Need perspective on fear driven 36 year old.

[hegen]

Hello guys! This is my first post on this forum

I am looking for some perspective from similar individuals on my thought process and looking for some advice for my future financial planning. I realize that there isn't a single solution to early retirement but I feel like I am contradictory in my approach to finance. 

I am 36 years old. I am married with no kids. I have an ADHD personality (not sure if I actually have, haha) with a general pessimistic view of the world. I am pretty frugal most of the time but I spent 45,000 on my car. (I realize this is blasphemy on this forum! but its paid off) Like most on this forum, I would like to become FIRE as early as possible, hopefully under 10 years.     

I work as a forecast analyst in a globally traded company and the most of the economic numbers I look at on a daily basis doesn't seem sustainable. Hence, my approach to my personal finance has been equally pessimistic. Here is my finances in a nutshell.

I contribute to 401K (up to my company match) in a money market account since 2012. I believe my account's growth rate has been near zero all this time. (yes, stupid)
I do not contribute to Roth IRA for the same reason my 401K is in a money market account. I do not own any other brokerage accounts. Only investments I have is 3 rental properties that generates a small cash flow. Therefore, my current asset allocation is 75% real estate, 15% 401k (money market), and 10% liquid accounts.

So my questions is as follows:

How should I balance or diversify my future accounts? I really see bad things for stock market eventually, although I think another inevitable QE will prolong this madness for a bit longer. After reading some of the posts on this site, I find that most people have majority of their retirement money in brokerage accounts with varying degrees of stock/bond exposure. Is my fear of the market unjustified? I also have extreme exposure to real estate in a very bubbly market which can tank as well. Looking at housing affordability index and recent run up in prices, real estate looks very shaky as well. I am also considering just paying off the mortgages on the rental, but I am concerned about liability and illiquidity issues of having too much equity on the properties.

Thank you for your attention. Suggestions welcome!














 
 

[meatface]

In my opinion you are thinking about this too hard. You can't control or predict the market, so don't waste your time.

Just focus on things you can control:
1. Reduce your spending.
2. Save as much as possible (aim high -> 50, 60, 70% of your gross salary).
3. Put all your savings into low-cost index funds (Vanguard).

That said, index investing is based on the philosophy that you think the world is getting better in the long-term. If you think it's all going to hell in a handbasket, then there is no real point. Maybe consider investing in AK-47s so that you have the market cornered when armageddon comes.

[Dicey]

Why, yes, I have let my money languish in MM accounts long enough to have birthdays. I got over it and am FIRE, finally.

Happily, salvation is at hand. As has been suggested, haul your ass over to JLCollin's stock series and start reading. It's important to haul your ass with you, so it's conveniently close for kicking as you read. Redemption and freedom are yours for the asking, FIRE takes just a little bit more follow through.

[nouveauRiche]

Are the rentals paid off?  If not, you could "invest" in paying them off - increasing your cash flow.

That's what we're doing now.  We're not adding extra money monthly (because that doesn't lower the mortgage payment).  We're saving aggressively and then paying off in lump sums.  A couple of our rental mortgages are 5.5% so that's a nice, guaranteed return on investment.  YMMV.

Edited b/c I just saw that you addressed this.  If you have an adequate emergency fund, I don't see a problem with having a paid off rental.  You need not pay off all three.

[hegen]

Hello. Thank you so much for your responds! I am quite shocked at the pace of this forum.

LAS, Thank you for your advice on reading JL Collins' book. In regards to the your comments on emotional decisions, I am starting to think you are correct. I used to think that I am very practical and analytical in my decision process but in the end, I usually end up making really emotional decisions. (i.e. 45k Car, Yes punch to face). Your warning on FOMO and greed is something I will struggle with for a while I think.

Meatface, I have considered investing in AK47, but fear of shooting myself or loved ones stopped me. Haha. =)

Bender, I realize the risks in real estate, but my fear of the market was greater. And Yes, I punched my self twice already. =)

Dicey, Redemption and freedom… sounds nice, but I think I need additional kicking…

NouveauRiche, I still have massive mortgages left on rentals and I was considering your payoff strategy for a while.   It is a guaranteed return on investment. Are you worried about liability of the paid off rental? Although I have individual LLC for rentals, a lawsuit would wipe out all of the equity?

PizzaSteve, WOW…I am lost for words… your insight and wisdom might be the foundation of my new paradigm. I printed your post and put it on my desk!
 

