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Hello, and WELCOME to the end of the world!
Originally, we we were supposed to be writing this Wednesday about the Investment Workshop. What ETFs should we pick, and how should we position ourselves in a world that was prosperous, and likely continue to be prosperous.
Yeah, those days are now over.
Yesterday we, along with the rest of the world, watched as the unthinkable happened: Donald Trump, a man who based his entire campaign on screaming random gibberish into the nearest microphone, has become the 45th President of the United States of America.
When the race was finally called around 3 AM EST, we read about it lying on a beach in Cambodia. And after a few minutes seriously considering swimming out into the ocean and never coming back to escape the nuclear Hellfire that would surely be raining down on us any minute now, we slowly came to a shocking realization.
This is why we became Financially Independent.
Here’s what we can all expect under a Trump presidency:
- An increase in violent hate crime across America, directed especially towards visible minorities. Visible minorities like us.
- A stock market crash. Stock markets hate uncertainty and Trump is the definition of uncertainty. At the time the election was called in his favour, the Dow Jones Industrial Average Futures had already dropped 900 points.
- A recession. If implemented, economists estimated that 11 million jobs would be lost. This will likely plunge the stock market into a tailspin.
Luckily, we don’t need jobs. That’s the power of being Financially Independent!
Because we structured our retirement portfolio as a 60% equity/40% fixed income asset allocation, with our fixed income portion pivoted towards higher-yielding investments, our $1 Million portfolio (which we expect to get hammered in value pretty soon) is currently yielding approximately 3%. That’s the entire point of a 60/40 portfolio versus a 90/10 or 100/0 portfolio. Fixed income gives you stability and, oh by the way, income!
3% of $1 Million is $30,000 a year, even if (or rather, when) our portfolio drops in value. And not only that, we have 3-5 years of living expenses outside the portfolio, just in case that fails. And that’s why we keep hammering the point home about having a cash cushion. This is EXACTLY why you need one.
And finally, because we’ve taken up a nomadic lifestyle, it is trivially easy to keep our spending below that limit by simply staying in low-cost countries. For example, right now in SE Asia, our spending if extended long-term is somewhere around $20,000 a year. That’s right, by deciding to spend more time lounging around on a beach, we will actually MAKE around $10,000 over the next year.
THAT’s the power of Location Independence, and that’s the reason we couldn’t give two shits about President Trump.
Unfortunately, there are many people who should be very very worried right now. Since the last financial crisis 8 years ago (and just to be clear, we are now officially entering the next one), many people made a lot of money during the subsequent economic recovery (which again, is now likely over). If you:
- Spent most of that money on consumer goods and have nothing to show for it, you are fucked.
- Ploughed most of that money into your house like most of our friends did, you are fucked. As we’ve demonstrated before, even when times are good your house doesn’t make you any money. Now that times are bad? You may be in for a world of hurt, just like in 2008.
- Are still dependent on your job for your day-to-day living expenses, your job may not last. Are you Hispanic? Are you Muslim? Trump promised to deport you. Are you in the country on a NAFTA visa, that may not be a thing anymore. And even if you’re not, by tearing up those trade agreements they will cause companies to lose money. And when companies lose money, jobs get cut.
But you know what? We’ve been through this before, and we survived just fine. That unpleasant feeling you’re experiencing right now in the pit of your stomach is the exact same thing we went through the last time the world collapsed in 2008. And back then, we managed to emerge from that smoking crater having lost no money, something most of Wall Street couldn’t claim themselves.
The reason for that is something that’s just as true back then as it is now. The Index never goes to zero. It always recovers. Always always always. And rather than cancel the Investment Workshop which, by the way, was supposed to be a nice and easy demo of how nervous first-time investors should wade into a stable, rising market, will now be a repeat of 2008.
We will demonstrate how to invest in a world-is-on-fire everybody-run-for-the-hills goddamned economic collapse. And we WILL make money. Because remember, this is what 2008 looked like for us.
