Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)

April 8, 2020 – Wow, we made it through the first quarter of 2020. Seemed like an eternity! Remember January 2020? Suleimani Drone strike and an almost-war with Iran? Australian Wildfires? February? The Super Bowl, the impeachment trial? Even early March: Super Tuesday (March 3). It all feels like years ago! All those daily 100-point S&P 500 and 1,000-point Dow Jones moves took a toll. They make you age in dog years, I guess!

Time to look back and reflect. Let’s take a look at a few lessons I learned…

1: Under the circumstances, the stock market held up surprisingly well!

I don’t want to sound too cocky here but considering the potentially extensive damage to the economy, we got off relatively easy (so far). From its 2/19 peak, the S&P 500 Total Return Index was down 23% as of 3/31 and 21% as of yesterday, April 7.

Estimates float around that indicate we could have a drop in economic activity significantly worse than in the Global Financial Crisis. Just to put this in perspective: the drop in GDP top to bottom was 4% between 2007 and 2009. Not 4% every quarter, but 4% total, spread over 1.5 years. In 2020 we might potentially get a worse drop but all in one single quarter! And as I mentioned previously, a 4% drop quarter-over-quarter will be reported as a (compounded) 15% drop. A 10% drop quarter-over-quarter will be reported as a -35% growth rate annualized (0.9^4-1=-0.3439=-34.39%). The worst economic decline ever – Bummer!

A 10% drop in the 2nd quarter of 2020 would show up as a -34% annualized reading. The worst quarter on record for as long as the BEA/U.S. Census Bureau report quarterly GDP Numbers. Ouch! (that said, there was a 13% annual drop between 1931 and 1932)

How about unemployment? The unemployment rate jumped to 4.4% in March from 3.5% in February. That 4.4% figure doesn’t sound so bad, but under the surface, it looks really scary:

  1. The survey was performed throughout the month of March. The impact will be much larger in April when we have a full month worth of job losses!
  2. The number of unemployed rose by 1,353,000, see the table below which caused the rise in the unemployment rate by 0.9 percentage points. But the number of employed dropped by almost 3 million. The reason we didn’t see a rise by roughly 2 percentage points in the unemployment rate is that the labor force participation rate also went down significantly. Thus, 1.6 million people left the ranks of the unemployed not because they found a job but because they gave even looking for one.
BLS UER Table March 2020
Bureau of Labo Statistics release, March 2020:

So, the employment picture is really, really, really grim and will get much worse as time goes on. An unemployment rate of 10%+ is almost guaranteed. I’ve heard estimates of 20+%! Just for comparison, during the financial crisis, unemployment peaked at 10% and the U.S. broad stock indices dropped by over 55%.

In other words, we shouldn’t feel so bad about the stock market drop in the first quarter. The reason we’re not down as much as during the Great Recession or even the Great Depression (80% drop peak to bottom!) is that financial markets still heed the expectation that this whole mess is a short-term affair and the economy will “reboot” later in the summer.

Let’s look at how this (hopefully) short shutdown and reboot would work their way through the GDP calculation. I constructed the following thought experiment, see the table below: Start with an economy that grows at an annual 2% trend rate. In March 2020 we shut down 10% of the economy but only for the second half of the month (i.e., 5% average for that month). In April we suffer a 15% loss of economic activity. Then we slowly restart the economy and shrink the shutdown percentage gradually to 5% in September. Furthermore, let’s assume that this 5% is also the permanent damage to the economy and we’ll not recover that anytime soon (at least not in 2020).

GDP monthly calc
Thought Experiment: Impact of a sizable short-term shutdown of the economy, a slow restart in Q3 and partial permanent damage lasting until (at least) Q4.

Quarterly growth rates at an annualized rate (as they will be reported by the BEA) will be -4.6% and -35.5% in the first two quarters of the year. That sounds a bit more awful than it is because the peak to trough GDP drop is “only” 11.46%. Still really bad because that’s almost 3-times the magnitude of the GDP drop in the Global Financial Crisis and half the drop during the Great Depression. But also notice that Q3 and Q4 will look really good with, +33% and +8%, despite the still severely depressed economic conditions.

Update 4/29/2020: The GDP numbers came out. -4.80% according to the BEA Advance Estimate (again, this is Q/Q at an annual rate, so Q/Q dropped by “only” about 1.2%). So, I was pretty close with my -4.64% guesstimate. 🙂

So, as long as we can keep the shutdown short enough and cross our fingers that enough of the damaged businesses survive we should be OK! That’s why the stock market is down by “only” 20% and not 80%!

Will the shutdown be that short? I certainly hope so! Because a longer shutdown will raise those “cure worse than the disease” issues again. There seems to be a decline in new infections in Europe over the last few days, which could imply a loosening of the shutdown there. Schools will open again in Denmark next week. Austria will cautiously open businesses again next week and more businesses, including shopping malls on May 1. Hopefully, we’ll see the bend point in the U.S. soon. It certainly looks like the new cases peaked over the weekend, though the fatalities are still increasing.

2: I slept well through this episode because I prepared well

If you’re retired and you did your homework you’d make sure to stick to two simple rules:

  1. Retire with a diversified portfolio, with no more than 75% equities and the rest in Treasury bonds and other safe assets to diversify.
  2. Pick a low enough initial withdrawal rate so that even with the recent drop you’ll still have a safe and sustainable withdrawal rate going forward from here. See my Safe Withdrawal Rate Series and especially Part 28 for a free tool to customize your own personalized safe withdrawal rate. If the withdrawal rate would have been safe during the Great Depression and we cross our fingers that the current bear market will be shorter than that we should be OK.

