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The stock market is doing well – too well. Most questions about investments come when the stock market is smoking hot or on life support. Should I own more stocks? Should I sell everything and go into cash? Thankfully, our firm provides deep education on sticking to an investment policy, so most of our clients tune out the noise. Even with that, we get a smattering of questions from left field. One that came up recently – should I buy rental property to guard against a stock market crash? I dissect that question here.

The client who asked that question is an early retiree, spends wisely, has enough money plus a cushion for some market volatility, and psychologically is okay taking some risk. In clients over 50, we use a test for financial literacy and she is one of few who scored a perfect 100. Her portfolio is 55% fixed income and 45% equities. A family member has been hounding her to buy a rental property in case “the market” crashes.

What is fascinating is that this client just sold a rental property! Her old rental property was her previous homestead and her excuse for keeping it was diversification of her income stream. She had a management company but was tired of the hassle, worry, and paying for repairs.

Because she lived in the home two out of the last five years, she would not incur any tax on the capital gains up to $250,000. I reminded her that she had another year to take advantage of the nice tax perk. This pushed her over the edge to put the original rental home on the market.

Peer pressure is tough, especially when it comes from the family. Sometimes peer pressure causes us to override the logical part of our brain. This particular client happens to be a math whiz, and her default is to dive deep into the details and logically decide her path so I approached the conversation by appealing to her usual problem-solving methods.

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The first question I asked her, “When your family member talks about the “market crash”, which market is he talking about?” Of course, he is talking about the stock market.

I then asked, “If the market repeats 2009 and has a 40% correction, how much…