See how quickly we recovered back then because we were buying into the storm while everybody else was fleeing? The same thing will happen here. That graph may end up shorter or longer (in terms of timeframe) than 2008-2009, but in the end it WILL look like that shape. The world will not end, and we will make money, because that’s how Index Investing works.
I get it. Right now, it seems like the end of the world as we know it. It feels like that to us too. But you know what? This feeling of dread in the pits of our stomach is exactly the same feeling as in the last economic crash that felt like the world was ending too. In fact, it was in this environment that we cut our investing teeth and built our initial fortune. And if you recall, our single biggest investing mistake was made during this period, meaning we exited the market once we made our money back and therefore missed the rampaging market afterwards.
We will not make that mistake again, and the Workshop will run as scheduled. And if you come along and manage to become Financially Independent like us over the next 8 years, the next time some demagogic jack-ass like Donald Trump gets elected, you can enjoy it stress-free while watching a sunset on a beach.
Just like we did.
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I’m not going to touch any of my current allocations (after finally maxing out per-paycheck 401k contributions last month), but I am super confused. Right at this moment, here’s what Vanguard is telling me:
Markets as of 11/9/2016 11:14 a.m., ET
DJIA 18,416.15 +83.41
NASDAQ 5,199.81 +6.32
S&P 500 2,145.11 +5.55
Things don’t look quite as sky-is-falling as we thought twelve hours ago.
whew?
Yeah apparently it was somehow based traders swinging from “the sky’s on fire” to “maybe he won’t do any of the stuff he said he would.”
Manic much?
As a NAFTA visa holder, I have some concerns but it is too early to panic.
At midday in North America the markets are up as are the US dollar, oil and gold. Individual stocks in certain sectors are up significantly such as steel, drug manufacturing, pipelines and private prisons. Volatility may continue but it’s not the end of the world feared by many.
Here in 312, my American co-workers are a somber crowd with long faces. Life will continue.
Enjoy the beaches but wear sunblock.
Correct. Life will to continue and the index will continue to move higher, but volatility will be here for a while.
Thanks for this guys, it’s just what we needed! There are so many problems with Trump being elected, and as a Canadian I feel fairly safe, but I am worried about our U.S. neighbours, especially women, gays and minorities. And of course, I don’t want people in the U.S. to lose their jobs. However, the small silver lining here as you point out is that we might be able to build wealth if there’s going to be a crash anyway.
I was a 26-year-old fool in 2008 and sold so many of my investments like most people. Now, with the help of your blog and having done my homework on index investing, I’m ready for round two, this time with a thicker skin, a direct-investing account and a higher income. Let’s do this!! 🙂
I see how the 60/40 portfolio benefited you through the 2008 crash as you since the value of your bonds increased allowing you to double down on buying more stocks and at a cheaper rate since the stock values were in steep decline.
In your scenario, you came out way ahead of somebody that had a 100% equity portfolio of the same size as your original combined 60/40 portfolio since that person would not be able to sell off bonds to buy cheaper stocks, unless they bought more stocks with new money. (if I’m making an error in my assessment please correct me).
The Trump presidency shows the pitfalls of a 100% equity portfolio, however, I’m curious to know if you’ve ever run the numbers on what your portfolio would look like today if after the 2008 crash you went 100% into equities rather than the 60/40 split. How much larger would your net value be today? I ask because I still intend to go into a 100% stock portfolio (my questrade account is up and ready; just doing as much research as possible and waiting for any nuggets I might learn from your workshop).
On a related note, I love that you guys have weathered times like this before and you have the ability to not even flinch over the uncertainty of the Trump presidency. It’ll give many of your readers, including myself, a feeling of calm. Staying the course will win the day. The world will not come to an end and markets may crash but they always recover, as you said.
I find the 60/40 portfolio being assumed to be better because you can rebalance to be somewhat inaccurate. The assumption is you can sell bonds to buy stocks during a market crash, which is obviously true.
But let’s face it, most people invest frequently, probably monthly. If you hold a 100% equity portfolio, sure, you can’t sell bonds in order to buy stocks, but instead you just buy 100% stocks again every month with cash.
