How Employees of High-Growth Companies Should Be Thinking About Company Equity

Fastly CEO Artur Bergman and team ring the bell at the NYSE.

Fresh off the heels of Uber Technologies Inc (NYSE: UBER) lockup expiration period last week, another San Francisco based tech company will go through the same on November 13. Fastly, Inc (NASDAQ: FSLY) isn’t a household name like the ride-sharing behemoth. 

Fastly is a content delivery network (CDN). By bringing servers and data centers closer to the end customer, it can provide the end user with a faster, safer internet experience. The CDN business is extremely competitive and investors seem to not know what to make of it. Just four months after its IPO of $16 in May 2019, the stock more than doubled to about $34 per share. A day before it’s lockup expiration day, Fastly is trading for $19 per share.

The volatility of IPO can be tough to stomach but the upside potential is appealing, especially for employees and early investors. There also comes risk. For example, six months removed from its IPO and fresh off its lockup expiration, shares of Uber stock are down 40% from its IPO price.

But six months does not make an investment career. For long-term investors, volatility is the price of admission and should be an after-thought when it comes to obtaining long-term wealth. 

Deciding whether to hold or sell company equity shouldn’t be based on short-term price fluctuations but on financial goals, concentration risk, and company prospects. Let’s take a look at what employees of Uber, Fastly, and other soon-to-IPO companies should think about when deciding what to do when their shares become free.

Swinging for the fences

Outsized returns often come from betting against conventional wisdom, and conventional wisdom is usually right. Given a ten percent chance of a 100 times payoff, you should take that bet every time. But you’re still going to be wrong nine times out of ten. 

We all know that if you swing for the fences, you’re going to strike out a lot, but you’re also going to hit some home runs. The difference between baseball and business, however, is that baseball has a truncated outcome distribution. When you swing, no matter how well you connect with the ball, the most runs you can get is four. In business, every once in a while, when you step up to the plate, you can score 1,000 runs. This long-tailed distribution of returns is why it’s important to be bold. Big winners pay for so many experiments.

 – Jeff Bezos, 2016 Amazon shareholder letter

Conventional wisdom will tell you to diversify your portfolio. But a part of the intrigue of working at a young tech company is the potential for striking it big. While diversification can preserve wealth, concentration can create it. And create it fast. However, you still have to be smart about risk management.

When it comes to deciding how to divide a cash and investment portfolio, I like to think in terms of building assets into three buckets:

  1. Protective assets – cover necessities and short-term needs such as your home, emergency reserves, medical care, home improvements, and family vacations. Allocate cash to this bucket.
  2. Market assets – covers basic retirement goals, second homes, and college funding. Use a diversified portfolio of stocks, bonds, and real estate for this bucket.
  3. Aspiration assets – buying a dream home on the beach, early retirement, creating generational wealth, leaving a legacy, buying an NBA team, or having your own private jet. This can be your concentrated and high-risk bucket.

Once you know how much to protect and how much you need to put away to cover your basic goals and needs, you can figure out how much to allocate to company stock. 

Know your risks

While the upside of any single position is much higher than a diversified portfolio, the downside is much larger too. A negative corporate event such as bankruptcy, loss of a key person, or criminal activity can lead to permanent losses (remember Enron). With a company like Fastly, which is not a necessary monopoly like PG&E, investors shouldn’t expect a bailout from a negative event such as an unrecoverable security breach. WeWork is a prime example of a company that went from Wall Street darling to pulling out of its IPO, to nearly having to shut its doors. 

While you can swing for the fences, your decision doesn’t have to be all or nothing. And when you do, you don’t necessarily have to think about how your life will be affected if the stock went to zero. Bankruptcies are common but the probability is low. However, you should think about what may happen with a loss of 70%+, especially when it involves a volatile tech company.

Know your biases

Money is emotional. There’s no denying that. Naturally, money decisions are often not based on logic and the best long-term outcome. Knowing your biases will help you overcome or mitigate those emotions. 

Here are some of the common behavioral biases that apply to equity compensation:

  • Overconfidence and familiarity: employees feel that because they work for the company, know the management team, and understand the business, their stock will also do well. They’ll also believe they’ll be the first to know if things are getting worse. The market is very smart. Unfortunately, familiarity and confidence don’t lead to better stock market returns. 
  • Status quo bias: it’s easier to do nothing rather than making a change. This leads to overconcentrated portfolios with outsized risk.
  • Regret avoidance: If the stock goes up, I’ll miss out on my payday and will be kicking myself for the rest of my life.
  • Loyalty effects: the desire to be loyal to your employer or not be seen in a negative light in front of your peers. If you feel this way, keep in mind that your company has an exit plan. You should too.
  • Price anchoring: the stock was worth double a year ago. I’m down 50% and want to gain my money back before I sell.

