Are Stocks The Only Game In Town?

Jonathan Clements provided an update on his thoughts related to his investment portfolio and wound the article down with this provocative comment; I don’t see any alternative to owning stocks. I'm not going to attempt to make an argument that stocks are not just about the best game in town, it's hard to beat the ergodicity of a well-diversified portfolio. I have always acknowledged that equities aren't right for everyone. I also think there is a lot to be said for endowment style diversification, owning truly disparate asset classes to avoid being overly dependent on the performance of just one asset class. I'll add that it is not impossible that cryptocurrencies evolve to compete with the equity market in this context, just saying it is possible, not that it is probable.

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For any random five-year period, yeah, stocks might be a coin flip but when you think in terms of investment lifetimes, you're probably going to be ok adding money at regular intervals and not doing too much to muck it up. Having other assets though can be a huge difference-maker if one of your major life events coincides with the types of market peaks that occurred in 2000, 2007 or the potential peak that could have occurred in 2020.

The easiest way to mitigate the market peak risk, the real term of course is a sequence of return risk, if you're not lucky enough to other asset class exposure is just to raise cash, enough cash to help you endure a market meaningful market downturn. "Enough cash" is a very subjective term. Don't listen to someone else's idea of how much is enough cash, this is really a sleep factor number....six months worth of expenses set aside in cash, 24 months, in terms of comfort level there is no wrong answer.

Some sort of real estate investment can help smooth out income from collecting rents that are less lumpy than stock market returns or in our case vacation rental income. I wouldn't expect vacation rental income to be as steady as income from a full-time renter but maybe for planning purposes you could figure a 50% haircut to your typical cash flow? You normally bring in $3000/mo, would be prudent to plan on $1500/mo? Maybe. Like with anything, getting started with a longer runway is better as opposed to "ok, I just retired so I am going to buy a piece of rental property and immediately bring in $2000/mo. You might be that lucky but I wouldn't assume it.

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