And I certainly slept better than I would have if I’d still had my corporate job!

But what about folks who are not retired yet? That brings me to the next lesson, which is not exactly a lesson from the current bear market, but I’m willing to go out on the limb here and forecast that this bear will work out the same way as every other bear market in U.S. history

3: There’s never a bad time to start investing

OK, so maybe you’re not retired but just starting to get your financial house in order. You want to start investing, but is now a good time to start? That’s a question I’ve gotten a few times from neighbors and friends over the last few weeks.

True, there are better times and not so good times to retire. But I always emphasize that there’s never a bad time to start investing. I always share my own personal experience: I got two major pay raises in my life: getting my first job after the Ph.D. program in 2000 and moving from my government job to Corporate America in 2008. In both situations I faced the question “is now a good time to put that extra money into the stock market.” And in both cases, we were at the stock market peak, right before a nasty bear market. Sure, some of the first contributions got hammered, but sticking with the plan I was able to dollar-cost-average my way through each bear market. And retire very comfortably as a multi-millionaire in 2018.

So, even if you had started investing in equities at the February peak, ask yourself, how much have you really lost? Stick with the plan and you will likely do well if you don’t lose your nerve.

Talking about new investors, the #1 question I get from newbies: Do I have to be an expert to pick the “right” stocks and ETFs? My advice is always: “Keep it Simple” and just go with passive index funds. Ignore the mumbo-jumbo with bells and whistles, which brings us to the next lesson…

4: Keep it Simple; two popular “smart” investing styles vastly underperformed the simple 60/40 portfolio in the first quarter

Because I used to work in finance (in asset management of all places!) a lot of people always think that I had some “special sauce” that allowed me to beat the market to reach FIRE. Not true! For the most part of my personal investing career, I’ve relied on simple passive index investing, mostly S&P 500 and U.S. Total Stock Index funds from Fidelity.

But there’s always the siren song of doing something different. Something smarter, better, sexier, right? Proponents of those smarter investing styles can always point to some past periods where they outperformed the totally passive investors. But it’s also good to look at the episodes that the proponents like to hide. Let’s go through two stock investing styles I’ve come across that didn’t do so well:

  • Small-Cap Stocks, Value Stocks and Small-Cap Value Stocks Best-in-Class Portfolios, as popularized by Paul Merriman and a lot of other financial advisers. They had Paul on the show on ChooseFI (episode 130) to talk about this investing style with the potential to beat the boring old broad equity index by a 2% annual “alpha” (his words, not mine). I was always a skeptic, especially about the consistency and the magnitude of that alpha and wrote a post about “My thoughts on Small-Cap and Value Stocks” last year.
  • The “Yield Shield”, i.e., start with a 60% Stock, 40% Bond portfolio and then jack up the ETF dividend yield to get close to 4% or whatever your withdrawal rate may be. I think I did a pretty thorough job debunking that strategy in the Safe Withdrawal Rate Series, see Part 29, 30 and 31.

In order to compare apples-to-apples, I contrast the good-old 60% S&P 500 plus 40% U.S. intermediate Treasuries portfolio (i.e., the two major asset classes I utilize in my safe withdrawal simulations) simulated as 60% in IVV (iShares index ETF) and 40% IEF (iShares Intermediate Treasury) with the Merriman Moderate portfolio (60% equities, 40% fixed-income) and the Yield Shield (also 60/40).

Merriman Best In Class Portfolios
Merriman Best In Class Portfolios. Source:

Note: In the basic 60/40 portfolio you can also replace the IVV with the VTI (Vanguard Total U.S. Stock Market ETF) and you’ll get very similar results. I have nothing personally against the VTI. But the S&P 500 index did perform slightly better than the total stock market index, simply because small-cap stocks got beaten up so badly recently.

The results are in the chart below. The plain 60/40 portfolio held up pretty well in Q1. Down only 8.2%, while both exotic styles were down by 17%. Also, I included the returns during the previous 2 calendar years: the mildly bad year 2018 and the 2019 blockbuster year. Both fancy ETF portfolios underperformed the simple 60/40 in each time window. So, it’s not just that the exotic portfolios are merely giving back some of their excess returns from previous years. They both underperformed consistently. Simplicity Rules, everybody!!!

ETF returns 2018-2020
ETF portfolio total returns. Source: Yahoo! Finance, Portfolio Visualizer

Why did these fancy styles underperform so badly?

  • U.S. REITs underperformed. Notice this is not guaranteed in every bear market. REITs held up very well in 2000-2002, but were pulverized in 2008/9. I haven’t looked into the details (yet) but I suspect shopping mall REITs, hotel REITs, and mortgage REITs are especially badly hit now. Not sure what’s happening in the residential real estate yet. Maybe readers know more about that and want to leave a comment…
  • International stocks were down more than the U.S. in Q1. This is a world-wide problem and other countries are even worse off than the U.S.!
  • Jacking up the yields in your fixed-income portfolio? While some of the other yield-maximizing stuff is not necessarily bad in every single recession (REITs, international stocks have also worked in your favor in other historical recessions), it’s unequivocally bad in the fixed-income space. This happens in every single recession/bear market because you are introducing back-door equity exposure into the asset class you hold for diversification.
  • Small-cap stocks: When times get tough large corporations tend to have an easier time relative to smaller ones: getting financing, getting politicians to pull strings on their behalf, etc.
  • Value Stocks: Shouldn’t value stocks perform better when times get tough? Not really: in this bear market (as well as 2008/9) the non-value stocks (i.e., growth stocks) performed better. It sounds counter-intuitive that growth stocks do better when (macroeconomic) growth is weak. But that’s the whole point: growth stocks can generate their own growth even if the economy is hurting by a) generating new markets (Google, Amazon, etc.) and b) taking business away from existing players (Google, Amazon, etc.).
  • U.S. dividend stocks underperformed. Only by a few percentage points, though. Again, ask yourself who the generous dividend payers are: the more established businesses that are hurting the most in this crisis: oil companies, REITs, etc. But dividend stocks are not a total disaster either. Think of Procter & Gamble and Johnson & Johnson, who are some of the really popular stable dividend payers and their respective industries are holding up pretty well.

