5 Things To Do When Everyone Is Getting Rich

Happy New Year! Hopefully you enjoyed some nice time over the holidays with friends and family. Turning over the calendar on a new year always feels great, minus that hangover!

The new year is an excuse to change how you are doing things to better your life. Many look to improve their career, body or finances when the calendar hits Jan 1st. If you are new to this site and looking to improve your finances, go ahead and start here.

Many readers however are already well positioned and have been building wealth over time already. Investors are hitting all new highs in terms of their net worth. The S&P closed out the year with a 20.49% gain. No wonder we saw record sales on “Cyber Monday”.

So, what are we all to do now? Whether you are new to investing or have a net worth in the millions everyone is starting to wonder are we nearing a top? I have questioned it for years at this point if I am being honest. What has helped me stay focused and not get caught up in the bubble talk is taking the following actions.

1.) Build A Solid Emergency Fund

An emergency fund will help you weather the storm if it ends up coming in 2018. Do not get over confident in your ability to invest when everything is going up! Ensure you leave some money on the sidelines that is accessible in case something bad happens.

2.) Figure Out Your Asset Allocation

Asset allocation is important to understand. Once you have accumulated a significant amount of assets you need to spread them around the table. Being well diversified but in only one asset class is not enough. Finding uncorrelated assets will help you ride out the ups and downs that inevitably will come.

3.) Do A Hypothetical Gut Check Today

It is important to do a net worth calculation at least once a year. If you have been putting this off, go ahead and do it today. Then based on the asset class you are invested in assume a very bad loss in line with what has happened in the past.

This means for stocks imagine a cut in half this year. For real estate look at what happened to prices post 2008. Could you handle this today? If not, you need to adjust now while you still have the opportunity.

4.) Turn Paper Profits into Tangible Rewards

The financial independence community is awesome at being super savers. They figure out ways to save and invest daily and this is great! Just remember to reward yourself along the way. The market has not had a down year for nine years.

Now might be the time to take some money off the table and upgrade some things in your life that you have been putting off. Investing for the future is important but don’t forget about your quality of life today as well. Risk assets are just that a risk so take some of the reward now if you have been putting off something in your life.

5.) Build Some Dry Powder

“Dry powder” is just another way of saying build up some extra cash. Stay invested with your current allocation but above your emergency fund let some cash build up instead of investing right away. No one knows what the market will do.

You must stay invested with most of your money but having some reserves in case things take a dive is a good feeling. Having some extra cash on the side gives me the confidence to continue to aggressively invest.

Final Thoughts

Once you have thought through these steps realize that you must stay invested. Time in the market is much better then timing the market. Only invest in what you feel comfortable holding onto forever. If it seems to good to be true it most likely is. Invest wisely in 2018 and continue to crush it on your path to financial independence.

Best of luck to you in pursuing your 2018 goals!

What Are Your Thoughts?

  1. What have you done to position yourself after this huge bull market run?
  2. How do you stay invested and continue to invest at high valuations?
  3. What was the largest “unrealized” loss you have experienced in one year?

Spread The Wealth!

37 Comments on “5 Things To Do When Everyone Is Getting Rich”

  1. Nice post, DM. I’ve been thinking of a few of these points with the market at such high levels.

    Obviously, no one can predict the market consistently (if at all). I also hope the current bull market lasts as long as possible.

    But I’m considering allocating some of our proceeds into underperforming holdings in our portfolio. For retirement accounts, I’m actually purchasing into a short-term bond for new retirement contributions. I dialed back to only get the company match, as we’re focusing on taxable accounts this year.

    That said, asset allocation will continue to be a key factor for us – especially in a taxable account.

    Related to your other questions, the largest unrealized loss was probably 60 percent of our net worth in 2008. But it was small then only 1.5 years out of college. It taught me two things:

    1) the larger percentage decrease, the even larger percentage increase needed to get back to breaking even. And this gap accelerates the the larger the loss or percentage.

    2) it’s buying time when when we lose a significant portion of our net worth.

    Overall, we’re continuing to DCA and stick with our long-term objectives and asset allocation, but we’re preparing to go lump sum shopping at some point in the future. No one knows when though.

    1. Hey Mike,

      Thanks for sharing your input!

      Curious as to why are you focusing on your taxable account vs. the tax advantaged space?

      60% is no joke! I think a lot of people like myself have rode a huge wave up and am curious as to how folks will handle it when the market corrects.

      I like your mindset and think that it is wise to stay invested. I will be building up cash though alongside my normal contributions.

  2. Hey DM,
    I think point 3 a gut check is really important. Knowing one’s asset allocation allows for this. I take my stock holdings and cut them by 40%, my bond holdings 10% and leave my cash stable. This way I know where I would stand in another bear market/crisis. I also cut the income stream from those investments by 20% figuring some dividends will be cut and some interest on bonds will not be paid. However, it’s one thing to do it on paper and another to live through it. So everyone needs to be really honest with themselves about the risk. It’s hard to do now since the average person has forgotten that financial markets do go down. Sometimes by a whole lot. Nice post. Tom

    1. Hey Tom,

      We all can’t live in fear and have to continuously invest to fight inflation. Yet I do think it is wise to ensure that after folks have built some sizable assets they make sure that they are allocated appropriately. Time horizon will save many young readers out there. I do worry though that many people do not have a high enough reserve and it gets tempting to invest more when markets look like they can’t lose.

