What I’m Doing Now that the Long Overdue Market Correction Is Finally Happening

Yes, I’ve used this picture before. But it’s a good one for today’s post too since stock market corrections are just another example of something going on sale!

I’m back! A wild string of events, combined with some laziness on my part, has resulted in me posting absolutely nothing for an entire month. I even considered shutting down the blog altogether. But after some reflection, I’ve decided that my original purpose of sharing my financial and life experience with anyone who wants it is still worthwhile and more than doable – provided I recommit myself to it a little. At this point, in light of my rapidly changing life circumstances, my goal is one post a week. And what better cue to get back to posting than a historic stock market event?

For the last couple of years, I’ve had plenty of people laughing at me. After all, I’ve been calling for a significant correction, or even a recession, since 2018 and I even did so publicly on this blog. In my eyes, the underlying economic fundamentals of this economy, as well as those of others around the world, have nowhere near justified the stratospheric asset pricing we’ve been seeing for quite a while now. And while recent events may be a little vindicating, this is no time for schadenfreude or gloating. Besides the fact that I’m not that petty, that wouldn’t do anyone any good. Instead, here is my take on where we are now and what I plan to do going forward. Please note that everyone should do his or her own diligence and I am in no way advising anyone to do anything in particular.

For anyone who hasn’t been paying attention, over the last week or so, stocks have collapsed, blowing right through correction territory (a loss of 10% or more) to the cusp of finally ending the more than decade long bull market that has had more people believing themselves to be investment savants than at possibly any previous point in the history of the world and entering a bear market (20% loss or more). Today alone, the DOW, Nasdaq, and S&P 500 indexes each lost over 7% of their value and even caused trading to be temporarily suspended for the first time since the Great Recession. At first, this was attributed mostly to the coronavirus, or more accurately, to the resulting mass hysteria drummed up by the typically profit motivated, rubbernecking mainstream media. But at this point, it appears pretty safe to say that was nothing more than a catalyst to the broad-based obliteration of trillions of dollars in asset value.

So what am I doing about this? Absolutely nothing…yet. I’ve had less than 5% of my assets exposed to the stock market in any way, shape, or form for well over a year now. But I’m eying the trigger with greater and greater excitement as I await the right time to start moving back in. I don’t think we’re there yet. I anticipate at least another week or two of serious volatility and carnage. Remember, the oil price collapse element just happened over the weekend so there will likely be more industry fallout there. Plus, the FED is likely to do at least one more pointless knee jerk rate cut, which will likely have a similar lack of positive effect to the .50% one they did last week, since they’ve long since painted themselves into a corner by following a policy of presidential placating rather than giving the economy the tough love it actually needed. When I decide it’s time, I’ll start pushing my 401K and Roth IRA money back in, probably 20% at a time. It’s almost impossible to “catch the falling knife,” so I’ll use dollar cost averaging to get as close as I reasonably can.

What if you didn’t get out when I did? If you have a long enough timeline before you need the money – I’m talking years – you’re fine. Staying in as opposed to bailing out has historically been the right move. Remember, you haven’t lost a penny until you’ve actually sold your asset for less than it was worth when you bought it. And if you keep putting additional money in, you will dollar cost average your way into a better position over time.

If you don’t have a long enough timeline, you shouldn’t have been in a stock heavy position. Sorry to be blunt, but sugarcoating isn’t going to make the situation any better. At this point, you have to adjust your plan to accommodate the new reality. Maybe you can hold off on retiring until the market recovers or if you have to retire soon, maybe you can work part time or do something else to bring in enough income to avoid being forced to sell and realize losses. Or if you have gains elsewhere, maybe you can use those assets for some liquidity and harvest some losses to offset them so you at least get a tax benefit out of the situation. It depends entirely on your individual circumstances.

Remember, there are two ways to look at this. One is that your asset values have declined. The other is that there is a big sale going on! If a recession does take place, it will definitely create huge opportunities one way or another. Happy hunting!