But I should also note that there is a way I would become more interested in the Small-Cap and Value styles again. It looks like we’re now going into exactly the scenario I described in my post last year “My thoughts on Small-Cap and Value Stocks

“You want the value premium to work again? Careful what you wish for!
You know what it would take to bring doubters like me on board again? During the next (!) recession and bear market, value stocks get totally clobbered! Just as Paul Merriman said on the podcast: More risk implies more return. Value stocks are more exposed to macroeconomic shocks. But do you see the irony in that? In order for value to be considered a bona fide risk premium again, we’d have to see a big drawdown”     (Big ERN, June 12, 2019)

So, what I tried to convey in the post from last year is that small-cap and value stocks should outperform when they are more exposed to downturns and thus require an additional expected return to compensate for that. After getting hammered in the current recession and bear market, they should also do well in the subsequent recovery.

5: Complicated beats Simple: Three “exotic” equity investing styles that actually worked pretty well in Q1

I outsourced that point into a new post, see here: Three Equity Investing Styles that did OK in 2020

6: Jack Bogle’s Revenge

Jack Bogle, Vanguard founder and index fund pioneer, passed away a while ago. One of the last interviews he gave was in March 2017 when he shared his personal equity expected return for the next 10 years: only +4%. He was ridiculed back then. But who looks ridiculous now? Since 2017 the S&P 500 hasn’t returned much more than 4% p.a.!

In the chart below I looked at how his forecast and my own market outlook made in August 2017 performed since then relative to the actual S&P 500. Well, the market (+20%) did a little bit better than Bogle’s projection (+13%). It’s currently about halfway between my own baseline forecast (+5.75% p.a. = 23% up to 2020) and my “pessimistic” scenario (+3.5% p.a. = 16% up to 2020). Notice that I start my projection at the time when I wrote my blog post when the S&P was at the slightly higher August 2017 level.

SPX Return Bogles Revenge
S&P 500 actual nominal returns vs. Bogle’s and Big ERN’s 10-year market outlook projected forward.

Of course, the ten-year window isn’t over until it’s over. A lot can happen over the next seven years. But the lesson here is that the market has been very richly valued with CAPE-ratios in the high-20s even above 30 only a few months ago and it was only a question of time until valuations normalize again. This market crash was overdue! Of course, I still hope that I will be wrong and we now get a faster recovery than 5.75% p.a. going forward! But my retirement will still be totally fine even at that measly return!

What are your stock market lessons for the year so far? Please share your thoughts in the comments section!

Title Picture Source:

78 thoughts on “Some Financial Lessons from the First Quarter of 2020 (incl. Jack Bogle’s Revenge)

  1. I still can’t get over the fact that everyone is bullish and expects a V shaped recovery. Economies can be stopped and started at the push of a button; especially when we are fighting an invisible enemy.

    Also not sure how consumer confidence will return so soon. Maybe the fiscal and monetary stimulus put is larger than I expected. Time will tell

        1. ANother reason to follow Sweden’s example. If you’re waiting for the virus to completely disappear and never return and never return from people from other countries you have to shut down your economy for the next 5 years.
          Let the virus spread slowly!

  2. I’m a bit more focused on consumer psychology at this point. Didn’t see that in your analysis. The debt laden consumer will emerge from this with deep scars. Maybe things go back to normal with more free money sloshing around, but I’m not so sure. At the end of the day, it’s really a matter of where we are on the fear-greed continuum. I remember my grandparents who grew up in the Great Depression. Forty years after they were still pinching pennies. If this turns into that, the hit to GDP will be far larger and much more prolonged. We’ll see.

    1. This is no comparison to the global financial crisis and certainly not the GD. Some consumers will come out of this with some credit card debt. But you also get the unemployment benefits plus stimulus checks, so tons of consumers will come out of this with more money than ever. Very different story from 2008/9 where a lot people were literally bankrupted.

  3. My lesson of Q1 2020:

    1. Gold is a good hedge during crisis time. for the 1st time during my short 5 years of investment history I felt that diversification to Gold, Cash and Bonds is an excellent idea.

    2. Cash is not Trash as Ray Dalio claims in January 2020. I would rather dispute his argument with the article of” The pain of holding cash ” by Seth Klarman’s of Baupost :

    “Betting that the markets never revert to historical norms, that we are in a new era of higher securities prices and lower returns, involves the risk of significant capital impairment. Betting that prices will fall at some point involves opportunity cost of uncertain amount. By holding expensive securities with low prospective returns, people choose to risk actual loss. We prefer the risk of lost opportunity to that of lost capital, and agree wholeheartedly with the sentiment espoused by respected value investor Jean-Marie Eveillard, when he said, “I would rather lose half our unitholders. . . than lose half of our unitholders’ money….”