You don’t always need to sell bonds in order to re-balance. I re-balance my portfolio every month without selling a thing.
I’d be curious to see how they would have performed with a 100% portfolio, assuming they re-balanced monthly just by buying more stocks without selling any bonds. I bet they’d be better off now if they went 100% equity.
Tommy what you said doesn’t make sense: I’m curious to know if you’ve ever run the numbers on what your portfolio would look like today if after the 2008 crash you went 100% into equities rather than the 60/40 split. How much larger would your net value be today?
Perhaps you are young or just inexperienced in the market, but that is a ridiculous statement to make. How the hell do you know when to put your allocation to 100% stocks? It is all hindsight. You don’t know when the market will recover. It is not that cut and dry. You don’t know if there is a quick rally so I will go all in on stocks or if that is just a sucker’s rally and the market will drop another 30% and you just screwed yourself by messing with your allocation. You have to stick to one allocation. When you try to dance around like you are describing, you will get eaten alive. You think the market is that easy? Go ahead and try your theory with the next crash and see what happens, you will do everything wrong, the market is always smarter than you.
Hi Kyle,
Thanks for your feedback. I’m not trying to time the market. I’m just posing a hypothetical. I would like to see how their portfolio net worth would look like if they had decided on 100% equities.
When I get into the market, I’m going to do so without any consideration for where the market is because it’s impossible to know if it’s in for a drop or rally. I intend to hold long term and and let it bounce around for 30 years. I plan to just go with 100% equities for the potential higher long term gain.
Back to the original question it’s just for comparison sake, for example in my own life I like to run numbers based on real estate investments I did or didn’t purchase when I could have to see how much farther ahead or behind I am financially based on the decision I went with.
A 100% cowboy portfolio may make mathematical sense for you if your timeframe is indeed 30 years, and Kyle is right the math is just only one part of the picture. Yes a 100% equity would have performed better in the same scenario but we would have seen swings in the -50% range instead of the -25% we got.
If you want to go 100% equity to get a higher return over a longer timeframe, go ahead. Just understand what you’re trading off by doing so.
I think most of us read your blog for your financial acumen…how about leaving this a financial freedom blog and not a political one…huh?
You don’t think a Donald Trump presidency will affect your finances?
Actually yes, Trump will make me rich! I am nicely invested in NDM (Pebble Mine) HUGE story but now with Trump in power, it will make shareholders rich! Yes I am 60/40 but it is my play money that will do really well in the near future! Cheers!!
Trump presidency has resulted in equities moving up.
A Trump administration may reduce regulation which will help the profitability of regional US banks, coal, pipeline companies. Please see STI as an example.
Revamping the ACA and increasing infrastructure spending could spur job creation at mid sized companies.
Yeah, I’m not too worried.
I chatted with Kristy (FIREcracker) a while this morning on Facebook about my optimism in the face of something ugly (and this was the first event in several years to ruin my sleep!). So far it looks like the transition of power will run smoothly. We have 535 elected officials in the legislative branch and 8-9 justices in the judicial branch that provide some level of checks and balances.
So far the markets have recovered so I think the panic selling was just that. In terms of policies and programs, I hope and expect Trump was lying through his teeth the entire time on the campaign trail and most of his zany policies won’t come to pass (like everything he ever said about taxes, foreign policy, military intervention, and well just about everything he said).
We have elections every four years, and we’ll have another go at getting a better slate of candidates on both sides of the aisle.
One thing is clear – with a single party controlling all three branches of government, there is no excuse if they don’t Make America Great Again. I have low expectations but high hopes that our elected reps won’t F this up too bad and might actually generate some real reforms across the board in a convoluted tax system and archaic healthcare funding system.
Justin – I would think your family would be more concerned about the ACA. Seems like a solid bet that one will get repealed.
Are you prepared to pay unsubsidized health care costs? If I recall, you received significant subsidies.
