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Leveraging the Power of Part-Time
Can a part-time job be good for your finances? Taking back control of your time might be the best thing you do for your economic future.
Daniel Lancaster
November 18, 2024
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“I realized that on a scale of 1-10, 1 being nothing and 10 being permanently life-changing, my so-called worst-case scenario might have a temporary impact of 3 or 4…
Keep in mind that this is the one-in-a-million disaster nightmare.
On the other hand, if I realized my best-case scenario, or even a probable-case scenario, it would easily have a permanent 9 or 10 positive life-changing effect.
In other words, I was risking an unlikely and temporary 3 or 4 for a probable and permanent 9 or 10, and I could easily recover my baseline workaholic prison with a bit of extra work if I wanted to.”
-The 4-Hour Workweek by Tim Ferriss
NEWS
What Happened Last Week
The Producer Price Index (PPI) rose 0.2% in October, which is an acceleration since September but still in line with general expectations.
Core PPI, which excludes volatile food and energy prices, has risen 3.1% as of October 2024. As of October 2023, prices had only risen 2.2% the previous year.
Elon Musk has been appointed to head up the newly created Department of Government Efficiency, with the goal of cutting $2 trillion out of the budget deficit.
Two big elements which affect inflation are rate of M2 money supply growth, which is still slightly above its 20-year trend line, and the velocity of money, which is below historical norms.
Investor sentiment is very moderate. About half expect a bull market and half expect a flat or bear market, according to the AAII Investor Sentiment Survey and Fear and Greed Index.
How I See It
If I had to name the number one fear among investors, I would say inflation.
Let’s review a lesson in behavioral finance.
There are two common biases at play right now among investors.
Recency bias: the tendency to overemphasize the importance of recent experiences or the latest information we possess when estimating future events.
Availability bias: the tendency to judge the likelihood of an event based on how easily we can recall similar events.
Think about it. How long have you heard the topic of inflation harped on? The last three years?
Inflation is not about to surprise the markets in any meaningful way.
Investors always try to fight the same battle that they fought last time. But the next bear market is extremely unlikely to be a result of high inflation. It’s just far too well-known and well-watched.
I actually think the threat to the next bear market is somewhat dependent on how fast the Fed cuts rates. Counter to common sentiment, I personally hope they slow down the frequency and magnitude of rate cuts.
They need to reserve that little power that they have in monetary policy for a time of need. Right now is not that time.
Inflation has accelerated somewhat, but looking at money supply growth and velocity of money appears to indicate that it’s not likely to accelerate to any meaningful or disruptive degree. Slower money velocity helps curb inflation. And money supply has meaningfully dropped since it peaked in 2022.
Cutting $2 trillion in government spending could potentially have a near-term negative effect on US GDP. After all, government spending is a factor in the GDP equation! But it also would likely have a counterbalancing effect that keeps money supply growth rate low, keeping future inflation low.
But these cuts are likely to be phased out over time, so that even if the deficit can be eliminated, it shouldn’t be happening all at once in the same year. Government employees who are cut loose are likely to be offered a generous severance package.
While such spending cuts could eventually cause a slowdown in the economy (think 2027 or later), the long-term benefits would not go unnoticed by the markets. And therefore, I don’t believe that it would spell a deep recession by itself. When executed in combination with lower taxes and fewer regulations, it’s even possible it has a canceling out effect and manages to keep the economy growing healthily in the midst of the restructuring.
Like any healthy change, sometimes there is a period of difficult sacrifices before the benefits are realized. In the long-run, if this restructuring proves successful, it could potentially solidify and reinforce America’s economic leadership across the world for decades to come.
We don’t know where the next bear market will come from, but what we do want is for the Federal Reserve to keep interest rates meaningfully above zero so that the economy can grow strong and accustomed to them. Then when the next economic crisis hits, they have the ability to reduce interest rates and give banks the profit incentive to lend and stimulate the economy.
PARADIGM SHIFT
Leveraging the Power of Part-Time
As my past clients would approach retirement, I often saw an inclination to begin by cutting back on working hours.
Whether they were afraid of quitting cold turkey, or they simply enjoyed work, the part-time option was a popular one for many.