    Some argue that holding significant cash is gambling, that being less than fully invested is akin to market timing. But isn’t a yes or no decision the crucial one in investing? Where does it say that investing means always buying something, even the best of a bad lot? An investor who can’t or won’t say no forgoes perhaps the most valuable tool available to investors. Charlie Munger, Warren Buffett’s long-time partner, has counseled investors, “Look for more value in terms of discounted future cash flow than you’re paying for. Move only when you have an advantage. It’s very basic. You have to understand the odds and have the discipline to bet only when the odds are in your favor.”

    3. Having lower withdraw rates of [3.25%] is always wiser than go for the 4% rule. Thanks for your exceptional SWR series.

    1. Awesome! Thanks for sharing!

      Yeah, some of that advice from Dalio is not aging well. That said, 10Y T-bonds did even better than cash. 🙂
      Also, yes, gold was a good hedge this time. There were some people that doubted gold early on in the bear market, but it’s worked out really well again. Great point!

  4. Karsten, how do you rationalize your general statement that retirees should have no more than 75% equity while your SWR analyses show that over the long-term 90% equity is optimal (glide path series for example)?

    1. Good point: I meant the initial SWR.

      Also, keep in mind that after a successful run with a glidepath, when you’re at 90% or 100% equities and your portfolio starts looking healthy again, one might shiftback to 25% bonds to prepare for the NEXT bear market! 🙂

      1. Haha, yes sir Mr. Market Timer. =p

        To my point – I’ve noticed a few times you’ve stated a need for a conservative allocation as a blanket statement without qualifying the long-term need for primarily equities (based on your own research). So just an FYI as it might lead some readers to assume a 75/25 allocation is “ideal” throughout the entire 60-yr retirement period.

        Maybe you should have a “non-technical” post about asset allocation to address your last statement. I think that’s a very fair approach and realistically many folks would or should adopt. If you’re at a 1 or 2% withdrawal rate 20-years into retirement, it’s “ok” not to be optimal at 90% equities and instead take some cards off the table and go to 60-75% bonds. If our portfolio were $5M and our WR was 1.5%, i’d be hard pressed to rationalize 90% equities. On the other hand, the math and history suggests you’d be fine and end up even better, so it really comes down to a personal choice not a technical one.

        1. Yeah, good point.
          Also in these extreme example you could go either way. If you have $10m and you only need $100k a year, you could do the Suze Orman thing: Muni Bonds Or just say “screw it, I’ll stick with 100% stocks” because you’ll never run out of money either and you’ll have so much left over when you die, you can donate it and they will name the UT Austin Football Stadium after you!

    2. The past is a predictor for the future, but it is not THE future. If I were Warren Buffett with $72 billion dollars at my disposal, I suppose that 90% equity, or what remains of it, would allow a nice standard of living regardless of market performance.

      Myself, at age 62, had I been 90% equities, I might not live long enough to ever see my portfolio attain it’s pre-2020 balance ever again. I’m very happy with my Permanent Portfolio and will start scooping up lagards after the next bottom-bounce.

      ERN – always enjoy your blog…thanks

  5. Great post.
    I hope your numbers in the thought experiment turn out to be close to reality.
    I can only comment about Israel’s economy:
    We have more than 1 million unemployed from total population of about 8.7 million.
    I think this represents about 20-25% of unemployment.
    Our economy is working at about 30% for about a month or so and everybody is supposed to be at home.
    Now in the week to ten days of Passover it might be closer to 15%.
    From about start to mid February they started prohibiting passenger entries of people from China and then from Italy and other European countries and then from any other place.
    Restarting the economy should start at the 19th of April and it is supposed to be slow.
    They say they want to take a release measure, test it for about two weeks to see if the healthcare system can still cope and then go to the next measure. There might be steps back in the way.
    The good thing about our strategy is that there are still relatively low death-toll and the health system is not even close to collapse.
    However I think Israeli economy numbers will be much worse than in your thought experiment and I believe the cure will be worse than the disease.
    The government even issued US Dollar denominated bonds for a 100 years at 4.5% interest rate to finance economy aid plan.

    1. Wow, thanks for sharing that.
      That sounds scary. I hope that the situation is not quite as dire, because even though it looks like the economy is down 70%, the drop might be much less. People still eat, they use housing services, they use utilities, the government is running, etc.
      But it’s great to hear that there will be some slow move back to normalization starting on April 19. I hope that’s an example for the rest of the world. Hang in there and be assured that in the US we always stand with our good friend and partner Israel!

      1. Just to clarify something: When the CEO of the treasury ministry says that the workplaces work at between 15%-30% doesn’t that mean that the GDP is at the same time 15%-30% from before?

        1. At 15%-30% means that 85% to 70% UNDER capacity. That can mean that GDP is 70-85% under normal. But also keep in mind that a lot of GDP is coming from activity that doesn’t require much work input. Housing services (rentals and owner-occupied imputed income) are likely not down at all.

  6. There’s a lot that could happen in the next few month, but you did a nice job on covering the bases!

    What’s most up in the air to me is when there could be any return to normalcy – the trigger that could start a recovery. China and some parts of Europe are months ahead of the US – which makes me think Intl stocks may outperform domestic for 2020. Couple that with a long stretch before there’s a vaccine rollout and we might not be congregating in public here in the US until at least August.