Watch Out for this 401k Trap Later in the Year

A very amateur picture of the mighty Jerry Dome, where the Cowboys would be crushing the hapless Giants tonight if not for it being an away game

Happy Monday, Folks! Today’s post is not going to apply to everyone. The problem I’m going to address falls into the category of “good problems to have.” However, if it does affect you, it will cost you money if you don’t address it. The post applies to folks who A) max out their 401k contributions, and B) have variable income – commissions, bonuses, etc. For those who don’t fall into both of those categories, don’t feel bad and don’t underestimate what can happen in your life either. This is only the third year this information has applied to me and the year before the first, I never would have seen it coming. This method may seem complex, but it is actually really simple once you understand the concept.

In most employer sponsored 401k plans, employers match some percentage of your contributions. The most common one I’ve seen is 3% if you contribute 6% of your salary, or simply 3% of your salary to keep things simple. Some are more generous than that, and many are less so. But let’s use that for the sake of our example. Let’s say you have a set $100k a year salary and want to max out your contributions for 2019. Since the limit is $19k this year, you would simply need to contribute 19% of your salary, which would both easily cover the 6% requirement to get the entire match and hit the contribution limit exactly by the end of the year. If you did that, you would contribute $19k, your employer would contribute an additional $3k, and your total would come to $22k. Bueno!

But what if your income varies depending on performance and other factors? Herein lies the problem. If you anticipate your income will end up being roughly $100k, you want to max out your contributions for the year, and you subsequently set them at 19% and forget it, one of two things is very likely to happen. Either you’re going to undershoot and leave tax shelter on the table (every dollar you contribute to a 401k reduces your tax liability) or you’re going to overshoot and lose out on some of your potential employer contribution money.

Here are some examples to illustrate the point. Let’s say you end up making $80k. At the end of the year, you will have contributed $15,200, missing out on $3800 of tax shelter. You can multiply your top marginal tax rate by that number to determine how much that will wind up costing you. But regardless, ouch! Now the opposite scenario. Instead of making $100k, you wind up making $120k. You would have contributed more than the maximum $19k at some point, except that whatever company administrates your plan is likely to simply cut off your contributions when you hit the limit. So instead, you would have finished making your $19k in contributions for the year at some point before the end of the year. It’s good to be early, right? Not in this case. Unless your employer “trues up” the match at the end of the year, which I doubt most do, you would have left $600 in employer match on the table. Why? Barring the “true up” exception, an employer matches check for check. In other words, you wouldn’t be getting any match for the $20k you had left to earn after you made the first $100k and had subsequently contributed 19k. Once again, ouch!

So how do I avoid either of these scenarios? I make adjustments throughout the year. At the beginning of the year, I set my contribution percentage as if I were only going to make my base salary. In other words, it is much higher than it will be by the end of the year, but if I don’t make a single dollar in bonus compensation throughout the year, I will still max out my 401k. Then, each time I get a bonus, I calculate how much I have left to contribute for the rest of the year, divide it by the amount of base salary I have left to make, and make the result my new contribution percentage. Admittedly, this is a conservative method. But that’s the way I prefer to operate.

You can modify this system to your liking, and you may have to if your base salary is a relatively small percentage of your total annual income. It just requires a little “guess and check.” For example, if your base salary is $40k and your total annual bonus is typically in the high five figures, you’re not going to start the year contributing 47.5% of your salary. Not only would that make for some very lean times until you got your first bonus, but it would also very likely cause you to eat up way too much of your $19k way too quickly, thus eventually defeating the purpose of the entire exercise once you couldn’t contribute a large enough percentage to get the full employer match without going over the annual limit. So in a situation like that, I would probably just estimate, start out contributing around 15-20%, and adjust as needed to stay on pace.

But one nice side advantage of doing things my way is that as the year goes on, the paychecks get bigger. In my case, the result is that I tend to do more of my after tax investing later in the year since I have more cash coming in the door. But regardless of how you do this, the important thing is that you not leave money on the table – either with your employer, or with the bad guys. I know this may seem like overkill to some of you to save what will likely amount to less than $1k a year, but this is a finance blog. And besides, no one knows what the future holds. When you’re at retirement age, you just might need that money and besides, it will almost certainly have grown considerably by then. Plus, although this took a lot of words to explain, it only takes me maybe fifteen minutes total of calculating and making adjustments throughout the year, so in my opinion, it is well worth doing. Have a wonderful week and go Cowboys!

