Monthly Archives: January 2016

Why Market Volatility Is Good For Our Future Financial Independence

My goal is to prove to you, the skeptical reader, why sometimes market volatility is a good thing for us. Like so many others in the financial blogosphere, I am addicted to spreadsheets.

Let me preface this by saying, this is not to say you should be 100% allocated into equities. But like I mentioned to Financial Samurai, I believe too many of us Gen Yers are way too risk adverse when it comes to investing our money for the long-term. The point is that you should have a predetermined investing strategy and desired asset allocation. Market movement and sentiment should not change this. Market volatility should not change this. It’s times like this that help new investors learn their spot on the risk continuum. But it’s also headlines like this that are the equivalent of financial porn. And they are out there almost every day, many times on major media sites. Ignore the noise and stay the course.

Now that I’m off my soapbox about creating a plan and coming up with an asset allocation, I wanted to look at a hypothetical portfolio with different growth rates throughout time. I spend quite a bit of time forecasting out net worth, retirement planning, other financial nerd stuff, etc. Until recently, I have always assumed a constant growth rate. But what happens if instead of assuming constant growth, we assume cyclical bear/bull markets that might be more realistic based on history. I was suprised by the results.

Here are my base assumptions:

  • Freddy the Finance Nerd is 27 years old
  • He earns $60k salary and expects to average a 3% raise throughout his career
  • Even though he slightly wants to blow all his money on hookers and coke (see what I did there), he instead is committed to contributing 10% of his lifetime salary into a 401k plan. His employer will match at 5%.
  • He holds his 10% contribution constant throughout all his working years (this is an important assumption!)

In this example, we will look at 5 different scenarios for the upcoming 33 year outlook. Each of the 4 scenarios with growth will average 7% return annually.

  1. No Growth: 0% return
  2. Constant Growth: 7% annual return
  3. Bear 5, Bull 5: -5% return for 5 years, 19% return for 5 years and so on – last 3 years assumed 7% return
  4. Super Bear 5, Bull 5: -11% return for 5 years, 25% return for 5 years and so on – last 3 years assumed 7% return
  5. Bear 7, Bull 7: -5% return for 7 years, 19% return for 7 years and so on – last 5 years assumed 7% return

The results can be found below.

Screen Shot 2016-01-21 at 6.41.45 PM

Screen Shot 2016-01-21 at 6.39.52 PM

Maybe you’re surprised, maybe you’re not. I was. But it makes sense. All 3 scenarios with bear/bull markets (cyclical) outpace the constant growth scenario. I also realize that time doesn’t stop when we turn 60 and we likely have 2-3 MORE decades in the market after that.

The no growth and constant growth are pretty straightforward. Over his working lifetime, Freddy & his employer have contributed about $450k to his 401K plan, which grows to about $1.5M with a consistent 7% annual growth rate.

But with the cyclical market scenarios, something remarkable happens. For 5-7 year stretches throughout his career, Freddy is able to effectively purchase more shares of whatever mutual fund or index fund because the market is going down, down, down. By staying the course, Freddy is effectively dollar cost averaging during the down times and gets the benefit of amazing returns during the up times. This translates into a 33-55% increase in Freddy’s 401K account (depending on which cyclical scenario we are looking at)  after 33 years compared to the constant growth rate scenario.

This only works if Freddy is consistently contributing money into his 401K. If he tries to time the market and decreases his 401k contribution during perceived bad times and increase during perceived good times, he could end up just about anywhere on this graph.

I’m not saying that I guarantee an average 7% return, but if it happens I sure as hell want it to happen in peaks & valleys instead of at a constant rate over time.

Being in my 20’s I have to remember that market volatility will be present throughout my accumulation phase. A down market (*cough*2016*cough*) means cheaper shares and at the end of the day, that’s what we are accumulating – numbers of shares.

I can understand as someone gets into their 40’s, there might be some resistance to this idea of thinking hoping for MORE market volatility. I would still argue that if you are resistant to the level of risk associated with increased market volatility, you should be changing your asset allocation to lower risk investments. This is, of course, because higher 401K balances raise the stakes and the magnitude of risk.

In your 20’s and 30’s, my argument would be that market volatility is a good thing for our accumulation and our path towards financial independence because of the decades that we have on our side.

At the end of day, my sentiment has less than 0% impact on the movement of the market and . So in that case, go down ms. market and get me some cheaper shares these next couple years!

So what do you think readers? Is market volatility good or bad? Have I gone absolutely crazy? Shoot some holes in my theory.


Buy Every Lottery Ticket You Can Afford

Cash out that old IRA. Take a cash advance on your credit cards. Find every dollar you can and buy Powerball lottery tickets for tonight’s record $1.5B jackpot.

Apparently that’s some people’s advice that somehow get on TV. Is this not just proof again of how ridiculous our media is and how dumb American culture is? Let me just say it – you’re not going to win the lottery. You’re not going to know the person that wins the lottery. You very likely won’t be within 3 states of the person that wins the lottery. With the odds now at 1 in 292 million, since last summer’s lottery change to become even more of a crock, expect big jackpots like this to become semi-normal. It may take a while, but we will hit $2B relatively soon with those odds.

I just want to know who runs the Powerball. (Multi-State Lottery Association) They found an effective way to get people to pay taxes and not even complain about it. And the states that gain tax dollars off these lottery sales are laughing all the way to the bank! If we are all so concerned about taxes, maybe the government should create some new even bigger lotteries to help pay down the national debt. It sounds like many, many Americans are more than happy to oblige. But you may say, there is a potential benefit from paying these types of lotto taxes. Yes, I agree – false hope. If people are dumb enough to fall for that government scheme, then I am all for it.