If you are a victim of any of the above biases, don’t be ashamed. It’s normal. But simply being aware of those emotions doesn’t always lead to an optional outcome. Asking yourself this question might:

“If I received X dollars in cash (amount of equity compensation you have), how would I invest this money?” 

Is your answer going to be 100% in the company you work for? If not, you should consider selling stock when the rules allow for it.

One more important consideration

I’ll dig deeper into this in a later article, but your company’s prospects play a large part in deciding what to do with your company stock. My favorite investor, David Gardner of The Motley Fool, likes to use the finger snap test when deciding if a stock is worth holding. If you snapped your fingers today and the company went away, would people and/or business be disrupted in a negative manner? Is there an alternative? Would that company be missed? 

This isn’t the only criteria. The strength of the management team, company culture, growth in revenue and cash flow, and the strength of its balance sheet also plays a part. In Fastly’s case, founder CEO Artur Bergman owns over 10% of the company. Margins are slowly increasing, and it’s winning some big customers – both signs of a better mousetrap. It’s losing money but it’s growing revenue over 30% year over year.

These are a few of the positives that led me to take a position in Fastly for my personal portfolio along with some of my risk-seeking clients. I expect volatility, especially after the lockup expiration date. However, we are diversified enough that we won’t be looking to take on a side hustle in the circus if the stock goes south. 

Be sure to do the same when deciding what to do with your company stock. 

Disclaimer: Palbir Nijjar and some of his clients own Fastly stock. This communication is not intended as an offer or solicitation to buy, hold or sell any financial instrument or investment advisory services.

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Dumping Your Uber Shares? Here are 4 Places to Invest the Proceeds

Sushi chef preparing Uber Eats delivery.

Six months after its initial IPO, Uber’s (NYSE: UBERlockup expiration date is here. Early shareholders and employees of the ride-sharing company are now able to sell their restricted shares. 

If you are selling all or a part of your company equity, you’re probably not feeling too great right now. After reporting weaker than expected bookings on Monday, Uber stock is now down about 40% from its May IPO price of $45 per share. Nonetheless, you’re still due for a nice payday and it’s time to make the most of it. Let’s take a look at some strategies on how to best utilize your investment proceeds. 

Set aside cash for taxes

Both Uber and Lyft (NASDAQ: LYFT) have a double-trigger vesting schedule with its RSU’s. What this means is that your employee shares are not vested until 2 things occur:

  1. A certain amount of time has passed.
  2. A performance event occurs. In this case, the event was the IPO.

When a stock is on a downward trend, the second trigger can have negative tax consequences. Here’s why:

With RSUs, a tax liability occurs when shares are vested and are available to you. Many tech companies offer annual RSU refreshes as an incentive. In most cases, those RSUs are on a phased vesting schedule over multiple years. Therefore, your income is also phased in, not causing a huge bump in any single year. In Uber’s case, most of the RSUs you were granted over the years are vesting at once. As a result, your income will be much higher than normal this year, bumping you up to higher tax brackets.

Here’s more bad news. Uber shareholders are taxed on their IPO price, not the price at the lockup expiration. Instead of being taxed at $27 per share, which is the price it’s going for today, you will be taxed at $45 per share.

Adding fuel to the fire, the federal withholding rate by the employer on RSUs is 22%. Yet because multiple years of RSU’s are all vesting at once, many Uber employees are going to be in the highest tax bracket which is 37%. Someone with $300,000 of RSUs vesting on November 6, will owe $111,000 in federal taxes. However, only $66,000 was withheld by your employer. To make the IRS whole, you’ll need to fork over another $45,000. Underpayment of taxes can also mean you’ll have to pay penalties and interest. To make sure you don’t fork over more than you need to, be sure to consult with your tax or financial advisor before the end of the year.

There’s no telling where Uber shares will be trading come Tax Day. However, you can set aside cash today to avoid a forced sale in the future at potentially lower prices.

Invest in an index fund

The probability of a loss of at least 20% on any one stock over a one-year period is nearly 30%. For a diversified portfolio, it’s 5%. For Uber, the decline has already doubled this level.

Diversification is the single-most-important tool in the investor toolbox to protect wealth. There’s plenty of stories out there about individuals getting rich off one stock. However, Uber may not be that homerun stock. At a market value of nearly $50 billion, the upside on Uber is probably limited. 

With a globally diverse portfolio of index funds, you will likely earn a reasonable return while significantly reducing risk. You can then supplement the index funds with an allocation towards a portfolio of high growth stocks.

