It’s Easier To Generate More Passive Income In A Bear Market

Although going through another bear market is a bummer, the positive is we can all generate more passive income! And given we can now generate more passive income we can also get that much closer to financial freedom.

As a reminder, financial freedom means having enough passive income to cover your desired living expenses. When this happens, you can do whatever you want.

For investors, this bear market with its surging interest rates may very well be a gift. The key is to not get too depressed about your declining portfolio’s value because you have the appropriate asset allocation. Eventually, portfolio values will recover.

Another important component is to maintain your active income streams to take advantage of depressed asset prices. Unless you have a guaranteed pension, retiring early and depending only on passive income sources may not be the optimal strategy.

However, even if you are a traditional retiree with zero active income, you should still see higher Social Security cost of living adjustments. Further, your income-producing investments may automatically generate more income in a higher interest rate environment.

Making More Passive Income In A Bear Market

Like many investors, my net worth has taken a hit with the decline in stocks. At one point, I had 30% of my net worth in stocks. A 25% decline in stocks drags down my net worth by ~7.5%. The most I feel comfortably losing from stocks is 10% of my net worth. After 10%, my mood starts to sour.

But as a fake retiree, my main focus is on generating enough passive income to cover our desired living expenses. Seeing our net worth grow in a bull market is nice for the ego. But the most important thing a retiree cares about is their cash flow, not net worth.

Net worth is more of a subjective vanity metric. It’s good to calculate so you can see what type of investment income yield you are generating based on your exposure. It’s also good to stay on top of your net worth for estate planning purposes.

But other than these two reasons, cash flow is more important than net worth. Cash flow is real, whereas net worth is subjective. My #1 financial goal is to generate enough investment income to support our desired lifestyle.

Higher Interest Rates Means More Passive Income

When interest rates go up, everything from bond yields to dividend yields also tends to go up. The reason why is because every yield is relative to the risk-free rate of return.

No rational investor would invest in a risk asset if they could get a higher risk-free return. As a result, investors should be able to generate more easily passive income when interest rates are higher.

Corporations issuing bonds need to increase their coupon payments to stay competitive with government bonds. Corporations may also increase dividend payout ratios to increase stock dividend yields as well.

In regard to real estate, cap rates need to go up to make the property more attractive compared to the risk-free rate of return. If rents don’t go higher then property prices should adjust downward. This is natural market forces at work.

In general, landlords are a big beneficiary of inflation as real estate prices and rents increase. It’s just that at the moment, the temporary rise in mortgage rates has been too quick.

The Crowding Out Of Private Capital Due To Higher Rates

In the past, I would regularly invest the majority of my cash flow in the S&P 500 and in private real estate funds. These two types of investments generated investment yields of between 1.5% – 10% on average. Further, the income generated is 100% passive.

However, with higher interest rates, government bonds are now crowding out private capital. Instead of mostly investing my cash flow into the S&P 500 and private real estate funds, I’ve earmarked 60% of my cash toward buying Treasury bonds yielding ~4.5%. Yes, 40 percent is still being invested in risk assets, but that percentage was closer to 80 percent before interest rates skyrocketed.

A guaranteed 4.5% rate of return on 1-3-year Treasury bonds is attractive for anyone who relies on investment income to stay free. Treasury bond yields are especially attractive compared to receiving a ~1.8% dividend yield from the S&P 500, which is highly volatile.

Real estate can easily yield greater than 4.5%. However, there is also downside risk now that mortgage rates have surged higher. Real estate prices could easily decline by 5% – 15% over the next 12 – 18 months if mortgage rates don’t come down during this time period. As a result, it’s better to slow down capital deployment or bid more aggressively.

Finally, some of the capital that might have gone to high growth stocks may now go to higher-yielding bonds or higher-dividend-yielding stocks. In a bear market, a flight to safety often means greater passive income. A bear market also reminds you that cash flow is king!

Nominal Returns Are Still Good

Sure, your higher-yielding investments may still lose in real terms due to even higher inflation. However, making a nominal return is still better than actually losing money. And if you aren’t losing money from your investments in a bear market, I’d love to know what you’re investing in.

