I have a hypothetical situation that I would like to present to all of my financial advisor friends, real estate investors, and anyone else interested in financial independence. It has to do with where you would put your money in today’s market. Let’s lay out a hypothetical scenario…
THE BACKSTORY
Let’s say the individual in this situation is relatively young (under 40), has no consumer debt, and has $150k in retirement accounts that they will not touch. They have a rental property that has about $150k remaining for the mortgage, but they have $50k of equity in it. Their own home is paid off, and their overall lifestyle is fairly basic (they live below their means). Lastly, let’s say they have $10k in the bank, but with the COVID-19 pandemic, their income has been reduced (whether due to their working less hours, their job being furloughed, etc.), and they would like to keep that money as an emergency fund.
THE OPTIONS
In option A, this individual believes that this market downturn will blow over quickly and things will be back to normal within a couple of months. He/she decides to stay the course with the rental property and keep investing in the stock market (perhaps more aggressively, or at least as aggressive as they feel comfortable). This would take far less work for them (since they’re already basically doing this) and still let’s them build towards their financial independence goals. The renters are still paying down the mortgage on the rental property and the individual is theoretically getting the stocks at a discount (by buying when the market is low). In their mind, slow and steady wins the race.
In option B, the individual is a bit more pessimistic about the short term outlook of the Coronavirus. They think that this pandemic will affect the country as a whole for 2-3 full years (meaning stock prices won’t be back to what they were until the end of that time period). This individual decides to sell the rental property (incurring all of the costs associated with this) and puts all of the proceeds from the sale into the stock market. Their expectation that stock prices will rise considerably once this is over, and that their investment in the stock market will more than make up for what their net worth would have been if they had followed the same route as the individual in option A.
CONCLUSION
Which investor is better off? Obviously it depends on the numbers…where the stock market is today, where it will be in 3 years (with the lump sum of money added to it versus essentially dollar cost averaging over that same time period), what the housing market does (how much will the rental property’s value increase over that same period of time), etc. Part of it also depends on your risk tolerance and the anxiety levels that each decision brings with it. Will your quality of life suffer in one scenario because you can’t take your eyes off of what the stock market (or the less volatile housing market) is doing? This scenario is made up, but I’m wondering, what would you do if you were in that individual’s shoes?