What’s amazing, is that so many people play the lottery every week or at the very least, quite often. At nearly every place that I’ve been employed, there has been an office pool and they are back at it, every week, paying their lotto taxes like upstanding American citizens. The LA Times put together a neat Powerball simulator that shows no matter how much money you put into the Powerball over time – you are extraordinarily likely to lose over 90% or more.

Just a couple of random odds for you:

  • Odds of dating a millionaire: 1 in 215 more than 1.35M times more likely
  • Odds of writing a NYT best seller: 1 in 220 more than 1.32M times more likely
  • Odds of becoming a billionaire (without the lottery): 1 in 7M more than 42 times more likely
  • Odds of becoming President (yes that POTUS): 1 in 10M more than 29 times more likely
  • Odds of winning Powerball: 1 in 292.2M (yikes)

Maybe we should focus some of that lotto tax money on something that is a bit more likely and actual could be a benefit to us.

Write a book. Go find a rich guy. Start a business or just do something productive.

If I come across as brash, it’s because I feel that way. You are 29 times more likely to be President than win the Powerball – come on people, be real. You’re not going to be President either, by the way. I know I have shattered many dreams with this statement.

So if you want to spend a couple bucks on this “historical” jackpot, go for it, but consider yourself a winner if you win even $4 tonight. In the meantime, I think I found a fix for our government debt issue…



I have never been a big fan of New Year’s resolutions, but I suppose creating a list of my 2016 goals is similar. Perhaps a bit less cliché (but is it really?!).


There is something about writing goals down that makes me push towards them harder. Maybe it is just getting them out of my head and on to a piece of paper, or maybe it is posting them online in hopes that sharing them with a bunch of strangers on the internet will help keep me more accountable. Either way, I highly encourage you to WRITE DOWN (like with an actual pen, not invisible ink) some goals for the upcoming month, quarter, or year. Even if is just a few. Start small, if necessary, and grow from there. Figure out a way to track your progress and check-in regularly. That’s my plan and we’ll see how it goes this year. I will be updating my goal charts monthly. Here are my 7 big goals for 2016.

Become a Morning Person

If you haven’t seen my post on what my current schedule is and where I want to be: check it out. This goal is a hard one to quantify, but there is a reason that it is listed first. Waking up early will help me become a MUCH more productive person and help me achieve my other goals this year and for many, many years to come.

Run 365 Miles this Year

The 365 isn’t significant, other than it really just means that I average at least 1 mile per day. I didn’t want to set this bar too high, as I am not necessarily focused on the arbitrary number, but more the general improvement in my lifestyle and exercise routine. I would expect that I run 2-4 times a week, but that’s not enough by itself. I also will be looking to strengthen my core through some of my wife’s ridiculous work-out at home routines and other weight exercises.

Run 2 10Ks & Run my first half-marathon

I have run 2 10K races in my life. I trained really hard for the first a few years ago and I felt like the journey did my body well. The second time around, I guess my mindset was, been there, done that, because I didn’t train as much. But I did gain something from that race. Because I had done it before, I knew how hard I could push my body and actually ended up with a better time than the first time around (both around 53 minutes). My goal this year is to run to 2 sub 50-minute 10Ks and my first half in under 2 hours. Lofty time goals but go big or go home.

50 First Dates

Okay, get the cheese ball out. But seriously, I want my wife and me to spend more time together. I really mean being engaged with each other. Stipulation here is that if we are watching TV or on our phones, it doesn’t count as a date. It will help that we are on the same schedule, since she doesn’t work during the middle of the night anymore!

Make at least $7,500 profit from side hustle-y things

I’ve got my eBay store, small-time ticket brokering, and recently started with the Fulfillment by Amazon path. If I have time, I am also looking to get some side consulting and/or tutoring going as these types of ventures are nearly pure profit other than the time that I invest in them. Last year I was too focused on sales volume, this year the focus needs to be on the cost-benefit analysis of my time vs. the profit that comes from the activity.

Read at least 12 Books (yes, from start – finish)

And no my accounting & economic textbooks for my spring classes won’t count. As I disclosed last month, I am great at cracking open books, but not good about finishing them. Exhibit A – I did not read Smart Couples Finish Rich last month fully, so that was a fail! Need to do a better a job of carving out time daily or nearly-daily to read. I am a creature of habit.

Increase Net Worth by 35% (About $65K)

Both Financial Samurai and I believe the market will take a slight decline in 2016. If I get a positive return on my investments in the next year, it will just be gravy. I’m not counting on it and honestly not worried about it, either way. With that said, I can still save money in my 401K, ROTH, & HSA accounts, pay down my mortgage, and increase other after-tax savings. With increases of about 31% and 32% respectively each of the last two years, a 35% net worth increase is a bit lofty of a goal, but I like challenges.


Notice that my blog is not in my top 7 goals this year. I only have so much bandwidth and I love reading and writing about personal finance. Ideally, I have a goal of posting every week this year, but I need to be realistic about my priorities. I think this is another underrated part of goal-setting. Making sure you prioritize what is in front of you and executing on the highest priorities. If you get to the lower priority goals, AWESOME! If not, pick yourself up, realize you can’t do it all at once, and re-evaluate your priorities next time, if necessary.

Stay tuned next month for updates and goal charts. What are some of your goals this year? How do you plan to achieve them and what are the biggest obstacles you see in the upcoming year?