Invest in non-tech stocks

Your job is in tech and your home is in an area dependent on tech jobs. Your company stock is in tech and because you understand the industry so well, your stock portfolio is likely tech-heavy too. This could be a recipe for disaster. The Bay Area has historically gone through major tech booms and busts. The ramifications of a technology recession can be painful. Unemployment, loss of equity in your home, and stock market losses are risks you have to plan for.

One strategy to become more diversified is to invest in low-cost index funds such as the S&P 500 but even that index has 30% of its value tied to the Information Technology and Communications sectors. To achieve true diversification, you have to look at the sectors of the funds and/or stocks you invest in.

Don’t get me wrong. I love technology as an investment. I believe the era we live in today is the technological equivalent of the industrial revolution in the late 1700s. 

However, one should be careful not to have too much of your net worth dependent on a volatile sector.

High-yield online savings account

Are you looking to sock some of your hard-earned money away to buy a home or send your high schooler to college? While the safety of cash is important, there’s little reason to keep your money in a standard checking account. 

While the big banks are paying 0.06% or less on savings account, FDIC insured online banks are paying about 2%. Over a five-year time period, the interest earned in an online savings account could be nearly 5 times that of a big bank. 

A favorite tool of mine to research the latest rates across the country is from Bankrate. Be sure to read the fine print. Many banks offer a teaser rate which drops significantly after the promotional period.

Municipal bonds

While an online savings account is better than cash under your mattress, the interest earned may barely be enough to keep up with inflation. For those in a tax bracket with a willingness to take a small amount of risk, municipal bonds may make sense.

Municipal bonds are issued by states, municipalities, and counties to finance capital expenditures such as schools, bridges, high-speed trains, and infrastructure. If you purchase the municipal bond of the state you live in, the income earned from those bonds may be exempt from federal and state taxes. 

The after-tax earnings from a municipal bond can be quite large. Below are the pre and post-tax yields for someone in the 37% federal and 10.3% state tax brackets.

 Pre-tax equivalent yieldAfter-tax yield
California municipal bond4.74%2.5%
High-yield savings2.0%1.05%
Big bank savings0.5%A waste of time

Of course, there’s no free lunch. Albeit small, there is some downside risk, especially if California goes through a liquidity crisis.

As a proxy, during the financial crisis in 2008, the Barclay’s California Municipal Bond Index had a total return of -4.16%. Assuming this is a worst-case scenario, the value at risk on a $100,000 portfolio is about $4,000. 

So, are muni bonds right for you? You have to ask yourself if the potential of earning 2.5% after-taxes is worth the downside of 4%.

Speak with a financial advisor that understands you

Lockup expiration day is an exciting time for Uber employees. It’s the payoff for the long hours put in from the startup phase. For those who are cashing out, the payoff doesn’t have to stop. By making a few smart moves, you can reduce risk and get even closer to achieving long-term wealth that can be passed down to generations to come.

If you are an Uber employee or an employee of a company where equity compensation is a large part of your income, you should speak with an advisor that understands your situation. You can schedule a no-obligation consultation with me here. The initial meeting is free. So is the second meeting where Before you pay me a single dollar, I will present to you a plan that shows exactly how I can help. 

No worries if you aren’t ready to talk. You can sign up for my e-newsletter which includes easy to understand financial planning articles to help you make good decisions with your money.

Perspective, Gratitude, and Feeding the Bear

Well, it looks like some normalcy has returned to the markets. After 18 months of steady stock market gains in one of the lowest periods of market volatility in history, we are starting to experience some discomfort. The financial media has been their typical self and have done a good job of reporting just how normal (sarcasm) the downward swings are. Here are some actual headlines over the past week:

  • Dow Experiences Biggest Point Drop in History
  • S&P 500, Dow Suffer Biggest Weekly Decline in More than 2 Years
  • The Dow Jones Industrial Average Crash Raises One Question: Is the World Ending?
  • Market on course for 6% drop, biggest one-week fall since 2008

I don’t want to discount the downturn. Yes, the 1,100-point drop in the Dow on Monday was the largest in history. However, on a percentage basis, which is what investors should be looking at, it was the 538th largest decline in history. This of course, doesn’t make a for a good story. If I was a headline writer, here is what I would have written (and subsequently receive zero clicks, leading to a prompt termination):

  • Dow Experiences 25th Worst Loss since 1960
  • S&P 500 Declines to Levels Not Seen Since November 20th – Yes, 2.5 Months Ago
  • The World Fails to End…Again
  • Market Drops 6% in One Week after Increasing 234% over 9 Years

What happened in the markets over the last week can be scary but it’s also normal. The S&P 500 and Dow has officially reached “correction” level which is defined as a 10% downward movement from peak to trough. A drop of this magnitude in such a short period of time should not be discounted. However, it also need to be into perspective. This is the 91st time a 10% correction has occurred since 1928. If stocks fall another 10%, which is entirely possible, it wouldn’t be outside of the norm either. A 20% drop, officially a bear market, would be the 22nd since 1928.


