Author Topic: At what point do downturns become good vs bad  (Read 1801 times)

FIRE47

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At what point do downturns become good vs bad
« on: February 08, 2018, 09:39:10 AM »
I saw people arguing in another thread about cheering on others' misfortune being bad (ie early accumulators hoping for a downturn vs retirees hoping that markets just keep going up)

My question is this: At what point is a downturn good vs at what point is it objectively bad (speaking from a FIRE/ER perspective only)?

Is it based on age? Is it based on the % of your total stache you are still contributing annually, is it based purely on years until or years post FIRE?

For example: For someone 30 YO - $300k saved - saving 50k annually, 10 Years from ER is a severe downturn good?

What about someone 40 YO $650k saved - saving 20k annually, 2 years from ER?

I think you guys get the point... please discuss. I am trying to see where the inflection point from good to neutral to bad is.
« Last Edit: February 08, 2018, 09:40:51 AM by FIRE47 »

waltworks

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Re: At what point do downturns become good vs bad
« Reply #1 on: February 08, 2018, 10:01:32 AM »
It's pretty simple. If you are buying stocks/adding to investments, the bigger the drop the better. You want to buy those investments as cheaply as possible.

If you are selling/withdrawing, the bigger the drop the worse off you are.

If the stock market drops so much that it has negative repercussions for the broader economy, then people still in accumulation mode can be in danger of losing their jobs or having hours/pay cut, of course.

-W

LAGuy

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Re: At what point do downturns become good vs bad
« Reply #2 on: February 08, 2018, 10:02:35 AM »
I think it's not really looking at things from the correct perspective. It doesn't really matter what the market does. What does matter is the "why". In 2008, there were real worries of the entire banking system coming apart. Any downturn in such an environment would be "bad". The whole damn situation was bad. Right now, however, the economy is humming along great. Even if the markets end up off 20-25% I'm not going to sweat it (I'm no longer an accumulator, but I still work some to offset my spend) because it's sure to bounce back soon enough. The only thing to me that are unmitigated "bads" as you say, are the "debacles", with the 2008 meltdown being the most obvious case. That's the sort of thing that really worries me. I mean, even the 2000 dotcom bust wasn't really all that bad, unless you just bought in the last day. Otherwise, you got to ride up a fantastic market run and sure the market tanked on the other side, but the overall economy didn't fare too badly and it wasn't really until 9/11 that we really had something to worry about.

Oliver

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Re: At what point do downturns become good vs bad
« Reply #3 on: February 08, 2018, 10:41:41 AM »
^It's "humming along great," as long as the student loan debt and tech bubbles that are propping it up don't burst. Pretty similar to in 2007 when it was also humming along great, aside form the fictitious wealth propping it up.

Beard N Bones

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TheAnonOne

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Re: At what point do downturns become good vs bad
« Reply #5 on: February 08, 2018, 11:24:10 AM »
A massive positive side effect of this drop is the lowering of PE levels, it should- even upon recovery- allow earnings to catch up a bit to prices.

Even though this is an arbitrary measurement, it is a somewhat-OK measuring stick. I would rather SP hit 3k in 2 years with a PE of 25, than it hit 3k this year at 35.


There should be literally 0 FIRED PEOPLE PANICING, COMPLAINING, OR OTHERWISE BEING 'COMPLAINY PANTS' Isn't this what we all signed up for? Actually, MUCH worse than this?

GuitarStv

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Re: At what point do downturns become good vs bad
« Reply #6 on: February 08, 2018, 11:41:38 AM »
The point where they start impacting you personally tends to be the tipping point on this one.

FIRE47

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Re: At what point do downturns become good vs bad
« Reply #7 on: February 08, 2018, 12:39:44 PM »
The point where they start impacting you personally tends to be the tipping point on this one.

So essentially it's always good until you have to reduce spending, go back to work, work longer etc? Or do you mean from a psychological standpoint?

Personally I think I would start to be very uncomfortable if I had already pulled the plug or had a massive balance at stake relative to the amounts I was still adding.




GuitarStv

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Re: At what point do downturns become good vs bad
« Reply #8 on: February 08, 2018, 01:08:30 PM »
The point where they start impacting you personally tends to be the tipping point on this one.

So essentially it's always good until you have to reduce spending, go back to work, work longer etc? Or do you mean from a psychological standpoint?

Personally I think I would start to be very uncomfortable if I had already pulled the plug or had a massive balance at stake relative to the amounts I was still adding.

Market drops are neutral, as are market rallies.  You just keep rebalancing your stuff every few years and it's all good.  Unless of course, the drops happen when you have a need to withdraw money, or the rallies happen when you are ready to invest.  Then both are bad, and people tend to gripe.  'Bad' is based on your personal needs, not the actions of the market.   :P

ChpBstrd

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Re: At what point do downturns become good vs bad
« Reply #9 on: February 08, 2018, 04:01:45 PM »
There are 2 ways to accumulate enough stocks to FIRE:

1) Accumulate shares whose current market value is enough that you could sell them and buy bonds, REITs, etc. and cover your living expenses. This was the proper strategy to execute if you hit your FIRE number in 2000 tech stocks or in 2017 cryptocurrencies, etc. Call this "bubble exploitation strategy".

2) Accumulate control over enough corporate earnings to exceed your living expenses. Arguably, once you've hit this number (EPS -corporate waste - taxes - fees = spending) you are FIRE'd because those earnings are being credited to your wealth in the form of buybacks, dividends, or growth. If VTI went from around $130ish today to $20 tomorrow in a computer-driven trading panic in which earnings weren't affected and even if it stayed there for a year, there would be no need for a person with 10,000 shares to get a job, other than to buy more shares or avoid selling. Despite Mr. Market's panic, the EPS of those shares is the underlying revenue stream supporting their owner's FIRE lifestyle. A simplistic way to understand this is that the dividend would still be there. On further reflection, buybacks and growth are contributing the same or more to the owner's wealth despite the lower market price. The market value of that earnings stream will certainly recover and the owner of the earnings stream will be a millionaire again someday. Call this the "earnings accumulation strategy".

To get to the question, a price correction is bad if it interrupts a person pursuing a "bubble exploitation strategy" because they missed the chance to purchase more reliable earnings with proceeds from bubbling assets. A downturn is always good for anyone pursuing FIRE with the "earnings accumulation strategy" because they can start accumulating earnings streams on the cheap.

You'll note that the good/bad perceptions apply to the same situation, are subjective, and are completely related to strategy. That's the point.

When you get to FIRE you have a basket of wealth-accumulating shares bought over X years at an average price of Y per share earning you $Z per year which you accept as dividends, interest, unrealized capital gains, or realized capital gains. The numbers do not remember the messy history of how they got there. The shares do not remember how you came to own them. Whether you exploited a bubble, won the lottery, or maxed your 401k for 18 years only matters in terms of time to FIRE. Time to FIRE is mostly a factor of savings rate, but is also affected by the sequence of market returns - a factor that is completely unpredictable and not worth much consideration unless you think the "bubble exploitation strategy" is the only way to win the game.

Acastus

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Re: At what point do downturns become good vs bad
« Reply #10 on: February 09, 2018, 10:58:53 AM »
The thing to keep in mind is that downturns are expected. They are neither good nor bad, but simply part of how the stock market works. Any goodness or badness is in whether you can gain some benefit from a change, after it has already happened.