Friday, June 30, 2017

Have no fear, market crashes will always be here!

While I don't believe that a bear market is coming, one big lesson from the last two recessions is that it can't hurt to be prepared.

Crashes will always come and go. Whether it's 6 months or 6 years from now, nobody really knows. The prospect of me becoming a thousandaire again is not beyond the bounds of possibility.

As a Generation X-er, I've been at ground zero of 2 big market crashes: the Dotcom Bust of 2002 and the Housing Bust of 2008. Both were followed by deep recessions. The great recession of 2008 was way deeper, but the recession of 2002 could be just as deep-- if you happen to work in the tech industry just like I do.

In the summer of 2000, I left my job in Philly to work for a software company that sells analytical tools to fund managers. The company was headquartered in Research Triangle Park, NC --the tech hub of the south. They collect data from investment companies that manage funds pooled by individual investors (i.e. mutual funds) and translates that into useful information.

Times were pretty darn rosy in that the company even paid for my relocation plus some generous sign-in bonus. There was "irrational exuberance" as massive euphoria was everywhere, investors were buying internet companies left and right that have ridiculous valuations. The NASDAQ index rose from 1,000 to almost 4,000 at its very peak.

But sometime around March that year, it came to a crashing halt. The bubble, which had been building up since I moved to the states, slowly started to pop. People lost faith. Stocks sunk. With less and less money to manage, fund managers who have been buying software licenses from us suddenly had to cut back on their spending causing our sales revenue to plummet. I had a strong inkling of a sinking ship  and boy I was right!

Except for the fact that...

I resigned a few hours before I was supposed to get laid off!

In a bizarre case of bad timing,  I submitted my resignation letter just a few hours before my company announced the massive employee layoff. My immediate boss happened to be on vacation that terrible day (maybe on purpose), so I had to give my two weeks' notice to his boss who happens to have a stake in the company's bottom line-- there's no chance he's going to give me a hall pass on severance pay.

The 'firing' process went something like this. A memo appeared on our inboxes telling us which room to go: room A or room B. I was asked to go to room B. Once there, an HR personnel told us that we're in room B because the people in room A will be given their pink slips.

There was complete silence in the room. We know this will happen but not so soon. There was a sense of relief at first. And then people were in tears, especially the ones that were friends with the people in the other room. I couldn't help but think about the friend of mine who just bought a house. But in retrospect, I felt bad for everyone.

As for me, I literally didn't know whether to laugh or cry...

- The good news was that I already accepted a contract position elsewhere that pays $50 an hour.
- The bad news was that I didn't get my severance pay-- I officially resigned, not laid off.
- The worse news was that  I had to work for 2 more weeks to fulfill my obligations. Ugh!!!

Later that day, the whole office was talking about my good but somewhat bad timing.

How not to fear the next market crash

When crazy things happen, always expect the worst. Companies can layoff people at any time, but it can become the norm during a recession-- hardworking people can lose their jobs. When people lose their jobs, they spend less-- much less. And when they do, companies make less money causing them to layoff more people. It's a vicious cycle.

As an investor, however, you should learn to embrace bear markets-- these are the greatest windows of opportunity in your life to leap frog from where you are to where you want to be. When the market drops 20%, 30% or 50%, then you'd be buying shares at a discount. Think of it this way, if bear markets were IPhones you'd be rushing to the nearest Apple store!

Here are some facts:
  • Bear markets generally occur every 4 to 5 years
  • Every single bear markets are followed by bull markets
  • The worst thing that you can do is stay in cash (read this Charles Schwab study).

Keep your portfolio well-diversified

Diversification essentially means investing in a mix of asset classes to ensure you are not in serious trouble even if you lost a significant amount of money on one of your investments. This is because any losses, incurred on any of your investments, may be offset by gains earned by other assets.

Being diversified can help cushion against losses, and that's a precaution that you can take now. Increasing your allocation in bonds, for example, helps soften the effect of a market crash on your portfolio because they are usually inversely correlated to stocks.

You should rebalance your portfolio like a dentist every 6 months to match your goals.

Stay the course, don't miss out on market rebounds

Many investors sold at the bottom of the bear market in March of 2009, turning temporary paper losses into real, wealth-shattering losses.

According to another Schwab study, if you had invested $100,000 on January 1, 2009, but missed the top 10 trading days, you would have had $43,000 less by the end of the year than if you’d stayed invested the whole time. Your timing might end up much worse than mine!

Make cash an integral part of your portfolio

Cash reserves will come in handy in down markets. With cash, you can buy when prices are relatively low, without having to sell any of your existing positions at a loss. Cash can provide your portfolio with a sense of stability and offers protection against volatility. It helps mitigate downward risk.

In my case, I'm setting aside at least 10% of my portfolio in money market accounts. But that's just me, run your own numbers.

Beef up your emergency fund

In a recession, 3 months won't do. You need at least 6 months worth of expenses. Beefing up your emergency fund helps keep your stress level down. Being prepared gives you the confidence that you need to tackle any of life's unexpected events like a job loss during a recession.

I eventually lost that contract job that paid $50 per hour. The original 6 months was shortened to a few months due to spending cuts. But guess what I did?

Instead of rushing to find another job, I toured the whole continental United States for the next couple of months! All because I had my emergency fund in place.

Have no fear.

Learn how to protect your portfolio in a downturn.
Here's a great book that I recommend.