No panic here

One lesson I learned over the past week is that I have the best group of clients an advisor can ask for. Although small in terms of quantity, they are robust in composure. A parent at my child’s school said to me yesterday, “Man…your phone must be overheating.”




Quite the opposite actually. I didn’t receive one phone call, text, or e-mail. My clients were not worried. Nor were they surprised. In fact, they frankly didn’t care. Instead of worrying about markets they can’t control, they were busy controlling what they could — yelling at their kids, enjoying the perfectly normal February sunshine, and debating what wine to drink with barbeque (Syrah…or better yet, beer). It was the same attitude I had which tells me that I’m blessed to be in a bunch of perfect marriages.

The biggest investing mistakes usually made are emotional, all-or-nothing decisions when the market is in free-fall. A necessary part of a good advisors where he or she adds the most amount of value is talking their clients off the ledge. While I’m prepared to have this conversation, given the strong bull market, I haven’t had to. This was my first opportunity and it hasn’t been necessary. In fact, a strong stomach from my clients opens up the door to some tremendous opportunity –taking advantage of a downturn.


Strategy to feed the bear

“We’re rich because we were smart when others were dumb” – Charlie Munger, Vice Chairman of Berkshire Hathaway


The above isn’t an exact quote. I’m paraphrasing something I heard Warren Buffet’s partner say during one of Berkshire Hathaway’s annual meetings. Nonetheless, his point is valid — the best time to buy stocks is during times of panic.


However, this is easier said than done. Buying low makes complete sense and every investor can’t wait to do just that. The reality is that when asset prices fall they become sellers rather than buyers.


A 10% drop from arguably extended valuation levels is not exactly a buying opportunity of a lifetime. That likely occurred in 2008 and 2009 and it’s a market we likely won’t see again during our lifetime. However, today is a better buying point then last week, and the odds that the market will be higher 5 years from now has increased.


According to research from financial columnist Morgan Housel, after a 10% drop from its peak, stocks are higher in five years 86% of the time. The average return during those five years is 51%. After a 20% drop, those numbers increase to 89% and 61% respectively. Logically, the larger the drop, the higher future returns will be. And there’s a higher probability of achieving those higher returns. That’s not a bad deal.

Five years from now, the markets most likely will have made some gains
Source: The Motley Fool


While logic states you should deploy your cash now, the fear of regret is going to overpower logic. Here are some perfectly normal thoughts you may be having right now:


What if the market drops even further? It’s too early to start buying.

This feels a lot like 2000 and 2008. What if we have another crash? I don’t want to feel that pain again.

This time, I’m going to be aggressive when others panic.


The market may continue to fall. It might not. If you invest your reserves now and it falls further, you’ll be kicking yourself. If it doesn’t, and you don’t buy, you’ll be kicking yourself.


To be a successful investor, you don’t need to time the markets. You need to control your behavior. Therefore, you need a strategy that’s rule-based, taking the emotion out of your investing decision. Let’s say you have $10,000 in dry powder that you are ready to invest during a downturn. Instead of investing it all in one chunk or waiting too long, a rules-based strategy on deploying a set amount at various drawdowns is a sound strategy. The approach I’m going to show you is adopted from Morgan Housel who articulates it much better than I in this article. Here is a summary:


Market falls You invest… Historical Frequency
10% $1,000 About once a year
15% $2,000 Every 2 years
20% $3,000 Every 4 years
30% $2,000 Every decade
40% $1,000 Few times in an investing lifetime
50% $1,000 Once in an investing lifetime


With the strategy above, more than half your available funds will be invested after a 20% decline. Larger declines are rarer, so it makes sense to invest sooner rather than later. However, in the event that the market continues its descent, you’ll still be able to take advantage of lower prices.


Significant wealth can be created during bear markets which fortunately, yes fortunately, also occur pretty regularly. We haven’t had a 20% decline since 2009, twice as long as the average frequency. While not predictable, it shouldn’t be surprising if such a drawdown occurs again.


Whether this strategy is followed with the precision of an olympian archer is not important. What is important is prepared and having a strategy. A simple plan will alleviate mental stress which in turn, leads to less hasty decisions and ultimately, better returns.