In my situation, that looks like the biggest wildcard.
We can pay the unsubsidized costs for the short and intermediate term. Long term, if rates go up 10%/yr to the moon and increase even more as we get older, I doubt anyone who isn’t a megamillionaire could pay unsubsidized rates. But by that point employers won’t be paying $30-40k/yr to cover their employees, so the system will break on its own and there will be a massive populist movement to fix it.
Sooner or later we’ll get it right. But of the things that worry me about the future president, loss of our heavy ACA subsidies ranks at the top. I think ACA will be tweaked to provide less subsidies (or zero), but not disappear completely.
Even more worrying would be his economic policies including trade protectionism. If we suddenly had to pay 30% more (due to tariffs) for everything imported, it would certainly impact my monthly expenses and trickle all throughout our economy.
Wanna come to SE Asia with us? $0.50 beers!
Not saying yes, not saying no. 🙂 I’m loving the weather here right now AND already have a houseful of SE Asians to keep me company. Those beers do sound appealing though.
quick question about your lumpsum vs DCA chart:
at the end of the chart, have both styles invested the same amount of capital (ie lump sum was investing once a year) or is some of the increase to the DCA due to the fact of more capital being invested?
in both cases it is clear that the initial investment amount at the start of 2008 was the same, however is it not misleading if the DCA approach is also adding capital. if it is, how much was added? based on your labels i don’t think we’re talking about re-balancing all of the time. if rebalancing vs not rebalancing is all you’re talking about than we have an apples to apples scenario, but then i think you should use different labels.
**I think i figured it out, since this way the lower volatility at the start of the chart for DCA makes sense to me. is the DCA starting out as 100% cash, and slowly investing in to the market over 5 years?
That chart was from an article we wrote on this.
https://www.millennial-revolution.com/invest/dolla-dolla-dolla-cost-averaging/
It was $100k invested over the first 2 years, which matched what we did during the 2008 financial crisis. See that article for more details.
Whatever the darkness, be your own light.
My predominant equity holding is in VUN, which holds 3600 US companies. Following the election I suspected to see a 3-5% drop in this, but it is currently standing at +2%.
For the life of me I can’t explain it, everyone said the market would crumble if Trump won, but it’s the total opposite, it’s absolutely soaring. What’s the deal?
VUN (Vanguard US Total Market Index ETF)
Is this fund only available to investors in Canada?
Yes it’s a Canadian hedged total US stock market holding. I suspect part of the upswing is due to a forex fluctuation but I haven’t checked how the USD is doing since the election.
Why does VUN have such a high expense ratio compared to the US version (VTI)?
VUN has an MER of 0.16% while VTI’s MER is 0.05%
Something to do with currency exchange?
I suspect so. At least most ETF’s that hold foreign equities have higher fees. I imagine any international ETF held in USD would be the same.
I don’t know if there are any US ETF’s holding Canadian Equity, but it probably costs more in fees than it does than if it were a Canadian ETF.
Bit of a shame as I don’t own any Canadian ETF’s even though I’m in Canada. I feel our economy is pretty weak and heavily reliant on oil and gas. US economy is far more stable long-term.
I also believe Canada’s economy is not diversified enough. VUN looks like a great choice. What about the XSP etf offered at ishares? This blog champions investing in the s&p500 and that etf does so and is Canadian hedged. Thoughts?
Thanks kindly.
Actually VUN is NOT CAD-hedged while XSP is. We’ll talk about why that’s an important distinction in a next article of the series.
Oops, you’re right. It’s VUS that’s CAD-hedged. Can’t wait for the next article. 🙂
I am noticing the same. Maybe people saw how briefly Brexit affected the market and are buying back in now to avoid paying more later.
So, may I ask when the workshop will be up? I’ve transferred money into my TD Ameritrade account so that I’d be ready to do it right when you guys did. Will it be up in the next few days? I imagine timing will be quite important.
Thank you!
I was SUPPOSED to post that today and then this Trump bullshit happened. Thought I should speak to that and explain why Index Investing is the only strategy that still makes sense in a situation like this.
