Dealing with another bear market might bring you down, but the silver lining is that we all have the chance to rake in more passive income! And with more passive income rolling in, financial freedom suddenly seems within reach. To clarify, financial freedom simply means having enough passive income to cover your living expenses comfortably. Picture this: when you achieve this, you basically have the freedom to do whatever your heart desires.
For all the investors out there, this bear market, accompanied by rising interest rates, could actually be a blessing in disguise. The trick is not to be disheartened by the drop in your investment portfolio’s value, as long as you’ve spread your assets wisely. The good news is that portfolio values tend to bounce back eventually.
It’s crucial to keep active income streams flowing, especially during times of depressed asset prices. If early retirement is your aim but you don’t have a guaranteed pension, solely relying on passive income might not be the smartest choice. Even if you’re a conventional retiree with no active income coming in, you can still benefit from higher Social Security adjustments. Also, your income-generating investments may churn out more earnings in a high-interest-rate environment.
So, how can you make the most of a bear market by boosting your passive income? Like many others, my net worth took a hit with the stock market decline. In my case, having 30% of my net worth in stocks meant a 25% drop there equated to about a 7.5% downturn overall. Once stock losses hit the 10% mark, my mood starts to sour. But as a pseudo-retiree, my focus is on generating enough passive income to cover our living expenses, not on watching my net worth fluctuate.
When interest rates rise, bond and dividend yields tend to go up too. This can be explained by how every yield is compared to the risk-free rate of return. Investors are likely to enjoy more passive income during periods of higher interest rates. Bonds issued by corporations might have to up their coupon payments to compete with government bonds, and companies could increase dividend payouts to boost stock dividend yields.
In terms of real estate, property prices might need to adjust to make properties more attractive in comparison to the risk-free rate of return. Landlords often benefit from inflation as real estate values and rents climb. But the sudden spike in mortgage rates happened too fast recently, dampening the excitement.
In the past, I used to pour most of my cash into the S&P 500 and private real estate funds, which yielded between 1.5% and 10% on average. However, with higher interest rates, government bonds are now attracting more capital. While I still dedicate 40% to risk assets, that percentage used to be closer to 80%.
A guaranteed 4.8% return from 1-year Treasury bonds is appealing for those relying on investment income. Compared to the ~1.8% S&P 500 dividend yield, Treasury bonds seem quite attractive. Though real estate can potentially yield more than 4.9%, increased mortgage rates also pose downside risks.
By the way, higher nominal returns, even if they might not beat inflation, are still better than losing money. This year, I’ve managed to increase my passive income portfolio by about 10%, roughly $35,000, mostly from Treasury bonds, private real estate investments, and rental properties.
The trick is to keep finding ways to ramp up passive income, particularly during a market dip induced by the Fed. By investing smartly in Treasury bonds, rental properties, and private real estate, I’ve seen positive results. Active cash flow from ventures like Financial Samurai is key for reinvestment and overall financial health.
Maybe a bear market isn’t all doom and gloom. With higher interest rates and a falling portfolio value, your investment portfolio’s income yield is likely on the rise. As long as the dip doesn’t exceed 35%, we should be fine. Staying afloat with regular cash flow allows for the acquisition of higher-yielding assets, potentially accelerating financial independence or securing a peaceful retirement.
Remember, investing in income-producing assets long before retirement can be a smart move. In a bear market, these assets can outperform, generating even more income during the tougher times. Keep an eye on your asset allocation, and make sure you have some active income sources to take advantage of any downturns.
Considering investing in real estate for a steady income boost? Platforms like Fundrise can be a solid option for passive diversification without the headaches of direct property management. And if you love staying in the loop with personal finance insights, joining the Financial Samurai community could offer valuable nuggets of wisdom for navigating the financial landscape.