      Most readers in the FI world are well positioned but even still no one is bullet proof. I am a big fan of aggressive investing but keeping a large side stack.

  3. Good tips, Hoss. This time of year is absolute craziness for small business owners who happen to work full time jobs. A-hem. I’m reviewing my W-4 withholdings and in constant contact with my accountant about the new tax bill. I had to cough up 4 grand to pre-pay 2018 property taxes. That was fun. So, once the dust settles, I’ll hopefully get to focus on the Airbnb experiment. A first booking would be nice!!!

    1. That prepayment frenzy was madness! I cannot imagine being on the receiving in trying to manage all of those incoming payments.

      Good luck with the Airbnb seems like a great way to profit if you execute well.

  4. Nice write up there. I agree staying invested and time in the market is very vital. I also agree not trying timing the market is good but picking the lower valued stocks at the time when money becomes available is also important. So in other words, not trying to time market but try to pick lower valued stocks compared to higher valued at each time while making the purchase. You kind of tough this though in item 2 though.

    I loved your idea of item 5. I agree to that wholeheartedly and have been following it myself since last year and half or so.

    Good luck.
    TDK.

    1. Appreciate it TDK.

      I don’t dabble in individual picking to often “but when I do” I prefer to look for value as well. Picked up an O&G exploration company last year with oil prices so beaten down. Has been an interesting ride and am currently up with the rebound in prices.

      Dry powder is always forgotten about until its needed….

  5. What have you done to position yourself after this huge bull market run?

    As you heard, paid off the student debt, saved some cash. Plan to pay off some mortgage just to reduce our leverage and hoping to build some “dry powder.” It’s nice to have options in case anything goes south 😀

    How do you stay invested and continue to invest at high valuations?

    Just keep whatever we have invested and not think about it. Still going to invest a bare minimum per month (DCA). As long as there’s some cash saved on the side (emergencies), and if we feel that our current income is sustainable (and does not affect our lifestyle), it SHOULD be okay (knocks on wood!!)

    What was the largest “unrealized” loss you have experienced in one year?

    I was invested in a euro index ETF about 5 years ago (still invested) and it was down as much as 30% in one point. I believe I bought it right at the highest, but I wasn’t trying to time it or anything like that. It took a while just to see it in the positive territory again and I didn’t really pay attention to it because it didn’t impact my life. But recovered or not, it doesn’t matter because I’m in it for the long term. Also 30% is nothing compared to >50% when markets tank lol!

    1. Awesome job again on the student debt just have a feeling you wont ever regret that one.

      DCA is a solid plan that I do as well. I think large cash reserves are what I need to stay invested and confident.

      Long term is a must in the unforgiving markets. Thanks for sharing a loss, most people won’t share their bad investments only the winners of course.

  6. I sense some fear in you, that that the market might not go up forever. I don’t think it is typical, and I get an overly optimistic feel from most millennials about the markets.
    I’m older and have been weary of a correction for a couple of years now. Hoping we get a couple more good years before that down turn does come.
    Good advice.

    1. Thanks MR. JS,

      Not fear as much as rational positioning. I am 27 so luckily I can still go back to the salt mines if I lose my fortunes. I think as I grow a bigger portfolio my mind irrationally thinks a downturn could come and wipe a piece out. Maybe that is secretly how I stay motivated to keep adding to the pot.

      I hope that everyone takes time to analyze where they are and position themselves so they can be happy even during a downturn. Key to long term success.

  7. Good article DM. #5 build up some cash. I am looking forward to a correction so I can pick up some stocks at nice evaluations. I can tolerate this now as I am still working, but in a few years I will have a more conservative portfolio.

    1. Hey Steve,

      I hope to be able to add some real estate in the future so my cash reserves are growing. Maybe I am being biased and that is why I wrote this article…

      The bulls could continue to run and that is why I stay aggressively invested. If I was planning on no longer having a W-2 I would have a much more conservative portfolio as well.

  8. I haven’t changed a thing as far as the 401K investing goes. Still throwing quite a bit at that since we have a longer time frame to go (mid 30’s). I haven’t been adding too much lately to the brokerage account. Just reinvesting dividends of course.

    1. I think that is wise. I am also continually investing as much as possible in tax advantaged space. After tax money I am with you and letting it build a bit.

  9. Great write up DM!! Hopefully the market continues it’s upward trend but being up for so long, it has to come down at some point. We all have to prepare for it by rebalancing your portfolio to be more conservative and when investors are in a selling frenzy, you should buy those stocks that have hit close to rock bottom because you know most will come back up.

