If you’re an investor in anything other than real estate, you’re probably in the middle of a bear market right now. And if you’re a real estate investor… these rising interest rates could mean choppy waters lie ahead. My largest investment by far is Ethereum, and it’s down about 80% from its all time high, so you can imagine what that’s done to my net worth.
And while I have an emotional preference for larger numbers over smaller ones, I have to admit that I’m excited and feel good about what’s going on. I wanted to write about why that is, hopefully help you feel better about it, and offer some practical ideas on what to do.
The first thing to accept is that bear markets are actually a healthy part of the financial ecosystem, just like forest fires are good for forests. In the short term they can feel really bad, but in the long run they are what keep things healthy.
The general idea behind capitalism is that people with excess capital can make it available to those with less capital to help them bring good ideas and productivity to fruition, with both parties enjoying the benefits. While not all aspects of capitalism are good, this core underpinning of capitalism is why I roll my eyes a little bit when people suggest that capitalism is a bad thing.
However, capitalism only works if the resources are going towards productive projects. If the money gets invested in projects that don’t create more value and jobs, it has caused more harm than good. Bear markets are the filter by which we cut out bad projects. It’s a blunt tool, to be sure, but we’d rather eliminate cancer with the relatively barbaric practice of chemotherapy than to let it spread.
Bear markets are good for the world in the long run, even if they’re bad for us in the short run.
You know how I always talk about building out a long financial runway and living below one’s means? The current situation is exactly the reason why, even though it’s hard to imagine such a situation during boom times. Use this as motivation to get to that place, and maybe more importantly, to stay there even when things go back up.
Everyone loves the old “buy low sell high” saying, but then when things are actually low they get scared and forget to buy. Most of the times someone tells me they’re buying an asset it’s when it’s at an all time high and they think it’s going even higher.
There’s no telling what will happen in the future, but if you actually did enough research on an asset to believe in it for the long term, you should be thrilled that it’s cheaper now. If you didn’t do enough research… you may not be thrilled.
It’s also important to understand why we’re in a bear market right now. The primary reason is that there is a liquidity crisis. As interest rates go up, people need more cash to service loans. Where do they get that cash? They sell assets.
When they sell assets the prices of those assets go down. People often borrow against assets (both equities and crypto), so when those prices go down they have less collateral. If they get close to a threshold where they will be liquidated, they must sell as well. This causes a spiral downwards until asset prices become so attractive that those with cash on the side can’t help but buy them.
This is, of course, an oversimplification of what’s going on, but it is the major driver. It’s also done by design. The fed is raising rates to cause exactly this to happen, because with too much easy money in the system people were too eager to buy and caused inflation. Consider it a controlled forest fire.
I’m invested in Ethereum because I am totally convinced that it is going to be a major part of the future. I have no idea if it was overvalued at $5k earlier this year or even today at closer to $1k, but I believe that it will be far higher in the future (to throw a random guess out, I’d guess $15-20k within 2 years). If Ethereum had dropped because it was hacked or a competitor came and absolutely destroyed it, I would sell it at a loss. But since nothing has changed in terms of my core conviction of it being part of the future (and further conviction that the market doesn’t even understand what it can do today), I’m happy to keep buying now.
An analogy might be that if I’m wet because my boat is sinking, I’ll get off the boat. If I’m wet because it’s raining, I’ll stay on the boat.
When Ethereum hit its low point in the last cycle I funded a crypto 401k and bought Ethereum at $80. Even though I already had Ethereum, it didn’t bother me that it was that low because nothing had changed in my conviction of its future importance.
This principle also applies to investing in the stock market. I believe that the world economy will continue to grow in the long term, so I’m happy to add more cash to my all weather portfolio, even though parts of it are down.
A bear market is also a good time to realize that most of your happiness and satisfaction in life will not come from earning money or spending money, but from how you spend your time and the relationships you build. While it’s a little bit less fun for me to daydream about things I might buy in the near future, it’s just as satisfying to sit down and have tea with my friends.
Use the bear market as an opportunity to test your convictions and to learn more about what you’ve invested in. Make structural changes to your life and finances so that if this bear market put you in a tough position, the next one won’t. If you’re still happy about the investments you have and your lifestyle hasn’t had to change much or at all even with asset prices down across the board, congratulations!
Photo is from the volcano on the Big Island of Hawaii. It’s a lot of fun to hike out and see the stars and lava at night. Also it represents all of our portfolios going up in flames…