    It’s all guesswork at this point, but I have a feeling the markets are priced assuming we’ll be back to normal much sooner that I think we will be. My guess is that things will stay about where they are – or fall another 20% – then start to recover once there’s a vaccine or we see success from another non-China-country start returning to normal and not see massive infection rates.

    1. Thanks, Adam!
      I wouldn’t trust China’s COVID-19 number. Europe is ahead of us by two weeks (Italy) to maybe a few days (Germany, Austria). So, I don’t think we have to be behind Austria by months. If Austria relaxes constraints in mid-April, we can certainly start that here in May.

      But I agree with you: markets are priced for “perfection” i.e., the best possible scenario. There’s some downside potential for sure!

    2. Try next August for vaccine, unless serum testing reveals widespread asymptomatic infections (thus not needing the vaccine).

      China is a bad actor all around. Numbers coming from all the globe are under reported. Just search YouTube for real footage by city, then compare with official death counts = not even in the same ballpark.

      In the US, infections are just picking up in second tier cities, especially in the South.

      1. Good point. I don’t expect a vaccine anytime soon. A completely new drug probably later than that. That’s why I hope the malaria drugs might help.

        I doubt we’ll repeat the NYC experience in many other cities in the US. NYC was the perfect storm:
        High population density
        Cold climate
        Lots of people taking public transportation
        Local politicians ignored the crisis for too long

  7. Karsten,

    What is your thought regarding the notion that growth of the U.S. market since the GFC has been largely, if not exclusively, on a net basis, driven by corporate buy-backs? According to one piece of analysis (although I have seen plenty of others), U.S. corporations have pumped ~$15 trillion into share repurchases since 2009, while U.S. households and pensions have been net sellers (albeit relatively modestly) of U.S. equities and foreign holders have been only modest net buyers.

    If the ability to conduct repurchases are removed or severely curtailed by law (or voluntarily, through companies’ needs to hold more cash for situations like the one we are currently experiencing), do you think that will remove a significant tail-wind from the U.S. stock market in the years ahead?

    Thanks for all the excellent commentary!

    1. I’d need to see a source for that. I doubt it.

      There has been economic growth, there has been earnings growth, both on the aggregate level and on the EPS level. So, the rise in stocks can’t be due to “only” share buybacks.

      1. Here’s one article that I read on this:

        I was referring to the charts on flows. While we have undeniably seen economic growth and corporate earnings growth, from a flow perspective, the support for stock prices looks like it has come principally from share repurchase activity. Of course, when (if?) the economy recovers, earnings will recover (at some companies, at least) and that should help the stock market to move higher, but if companies are either prevented from repurchasing their stock in return for taking some form of government aid, or unwilling to repurchase stock in favor of keeping more cash on the balance sheet, that could remove a support from stock prices that appears to have been quite material over the last 10 or so years.

        1. Look, my article was about the lessons from Q1. I’m not a huge fan of buybacks either but I sometimes see the need to defend them against the attacks of 1) clueless politicians (E. Warren) and 2) breathless-clueless financial “journalists”
          The person who wrote the article, not being a politician, apparently falls into category 2.
          His article doesn’t show that “all of the gains are due to buybacks”
          It’s not my job to comment on everything that someone posts out on SeekingAlpha. I’ll leave it at that. If you have a huge urge to discuss buybacks furher, please do so at SeekingAlpha.

  8. This has been a totally unique experience in our 30 year investing life. My wife and I just retired last year in mid 50s (me) and early 50s (her). During all other downturns earlier we’ve stoically ridden out the turmoil without any adjustments to our 401Ks (selling) or buying (didn’t have extra money to do so).

    But even this time we didn’t get tested the way we likely will next time since we didn’t have much stock to consider panic selling after the downturn started. We had moved to very heavy cash (bonds/CDs) position about a year ago after retiring due to high market valuations, perceived higher than usual sequence risk and the fact we could afford to do so without jeopardizing our ability to wait out a healthy SS payout more than a decade away at age 70.

    Our lessons learned (or confirmed):

    1) Don’t overthink it. There’s a strong tendency to interject some form of “this time it’s different” and draw the conclusion that some non-standard strategy is called for. Neither is likely true. We simply have not been willing to be swayed by any thinking that this time is the zombie apocalypse. (Though we have been bingeing all the zombie movies.)

    2) Have a plan. Stick to the plan. Our plan was to get back into the market on a big dip. And early on we decided we wanted to dollar cost average starting at 10% off the tops.

    3) Don’t be too greedy searching for the bottom. We bought all the way down. Our biggest buying day was magically on 3/23 (based on Italy’s flattening of new cases). But we also bought plenty earlier that’s still under water and probably will be for awhile.

    4) We’re not supposed to “market time”….but…

    I continue to believe that an allocation strategy that doesn’t at least consider market valuation is silly (at least for those who can afford to have less in the market and still make an satisfactory SWR). If you want to call that market timing, ok. I can’t find anywhere on the Shiller chart where I would have long regretted being heavy cash (bonds, whatever) at 30+ PE. (In fact, today’s 25 may leave us wishing we’d held off longer…we’ll see.)

    ERN, I know you’ve talked about the fact there’s no need to take unnecessary risks if you have an acceptable plan without doing so. The above was how we acted on that sort of thinking. We’re now taking on equity risk again…but at lower valuations.