Wednesday, June 14, 2017

When the lender is a slave to the borrower

You've probably heard Dave Ramsey say this many times before, "The borrower is a slave to the lender." The quote was taken from the scriptures. That's exactly what I had in mind when I decided to lend my sister $14,000 last summer. Finally, I can 'enslave' my annoying sister, who spends most of her free time bashing Obama on Facebook. At least that's what I thought.

She and her husband, Abe were looking to buy a property near Texas Tech University in Lubbock where my nieces currently attend college. By buying the property, they were hoping to save money on room and board costs. But they were short of the 20% down payment required to avoid PMI (private mortgage insurance).

Love-hate relationship with my sister

No, I'm not really a big fan of Obama. I didn't vote for him in 2008. Yet I told her I did, just to piss her off. You see, my sister hates the former president, and she's not shy expressing it on social media. What crosses the line is when she continues to do so, three months into Trump's presidency. That's when I finally unfollowed her.

My sister and I have very little in common. She lives in the heartland, I live on the east coast. She's a republican, I'm a registered democrat. She's also a huge fan of G. W. Bush, which is not surprising because they live in Midland, Texas-- the hometown of the Bushes.

Almost every other summer, our families would meet in Orlando and discussions always end up revolving around politics. The last meet turned ugly when she lost her cool--  I told her that the younger Bush is the worst president the U.S. ever had (again, just to piss her off) and that the only thing that I admire about him is his shoe-dodging skills. That was the day I learned that my shoe dodging skills weren't as good.

So, it came as a surprise when I received a phone call from her, last summer, asking if she could borrow money.

How she negotiated the deal

The conversation went something like this (names were changed to protect those involved):

Sister: "Mark, can I ask you something? We are planning to buy a house in Lubbock and we're looking to put down $30,000, which is 20% down.  Your nieces will both attend college there. But I'm not really borrowing the whole amount."

Me: "Umm.. how much are you borrowing then?"

Sister: "Maybe, $10,000? Abe was thinking of applying for a personal loan but the 7 percent interest is too steep. Instead of paying enormous interest, we can just pay you more than the borrowed money. I really hate using our credit. Our three rental houses are paid off, though our residential house, not yet fully paid but interest rate on that house was less than 3 percent. "

At this point, I was thinking that investing in real-estate supposed to provide you with increased cash flow. It's clearly not the case for them.

The bright side is that they must have an excellent FICO score judging from the interest rate on their existing mortgage.

Sister: "The dormitory is so small plus they will have to share with other kids.  School officials don't  want them to rent outside, other than if we have our own house there. Abe thinks it is not wise to throw $9,000 away."

Apparently, she thinks it's wiser to borrow from me, her brother 8 years her junior. Perhaps she's right because I end up lending her the money anyway, without publishing her real name in this blog for the whole world to see.

The conversation continued partly in Taglish, which is a mixture of Tagalog (Filipino) and English languages:

Sister: "Baka naman, may extra ka diyan? I'll make a promissory note. I'm sorry that I'm asking you. We have not found a house yet but every time we buy a house, we put at least 20 percent down."

Sister: "I will pay in full within one year and may give extra for interest."

Me: "OK, call me again later tonight."

I end up writing her a $14,000 check. That's the maximum amount that you can give to an individual in one year without having to pay a gift tax. Except that this is not exactly a gift, she offered to pay me $500 in interest or about 3.5%. In contrast, my savings account is offering next to zero.

Her promissory note

Loaning money to family or friends is often a bad idea

I was reluctant to lend her the money at first, not because I didn't like her or because we disagreed over politics. Lending to family or friends is never a good idea. The relationship almost always ends up strained, or worst, destroyed. But when the one who is asking is your beloved sister, it is easier said than done.

Almost all of us have had bad experiences with loaning people we have good relationships with at some point in our lives. When I was 19,  I sold my Hypercolor T-shirt to someone whom I thought was my friend. He promised to pay me back on payday. Payday came, and went, he was nowhere to be found. It became clear that he has been avoiding me. I'm glad I lost that %$#%# friend of mine, but I regret losing my shirt, literally speaking.

In the end, I've set the bad experience aside and relented to her request for the following reasons: (1) that's what my late mom would do, (2) she's my sister-- blood is thicker than water, (3) I have extra cash sitting in the bank.

One year later, when the loan matures

She called me up with a barrage of excuses, which I'm sure was genuine. But this time, the conversation was one-way. I barely said anything.

Sister: "Mark, I'm sorry I can't pay you in full. We have so many expenses. We just had our air-conditioner unit system changed last September. One of our rentals got vacant for 5 months. We have so many expenses. We're scared we may not have enough money to pay for 5 property taxes. We were planning to take a loan to pay you immediately 'coz we said we pay it all this June. Kaya lang baka malaki yung interest."

Me (thinking): I'd sell all your rentals, if I were you.

Sister: "But if you need it quick tell us. I really appreciate your understanding. We have money in stocks and retirement. But we don't want to take it out because of the huge penalty."

Me (thinking): Yeah right, like I didn't know.

Sister: "Instead, I will send the $5,000 tomorrow. I'll send another $5,000 in 3 months. And $4,500 before the end of the year."

Me: "That's fine. I understand." (hanged-up the phone)

Now she's dictating the terms of the loan. I stayed quiet. I was disappointed that she didn't keep her word. But I wasn't in the mood to negotiate. I don't need the money yet anyway.
What am I supposed to do, sue my own sister? Easier said than done.

I'd rather obey the new contract and be her slave.