401k and Roth IRA Basics

My retirement will certainly involve more flights at more breweries. Sadly, this particular brewery did not live up to its hype in my opinion but it was still a great time!

Do you love paying taxes? Ok, stupid joke. But today I want to talk about a couple of great ways to pay a little less and help your future self out in the process. For those who ignore the almost nonstop reminders in the media, the United States has a massive retirement crisis in its not so distant future. It seems that in spite of this being the richest country in the history of mankind, nearly half of everyone living here HAS NOT SAVED A SINGLE FUCKING PENNY for retirement. Many of the people who have saved at least something are still woefully short of where they need to be. With obviously unsustainable pensions (otherwise known as defined benefit plans) mostly relegated to the history books, the criminals fine, upstanding people in charge realized they would have riots in the streets if they didn’t toss a little bread out to those pesky subjects citizens. And thus, some new tax advantaged retirement savings options were born. So far, they don’t seem to be helping much, but that’s why I and countless others are writing posts like this one. 401ks and Roth IRAs are the two most common tax advantaged retirement savings options and an overview of the basics of both is below.

Both of these offer tax breaks, but only to people wise enough to take advantage of them. In my opinion, they should both be maxed out if possible prior to investing in anything else excluding building an emergency fund – which is actually saving, not investing. And yes, there are other types of these but they are less common and I’m writing for a mass audience. And yes, there are various tricks and loopholes that entire posts could be written on but this particular post is just meant to be a general primer. Also, I am not a tax professional and I don’t know the details of your situation so nothing in this post constitutes specific tax advice. This is for information only. Here are the basics.


  • Usually offered by an employer
  • Maximum contribution for 2019 is $19,000 + $6000 “catch up” for people 50 and older
  • Employers often match up to a certain percentage of your income if you contribute at a required level
  • No phase outs but HCEs (highly compensated employees) may potentially have their contributions limited
  • Contributions lower taxable income in the current tax year
  • Distributions are taxed when taken
  • Cannot take distributions prior to age 59.5 without being taxed and charged a 10% penalty

Roth IRA

  • Usually not offered by an employer
  • Maximum contribution for 2019 is $6000 + $1000 “catch up” for people 50 and older
  • Phase outs starting at $122k MAGI (modified adjusted gross income) and completed by $137k for single filers, or $193k and 203k for married filing jointly
  • Contributions are made using post tax dollars
  • Distributions are not taxed
  • Contributions can be withdrawn prior to 59.5 but earnings withdrawn prior to 59.5 will be taxed and penalized except in specific “qualifying” circumstances

I think the easiest general concept to remember about the difference between the two is this: 401ks are taxed on the back end, Roth IRAs are taxed on the front. To get the maximum benefit, you need to contribute $25k in 2019, assuming you are 49 or younger and not prevented from it by having a very high income.

If you can’t max out both, I would do the following in most cases. First, contribute whatever your employer requires to get the full match that is offered. For example, if your employer matches 3% of your salary if you contribute 6%, a fairly common setup, you would want to contribute 6% to avoid “leaving money on the table.” From there, I would work towards maxing out the Roth IRA unless you are phased out, in a high tax bracket, or have some reason to expect your income is going to go down significantly in the future. If you can do that, I would put any additional available money towards increasing your 401k contribution percentage. Anything you can do is better than nothing and slow progress is better than none. For example, you could start out contributing whatever you are comfortable with and set up an automatic increase of 1% a year on one or the other or both. If you get even a basic cost of living adjustment at the end of the year, you won’t feel any pain because you will still be getting a raise after taxes. This would particularly be the case if you’re talking about a 401k since you would be lowering your taxable income by increasing the contribution meaning the 1% increase wouldn’t cost you the full 1%.

Hopefully this will help some folks get a better idea of how to handle these accounts. If anyone would like me to get into more detailed subtopics on this, please let me know in the comments or send me an email at admin@healthwealthpower.com. Have a great day!  

What I’m Doing Now that the Recession is Finally On

Winter is coming… – Image courtesy of Jean-Marc Buytaert

I’m going to start this post with a disclaimer. The following is a description of a strategy I am employing with my own assets. I accept no responsibility for any consequences, good or bad, of whatever you do with yours. The only actual advise I’m going to give you is to do your own research. This goes for anything posted on this blog but especially for a post of this nature.