    5) This last month was EXHAUSTING. I have no idea how people actively manage their investments day to day. We’re much happier with infrequent adjustments. I’ve had so many conversations with my spouse and brother on what to do (buy) and when. I’m thankful now we’re done and it’s hold time.

    Thanks as always for all the help. I consider ERN my most useful (and thought provoking) tool in managing our retirement.

      1. Thanks! I see holding as being equally gutsy as buying. Maybe more so given the emotions involved. With zero transaction fees it’s the *exact* same decision to me. 🙂 “I could have this stock one more day or I could have cash. Which do I want?” Congrats to all who didn’t sell on the way down! (And yeah, this rally seems crazy to me. But I should just ignore it for a year and then look.)

        1. Yeah, I wonder what happens to the folks who lost their nerves on March 23. Get in now? Wait for a pullback? Tough one. It’s easier to just stay invested and never have to worry about when to get in again.

  9. Hi Big ERN. Paul Merriman has many “moderate portfolios”. Which specific one did you use in your analysis?

  10. Hi ERN
    I would like to hear your opinion (worth a post?) about all the measures that Fed is taking. Maybe even in a wider perspective because they actually continue with what they started in 2008. The idea that trillions of printed dollars can be injected into the markets without anyone paying any price seems to me something that simply does not make sense.

    1. As a former Fed employee I probably have some subconscious biases. I trust the folks at the Fed with their emergency measures. I always believed that monetary policy is a better tool than fiscal policy.

  11. IGOR:

    Great Question. I also would welcome Big Ern’s thoughts on this. Can this amount of incremental debt be added without inflation or devaluation of the dollar? At some point of total federal debt issuance – won’t non-governmental debt issuance get crowded out – or will the Treasury need to pay higher interest rates to clear the market – and will this added interest expense require the U.S. to make some hard decisions about income taxes, spending, and budget priorities.

    Ok – maybe I am asking too many questions 😃😃

      1. As someone who expects a small (frozen 15 years ago), but very precious to me, non-COLA corporate pension, starting next year at age 65, I don’t think I would want any inflation at all. It would just further erode the value of the pension payments during my retirement, more than they’ve already been eroded by the last 15-years mild, but corrosive, inflation. I don’t think that governments eroding the value of anyone’s dollars is ever good, despite what academia teaches in economic theory.

  12. I’m still trying to catch a falling knife. I noted small caps were falling further than large caps and bought “during a dip”, only to get cut deep as small caps continued to fall. I also bought some individual stocks in the travel industry as they’ve fallen much further than the market overall and should recover more dramatically than the market overall, right? Problem, of course, is not knowing when things will bottom out. I’ll keep buying as they keep dropping until my excess dry powder is depleted. I do wonder if I would have been better off if I went ahead and invested my excessive dry powder systematically (which I’ve accumulated over the last 3 years since I felt the market was getting too expensive) vs trying to time the market. Maybe I’ll get lucky but sometimes I feel like I’m that idiot playing a midway game at the county fair trying to win that big stuffed animal.

    1. I haven’t monitored how the small-caps are doing since 3/31. But they should recover now just like the overall market. Who knows, maybe this Merriman thing will be the great success story in the next bull market.

  13. My favorite analogy from your safe-withdrawal series was the plane ride where the pilot says “we’re all going to die!” as the plane bucks and bounces around, yet in the end lands safely. You pointed out that while the end point was fine (in investment terms assets were not depleted too early) you would not have wanted to be on the that ride!

    We took that to heart in our own asset allocation, recognizing that while historical data would suggest our 3.5% withdrawal rate has a very high probability of success we did not necessarily want to be on that plane ride during a market meltdown.

    Thus we put ~4 years of living expenses in cash and very short term bonds. It is our “sleep good at night” money as we know that regardless what happens to equities or longer-term bond prices/yields we are not forced to withdraw money from those investments to live on when the economy is flying through turbulence.

  14. Hi ERN,

    1.) Regarding your section 2) above describing allocation, the 25% fixed income allocation, I would think that having some bank fdic-insured CDs, and on-line savings accounts, staying under the $250k insured limit per institution, along with Treasuries, would also be safe to include.

    2.) I also use Fidelity. What about Fidelity Total bond FTBFX for a portion of fixed income? Or the Fidelity Short-Term / Limited-Term bond funds FSHBX, FJRLX? I’m wondering if these and similar bond funds are actually too risky for retirement portfolios. e.g. FTBFX: 17% BBB. 12% below that rating. SEC yield 2.93% with 5.64 years duration. Maybe not getting compensated for risk with these various bond funds?

    3.) I have fdic-insured CDs 6-month 1.15% better yield than Treasuries now. I have fdic-insured on-line savings accounts with Synchrony and Discover banks paying not much below that. I’m beginning to think that my retirement fixed income allocation should only be Treasuries, CDs, money market funds, and on-line savings accounts. Take the risk with the passive-index equity portion, not with fixed-income.


    1. Yeah, good point. I don’t have more than $250k in cash but if someone has, it’s wise to spread that money around.
      Cash is better than bonds in an inflationary environment.
      Total bond market has higher yields but also too much corporate bond exposure. Temporarily, the corporate bonds came under extreme pressure in March.
      The appeal from 10y T-bonds comes not just from the yield (slightly higher than 3M T-Bill) but also from the duration play and the negative correlation with equities.

      1. You would like to think that active bond fund managers are managing their bond funds to safely navigate troubled waters, adding alpha, else we could just buy passive bond etfs, but you mentioned in one of your previous posts that warren buffet has said, “it’s only when the tide goes out………………….” yipes! toss the managers and shareholders some bathing suits!