Plus I generally avoid making any trading decisions during extreme events like this because the market just swings too much between day-to-day. Imagine trying to place an order and having a wildly different price than what you expected because the markets swung 200 points in 10 minutes…
I think you have swallowed the media kool-aid regarding the disaster a Trump presidency may be. I couldn’t/wouldn’t vote for him (voted write-in), but I’m kinda surprisingly optimistic. I’ve felt the last several years we’ve been in a slow grinding downward spiral pattern and a Clinton administration would be more of the same. Maybe we need a spark to reignite things. Trump will definitely be a spark and only time will tell whether he will be good or bad, but I’m willing to let his actions speak before I make any judgements.
An economic analysis of his policy concluded that it will spike unemployment and spike inflation. Economists add these two up when they’re rising and call it the “Misery Index.” You guys are about to find out exactly why it’s called that.
I typically love the writing on this blog, but this post is ridiculous, irresponsible and naïve. You are being so dramatic and trying to stir up panic. This is not that big of a deal. The sun will still rise tomorrow. There is never much change that occurs anyway.
You have to be cognizant of randomness here. Will the stock market crash? Maybe…or it might take off and never look back. But you are placing too much subjectivity in this. So if the market crashes and since Trump is president, it is clearly all his fault right? But if Clinton was president and the market crashed it would just be the economic cycle and she has nothing to do with it? You need to study the market a little better. Go ahead and look at the past 80 years and look at the terrible things that happened in each year, the market doesn’t correspond to the media coverage of what goes on in the world. Sometimes it does and in those cases it is usually random or just temporary.
It seems like the end of the world? I thought you were going to show how you were being sarcastic, but it really seems you believe this. Very immature and naïve. You guys can do much better than this.
Plus the fact that everyone is predicting a crash is a red flag. A red flag that it probably won’t happen. These things happen when people least expect it and the fact everyone is expecting it leads me to believe that it probably won’t, at least not more than the normal 10-20% corrections that occurs every couple years.
I usually love your posts, so as a fan I just wanted to tell you how this post is coming off.
There is no panic. You are the one that is feeling panic for no reason. Just relax, there is nothing you can do, stop stressing yourself and your readers out when there is no need.
And one other thing. Many of the world leaders responded about Trumps victory. They are all looking forward to working with him. Even China’s president and NATO who Trump insulted many times are looking forward to making deals that benefit everyone. Clinton and Obama are being mature about this. They are ready and willing and offered to help as much as possible.
There doesn’t appear to be wide spread panic, except from the made up things from this blog post and you and a bunch of other nonqualified people talking about the end of the world.
I love how you mention how the market does its thing and day to day fluctuations don’t matter, yet you decided to mention how futures have dropped 900 points as if this is significant. Very hypocritical. It means nothing. That drop, is a normal fluctuation, what were you expecting the market to open 50% lower or something today? Interesting how the market is reacting, the S&P is up over 1% today….That is the point. You have no idea how the market works or what it is going to do. Stop trying to incite panic and be the next “Guru” to predict a crash and incite panic.
I’m saying how a President Trump and his dangerous economic policies DON’T scare me, because even if he does crash the stock market it’ll all be OK in the end. That’s the opposite of inciting a panic.
The subsequent rise after markets rose was kinda dumb, and based on the strange belief that “Hey, maybe he won’t do all the horrible things he promised.” even though he now has literally no reason not to. But again, it’s gonna be OK. No panic needed here.
I don’t think this post is “ridiculous, or naive ”
Writer is dead-on.
I Agree. What would be ridiculous is to ignore this event. Especially as it will have an effect (one way or the other) on our portfolios (on a short or/and long term).
As for the violent hate crimes, well they already started following Trump’s elections, and have been reported and well documented. Ignoring those would also be ridiculous.