  10. Hey DM,

    Great read. I think it’s critical, in the grand scheme of things, to highlight the point you made in #4 -Turn Paper Profits into Tangible Rewards. I think we in the FI community, as you mentioned, tend to be super savers and sometimes we forget to reward ourselves. Saving money and getting out of debt is mundane, hard work because we see so many of us living inflated lifestyles.

    Great stuff!
    Carmen over at @makerealcents

    1. Thanks Carmen,

      I agree that it is really important. Most of us come from humble backgrounds and start on a war path. As we advance in our careers/lives it is important to reward ourselves along the way. A raging bull market is the time to do it.

  11. Feels like wise words, everything does seem to be racing upwards at the moment! I’m a similar age and have only been investing 18 months so haven’t really experienced any downturns! I think keeping in mind time in the market vs timing the market is important, I’m invested for the long-term, I expect my portfolio to drop at some point but will keep investing as per my plan.

    1. Hey Cam,

      Time horizon is a something to consider for everyone and that is a good place to start for determining how risky ones portfolio should be. Over time we all need to stay invested and not time the market. I continually invest each pay period and am referring to cash above and beyond tax advantaged space.

      Thanks for commenting.

  12. Great post again! Right now, I have to build my emergency fund which is terrible in Germany as a freelancer. As a freelancer you need at least 6 months of savings because you won’t get paid through vacations and in some bad months where you don’t find a project you also want to be ‘safe’.

    In Germany the costs of living are incredibly high and I need at least 2k/month. There is no way of saving more money without decreasing our quality of life heavily (move from 3-room-apartment to a 2-room-apartment) or cancelling insurances (which is also a stupid decision).

    I also want to diversify myself during the next months. However, as a job starter, I have to build one asset class first before diving into another. Let’s see what 2018 brings for me.

    Thanks for that great guide again. I will try to go through that list from time to time.

    1. Sounds like a good plan SB! It is great to get an international perspective. I feel for you on the freelancer work I am sure that is frustrating sometimes and rewarding at others.

      Respect that you are putting yourself in the drivers seat though.

      Best of luck in building things up in 2018!

  13. Good list. If I can add #6, I would say, befriend and hang out with those getting rich. They say: “If you surround yourself with 4 broke people, you will be the 5th one”. I think the opposite is also true: “If you surround yourself with 4 rich people, you will be the 5th one” 🙂

    1. Great add! You are the average of the 5 people you spend the most time with.

      Naturally if your ambitious and have big goals it only makes sense to associate with others who are in the same category. Plus they tend to be way more interesting.

  14. Good list! I’ve been sort of hoarding cash ever since I paid off my student loans almost a year and a half ago. Part of that is because I’m expecting some big expenses in the near future (I’ve been dating my girlfriend for 4 years . . . you do the math) and part of that is because I’m trying to set myself up to take major advantage of the next market dip.

    1. Haha well first of all early congrats! Hopefully you can take care of those big ticket items coming up in your life and hit the market timing jackpot!

  15. Dry Powder; never heard of that term. I like it! And sooner or later we will see a correction in the market, which means opportunity. For ones who are able to continue to save and invest and have some idle cash, it’ll be an ideal situation.

    1. I do think those who stick to a strategy and are patient will be rewarded in the coming decade…as history tends to repeat itself.

  16. Hey DM,

    Good ideas, I especially like dry powder. For me, the best way to do this is to set up an auto-transfer to a savings account at another bank and then forget it exists. I also keep two personal credit lines open that I never use, for cases of extreme emergency.

    1. Always good to have extra resources to pull from. Auto savings has worked very well for me too. Out of sight out of mind, the more that is automated the better.

  17. We’ve been thinking a lot about turning some paper profits into some tangible rewards. We are seeing some sizable gains in our taxable accounts and want to take some off the table an upgrade a bit. We have delayed gratification for over 10 years and now seems to be a great time to trim some gains and enjoy. Now if only I could keep the taxman from taking his share.

    1. The taxman is relentless.

      I think it is important to take some wins along the journey. We might be looking back in 3 years and wishing we had…

  18. Excellent advice!

    I have only been investing for 3 years (post college graduation) so I have only ever known a Bull Market. Thankfully I read a s*** ton on the market and its history so I understand how to effectively prepare for its inevitable ups and downs.

    Building the emergency fund is definitely one I will continue to improve in the future. We currently have about a 6 month emergency fund, but I want to get in the habit of putting a couple thousand in there every year just to be safe.

    I terms of asset allocation, I simplified our investments this year to the MAXIMUM. I sold both of the index funds that we (fiancée and I) had in our Roth IRA’s, and then put all the money into the Vanguard Total Stock Market Index Admiral Fund. I am becoming more and more comfortable with simply owning the market at its cheapest cost and letting compound interest do the rest over the course of 35-40 years!

    Great post!

    1. Sean simplicity is so under rated. Did you read The Little Book of Common Sense Investing and decide to get rich?

      Very wise I wish more people would learn this young and start early. The truth is this path is most powerful for long time horizons, in the beginning you build slowly and in the end you reap heavily.

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