        1. Ha, I’m sure there might be some good active bond managers that did well in this. But the broad corporate bond indices went through some tough times in March. Might all come rushing back soon. I certainly hope so.

  15. There’s a disconnect between the forecasts suggesting unemployment and GDP get worse than 2008 in a best case scenario and the optimism of investors buying airline and cruise ship stocks, changing their AAs to be more bullish, buying at a S&P500 PE level greater than 20 even as an economic crisis unfolds, etc.

    There’s a second disconnect between those who think we’ve found a bottom 2 months into a crisis, at still-historically-high valuations, and the observation that bear markets tend to last much, much longer than two months. It is as if a significant percentage of investors see this as a December 2018 style correction, driven by worry that something bad could happen, when in fact something extraordinarily bad is actually happening.

    A third disconnect is the lack of concern about a financial crisis in phase 2 of this situation (maybe 6-18 mos out). The mortgage crisis of 2007-08 was a tiny amount of money compared to the amount of corporate, and perhaps sovereign, bonds that will default this year. Italy was on shaky ground before their depression started. Meanwhile at the retail level, hundreds of thousands of US small businesses loans are about to default, along with car loans, student loans, and mortgages. Which financial institution will be the first domino, and which markets are about to freeze?

    I’ve dialed back my allocation significantly because I’ve lived through this before (one asset bubble in 2000, financial crisis in 2008) and it always takes over a year to hit bottom. Yet, ‘00 and ‘08 were each just one aspect of the current crisis. The current crisis involves (1) bubble prices in stocks, bonds, and housing, (2) possible financial industry seize-ups in phase two, and (3) unresolvable hits to productivity/GDP due to hundreds of millions of people worldwide suddenly stopping work. That 3rd piece is an actually-occurring, unprecedented, pure, unmitigated economic disaster with a multiplier effect no one understands. And yet stocks are barely down 17%?!

    And if this turns out to be a “bottom” and no financial crisis occurs, the virus disappears, and stocks go back up? I don’t think I’ll regret missing my chance to buy at an earnings yield of 1/21 = 4.8% and a CAPE of 26 (CAPE yield: a mouth watering 3.8%). I can earn that pittance selling puts so far OTM that the strike price would be a bargain. Are these earnings yields worth the gamble?

    If on the other hand, we have a more 2000 or 2008 experience ahead of us, I will eventually buy enough yield or earnings yield to retire with confidence at a 5 or 6% WR, saving myself years of work. I’ve seen your cohort studies, big ERN, and hope to live in exactly the right time to be one of the high WR cohorts! That optionality is worth more to me than missing out on whatever the rest of 2020 holds. Riches require patience.

    1. Yeah, I hear you. It seems the market is priced for perfection, having priced in a 90%+ likelihood of a short recession and a nice recovery.
      I’m still hoping for that, too, but I think there could a pullback if things don’t work out as perfectly as everybody hopes.

  16. We won’t begin to understand where we are until at least 6 months from now. Past crashes have no relevance to what is happening today.

    Never before has the US had so much debt at all levels. Back in 1929 there were NO credit cards and home equity loans and student loans.

    Never before have 50 million people lost their jobs in US at one time. Many, many more job losses are soon to come, especially in the energy sector where there are still good-paying jobs that form the backbone of our economy. The world is awash in oil and no one wants it.

    Even if the Fed monetizes everything everywhere they can’t restore consumer confidence. If printing money was the solution Zimbabwe would be rich.

    Many hospitals were cruising towards bankruptcy before COVID-19 and have only stayed open because of state intervention. What happens when all the overtime paid to employees comes due? After COVID-19 the healthcare sector will be in shambles.

    FIRE fanatics need to ask themselves – “What is my investment horizon?” 10, 20, 30 years? Because recovery, if it happens, will be measured in decades.

    1. Yeah, all good points. I’ve definitely stopped using 6.5-7.0% real equity returns going forward. We’ll have to get accustomed to much leaner returns. But I don’t buy into the horror scenarios either. Corss my fingers! 🙂

      1. IDK. Preferred stocks and many non-retail REITs were yielding 6-8% very recently. No, they’re not Zoom stock, but the could be a way to lock in the required returns even in a scenario where growth never recovers (i.e. a Japanification scenario).

        1. We have to distinguish here:
          RIGHT NOW preferreds are not a bad buy after they have dropped so much.
          But it’s usually a bad idea to start retirement right at the top of the market with a portfolio full of preferreds.

          1. Agreed. Preferreds did what people hate them for. Dropped like a common share in a market panic. We might soon have the chance to buy a 5% WR + 3% inflation + 2% portfolio growth. That sounds cray, but wait until Trump declares the economy reopened.

      1. Hi Gasem,

        I read your blog regularly mostly to check myself that my thoughts are not way out there. The things you write are extreme, which is good because it brings awareness to me that a lot of things that you will write will come in fruition but some of course will but not to the magnitude that you believe it.

        Conversely, Karsten in my opinion stays basically right in the middle.

        Yes, I do believe the markets will survive and thrive again. Otherwise, the alternative that everyone will lose including you as well. The beautiful thing about end of the world type of predictors and “analysts of paralysis” is that they provide liquidity to the market, which make the entire system work for which I am thankful for.

