So the market dropped 6% over the past couple weeks. According to Personal Capital, my net worth decreased by roughly $40,000. This time is different, at least for me. I'm totally chill with "losing" $40k. So chill, I'm too lazy to do the actual math about how much I am down. In past corrections / dips, I had a tendency to stress out (even though much less money was at stake). I even used to change my investments to a more conservative allocation mid-dip, only to forehead-smack a few months later, go more aggressive, and as you already guessed repeat and rinse on the next dip. Now though, I'd be fine with being "down" $100k tomorrow.
I'm not sure when or exactly how my mentality changed. Maybe I hit some threshold of investing experience. Maybe I burned myself enough times. Maybe my net worth is at some fixed comfortable level. But here I am, calm and collected, and here's what I learned:
TENETS OF MY NEW MENTALITY
1) I've realized that ability to FIRE is based on controlling streams of income, not hitting some pre-established net worth based on that day's market prices. It would be ridiculous to be in a zig zag market and say your are FI one day, not FI the next, and FI the day after that. People who were temporary millionaires in the 2000 tech bubble, the 2006-07 housing bubble, or the 2017-18 crypto bubble found they were not actually FI because their assets represented no enduring income stream. My shares of S&P 500 and Nasdaq 100 ETFs, on the other hand, mean I control a share of the net income of each company in the index. E.g. SPY is priced at one-tenth the S&P500. The S&P500 earned about $122.48 in the last 12 mos (source:
https://www.macrotrends.net/1324/s-p-500-earnings-history). Each share of SPY therefore controls about $12.25 in earnings (122.48/10). If my cost of living is $50k, I would need 50000/12.25 = 4082 shares of SPY to be FI. In this example, if I for whatever reason chose to hold no other investment in my portfolio, 4082 shares should be my goal, not 25x my spending. If SPY gets cheaper, my pace to achieve ownership of 4082 shares increases even as my net worth decreases! Dips are an acceleration, not a setback. As a retiree selling shares every month to pay the bills, my mentality might be different.
1.a) Earnings generally find their way back to equity owners through capital appreciation due to increases in cash, buybacks, dividends, organic growth, debt pay down, acquisitions, R&D, investments, etc.
2) I've realized that market crashes are excellent news to anyone still in the accumulation phase. You get to buy more shares with this month's savings! They're on sale! Bonus shares! That means you get to control more income streams (see #1) than you otherwise would. Again, corrections accelerate your path to FIRE.
3) "It'll go back up." My grandfather became wealthy as a frugal buy-and-hold investor. At every dip, I would ask him for a forecast. "It'll go back up" was what he always said. He was never wrong. Too bad I didn't truly believe him for over 20 years.
4) Realizing you don't actually "lose" money until you sell low.
5) Realizing that cash has little utility other than the ability to (a) trade for shit other people have, or (b) buy one's freedom. To shift assets from the "freedom" fund to cash is to sell some of your freedom. The only thing that makes such a transaction not as bad as trading for other people's shit is the fact it is more easily reversible. However, when are you going to reverse it? Certainly, you'll miss the bottom.
6) The more financial freedom an investment provides for you, the more volatile the market price for it will be. During a correction or crash is the wrong time to realize you are uncomfortable with your asset allocation. It's also a tough time to figure out that market prices don't matter as much as you might think.
QUESTIONS FOR YOU:
1) Should personal finance bloggers / advisors speak more in terms of the number of shares/bond coupons to accumulate, rather than withdraw rates or FIRE numbers? Does tying FIRE to market prices rather than underlying earnings create distortions in people's minds and encourage panic selling?
2) If you agree with the tenets above, how did you go from the naive investing mindset to this? Experience? Mentors? Reading? Instinct?