Allow me to help you create a portfolio built for a bull or bear market. Get started today by clicking the link below for a FREE portfolio review.

A Changing Landscape for Young Families

For today’s younger couples, taking a drive along the winding road of finances is a lot different than it used to be. There are so many choices—each one steering the young couple closer or further away from the dreams of a lifetime. Hanging in the balance are two individuals hoping that their decisions will be in their overall best interest.

To better understand some of the challenges facing young families, meet Raj and Priya Chopra. They’re both in their late twenties and were married three years ago. Priya is a registered nurse and Raj is a marketing representative for a medium-sized technology company. Up until this point, they’ve enjoyed a lifestyle supported by two incomes. Without children, they’ve been able to be somewhat carefree about their spending.

Now, however, they are contemplating buying a home and having children. This has certainly raised questions about the financial implications of enlarging their family, as well as their financial future. Although the Chopras’ jobs seem relatively secure, they have friends who work for companies that have experienced significant downsizing and who are less certain about their future employment situation. Moreover, some of their friends have lost jobs and are going through difficult transitions.

Discussions with family and friends have led them to the conclusion that uncertainty may be the defining characteristic of their generation. Emerging families like the Chopra’s are facing a new reality, one with much more uncertainty about the future than that faced by previous generations. Some of this uncertainty is tied to rapid technological changes and some is the result of the realization that they personally may be responsible for providing for themselves much of what was previously provided by others (e.g., pensions by employers; social programs by the government).

There are many issues facing Raj and Priya, and they’ll need to ask themselves some difficult questions such as: Will corporate downsizing eventually catch up to them? If Priya intends to return to work full-time after having a baby, how would they cope if one of them should lose their job? What about the world of work in general? Will they go through several career transitions over the course of their working lives due to an economy that might be changing constantly? Is there a way to protect themselves financially? How difficult will it be for them to save for a child’s education? What about saving for more than one child? They both participate in 401(k) plans at work, but will they be able to save enough for a comfortable retirement? What about Social Security? Will the system change significantly? Will they be protected should they become sick or disabled?

What can a young couple like Raj and Priya do? A good first step is to discuss the various alternative solutions to these difficult questions. By doing so, Raj and Priya will be able to arrive at a realistic assessment of what they should and should not do financially, what they can and cannot afford, and what sacrifices they might need to make to assure financial security for both today and tomorrow. They know that their spending choices will have to be made carefully, and that preparing for a bright financial future will require setting goals now.

As the Chopra’s continue down the road of finances and look to expand their family, they can be a bit more optimistic about their future. The financial decisions they make today will make them less likely to be caught off guard by sudden economic or personal “bump in the road” tomorrow.

Is your 401k optimized to help you meet your retirement goals? Want to learn how to save thousands in taxes by making tax efficient invstments? Is your family covered if something were to happen to you or your spouse? Need help making these decisions? Talk to an advisor with your best interest in mind. 

2 Things Other Advisors Will Disagree With Me On

“What’s your philosophy?”

This question has frequently popped up in my first year as a Financial Advisor. It’s a good and fair question, albeit a loaded one. When I hear that question, I believe most people are referring to investing. If so, the answer is not sexy or surprising – it’s long-term, buy and hold. However, good financial advising is about more than just investing. Real financial advisors look at a client’s entire picture. They take debt, college planning, real estate, insurance, and estate planning into account. However, even here, the answers across planners are pretty standard:

  • Save more than you spend
  • Pay higher interest debt first
  • Invest in a 529 plan
  • Term life insurance is usually better than whole life
  • Have a will and a living trust

Nothing shocking. Execution is often more difficult than the theory but it’s pretty straightforward. Now, you may be asking, “what makes you so special?”

For one — I’m tall, brown, and handsome. Hopefully, that’s enough to gain your confidence but if not, I do have a couple financial philosophies that differ from most advisors.


Enjoy your latte and avocado toast

There’s a recent article in Money Magazine titled, Millionaire to Millennials: Stop Buying Avocado Toast If You Want to Buy a Home.

I mean…really? In that article, an Australian property mogul insinuated that folks shouldn’t eat out so much or buy a $4 cup of coffee if they want to afford a house. Well, doing some quick back of the envelope math, sacrificing a latte a day would mean that you would have enough to afford a down payment in San Francisco by May of 2195. That’s 65,000 lattes.

The Money Magazine article reminded me of a story I once heard from Morgan Housel, a Loeb Award finalist for financial journalism. It’s about a guy taking a smoke break with his non-smoking colleague.

“How long have you been smoking for?” the colleague asks.

“Thirty years,” says the smoker.

