Like many of you, Mr. FIRE and I are watching the market and are worried that it's colossally overvalued -- that is, that stock values are wildly outstripping the actual values of the companies they represent. As many financial gurus are currently noting, this is a perfect storm for a recession. And no one wants to "buy high" into the market and then get slammed by a crash. So what to do?
I'll tell you what our financial adviser told us: The WORST option is to do nothing.
This advice breaks down in a few ways. First, people who try to time the market tend to lose money and opportunity. This goes for both ends of the market: sitting on the sidelines waiting for stocks to "go on sale" means you'll miss out on market climbs, while holding onto stocks waiting for them to peak in order to maximize your profit often leaves you selling as they plummet. So, as a general rule, don't try to time the market -- invest when you can, sell when you reach your goals, or hold until a designated date....don't try to guess when the rollercoaster will be perfect for you to get on or off.
Second, there are lots of ways to invest in the stock market. You could pick a conservative portfolio set up for a recession (mixing in more bonds) or if you're tolerant to high risk, you can always short the market (NOTE: don't do this without help -- in normal investing, the worst thing that can happen is that the stock goes to zero....but in shorting, your potential losses are infinite). With a conservative portfolio, you won't get the same gains as aggressive investors if the market keeps climbing, but you'll be more insulated against a recession.
You could also pick individual stocks from strong companies that you expect to climb and invest there. Before index and mutual funds, this is how everyone invested. It's how my great-grandfather ended up buying Coca-Cola stock when it was just starting out. And it's still an excellent (if time-consuming) way to invest. I know a Lieutenant who uses this technique with tech firms because, with his background, he can evaluate the strength of their code and hence predict their success in the software market.
Third, there are other things to invest in besides the stock market. Find something that is tailored to your risk tolerance. Because Mr. FIRE and I are approaching our desired FIRE age, we are more conservative with our FIRE bucket money, so we're seeking predictable (if smaller) gains. Our FIRE cash is in a high-yield money market account, and we pull from there to invest in real estate opportunities. Like picking individual stocks, there are always good investments in the real estate market. For example, we're looking at a couple of multi-unit rental properties that will give us a steady income with more than 10% ROI and a vacation property that should yield about 4% ROI but also give us somewhere to vacation for free. Meanwhile, our RETIRE bucket money is still in the market because it has decades to grow and can weather any upcoming recession.
Last, but not least, if you're worried about the market, you can use some of your savings to invest in yourself: take a class, get a certification, invest in your side hustle, join a professional association, attend a conference....the list goes on and on. Even an investment in your physical and mental health can pay dividends if it increases your productivity and happiness. FIRE isn't just about stacking up the Benjamins -- it's about funding your chosen lifestyle, so investments that increase earning potential or longevity are investments in FIRE, too.
Bottom Line: our adviser is right, the worst option is to do nothing. Don't let fear paralyze you. If you do nothing else, keep saving your money into a money market or high-yield savings account. KEEP SAVING.... no matter what the market looks like.
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