How can a drop in the stock market possibly be good for investors?

I hope everybody checked out the ChooseFI Roundup episode in early January, where I talked with Jonathan and Brad about the recent stock market volatility. They invited me for a short appearance on their Friday show after reading my piece from two weeks ago. That post was on how the recent stock market volatility will probably not obliterate the FIRE community. One issue that came up is the potential for people on their FIRE path to actually benefit (!) from the drop in the stock market. How can one possibly benefit from a drop in the stock market? It’s certainly not a guarantee. It depends on the personal circumstances and on the nature of the stock market drop! Generally speaking:

  • How permanent or how transitory is the drop in the market? If your portfolio dropped because one of the equity or bond holdings went bankrupt (or you were a victim of the OptionSellers meltdown) then that’s not something to cheer about. It’s about as permanent as it gets. Not good for the investor! But frequently, the market drops without much of a change in fundamentals. Be it a “flash crash” that reverses within a few hours or even minutes or the (likely) overreaction of the stock market drop in December, one could argue that since nothing (or not much) changed in the fundamentals (GDP growth, earnings growth, etc.) the drop may be only temporary and will eventually revert to the mean. Or even during a recession (the definition of weaker fundamentals!) stocks often overreact on the downside and then stage a strong comeback, i.e., return expectations going forward could be higher than long-term average returns. In other words, that paper loss you see now could be at least cushioned by higher returns on your additional savings going forward. And if this admittedly uncertain advantage of higher expected returns is large enough and over time more than offsets the paper loss then we could be looking at a net gain.
  • How far along are you on your path to FIRE? The further along you are the more damage a bear market will cause even if you can expect a bounce in future expected returns from a transitory shock to the market. On the other hand, if you’re just starting out saving for retirement and all you lost is a few hundred or thousand bucks in your 401k/IRA and you still got 10-15 years ahead of you then you might benefit from the drop!

So, in other words, if the loss in your existing portfolio is offset by enough of a rise in future expected returns, then a drop in the stock market can be a net positive. Seems pretty obvious from a qualitative point of view. But quantitatively? How early is early along the FIRE journey? How much of a rise in expected returns do we need to make this work? Even if there isn’t a net benefit, how much of the paper loss is at least cushioned by higher future returns? These are all inherently quantitative questions. This blog post is an attempt to shine some light on the math behind the tradeoffs…

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We Are Homeowners Again!

Homeless no more: We just bought a house last month! Over the internet! Well, not entirely over the internet because we actually toured houses in person the old-fashioned way. With a real estate agent, more on that below. But we eventually closed the transaction while we were on our epic trip through Asia this Fall! All the “paperwork” was done electronically! One reason we were able to pull this off was that we paid for the house in full. Applying for a mortgage would have required a lot more paperwork and notarized signatures. Probably not something you can accomplish while traveling in Southeast Asia! And just in case you don’t remember, we outline the reasons for not getting a mortgage while in early retirement in Part 21 of the Safe Withdrawal Series!

In any case, where did we buy, what and why? Let’s take a look…

Picture credit: Pixabay (this is not our new home!)

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Did Suze Orman just pour cold water on the FIRE movement?

Unless your internet was out or you’ve been living under a rock for a few weeks you must have heard about the earthquake created by the Suze Orman interview on Paula Pant’s Afford Anything podcast. Lots of people have weighed in already. I participated in a few discussions here and there on Twitter and on other blogs but I also have a few things to say that can’t be distilled into a short tweet or blog comment. So here’s a short blog post with my thoughts.

Well, you can’t blame her for beating around the bush; Suze started the podcast proclaiming that she hates the FIRE movement. And the reaction in our community was swift. And brutal! Suze Orman was called a buffoon and worse names. She just doesn’t get what we are all about in the FIRE movement! OK, let’s congratulate ourselves on what the royal smackdown we gave the Matriarch of Money… Are we done patting ourselves on the back? Great, so let’s face reality again. Sorry to tell you all, but we merely convinced the folks who need no more convincing, i.e., other members in the FIRE community. And I have the concern that, wait for it…

…to a neutral observer, Suze Orman won the argument!

That’s because she got the headlines in the popular media after the interview; Business InsiderMarket Watch and Time/Money Magazine. Watch the YahooFinance video of Suze and the journalists making fun of us!

Business Insider headline
Headline from Business Insider, 10/8/2018.

The average reader/viewer who’s never heard about the FIRE movement walks away with the impression that the great money expert Suze Orman just schooled a bunch of uneducated financial clowns. Sadly, people might get the false impression that early retirement requires such an insurmountable large pile of cash that it’s not even worth trying to pursue FIRE. I’m not saying that this is true because nothing could be farther from the truth but it might be the perception to a lot of people unfamiliar with FIRE. To me, it sounded like Suze wanted to ruffle some feathers and that’s why she approached Paula and volunteered to go on the podcast! Did she use us to get herself into the spotlight and sell her strange “work until you’re 70” narrative again?

