(A somewhat deliberately contrarian post.)
If, in 2009 when Mrs. PoP and I got married in the Sea of Cortez, somebody told me that we would be worth about $500K by the time we were 30, I would have given them a “Cool story bro!” and promptly written them off as nuts.
The last four years have been a pretty good financial ride for us, with lots of graphs going up and to the right, increasing earnings power and the sense of security that large amounts of liquidity can provide only if you’ve been completely broke at least once in your life.
And tracking the trend on the blog has been fun as well!
We think that the income statement/balance sheet format is an industrial-grade tool for personal finance, and love that so many bloggers are using a similar format. With its roots in corporate finance and GAAP, this format lets you apply a few hundred years of best practices that have been developed in the business world to increasing your personal net-worth.
Pretty heady stuff if you think about it, and really dynamite if you combine it with the newer developments in personal finance like Bogle’s low cost funds (1970’s), the Trinity Study (90’s) and ERE-style lifestyle hacking (2000s).
But as much fun as it is to watch our worth increase every month, we should really be hoping for our income statement to keep going up, but our balance sheet to fall like a rock for the next few years. Here is why…
Why We’re Hoping For A Drop In Stocks And Real Estate…
Put simply, if you are in your 20s and 30’s your retirement is more than 5 years off you are likely to be a net buyer of stocks, Real Estate and other assets in that time leading up to your retirement, and then possibly a net-seller of assets after that point. Since we want the assets to be worth more when we are ready to sell them, what we should be hoping for is to buy them at a discount now. In other words, we’re hoping for a big old fashioned market dip over the next few years. Doesn’t make sense? Here, try this:
“The logic is simple: If you are going to be a net buyer of stocks in the future, either directly with your own money or indirectly (through your ownership of a company that is repurchasing shares), you are hurt when stocks rise. You benefit when stocks swoon. Emotions, however, too often complicate the matter: Most people, including those who will be net buyers in the future, take comfort in seeing stock prices advance. These shareholders resemble a commuter who rejoices after the price of gas increases, simply because his tank contains a day’s supply.” –Warren Buffet, 2011 shareholder letter
When you are simply buying large swaths of stocks and bonds in a low-cost fund (and if you aren’t, you could be the most dangerous type of fool – the type who doesn’t understand what they are), then your holdings are roughly a mirror of the overall market. As such, there is no way to escape from the market’s fluctuations; up or down. This means that if your existing holdings go up in price, the price of the stuff you will buy has gone up as well. The same theory goes for Real Estate and most other asset classes as well.
If the Dow dropped to 7k tomorrow it would knock about $125K off our net-worth, but you would see Mrs. PoP and I dancing in the street because it would mean that the US economy just went on a 50% off sale. And Mrs. PoP loves a good 50% off sale [Mrs PoP – when it’s something we were planning on buying anyway]!
So if you are mostly out of debt, have a good job and are currently socking money away for FI, ask not for whom the closing bell tolls…it tolls for thee.
Who thinks stock prices are too damn high?