Due to higher interest rates, this year I’ve been able to boost my overall passive income portfolio by about 10%, or roughly $35,000. The increases are mainly coming from Treasury bonds, private real estate investments, and rental property income.

As a fake retiree, I have cash flow from Financial Samurai and other writing-related activities, which gets reinvested into income-generating investments. I also have excess passive income that gets reinvested since we spend less than our current passive income amount.

Here are some ways I’m boosting passive income in this Fed-induced bear market.

Passive Income Boosts In A Bear Market

  • So far I have invested $250,000 in Treasury bonds that will generate an extra $11,250 a year. Before this year, Treasury bond yields were not attractive.
  • Sunbelt rental property income is rising from ~$50,000 (excluding distributions) to about $60,000 given higher mortgage rates are pushing more people to rent. Check out Fundrise, my favorite private real estate investing platform.
  • Lake Tahoe vacation property net rental income has increased from about $650 a month to $1,500 a month net on average given no more COVID restrictions. We went twice this summer and activity was robust.
  • Boosted one property’s rental income from $6,700 to $8,000 a month. About $300 of the rent increase was due to the market and $1,000 was due to a remodel that created an extra living room, bedroom, bathroom, laundry room, and closet. Tenants have agreed to a $200 rent increase next year.
  • Venture debt investments should generate higher returns given pricing is based on the risk-free rate plus a markup. I estimate an extra $3,000 – $5,000 in annual income from new investments this year.

Below is my estimated passive income streams for 2023. There will likely be a +/- 15% variance mainly due to distribution amounts from various private fund investments.

Financial Samurai passive income estimate 2023

Maybe A Bear Market Isn’t So Bad After All

The income yield of your overall investment portfolio is likely up because of higher interest rates and a decline in your portfolio’s value. So long as the bear market doesn’t suffer much more than a 35% drawdown, we should be OK.

It’s obviously a bummer to see your portfolio’s value go down. Retiring at the top of the cycle is terrible timing. But if you have cash flow, you can now buy higher-yielding assets. Therefore, a bear market helps you get to financial independence quicker or may increase your chances of staying retired.

Once a bull market returns, investment yields will likely go down as asset prices rise. In such a scenario, you’re still making the same amount or more in passive investment income.

In other words, so long as you have regular cash flow and things don’t get too bad, you’re always winning! Even if you plan to retire, I recommend finding ways to continuously make supplemental retirement income.

The best supplemental retirement income is doing something you’d do for free because it brings you joy and purpose. Financial Samurai will last for years to come because it’s still enjoyable to operate. I will also probably write more books before I die.

Shift To Income-Producing Assets Well Before You Retire

A bear market is a good reminder to start shifting some of your non-income-producing investments to income-producing-investments years before you retire. After all, the only way to capitalize on growth stocks is to sell occasionally.

If you counted on making the switch to more income-producing assets this year, then obviously you’re more bummed out. Therefore, it is probably wise to start making the asset transfer three-to-five years before you retire.

A bear market is also a good reminder to always have some active income sources so you can take advantage of depressed prices. Don’t just retire and do nothing. Retire and do something purposeful that also generates income. It doesn’t feel good to be 100% at the mercy of the market.

Not only do income-producing assets tend to outperform during a bear market, they can sometimes produce even more income during downturns. With a proper net worth asset allocation, you should be able to weather the storm until good times return.

Questions And Action Items

Readers, are you finding that your passive investment income is going up in this bear market? How are you planning on taking advantage of higher rates to generate more passive income?

If you’re looking to surgically invest in real estate, take a look at Fundrise. Fundrise is a vertically integrated real estate platform that invests predominantly in Sunbelt single-family properties. Private real estate is a good way to diversify and earn income 100% passively.

If you would like an unfair competitive advantage in building wealth, pick up a hard copy of my instant WSJ bestseller, Buy This, Not That. The book goes deep into helping you build more passive income during a bear market or bull market.

For more nuanced personal finance content, join 50,000+ others and sign up for the free Financial Samurai newsletter. Financial Samurai is one of the largest independently-owned personal finance sites that started in 2009.

It’s Easier To Generate More Passive Income In A Bear Market is written by Financial Samurai for


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