Every time someone (myself included) says that the SP500 will probably average 8-9% because it’s been dong so historically, I cringe slightly. Sure, I believe it too, but that little voice in the back of my head says, “Olivia, what about the Nikkei?”. Please note that the below article is purely my opinion and by no means fact. I am not a financial advisor and I don’t know what will happen to the market. I could be completely wrong in everything.
The Nikkei is the Japanese version of the SP500. It plummeted to half its value in 1989. But if we’re going by the response we always spout to the SP500 dipping, it has definitely recovered by now right? And is much higher than it was in 1989, right? After all, in the US we’re taught that market cycles go in 10 years and that we’ll just gain it all back and then some. Stocks are just on sale when the market crashes. Buy the Dip (BTD)!
Unfortunately, no. The Nikkei has never recovered. We’re currently sitting at 65 percent of where the top was in 1990. That’s pretty sobering. Nearly 3 decades later and we’re barely halfway to the top. In the 80s, Japan went through an unprecedented buying spree in the US due to their appreciating currency and lower interest rates than America’s. Did you know that during the late 1980s, you could have sold off all the land in just Tokyo and bought all the land in the entire United States. Sure, hindsight is 20/20, but it seems as if it were a tiny warning sign at least.
So, why should we trust that the US won’t do the same?
1) . I’ve always believed that an economy grows with innovation. When you have a country that accepts talent from all over the world, you end up with people with different experiences and approaches to solving a problem. Japan is a very culturally insular community, with only 1.5 percent of the population as foreigners. The US immigrant population stood at 14 percent in 2015. The cultural status quo in Japan is to blend in, not stand out. The US encompasses many religions, ethnicities, and races. When you have all sorts of different people, you’ll have a ton of different ideas and different problems to solve.
English is also the main academic language and most people still program in an english based programming language. While programming is supposed to be language agnostic, you try reading the documentation in another language and come back and tell me how it goes. Yes, non-Americans might leave comments in another language, but the code itself is written in English.
2). The US has larger and more global companies than Japan. Take a look at the Nikkei 225 and then the SP500. What percentage of the companies on the Nikkei do you recognize? How many on the SP500? I’m sure this isn’t a “You’re an American, of course you would recognize more on the SP500” scenario. Give both lists to a non-American and non-Japanese person and I’m sure they’d recognize a much higher percentage of American companies.
3). It seems the Japanese asset price bubble was mainly caused by an appreciation in their home currency, the slashing of their prime interest rate for many years, and their fervor in investing outside of their country. Sounds to me more like China with their capital controls of $50,000 USD a year than something the US is at risk for.
4). While all countries eventually collapse, I don’t think the US will do so in the next few decades. So much of the financial infrastructure is reliant on US firms and much of the technology innovation lies in the US. Yes, I know current politics are a bit wonky, but hopefully that will soon pass…
How do I mitigate something like the Nikkei happening, just in case?
1). Invest in real estate. I tend to think of real estate as bonds that just produce higher returns. I tend to like cash flow properties, because appreciation to me is like guesswork as to where your actual appreciation goes. Also, the interest on the investment property is deductible and so is the depreciation. In most cases, you’re not paying taxes on the income in the first years of owning your investment property because the interest and depreciation outweigh it. Depreciation is 1/27.5th of your house purchase price. Interest deductible on a 30 year mortgage with 5 percent interest rate (investment properties carry a rate a bit higher than prime) is about 60+% of the house purchase price for the first year, and slowly declines.
This isn’t going to be easy. If you live in a HCOL city, odds are you can’t find a good investment property. You’ll need to go to smaller cities and search on BiggerPockets and Google to figure out which realtors cater towards investors. Send an email, call them, evaluate them. Visit the city and tour some properties with a realtor on the weekend. Bring a notebook and take notes. If you’ve picked a good realtor, they will have a wealth of knowledge.
2). Invest in crowdfunded real estate. Check out FundRise and PeerStreet. PeerStreet only allows accredited investors (those who make $200k per year, or are worth more than $1M), while FundRise offers investments even if you are not an accredited investor. It’s a bit like investing in bonds but with 9-12% estimated returns on their respective websites.
Crowdfunding makes sense because it allows you to diversify and participate in deals that are worth millions. In bigger deals, the cost per unit to build an apartment is cheaper when you are building 200 of them at the same time. Instead of hiring a property manager who you pay 10 percent of monthly rent to, you get a superintendent and handymen for a tiny fraction of the cost of hiring a property manager. Large apartment complexes are also more likely to have great amenities that will attract long-term tenants so you have less vacancy and maintenance costs with regards to turnover. With every tenant that moves out, you need to spruce the place up. The cost of repainting part of an apartment and heavy duty cleaning it is no joke, mostly due to the cost of labor.
I’m ok with investing a small portion of my portfolio in property I like, but I will most likely never become a super big shot and invest millions in a single development. Crowdfunding gives me diversification and the ability to participate in great returns.
3). Put part of your portfolio in bonds. This is only if you’re planning on keeping your bond allocation constant. Ie, you are not selling off your bond portfolio at all. Bonds are subject to interest rate risk, and as someone who is even less sure about interest rates than the equity market, neither I nor you should not be guessing where interest rates go.
Though I still strongly trust the US equity markets will rise every time there is a fall (eventually), the truth is that I can’t be sure. I’d rather have a 9-12% return on my crowdfunded real estate, or 10-15% cap rate on my physical real estate for part of my portfolio allocation than have to hope that in the few years I become FI the market doesn’t experience a downturn and never recover.
I should caution that this is only for those with larger portfolios though. You should be maximizing your 401ks, IRAs (or backdoor), and mega backdoor IRAs before you start mucking around with investment properties and crowdfunding.
What do you think of the Nikkei now vs the SP500? Are you ok with the potential equity crash? Do you have any part of your portfolio in real estate?
Olivia worked in finance and wants you to learn the secrets of financial independence. She believes there are so many ways to monetize your life and make money doing the things you're already doing because so many companies offer free money.
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