“Thirty years!” marvels the co-worker. “That costs so much money. At a pack a day, you’re spending $1,900 a year. Had you instead invested that money at an 8% return for the last 30 years, you’d have $250,000 in the bank today. That’s enough to buy a Ferrari.”

The smoker looked puzzled. “Do you smoke?” he asked his co-worker.


“So where is your Ferrari?

If you don’t smoke you can substitute coffee for cigarettes and work through similar math. It’s the type of math many advisors use when speaking to colleagues about saving every last buck and letting the magic of compounding interest do its work. However, it doesn’t take into account the simple joys in life. Sure, not buying a pack of cigarettes or a Starbucks a day will save you money. But it may not save you from strangling your boss. Within reason, vices can be good for people; there’s an upside to happiness.

The goal of financial advising should not be to put a stop to happiness but to help you find ways to achieve the life you want. That probably involves a few vices or experiences that just feel good.


The market can be beat

Studies have shown that over a 10 year period, more than 85% of fund managers failed to perform better than the S&P 500. These statistics have led many advisors and those in academia to conclude that the market cannot be beaten.

I don’t buy into what academia attempts to preach. Imagine if a medical student was told that no matter how hard they try; they will just be a mediocre doctor. Investing and portfolio management is probably the only subject matter where professors will tell their students that it’s impossible to be better than average.

All the statistics tell me is that mutual fund managers cannot beat the market. I believe individual investors can.

Mutual funds have a tougher battle than individual investors. Fund companies have to hire portfolio managers, research analysts, compliance folks, sales teams, and accountants. These people cost money and they are paid through the contributions from investors, therefore hindering investment returns.

There is also unbelievable pressure for those funds to outperform the market on an annual or even quarterly basis. Therefore, stocks are being bought and sold frequently, not giving a sound investment idea time to perform. Fund managers also face pressure from their bosses to go with the herd. A couple years ago, every manager was all-in on Apple stock. However, when signs of slowing growth started to emerge at Apple, the stock declined nearly 30% from its highs. Many of the funds that were overweight in Apple struggled. However, those managers weren’t going to lose their jobs because, “hey, it’s not my fault — everyone was invested in Apple.” Had the stock gone up 30% and a manager was not invested in the popular company, they may be on the hot seat. Of course, Apple recovered but the point is that it’s tough for fund managers to go against the grain. As an individual investor, you do not face that same pressure.

You as an individual investor can avoid Wall Street’s outrageous fees and short-term pressures. Your edge is that you have the advantage of time. Your investments don’t have to be better than the competition every year or quarter. You can own great companies and give them time to run.

Now, don’t get me wrong. I’m not saying that beating the market is what you should be trying to do. As an individual investor, you should try to do well enough to achieve certain goals such as retirement or paying for your children’s college education. This can often be done by just investing in a diversified mix of low-cost index funds. This alone will likely lead to better returns than 85% of mutual funds. However, investing in high-quality individual stocks alongside those index funds can be a great way to enhance returns.

Is your 401k optimized to help you meet your retirement goals? Are you paying too much in fees for under-performing funds in your retirement plan? A 14-year Vanguard study showed a good financial advisor can add up to a 3% value to its client — a difference of $500,000 for someone maximizing their 401k over 20 years. Click below to schedule an appointment for a FREE 401k evaluation. 

Preparing For The Next Bear Market

The following snippet is from a CBS article written during the heart of the 2009 financial crisis.

Alan Weir, who turns 60 this month, showed 60 Minutes his latest 401(k) statement, which he hadn’t had the courage to open up.

“I’m afraid,” he told correspondent Steve Kroft.

There’s good reason for his trepidation: nearly half of his life savings have vanished in a matter of months.

“It went down again,” Weir told Kroft, after opening the statement.

Overall, he said he was down about $140,000.

Asked if he thought he’d ever get that money back, Weir said. “I probably never see it come back. I was looking to retire, probably, when I hit 62. Can’t do it now. I’ll probably be working until I’m at least 70.”

Stories like Alan’s were all too common in 2008 and 2009. Similar headlines were popular during the dot-com bust in 2001. With unemployment below 5% and markets at all-time highs, it’s easy to forget about delayed retirements, foreclosures, evictions, and long lines at local job fairs. As time passes as retirement accounts grow larger, it’s easy to forget the pain of past market crashes. However, investors may be seeing some signs that it’s time to be a little cautious.
Are we in a bubble?
My favorite financial writer is Morgan Housel, who in this article pointed out that the word “bubble” didn’t even exist in the financial dictionary 25 years ago. With the bursting of the technology and real estate bubble fresh on our minds, that word is now thrown around frequently. Housel mentions that today, according to the media, we are in at least 14 different bubbles:

• A new real estate bubble.
• A bond bubble.
• A tech bubble.
• A VC bubble.
• A startup bubble.
• A stock bubble.
• A shale oil bubble.
• A healthcare bubble.
• A dollar bubble.
• A college tuition bubble.
• A Canadian housing bubble.
• A central bank bubble.
• A social media bubble.
• A China bubble.

