You Can’t Predict But You Can Prepare

How much do you want to be able to look into the future?

Would you take the chance if it presented itself to you? You could see all the world events that are going to happen, and when they’re going to happen. You could see stock prices and make incredible amounts of money. You could see who you’d end up with to grow old.

Would you take it?

I probably would.

The problem is, you can’t predict. You cannot predict the future. But you can prepare. So prepare and be ready for whatever the future has coming for you.

Predicting in Finance

In the financial sector, there are a lot of companies and individuals that want to sell you the dream I laid down above. They want to sell you the dream of being rich. They know the way, they know how to become rich. But they don’t. They’re trying to sell you their services, as investment advisors, or wealth managers.

They claim they can outperform the market. They claim to be so in the know of what’s going to happen, that they can make the right trades so you make more returns than the market. And as a small compensation for their effort, they take 2% of your portfolio every year.

Obviously, this is bullshit. Yes, there are some fund managers who outperform the market. But they can’t do that consistently. If they can do it for 5 years, they are already top class. Almost nobody can do it for 10 straight years. And certainly nobody can predict the future for the coming 20 or 30 years.

These days, stocks are becoming more volatile again after almost a decade of smooth growth.

But you can prepare for this.

Prepare for the Future

When you want to become financially independent, you should prepare for the future. And since you cannot predict things with certainty, you have to go with the most likely options.

I didn’t predict that the real estate market would go up by 50% in my city in the two years since I bought my apartment. It did go up 50%. In hindsight, the money that I made on my apartment was sheer luck. A year after I bought my place, I was looking to purchase a second apartment in the city to rent out.

In the end, I didn’t buy. I was too scared. The prices jumped up pretty fast. I visited quite a few apartments that were for sale, but I tried to lowball them all. If I had just bought one, I would’ve made, probably, an easy 50,000 euros on appreciation alone.

However, I couldn’t look into the future. I didn’t know how long this appreciating market would last so I didn’t feel comfortable buying property at these prices.

I still don’t know what the future might hold, but what I do know is that I will be prepared.

How I Prepare Myself

I save and invest quite a bit of my monthly pay, about 35% of my net income. Then I save roughly 90-100% of my bonuses and other windfalls for a total yearly savings rate of about 40%. See my savings rate for September 2018.

I put that money to work in the stock market. At first, I followed the simple rule of 80/20, where I invested 80% in stocks and the rest in bonds. Then I saw how bonds are likely to underperform, so I shifted to a more aggressive strategy of age-10 in bonds, which currently for me means 15% in bonds and 85% in stocks.

I still wanted to purchase property, however I thought I could simply liquidate my portfolio to put 20/30/40% down on an investment property. That works only if the market keeps going up. Luckily, until now it has. But I do not want to sell equities when I finally find property I can buy at the right price. That’s when I decided on my current investment strategy, of 50% in stocks and 50% in cash.

Even though cash doesn’t return anything, even worse, after inflation the real returns are negative, it gives me the opportunity to save up for a large real estate purchase, without relying too much on the stock market.

Sure, when I find a great deal tomorrow I would have to sell my stocks to be able to put down a meaningful amount on the property, but in the long run this dependence will continue to go down.

I Don’t Know

The key here is that I don’t know. I don’t know when the real estate market will cool down so I can buy some investment property. I don’t know for how long the stock market will continue to rise. But since I’m preparing to win in every likely scenario, over the long run I will probably be successful.

There is not much that can go wrong when you save 40% of your income and put it in some tried and true investments like stocks and real estate, as long as you don’t put your money in obviously bad investments. For stocks, go with cheap index funds. For real estate, go for cash flow. There’s nothing you can mess up when doing so.

How does your future look like? What are you doing to prepare and be ready?