[intellectsucks]

That said, index investing is based on the philosophy that you think the world is getting better in the long-term. If you think it's all going to hell in a handbasket, then there is no real point. Maybe consider investing in AK-47s so that you have the market cornered when armageddon comes.

This quote is so crucial to how you move forward.  You said that the economic indicators you review daily indicate that current market trends are unsustainable. When the "bubble" does pop, what will be the results? Will there be a temporary, short term loss (think 2008); a temporary, long term loss (great depression); or a permanent decline in human civilization (something which hasn't happened yet in history)?  If you believe it's one of the first two then definitely read the JL Collins stock series.  Also Google the worlds worst investor ; there is an article about a fictional investor who invests just before each major market downturn but still sees significant growth because dividends and market recovery offset the short term losses.  If your personality is so risk averse that any short term losses will cause you significant stress, then consider investing in insurance products that have guarantees or individual bonds which you hold to maturity.  Neither will carry market risk and will offer returns significantly better than money markets.
If you are convinced that human civilization is facing a permanent decline, then ask yourself why. Is the world in a more precarious position than before WWI? WWII? The great depression? The dropping of the atomic bombs? The rise of socialism and the cold war? September 11th? 2008? In other words, what is so catastrophic this time that people won't need to buy cars, or houses, or toothbrushes or food or any of the other things that make the economy go?  If after that reflection you are still convinced that the world is permanently fucked, then you are beyond the help of investment advice and need to divert all your time and money into being a prepper or seek psychiatric help.
I hope you conclude that the doom and gloom is temporary and adjust your finances accordingly(hint: it always is).

[nouveauRiche]

NouveauRiche, I still have massive mortgages left on rentals and I was considering your payoff strategy for a while.   It is a guaranteed return on investment. Are you worried about liability of the paid off rental? Although I have individual LLC for rentals, a lawsuit would wipe out all of the equity?

LLCs are a good idea.  I need to ask DH about the equity question (he's the brains of our operation).

We do have a large umbrella insurance policy (need to ask DH the amount) for this.  There is still some risk (if we have a $1 million policy, we could be sued for $2 million). 

I'll get back to you.


------------------------------------------

Edited to add:

I asked DH about LLCs & asked if having a paid off house in an LLC puts you at greater risk of losing it in the event you're sued.

DH responded:

There are debates on bigger pockets all the time about this and it goes either way. Some people say LLC, some people say it's easy to pierce the corporation - just make sure you have umbrella insurance.

Putting a mortgaged property into an LLC can trigger the due-on-sale clause in the mortgage.  Some people do it anyway and if the lender doesn't bother them, they are fine.

Other things to consider is that you have to be very careful to use only funds from the LLC and keep them separate, so you need to run it like a business.
 
To answer your other question, maybe, but I don't think that's much different from a mortgaged property, where you could lose all of the equity also.
Like I said, everyone seems to have a different opinion on this.

[Bicycle_B]

Supporting the idea that you need to diversify, therefore need something in stocks instead of nothing.

At the risk of overcomplicating:

It's not mainstream on this board, but a forum member (not me) created a wonderful site called portfoliocharts.com that displays many investment scenario results for a variety of investing portfolios.  What I got from reading many examples and playing with the built-in calculators was:
1. Diversification greatly helps create security.
2. Over short periods (1 to 10 years), stocks are risky and other types of investment add safety as long as you have both stock and non-stock in the mix.
3. Over long periods, especially 20 years or more, stocks are necessary. 

You can look at the examples and consider the data if you like.  But don't do analysis paralysis, at least draft an AA and gradually implement as the other posters suggested. 

If you're planning to be alive more than 20 years, put some money in stocks and have a plan.  If you're really afraid, put 5% into prepper tools and 95% into conventional investments.  I read somewhere that any allocation between 40% and 80% stocks had a fairly high performance over several decades, so maybe have at least 40% stocks in your Asset Allocation plan.  Anyway, decide and act, you'll feel better afterward.

[Left]

you don't need stocks, if you prefer real estate, stick with what you like because you'd end up tinkering with stocks if you didn't like it anyhow

forum users here like to retire early, myself included, but I like MMM for the FI part more than the RE in FIRE. I intend to keep working after FI for a time being but like the option that I can pick the job more than the job being picked for me. <--- don't get too caught up on the RE part of the forum if that isn't your goal

[Smokystache]

That said, index investing is based on the philosophy that you think the world is getting better in the long-term. If you think it's all going to hell in a handbasket, then there is no real point. Maybe consider investing in AK-47s so that you have the market cornered when armageddon comes.