The word bubble makes for a great headline that gets clicks but are we really in a bubble today? When I look at the tech and housing bubbles, there are two similarities that stick out to me: 1) Valuations, measured by a variety of metrics, far exceeded historical averages, and 2) A clear majority of people thought that things were going to get better forever. Let’s look at how those 2 dynamics are playing out today.

The data
One of my favorite metrics too look at when evaluating market valuation is the TMC to GNP ratio. This ratio measures the total value of all publicly traded equities (Total Market Capitalization or TMC), against the size of the entire U.S. economy (Gross National Product or GNP). The TMC to GNP ratio is often called the Buffett Indicator as billionaire investor Warren Buffett once called it “the best single measure of where valuations stand at any given moment.” He goes on to say, “If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%–as it did in 1999 and a part of 2000–you are playing with fire”. Today, TMC/GDP ratio sits at 130.8%, a level only surpassed during the tech bubble.


Another popular valuation metric is the CAPE Ratio, created by Robert Schiller, a Yale professor and American Nobel Laureate. The CAPE ratio, or cyclically adjusted price-to-earnings ratio, takes a popular valuation metric, the P/E ratio and expands it by adjusting for business cycles and inflation. The CAPE ratio is not an indicator of upcoming market crashes. Schiller’s research concludes it is an indicator of future long-term market returns.

Yet, at a ratio of 29.5, the only two times the CAPE ratio was higher than today’s level was leading up to the Great Depression and the dot-com bust.


Although the CAPE ratio appears to be at dangerously high levels, investors should be aware of a strong argument against this metric. The long-term average of 16.7 is deceiving as the denominator used to calculate the CAPE ratio, earnings, is skewed downwards as more profitable technology companies replaced lower margin industries which dominated the S&P 500 in the past. Furthermore, earnings can not only be manipulated but can vary through time as accounting rules change. Despite its flaws, the CAPE ratio is still one of the strongest indicators out there used to predict future market returns.

The emotions
When I first started investing about 15 years ago, I merely focused on the numbers. The dominant left-side of my brain gravitated towards financial statements and economic data. However, as I gained more experience, I realized that understanding human behavior was just as important as understanding data when trying to gauge the markets.

So, what is the pulse of today’s bull market? In a recent Bloomberg View podcast, legendary investor Howard Marks noted three stages to a bull market:

1. A few bright people believe there could be improvement
2. Most people believe things are getting better
3. Every idiot thinks things are going to get better forever

In hindsight, it’s easy to state that the housing and tech bubbles were discernable. How easily people forget. Middle managers quitting their full-time jobs to become day traders was a recurring theme in the late 90’s. Move forward a decade and all the talk was about how “they aren’t making any more land.” Both time periods were filled with irrational exuberance as the road to riches appeared to be as easy as buying a few tech stocks or five townhomes in the Arizona desert with no income verification.

I don’t see this type of euphoria today. In fact, the market rally of the past seven years might be the most hated rally in the history of markets. The S&P 500 is up over 230% since reaching its lows in March 2009. Yet the commentary during that entire time has been that markets are overvalued, the Fed is incompetent, Wall Street is rigged, and Bitcoin will rule the day. Additionally, the political divide is larger in the U.S. than it has ever been. The national debt is still at high levels. Interest rates have been at or near zero for nearly a decade. But rather than ignoring these facts, there appears to be general concern with those that pay attention to this kind of stuff.

Although the data shows stretched valuations, the euphoria that exists during bubbles is not as prevalent as it has been in the past. This doesn’t mean there won’t be a correction. In fact, there will be. There always has been. It’s a part the cycle.

The S&P 500 has fallen 10% or more from recent highs a total of 46 times since 1929, an average of about once every couple of years. The definition of a bear market is a drop of 20%. The S&P 500 has experienced a bear market over 20 times, or once every four years. We last saw a 10% drop in January 2016, which is about on schedule. The last time there was a 20% drop was nearly 6 years ago (it was a 19.4% drop but let’s call it a wash).

It’s a matter of time before we see another bear market. We’re due. However, that doesn’t mean it will happen soon. Although markets appear to be overvalued, nobody has been able to predict downturns and it’s no different this time. Therefore, pulling your money out of the market completely could mean you can lose a lot of money.