(and NO, we wouldn’t have had those hate crimes if Clinton had won).
http://www.independent.co.uk/news/world/americas/us-elections/donald-trump-president-supporters-attack-muslims-hijab-hispanics-lgbt-hate-crime-wave-us-election-a7410166.html
Great decision to delay the Workshop. I am doing the same with my own investments.
Keep up the great work guys, and enjoy SE Asia!
I’m with you, Kyle. I come here for the financial discussions but it is getting hard to let the exaggerations continue.
As far as the Trump Presidency is concerned, we have checks and balances if he tries to get out of line, but I don’t think he will. Unlike most people, whenever I heard “Trump said…”, I actually went and found the full speech and listened to it. People bought into the hype. I don’t blame them, they were fed it 24/7. It’ll take some time for that to wear off. I suspect most people will be singing a different tune by the summer.
The election result is quite shocking for me too, but I believe you’re looking at things too dark. Violent hate crimes, stock market crash, recession… The latter two unavoidably happens from time to time, the first one unfortunately existed also during a democratic presidency.
The guy is a rude bastard, no question about that, but the fact that he could be elected shows that democracy actually works. And it will keep on working, no matter who’s the president, the system of checks and balances still functions. We’re not talking about Venezuela.
I’d say you guys should stick to your original plan, don’t try to be smarter than Mr. Market. Good luck with the workshop, I’m sure it will be a success in every sense, no matter who’s the president of the USA! 🙂
Yeah sometimes those things happen randomly from time to time, but this time someone is deliberately trying to CAUSE them, and he now has control of the house, the senate, the supreme court, and the military. You Americans love to talk about your system of checks and balances but right now, I see none.
And I agree with you. Do NOT try to be smarter than Mr. Market. That’s why I delayed the workshop, to wait until the dust settles so we’re not trying to trade around volatile events like this.
Plenty of portfolio income and cash to invest here.
We’re ready for any big downturns should one appear…even if it takes 4 years for things to start improving again.
Canada is now officially in a recession? Or the US?
Trump isn’t the end of the world. And the markets seem to have recovered in the last day. I imagine its going to be a bump ride for awhile though.
I have a friend who went into a large percentage of cash to capitalize on the downturn if Trump won. It didn’t quite pan out for him the way Brexit did, oddly.
We can only hope much of what the media portrayed as an intolerance asshole was just that, portrayal. And that he gains some wits, or listens to the right advisors about climate change and minority group rights.
We are witnessing history nonetheless.
Colby
Yeah, I know! If I had predicted a Trump victory CORRECTLY and tried to short the market, I STILL wouldn’t have made money! That’s why you don’t market time, and that’s why we won’t either.
Stick to FIRE, a subject I trust you with completely, rather than attempt to predict future political fallout.
Agree totally with that comment. I think we can all agree that almost none of that eventuated and that Trump has done a pretty reasonable job really and we should give him his dues.
No one has to like him but surely everyone knows that the stupid shit he says and does is for publicity. Publicity good or bad is still good. Plus we all know that the media cannot be trusted and is often owned by people with much different motives.
Thank you for addressing the horror that is the US presidential election. None of the FI bloggers here has, presumably out of fear of decreasing their readership and subsequently their advertising revenue.
Thank you for addressing not only the coming recession but the hate.
I can’t believe you’ve made such ridiculous statements about Trump wanting to deport Hispanics. He only talked about the ones here illegally–and unfortunately there are millions. Canada has immigration laws with teeth. They don’t let just anyone with no education from any 3rd World country immigrate. Neither should America–yet we get called racist for wanting laws that are as sensibly strict as Canada’s. Makes no sense.
And for the record, I didn’t vote for Trump. But I hate seeing such blatant misinformation being spouted as truth.
Any plans to update this article or do a look-back after his term? I think your predictions, at least the ones related to the market, were a bit extreme.
So…I guess you were off a bit on your market predictions. Fun to read this several years later.
“The individual investor should act as an investor and not as a speculator.” – Ben Graham
Somehow, someway, this post from 2016 reappears. H/T to you and Firecracker for being the savants you are. Keep doing what you’re doing.