So, we got a lot of work ahead of us dealing with the Suzes of the world! Notice I’m using the plural here. Most of us are probably not famous enough to talk to Suze in person. But we are still going to encounter a lot Suze lookalikes in our lives; relatives, friends, neighbors, colleagues etc. who have an equally unrealistic and bombastic “you need at least a gazillion dollars to retire early” mentality. Here are a few suggestions on how to discuss FIRE when encountering a skeptic like Suze…

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Eight Lessons After Eight Weeks Of Early Retirement

Eight weeks of retirement already! Actually, a little bit more by the time this goes online, but it was exactly eight weeks when I started writing this. Early retirement is a lot more than number crunching and safe withdrawal simulations, so today it’s time to reflect on the first two months of Early Retirement. Everybody’s experience will be different and here’s what have I learned, what surprised me and what didn’t surprise me…

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Our Net Worth as of 3/31/2018

I wish the first quarter had ended on January 26 when the S&P500 peak reached the all-time high of 2,872! But in the end, the first quarter of 2018 was really nothing to write home about. And the second quarter is off to a volatile start as well! But I started with this series exactly a year ago and I might as well keep going! Besides, looking at the visitor stats, these posts are some of the most popular! I don’t blame you for being nosy because net worth updates are some of my favorites to read on other blogs, too! 🙂 Soooo, where do we stand as of 3/31/2018? Let’s take a look at the cold hard numbers…

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Meet the ERN family!

Well, the day has come! I have finally announced at work that I will be retiring! We have talked to family and friends about our plans. No turning back now! One way I ensured that I’m not going to get cold feet was to do the ChooseFI podcast that I knew will broadcast on March 12. Since I spilled the beans there I might as well do so here on the blog as well! Continue reading “Meet the ERN family!”

Our interview on “From Cents to Retirement”

My blogging buddy Ben Davis who runs From Cents to Retirement invited me to participate in his interview series. Ben lives and works in Germany and plans an early retirement at the age of 36 to become a real estate mogul in Portugal. Here’s the link to the interview. Enjoy!

—> Interview with ERN from earlyretirementnow.com <—

Cash Management in Early Retirement

Less than two years away from early retirement, we wonder how much cash (if any?) we’d like to hold in a money market account. As many of you might have heard, we currently run a very tight ship with our cash management. We have no emergency fund – our entire portfolio is our emergency fund! But that’s easy to do while the paychecks are still rolling in and we maintain a 60% savings rate. Early retirement will be very different. How would we handle the cash withdrawals in retirement? How do we react to market fluctuations?

In the FIRE community, I often read that the solution (maybe even the panacea) for an equity bear market is to keep a certain percentage of the portfolio in cash (money market account) to sustain cash flows through a bear market. And we should point out that we are not the only ones thinking about this, as evidenced by recent popular posts on the PIE blog and on Retirement Manifesto (also check out the really cool infographic) dealing with this subject. Two to three years worth of expenses (presumably 5-10% of the portfolio) seem to be the numbers floating around (examples: 5% cash allocation for the PIE blog, The Retirement Manifesto recommends 2-3 years, ThinkSaveRetire uses 3 years), obviously calibrated to roughly correspond to the length of the average bear market.

How much of a difference does a cash cushion really make?

How big is the opportunity cost of holding cash when there isn’t a bear market? Continue reading “Cash Management in Early Retirement”

Happy Birthday, USA

Every year around this time, when Americans celebrate Independence Day we gather with friends and family, get the BBQ going and watch fireworks at night. We celebrate Independence Day on July 4, but of course every single day of the year we celebrate independence. Just like we celebrate diversity, tolerance, hard work, innovation,… you name it. But Independence has always been particularly dear to our hearts. All of us in the FIRE (Financial Independence/Retire Early) community must have that Independence bug in us, too. We think outside the box, we are nonconformist and declare Independence from paychecks, rush hour traffic and out-of-control consumerism. While we don’t want to draw any parallels between Mr. ERN’s boss and King George III, we will certainly not miss leaving behind all the nonsense of work life, least of which the excessive taxation.

Incidentally, excessive taxation was one of the sparks that set off the American Revolution. Moving to a state with no income tax and getting into a much lower federal income tax bracket, hopefully within the next two years, will be our way of sticking it to the tax-man. It’s a little bit like one mini Boston Tea Party for everyone of us achieving FIRE. Obviously not as violent and risky as facing his majesty’s well-armed and trained soldiers centuries ago but nevertheless quite revolutionary. Continue reading “Happy Birthday, USA”