So what should you do?

You hear this term diversify all the time but what does this word really mean? Of course, you don’t want all your money in Groupon stock but is investing in a S&P 500 index fund diversified enough too? Many investors investing in the S&P 500 gets broad market coverage at a low cost but the problem is that your portfolio will only be in the largest U.S. companies. It ignores the rest of the investment universe, not only across the U.S., but across the globe.

What’s wrong with owning just the U.S. market? Sure, it’s comfortable. It’s like that warm and fuzzy blanket you wear when watching seven straight episodes of Narcos. However, the total market value of the U.S. stocks is only 43% of the global market. As a share of GDP, the U.S. is only 20% of the global share. Yet, according to Vanguard, U.S. investors have 72% of their portfolios in U.S. stocks.

If you had all your money in U.S. stocks since the market lows of March 2009, this concentration wouldn’t be a bad thing. The U.S. market has been much stronger than global markets since the Great Recession. However, this is not always going to be the case. Going forward, investors should expect much lower returns. Going back to the CAPE ratio, long-term returns with the CAPE ratio above 25 has only been about 1% when adjusting for inflation. Returns have been negative when they go above 30. Recall that the CAPE ratio is at 29.5 today.

A diversified portfolio means buying a variety of asset classes. An asset class can consist of investments in government bonds along with stocks of large, medium, and small companies. It will also include international stocks and bonds, real estate, and commodities. A diversified portfolio that invests in each of these asset classes won’t always get you returns as high as you would if you focused on a single asset class. However, there’s no way of knowing which asset class will outperform the others. If there was, I would still be blogging…it would just be from Belize.

The goal with diversification is not to outperform everyone else but to have a portfolio that will do well in multiple markets. It’s to keep you in the market when things go awry.

Let’s look at a diversified portfolio in action. In his book, Global Asset Allocation: A Survey of the World’s Top Asset Allocation Strategies, author Mark Faber looked at the returns and volatility of various asset strategies. One of the better performing strategies was that by former Harvard endowment chair Mohammad El-Erian. His portfolio strategy consisted of the following asset classes:

Below is how this diversified portfolio performed.

Notice how the diversified portfolio trailed stocks when they were going up. However, during bear markets, losses were protected. Additionally, volatility was significantly reduced. A diversified portfolio netted positive returns in a variety of investment environments while only having 25% of the volatility. This is important as investors will more likely not regretfully sell their entire portfolio in the event of an inevitable bear market.

Other strategies
Money is emotional. Academic studies show that the best time to invest is always today rather than time the market and attempt to get in or out at the best moment. If we were all robots, this would be a great strategy. However, many people have been left with a sour taste in their mouth regarding Wall Street and that’s okay. Others are fearful of an overheated market and that makes reasonable too. If your worried about what the future holds, focus on the following:

1. Change the focus of your hard-earned dollars. A good start would be paying down some debt. It could also be a good time to get to that home remodel you’ve been putting off. Do you have enough of an emergency fund that can something unexpected occurs? Basically, use this time to evaluate your personal financial situation outside of the investment world.

2. Start hoarding cash. Rather than selling out of your investments which is one of the biggest mistakes individuals can make, just stop contributing for a little while. If you receive a tax benefit by investing in your 401k, you should still take advantage of it. Most plans give you the option to invest in cash or other low-risk investments. It’s no guarantee that the market grants you a buying opportunity, but if it does, you’ll be ready to make your cash work at a cheaper price.

3. Don’t change a thing. The number one factor in determining investment success is time. Going back 40 years, an investor could have only added to the market just before a big crash and they still would have made money if they held on during the rough patches. If you have years ahead of you and don’t need to tap your investment portfolio anytime soon, just keep investing what you can and ignore the market gyrations.

4. Know where you stand. Contrary to not changing a thing, if you are close to retirement and will be reliant on your investment portfolio, take a close look at your portfolio. Make sure you aren’t putting yourself at risk of becoming a 60 Minutes story. However, you also must be mindful of not getting too conservative and putting yourself at risk of running out of money during retirement. I know a good financial advisor who could run the numbers and assist in letting you know where you stand.

To be clear, I’m not making a market call on a stock market correction or bear market. The global markets are complex and nobody has been successful in finding a secret formula that predicts short-term movements. However, having a diversified portfolio and sticking with it during good times and bad has proven to be a winning strategy over the long-term.

Need help building that diversified portfolio or just want a 2nd opinion? Allow us to help you create a portfolio built for a bull or bear market. Get started today by clicking the link below for a FREE consultation.