Be fearful when others are greedy and greedy when others are fearful. – Warren Buffett

After a historic bull market has made investing experts out of novices everywhere, we are finally about to separate the wheat from the chaff. It’s easy to make money when everything is going up. Almost everyone does. But truly gifted investors get excited when the market is falling. They don’t just protect themselves in the event of a down market; they look forward to the many opportunities it will present. And finally in the last couple of weeks, we’ve seen an exclamation point added to the long building evidence that this is finally about to happen again. The FED gave up on its anemic effort to both raise rates to normal levels, which only got about halfway there, and to unwind quantitative easing by allowing the runoff of its balance sheet to move it towards more normal levels – again, it didn’t get anywhere close. Paul Volcker, that giant among Federal Reserve chairmen (both figuratively and literally, the man is six and a half feet tall), must be disgusted. Almost immediately after what is both widely and accurately being described as the FED throwing in the towel, the so called yield curve, which had been flirting with inverting for some time, finally did so. For those outside the finance world, the inverted yield curve is a nearly certain signal that a recession is around the corner.

Combine those blaring recession alarms with several other key indicators that have been more than hinting at one for literally years now, and the historical improbability of going even as long as we already have without one, and a recession is virtually etched in stone. Whereas the last one originated primarily in the housing sector, I believe this one will be more broad based. There is significant stress from diverse sources. The housing market is overheated again, albeit somewhat less so than last time and with a much less severe subprime problem. A large subprime auto loan bubble has developed and the default rate has been quietly increasing for some time. Americans young and old are weighed down by a mountain of non-dischargeable student loan debt with a high default rate there too. Substantial structural problems in the Chinese economy as well as several others around the world need to be taken seriously in what is now a fully global economy. And who can forget an unsustainably high national debt here at home? Since the FED has squandered a decade long bull market by acquiescing to political pressure to keep the pedal to the floor and failing to build an adequate buffer as a result, it seems this recession will be a relatively uninhibited one. Or to put it another way, it’s time to batten down the hatches.

As a finance man myself, I was among many of my peers in expecting this a few years ago and preparing for it accordingly. The good news for those who did not do so is that it turned out we finance folks were early. However, I’m 100% comfortable having missed the very peak of the mountain if it means ultimately avoiding going off a cliff. It looked like the market was finally correcting last December but that turned out to be only a precursor and almost everything promptly recovered. The next time will likely be different and if it doesn’t happen by the end of this year, I will be very surprised.

So what do I do to prepare for a recession? It’s a very simple approach. As we near what I believe is the peak, I gradually move any assets without tax consequences (401ks, IRAs, etc) out of stock exposure and into cash or in cases where there is no pure cash option, money market funds. With taxable investments, I do the same for the most part with the addition of harvesting any available long term capital losses at the same time to minimize tax liability. If I can’t do that, and it can be difficult in an “everybody wins” market like we’ve had for some time now, I will sell out anyway and take the tax hit. So for the short term, I’m giving up potentially larger returns in stocks and accepting low, but comparably stable ones in return – currently 2.45% and thereabouts. The risk I run is that as happened in this case, I will be too early and miss out on some upside. But no one can time the market and anyone who says he can is either lying or doing something that is likely to wind him up in a lot of trouble one day. And a small to moderate loss of upside is a small price to pay in my opinion when the reward is ultimately avoiding a 20% or greater collapse nearly across the board.

Of course the return on cash will decline when the FED cuts rates (what little it can in this case) and does everything else in its power to juice the market and soften the impact of the collapse. But that’s ok because the primary goal is to avoid losses; the small return on cash is just a short term bonus. Once there is blood in the streets, and that will almost certainly be the case when rates are being cut, that’s the time to shift from one end to the other in following the advice of one of the greatest investors of all time, Warren Buffett, which I opened this post with. I can’t predict exactly what will be going “on sale.” It may be everything or it may only be certain sectors/asset classes. Maybe stocks will fall so far that they’ll be too good to pass up. Maybe both real estate pricing and mortgage rates will decline so much that even this renter, who is thoroughly uninterested in homeownership, will become a landlord. Maybe I’ll look at investing more in small businesses.