  17. Big ERN, wondering what your thoughts are on various quant approaches like systematic momentum and/or value strategies, or systematic timing strategies like tactical asset allocation? I proscribe to Bogle buy and hold, but am always allured by the possibility that quantitative and disciplined use of ‘anomalies’ will allow even a retail investor to outperform the S&P over a long period of time.

    1. Personally, I’m an indexer and I do some options trading.
      When I worked in finance I was heavily involved in tactical asset allocation. It’s hard. But if you are good you can create some alpha. But I’m retired now and don’t want to deal with that anymore. 🙂

  18. In all fairness, though, looking at performance of different strategies over short periods of time, such as a few years, doesn’t tell us much. Value has underperformed the broad market for over a decade. There have been three 13 year periods when value underperformed since 1926, yet value has outperformed over that time period by 2% or so. You need to stick with a value tilt over the long term for it work. Value is now the cheapest it’s been in 100 years, so maybe due for a come back, especially as it usually does well in the recovery from a bear market. Because factors can’t be timed, I think it makes sense, especially for retirees, to diversify across factors as we don’t know if market beta will continue to dominate.

    I agree with you about the yield shield. That doesn’t make any sense as is not supported by the data. No surprise there, as reaching for yield does not have a history of doing well.

  19. Hi ERN,

    Just stumbled across the blog and gobbled up a handful of posts and hundreds of comments to try to catch up on things.

    I wanted to get your thoughts on my situation. 30y/o with a decent chunk of cash on the sidelines to invest (nothing crazy, under 6 figures). I’ve been having a tough time trying to figure out when to start putting it into the market, and how much. I didn’t want to jump in too soon, but also didn’t want to miss the whole discount buying completely. I also wanted to somewhat protect myself in case Covid stuff got crazier and I lost my job or something.
    Just wanting to be wise. This is the moment I’ve been waiting/saving for and I don’t want to screw it up.


  20. Hi Big Ern, great post? Enjoying your posts given all the time at home these days. I just retired on 4/1/2020 and fortunately I was only 50% equities, so now I am 45% and sleeping well! I regret, however, not having worked through your Google Sheet/swr #28 until yesterday! I definitely need to move towards 70%+ equities but am a little perplexed by the results of your Google Sheet and Glide Path, and how to interpret them, so am a bit in limbo.

    Background: Although I have been happy and living fine on $3500/month which reflects a now higher SWR of 2.33% of a smaller portfolio ($1.8M), I plan to bump that to $4K/month (2.67% SWR). I’m modeling 472 months with 40% Cap Preservation. My goal is to maximize accumulation for the next 15-20 years (not a necessity) and perhaps live more FAT and donate to some causes.


    40% Cap Pres, 472 Months
    Scenario 1: 45%/55% Results: SWR 2.72% [0% Failures (All)] and 3.11% SWR (failsafe given 15% S&P Drawdown)

    Scenario 2: 70%/30%: Results: SWR 3.09% [0% Failures (All)] and 3.6% (failsafe given 15% S&P Drawdown).

    Great!!! Seems I can get up to 70% equities and live confidently on even $54K/year! Cool. However, the results seem to imply I am much better off going straight to 70% equities now…lump sum $450,000, correct or not so fast? (Glide Path scenarios below also seem to imply a single lump sum)

    I decided to run GP to 70% Equities and then eventually 100% with my 4/2020 retirement date, $1,8M NW and 2.67% SWR ($48K/yr) But, no matter how I run the GP Case Study and whether I use Scenario 1 or Scenario 2 above with appropriate starting equity weight of 45% and 70% respectively, gliding to 75%-100% is still best achieved with a 100%/month step! Again, seems to imply lump sum on the first month.

    What am I missing here? Could you please shed some light on how to interpret this?

    (My gut is telling me I need to move some big chunks monthly into the market this year to at least 60% equities, and then perhaps take a more conservative monthly glidepath step approach of .5%-1%/month depending how the market is behaving and CAPE.

    Note, I am not using any cashflows from future social security at this point

    Thanks again for all the great work. You are a tremendous asset to the community!



      1. Hi Ern, much appreciate the quick reply. Links are below. Just to recap”

        Ignoring Glidepath, moving to 70% EQ now from currently being at 45% EQ shows 3.09% vs 2.72% failsafe SWR. Seems to imply lump sum investment needed!

        Ultimately, I’m wanting to Glide to 80%

        For sake of concern, set both glidepaths with final weights of 80% by 50%/month steps, and if increase step% or Final Weight, I get even better results. [Lump sum seems implied]

        Retirement Date: 4/1/2020, Years: 41 (472 months)

        Model Capital Preservation = 40%

        45% Equity / 55% Bond
        Glidepath: 45% to 80% equities at 50%/month

        70% Equity / 30% Bond
        Case Study Glidepath = 70% to 100% equities at 50%/month.

        Thanks so much!

        1. You should use the case study only for dates in the past. You have no actual return data for 4/2020 going forward.
          In other words, you can look at the case study and glidepaths to see how PAST retirement cohorts (e.g., 1929, 1965, etc.) would have fared with/without GPs.

  21. Looks like actual GDP contraction for Q1 is much higher than your analysis. How does that impact the remaining projections?

  22. What are your thoughts on long volatility strategies in general? Holding VIX is one way but a different approach is Christopher Cole at Artemis capital’s white paper suggesting 50/50 S&P500/ CBOE Eureka Hedge has outperformed SP&500 alone by 2x. I’m increasingly interested in these kinds of strategies.

Leave a Reply

This site uses Akismet to reduce spam. Learn how your comment data is processed.