The DOW is down 10.3% from it’s high of 18,350.13 on May 20th of this year. In just 90 days, the DOW has shed over 10%. In that same time, the S&P 500, a broader view of the market overall, is down 7.7%. It’s easy to forget how often these little drops happen (we’ll offer some GRODT long-term stock market perspective below), especially when the market has recently been going up.
These numbers aren’t intended to scare anyone but intended to make a point. The stock market is a slow way to get rich – as we’ve stated many times as we’ve laid out the Get Rich or Die Trying Lifestyle steps to achieve Financial Freedom. No amount of you, I or anyone “hoping” the stock market will go up does a single thing to make it go up. Hope is a terrible word when it comes to investing.
We can all do the due diligence and work to invest responsibly, but even VTSAX, my preferred long-term investment vehicle for anyone wishing to accumulate true wealth over a long period of time, is only up about 4.5% per year, dividends included, over the last almost 15 years.
Sure, the last 90 days are just a blip on the radar, but 4.5% annual returns over your investing lifetime (if we were to extrapolate that out to 40 years or more) would not have anyone retiring early without living an extremely miserly existence. 90 days will likely be a very short period of time in your investing. As a matter of fact, if you were to be invested in the stock market for 40 years, 90 days would only represent 1/2 of 1% of that time. However, when you look at the last 15 years, we’re starting to build a new trend which should have us considering even more diversification.
This is why we need to focus more on CASH FLOW and how best to diversify it. The market generates very little cash flow and includes the up and down risk (or what the Wall Street insiders like to use code language like “volatility” to mean) we are seeing right now. From a cash flow perspective, the VTSAX is currently yielding 1.84% and has hovered in that area the last few years. For every million you had invested, to use round numbers, you’d only generate $18,400 in yield per year. On the flip side, in the last 90 days, your portfolio would have lost over $100,000.
Those losses may be hard to stomach, but a 10% drop in the market is not uncommon when you look back through the lens of history. Would you be surprised to know the following:
- Since 2010 alone, there have been five drops of near or more than 10% in the S&P (2010 16%, 2011 19.4% and 9.8%, 2012 9.9% and 7.7%)
- Since 2000, there have been nine such drops, with two of them resulting in a loss of 50% or more of your investment
Typically, people will panic out of the market and sell when they should be buying. There’s an old phrase that says “Buy when there’s blood in the streets.” Or said another way, Warren Buffett likes to say “Buy when others are fearful.”
I’m sharing all this to help you keep perspective and to not be too fearful or be too exuberant. The fact remains, if you are expecting the stock market to be a fast way to help you achieve financial freedom, it continues to be a difficult short term solution to that problem (with “short term” meaning less than 15 or 20 years). Recall that since 2000 alone, the stock market is only going up an average of 4.5% per year. Those are paltry results and if you’d have stayed in for the long haul and never sold, you’d have lost 50% or more of your money TWICE and lost ~10% or more of your money NINE times. Even if you thought you were smart enough to know when to sell, you then have to be right twice to reap the rewards. You’d need to secondly know when to re-enter. It’s very hard to be right once, much less twice.
This is why we have to give ourselves options. Of course, having a job is one option. It is the one revenue stream most all of us have. The stock market is another option, although a highly volatile and often low-yielding options.
There’s always bonds, but even a 80/20 stocks to bond portfolio over the last from 2000-2012, you’d have only had an average annual return of 3.9%.
This is why we teach you must focus on diversifying your revenue stream and setting your expectations appropriately for your investments. The revenue stream you will always have the most control over is one in which you’re selling something – a product or an idea or a service. Even that stream doesn’t give you 100% control, but it does give you more options than selling your services to Corporate America via a salaried job.
The “job” approach is generally the least volatile, but in recent years, if you’ve been laid off before, like I have, you know that it’s not always as “safe” as it once seemed to be.
Consider the facts as you lay out your GRODT Financial Freedom Plan. Recognize the limitations of the various options. Evaluate the risks and your risk tolerance. From there, you can begin your journey and make adjustments along the way. There are MANY ways to achieve Financial Freedom from Corporate America, but you have to see the big picture to define and execute your GRODT Financial Freedom Plan.
What are your thoughts on the recent stock market volatility? Do you just accept it for what is it? Do you consider other options? Are you planning to sell, hoping you can time your re-entry into the market correctly?
Most importantly, how are you diversifying your revenue stream beyond selling your time to Corporate America, stocks and bonds?
Let us know in the comments below.
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