I don’t know which opportunities will or won’t materialize but as always, I’m watching everything. Whatever you do, it will take balls to buy while everyone else is panicking and boarding up the windows. But if it were easy, everyone would do it. The underlying principle is to capitalize on the inefficiency created by people (and even computers, which control most stock trading now) operating emotionally rather than logically. The window may or may not stay open very long but it will almost certainly open. The important thing is to keep your eyes open and be prepared to act based on what you see.  

And you don’t have to get fancy either. I’ll leave you with this as food for thought. If you had bought into the best and most basic stock fund (Vanguard Total Stock Market Index – VTSMX or VTSAX) anywhere between October 2008 and October 2009, your investment would be worth roughly 300% today – an 11.6% annual return for an entire decade. If you had nailed the bullseye and bought dead at the bottom, it would be closer to 400% – or 14.8% annualized. That would take some luck. But the 300% outcome of the year I mentioned would take much less. If you want to take a more conservative approach, use dollar cost averaging as opposed to dumping everything in all at once. You won’t get the biggest possible return, but you will be putting the odds of a strong long term outcome in your favor. Good luck everyone! And don’t forget to take luck out of the equation as much as possible by doing your research.

My Latest Book Review

The Equity Culture: The Story of the Global Stock Market by B Mark Smith (2003)

This book was written by the same author as the classic “Toward Rational Exuberance,” so I expected big things going in. As advertised, the book takes a winding path through the history of stock markets around the world, providing an in depth look at major events in each. An observant reader of this blog will probably notice that there has been a long gap between the last book review I posted and this one. This is because aside from a couple of lackluster books I decided not to review and the fact that I moved into a new apartment a little over a week ago and spent several days getting my life put back together afterwards, this book was very dense and took a while to get through. While interesting at times, it was mostly pretty dry and even though I was interested in the subject matter, reading it reminded me of having to muddle my way through some priceless work of ancient philosophy that isn’t nearly as readable as modern analysis had me believing it would be going in.

However, because there is tremendous value in this book, I kept going and ultimately made it through. Cultural differences were addressed that help to explain some of the still lingering differences between, for example, the western and Japanese stock markets. But for me, the most valuable part was perspective. After reading about stock market after stock market going through similar stages of development, patterns began to emerge. Just about every different market has experienced something that appeared to be a disaster at the time. But almost invariably, the end result of each of these events has been greater innovation and the continued building of wealth en masse – at least given enough time. However, there were winners and losers in each of these situations and that point is important to keep in mind as well.

My biggest disappointment about this book is that it only goes through the early 2000s bursting of the “dot com bubble.” It would have been nice to have seen the author’s analysis carried through to our most recent recession – and possibly into at least a portion of the historic bull market of the last decade or so as well. I see that there is a 2015 edition so maybe the author extended it. Sadly, my local library had the 2003 one so I’ll never know. Anyway, while the 2008 recession clearly had different underlying causes than the one we are finally beginning to see materializing now, it would have been nice to have had the additional insight. Overall, while this author can’t necessarily keep you on the edge of your seat for 300 pages and change, it’s only fair to acknowledge that isn’t really a reasonable expectation when picking up a book on the worldwide history of stock markets. It is still valuable, well presented information and thus, it is worth reading.  

Basic Investing: A Roadmap to Getting Started

The Sunshine Skyway Bridge in Tampa, FL

There is an awful lot of misinformation out there about investing, much of it propagated by people who stand to benefit from leading others astray. Detangling all of it will take time and while I intend to do that on this blog eventually, I want to start with a simple, basic strategy that a lot of people can follow. This strategy will outperform most of the “experts” over time and at a much lower cost than what they will charge you. As a general side note, please remember this; very few people in the media are impartial anymore. Don’t act on any financial advice that is given out publicly without evaluating who the source is and what he or she may have to gain from disseminating it.