....
If you are convinced that human civilization is facing a permanent decline, then ask yourself why. Is the world in a more precarious position than before WWI? WWII? The great depression? The dropping of the atomic bombs? The rise of socialism and the cold war? September 11th? 2008? In other words, what is so catastrophic this time that people won't need to buy cars, or houses, or toothbrushes or food or any of the other things that make the economy go?  ....

And remember what Warren Buffet says (paraphrasing) you only want stocks to be high when you sell.

[Optimiser]

That is an awesome chart. I should print that out and put it on my wall.

[Blindsquirrel]

   Stay off the www.zerohedge.com website will probably help you. :)

[jjandjab]

As a 36 year old you need to read this. My favorite stock investing article of all time

http://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

You can still be Bob (perhaps the 1987 version?) even if the market crashes!

[hegen]

Thank you all for your advice…. I really thought hard about everyone’s opinion on this issue.

To start, I finished reading the JL Collins’s stock series as suggested and I think I finally… understand why everyone universally suggested reading this. I also finished reading the “world worst investor”, which was really good as well.

Regarding the larger discussion on faith of humanity and the intrinsic values we place on my monetary and financial system, I think I was lacking the fundamental faith of our system that “Pizzaguy” & “Intellectsuck” alluded to.  I am not a financial expert but our global financial liabilities won’t just disappear. From the numbers, I am almost certain that we will have to correct in a massive way. Of course I have no idea when or how and I have been obviously wrong for the last 5 years (haha). I think I have accepted the fact that when “doom and gloom” occurs that it will still be temporary situation and that life will go on…

After struggling with these ideas over the entire weekend, I honestly feel really “cheap” that couple of these ideas will change my paradigm in such dramatic way…
In order to take massive action, I reallocated my 401K portfolio this morning to an index fund and doubled my overall contribution rate. I still have so many questions on my future financial actions, but thank you all for your help!

[zinnie]

You have gotten plenty of great advice and it sounds like you have a good start, but one thing to consider is what you will do when there is a significant crash. Will your emotions result in you selling when prices are low? It can be hard to stick to the plan when you're losing a ton of money on paper. While we all think we know how we will react, a lot of us on this board haven't experienced a large crash while having significant assets yet.  So, something to think about is whether a higher percentage in a money market or cash would help you weather the storm. Investing everything isn't going to do you any good if you panic and sell when prices go down.

Something else I've been looking into recently is modifying my US vs. international allocation. I haven't seen it discussed much here recently but a financial advisor I know suggested adjusting my allocation to address some of my specific concerns. Are your concerns based on a specific market, or global? Just a thought. 

The way I see it, investing is always going to be risky because there are no guarantees that what has happened in the past will happen in the future. But what other choice do I have? Keep it all in cash and not have enough to retire, ever? It's a risk but I also don't see another suitable option.

[PizzaSteve]

Good advice zinnie.

While i dont have a reference, i recall reading that Fidelity Investments did a data mining exercise to find their most successful customers.  It turns out the highest performing group were those who had died or forgot they had an account.

By investing and then selling nothing, they eliminated behavioral errors.   Investing is for the long term.  Also,  remember that these huge debts you worry about that will cause a correction are just accounting.  While real in our minds, they could, in theory, be eliminated with the stroke of a pen.  Think about the world of star trek, one already imagined by writers, where accumulation of wealth is not a primary goal of humanity anymore, primarily because the essentials of life are readily produced, with a low marginal cost of production.

I think we are headed that direction, so i am personally optimistic.  If not, i will be dead anyway, so why stress about it.

[DieHard_772]

This is a great post.  To the OP:  I appreciate your honesty, all we can do is our best.  The question is, now what?

I also relate, we are the same age, I didn't get started investing until two years ago. 
For both of us, even if we retire early, our time horizon is still long enough to yield a lot of overall growth.  Past data have shown that over time,
the market grows... and risk shrinks when you leave your money in the market long  enough.

Keep soaking in the good knowledge here!

[DieHard_772]

As a 36 year old you need to read this. My favorite stock investing article of all time

http://awealthofcommonsense.com/2014/02/worlds-worst-market-timer/

You can still be Bob (perhaps the 1987 version?) even if the market crashes!

THIS.  IS.  AWESOME.