But here is my question. Why should part-time only apply to upcoming retirees?
In fact, going part-time much earlier could be the greatest thing you’ve ever done financially.
Why?
Because if you’re disciplined, you can use those extra hours to dive headlong into building your own side hustle.
Trying to build a small business while also working 40-50 hours per week can easily lead to burnout, sleep deprivation, and put a strain on family life. Granted, some people manage to juggle it all. But I’m a huge fan of part-time work instead.
The key is to plan ahead and invest wisely so you can subsidize that part-time work and float expenses for about 3-5 years while you build up the small business.
For example, imagine you’ve saved $100,000 in liquid cash or investments. Drawing $25,000/year would last four years. Could you take on a 30-hour per week job to cover the remaining expenses?
Alternatively, you could go even more part-time and draw $50,000/year from the bucket for two years.
Sound a bit scary? Don’t forget, a good adventure usually involves uncertainty.
Using the additional 10 hours per week, could you build up a side income of at least $20,000 over those 2-4 years? A $100,000 investment in something earning $20,000/year indefinitely is an attractive return. Depending on how soon that income starts to build, and how long it’s likely to last into the future, you’re looking at something between a 15%-20% internal rate of return. That’s far better return than you’d expect to average on just about any other type of investment!
Even if things don’t pan out as fast as you expect, having any sort of passive income on the side will allow you to recoup those early expenses and build wealth faster than you otherwise would have. Plus, the education along the way will pay huge dividends in itself!
FINANCIAL TOOL
Standard Deviation
You may remember the bell curve from your high school or college statistics class.
It’s a nice little symmetrical bell that shows us how many data points show up around the average, and how few show up toward the less likely extremities.
As a refresher, here’s the basic rule of thumb for a perfect bell curve:
68% of the data is contained within one standard deviation
95% of the data is contained within two standard deviations
99% of the data is contained within three standard deviations
So let’s take an overly simplistic view of what this means for stocks.
Let’s assume for a moment that stock returns have a perfect bell curve of returns (they don’t!). We’ll start simple.
Pretend XYZ stock has a 5-year average annual return of 15%.
Assume it also has a standard deviation of 18.
On a normal bell curve, we could infer that:
68% of years have ranged from 15% plus or minus 18% (-3% to 33%).
95% of years have ranged from 15% plus or minus 36% (-18% to 51%).
99% of years have ranged from 15% plus or minus 54% (-39% to 69%).
Now here’s the good news. Most stocks have what’s called a positive skew, meaning that the upside is more likely and frequent than the downside.
However, there are some extreme events on the downside that are also more likely to happen than what a normal bell curve would suggest.
So take it with a grain of salt.
But while there are outliers, standard deviation can offer you a good idea of what’s considered normal.
Add and subtract one standard deviation from the average to see if you’re comfortable with that range about 68% of the time.
Are you comfortable with 2x the standard deviation about 95% of the time?
Being familiar with these ranges can offer perspective and help you make disciplined decisions even in the years when markets encounter losses.
HERE’S HOW I CAN HELP
COURSE 1 OF 3 IS AVAILABLE FOR ENROLLMENT!
I am in the process of creating three in-depth digital courses that comprehensively will make you a master of your financial destiny.
The first course, called Low Risk Investing, is available and ready for enrollment. This lays a solid foundation for risk management and everything else investing.
Understanding and utilizing these strategies will give you confidence in knowing exactly what risk to take and why. It will also show you how to eliminate the unnecessary and unwanted risks while maintaining great potential for returns.
These are pre-recorded courses that you can follow at your own pace.
What you'll get with over 3.5 hours of content:
Learn to identify the main risks of investing.
Discover the financial tools, products and strategies at your fingertips.
Determine the risk factors you want to reduce.
Learn how to build a diversified portfolio that weights the odds of success heavily in your favor!
Access a risk tolerance questionnaire, a quick guide to low risk investments, a list of scenarios paired with low risk portfolios, and a list of companies where you can access such strategies.
I’d love to hear from you. Let me know what you’d like to see in upcoming newsletters, articles, or a digital course at Contact Us - The Wealth Expedition.