Cash is king and that is where you should start. If you don’t have enough on hand to deal with life when it happens to you, it is going to cost you dearly. For example, you can’t pull money out of your 401k very easily (or cheaply) to deal with sudden medical expenses. It is better to have enough cash saved up before sacrificing liquidity in favor of potentially higher returns. A lot of people will tell you to have six months to a year of expenses on hand. I think that is a decent place to start but also that it is a little more nuanced than that. Think about your personal situation. How many incomes are in your household and how many total people? If there are more mouths to feed than sources of income doing so, your cash needs are greater. Conversely, if you have a household of two working partners and no dependents, you can probably get by with somewhat less cash, particularly if your incomes are relatively similar. No matter what you do, keep in mind that the basis for your calculations should be your expenses, not your income. And if you don’t know at least approximately what your monthly expenses are, then you need to go back and start there.

Once you are comfortable with your cash position, you can start investing. I recommend a 401k if your employer offers one. Of course, not all 401k offerings are the same. A good one will include at least some level of employer matching, at least a handful of low cost (expense ratio of no more than .5% and preferably lower) investment options, and a reasonable vesting schedule. Sadly, my current employer fails on that last point with a ridiculous six years to 100%! But I digress. You can put a maximum of $19k a year into a 401k and it will lower your taxable income accordingly. But assuming your MAGI (modified adjusted gross income) is less than $122k, you can also put up to $6k a year into a Roth IRA.

But start by contributing at least enough to your 401k to get the employer match. A typical one seems to be 50% of the first 6% of your salary (in other words, 3% if you contribute 6). From there, you can determine where to go with the excess. In general, a 401k reduces your tax liability today while a Roth IRA reduces your tax liability in retirement. Since your tax rate is very likely lower today than it will be years down the road, there is a solid argument to be made for putting $6k into your Roth IRA and then going back to finish maxing out your 401k. But I would start with some combination of these two, again taking the phase outs based on your income under consideration in the case of the Roth IRA.

What should you invest in with your 401k and Roth IRA money? This is an easy one. Go for low cost index funds that mirror your objectives. If you’re young and you have a long time until you plan to retire, you can afford to be risky so you can go with a heavier stock to bond ratio – as high as 100/0 even. If you’re getting older, you will likely want to move towards the other end of the spectrum. It’s all a matter of risk tolerance but remember, more risk typically produces more reward.

Regardless of the risk you want to take on, this next point is the most important of all on investment choices. Do not let anyone bleed your retirement savings year after year. Actively managed funds almost never outperform index funds over the long term and they are much more expensive. A fee of over .5% will eat up a ton of your money over time. If Vanguard options are available to you, there is a good reason they are the largest mutual fund company on earth. Their funds are the gold standard in providing low cost funds with competitive returns. You would be hard pressed to go wrong if you’re looking at anything of theirs.

What if you’re making less than $122k a year (roughly 90% of people are below that level) and you are already maxing out both your 401k and your Roth IRA or you’re making more than that and doing all you can with those two avenues? First, pat yourself on the back because if you stay on that course and make decent investment decisions, your retirement is more secure than that of almost anyone you know. Now, prepare to have a little fun. With that $25k a year going into your long term retirement funding, you can afford to get aggressive with any excess if you want to. In my case, I do some more conventional stuff and I’ve also started a side business investing in real estate. In your case, the world is your oyster. This is where you may want to talk to a professional if you aren’t sure. I work with both attorneys and a CPA with my business. If you work with a financial advisor/planner, make sure they are fee only. If not, they’re likely to put you in the investments that are most profitable to them while your interests wind up more of a secondary consideration. But you can also just stick with more conventional investment choices like the ones I mentioned for your 401k and Roth IRA if you prefer.

I do want to stress one point, however. Unless you have a fairly large amount available to invest, say at least mid five figures, I would stay away from individual stocks. With less than mid five figures, you simply don’t have enough to be able to diversify adequately. The less diversified you are, the more you are gambling. And consider this; almost no one in the history of mankind has picked stocks well enough to beat the market consistently over time. Do you think you will be one of the handful of counter examples? If not, your best bet is probably to stick to mutual funds for stock market investing.

I think this is enough for now. I kept it very basic because with investing, as with so many things, getting started is most important. And if people feel overwhelmed, it tends to push them in exactly the opposite direction. As always on my posts, if you have any questions, feel free to comment below or email me at admin@healthwealthpower.com.