00:09:10.000 | And if I follow this framework over time, if you do as well, you're always going to
00:09:13.680 | be winning somehow.
00:09:15.100 | So the beginning of the year, I was paying down some mortgage debt.
00:09:17.800 | It wasn't the right optimal financial move, but I felt good.
00:09:23.400 | And I understood how I felt, and I understood why it wasn't the optimal move.
00:09:28.200 | However, fast forward to today, it turns out, hey, paying down mortgage debt is a 25 plus
00:09:35.720 | percent outperforming move, because that money didn't go into the stock market.
00:09:40.080 | Right?
00:09:41.080 | Obviously, at the time, I didn't know that.
00:09:42.440 | But again, you're always winning if you're always paying down debt.
00:09:45.740 | And today, well, we still have high inflation, but you can live for free now by buying US
00:09:51.920 | Treasury bills or bonds, which yield a higher rate than your mortgage.
00:09:57.960 | So in this scenario, paying down mortgage debt is even more of a suboptimal move.
00:10:05.000 | So I'm not going to be paying down any more mortgage debt from now on.
00:10:08.680 | I'm just going to see how things go, pay my regular mortgage payments every single month.
00:10:14.320 | And if inflation starts rolling over and if Treasury yields start rolling over to or below
00:10:20.040 | my mortgage rate, then I'll start getting motivated.
00:10:23.200 | But my primary residence mortgage is at 2.175% for the next, what, five years.
00:10:30.760 | So I just don't see the 10-year Treasury bond getting to that level anytime soon.
00:10:37.080 | But it is interesting, folks, right?
00:10:38.840 | So inflation is ramped higher relatively quickly within 12 months, and it could collapse relatively
00:10:45.440 | quickly within 12 months.
00:10:47.280 | You just never know.
00:10:48.620 | So that's why investing in shorter duration T-bills is good for liquidity.
00:10:54.480 | But that's also why investing in long-dated Treasury bonds, let's say 20 years, might
00:11:00.280 | actually be quite smart as well.
00:11:03.200 | Because if inflation rolls over and collapses back to the long-term trend of 2%, locking
00:11:08.000 | in a 4.45% 20-year Treasury bond is probably pretty good.
00:11:14.600 | You're not going to get rich, but on a relative basis, it's going to look pretty good.
00:11:18.660 | All right, here is the final way I would be spending my cash hoard.
00:11:24.100 | Continuing education.
00:11:25.100 | I bet, I bet the large majority of folks do not spend any money on continuing education,
00:11:32.500 | right?
00:11:33.540 | Everything is for free online, so why bother?
00:11:36.180 | But spending more intentionally on your education could very well be the best investment you
00:11:42.780 | can ever make, and continuously spending money on your education.
00:11:47.100 | Right now, for example, you can just spend $20, $20 to buy Buy This, Not That, How to
00:11:52.580 | Spend Your Way to Wealth and Freedom on Amazon, on wherever you want to buy books.
00:11:57.840 | Super cheap, but you're going to gain a wealth of knowledge worth, I would say, 100, 1,000
00:12:03.060 | times more than the cost of the book.
00:12:06.020 | And I think it's very similar to other books.
00:12:08.260 | One of the peculiar things about now being a published author is that I get to read other
00:12:13.700 | authors' books, and I'm addicted.
00:12:16.200 | I am buying books, I'm receiving books, and I'm reading every single day all these topics
00:12:22.120 | in terms of finance, self-help, meditation, the youth sports industry, and so forth.
00:12:28.340 | And it's just fascinating, and I love enriching my brain through deep, deep dive reading.
00:12:35.380 | Reading a book is just a deeper and different way of learning.
00:12:40.300 | Listening to podcasts like this one, it's nice.
00:12:42.940 | It scratches the surface.
00:12:43.940 | Hopefully, I go a little bit deeper and I help you take more action.
00:12:47.780 | But compared to a book where you're just immersed in it, you're looking at the charts, you're
00:12:52.020 | really thinking about what the author is saying, it's an even more enriching experience, and
00:12:58.180 | it's low cost.
00:12:59.460 | And if you don't want to buy books, you can obviously go on YouTube and watch hundreds
00:13:03.560 | of hours about anything you want.
00:13:05.860 | As a landlord, I've gone on YouTube many times to learn how to fix things, right?
00:13:11.740 | Fix change faucets, fix showers, fix garage doors, and so forth.
00:13:17.180 | And I feel I have all these skills to be a pretty good handyman now in the real estate
00:13:20.860 | market.
00:13:21.860 | Your children or you could learn about any single topic from middle school and high school.
00:13:27.820 | It's a really great supplemental learning for free tool.
00:13:32.880 | You can also go back to school part time.
00:13:35.260 | That's what I did in 2003.
00:13:37.660 | This is after the dot-com bubble.
00:13:39.420 | I was worried about whether I would be able to keep my job because people were getting
00:13:43.280 | let go after the dot-com bust, and there was like 10 years of the equity market going nowhere.
00:13:48.740 | I didn't know that at the time, but it didn't feel that great in 2002 and 2003.
00:13:54.660 | So I decided to go to UC Berkeley's Haas School of Business part time to get my MBA.
00:14:00.380 | And that lasted for three years, and it cost a lot of money, but I got 80 plus percent
00:14:05.940 | of my tuition reimbursed by my firm.
00:14:08.940 | And I also got my MBA and learned a lot of things about marketing, real estate, finances,
00:14:15.340 | entrepreneurship, that gave me a ton of confidence.
00:14:17.880 | By the time I was 30 years old, with my MBA, with eight years of experience in finance
00:14:23.300 | and banking, I was feeling like a confident man.
00:14:27.760 | And as a result, my career progressed accordingly.
00:14:30.980 | I got paid more, I got promoted, and it felt great.
00:14:34.420 | Don't underestimate the power of confidence.
00:14:37.340 | The confidence you gain by increasing your knowledge is very powerful, very rewarding.
00:14:44.420 | When you have confidence, because you have knowledge, good things tend to happen.
00:14:49.220 | You start making more optimal decisions.
00:14:51.780 | You start looking at problems as a fun challenge.
00:14:55.500 | You look at things differently.
00:14:56.940 | You really do.
00:14:57.940 | And you have better control over your emotions.
00:15:00.900 | You don't let things easily bother you, because you can look at different perspectives better.
00:15:06.740 | All right, I'd love to hear how you are spending your cash hoard in this bear market.
00:15:12.300 | Remember, bear markets on average last about 12 months, and they on average see a 35% drawdown.
00:15:20.120 | We're about nine months in, and we've seen a 25% drawdown.
00:15:23.820 | So the bad times could continue for a while, but what's better than educating yourself,
00:15:30.260 | enriching your mind during the bad time to prepare for the better times ahead?
00:15:35.220 | If you would like to support my work, check out BuyThisNotThat@financialsamurai.com/btnt.
00:15:43.220 | And also, I'm thinking about 2023 and whether you find value in this podcast.
00:15:48.620 | I do this as a labor of love.
00:15:50.260 | I love connecting and speaking.
00:15:52.580 | However, I'm trying to optimize my time.
00:15:55.380 | So if you would like to support this podcast, please leave a review.
00:15:59.260 | And if there are no reviews, it's okay, because it gives me permission to do other things
00:16:03.380 | in 2023.
00:16:05.100 | And I just wanted to commit to recording at least 50 episodes in 2022, because that was
00:16:09.540 | my promise at the beginning of the year, and I never, never break my promise.
00:16:14.180 | Thanks so much, everyone, and hang in there.